In a recent decision, the Indiana Court of Appeals held that a new exception existed to the general rule of Economic Loss Theory. Magic Circle Corps v Crowe Horwath LLP, 71A03-1607-PL-1520 (Ind. Ct. Ap. Mar. 8, 2017). In Magic, Magic Circle and several of its shareholders filed a complaint against several individuals including its auditing firm, Crowe Horwath. The trial court granted Crowe’s motion to dismiss as the claims were barred by the economic loss rule, but Magic Circle appealed the decision.
The economic loss rule states that as a general rule, commercial law should determine the damages for economic loss caused by negligence rather than tort law. This first ensures that a party can’t circumvent the application of commercial rules and warranties and then prevents an unlimited scope being developed within tort law so that no defendant can practically account for all potential liabilities. But like all rules, there are always exceptions. For instance, in Indiana, these exceptions to the economic loss rule include lawyer malpractice, breach of fiduciary duties, insurance agents’ duty to settle, and negligent misstatement.
The question before the Court of Appeals was if a similar exception should be made for accounting services. The Court in Magic first took guidance from Illinois’s decision upon the matter. Illinois decided that the economic loss rule should only apply to situations where, “….the duty of the party performing the service is defined by the contract…” Thus, like the attorney-client privilege, the independent judgment nature of accounting services falls outside the defined terms of a contract and is not barred by the economic loss rule.
With Illinois’s guidance and Federal Courts making similar rulings, Indiana decided that Crowe’s accounting relationship and its engagement letters with Magic Circle did not bar it from the economic loss rule. The relationship was (1) bigger than what could be describe in an engagement letter, (2) the service was more than “simply the resultant documents, and (3) Crowe’s scope of work included the generation of “opinion” exactly like the attorney malpractice exception. Thus, the Trial Court erred in its initial ruling and a new exception was added to the Economic Loss Rule.
Corey Meridew of Camden & Meridew, P.C. practices in the area of civil litigation and civil torts. If you’re looking for an experienced and knowledgeable attorney to fight for you, call Corey at 317-770-0000 or complete our online contact form.
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