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By John W. Ralls
KB Home installed gas-fired furnaces manufactured by Consolidated Industries Corp. in thousands of California homes in the 1980s and 1990s. In order to meet California requirements limiting nitrogen oxide emissions, Consolidated also installed NOX rods, a device used to limit nitrogen oxide emissions, above each of the furnaces. The NOX rods were not manufactured by Consolidated.
In September 2000, the federal Consumer Product Safety Commission issued a safety alert warning that Consolidated NOX rods "present[ed] a substantial risk of fire," and on July 9, 2001, CPSC recalled approximately 30,000 Consolidated furnaces installed in California homes. In response to the recall, KB inspected homes it had built with Consolidated furnaces. In 80 percent of the homes inspected, the NOX rods either were bent or melted and had damaged other components of the furnaces, including heat exchangers, fire boxes and burners. In all, KB spent more than $3 million replacing defective Consolidated furnaces.
KB sued Consolidated to recover the cost of replacing the furnaces, alleging, among other causes of action, tort claims for negligence and strict liability. The trial court issued an order deciding, as a matter of law, that the defective furnaces caused KB no personal injury or damage to "other property" and that KB's negligence and strict liability claims were, therefore, barred by California's economic loss rule, which "bars recovery in tort for economic damages caused by a defective product unless the [economic damages] are accompanied by some form of personal injury or damage to property other than [damage to] the defective product itself."
KB asked the trial court to reconsider, relying on a component-to-component damage theory. KB argued that the NOX rod was an entirely separate component from the rest of the furnace and that by damaging the rest of the furnace, the defective NOX rod caused damage to "other property," which was recoverable under the economic loss rule. The trial court rejected KB's component-to-component damage theory on grounds that it considered each furnace "a single manufactured product and did not consider the component parts of that integrated product as separate products." The trial court concluded that the heat exchangers, fire boxes, burners and NOX rods were collectively one product (the furnace), and, therefore, the damage the NOX rods caused to any of the other component parts was merely damage to the product itself.
On appeal, KB made two arguments. First, KB argued that the trial court erred in deciding that there was no damage to "other property" as a matter of law. Second, KB argued that "the trial court also erred in failing to recognize a life-safety defect exception to the economic loss rule."
The Court of Appeal accepted KB's first argument and ordered the trial court to vacate its order holding that the economic loss rule necessarily barred recovery under KB's negligence and strict liability theories. KB Home v. Superior Court of Los Angeles County, 112 Cal. App. 4th 1076, 5 Cal.Rptr. 3d 587 (2003). The appeals court explained that whether the different components of a furnace are considered collectively to be one product or "other property" within the meaning of the economic loss rule is an issue to be decided by the trier of fact, not by the court as a matter of law.
In reaching this conclusion, the court relied heavily on Jimenez v. Superior Court, 29 Cal.4th 473 (2002), in which the California Supreme Court held that a window manufacturer could be held strictly liable in tort for damages the defective windows caused to other parts of the homes in which they were installed. The Court of Appeal quoted Jimenez:
California decisional law has long recognized that the economic loss rule does not necessarily bar recovery in tort for damage that a defective product (e.g., a window) causes to other portions of a larger product (e.g., a house) into which the former has been incorporated.. The concept of recoverable physical injury or property damage ha[s] over time expanded to include damage to one part of a product caused by another, defective part.
Following Jimenez, the appeals court emphasized that properly identifying the "product at issue" is the first and most critical step in distinguishing between "other property," for which recovery is allowed, and injury to the product itself, for which recovery is barred. As articulated by the court, the test under the economic loss rule for "distinguishing between 'other property' and the defective product itself in a case involving component-to-component damage requires a determination [of] whether the defective part is a sufficiently discrete element of the larger product that it is not reasonable to expect its failure invariably to damage other portions of the finished product."
If one would not expect the defective part's failure to damage other portions of the finished product, then permitting tort recovery is warranted because the manufacturer has created an unreasonable risk beyond the consumer's expectations, the court wrote. On the other hand, if it is reasonable to expect that the defective part's failure would cause damage to other portions of the finished product, then "it is fair to impose upon the consumer. 'the risk that the product will not match his economic expectations' " and limit recovery to the law of contractual warranty, the court wrote.
The court acknowledged that the trier of fact could consider factors proposed by the parties when determining "what the product at issue is." In support of its argument that the NOX rod and the rest of the furnace components were one product, Consolidated put forward the following factors: "(1) Does the defective component (here, the NOX rod) perform an integral function in the operation of the larger product (the furnace)? (2) Does the component have any independent use to the consumer, that is, some use other than as incorporated into the larger product? (3) How related is the property damage to the inherent nature of the defect in the component? (4) Was the component itself or the larger product placed in the stream of commerce (or, viewed from the buyer's prospective, was the larger integrated product or the component itself the item purchased by plaintiff)?"
Similarly, the court acknowledged that the following factors put forward by KB should be considered: "(1) Consolidated purchased the rods from another manufacturer for the purpose of adding them only to furnaces supplied to areas covered by the more stringent California emissions regulations; (2) Consolidated sold the identical furnaces in other markets without the NOX rods; (3) the rods can be readily removed from the furnaces; and (4) NOX rods have been used in other, non-furnace applications (for example, gas-fired water heaters) and were listed as separate parts in Consolidated's parts catalog."
In its second issue on appeal, KB urged the court to adopt a life-safety defect exception to the economic loss rule, which "would be applicable only in unusually compelling circumstances" where substantial risk of significant personal injury exists. The court denied the request, explaining that the "Supreme Court has [already] unequivocally rejected such a life-safety exception to the economic loss rule."
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