Family Advice - Damages and divorce: how to safeguard compensation payments for the future

A significant accident or injury can have a far-reaching impact on every area of life, including personal relationships. Life-altering injuries can put pressure on relationships and sadly, in some cases, lead to relationship breakdown.

Indeed, research has shown that the likelihood of divorce increases when a married individual suffers a personal injury. This can be for a variety of reasons. Relationships can be placed under strain with the challenges of coping with the after-effects of the injury.

The injured party may feel a lack of support or understanding. The non-injured party may not feel able to cope with the change in role from ‘partner’ to ‘carer’. Both parties will have had an irreversible impact on their pre-injury lifestyles.

Damages or compensation payments can involve significant sums intended to provide for the injured party’s needs for the duration of their lifetime. In particular, damages in London tend to be higher due to higher property prices, the increased cost of living, and care fees.

Damages and divorce

In the event of marital breakdown, it is important to recognise that compensation payments are not automatically protected or ‘ring-fenced’ for the injured party under UK law.

The general principle is that all assets the parties have acquired during their marriage – whether jointly or individually – form part of the marital pot and are available for distribution between the parties, and this includes compensation payments.

The Court’s objective is to share the marital pot fairly based on the parties’ respective needs. It will consider a variety of factors including the income and earning capacity of both parties, their respective housing needs as well as any physical or mental disabilities. Priority should also be given to the welfare of any children so the Court has the unenviable task of balancing the competing needs of the family as a whole.

There are examples of ‘non-matrimonial’ assets, i.e. those not included in the marital pot, but these are limited in nature such as pre-marital wealth, inheritance or gifts and there is no set definition.

The source of the compensation payment being because of a personal injury and the purpose of the funds, i.e. to support the injured party for the duration of their lifetime, are relevant factors which the Court will take into account - in particular, that damages are calculated with reference to the injured party’s specific needs.

Damages may also be less easy to carve out as a ‘non-matrimonial’ asset if they have been intermingled with matrimonial assets over a significant period. If possible, it is advisable to try to keep compensation payments distinct and separate from other family resources although this can be difficult to achieve in practice. For example, damages are often utilised when adapting a property to meet the changing needs of the injured party but this property will also serve as the family home.

The Family Court has a very wide discretion on how to redistribute marital assets following the breakdown of a marriage, outcomes are very difficult to predict and there is no guarantee that compensation payments will be ring-fenced for the injured party upon divorce.

So, what steps can an injured party take to safeguard these sums for their future needs?

Pre-nuptial and post-nuptial agreements

A pre-nuptial agreement sets out how financial assets, including any compensation received for personal injury, would be distributed in the event of a marital breakdown giving both parties a level of certainty and security.

A pre-nuptial agreement can make provision for any capital lump sum or periodical compensation payments to be ring-fenced for the injured party’s use. The non-injured party can also agree not to claim against these sums in the future.

Although not currently strictly legally binding in the UK, a pre-nuptial agreement is likely to be given substantial weight by the Family Court, provided both parties have received independent legal advice and engaged in full and frank financial disclosure.

Recent case law has also suggested that the Court should give effect to an agreement that is freely entered into with a full understanding of its implications unless it would not be fair to do so.

If an injured party is married and does not have a pre-nuptial agreement in place, they may wish to enter into a post-nuptial agreement which can operate in the same way. This is done by stipulating that damages received as a result of an accident or injury are treated as a ‘non matrimonial’ asset and set aside for the injured party’s ongoing needs.

Although a sensitive topic, addressing these matters at an early stage can avoid conflict and costly court proceedings in the future.

Cohabitation agreements

If an injured party is in a relationship but not married, they may wish to enter into a cohabitation agreement. This is a written agreement that sets out the financial arrangements in relation to the assets the parties own – either jointly or individually – in the event the parties separate.

A cohabitation agreement can make provision for any damages award to be treated as the injured party’s personal and separate, solely-owned property.

Cohabitation agreements are legally binding in the UK if they are drafted and executed properly, and are signed as a deed. It is therefore, again, essential for both parties to obtain independent legal advice before entering into one.

Cohabitation agreements should ideally be entered into before moving in with a partner but can be put in place at any point, even after many years of living together.

In addition, cohabitation agreements do not only apply to partners but can also apply to living arrangements between the injured party and anyone who they may reside with including parents or siblings.

No one enters into any relationship expecting it to end but agreeing, in advance, how finances will be divided and, in particular, how damages awards will be treated if the relationship were to come to an end can avoid significant uncertainty, stress and conflict in the future.

Ursula Danagher is Partner and Head of Family in our London office and this article was co-written by Zara Jordan, an Associate Solicitor in our Family team.