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The Effects of Compensation From Multiple Sources in Tort Litigation

In addition to laws passed by legislatures, there exists a body of principles derived from court decisions and other judicial sources called the “common law.” Courts frequently rely on common law in deciding cases. One common law principle often followed in civil lawsuits, such as personal injury lawsuits arising out of auto accidents, is the “collateral source” rule.

The Collateral Source Rule

Under certain circumstances, the law allows individuals to sue for damages when injured as a result of the wrongful action, or “tort,” of another. One often stated goal of such litigation is to make the injured party “whole” again, i.e., to compensate for all damages suffered as a result of the tort. The collateral source rule is an exception to this goal, in that it may allow the injured party to recover more than his or her damages. Simply stated, the rule is that damages received by an injured party from a source wholly independent of the wrongdoer (and thus “collateral”) should not be deducted from damages owed by the wrongdoer (defendant) to the injured party (plaintiff).

For example, plaintiffs injured in auto accidents may be compensated by their own health or auto insurance carrier, receive government benefits, or be given money by relatives or an employer, to assist with any resulting financial crisis, but these amounts do not reduce the damage award against the defendant. Courts have even held that the rule can apply to discounts given by health providers, i.e., the health provider agrees to accept less than full payment. The discount can be treated as a collateral source, and the defendant may be assessed the full amount of the plaintiff’s health care, regardless of the discount.

While this may result in double recovery for a plaintiff, the rule reflects a judicial determination that the wrongdoer should compensate the victim for all damages caused and not be allowed a “windfall” as the result of a contract or relationship the victim may have with a third party. In the event that a windfall exists, the plaintiff should receive the benefit of it, not the defendant.

Application of the Collateral Source Rule

The exact nature and application of the collateral source rule can vary from state to state and even among different courts in the same jurisdiction. The rule may be applied:

  • To determine what damages are includable in a judgment.
  • To exclude evidence of payment to the plaintiff from a collateral source.

The reasoning behind exclusion of evidence about collateral source payments includes that it is irrelevant, as it cannot reduce any judgment for damages against the defendant, and may have a prejudicial effect on the jury, which may be unwilling to allow double recovery to the plaintiff. Courts have, however, created exceptions to the rule against admitting collateral source evidence, when it is relevant to some other contested issue in the case. Examples include:

  • To rebut testimony of a plaintiff or other party that the plaintiff was hurt financially as a result of the incident, e.g., was forced to return to work prematurely.
  • To impeach testimony that the plaintiff was forced to pay for his or her own medical care.
  • To show that the plaintiff continued to work, instead of being out of work, as claimed.

Case Law Examples on Admissibility of Collateral Source Evidence

In a 1970 Ohio Supreme Court case, the court ruled that testimony about payments from an employer while the plaintiff was convalescing from a car accident were barred by the collateral source rule. The plaintiff’s direct testimony was that she had “lost” wages. The defendant then questioned the plaintiff about payments from her employer to rebut the testimony that the wages were “lost” and to impeach her credibility. The trial court allowed the testimony, over objections, and the jury found for defendant. The Ohio Supreme Court ordered a new trial because of the prejudice in allowing testimony about collateral source payments from the plaintiff’s employer.

However, in a case decided by the court of appeals in the First Federal Circuit, the court affirmed the admissibility of questions to a Mother of a six-year old plaintiff regarding collateral insurance payments. The Mother’s testimony had created a false impression that medical expenses were causing financial hardship to the family. The court of appeals held that this put the existence of financial hardship at issue and the defendant had the right to establish that there were collateral payments from an insurance company to rebut the financial hardship claim.

Collateral Source Reforms

There have long been critics of the collateral source rule. A plaintiff collecting twice for the same damages has bothered many. Insurance companies have asserted out that they (and their customers) often pay for the windfall and the needlessly inflated damage awards.

Along with caps on damage awards and limits on fees charged by lawyers, reform (or abolition) of the collateral source rule has become part of a general movement towards “tort reform” in many state legislatures, as well as at the federal level. As a result, more than one-half of U.S. states have passed laws modifying the collateral source rule. These laws vary widely in breadth and details, but most include one or more of the following:

  • Allowing for introduction of evidence regarding collateral sources of payment, either before or after an award or judgment, and allowing the evidence to affect the judgment.
  • Mandatory or discretionary reduction of any judgment by amounts received from collateral sources.
  • Allowing a defendant to petition the court for reduction of an award because of collateral source payments.
  • Allowing reduction only for judgments over a certain amount.

Many of these state laws also create broad exclusions for evidence of certain types of collateral sources. Others limit applicability to certain types of cases, such as medical malpractice cases.