The Subrogation Strategist

The Supreme Court of Utah recently found that an incorrect pre-construction geotechnical engineering report is a “defective design.” Thus, actions arising from an incorrect geotechnical report are appropriately governed by Utah’s Economic Loss Statute (Statute), Utah Code Ann. § 78B-4-513(1).

Hayes v. Intermountain GeoEnvironmental Servs. No. 20190764, 2021 UT 62, 2021 Utah Lexis 144, arose out of a suit filed by homeowners Kim and Nancy Hayes (the Hayeses). The Hayeses’ home was part of the Quail Hollow subdivision in Layton, Utah, which was developed by K.C. Halls Construction, Inc. (K.C. Halls). Prior to construction, K.C. Halls contracted with Intermountain GeoEnvironmental Services, Inc. (IGES) for a geotechnical report of the planned development to comply with the requirements of Layton City. The report found that “the subject site is suitable for the proposed construction” and made recommendations to ensure foundational integrity for future construction. The Hayeses ultimately purchased a lot from an agent for K.C. Halls and hired Bob Stevenson (Stevenson) to construct the home. About 14 months after the completion of construction, the Hayeses noticed cracking in their foundation walls.

After discovering the cracking in the foundation, the Hayeses filed suit against K.C. Halls, Stevenson and IGES for damages. The counts against IGES included negligence, negligent misrepresentation and negligent infliction of emotional distress, focusing on the allegation in each count that IGES’s report incorrectly stated the property was “safe and suitable” for residential construction.

IGES moved to dismiss the complaint, alleging that the Hayeses’ negligence claims were barred by both the common law economic loss rule and Utah’s Economic Loss Statute because the Hayeses were seeking compensation for purely economic losses and the case was an action related to “defective design.” The district court granted the motion and its ruling was subsequently affirmed by the court of appeals. The Hayeses petitioned for certiorari, which was granted to address whether the court of appeals erred in its interpretation and application of the Statute by holding the Hayeses’ tort claims “amounted to an ‘action for defective design and construction as that term is used in the [S]tatute.’”

The court began with an analysis of the economic loss rule. The economic loss rule places limits on tort claims for purely economic losses by creating a “fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.” The common law economic loss rule was first adopted in Utah in American Towers Owners Ass’n, Inc. v. CCI Mechanical, Inc., 930 P. 2d 1182 (Utah 1996).

The court noted the exception to the common law economic loss rule regarding an independent duty of care. If a duty of care exists independent of any contractual obligations, the economic loss rule is excepted, and a tort claim may be brought. The court further noted that after the court’s adoption of the common law rule in 1996, in 2008 the Utah legislature codified the economic loss rule with respect to actions “for defective design or construction.” The Statute does not contain the same exception as the common law rule regarding an independent duty of care.

Given the statute, the threshold question was whether to apply the statutory or common law economic loss rule to the Hayeses’ claim—that is, whether IGES’s geotechnical report was a “defective design.” If the report qualified as “defective design or construction,” the Statute applied. If the report was not “defective design or construction,” the Statute did not apply. If the Statute did not apply, the Hayeses argued the claim was subject to the common law exception to the economic loss rule involving the violation of an independent duty of care.

To determine whether this action was subject to the Statute, the court analyzed what constitutes a “defective design.” The court noted while the Statute governs defective design and construction claims, it never actually defines the word “design.” The Hayeses argued the appropriate definition would be based on those found in the dictionary, such as “to make or draw plans for something” or “a drawing or set of drawings.”

The court found that while the ordinary meaning of a word is “powerful evidence,” it must consider the meaning intended in the context of the statute. If words are used in a “technical sense,” they must be construed within that technical context. As such, the court stated that the term “design” must be interpreted within the realm of construction or engineering.

Analyzing the legislature’s use of the term “design professional” in other statutes and after considering the definition for an “engineering design” utilized by The Accreditation Board of Engineering & Technology, the court defined the term broadly and agreed with the finding of the Court of Appeals that “[a] geotechnical engineer is often an essential participant on the design team.” The court further noted the geotechnical report was “an integral part of the structural design of the building’s foundation.” Although the court acknowledged that IGES failed to identify the structural instability in the soil in their geotechnical report, which resulted in the structural instability of the home, given that the building would not have been constructed in the manner it was but for IGES’s report, the court found the IGES report was foundational to the design of the building. As a result, IGES’s work was structural, which was a defective design, and the action was appropriately governed by Utah’s Economic Loss Statute.

Because the loss was encompassed within the Statute, the common law exception for an independent duty of care did not apply. The court noted that the only possible exception to the Statute involves a claimant in privity of contract “based on an intentional or willful breach of a duty existing in law.” However, since the Hayeses were not in privity with IGES, the exception did not apply.

The Hayes case demonstrates that subrogation professionals must always be mindful of economic loss issues when evaluating claims and determining recoverable damages. It is particularly important to analyze any relevant statutes in the state of loss to ascertain whether an economic loss issue may arise, even where it is not facially apparent that it will affect the claim.