Are Personal Injury Settlements Considered Community or Separate Property in California Divorces?

Spouses don’t think about separation or divorce when they are going through a personal injury case. The injured spouse’s health, both present and future, and whether he or she will be fairly compensated for the injuries is generally at the forefront of both spouse’s minds.

However, in the event of a divorce, personal injury settlements can become a point of contention between spouses. This article generally explains California law on the issue of whether or not personal injury compensation due to an injury that occurs during the marriage is community property or the injured spouse’s separate property. This article is not legal advice and is not intended to apply to your specific situation. Please retain an experienced California family law attorney to seek legal advice regarding your specific situation. Remember also that laws can change so what is written in this article may become outdated which is another reason you should always seek the advice of an attorney about your specific matter.

The general rule to division of money or property that is acquired during the marriage and is community property is that of an “equal” division. There are exceptions of course. One such exception is personal injury compensation, which has its own California Family Code rules.

This article only addresses personal injuries if the cause of action for the damages arose during the marriage, not those that arose before marriage or after separation.

California Family Code section 2603 defines "Community estate personal injury damages" as "all money or other property received or to be received by a person in satisfaction of a judgment for damages for the person's personal injuries or pursuant to an agreement for the settlement or compromise of a claim for the damages, if the cause of action for the damages arose during the marriage but is not separate property as described in Section 781, unless the money or other property has been commingled with other assets of the community estate."

In this article, we don't discuss Family Code 781. Please read that if you have questions about what that statute covers.

Family Code section 2603 further states that "Community estate personal injury damages shall be assigned to the party who suffered the injuries unless the court, after taking into account the economic condition and needs of each party, the time that has elapsed since the recovery of the damages or the accrual of the cause of action, and all other facts of the case, determines that the interests of justice require another disposition. In such a case, the community estate personal injury damages shall be assigned to the respective parties in such proportions as the court determines to be just, except that at least one-half of the damages shall be assigned to the party who suffered the injuries."

So, personal injury settlements or awards that fall within section 2603 are given to the injured spouse unless the court finds another distribution is appropriate.

In our experience, this result occurs in most situations whether or not the personal injury settlement remains in a liquidated form (bank or brokerage account) or traced to property (a home, car, etc.) Commingling can make the issues more complicated especially if the personal injury settlement or award has been commingled to such an extent that it is difficult to trace. In such situations, the assistance of an attorney and potentially a forensic CPA become very important.

What does the Family Court determine to be the “interests of justice”? While there are no hard and fast rules, the Court should not arbitrarily give the non-injured spouse money. The Court should look at the circumstances and needs of each party as well as the amount of time that has elapsed since the recovery of the damages or the accrual of the cause of action as well as other facts. The Family Court is obligated to look at all other facts of the case, as required by Family Code section 2603(b).

The Court is generally also not permitted to do indirectly what it will not do directly - by giving the non-injured spouse 100% of other community property to “balance” out the injured spouse getting the personal injury settlement or the property that derived from it.

Let’s discuss some frequently asked questions (FAQ) that come up on this subject of personal injury settlements and awards and its impact on a divorce:

FAQ #1: “What if the community during the marriage paid for the injured spouse’s medical bills?”

If the community (marital funds) paid such money during the marriage, the Court can compensate the community back for its out of pocket expenditure. That is well within the Family Court’s discretion

FAQ #2: “What if part of the personal injury settlement included earnings lost during the marriage that resulted from the injury?”

This can be difficult to prove because most personal injury settlements are a lump and unallocated sum of money. However, if there has been a verdict or other means in which the lost earnings portion of the settlement can be identified, the community stands a fair chance of getting that money reimbursed to it. Such reimbursement to the community can get complicated and the advice of an experienced family law attorney is a must.

FAQ #3: “What if the non-injured spouse is the one that committed the personal injuries?”

If one spouse injures another, he or she cannot share in the ultimate personal injury settlement or award that results.

The characterization of personal injury money or property that is traced to it can be complex and requires the advice of an experienced family law attorney as well as, in situations where a tracing of the funds is necessary, an expert witness such as a forensic accountant. If you have questions about this topic, our Orange County divorce attorneys are available for an affordable strategy session.