Disability Payments and Divorce in Arizona
In Arizona, all money received by one spouse during marriage – other than that received as a gift or by inheritance – is presumed to belong to both spouses as community property. However, special rules apply when the money is a recovery under a disability insurance policy. In the recent case of Hatcher v. Hatcher, 933 P.2d 1222 (Ariz. Ct. App. 1996), the Arizona Court of Appeals discussed whether disability payments made to one spouse during the marriage are community property or the sole property of the injured spouse.
Facts of the Case: Hatcher v. Hatcher
Marvin and Julia Hatcher were married in 1980. Marvin signed up for an insurance program offered by his employer that provided compensation in case of accidental death, dismemberment or disability. The premiums were deducted from his wages. In 1984, when Marvin lost his right hand and part of his right arm in a work-related accident. He received a small worker’s compensation award, as well as a recovery under the insurance policy: a payment of $120,000, plus monthly payments for 54 months. The couple used part of the lump sum payment to buy a family residence, with Marvin and Julia taking title as joint tenants.
They used the monthly payments to pay off the rest of the money owed on the house. They also used some of the insurance settlement to build an apartment complex on land Marvin owned before marriage. Marvin and Julia also took title to the apartments as joint tenants. Julia filed for divorce in 1991. At trial, the court found that the insurance settlement proceeds were Marvin’s separate property and that all of the real property belonged solely to Marvin. Julia appealed.
Arguments on Appeal
Julie argued on appeal that the insurance proceeds were Community Property because the premiums were paid with community money. Alternatively, she claimed that – even if the monies were Marvin’s separate property — the fact that the property was held by both of them in joint tenancy created a presumption that Marvin intended to make a gift to her. Marvin argued that all of the insurance proceeds were intended to compensate him for his injuries and, therefore, were his separate property.
Arizona Divorce Law on Personal Injury/Disability Recoveries
The Court of Appeals reviewed Arizona case law about how personal injury or disability recoveries should be treated in an Arizona divorce. In Jurek v. Jurek, 124 Ariz. 596, 606 P.2d 812 (1980), the Arizona Supreme Court ruled that one spouse’s personal injury recovery can include some money that is community property and some that is separate property. Any part of the recovery that compensates the spouses for medical treatment payments or loss of wages during the marriage is community property. On the other hand, any portion of the recovery that is intended to compensate for the injury to a spouse’s personal well-being is that spouse’s separate property.
Subsequent cases held that any part of disability payments that are to compensate the injured spouse for lost wages after a divorce are his separate property. The Court of Appeals noted that no decision focused on how disability benefits received during marriage should be treated.
Disability Proceeds May Be Partly Community Property
The Court determined that a spouse’s disability insurance compensation can be partly community property. It rejected Julia’s position that the fact that the policy was purchased with community funds was important. Rather, it ruled that — like personal injury recoveries — disability benefits have various parts. The primary intent of disability insurance is to protect against the loss of a spouse’s future earning capacity. During the marriage, a disabled spouse’s reduced earning capacity results in a loss to the community. If the spouses divorce, any reduced earning capacity becomes the separate loss of the disabled spouse.
The Court ruled that Marvin’s loss of his arm and hand resulted in both a loss of earnings and a permanent impairment to his future earning ability. Workers’ compensation insurance provided compensation for lost wages. The lump sum disability payment was to compensate for the reduction to Marvin’s future earning capacity. Some of the insurance proceeds compensated the community for his reduced earning capacity during marriage, which amount was community property. The remainder of the lump sum payment compensated him for future (post-dissolution) lost earning capacity. That portion is husband’s separate property. The Court sent the case back to the trial court to determine what amount of the disability recovery was separate and what part community property. It also order the trial court to revisit Julia’s claim that, in placing title in joint tenancy with wife, Marvin made a gift of his separate property to her.