California Supreme Court Suggests Insurers Invent a New Coverage For Loss of Earnings When Disaster Causes Only Economic Losses

No Tort Liability for a Purely Economic Injury

Tort law serves society’s interest in allocating risks and costs to those who can better prevent them, and it provides aggrieved parties with just compensation. But claims for purely economic losses suffered from mere proximity to an industrial accident create intractable line-drawing problems for courts that removes the issue from the courts to insurance acquired by the potential victims of a tort causing a purely economic injury.

In Southern California Gas Company v. The Superior Court of Los Angeles County, First American Wholesale Lending Corporation et al., Real Parties in Interest, S246669, Supreme Court of California (May 30, 2019) a massive, months-long leak from a natural gas storage facility located just outside Los Angeles caused serious multi-faceted litigation. According to the allegations before the Supreme Court, the accident severely harmed the economy of a nearby suburb. The litigants asked the court to determine if businesses — none of which allege they suffered personal injury or property damage — may recover in negligence for income lost because of the leak.

The businesses argued that they deserve compensation for the economic losses they incurred and that the entity responsible must bear the full costs of its alleged negligence.

FACTS

Near the northwestern corner of Los Angeles lies Porter Ranch, a residential neighborhood home to some 30,000 people. Southern California Gas Company (SoCalGas) stores vast amounts of natural gas in an underground facility in the hills surrounding the community. Known today as the “Aliso Facility,” that subterranean storage site was once an oil reservoir. It was repurposed about 40 years ago for its present use. SoCalGas supplies over 21 million people with natural gas from its four storage facilities, but the Aliso Facility is the company’s largest. It holds up to 80 billion cubic feet of natural gas, which SoCalGas pumps underground at high pressure into more than 100 “injection wells.” Because natural gas is odorless, SoCalGas adds a nausea-causing chemical to the gas so that people notice when a leak happens.

In October 2015, a leak happened — and people noticed. An uncontrolled flow of natural gas from the Aliso Facility coated nearby neighborhoods in an oily mist. At its peak, the leak released some 55 tons of natural gas every hour. Porter Ranch residents reported unpleasant odors, headaches, dizziness, and respiratory problems. In addition to those symptoms, students at local schools complained of nosebleeds and vomiting.

As a result of the leak about 15,000 people were relocated in total, scattering to locations dozens — and in some cases hundreds — of miles away.

Plaintiffs are Porter Ranch area businesses seeking to represent a class of “[a]ll persons and entities conducting business within five miles of the [Aliso] Facility from October 23, 2015 to [the] present.” They alleged that SoCalGas’s negligence caused the leak. The resulting relocation of many Porter Ranch residents devastated the local economy: by depriving local businesses of customers, the environmental disaster cost local businesses considerable earnings.

That harm, Plaintiffs maintain, is ongoing.  No named plaintiff alleged personal injury or property damage. Accordingly, Plaintiffs acknowledge they are suing SoCalGas to recover solely for the income they lost because of the leak.

SoCalGas demurred, arguing that Plaintiffs’ negligence claims failed as a matter of law because Plaintiffs were seeking to recover for purely economic losses.  After SoCalGas petitioned for a writ of mandate, the Court of Appeal granted the petition and reversed the trial court. The Court of Appeal explained that, under California law, it is “not presumed” that a defendant owes a duty of care to guard against economic losses unaccompanied by injury to person or property.

ANALYSIS

Recovery in a negligence action depends as a threshold matter on whether the defendant had a duty to use due care toward an interest of the plaintiff’s that enjoys legal protection against unintentional invasion. The Supreme Court was asked to determine if SoCalGas — separate from other legal and practical reasons it had to prevent injury of any kind to the public — had a tort duty to guard against negligently causing purely economic losses.

In California, the “general rule” is that people owe a duty of care to avoid causing harm to others and that they are thus usually liable for injuries their negligence inflicts. At least in cases involving traditionally compensable forms of injury — like physical harm to person or property — the court will presume the defendant owed the plaintiff a duty of care and then ask whether the circumstances “justify a departure” from that usual presumption.

The primary exception to the general rule of no-recovery for negligently inflicted purely economic losses is where the plaintiff and the defendant have a “special relationship.” What we mean by special relationship is that the plaintiff was an intended beneficiary of a particular transaction but was harmed by the defendant’s negligence in carrying it out. For example, the intended beneficiary of a will could recover for assets she would have received if a notary had not been negligent in preparing the document.

Concerned about line-drawing problems and potentially overwhelming liability, courts across the country have rejected recovery for purely economic losses stemming from man-made calamity. In fact, the latest Restatement of Torts provides that there is “no general duty to avoid the unintentional infliction of economic loss on another.” (Rest.3d, Torts, Liability for Economic Harm (Tent. Draft. No. 1, Apr. 4, 2012) § 1 (Restatement T.D. 1).)

In justifying that position, the Restatement echoes widespread judicial concern that purely economic losses proliferate more easily than losses of other kinds and are not self-limiting in the same way. Those characteristics, the Restatement explains, threaten liabilities that are indeterminate and out of proportion to a defendant’s culpability, and with them exaggerated pressure to avoid an activity altogether.

The allegations before the Supreme Court underscored the ineluctable difficulty associated with imposing a duty to guard against purely economic losses in negligence cases like this one. It may be possible to quantify the profits any one business lost because of an industrial accident, but imposing such a duty would nevertheless create line-drawing problems across — quite literally — space and time.  The Supreme Court, therefore, concluded that it lacked clear spatial bounds within which to cabin claims like those asserted by the plaintiffs.

This case does not involve a so-called special relationship. Plaintiffs propose to limit the class they seek to represent based on geographic proximity alone. Putative class members here are businesses operating “in the area within five miles” of the leak, a space which Plaintiffs characterize as “the precise area from which residents were evacuated.”

What is far from clear is why the five-mile line means anything. Others beyond that boundary were also affected. There is no compelling basis for the court to let a business operating 4.9 miles away recover its lost profits but deny such recovery to another business operating 5.1 miles away.

The case confronted the Supreme Court with hundreds of claims brought by hundreds of businesses stemming from one industrial accident — and that’s just the artificially limited class Plaintiffs seek to represent, not the full universe of potential claimants whose pocketbooks were adversely (and foreseeably) affected by the leak.

Denying recovery for those who did not suffer injury to person or property is not a perfect solution in negligence cases like this one. Far from it. It is only the least-worst rule out there.

Although many business interruption insurance policies presently available might not cover the purely economic losses alleged here private insurance companies could conceivably see a profit-making opportunity in today’s decision. Now that it is certain that a lawsuit seeking purely economic losses of this sort will not succeed, businesses operating near a natural gas storage facility — or a dam, shipping lane, oil well, and so forth — may be more inclined to buy insurance covering profits they stand to lose if disaster strikes. If so, private insurance companies might expand their policy offerings accordingly.

Society’s interests are not best served by extending its scope indefinitely. The better part of a century has passed since then-Judge Cardozo warned that permitting recovery in negligence for purely economic losses can threaten indeterminacy-cubed: “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” (Ultramares Corp. v. Touche (N.Y. 1931) 174 N.E. 441, 444.)

Courts across the country have since heeded that warning, by and large denying recovery in negligence cases like this one even though purely economic losses inflict real pain. That prevailing rule of no recovery is, like society itself, imperfect. Yet nearly everyone follows a rule that few (if any) entirely like. California, by this decision, does, too.

ZALMA OPINION

The California Supreme Court, in a lengthy and well researched opinion found an imperfect solution to a problem that could not be cured by tort law. It gave the insurance industry a great idea to create a new market for an insurance product that – if spaced carefully like earthquake insurance – that could be profitable and protect those victims of a disaster like the gas leak in Porter Ranch who only suffer economic losses that tort law will not respond. In so doing the Supreme Court protected tortfeasors from purely economic losses and suggested insurance as a way to protect those injured.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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