Royal Indemnity Co. v. Factory Mutual Insurance Co.
786 N.W.2d 839 (2010)
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Rule of Law:
Damages for breach of a service contract are limited to those foreseeable and contemplated by the parties at the time of contracting. Similarly, tort liability is limited to harms that result from the specific risks created by the tortious conduct, not for merely placing a party in a location where an unrelated harm occurs.
Facts:
- After Factory Mutual Insurance Company (FM) ceased to be Deere & Company's (Deere) primary insurer, Deere contracted with FM separately for loss-prevention engineering services.
- In 2000, Deere considered leasing a warehouse from Petersen Properties and hired FM to conduct an inspection of the facility's fire protection system.
- Deere's manager requested a comprehensive 'first-inspection-site-risk evaluation', but due to a miscommunication, an FM engineer, Tim Geiger, performed a less thorough 'simple COPE evaluation'.
- Geiger's inspection did not include testing the sprinkler system or reviewing the facility's maintenance records.
- Geiger provided Deere with a 'punch list' of recommendations for upgrading the fire system.
- Deere entered into a lease and moved its products into the warehouse in November 2000, before the punch list items were completed and without the sprinkler system having been tested.
- On February 20, 2001, a fire of undetermined origin broke out in the warehouse.
- Firefighters discovered insufficient water pressure to fight the fire, the cause of which was also undetermined, and all of Deere's products were destroyed.
Procedural Posture:
- Deere's insurer, Royal Indemnity Company (Royal), after paying Deere's claim, became subrogated and sued FM and others in a state trial court.
- All defendants except FM settled with Royal before trial.
- The case against FM proceeded to a jury trial on claims of breach of contract and negligence.
- At the close of evidence, the trial court granted FM's motion for a directed verdict on the negligence claim.
- The jury returned a verdict for Royal on the breach of contract claim, awarding $39.5 million.
- The trial court denied FM's post-trial motion for judgment notwithstanding the verdict on the contract claim.
- The trial court granted FM's motion to apply a pro tanto credit, reducing the judgment by the amount of the pre-trial settlements.
- FM appealed the judgment on the contract claim, and Royal cross-appealed the dismissal of its negligence claim.
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Issue:
Does a defendant's breach of a contract for inspection services make it liable for the full value of property subsequently destroyed in a fire, where the breach did not cause the fire or the failure of the fire-suppression system, but allegedly influenced the plaintiff's decision to occupy the premises?
Opinions:
Majority - Baker, Justice.
No. A party that breaches a contract is not liable for damages that were not foreseeable or contemplated by the parties when the contract was formed. The court reasoned that for a breach of contract claim, damages must have a nexus with the breach. Here, Royal's claim was not that FM's inadequate inspection caused the fire or the water pressure failure, but rather that 'but for' the bad inspection, Deere would not have leased the warehouse. The court found this insufficient, holding it was not in the contemplation of the parties that FM, for an inspection fee under $6,000, would become a guarantor for a fire loss over $30 million. The extreme disproportion between the fee and the damages sought is strong evidence that such liability was not intended. For the negligence claim, the court applied the 'scope of liability' analysis from the Restatement (Third) of Torts, which limits liability to harms that result from the risks that made the actor's conduct tortious. FM's failure to conduct a proper inspection did not increase the risk of the harm that occurred (a fire of unknown origin and a mysterious water pressure failure); it merely placed Deere's property in the location where an unrelated calamity occurred. Therefore, the loss was outside the scope of FM's liability.
Analysis:
This case sharply defines the limits of consequential damages in both contract and tort law by reinforcing the distinction between factual ('but-for') causation and legal (or proximate) cause. It establishes that a service provider is not a de facto insurer against all subsequent calamities merely because its deficient performance influenced a client's decision to be in a particular location. The decision protects service providers, such as inspectors and consultants, from potentially limitless liability for risks they did not create and for which they were not compensated. It solidifies the principle that liability must be tethered to the specific risks a defendant's conduct foreseeably increased, not to a serendipitous chain of events.
