Fireman's Fund Insurance Co. v. SEC Donohue

NOTICE: Under Supreme Court Rule 367 a party has 21 days after
the filing of the opinion to request a rehearing. Also, opinions
are subject to modification, correction or withdrawal at anytime
prior to issuance of the mandate by the Clerk of the Court.
Therefore, because the following slip opinion is being made
available prior to the Court's final action in this matter, it
cannot be considered the final decision of the Court. The
official copy of the following opinion will be published by the
Supreme Court's Reporter of Decisions in the Official Reports
advance sheets following final action by the Court.

Docket No. 81439--Agenda 13--January 1997.
FIREMAN'S FUND INSURANCE COMPANY, as Subrogee of Neptune
Construction Company, Inc., Appellant, v. SEC DONOHUE, INC.,
f/k/a Donohue & Associates, Inc., Appellee.
Opinion filed April 17, 1997.

JUSTICE FREEMAN delivered the opinion of the court:
The question presented for review is whether the economic loss
doctrine, as enunciated by this court in Moorman Manufacturing Co.
v. National Tank Co., 91 Ill. 2d 69 (1982), bars a tort action
against an engineer for purely economic losses. We hold that it
does.

BACKGROUND
This cause is before us following a motion to dismiss pursuant
to section 2--619(a)(9) of the Code of Civil Procedure (735 ILCS
5/2--619(a)(9) (West 1994)). The motion admits all well-pled
allegations in the complaint and reasonable inferences to be drawn
from the facts. Mayfield v. ACME Barrel Co., 258 Ill. App. 3d 32,
34 (1994); Chicago Title & Trust Co. v. Weiss, 238 Ill. App. 3d
921, 924 (1992).
The complaint alleges as follows. Plaintiff, Fireman's Fund
Insurance Company (Fireman's), is the subrogee of Neptune
Construction Company (Neptune). Neptune is a contractor in the
business of constructing underground water service. Defendant, SEC
Donohue, Inc., formerly known as Donohue and Associates, Inc.
(Donohue), is a professional engineering firm.
In April 1989, Neptune entered into a subcontract agreement
with Artfield Builders to install underground water service for an
apartment complex located on East River Road between Golf and
Central Roads in Des Plaines. Neptune was to tunnel horizontally
from the complex, under a state tollway, and connect with water
supply lines on the opposite side of the tollway. Neptune was to
perform its work "in accordance with the engineering plans,
specifications and general conditions prepared by: DONOHUE &
ASSOCIATES, INC."
Donohue was the project engineer. Under Donohue's contract
with Artfield, Donohue was to provide engineering plans for
improvements that included water supply lines. In anticipation of
Neptune's work, Donohue supplied drawings and plans that specified
where Neptune should dig the tunnel and use an auger to bore into
the water supply lines.
Donohue's drawings and plans erroneously located the site for
digging and boring at a spot approximately 73 yards south of the
correct location. Relying on Donohue's plans, Neptune worked at the
wrong location, thereby damaging the shoulder of the tollway. The
Illinois State Toll Highway Authority required Neptune to repair
the tollway at a cost of $57,754.02. Neptune made a claim to its
insurer, Fireman's, for this amount. Fireman's paid the claim,
becoming subrogated to Neptune's claim against Donohue.
Fireman's brought a negligence action against Donohue in the
circuit court of Cook County. The complaint alleged that Donohue
had the duty to provide accurate information to those who would
rely on it, such as Neptune; that Donohue breached that duty by
"carelessly and mistakenly" locating the site for digging and
boring 73 yards south of the correct location; and that Neptune's
damages were proximately caused by its reliance on Donohue's
erroneous work.
The trial court denied defendant's motion to dismiss pursuant
to section 2--619(a)(9) of the Code of Civil Procedure (735 ILCS
5/2--619(a)(9) (West 1994)). The trial court subsequently certified
the following question for interlocutory review (see 134 Ill. 2d R.
308):
"Is a professional engineer who prepares plans and
specifications for a construction project in the business
of supplying information to others for the guidance of
the recipient in its business dealings with third parties
and liable in tort for negligent misrepresentations under
Moorman Manufacturing Co. v. National Tank Co.,
[citation][?]"
The appellate court answered the question in the negative,
reversing the trial court. 281 Ill. App. 3d 789. The appellate
court concluded that the economic loss doctrine applies to
engineers in general. 281 Ill. App. 3d at 796. The appellate court
also concluded that Moorman's negligent misrepresentation exception
to the economic loss doctrine (Moorman, 91 Ill. 2d at 89) did not
apply in this case. 281 Ill. App. 3d at 798. We allowed Fireman's
petition for leave to appeal (155 Ill. 2d R. 315), and now affirm
the appellate court.

DISCUSSION
The question certified for interlocutory review presents two
issues. The first issue regards the form of the question itself;
the second issue regards an exception to the economic loss
doctrine. Before addressing these issues, some background is in
order.
At common law, purely economic losses are generally not
recoverable in tort actions. In re Illinois Bell Switching Station
Litigation, 161 Ill. 2d 233, 240 (1994). In Moorman Manufacturing
Co. v. National Tank Co., 91 Ill. 2d 69 (1982), this court
enunciated the economic loss rule, and held that a products
liability plaintiff cannot recover purely economic loss under the
tort theories of strict liability, negligence, and innocent
misrepresentation. Moorman, 91 Ill. 2d at 91.
This court has explained the rationale of the economic loss
doctrine as follows:
"In Moorman, this court [reasoned] that tort law
would, if allowed to develop unchecked, eventually
envelop contract law. Contract law serves a vital
commercial function by providing sellers and buyers with
the ability to define the terms of their agreements with
certainty prior to a transaction. Where the duty of a
seller has traditionally been defined by contract,
therefore, Moorman dictates that the theory of recovery
should be limited to contract although recovery in tort
would be available under traditional tort theories."
Congregation of the Passion, Holy Cross Province v.
Touche Ross & Co., 159 Ill. 2d 137, 159-60 (1994).
In Anderson Electric, Inc. v. Ledbetter Erection Corp., 115 Ill. 2d 146 (1986), this court applied the economic loss rule to
claims that services were performed negligently. This court also
held that "[a] plaintiff seeking to recover purely economic losses
due to defeated expectations of a commercial bargain cannot recover
in tort, regardless of the plaintiff's inability to recover under
an action in contract." Anderson, 115 Ill. 2d at 153.
In the present case, Fireman's does not dispute that its
losses are purely economic. With this background in mind, we now
address the issues presented for review.

I. Certified Question
Both Fireman's and Donohue urged the appellate court to modify
the certified question on appeal. The certified question,
previously quoted, asks whether a professional engineer who
prepares plans and specifications for a construction project is "in
the business of supplying information to others for the guidance of
the recipient in its business dealings with third parties and
liable in tort for negligent misrepresentations under Moorman."
(Emphasis added.) The parties contend that the reference to "third
parties" is erroneous. We agree with the appellate court that "with
or without a third-party requirement, our answer to the certified
question would be the same." 281 Ill. App. 3d at 798. However,
pursuant to our responsibility to maintain a sound and uniform body
of precedent (Hux v. Raben, 38 Ill. 2d 223, 224-25 (1967)), we will
address this issue. See 134 Ill. 2d R. 366(a)(5); Schrock v.
Shoemaker, 159 Ill. 2d 533, 537 (1994).
In Moorman, this court articulated three exceptions to the
economic loss rule: (1) where the plaintiff sustained personal
injury or property damage resulting from a tortious event, i.e., a
sudden or dangerous occurrence (Moorman, 91 Ill. 2d at 86); (2)
where the plaintiff's damages are proximately caused by a
defendant's intentional, false representation, i.e., fraud
(Moorman, 91 Ill. 2d at 88-89); and (3) where the plaintiff's
damages are proximately caused by a negligent misrepresentation by
a defendant in the business of supplying information for the
guidance of others in their business transactions (Moorman, 91 Ill.
2d at 89). See In re Chicago Flood Litigation, Nos. 80460, 80535
cons., slip op. at 15 (February 20, 1997); In re Illinois Bell
Switching Station Litigation, 161 Ill. 2d at 240-41. In each of
these three situations, the plaintiff may recover in tort against
the defendant.
In several subsequent decisions, this court has discussed the
Moorman exception of a negligent misrepresentation by a defendant
in the business of supplying information for the guidance of others
in their business transactions. This court has never included an
additional requirement that those business transactions must be
made specifically with third parties. See, e.g., 2314 Lincoln Park
West Condominium Ass'n v. Mann, Gin, Ebel & Frazier, Ltd., 136 Ill. 2d 302, 309 (1990); Anderson, 115 Ill. 2d at 153-54.
However, several appellate court decisions refer to an
additional third-party requirement. See N. Rifkind, Negligent
Misrepresentation in Illinois: The Third Party (Non)requirement, 82
Ill. B.J. 668 (1994). Appellate court decisions that refer to an
additional third-party requirement (e.g., Grass v. Homann, 130 Ill.
App. 3d 874, 878-79 (1984); Black, Jackson & Simmons Insurance
Brokerage, Inc. v. International Business Machines Corp., 109 Ill.
App. 3d 132, 134-36 (1982)) are overruled on this point. We modify
the certified question by deleting the reference to third parties.
The question, as modified, is as follows:
"Is a professional engineer who prepares plans and
specifications for a construction project in the business
of supplying information to others for the guidance of
the recipient in its business dealings and liable in tort
for negligent misrepresentation under Moorman ***[?]"

II. Economic Loss Doctrine
We first address Fireman's suggestion that we abandon this
court's application of the economic loss doctrine to the furnishing
of services, and replace it "with a traditional tort duty
analysis." We decline the invitation. As this court has explained:
"A provider of services and his client have an
important interest in being able to establish the terms
of their relationship prior to entering into a final
agreement. The policy interest supporting the ability to
comprehensively define a relationship in a service
contract parallels the policy interest supporting the
ability to comprehensively define a relationship in a
contract for the sale of goods. It is appropriate,
therefore, that Moorman should apply to the service
industry. Just as a seller's duties are defined by his
contract with a buyer, the duties of a provider of
services may be defined by the contract he enters into
with his client. When this is the case, the economic loss
doctrine applies to prevent the recovery of purely
economic loss in tort.
* * *
The evolution of the economic loss doctrine shows
that the doctrine is applicable to the service industry
only where the duty of the party performing the service
is defined by the contract that he executes with his
client. Where a duty arises outside of the contract, the
economic loss doctrine does not prohibit recovery in tort
for the negligent breach of that duty." Congregation of
the Passion, 159 Ill. 2d at 161-62.

A. Application to Engineers
The appellate court held as follows: "We think that the
holding in 2314 Lincoln Park West requires us to find that a
plaintiff may not recover purely economic losses in a tort action
against an engineer." 281 Ill. App. 3d at 796. Fireman's assigns
error to this holding and to the appellate court's reliance on 2314
Lincoln Park West.
We agree with the appellate court that, based on 2314 Lincoln
Park West, the economic loss doctrine applies to engineers. In 2314
Lincoln Park West, this court held that the economic loss doctrine
applied to architects, preventing the recovery of purely economic
losses in tort. This court reasoned that "[t]he architect's
responsibility originated in its contract with the original owner,
and in these circumstances [purely economic loss] its duties should
be measured accordingly." 2314 Lincoln Park West, 136 Ill. 2d at
317.
2314 Lincoln Park West involved a claim against several
parties, including an architectural firm. However, the certified
question in that case was:
" `Should there be an exception to the rule set
forth in Moorman which would permit Plaintiffs seeking to
recover purely economic losses due to defeated
expectations of a commercial bargain to recover from an
architect or engineer in tort?' " (Emphasis added.) 2314
Lincoln Park West, 136 Ill. 2d at 306.
This court concluded that, "[c]onsistent with Moorman and its
progeny, we answer the certified question in the negative and hold
today that a tort action will not lie in the circumstances
described." 2314 Lincoln Park West, 136 Ill. 2d at 312.
Further, the appellate court could not find any substantive
difference between architects and engineers for purposes of the
economic loss rule (281 Ill. App. 3d at 796 (and cases cited
therein)), nor can we. In 2314 Lincoln Park West, this court
likewise did not distinguish architects from engineers. 2314
Lincoln Park West, 136 Ill. 2d at 311. We hold that the economic
loss doctrine bars recovery in tort against engineers for purely
economic losses.

B. Negligent Misrepresentation Exception
Again guided by 2314 Lincoln Park West, the appellate court
also held that the negligent misrepresentation exception to the
economic loss doctrine found in Moorman did not apply in this case.
Fireman's assigns error to this holding.
The focus of Moorman's negligent misrepresentation exception
to the economic loss doctrine is whether the defendant is in the
business of supplying information for the guidance of others, or
whether the information that is supplied is merely ancillary to the
sale or in connection with the sale of merchandise or other matter.
281 Ill. App. 3d at 797, quoting Rosenstein v. Standard & Poor's
Corp., 264 Ill. App. 3d 818, 823 (1993). In dicta in 2314 Lincoln
Park West, this court reasoned that although an architect supplies
information, that information is incidental to a tangible product,
i.e., a structure, and is usually transformed into the structure
itself. 2314 Lincoln Park West, 136 Ill. 2d at 313.
Fireman's attempts to distinguish this case from 2314 Lincoln
Park West based on the following facts. In 2314 Lincoln Park West,
the architect's information had been incorporated into the building
at the time the action arose. Fireman's points out, however, that
at the time this action arose, Donohue's drawings and plans had not
been incorporated into the water supply system. Indeed, Donohue's
plans could never be incorporated into the water system because
they were erroneous. Therefore, according to Fireman's, Donohue's
drawings and plans were information rather than a product, and
Moorman's negligent misrepresentation exception to the economic
loss doctrine applies to this case.
We cannot accept Fireman's argument. The appellate court
correctly observed that this court, in determining whether the
economic loss doctrine applies to a case of professional
malpractice, focuses on the ultimate result of the professional's
work. Congregation of the Passion, 159 Ill. 2d at 163. The
appellate court correctly reasoned that it could not base its
determination on the fact that Donohue's plans were not, or could
not be, incorporated into the water supply system. Rather, the
appellate court correctly looked to the ultimate result of
Donohue's work, which was a tangible object, i.e., the water supply
system. 281 Ill. App. 3d at 797-98. As we explained in Congregation
of the Passion, 159 Ill. 2d at 163:
"In contrast to the relationship between an attorney or
accountant and their client, the relationship between an
architect and his client produces something tangible,
such as a plan that results in a structure. The
characteristics of a tangible object are readily ascer-
tainable, and they can be memorialized in a contract and
studied by the parties."
Donohue's plans and drawings were incidental to a tangible
product, i.e., the water supply system. The accuracy of such plans
can be memorialized in contract terms. We hold that Moorman's
negligent misrepresentation exception to the economic loss doctrine
does not apply in this case.

CONCLUSION
Fireman's attempts to recover purely economic loss resulting
from Donohue's product that did not meet commercial expectations.
This interest was meant to be protected by contract law rather than
tort law.
For the foregoing reasons, the judgment of the appellate court
is affirmed as modified, and the cause is remanded to the circuit
court of Cook County.

Affirmed as modified;
cause remanded.

CHIEF JUSTICE HEIPLE, dissenting:
I dissent from the majority opinion because I believe that the
Moorman doctrine should no longer apply to professional malpractice
cases. We should take this opportunity to reevaluate the
application of Moorman and remove its protection for professional
services, rather than continue to engage in a case-by-case
determination of whether a given profession owes some undefinable
extracontractual duty to clients. See Congregation of the Passion,
Holy Cross Province v. Touche Ross & Co., 159 Ill. 2d 137, 186-92
(1994) (Heiple, J., dissenting, joined by Harrison, J.). The
majority, however, has seen fit to continue a piecemeal approach by
applying the Moorman doctrine to professional malpractice of
architects and now engineers but not to attorneys or accountants.
In so doing, this court has failed to coherently differentiate
between these professional groups, thereby placing trial judges and
litigants in the unenviable position of guessing which additional
professionals will receive protection under Moorman's economic loss
doctrine.
Accordingly, I respectfully dissent.

JUSTICES HARRISON and NICKELS join in this dissent.