The collateral source rule: statutory reform and special interests.

• Author: Schap, David

Paul Rubin (2005) has addressed the evolution of American tort law from a public choice perspective. In contrast to earlier work in law and economics, which generally regarded tort law norms as efficient (Landes and Posner 1987), Rubin relied on more recent work in the field (Epstein 1988, Rubin and Bailey 1994) that regards tort law as being shaped by the special interests of plaintiff and (perhaps to a somewhat lesser extent) defense attorneys. In addition, Rubin envisioned business interests' influence toward tort reform as enhancing efficiency. He ended his article with a call for additional empirical research on modern American tort law from the public choice perspective and indeed suggested a number of specific items and areas of possible fruitful research. The spirit of Rubin's anticipated research program, as well as many of his specific suggestions, can be applied to our survey research findings concerning statutory reform of the collateral source rule.

The Collateral Source Rule

The collateral source rule is a normative rule in the common law (i.e., judge-made law) that applies to recoverable losses in tort actions such as personal injury, wrongful death, mad medical malpractice. Specifically, the rule prohibits jury members from considering any payments to a plaintiff (victim) other than those made by the defendant tortfeasor (injurer). Under the rule, a victim can recover full damages from a tortfeasor even after the victim has already received full compensation for damages from the victim's own insurer for the very same injurious event (assuming, of course, that the victim had not previously by contract subrogated the rights of recovery from tortfeasors to the insurer in consideration of a lower policy premium).

Richard Posner (2007: 199-200) regards the collateral source rule as being an efficient common law norm. The basic argument is that the appearance of double recovery by the victim is very much beside the point whereas the crucial issue is that the full cost of negligent behavior be imposed on tortfeasors if such persons or firms are to get the correct signal concerning the appropriate (i.e., efficient) level of care to be taken. Matters are seemingly a bit trickier, for example, in a case of workplace-induced injury where the injured party's employer has provided the insurance policy under which recovery has been obtained. Some states specifically exclude double recovery in such a situation. Posner deftly sees through this complication, noting that insurance is part of a compensation package, so that in the absence of employer-provided insurance the worker would have negotiated a higher wage. Thus, the insurance, although employer-provided in appearance, is actually paid for by the employee in the form of a lower wage rate than would otherwise be the case. In Posner's view, therefore, exceptions to the ordinary collateral source rule in the circumstance of employer-provided insurance actually decrease efficiency. Posner concedes that exceptions to the rule for certain public-sector benefits, like monies awarded through workers' compensation programs, suitably establish a governmental right to recovery of public funds without adversely affecting efficiency.

Posner's analysis may appear to be open to criticism. For one thing, as noted elsewhere in Posner (2007: 172), but not in his discussion of the collateral source rule, potential victims frequently have a role to play in accident avoidance and must be given correct signals of what constitutes appropriate precautionary behavior. If there were to be double recovery under the collateral source rule, then victims might actually induce accidents, the cost of which would then be only half of what a victim could expect to recover from two sources (namely, the tortfeasor and an insurer).

There are three fallacies embedded within this attempt at criticism. First, and most obvious, the logic of the criticism fails if potential victims have already voluntarily (i.e., by contract) provided for subrogation of their rights to recovery to the insurance provider, for then there is only a single recovery by any victim. Second, depending on which variant of negligence law one has in mind, victim recovery may indeed be blocked or reduced in situations in which the victim is willfully, principally, or even just partially at fault. Third, concerning situations in which victims allegedly might take inadequate levels of care, insurance premiums would presumably reflect such possibilities. The moral hazard problem (wherein those insured are induced to behave more recklessly at the margin by virtue of their being insured) may be so severe as to preclude insurance in certain markets. Where insurance is in fact provided, given the insurer must charge a premium sufficient to cover overhead costs, if direct primary recovery from the tortfeasor by the victim is assured then the purchase of insurance represents an actuarially unfair and needless (i.e., avoidable) bet. Consequently, one should not expect victims to purchase insurance for the sake of merely gambling in hopes of a second recovery, at least not if they are risk-neutral or risk-averse individuals. To our knowledge this point has not been previously noted in the literature.

A second type of criticism has been applied to Posnerian logic with respect to the collateral source rule. The criticism grants that the collateral source rule may be efficient, but calls for exceptions to be created to the rule because other sources of inefficiency in tort law result in a general overcompensation of victims, and it may not be possible to alter the other sources of inefficiency (U.S. Congressional Budget Office 2004: 6). By way of example, the reasoning at hand might call attention to the phenomenon of runaway jury awards in a context in which the legislature for some reason has been unwilling or unable to cap damages in tort actions. In such a situation, with logical validity (yet with a measure of uneasiness) one might call for exceptions to the collateral source rule as a "second best" tort reform solution. The application of "second best" argumentation is vexing to the extent that it may leave one not knowing whether any rule or norm could ever be considered truly efficient on its own merits, because the efficiency properties of a rule would no longer be determined in an otherwise isolated state. Rather, they would always be contextually determined and dependent on the existence and performance of other rules.

Determining whether the collateral source rule is itself efficient (assuming "second best" argumentation does not preclude such a determination) is not really the primary purpose of the analysis here. Suffice it to say that the rule has undergone substantial revision in many (but not all) state legislatures, and empirical studies have emerged that attempt to measure the efficiency consequences of modification of the rule in the states. Weakened versions of the collateral source rule are reported to be associated with (1) increased vehicular accidental deaths, as drivers exhibit marginally less care when they face less than the full costs of the accidents they cause (Rubin and Shepherd 2005), and (2) increased infant mortality (concentrated in the black population), as physicians exercise less care when accountability for full malpractice costs is reduced (Klick and Stratmann 2005).

Rather than exploring the efficiency consequences of statutory...