Common Cents

Someone’s gonna get a windfall…

Reading appellate court rulings can be fun, really! Way back when I was studying legal principles for my job as a claims rep, I was amused at the following wording:  “The question is not whether a windfall is to be conferred, but rather who shall receive the benefit of a windfall which already exists.”  

I thought “windfall” to be an odd “legal” term. But then I had difficulty coming up with a better term..

The issue was the Collateral Source Rule. It occurs when an injured party has two or more sources of recovery for expenses. An example is payment of medical bills resulting from an automobile accident. The victim has a right of recovery against the at-fault driver in the accident. The victim may also have a health insurance policy available to pay for the medical bills. Should the at-fault driver benefit by the presence of the health insurance policy – and avoid paying the medical bills? Or should the health insurer benefit by the presence of the at-fault driver’s obligation – and avoid paying medical bills covered by the policy?

Or should the injured person recover twice? And pocket the money paid by one of the payers?

In the eyes of the court, someone will have a “windfall.” Either the at fault driver by not having to pay bills being paid by the medical insurer, or the medical insurer by not having to pay bills paid by the at-fault driver, or… TaDa – the victim who collects from both and keeps the over-payment for him/herself?

The court favored the victim, saying: “As between the injured person and the tortfeasor [that’s legal talk for at-fault driver], the former’s claim is the better. This may permit a double recovery…”

My objection to this ruling is twofold. First, insurance is about indemnity, restoring an injured party to the financial position held before the injury. It is not intended to confer a profit, and for reasons we’ll discuss in other posts, cannot function if the indemnity standard is ignored.,

Second, and much more… fun? Is the effect the court ruling has on affordability. On the price you pay for your insurance.

I’ve labeled this post “Common Cents,” with apologies for getting cute with the spelling (when writing about insurance, you strive for cuteness when possible).

Common sense  – the cost of insurance is determined by the cumulative amount of money that will be paid to the insured population in settlement of claims, divided by the number of people insured. If you are part of an “insured population” of 10,000, and if the total amount paid within that population is $1,000,000, your cost, your share of that amount, is $100 (this disregards expense and profit loads added by the insurer.)

If the amount paid within that population is $2,000,000, your cost of insurance is $200.

Any court ruling that increases the average cost of claims increases the amount of premium each insured person must pay.

When the court(s) decided that injured persons may collect twice (or more) the amount of their actual damages, they doubled the cost of the damages, and thereby increased your cost of insurance.

Let’s generalize on this concept. Whenever the victim of an accident or covered-loss is compensated, it is in the interest of the other insured parties that the compensation be fair and equitable, but not generous, not excessive. Because over-payment of claims unnecessarily increases the cost of insurance to the rest of us.

The judge quoted above held that there were two interests involved, the injured party and the at-fault driver (tortfeasor). In fact, the second party was really parties – all of the buyers of insurance whose premium must increase to provide windfalls.

More on this in future posts.

Note: I’m quoting from an old case. Insurance companies now include “coordination of benefits” wording in their policies attempting to avoid double dipping by claimants.

My quotation was from: Gypsum Carrier, Inc, v. Handelsman (in part) 307 Fed. ed 525, United States Court of Appeals, Ninth Circuit, August 1, 1962.



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