What is the 'Collateral Source Rule'

The collateral source rule prevents the reduction of damages awarded to a plaintiff for injury, illness or disability covered by a third party. The rule mandates that damages awarded to a plaintiff in court cannot be reduced by any amount paid by other sources to cover the damages suffered by the victim, including from health insurance and workers compensation.

BREAKING DOWN 'Collateral Source Rule'

The collateral source rule has been modified in several states but typically prevents evidence from even being admitted in court that proves the plaintiff (or victim) is receiving compensation for injuries from other sources, such as insurance. This doctrine has been contested in court in recent years by those who feel that victims should not be able to sue tortfeasors again for damages that were already paid from another source.

Depending on state insurance laws, an insurer may also 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, that same health insurance company may be allowed to collect $20,000 from the at-fault party or their insurer to cover the payment and the policyholder's deductible.

Basis For and Criticism of Collateral Source Rule

A basis of the collateral source rule is the notion that a defendant should not benefit from the fact that damages caused were covered by the plaintiff's relationship with an insurer or eligibility for government benefits. Absent the collateral source rule, parties may be more likely to act irresponsibly or even illegally, such as by conspiring to defraud via injury claims. Critics of the rule argue that plaintiffs should not receive double recovery, and several states have acted to modify the scope of the collateral source rule.

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