The Collateral Source Rule, Explained

Under the traditional rule, a tortfeasor does not benefit from payments the plaintiff received from collateral sources such as insurance (Restatement (Second) of Torts sec. 920A). Damages are calculated without offsetting those payments.

Many jurisdictions have modified or abrogated the rule by statute, permitting or requiring offsets for specific types of collateral payments. The specifics vary widely by state and by category of payment.

Federal and state programs have separate lien and reimbursement statutes (Medicare Secondary Payer Act, state Medicaid liens). These interact with, but are distinct from, the collateral source rule.

The rule matters in a case whenever someone other than the defendant has already paid for part of the loss. The most frequent example is medical expense: a health insurer paid the providers at negotiated rates, and the question is whether the plaintiff recovers the amount billed, the amount paid, or the amount paid less what the insurer will take back. A workers' compensation carrier that paid wage benefits and medical bills holds a lien on any recovery from a third party, and the carrier's payments are collateral to that third-party claim. A long-term disability policy that is paying a monthly benefit is a collateral source in a personal injury action against the person who caused the disability. Medicare and Medicaid payments carry their own reimbursement rights and interact with the rule rather than being governed by it. In each example the forum's version of the rule decides whether the payment is subtracted from the damages figure, and a lien decides how much of the figure the plaintiff keeps. Attorneys confirm the governing rule for their case.

Before the economist is asked to prepare the schedule, five questions are settled with counsel, and their answers go into the engagement letter. Which version of the rule applies in the forum, and does it treat medical payments, wage benefits and disability benefits alike or category by category? Which payers have made payments on account of the injury, and has each produced a statement of what it paid, or only of what was billed? Has any payer asserted a lien or a right of reimbursement, and under what document? Are any of the payments expected to continue, so that a future stream has to be projected on the offset side as well as the loss side? And does the forum reduce an offset by the premiums the plaintiff paid for the coverage? Each answer changes a row of the schedule or the footing of the net figure, and an answer that is still open is recorded in the report as an assumption rather than resolved by the economist. Attorneys confirm the governing rule for their case.

A forensic economist's report handles the rule by showing the computation both ways rather than by choosing. The first figure is gross damages, computed as if no collateral payment existed. Beneath it is a schedule of the collateral payments identified in the record, one line per source, with the period and the documented amount, drawn from benefit statements, carrier ledgers and program conditional payment records. The second figure is net damages under the offset counsel has identified, with each subtracted line traceable to the schedule. Future benefits that are expected to continue are projected and discounted on the same footing as the losses they offset. A closing note lists liens and reimbursement claims and their basis, apart from the damages, so counsel can see the likely net recovery. The report does not decide which figure the law requires; it makes both available so the court can apply the rule it finds governs. The method page describes the computation and the records behind each row.