Imagine that you are in a car accident and sustain $100,000 in medical bills. You sue the person who caused the accident and you go to trial. At the trial the defendant wants to introduce evidence that, of the $100,000 in medical bills that you claim, $80,000 of that amount has actually been paid by your health insurance. The defendant asks the judge to give him credit for the bills your health insurance paid so he would end up only owing you $20,000 on your medical bills. The arguments before the judge are pretty straight forward. You argue that you paid the premiums on that health insurance policy and the defendant should not be allowed to take advantage of your foresight (and your premium payments) to shield himself from his legal liability.
The defendant acknowledges that you paid the premium, but argues that the point of the lawsuit is to compensate you for your actual loss. If you get to present those $80,000 in medical bills to the jury as if they are "unpaid" that would simply be a lie. If the jury awarded you the additional $80,000, you would be receiving money to compensate you for dollars you never spent. You would, the defendant argues, be getting a “windfall.” What does the judge do?
The "collateral source rule" has traditionally required that American judges rule in your favor on this question. The courts decided many years ago that the defendant, who caused your injuries, should not be rewarded because of your foresight in purchasing health insurance. Under this rule, the jury will never even hear that $80,000 of your medical bills have already been paid. Presuming the jury gives you any award at all, they will do so believing that you stand before them still owing $100,000 in medical bills.
Another wrinkle in the argument is the fact that most health insurers have "subrogation rights." Subrogation rights are the insurer's contract or statutory right to force you, their policy holder, to repay them if you recover money from the person who caused your injuries. If a jury hears you have been paid $80,000 by your health insurer, they then might only award you $20,000 because they believe the rest of your medical bills have been paid. Unfortunately, your insurance company would still take the $20,000 from you as "subrogation" to help pay them back for the $80,000 in medical bills that they paid for.
This leaves you with nothing, other than an attorney to pay and the frustrations of having gone through a lawsuit. You paid $20,000 of your medical bills yourself, but your insurance company grabs it all using their subrogation rights. The collateral source rule is supposed to keep this from happening. Under the collateral source rule, the jury makes its damage calculation without knowing of the insurance payment, or any health insurer's subrogation rights.
You, theoretically, get compensated for all of your medical bills and you are left to work out any subrogation repayment with your insurance company.
The example is about an auto accident. However, the collateral source rule applies in many other personal injury cases such as medical malpractice, products liability and injuries from assaults. It can also apply in cases that do not involve personal injury. For example, if someone’s negligence causes your house to burn down, the collateral source rule says that you can sue the negligent party for the full amount of damages, despite the fact that some of those damages may have been paid for by your fire insurance company.
The traditional collateral source rule was originally developed when the only monetary protection that injured parties had, if any, was health or accident insurance.
However, the law has had to adjust to many new "collateral sources" over the years. Injured parties may now be compensated by workers’ compensation, various government benefits (Medicare, Medicaid), disability insurance, life insurance, uninsured motorist insurance and auto medical payments (or “PIP”) insurance. Rulings have varied on whether these new sources are covered by the rule and in some cases legislation has determined the result. For example, what if you were in the same wreck, but you were on the job at the time and your bills were paid by your employer's workers' compensation coverage?
Defendants point out that you are not paying your employer's workers' compensation insurance premiums, so the collateral source rule should not apply. However, in most states workers' compensation recovery is still considered a collateral source. Courts and legislatures, both state and federal, have had to wrestle with when the rule applies and when it does not, depending on the type of case and from what "source" the plaintiff's damages were paid.
Courts in different jurisdictions have disagreed as to whether a plaintiff is entitled to the protection of the collateral source rule if the plaintiff has received payment from one of these new "sources." As explained above, the plaintiff’s right to claim the protection of the collateral source rule is often tied to the fact that the plaintiff must honor an insurer’s subrogation rights and return at least a portion of his recovery to the insurer. Legislation or regulation has also strengthened the subrogation rights of many of these sources, or has granted the government or the insurer a lien on the plaintiff's right of recovery. This helps force the plaintiff to repay the insurer, or government, after a settlement or jury verdict.
To complicate matters further, many states have adopted "tort reform" legislation severely limiting the plaintiff's right to use the collateral source rule under certain circumstances. Reformers argue that insurance and business costs are driven up because the collateral source rule allows plaintiffs to collect the full amount of their medical bills even though those bills have already been paid. This legislation often does away with or modifies the collateral source rule.
If you have been involved in an accident, or been injured by someone else's negligence, and have received payments from what you suspect might be a "collateral source," it is advisable to contact an attorney knowledgeable about the most recent legislation and court decisions on the subject. The rules now vary from state to state, and often from federal court to federal court, and will depend on the type of "collateral source" payment you have received. Many years ago, the collateral source rule was fairly simple and easily applied. Now it often takes a specialist to understand. This is why lawyers like to say, “Govern yourself accordingly.”