Texas Collateral Source Rule

Texas Collateral Source Rule

The collateral source rule is a legal doctrine that prohibits the admission of any evidence of a plaintiff receiving compensation from another source besides the defendant from whom damages are being sought. Simply put, any compensation that an injured person has received from a source other than the person who is legally responsible for the injuries (the defendant) will not reduce the amount of damages recoverable from the defendant. In other words, the rule prevents payments from an independent source from reducing the amount that the defendant is “on the hook” for in a lawsuit. The “collateral source rule” is thus a powerful negotiating tool you can leverage to help maximize your recovery after an injury which was not your fault. Here we discuss insurance incentives and tort reform, legal precedents shaping the doctrine, a case study of the rule, the notion of reasonable value and its limitations along with exceptions and considerations.

Incentives and Reforms

In states like Texas that follow the collateral source rule, any compensation to an injured party from a source other than the injured party does not get deducted from the total amount of damages. The general idea behind the collateral source rule is that a defendant should not benefit from a victim receiving insurance payments from the victim’s own providers. The collateral source rule, in effect, encourages people to purchase their own private insurance policies in order to receive compensation regardless of personal injury actions. Other than insurance, collateral sources include worker’s compensation, Social Security or Medicaid, and services performed gratuitously that help the injured person. Some so-called “tort reform” advocates have complained about the collateral source rule because they feel it is unfair to make a defendant (the person who commits a tortious act) pay damages for which the victim has already been compensated. The other side of the argument is that the cost of negligent behavior should be imposed on the defendant as the at-fault party, in order to reinforce the standard of reasonable care that all members of a society should adhere to. And an injured person should not receive reduced compensation for injuries because he or she was prudent enough to purchase insurance prior to the injury.

Legal Precedents

In 2003, the Texas Legislature enacted Texas Civil Practice and Remedies Code § 41.0105, which establishes that recovery of medical or health care expenses is limited to the amount actually paid or incurred by or on behalf of the claimant. The Supreme Court of Texas stated in Brown v. American Transfer & Storage Co., “The theory behind the collateral source rule is that a wrongdoer should not have the benefit of insurance independently procured by the injured party, and to which the wrongdoer was not privy.” The Supreme Court of Texas, however, clarified how Texas Civil Practice and Remedies Code § 41.0105 interacts with the collateral source rule in its decisions in Haygood v. De Escabedo, 356 S.W.3d 390 (Tex. 2011) and Daughters of Charity Health Services of Waco v. Linnstaedter, 226 S.W.3d 409, 412 (Tex. 2007). Consistent with its views in Daughters of Charity, the Supreme Court held in Haygood that the common law collateral source rule does not allow damages recovery of medical expenses a health care provider is not entitled to charge. As a result of Haygood, many people avoid submitting medical expenses prior to resolving their personal injury cases.

Case Study

Although collateral source compensation may not be introduced at trial for the purpose of reducing the total amount of damages, the defendant is generally permitted to investigate the source and amount of collateral compensation. Generally speaking, the collateral source rule states that in the event your case goes to trial, you are allowed to ask the jury to award you damages for your medical bills based on the amount the care provider billed you for the services, and not the discounted rate the care provider allowed your insurance carrier to pay. Consider the application of the collateral source rule in the context of a person who has Medicaid, and who is injured in an accident. Assume the medical bills are $700,000. In such a case, it is not unreasonable to learn that the Medicaid pay rate on those services is $250,000. If this case goes to trial in a state which has adopted the collateral source rule, this person would be allowed to present the jury with $700,000 of bills for their injuries, as opposed to $250,000 which the care providers actually accepted as full payment for their services.

Reasonable Value

As per the previous example, obviously there is a large difference between paying out $250,000 for medical bills, versus paying out $700,000 for medical bills. If you are the injured person in this example, and you are in a state where the collateral source rule applies, you can offer evidence of $700,000 of medical bills at trial. If the collateral source rule does not apply, you are going to be limited to offering evidence of $250,000 of medical bills. The law in every jurisdiction allows plaintiffs to recover the “reasonable value” of medical services to address such situations. Defining “reasonable medical expense” has become less clear, more contentious, and the subject of increased litigation and legislation. In limited situations, the collateral source rule may not apply. For example, if a third party covers your injury but you do not seek medical treatment or continue working after recovering from your injury, the rule may not apply. Another instance in which the rule might not apply is if there are damage restrictions, often referred to as “caps,” on the amount of money you can ultimately recover for a claim.

Exceptions and Considerations

One major exception to the collateral source rule is often an insurance company’s subrogation rights. Subrogation allows an insurer who pays to cover a victim’s medical bills to either sue the defendant or their own insurance company for those costs or from the victim themselves after they receive an award. Further exceptions can exist when victims do not receive medical treatment for their injuries or continue to work after suffering their injuries. Additionally, possible reductions that an injury victim could face concern any liens that were placed on their awards by creditors such as hospitals or other medical care providers. A lienholder may have a valid right to compensation in these cases, but resolving a lien can be negotiable. It is easy to see how you and your attorney can use the collateral source rule as leverage to induce the at-fault person’s insurance company to settle outside of trial for a larger amount of damages when you are in a state the applies the collateral source rule, than if you are in a state where the collateral source rule does not apply. Having an attorney who is familiar with the collateral source rule can pay off huge dividends for you when it comes time to negotiate a settlement of your case. The Hadi Law Firm is committed to helping injured people in Houston and the surrounding areas in Texas. Our lawyers are ready to review your case and answer all of your legal questions when you call our Houston car accident and personal injury lawyers or contact us online to receive a free consultation.

October 28, 2021
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