Arizona Collateral Source Rule: Key Takeways and Implications

The Basics of the Collateral Source Rule

The collateral source rule is defined as follows: "The collateral source rule is a rule of evidence that excludes from the jury’s consideration benefits to the plaintiff in a tort action from independent sources." See 2 Restatement (Third) of Torts § 921 cmt. c. In other words, the jury will not be told or be able to consider the fact that the victim has received benefits such as health insurance, lost wage compensation, workers’ compensation, or other independent benefits because of the injury.
This is a common rule in personal injury cases. However, this rule has been eliminated in administrative tax refund actions , as found in Arizona Administrative Code R15-5-141. The reason for its applicability in tax refund matters is that the payment of taxes leads the public to expect that "the roads will be paved, the schools funded, the libraries open, the parks well-maintained, and the police and fire departments at the ready to protect us all," and "the loss of an additional dime to the tax collector might not have even been felt." See Simpson v. State of Arizona, Dept. of Revenue, 184 Ariz. 570, 573-74, 911 P.2d 1040, 1043-44 (App. 1995) (upholding the application of the collateral source rule in the issue presented). Thus, the goal of the collateral source rule can be lost in these cases where the benefit received was actually designed to compensate the taxpayer or to advance the general public welfare.

How the Collateral Source Rule Applies in Arizona

In Arizona, the collateral source rule is codified under A.R.S. § 12-2781. The Arizona rule provides that when a plaintiff obtains compensation from a third party for economic damages, the third party payment will not reduce the amount of noneconomic compensatory damages awarded to the plaintiff. However, nothing in the statute "prohibits the admission into evidence of the fact that economic damages are compensated by insurance or another collateral source." A.R.S. § 12-2781(B). Arizona limits the collateral source rule such that the statute "does not apply to payments from a collateral source to the extent those payments are intended to compensate the plaintiff for non economic damages." A.R.S. § 12-2781(C). Arizona has previously amended A.R.S. § 12-2781 to limit the recovery of all economic damages, rather than only the recovery of non-economic damages. The Arizona Supreme Court has indicated that such payments must be "compared to the total economic damages in determining the portion of the award that is intended to compensate the plaintiff for noneconomic damages." A.R.S. § 12-2781(D).

The History of the Collateral Source Rule in Arizona

Arizona’s application of the collateral source rule has deep roots that can be traced back over a century. The state first adopted the rule in 1969 when the Arizona Supreme Court, in an opinion written by Justice Henry S. Stevens, incorporated the "negative" portion of the rule into the state’s Constitution by declaring, "We hold that a person who is injured by the improper or negligent acts of another may recover general, special, and punitive damages from the one causing the harm and that collateral payments received from other sources do not diminish the payments the injured party receives from the tort-feasor." O’Keefe v. Moyer, 104 Ariz. 300, 303, 453 P.2d 78, 81 (1969). Although later analyzed in greater detail in Arizona cases, this idea that damages for the tortuous acts of others should not be limited by payments received from other sources was first expressed in O’Keefe.
In addressing the "positive" portion of the rule, which provides for a more equitable result under certain circumstances when the plaintiff will receive windfall profits due to the collateral source payments, the Arizona Supreme Court analyzed whether or not the injured party paid for the coverage the plaintiff has received. In Sweeney Chartered Trust for the Unreimbursed Medical Expenses of Kelly F. Palmer v. Pinal County, 120 Ariz. 140, 585 P.2d 781 (1978), the court distinguished Schellenberg v. Twin City Motor Bus Co., Inc., 257 N.W.2d 804 (Minn. 1977), where the court denied collateral source benefits to a plaintiff who was introduced to a state-run program that paid for her medical bills if she did not get an award against the bus company. Id. at 145, 585 P.2d at 784.
Sweeney chartered the rule to situations where the plaintiff had not completely paid for the collateral source benefits. In Wrightson v. Windsor, 128 Ariz. 77, 624 P.2d 1139 (1981) the court further analyzed the application of the collateral source rule to a situation where at the time of trial, an injured party had not received any collateral benefits as a result of the injuries. Although there was some question about whether or not the court’s decision was consistent with its prior decisions, the court expanded the rule to allow those collateral payments that were merely delayed due to the processing of claims. Id at 80, 624 P.2d at 1142. In doing so, the court found that "to deny them the full amount of their medical expenses would constitute unfair double punishment for their suffering, thus violating their right to full and fair compensation." Id.
The trend has continued with the Arizona Supreme Court including the "positive" portion of the collateral source rule into its rules of civil procedure. Ariz. R. Civ. P. 409(b), which was adopted by the court effective Jan. 1, 1985, states "in an action upon a claim to recover such damages, except in actions to recover for wrongful death or for personal injuries pursuant to A.R.S. § 12-563, payments made in the nature of insurance are not subject to set-off or otherwise admissible in evidence unless made by or through a person asserting a lien thereon." (emphasis added). This gave further effect to the negative portion of the rule adopted in O’Keefe. Of course, today the "positive" portion of the rule, which allows the court to deduct the amounts "paid… by or through a person asserting a lien," has continued to evolve through practice and case law.

Why the Collateral Source Rule is Important in an Injury Case

The collateral source rule is an essential component of the legal landscape for personal injury cases in Arizona. It serves to ensure that a plaintiff is not penalized for their decisions regarding insurance coverage and medical care. When a plaintiff is awarded compensation for their injuries, the court makes the determination without referencing the source of the compensation. This distinction helps to ensure that even if they’ve used their own insurance to pay medical bills, any other compensations are not reduced based on the fact that the plaintiff paid the medical bills using insurance.
The collateral source rule also helps to maintain the integrity of the insurance system by incentivizing plaintiffs to obtain insurance and use it properly. If plaintiffs were penalized for having insurance, many people would elect not to have it, which would keep them vulnerable if a situation like a car accident were to occur that required medical treatment and they had no insurance coverage.
Generally, in Arizona, if a plaintiff is injured in a car accident and the other driver is at fault , the other driver’s insurance will cover the plaintiff’s medical expense up to the policy limit. When this occurs, the other driver’s insurance company will then seek reimbursement from the plaintiff’s insurance company for the costs, if the plaintiff’s insurance covers the costs.
For example, in the case of an accident where the plaintiff had a $100,000 insurance policy with a $20,000 deductible, in the absence of the collateral source rule, the injured driver would only be compensated $80,000, or the $100,000 less the $20,000 deductible. If the plaintiff had to pay the $20,000 deductible out of their own pocket, their recovery would be reduced by the deductible as well.
However, under the collateral source rule, the plaintiff will be compensated for the full $100,000 even if they needed to pay all or part of the deductible out of their own pocket. In cases where the plaintiff does not have any insurance to cover the cost of the accident, the other driver’s liability coverage should provide the Cll being represented by her attorney.

Critiques and Support of the Collateral Source Rule

Critiques of the collateral source rule hold that its existence leads to "a windfall" to an injured party, as it permits a plaintiff to make a recovery for both the amount paid through other sources (insurance) as well as through a civil suit. Both of these amounts would otherwise be a complete bar to recovery at law. Of course, affected parties also include the alleged tortfeasor and their insurance carrier. Such parties lose those payouts entirely when, for example, an injured party receives health insurance plan benefits for the treatment of medical injuries resulting from the negligence of the allegedly liable party.
Advocates of rules or changes to rules governing the collateral source doctrine would argue that the exclusion of collateral source payments from evidence to the jury is fundamentally unfair, as it does not allow the jury to see the true financial picture relating to both parties. That is, these advocates would say that jurors should hear that although in a perfect world the plaintiff would have gotten paid the full amount of their damages, they did not because a third party (the health insurance carrier) paid for them. Ultimately, they seem to argue, this exclusion permits a plaintiff to "double dip" on a single claim.
In response, proponents of the collateral source rule argue that its existence actually promotes settlement by allowing plaintiffs to recover from the responsible or at fault party, while leaving their own insurer to cover any additional costs incurred. They would point to the fact that most personal injury cases resolve by settlement outside of court, with little or no judge or jury involvement. Accordingly, many advocates of the rule would argue that any perceived windfall that the rule may confer on a plaintiff may actually help to avoid the burdens on the court of lengthy and expensive litigation.
Lawmakers ultimately tend to side with the arguments of advocates of the collateral source rule. Since 1973, four states have enacted statutes dealing with the issue, each giving the collateral source rule even greater effect. These include Florida, Kansas, New Jersey and South Carolina. More recently, the legislatures of Massachusetts, Vermont, Ohio and Virginia have stripped away application of the rule, in tort claims that are arbitrated or taken to trial. Currently, over 25 states have some form of a collateral source statute on their books.

Recent Developments and Future Predictions

In recent years, both legislative changes and court rulings in Arizona have impacted the application of the collateral source rule. Potential changes in the law could further affect how the rule is applied in future cases.
For example, a recent Arizona appellate decision, Elizabeth C. v. Liberty Mutual Fire Insurance Co., refused to apply the common law collateral source rule, going for an even more restrictive and insurer-friendly form of the rule, called the "voluntary payment rule." In Elizabeth C., the court held that plaintiff should not be able to recover the full amount of her medical bills that were paid by the defendant’s insurer, because she had not paid them herself. 2019 WL 6645662. The voluntary payment rule has traditionally been limited to no fault insurance cases, but the court in Elizabeth C. expanded it to the liability insurance context. The application of the rule in a liability insurance situation is at odds with Arizona’s Public Policy and the purpose of liability insurance – to make the injured party whole, which includes the full payment of medical invoices. Id.
The court in Elizabeth C. justified this extension by reasoning that plaintiff got "a double recovery" – recovery of the full value of her medical bills from both the insurer and the health care providers, who agreed to accept less than those amounts through agreements with the insurers , and only recovered from the insurer. Id. The court went on to direct trial courts to apply its rationale in all similar cases, essentially abolishing the common law collateral source rule. Id. (Allwhile of Arizona Holdings LLC v. City of Phoenix, 110 Ariz. 476, 477-78, 520 P.2d 1136 (Ariz. App. 1974) declined to adopt the "voluntary payment rule" – primarily because the concept is rooted in prior no-fault insurance statutes.)
Two years later, in 2021, the Arizona Supreme Court relied on Elizabeth C., in Martinez v. Owa, 247 Ariz. 198, 447 P.3d 654 (2019). There, the Court eliminated the common law rule for uninsured motorist insurance claims. Id. In affirming the ruling in Elizabeth C., the Martinez court noted that the provision of A.R.S. § 20-259.01(C)(2), enacted in 2018, largely negated the need for the common law rule: "[a]n insured who receives benefits from an insurer to pay the insured’s damages arising from an accident with an uninsured motor vehicle shall be made whole before any benefits are paid to any health care provider." A.R.S. § 20-259.01(C)(2). Although the future of the common law collateral source rule appears bleak in Arizona, if the legislature enacts a law similar to the "made-whole" doctrine set out in A.R.S. § 20-259.01(C) in another context (for example, liability insurance), the collateral source rule will no longer apply. Until then, the rule is alive and well (or, as it is often viewed, is an exception to the general rule).