What is the Collateral Source Rule?

The collateral source rule, also called the collateral source doctrine, is a legal rule pertaining to compensation made to plaintiffs in a lawsuit by parties other than the defendant, including insurance companies, workman’s compensation, and other agencies. These parties are called collateral sources. The rule orders that a defendant, if determined to be liable, cannot deduct from the amount awarded in damages to the plaintiff any monetary amounts already paid by the collateral sources. The doctrine also bars the acceptance into the court record of any evidence that damages have been paid by another source. Instituted in 1854, the purpose of the rule was to prevent a person who caused an injury to benefit from the plaintiff’s insurance coverage.

Many tort reform proponents oppose this doctrine, arguing that it allows a plaintiff to obtain a double recovery. The plaintiff receives reimbursement for the same expenses twice, collecting from both the collateral source and the defendant. Some states have modified or even eliminated the collateral source rule. Such reforms allow judges to notify the jury of the previous compensation, lower the award by the amount already compensated, or prevent the plaintiff from suing for damages that have already been paid. Opponents of reform claim that the party at fault should not be able to avoid responsibility for the damages even if other sources have paid the bills.

In 2006, a national survey revealed that 38 states had changed the collateral source rule to allow evidence of collateral source payments in medical liability cases. Of the 38 states, 20 states allowed the jury or judge to take into consideration any collateral payments during a trial. An additional 14 states directed that reductions in awards be considered after the trial. Six states allowed the evidence to be considered after a jury verdict but before a final judgment by the court was entered. Some modifications in the collateral source rule make a distinction between private collateral sources, for which the plaintiff had to pay a premium, and public sources like Medicare and Medicaid.

Some collateral sources have subrogation clauses in their contracts with consumers, allowing the company to collect a portion or all of the money that the company paid to the consumer if that consumer wins a lawsuit. Subrogation means that the insurance company has the right to sue the defendant in conjunction with the plaintiff. If the plaintiff prevails in court, the insurance company may then collect that portion of the damages that compensates for what the insurance company has already paid. The subrogated company can also sue a plaintiff who receives a monetary settlement in order to recover the money contributed on behalf of the insured.