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FOR PUBLICATION

FILED
Jun 08 2011, 9:46 am
of the supreme court, court of appeals and tax court

CLERK

ATTORNEYS FOR APPELLANT/CROSSAPPELLEE GUIDEONE INSURANCE COMPANY: CAROLYN SMALL GRANT ROBERT G. GRANT Grant & Grant Indianapolis, Indiana

ATTORNEY FOR APPELLEE U.S. WATER SYSTEMS, INCORPORATED:

WILLIS E. HUIRAS
Huiras Law Indianapolis, Indiana ATTORNEYS FOR APPELLEE/CROSSAPPELLANT LOWES HOME CENTERS INCORPORATED: MARK D. GERTH JENNIFER M. HERRMANN MATTHEW D. BRUNO Kightlinger & Gray, LLP Indianapolis, Indiana

IN THE COURT OF APPEALS OF INDIANA
GUIDEONE INSURANCE CO., as Subrogee of Andrew Alexander and Michael Schafstall, Appellant/Cross-Appellee/Plaintiff, vs. U.S. WATER SYSTEMS, INC., Appellee/Defendant, and LOWES HOME CENTERS, INC., Appellee/Cross-Appellant/Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

No. 49A05-1009-CT-569

APPEAL FROM THE MARION SUPERIOR COURT The Honorable Theodore M. Sosin, Judge Cause No. 49D02-0611-CT-45687

June 8, 2011 OPINION - FOR PUBLICATION BRADFORD, Judge

Appellant/Cross-Appellee/Plaintiff Guideone Insurance Company appeals the trial courts order granting partial summary judgment in favor of Appellee/CrossAppellant/Defendant Lowes Home Centers, Inc. Guideone also appeals the trial courts order dismissing Guideones claims against Appellee/Defendant U.S. Water Systems Inc. On cross-appeal, Lowes contends that the trial court abused its discretion in making certain evidentiary rulings. Lowes also contends that the trial court erred in granting partial summary judgment in favor of Guideone. We affirm in part, reverse in part, and remand with instructions. FACTS AND PROCEDURAL HISTORY On May 8, 2006, homeowners Michael Schafstall and Andrew Alexander went to a Lowes store to purchase a reverse osmosis drinking water filtration system ("water system"). At some point prior to completing the purchase, Schafstall and Alexander obtained a halfsheet flyer that read as follows: All installation services are guaranteed by Lowes warranty. Customer will receive any warranty provided by a manufacturer of the goods installed. Lowes warrants that the installation services will be performed by 2

an independent subcontracted installer in a good and workmanlike manner. Lowes warranty for installation services shall extend for a period of one year from the date the certificate of completion is signed by customer or for such greater period as may be required by applicable law. See Installed Sales Contract or Presentations Folders for details. Appellants App. p. 63. In completing the purchase of the water system, Schafstall signed an Indiana Itemized Installed Sales Contract ("Sales Contract"), as well as an Addendum to Installed Sales Contract ("Addendum"). The Addendum set forth the detailed warranty terms, and provided, in relevant part, as follows: Lowes does warrant that the Installation services will be performed by the Installer in a good and "workmanlike manner." Lowes warranty for Installation Services shall extend for a period of one year from the date the Certification of Completion is signed by Customer.... Customer agrees that its sole and exclusive remedy against Lowes for a warranty claim is reinstallation in a good and workmanlike manner, including the repair and replacement of any Goods if and to the extent reasonably necessary to correct the defective Installation Services. Customer shall have no warranty claim or remedy against Lowe's for loss or damage caused by normal wear or tear, loss or damage which had not been reasonably mitigated, loss or damage caused by acts of God, incidental or consequential damages for lost profits, sales, injuries to persons or property, or any other incidental or consequential damages. Appellee Lowes App. p. 15 (emphasis added). Lowes contracted with U.S. Water to install the water system in Schafstall and Alexanders home. The water system was installed on May 17, 2006. Approximately twelve hours later, Schafstall and Alexander awoke to the sound of running water. Schafstall and Alexander found that the water supply line was disengaged from the water system, and that water was "flowing out" onto the kitchen floor. Appellants App. p. 34.

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The next day, U.S. Water employee Gregg Adams came to Schafstall and Alexanders home. Adams opined that the water system was installed correctly and that the "leak" was caused by a "fitting failure." Appellants App. p. 35. The leak resulted in approximately $115,000 in water damage to Schafstall and Alexanders home. Guideone compensated Schafstall and Alexander for the damage pursuant to the terms of their homeowners insurance contract, and on November 9, 2006, Guideone filed suit against Lowes and U.S. Water seeking to recoup the $115,000 paid to Schafstall and Alexander. Louis Inendino, a registered professional engineer employed by Rimkus Consulting Group, hooked the water system up to the water line in his office in Indianapolis for a period of one week beginning on June 15, 2010. On July 20, Guideone filed its Second Motion for Summary Judgment relating to the issue of liability, arguing that Lowes should be held liable as a matter of law because it had breached its warranty that the water system would be installed in a good and workmanlike manner. On July 30, 2010, Lowes filed a Motion for Partial Summary Judgment relating to the scope of its potential liability, arguing that consequential damages were not available under the specific terms of the warranty, and as a result, its potential liability should be limited to the replacement cost of the water system. On August 16, 2010, U.S. Water filed a Motion to Dismiss, arguing that the economic loss doctrine precluded Guideone from recovering from U.S. Water. On August 23, 2010, Lowes moved to strike Indendinos affidavit, which Guideone had designated as evidence in support of its motion for summary judgment. On August 27, 2010, Guideone moved to strike the affidavit of U.S. Water President Mark Timmons, which

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Lowes had designated as evidence in support of its motion for partial summary judgment. The trial court conducted a hearing on all pending motions on August 30, 2010. On September 2, 2010, the trial court issued an order in which it (1) granted Guideones motion for summary judgment relating to the issue of liability; (2) granted Lowes motion for partial summary judgment relating to the scope of its liability; (3) granted in part and denied in part U.S. Waters motion to dismiss; (4) denied Lowes motion to strike Indendinos affidavit; and (5) granted Guideones motion to strike Timmonss affidavit. The trial court determined that U.S. Water was liable to Guideone in the amount $.01 and dismissed U.S. Water from the case. The trial court also determined that because the scope of Lowes liability was limited to the value of the water system and its installation, Lowes was liable to Guideone in the amount of $320 for the value of the water system and $.01 for the installation. This appeal follows. DISCUSSION AND DECISION I. Guideone's Claims on Direct Appeal A. Whether Schafstall had the Authority to Bind Alexander to the Warranty Contract Guideone maintains that the trial court erred in granting Lowes motion for partial summary judgment and U.S. Waters motion to dismiss because one of its underlying coinsureds, Alexander, was not bound by the contract between Lowes and Schafstall. Specifically, Guideone claims that Alexander was not bound by the warranty contract because he was not a party to the contract that was signed by Lowes and Schafstall. Lowes and U.S. Water, on the other hand, maintain that Alexander was bound by the warranty 5

contract because in purchasing the water system, Schafstall acted as Alexanders agent, or at the very least, Alexander ratified the purchase. 1. Actual or Apparent Authority In general, a principal will be bound by a contract entered into by the principals agent on his behalf only if the agent had authority to bind him. Gallant Ins. Co. v. Isaac, 751 N.E.2d 672, 675 (Ind. 2001). The agents authority to enter into a contract on his principals behalf will typically be either actual or apparent. Actual authority exists when the principal has, by words or conduct, authorized the agent to enter into a contract for the principal. Id. Apparent authority, on the other hand, exists where the actions of the principal give the contracting party the reasonable impression that the agent is authorized to enter into an agreement on behalf of the principal. Id. The question of whether an agency relationship exists and of the agents authority is generally a question of fact. Johnson v. Blankenship, 679 N.E.2d 505, 507 (Ind. Ct. App. 1997), trans. granted and summarily affirmed, 688 N.E.2d 1250 (Ind.1997). Heritage Dev. of Ind., Inc. v. Opportunity Options, Inc., 773 N.E.2d 881, 888 (Ind. Ct. App. 2002). "It is well settled that the existence of an agency relationship or an agents authority may not be predicated solely upon the declarations of the alleged agent." Id. However, "an agents authority may arise by implication and may be shown by circumstantial evidence." Id. The undisputed evidence demonstrates that Alexander was intimately involved in the purchase of the water system. Schafstall and Alexander went to Lowes together, discussed the purchase with the Lowes salesperson, and were both present when Schafstall completed the purchase and signed the warranty contract. The actions of Schafstall and Alexander could reasonably give Lowes the impression that Schafstall was authorized to enter into the warranty contract on behalf of Alexander.

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2. Ratification However, even if the Schafstall did not have actual or apparent authority to purchase the water system on Alexanders behalf and bind Alexander to the warranty contract, Alexander would still be bound by the terms of the warranty contract if he subsequently ratified the contract. A principal will be bound by a contract entered into by the principals agent on his behalf regardless of the agents lack of authority if the principal subsequently ratifies the contract as one to which he is bound. Id. at 889. Very generally, ratification may be express, where the principal explicitly approves the contract, or implied, where the principal does not object to the contract and accepts the contracts benefits. Id. This Court has explained the concept of ratification more particularly: Ratification means the adoption of that which was done for and in the name of another without authority. It is in the nature of a cure for [lack of] authorization. When ratification takes place, the act stands as an authorized one, and makes the whole act, transaction, or contract good from the beginning. Ratification is a question of fact, and ordinarily may be inferred from the conduct of the parties. The acts, words, silence, dealings, and knowledge of the principal, as well as many other facts and circumstances, may be shown as evidence tending to warrant the inference or finding of the ultimate fact of ratification.... Knowledge, like other facts, need not be proved by any particular kind or class of evidence, and may be inferred from facts and circumstances. Id. at 889-90 (internal quotation omitted). An agency relationship is not a prerequisite for ratification. Beneficial Mortg. Co. of Ind. v. Powers, 550 N.E.2d 793, 796 (Ind. Ct. App. 1990). Knowledge of all the material facts by the person to be charged with the unauthorized acts of another is an indispensable element of ratification. Id. Here, the undisputed evidence demonstrates that in its complaint, Guideone alleged

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that Lowes had a duty to its insureds, Alexander and Schafstall, to use reliable, skilled workmen who could perform the installation of the water system; that Lowes breached this duty to the insureds; that U.S. Water had a duty to the insureds to perform its work skillfully, carefully, and in a workmanlike manner; and that U.S. Water breached this duty to the insureds. Likewise, in its motion for summary judgment on the issue of Lowes liability, Guideone asserted that its insureds, Alexander and Schafstall, purchased a water system from Lowes; that Lowes gave the insureds a warranty for the installation providing that installation services would be performed in a "good and workmanlike manner[;]" that Lowes had the insureds water system installed; that the water system failed, flooding the insureds home; that U.S. Water returned to the insureds home to observe the flood damage; and that Lowes breached its warranty to the insureds. Additionally, Alexanders statements support the inference that Schafstall was authorized to purchase the water system on his behalf. Alexander averred that on May 8, 2006, he and Schafstall purchased a water system for their home from Lowes, and Lowes had U.S. Water install "our" water system in our home on May 17, 2006. Appellants App. p. 34. Upon review of the undisputed evidence and testimony presented before the trial court, we conclude that, in the very least, Alexander ratified the contract and thus is bound by its terms. B. Whether the Trial Court Erred in Granting U.S. Water's Motion to Dismiss Guideone contends that the trial court erred when it granted U.S. Waters Trial Rule 12(B)(6) motion to dismiss for failure to state a claim. In reviewing a motion to dismiss granted pursuant to Trial Rule 12(B)(6), our standard of review is well settled. Burke v. Town of Schererville, 739 N.E.2d 8

1086, 1090 (Ind. Ct. App. 2000). A 12(B)(6) motion to dismiss for failure to state a claim upon which relief can be granted tests the legal sufficiency of a claim, not the facts supporting it. Id. Therefore, we view the complaint in the light most favorable to the non-moving party, drawing every reasonable inference in favor of that party. Id. at 1091. In reviewing a ruling on a motion to dismiss, we stand in the shoes of the trial court and must determine if the trial court erred in its application of the law. Id. The trial courts grant of a motion to dismiss is proper if it is apparent that the facts alleged in the complaint are incapable of supporting relief under any set of circumstances. Id. In determining whether any facts will support the claim, we look only to the complaint and may not resort to any other evidence in the record. Id. Further, under notice pleading, a plaintiff need only plead the operative facts involved in the litigation. Donahue v. St. Joseph County, 720 N.E.2d 1236, 1239 (Ind. Ct. App. 1999). The plaintiff is required to provide a "clear and concise statement that will put the defendants on notice as to what has taken place and the theory that the plaintiff plans to pursue." Id. Godby v. Whitehead, 837 N.E.2d 146, 149 (Ind. Ct. App. 2005), trans. denied. We apply a de novo standard of review to Guideones appeal from the trial courts grant of U.S. Waters motion to dismiss for failure to state a claim. Id. (citing Stulajter v. Harrah's Ind. Corp., 808 N.E.2d 746, 748 (Ind. Ct. App. 2004)). A complaint cannot be dismissed under Trial Rule 12(B)(6) unless it appears to a certainty that the plaintiff would not be entitled to relief under any set of facts. Id. (citing Schulz v. State, 731 N.E.2d 1041, 1043 (Ind. Ct. App. 2000), trans. denied). Further, when a trial court grants a motion to dismiss without reciting the grounds relied upon, it must be presumed upon review that the court granted the motion to dismiss on all the grounds in the motion. Id. (citing Gorski v. DRR, Inc., 801 N.E.2d 642, 645 (Ind. Ct. App. 2003)). Thus, our review includes an examination of the complaint and the arguments U.S. Water presented in its motion to dismiss. See Id. Guideone claims that the trial court erred when it granted U.S. Waters motion to 9

dismiss because one of its underlying co-insureds, Alexander, was not bound by the contract between Lowes and Schafstall. U.S. Water, on the other hand, maintains on appeal that the trial courts decision to dismiss Guideones complaint was proper because Alexander was bound by the contract between Lowes and Schafstall, and application of the economic loss doctrine precludes any recovery by Guideone. U.S. Waters Br. p. 9. 1. Whether Alexander was Bound by the Contract Between Lowe's and Schafstall Guideone maintains that the trial court erred when it granted U.S. Waters motion to dismiss because Alexander was not bound by the contract between Lowes and Schafstall. However, having concluded above that Alexander was bound by the contract between Lowes and Schafstall, we conclude that Guideones claim that the trial court erroneously dismissed its claims against U.S. Water must fail in this regard. 2. Whether the Economic Loss Doctrine Precludes any Recovery by Guideone U.S. Water maintains that the trial court properly dismissed Guideones claims against it because the economic loss doctrine precludes any recovery by Guideone. Guideone argues that the nature of its losses take this case outside of the economic loss rule. Under the economic loss doctrine, a party may only recover the remedies provided by the contract following a failure of a product or service to perform as expected. See Gunkel v.

Renovations, Inc., 822 N.E.2d 150, 152 (Ind. 2005). Under this doctrine, "contract is the only available remedy ,,where the loss is solely economic in nature, as where the only claim of loss relates to the products failure to live up to expectations, and in the absence of damage to other property or person." Id. (quoting Reed v. Central Soya Co., 621 N.E.2d 1069, 1074-

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75 (Ind. 1993)). "The economic loss rule is only implicated where a plaintiff has suffered ,,pure economic loss." Indpls.-Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 731 (Ind. 2010). "Pure economic loss" means pecuniary harm not resulting from an injury to the plaintiffs person or property. Id. The Indiana Supreme Court has held that "where the loss is purely economic, and there is no damage to other property and no personal injury, the legislature has determined that the plaintiffs remedy lies in contract law." Progressive Ins. Co. v. Gen. Motors Corp., 749 N.E.2d 484, 488 (Ind. 2001). In Reed, the Indiana Supreme Court elaborated on what constitutes purely economic loss and defined economic damages under Indiana law as: the diminution in the value of a product and consequent loss of profits because the product is inferior in quality and does not work for the general purposes for which it was manufactured and sold.... Economic loss includes such incidental and consequential losses as lost profits, rental expense, and lost time. 621 N.E.2d at 1074. Damage to the product itself, including costs of its repair or reconstruction, is an "economic loss" even though it may have a component of physical destruction. Gunkel, 822 N.E.2d at 154. Indiana general negligence law provides that damage from a defective product or service may be recoverable under a tort theory if the defect causes personal injury or damage to other property. However, "[e]conomic losses are not recoverable in a negligence action premised on the failure of a product to perform as expected unless such failure causes personal injury or physical harm to property other than the product itself." Id. at 154

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(quotation omitted). "If a buyer were allowed to recover economic loss under a negligence theory, he could, in effect, circumvent the sellers limitations or exclusion of warranties permitted under the Uniform Commercial Code." Progressive Ins. Co., 749 N.E.2d at 488 (quotation omitted)). Because the "economic loss" doctrine permits tort recovery only for personal injury or damage to "other property," if property is damaged it is necessary to identify the product at issue which defines "other" property. The subject of "other property" has been approached in a number of different ways. Much of the law addressing the issue of what constitutes "other property" deals with whether the other property is a distinct item or merely a component of the overall defective product. Other courts have focused on whether "goods" are involved. Yet others have concluded that the economic loss doctrine precludes recovery for injury to "other property" if the injury was, or should have been, reasonably contemplated by the parties to the contract. Some have concluded that the "product" is the product purchased by the plaintiff, not the product sold by the defendant. Gunkel, 822 N.E.2d at 154. "If property is sold to the user as part of the finished product, the consequences of its failure are fully within the rationale of the economic loss doctrine ... [and] therefore is not ,,other property." Id. at 155. "Property acquired separately from the defective good or services is ,,other property, whether or not it is, or is intended to be, incorporated into the same physical object." Id. Here, Guideone seeks to recover monetary damages incurred by its subrogors, Schafstall and Alexander, after Schafstall and Alexander suffered water damage to their home as a result of an apparent failure of the water system purchased from Lowes by Schafstall and Alexander. Lowes subcontracted with U.S. Water to install the water system. The apparent failure and loss occurred less than twelve hours after representatives for U.S. Water installed the water system, and resulted in flooding that caused over $100,000 in 12

damage to the lower level of Schafstalls and Alexanders home. Guideone subsequently filed suit against Lowes and U.S. Water alleging that the parties were in breach of the warranty guarantee issued by Lowes that the water system would be installed in a "good and workmanlike manner" because the water system was negligently installed. Appellants App. pp. 16-17. While we agree with U.S. Water that the economic loss doctrine would preclude recovery by Guideone for damage to the water system itself, we conclude that the "other property" exception to the economic loss doctrine would permit tort recovery for the flood damage to Schafstall and Alexanders home because the damaged floor, walls, etc. were acquired separately from the water system and were not merely a component of the water system, but rather were separate, distinct items. See Gunkel, 822 N.E.2d at 156-57; Indpls.Marion Cnty. Pub. Library, 929 N.E.2d at 732. Because the flood damage that resulted from the apparent failure of the water system resulted in physical damage to "other property," we conclude that Guideone raised a claim under which it could potentially recover, and, as such, the trial court erred in granting U.S. Waters motion to dismiss.1 See Godby, 837 N.E.2d at 149. C. Whether the Trial Court Erred in Granting Lowe's Motion for Partial Summary Judgment

In reaching this conclusion, we make no comment as to whether Guideones negligence claim will ultimately be successful, but only conclude that Guideone has raised a claim under which it could potentially recover.
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Guideone also contends that the trial court erred in granting partial summary judgment in favor of Lowes because Alexander was not bound by the contract between Lowes and Schafstall, and also because the language limiting Lowes express warranty was inoperative. Pursuant to Rule 56(C) of the Indiana Rules of Trial Procedure, summary judgment is appropriate when there are no genuine issues of material fact and when the moving party is entitled to judgment as a matter of law. When reviewing a decision to grant summary judgment, this court applies the same standard as the trial court. Best Homes, Inc. v. Rainwater, 714 N.E.2d 702, 705 (Ind. Ct. App. 1999). We must determine whether there is a genuine issue of material fact requiring trial, and whether the moving party is entitled to judgment as a matter of law. Id. Neither the trial court nor the reviewing court may look beyond the evidence specifically designated to the trial court. Id. A party seeking summary judgment bears the burden to make a prima facie showing that there are no genuine issues of material fact and that the party is entitled to judgment as a matter of law. American Management, Inc. v. MIF Realty, L.P., 666 N.E.2d 424, 428 (Ind. Ct. App. 1996). Once the moving party satisfies this burden through evidence designated to the trial court pursuant to Trial Rule 56, the non-moving party may not rest on its pleadings, but must designate specific facts demonstrating the existence of a genuine issue for trial. Id. A trial courts grant of summary judgment is "clothed with a presumption of validity," and the appellant bears the burden of demonstrating that the trial court erred. Best Homes, Inc., 714 N.E.2d at 706 (quoting Barnes v. Antich, 700 N.E.2d 262, 264-65 (Ind. Ct. App. 1998)). Heritage Dev., 773 N.E.2d at 887-88. 1. Whether Alexander was Bound by the Contract Between Lowe's and Schafstall Again, Guideone maintains that the trial court erred when it granted Lowes motion for partial summary judgment because Alexander was not bound by the contract between Lowes and Schafstall. However, having concluded above that Alexander was bound by the contract between Lowes and Schafstall, we conclude that Guideones claim that the trial court erroneously granted partial summary judgment in favor of Lowes must fail in this regard. 14

2. Whether the Language Limiting Lowe's Express Warranty Was Inoperative Guideone also contends that the trial court erred in granting partial summary judgment in favor of Lowes because the language limiting Lowes express warranty was inoperative. Specifically, Guideone claims that the limiting language was inoperative because the sales provisions of the Uniform Commercial Code ("UCC"), as codified at Indiana Code chapter 26-1-2 et. seq., allows for the recovery of consequential damages. Guideone also claims that the limiting language conflicted with Lowes express warranty. A contract is thought to be the product of the free bargaining of the parties. Fresh Cut, Inc. v. Fazli (1994), Ind. App., 630 N.E.2d 575, 577. As a general rule, the law allows persons of full age and competent understanding the utmost liberty of contracting and their contracts, when entered into freely and voluntarily, are enforced by the courts. Id. This is so because it is in the best interest of the public that persons should not be unnecessarily restricted in their freedom of contract. Id. Accordingly, the parties to a contract are free to include in the agreement any provisions they desire so long as such provisions do not offend the public policy of this state. Id. Pinnacle Computer Servs., Inc. v. Ameritech Pub., Inc., 642 N.E.2d 1011, 1013-14 (Ind. Ct. App. 1994). "Under Indiana law, a person is presumed to understand and assent to the terms of the contracts he signs." Buschman v. ADS Corp., 782 N.E.2d 423, 428 (Ind. Ct. App. 2003) (citing Lake Cnty. Trust Co. v. Wine, 704 N.E.2d 1035, 1040 (Ind. Ct. App. 1998)). a. UCC Guideone argues that the limiting language was inoperative because the UCC allows for the recovery of consequential damages. In a proper case, a buyer may recover incidental and consequential damages following a breach of warranty by a seller. Indiana Code

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