Collateral Damage: The Wisconsin Supreme Court Extends the Collateral Source Rule to Underinsured Motorist Claims in Orlowski v. State Farm Mutual Automobile Insurance Company.
The Wisconsin Supreme Court, in a recent decision concerning application of the collateral source rule, held that plaintiffs are entitled to the full amount of their medical services when making underinsured motorist (UIM) claims. In Orlowski v. State Farm Mutual Automobile Ins. Co.,[i] a unanimous 7-0 decision, the court found that the plaintiff was entitled to the full amount of past medical expenses, even those amounts that were written off by the medical providers as a result of a contractual agreement between the provider and the health insurer. This holding specifically overruled the 2002 case of Heritage Mutual Insurance Co. v. Graser,[ii] in which the Wisconsin Court of Appeals ruled that a plaintiff insured could not recover medical expenses paid by the health insurer where the UIM insurer waived a subrogation right to those expenses. Specifically, the Graser court held that “the collateral source rule, which finds its genesis in tort law, is inapplicable to claims made by an insured under his or her UIM policy.”[iii]
This article will briefly summarize the history of the collateral source rule in Wisconsin personal injury cases, the facts and holding of the Orlowski case, and the implications of that decision for defense attorneys and insurance companies moving forward.
I. History of the Collateral Source Rule in Wisconsin
Generally, the collateral source rule provides that a plaintiff's recovery cannot be reduced by payments or benefits from other sources. The collateral source rule prevents any payments made on the plaintiff's behalf or gratuitous benefits received by the plaintiff from inuring to the benefit of a defendant-tortfeasor.[iv] The rule is grounded in the long-standing policy decision that, should a windfall arise as a consequence of an outside payment, the party to profit from that collateral source is “the person who has been injured, not the one whose wrongful acts caused the injury.”[v] In Ellsworth v. Schelbrock, the Wisconsin Supreme Court further explained the policy basis for the collateral source rule:
The tortfeasor who is legally responsible for causing injury is not relieved of his obligation to the victim simply because the victim had the foresight to arrange, or good fortune to receive, benefits from a collateral source for injuries and expenses.[vi]
In the context of medical expense damages, the collateral source rule allows the plaintiff to seek recovery of the reasonable value of medical services without consideration of gratuitous medical services rendered or payments made by outside sources on the plaintiff's behalf, including insurance payments.[vii] Where the plaintiff's health care providers settle the plaintiff's medical bills with the plaintiff's insurers at reduced rates, the collateral source rule dictates that the defendant-tortfeasor not receive the benefit of the written-off amounts. The benefit of the reduced payments inures solely to the plaintiff.[viii]
The collateral source rule is a well-established rule of law in Wisconsin, and has been since it was formally adopted by the Wisconsin Supreme Court in the 1921 case of Cunnien v. Superior Iron Works.[ix] In Cunnien, the plaintiff was unable to work after being injured in an automobile accident. Even though he received wages through a government-operated vocational training program, the plaintiff's damage award included lost earnings. On appeal, the supreme court determined that the wage payments were not grounds for a diminution of the damages owed by the tortfeasor.
II. Koffman, Graser and Leitinger—Three Cases That Set-Up the Decision in Orlowski
The Wisconsin Supreme Court accepted the appeal in Orlowski to resolve a conflict which had developed regarding the applicability of the collateral source rule in the context of UIM cases. A brief description of the cases that created this conflict is helpful to understanding the court’s decision in Orlowski.
In 2001, the Wisconsin Supreme Court decided Koffman v. Keichtfuss,[x] and ruled that the collateral source rule applies to cases involving payments made by health insurers. In Koffman, the plaintiff-motorist brought a negligence action seeking recovery of medical expenses related to injuries suffered as the result of an automobile collision. Plaintiff’s health and auto insurers asserted their subrogation interests in amounts they had paid on the plaintiff's behalf. After the jury returned a verdict awarding the plaintiff $98,664.18, the Circuit Court of Fond du Lac County, Judge Henry B. Buslee presiding, granted the defendants' motion to reduce verdict to $66,062.58, which was the amount that the plaintiff and his health and auto insurers had paid for his medical care. Plaintiff appealed, and the court of appeals certified the case for review. The Wisconsin Supreme Court reversed, concluding that the circuit court had erred in reducing the plaintiff's medical expense award to the amount actually paid by himself and his insurers.[xi] In support of this position, the court noted that, “should a windfall arise as a consequence of an outside payment, the party to profit from that collateral source is ‘the person who has been injured, not the one whose wrongful acts caused the injury.’”[xii]
The following year, the court of appeals decided Heritage Mutual Insurance Co. v. Graser.[xiii] In that case, Galina Graser’s minor son suffered injuries when his bicycle was struck by a vehicle operated by Jean Fisher. Graser reached a settlement with Prudential, Fisher’s liability insurer, for the policy limit of $100,000. The Wisconsin Health Organization (WHO), which paid out approximately $45,000 for injuries Graser’s son suffered when he was struck by the car, accepted $20,000 from Prudential in satisfaction of its subrogation interest for medical expenses. Graser subsequently filed a claim under her UIM policy issued by Heritage Mutual Insurance Company (Heritage). Graser and Heritage proceeded to an arbitration hearing at which the WHO did not appear. The WHO had also communicated to Graser by letter its intent to waive its subrogation claim. Following the arbitration, Heritage paid Graser $154,782, representing payment in full less the approximately $45,000 which had been subject to the waiver by WHO. The circuit court subsequently granted summary judgment in favor of Heritage, who was seeking an order confirming that its payment of $154,782 satisfied its obligation under the arbitration award.
On appeal, the Wisconsin Court of Appeals held that the collateral source rule was inapplicable to claims Graser made under her UIM policy. In finding that the collateral source rule did not apply to UIM claims, the court focused on the underlying public policy purpose of deterring negligent conduct. Specifically, the court described how the collateral source rule operates in negligence actions as a deterrent or punishment to a tortfeasor to not be relieved from his or her obligation to the victim because the victim had the foresight to arrange benefits from a collateral source for injuries and expenses.[xiv] In the case of a UIM claim, however, there is no tortfeasor against whom to invoke deterrence or punishment by applying the collateral source rule, and thus, the court of appeals determined that the rule does not apply in those situations.[xv]
Only five years after Graser, the Wisconsin Supreme Court addressed the collateral source rule in Leitinger v. DBart, Inc.[xvi] Joseph Leitinger and Bonnie Leitinger, his wife, sued several defendants for damages from a personal injury Joseph Leitinger suffered while employed at a construction site. The parties disputed the reasonable value of Leitinger's medical treatment. The health care provider billed Leitinger $154,818.51 for the treatment rendered, but, as a result of negotiated discounts, the health care provider accepted $111,394.73 from his health insurance company. The difference between the amount billed and the amount actually paid by Leitinger's health insurance company was $43,424.78.
The trial court awarded Leitinger the amount his health insurance company actually paid for the medical treatment, not the amount billed. On appeal, the Wisconsin Supreme Court held that the “collateral source rule prohibits parties in a personal injury action from introducing evidence of the amount actually paid by the injured person’s health insurance company, a collateral source, for medical treatment rendered to prove the reasonable value of the medical treatment.”[xvii] The court further stated that “[t]he collateral source rule is specifically designed to prevent a discount received by a plaintiff’s insurance company from affecting the plaintiff’s recovery of the reasonable value of medical services rendered.”[xviii]
As a result of these three decisions, a conflict developed in Wisconsin courts. Specifically, did the broad language of the ruling in Leitinger regarding the scope of the collateral source rule overrule the holding of Graser which appeared to carve out a narrow exception for UIM claims? The Wisconsin Supreme Court ended this conflict with the 2012 decision in Orlowski.
III. The Decision in Orlowski v. State Farm Mutual Automobile Ins. Co.
In the case of Orlowski v. State Farm Mutual Automobile Ins. Co., the plaintiff, Lindy Orlowski, was injured in an automobile accident caused by an underinsured driver. Orlowski submitted a claim to State Farm under her UIM coverage after exhausting the policy limits of the underinsured motorist. Pursuant to the arbitration provision in the UIM coverage portion of her policy, Orlowski and State Farm submitted the question of damages to an arbitration panel. The panel concluded that the court of appeals decision in Graser precluded Orlowski from recovering under her UIM coverage the value of medical expenses that were written off by her provider. Specifically, the arbitration panel awarded Orlowski $11,498 in medical expenses, although the reasonable value of the medical services provided came to $72,985. The medical provider had written-off $61,487 based on discounts through her health insurance coverage. Orlowski maintained health insurance coverage with United Healthcare, which had paid $9,498 of her medical expenses.
Orlowski appealed the arbitration panel’s decision to the Milwaukee County Circuit Court pursuant to Wis. Stat. § 788.11, arguing that the arbitration panel erroneously relied on Graser. The court, the Honorable Dennis P. Moroney presiding, reasoned that insured individuals should get “what they bargained for,” and modified the arbitration award to include the value of the written-off medical expenses. The court emphasized that allowing Orlowski to recover the full reasonable value of medical services, including written-off medical expenses, is less about the collateral source rule and more about giving her the benefit of what she contracted for.
State Farm appealed the decision and the Wisconsin Court of Appeals certified the case, asking the state supreme court to resolve the conflict between cases applying the collateral source rule and the holding in Graser. The court of appeals specifically asked the supreme court to resolve how the rulings in Koffmanand Leitinger affected the holding in Graser, where the court had held that collateral source law is inapplicable in UIM cases.[xix]
In a 7-0 decision authored by Justice N. Patrick Crooks, the Wisconsin Supreme Court upheld the trial court’s decision and awarded Orlowski the full amount billed by the medical provider rather than the amount actually paid. As a result, the court awarded her $61,487 in damages that neither she nor anyone else had paid or ever would pay to the medical provider. The court cited to its previous decisions, all of which held that the plaintiff is entitled to the full amount of medical expenses, even those amounts that were written off by the medical provider. The court stated:
We reaffirm what our prior precedent has clearly established: an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses.[xx]
The court went on to specifically overrule Graser “to the extent that it holds that the collateral source rule has no application in cases involving UIM coverage.”[xxi] It further noted that the holding in Graser is “at odds with Wisconsin law on damages, the collateral source rule, and the purpose and function of UIM coverage.”[xxii] In addressing the specific rational applied in Graser—that the policy consideration of deterrence does not apply in UIM cases—the supreme court found that the Graser court “gave too much weight to the deterrence rationale, at the expense of the other public policies served by the collateral source rule that are still relevant in the UIM context.”[xxiii]
The court described how the public policy reasons which have been cited as generally supporting the collateral source rule also support its application in UIM cases. Specifically, allowing the claimant to recover the full amount of the billed medical expenses serves to: (1) deter a tortfeasor’s negligence; (2) fully compensate a plaintiff; and (3) allow the insured to receive the benefit of the premiums for coverage that he or she purchased. The court noted that ensuring whether a person injured by tortious conduct is fully compensated is “no less important in a UIM case than it is in a negligence action,” and that its decision furthers “Wisconsin’s significant interests in fully compensating victims of ordinary negligence.”[xxiv]
In response to State Farm’s argument that Orlowski was going to receive a “windfall” or double-recovery with the application of the collateral source rule, the court emphasized that this ruling was necessary to give the insured plaintiff the benefit of the two premiums she had paid. In particular, the court noted that to “ensure full coverage,” Orlowski had paid two premiums: (1) to a health insurer (United Healthcare) for coverage for medical expenses including the benefit of having some of those medical expenses written off by the medical provider; and (2) to an automobile insurer (State Farm) to be indemnified for damages, including medical expenses, caused by an underinsured motorist.[xxv] Given that Orlowski had paid premiums for both of these polices, the court reasoned that “she should receive the benefit from both.”[xxvi]
IV. Practical Implications
As a result of the Wisconsin Supreme Court’s unanimous March 2012 ruling in Orlowski, insureds making a UIM claim will be able to seek the full amount of past medical expenses, including amounts written off by the medical providers as a result of contractual agreements between the medical providers and health insurers. The specificity of the decision in Orlowski, and in particular the overruling of Graser, pretty clearly eliminates any support for the position that the collateral source rule does not apply in UIM cases.
[i] 2012 WI 21, 339 Wis. 2d 1, 810 N.W.2d 775.
[ii] 2002 WI App 125, 254 Wis. 2d 851, 647 N.W.2d 385.
[iii] Id., ¶ 1.
[iv] Payne v. Bilco, 54 Wis. 2d 424, 433, 195 N.W.2d 641 (1972).
[v] Campbell v. Sutliff, 193 Wis. 370, 374, 214 N.W. 374 (1927), overruled on other grounds, Powers v. Allstate Ins. Co., 10 Wis. 2d 78, 92, 102 N.W.2d 393 (1960).
[vi] 2000 WI 63, ¶ 7, 235 Wis. 2d 678, 611 N.W.2d 764.
[vii] Id., ¶ 10; Thoreson v. Milwaukee & S. Trans. Corp., 56 Wis. 2d 231, 243-45, 201 N.W.2d 745 (1972); Restatement (Second) of Torts § 920A.
[viii] Koffman v. Leichtfuss, 2001 WI 111, ¶ 30, 246 Wis. 2d 31, 630 N.W.2d 201.
[ix] 175 Wis. 172, 184 N.W. 767 (1921).
[x] 246 Wis. 2d 31.
[xi] Id. at ¶ 47.
[xii] Id. at ¶ 29.
[xiii] 2002 WI App 125, 254 Wis. 2d 851, 647 N.W.2d 385.
[xiv] Id., ¶¶ 8, 16.
[xv] Id., ¶ 1.
[xvi] 2007 WI 84, 302 Wis. 2d 110, 736 N.W.2d 1.
[xvii] Id., ¶ 7.
[xviii] Id., ¶ 44.
[xix] Orlowski, 339 Wis. 2d 1, ¶ 11.
[xx] Id., ¶ 4.
[xxii] Id., ¶ 23.
[xxiii] Id., ¶ 25.
[xxiv] Id., ¶ 23.
[xxv] Id., ¶ 27.