Are Reinsurance Proceeds a Collateral Source?
In many jurisdictions, a rule exists that allows the injured party to collect damages from a tortfeasor even if the injured party has received benefits from sources independent of the tortfeasor. The theory is that the tortfeasor should be allowed to benefit from the injured party’s foresight in acquiring insurance to protect him or herself. If an insurance company suffers a loss because of the alleged malpractice of its attorney, does the collateral source rule apply to allow the insurance company, as cedent, to still obtain damages even though it obtained a reinsurance recovery on the underlying loss?
That interesting question was before an Illinois appellate court, but the court never had to reach the issue because it affirmed the dismissal of the complaint for other reasons. In Developers Surety & Indemnity Co. v. Lipinski, No. 1-15-2658, 2017 Ill. App. LEXIS 545 (Ill. App. 1st Dist. Aug. 22, 2017), a surety brought a legal malpractice claim against its own counsel after it was forced to settle an underlying construction bond dispute for an amount it contended it would not have had to pay, but for the alleged negligence. The defendants sought the cedent’s reinsurance recovery information on the underlying bond claim because they believed that legal malpractice claims were not subject to the collateral source rule. The cedent argued that the collateral source rule should apply because the defendants should not benefit because the cedent reinsured its bond.
The trial court held that the collateral source rule did not apply and the cedent was forced to admit on the eve of trial that it had received 100% of its provable damages in reinsurance recoverables. The trial court dismissed the complaint with prejudice because of the cedent’s inability to prove damages. The appellate court affirmed, but on a different ground. It agreed that the legal malpractice complaint should be dismissed with prejudice because the case was in the nature of subrogation (the cedent was obligated under its reinsurance contracts to seek recovery for its reinsurers) and the relevant statute required that the case had to be brought in the name or for the use of the subrogee (the reinsurers). Because of that ruling, the court never reached the collateral source issue concerning legal malpractice and reinsurance recoverables.
In a concurring opinion, one judge thought that the cedent had a meritorious argument that the collateral source rule should not apply because the cedent was not going to receive a windfall recovery (it had to return any recovered funds to the reinsurers). But even that judge agreed that the complaint should be dismissed because the cedent was not entitled to withhold information about its reimbursement for the underlying bond claim. The cedent tried to amend its claim to assert a claim for subrogation, but the trial court rejected the motion to amend on the ground of futility.
Most collateral source cases are purely injured plaintiffs seeking damages after having received medical reimbursement from health insurance and the like. This case presented an unusual commercial application of the rule, but given the appellate court’s basis for affirmance, the question of whether the collateral source rule applies to legal malpractice and whether reinsurance recoverables are subject to the rule will have to wait for another day and another case.