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Workers' Compensation Benefits - Mechanistic Approach to Property Award Upon Divorce
© 2005 National Legal Research Group, Inc.
IOWA: In re Marriage of Schriner, 695 N.W.2d 493 (Iowa 2005)
Workers' compensation benefits are marital property if they accrue during the marriage, even if the benefits are compensation for personal losses suffered by the injured spouse alone, or for financial losses to the injured spouse's separate estate.
The Iowa Supreme Court recently faced an issue of first impression which has been addressed in many other states: the classification of workers' compensation proceeds. Iowa has an unusual equitable distribution statute which defines separate property to include only property acquired by gift or inheritance, and not property acquired before the marriage. Iowa Code Ann. 598.21.
Decisions from other states classify workers' compensation benefits according to one of two competing rules. The majority rule, the analytical approach, classifies the benefits according to the injury which the benefits were intended to address. Compensation for lost marital wages is marital property; compensation for lost premarital or postmarital wages is separate property. (Compensation for pain and suffering is also separate property, but most workers' compensation systems do not award benefits for pain and suffering.) Compensation for paid unreimbursed medical expenses has the same classification as the funds used to pay the expenses. See generally Brett R. Turner, Equitable Distribution of Property 6.19 (2d ed. 1994 & Supp. 2004).
The minority rule, the mechanistic approach, treats all benefits which accrue during the marriage as marital property. Id. The mechanistic approach is obviously required in all-property states which do not recognize the concept of property at all. Among states which recognize the concept of separate property, the analytical approach is the strong majority rule. Id.
The great majority of states follow the same approach to classifying both personal injury and workers' compensation awards. Iowa adopted the mechanistic approach to classifying personal injury awards in In re Marriage of McNerney, 417 N.W.2d 205, 207 (Iowa 1987). Not surprisingly, Schriner elected to follow the same minority approach to classifying workers' compensation benefits:
While some differences exist between a personal injury award and a workers' compensation award, the overall approach adopted in McNerney that is, limiting property excluded from the divisible estate to the specific exclusions established by the statute and relying upon the equitable powers of the court to reach an overall equitable distribution scheme of all of the property is generally compatible with treating workers' compensation benefits as a divisible asset. If our legislature had wanted to exclude workers' compensation benefits from divisible property, we think it would have included the benefits in the list of exceptions along with inherited and gifted property.
695 N.W.2d at 497-98. This reasoning is to some extent incomplete, for many of the states which have adopted the analytical approach also have statutes which do not classify personal injury or workers' compensation benefits directly. The silence of the statute is therefore not a complete explanation for the court's action. A more important factor is probably that the Iowa statute has a very weak definition of separate property, one which excludes one type of property traditionally defined as separate (premarital property), and which permits limited division of separate property in some situations. Where the statutory definition of separate property is weak, it is hard to argue that the definition should be construed broadly. In other words, when the statutory definition of separate property is weak on the issues it does address, it is likely to receive an equally weak construction on issues it does not address.
The husband tried to avoid Iowa's preference for the mechanistic approach by arguing that workers' compensation awards are income and not property. The court disagreed:
We acknowledge that future earnings of a spouse from employment are not considered to be property at the time of the divorce. See In re Marriage of Horstmann, 263 N.W.2d 885, 891 (Iowa 1978) (advance degree is not itself an asset for property division, but an increased earning capacity is a factor to consider in making an equitable distribution of property). However, even if workers' compensation proceeds represent future earnings, once received and retained during the marriage, the proceeds become property of the marriage. As property of the marriage, we do not attempt to apportion the proceeds received between lost earnings before the divorce and earnings after the divorce under the approach we adopted in McNerney. Thus, our treatment of workers' compensation proceeds as income means that the benefits become part of the divisible estate when received and retained during the marriage, just as other income becomes property when received and retained during the marriage.
Id. at 498. Thus, a workers' compensation award is separate property under Iowa law only if it accrues after the divorce.
Like other courts adopting the mechanistic approach, the Iowa court stressed that the trial courts remain free to divide personal injury and workers' compensation proceeds unequally:
Overall, the approach we adopt towards workers' compensation benefits allows the trial court the greatest opportunity to accomplish justice in each case. It permits the court to consider the same arguments John urges in support of treating the benefits as separate property in deciding how the benefits should be equitably divided, along with all the other relevant factors and circumstances of each case. See Drake, 725 A.2d at 726-27. For example, the statutory factors considered in reaching an equitable distribution of all property include the age and physical health of the parties, earning capacity of the parties, economic circumstances of each party, including future interests, and any other relevant factors. Iowa Code 598.21(1). These factors authorize the court to consider the disability of an injured spouse and could support an award of a larger portion of property to a disabled spouse, including a larger portion, or all, of the workers' compensation benefits. Conversely, the same statutory factors could permit a court to use workers' compensation benefits expected to be received by an injured spouse after the divorce as a circumstance to justify an award to the other spouse of a larger portion of the property subject to division. In the end, the award, one way or the other, is a product of both the items of property included in the divisible estate and all other relevant factors that impact the equitable distribution of that property. An equitable distribution does not mean an equal division.
Id. at 499.
Editor's Comment: The Schriner court was wrong in stating that the mechanistic approach "allows the trial court the greatest opportunity to accomplish justice in each case." Id. at 499. Justice requires a result which is individually tailored to the parties' specific situation, but it also requires a result which is consistent among cases with similar facts, and which is obtained without undue expense.
In states which follow the mechanistic approach, unequal division of personal injury proceeds and workers' compensation benefits is very common. The idea of dividing compensation for an injury between both spouses, when only one spouse has suffered the underlying injury, is instinctively inequitable. This does not mean that such awards should never be divided, especially when they are compensation for financial losses suffered by the marital estate. But it is wrong to insist that compensation for personal injuries is marital property in the same sense as salary, and mechanistic approach states do not in fact treat personal injury compensation like salary at the division stage. The better policy is likewise to refuse to treat personal injury compensation like salary at the classification stage.
To the extent that such a policy causes a loss of flexibility, that loss does not translate into a loss of justice. Flexibility is a two-edged sword, for while it fosters individualized justice, it also fosters inconsistency in the case law. Inconsistency makes the result of the cases harder to predict, and lack of predictability discourages out-of-court settlements. In the specific context of personal injury proceeds, the analytic approach moves both approaches' contending positions toward each other by suggesting a compromise result treating part of the proceeds as marital property. The presence of the compromise result encourages settlement. The mechanistic approach gives the parties no guidance as to what the ultimate division is likely to be, and therefore encourages litigation.
The same point can be seen in the law of child support. By suggesting a middle figure which guides the expectations of the parties, child support guidelines strongly encourage out-of-court settlements. To maintain the general accuracy of the guideline amount of support, there is a general policy of considering as many variables as possible when setting the guideline amount, to reduce the need for deviation. See generally Laura W. Morgan, Child Support Guidelines: Interpretation and Application 4.04[b] (2004). It is likewise good policy to consider as many variables as possible when classifying property as marital or separate, in order to reduce the need for unequal divisions.
None of this criticism is meant to suggest that Schriner misread the Iowa statute. Iowa's definition of separate property is weak, and further extension of its weakness may well be accurate statutory construction. There is also good reason to follow one consistent approach for classifying both personal injury and workers' compensation proceeds; realistically, McNerney and Schriner must stand or fall together. But the weakness of Iowa's definition of separate property is still unfortunate. A stronger definition of separate property would result in more equal divisions and therefore in more negotiated settlements, while still retaining sufficient flexibility to work individualized justice in situations which require it.
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