The Collateral Source Rule in Contract Cases

The issue in a collateral source case is: should contract damages be reduced by the amount of payments that the wronged party has received from a third party such as an insurer? This kind of question arises most frequently in tort cases involving property damage, personal injuries, or death, where a doctrine known as collateral source rule has evolved. Under this rule, except where changed by statute, damages assessed against a tortfeasor generally are not diminished by any payments received by the injured party from medical insurance, pension and disability plans, or any sources other than the tortfeasor or the tortfeasor's insurer. Similar questions arise in contract law.

Despite this, many cases state that the collateral source rule does not apply to cases of breach of contract. The case law is replete with dicta to the effect that the collateral source rule had no application in contract cases, although actual holdings to that effect are few. The answers to two questions dominate the results: first, did the contract breaker provide the consideration?; and second, is the collateral source subrogated to the plaintiff's recovery?