Phantom damages defy law, common sense

by | Nov 26, 2010 | Blog, Capitol Review, Notes | 1 comment

Whether “haggling” at a garage sale or for the best deal on a vehicle, most of us understand the give-and-take that often determines a fair price.

A seller asks a price that is more than he needs to cover costs and a potential buyer responds by offering less than she is actually willing to pay.  If the two parties settle on a price, common sense tells us that price is reasonable – i.e., it meets the seller’s need to cover costs and fits the buyer’s ability and willingness to pay.

A 4-3 majority of the Colorado Supreme Court doesn’t seem to understand that the advertised price and the actual cost are often vastly different.  In Volunteers of America vs. Gardenswartz, the court considered whether someone injured by another’s negligence is entitled to recover the amount originally billed for his medical expenses or the only the amount actually paid to the hospital and doctor.
Finding that the at-fault party is responsible for the original amount billed, the court majority — led by retiring chief justice Mary Mullarkey — created a huge windfall for plaintiffs — and for plaintiffs lawyers who typically take 33% to 40% of the recovered damages for their services.

Although this case was complicated with other details, consider this simple hypothetical:  James drives recklessly and injures Cindy in a collision.  Cindy is treated at a hospital and billed $10,000 for medical care.  Cindy’s insurance company and the hospital agree to settle her account for $6,000.

Common sense dictates that, because James was at fault, he should be responsible for Cindy’s medical costs.  Instead, the court’s majority says even after James pays $6,000 for Cindy’s medical care, he must pay an additional $4,000 simply because that the amount was printed on the original bill.

Why?  According to the court, Cindy is entitled to this double recovery simply because she had the foresight to purchase an insurance policy.

In essence, the court says Cindy is entitled to “phantom damages” which she never actually owed nor was required to pay.

To arrive at this decision, the court’s majority turned inside out a 1986 law, passed by a Republican legislature and signed by Democratic Gov. Richard Lamm, that was intended to prevent such double recoveries.  That law requires the court to “reduce the amount of the verdict by the amount” the victim will be indemnified by an insurance company.

The court insinuates that only insurance companies have the leverage to negotiate discounts and that without insurance, the injured victim would owe the full amount billed.  That simply isn’t true.  Anyone who has paid medical expenses out-of-pocket knows that doctors and hospitals will often negotiate a cash or private-pay discount.

Moreover, the majority offered no basis for its conclusion that the negotiated amount was likely less than the true value of services.  In fact, that assertion defies economic reality, as hospitals would not stay in business were they not able to cover their own expenses and make a reasonable profit.

As Justice Nancy Rice noted in her dissent, the majority fortified its opinion by selectively misquoting a key co-sponsor of the bill, Sen. Al Mieklejohn, who argued, “I don’t think a person ought to collect more than once . . . for hospital costs and things like that.”

Mieklejohn argued that the victim’s insurer should “be allowed to collect” from the at-fault party “to get their money back.”  That is, the insurer should be allowed to recover the costs it actually paid.  Nowhere did the legislature suggest that the victim had a legitimate claim to a greater amount simply by virtue of buying insurance.

The dissenters, also including justices Allison Eid and Nathan Coats, noted that the majority’s opinion is contrary to “the legislature’s clear intent, the statute’s plain language and sound public policy.”

Certainly, the party at fault should be responsible for the medical expenses caused to the injured person, but compelling the payment of “phantom damages” not only ignores the letter of the law, it also drives up insurance costs, encourages more lawsuits and defies common sense — all while serving no worthy purpose.


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