Collateral source rule now applicable in contract matters

The Legal Point

Earlier this year, the Virginia Supreme Court affirmatively answered the question of whether Virginia law permits the application of the collateral source rule in breach of contract cases. While the issue may appear esoteric, a little explanation will demonstrate why this ruling is worthy of notice by business owners.

In legal terms, the collateral source rule requires a wrong-doer to bear the full cost of injuries the wrong-doer caused as a result of the wrongful act regardless of any benefit the injured party actually received from other independent or “collateral” sources. For more than a century, Virginia courts have applied this rule in “tort” cases, meaning cases arising out of a civil wrong other than a breach of a contract. For example, in a case in which an injured party, Paula, sues to collect money damages as compensation for her injuries sustained as a result of David’s negligence, the collateral source rule prevents David from receiving a credit against the amount of damages he must pay Paula for payments she received from her insurance company.

While Virginia law is settled in tort cases, it remained unsettled in contract cases. But in late 2018, a federal court in Connecticut certified the following question of law to the Virginia Supreme Court in a case that arose from a boiler explosion at a power generation facility owned by Dominion Resources (“Dominion”) located in Massachusetts in 2007: “Does Virginia law apply the collateral source rule to a breach of contract action where the plaintiff has been reimbursed by an insurer for the full amount it seeks in damages from the defendant?” The facts of the Connecticut case show why that court needed an answer to its question:

Prior to the explosion, Dominion contracted with Alstom Power, Inc., for boiler inspection services. The parties’ contract also required Alstom to purchase for Dominion insurance with certain coverage and limits specified in the contract. The parties agreed that their contract would be governed by Virginia law. Alstom paid for two insurance policies to cover Dominion and, independent of the contract, Dominion purchased its own excess insurance policy.

In November 2007, seven months after Alstom had performed an inspection of the boilers at the plant, one of the boilers exploded, killing three individuals and injuring two others. The decedents’ estates and injured parties sued both Dominion and Alstom. The case ultimately was settled by Dominion with a payment to the plaintiffs of more than $5M. Dominion incurred nearly $10M in defense costs.

Alstom’s insurers reimbursed Dominion for the full settlement amount, and Dominion’s own insurance policy covered its full defense costs. Nevertheless, Dominion sued Alstom in Connecticut for its defense cost, alleging that Alstom breached the contract when it failed to defend Dominion in the suit and failed to purchase the prescribed insurance for Dominion. Alstom moved to dismiss Dominion’s suit because Dominion already had been compensated in full for its defense costs by Dominion’s own insurance policy. Dominion argued that the collateral source rule should apply, so that the nearly $10M it received from the insurance policy it purchased should not be deducted from any damages it may collect from Alstom.

To answer the question, the Virginia Supreme Court first considered the primary rationale offered in the past for not permitting application of the rule to contract cases, the principles that “a plaintiff is not allowed to recover for breach of contract more than the actual loss sustained by him, nor is he allowed to be put in a better position than he would have been had the wrong not been done and the contract not been broken.” Looking behind the historic consideration of those principles, however, the Court found them not that different from those that govern damages law in the tort context, determining that the accepted policy in tort permitting a plaintiff with insurance to receive what amounted to a double recovery for a single tort rather than allowing the defendant to escape liability is equally applicable in a contract setting. The Court also noted that a plaintiff with insurance in both contexts would be denied the benefits of that separate “collateral” contract it paid for if the collateral source rule is not available.

Concluding that the “same rationales supporting the Court’s long recognition of the collateral source rule in tort cases also supports the rule’s application in certain breach of contract actions,” the Court affirmatively answered the certified question, but noted the rule’s application “requires a case-specific determination of whether the parties’ expectations, in light of those rationales, support the rule’s application.” The Court left that “case-specific determination” in the Dominion case to the Connecticut court.

This ruling is good news for prudent businesses, which now have some comfort that a Virginia court will permit a non-breaching party both to recover the full amount of contract damages from the party in breach and to receive the benefits of an insurance policy purchased for protection against the consequences of such a breach.

Frank A. Edgar, Jr
About Frank A. Edgar, Jr 5 Articles
Frank A. Edgar Jr. is an attorney with the law firm of Goldstein, Edgar & Reagan in Newport News. He can be reached at faedgarjr@ibglaw.com or 757-873-8773.

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