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Collateral Source Rule Reform

Issue:

Whether to permit evidence of a plaintiff's recovery from an independent party to be admitted when the plaintiff's claim is tried in court.

Problem:

The Collateral Source Rule prohibits a defendant from introducing evidence that the plaintiff received any benefits from sources outside the dispute. The Rule allows a plaintiff to recover the full amount of damages twice and also undermines the basis of a fault-based liability system.

Background:

When a plaintiff in a tort case receives benefits from an independent party to compensate the plaintiff's damages, these benefits are said to have come from a "collateral source." Collateral source benefits include insurance policies, the gratuitous receipt of benefits such as wages or medical services, and governmental benefits such as workers' compensation and social security.

The plaintiff receives compensation once from the insurance company, and then again at trial where no evidence of a prior recovery is permitted. Insurance does not compensate for an individual's injuries, but rather is a source of windfall profit. The insurance companies, in turn, pass on this expense to every consumer in the form of higher premiums.

In determining damages, a jury gives little thought to the degree of fault which should attach to a liable defendant. Instead, the jury imposes the full amount of the judgment on the defendant, regardless of its degree of fault or whether the plaintiff received collateral source payments. The Rule focuses on punishing defendants rather than making plaintiffs whole.

Rationale:

Whatever the historical reasons for tolerating double recoveries, today they are an unacceptable misallocation of scarce resources. Moreover, compassionate jurors are often motivated to return a verdict for the plaintiff, regardless of the merits of the plaintiff's claim, when they are uncertain whether the plaintiff would otherwise have the means to pay the bills resulting from the injury suffered.

Recommended Action:

Reform of the Collateral Source Rule is a high priority. State legislators should control the inequitable effects of the Rule by permitting evidence of collateral source payments to be presented to the jury. Some states have changed their evidentiary rules to allow evidence of collateral source payments to be admitted at trial, and several states have allowed the judge to offset awards by the amount of collateral source payments received. Many states have combined portions of these two solutions, resulting in a wide variety of statutes.

REDUCTION OF COMPENSATORY AWARDS BY COLLATERAL SOURCES

AS OF JUNE 30, 2001

1986

Alaska

Admissible as evidence and offset with broad exclusions

Colorado

Admissible as evidence and offset with broad exclusions

Connecticut

Admissible as evidence and offset with broad exclusions

Florida

Mandatory offset with broad exclusions

Hawaii

- Provided for payment of valid liens (arising out of claim for payment made from collateral sources for cost and expenses arising out of injury) from special damages recovered

- Prevented double recoveries by allowing subrogation liens by insurance companies or other sources; third parties are allowed to file a lien and collect the benefits paid to the plaintiff from the plaintiff's award; the amount of damages paid by the defendant to the plaintiff is not affected

Illinois

- Only collateral sources for benefits over $25,000 can be offset

- Offset cannot reduce judgement by more than 50%

Indiana

Admissible as evidence with certain exclusions; court may reduce awards at its discretion; jury may be instructed to disregard tax consequences of its verdict

Michigan

Admissible after the verdict and before judgment is entered; courts can offset awards but cannot reduce the plaintiff's damages by more than amount awarded for economic damages

Minnesota

Admissible as evidence only for the court's review; offset is provided for but collateral sources having rights of subrogation are excluded

New York

Mandatory offset

1987

Alabama

Collateral sources allowed as evidence -- reduction not mandated

Iowa

Collateral sources allowed as evidence -- reduction not mandated

Missouri

Collateral sources allowed as evidence but as used as evidence, defendant waives the right to a credit against the judgment for that amount

Montana

Collateral source rule abolished -- reimbursement from collateral source is admissible in evidence -- unless the source of reimbursement has a subrogation right under state or federal law, court is required to offset damages over $50,000

New Jersey

Mandatory offset of collateral source benefits other than workers' compensation and life insurance benefits

North Dakota

Mandatory offset of collateral source benefits other than life insurance or insurance purchased by recovering party

Ohio

Mandatory offset of any benefits received less the total of any costs paid for the benefit

Oregon

Allowed a judge to reduce awards for collateral sources

Excludes:

- life insurance and other death benefits

- benefits for which plaintiff has paid premiums

- retirement, disability, and pension plan benefits

- federal social security benefits

1988

Kentucky

The jury must be advised of collateral source payments and subrogation rights of collateral payers

1990

Idaho

Allowed the court to receive evidence of collateral source payments and reduce jury awards to the extent that they include double recoveries from sources other than federal benefits, life insurance or contractual subrogation rights.

1993

Arizona

Extended the existing collateral source legislation from medical malpractice issues to other forms of liability litigation (under this legislative approach, a jury would not be bound to deduct the amounts paid under a collateral source provision, but would be free to consider it in determining fair compensation for the injured party)

For specific model legislation, contact ATRA at 202-682-1163.

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