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:
“[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.”
In essence, this long-standing precedent was created to ensure that victims were able to get just compensation for their injuries and places the significant protections on a victim's ability to sue for damages caused by the recklessness, carelessness, or neglect of others.
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.
This may be a bit confusing to those who have never gone through the financial recovery process. Medical providers (doctors and hospitals) often bill individuals and insurance providers for much higher rates than are actually paid. That's because these providers often have contracts or outstanding agreements with insurers as to what is an acceptable cost for certain procedures, treatments, and prescriptions. That's why, if you've ever examined a statement of claim from your health insurance, you'll often see a much higher initial bill than the amount that has been paid by your insurer.
This new court ruling has effectively reversed the long-standing Collateral Source Rule as It applies to an individual's medical bills. Now 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 because a plaintiff has paid into an insurance policy for years—essentially creating a situation in which a victim effectively pays for their own injuries!
But this landmark ruling was only the beginning. In recent 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).
How Will This Ruling Affect You?
This may all seem like a bunch of legal posturing and mumbo jumbo but it can have a very real effect on the outcome of any personal injury lawsuit you file in California. Indeed, many victims involved in auto accidents, pedestrian accidents, or bicycle accidents have no idea that such limitations on the amounts they could potentially collect and complications in the compensation process even exist. Imagine finding out after you've been partially compensated by your own insurance that the person who is actually at fault for your injuries may escape the situation without having to pay the full amount of your medical expenses.
But how can the Collateral Source Rule impact your individual case?
In general, there are two ways in which modifications to the Collateral Source Rule in California can affect your compensation for injuries.
Lower Awards for Insured Persons
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.
You will essentially be paying a significant portion of your own medical expenses (via an insurance policy) due to having paid premiums for years. While the overall amount oyu owe for your medical expenses out-of-pocket might not change, the amount you may receive from an at-fault individual or their insurer definitely will.
Refunds for Overcompensation
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. So, for example, say your insurance company pays for a portion (or the entirety) of your medical treatment. You then seek (and win) compensation from the at-fault party's insurance provider. If the amount they are ordered to pay is not offset by the amount your insurance has already paid, they may in fact be paying more than your injuries actually "cost."
They can then petition for a refund of the difference.
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.
This can be extremely troublesome if the monies a victim receives in compensation for their injuries have already been spent. In such cases, the injured individual may actually be personally responsible for reimbursing the defendant's insurance company. If funds are not immediately available to do so, the whole situation could degrade into a protracted legal battle which may end with liens and other financial penalties placed on the victim!
Getting Legal Help to Determine Your Rights and Responsibilities
As you can see, the compensation process has been made exponentially more difficult by recent modifications to the Collateral Source Rule in California. A system that was designed to protect a victim's right to compensation has—through legal manipulation—been extended and bloated with complex calculations, estimations, and checks and balances which may ultimately end up delivering a significant financial blow to those individuals who can least afford it.
While most people are completely capable of going through the financial recovery process after a personal injury accide4nt in California themselves without the help of an attorney, if your individual case is more complex—especially if it involves multiple insurance providers—you may wish to at least consult with a legal professional before proceeding.
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.