Are Personal Injury Settlements Considered Community or Separate Property?

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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 received during the marriage can become a point of contention between spouses. This article 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. If you have any questions about this topic or article, please don’t hesitate to contact our Orange County divorce attorneys at Farzad and Mazarei.

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

California law requires that community estate personal injury damages (as California Family Code section 2603 calls it) be given to the injured spouse unless the court finds that the interests of justice require another type of distribution, so long as the injured spouse receives no less than 50% of the compensation.

It doesn’t matter whether or not the personal injury settlement remains in a liquidated form (bank or brokerage account) or traced to property (a home, car, etc.) It also does not matter how the personal injury award was obtained, whether by settlement or a court or jury award. Even uninsured motorist compensation, whereby the insurance premiums are paid during the marriage, to an injured spouse is considered a personal injury settlement and the above rules apply.

What does the Family Court determine to be the “interests of justice”? While there are no hard and fast rules, the Court cannot simply give the non-injured spouse money, at a whim. The Court must 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. 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 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 personal injuries to the spouse occurred prior to the marriage?”

In such a situation, it is more difficult for the community to share in any of the personal injury award. The California Family Code that deals with the court’s discretion to award no more than half of the award to the non-injured spouse is designated for injuries that occur during the marriage. Pre-marital injuries are generally the separate property of the injured spouse, absent specific circumstances whereby the money has been so commingled that that the funds cannot be adequately traced. There are other limited scenarios where the community may be entitled to reimbursement of some of the money.

FAQ #4: “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 often 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 to offer you a free consultation.

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