Lead Opinion
Opinion
Under what circumstances should disability insurance benefits received by a husband after dissolution of the marriage be divided as community property? In In re Marriage of Saslow (1985)
Here, although disability term insurance for the husband was purchased out of community funds during the marriage, payment of the benefits did not commence until 32 months after the parties’ separation, during which time the husband had paid renewal premiums out of his separate property to keep the insurance in effect. As in Saslow, there was evidence the premium payments during the marriage were made with an intent to provide retirement income. It also appears the husband’s physical condition at the time of separation might have precluded his continuing to enjoy comparable disability coverage without the automatic рolicy renewal rights that had been purchased by the community.
Here, the husband appealed from a judgment characterizing disability insurance proceeds as community property. The Court of Appeal reversed. We shall affirm the judgment of the Court of Appeal.
I. Facts and Procedural Background
John H. Elfmont (husband) and Edie M. Elfmont (wife) were married in 1975 and separated on May 1, 1987. They have a daughter bom in 1978 and a son bom in 1979. The present dissolution proceeding was commenced in August 1987.
Husband was bom in February 1939. During the marriage he practiced medicine as an obstetrician and gynecologist. In 1977, he incorporated his medical practice, established a corporate pension and profit-sharing plan, and took out disability insurance that would pay $3,500 per month. The coverage under that policy was increased to $4,000 per month in 1980 and to $5,000 per month in 1983. In 1982 and 1984 he purchased two more policies, each for $2,000 per month, bringing the total benefits payable upon his disability to $9,000 per month. All of this disability coverage was in the form of three-month term insurance. Each policy guaranteed renewal upon timely payment of the renewal premium, but provided that, if the prеmium were not paid within the 31-day grace period following the expiration of any 3-month term, the policy would lapse. Before the parties’ separation, all the premiums were paid out of community earnings.
In 1989 husband became disabled from a disorder of the lower back. He thereafter made arrangements to sell his medical practice, with a covenant not to compete, for $265,000. As of January 1, 1990, he applied for disability insurance benefits of $9,000 per month. The benefits became payable, after policy waiting periods, on February 1, 1990, under the larger ($5,000 per month) policy and on April 1, 1990, under the two smaller policies. Payment of the benefits is expected to continue indefinitely, so long as he remains unable to resume the practice of medicine.
At the trial to determine issues of property division and support, husband explained how his lower back disorder, for which he receives the benefits, interfered with his obstetrics practice. He described his disability as consisting of multilevel degenerative disc disease in the lower back, a compression fracture of the first lumbar vertebra, and osteoarthritis in the neck. He thereby related the disability to two separate incidents, one before, and the other after, the parties’ separation.
Husband testified the first incident was brought to light, in 1985 or 1986, by CAT-scan (computerized axial tomography) findings showing a large herniated disc between the fifth lumbar and first sacral vertebrae on the left side. In hindsight, he traced the source of those findings to an occasion in 1980 or 1981 when he lifted his then two-year-old daughter off a coffee table. He knew at the time he had hurt his back, but did not then think the injury was significant. In written applications for increased disability insurance in 1982, 1983 and 1984, he denied having any back disorder or other physical impairment.
The second incident occurred in the summer of 1989, when he was injured on a ride at a water slide park. An examination showed he had incurred a compression fracture of the body of the first lumbar vertebra and a slipped disc between the fourth and fifth lumbar vertebrae on the right side.
Wife testified as follows: When husband lifted their daughter from the coffee table in 1980 or 1981, he had significant pain “a good part of the week” and, after that, intermittent pain that “never went away.” One day he told her of hearing about a physician in his 50’s who hated his practice and wanted to quit. The physician had a slipped disc that he deliberately neglected, letting it degenerate, with the result he ultimately was able to claim
After considering arguments on the applicability of Saslow, supra,
The judgment, dated June 14, 1990, describes the three disability insurance policies and provides that (1) $1,000 out of the $5,000 to be paid monthly under the first policy is community property; (2) all of the $4,000 per month to be paid under the other two policies is community property; and (3) the total monthly community property benefits of $5,000 are to be paid $2,500 to husband and $2,500 to wife. The judgment also requires that husband be reimbursed $7,850 from the community for “payments from his separate property of premium payments on the community portion of the Provident disability policy.”
The Court of Appeal, one justice dissenting, reversed with directions to find all the disability insurance benefits to be husband’s separate property and to adjust spousal and child support accordingly. The majority declined on two grounds to apply the requirement of Saslow, supra,
The dissent in the Court of Appeal, on the other hand, would have allowed the community a reduced amount of the $5,000 per month benefits the trial court found to be community property, calculating the reduction as follows: first, those benefits would be divided between community and separate property shares proportionately to the relative amounts of community and separate funds used to pay the premiums on the underlying insurance before and after separation. Second, the community property share would be further restricted to benefits received by husband before he reaches 59V2, the age at which his fully funded pension plan becomes available as a retirement resource. All subsequently received disability benefits would be husband’s separate property, on the theory those benefits were intended to provide for retirement only until he begins to receive pension benefits.
II. Intent to Provide Retirement Income
In Saslow, supra,
The Court of Appeal concluded any finding of an intent during the marriage to use the disability benefits as retirement income was precluded by the fact that here, unlike in Saslow, husband had invested up to $60,000 a year in his professional corporation’s tax-qualified pension plan, a plan that was worth approximately $600,000 at the time of separation and was to become available for distribution when he reached the age of 591/2. We disagree. Husband’s investment in the pension plan did not preclude the trial court from finding the parties intended to supplement the retirement income produced by the plan with benefits from the disability insurance. The court could reasonably infer income from both sources would be required to
Other evidence tends to support the trial court’s view, expressed in oral findings, that, prior to the parties’ separation, the disability insurance in dispute was acquired and maintained out of community funds for the purpose of providing retirement income. Husband testified he hated medical practice, and wife gave testimony of husband’s determination to retire by the time he was 50, no matter what happened, and of his tale of a physician who also hated medical practice and had deliberately let his back deteriorate in order to claim disability benefits. Husband’s experience of hurting his back in lifting his small daughter, while it did not produce an injury significant enough to require disclosure on disability insurance applications, may have raised in his mind the possibility of following the other physician’s example.
Saslow, however, indicates that in apportioning disability insurance benefits between community and separate property, the court should consider the spouses’ intent not only “at the time the disability insurance was originally purchased,” but also “at the times that decisions were made to continue the insurance in force rather than let it lapse” (
III. Purchase of Insurance With Community Funds
Postseparation disability benefits, even if intended to provide retirement income, may be treated as community property only to the extent they were “purchased during marriage with community funds” (Saslow, supra,
Term disability insurance is similar in some, but not in all, respects to term life insurance. “Term life insurance policies typically contain two elements, dollar coverage payable in the event of death and a right to
An insured who is not medically “insurable,” however, may be unable after separation to continue life insurance coverage except by exercising the policy’s renewal right, previously purchased with community funds, and paying renewal premiums for one or more additional terms out of his or her separate property. If the insured then dies during an additional term thus purchased, it has been held that the community has an interest in the life insurance proceeds commensurate with its contributions to the right of renewal. (See Bowman v. Bowman (1985)
That the community’s purchase of renewal rights in term disability insurance gives rise to an analogous community property interest in disability benefits does not, however, follow. Term life insurance and term disability insurance have dissimilar purposes. The proceeds of a term life policy are payable not to the insured, but to survivors, offsetting the economic consequences of the insured’s death. To рrovide for a former spouse’s participation in those proceeds, when premium payments from community funds have purchased policy renewal rights necessary to keep the insurance in force, may well be appropriate.
The purpose of term disability insurance, by contrast, is to replace lost earnings. If during the marriage an insured spouse becomes disabled, the benefits received are community property because they replace community earnings. (In re Marriage of Jones (1975)
A contractual renewal right that is included in a term disability policy purchased and renewed during the marriage with community funds may afford an insured spouse, who is medically ineligible for new insurance when the parties separate, an opportunity to obtain further disability coverage that would otherwise be unavailable. But unlike a right to renew term life insurance, which keeps alive a possibility of benefits in which the community will have an interest, the right to renew the insured spouse’s term disability insurance after separation does not give rise to any community property interest in the insured’s disability benefits. (See Saslow, supra,
IV. Conclusion
None of husband’s disability insurance benefits became payable dining terms of policy coverage for which the premiums had been paid out of community funds during the marriage with the intent of providing community retirement income. Instead, husband became entitled to draw the benefits only after he had renewed all three term policies, following the parties’ separation, with premiums paid out of his separate property and with no such intent. Accordingly, all the benefits are his separate property.
The judgment of the Court of Appeal is affirmed.
Lucas, C. J., Mosk, J., Arabian, J., and Baxter, J., concurred.
Notes
All three disability policies were issued by Provident Life and Accidеnt Insurance Company.
Justice George’s concurring and dissenting opinion, though agreeing that all the disability benefits are husband’s separate property, proposes that the trial court be directed, on remand, to require husband to reimburse the community for the value of his contractual rights to renew the policies. Yet no such reimbursement was requested or even suggested below by either party. Valuation of the supposed rights, moreover, would be enormously difficult. For example, since “the insured spouse [who] chooses to let the policy lapse upon separation. . . would not have any obligation to reimburse the community” (conc. & dis. opn. of George, J., post, at p. 1042), should valuation be predicated upon renewal for only a single term, or, if not, how should the number of future renewals be predicted? Generally, questions of compensating the community for items that have no conceivable value to anyone except the spouse (unlike custom clothes, golf clubs or stock options, which do have such value) can be addressed more effectively by the Legislature than by the courts. (Compare, e.g., In re Marriage of Aufmuth (1979)
Concurrence Opinion
I have signed the majority opinion because I concur in the majority’s judgment that the disability insurance proceeds are the husband’s separate property. I also agree with the majority’s reasoning that the present case is distinguishable from In re Marriage of Saslow (1985)
As the majority correctly explains, Saslow held that disability insurance proceeds received after marital separation are community property if three conditions are met: (1) the insurance was purchased wholly with community funds; (2) payment of the benefits began before the separation; and (3) the benefits were intended to provide community retirement income. My principal objection to Saslow is the third element. In the private disability insurance context, I see no apparent logic in the notion that disability benefits can be a replacement for retirement income.
Saslow, supra,
In Saslow, supra,
Aside from a lack of precedent, the threshold problem with Saslow, supra,
The point in Stenquist, supra,
Implicit in Saslow, supra,
Moreover, the Sasbw holding, supra,
In light of all the flaws in Saslow, supra,
Arabian, J., concurred.
I concur in the majority’s conclusion that, under the circumstances of this case, the husband is entitled to retain as his separate property all of the disability benefits payable under the disability policies, because he chose to maintain the disability poliсies in force after separation—by paying the renewal premiums from his separate property—and thereafter became disabled. I agree with the majority that the decision in In re Marriage of Saslow (1985)
Although I agree with the majority that the benefits payable under the disability insurance policies properly should be considered the husband’s separate property, I respectfully dissent from that opinion insofar as it fails to require the husband to reimburse the community for the value, at the time of separation, of the contractual right to renew the disability policies, a valuable asset that had been obtained and retained during the marriage through the expenditure of a significant amount of community funds. As I shall explain, in permitting the husband, upon separation, to appropriate for his own use and benefit this valuable community asset, without requiring him to reimburse the community for the value of that asset, the majority has departed from established community property principles and has provided an unwarranted windfall to the husband. In my view, regardless of the purpоse or intent underlying the decision to obtain the disability policies,
I
In analyzing the question whether the community is entitled to any reimbursement with regard to the disability policies at issue in this case, I begin with several familiar principles fundamental to the concept of community property. First, it is well established that property obtained during the marriage with community funds is itself community property. (Former Civ. Code, §5110, now Fam. Code, §760.) Second, it also is well established that this principle applies to insurance policies obtained during the marriage with community funds. (See, e.g., Tyre v. Aetna Life Ins. Co. (1960)
As the majority acknowledges, each of the disability insurance policies here at issue was obtained initially during the marriage, and, prior to the parties’ separation, all of the premiums were paid with community funds. Accordingly, under the general community property principles set forth in the preceding paragraph, it is clear that, at the time of separation, each disability policy was itself a community asset.
After the parties separated, the husband appropriated and retained, for his own benefit and use, one significant element of these community assets—the contractual right of renewal contained in each of the then existing disability policies
II
A question may be raised whether the contractual right of renewal contained within the disability policies here at issue is a sufficiently significant asset for which reimbursement should be required. In addressing that question, I believe it is useful to describe these disability policies in more detail than is set forth by the majority.
As the majority note each of the disability policies was written with a three-month renewal term and provided that in the event the renewal premium were not paid within the thirty-one-day grace period following expiration of any three-month term, the policy would lapse. At the same time, each policy contained a clause providing that the policy was “non-cancellable” and guaranteeing that the policyholder could continue the policy in force by timely payment of the renewal premiums. Finally—and this point may not be apparent from the majority opinion—each policy guaranteed that, from the time the policy was issued until the insured turned 65 years of age, the renewal premiums for the policy would remain unchanged, thus guaranteeing the policyholder that the full disability coverage provided under the policies could be retained until the insured reached age 65 at the same premium that was in effect when the policy was issued, regardless of the medical condition of the insured.
Under these circumstances, it appears clear that the contractual right of renewal contained in these policies constituted a significant asset that, in all likelihood, had a substantial value at the time the parties separated. It is evident, of course, that the right of renewal would have significant value if the husband’s medical condition at the time of separation was such that, in the open market, he either would have been unable to obtain comparable
Under these circumstances, no justification exists for permitting the husband to appropriate, for his own benefit, this contractual right of renewal (which had been obtained during the marriage with community funds), without reimbursing the community for the value of this asset at the time of separation.
III
The general reimbursement principles set forth above are not inapplicable simply because, after separation, the asset in question—i.e., the right to renew the disability policies—may have been of value only to the husband and not to the wife. There are many items purchased with community funds during a marriage that may be of use or value tо only one of the marital partners—for example, a spouse’s personal wardrobe, custom golf clubs, or other personalized property. When such items have been purchased during the marriage with community funds they are community property, and if one spouse retains such property upon dissolution, the other spouse is entitled to obtain community property of equal value (or the spouse who retains the property must otherwise reimburse the community for the value of the retained property).
In the case of an individual disability insurance policy, of course, the spouse who is covered by the policy is not compelled to renew the policy
IV
Furthermore, the general community property principles requiring reimbursement under such circumstances are not inapplicable simply because the community asset in question—the contractual right to renew the disability policy—is less tangible than a suit of clothes, a dress, or a set of custom-made golf clubs. If, during the marriage, community funds or efforts are used, for example, to acquire an option to purchase a parcel of real property or shares of stock for an established price at some point in the future, there would be no question, of course, but that the option, though an intangible asset that might never be exercised, would be a community asset that could not be appropriated unilaterally by one of the spouses without reimbursement to the community. (See, e.g., In re Marriage of Nelson (1986)
V
Finally, in my view, the established community property principles mandating reimbursement cannot be held inapplicable on the theory that the asset here in question—the right to renew the disability policies at the guaranteed premium—is not reasonably susceptible of valuation. The record in this case contains no evidence whatsoever suggesting that this type of asset is not subject to reasonable valuation, and past cases that have discussed the valuation question with regard to the similar right to renew a term life insurance policy have observed that “expert testimony can undoubtedly establish its value.” (Estate of Logan, supra,
VI
Accordingly, although I agree with the majority’s conclusion that the trial court erred in holding that some of the benefits payable under the disability policies should be treated as community property rather than the husband’s separate property (and I concur in the majority’s affirmance of the Court of Appeal judgment on this point), I conclude that, in addition, we should direct the Court of Appeal to order the trial court, on remand, to determine the value—as of the time of separation—of the community’s contractual right to renew the disability policies, and to order the husband to reimburse the community for that amount.
As prior decisions have explained, renewable term insurance policies contain two basic elements: (1) “dollar coverage,” payable if the insured-against event occurs within the policy period, and (2) the right to renew the policy for future terms, typically without proof of continued insurability at the time of renewal. (See, e.g., Estate of Logan (1987)
In this respect, the renewable disability policies here at issue differ significantly from the renewable term life insurance policies described in Estate of Logan, supra,
According to the testimony of an insurance agent called by the husband, at the time of separation the premiums on the disability policies here at issue exceeded $7,000 per year.
Dissenting Opinion
In a unanimous decision rendered in 1985, this court held that when a married couple buys a disability insurance policy with community funds, and the disabled spouse begins receiving benefits on the policy during the marriage, policy benefits paid after the couple has separated are the disabled spouse’s separate property if such benefits were intended to replace that spouse’s postdissolution earnings, but are community property if the couple purchased the policy with the intent to provide
I disagree. Although disability insurance is rarely purchased for the purpose of providing retirement income, when a couple has bought a disability insurance policy with this goal in mind we should recognize the community’s interest in the policy, just as we recognize the community’s interest in retirement pensions paid for with community funds. Here, in awarding all of the disability insurance benefits to the insured spouse, the majority disregards the substantial sums the community paid to purchase the policy. Not only is this an inequitable result, it is also an erosion of this court’s decision in Saslow, supra,
I
John and Edie Elfmont (husband and wife) were married in 1975. In 1977, they bought disability insurance that would pay benefits of $3,500 per month if husband, a physician, became disabled.
In 1985 or 1986, a CAT scan showed that husband had a large herniated disc, apparently the result of the injury occurring in 1980 or 1981. The couple separated in 1987; thereafter, husband, using his separate funds, continued to renew each of the disability insurance policies. In 1989, husband suffered a further injury to his back. The next year, at the age of 50, he retired, and began to receive disability benefits totaling $9,000 per month on the three policies.
In the dissolution proceedings, wife offered evidence that husband had suffered intermittent back pain following his back injury in 1980 or 1981; that he hated the practice of medicine; that he had repeatedly told her and others he intended to retire, “come hell or high water,” when he reached 50; and that he had told her about another physician who had deliberately permitted a slipped disc to degenerate so he could claim disability benefits.
The trial court found that during their marriage the Elfmonts had bought 80 percent of their first disability insurance policy (providing $4,000 a month in benefits) as a replacement for husband’s income if he became disabled, and that these benefits were thus his separate property. With regard to the remaining 20 percent of that policy (providing benefits of $1,000 per month) and the couple’s other two disability insurance policies (each providing benefits of $2,000 per month)—all bought after husband had injured his back in 1980 or 1981—the court found that the parties purchased the disability insurance to provide retirement income, rather than to replace earnings, and that therefore the benefits were community property. Consequently, the court awarded the wife half of these benefits, amounting to $2,500 per month. The court ordered the community to reimburse husband for the separate funds he expended to renew the “community portion” of the policies. The Court of Appeal reversed the judgment, holding that all of the disability benefits were husband’s separate property.
II
In In re Marriage of Stenquist (1978)
In a subsequent court proceeding for dissolution of the marriage, the husband contended that the disability pension was his separate property. In support, he cited this court’s decisions in In re Marriage of Jones (1975)
We concluded in Stenquist that neither Jones nor Brown lent support to the husband’s claim in Stenquist that the disability pension was his separate property. We said: “Looking beneath the label of a ‘disability’ pension, . . . the trial court found that only the excess of the ‘disability’ pension rights over the alternative ‘retirement’ pension represented additional compensation attributable to husband’s disability; the balance of the pension rights acquired during the marriage, it ruled, served to replace ordinary ‘retirement’ pay and thus must be classed as a community asset. [¶] We agree with the reasoning of the trial court; to permit the husband, by unilateral election of a ‘disability’ pension, to ‘transmute community property into his own separate property’ (In re Marriage of Fithian [(1974)]
As we later explained in Saslow, supra, 40 Cal.3d at pages 858-859, our decision in Stenquist, supra,
Applying to the facts of Saslow the rationale of Stenquist, supra,
We acknowledged in Saslow that the “purpose” analysis articulated in Stenquist, supra,
The facts of this case are almost identical to those of Saslow, supra,
As I have pointed out previously, the marital community retains a post-separation interest in a spouse’s retirement pension that has not vested at the time of separation. (In re Marriage of Brown, supra,
Because, as just explained, disability insurance purchased as a substitute for retirement benefits shares the same purpose and essential characteristics of a pension, it should be treated the same as a pension under our community property system, regardless of when the benefits on the pension or the disability insurance policy are first paid. Thus, the rule this court enunciated in In re Marriage of Brown, supra,
The majority’s reasoning is based on a fallacious premise: By holding that the marital community’s interest in husband’s disability insurance policy expired when the last term paid for with community funds ended, the majority treats noncancelable term disability insurance as if it merely provides the insured party with coverage for a discrete period of time. In so doing, however, the majority ignores a critical aspect of such insurance. Noncancelable term disability insurance not only provides the insured with benefits if a disability arises during the term covered by the policy; equally important, it also gives the insured the right to continue to renew the policy, with no increase in premiums, even if the insured has since inсeption of the policy developed a medical condition that may render him or her uninsurable. Depending on the insured’s condition, the right of renewal can be as valuable, or even more valuable, than the disability coverage for the term covered by the policy, because it provides assurance of coverage, regardless of medical condition.
This case provides a good illustration of the value of the right of renewal. As mentioned earlier, in 1985 or 1986 a CAT scan showed that husband had a large herniated disc in his back. The existence of that condition, if revealed to the insurer, would most likely have made the insurer quite reluctant to cover husband for disability arising from problems with his back; it is a virtual certainty that any company willing to insure him under these circumstances would have charged substantially higher premiums than those paid on the disability insurance policies purchased by the community at a time when husband could truthfully state that he was unaware of having any serious back injury. In all likelihood, it was only the right of renewal, paid for with community funds, that enabled husband to insure himself for the period in which he suffered the additional back injury that led to his retirement, thus enabling him to receive the disability benefits at issue in this case.
According to the majority, term disability insurance and term life insurance have different purposes and therefore should be treated differently. Term life insurance, the majority asserts, is intended to offset the economic consequences of the insured’s death, while term disability insurance “is to replace lost earnings.” (Maj. opn., ante, p. 1034].) This asserted purpose of disability insurance is at odds with this court’s statement in Saslow, supra,
For the reasons set forth above, I conclude that the trial court properly found that $5,000 per month in disability benefits that were intended to provide retirement income should not be treated as husband’s separate property. The trial court, however, erred when it concluded that all of those benefits were community property. Those benefits are in part attributable to husband’s postseparation renewal of the insurance with his separate funds, and the trial court’s order that the community pay husband the amount of the premiums paid with his separate property does not adequately compensate husband for his separate interest in the insurance benefits. A retirement pension paid for partly with community and partly with separate funds would be subject to apportionment. (In re Marriage of Brown, supra,
I would reverse the judgment of the Court of Appeal.
Term insurance provides coverage for a certain period, or term. The insurance expires at the end of the term if the insured does not renew the policy by paying another premium. So-called “noncancelable” term disability insurance may not be canceled by the insurer so long as the insured continues to pay premiums on the policy. (See Ins. Code, § 10273 [defining noncancelable insurance]; 2 Cal, Insurance Law & Practice (1995) §§ 25.04[2], 26.05[13] [discussing renewability of disability insurance].)
The majority states that husband alone purchased the insurance. Although he may have filled out the application for the insurance, the policy premiums were paid for with community funds. It is therefore more accurate to state that the community purchased the policy.
It is unclear from the record how many separate disability insurance policies the couple ultimately carried. Husband’s insurance broker testified that the couple had three policies, one
A married couple may purchase disability insurance for the purpose of providing retirement benefits when, as in this case, the insured spouse suffers from a degenerative condition which, the couple believes, is likely to ultimately cause the insured spouse to retire. Although the concurring opinion by Justice Baxter asserts that it is “preposterous” to expect that an insurance company will provide insurance to a person with such a condition (conc, opn., ante, p. 1037]), an insurance company may be contractually obligated to do so under an agreement to offer disability insurance to ¿11 employees of a company for which an insured is employed. Alternatively, an insurance company may believe that the insured’s condition will not cause his or her retirement until the amount of the premiums exceeds the present value of the amount it will ultimately pay out in benefits. In any event, in this case the insurer did insure husband, and substantial evidence supports the trial court’s decision that husband and wife bought the insurance to provide them with retirement benefits.