Collateral source reductions

Collateral source reductions under CPLR 4545

In one form or another, the CPLR has provided that certain personal injury awards be reduced for collateral source payments for more than 25 years. The common law rule is still important, though, and the statutory scheme cannot be understood without it. Under common law a tortfeasor was liable for the full amount of damages caused to the plaintiff, even if the plaintiff had received compensation from other sources. Courts were willing to overlook the possibility of double recovery, because their focus was on the negligence of the defendant. The underlying idea was that tort law was a more effective deterrent if defendants were fully responsible for the consequences of their negligence. For that reason, too, juries were not allowed to hear any evidence of collateral source payments which the plaintiff had received (see generally, Kish v Board of Educ., 76 NY2d 379, 384).

All this changed beginning in 1975. The first version of what is now CPLR 4545 (a) was enacted as part of a "tort reform" package, which addressed the supposed crisis in medical malpractice coverage. By 1981 that part of the law had taken its final form. It applied only to medical malpractice cases. If the plaintiff had received compensation for economic losses from other sources, the court was required to reduce the award by the amount received. The jury, then, was still prohibited from hearing evidence of collateral source payments, just as it was under the common law rule. The new scheme created a post-judgment proceeding for the court only.

In 1984 similar provisions were enacted dealing with personal injury and wrongful death lawsuits against public employers. These provisions were somewhat different in scope that those governing medical malpractice cases, a topic covered below. Finally, in 1986, a further section was added which brought all other personal injury and wrongful death cases in line with the medical malpractice rules (Oden v Chemung County Industrial Development Agency, 87 NY2d 81, 85-86).

There were two different reasons advanced for these changes (Bryant v NY City Health & Hospitals Corp., 93 NY2d 592; Oden, supra, 87 NY2d, at 87-88). The first and more commonly-cited explanation is that the statutory rule seeks to avoid double recoveries. Plaintiffs should not receive any more than the compensation which would put them back the way they were before the injury. In other words, instead of looking at the award as a deterrent to the defendant, it is being viewed as compensation to the plaintiff.

The common law rule had recognized that double recoveries were possible, but did not consider them important enough to override other interests. Why the change? One reason is that collateral source payments are much more common now than they were when the common law rule took shape. Most plaintiffs today have health insurance, and many receive disability payments or other compensation for economic losses. This safety net of public and private payments is relatively new. In short, there are many more chances of double recovery now than there were in the past, and it has simply gotten harder to ignore them.

The other reason is less often talked about, but it emerges as soon as the circumstances of the 1975 legislation are recalled. Plaintiffs are not the only litigants who have insurance these days. Defendants, of course, also have insurance, and in most of our cases the award will be paid by the insurer--not the tortfeasor. The tort reform package that started the present-day rule was designed to reduce the costs of insurers and bring down premiums for malpractice insurance. There is some tension between these two aims, and this affects how courts have interpreted the statute. The vexed question of subrogation in connection with collateral source reductions is the clearest example of this tension, and I have treated this subject in a separate essay.

CPLR 4545 is not a repeal of the common law rule. It changes it in a specific group of cases, and only as to certain expenses. Because of that, courts have followed the principle that statutes in derogation of the common law are to be construed strictly (Oden, supra; Young v Tops Markets, 283 AD2d 923; Faas v State, 249 AD2d 731). The effect of this is that interpretations of the section can be very narrow indeed.

The collateral source reduction applies to economic losses only, not to awards for pain and suffering. Subsection (c) of the section, as an example, sets out the types of expenses which are included; they are:

the cost of medical care, dental care, custodial care or rehabilitation services, loss of earnings or other economic loss

The section also lists the sources for collateral payments:

insurance (except for life insurance), social security (except those benefits provided under title XVIII of the social security act), workers` compensation or employee benefit programs (except such collateral sources entitled by law to liens against any recovery of the plaintiff)

Title 18 of the Social Security Act is better known as Medicare.

There is also a reduction of the reduction, because the plaintiff gets to keep "an amount equal to the premiums paid by the plaintiff for such benefits for the two-year period immediately preceding the accrual of such action."

In the important case of Oden v Chemung County Industrial Development Agency supra) the Court of Appeals ruled that collateral source reductions can be applied only if the payments correspond in purpose to specific damage awards. It said:

The Legislature's goal of eliminating plaintiffs' duplicative recoveries is served by subtracting from the total award those collateral source payments that duplicate or correspond to a particular item of economic loss.

In Oden the plaintiff had been awarded $80,000 for lost future earnings. However, he was also entitled to a "disability retirement pension." The defendant wanted to have the award reduced because of this, but the Court of Appeals disagreed, saying:

those benefits are paid in lieu of ordinary pension benefits and do not necessarily correspond to any future earning capacity plaintiff might have had.

One consequence of the Oden decision is that jury awards have to be itemized. If the award is a lump sum, and there is no way to tell how much was intended to compensate for the specific items which fall under CPLR 4545, the defendant is out of luck (see, e.g., Shue v Red Creek, 266 AD2d 899).

The way the Oden rule works out can be seen in cases that deal with Social Security benefits. The first is Bryant v NY City Health & Hospitals Corp., 93 NY2d 592, which was a wrongful death case brought by the children of the decedent. In New York damages for wrongful death are limited to the pecuniary value of the decedent to the plaintiffs. The Court of Appeals decided that

[b]ecause child survivor benefits are intended to compensate for a parent's lost earnings, there is a "close correspondence between the collateral source payment and the item of pecuniary loss to be replaced". If plaintiff had the benefit of her mother's earnings, she would not be entitled to Social Security survivor benefits. Similarly, the jury award for future earnings is predicated on plaintiff's inability to reap the benefits of her mother's financial support (93 NY2d, at 608).

The Third Department case of Krum v Green Island Constr. Corp. (249 AD2d 730) shows another side of this issue. This, too, was a wrongful death case; but here the plaintiff was receiving widow's benefits instead of survivor's benefits. The Court held that while Social Security benefits in general are supposed to be excluded, a widow's benefit is not a first-party benefit like ordinary Social Security and would have been paid to the widow whether the decedent was employed or not. It was more in the nature of life insurance, which is specifically outside the rules for collateral source reductions.

What, then, of the specific words of the statute suggesting that all Social Security payments except Medicare are to be deducted? See, for example, the Fourth Department case of Caruso v Russel A. LeFrois Builders, 217 AD2d 256, following the rule of inclusio unius est exclusio alterius (to include one is to exclude all others):

Payments pursuant to title XVIII of the Social Security Act are specifically excluded by the statute from consideration as a collateral source. As a matter of statutory construction, all other Social Security benefits may be applied as a setoff.

The key to understanding these cases is the rule in Oden. Social Security benefits must be deducted, but only if there is something in the award that corresponds to those Social Security benefits. Otherwise the award will be left alone.

For example, in Young v Knickerbocker Arena (281 AD2d 761), the defendant tried to reduce an award by the benefits paid to the plaintiff's children. Those benefits made up for the support the disabled plaintiff could no longer provide from his wages. But the Third Department ruled that no deduction should be made, because it was not the plaintiff who was entitled to the benefits; they were the entitlement of the children. Thus, if the plaintiff's lawyer is careful about the demand and the court is precise in the verdict sheet, the effect of the statutory rule is considerably lessened. The plaintiff in Schmidt v Buffalo General Hosp. (183 Misc 2d 32, affd 278 AD2d 827) received very specific awards for lost wages:

Plaintiff sought an award for loss of earnings with lost wages being one component and a reduced Social Security retirement benefit being the second component. No request was made for an award that totally supplanted Social Security retirement.

In essence, the plaintiff's award had already been limited. He received an award for lost wages in the past, and for the difference between the Social Security he was entitled to and the higher amount he would have received if he had continued to work. The Social Security payments he was receiving and would get in the future did not correspond to either of these heads, so his award was not reduced any further.

The statute sets out three specific exemptions from the rule. Life insurance benefits are not to be deducted. Nor are Medicare benefits. The final exception is where the source is entitled by law to a lien on recovery. The most common cases of this entitlement are Workers' Compensation payments and first-person benefits under the no-fault system, Insurance Law § 5104 (b).

This exception is a necessary one. The statutory lien means that the plaintiff will have to pay the insurer back out of the proceeds of the award, and it would be wrong to deny the plaintiff the funds to do this. Otherwise the plaintiff would in effect face a double deduction instead of a double recovery.

This exception, though, applies only to statutory liens. Many insurance policies have contractual lien language, but contractual liens do not change the rules about collateral source reductions. This distinction plays an important part in the cases about subrogation rights, addressed elsewhere on this site. It is also important to distinguish between basic economic loss under no-fault, for which plaintiffs have no right of recovery at all, and other economic loss, where a right of recovery exists but a statutory lien comes into play (see, Divelbliss v Bilancini, also on this site).

As was mentioned before, subsection b, which governs actions against a public employer, is different from the other two. One major difference is that reductions are made only for sources funded by the employer. The other is that no reduction is made for future losses. Although subsection c, the most general provision, was enacted after the other two, the Court of Appeals has ruled in Iazetti v City of New York (94 NY2d 183) that it does not preempt the others; these restrictions, then, remain in full force.

From 1975 to 1981 collateral source reductions were made as part of the jury verdict, but since 1981 the question is solely for the court to determine after the verdict is delivered. There are occasional exceptions to this that probably arise from plaintiff's counsel's attempt to avoid a later reduction. In one such case, Levy v Gemma Constr. Corp. (184 AD2d 219), the court reviewed the verdict and decided that the jury had already made a reduction.

In general, though, the questions are brought before the judge. Collateral source determinations are fact-based. In simple cases it may be possible for the questions to be decided on affidavits. But there is usually a hearing after the trial. It is up to the defendant to request a hearing, and cases have held that failure to make a timely request results in losing the right to demand a deduction. Although the section says nothing about specific deadlines, the usual approach has been to limit requests to the normal period for post-verdict motions.

The burden at the hearing is on the defendant to show that the plaintiff has received benefits which fall under the statute (see, Adamy v Ziriakus, 231 AD2d 80, 86, lv granted 91 NY2d 805). Once this has been done, the plaintiff then has the burden of showing that the payments fell under one of the statutory exceptions. In Panattoni v Inducon Park Assoc. (247 AD2d 823), for example, the plaintiff failed to show that his health insurance payments would be covered by Workers' Compensation. If he had succeeded there would have been no reduction, because his Workers' Compensation carrier would have had a statutory lien on his recovery.

As with any other fact issue, discovery is available on payments the plaintiff has or will be likely to receive (Fleming v Bernauer, 138 Misc2d 267). But absent prejudice to the defendant, that discovery is to take place during regular pre-trial disclosure, not after the verdict (Hoffmann v S.J. Hawk, Inc., 177 Misc 2d 305, affd 273 AD2d 200).

One issue that no state court has decided is whether the deduction should take place before or after the verdict is reduced for comparative negligence. This clearly makes a significant difference in many cases. The District Court for Southern New York has held that the deduction should be made before the comparative fault reduction, in Rivera v Cincinnati, Inc., 1998 WL 898128 (the case is not reported in the Federal Supplement). This is surely the right result. If the defendant was only 50% at fault, then only half of the benefits that the plaintiff received from his or her collateral source was to compensate for the defendant's conduct. The other half is simple first-person insurance. Since the plaintiff will not recover from the defendant for this amount, there is no chance of a double recovery.

Other issues arise with evidentiary support for future benefits. Except for actions against public employers, reductions must be made for "any *** future cost or expense *** [that] will, with reasonable certainty, be replaced or indemnified, in whole or in part, from any collateral source". The section provides that the proof must be "with reasonable certainty". The Third Department has summed up the burden in Young v Knickerbocker Arena (supra) this way:

"Reasonable certainty,"***, has been deemed to be synonymous with "clear and convincing proof" such that a defendant seeking to offset a personal injury award by a collateral source payment bears the burden of showing that it is "highly probable" that the plaintiff will continue to be eligible for the benefits in question (see, Caruso v Le Frois Bldrs., 217 AD2d 256, 259).

Just as in the ordinary case, there is a reduction of the reduction itself: the award is reduced by the future payments "minus an amount equal to the projected future cost to the plaintiff of maintaining such benefits."

In Young v Tops Markets, (283 AD2d 923) a 3-to-2 decision that has been heavily criticized, the Fourth Department held that no reduction should be made for benefits that the plaintiff had not applied for. The Court reasoned that the plaintiff was not entitled to the continual receipt of payments he was not yet receiving.

This case is binding authority in this department, but it is likely to be overruled in the future. The Court interpreted "entitled to" as meaning actually receiving. It is more probably that the Legislature intended "entitled" to mean the right to claim the benefits; surely the plaintiff was legally entitled to receive these benefits in the future and had simply failed to apply for them.

The upshot of the Young decision is that the plaintiff could walk into his Social Security office the next day, apply for benefits which duplicate the future damage award, and receive the very double recovery the statute was supposed to prevent. Put bluntly, Fourth Department plaintiffs who can afford to wait have every reason not to apply for future benefits.

As the Young case and the subrogation decisions show, the full effect of the changes made by CPLR 454 have yet to be worked out. Courts and legislature alike will need to address the complex issues that arise when a fault-based tort system tries to keep up with a heavily insured society.

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