How are personal injury settlements divided in divorce cases?
By Andrew Tran, Esq. and David K. Wilkinson, CFLS, AAML
If a spouse has been involved in a personal injury lawsuit and is entitled to receive a settlement, how much (if any) is the other spouse entitled to during a divorce proceeding?
Starting Point – if During Marriage then Community Property
Pursuant to California Family Code 780, if a personal injury cause of action arises during the marriage, then the non-injured spouse would be entitled to half of the money, unless an exception applies.
California Family Code § 780 states that any money or property that is received or will be received by a married individual in satisfaction of a judgment for damages by personal injuries or pursuant to an agreement for the settlement or compromise of a claim for such damages, is community property if the cause of action for the damages arose during the marriage.
For instance, if a spouse was involved in a car accident during the marriage, then the cause of action, or the facts that gave rise to the lawsuit, arose during the marriage. Pursuant to California Family Code §780, half of the damages should belong to the injured spouse and half of the damages should belong to the non-injured spouse.
What if the Settlement Proceeds are Received after Marriage or Separation?
Family Code Section 780 says that the damages that may be received in the future by an injured spouse, so long as the cause of action for the settlement occurred during marriage, is community property (and thus split equally between the spouses).
Important Tip:
When one spouse suffered an injury during marriage and the parties are getting divorced,
the Marital Settlement Agreement should contain specific provisions about
how future money received by the injured spouse should be divided.
Exception 1 – if Injury Occurred “Outside” of Marriage then Separate Property
Pursuant to California Family Code § 781(a), if the cause of action (i.e. injury) arose before the date of marriage or after the injured spouse “is living separate from the other spouse”, then the non-injured spouse would not be entitled to any of the settlement money.
California Family Code § 781(a) states that any money or property that is received or will be received by a married individual in satisfaction of a judgment for damages by personal injuries or pursuant to an agreement for the settlement or compromise of a claim for such damages, is the separate property of the injured person if the cause of action arose (1) after the entry of a judgment of dissolution of a marriage or legal separation of the parties or (2) while either spouse, if he or she is the injured person, is living separate from the other spouse.
Interestingly, the phrase used in Section 781 says that the injury settlement proceeds are separate if the parties are “living separate[ly]”, but doesn’t say “after the date of separation” as one might expect. What if spouses are living separately just for convenience (perhaps they live in separate cities for work?), but have no intent to end their marriage? Technically, the statute requires only that the parties are living separately. Indeed, this is strange terminology and should probably be amended by the California Legislature.
Exception 2 – Reimbursement for Payment of Expenses
Family Code 781(b) states that when certain expenses are paid by the spouse of the injured party from his or her separate property, or from community property “by reason of the personal injuries”, then the spouse is entitled to reimbursement from the settlement proceeds. Here’s how this works: If money was spent for medical expenses of the injured spouse, care, and other similar expenses, the non-injured spouse should be entitled to reimbursement unless the expenses were paid from the injured spouse’s separate property.
Notably, the phrase “by reason of the personal injuries” is vague. What does that mean? What about lost wages? The statute doesn’t include a provision for the non-injured spouse to receive any reimbursement if the injured spouse no longer works due to the injuries. Suppose a situation arose where a married couple is married for 20 years but living apart from each other. Perhaps they are not even intending on getting a divorce, just temporarily living apart. Then the spouse that was the primary income earner during marriage is injured and can’t work and does not have long term disability insurance. Under the current law, the non-injured spouse would likely not share in any of the settlement proceeds and might not receive spousal support (or a reduced amount of spousal support) because the injured spouse can’t work.
Exception 3 – Causes of Action between Spouses
Family Code 781(c) provides a framework when one spouse sues (or has the right to sue) the other spouse for something that occurred between the spouses during marriage, then the aggrieved spouse may be entitled to money. This is a strange section and its applicable may be limited due to the “no fault” nature of California divorce law. Spouses cannot sue each other for damages resulting from the marriage, unless the “damages” are ordered payable under some section of the Family Code.
Notably, this section discusses a cause of action between spouses. What if part of the injury settlement proceeds are for a “loss of consortium”, and the plaintiffs in lawsuit include both spouses? Loss of consortium is a legal basis for the non-injured spouse of an injured person to receive damages because the injured spouse may not be able to fulfil their spousal role due to the injury. None of the statutes discuss this scenario.
Exception 4 – Personal Injury Damages are Assigned to the Injured Spouse?
Family Code 2603(b) states that “community estate personal injury damages” are assigned to the injured spouse. How does this make any sense in light of Family Code 780? Although the section is poorly worded and not explicitly clear, the section means that the damages proceeds are assigned to the injured spouse and the non-injured spouse should receive some other property from the community property estate.
What if the community estate personal injury damages are the only asset that the parties own? Based on Section 2603(b), the non-injured spouse may be totally out of luck.
Section 2603(b) goes on to provide an exception to the assignment rule which allows the Family Court to divide those damages proceeds between spouses in any manner that is “just”, so long as the injured spouse receives at least one-half of the damages.
Notably, if the community estate personal injury damages are commingled with other community assets, then the damages received are not assigned to the injured spouse. This is also vague language that should be changed. What if the damages received are “traceable”? For example, if personal injury damages are deposited into a joint account and “commingled” with community funds, but remain in the account and clearly traceable to the damages proceeds, are they assigned to the injured spouse?