Dec 18

Dividing a Workers’ Comp Settlement at Divorce: A “Splitting” Headache

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In a divorce proceeding, a court must divide your community property equally unless you and your spouse agree to a different division. ((Fam. Code §2550.)) That means the court will award your spouse half of anything you acquired during marriage and before separation. ((Fam. Code §760.)) Splitting the community property with your spouse is never easy, but when it comes to the settlement of a workers’ compensation claim, splitting the settlement proceeds can cause a splitting headache. The proceeds from a such a claim are subject to unique rules of characterization and division that can bewilder even the most seasoned family law attorneys.

Characterization and Division of a Workers’ Compensation Settlement

Generally, workers’ comp is an employee’s exclusive remedy for an industrial injury. ((Lab. Code §3600.)) The employee may receive two forms of indemnity (wage replacement) if his injury ripens into a disability: temporary disability indemnity (TD) and permanent disability indemnity (PD). The purpose of TD is to replace the wages that the employee lost during the period of his temporary disability. ((Russell v. Banker’s Life Ins., 46 Cal.App.3d 405, 415 (1975).)) In contrast, the purpose of PD is to compensate the employee for his loss of future earnings capacity. ((Id.)) Often, a workers’ compensation settlement will consist of a lump-sum payment of PD and future medical treatment.

In a divorce proceeding, a post-separation settlement of a PD claim is the injured spouse’s separate property ((In re Marriage of McDonald, 52 Cal.App.3d 509, 513 (1975).)) – the reason being that the purpose of the settlement in that case is to compensate the injured spouse for his or her loss of future (i.e., post-separation) earnings capacity. But a pre-separation settlement of a permanent disability claim can be community property to the extent the settlement compensates the community for the injured spouse’s loss of earnings during the marriage and before separation. ((In re Marriage of Fisk, 2 Cal.App.4th 1698, 1706 (1992); In re Marriage of Ruiz, 194 Cal.App.4th 348, 355-356 (2011).)) The remainder of the settlement of the PD claim is the injured spouse’s separate property. ((Id.))

Those rules seem simple enough, but sometimes, things aren’t what they seem. In Marriage of Ruiz, 194 Cal.App.4th 348 (2011), Mrs. Ruiz was injured on the job during marriage and before separation, leaving her with a permanent disability. Evidently, her employer’s workers’ comp carrier never paid her TD, presumably because the carrier denied liability for the injury. Ten years after she suffered the injury, she received a $250,000 lump-sum payment, minus attorney’s fees and medical expenses, as a settlement of her PD claim. She and her husband separated three years later.

Of course, Mrs. Ruiz argued the balance of the settlement, being a lump-sum payment of PD, compensated only her post-separation loss of earnings capacity and was thus her separate property. The trial court rejected that argument, however, explaining that she never received payments of TD during the marriage. Therefore, she and her employer must have intended the settlement to at least partly compensate the community for her loss of earnings during the marriage. The court awarded $103,033 to the community. In other words, her non-injured husband walked away with $51,517.

The Consequences of Concealing a Workers’ Compensation Settlement

Marriage is a fiduciary relationship. ((Fam. Code §721(b).)) Each spouse has a fiduciary duty to fully disclose all material facts about the existence, characterization, and valuation of all assets in which the community has or might have an interest. ((Fam. Code §1100(e).)) That duty with respect to a particular community asset continues until the court divides it. ((Fam. Code §§1100(e), 2102.)) The failure to disclose all material facts about either a pre-separation PD settlement or a post-separation PD settlement that compensates for the injured spouse’s loss of earnings during marriage and before separation is a breach of fiduciary duty because the community has an interest in the settlement.

Hiding a workers’ comp settlement from your spouse is a bad idea. The penalties for a breach of spousal fiduciary duty are severe. The non-breaching spouse has a “claim” or “action” against the other spouse for any breach that impairs or will impair the non-breaching spouse’s “one-half interest” in the community estate. ((Fam. Code §1101(a).)) The court must award the non-breaching spouse 50%, or an amount equal to 50%, of any community asset that the breaching spouse failed to disclose or transferred. ((Fam. Code §1101(g).)) The court must also order the breaching spouse to pay the non-breaching spouse’s attorney’s fees and costs. ((Id.))

Even worse, a spouse’s transfer or failure to disclose any material facts about the existence, characterization, and valuation of a community asset requires a court to award the non-breaching spouse 100 percent, or an amount equal to 100 percent, of that asset if the breach of fiduciary duty rises to the level of malice, oppression, or fraud – the same standard for awarding punitive damages in a tort case. ((Fam. Code §1101(h); Civ. Code §3294.)) That is exactly what the court did in Marriage of Rossi, 90 Cal.App.4th 34 (2001), when Mrs. Rossi filed for divorce without telling Mr. Rossi that she had won the lottery.

Ben Rothman, Esq.

Ben Rothman is a Los Angeles-based attorney practicing in the areas of personal injury, employment, and workers' compensation on a "no recovery, no fee" basis. Call him at (424) 465-2948 for a free, no-obligation consultation.