The Downsizing of the Collateral Source Rule

On June 26, 2001, the New Jersey Supreme Court unanimously held that the collateral source rule, N.J.S.A. 2A:15-97, does not allow health insurers to assert a lien for repayment of benefits through subrogation or contract reimbursement when the insured recovers a judgment against a culpable party. The holding in Perreira v. Rediger concluded that those policy holders and potential plaintiffs should not be penalized for receiving health benefits. In support of its explanation, the court stated, "Under the law existing prior to 1987 when the collateral source rule was amended, health insurers could equitably obtain repayment from tortfeasors for the healthcare costs they advance plaintiffs, then plaintiffs in fact, would not have experienced double recovery and there would have been no point to N.J.S.A. 2A:15-97. If health insurers had a common-law equitable right to be repaid out of the tort judgment for the healthcare costs they advance to the plaintiff, the entire notion of double recovery would not have existed."

The History Of The Collateral Source Rule

Under common law, the collateral source rule allowed an injured party to recover the value of medical treatment from a culpable party regardless of payment of actual medical expenses by the injured party's insurance carrier. According to the Restatement (Second) of Torts, §920A(2) (1977), payments made to an injured party by a source other than the tortfeasor are "not credited against the tortfeasor's liability although they cover all or part of the harm from which the tortfeasor is liable." The public policy that was advanced by the rule stated, "A benefit that is directed to the injured party should not be shifted so as to become a windfall for the tortfeasor." Essentially, under the common law, if an injured person had the foresight to maintain a separate insurance policy for the repayment of medical bills, then the collateral source rule would allow him or her to benefit from that foresight by recovering not only the insurance proceeds but also the full tort judgment.

However, in New Jersey, as in other states, the collateral source rule was revisited and comprehensive tort reform was passed when N.J.S.A. 2A:15-97 was enacted in 1987. The primary effect of this collateral source rule was to eliminate double recovery by plaintiffs. However, it was not modeled exactly on any of the other statutes which had been adopted by other states. It provided in relevant part:

In any civil action brought for personal injury or death . . . if a plaintiff receives or is entitled to receive benefits for the injuries allegedly incurred from any other source other than a joint tortfeasor, the benefits, other than workers' compensation benefits or the proceeds from a life insurance policy, shall be disclosed to the court and the amount thereof which duplicates any benefit contained in the award shall be deducted from any award recovered by the plaintiff, less any premium paid to an insurer directly by the plaintiff or by any member of the plaintiff's family on behalf of the plaintiff of the policy period during which the benefits are payable. Any party to the action shall be permitted to introduce evidence regarding any of the matters described in this act.

The Collateral Source statute on its face eliminates a double recovery by directing the court to reduce a tort judgment received by the plaintiff by deducting certain collateral sources other than workers' compensation and life insurance. However, unlike other states' enactments, the New Jersey statute was silent regarding any right to subrogation or reimbursement on the part of health insurers. The problems with this statute left health insurers with no right to recover paid benefits from an insured or the wrongdoer.

As It Stands Now

In Perreira v. Rediger, the New Jersey Supreme Court found no evidence of a common-law equitable right of health insurers to subrogation. Plus, the court found that it need not address the question of the Legislature's silence on the subject of subrogation. The court referred to a voluminous number of cases regarding a health insurer's right to subrogation and concluded that no right of subrogation existed in the health insurance area. In reaching its decision, the court compared numerous policies, such as property damage and fire insurance, which have been regularly held to include an implied right of subrogation. However, the court specifically stated that the same had not been true in the area of personal insurance, i.e., a category that included health and medical insurance.

The Supreme Court also concluded that based on the weight of cited out-of-state authority, there was no equitable remedy of subrogation available to health insurers in 1987 when the collateral source rule was enacted. The Supreme Court therefore found no support for the proposition that a health insurance carrier had an equitable right of subrogation available under the common law.

Also important to note is the advance of the public policy argument illustrated in this recent holding. The court restated its decision within the definition of the nature of insurance: "Insurance is a plan of risk management or risk sharing. That bargain, struck between an insurer and its insured guarantees payments, in exchange for a premium, regardless of whether an injury was caused by the insured or a third party," citing to Joseph Dubray, A Response to the Anti-Subrogation Argument: What Really Emerged From Pandora's Box, 41 S.D. L.Rev.264, 272 (1996). Thus, under Perreira, health insurance carriers have no common law equitable right to subrogation and the tortfeasor would receive a credit at the end of the case for these accounts paid by the carrier. The verdict would be therefore molded accordingly.