Collateral Source Rule | How Does It Work?

So the collateral source rule permits an injured person to recover the full amount of his provable damages, regardless of the amount any money the person has received for his injuries from sources unrelated to the defendant.

In 2018, the Maryland Court of Special Appeals summarized the rule as "payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable."

The collateral source rule is now an embedded part of the law not only in Maryland but nearly every state in the country. When trying a personal injury case to a jury, the fastest path to a mistrial is to breathe a word about insurance.

• Origin of collateral source rule in Maryland
• Justification for rule
• Exceptions
• What insurance companies do not want you to know
• Collateral source rule and lost wages in Maryland: you might be entitled to more than you think
• ObamaCare impact of law?
• Key Maryland cases

This Maryland rule of evidence which dates back to 1899. The rule is grounded in the long-standing policy decision that should a windfall arise as a consequence of an outside payment, the party to benefit from that collateral source – that the injured party likely paid for through insurance premiums - is the person who has been injured, not the one whose wrongful acts caused the injury.

A plaintiff's PIP, health insurance, or any other collateral source is not introduced to the jury because of the jury may reduce the damages award when it discovers that the plaintiff's damages have been paid by another source. Why is this a bad thing? Well, let's spin it the other way first: why should a wrongdoer get a benefit from a collateral source of damages caused by his wrongful act? If I'm lucky enough that my boss still paid me while I was out of work because I'm a good employee and have a track record of success at my company, why should the person who hurt me get the benefit of that goodwill? Similarly, why should the negligent party benefit because I was smart enough to take out health insurance or PIP insurance? If someone is going to get a "windfall", shouldn't it be the victim as opposed to the wrongdoer?

So the collateral source rule is an evidentiary rule that keeps out otherwise admissible evidence. The Maryland Court of Special Appeals summarized the rule by saying, "In a nutshell, the evidence, though otherwise admissible, is deemed to do more harm than good. On balance, therefore, it is out!" (a rare exclamation point in an appellate opinion).

There is also a law and economics basis for the rule as well. If the negligent party does not bear the full cost of the lost, they are incentivized to take more risks with our safety. Why not roll the dice when you only have to play half of the loss? Said differently, the collateral source rule deters future negligence by placing the full value of the loss on the party that caused the accident.

There has been a slew of recent attacks on the collateral source rule over the past few years. The main impetus behind this attack is an ostensible financial crisis in the insurance industry. (Like Hyman Roth, the insurance companies have been dying of the same disease for 20 years now. Of course, they are still making billions upon billions of dollars.) This has led many state legislatures and courts to carve out exceptions to the rule, including Maryland in malpractice cases. See below.

Defense lawyers hate the collateral source rule and spend a lot of energy trying to run around it. Thirty-eight states recognize some exceptions to the collateral source rule. There are four exceptions that appear with some frequency (1) the Gladden exception, (2) the lien reduced exception, (3) malingering exception and, (4) the malpractice exception.

The Gladden exception allows defendants to introduce insurance payments if they rebut the plaintiff's claim of his financial condition. The lien reduction exception argues that if the amount that must be paid back is reduced or waived - let's say the hospital waives the medical bill - that fact should be admissible.

The malingering exception allows for the admission of collateral sources to show the plaintiff is exaggerating his injuries because he is getting payments to sustain him while not working. So where the defense lawyers argue malingering with only minor injuries, it may not be reversible error to allow evidence that the plaintiff's employer was still paying him while he was off work. In these cases, the evidence of collateral source payments is admissible to establish lack of motivation to work, but not to mitigate the victim's lost wage damages. That is a real tightrope for trial judges to walk.

Maryland courts have recognized the Gladden exception and the malingering exceptions. But it is still an uphill battle for defendants to get around the collateral source rule with these exceptions because this argument can usually be made with evidence that is far less prejudicial.

So how it works in Maryland is collateral source evidence is still inadmissible during a medical malpractice trial. But after a verdict, the defense lawyers will ask for a remittitur to the amount that the plaintiff still owes. So if there is a $100,000 medical lien that cannot be reduced further, the judge will reduce the outstanding medical bills to $100,000 even if the total amount of medical bills awarded was much higher. So if the plaintiff has been paid, reimbursed, or indemnified pursuant to statute, insurance, or contract for all or part of the damages. The sum remitted will equal the sum received from the collateral source.