Economic Loss Rule Bars Insurer Recovery for Utility’s Damaged Turbine

By Jim Sams | April 9, 2020

The economic loss rule established by Texas courts bars recovery for an insurance company that sought nearly $8 million in damages from a company that installed faulty software that led to extensive damages to an electric utility’s generating equipment, a federal appellate court ruled Wednesday.

A panel of the 5th Circuit Court of Appeals affirmed a district court’s decision to dismiss a subrogation lawsuit filed by Westport Insurance Co. against Emerson Process Management Power & Water Solutions.

“It is well-established that, under Texas law, a party cannot recover from a seller in tort for damage to the product itself,” the 5th Circuit Court of Appeals ruled.

The Golden Spread Electric Cooperative, headquartered in Amarillo, provides power to 227,000 consumers in Texas, the Oklahoma Panhandle, Southwest Kansas and Southern Colorado. In 2014, the utility contracted with Emerson, a national engineering firm based in St. Louis, to replace the control system for its Mustang Station generating facility.

During testing of the new system in 2015, a steam turbine generator tripped offline. As the turbine rolled down from full speed, a bug in the software installed by Emerson caused the flow of lubrication oil to the turbine to shut off. The turbine overheated because of friction, causing extensive damage.

Emerson fixed the software problem and the steam turbine is up and running again. But Golden Spread paid $8,352,996.94 to repair the damage. Its insurers, which included Westport, paid $7,852,996.94 on the claim. The insurers sued Emerson to recover, with Westport taking the lead.

The Northern District of Texas granted summary judgment for Emerson. The trial court said that under Texas’ economic loss rule, a commercial party cannot sue in tort for damages caused by a product it purchases if the damages extend only to the product itself. For example, if a defective engine catches fire and destroys a vehicle but nothing else, the buyer can recover only what is owed according to the sales contract for that vehicle.

Whether the economic loss rule applies is a more complicated question in disputes where a component of a greater system is purchased and a defect in that component causes damage to other parts. Westport Insurance argued that the rule did not apply to the damage caused by Emerson’s defective software because Golden Spread had purchased only a control system, not an entire generation plant.

Mark Pickering

Attorney Mark Pickering, a senior associate with Donato, Minx, Brown & Pool in Houston, represented Westport. In a telephone interview Wednesday, he said that he researched case law and found several rulings where the economic loss rule was deemed not to apply because the damages extended beyond the component that was purchased. He said he cited a number of cases that involved boats and helicopters.

“You had your boat engine repaired. It catches fire and sinks your yacht, you can sue to collect,”he said.

But Pickering said whether to apply the economic loss rule has to be determined case-by-case. “It’s a fact-specific analysis,” he said.

The 5th Circuit panel, in an opinion written by Judge Jacques Loeb Weiner, said that Golden Spread did not bargain with Emerson to install a new control system, it contracted with the company to deliver an upgraded, more efficient steam turbine generator. Emerson provided detailed project engineering, control strategy implementation, system testing, system start-up and ongoing support, the court said.

Also, the opinion says, the problem that caused damage to the turbine is more akin to a failure to meet contractural obligations than a dangerous defect. The court said when sophisticated commercial parties are involved, the recovery of damages “is better addressed in contract than in tort.”

Pickering said his client had not yet decided whether to ask the 5th Circuit to reconsider the decision. He said an appeal to the Supreme Court is unlikely.

About Jim Sams

Sams is editor of the Claims Journal, a part of the Wells Media Group. He can be reached at jsams@wellsmedia.com.

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