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Civil Litigation FLASHPOINTS June 2020

June 15, 2020Print This Post Print This Post

J. Matthew W. Haws, Katten Muchin Rosenman, LLP, Chicago
312-902-5319 | E-mail J. Matthew W. Haws

Illinois Supreme Court: Collateral-Source Rule Does Not Apply to Purely Economic Tort Claims Paid by Third Parties

In Lewis v. Lead Industries Ass’n, 2020 IL 124107, ¶50 (Lewis III), the Illinois Supreme Court declared that applying the collateral-source rule to establish standing in pure economic-loss tort cases “would obscure the very nature of the cause of action [and] allow plaintiffs who have themselves suffered no injury, economic loss, or damages to sue anyway.” Applying this reasoning, the court ruled that plaintiffs seeking to recover the costs of blood lead screening, which their children underwent as required by the Lead Poisoning Prevention Act, 410 ILCS 45/1, et seq., could not maintain an economic-loss tort claim because the costs of the blood lead screening were covered and paid for by Medicaid.

Although the case has an immediate impact on the standing of Medicaid recipients asserting torts for purely economic injury, the court’s reasoning is more sweeping. The ruling has the potential to have lasting implications for the standing of plaintiffs that are fully insured, employees that have been reimbursed by their employer, and perhaps even plaintiffs whose loss was covered gratuitously by a third party. Like the Medicaid recipients in Lewis III, such plaintiffs may not have standing to assert pure economic torts, like fraud, unless they can show some pecuniary loss that has not been covered by a third party.

Lewis III is also likely to have the unintended consequences of putting the poorest Medicaid recipients in a worse position relative to privately insured plaintiffs, who are more likely to have paid some small amount of their medical bills by way of a copay or a deductible. Indeed, Lewis III leaves open the possibility that a plaintiff with a small copay will have standing in a pure economic-loss case and yet recover the full amount of damages by invoking the collateral-source rule to bar evidence that an insurer paid the lion’s share of the loss.

Background of Case

The Lewis III line of cases began over 19 years ago, when the plaintiffs, on behalf of themselves and others similarly situated, filed a class-action lawsuit against former manufactures of white lead pigment products. 2020 IL 124107 at ¶3. After years of litigation and multiple trips to the Illinois appellate court, only a single count of civil conspiracy remained against the defendants. See Lewis v. Lead Industries Ass’n, 342 Ill.App.3d 95, 793 N.E.2d 869, 276 Ill.Dec. 110 (1st Dist. 2003); Lewis v. Lead Industries Ass’n, 362 Ill.App.3d 1226, 919 N.E.2d 521, 335 Ill.Dec. 802 (1st Dist. 2006) (Rule 23).

For their conspiracy count, the plaintiffs alleged that a lengthy conspiracy to misrepresent the dangers of lead-based paint orchestrated by the defendants resulted in the enactment of the Act, which mandated that their children be screened for lead toxicity. Lewis III, supra, 2020 IL 124107 at ¶21. The plaintiffs sought to recover the costs of blood lead screening that their children underwent, while specifically disclaiming any claim for recovery for physical injury to their children.

Deposition testimony revealed that two of the named plaintiffs, Lewis and Banks, were both Medicaid recipients at the time their children were tested and neither paid for those tests.

Summary Judgment

At summary judgment, the defendants argued that neither Lewis nor Banks had standing because they had not incurred any expense or liability for the lead toxicity testing of their children. In particular, defendants argued that they could not prove any economic injury because (1) Medicaid paid the full costs of the screenings, (2) they received no demands for payment from medical providers, and (3) state and federal laws prohibit medical providers or Medicaid itself from seeking reimbursement from them. 2020 IL 124107 at ¶5.

In response, the plaintiffs invoked the collateral-source rule, which provides that “benefits received by the injured party from a source wholly independent of, and collateral to, the tortfeasor will not diminish damages otherwise recoverable from the tortfeasor.” 2020 IL 124107 at ¶46, quoting Wills v. Foster, 229 Ill.2d 393, 892 N.E.2d 1018, 1022, 323 Ill.Dec. 26 (2008). The rule, they argued, dictated that Medicaid’s payment for the tests did not negate the plaintiffs’ economic injury but instead gave them the right to be reimbursed for the costs of the screenings even though a “collateral source” paid the costs. 2020 IL 124107 at ¶6.

The circuit court disagreed with the plaintiffs and granted summary judgment. With respect to Lewis and Banks, the circuit court ruled that they suffered no injury because they did not pay for the tests and incurred no obligation or liability for the costs.

The Appellate Court Opinion

On appeal from the summary judgment order, the First District Appellate Court reversed. Lewis v. Lead Industries Ass’n, 2018 IL App (1st) 172894, 126 N.E.3d 1241, 430 Ill.Dec. 714. The appellate court acknowledged that neither Lewis nor Banks paid any portion of the cost of her child’s lead testing because Medicaid paid the charge and that neither of them was obligated to reimburse the state for any portion of that expense. 2018 IL App (1st) 172894 at ¶¶7 – 9. The appellate court nevertheless concluded that Lewis and Banks had a legally sufficient injury because they incurred an obligation, under the Illinois family expense statute, 750 ILCS 65/15, for the expense of their child’s test. 2018 IL App (1st) 172894 at ¶10. The family expense statute “codifies the common-law rule making parents liable for the expenses of their minor children.” Id.Finally, the appellate court agreed with the plaintiffs, concluding that the collateral-source rule applied in this case and prevented the court from deducting payments made by Medicaid from any damages recoverable from the defendants. 2018 IL App (1st) 172894 at ¶¶12, 13.

The Illinois Supreme Court’s Analysis and Ruling

The Illinois Supreme Court’s decision in Lewis III proceeded in three general steps. First, the court emphasized that actual economic loss is an element of a tort claim and necessary to establish standing absent some personal injury or property damage. Second, the court rejected the notion that a mere hypothetical “obligation,” like those created by the family expense statute, can satisfy the actual injury requirement. 2020 IL 124107 at ¶¶35 – 43. Finally, the court held definitively that the collateral-source rule cannot be invoked to establish actual harm in tort cases that do not allege personal injury or property damage.

The Necessity of Economic Loss

The court began by returning to first principles — namely, the general common-law rule that prohibits a plaintiff from suing in tort to recover for solely economic loss without any personal injury or property damage, or the so-called “Moorman Doctrine.” Lewis III, supra, 2020 IL 124107 at ¶24, citing Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 435 N.E.2d 443, 450, 61 Ill.Dec. 746 (1982). In Moorman, supra, 435 N.E.2d at 449, the court defined “economic loss,” to include

damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits — without any claim of personal injury or damage to other property . . . as well as ‘the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.’ 2020 IL 124107 at ¶24.

Despite its force, the court observed that the Moorman doctrine did not bar Lewis or Banks from asserting a conspiracy count seeking recovery for the cost of her child’s lead screening test. Claims of intentional misrepresentation or fraud, like the conspiracy count, “fall[ ] squarely within that exception to Moorman’s prohibition of recovering purely economic loss in tort.” 2020 IL 124107 at ¶28.

Although the court agreed that in theory the plaintiffs’ conspiracy count survived as an alleged fraud, it noted that “[c]ourts have long considered an actual injury to be an essential element of fraud, which a plaintiff must establish to a reasonable degree of certainty.” 2020 IL 124107 at ¶30 (collecting cases). That pecuniary injury is measured by the actual “harm the plaintiff suffered,” rather than the defendant’s benefits, and “may not be predicated on mere speculation, hypothesis, conjecture or whim.” Id., quoting Dloogatch v. Brincat, 396 Ill.App.3d 842, 920 N.E.2d 1161, 1169, 336 Ill.Dec. 571 (1st Dist. 2009).

The Family Expense Statute

Having concluded that the conspiracy count required Lewis and Banks to prove an actual pecuniary loss, the court considered the appellate court’s conclusion that obligations imposed by the family expense statute on Lewis and Banks as parents were sufficient to satisfy that element. In relevant part, the family expense statute provides that

[t]he expenses of the family and of the education of the children shall be chargeable upon the property of both husband and wife, or of either of them, in favor of creditors therefor, and in relation thereto may be sued jointly or separately. [Emphasis added.] 2020 IL 124107 at ¶37, quoting 750 ILCS 65/15.

The statute, the court observed, only obligates parents to pay expenses to persons who are “creditors,” which is commonly understood as “one to whom money is due.” 2020 IL 124107 at ¶37, citing WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY, p. 533 (1993). But the medical providers in this case were never creditors because the plaintiffs never incurred any liability or obligation to pay the providers for their children’s tests. In fact, Illinois Medicaid providers agree to accept payment from the program as “payment in full” and not to “bill, demand or otherwise seek reimbursement” from a Medicaid recipient. 2020 IL 124107 at ¶40.

The court also rejected the plaintiffs’ argument that there was an actual injury because the state maintains a recoupment right in the event that a recipient recovers against a tortfeasor for any expenses covered by Medicaid. Because the state’s right of recoupment run against the recovery itself, not the Medicaid recipient directly, the recipient does not incur any personal liability necessary to establish an actual harm. 2020 IL 124107 at ¶42.

Finally, the court distinguished its prior holding in Graul v. Adrian, 32 Ill.2d 345, 205 N.E.2d 444 (1965), which recognized that parents have standing (by operation of the family expense statute) to assert a claim for medical and funeral expenses they paid for their child in a wrongful-death suit. In that case, the father’s claim was derivative of the physical harm to his child, so a Moorman-approved injury had been established. In contrast, Banks and Lewis did not allege any physical harm to their children, so they were required to show some actual pecuniary loss. 2020 IL 124107 at ¶43. In other words, the hypothetical obligation imposed by the family expense statute on a parent does not give rise to the cause of action; it is the actual loss that gives rise to the cause of action.

The Collateral-Source Rule

In the concluding portion of its analysis, the Supreme Court rejected, at least in part, the First District’s holding that the collateral=source rule applies in a case involving purely economic injury.

The court began by noting that the justification for the collateral-source rule “is that the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of contracts or other relations that may exist between the injured party and third persons.” 2020 IL 124107 at ¶46, quoting Wilson v. Hoffman Group, Inc., 131 Ill.2d 208, 546 N.E.2d 524, 530, 137 Ill.Dec. 579 (1989). That justification breaks down, however, when the plaintiff has not been injured, the court observed. 2020 IL 124107 at ¶48.

The court also conceded that it had expanded the collateral-source rule significantly over the years. In Arthur v. Catour, 216 Ill.2d 72, 833 N.E.2d 847, 295 Ill.Dec. 641 (2005), the court held that an injured plaintiff can submit the entire amount of billed medical expenses to a jury, rather than the amount actually paid to healthcare providers by the plaintiffs’ insurers. In Wills v. Foster, 229 Ill.2d 393, 892 N.E.2d 1018, 323 Ill.Dec. 26 (2008), the court overruled a prior decision that had prohibited a plaintiff from recovering the value of medical services provided gratuitously. After Wills, a personal injury plaintiff may seek recovery for the “reasonable value” of medical services, even if the services were performed without charge. 2020 IL 124107 at ¶48.

Despite its history of expanding the collateral-source rule, the court drew the line at invoking the rule to establish injury as a threshold matter. “The problem with plaintiffs’ reliance here upon the collateral source rule,” the court explained, “is that the rule prescribes the methodology of awarding damages but does not prescribe rules for determining whether plaintiff has suffered an injury.” 2020 IL 124107 at ¶47. Thus, the appellate court’s conclusion that the collateral-source rule applies in a case involving a purely economic injury “put the cart before the horse” because the “threshold question was whether plaintiffs could establish an injury at all.” 2020 IL 124107 at ¶49. By contrast, the court’s prior holdings expanding the collateral-source doctrine were all cases in which some injury to person or property was already established. 2020 IL 124107 at ¶48.

Unable to locate authority allowing the collateral-source rule to excuse a plaintiff from showing actual injury, the court refused to be the first. 2020 IL 124107 at ¶49. Such a rule, the court observed, “cannot be squared with the basic principle of standing that requires ‘some injury in fact to a legally cognizable interest.’ ” 2020 IL 124107 at ¶50, quoting Greer v. Illinois Housing Development Authority, 122 Ill.2d 462, 524 N.E.2d 561, 574 – 575, 120 Ill.Dec. 531 (1988). Indeed, “[i]t would allow plaintiffs who have themselves suffered no injury, economic loss, or damages to sue anyway.” 2020 IL 124107 at ¶50.

Returning to its analysis that actual pecuniary injury is required in tort cases not involving personal injury or property damage, the court stated its holding more definitively: “[I]n economic tort cases, dollars are not just damages, they are the claim itself. . . . If plaintiffs cannot prove economic injury, that is, if plaintiffs have incurred no economic loss due to defendants’ conduct, they have no claim at all.” [Citations omitted.] 2020 IL 124107 at ¶53.

The Potential Implications of Lewis III

Lewis III offers some insights for future cases, while leaving open important questions for a later date. Among its insights, the court strongly telegraphed that it is unlikely to find a principled distinction between Medicaid and private insurance payors that would change the outcome in Lewis III. Indeed, in rejecting the collateral-source rule as a means to establish injury, the court relied almost exclusively on cases from other jurisdictions in which the third-party payor was a private insurer. See2020 IL 124107 at ¶¶51, 52 (citing cases).

The court also cited with approval Gillespie v. Travelscope LLC, No. C13-0622 RSM, 2014 WL 4243706 (W.D.Wash. Aug. 26, 2014), which dismissed a putative class action filed by a plaintiff who alleged that a travel company overcharged her for her rooms. 2020 IL 124107 at ¶52. The plaintiff did not have standing in that case because her employer had reimbursed her for the overcharges. See id. (discussing Gillespie). The court’s reliance on Gillespie suggests that even if Lewis or Banks had originally incurred a debt to their providers, but had later been covered by a third party to whom they were not indebted, they still would not have had standing. By that same logic, Lewis III could be read to preclude standing in economic tort cases in which the plaintiffs’ loss was paid gratuitously by a family member.

Lewis III, however, does not answer the same question that the appellate court answered — i.e., does the collateral-source rule apply at all in economic tort cases? The court made it clear that it was only answering the narrower question whether the rule could satisfy the injury requirement on its own because, without the rule, Banks and Lewis could show no pecuniary injury. Without a ruling to the contrary, Lewis presumably leaves Illinois’ generous collateral-source rule equally applicable to economic tort cases as it is in personal injury suits, at least when the loss is not covered in its entirety by a third party. Thus, a plaintiff that pays some small amount will likely be able to invoke the rule to avoid a reduction of his or her damages claims for the portion paid by a third party.

Although Lewis III cannot be read to preclude a party from invoking the collateral-source rule altogether in economic tort cases, the case neverthelesspresents an opportunity for defense counsel to argue that the rule should not apply in those cases. If payment by a third party can extinguish the claim altogether, as in Lewis, why should a payment of a dollar less not prevent the same kind of payment from reducing the size of the claim? At the very least, the court emphasized that the collateral-source rule originated from cases involving personal injury or property damage and that purely economic torts should be treated differently. Indeed, unlike traditional tort claims, in economic tort suits “dollars are not just damages, they are the claim itself.” 2020 IL 124107 at ¶53.

For more information about civil litigation, see PROVING FAULT IN AUTO ACCIDENT CASES (IICLE®, 2020). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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