What Is the Collateral Source Rule in California?
Although settling a personal injury claim out of court with an insurance company often results in the best outcome for the injured victim of an accident, there are situations where the interests of an injured party can only be served by taking the accused party to court.
Among the laws and precedents that govern the process and the outcome of a personal injury trial in California is the collateral source rule, which was designed to protect injured parties from defense efforts to reduce payments for damages.
In recent years, with regard to medical damages, California courts have gone beyond merely neutralizing the rule to effectively reverse its provisions in favor of defendants and insurance companies, although it has continued to be successfully applied to other types of liability, such as uninsured motorist coverage and property damage.
First instituted in California in 1854, the collateral source rule prohibits a defendant’s attorneys in a civil lawsuit from introducing evidence that the injured party had already received compensation for damages from a third party.
For example, if an injured person’s medical treatments had already been paid for by a health insurance policy, that information could not be used by the defense at trial, as it could potentially prejudice (negatively influence) the amount of the plaintiff’s jury award.
While “tort-reform” advocates often claim that the collateral source rule is unfair because it can allow plaintiffs to collect more than their damages actually cost, in a 1970 ruling (Helfend v. Southern California Rapid Transit District), the California Supreme Court explained the reasoning behind the collateral source rule, that a defendant:
“should not be able to avoid payment of full compensation for the injury inflicted merely because the victim has had the foresight to provide himself with insurance.”
The essence of the rule was further characterized in a 2002 California Court of Appeal decision (Miller v. Ellis), which concluded that it is:
"intended to ensure that the right of an injured party to be fully compensated for all his or her damages is protected, even if in some instances it entails that party obtaining double recovery from both the insurer and the wrongdoer.”
These protections have been consistently upheld by courts, and remained in effect for medical damages until in 2011 the California Supreme Court delivered a milestone ruling (Howell v. Hamilton Meats and Provisions, Inc.), which reinterpreted the legal basis that can be used for awards for medical damages in the state.
The Court ruled that an injured plaintiff may recover as economic damages no more than the amounts actually paid or owed by the plaintiff or his or her private insurer for medical services received, and that the amounts billed by medical providers are inadmissible at trial.
Thus, not only is 3rd party compensation now entered as evidence, the Court has formally capped any award for medical damages at the amount paid or owed for services.
This is an important change, because providers typically have agreements with insurance companies to provide medical services at much lower rates than the amounts they actually bill individuals for. Thus, plaintiffs with similar injuries (or their insurers) can pay or owe vastly different amounts for treatment, and as such receive radically different medical damage awards.
It also means that a defendant’s insurance company may now reap substantial financial benefit from an insurance policy that the plaintiff may have paid into for years.
Subsequent court decisions have expanded the original ruling on private insurance payments to cover Medicare & Medi-Cal (Sanchez v. Strickland), workers’ compensation (Sanchez v. Brooke), future medical damages and pain & suffering (Corenbaum v. Lampkin) and the Affordable Care Act (Cuevas v. Contra Costa County).
In general, there are two ways in which the collateral source rule in California can affect your compensation for injuries.
Since the Court decided that the total amount billed (the reasonable value) for your treatment cannot be used to determine your award for medical damages, the amount of your award could actually be substantially smaller if you have health insurance than it might be for an uninsured person.
In the rare case where a plaintiff has "overpaid" for medical treatment, an insurance company can actually seek a refund of the “excess” compensation for medical damages. This is not a simple process, but if an insurer determines that an injured party was exceptionally overcompensated, they will take legal action to attempt to recoup their losses. Thus, in exceptional circumstances, an individual could be forced to repay money they've already used to pay medical expenses, cover lost wages, or provide for their family during their physical recovery.
The best way to understand how recent changes to the application of the collateral source rule in California will affect your compensation and recovery is to consult an experienced personal injury accident trial attorney.