How to Avoid a Windfall for Plaintiffs
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The Collateral Source Rule: cal bills were satisfied by a public aid
source for which the plaintiff did not con-
How to Avoid a Windfall for Plaintiffs tribute. Therefore, a second rationale for
the collateral source rule is that if anyone
Matthew Reddy, Pretzel & Stouffer, Chartered
receives a windfall, it is best that it should
Mark Tarnavsky, Markel Service, Inc.
be the injured party, rather than the tort-
feasor. Grayson v. Williams, 256 F.2d 61,
The healthcare industry’s business of damages. This component 65 (10th Cir. 1958). Additionally, allow-
model has changed as profoundly and bars a defendant from reduc- ing the windfall to shift to the defendant
rapidly as the technology with which it ing the plaintiff’s compensatory would relieve the defendant of the full
treats patients. Given the fundamental award by the amount the plaintiff responsibility for his wrongdoing. Id. The
shift to private and public insurance, the received from the collateral collateral source rule has also avoids the
clear majority of patients no longer direct- source. The evidentiary compo- arguably unjust outcome where a de-
ly reimburse their health care providers nent bars admission of evidence fendant’s potential liability was reduced
for services rendered. There is a volume of the existence of the collateral based only on whether the injured party
discount inherent in a group’s bargaining source or the receipt of benefits. could afford insurance. Brandon HMA,
power. This discount takes the form of The concern here is that the trier Inc. v. Bradshaw, 809 So. 2d 611, 619
write-offs, adjustments, and contractu- of fact may use that evidence im- (Miss. 2001).
ally set prices for services. At issue in properly to deny the plaintiff the Numerous scholars, practitioners,
this article is the manner in which differ- full recovery to which he is enti- and politicians have been critical of the
ent jurisdictions handle the evidentiary tled.” J. Fisher, Understanding collateral source rule, particularly its
issue of special damages arising out of the Remedies § (a), at 77 (1999). perceived punitive effect on defendants
medical bills, particularly those already and the windfall effect it has for plaintiffs.
satisfied by a collateral source. A tension The collateral source rule therefore Harper & James, The Law of Torts (1968
arises where a bill is satisfied in full for protects collateral payments made to or
an amount less than the amount billed. benefits conferred on the plaintiff by de-
About the
This can occur due to contractually set nying the defendant any corresponding AUTHORS
reimbursement rates for certain ser- offset or credit. Arthur v. Catour, 833 N.E.
vices. A majority of states allow a plaintiff 2d at 851. Such collateral benefits do not Matthew Reddy is a part-
to recover the entire amount billed for his reduce the defendant’s tort liability, even ner at Pretzel & Stouffer,
Chartered in Chicago. He
or her medical treatment, and do not limit though they reduce the plaintiff’s loss.
has broad litigation and
that recovery to the amount actually paid Id. The most common rationale for the trial experience with a
to satisfy the bill. Arthur v. Catour, 833 collateral source rule is that the defend- primary focus in the
N.E. 2d 847, 858 (Sup. Ct. Illinois 2005). ant should not benefit from the plaintiff’s defense of professional negligence actions
A firm grasp on how a particular jurisdic- foresight in acquiring insurance. Note, and has successfully tried dozens of cases to
tion handles this issue informs the valu- Unreason in the Law of Damages: The verdict. Mr. Reddy may be reached at mreddy@
pretzel-stouffer.com.
ation of a case as well as provides the Collateral Source Rule, 77 Harv. L. Rev.
practitioner an opportunity to reduce the 741, 741 n.3 (1964). Put differently, the
special damages a plaintiff can present, plaintiff should reap the benefit of the bar- Mark Tarnavsky is a
and therefore the likely verdict. gain he or she had made for insurance. Claims Examiner with
Markel Service, Inc. He
Should this benefit be shifted instead to
specializes in medical
The Collateral Source Rule the defendant, the plaintiff is in a worse professional negligence
financial situation than if they had not ac- and manages litigated
“The traditional approach is quired insurance coverage. Helfend v. S. claims across various
to treat [the collateral source Cal. Rapid Transit Dist. P. 2d 61, 66 (Cal. jurisdictions. Prior to
rule] as having substantive and 1970). Of course this rationale does not working in professional liability insurance, he
practiced family law and consumer debt defense
evidentiary components. The apply where the services rendered were
in Michigan.
substantive component is a rule gratuitous, or where the plaintiff’s medi-
22 | PLDF QUARTERLY | Second Quarter 2019
Collateral Source Rule | continued
Supp.) §25.22, at 152. Opponents of the 1239 (Idaho 2003); Coop. Leasing Inc. v. a plaintiff who has received gratuitous
collateral source rule contend that it is Johnson, 872 So. 2d 956, 960 (Fla. Dist. medical benefits. However, few jurisdic-
inconsistent with the general policy of Ct. App. 2004); Kastick v. U-Haul Co., tions omit gratuities from the collateral
modern tort law: that damages are com- 740 N.Y.S. 2d 167, 169 (2002); Chap- source rule. This position is consistent
pensatory and not punitive. Peterson v. man v. Mazda Motor of Am., Inc., 7 F. with the Restatement of Torts which pro-
Lou Bachrodt Chevrolet Co. 392 N.E. Supp. 2d 1123 (D. Mont. 1998). Courts in vides as follows:
2d 1, 5 (Sup. Ct. Illinois 1979). See also California and Pennsylvania, states that
Restatement (Second) of Torts §903, do not have statutory limitations on the Gratuities. This applies to cash
comment a (1979). collateral source rule, have likewise de- gratuities and to the rendering
termined that a plaintiff may not recover of services. Thus the fact that
Medical Bill Discounts the discounted or written-off portions of the doctor did not charge for
their medical bills. Hanif v. Housing Auth. his services or the plaintiff was
As noted above, as medical in- Of Yolo County, 200 Cal. App. 3d 365, treated in a veterans hospital
surance became more prevalent, the 643-44 (Ct. App. 1988); Moorhead v. does not prevent his recovery
amount paid for medical services be- Crozer Chester Md. Ctr., 765 A.2d 786, for the reasonable value of the
came akin to the sticker price on a car. It 791 (Pa. 2001). Those courts concluded services. Restatement (Second)
is commonly understood that few medi- that the collateral source rule simply did of Torts §920A, Comment c(3), at
cal bills are satisfied for the amount ini- not apply to the discounted portions of 515 (1979).
tially charged (the sticker price). Rather, the bills, because in truth, no collateral
the amount of money paid for a particular source actually paid those charges. Id. Different Approaches
service is linked to who the payer is as The majority of jurisdictions, how-
much or more than who the medical pro- ever, have allowed for the full recovery The above issues call for consistent,
vider is. By way of example, Insurance of the billed amount. This includes the considered, and policy-based eviden-
companies in Illinois received an aver- District of Columbia, Georgia, Hawaii, tiary and substantive rules. Generally,
age discount of 40% for their customer’s Kansas, Louisiana, Missippi, Missouri, there are three approaches to the ap-
hospital bills. Brief for Illinois Association New Hampshire, South Carolina, Texas, plication of the collateral source rule: ac-
of Defense Trial Counsel as Amicus Curi- Virginia, and Wisconsin. Robinson v. tual amount paid, benefit of the bargain,
ae Supporting Defendants-Appellants at Bates, 828 N.E. 2d at 665-69. The State reasonable value approach. Bozeman v.
12, Arthur v. Catour, 216 Ill. 2d 72 (2005). of Illinois also substantively allows a State, 879 So. 2d 692, 701 (La. 2004).
Thereby, a new question has arisen with plaintiff to recover the full billed amount,
respect to the collateral source rule: may provided adequate foundation is made. Actual Amount Paid
a plaintiff recover the billed amount or See Klesowitch v. Smith, 2016 IL App
are the medical damages limited to the (1st) 150414. As mentioned above, Courts following this approach
amount actually paid? some states disallow a defendant from limit the plaintiff to recovering only the
Different jurisdictions have devel- presenting as evidence the amount writ- amount actually paid in full settlement of
oped different substantive and eviden- ten off nor the amount accepted as full the medical bill. See Dyet v. McKinley, 81
tiary rules for handling the discrepancy satisfaction of the bill. Radvany v. Davis, P. 3d 1236 (2003); Terrell v. Nanda, 759
between what was paid versus what was 551 S.E. 2d 347, 348 (Va. 2001). So. 2d 1026 (La. App. 2000). According
billed. Most of the jurisdictions restrict- to these courts, the written-off amounts
ing recovery to the amount paid have Gratuities are not damages incurred by the plaintiff,
done so based on statutory limitations and are therefore not recoverable. Ter-
of the collateral source rule. Robinson v. One of the policy justifications often rell, 759 So. 2d at 1031. This approach is
Bates, 828 N.E. 2d 657, 669 (Ohio Ct. cited for the collateral source rule is that criticized for focusing the inquiry on the
App. 2005). By way of example, courts in the tortfeasor should not benefit from nature of the damages vis-à-vis the tort
Idaho, Florida, New York, and Montana, the expenditures made by the inured victim rather than vis-à-vis the tortfea-
have relied on state statutes that ex- party in procuring insurance. 22 Am. Jur. sor. See Bozeman, 879 So. 2d at 703;
pressed a policy against double recover- 2d Damages §210, at 293-94 (1965). Acuar v. Letourneau, 531 S.E. 2d 316,
ies. See Dyet v. McKinley, 81 P. 3d 1236, This rationale simply does not apply to — Continued on next page
Second Quarter 2019 | PLDF QUARTERLY | 23
Collateral Source Rule | continued
322 (2000)(explaining that the “focal plaintiffs based on the type of insur- 2001); Texarkana Memorial Hospital,
point of the collateral source rule is not ance applicable to them. Those with Inc. v. Murdock, 903 S.W. 2d 868 (Tex.
whether an injured party has ‘incurred’ private insurance may recover the full App. 1995); Brown v. Van Noy, 879 S.W.
certain medical expenses. Rather it is billed amount of their medical treatment, 2d 667 (Mo. App 1994).
whether a tort victim has received ben- whereas those whose bills were paid As noted above, this approach is
efits from a collateral source that cannot by Medicaid may not, and their recovery subject to the criticism that it leads to a
be used to reduce the amount of dam- is limited to the amount actually paid by windfall for the plaintiff. This approach
ages owed by a tortfeasor”). Medicaid. See G. Zorogastua, Comment, may lead to an outcome where the plain-
Improperly Divorced From Its Roots: The tiff is placed in a better position than he or
Benefit of the Bargain Rationalles of the Collateral Source Rule she would have been had the wrong not
and Their Implications for Medicare and been done. Hanif v. Housing Authority,
Courts following this approach al- Medicaid Write-Offs, 55 U. Kan. L. Rev., 200 Cal. App. 3d 635 (1988). However,
low a plaintiff to place into evidence the 463, 491-93 (2007). it must be noted, that many jurisdictions,
full amount of the medical expenses as while disallowing introduction of the write
billed, provided that the plaintiff has paid Reasonable Value off, will allow the defense to cross-exam-
some consideration for the benefit of the ine on the reasonable value, or proffer
write-off or contractual rate. The usual Most courts follow the reasonable affirmative evidence of the reasonable
reasoning for this approach follows: value approach. These courts hold that a value of the services. See Klesowitch v.
plaintiff is entitled to recover the reason- Smith, 2016 IL App (1st) 150414.
“[W]e conclude that [defendant] able value of the services rendered, and
cannot deduct from that full com- do not distinguish between a plaintiff with Conclusion
pensation any part of the ben- private insurance versus one covered
efits [plaintiff] received from his by the government. However, it should There can be no doubt that a plain-
contractual arrangement with his be noted that a minority of the courts tiff’s special damages provide a jury with
health insurance carrier, whether employing this approach hold that the a barometer for the plaintiff’s injury as
those benefits took the form of reasonable value of the medical service well as an anchor point for any eventual
medical expense payments or rendered is the amount actually paid. award. A nuanced understanding of a
amounts written off because of See Cooperative Leasing, Inc. v. John- practitioner’s law on the introduction of
the agreements between his son, 872 So. 2d 956 (Fla. App. 2004). medical bills and the implications of that
health insurance carrier and his The vast majority of courts employing a jurisdiction’s approach to the collateral
health care providers. Those reasonable value approach hold that the source rule informs the value of a case
amounts written off are as much plaintiff may seek to recover the amount and may allow for a reduced verdict
a benefit for which [plaintiff] originally billed regardless of the amount through insisting that the plaintiff prove
paid consideration as are the that the bill was settled for. See, e.g. Mc- their case as to damages.
actual cash payments made by Mullin v. United States, 515 F. Supp. 2d It also behooves the practitioner
his health insurance carrier to 904 (E.D. Ark. 2007) (applying Arkansas or insurance claims professional in the
the health care providers. The law); Pipkins v. TA Operating Corp., 466 pre-suit stage to know which collateral
portions of medical expenses F. Supp. 2d 1255 (D.N.M. 2006)(apply- source approach has been adopted in
that health care providers write ing New Mexico Law); Papke v. Harbert, the jurisdiction where suit is likely to be
off constitute ‘compensation’ 738 N.W. 2d 510 (S.D. 2007); Robinson filed. Aggrieved parties will often make a
or indemnity recived by a tort v. Bates, 857 N.E. 2d 1195 (Ohio 2006); claim for damages or give notice of their
victim from a source collateral Baptist Healthcare Systems, Inc. v. Miller, intent to file suit before actually doing so.
to the tortfeasor…” Schickling v. 117 S.W. 3d 676 (Ky. 2005); Haselden v. This is especially common in the profes-
Aspinall, 369 S.E. 2d 172, 174 Davis, 579 S.E. 2df 293 (2003); Brandon sional liability context, as practically all
(1988). HMA, Inc. v. Bradshaw, 809 So. 2d 611 practitioners carry liability insurance.
(Miss. 2001); Koffman v. Leichfuss, 630 This pre-suit notice creates an oppor-
This approach however has been N.W. 2d 201 (Wisconsin 2001); Olariu tunity to discuss potential settlement
criticized for setting apart classes of v. Marrero, 549 S.E. 2d 201 (Georgia before each party invests its resources
24 | PLDF QUARTERLY | Second Quarter 2019Collateral Source Rule | continued
into litigation. Negotiations at this early Lateral Hire Pitfalls:
stage encourage tempered settlements
that more accurately reflect the true
Know Who You Are Really Hiring
value of an injury, as the discussions are
Laura Zaroski, Arthur J. Gallagher & Co.
not tainted by considerations of sunken
costs, procedural posture or unexpected
turns in the course of litigation. Law firms grow in three major ways: important to most law firms as disruption
Medical specials serve as an anchor 1) hiring new law school graduates, 2) of a firm’s core personality can often lead
point in pre-suit settlement discussions lateral hires and 3) through mergers to disaster. As you know, attorneys are
just as they do in jury deliberations. and acquisitions. In recent years, firms trained to be contentious, so getting all
Claimant attorneys will predictably sub- have shown a clear favoritism to growth your new as well as existing partners to
mit demands that are calculated based through lateral hires either on a single at- play nice in the firm sandbox can often
on the full billed amount, regardless of torney basis, or as a group of attorneys. be a much more difficult task than antici-
which approach the jurisdiction employs Stats from Decipher, a firm specializing pated.
on the collateral source rule. A scrupu- in deep-dive vetting of lateral partner Historically, a majority of law firms
lous advocate for the alleged tortfeasor hires, show that 96% of Managing Part- have been very lax with vetting proce-
will recognize when limitations apply to ners believe that lateral hiring is their dures, and have not vetted candidates
the admissibility of collateral sources most effective growth strategy. Further, with a view to long-term sustainability
and use that to drive down the demand. statistics show that roughly 25% of all and suitability. Firms may often feel a
Claims professionals are particularly AmLaw 100 partners are laterals, and rush to hire a lateral as they are excited
obliged to stay mindful of the jurisdiction- that 17% of AmLaw 100 partners move about the prospect of new business and
al landscape, as they commonly handle each year. Lateral hires are attractive as don’t want to miss out on a lateral who
matters arising from numerous states, they are usually experienced attorneys wants to move quickly. Rushing to hire
if not across the entire country, and are who require little or no training. A lateral a lateral without careful consideration is
typically the first ones with an opportunity can also be a source of new clients as a mistake that some firms have come to
to resolve a claim. well as provide the firm with an area of regret. And on the flip side, often lateral
Whether a particular jurisdiction fol- practice that they did not have before. partner candidates don’t ask even ques-
lows the majority rule and allows recov- However, lateral hiring also has its chal- tion their potential new firm regarding the
ery of the entire billed amount, or is in lenges. Firms often hire laterals with the firm’s finances, firm management, firm
the minority and allows only the amount candidate’s promise of a certain amount hierarchy, performance evaluations and
actually paid by an insurer, a defense of existing and portable business. How- culture. Hence, proper vetting on both
advocate in pre-suit discussions can ever, stats show that 75% of lateral hires sides of the hiring continuum is important
point to the amount that the injured party bring in less than half of their promised for a lateral hire to be a success. n
actually paid—that is, his or her out-of- book of business. And in the end, sta-
pocket costs, as an argument for ne- tistics show that 50% of lateral hires fail
gotiated down the demand, particularly within five years.
when couched in the context of making A serious danger with lateral hires About the
the claimant whole. n involve conflicts, actual or perceived, AUTHOR
that they may bring with them to the new
firm. Firms need to use a fine-tooth comb Laura Zaroski is a
SVP of Gallagher’s
when vetting potential conflicts, as well
Law Firms. Her prac-
as ascertaining if prospective clients will
tice is responsible for
welcome that attorney’s transition to the the placement of Law-
new firm. Not only does the work the at- yers Professional Liability Insurance, Manage-
torney brings in need to be assimilated ment Liability Insurance, and Risk Management
into the new firm, but the attorney himself services for Gallagher law firm clients. She can
be reached at laura_zaroski@ajg.com.
needs to blend in as well. Maintaining
the firm’s culture and traditions is very
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