Law and Economics of Pure Economic Loss in Tort

The law of torts excludes or restricts compensation for pure economic losses in many legal orders even though differences exist across countries. By definition, pure economic losses are not associated with the infringement of an absolute right, which its holder can defend against everyone, like life, bodily integrity or property. The economic underpinning of the exclusion from damage compensation is that a tortious act leading to pure economic loss often also causes gains for others. Therefore, the damages of the victim are higher than the social damage. Damage compensation will then—from a societal point of view—lead to overcompensation and possibly over-deterrence. The paper shows that this argument is sometimes correct and sometimes misleading. Many pure economic losses deserve compensation under the economic rationale as recent research has shown. Legal orders should therefore define subcategories of pure economic losses, which deserve or do not deserve compensation. Some catastrophic accidents as the Alaska oil spill and the “deep water horizon” catastrophe in the Gulf of Mexico revealed that most of the damages were pure economic losses like income loss of fishermen and in the tourist industry, which require compensation for providing sufficient incentives to tortfeasors.