In negligence actions, Virginia has long adhered to the “collateral source rule” which holds that payments received by an injured plaintiff from a source other than the tortfeasor/defendant are not deducted from the damages owed to the plaintiff by the tortfeasor/defendant. This principle is classically illustrated in personal injury actions where the medical bills of the plaintiff are initially paid for by the plaintiff’s own health insurance. In that context, the Virginia courts have long held that the tortfeasor/defendant gets no credit for or benefit from the amounts paid to the plaintiff by her own health insurance. The tortfeasor/defendant owes the plaintiff for those amounts in full.

In Dominion Resources, Inc., v. Alstom Power, Inc., the Virginia Supreme Court for the first time addressed whether the collateral source rule also applied in breach of contract actions. The Court answered in the affirmative holding that the rule does so apply.

This dispute arose in the context of a boiler accident at a Dominion Resources power-generation facility which injured five workers, three fatally. To resolve those claims, Dominion Resources paid close to $15M in legal fees and settlements. The loss was covered by a series of insurance policies. The primary coverage was provided to Dominion Resources as an additional insured on two policies obtained by Alstom Power. Alstom Power did so pursuant to a services agreement between the parties.

After the underlying personal injury suits were resolved, Dominion Resources filed a breach of contract action against Alstom Power alleging breach because:

(1) Alstom failed to defend Dominion in the underlying lawsuits; and,

(2) The insuring agreements obtained by Alstom treated the costs of defense as a part of the loss.  This last policy feature, known as an “eroding” policy, lessened the amount available to Dominion Resources to compensate the injured workers.

In deciding that the collateral source rule did apply to breach of contract matters, the Court noted that the rule’s primary purpose was to prohibit a defendant from escaping the full liability for all injuries resulting from his wrong. As a public policy matter, the Court reasoned that it is best to make a defendant answer for the full extent of the injury caused even if the plaintiff receives a “double recovery” as a result. The Court ended its analysis by noting that in many breach of contract matters involving insured losses there would in fact be no double recovery. In the instant case, Dominion Resources will use its recovery to reimburse its own excess insurance carrier who had paid part of the compensation and legal fees in the underlying personal injury actions.