A review of state law modifying the collateral source rule: seeking greater fairness in economic damages awards.

Author:Benjet, Bryce


THE collateral source rule comes up in most cases in which medical expense damages are an issue. Although the rule is entrenched in the common law, there is a growing trend to restrict, if not abolish, the rule. In this article we look at how the collateral source rule is treated in the United States and elsewhere, focusing especially on those recent legislative and judicial actions restricting the application of the rule. This article also discusses the separate, but related question of how various jurisdictions consider contractual write-offs and other discounts in assessing damages.

The Collateral Source Rule

The collateral source rule is both a rule of damages and a rule of evidence. (1) It prohibits both the reduction of a recovery by payments from collateral sources and the introduction of evidence of such payments. (2) The rule first arose in England with the dawn of commercial insurance and has been adopted by jurisdictions in the United States for over 150 years. (3) Several reasons are advanced to justify the collateral source rule. It is often argued that payments by collateral sources are either gratuitous or the result of some pre-existing payment or action made by the plaintiff. Although an award of the full value of damages in addition to the collateral source receipts may result in some overcompensation to the plaintiff, it is argued that such a windfall should benefit the injured party and not the guilty tortfeasor. (4) Other arguments supporting the rule are that plaintiffs require an extra recovery in light of the payment of contingent attorney's fees and that jurors will be confused if they are asked to reduce awards of damages by amounts received by the plaintiff from collateral sources. (5) Further, the collateral source rule has been justified as a means of preserving an insurer's subrogation rights. (6) This justification suggests that if a plaintiff cannot recover expenses that have been paid by insurance, then the insurer cannot obtain reimbursement in subrogation. (7)

The common law collateral source rule developed during a time when health insurance and publicly provided health benefits did not exist. Recent changes in the way health care is provided and paid for have called into question the fairness of the rule in many cases. (8) Despite the prevalent justifications in support of the rule, the collateral source rule has been increasingly viewed as a windfall to plaintiffs. Consequently, a number of states have enacted a wide variety of legislation to modify the rule to account for today's economic realities. (9)

Summary of the Law

This article will review the law in the United States and Europe regarding the question of whether a plaintiff is entitled to receive as medical expense damages more than the amount that was actually paid or will be paid by the plaintiff. Of the fifty States and the District of Columbia, forty-two jurisdictions have enacted and retained some form of stature that restricts the collateral source rule. Even where the rule has been applied generally, collateral source damages are often limited in health care liability cases as part of broader tort-reform legislation. (10)

The statutes modifying the collateral source rule vary widely. While most require a reduction in damages, some eliminate the evidentiary aspect of the rule, but leave to the jury the policy decision of whether to limit the damages. (11) All of these statutes are directed towards eliminating over-recovery by the plaintiff.

The majority of the statutes prohibit recovery of damages that have been paid by a collateral source. However, these statutes generally exclude collateral payments for which there are subrogation rights, to ensure that a plaintiff is hot undercompensated. The Pennsylvania statute accomplishes the same result by eliminating subrogation for collateral payments. (12) Statutory reductions for collateral payments also are generally offset by the amount paid by a plaintiff for insurance premiums or other payments made in order to obtain the collateral benefit. This again addresses concerns that a reduction in damages will undercompensate the plaintiff.

Ultimately, the various statutes modifying the collateral source rule represent an attempt to render compensatory economic damages truly compensatory. Although some jurisdictions have found these types of statures to violate their applicable state constitution, there is a clear national trend towards limiting the collateral source rule, especially in health care liability cases This brings the law in the United States much more in line with that of Great Britain, France, and Germany, where collateral source payments are even more likely in a personal injury case due to the broad social welfare system found in those countries. (13) As more Americans become privately insured or are covered by government benefits, state legislatures will likely continue to address the problems of potential overcompensation resulting from collateral source rule.



Section 920A of the Restatement (Second) of Torts, entitled "Effect of Payments Made to Injured Party," provides:

(1) A payment made by a tortfeasor or by a person acting for him to a person whom he has injured is credited against his tort liability, as are payments made by another who is, or believes he is, subject to the same tort liability.

(2) Payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable. (15)

In the Comment, the Restatement echoes a common theme in the case law:

But it is the position of the law that a benefit that is directed to the injured party should not be shifted so as to become a windfall for the tortfeasor. If the plaintiff was himself responsible for the benefit, as by maintaining his own insurance or by taking advantage of employment arrangements, the law allows him to keep it for himself. If the benefit was a gift to the plaintiff from a third party or established for him by law, he should not be deprived of the advantage that it confers. The law does not differentiate between the nature of the benefits, so long as they did not come from the defendant or a person acting for him. One way of stating this conclusion is to say that it is the tortfeasor's responsibility to compensate for all harm that he causes, not confined to the net loss that the injured party receives. (16) The Comment further states that the rule that collateral benefits are hot subtracted from the plaintiff's recovery applies to insurance policies, employment benefits gratuities and social legislation benefits, e.g. Social Security. (17)


In Alabama, the Legislature has enacted a statute mandating that, "in all civil actions where damages for any medical or hospital expenses are claimed and are legally recoverable for personal injury or death, evidence that the plaintiff's medical or hospital expenses have been or will be paid or reimbursed shall be admissible as competent evidence." (18) If evidence of reimbursement or payment of expenses is admitted, the plaintiff is then entitled to introduce evidence of the cost of obtaining reimbursement or payment. (19) Additionally, if the plaintiff proves that he is obligated to repay the expenses that have been paid or reimbursed, then evidence of such an obligation is also deemed admissible. (20) Thus, in Alabama, the collateral source rule does not bar the admission of competent evidence relevant to the actual amount of medical expenses paid or incurred by the plaintiff. (21) Therefore, Alabama circumvents the need for a "paid or incurred" law by abrogating the evidentiary aspect of the collateral source rule with regard to medical and hospital expenses. Alabama, however, has clouded the issue by mandating the admission of evidence before the jury that medical expenses have been or will be covered by a collateral source, while leaving it to the jury to decide whether to off-set the defendant's liability accordingly. (22)


Alaska has two statutes governing the collateral source rule. Alaska Stat. section 9.17.070 applies generally and allows for a post verdict reduction by the amounts received or to be received by the claimant as compensation for the same injury from collateral sources that do not have a right of subrogation by law or contract. (23)

Alaska also has a provision specifically applicable to medical malpractice cases. (24) This statute abrogates the collateral source rule for all collateral payments except for death benefits and federal programs in which subrogation is required by law. (25) The statute explicitly limits damages to amounts exceeding that already paid by a collateral source. (26)


Arizona generally applies the collateral source rule to allow a plaintiff to recover damages even if they were not actually sustained. (27) However, Arizona has abolished the collateral source rule by statute in medical malpractice cases. (28) Under this statute, a defendant may introduce evidence in response to a claim for damages by showing that any medical expenses are subject to reimbursement or indemnification by a collateral source such as insurance. (29) In response, a plaintiff may introduce evidence of premiums or other expenditures incurred to obtain the collateral benefit. (30) Thus, the question of damages is entirely before the jury, and the jury is free to award the full amount of expenses or only those that were actually paid or incurred by the plaintiff. (31)


Until recently, Arkansas strictly applied the collateral source rule. (32) The Arkansas Supreme Court has acknowledged that double recovery for the same damages by the injured claimant may result, but has decided against admitting collateral source evidence for the purpose of mitigating damages. (33)

However, Arkansas passed...

To continue reading