The Subrogation Strategist

The economic loss doctrine is a concept in subrogation law that is often debated and rarely completely understood. Even when a subrogation practitioner may think they have it figured out, a new scenario presents itself that creates a brand-new gray area. The United States District Court for the Northern District of Illinois (District Court) recently addressed the effect a data breach – at a software provider - had on an insured’s software access and how the economic loss doctrine played into the resulting claims for damage.

In Travelers Excess & Surplus Lines Co. v. CDK Glob., LLC, 2025 U.S. Dist. LEXIS 203262 (Ill. 20025), the District Court addressed whether an auto dealership that sustained loss of business damages after its software vendor suffered a data breach - rendering its software inaccessible - could bring tort claims, or was it limited to a contract claim per the economic loss doctrine. Because the court found that the damage was purely economic and no exceptions applied, it barred the plaintiff-carrier’s tort claims. In doing so, it reinforced the application of the economic loss doctrine, known in Illinois as the Moorman doctrine.

The subrogation case at issue involved plaintiff-carrier’s auto dealership insured, Mills Enterprise Holdings, LLC (Mills), and its relationship with CDK Global, LLC (CDK), which provided software systems to Mills for "dealer-specific data" used for "essential functions such as sales, parts, service, repairs, and warranties." When CDK sustained a catastrophic cyber-attack to its system, Mills lost access to its software and was out of business for an extended period of time. Its carrier reimbursed Mills for its subsequent damages and filed suit as subrogee of Mills against CDK.

In its suit, the plaintiff-carrier included counts of negligence and gross negligence, negligent training and supervising, and breach of contract. CDK filed a motion to dismiss the negligence-based claims, arguing for the application of the economic loss doctrine, and the contract claim based on lack of specificity in the pleading. The court granted the dismissal on the tort claims and denied the motion on the contract claim.

The economic loss doctrine bars tort recovery for damages that are purely economic. Such damages include inadequate value, cost of repair or replacement of a subject product and consequential loss of profits. Exceptions to the doctrine include where there is an accompanying personal injury or property damage, fraud, and damage resulting from the defendant’s negligent misrepresentation. Absent one of these exceptions, claims for economic loss must be based in contract.

The court found that Mills’ lost profits - from its inability to access to the subject software - were purely economic. It rejected the plaintiff’s argument that CDK had a higher duty - akin to an accountant - and found that the only product damaged was the software itself. As noted by the court, “Mills did not contract with the defendant for intangible professional services . . . At the end of the day, [the defendant] provides software, and software is a product.” The court also rejected the argument that CDK made negligent misrepresentations while dealing, holding that the information it provided about its system was merely ancillary or incidental. Concluding that the damages Mills sustained were within the public policy applicable to the economic loss doctrine, it dismissed the tort claims and limited the plaintiff-carrier’s recourse to contract.

Even with numerous exceptions, the types of losses defense counsel are attempting to limit with the economic loss doctrine are growing. Cyber-attacks and lost profits from them are becoming increasingly more prominent in the corporate world. With more insurance policies that cover this type of damage and thus more opportunity for subrogation, we must be more mindful of the potential defense of the economic loss doctrine.

One tip for subrogation practitioners is to dig into the damages to confirm whether they are truly all economic. Even if there is a small amount of accompanying property damage, it could be enough to bring a tort claim. It is also important to dig into the facts of a case, especially when the state of loss has an exception for negligent misrepresentation. A letter or an email buried in the insured’s file may be enough to support a misrepresentation claim and avoid the consequences of the economic loss doctrine.