Collateral Source Rule in Personal Injury Law

The collateral source rule prevents an injured person's "damages" from being reduced by payments from their own medical insurance and other third-party sources.

The "collateral source rule" is a long-standing legal principle that applies to the compensation, or "damages," a plaintiff gets from a personal injury lawsuit. It can have a big impact on how much a defendant must pay to compensate an injured person for their losses. In this article, we'll explain this rule and how it might affect your personal injury case.

What Is the Collateral Source Rule?

If you're injured, even when someone else caused your harm, your health insurance might initially pay for your medical care. If your job benefits include paid time off (PTO), you might also use it to take time off work to recover from your injuries and attend medical appointments. In a personal injury lawsuit, those benefits are considered "collateral sources" of compensation because they didn't come from the person who caused your injuries (or their insurance company).

Under the "collateral source rule," any compensation you receive from a collateral source won't reduce the amount of damages you can recover from the person who caused your injuries (the "defendant"). In other words, the rule prevents those collateral payments from reducing the amount that the defendant is "on the hook" for in a lawsuit.

How Is the Collateral Source Rule Applied?

The collateral source rule is most often applied in cases where the injured person's own health or car insurance paid for medical treatment associated with their injuries. Under the collateral source rule, if you're hurt by someone else's careless or intentional conduct, your insurance company (or another source) might pay for some or all your resulting medical treatment. But in the eyes of the law, the defendant who caused your injuries is still liable for all costs of medical care associated with the incident.

Besides insurance, collateral sources can include workers' compensation, Social Security, Medicaid, or employee benefits (like PTO). It can also include donations of goods or services that help the injured person.

A second part of the collateral source rule concerns the admission of evidence in court during a personal injury trial. The rule bars the judge or jury from considering any payments made by others to cover treatment of your injuries—that includes payments from an insurance company—when figuring out your total damages (which sets the amount the defendant will be ordered to pay you).

Rationale for the Collateral Source Rule

Critics of the collateral source rule argue that an injured person shouldn't receive payment for their losses more than once. If you're injured, and your health insurance pays your medical bills, these critics argue, the defendant shouldn't also have to pay you the amount of your medical bills. This argument is blunted somewhat by "personal injury liens" and other reimbursement tools available to insurance companies who've paid for an injury claimant's accident-related health care (more on this below).

The other side of the argument is that if someone's negligent behavior caused your injuries, the defendant should be responsible for all resulting damages. The idea is that in order to reinforce the duty of reasonable care (taking care to avoid harming others) that everyone owes other people, the defendant must be held fully accountable for their actions. And you, as the injured person, shouldn't receive reduced compensation for your injuries just because you were prudent or fortunate enough to have insurance prior to being injured.

Insurers and Others May Be Entitled to Reimbursement

The collateral source rule ensures that an at-fault defendant is held responsible for the full spectrum of the injured person's harm. But that doesn't mean insurance companies and others have no recourse for getting back money they've paid on behalf of an injured person whose case is successful.

Under the terms of your policy or plan, your health and car insurance companies, Medicare, and others will almost certainly have the right to a personal injury lien on any personal injury settlement or court award you receive in connection with your injuries. If those sources have already paid to treat your injuries, the lien allows them to be reimbursed from your settlement or court award.

So, for example, if you're injured in a car accident, and $6,200 in accident-related medical treatment was covered (and paid) by your health insurance plan, your health insurer would have a $6,200 lien on any money you receive from the defendant. Similarly, after that same accident, if you had $10,000 in personal injury protection (PIP) car insurance, the $6,200 in medical bills would be covered under PIP. So, your car insurance company could probably enforce a $6,200 lien on any settlement or court award you receive.

The good news here is that your lawyer might be able to get these liens reduced, often significantly. Learn more about how to deal with a personal injury lien.

Similarly, if you've got unpaid bills from a hospital or health care professional, that provider can file a lien on your lawsuit and will likely be entitled to payment from any settlement or court award you get (they'll probably get paid before you do).

An Example of the Collateral Source Rule

Suppose Adam trespassed onto Brian's property and accidentally left a lit cigarette on Brian's wood deck. The cigarette causes a fire that destroys Brian's house and causes permanent burn-related tissue damage to Brian's hands.

Brian's neighbor and friend, Chris, volunteers to help rebuild the house as a friendly gesture. Brian also receives health insurance coverage for his injuries. Under the collateral source rule, Brian can sue Adam and recover the full value of the property and all costs associated with his burn injuries.

If the lawsuit goes to trial, the jury won't hear about either Chris's act of helping rebuild the house or Brian's insurance coverage. But Brian's health insurer will almost certainly have a valid personal injury lien on any amount it paid to cover treatment of Brian's burn injuries.

State Reform of the Collateral Source Rule

A number of state legislatures have passed laws that change the way the collateral source rule is applied. Depending on the state, these changes create some narrow and broad exceptions to the rule.

In California, collateral source evidence is admissible in a case against a health care provider for professional negligence ("medical malpractice"). As the defendant, the health care provider can introduce evidence of amounts that are payable to the injured person by insurance carriers and other sources. However, where the defendant introduces this kind of evidence, the injured person can also introduce evidence of the payments they made to get those insurance benefits. The California statute is a relatively narrow exception to the collateral source rule, and it's similar to rules in place in other states.

To understand how the collateral source rule could affect your case, it might make sense to talk with a personal injury lawyer in your area. Learn more about finding the right personal injury lawyer for you and your case. You can also use the tools on this page to connect with a lawyer near you.

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