Is a Personal Injury Award Considered Marital or Separate Property?
by David Hudson and Daniel Fox
When a spouse is injured during the marriage, such as through an automobile accident or a slip-and-fall, that spouse may be entitled to receive a personal injury award. In simple terms, a personal injury award is financial compensation paid to someone who has suffered harm or injury, to mind or body, due to the negligence or misconduct of another person or entity. When spouses separate, questions may arise as to whether any funds or assets derived from the personal injury award should be classified as marital property that is subject to division between the parties, or whether it is the separate property of the injured spouse.
Purpose of Compensation
In North Carolina, the legal standard for determining whether personal injury awards are classified as marital property, or the injured spouse’s separate property, depends on the purpose of the compensation. A financial award that represents compensation to the injured spouse for pain, suffering, loss of capacity, and loss of future earnings may be classified as the separate property of the injured spouse. However, the portion of the award that represents compensation for lost wages, property damage, and/or medical expenses that occurred during the marriage may be classified as a marital property that is subject to division between the parties.
When an injured spouse receives a personal injury award during the marriage, the injured spouse has the burden of proving that any funds or assets attributable to the personal injury award which existed at the date of separation are his/her separate property. In order to do so, the injured spouse would need to show that such funds or assets were derived from the portion of the personal injury award that was received for pain, suffering, loss of capacity, future earning ability, or other such loss.
When a spouse is injured during the marriage and receives a financial award for personal injury after the parties’ date of separation, the burden of proof is on the non-injured spouse to prove what portion of the personal injury award represents compensation for economic loss during the marriage and which should be classified as marital property.
If an injured spouse receives a financial settlement for a personal injury claim months or years before the parties separate, it may be difficult, if not impossible, to determine if any funds or assets that existed as of the date of separation can be traced to the injured spouse’s separate portion of the proceeds. How the personal injury funds are treated after they are received can be a significant factor in determining whether funds or assets are marital property or separate property. For example, if the injured spouse deposits the personal injury funds into a joint financial account that is co-mingled with both marital and separate funds, the injured spouse may be unable to prove that any funds in the joint account on the date of separation should be classified as his/her separate property. Depending on the time that has passed since the personal injury award was received and the manner in which it was treated during the marriage, it may be necessary to retain a forensic accountant to assist in tracing any funds or assets to the personal injury award. Thus, an injured spouse still could be successful in recouping some of his/her separate property related to the personal injury award. In the alternative, a judge may consider the contribution of the injured spouse’s separate property to the marriage as a distributional factor in support of an unequal distribution of marital property in favor of the injured spouse.
Key Takeaways
The legal standard for determining whether personal injury awards are marital property or separate property may sound simple, but injured parties often settle outside of court and receive a lump sum payment which may not be clearly broken down into the amount of damages allocated to each specific claim for which damages are sought. This makes it all the more important that an injured spouse seek to clarify the amount awarded for each claim (property damage, medical expenses, lost wages, pain and suffering, etc.), especially when there is the possibility of a marital separation or when a personal injury claim is settled after separation. When substantial property has been acquired as the result of a personal injury award, this raises the ante and may lead to highly contentious disputes between the parties over the classification, valuation and distribution of property. When there are high dollar awards at stake, there is a greater chance of lengthy and costly litigation.
The financial uncertainty and potential for complex legal issues to arise in equitable distribution cases underscores the importance of having an experienced, knowledgeable, and competent lawyer representing you from the onset of your marital separation and looking out for your best interests. The attorneys at Siemens Family Law Group have extensive and in-depth experience in all aspects of equitable distribution, and we are here to help. Our goal is to provide each client with effective advocacy, practiced guidance, and strategic representation to maximize the opportunities for a fair and favorable outcome.
DISCLAIMER: This article is for information purposes only and should not be relied on or substituted as legal advice. The information in this article is based on North Carolina state laws in effect at the time of posting.