California Supreme Court Upholds Long-standing Rule on Reimbursement of Plaintiff’s Medical Expenses

In Howell v. Hamilton Meats & Provisions, Inc., the California Supreme Court upheld a long-standing rule that benefits defendants in personal injury lawsuits, finding that plaintiffs could not seek reimbursement for medical charges that they ultimately did not have to pay. In doing so, the Supreme Court rebuked a finding by the Fourth District Court of Appeal (San Diego) that restricting plaintiffs to monetary recovery in a lawsuit to amounts for medical services that had been actually paid on plaintiff’s behalf by plaintiff’s insurer ran afoul of California’s collateral source rule.

Two competing interests came before the court, the application of California’s collateral source rule and the general bar against windfall recoveries by a plaintiff. Under the collateral source rule, defendants are not allowed to benefit from a plaintiff’s diligence in being cautious and insuring against mishaps. In its most classic application, the collateral source rule prevents a defendant from arguing at trial that a plaintiff should not recover any monetary damages because plaintiff’s insurer already paid for the cost of medical treatment, repairs to plaintiff’s vehicle, etc., necessitated by defendant’s tortious conduct.

The bar against windfall recoveries, on the other hand, prevents a plaintiff from recovering more than the actual monetary damages suffered by a plaintiff as a result of a defendants’ tortious conduct. While a plaintiff is supposed to be fully reimbursed for the economic damages caused by defendant’s tort, plaintiff is not supposed to receive a windfall by receiving more in economic damages than was actually suffered by plaintiff. Unlike emotional distress, pain and suffering – all non-economic damages – economic damages are the actual bills that a plaintiff has incurred or will incur because of the defendant’s tort, i.e., medical treatment costs, lost wages, costs of repairing or replacing property.

With medical injuries, an insured plaintiff will often be billed one amount by a medical provider, with the amount actually paid by the insurer and accepted by the provider being much less due to a provider rate agreement negotiated by the insurer. Thus, e.g., a $2,800 bill for a procedure could ultimately be fully satisfied by payment of $1,100 by the plaintiff’s medical insurance company because the insurer had pre-negotiated that amount as the rate the provider would accept for the particular procedure as part of the insurer’s provider agreement.

Prior to Howell, the rule had been that a plaintiff could only seek and recover the amount actually paid for the medical service, i.e., the $1,100 out of the above example. Three Court of Appeal cases – Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298, Hanif v. Housing Authority (1988) 200 Cal.App.3d 635, and Helfend v. Southern California Rapid Transit Dist. (1970) 2 Cal.3d 1 – had been read together by trial courts to find that allowing a plaintiff to recover the amount billed – the $2,800 – would result in an unfair windfall to plaintiff, because the bill did not reflect the true or “reasonable” cost of the damages incurred by plaintiff as a result of defendant’s conduct. A successful plaintiff would only be required to pay his insurer back the $1,100 the insurer had paid the provider, and the remaining $1,700 awarded the plaintiff would have been gravy, an unfair result under California public policy.

The plaintiff in the underlying Howell action successfully argued to the Court of Appeal that the accepted application of Nishihama, Hanif, and Helfend was unfair in that it allowed the defendant to benefit from plaintiff’s diligence in maintaining medical insurance. The Court of Appeal agreed with plaintiff that the collateral source rule barred defendant from benefitting from the discount negotiated by plaintiff’s insurer with the provider.

The Supreme Court disagreed with the Court of Appeal, finding that the difference between the amount billed and the amount paid may not be recovered by the plaintiff. The Court left undecided whether the difference between the amount paid and the amount billed should be classified as a “donated service”. In most jurisdictions, including California, a plaintiff can recover from a defendant the reasonable value of services that were donated to the plaintiff. In the above $2,800 example, if instead of the provider accepting the $1,100 payment from the insurer as payment in full, the plaintiff had no insurance, and the provider agreed to donate the services, under the donated services rule, that plaintiff could recover the entire $2,800 value of the donated service from the defendant even though plaintiff had paid no money for the service.

The Supreme Court held that whether or not the reduction in cost occasioned by the insurer’s negotiated rates was characterized as a donated service, a limited exception to the collateral source rule should apply because the reduced rate for the service reflected the “reasonable value” for the service. The Supreme Court pointed out that neither the provider nor the plaintiff were hurt by such an exception; the plaintiff received full reimbursement for what the service cost, and the reduced rate paid to the provider reflected a negotiated market rate for the service with the benefit of a guaranteed payment from the insurer. Most importantly, the Supreme Court found that the difference between the rate charged and rate paid should not be considered to be a benefit to the plaintiff that was being taken by the defendant.

This case positively impacts business owners and their insurers who face premises liability and other personal injury claims. Howell provides clarity on a significant aspect of damages in these types of cases, allowing these defendants to argue for a lesser amount of economic damages in defense of such lawsuits. Howell will have an overall effect of causing lower judgment amounts and perhaps lowering insurance premiums in response to an overall trend of lesser exposure. Whether the net effect of lower judgments is significant enough to be noticed by businesses and insurers remains to be seen, and there is a possibility that the overall effect may be small enough to be immeasurable.

Howell v. Hamilton Meats & Provisions, Inc.  (August 18, 2011) No. S179115.