What is the Collateral Source Rule?
The collateral source rule is a legal principle that applies in many areas of the law, but mainly in personal injury and wrongful death matters. It states that juries are not allowed to consider whether the plaintiff’s treatment was provided under a private or government health insurance program when they determine the amount of damages.
The "credit" or "discount" is considered a headline or "phantom" charge that the medical provider just provided to the insurer. The fact that the charges were reduced is not something a jury is told because they can’t be trusted to not make reducing the award by that amount a factor in what they ultimately decide.
It’s important to note that the at fault party still is allowed to present the full amount of the medical bills as evidence for them to make a decision as to the value of related damages. However they cannot disclose how much the bills were discounted down once the health insurance company paid them.
An example of this is in accident cases. Let’s say your bills are $20,000 . The insurance company could present evidence of that amount to help prove their case that your damages are less than what you are asking. But once your insurance company pays that bill, the amount remaining unpaid could only be a matter of internal business practice and not something the jury gets to know about.
The same rule applies with lost wages. After you sue, your employer must keep track of how much money you would have made if not for the accident and you would receive an Exhibit to verify that. The at fault driver’s insurance company can show the Exhibit as evidence of economic loss due to the accident.
In the same vein they can’t present the Exhibit from the employer that shows what the payments would be if you took paid time off or short term disability or if you received Social Security benefits. They are also not allowed to present medical records showing that you were doing unpaid work while recovering or that you had been fired prior to the collision. Such evidence would be unfair to show the jury since it could unfairly influence the outcome.
The Collateral Source Rule Under Illinois Law
In the State of Illinois, the collateral source rule plays a significant role in personal injury cases, particularly those governed by the modified comparative fault standard. This standard applies when more than one party contributes to the plaintiff’s injuries, attributes liability proportionally to each party’s level of fault.
The collateral source rule in Illinois is used to prevent defendants from blaming plaintiffs for their own failure to mitigate their injuries. For example, if a plaintiff fails to seek timely medical treatment, the defendant cannot claim that this negligence should reduce the plaintiff’s damages award. Instead, the plaintiff’s damages may be reduced according to the doctrine of comparative fault, which holds each party responsible to the degree that party contributed to the prevailing negligence.
The plaintiff may recover for all damages caused by the negligence of the defendant, even if some of those damages were avoidable. For instance, if the plaintiff incurred $1 million in medical bills due to the defendant’s negligence, but the plaintiff had health insurance and only paid $200,000 out of pocket, the plaintiff may still recover $1 million. The rule does, however, provide for a few narrow exceptions. For example, even though Illinois adheres to the collateral source rule, written statements can be used to offset a plaintiff’s claim for medical expenses, for which the plaintiff received a reduction without consideration by an insurer or benefit plan. The Illinois Supreme Court also allowed evidence of collateral source payments which the plaintiff was contractually obligated to pay back to the health care provider. However, since these exceptions have been created by judicial precedent, they should not be considered comprehensive.
Additionally, the Illinois General Assembly has enacted two statutes that may be seen as exceptions to the collateral source rule. The Medical Payment Coverage Act (MPC) allows insurers to pursue subrogation claims for medical expenses that were paid pursuant to the policy. The provisions of the MPC can be read to allow defendants to obtain written statements that describe the scope of the MPC policies. This would adequately indicate that the expenses were being paid for by a third-party source, and therefore evidences of these payments should not be excluded. Although this argument has not yet been heard by the Illinois courts, it is likely that the courts will uphold the legislature’s intent.
The Collateral Source Setoff Statute is another example of the Illinois General Assembly’s desire to address the collateral source issue. This statute reduces a plaintiff’s damages by the amount of collateral source payments already made to the plaintiff. However, the plaintiff is then entitled to recover the amount paid to reduce the collateral source payments so that the plaintiff is "made whole," subject to the limitations of the tort reform laws in effect at the time the cause of action arose.
Each of the states surrounding Illinois has adopted the collateral source doctrine with slight modifications from the original doctrine propounded in 18th century England. Like the Illinois legislature, many of these states have also recognized the need for certain exceptions to the rule, which are not universally seen in Illinois.
How Did the Rule Emerge in Illinois?
The doctrine is a common law rule, and evolved in Illinois with the rest of the tort system in the 19th Century. The rule was first expressly stated in the Illinois Supreme Court in North Chicago Street R.R. v. Smith, 195 I11. 293 (1901) (a case involving a minor child, defendant’s motion to exclude unspecified sums received by plaintiff’s father for the injuries involved in the accident). The collateral source rule was subsequently stated by the Supreme Court as "It is a well established principle in this State that in actions for negligence the damages are to be assessed without regard to any collateral advantages which the injured party may have acquired by his own prudence or from the bounty of others." Chicago City Ry. v. McGurren, 208 Ill. 210, 55 N.E. 805 (1900). In Simpson v. Chicago Transit Authority, 201 Ill. 381, 61 N.E. 770 (1901), the rule was explained more fully: "An independent source of income or property, by insurance, gift or otherwise, comes to the aid of and contributes to making good the loss sustained by the plaintiff in consequence of the negligent acts of the defendant. In such a case the benefit which thus accrues to the plaintiff should not be allowed to diminish the damages recoverable, but there should be no showing in the evidence of any such benefit accruing."
At the time Simpson was decided, the hospitals which treated trauma patients sued by the wrongdoers often prepared itemized bills including a "donated care" deduction. As Simpson was an appeal from an effort to prevent reference to the offset from the jury, Simpson’s clear holding that the donation offset should not reduce the damages was logical. The decision was effectively codified in 1939 when the Legislature enacted Ill. Rev. Stat. 1939, ch. 91 1/2, para. 86, which allowed collateral source evidence. See Knause v. Rockford Mfg. Co., 389 Ill. App. 3d 988, 990-91, 907 N.E.2d 704 (1st Dist. 2009). The full breadth of the collateral source rule was not codified until 1967. See McGillicuddy v. Smith, 51 Ill. App. 3d 1, 5, 366 N.E.2d 1207 (4th Dist. 1977); Yellow Cab Co. v. Wagner, 371 Ill. App. 3d 842, 861, 863 N.E.2d 821, 838 (1st Dist. 2007).
How Does the Rule Apply to Personal Injury Claims?
In personal injury claims, the collateral source rule applies to various types of benefits, including insurance payments, medical bills paid by a spouse, worker’s compensation, and public assistance. The purpose of this rule in the context of an injury case is to ensure that the defendant pays the full amount of damages he caused, plus interest; it would be grossly unfair to make you, the defendant, pay twice for medical expenses such as those related to an auto accident, for example, if your bills are paid by someone else. But what happens if the defendant has liability insurance? The insurance company should be able to reclaim some or all of its money for your expenses from the jury award the defendant gets to compensate him for causing your injury. If the insurance company receives a part of the damages award, you can learn how to report it as income tax. However, the insurance company of the defendant is never responsible to pay your bills directly to the medical provider.
In Illinois, the collateral source rule has been codified by statute in 735 ILCS 5/2-1207. The statute provides that the amount paid or owed to the plaintiff by a third party may not be admitted as evidence to reduce the damages assessed in personal injury cases. According to the statute, any payments made by health or dental insurance, disability insurance, social security benefits, charitable contributions, or any other sources, including Medicare or workers compensation benefits, are included in this. The collateral source rule is an exception to the conjunctive common law rule, which states that no party shall be put in a better position by nonliability than it would have been in the absence of such nonliability. Again, for an example, if a defendant receives payments from an insurance company, he will be better off financially than before the accident, so insurance proceeds must be considered when determining damages. This reflects the fact that any benefits recovered from a collateral source will not directly reduce the defendant’s liability.
Subrogation means that the hospital can claim money from the injured person or the uninsured motorist insurer, in order to reimburse them for the medical expenses they already paid. If the injured person signed a subrogation contract with the hospital, then the hospital will be entitled to money it paid to the patient, and its portion will be withheld from the settlement for the accident. The insured will be entitled to keep anything beyond the amount of the subrogated expenses. If an insured did not sign a subrogation contract, but the hospital has lien rights under Illinois law, then the lien will be placed on the recovery from the UM carrier. Even if the person was covered by both PIP and health insurance, only one of the insurers can have a lien; thus, there will be negotiations between both parties. Without signing a subrogation contract, subrogation will occur through the statute, which will provide the priority for payment.
Since Illinois law has provided the priority for the subrogation interests, in practice the outcome of a case will depend on the private negotiations between the parties. In the absence of a statutory subrogation, the hospital will take priority among the other persons or entities that have claims to payment. The person receiving payments from PIP will be able to keep any sum above the subrogated amount. The PIP carrier will not have a subrogation lien in addition to its right of subrogation; it will have priority over the insured’s right to reimbursement for unreimbursed medical expenses.
Exceptions and Limitations to the Rule
Until recently, the collateral source rule in Illinois was absolute, except in the case of medical billings where plaintiffs were generally only entitled to recover the amount that healthcare providers charged for medical services rendered rather than the amounts that such services were actually paid through insurance or otherwise.
However, in 2016, the Illinois Supreme Court ruled in Christian v. Indigo Amusement, Inc. that the collateral source rule does not apply in wrongful death claims and verdicts cannot be reduced by amounts paid or payable through insurance coverage.
In Christian, the plaintiff’s son was killed in a bar fight and plaintiff brought a wrongful death action against the alleged assailants who were determined by the jury to be liable for the death. Plaintiff also brought the same action against the bar and sought damages based upon evidence of the hospital bills and loss of future income in excess of $3 million. The plaintiff had paid the hospital $575,000 to settle her son’s medical bills from the hospital . Under the payment schedule established between the hospital and Medicaid, the hospital billed Medicaid $1.8 million for her son’s treatment, and consequently, Medicaid paid only $1.2 million. The defendants submitted a motion to reduce the damages by $1.2 million (the amount the plaintiff had alleged at trial), but the trial court denied the motion holding that wrongful death damages are not subject to reduction by collateral sources. The appellate court affirmed the ruling of the trial court, and the Illinois Supreme Court subsequently affirmed the ruling of the Appellate Court.
In its ruling, the Supreme Court stated that reducing the award would conflict with a legislative "conscious decision to provide the collateral source rule as a remedial measure." The court further explained that the General Assembly had created a statutory scheme to provide financial remedy for that loss to victims of wrongful death because familial relations cannot be compensated outside of court.
Recent Developments and Future Implications
In recent years, Illinois appellate courts have maintained a generally pro-collateral source rule approach in their case law, but the Illinois legislature has attempted to modify that approach. In particular, a recent case sought to avoid statutory limitations modifying the collateral source rule. The case involved a wrongful death claim by parents of an adult child who died in a car accident. Hendricks v. Starck Transp., Inc., 2015 IL App (1st) 141091. The case also illustrated one way to anticipate the future of the collateral source rule in Illinois. Even if the law has settled into a generally pro-collateral source rule approach, parties should anticipate an appeal to create precedent or at least to preserve the record for an appellate challenge.
Helpful Tips for Understanding the Rule
When facing a claim involving the collateral source rule, it is essential for an injured individual or their attorney to follow certain practical tips to navigate the complex rules surrounding this legal doctrine in Illinois. Here are some recommended guidelines to maximize compensation and ensure compliance with the collateral source rule:
1. Notify All Eligible Insurers
To avoid potential challenges to the amount of compensation based on the collateral source rule, it is crucial that an injured party notifies all of their potential insurance carriers of the likelihood of their filing a personal injury complaint. Where an injured party is covered by more than one health insurance policy, this can have a dramatic effect on the maximum amount of recovery a plaintiff may receive for medical bills. Prematurely settling claims with the health insurance carrier without the advice of an attorney can result in the need for further negotiation. By notifying all insurance carriers at the same time and seeking their input , it is possible to venture a proper course of action.
2. Submit All Medical Bills to All Possible Insurance Carriers
If there is uncertainty as to whether the collateral source rule will apply, the injured party should submit all medical bills to all possible insurance carriers to determine who or what entity is responsible for reimbursement of medical expenses. If the health insurer does not properly reimburse the medical providers according to their contracts, the health insurer may be liable to pay the shortfall that the individual may be liable for.
3. Seek Legal Advice
An experienced personal injury attorney in Illinois has the legal knowledge necessary to navigate the collateral source rule and other relevant laws when maximizing compensation for injuries sustained in an auto accident, a motorcycle crash, or other types of personal injury matters. Legal representation improves the chances of avoiding noncompliance with the collateral source rule. Even if an individual receives unwarranted advice from the other parties’ attorneys as to how the collateral source rule will affect the case, the injured person’s attorney is in the best position to advise on the application of the rule.