Waterlogged tenants fail to sink privity requirement at COA

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Although the tenants of an office that flooded after a sprinkler system malfunctioned floated “compelling arguments” as to why the sprinkler company should reimburse their insurance carriers for the damage, the Court of Appeals of Indiana was anchored by precedent which holds that the requirement of privity still stands in the property-damage context.

The dispute started when U.S. Automatic Sprinkler Corp. sent an employee to adjust the sprinkler system in an Indianapolis building that housed the Sycamore Springs Surgical Center, two dentists and 3D Exhibits, Inc. A few days later, multiple pipes froze then burst causing damage to all the tenants.

Travelers Indemnity Company of Connecticut covered the cost for the surgery center and Erie Insurance Exchange covered the losses for the other tenants. Subsequently, the insurance companies sued Automatic Sprinkler in subrogation. Also, one of the dentists and 3D Exhibit also sued the sprinkler company.

Automatic Sprinkler filed a motion for summary judgment against Travelers and another summary judgment motion against the other parties which it referred to as the “non-contract tenants.” The Marion Superior Court denied both motions.

However, the Court of Appeals reversed the ruling in favor of the non-contract tenants in U.S. Automatic Sprinkler Corporation v. Erie Insurance Exchange, Travelers Indemnity Company of Connecticut a/s/o Sycamore Springs Surgical Center, LLC, Dr. Nancy Pruett, D.D.S. and 3D Exhibits, Inc., 21A-CT-580.

The appellate panel found Citizen Gas & Coke Utility v. American Economy Insurance Co., 486 N.E.2d 998 (Ind. 1985) is still binding in the property-damage context. In that case, the Indiana Supreme Court established the “acceptance rule” which holds that “a contractor or repairman is not liable for negligent damages to third parties after acceptance of the work by an owner.”

The non-contract tenants argued Peters v. Forster, 804 N.E.2d 736 (Ind. 2004) controlled this case. In Peters, the Indiana Supreme Court rejected the acceptance rule and adopted the “modern rule” or the “foreseeability doctrine” which maintains that “a builder or contractor is liable for injury or damage as a result of the condition of the work.”

Arguing before the Court of Appeals, the non-contract tenants contended that because it was foreseeable their property would be damaged by Automatic Sprinkler’s negligence, the sprinkler company owed them a duty under Peters.

However, the appellate agreed with Automatic Sprinkler. The company asserted that the Supreme Court’s rejection of the acceptance rule and the privity requirement in Peters was limited to the personal-injury context and had no bearing in the non-contract tenants’ property-damage case.

“The Non-Contract Tenants offer compelling arguments that would support overruling Citizens Gas,” Judge Nancy Vaidik wrote for the court. “They assert that requiring contractual privity for a negligence claim “would essentially allow contractors such as [Automatic Sprinkler] to perform negligent work without regard to anyone but their own client.” They contend that ‘requiring contractors to perform safe work and to not endanger person and property in the course of their work represents the interests of the State of Indiana at large and is consistent with long standing law.’

“But we cannot overrule Citizens Gas, a decision by our Supreme Court,” Vaidik continued. “And under that decision, Automatic Sprinkler did not have a duty to the Non-Contract Tenants because it was not in privity with them.”

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