Distributing Personal Injury Settlements and Workers� Compensation Awards in Divorce

Publication year2016
45 Colo.Law. 25
Distributing Personal Injury Settlements and Workers� Compensation Awards in Divorce
Vol. 45, No. 10 [Page 25]
The Colorado Lawyer
October, 2016

By Arthur W. Porter, Jordan Saint John

Family Law

Colorado courts treat personal injury settlements and workers' compensation awards differently in determining what constitutes marital property in dissolution of marriage cases. This article examines Colorado ’s treatment of these types of injury recovery and summarizes the approaches taken by other states.

Unlike the vast majority of equitable distribution states, Colorado treats personal injury settlements and workers’ compensation awards differently in determining what constitutes marital and non-marital property in a dissolution of marriage. Most equitable distribution states determine the marital component of such settlements and awards using one of two approaches, and states typically use the same approach for both types of injury recovery. Colorado is one of just four states that use different methods in allocating personal injury settlements and workers’ compensation awards.

This article surveys Colorado divorce law on personal injury settlements and workers’ compensation awards. It does not cover other forms of injury compensation, such as automobile personal injury protection benefits or disability insurance, except incidentally, as such benefits are discussed in the cases otherwise considered. The article focuses solely on equitable distribution states; it does not examine how community property states treat these awards.

Colorado’s Approach

When equitably distributing marital assets, Colorado courts use a “mechanistic” approach for personal injury settlements. This approach considers only the timing of the injury in classifying the settlement as marital or separate property. Colorado courts use an ”analytic” approach for workers’ compensation awards, which turns on the elements of damages that the award is intended to compensate.

Personal Injury Settlements

In re Marriage of Fjeldheim[1] is the seminal Colorado case on the treatment of personal injury settlements in divorce. In Fjeldheim, the parties petitioned for dissolution after two years of marriage. Wife received a personal injury settlement for an auto accident that occurred during the marriage and compensated her solely for her pain and suffering. The trial court classified the settlement as wife’s separate property.

The Court of Appeals reversed, analyzing the marital property statute[2] to conclude that the settlement did not fit within any of the statutory exemptions to marital property. Therefore, the statutory presumption that all property acquired during a marriage is marital property controlled.

Although the Court acknowledged that other jurisdictions have decided the issue differently, it was persuaded by Gan v. Gan,[3] an Illinois case that construed a virtually identical statute to hold that a personal injury settlement for an injury that occurred during the marriage was marital property subject to disposition. However, alluding to the broad discretion of the trial court to fashion an equitable disposition, the Fjeldheim Court further stated,

By so holding, we do not mean to imply that the amount of the personal injury settlement offer here is to be awarded to husband, in whole or in part. Rather, having been declared marital property, the amount of the personal injury settlement offer is subject to disposition, along with other marital property, pursuant to § 14-10-113(1), C.R.S. 1973.[4]

Fjeldheim was followed by In re Marriage of Fields.[5] In Fields, the issue was an unliquidated personal injury settlement arising from an injury that occurred the day the parties separated, approximately 19 months after marrying. As in Fjeldheim, the Court of Appeals examined the statutory language to hold that the future settlement was entirely marital property.[6]

The dissenting opinion in Fields argued that those portions of an injury award that are intended to compensate damages peculiarly personal to the injured spouse, such as pain, suffering, and mental anguish, should not benefit the non-injured spouse.[7] Nevertheless, Fjeldheim and its progeny dictate that in Colorado, personal injury settlements are entirely marital property if the injury occurred during the marriage, even if the settlement solely compensates the pain and suffering of the injured spouse.[8]

Workers’ Compensation Benefits

In In re Marriage of Smith,[9] the issue was whether an unliquidated workers’ compensation claim is marital property. The trial court in Smith analogized the workers’ compensation claim to a vested retirement pension, which was considered in In re Marriage of Grubb,[10] and concluded that because the injury occurred and the claim accrued during the marriage, the claim was divisible as marital property. The court therefore awarded wife a percentage of husband’s future workers’ compensation payments.[11]

The Court of Appeals also considered Grubb, but applied its guiding principle to both reverse the trial court and to distinguish Fields:

In In re Marriage of Grubb, . . . our supreme court cautioned that: “[A] rule directed to the disposition of property in a dissolution proceeding can only be as sound as the economic reality which it attempts to service.”[12]

The Smith Court first distinguished workers’ compensation awards from retirement pensions. While retirement benefits constitute deferred compensation for past services rendered, workers’ compensation awards indemnify an employee for the loss of earnings, future diminished earning capacity, and medical expenses arising from the work-related injury.[13]

After surveying the approaches taken by other jurisdictions, the Court stated that the analytic approach to workers’ compensation awards was more “consonant” with the Supreme Court’s directive in Grubb “to classify property realistically based on the nature of the asset in question.”[14] The appellate court thus reversed and held that only those portions of the award that compensate for loss of earning capacity and medical expenses incurred during the marriage are marital property.[15] In so holding, Smith explicitly distinguished Fields (and therefore the Fjeldheim line of cases) by stating that the rule used in personal injury settlements in divorce was not dispositive of workers’ compensation awards in divorce.[16]

The Court concluded that the Colorado Workers’ Compensation Act[17] reflects a legislative intent that workers’ compensation benefits constitute a wage replacement for the injured employee and further determined that this legislative policy would be contravened by a judicial holding that such awards are marital property subject to division “irrespective of whether the award compensates for an injured spouse’s diminished earning capacity during marriage or after dissolution.”[18] Thus, to the extent an award compensates for diminished earning capacity post-dissolution, it is not marital property.[19]

More recently, the court in In re Marriage of Breckenridge[20] considered a workers’ compensation settlement awarded during the marriage. Under the settlement, husband was to receive lifetime monthly payments of $210, which the parties agreed were his separate property, and a lump sum payment of $25,000, which represented a compromise payment of the weekly permanent total disability benefits over the husband’s projected life expectancy.[21] The trial court found that Smith did not support treating husband’s $25,000 settlement as separate property because, in contrast to the pending unliquidated claim in Smith, the $25,000 was awarded prior to dissolution.[22]

The Court of Appeals disagreed; it read Smith more broadly, concluding that its analytic approach lent itself equally well to settled and unliquidated workers’ compensation claims. Other jurisdictions similarly apply the analytic approach when workers’ compensation settlements are received during the marriage.[23]

Smith has been instructive in two Colorado dissolution of marriage cases construing the nature of employment-related disability benefits[24] and its holding has been cited approvingly by other jurisdictions.[25] It has also been cited by six Colorado cases applying its analytic approach to other potential marital assets, or otherwise following its guiding principle that property classification must be based on the nature of the asset.[26]

Thus, while Colorado follows the mechanistic approach in determining whether personal injury settlements in divorce are marital property, it follows an analytic approach in determining the marital portion of a spouse’s workers’ compensation award.

Other Equitable Distribution States

This section briefly surveys the approaches taken by other equitable distribution states in allocating the marital portion of personal injury settlements and workers’ compensation awards.[27] The vast majority of these states apply the same approach to both types of injury recovery; of the 40 other equitable distribution jurisdictions,[28] only three in addition to Colorado treat the two dissimilarly.

States Taking the Analytic Approach

The analytic approach looks at the damages that the various components of the settlement or award are intended to compensate, allocating them as marital or separate property accordingly. For instance, compensation for lost wages during the marriage or for medical expenses paid with marital funds is marital property, while compensation for pre- or post-marital lost wages, or for medical expenses paid with separate funds, is the injured spouse’s separate property. As one court put it, “Characterizing a personal injury recovery based on the purpose for which it was received permits separate treatment of the various components of the recovery.”[29]

Some cases speak in terms of “economic” and “non-economic” damages...

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