The Collateral Source Rule and Its Impact on Personal Injury Claims

Personal Injury

What is the Collateral Souce Rule?

The United States has always favored insurance for the payment of claims. And to encourage the take-up of coverage, many states have interpreted the collateral source rule as a vehicle, which enables plaintiffs to recover from defendants, regardless of the plaintiff’s insurance status. This position means any collateral sources, be it the worker’s compensation, Social Security or Medicaid, and free services, that the injured person received should not reduce the number of damages recoverable from the defendant.

That’s the first part of the rule, and it is most often applied in cases where the injured person’s insurance paid for medical treatment associated with the injuries. The second part of the collateral source rule concerns the admission of evidence in court during a personal injury trial. The rule prohibits jury members from considering any collateral sources other than the payments from the wrongdoer. 

Rationale of the collateral source rule

The rule encourages people to purchase private insurance policies, so they can receive full compensation in case they ever need it. The rule aims to prevent the defendant from benefiting from a personal injury lawsuit just because the plaintiff has the good sense to prepare for future emergencies. 

As a result, the plaintiff benefits from double recovery or having their medical bills and lost wage paid by their insurance carrier in addition to receiving a monetary reward.  

Example of the Collateral Source Rule

For instance, Rich and Justin have been neighbors for years, and Justin invited Rich to a party in his backyard. Rich accidentally left a lit cigarette on Justin’s deck, causing a fire that destroys the latter’s property and permanent disability to Justin’s legs.

Justin’s friend, Joel, kindly offered to help Justin rebuild his home because his injuries prevented him from doing it on his own. Justin also received health insurance coverage for his physical injuries. 

Under the collateral source rule, Justin can sue Rich to recover the value of his property and costs associated with his leg injury. And in case the lawsuit goes to trial, Joel’s act of rebuilding the house and Justin’s insurance coverage cannot be heard by the jury. 

How does the collateral source rule affect personal injury cases

Victims who take their cases to trial are often awarded compensatory damages, which are usually a combination of economic and non-economic damages. Economic damages are tangible costs that a victim has sustained or will sustain. Examples are medical expenses, lost wages, and property damages. On the other hand, non-economic damages are the more subjective damages such as loss of consortium, pain, and suffering, and disfigurement. 

The third type of damages known as punitive or exemplary damages may sometimes be awarded to punish the defendant for their behavior and to control similar actions in the future. In some parts of the country — Texas, for instance — exemplary damages are only awarded if a plaintiff can submit clear and convincing evidence that their harm stemmed from fraud, malice, or the gross negligence of the defendant. 

Limitations to the collateral source rule vary among states. In Texas, there are no limits or “caps” on economic damages while non-economic and punitive damages are subject to a few limitations. Non-economic damages in cases concerning doctors or healthcare providers cannot exceed $250,000. Punitive damages, on the other hand, are capped at $200,000 — two times the amount of economic damages and an equal amount of non-economic damages of up to $750,000, whichever is greater. 

Critics still argue that the victims shouldn’t receive double recovery, but in most cases, the collateral source rule prevails regardless of the type of breach, type of loss, or type of collateral benefit. Because of these disagreements, certain state legislatures have passed laws to modify the collateral source rule. 

State reform of the collateral source rule

Just like its limitations, the execution and reforms of the law vary from state to state. In California, evidence for the collateral source is admissible in a case of medical malpractice against a healthcare provider. The healthcare professional may introduce evidence of amounts payable to the injured person by insurance carriers and other collateral sources. 

But while the defendant can introduce this kind of evidence, the plaintiff can also provide evidence of payments made to secure the right of insurance benefits. This shows that the California statute is a rather narrow exception to the rule — quite similar to the rules in other US states. 

In contrast, the collateral source rule in Florida prohibits the introduction of evidence of insurance benefits, with the exception of the benefits provided by the government. This means the defendant is free to inform the jury of the Medicare and Medicaid benefits received by the plaintiff. 

In effect, this reduces the amount of compensation for medical expenses or lost wages awarded to the injured person where an insurance company has a right to reimbursement. Upon the final judgment in the lawsuit, only a part of the medical expenses is covered by the plaintiff’s insurance company, and other medical expenses are written off and reimbursed to the insurance carrier. 

If you have more questions about collateral sources, contact TD & P Consulting, Inc. today. When collateral sources are at issue, we can help you make the right legal decisions.