The collateral source rule is a legal principle that ensures injured people who take their case to court can receive full damages without those damages being reduced by any money they’ve already received from other sources, like insurance.
The collateral source rule is important because it means if someone is hurt, the money they get from insurance won’t lessen what the person or company that caused the injury has to pay.
However, this rule doesn’t work the same way everywhere in the United States; each state has its own way of applying it, which means in some states, you may receive more protection than in others.
What is the collateral source rule?
The collateral source rule is a legal doctrine in personal injury law that prohibits the at-fault party (the defendant) from reducing their liability by the amount the injured party (the plaintiff) receives from other sources, such as health insurance or workers’ compensation.
This means that if you’re injured and receive compensation from your insurance, the defendant cannot argue to decrease their financial responsibility by the amount your insurance covers. This rule underscores the principle that a negligent party should not benefit from the victim’s foresight in securing insurance coverage.
Pros and cons of the collateral source rule
The collateral source rule has its fans and critics. Some people think it’s a necessary rule to make sure if you’re hurt, you get fully paid for your troubles, no matter what insurance you have. Others don’t like it because they believe it can potentially give some people more money than they should get, and this can make things more expensive for everyone else.
Let’s look at the main pros and cons of the collateral source rule:
| Pros | Cons |
|---|---|
| Full compensation for victims: The rule ensures victims are fully compensated for their injuries, regardless of the benefits they receive from other sources. Deterrent to negligence: By holding defendants fully accountable for their actions, the rule serves as a deterrent against negligence. Knowing that liability won’t be reduced by collateral sources may encourage individuals and companies to act more responsibly. |
Potential for overcompensation: Critics argue that the rule can lead to victims receiving more than their actual losses, which they claim could create a windfall for the injured party. Increased insurance premiums: The rule can lead to higher damage awards, which, in turn, may increase insurance premiums for everyone as insurers pass on the cost of these higher payouts to consumers. |
Understanding subrogation and its impact on injury compensation
While the collateral source rule allows plaintiffs to receive full damages in court without reduction for insurance payments, it’s not as straightforward as receiving double compensation. This is where the concept of subrogation plays a crucial role.
Subrogation is the legal mechanism that prevents an injured party from benefiting twice for the same injury.
Here’s how it works: when an insurance company pays for your medical bills or other expenses after an injury, and you then receive compensation for those same expenses from the party at fault through a lawsuit, your insurance company may have the right to be reimbursed from your lawsuit winnings. Essentially, the insurance company steps into your shoes to recover what they paid on your behalf.
This process ensures that while you're compensated fully for your losses, you're not unjustly enriched by receiving duplicate payments for the same expense. Subrogation underscores the principle that the collateral source rule is designed to make victims whole, not to provide them with a financial windfall beyond their actual losses.
Even with subrogation, there are times when plaintiffs might still end up with more money than their injuries cost. Here's why:
- Pain and suffering payments: Lawsuits can give you money for things like pain and suffering, which insurance doesn't usually cover. So, you might get insurance money for medical bills and lost wages, plus extra from a lawsuit for these other hardships.
- Deals with insurance: Sometimes, insurance companies don't ask for all their money back or agree to take less. This can leave you with some of the insurance payout, plus whatever you win in court.
- Different rules in different places: The rules about insurance companies getting their money back vary by state. In some places, the laws make it harder for insurers to reclaim their full payout, letting plaintiffs keep more.
- Insurance doesn't cover everything: There might be costs that your insurance doesn't cover, but your lawsuit does. So, your lawsuit win could cover more than just what insurance paid, especially for future needs or if your insurance had a payout limit.
In these situations, it's possible to get more money than just the cost of your injury, which is why some people think the collateral source rule can lead to unjust enrichment. However, most of the time, this rule is there to make sure you're fairly compensated, not to give you a windfall.
The collateral source rule in action: a hypothetical
Let's explore how the collateral source rule works in real life with a hypothetical example. This will help us understand its effects on both the injured person and the person at fault in a clearer, more practical way.
Sarah is injured in a car accident caused by Tom’s negligence. Sarah incurs $100,000 in medical expenses, covered by her health insurance, and she cannot work for two months, leading to $10,000 in lost wages.
Sarah’s auto insurance covers the lost wages.
In a personal injury lawsuit against Tom, the collateral source rule comes into play. Despite Sarah receiving $110,000 from insurance, Tom cannot reduce his liability by this amount. Thus, Sarah receives the full $110,000 in economic damages from Tom (along with any noneconomic damages).
After the lawsuit, Sarah's health and auto insurance companies may exercise their subrogation rights. This means they can claim a portion of Sarah's lawsuit winnings equivalent to what they've already paid her. For example, if her health insurance covered $100,000 of her medical bills, the insurance company could seek reimbursement for this amount from the lawsuit compensation Sarah received from Tom. Similarly, the auto insurance company could claim the $10,000 it provided for her lost wages.
Diverse state approaches to the collateral source rule
The application of the collateral source rule varies across the United States. Some states adhere strictly to the traditional rule, fully excluding evidence of collateral payments. Others have enacted modifications that allow certain exceptions. For example:
- California: California's collateral source rule largely favors plaintiffs, disallowing the reduction of damages due to payments from other sources, such as insurance. Exceptions include certain scenarios in medical malpractice claims and instances where insurers pay reduced rates for services.
- Texas: Texas maintains the collateral source rule, preventing reductions in a defendant's liability because of benefits received by the plaintiff from third parties. However, recovery for medical expenses is limited to amounts that healthcare providers are entitled to charge.
- Florida: In Florida, the collateral source rule acts to prevent evidence of third-party payments from being shown to the jury. There are, however, a couple of exceptions with respect to PIP benefits and evidence that is relevant to another issue.
Understanding the nuances of how each state handles the collateral source rule is important for both plaintiffs and defendants. It shapes the strategy for presenting cases and calculating potential damages or liabilities.