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Health Insurance and the Personal Injury Case: The Collateral Source Rule

by Jonathan Breeding | March 13th, 2018

My clients often ask me, “Does the person or company that hurt me pay for the entire bill or just my co-pay or deductible? Should I even use my health insurance?”

The short answers to these questions are “The entire bill” and “Yes.” I don’t always get to give the long answer. The reason for those answers is the collateral source rule, one of those classically clunky legal turns of phrase, but a rule that I’ve thought a lot about since I became a trial lawyer, because it’s one I explain to a lot of my clients. It has become even more important to me as I have seen the efforts to eliminate the rule in Missouri, where I was born and raised. Today, I’ll discuss what the rule is, why it has been under attack, and why I think the time has come to let juries hear the whole truth about the effects of insurance in our courtrooms.

What is the collateral source rule?

The collateral source rule deals with payments to injured people that are “collateral” to the person responsible (aka the “tortfeasor”, the negligent party, the wrongdoer, or the defendant). For instance, those payments might include the benefits an injured person receives from workers’ compensation, social security payments, paid sick leave or vacation, unemployment benefits or, especially in our context, health insurance payments.

When an injured person uses their health insurance to pay for medical treatment, often the insurer will pay a much lower rate for the treatment than would be billed to a person paying out of pocket. Part of the benefit of health insurance is this: by purchasing treatment in bulk, the insurer can negotiate favorable rates. So, if the negligent party hurt me and put me in the hospital, the bill for which is $100,000, but my health insurance settled the bill on my behalf for $30,000, and I paid only $1,000 out of my own pocket, how much does the negligent party owe me—$100,000, $30,000, or $1,000?

The answer in Virginia, and in most states, is that the defendant is on the hook for the entire bill, or $100,000.

A plaintiff who receives a double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer.1

In other words, those health insurance payments are either going to benefit me, the injured person, because I will get to “charge” the defendant a price I didn’t pay, or they’re going to benefit the wrongdoer, who got lucky when he hurt someone who was responsible and paid for health insurance. If somebody is going to benefit, the law says the person who did nothing wrong ought to benefit.

The way the law comes into play in trial is through the collateral source rule jury instruction, which is read to the jury by the judge before they make a decision on the verdict:

The presence or absence of insurance or benefits of any type, whether liability insurance, health insurance, or employment-related benefits for either the plaintiff or the defendant, is not to be considered by you in any way in deciding the issue of liability or, if you find your verdict for the plaintiff, in considering the issue of damages.

The existence or lack of insurance or benefits shall not enter into your discussions or deliberations in any way in deciding the issues in this case. You shall decide this case solely on the basis of the testimony and evidence presented in the courtroom, as well as the other instructions given to you by the court.2

Because of this rule, nobody in a trial is allowed to talk about insurance. The defendant wrongdoer cannot bring up the health insurance payments made on behalf of the injured person. The plaintiff, who was injured, cannot bring up the defendant’s car insurance or other liability policy.

Should I use my health insurance?

So what about the second question—should I even use my health insurance? The answer is yes, unequivocally. The Commonwealth of Virginia has what is called an “anti-subrogation” statute, which means that health insurers are usually not allowed to recover any payment they make on behalf of a person injured by the negligence of another.3 In certain circumstances (usually with large employers or government jobs) the insurer has a right to recovery, and the question becomes a complicated one that could (and has) filled entire blog posts of their own.4 Even if you are ultimately required to repay your insurer, however, they will have paid far less for your treatment than you would be paying out of pocket. 

“Phantom Damages”

As I mentioned before, in 2017 Missouri passed a bill in their state house that would limit the injured person from presenting medical bills that their health insurer had paid.5 House Bill No. 95 would permit either party to introduce evidence of the “actual cost” of treatment, “after adjustment for any contractual discounts, price reduction, or write-off by any person or entity.” The bill is known as the “phantom damages” law, and it’s no surprise that Chamber of Commerce6 and defense lawyers7 favor them.

They argue that “strengthening” the collateral source rule is their goal, but in fact the proposed laws eliminate the protection the rule gives to injured people. If an innocent person who works hard for a living and pays, either directly (on the open market) or indirectly (as a benefit of their employment) for health insurance, why should those payments benefit the person or company who injures them?

Consider this: a defendant crosses a double-yellow line and strikes another car head-on, injuring two identical twins in identical ways. These two twins, for the sake of argument, have identical lives in every way except one: one of them has health insurance and the other does not. Has this wrongdoer injured the twin with health insurance less than the one without health insurance? Of course not, but this is what the state of the law would be in Missouri if HB 95 becomes law.

So where does this proposed law come from? It’s not just the Chamber of Commerce. Like with a lot of the state legislation in America that benefits large corporations, the original author of the bill is the American Legislative Exchange Council (ALEC), a corporate-funded scheme masquerading as a “limited government” lobbying group whose purpose is to rewrite state laws to protect companies at the expense of regular people.8 Specifically, the author of the “phantom damages” model bill for ALEC is an attorney for Shook, Hardy & Bacon.9 This is the same law firm (based in Kansas City, Missouri, coincidentally) that infamously defended the tobacco industry for years, which a Federal judge all but accused of orchestrating a fraud on behalf of the industry as their propagandists, apologists, and co-conspirators in the 1960s and 1970s.10

It’s not just Missouri. As close to home as West Virginia, there was a so-called “phantom damages” bill introduced in 2017 that closely tracks the ALEC language.11 The West Virginia law, SB 197, would prohibit introduction of medical bills incurred and limit the injured person to introducing only bills actually paid.12 This change would introduce another barrier to injured people getting justice, as those without health insurance of any kind, who have no ability to pay, often rely on their doctors to treat them first on the written promise of being paid out of their subsequent settlement or verdict. SB 197 would be a disaster for injured people in West Virginia, especially for those who can least afford an injury.

The changes are not just limited to legislative statutory changes, either. All over the country, courts are beginning to turn against this common-law rule. The long history of medical billing that brought us to this point, where health care providers routinely bill a “sticker price” that greatly exceeds what they actually accept from insurance, is beside the point here today. No longer will courts look to the “sticker price” as conclusive in determining whether the amount of medical bills is “reasonable.” Courts in Pennsylvania, California, Texas, Minnesota, Florida, Idaho, New York, Georgia, Vermont and Mississippi have all decided the plaintiff has no right to recover medical bills not actually paid.13 Yet others, Ohio, Massachusetts, Indiana and Kansas among them, have thrown up their hands in effect, and permitted both sides to present evidence concerning the reasonable value of the medical services delivered.14

These efforts by the insurance industry are clearly aimed at hurting injured people and saving big companies money. However, they are appealing to some people, me included, because by hiding behind a medical bill that everyone knows does not reflect what medical providers actually receive, Plaintiffs are not being honest with the juries that decide their cases. In fact, I think the time has come to get rid of the collateral source rule, so long as we get rid of it on both sides.

The Other Collateral Source

It’s not only injured parties who have insurance agreements that may cover all or part of their losses, of course. Most companies and people have a liability insurer who will defend their interest if they hurt someone and are sued and will pay for any judgment the injured person receives. However, the Supreme Court of Virginia has long held “that evidence as to whether defendant did or did not carry liability insurance was irrelevant and inadmissible. This holding is based on the theory that such evidence tends to unduly influence the jury on behalf of the plaintiff.”15 The rule has been in effect since at least 1907, when the Court held

the fact that the defendant was insured against accidents could throw no light upon the question of whether or not the defendant was guilty of negligence. It may be true that the fact of insurance might have the effect of lessening the reason or motive of the defendant to be careful; but the question for the jury to pass on was, not of how much or how little motive the defendant may have had for being careful, but whether as a matter of fact it had exercised reasonable care.16

The reasoning of the court could not be clearer – they believe that when jurors know that their verdict will not bankrupt the individual who caused the injury but instead will be paid from the wallets of State Farm, Nationwide, Allstate etc., they will become more generous:

The plaintiff here has been allowed to obtain the advantage of having the attention of the jury called to the insurance, a wholly collateral subject, which was likely to influence the mind of the average juror notwithstanding the instructions of the trial court. The reception of such evidence sometimes has a subtle influence that will act unconsciously upon the mind, and hence not be removed by instructions.17

The rule is not at all unique to Virginia; it is universal. It is explicit in the Federal Rules of Evidence, Rule 411: “Evidence that a person was or was not insured against liability is not admissible to prove whether the person acted negligently or otherwise wrongfully.”18 The notes of the rule indicate that, of course, it is difficult to infer fault from the mere presence or absence of liability insurance, but that “more important, no doubt, has been the feeling that knowledge of the presence or absence of liability insurance would induce juries to decide cases on improper grounds.”19 The rule that a mention of insurance will result in a mistrial is one of the first things a young trial lawyer learns.

To return to the jury instruction in Virginia, the actual “Collateral Source Rule”, the goal is that jurors should not consider the Defendant’s ability to pay, just as they should not consider what compensation the Plaintiff has already received. The jury is to decide the case on the “merits”, which is to say, the elements in negligence: did the Defendant breach a duty, which proximately caused the Plaintiff’s damages? However, the Virginia Supreme Court has acknowledged that the fact of insurance could not be erased by a court’s instruction. They recognize that the presence of liability insurance could influence a person’s propensity to take risks in their behavior toward others. Jurors are curious about the existence of liability insurance covering the Defendant because it is relevant.

There can be no doubt that jurors are, by and large, aware that liability insurance exists for drivers and for corporations. It is not only expected; it is required. There is no doubt, too, that they are curious about the existence of health insurance, workers’ compensation benefits and the like on the Plaintiff’s side, when some 9 out of 10 people today have health insurance.20 It is naïve to think that jurors do not consider the ability of the Defendant to pay. Yet based on the evidence shown to the jury in trial (which is all they are permitted to consider), a verdict that would actually fully compensate the Plaintiff for a life-changing injury is going to bankrupt any individual Defendant. The fact that the money actually comes from GEICO, or State Farm, or Nationwide, or Allstate is never acknowledged by the judge, the parties or the attorneys, and it is never supposed to be discussed by the jury. This is the ruse behind which the insurance industry hides to stockpile half a trillion dollars in profits over the last 10 years.21 It is well past time to drop the kabuki show in front of our juries—they know and expect that both sides have insurance to cover their losses, and in pretending otherwise the lawyers, judges and the entire court system are lying to them. This insults their intelligence and undoubtedly undermines their confidence in the justice system as a whole. It’s time to put the cards on the table—these are the real bills; this is what the Plaintiff really had to pay. But as in any fair card game, both parties have to show what they’re holding—the jury has a right to know about the insurance coverage on BOTH sides of the courtroom.

[1] Schickling v. Aspinall, 235 Va. 472, 475, 369 S.E.2d 172, 174 (1988)

[2] Virginia Model Jury Instruction 9.015






[8] Learn much more about how ALEC hurts regular people here:






[14] Id.

[15] Highway Exp. Lines v. Fleming, 185 Va. 666, 672, 40 S.E.2d 294, 297 (1946)

[16] Virginia-Carolina Chem. Co. v. Knight, 106 Va. 674, 56 S.E. 725, 728 (1907)

[17] Lanham v. Bond, 157 Va. 167, 174, 160 S.E. 89, 91 (1931)


[19] Id.



What is a bad faith claim?

by John T. Everett | February 26th, 2018

A third party bad faith claim arises when an injured person obtains a judgment against a negligent driver that exceeds the negligent driver’s liability insurance limits (i.e., an “excess verdict”).

Example #1:

  • Driver A runs a red light and crashes into Driver B.
  • Driver A has a GEICO insurance policy with $100,000 in liability coverage.
  • Driver B files a lawsuit for his injuries.
  • Driver B offers to settle his case for the policy limits, but GEICO refuses.
  • Driver B obtains a jury verdict for $150,000.
  • GEICO pays the $100,000 under the policy.
  • Driver A personally owes Driver B the excess $50,000.

Driver A has a bad faith claim against his own insurance company because GEICO failed to negotiate and settle the case within the policy limits of $100,000. GEICO did not have their customer’s best interests at heart when they gambled at trial in an attempt to save money. As a result, Driver A is personally responsible for the excess verdict and may have his wages garnished or assets seized. Driver A can assign the right to pursue the $50,000 bad faith claim back to Driver B in exchange for an agreement to not pursue his personal assets. The assignment procedure is outlined in Medical Mut. Liab. Ins. v. Evans, 330 Md. 1 (1993).

Test for Bad Faith

An excess verdict alone does not establish bad faith. The Maryland Court of Appeals has established the following 6-factor test to help determine whether an insurance company has acted in bad faith towards their insured:

  1. The severity of the plaintiff’s injuries indicates the likelihood of a verdict greatly in excess of the policy limits.
  2. Lack of proper and adequate investigation of the circumstances surrounding the accident.
  3. Lack of skillful evaluation of plaintiff’s disability.
  4. Failure of the insurer to inform the insured of a compromise offer within or near policy limits.
  5. Pressure on the insured to make a contribution to settlement within policy limits, as inducement to settle.
  6. Actions which demonstrate a greater concern for the insurer’s monetary interests than the financial risk to the insured.

State Farm v. White, 248 Md. 324 (1967); Allstate v. Campbell, 334 Md. 381 (1994).

Additionally, the insurance company has a duty to keep their insured fully informed on the progress of the claim. Schlossberg v. Epstein, 73 Md. App. 415 (1988). The insured also has the right to hire their own counsel outside of the insurance company’s lawyers due to the conflict of interest. Finally, the bad faith claim arises in tort and not contract. Kremen v. Maryland Automobile Insurance Fund, 363 Md. 663, 674 (2001).

What’s the value of the bad faith claim?

Once the bad faith claim is established, the measure of damages is the difference between the liability policy limits and the verdict. Medical Mut. Liab. Ins. v. Evans, 330 Md. 1, 25 (1993). So, going back to example #1, the value of that bad faith claim is $50,000. The insured or their assignee cannot collect additional damages for emotional distress or punitive damages unless they can demonstrate “actual malice” on the part of the insurance company. Owens-Illinois v. Zenobia, 325 Md. 420 (1992).

The bad faith claim is subject to the collateral source rule and is NOT reduced by payments from the uninsured or underinsured motorist insurance (UIM) carrier.

Example #2:

  • Driver A strikes Driver B.
  • Driver A has liability coverage of $30,000.
  • Driver B has UIM coverage of $50,000.
  • Driver B obtains a jury verdict for $75,000

The value of this bad faith claim is $45,000 (the difference between the verdict and liability coverage). The liability carrier does not get a credit for payments made under UIM. See Kremen at 675. So here, Driver B may collect a total of $95,000 ($30,000 liability, $20,000 UIM, $45,000 bad faith).

Bad Faith Survives

Bankruptcy does not extinguish a third party bad faith claim. If a negligent driver incurs an excess verdict and files for bankruptcy, his debts are discharged. The defendant may not have to pay the excess verdict, but the bad faith claim against the insurance company survives. Kremen v. Maryland Automobile Insurance Fund, 363 Md. 663 (2001).

As of the time of this article, the Maryland courts have not addressed whether the death of a negligent driver extinguishes the bad faith claim. The issue was raised in Mesmer v. Maryland Automobile Insurance Fund; however, the Court decided the case on other grounds. 353 Md. 241 (1999).

What Actually Happens

In practice, ChasenBoscolo has obtained many verdicts in excess of the negligent driver’s policy limits, and the insurance companies have always paid the excess. In fact, many insurance companies tell their negligent drivers, “Don’t worry. We’ll pay the verdict. No matter what.” State Farm ironically calls this their “good neighbor” policy.

Why does bad faith matter if the carriers pay the excess verdict?

The potential for a bad faith claim creates benefits for the injured person beyond the simple satisfaction of sticking it to the insurance company and their lawyers.

Initially, it is important to understand the motivation. The insurance companies and their adjusters evaluate each claim and set aside money from their other investments to pay the claim. This amount is called The Reserve. The adjuster then moves money from The Reserve back into the investment pool as they learn more about the value of the claim or as the injured person lowers their settlement demand during negotiations. An excess verdict exceeds the amount of policy and The Reserve. This reflects poorly on the adjuster who misevaluated the case, and their lawyer who lost at trial. Ultimately, the insurance company loses money beyond their original budget for the claim, invites additional litigation of the excess verdict, and risks bad publicity.

The injured person benefits because the potential of a bad faith claim puts pressure on the insurance company to offer their maximum policy limits or risk the additional costs of an excess verdict.

Example #3:

  • Driver A runs a red light and crashes into Driver B.
  • Driver A has a GEICO insurance policy with $100,000 in liability coverage.
  • Driver B has a back injury, goes to the hospital, gets physical therapy, receives pain management, misses six weeks of work, and has some residual back pain. His medical expenses and lost wages are $30,000.

We believe that Driver B’s case value exceeds the $100,000 policy limits and demand $100,000 to settle the case. GEICO is motivated to offer the policy limits because they do not want to incur a bad faith claim or exceed The Reserve.

The Bad Faith Letter

The bad faith letter is another tool in the arsenal to apply pressure on the insurance company and force a policy limits offer. Typically, we send a letter to the insurance company during the course of litigation that addresses a number of key issues. The letter emphasizes the strengths of our case including the defendant’s violation of community safety rules, the significant injuries caused by his or her violations, the medical expenses incurred, time lost from work, and the overall impact on the victim.

The letter clearly states that our client’s case value exceeds the insured’s policy limits. Therefore, failing to offer the policy limits and settle the case to protect their insured demonstrates bad faith. Ultimately, this letter will become evidence in the subsequent bad faith claim when evaluating the 6-factor test established by the Maryland Court of Appeals.

Oftentimes, there is an information gap between the insurance company and their insured. The insurance lawyer has told his carrier or his client that he is doing a great job and that everything is going well. The insured does not know that his personal assets and wages are at risk. Therefore, we state that our letter must be shared with the insured and enclose extra copies via certified mail.

Beyond the bad faith letter, there are other opportunities to communicate the risk of an excess verdict to the negligent driver. During depositions, we will mark the bad faith letter as an exhibit and ask the negligent driver to review the contents. At mediation, we may remind the defense attorney and his client what will happen after an excess verdict, which can include notices of wage garnishment to their employer or lien on their nice new home.

Bottom Line: Bad faith can be a weapon for the injured and allows us to obtain maximum policy limits results for our clients.