Court of Appeals Applies Collateral Source Rule in Construction Dispute

Legal doctrines develop over time, with judges determined to allocate blame and risk fairly. One such doctrine – an old one – is the “one recovery” rule. The one recovery rule basically means that an injured party should only recover once for any particular injury. In practice, that usually means that if there are two people responsible for a plaintiff’s particular injury (let’s say $100,000 in damages) and one of them pays $75,000, then the plaintiff can only recover $25,000 from the other. However, as with every rule, this one has exceptions.

For the first time, the North Carolina Court of Appeals recently applied one of those exceptions – the collateral source rule – to construction disputes. In Caroline-A-Contracting, LLC v. J. Scott Campell Construction Company, the court explained the basis for the exception and why it applied to the fairly unusual facts of this case. In general, the idea is that it is unfair to allow someone who caused an injury to avoid the full cost because of payments that the injured party recovered from some unrelated (or collateral) party. As the court noted in its conclusion, to the extent such payments overlap and allow a double recovery, “in this situation, the injured party…not the tortfeasor…should reap any such windfall.” As noted above, however, the facts of this case were somewhat unusual.

The collateral source rule most frequently arises in insurance coverage cases (the insurance company being the collateral source), but here it was the result of independent failures by two different subcontractors regarding the same project. The general contractor hired one subcontractor to build a retaining wall. When it was unable to do so, that subcontractor itself hired another company – the plaintiff in this case – to correct its work and build the wall. The plaintiff, however, was similarly unable to complete the work adequately. The general contractor then hired a third company to correct the errors of the previous attempts. Caroline-A-Contracting sued both the original subcontractor (with whom it had a contract) and the general contractor (Campbell Construction, whom it did not). The general contractor alleged counterclaims based on Caroline-A-Contracting’s negligence (not any breach of contract). Caroline-A-Contracting argued that any amounts awarded to Campbell Construction on its counterclaim should be offset by amounts that it had previously recovered from the original subcontractor. The trial court determined that the original subcontractor was in no way related to Caroline-A-Contracting (it was not acting as its agent, for example) and that its payments resulted from its own failures and were independent of the plaintiff’s negligence. Therefore, it was a collateral source, and any payments it made would not reduce Caroline-A-Contracting’s liability for damages caused by its own negligence.

The Court of Appeals affirmed this decision and noted that it appeared to be the first time the doctrine was applied in construction disputes. Because of the unusual facts, the application of the collateral source rule in construction disputes may be limited, but this case confirms that it does, in fact, apply.