The Collateral Source Rule: Double Recovery and Indifference to Societal Interests in the Law of Tort Damages

• Publication year: 1978

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 2, No.1FALL 1978

The Collateral Source Rule: Double Recovery and Indifference to Societal Interests in the Law of Tort Damages

William A. Olson

While society changes, the law of tort damages clings persistently to the outmoded collateral source rule, struggling to justify the rule and to balance conflicting objectives of compensation and punishment. Nineteenth century tort liability theory, predicated on individualistic notions of fault, suited a time of self-help, rugged individualism, and laissez-faire government. Punitive objectives, predicated on moral fault, comported with the compensatory purpose of tort damages because the defendant bore the responsibility of compensating the victim. Social changes, however, manifesting widespread insurance protection and government social welfare programs, shift responsibility for civil loss to society and away from the individual tortfeasor. Vicarious liability, strict products liability, comparative negligence, no-fault insurance, and notions of enterprise liability(fn1) further evince pervasive legal changes in fault liability theory. These legal and social developments facilitate individual recovery for injuries and spread the cost to purchasers of insurance, buyers of goods, and taxpayers. Ensuring individual recovery and easing the burden of compensation for the loss by spreading the cost over a wide segment of the populace are socially approved goals.(fn2) The collateral source rule, which forbids mention in court of plaintiffs prior compensation for the same injury, is unresponsive to legal and social changes invalidating the rule's punitive justification and adds to the public expense of compensating individual civil loss.

This comment analyzes the present utility of the collateral source rule and finds the rule unjustified as a means of ensuring either punishment of the defendant or just compensation for the plaintiff. It further examines the efficacy of subrogation in eliminating the collateral source rule's vice of double recovery. The comment concludes that legislative reform abolishing the collateral source rule and subrogation in medical malpractice suits should extend to all tort actions for personal injury, thereby entirely eliminating double recovery and the consequent higher societal costs in insurance premiums, taxes, and prices.

By allowing double recovery, the collateral source rule compromises the strict compensatory purpose of tort damages, which seeks to reimburse injured parties only for their actual loss.(fn3) Courts, invoking the collateral source rule, permit the plaintiff to recover an award undiminished by compensatory benefits from sources independent of the wrongdoer.(fn4) For example, A sues B for personal injuries sustained in an auto collision. A claims, as special damages, $500 in medical expenses and $500 in lost wages. The collateral source rule bars B from proving that A's medical insurance reimbursed A for medical expenses, and that A's employer continued salary payments during A's disability. Consequently, A collects $1,000 from collateral sources, and $1,000 from fi's insurer, receiving a total of $2,000 for a $1,000 economic loss. Because collateral sources reimbursed A's loss, A's additional recovery against B is not compensation. Instead, A's recovery is enrichment, and B's payment appears punitive in emphasizing the responsibility of B to pay for a loss A did not suffer.

Courts originally supported the collateral source rule because of its punitive effect.(fn5) The rule was created in 1854,(fn6) contemporary with the establishment of the fault theory of liability in I860.(fn7) Courts perceived the collateral source rule as deterring the socially inexpedient or wrongful conduct the new fault theory of liability sought to identify.(fn8) Judicial policy makers morally appraising B's conduct would reason B deserves to pay because enforcing a penalty against B punishes his immoral conduct and deters similar wrongful acts.(fn9) Courts argued that a wrongdoer should not avoid paying full compensation for the injury merely through the fortuitous circumstance of collateral benefits.(fn10) Aversion to giving misbehaving defendants the mitigating benefit of collateral compensation had more to do with permitting double recovery than any belief in the merits of the plaintiffs entitlement to enrichment.(fn11) Thus, despite its violation of the compensatory purpose of tort damages, the collateral source rule was embraced by courts naturally responding to the new emphasis on identifying and preventing civil misconduct. The rule's very adaptability to the punitive logic behind the fault theory of liability promoted its adoption.

The scarcity of collateral sources and the types of collateral benefits courts normally confronted also contributed to the rule's adoption. Generally, tort liability and private resources were the only available sources compensating personal injury losses.(fn12) In contrast to today, accident and health insurance, personal liability insurance, work benefits, and government protection against personal injury losses were scarce or nonexistent in 1854.(fn13) When confronted with collateral benefits, court decisions permitting double recovery had negligible social impact because the defendant, rather than a liability insurer, paid the award. The virtual absence of liability insurance and government protection against personal injury losses characterized the nineteenth century's valued social philosophy of self-help and rugged individualism. Judicial opinion naturally protected that sentiment. Courts were not about to mitigate damages because plaintiffs received collateral compensation from contractual arrangements, gifts from family and friends, or public charity, thereby thwarting or discouraging individual providence, family unity, and philanthropy.(fn14) These collateral benefits represented individual resourcefulness in preparing for accidential loss, or donative intent for the sole benefit of the recipient. Property insurance, specifically marine and fire insurance, was common in comparison to accident and health insurance.(fn15) The right to subrogate under marine and fire insurance contracts, however, granted the insurer a lien on the insured's tort recovery equal to the indemnity obligation under the insurance contract.(fn16) This subrogation right avoided double recovery, enabled the courts to punish the defendant and still pay homage to the compensatory purpose of tort damages, and thus attenuated the dilemma of applying the collateral source rule.

Modern legal and social changes invalidate punitive justifications for the collateral source rule. The prevalence of inadvertent harm, the emphasis on securing compensation for personal injuries, and a view of social responsibility for individual loss lead to modern concepts of strict products liability, vicarious liability, comparative negligence, and wider liability insurance protection against negligence.(fn17) Strict liability and vicarious liability may place legal responsibility on faultless parties.(fn18) Additionally, allowing plaintiffs to recover under some comparative negligence schemes when they are more at fault than defendants(fn19) fails to comport with any punitive function in tort law. Finally, widespread liability insurance lightens a jury's task of finding fault in the defendant.(fn20) The jury's inclination to find fault because of liability insurance embodies values of a society demanding reparation of harm and wide distribution of loss, through insurance or the marketplace, rather than a finding of moral blameworthiness.(fn21) The shift in tort law towards social responsibility for individual loss and the spread of liability insurance envelop societal interests in private litigation and widen the gap between legal and moral fault. Finding legal liability with less concern for finding fault weakens the collateral source rule's punitive justification because the rule cannot reform or deter faultless conduct.

Similarly, a punitive justification for the collateral source rule is lacking in ordinary negligence cases. Defendants liable for ordinary negligence normally do not display the malevolence necessary to justify punitive damages. They are held responsible for an error in judgment or accident proneness resulting in conduct falling below a uniform standard of behavior.(fn22) Some opinions insist that relieving negligent tortfeasors from civil responsibility would encourage carelessness;(fn23) yet, the financial protection of liability insurance relieves negligent tortfeasors from full civil responsibility and no demonstrable correlation exists between insurance coverage and accident rates.(fn24) Courts are too suppositious in expecting undiminished civil liability to further deter negligent conduct; potential civil liability is a sufficient incentive to be careful.(fn25) A tortfeasor's knowledge subsequent to the negligent act, that a particular plaintiff is the beneficiary of collateral benefits, will not impair the deterrent effect of civil liability.(fn26)

Even assuming full civil responsibility deters negligence, courts should go on to determine not only who will bear the ultimate financial responsibility, but also the social expense of multiple insurance recoveries before applying the collateral source rule. Because adequately insured tortfeasors generally do not pay compensatory damage...