In Zurich American Ins. Co. v. Hughes, Watters & Askanase, L.L.P., No. 11-05-00044-CV, 2006 Tex. App. Lexis 6037 (Tex. App.–Eastland July 13, 2006), Zurich filed suit against Hughes Watters for legal malpractice. Zurich’s insured, Piccadilly Cafeterias of Texas, Inc., operated a restaurant and was a tenant of Northline Mall in Harris County, Texas. In 1997, a corridor wall in the mall collapsed. This interrupted the mall's utilities and power and caused the mall to be closed for repairs. Piccadilly was forced to close for approximately three months because of the repairs. Zurich was Piccadilly's insurer, and Zurich paid Piccadilly $ 283,492 for a business interruption claim. Zurich hired Hughes Watters to file a subrogation suit. In 1999, one day before limitations ran, Hughes Watters filed a petition for intervention on behalf of Zurich in a case titled Sammie Lee Curtis, et al v. Northline Joint Ventures, et al. Subsequently, Hughes Watters filed a petition for intervention on behalf of Zurich in a case titled Rice Food Markets, Inc. v. Northline Joint Ventures, et al. This intervention was filed more than two years after the wall's collapse. Hughes Watters then nonsuited Zurich's claims in the Curtis case. The trial court granted summary judgment against Zurich in the Rice case on the ground that the original intervention did not toll limitations and, therefore, that Zurich's subrogation claim was barred by limitations.

A legal malpractice claimant must show that a duty existed, that the duty was breached, and that the breach was the proximate cause of plaintiff's damages. Cosgrove v. Grimes, 774 S.W.2d 662, 666 (Tex. 1989); Mackie v. McKenzie, 900 S.W.2d 445, 448 (Tex. App.–Texarkana 1995, writ denied). To establish proximate cause, the claimant must show that it would have prevailed in the underlying suit but for the attorney's negligence. Schaeffer v. O'Brien, 39 S.W.3d 719, 720-21 (Tex. App.–Eastland 2001, pet. denied). This is often referred to as the "case within a case." Id. Zurich's malpractice claim, therefore, required proof that it would have prevailed in its subrogation claim if Hughes Watters had intervened before the statute of limitations expired.

Hughes Watters filed a traditional motion for summary judgment asserting that Zurich could not establish the "case within a case" necessary to prevail on its legal malpractice claim because Piccadilly did not sustain property damage when the wall collapsed and, therefore, that the economic loss rule precluded any recovery.

The parties executed an agreed stipulation of facts in connection with the motion for summary judgment. The parties agreed that a corridor wall at the mall collapsed, that this wall was not one of Piccadilly's walls, and that Piccadilly was forced to close for approximately three months because of the wall collapse. The parties agreed further:

The direct damage to the location consisted of cleanup of the restaurant's equipment and fixtures from the construction dust. Some stock items and prepared food and food in process spoiled as a result of the closure of the location.

The trial court granted Hughes Watters summary judgment. Zurich appealed from this judgment.

The economic loss rule provides that, in tort cases, economic damages are not recoverable unless they are accompanied by actual physical injury or property damage. Hou-Tex, Inc. v. Landmark Graphics, 26 S.W.3d 103, 107 (Tex. App.–Houston [14th Dist.] 2000, no pet.). The rule is a vehicle for defining duty and liability. It has, for example, been used to distinguish between tort duties and contractual duties. See, e.g., Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991). It has been used to define a manufacturer's or seller's liability when a defective product causes damage only to itself. See, e.g., Am. Eagle Ins. Co. v. United Techs. Corp., 48 F.3d 142, 144 (5th Cir. 1995); Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 80 (Tex. 1977). It has also been used to define the extent of duty owed when one alleged tortfeaser's action arguably damages several others. See, e.g., Rodriquez v. Carson, 519 S.W.2d 214, 215-16 (Tex. Civ. App.–Amarillo 1975, writ ref'd n.r.e.); see also Express One Int'l, Inc. v. Steinbeck, 53 S.W.3d 895, 899 (Tex. App.–Dallas 2001, no pet.) (the economic loss rule places reasonable limits on a defendant's liability to those who suffer only economic damages).

The Court of Appeals agreed that the economic loss rule barred the claim of Zurich’s insured and, therefore, Zurich could not establish that it would have won the case-within-a-case:

[I]t is clear that property damage cannot consist merely of damage to an intangible asset or increased operational costs. Instead, some physical destruction of tangible property must occur. Piccadilly's cleanup costs are merely increased operational costs and do not satisfy the economic loss rule.

The spoiled food and food products is a closer question. Because the products spoiled as a result of the restaurant's closure, they are also economic damages. Food and food products are continually consumed and replaced as part of a restaurant's normal operations. Because they are perishable goods, they must be discarded if not timely consumed. The collapsed wall did not destroy any of Piccadilly's inventory. That inventory was discarded because the restaurant was closed for three months. If Piccadilly had prosecuted its own action, its claim would not have been for the cost of replacing any inventory but for the profits it lost as a consequence of being closed for three months. Piccadilly's cleanup costs, inventory restocking costs, and any other out-of-pocket expenses incurred while closed would have factored into the lost profits calculation.

Zurich has not identified any property damage that Piccadilly sustained as a result of the wall's collapse. Consequently, the economic loss rule bars Zurich's subrogation claim, and the trial court correctly granted Hughes Watters's motion for summary judgment.