Tort reform in America: abrogating the collateral source rule across the states.

• Author: Wershbale, Jamie L.

IS "TORT REFORM" still a dirty word? The debate over tort reform in America has been raging for more than thirty years, since the time when corporate and insurance interests began lobbying for legislation limiting the availability of financial relief in personal injury tort actions. (1) Proponents of tort reform argue that such reforms as statutory caps on damages and the abolition of the collateral source rule will both decrease insurance premiums and reduce the number of frivolous lawsuits. (2) Opponents of tort reform contend that such reforms undermine the compensatory purpose of the tort system and do little to reduce insurance rates. (3) Empirical studies have been conducted without a clear result. (4) As the debate continues over tort reform, litigation costs and insurance premiums remain high, (5) and the American economy is straining. (6)

Each year state legislatures enact statutory tort reforms in an attempt to reduce tort system costs. Each year opponents of tort reform challenge these reforms in courtrooms across the nation. These reforms meet constitutional challenges ranging from the right to trial by jury, to due process, to separation of powers. (7) While it is difficult to generalize about these constitutional challenges, it can be said that tort reforms overall have passed muster at the state level since most statutes have been upheld by the states' high courts. (8) Proponents of tort reform are successfully promoting change in state legislatures and courts across America, using victories in business-friendly jurisdictions to bolster tort reform arguments in other, less receptive, jurisdictions. (9) One area of tort reform that has recently seen such success involves the statutory and judicial abrogation of the common law collateral source rule.

This paper discusses the role of the collateral source rule in the modern American tort system. It begins with a review of the American tort system and its underlying policies. The paper then discusses what the collateral source rule is and what purpose it serves. The discussion then turns to recent reforms that the common law collateral source rule has undergone. Finally, this paper concludes with a call for abrogation of the collateral source rule on a broad and national scale.

1. The American Tort System

   The American tort system has been called the most expensive tort system in the world, with an annual cost of approximately 2.3 percent of the annual U.S. gross domestic product ("GDP"). (10) Italy averages the second highest tort cost at 1.3 percent of its GDP. The average cost of the tort system in other nations is 0.9 percent. (11) With American tort costs so high both practically and comparatively, the question then becomes, is the cost of the U. S. tort system appropriate? Is it worth it? Ultimately, is the American tort system working? While there is no clear consensus, proponents of tort reform submit that the answer is a resounding "no."

   As the cost of the American tort system continues to remain high, there are ever increasing pressures to enact sweeping tort reforms in an effort to reduce tort system costs. The most prominent types of reform include caps on both non-economic and punitive damages, caps on attorney's fees, and abrogation of the collateral source rule.

   The tort system first developed at common law, founded on principles of compensation and accountability. The modern American tort system, while grounded in the same principles, involves many significant, and at times complex, policy bases and objectives. One of the most important considerations is compensation for the injured. The tort system seeks to make an injured plaintiff "whole" again. (12) The tort system also plays a role in protecting personal dignity and autonomy, and it serves to protect personal freedoms by regulating the imposition of tort liability in situations involving accidents or mistakes. (13) The tort system also serves to express societal disapproval of particular forms of conduct. (14) Deterrence of dangerous or hazardous conduct is another essential tort policy objective. Damage awards ensure that a tortfeasor both takes responsibility for the past harm it has caused and is encouraged to take prophylactic safety measures to prevent future harms. (15) Deterrence may be further promoted through the imposition of punitive or exemplary awards. This type of award is appropriate only in situations where the tortfeasor has engaged in particularly egregious or reprehensible behaviors. (16)

   Importantly, "[t]he goal of the tort system is not perfect safety and full compensation at all costs[,]" as many daily activities involve inherent risks. (17) Because such risks exist there is also a utilitarian component to the tort system. The utilitarian component ensures rational cost-benefit analysis, weighing the ultimate social value of particular dangerous conduct or products against potential harm to the individual. (18) The utilitarian component seeks equilibrium between safety and other important societal values and needs. Related to the utilitarian aspect of weighing risks, the tort system provides a de facto form of loss-spreading. By placing a substantial portion of the tort system's costs on manufacturers and insurers, these costs are ultimately passed on to distributors and consumers through incremental price increases. (19)

2. Tort Reform: The Collateral Source

   Rule

   The tort system has many objectives and purposes. However, these goals are not always in perfect alignment, such as when the collateral source rule and its varied consequences are considered.

   1. What is the "Collateral Source Rule?"

      The collateral source rule, also known as the collateral benefits rule, is a common law doctrine that developed more than one-hundred and fifty years ago. (20) It is both an evidentiary and substantive rule. (21) The rule dictates that a defendant may not introduce evidence of collateral sources in order to mitigate a potential damage award, nor may a plaintiff's damage award be reduced by benefits collateral to the tort action. Under the collateral source rule, evidence of collateral benefits is inadmissible at trial. (22) Likewise, an award cannot be reduced by financial benefits paid to the plaintiff from third-party sources, such as first-party insurance or unemployment benefits. (23)

      The rationale underlying this common law rule is two-fold. First, a defendant should not receive the benefit of paying lesser damages due to the plaintiff's fortuitous receipt of collateral benefits. Second, the deterrent effect inherent to the tort system is thought to be diminished when a wrongdoer's payment of damages is reduced by virtue of collateral sources. (24) In recent years, the rationale underlying this rule has been questioned as being out of step with modern realities. (25) For example, the theory that a defendant should not benefit from a plaintiff's foresight in obtaining insurance coverage was developed before the proliferation of managed care and public benefit programs. (26)

   2. The Role of the "Collateral Source Rule"

      In a personal injury action, a prevailing plaintiff is entitled to recover the "reasonable and necessary" medical costs that he or she has incurred. (27) Given the evidence presented at trial, the fact-finder determines what dollar amount constitutes such reasonable and necessary medical costs. When the collateral source rule is applied, the factfinder is not informed of any collateral benefits the plaintiff may have received in connection with the actionable injury. Nor is there typically a post-verdict reduction or setoff for any such collateral benefits received. (28)

      Proponents of tort reform favor abolishing the collateral source rule. The concern is that where the fact-finder remains uninformed, or there is no collateral source setoff, a successful plaintiff acquires a windfall, being awarded monetary damages in excess of necessary and reasonable medical costs. (29) Proponents support abolition of the collateral source rule on the grounds that plaintiffs should not be compensated twice for the same injury. (30) Opponents of tort reform support maintaining the status quo and continuing to enforce the application of the collateral source rule. The primary argument favoring the rule is that third-party collateral payors often have a contractual or statutory relationship with the plaintiff, entitling them to subrogation or a lien and thus an opportunity to recover the value of the benefits once paid to the plaintiff. (31) Proponents of tort reform argue that there is still a windfall to the plaintiff, as subrogation is rare. It is rare due to the time and expense involved in securing subrogation, and because there is often a contractual write-off for medical expenses that are billed, but never paid. (32) This potential windfall to the plaintiff is presumptively at odds with what is arguably the most important objective of the tort system--making an injured plaintiff whole. Further, "[i]n many respects, the [collateral source] rule is punitive because it allows a plaintiff to fully recover from a defendant for an injury even when the plaintiff has recovered from a source other than the defendant for the same injury." (33)

      1. Subrogation

         Subrogation, in the context of the collateral-source rule, is defined as "[t]he principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy." (34) The right of subrogation is based either in contract, often an insurance contract between the insurer and the insured, or in equity. (35) Upon payment for a loss, an insurer's right to subrogation arises, assuming that the right has not been waived by contract or conduct, or extinguished by applicable state or federal laws. (36) Further, under the "make whole doctrine," an insurer generally cannot seek...