Examining Tennessee’s Collateral Source Rule

The collateral source rule is a common law rule derived from case decisions that allows an injured plaintiff to recover the reasonable value of their damages, even when insurance or another third party paid some of those damages. Under this rule, an injured party is allowed to present evidence of the full amount of her medical bills, but the defendant is not allowed to counter this evidence by showing the injured party was covered by insurance or that the insurance company paid some or all of her medical bills. During the last 25 years, tort reform has targeted this rule with the result that it has been limited or abolished in most states. In Tennessee, the Medical Malpractice Statute has made the Collateral Source Rule inapplicable to medical malpractice cases. (The collateral source rule remains applicable in other types of personal injury cases such as automobile accident cases.)

In the 1970s, the Tennessee legislature limited this rule in medical malpractice cases because of the purported medical malpractice crisis at that time. This paper reviews this rule to assist physicians, involved in medical malpractice litigation, in understanding how damages are determined once negligence has been established.

The common law collateral source rule states that if benefits are received by an injured party from a source wholly independent of and collateral to the wrongdoer, the payment should not be deducted from the damages otherwise recoverable from the wrongdoer. Thus, even if an insurance company or another third party pays the injured plaintiff’s medical bills, this rule precludes the wrongdoer from admitting this evidence in order to reduce any damages for which they are liable. This rule first took effect when the United States Supreme Court, in The Propeller Monticello v. Mollison, ruled that the plaintiff could pursue damages from the wrongdoer. The Court decided the amount the plaintiff received from insurance played no part in the defendant’s liability. During the last 30 years, most states, including Tennessee, have enacted legislation that limits or prohibits this rule.

The collateral source rule has been precluded from applying to medical malpractice cases in Tennessee. Thus, a plaintiff in a medical malpractice case may recover medical expenses only if that plaintiff has paid the expenses personally and the expenses have not been reimbursed by insurance, or if the expenses were paid by insurance that was bought privately and individually by the plaintiff. However, if a third-party insurance company, Medicare or TennCare (Medicaid) asserts a right of subrogation for medical expenses it paid, then it may recover the amount of actual payments it made for the injuries and damages resulting from the alleged malpractice.

Tenn. Code Ann. § 29-26-119 provides that:

In a malpractice action in which liability is admitted or established, the damages awarded may include (in addition to other elements of damages authorized by law) actual economic losses suffered by the claimant by reason of the personal injury, including, but not limited to cost of reasonable and necessary medical care, rehabilitation services, and custodial care, loss of services and loss of earned income, but only to the extent that such costs are not paid or payable and such losses are not replaced, or indemnified in whole or in part, by insurance provided by an employer either governmental or private, by social security benefits, service benefit programs, unemployment benefits, or any other source except the assets of the claimants or of the members of the claimants’ immediate family and insurance purchased in whole or in part, privately and individually.

The constitutionality of this statute was attacked in Baker v. Vanderbilt University. Here the plaintiff sought to have the Court declare the prohibition of the collateral source rule in medical malpractice cases unconstitutional under the United States Constitution and the Tennessee Constitution. The Court, however, applying the rational basis test, had little difficulty in upholding this statute. The Court stated that, “{t}he statute is rationally related to the legitimate governmental objective of reducing malpractice insurance premiums and health care costs, and the classification between medical malpractice litigants and other litigants is in furtherance of that objective.” The plaintiff’s constitutional challenge was rejected.

Several recent Tennessee court decisions have clarified the prohibition of this rule by statute in medical malpractice cases. In Hunter v. Ura, 163 S. W. 3d 686 (Tenn. 2005), citing Steele v. Fort Sanders Anesthesia Group, P.C., 897 S.W. 2d 270 (Tenn. Ct. App. 1994), the Court found that the decedent had contributed to Nissan’s Executive Insurance Plan and the contributions were used in part for purchase of insurance, thus allowing the plaintiff to introduce his entire medical expenses as damages. In Nance v. Westside Hospital, the Court reviewed whether workers’ compensation benefits are included in the Medical Malpractice Act, thus giving healthcare providers a reduction in damages for benefits available to the injured party. The Court determined that an employer could enforce his statutory lien against an employee and the legislature intended to exclude collateral sources such as workers’ compensation from the Act when there was a right of subrogation.  Finally, in Hughlett v. Shelby County Health Care Corp., the Court held that Medicaid expenses were not costs paid for losses “replaced or indemnified” by social security benefits.8 Thus medical expenses paid by Medicaid are recoverable as damages in a medical malpractice case.

Our courts have not yet addressed whether a defendant should be permitted to introduce evidence of life insurance benefits from a policy not paid for by the Plaintiff or whether any verdict should be reduced by the amount of life insurance benefits from such a policy.

The common law collateral source rule was established to prevent the defendant from benefiting from their wrongful actions. Despite a trend in the United States to limit the effects of the collateral source rule, the rule remains in force in courts of the State of Tennessee. However, to assist with the malpractice crisis, the legislature prohibited this rule by statute in regards to the Medical Malpractice Act. Although this statutory prohibition of the collateral source rule worked to lessen verdicts in malpractice cases after passage, the availability of consortium damages resulting from Jordan v. Baptist Three Rivers Hospital in 1999 has worked to drive verdicts substantially higher. Regardless the Medical Malpractice Act has been held as constitutional and has been clarified through several recent Tennessee court decisions.

1. Young M: Victim’s Rights Versus Special Interest: A Difficult Choice for the Kansas Legislature in Its Fight to Abrogate the Collateral Source Rule. 45 Washburn Law Journal 135 (2005).
2. Black’s Law Dictionary, 6th ed. 1990.
3. The Propeller Monticello v. Mollison, 58 US 152 (1855).
4. McDaniel v. General Care Corp., 627 S.W.2d 129 (Tenn. Ct. App. 1981).
5. Tenn. Code Ann. § 29-26-119 (1980).
6. Baker v. Vanderbilt University, 616 F. Supp. 330 (M.D. Tenn 1985).
7. Nance v. Westside Hospital, 750 S. W. 2d 740 (Tenn. 1988).
8. Hughlett v. Shelby County Health Care Corp., 940 S.W. 2d 571. (Tenn. 1996).

Dr. Judy Regan is an associate clinical professor of psychiatry at Vanderbilt University School of Medicine and an associate with North, Pursell & Ramos, PLC, in Nashville; Mr. Hadley is a partner with NPR with a practice that includes defending physicians in malpractice and licensure action; Dr. Bill Regan is associate clinical professor of psychiatry at Vanderbilt University School of Medicine.