Forensic economics combines economic analysis with the law, and it’s important for practitioners to stay in their lane. No one wants an economist who speaks or acts like a lawyer. But that doesn’t mean we economists can’t discuss what lies outside our lane. Sometimes the non-economic stuff is interesting.
A great example is the collateral source rule (CSR). The CSR holds that a plaintiff’s recovery in a personal injury case cannot be reduced by compensation received from independent sources, such as insurance. What makes it so interesting is that there are reasonable arguments both for and against the CSR. But ultimately, the CSR is a legal rule. It’s based on equity, not economics.
Typically, the collateral compensation is a health or disability insurance payout, though it can also come from a government entity like a workers compensation fund or state unemployment insurance. For the CSR to apply, the collateral payment must be independent of the defendant. Insurance coverage provided by the defendant isn’t collateral.
The Arguments
The standard argument for the CSR is that society doesn’t want to penalize a successful plaintiff for having acted responsibly by purchasing insurance. Without the CSR, responsible behavior is effectively discouraged, because an “irresponsible” plaintiff (one who hadn’t purchased insurance) would get the same damage award as a responsible one.
A related argument is that society doesn’t want the defendant to be freed from the burden of paying compensation to the plaintiff. After all, the purpose of tort law is to punish as well as compensate.
Perhaps you see the conundrum at the core of this discussion. The existence of collateral compensation means that someone will get a windfall. Either the plaintiff receives double compensation for a portion of the damage award, or the defendant is freed from having to pay the full amount of the damages. Economics can’t decide which it should be. The law must decide.
A separate argument for the CSR is evidentiary. Evidence about a collateral source might prejudice the jury against the plaintiff. If the jury learns that some or all of the plaintiff’s damages will be covered by a third party, it might be less likely to find for the plaintiff on liability.
Once the trial is over, such prejudice is no longer a concern. In states where the focus of the CSR is admissibility of evidence, the plaintiff’s award is often reduced after the trial by the amount of the collateral compensation.
A Patchwork of Rules
There is a 50-state patchwork of different versions of the CSR, including no CSR at all. In states enacting tort reform, the CSR is often opposed on the grounds that it encourages specious claims by dangling the prospect of double compensation in front of prospective plaintiffs. A few states choose not to apply the CSR to medical-malpractice cases, on the reasoning that CSRs increase the cost of litigation incurred by physicians and hospitals and thereby make malpractice insurance more expensive.
When I first started writing this column, I thought the issue of CSRs was straightforward. I now know otherwise. For example, I’ve read that North Carolina’s 2011 tort reform law changed the CSR in the state, but also that no change has happened yet. I wouldn’t be surprised to learn that something I’ve written here is inaccurate. But that’s okay! When it comes to the CSR, it’s not the forensic economist’s job to determine the parameters of the rule. That’s the attorney’s job.
