In Federal Insurance Co. v. Fredericks, an Ohio Court of Appeals upheld the dismissal of claims for intangible economic losses, such as lost profits, brought by related, unnamed parties to a construction subcontract. The Court applied the economic loss rule, which prevents recovery in tort of damages for purely economic loss.
The case involved a set of several companies (including Pasco, Carter Express, and Carter Logistics) owned by the same parent company (J.P. Holding Co). The sister companies were wholly owned subsidiaries of the parent company, all sharing the same company president. The president of the companies established a hand shake agreement with the head of Fredericks Construction to build a facility.
Fredericks then entered into a written subcontract with Skiles, in which it identified Fredricks as the contractor, Skiles as the subcontractor, and Pasco as the property owner. The subcontract also incorporated the prior agreement between Pasco and Fredricks for construction. Skiles was negligent in its work, and a severe wind storm during construction resulted in partial facility collapse. After Pasco’s insurer (Federal Insurance Co.) paid Pasco for losses, it instituted a subrogation action against Skiles’ insurer, J.P. Holdings.
Pasco was the only valid third party beneficiary, because it was named as property owner in the subcontract between Fredericks and Skiles. The other J.P. Holding Co. owned companies additionally sought compensation through a negligence claim, because their interest in the business was harmed by Skiles’ negligent damage to Pasco’s physical property. The Court held that interests of the other companies were intangible and could only be sought through a contract to which they were a named party. The Court also refused to disregard the corporate forms of each entity and allow the parent company to seek damages (through Pasco’s inclusion in the subcontract) for itself and its subsidiaries.
Bottom Line: Ohio still applies the economic loss rule, and a party with intangible economic losses can only recover through a breach of contract action. This makes it even more important for all parties with an interest, e.g., a future tenant of a constructed facility, to be included in written contracts and subcontracts as beneficiaries. This step will ensure that the party can protect its interest and allocate risk predictably and transparently.
To read the newsletter in its entirety, please click here.