What is the definition of "collateral source" in relation to insurance claims?

The term "collateral source" in the context of insurance claims refers to additional payments or benefits received from sources other than the primary insurer, which can affect the amount that the primary insurer must pay out. Specifically, this concept is relevant when a claimant receives compensation from a third party for the same loss that they are claiming from their insurance policy.

Choosing the option that states it is a payment from a third party that reduces the amount paid by an insurance policy accurately reflects this definition. If a policyholder receives compensation from a collateral source, such as a worker's compensation benefit or a settlement from a liable party, this will typically reduce the payout amount that their insurance company would otherwise be obligated to provide. Insurers may have provisions in their policies that take into account any collateral source payments to avoid overcompensating the insured. This ensures that the claimant does not receive a "double recovery" for the same loss, which is the fundamental safeguard intended by the collateral source principle.