Tort Wars: In That Galaxy Far, Far Away, The California Legislature Strikes Back For Larger Tort Recoveries

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A version of this alert was published as "Tort Wars: The California Legislature Strikes Back" by Law360, March 7, 2012.

1. Background

On February 24, 2012, California Senate President Pro Tem Darrell Steinberg introduced Senate Bill 1528 ("SB 1528"). The bill is aimed at overturning last year's long-awaited California Supreme Court decision in Howell1. The issue in Howell was whether plaintiffs could recover, as a measure of economic damages, the previously negotiated amount that their insurers (and plaintiffs) were not obligated to pay medical providers for treatment. The Supreme Court ruled that plaintiffs could not.

While plaintiffs' attorneys are up in arms over the ruling because it reduces potential tort recoveries, the holding in Howell has been the law in California for almost 25 years in personal injury cases brought by plaintiffs covered by the state-sponsored medical insurance program Medi-Cal. But now that Howell has extended this rule limiting a potentially substantial component of damages recovery (and attorney recoveries under contingency fee arrangements) to a much larger plaintiff population -- it is time for some legislation.

Enter Senator Steinberg, a supporting coalition of plaintiffs' attorneys and SB 1528.

2. Medical Expenses as a Measure of Economic Damages

The "reasonable value" of medical expenses are among the economic damages plaintiffs may recover for injuries caused by defendants. This recovery acts as a form of indemnity to a plaintiff injured by a defendant's tort. For over a century, it has been the law that personal injury plaintiffs in California are entitled to recover "such reasonable sum . . . as has been necessarily expended or incurred in treating the injury." Melone v. Sierra Railway Co., 151 Cal. 113, 115 (1907) (italics added).

In this day and age, many Californians receive insurance benefits to cover their medical expenses, through public programs like Medi-Cal or private insurance. Public policy and the long-standing "collateral source rule" prevent defendants from taking advantage of a plaintiff's thrift and foresight in acquiring and benefitting from medical insurance. A defendant cannot argue that a plaintiff should not recover medical expenses because insurance (or some other source) made a payment for treatment or gratuitously covered the costs on the plaintiff's behalf.

3. Law Impacting Medical Expense Recoveries

Long before Howell, there was Hanif v. Housing Authority of Yolo County, 200 Cal. App. 3d 635 (1988). In Hanif, attorneys for the plaintiff introduced evidence in the trial court, over the defendant's objection, that the "reasonable value" of recoverable medical expenses was higher than the amount Medi-Cal actually paid providers. Id. at 639. There was no evidence that the plaintiff was liable for the difference between the amount paid and the amount billed. Id.

On review, the Court in Hanif did not see the collateral source rule as an issue bearing on the decision to limit the plaintiff's recovery of medical expenses to those paid by Medi-Cal and not billed by the provider. Id. at 640. Instead, the Court relied on the "[f]undamental principles underlying recovery of compensatory damages in tort actions," and it referenced existing California statutory authority when it ruled that the trial court overcompensated the plaintiff for his medical expenses. Id. at 640-641. In holding that the "reasonable value" of medical expenses to be recovered could not exceed the amount paid by Medi-Cal where the plaintiff was not personally responsible for the difference between the amounts billed and paid, the Hanif Court recognized a nearly century-old principle: "'[t]he primary object of an award of damages in a civil action, and the fundamental principle on which it is based, are just compensation or indemnity for the loss or injury sustained by the complainant, and no more.'" Id. at 640-41 (italics in original) (quoting Mozzetti v. City of Brisbane, 67 Cal. App. 3d 565, 576 (1977)); see also Melone, 151 Cal. at 115.

Hanif's holding set the stage for two things: (1) more disputes between lawyers and (2) Howell.

With respect to disputes in litigation, defense attorneys pointed to Hanif to argue that recoverable medical expenses were not as high as the plaintiff's counsel suggested. The plaintiff's counsel then argued that Hanif's holding was limited to the Medi-Cal insurance context, and that any application of Hanif outside of that context violated the collateral source rule. The outcome of the dispute was important because it impacted the economic damages a plaintiff (and his or her attorney) might enjoy in addition to potential non-economic damage recoveries. Non-economic damages were potentially affected by the outcome of the argument to the extent plaintiffs' attorneys reference gross medical bills as a guide to recovery for "pain and suffering."

Howell settled the dispute to the displeasure of SB 1528's proponents.

The Supreme Court in Howell, like the Court in Hanif, found that the collateral source rule had no bearing on the issue. Howell, 52 Cal. 4th at 563. The Court recognized that a medical provider's prior agreement with an insurer, whereby the provider agreed to accept partial payment as payment in full for specified medical services, meant that the differential amount was never to be paid to the provider on the plaintiff's behalf – by anyone. Consequently, the differential is not an amount to be paid to indemnify any plaintiff for any loss. Id. at 556, 559.

The Court closely scrutinized references to the negotiated rate differential as a "write-off" or other benefit on the plaintiff's behalf. Id. at 559. Insurers' practice is to negotiate a pre-existing price for services, and that price constitutes the amount owed by any source for the services. This bargain sets the price for medical services and there is no amount "written off." The Court also reasoned that the benefit of a negotiated rate differential is one negotiated between insurers and providers for their own direct benefits, not an insured's. Id. at 559. The differential amount is simply not a "write off" or "benefit" on a plaintiff's behalf within the meaning of the collateral source rule.

Thus, the Court refused to read the collateral source rule – or the existing law on the "reasonable value" of medical expenses – to extend so far as to permit recovery for sums the plaintiffs would never have paid on their own behalf. Id. at 564. Like the Court in Hanif, the Howell Court read the words "reasonable value" in relation to recoverable medical expenses to limit, not aggrandize, the measure of recoverable economic damages for personal injury plaintiffs. Id. at 553.

4. Practical Thoughts

So are legislators primarily concerned about "all injured persons being compensated equally," like they say they are now in SB 1528?

Evidently not.

If the California Legislature truly felt that preventing plaintiffs from recovering medical expenses billed was a sign of social inequality, then this law probably would have been enacted almost a quarter of a century ago. That is when plaintiffs covered by Medi-Cal were left wondering why their fortune, or lack thereof, left them with less potential for recovery than a privately insured plaintiff with a less extensive injury. More directly though, the California Supreme Court in Howell arrived at its 6-1 decision precisely because it found that the decision in Hanif should logically and fairly extend to cases where plaintiffs are covered by private insurance. Howell, 52 Cal. 4th at 555-568.

The reality is, the Supreme Court's decision in Howell was all about equality and fairness. Nothing in Howell stops plaintiffs from offering available evidence that prevents the application of the holding to their case. Plaintiffs can still offer evidence that they are personally liable for amounts meant to compensate for medical services rendered and argue, according to evidence, that their case is one where they are to some extent personally liable for a differential. And nothing in Howell eliminates other damages compensating for non-economic damages a plaintiff incurred, or punitive damages in appropriate cases.

What Howell does is prevent people from enjoying a measure of economic recovery that they never economically sustained.

The Court in Howell settled a consuming dispute and ensured fairness where it had eluded us for years. Before Howell, it was inequitable for privately insured plaintiffs to recover a measure of economic damages that other plaintiffs could not. Howell is consistent with public policy and the collateral source rule (and fair to plaintiffs) because evidence of amounts paid can be admitted into evidence without reference to the payment's source. It is fair to Californians because it ensures equality in litigation in a way that does not directly threaten increased insurance premiums or prices for products and services. The decision is also consistent and fair in terms of following existing law.

Despite the fairness of Howell, SB 1528 would wipe the decision out and have litigants pay for economic losses no one ever sustained. That result is not consistent with well-established law -- and it is not fair.

If you have questions about the content of this alert please contact Thomas A. Woods or your Stoel Rives attorney.

1Howell v. Hamilton Meats & Provisions, Inc., 52 Cal. 4th 541 (2011).

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Thomas A. Woods
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