Legal Question in Civil Litigation in California

Actually, there are two obscure legal rules at play here. The first is called the collateral source rule. It provides that even if someone's damages are paid from a collateral source, that does not mean they cannot also still collect from the person responsible for the damages. The second is called insurance subrogation. That rule provides that when an insurance company pays a loss, they are entitled to step into the shoes of the insured and collect from the person responsible. Where these meet is that yoru neighbor is entitled to collect from you, but they owe it to the insurance company. So I recommend that you advise your neighbors that if they insist on going forward with the suit, you will notify their insurance company that they have obtained payment from you, and offer to cooperate in the insurance company enforcing their subrogation rights. Then offer to split the baby with the neighbors and be done with it.