En Banc: Superior Court Holds that Timing, Rather than Purpose, Determines Marital Nature of Disability Payments
An en banc panel of the Superior Court last month issued an important decision on the issue of whether disability payments should be characterized as marital property in the context of a divorce. In Yuhas v. Yuhas, 2013 PA Super 283 (October 28, 2013), a surgeon underwent a carpal tunnel surgery several months prior to the date of separation, rendering him unable to operate as a vascular surgeon. Husband and Wife were separated in July 2007. Husband applied for disability benefits in April 2007 and received a lump sum payment for disability benefits retroactive to January 2007. Husband and Wife stipulated that the retroactive benefits were marital property. They disagreed, however, over the nature of disability benefits to be received by Husband after separation and into the future.
The disability policy in this case was issued during the marriage in 1988. For the first five years, premiums were paid from income earned by husband. Thereafter the premiums were paid by husband’s practice, except for the last two payments before his benefits began. The disability benefits were conditional upon an annual review of husband’s medical condition and continuing disability.
Initially, a divorce master held that the disability benefits were marital property, as the policy had been purchased during the marriage and the injury occurred prior to separation. Husband filed exceptions, prompting the trial court to hold that all benefits starting on the first renewal period after the date of separation would be considered as income but not marital property. The case was remanded to the master, who made findings in accordance with the trial judge’s ruling. Wife filed exceptions, which were dismissed, and then Wife filed an appeal to the Superior Court.
Affirming the trial court’s decision, the Superior Court first looked to Drake v. Drake, 555 Pa. 481, 725 A.2d 717, a 1999 decision of the Pennsylvania Supreme Court. Unlike this case, Drake dealt with a workers compensation commutation award covering a ten year span, of which five years occurred prior to the date of separation. In Drake, the Supreme Court affirmed the trial court’s decision to characterize the entire lump sum as marital property since the award was granted prior to the date of separation. The Supreme Court rejected the notion that it must differentiate the portion of the lump sum award intended to replace future lost wages.
The Drake Court found the WC award to be marital because the “right to seek a commutation … accrued during the marriage.” Applying the “unitary” theory, rather than the “analytic” theory, the Court held that property is acquired when the spouse earned the right to receive the benefit. Drake left open the question, however, as to whether a disability benefit is acquired when the disability occurs or at some other time. Prior to Drake, the Superior Court in Ciliberti u Ciliberti, 542 A.2d 580 (Pa. Super. 1988), had held that disability income paid after separation in lieu of future lost wages were not marital property.
In Yuhas, the Superior Court examined the terms of the disability policy at issue. In that policy, Husband was required to submit to an annual medical examination to determine his continuing eligibility to receive disability benefits. According to the Court, this provision meant that his disability benefits were “earned” or acquired annually when he passed these medical exams, not on the date of the injury when his disability began. Because his benefits were acquired each year after separation, his post-separation benefits would be characterized as income rather than marital property. Notably, the trial court found in its Opinion that Husband’s disability was not solely due to the failed surgery but also his degenerative medical conditions that might worsen after the date of separation.
In its opinion, the Superior Court made no attempt to revive or even mention the Ciliberti decision and its “analytic” approach that would require a determination of whether the benefits were intended to replace future lost wages. The Superior Court rejected Wife’s argument that “[because] Husband became totally disabled prior to the parties’ date of separation and that he applied for and was approved to receive the disability benefits prior to separation. . . Husband’s right to receive the disability payments accrued prior to the parties’ date of separation.” Wife cited Section 3501(a)(8), which excludes from marital property any award or settlement of a cause of action that accrued prior to the marriage or after the date of separation,” Drake, and Focht v. Focht, 32 A.3d 668 (Pa. 2011) (in which a personal injury settlement paid after separation was held to be marital property).
The Superior Court distinguished those authorities because (a) a disability benefit does not arise from an injury that create a cause of action as contemplated by 3501(a)(8); (b) the right to receive benefits in this case “accrued” after separation when the insurance carrier conducted its annual medical examination; and (c) both Drake and Focht involved lump sum payments.
A spirited and cogent dissent was issued by three of the nine Superior Court judges. The first paragraph succinctly summarizes the majority’s holding:
I agree with the learned Majority that payments made pursuant to an insurance policy do not fit within the exception to the definition of marital property codified at 23 Pa.C.S.A. § 3501(a)(8) (exempting from marital property “[a]ny payment received as a result of an award or settlement for any cause of action or claim which accrued prior to the marriage or after the date of final separation regardless of when the payment was received.”). As the Majority recognizes, the right to a tort or workers’ compensation award is based upon the occurrence of an event that gives rise to an actionable claim, and our law provides that if that event occurs during marriage, any proceeds received as a result thereof will be deemed a marital asset. Maj. Op. at 9. The Majority also recognizes that benefits received pursuant to an insurance contract cannot be likened to “payments received as a result of an award or settlement for any cause of action or claim” because one does not contract for a tort or workers’ compensation award, but one does pay for the right to receive insurance benefits. Id. I depart from the Majority in its conclusion that insurance benefits received by Husband after the parties’ separation should be treated as income to Husband and not as marital property.
Judge Donohue in her dissenting opinion went on to say that she would have judged this issue on “whether the premium payment preceding the filing of a claim was made during marriage with marital funds.” Reasoning that disability insurance benefits are a contractual right obtained by an insured person in consideration of a premium payment, they should be treated no differently than any other contract right in the context of equitable distribution. Analogously, the cash surrender value of a life insurance policy, and even the death benefit, is considered to be marital property if premiums were paid during the marriage. Fexa v. Fexa, 578 A.2d 1314, 1319 (Pa. Super. 1990); Lindsey v. Lindsey, 342 A.2d 396, 399 (Pa. Super. 1985); Schubert v. Schubert, 580 A.2d 1352 (Pa. Super. 1990). Judge Donohue (and Judges Wecht and Ott who joined her) rejected the notion that disability benefits are “acquired” when the annual medical examinations are conducted. It is hard to disagree with this compelling approach.