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Virginia's Collateral Source Rule and Its Effect on Owners and Contractors

Virginia’s collateral source rule surfaces regularly in personal injury cases, and it works like this. Let’s say a driver who is responsible enough to carry her own medical insurance is injured in an accident she did not cause. Her injuries result in medical bills of $35,000, all of which are covered and paid for by her medical insurance. Later, she files a lawsuit against the other driver, who was negligent. In that suit she claims money for i) property damage to her car, ii) pain and suffering, and iii) the $35,000 in medical bills that her insurance had already covered.

This type of lawsuit is a “tort” claim (as opposed to a “contract” claim) because there is no contract between the two drivers. Even without a contract, however, the law imposes on each driver a duty to drive with reasonable care. A breach of that duty gives rise to a “tort” claim.

Virginia’s collateral source rule allows the injured driver to sue for (and collect) the $35,000 that she had already collected from her own insurance (the “collateral” source of money). Thus, the injured driver receives a “double recovery.” Double recoveries are usually not allowed, unless they arise under tort cases under Virginia’s collateral source rule. The reason to allow double recovery is so the negligent party does not receive a “credit” for money that the injured party receives from a collateral source. If anyone is going to receive a windfall, it should be the injured party. Another reason that the law allows the injured party to recover twice is to allow her to receive the “benefit of the bargain” that she made with her insurer. Until the Alstom Power case earlier this year (in which our litigation team represented Dominion), the Virginia Supreme Court had never decided whether the rule was also applicable in contract cases. The facts in the Alstom Power case presented this very question. Dominion and Alstom Power had a contract that required Alstom to work at Dominion power plants. The contract contained certain indemnification and insurance obligations.

An accident at a Dominion power plant resulted in injuries and fatalities. Wrongful death and personal injury lawsuits against Dominion ensued. These suits were settled, but only after Dominion incurred nearly $10 million in legal defense costs. (Dominion’s carrier paid a significant portion of these defense costs.)  

Dominion then sued Alstom, claiming that Alstom breached its contract in two ways: (1) by failing to defend Dominion in the lawsuits; and (2) by obtaining “eroding” rather than “non-eroding” insurance. Dominion sought to recover from Alstom the same amount of money that Dominion had already received from its own insurance carrier. Alstom argued that Dominion could not recover both from Alstom and its insurance carrier. Dominion argued that the collateral source rule applies in contract cases, and that Dominion was entitled to the benefit of its bargain with the insurance carrier.

For the first time, the Virginia Supreme Court ruled that Virginia’s collateral source rule could apply in certain breach of contract cases. The Court reasoned that “enforcing the parties’ expectation interests in the contracts they have entered” supported application of the rule to contract cases. Thus, Dominion is not barred from seeking damages from Alstom even though Dominion’s insurance company had already reimbursed it for the full amount of the damages.

The Alstom Power case has important implications for Virginia construction project owners and contractors. Owners may now be able to recover money from a general contractor even if the owner’s own insurance policy already paid the owner. For contractors, the lessons are two-fold: 1) Where prime contracts contain an indemnification clause, contractors should make sure that they have insurance that covers their indemnification obligations. 2) Many prime contracts require GC’s to obtain insurance that names the owner as an additional insured on a non-eroding basis – contractors should make sure that their coverage meets all requirements of the contract.

Contractual insurance and indemnification are tricky areas of law. This ruling highlights the importance of comparing your construction contracts with insurance policies – your professional insurance consultants, as well as your Hirschler Construction Team, can help manage these risks.

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