Melanie Larock of Thomson Rogers shares insights into how PI settlements are affected by family law
This article was provided by Thomson Rogers.
Almost 50% of marriages end in separation or divorce, which means there are a number of family law issues that personal injury lawyers should consider when a client receives a personal injury (PI) settlement. This is especially critical given that the settlement may be the client’s largest asset other than a home.
Referring the client to a family law lawyer for advice about the financial implications of the PI settlement upon separation or death and assistance with a marriage contract will help them protect that asset.
How personal injury settlements are affected by separation
In Ontario, the Family Law Act (FLA) provides for “equalization of net family property” between married spouses who are separating. The spouse whose net family property is greater is required to pay to the other spouse one half of the difference between them. A person’s net family property is the difference between their net worth on the date of marriage and the date of separation, subject to certain adjustments.
“Property” includes any interest, present or future, vested or contingent, in real or personal property. Therefore, the contingent value of a PI claim is considered property. In calculating a spouse’s net family property, the first step is to determine the valuation date, which in most cases is the date on which the spouses permanently separate but can also be the date on which one spouse dies leaving the other spouse surviving.
Section 4(2)3 of the FLA provides that a spouse may exclude from their net family property “damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship, or the part of a settlement that represents those damages” that they owned on the valuation date. These damages relate to compensation for personal loss which does not relate to the marriage partnership. A spouse may also exclude property, other than a matrimonial home, into which those damages can be traced, and property that has been excluded by marriage contract. Personal injury lawyers should suggest at the outset that their clients consult with a family lawyer for purposes of entering into a marriage contract, which can occur before or during marriage. A marriage contract avoids any future ambiguity with respect to the treatment of the PI settlement upon separation.
Not all heads of damages are excluded. Different types of damages are treated differently for family law purposes. Damages for past income loss will not be excluded. However, damages for the loss of future income after the valuation date will be excluded from a spouse’s net family property. The reasoning is that income earned following separation would not have been shared as of right, and therefore, the portion of the settlement paid to replace that lost income should not be shared.
The case law is not settled on the treatment of damages for future care costs and punitive damages. While not specifically excluded under s. 4(2), these damages are personal to the plaintiff and do not stem from the marriage.
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Regardless of marital status, the PI settlement can impact child and/or spousal support obligations. The Ontario Court of Appeal in Hunks v. Hunks held that if a PI settlement is used to purchase a structured settlement, it is not subject to property division for family law purposes. The annuity payments are analogous to disability benefits and are not property but considered as income for support purposes. PI lawyers should consult with a family law lawyer to see if their clients may benefit from a structured settlement for family law purposes.
Courts will only regard the portion of the PI settlement for loss of income as income for support purposes. Where there is no evidence as to how the settlement has been allocated among the heads of damages, the courts are guided by certain criteria when determining whether such funds are income for support purposes.
Where income is received on a non-taxable basis, as is usually the case where disability benefits or annuity payments are received, this income must be “grossed up” to approximate the equivalent taxable employment income. In other words, a person may be deemed to have an income for support purposes that is higher than the amount of the monthly benefit received.
Pitfalls to avoid
The party seeking to exclude the PI settlement bears the onus of proof. This is why a family law lawyer will reach out to the PI lawyer and ask for his or her file, and copies of all settlement documents to determine how the settlement was broken down between the heads of damages.
The client will lose the ability to claim the exclusion if the PI settlement: (a) is applied to the matrimonial home (i.e. towards its purchase, maintenance, improvements, mortgage); (b) has been spent and does not exist on the valuation date; (c) is placed into a joint asset, they will lose 50% of the exclusion; or (d) it cannot be proven or traced to another asset. Therefore, clients need to be made aware of these matters before and as soon as they receive the PI settlement. They should also be made aware of the need to retain back up documents to trace the purchase of assets with the PI settlement.
If there is no clear division between the various heads of damages in the settlement documents, it will create conflict in the family law case and increased costs. The lawyer’s files and notes, expert reports, mediation memoranda, and notes from mediation, may all be relevant for purposes of determining the breakdown of the settlement and the lawyer should be prepared to give evidence even years after a file is closed. In the cautionary case of Studerus v. Studerus, the wife did not have a copy of the PI file which no longer existed, and the PI lawyer had to testify over 25 years after being retained. The wife ultimately lost a $240,000 exclusion given the lack of evidence on the settlement.
Practical tips
It is crucial that PI settlement documents set out the amount of the settlement, net of lawyer’s fees, and break down the heads of damages. A detailed reporting letter should be sent summarizing the breakdown and advising clients to retain the settlement documents indefinitely and to consult with a family law lawyer.
The treatment of PI settlement funds under family law is not always straightforward and in certain areas remains unsettled. It is critical that the recipient of a PI settlement consult a family law lawyer familiar with this area.
