Chapter 28 NEGLIGENT MISREPRESENTATION

• Jurisdiction: North Carolina

28 NEGLIGENT MISREPRESENTATION

A. Definition

Negligent misrepresentation has been described as "primarily a fraud-based claim . . . premised upon the making of a false assertion of a material fact."¹ It is a tort that occurs when someone justifiably relies, to his or her detriment, on information prepared without reasonable care by another who owed a duty of care to the party who relied on said information.²

The tort is of relatively recent origin in North Carolina.³ In one early case,⁴ the Court of Appeals quoted the Restatement provision on negligent misrepresentation, and said simply that it was "in accord" with the law of North Carolina.⁵ The court then gave a rather backhanded recognition to the cause of action by saying it knew of "no cases disavowing the recognition of a cause of action in negligence based on a negligent misrepresentation."⁶ From that somewhat inauspicious birth, the action evolved over the following decade.⁷ It continues to evolve and be refined by the courts, providing challenges and opportunities. On the one hand, practitioners must be especially vigilant in their research to identify the most recent opinions and the refinements they make in the cause of action, while at the same time being alert to opportunities to make new law.

B. Elements

There are six elements of the tort of negligent misrepresentation as set forth in the Pattern Jury Instructions:

(1) The defendant supplied information to the plaintiff,
(2) The defendant intended for the plaintiff to rely on that information,
(3) The information was false,
(4) The defendant failed to use reasonable care or competence in obtaining or communicating the information,
(5) The plaintiff actually relied on the information, and
(6) The reliance caused financial damage to the plaintiff.⁸

The jury instruction tracks the Restatement (Second) of Torts.⁹ North Carolina courts have long relied on the Restatement and routinely assert that the State has adopted it.¹⁰ Privity of contract is not an element of the tort.¹¹ Note that intent, as used in the second element, is not intent to deceive. Intent to deceive is an element of fraud;¹² however, negligent misrepresentation, by its very appellation, concerns negligent, not intentional, misrepresentation.¹³

C. Elements Defined

1. Defendant Supplied Information to Plaintiff

To meet the first element, it must be shown that the defendant supplied information¹⁴ to the plaintiff.¹⁵ The information must constitute a representation.¹⁶ As defined by the Pattern Jury Instructions, the element requires that the information was supplied in the course of the defendant's business,¹⁷ profession, or employment, or in a transaction in which the defendant has a financial interest.¹⁸ This is consistent with the first section of the Restatement.¹⁹ The jury instruction then states that the information must have been supplied to the plaintiff, "a limited group of persons of which the plaintiff was a member,"²⁰ or a client of the defendant, with knowledge that the client intended to supply the information to the plaintiff²¹ or to "a limited group of persons of which the plaintiff was a member."²² This follows the second section of the Restatement.²³ There is a "public duty" exception to the second section of the Restatement that expands the class of potential plaintiffs that may sue.²⁴ The exception provides: "The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them."²⁵ However, the public duty exception has not been specifically addressed by North Carolina appellate courts.²⁶

The leading and most cited North Carolina case on negligent misrepresentation is Raritan River Steel Co. v. Cherry, Bekaert & Holland.²⁷ The plaintiffs in the case were suppliers of raw materials to a manufacturer. They alleged they extended credit to the manufacturer in reliance on incorrect information in an audit report prepared by the defendant accounting firm. They suffered losses and sought to hold the defendant liable for them. The court said it was presented with a question of first impression: what is the scope of an accountant's liability to those other than the client for whom an audit report was prepared? The court decided the scope of liability was best measured by the Restatement approach. Applying the Restatement test, the court concluded that a plaintiff who alleged that, when the defendants prepared the audited financial statements, they knew they would be used by their client to represent its financial condition to creditors who would extend credit based on them, and that the plaintiff and other creditors would rely on these statements, stated a legally sufficient claim against the defendants for negligent misrepresentation. The allegations were sufficient to impose a duty of care on the defendants to the plaintiff.

The Restatement contains a comment that is important to the first element and that was mentioned in Raritan River Steel.²⁸ The comment says that liability for a supplier of information is limited to those persons for whose benefit and guidance the information at issue was supplied. The defendant need not have any particular person in mind as the intended, or even the probable, recipient. Thus, it is not required that the person who is to become the plaintiff is identified or known to the defendant when the information is supplied. If the defendant intends the information to reach and influence either a particular person or persons known to him, or a group or class of persons — as opposed to the much larger class who might reasonably be expected sooner or later to have access to the information and foreseeably to take action in reliance on it — there can be liability. The same is true if the defendant knows that the recipient intends to transmit the information to a similar person, persons or group. Thus, even if the defendant had never heard of the plaintiff by name when the information was given, there can be liability under the Restatement if the defendant supplies the information for repetition to a certain group or class of persons, and the plaintiff proves to be one of them. However, if the defendant merely knows of the "ever-present possibility of repetition to anyone, and the possibility of action in reliance" on the part of anyone to whom the information may be repeated, there is no liability.

2. Defendant Intended for Plaintiff to Rely on the Information

The second element of the action under the Pattern Jury Instructions requires the plaintiff to prove that the defendant intended the plaintiff, or a person "within a limited group of persons of which the plaintiff was a member," to rely on the information "for guidance or benefit in a particular business transaction (or one substantially similar to it)."²⁹ Alternatively, the plaintiff may show the defendant knew that his or her client intended the plaintiff, or a person "within a limited group of persons of which the plaintiff was a member," to rely on the information for those purposes.³⁰ How the defendant comes to know that his or her client intends to supply the information to the plaintiff does not matter.³¹

The North Carolina Supreme Court addressed the question of to whom a duty is owed in Jefferson-Pilot Life Insurance Co. v. Spencer.³² In that case, an insurer's agent told an insured that his wife was the beneficiary of his life insurance policy, but she was not. In her claim for negligent misrepresentation, the Court of Appeals, relying on Raritan River Steel, said that although she presented evidence the insurer failed to exercise care in communicating information to the insured husband in the course of its business, there was no evidence the insurer knew the information would be relied on by his wife. The North Carolina Supreme Court noted that, in Raritan River Steel, it had been concerned with protecting accountants from liability that unreasonably exceeded "the bounds of their real undertaking." It had, therefore, restricted those who could sue to those who the accountants knew would rely on their opinions or who they knew their clients intended to rely on their opinions. However, it would not, said the court, "unreasonably extend the liability of an insurance company to make it liable to the widow of an insured if the insurer negligently supplies information to the insured which causes the insured not to provide insurance for his wife."³³

3. The Information Was False

The plaintiff must show the representation at issue was false.³⁴ For example, in Jordan v. Earthgrains Cos.,³⁵ the president and CEO of the plaintiff's employer met with plant employees and was asked about job security and the economic status of the plant. The plaintiffs claimed the president told them their plant was profitable and their jobs secure.³⁶ Very soon after that meeting, a corporate study commission recommended the plant be closed, and the president approved that recommendation about four months after the plant meeting. The court concluded the president could not have provided false information about the plant closure four months before it was recommended to him.³⁷

In Pinney v. State Farm Mutual Insurance Co.,³⁸ the plaintiff accepted $1,000,000 in additional automobile liability coverage. The insurer's office assistant told the plaintiff the coverage would protect him and his family for up to $1,000,000 for injuries "caused by some other person." She did not explain that he was ineligible for underinsured motorist (UIM) coverage. That was exactly the coverage he later needed. He claimed the insurer's employee misrepresented the coverage. After noting that, at law, the insurer had no duty to explain UIM coverage and that the plaintiff never asked for any explanation, the court said the statement by the office assistant that the coverage would protect for up to $1,000,000 was "in no way...