The Subrogation Strategist

In Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E.2d 35 (N.C. Ct. App. 2016), the Court of Appeals of North Carolina addressed whether the economic loss rule barred the negligence claim of White Plains Church Ministries, Inc. (White Plains) against Charles F. Cherry (Cherry), the owner of Beaufort Builders, Inc. (Beaufort Builders). The court held that, because the economic loss rule would bar White Plains’ negligence claims against Beaufort Builders, White Plains could not pursue a third-party negligence claim against Cherry, individually.

In Beaufort Builders, White Plains entered into a contract pursuant to which Beaufort Builders agreed to construct a church for White Plains. Federal Emergency Management Agency regulations mandated that the church foundation be built above the seven foot base flood elevation (BFE). White Plains hired Ralph Jarvis (Jarvis), a surveyor, to determine the elevation at the building site. Jarvis surveyed the property, set a pole at the building site and marked it at an elevation of eight feet, which was one foot higher than the seven foot BFE.

During construction, Cherry, co-owner and president of Beaufort Builders, removed some soil from the foundation and transported it for use on the parking lot prior to laying the foundation. Although Cherry thought the foundation pad Beaufort Building eventually laid was at the proper level, a final survey revealed that, through a combination of Jarvis mismeasuring the initial BFE and Cherry removing soil from the foundation, the foundation pad was below the BFE. Thus, the county would not issue a certificate of occupancy to White Plains. Because it could not obtain a certificate of occupancy, White Plains refused to pay Beaufort Builders the remainder of the contract price.

Thereafter, Beaufort Builders instituted a lawsuit against White Plains for breach of contract. In response, White Plains filed a counterclaim against Beaufort Builders asserting breach of contract and negligence, and a third-party complaint against Cherry asserting negligence based on his removal of foundation soil. The jury found that: (1) White Plains breached the contract, (2) Beaufort Builders did not breach the contract, and (3) Cherry was negligent. The jury awarded Beaufort Builders $70,090.00 in damages for White Plains’ breach of contract claim. The jury also awarded White Plains $57,500.00 in damages for Cherry’s negligence. Cherry moved for a judgment notwithstanding the verdict (JNOV), which the trial court granted. White Plains appealed the entry of JNOV in favor of Cherry.

On appeal, the Court of Appeals of North Carolina discussed North Carolina’s economic loss rule and stated that, under the rule, where all rights and remedies are set forth in a contractual relationship between the parties, no negligence claim exists. In North Carolina, the rule applies to building contracts where the only injury claimed is to the building that is the subject matter of the contract between the parties.

Although White Plains argued that the economic loss rule did not apply to its negligence claim against Cherry because it was not in privity with Cherry and it did not authorize Cherry to move dirt from the foundation to the parking lot, the court rejected White Plains’ argument. Because Cherry was the president and co-owner of Beaufort Builders, he was on the construction site because of his company’s contract with White Plains and all of the actions he undertook at the site were related to Beaufort Builder’s contractual obligations. In addition, the only injury White Plains alleged was that it did not receive the benefit of its bargain: a properly constructed church building. Thus, the court held that White Plains could not do an “end run” around the economic loss rule to pursue a negligence claim against Cherry, individually. Consequently, the Court of Appeals of North Carolina affirmed the trial court’s entry of JNOV in favor of Cherry.

In light of Beaufort Builders, if the economic loss rule bars claims against a building company, it should also bar claims against the building company’s officers. Thus, if a subrogating insurer in North Carolina wants to pursue negligence claims against a company officer under a participation theory, the insurer should analyze, initially, whether it can state a negligence claim against the building company.