Georgia Supreme Court clarifies disability insurance proceeds in divorce

Whether disability insurance proceeds are marital or separate property depends on their function.

In a Georgia divorce, marital property is equitably divided between the divorcing spouses. Equitable division is based on fairness and may not always be a perfect split down the middle.

Marital or separate property?

A component of this equation is first to determine which property is "marital" and which is "separate." Separate property is that which belongs to one spouse alone and stays under that person's ownership after the divorce. Examples of separate property include property pre-owned before the marriage and property received as a gift or inherited by only one spouse.

Sometimes the issue of how to classify an item of property can be difficult. Ironically though, the classification of large and substantial assets can make a huge difference in the future standard of living of the spouses.

Nature of disability insurance proceeds?

The Georgia Supreme Court in June 2017 decided a case in which it determined the nature of the proceeds of a disability insurance policy subject to classification and potential division in the divorce of Tracy and John Hardin. In Hardin v. Hardin, the wife appealed a finding that the disability benefits were separate, nonmarital property and therefore not part of the marital estate subject to division in their divorce.

During the marriage, the husband took out a disability insurance policy worth $1.5 million to be paid if an accident caused him to become permanently and totally disabled. Subsequently, the husband fell from a high platform, resulting in paralysis below his chest. Because of his disability, he required assistance with activities of daily living. Pursuant to the policy, a year after the injury the entire proceeds were paid out to the husband.

In their subsequent divorce, the wife argued that the insurance proceeds were marital property subject to division and the husband that they were separate property belonging only to him. The trial court agreed with the husband and the Supreme Court affirmed.

An analytical approach

The Supreme Court used an "analytical approach" to classify the disability insurance proceeds, agreeing with the approach of the majority of courts in other states. This test looks at the "nature and purpose" of the disability proceeds to determine the "nature of the property they replace ..."

For example, usually wages and retirement benefits earned or accrued during marriage are marital property subject to division. Wages earned after the marriage would be the separate property of the wage earner.

The court said that the disability benefit award should be analyzed to determine its function and then classified accordingly. This analysis could require a court to divide a lump-sum award into portions if there are multiple uses.

In Hardin, because the award was received during the marriage, the court reasoned that part of it would be marital because it functioned as replacing the earning potential of the disabled husband during the marriage. The court said that the $640,000 spent from the proceeds during the marriage "more than compensated the marital estate" for the husband's lost earnings during that time.

The remainder of the proceeds was classified as separate property of the husband because it replaced wages the husband could no longer earn after the divorce. It also compensated him for pain and suffering. As separate property, the remaining $860,000 was not subject to division in the divorce and belonged entirely to the husband, reasoned the court.

The attorneys at Daniels & Rothman, P.C., in Athens represent clients in the Athens area, at the University of Georgia, in Clarke County and throughout the surrounding communities in divorce matters.