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Is a Personal Injury Settlement Considered Marital Property?

During a property settlement, personal injury settlements can be included in a divorcing couple’s pool of assets.

A personal injury settlement is received when a person is compensated for physical or psychological damages sustained, which are the fault of another party, such as an employer, driver of another vehicle, or injuries sustained in a public space.

Section 79 of the Family Law Act, which describes the alteration of property interests, allows the Court to adjust a property settlement if a personal injury settlement is part of the couple’s combined asset pool. The timing and announcements of awards are essential, though.

Property settlements where there are personal injury settlements are far more complicated for courts to consider, and these are assessed by the family court system using a five-step test to determine a fair and equitable distribution of property post-divorce.

Many divorcing couples want to know whether their spouse is entitled to their personal injury settlement, mainly if they supported them after the injury.

Table of Contents

Personal Injury Settlement Components

A Personal Injury Settlement refers to the resolution of a legal claim where one party is obligated to pay damages to another party as compensation for physical or psychological injuries. Here’s a closer look at its components:

Type of Damages	Description
General Damages	Pain and Suffering: Compensation for physical pain and emotional distress. Loss of Enjoyment of Life: Compensation for inability to participate in enjoyable activities.
Special Damages	Medical Expenses: Reimbursement for medical bills, medication, and ongoing treatment costs. Out-of-Pocket Expenses: Compensation for miscellaneous expenses incurred due to the injury.
Economic Loss	Loss of Earnings: Compensation for lost income, including potential future earnings. Loss of Superannuation: Compensation for lost contributions to retirement savings.
Non-Economic Loss	Loss of Consortium: Compensation for the impact of injuries on relationships and familial roles. Emotional Distress: Compensation for psychological impact, such as anxiety or depression.
Future Losses and Expenses	Covers the anticipated future medical expenses and loss of earnings due to inability to work or diminished earning capacity.
Interest	Claimants may be entitled to interest on the compensation amount from the accident date to the settlement date.
Legal Costs	The settlement can include compensation for legal fees, subject to negotiation or court assessment.
Gratuitous Services	Compensation for services provided by friends or family members due to inability to perform tasks.

Calculation

Calculating a personal injury settlement involves evaluating economic damages, such as medical expenses and lost wages, and non-economic damages, which include pain and suffering and loss of enjoyment of life.

The calculation also considers future damages like ongoing medical costs and diminished earning capacity. In some regions, comparative or contributory negligence may reduce the settlement amount if the injured party is partially at fault. Insurance policy limits can also cap the maximum payable amount.

Marital Property

Whether a personal injury settlement is considered marital property can depend mainly on the laws of the jurisdiction where the couple resides, as well as the specifics of the settlement and how it is classified. Marital property laws vary, but here are general principles that might apply:

Community Property vs. Equitable Distribution States

Generally, all assets acquired during the marriage are considered marital property, to be divided equally among the spouses. However, personal injury settlements might be considered separate property, depending on the specifics of the laws in those states and the nature of the damages awarded.

In equitable distribution states, assets are not necessarily divided equally but rather equitably based on various factors. The classification of a personal injury settlement may depend on whether the award compensates for losses incurred during the marriage and whether it compensates for economic or non-economic damages.

Economic vs. Non-Economic Damages

Economic Damages: Portions of a settlement intended to compensate for economic losses, such as lost wages or medical bills, might be considered marital property if the losses are incurred during the marriage.

Non-Economic Damages: Portions intended to compensate for non-economic losses, such as pain and suffering or loss of consortium, are more likely to be considered the injured spouse’s separate property.

Written Agreements and Pre-Nuptial Agreements

Written or prenuptial agreements sometimes dictate whether personal injury settlements are marital or separate property.

How Can Individuals Protect Their Personal Injury Settlements From Being Classified As Marital Property?

Individuals can take several steps to protect their personal injury settlements from being classified as marital property. However, success can depend on jurisdictional laws, the nature of the settlement, and judicial decisions. Here are several strategies that can be considered:

Prenuptial and Postnuptial Agreements: Entering into a prenuptial or postnuptial agreement can help specify that any personal injury settlements received by either spouse will be considered separate property.
Separate Accounts: Keeping the settlement funds in a separate account in the name of the injured spouse can help maintain it as separate property, avoiding commingling with marital funds, which can complicate separations.
Transparent Allocation in Settlement Agreement: Having a clear and detailed allocation of the settlement amount in the settlement agreement can help distinguish between marital and separate property components. Explicitly stating which parts are for pain, suffering, or other personal losses can aid this distinction.
Documenting Intent: If the funds are intended to be separate property, documenting this intent clearly and maintaining records demonstrating this intention can be beneficial in disputes.
Managing Settlement Funds: Avoid using the settlement funds for marital expenses or investments, as this can lead to the commingling of assets and potentially convert separate property into marital property.
Use of Trusts: Placing the settlement funds into a trust can provide an additional layer of protection, especially if the trust is clearly designated for the benefit of the injured individual.
Estate Planning: Incorporating the settlement into estate planning and explicitly stipulating its status as a separate property can offer additional safeguards.

Timing

The shared property pool does not include a pending personal injury claim against an employer or other party whose outcome is still undecided. Still, a person with an underway claim must notify the other party of a potential payout.

The husband or wife could delay the property settlement until the personal injury settlement payout amount is known. Once the personal injury settlement payment is announced, it can be included in the matrimonial asset pool.

You must engage with skilled property settlement lawyers to guide your next steps in these cases.

Relevant Case Law

In the 1996 case of Aleksovski v Aleksovski, the court found that the wife’s motor vehicle accident personal injury payout was a financial contribution to the relationship, and her award was added to the matrimonial pool of assets.

In this case, the divorcing couple had three children of the marriage, earning similar incomes with a net asset pool of $240,000. In the judgment, the court adjusted the property settlement in the wife’s favour to account for her personal injury settlement of $143,000 she received during the marriage, where $100,000 was attributed to her pain and suffering.

The wife received 77% of the property pool, but the husband appealed, and her award was decreased to 62%. Courts will adjust property settlements if they consider that the personal injury settlement monies formed part of a party’s significant financial contribution to the combined property pool during the marriage. The courts will make further adjustments if the injured party has a limited earning capacity in the future. {this para above is my words]

In the 1990 decision of Zorbas and Zorbas, a personal injury settlement was underway at the time of property settlement, and no award had yet been made. The court ruled that since no award of damages had been received. At the same time, the property settlement was being considered that any potential future award would not be included as marital property (See Zorbas v Zorbas (1990) FLC 92-160).

The court argued that the right to claim damages in a personal injury case is personal and is not considered property for asset division during divorce.

Also read: What Is My Wife Entitled to in a Divorce Australia?