A pure economic loss is distinct to other types of losses, and can be more difficult and onerous to claim compensation for. Read on to find out more about how to make a claim if you experience pure economic loss.
What is a pure economic loss?
A pure economic loss occurs when the plaintiff (the injured party) suffers a financial loss due to the negligence of the defendant (the negligent party) and this loss was not the result of a personal injury or damage to property. Common examples of financial losses are a loss of profit or profitability, a loss of earnings, or incurred expenditure.
There are two types of pure economic losses:
- Negligent statements leading to pure economic loss: Usually regarding parties in the business or profession of giving advice, such as financial advisers giving negligent advice leading to a financial loss
- Negligent acts leading to pure economic loss: Such as third-party property damage, where the defendant may damage another party’s property and this causes the plaintiff to suffer a financial loss
Where a financial loss results from the plaintiff suffering a personal injury or damage to their property, this would instead be a classified as a consequential economic loss.
What do I need to make a pure economic loss claim?
Traditionally, the courts have been reluctant to allow a pure economic loss claim, due to a fear that potentially unlimited claims could arise. However, the courts are now allowing a pure economic loss to give rise to a claim, if there is a duty of care owed from the defendant to the plaintiff. For the defendant to owe the plaintiff a duty of care, there must be a sufficiently close relationship between the two parties. There must also be reasonable foreseeability, in that the defendant should have been able to reasonably foresee that if they were negligent, it would not be far-fetched or fanciful that the plaintiff would suffer an economic loss.
In determining whether a duty of care exists, the courts will consider salient features, such as:
- Vulnerability: If the plaintiff is unable to take reasonable steps to protect himself from the defendant’s negligence, then it is more likely the defendant will owe a duty of care. The courts will also consider how practical it is for the plaintiff to take such precautions
- Control: If the defendant was in control of the negligence which caused the economic loss, then it is likely more likely the defendant will owe a duty of care
- Interference with legitimate business activity: If a duty of care would interfere with the carrying on of the defendant’s business, or adds a further burden, it is more likely that that the defendant will not owe a duty of care
- Assumption of responsibility or reliance: If the defendant has assumed responsibility or has created an assumption in the plaintiff, and the plaintiff relies upon this, then it is more likely that there will be a duty of care
- Indeterminate liability: If the defendant cannot readily identify or realistically calculate all the parties who would be affected by their negligence, and what their economic losses may be, it is less likely there will be a duty of care
- Conflict of duties: If finding a duty of care will conflict with an already existing duty of care, it is less likely that the defendant will owe this more recent duty of care
- Disclaimers: If the defendant issued a disclaimer from liability to the plaintiff, it is more likely there will not be a duty of care
- Financial interest: If the defendant had a financial interest in the transaction with the plaintiff, there is more likely to be a duty of care
Once a duty of care has been established, this alone is not enough to bring forth a claim. For negligence to be established, there are three criteria to be met:
- The defendant owed a duty of care.
The defendant owed the plaintiff a duty to take reasonable care
- The defendant breached that duty of care.
A breach of duty of care means that the defendant has not taken reasonable steps to ensure the safety and well-being of those to which they owe a duty of care. For example, in the context of a public liability compensation claim, where supermarkets deviate from reasonable practices, such not having floors cleaned from spillage or not having warning signs or barriers placed around potential hazards, this will constitute a breach.
- The plaintiff suffered a pure economic loss as a result of the breach of duty of care
A financial loss was suffered, such as a loss of profit or profitability, a loss of earnings, or incurred expenditure.
For more information about a liability insurance claim, contact Schreuder Partners today.