What is the Collateral Source Rule?
In an era where the insurance industry looms large in the economy, not to mention the healthcare system, California law has seen the rise of a rule that has become a diving topic in the courts and sought after by plaintiffs and defendants alike. This rule is known as the collateral source rule. While its name implies another dig at insurance companies, it is really just another tactic for plaintiffs to get the full use of their damages buckets.
Generally, the collateral source rule states that where a plaintiff has received monetary compensation from sources independent of the tortfeasor that are collateral to the wrong of the tortfeasor, the amount received by the plaintiff should not be credited against the amount that the tortfeasor owes. The basic premise behind the rule is that wrongdoers should not benefit from other compensation received by a plaintiff and they are liable for the full damage amount. While this is true, it makes defendants pay for the higher cost of medical care they have to bear.
Some common examples of a collateral source are health insurance, disability coverage, and workers compensation benefits. In fact, if a plaintiff is receiving worker’s compensation benefits then the defendant is entitled to an offset for a proportionate share of the benefits as long as the benefits were not paid due to a subrogated interest or lien resulting from a lien or subrogation by the worker’s compensation insurer. (Mayes v. Freddie Mac Home of Loan, Inc. (1999) 75 Cal.App.4th 168).
A notable, even famous, example of the collateral source rule in California is the case of Helfand v. National Geographic Society, a celebrity defamation action. The plaintiff’s daughter started a petition in a book campaign that listed the plaintiff without his consent, so he filed a defamation action against National Geographic, the book authors, and the photographer whose photograph was used . During the trial, National Geographic purchased the remaining copies of the book for a lump sum payment that the plaintiff and his attorneys agreed to divide.
However, the plaintiff was also recovering a $10,000.00 per day disgorgement of profits from National Geographic for ignoring the plaintiff’s request to withdraw the book from publication. National Geographic moved to reduce the disgorgement damages, contending that the other funds received for the remaining books should be credited against the disgorgement award. The California Court of Appeal rejected this argument stating that "applying the collateral source rule to disgorgement of wrongful profits would render the disgorgement remedy meaningless." The court further held that the disgorgement was a separate equitable remedy from damages for defamation and thus subject to different rules. Therefore, under the collateral source rule, National Geographic was ordered to pay the plaintiff for all of his loss without regard to other receipts regardless of the equitable considerations attempted to be applied by National Geographic.
Despite this rule, defendants often try to introduce a variety of evidence to point out the plaintiff’s other sources of payment for medical costs and other losses and therefore limit the amount of the damages awarded. For example, in a recent case, a plaintiff was injured while riding a bike on a city bike path where a defendant parked his vehicle. At trial, the defendant wished to introduce evidence of the plaintiff’s own insurance coverage as well as public funds available to the injured plaintiff. The court ultimately ruled that such evidence was barred by the collateral source rule.
Collateral Source Rule in California Law
The collateral source rule, as applied in many states, including California, bars the tortfeasor from reducing the amount of damages owed to the plaintiff by the amount of medical payments made by a collateral source. The rule also prohibits the introduction of evidence at trial concerning the amounts of any such payments from collateral sources. The California decision in Hanif v. Housing Authority of the City of Los Angeles, 200 Cal.App.3d 635, 646 (1988), identifies three reasons for the rule: (1) the collateral source has benefited the plaintiff without contributing to his or her loss; (2) disallowing such an offset encourages voluntary compensation of tort victims by responsible persons; and (3) the wrongdoer should not benefit by a windfall indirectly contributed to by the plaintiff.
The general rule in California is that any amount due to the plaintiff as a family support payment and any amount received pursuant to an insurance policy that is owned by the plaintiff or paid for by the plaintiff, and into which the plaintiff has made premium payments, is not a collateral source. The court in Hanif held that an insured plaintiff was entitled to a jury instruction that excluded future disability payments under Medicare from its verdict because those payments were contingent upon a finding of entitlement to benefits. The Hanif court also held that the jury may be instructed to exclude any amounts received by the plaintiff for commercial benefits (e.g., in the form of subrogation payments) that are excluded from the definition of collateral source. However, Hanif does not require that non-subrogated commercial benefits have no offset in the trial court’s reduction against the plaintiff’s verdict.
For purposes of determining whether the collateral source rule applies, "collateral sources" are defined to include any of the following: (1) general insurance payments, except life insurance payments; (2) payment under an employee benefit plan; (3) Medicare benefits; (4) "disability benefits provided under any law or any employers’ plan, policy, or practice;" and (5) "any other similar system intended to provide payments in lieu of or in addition to workers’ compensation benefits for the purpose of undercompensating injuries."
Implicit in the above are the following exceptions to the rule: (1) life insurance payments qualify as collateral sources under the statute; (2) the collateral source rule is inapplicable to benefits received by health care providers or their guardians; and (3) health care benefits that are contractually excluded under a public policy exception provided by a state statute are not collateral sources.
Impact on Personal Injury Settlements
When personal injury cases are settled or go to trial, the collateral source rule often makes an appearance. This rule affects damage awards in all personal injury cases, where a proposed award for medical expenses may be reduced by amounts actually paid or payable to the injured person by third party payors.
Under one strand of the rule, when a plaintiff has received compensation for injuries from sources not involving the one who allegedly caused the injuries, the compensation is not to be deducted from the amount recoverable by the plaintiff. One of the most common collateral benefits received is the amount of the plaintiff’s medical or other expenses paid by health insurance, Medicare, Medicaid, or workers’ compensation. However, adjustment for such benefits is primarily limited to those benefits which do not have to be repaid or borne solely by the plaintiff. For example, Medicare and some employer-provided insurance plans require repayment or reduction of their benefits to compensate public or private insurers for the costs of the benefits provided.
Another approach to the rule prevents the defendant from taking credit, in bills for hospital and doctor services, for amounts billed but not paid.
A contrary approach, followed where the collateral benefit reduces expenses that would be charged to a plaintiff without the benefit, bars the plaintiff any recovery of such expenses, or reduces the recovery by the amount of the benefit. Because there is no one stated rule, rather each court applies the rule within its own legal framework.
In California, the adopted rule under Civil Code section 1431.2 is a form of the first approach, and allows for collateral source payments up to amounts paid or incurred. A tortfeasor has no right to benefit from the good fortune of the injured plaintiff. But this right isn’t without limitations—such as in motor vehicle cases. The collateral source rule does not routinely apply in automobile cases because the insurer has made a contractual relationship with the insured. Thus, in motor vehicle cases, a defendant is entitled to an "off-set" of insurance benefits. This intended limitation is also evident in Government Code section 985, which gives the county contracting with a tort victim or a plaintiff’s attorney the right to seek reimbursement of the balance of an award payable to the plaintiff.
Recent Case Law and Trends
The rules of civil procedure, statutes of limitations, applicable rules of evidence, and the creation of new causes of action all have an impact on the collateral source doctrine. One large source of recent change within California has been proactive legislation to restrict application of the collateral source doctrine, particularly by requiring plaintiffs to submit their medical bills to health insurance carriers prior to seeking payments from defendants. See, e.g., Cal. Civ. Code § 3333.1, (making collateral source evidence admissible). Although not intended as a full guide to all recent developments, this section highlights some of the more significant changes in the law of the collateral source rule.
As discussed above, the doctrine of collateral source rule prevents a defendant from having a plaintiff’s special damages in a tort action reduced by whatever the plaintiff’s insurance pays for medical or property damage. For example, in Taylor v. County of Los Angeles, 387 F. Supp. 3d 1108 (C.D. Cal. 2019), the City and County were obligated to provide medical care to injured employees through its employee medical clinics. Thus, the Plaintiffs, seeking recovery of future medical expenses related to an injury suffered during employment with the City and County, were subject to the collateral source rule. See also Hill v. State of California, 54 Cal. 3d 753, 769 (1991) (injured plaintiff cannot be reimbursed for medical costs by either his employer or a private medical insurer without violating the collateral source rule and provisions codified at California Civil Code section 3333.1).
In McCarthy v. Kaiser Foundation Hospitals, 9 Cal.App.5th 81, 93 (2017), second quarter hospital billings, which had been negotiated by Kaiser and discounted, were inadmissible in an action under the FCEHA. Third quarter hospital billings paid by the plaintiff were admissible. In Goodman v. Costco Wholesale Corp., supra, 187 Cal.Rptr.3d 727, 738 (2015), an injured plaintiff may only recover damages arising from a prior automobile accident to which Costco, as an employer, could show a direct and proximate connection.
In Hastings v. U.S. Postal Service, C15-789RAJ (April 23, 2015), the U.S. District Court of the Western District of Washington found that the Federal Medical Care Recovery Act preempts state law and does not permit collateral source reductions.
Pros and Cons of the Rule
Proponents of California’s collateral source rule point to policies underlying the rule itself. For example, some courts explain that if juries were permitted to reduce damages by amounts already paid that are unrelated to the tortfeasor, such payments would be entirely ignored, providing an undeserved windfall to the tortfeasor. Advocate also argue the rule is needed to ensure injured parties receive fair compensation for injuries and that in the absence of the rule, insurance companies would lower premiums only if it meant tortfeasors would pay less to injured parties, creating adverse results for victims of negligent conduct.
Additionally, some legal experts argue the collateral source rule is necessary because California law does not permit juries to consider a party’s wealth in assessing damages, and under the law as it exists, there is no justification for singling out insurance payments to disregard when other monetary gains, like gifts, loans, and spousal or parental support, are considered. Finally, proponents argue commercial advantages that may ensue from liability are adequately controlled under California law through punitive damages, and there is no justification for requiring courts to modify awards because the defendant carries liability insurance.
Those who seek modifications to the rule , however, contend that even if the rationale for collateral source stands, there can be many exceptions where these equitable considerations do not apply. For example, defendants’ liability may be unfairly increased if they must pay for benefits not provided due to the rule. In malpractice actions, some argue, there is no justification for double-dipping when payment has been made for the same past magnetic resonance imaging ("MRI") charges under a medical payment plan with no subrogation right, and similarly for mileage compensation payments made to the plaintiff for the same mileage reimbursed by the plaintiff’s all-in-one health plan.
Commentators have also pointed to insurance fraud as a problem. Proponents of changing the collateral source rule argue that the rule increases medical costs, adding hundreds of millions of dollars to premiums with little justification. Conversely, courts and legal commentators have dismissed arguments that insurance fraud or abuse has been a problem under the rule. Some have argued these problems could be addressed through alternative remedies, including creating a lien against the malpractice defendant’s judgment as an offset to the plaintiff’s insurance payments.
Implications for Plaintiffs and Defendants
From the perspective of plaintiffs, the rule is clear: so long as a plaintiff is seeking compensation for actual damages, a defendant will be liable for the full amount billed. Indeed, plaintiffs can benefit from the rule even if the medical bills are never paid by the insurance company: The rule allows the plaintiff to seek compensation for its "intended loss," or the cost of the care at the provider’s full rate — that is, the amount that the plaintiff would have had to pay if it had not been covered by insurance.
For defendants, however, the practical application of the rule is less straightforward. In those cases where the plaintiff has an underlying health care insurance policy, the defendant may successfully limit the evidence of damages to the amount actually ingested by the plaintiff. In other words, the defendant in such a case will only be required to pay the amount a provider accepted as payment in full and that was paid by the plaintiff’s insurance company — not the higher "sticker" price of the medical services.
When an injured plaintiff does not have health care insurance, however, the implications of collaterally located sources become less clear-cut. In such cases, California law remains unsettled as to whether the plaintiff bears the obligation of the reasonable value of the medical services rendered, which the defendant can challenge as a non-necessary item of damage.
Indeed, in personal injury litigation involving evidence of collateral source benefits, there are literally dozens of variations: A plaintiff may (1) not have health care insurance, but may (2) be entitled to Medicare or MediCal benefits such that (3) Cal. Evid. Code Section 1155(a) applies, (4) or it may not apply. Or the plaintiff may be covered by Medicare or MediCal, but it may or may not be entitled to seek recovery of the reasonable value of the plaintiff’s medical expenses. Likewise, with the enactment of Proposition 64 and the passage of SB 462, litigants must also consider whether, or the extent to which, the defendants may be entitled to an affirmative defense of "collateral source set-off" under California Civil Code Section 3333.2. Of course, the above analysis is predicated on the use of a monetary collateral source; however, the same analysis applies when the collateral source is in-kind benefits.
Future of the California Collateral Source Rule
As with many aspects of the law, the collateral source rule may be subject to future changes as case law evolves and social attitudes shift. While the rule has remained largely intact in California, a growing push to limit damages awards, particularly in personal injury and medical malpractice cases, may impact its future application. Possible future changes include:
Proposed Legislation
Recently, many lawmakers have proposed legislation that would alter the collateral source rule. One proposal included a requirement for health care providers to disclose all bills and payments made to the injured party; another included excluding from evidentiary consideration any amounts exceeding an average bill for the same services. As of July 2021, however, no major changes have been implemented.
The Trump administration also implemented an executive order in October 2020 aimed at reducing the collateral source rule’s effect on workers’ compensation payouts to employees who had also received payments from health insurance . Under the order, health insurance payments would be subtracted from worker’s compensation awards. This executive order has not yet been implemented and is awaiting executive review under the Biden administration.
Judicial Trends
The courts may also be more likely to adopt an enhanced reasonable medical expense standard. Because the rule applies only to payment of medical expenses rather than to the total value of medical services, in the future, judges may require juries to adjust their awards based on what is considered reasonable medical value. Assuming continued advancements in medicine and technology, this reasonable medical standard may decrease compensatory payouts for victims in order to reduce the financial burden on the rest of the population.
The application of the collateral source rule throughout California remains an important and often contentious topic, meaning that as case law changes and the rule is applied in new ways, the potential for change will continue.