Coming to Construction Claims—The Collateral Source Rule

By Pete Marino, Andrew Atkins and Casey Vaughn 

In another significant opinion from the North Carolina appellate courts, the Court of Appeals recently expanded the application of the collateral source rule to negligence claims arising out of construction disputes in a case of first impression, Carolina-A-Contracting, LLC v. J. Scott Campbell Construction Company, Inc., 2021-NCCOA-62 (Mar. 16, 2021). In general terms, the collateral source rule provides that a negligent party is not entitled to a credit for payments made by an independent source, such as an insurance company, to the injured party for the same injury. As the Court noted, this common-law rule is an exception to the general legal principle that there can only be one recovery for one injury.

While this opinion is integrally linked to the unique facts of the case, which may be unlikely to arise in the future, the important takeaway is that the collateral source rule now clearly has a place in construction negligence disputes. Application of the collateral source rule could have an impact on developer-owners, general contractors and designers, as the amount of permissible damages could shift significantly depending on insurance or other collateral sources of payment at issue.

Prior to this decision, the collateral source rule arose most often in cases involving insurance payments related to personal injury or property damage. For example, in a personal injury case, the damages awarded to the injured party would not be reduced or set-off by any amounts paid by the injured party’s insurance. The rationale behind this rule is that a negligent party should not be entitled to benefit from payments made by an independent, third-party, such as an insurer, particularly when they did not pay for the policy. While the fairness of the collateral source rule is often debated, it has been part of North Carolina jurisprudence for well over 100 years.

The fact pattern addressed by the Court of Appeals in Carolina-A-Contracting was different than the typical collateral source rule case because it dealt with claims between a prime contractor and a second-tier subcontractor, Carolina-A-Contracting, arising out of a defectively constructed retaining wall. At the trial-court level, Carolina-A-Contracting argued that its liability for the prime contractor’s negligence claims should be reduced by amounts that had already been paid by the first-tier subcontractor. Pointing to the collateral source rule, the trial court rejected this argument and refused to allow Carolina-A-Contracting to offer evidence at trial regarding the prior payments made by the first-tier subcontractor to the prime contractor.

On appeal from a judgment in favor of the prime contractor, the Court determined that, due to the collateral source rule, Carolina-A-Contracting was not entitled to any credit or offset for the amounts that had previously been paid by the first-tier subcontractor to the prime contractor. As noted in the opinion, there were certain issues not before the Court. Most obviously, under the North Carolina Supreme Court’s recent opinion in Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., the economic loss rule potentially bars these types of negligence claim against lower-tier subcontractors and suppliers. However, because Carolina-A-Contracting only challenged the amount of damages awarded to the prime contractor on appeal, the issue of whether the economic loss rule barred the negligence claims was not before the Court. Additionally, the Court’s opinion makes clear that it was bound by the lower-court’s factual findings, including findings that the work performed by Carolina-A-Contracting was independent from the first-tier subcontractor’s work and that the first-tier subcontractor was independent of Carolina-A-Contracting.

While the Court of Appeals has clearly determined that the collateral source rule should apply in construction negligence cases, the opinion leaves open many issues. Most importantly, a payment from a collateral source must be an “independent” payment. The intertwined relationships between parties involved in construction makes this and other issues that are typically straightforward in other areas of the law much more complicated in the context of a construction project and will likely be the subject of future litigation.