The “Collateral Source Rule” & How it Can Cost (or Make) You Thousands – Part I

Imagine you are a defendant sued because you negligently injured someone in Louisiana.  In the accident, the plaintiff received extensive medical treatment. The health insurer paid $50,000 for medical costs even though the doctors billed $150,000 for the plaintiff’s care. The plaintiff was only out-of-pocket $500 for his health insurance deductible. What amount should you have to pay: $150,000, $50,000, or only $500?

The answer to this question is not so simple. You will certainly have to pay more than the plaintiff’s deductible, that much is clear. But whether you are required to pay the medical providers’ full rate of $150,000, the insurer’s discounted rate of $50,000, or some other amount for the medical services provided is a more complicated issue.

This blog is broken down in a two-part series. This installment will address the background of the collateral source rule and the public policy behind the rule.

What is the Collateral Source Rule?

The collateral source rule provides that a tortfeasor is generally not entitled to a credit for payments made to a plaintiff through “collateral sources,” i.e., sources not provided by the defendant. Under this rule, a tortfeasor’s exposure for damages should be the same regardless of whether or not the plaintiff purchased health insurance.

The collateral source rule permits the plaintiff to recover medical expenses in excess of the amounts actually paid by the plaintiff or their insurer. Critics therefore assert that the rule provides a “windfall” to the plaintiff that violates the goal of Louisiana tort law, namely to make the victim “whole.”  As applied, the rule can make the victim more than whole.

Origins of the Collateral Source Rule

To understand the collateral source rule, it helps to look at its origins. The rule in the United States at least dates back to the 1854 case The Propeller Monticello v. Mollison, 58 U.S. (17 How.) 152, 15 L.Ed. 68 (1854). In Propeller Monticello, two ships wrecked and one sank. The insurer of the ship that sank paid for the loss. The owner of the at fault ship asserted that the plaintiff had been fully compensated by the insurer’s payment and that it was therefore not obligated to pay for the damage. In rejecting this argument, the Propeller Monticello Court held the defendant was not a party to the insurance contract and could not reduce exposure by citing to the insurance available to the plaintiff.

Policies Behind the Collateral Source Rule

In Dep’t of Transp. & Dev. v. Kansas City S. Ry. Co., 846 So. 2d 734 (La. 5/20/03), the Louisiana Supreme Court detailed the public policy concerns that support the collateral source rule. According to the court, the policies in favor of the rule include:

i.  Fairness– a defendant should not gain an advantage from benefits provided to the plaintiff independent of any act of the defendant;

ii.  Deterrence– the rule provides a deterrence to negligent conduct; and,

iii.  Promotion of Insurance– victims could be dissuaded from purchasing insurance if that act could affect tort recovery.

So, how much do you owe: $50,000, $150,000, or some other amount? We’ll tell you in Part II of this blog.