Does the Collateral Source Rule Apply in Contract Cases?

Written by Stephanie G. Cook, Esq.
Edited by Bill Pfund, Esq.

For the first time, the Supreme Court of Virginia has ruled on whether the collateral source rule
applies in contract cases. The collateral source rule provides that compensation or indemnity
received by a tort victim from a source other than the tortfeasor may not be applied as a credit
against the amount of damages owed by the tortfeasor. This rule has been consistently
recognized in tort cases in Virginia. It has also been applied to cases involving social security
benefits, public and private pension payments, unemployment benefits, workers’
compensation benefits, and vacation and sick leave allowances.
In Dominion Res., Inc. v Alstom Power, Inc., 825 S.E. 2d 757, 297 Va. 262 (2019), the court held
that the collateral source rule does apply to breach of contract actions, where a plaintiff has
been reimbursed by an insurer for the full amount it seeks in damages from the defendant. The
court noted, however, that whether the collateral source rule applies should be determined on
a case by case basis.
In Dominion Resources, a company called Alstom Power, Inc. performed services at a power
plant owned by Dominion Resources. These services were governed by a contract which
required Alstom to obtain two separate policies, an aggregate limit policy and an excess policy.
In addition to the two policies held by Alstom, Dominion Resources also had an excess policy
with Associates Electric & Gas Insurance Services (“AEGIS”). As a result of a boiler accident at
the plant, three workers died and two others were injured. The workers and their estates sued
Dominion Resources and Alstom. The cases were eventually settled by Dominion Resources,
and Dominion Resources was reimbursed for the cost of defending and settling the cases from
the two policies held by Alstom as well as from its AEGIS policy.
Dominion Resources then sued Alstom for breach of contract, seeking to recover from Alstom
the amount paid by AEGIS. Specifically, Dominion Resources alleged that Alstom failed to
defend Dominion Resources in the tort actions filed by the injured and deceased workers. It
also alleged breach of contract for securing eroding policies rather than non-eroding polices. An
eroding policy is one in which the costs of defending a lawsuit are considered part of the loss. In
sum, Dominion Resources sought to recover from Alstom the same amount it received from its
own AEGIS policy. Alstom, of course, argued that Dominion Resources should be barred from
obtaining a double recovery.
In analyzing whether the collateral source rule should apply in this case (and whether Dominion
Resources should be allowed to recover from Alstom the amount it was paid by AEGIS), the
court acknowledged that double recovery is generally inequitable and that the purpose of
compensatory damages is simply to make a tort victim whole. Id. at 755. Likewise, damages in
both tort and contract actions “exist only to compensate a plaintiff for the injury suffered, not
to leave that plaintiff better off because of the injury.” Id. at 756.

However, the court also went into an in depth look at the reasoning behind the collateral
source rule. For instance, the court pointed out that the law “favors the victim of the wrong
rather than the wrongdoer.” Id. (quoting Schickling v. Aspinal, 235 Va. 472, 474, 369 S.E.2d 172,
174 (1988). Further, a defendant should not be able to benefit from a contract it is not a party
to and for which it gave no consideration. Id. (relying on Baltimore & Ohio R.R. Co. v. Wightman,
70 Va. (29 Gratt.) 431, 446 (1881). Additionally, “the supposed double recovery often will prove
to be more hypothetical than actual.” Id. at 757 (quoting John Munic Enterprises, Inc. v. Laos,
235 Ariz. 12, 326 P.3d 279 (Ariz. Ct App. 2014)). Frequently in contract cases, a plaintiff has
either assigned its claims or otherwise may be liable to reimburse the collateral source. Id.
For these reasons, the court found that the real issue, in determining whether the collateral
source rule should apply is “not whether to overcompensate the plaintiff – it is instead whether
the breaching defendant or the collateral source should be primarily responsible for
compensation.” The court emphasized that the answer to this issue may not be the same in
every contract case; and, therefore, a case by case basis of “whether the parties’ expectations
… support the rule’s application” should be applied. Id.
While this case invites different decisions in different contract cases on the issue of whether the
collateral source rule will apply, it is safe to say that parties to a contract should not be
reluctant to consider and perhaps instigate claims for reimbursement from entities which have
breached such a contract, even if previously made whole by a different source. The lawyers
here at KPM LAW will be glad to consult with you about such cases.

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