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Workers' Compensation Proceeds Mechanistic Approach
© 2005 National Legal Research Group, Inc.
IOWA: In re Marriage of Schriner, 695 N.W.2d 493 (Iowa 2005).
Under a statute which limits separate property to property acquired by gift or inheritance, workers' compensation proceeds received during the marriage are marital property. But the trial court erred by holding that workers' compensation benefits due to be received after the divorce are marital property. On the facts, an equal division of the remaining proceeds was affirmed.
In a matter of first impression in Iowa, that state's highest court considered the issue of the nature of workers' compensation benefits as marital property under the state's equitable distribution scheme following the husband's claim that the district court below had improperly classified his award of benefits following a work-related injury.
In May 2001, the husband filed a workers' compensation claim and was awarded weekly benefits. At the time of the divorce in May 2003, he had received payments of $59,151 and he expected to receive future payments of an additional $32,256 based on his original injury. In January 2003, he suffered another work-related injury which he claimed made him unable to work overtime, something he had done on a regular basis throughout his employment. The parties separated in January 2002.
As part of the divorce decree, the district court equally divided the marital estate, with each party receiving $264,488. As to the workers' compensation benefits already paid, which were being held in a separate account, the court gave the husband $37,041 and the wife $22,110. The remaining benefits of approximately $32,000, which were yet to be paid, were awarded in their entirety to the husband. The wife made no claim to any benefits the husband might receive based on his most recent injury, which he asserted rendered him totally disabled. The husband appealed the award of any of the previously paid benefits to the wife, claiming that they were income and should not have been classified as marital property subject to equitable distribution. The intermediate court of appeals affirmed the district court's decree.
The Iowa Supreme Court first noted that, under the state's statutory scheme, all property at the time of the divorce, except two categories designated as "separate property," that which was inherited or gifted, was subject to equitable distribution, although because Iowa has what it described as a "hybrid system," this exclusion was not absolute and that the system permitted trial courts to divide such property if equity demanded in light of the circumstances of the parties. Property acquired prior to the marriage can be considered marital property, although this can be a factor in awarding such property to the spouse who holds it. The court also stressed that the statutes make no effort to exclude property from the divisible marital estate based on such factors as the nature of the property, the method of acquisition, or the owner.
The court then responded to the husband's argument that workers' compensation benefits were intended to compensate him for the loss of earning capacity over his lifetime and that such benefits, like inherited or gifted property, should fairly and logically be set aside and excluded from the property division. The court acknowledged that some jurisdictions follow this "analytic approach," whereby states that follow this approach primarily look to the underlying nature of the loss that makes up the award. Under this method, any portion of an award during the marriage that compensates for lost wages was marital, while any portion paid to compensate for lost premarital or postmarital wages belonged to the injured spouse. Other states, added the court, apply the "mechanistic approach," whereby if the award was received or the right to receive it occurred during the marriage, it was subject to distribution as part of the marital estate. Looking to Iowa law, the court noted that in cases of personal injury awards, the mechanistic approach has been adopted, citing to In re Marriage of McNerney, 417 N.W.2d 205 (Iowa 1987). Believing that there were sufficient similarities between a workers' compensation award and a personal injury award, the court adopted the rule in McNerney, that is, limiting property excluded from the divisible estate to the specific exceptions established by the statute (inherited and gifted property) and relying on the equitable powers of the court to reach an overall equitable distribution scheme of all of the property, thus treating workers' compensation benefits as a divisible asset. If the legislature had intended to exclude such benefits, it could have done so as it did in the case of inherited or gifted property.
The husband had sought to avoid this approach by arguing that the workers' compensation benefits were income rather than property. The court rejected this contention, at least as to the benefits already paid. Even after acknowledging that future earnings are not to be considered to be property at the time of the divorce, the court noted that such earnings, once received and retained during the marriage, become the property of the marriage. Thus, held the court, workers' compensation benefits become part of the divisible estate when received and retained during the marriage, just as is true with regard to other income.
Finally, the court looked to how to treat benefits paid out to and received by the injured spouse after the divorce. While it recognized that such items as pension benefits and royalties received after the divorce could be subjected to equitable distribution, future income from future employment was not property that could be included in the marital estate.
The court held, therefore, that the workers' compensation benefits received up to the time of the divorce are marital property subject to division to the extent they have been retained and not spent, and that benefits received after the date of dissolution constitute the separate property of the injured spouse. The only error by the district court was including the value of the future benefits, $32,256, in the overall marital estate before equally dividing that total amount. The Iowa Supreme Court, therefore, reduced the value of the estate by that amount and affirmed the equal division.
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