What happens to your personal injury settlement if you separate from your spouse?
Ontario's Family Law Act mandates that the property acquired by spouses during marriage, called “net family properties”, is to be shared equally upon marriage breakdown, with some narrow exceptions. One such exception is - "Damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship or the part of the settlement that represents those damages” - that are to be excluded from equalization of net family properties.
This exception is set out in subsection 4(2)3 of the Family Law Act. Property that is traceable to such damages will not be shared with the former spouse unless the funds were directed to a matrimonial home, which is treated as a special property for family law purposes and is not an excludable asset for property division. Half the exclusion may also be lost if you put the settlement funds into any joint asset or investment.
It does not matter if the damage settlement was obtained before or during the marriage, or if the entitlement to claim damages arose during the marriage but is still in the process of being settled or tried - the damages will be excluded. If the accident happens after separation, it will be entirely excluded because the property divided is only what was acquired during the time period of the marriage itself.
It will be important to know how the damage settlement is characterized. Courts have found that the portion of the damages related to loss of wages during the parties' marriage will be shareable property for equalization, whereas the portion of the damages related to the loss of wages since separation and future lost wages will not be shareable property. There has been conflicting case law on this point, however, because subsection 4(2)3 of the Family Law Act does not mention monetary versus non-monetary damages, sometimes making this analysis cumbersome in court.
Courts in Ontario are consistent about finding that general damages and pre-judgment interest qualify as excluded property because they are compensation for a personal loss to one of the spouses that is unrelated to the marriage. Such damages are awarded to address some aspect of the injured party's life, and accordingly, there is no justification to share that award with anyone else, including a former spouse.
There is conflicting case law regarding the sharing the portion of damages that relate to accident benefits, such as housekeeping benefits. It's clear, however, that damages that are personal to the injured party should not be shareable property. This means that lump-sum housekeeping, attendant care, rehabilitation benefits and future care costs are to be excluded from property division.
The law is not definitive on the treatment of structured settlements; however, such a settlement represents a future income stream and is not accessible to the spouse. It may be included in income for child or spousal support payments, but it should not be shareable property.
As a result of a recent decision of the Ontario Court of Appeal, the law in Ontario is finally definitive about the treatment of structured settlements. Such a settlement represents a future income stream and is not accessible to the spouse. A structured settlement is treated as income for support purposes, and it is not shareable property upon marriage breakdown. This is an important consideration for determining how your settlement funds will be characterized.
How should you protect your personal injury settlement from division upon marriage breakdown?
- If you have received the damage settlement prior to marriage, only the growth of that asset will be shareable property. To exclude the increase in value of that asset, it would be advisable to sign a marriage contract that specifically excludes the growth of the funds from you damage settlement. Always ensure that your marriage contract includes full financial disclosure and that each spouse receives independent legal advice to create a long-lasting agreement.
- Avoid directing the settlement funds towards the matrimonial home, or alternatively, sign a marriage contract that ensures that the exclusion is not lost by doing so.
- Avoid using the funds to pay off debts and/or co-mingling the funds in any joint investment with your spouse. Funds that cannot be traced will not form an exclusion under the Family Law Act.
- Care should be taken in drafting the settlement documents to clearly provide a breakdown of the damages. Keep a safe and secure record of these documents.
- It may be advisable to keep the accident benefits as "in pay" rather than a lump sum. This is due to the unclear treatment of accident benefits in court as potentially shareable property. Where there is ambiguity in the law, litigation often arises.
Do I need to worry if I'm not married but cohabiting only with my spouse/partner?
Yes. It is important to note that the area of property division for common-law couples who cohabit only, without marrying, is an evolving topic that is complex and often unpredictable because it is fact-specific to the circumstances of each case. Unjust enrichment and trust claims may seem like non-starters with respect to an accident settlement, but the claim for a joint family venture (JFV) may open the door to claims to share damages from personal injuries. It would be prudent to sign a cohabitation agreement, with full financial disclosure and independent legal advice, to protect the damages from any divisions upon relationship breakdown.
Take-away
The age-old saying of "an ounce of prevention is worth a pound of cure" applies to the interplay of personal injury awards and family law. Take early steps to protect your settlement from any future family law litigation - keep the funds invested in your own name (do not direct the funds to the matrimonial home) and strongly consider signing a marriage contract or cohabitation agreement.
