Out-of-Pocket Recovery

Negligent Misrepresentation Damages

Out-of-Pocket Recovery

Restatement (Second) of Torts § 552B(1) fixes the award for negligent misrepresentation: the damages necessary to compensate the plaintiff for the pecuniary loss of which the misrepresentation is a legal cause.¹ Suppose a lawyer has carelessly misstated a fact to a nonclient, and duty, breach, and justifiable reliance are established. Only the dollar figure remains, and Second Restatement terms supply it.² That one sentence of § 552B(1) carries two limits: the loss must be pecuniary, and the misrepresentation must be a legal cause of it.

The measure the section adopts is the out-of-pocket rule, which compensates the loss the plaintiff took on by relying on the statement and excludes what the plaintiff would have gained had the statement been true. Subsection (2) says so directly: the damages “do not include the benefit of the plaintiff’s contract with the defendant.”³ In Trytko v. Hubbell, Inc., the court read the commentary to § 552B the same way, concluding that the Restatement adopts the out-of-pocket rule for negligent misrepresentation and specifically excludes benefit-of-the-bargain damages.⁴ Subsection (1) names, as one component of recoverable loss, “the pecuniary loss suffered otherwise as a consequence of the plaintiff’s reliance upon the misrepresentation.”⁵

The rule fits the wrong the defendant committed. A negligent speaker is careless, not promissory, and never warranted that the statement was true. A remedy that paid the plaintiff what the statement would have been worth if true would turn a negligence claim into enforcement of a promise nobody made. Out-of-pocket recovery makes the speaker bear the cost of the mistake and nothing beyond it, and the two limits in § 552B(1) apply that principle in turn, beginning with the requirement that the loss be pecuniary.

Pecuniary Loss Only

Section 552B(1) pays for pecuniary loss, meaning loss counted in money, such as sums the plaintiff spent in reliance or value the plaintiff gave up.⁶ Humiliation, worry, and sleeplessness, however real, are not economic in that sense, and a negligent misrepresentation award does not compensate them. A single decision shows the line, because one claim produced an item the court allowed and an item it struck.

In Federal Land Bank Association v. Sloane, a couple learned they could obtain a contract to raise chickens for Pilgrim’s Pride if they built new chicken houses, and they applied to a lender for a $141,000 construction loan.⁷ A loan officer told them the bank’s board had approved the loan and that they could begin site preparation. Construction began; then a letter denied the application. The denial rested on valid grounds: the couple had left two outstanding debts off the application and had borrowed more money while it was pending. No other lender financed the project.⁸

The couple sued on the theory that the officer had negligently misrepresented the approval, and they asked for three things: their construction expenses, the profits they lost with the Pilgrim’s Pride contract, and damages for mental anguish. The Supreme Court of Texas began its damages analysis with § 552B, and the ruling is easiest to follow in Second Restatement terms.⁹ It rejected the mental anguish award because the section provides damages only for pecuniary losses, and it left the couple with compensation for their past pecuniary losses other than lost profits.¹⁰ The lost profits fell on grounds taken up below. The mental anguish award fell on the kind of loss alone, though the bank’s statement and the couple’s reliance were the same for every item.

A practical reason supports the limit. A careless statement is cheap to make and may reach many listeners; if each listener could add an award for distress, which no receipt or market price anchors, the speaker’s exposure would have no ceiling. Money losses can be proved with records and bounded by valuation, which keeps the duty of care tolerable for lawyers and others who supply information to people outside the relationship.

States differ in how firmly they hold the line. Some limit negligent misrepresentation damages to pecuniary loss, so that in Minnesota and North Carolina a personal-injury claim cannot be based on the theory, while California bars negligent misrepresentation claims for emotional distress.¹¹ Misrepresentation law more broadly allows emotional-harm recovery only in exceptional settings. Ordinary commercial dealings such as buying property do not qualify. A plaintiff may recover emotional harm when the misrepresentation is an operative fact in some other cause of action, when the fraud invades personal rights as in insurance bad-faith claims, or when the misrepresentation also amounts to the independent tort of intentional infliction of emotional distress.¹²

An exam fact pattern that dwells on the plaintiff’s suffering after a careless statement is testing whether you sort losses by kind. List the money the plaintiff spent or lost because of the statement, treat those items as candidates for recovery, and set the distress aside, however vivid it is. That sorting settles only the kind of loss; whether a particular money item is recoverable turns on the second limit, legal cause.

Legal Cause Required

Section 552B(1) awards only the pecuniary loss “of which the misrepresentation is a legal cause,” and that phrase screens every dollar the plaintiff claims.¹⁴ Legal cause here is the causation of ordinary negligence, in two parts. The statement must be a cause in fact of the loss, meaning the loss would not have happened without it, and the loss must be a foreseeable result of relying on the false statement.¹⁵

Each part does its own work. The first asks whether the statement made a difference: a plaintiff who would have lost the same money had the speaker said nothing, or had the statement been true, was hurt by something else. The second asks whether the loss is the kind of harm that makes reliance on a careless statement dangerous. Without these parts, the speaker would insure the plaintiff against every misfortune that follows reliance.

A stock purchase shows both parts at work. A buyer is induced to buy corporate stock by a false statement about the company’s condition, and the company later goes bankrupt because of unforeseeable events unrelated to the falsity of the statement. The speaker is not liable for the stock loss, because the statement got the buyer into the investment but did not cause the collapse.¹⁶ The buyer does recover on proof that the company probably would have weathered the misfortune had its condition been as represented, since the falsity is then the reason the company failed.¹⁷ The buyer also recovers if the later events, though unrelated to the falsity, were foreseeable.¹⁸

The Texas court ran the same screen item by item in Sloane. The couple spent on construction because the officer told them to go ahead, so the statement is a cause of that spending. It is not a cause of the lost contract. The bank denied the loan for valid reasons, no other lender financed the project, and the loan would have been denied on those same grounds had the officer spoken carefully, so the couple would not have obtained the Pilgrim’s Pride contract whether or not the misrepresentation was made.¹⁹ The court also invoked the bar on benefit-of-the-bargain damages, treated in its own section below, but the causation gap reaches the same result on the facts.

Lost profits are not out of bounds as a category. Recoverable loss includes the pecuniary loss suffered otherwise as a consequence of reliance,²⁰ and commentary on damages in jurisdictions that permit loss-of-bargain recovery adds that reliance expenses may be recovered even when the transaction is never completed. Expenses incurred or profits lost as a proximate result of the misrepresentation count as consequential damages there, provided they are proved with reasonable certainty and do not duplicate another award.²¹

The Sloanes could not tell that story, because no lender would have funded them either way.

Causation links a statement to a loss, so there must be a loss to link. A tort action for misrepresentation requires proof of actual damages, even when the misrepresentation was fraudulent.²² A false statement, a listener who relied, and a careless speaker leave the claim incomplete until the plaintiff identifies money actually lost.