Collateral Source

The South Carolina Supreme Court declined to apply the collateral source rule in a legal malpractice action based on the too-frequent issue arising from a hacked transfer of funds

Marvin Gipson sold a piece of real estate and asked Petitioner law firm, Coffey & McKenzie, P.A. (Coffey), to close the sale for him. The sale netted Gipson proceeds of $10,036. Coffey, acting on email instructions it thought came from Gipson, wired the proceeds to a bank account in California. It turned out this account was owned by a hacker, who had accessed Gipson's email and sent wiring instructions using an email address almost identical to Gipson's. After discovering the hack, Coffey was able to recover $1,516.89 from the hacker's bank, and the firm returned this amount to Gipson.

Gipson sued Coffey for negligence. A jury awarded Gipson $10,036. The trial court denied Coffey's motion to reduce the verdict by the $1,516.89 already returned to Gipson. The court of appeals affirmed, holding the jury's damage award was reasonable, and in any event, the recovered funds derived from a collateral source. Gipson v. Williamson, Op. No. 2023-UP-324 (S.C. Ct. App. filed Oct. 4, 2023). We granted certiorari. Because we conclude the money returned was not from a collateral source, we reverse in part.

Disposition

The first American stirrings of the [collateral source] rule appeared, well camouflaged, in the mid-nineteenth century, see The Monticello, 58 U.S. 152, 155–56 (1854), and debuted in our state a few decades later, see Bridger v. Asheville & S.R. Co., 27 S.C. 456, 460, 3 S.E. 860, 862 (1887). Although it may appear in many contexts, the collateral source rule most often arises when the injured party has received money for the injury from one of the following sources of benefits: (1) insurance policies, see Bardsley v. Gov't Emps. Ins. Co., 405 S.C. 68, 80, 747 S.E.2d 436, 442 (2013) (underinsured property damage benefits); (2) employment benefits, Powers v. Temple, 250 S.C. 149, 155–59, 156 S.E.2d 759, 762–63 (1967) (disability payments by employer); (3) gratuities, New Found. Baptist Church v. Davis, 257 S.C. 443, 446–47, 186 S.E.2d 247, 248–49 (1972) (donation of construction services); (4) social legislation benefits, Haselden v. Davis, 353 S.C. 481, 485, 579 S.E.2d 293, 295 (2003) (Medicaid payments). See Restatement (Second) of Torts § 920A cmt. c (Am. L. Inst. 1979) (listing common collateral sources).

As we have said, a source will be deemed collateral only if it has no connection to the wrongdoer. Payment made by the wrongdoer to a person he has injured is not payment from a collateral source. Restatement (Second) of Torts, supra, at § 920A. Nor is a payment made by a joint tortfeasor. Id.; In re W.B. Easton Constr. Co., Inc., 320 S.C. at 92, 463 S.E.2d at 318; see generally Note, Unreason in the Law of Damages: The Collateral Source Rule, 77 Harv. L. Rev. 741 (1964); Eugene C. Covington, Jr., "Collateral Source Rule" in 1 South Carolina Damages at 3-1 (2004).

Coffey's return of the $1,516.89 to Gipson was not a payment from a collateral source. The $1,516.89 represented the residual balance languishing in the hacker's California bank account. The return of these funds was not a windfall. The return was made by Coffey, the wrongdoer. The source of the funds was therefore direct, not collateral. In the alternative, it could be said the source of the funds was the hacker, a joint tortfeasor.

Because we hold the collateral source rule does not apply, Coffey was entitled to have the verdict reduced by the $1,516.89 it had repaid Gipson.

Although we also granted certiorari on an issue concerning expert testimony, we dismiss the writ as to that issue as improvidently granted.

(Mike Frisch)