The Collateral Source Rule: An Overview

The collateral source rule is a law in state jurisdictions that prevents the reduction of damages awarded to a plaintiff for injury, illness, or disability by the amount already recovered from a third party such as an insurer.

The rule varies by state but generally mandates that damages awarded to a plaintiff in court cannot be reduced by any amount that is paid from other sources, including health insurance and workers' compensation, that cover the damages.

Key Takeaways

  • The collateral source rule prevents a monetary award from being reduced if the costs are covered by another source.
  • The rule may prohibit evidence of such payments from being presented in court.
  • Every U.S. state has a collateral source rule and their details vary.

How the Collateral Source Rule Works

In many states, the collateral source rule prevents evidence that the plaintiff is receiving compensation for injuries from other sources, such as insurance, from being admitted in court. Other states allow such evidence in some cases, such as bodily injury suits, but not in others, such as medical malpractice.

This doctrine has been contested in recent years by those who argue that victims should not be able to sue tortfeasors for damages that have been reimbursed from another source. Those sources can include health insurance or property insurance, workers' compensation, Social Security disability benefits, or life insurance.

Tort reform advocates oppose the collateral source rule, arguing that it encourages specious claims by dangling the prospect of double compensation.

Depending on state insurance laws, an insurer may have the right to pursue subrogation to obtain reimbursement for claims paid to a policyholder. For example, if a health insurance policyholder is injured in an accident and the insurer pays $20,000 to cover the medical bills, the insurer may sue to collect that $20,000 from the at-fault party or that party's insurer.

Pros and Cons of the Collateral Source Rule

The collateral source rule is one of the laws that has come under scrutiny from advocates of tort reform.

Critics of the rule argue that it is not reasonable to award some plaintiffs double the amount of damages for an injury and that it encourages specious legal claims.

Proponents of the collateral source rule argue that a defendant in a suit for damages should not escape the consequences of negligence or malpractice just because the damages were covered by the plaintiff's insurer or by government benefits. They maintain that the defendant's irresponsible behavior should not be rewarded because the plaintiff acted responsibly by acquiring insurance.

They also argue that the collateral source rule encourages consumers to obtain insurance with the knowledge that they are certain of reimbursement from one or both sources.

Several states have acted to weaken the collateral source rule or limit its applicability to certain types of cases.

Some insurance companies have added a subrogation clause to their contracts. This effectively requires a successful plaintiff to reimburse the company by the amount awarded for damages that were covered by the policy.