Gragg v. Gragg

IN THE SUPREME COURT OF TENNESSEE
AT JACKSON
(HEARD AT MEMPHIS)
FILED
January 31, 2000
Cecil Crowson, Jr.
Appellate Court Clerk
FOR PUBLICATION
C. WINSTON GRAGG, )
) Filed: January 31, 2000
Plaintiff/Appellee, )
) Shelby Circuit
v. )
) Hon. Kay S. Robilio,
NELLIE C. GRAGG, ) Judge
)
Defendant/Appellant. ) Appeal No.
) W1998-00734-SC-R11-CV

Defendant/Appellant Plaintiff/Appellee
Thomas R. Prewitt, Sr. Hal Gerber
ARMSTRONG, ALLEN, PREWITT, GERBER LAW OFFICE
GENTRY, JOHNSTON & HOLMES, PLLC Memphis, Tennessee
Memphis, Tennessee

OPINION

AFFIRMED. DROWOTA, J.
 The issue of first impression in this appeal is whether, under Tennessee law,

disability benefits from a private disability insurance policy acquired with marital funds

during the marriage are subject to distribution upon divorce as marital property. See

Tenn. Code Ann. § 36-4-121 (1996). We conclude that disability benefits replace lost

income and are not marital property subject to distribution upon divorce. However,

such benefits may be considered by a trial court when determining alimony and child
support obligations. Accordingly, the judgment of the Court of Appeals is affirmed.1

BACKGROUND

The facts pertinent to the legal issue in this appeal are undisputed. The

appellant, Nellie C. Gragg, and the appellee, G. Winston Gragg, were married on

September 4, 1971. The parties separated on December 10, 1993, and Dr. Gragg
filed the present action for divorce on September 12, 1994.

Dr. Gragg is a medical doctor specializing in anesthesiology. During the

course of the marriage, he obtained two policies of disability insurance. The first
policy was issued on May 13, 1977 by Provident Life and Accident Insurance
Company and provides for disability benefits of $2,000 per month during total

disability until Dr. Gragg attains the age of sixty-five.2 The second policy was issued
by Continental Assurance Company on July 15, 1988 and provides for disability
benefits of $5,000 per month with an automatic annual increase of five percent to

account for cost of living increases. This policy provides that disability benefits will
continue to be paid during Dr. Gragg’s lifetime so long as he remains disabled.

1
Oral arguments were heard in this case on November 18, 199 9, in M em phis , She lby Co unty,
Tennessee, as part of this Cou rt’s S.C .A.L.E .S. (Supreme Court Advancing Lega l Education for
Students ) project.

2
W hen the trial court entered its final decree in March of 1998, Dr. Gragg was fifty-three years of
age and will therefore continue receiving the $2,000 monthly benefit for an additional twelve years so
long as h e rem ains totally disab led.

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 Dr. Gragg became totally disabled in late October of 1994, and likely

will not ever be able to resume his practice as an anesthesiologist. At the time of

trial, the parties stipulated that Dr. Gragg was receiving monthly benefits under the
two disability polices in the amount of $7,750 and that this amount would increase to

$8,000 per month beginning in October of 1998. The parties stipulated that the

premiums paid for these two polices up to the time when Dr. Gragg became disabled
had amounted to $45,000 and had been paid with marital funds earned by Dr. Gragg.

Each policy includes a provision for waiver of premiums during the period of total

disability, so Dr. Gragg has paid no premiums since his disability commenced in
October of 1994. The parties also stipulated that all marital property should be

divided equally between them.

The trial court found that “[a]s a matter of law, all benefits paid by the two
insurance companies to Husband both before and after the divorce constitute marital

property subject to division pursuant to T.C.A. § 36-4-121 and all benefits, beginning

with the payments due in March, 1998 and thereafter, should be divided equally
between the parties.” The decree was later amended to provide that in the event an
appellate court held the disability benefits to be separate property belonging to Dr.

Gragg rather than marital property subject to distribution, Ms. Gragg should be paid
$2,500 per month alimony in futuro until death or remarriage.

Dr. Gragg appealed the trial court’s decision with respect to the disability
benefits. The Court of Appeals reversed “that part of the trial court’s decree which
awarded Wife a part of the disability income benefits as a marital distribution.” The

Court of Appeals disagreed with the trial court’s classification of the benefits as

marital property and held that the “benefits constitute substituted income to Husband
and are available for such obligations as might be imposed by the court.”
Accordingly, the Court of Appeals affirmed that portion of the trial court’s judgment

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which awarded Ms. Gragg $2,500 per month alimony in futuro until death or

remarriage.

Thereafter, this Court granted Ms. Gragg’s application for permission to appeal

to consider whether disability benefits received by one spouse from two private

insurance policies are subject to distribution upon divorce as marital property. For
the reasons that follow, we now affirm the judgment of the Court of Appeals.

DISABILITY BENEFITS - CLASSIFICATION

Our analysis of the issue in this appeal necessarily begins with Tenn. Code

Ann. § 36-4-121 which defines marital and separate property as follows:

(b)(1)(A) “Marital property” means all real and personal property, both
tangible and intangible, acquired by either or both spouses during the
course of the marriage up to the date of the final divorce hearing and
owned by either or both spouses as of the date of filing of a complaint
for divorce, except in a case of fraudulent conveyance in anticipation
of filing, and including any property to which a right was acquired up to
the date of the final divorce hearing, and valued as of a date as near
as reasonably possible to the final divorce hearing date.

(B) “Marital property” includes income from, and any increase in value
during the marriage of, property determined to be separate property in
accordance with subdivision (b)(2) if each party substantially
contributed to its preservation and appreciation and the value of vested
pension, retirement or other fringe benefit rights accrued during the
period of the marriage.

....
(2) “Separate property” means:
(A) All real and personal property owned by a spouse before
marriage;

(B) Property acquired in exchange for property acquired
before the marriage;

(C) Income from and appreciation of property owned by a
spouse before marriage except when characterized as
marital property under subdivision (b)(1); and

(D) Property acquired by a spouse at any time by gift,
bequest, devise or descent.

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Tenn. Code Ann. § 36-4-121(b)(1)(A), (B) & (2) (1996)(emphasis added). We are

mindful that the role of this Court in construing statutes is to ascertain and give effect

to legislative intent. See Cronin v. Howe, 906 S.W.2d 910, 912 (Tenn. 1995). When
the language of a statute is unambiguous, legislative intent is to be ascertained from

the plain and ordinary meaning of the statutory language used. See Carson Creek

Vacation Resorts, Inc. v. State, Dep’t of Revenue, 865 S.W.2d 1, 2 (Tenn. 1993).
However, the issue in this appeal can not be resolved simply by reference to the plain

language of this statute. This statute does not explicitly declare that benefits from a

private disability insurance contract are marital property, nor does the statute
specifically state that such benefits are separate property. Where as here, the

parties legitimately have different interpretations of the same statutory language, an

ambiguity exists, and we may consider the legislative history and the entire statutory
scheme for interpretive guidance. See Carter v. State, 952 S.W.2d 417, 419 (Tenn.

1997); Owens v. State, 908 S.W.2d 923, 926 (Tenn. 1995); Lyons v. Rasar, 872

S.W.2d 895, 897 (Tenn. 1994).

Applying these rules, we first note that marital property is broadly defined to
include “all” real, personal, tangible, and intangible property acquired during the

course of the marriage by either or both spouses and includes “any property to which
a right was acquired up to the date of the final divorce hearing.” Tenn. Code Ann. §
36-4-121(b)(1)(A); see also Cohen v. Cohen, 937 S.W.2d 823, 826 (Tenn. 1996).

The current definition of marital property was adopted in 1983,3 and, according to its
House sponsor, the legislation was intended “to codify existing case law, to define
marital property more clearly, and to recognize homemakers’ contributions.” Kendrick

v. Kendrick, 902 S.W.2d 918, 924 (Tenn. Ct. App. 1994). The broad statutory

definition of marital property is followed by Tenn. Code Ann. § 36-4-121(b)(1)(B)
which states that marital property “includes. . . the value of vested pension, retirement

3
See 1983 Tenn. Pub. Acts ch. 798, ch. 800.

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or other fringe benefit rights accrued during the period of the marriage.” Use of this

broad statutory definition followed by language stating that the definition “includes”

specific items indicates that the enumerated items are illustrative, not exclusive. See

Kendrick, 902 S.W.2d at 924. In other words, the property interests identified in

Section 36-4-121(b)(1)(B) are simply illustrative of the types of intangible property

interests that may be classified as marital property. Id. Other types of intangible
property interests which are similar to those enumerated in the statute should also

be considered marital property.

We have previously held that both vested and unvested retirement benefits

constitute marital property under the statutory definitions set out above. See Cohen,

937 S.W.2d at 828. Relying upon the broad statutory definition of marital property
and this Court’s decision in Cohen, Ms. Gragg argues that the disability benefits at

issue are marital property because the premiums were paid with marital funds and

because the disability giving rise to the right to receive the benefits commenced

during the marriage. In contrast, Dr. Gragg argues that the disability benefits are not
marital property. He points out that the illustrative types of intangible property
enumerated in Tenn. Code Ann. § 36-4-121(b)(1)(B) are either forms of, or

analogous to, annuity insurance and emphasizes that the statute does not mention
any type of casualty insurance. See Tenn. Code Ann. § 56-2-201(2) (Supp. 1999)

(stating that disability insurance is casualty insurance). Dr. Gragg stresses that,

unlike annuity insurance benefits, disability insurance benefits do not represent
deferred compensation for services rendered but instead are designed to replace
future income which the disabled spouse will be unable to earn because of the

disability. Since future income is not considered marital property, Dr. Gragg argues

that disability insurance benefits also should not be considered marital property, but
should be considered by the trial court only when determining the disabled spouse’s
alimony or child support obligations. In support of his contention, Dr. Gragg relies

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upon an unreported decision of the Court of Appeals which classified disability

benefits as income when determining child support obligations. See Turner v.

Turner, No. 01A01-9506-CV-00255, 1997 WL 136448 (Tenn. Ct. App. Mar. 27,
1997).

Clearly, disability benefits have varied characteristics and purposes which
make the task of classification problematic. As one Pennsylvania appeals court

explained, disability benefits

may compensate for the loss of earnings resulting from compelled
premature retirement and from a diminished ability to compete in the
employment market. Disability benefits may also serve to compensate
the disabled person for personal suffering caused by the disability.
Finally, disability benefits may serve to replace a retirement pension by
providing support for the disabled worker and his family after he leaves
the job.
Ciliberti v. Ciliberti, 542 A.2d 580, 582 (Pa. Super. Ct. 1988). Moreover, such

disability benefits become payable only when the insured spouse has suffered an

injury and has become disabled. On the other hand, the right to receive disability

benefits may have been acquired with marital funds, either by foregoing a higher
salary in the case of disability benefits provided by an employer, or by paying
premiums with marital funds in the case of a private disability insurance policy. To

complicate matters further, ordinarily some disability benefits will be received during
marriage and some will be received after the marriage is ended by divorce. See

Disability Benefits-Classification, 14 No. 9 Equitable Distribution J. 97 (September,

1997).

Like Tennessee, no other state has a statute that either specifically designates

disability benefits as marital property or specifically excludes such benefits from the

definition of marital property. Although this lack of explicit statutory guidance has
produced a substantial body of case law on the subject, given the differing purposes
of disability benefits, courts are split on the proper classification.

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 Those courts which hold that disability benefits constitute marital property have

advanced several rationales for this conclusion. Under one approach, which has
been referred to as the “mechanistic approach,” courts consider whether disability
benefits have been specifically excepted from the definition of marital property by

statute. 14 No. 9 Equitable Distribution J. at 98. Disability benefits will be considered
marital property unless there is a statutory provision specifically excluding disability
benefits from the marital estate.4

Another rationale given in support of the mechanistic approach is that disability
benefits should be considered marital property because the policy premiums were

paid with marital funds or the marital estate acquired the benefits as a form of
compensation for spousal labor during the marriage, much like a pension.5

However, the majority of courts considering the proper classification of
disability benefits have adopted the analytical approach which focuses on the
nature and purpose of the specific disability benefits at issue. Under this

approach, benefits which actually compensate for disability are not classified as

marital property because such benefits are personal to the spouse who receives

them and compensate for loss of good health and replace lost earning capacity.

However, where the facts warrant, courts utilizing the analytical approach will

4
See, e.g., Mason v. Mason, 895 S.W.2d 513 (Ark. 1995) (holding that husband’s employment
disability bene fits pa id in connection with long-term physical problems were marital property because
they did not fall within the statutory ex emp tion for per sonal injur y benefits); Morrison v. Morrison, 692
S.W.2d 601 ( Ark . 198 5) (ho lding t hat b ene fits m ust b e trea ted a s m arital p rope rty in the absence of a
statutory exem ption); In re Marriage of Simon, 856 P.2d 47 (Co lo. Ct. App. 1 993) (ho lding that disa bility
benefits from a private disability insurance policy acquired with marital funds during the marriage were
marital property because such private insurance is not excluded from the statutory definition of marital
property); In re Ma rriage of S mith , 405 N.E.2d 884 ( Ill. App. Ct. 1980) (holding that a disability pension
is m arital p roperty be cause it does no t fall within a statu tory exem ption); Gnerlich v. Gnerlich, 538
N.E.2d 285 (Ind. Ct. App. 1989) (holding that disab ility pension is marital property because it was not
excepted from the broad statutory definition).

5
See, e.g ., Dunn v. Dunn, 811 S.W.2d 336 (Ark. Ct. App. 1991) (holding that husb and’s dis ability
benefits were marital property because the benefits constituted compensation in return for past services
rendered); Lookingbill v. Look ingbill , 483 A.2d 1 (Md. 1984) (h olding that d isability pension payme nts
were marital property because such payments are partial consideration for past employment whether
matu rity of pension depends upon age and service or upon dis ability); Vanderleest v. Vanderleest, 352
N.W.2d 54 (Minn. Ct. App. 1 984) (ho lding that disa bility annu ity was ma rital pr ope rty sinc e hus ban d’s
right to receive the benefits resulted from his years of employm ent during the parties’ marriage).

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separate the benefits into a retirement component and a true disability

component, with the retirement component being classified as marital property
and the disability component being classified as separate property. This approach
has been applied both to disability benefits paid in connection with insurance

coverage maintained by the disabled spouse’s employer and to disability benefits
paid in connection with a private policy of disability insurance acquired with marital
funds during the marriage.6

6
See, e.g., Villasenor v. Villasenor, 657 P.2d 889 ( Ariz. C t. App . 198 2) (ho lding t hat h usb and ’s civil
service disability compensation had both a disability component, which was his separate property, and
a retirem ent com ponen t, which wa s com mun ity property); In re Marriage of Saslow, 710 P.2d 346 ( Cal.
1985) (hold ing th at dis ability be nefit s paid in connection with a private insurance policy should be
treated as separate property insofar as they are intended to replace post-dissolution wages and as
com mun ity property insofar as they are intended to provide retirement income); In re Marriage of
Stenquist, 582 P.2d 96 (Cal. 1978) (holding that disability benefits should be analyzed according to
purpose and classified as community property to the extent that they replace longevity retirement
income but as se parate p roperty to the extent tha t they c ompensate for personal suffering and lost
earnings); Gay v. Gay, 573 So. 2d 180 (Fla. Dist. Ct. App. 1991) (holding that disability benefits are
entire ly separate property because they replace f uture inco me) ; Hoffner v. Hoffner, 577 So. 2d 703 (Fla.
Dist. Ct. App. 1991) (holding that disability pension replaces future lost income and thus is not a marital
asset); Brogdon v. Brogdon, 530 So. 2d 1064 (Fla. Dist. Ct. App. 1988) (holding that disability pension
is marital property to the extent it constitutes a retirement benefit and separate property to the extent
it compensates for pain, suffering , disability, and disf igurem ent); Freema n v. Freeman, 468 So. 2d 326
(Fla. Dist. C t. App. 1985) (holding that disability pension is not a marital asset because it is designed
to compensate the employee for lost earning and injuries and, as such, is personal to the employee);
Griggs v. Griggs, 686 P.2d 68 (Idaho 1984) (holding that disability pay is not marital property because
it is intended to com pensa te for dam ages th at are pe rsonal to th e injured s pouse ); In re Marriage of
Miller , 524 N.W.2d 442 (Iowa Ct. App. 1994) (holding that disability payments are not compensation
for past services and therefore are not m arital property); Chance v. Chance, 694 So .2d 613 ( La. Ct.
App. 1997) (holding that disability payments from a private policy of insurance are not marital p roperty
because they were n ot intende d to as retire men t benefits); Hudson v. Hudson, 865 S.W.2d 405 (Mo.
Ct. App. 1993) (holding that disability benefits were not marital property because they were intended
to compen sate husband for lost future earning ability rather than to provide supplemental retirement
benefits); Sherman v. Sherman, 740 S.W .2d 203 ( Mo. C t. App. 1987) (holding that disability benef its
paid in conne ction with a p rivate insura nce po licy are not m arital prope rty because they are a su bstitute
for the husband’s lost earnings and are not compensation for past emp loymen t); Avallone v. Avallone,
646 A.2d 1121 (N.J. Super. Ct. App. Div.1994) (holding that d isab ility pens ion is m arital p rope rty only
to the exten t it represen ts retirem ent com pensa tion); Dolan v. Dolan, 583 N.E.2d 908 (N.Y. 1991)
(holding that d isability pension was marital property only to the extent it compensated for length of
service o f e m ploym ent and r eprese nted def erred co mpe nsation); Gann v. Gann, 649 N.Y.S.2d 154
(Sup. Ct. App. Div. 1996) (holding that husb and’s dis ability insuranc e bene fits were n ot ma rital property
because they had no deferred incom e com ponen t); Fleitz v. Fleitz, 606 N.Y.S.2d 825 (Sup. Ct. App.
Div. 1994) (holding that disability insurance benefits paid in connection with a private policy of insurance
to disabled husba nd, a den tist, were no t marital pr operty because they were intended to replace lost
future earnings and had no separate or distinct annuity or deferred compensation element unrelated
to the pers onal injury disa bility); Johnson v. Johnson, 450 S.E.2d 923 (N.C. App. 1994) (holding that
benefits which co mpe nsate for disability are personal to the spouse who receives them and constitute
that spouse’s separate property, while benefits which are based on the disabled spouse’s contribution
to a retirement fund are m arital prope rty); Fox v. Fox, 592 N.W.2d 541 (N.D. 1999) (holding that
disability payments to husband, pathologist, do not constitute marital property because they are
intended to replace income the disabled spouse would be earning currently and in the future had the
spouse not become disabled ); Christmas v. Christmas, 787 P.2d 1267 (Okla. 1990) (holding that
disability payments received by spouse after divorce were no t marital pr operty sinc e these payme nts
wou ld be a replacement for post-divo rce wag es); Ciliberti v. Ciliberti, 542 A.2d at 233-34 (holding that
“true” disability payments are not marital property beca use they re plac e futu re wa ges the e mp loyee w ill
not be able to earn, but any “retirement component” received in lieu of retirement benefits is marital
prop erty) ; Allard v. Allard, 708 A.2d 554 (R.I. 1998 ) (holding th at disability pens ion is the se parate
property of the disabled spouse to the extent it compensates for lost earning capacity but marital
property to the extent it represents the disabled spouse’s retirement pay earned d uring the marriage);

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 After carefully considering the relevant authorities, we conclude that the

analytical approach is the better-reasoned approach and the one most consistent
with our statutory scheme defining marital and separate property. Pension and
retirement benefits compensate individuals who live past retirement age. Such

benefits constitute deferred compensation for services rendered and function as a
substitute for life savings. Like any joint savings accumulated during the marriage,
pension and retirement benefits are subject to distribution as marital property

upon divorce. See Christmas, 787 P.2d at 1268. On the other hand, disability
benefits do not substitute for savings but instead “protect against the inability of an
individual to earn the salary or wages to which he or she was accustomed in the

immediate past.” Lee R. Russ & Thomas F. Segalla, 1 Couch on Insurance §

1:65 (3d ed. 1996). Generally, therefore, disability benefits replace income which

is lost before retirement. See Christmas, 787 P.2d at 1268. Logic dictates that

disability benefits and income should be treated in the same manner since
disability benefits are income replacement. Since the future income of each
spouse is not classified as marital property, disability benefits which replace future

income should not be classified as marital property. Like income, disability

benefits should be considered when determining alimony and child support

obligations.

Thompson v. Thompson , 642 A.2d 1160 (R .I. 1994) (holding that a disability pension is not a marital
asset because the benefits are intended to compensate the disabled employee spouse for lost earning
capac ity and are paid in lieu of the e arnin gs w hich wou ld hav e bee n rec eived if the disabled spouse had
been able to wo rk); Tinsley v. Tinsley, 483 S.E.2 d 198 (S.C . Ct. A pp. 1 997 ) (hold ing th at a h usb and ’s
disability bene fits are not marital property because they are replacement for income he would be
earning curr ently a nd w ould b e able to ea rn in the future had he n ot beco me d isabled); In re Marriage
of Brewer, 976 P.2d 102 (Wash. 1999) (en banc) (holding tha t disability benefits paid in con nection w ith
a private insurance policy acquired during the marr iage with com mun ity funds are separa te prope rty
of disabled husba nd, a den tist, except to the exte nt the ben efits are de ferred c omp ensation ); In re
Marriage of Kollmer, 870 P.2d 978 (Wash. Ct. App. 1994) (holding that disability pay which husband
wou ld receive after becoming eligible for retirement pay would be akin to compensation for past
services, up to the amount he would have received as retirement pay at that age, but disability pay
husband would receive prior to becoming eligible to collect retirement pay could not be viewed as
com pensation for past s ervices a nd is not m arital prope rty). See gene rally Grace Ganz Blumberg,
Marital Property Treatment of Pensions, Disability Pay, Workers’ Compensation, and Other Wage
Sub stitue s: An Insu ranc e, or R eplac em ent A nalys is, 33 U.C.L.A. L. Rev. 1250, 1294 (1986 ).

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 In so holding we reject the mechanistic approach which classifies all

property as marital unless it is specifically designated separate property by
statute. In our view, such an inflexible approach is not appropriate. While the
General Assembly has broadly defined marital property, as Dr. Gragg points out,

the items enumerated as illustrative of intangible marital property are pension and
retirement benefits, property which is in actuality a form of deferred compensation
for services rendered. Given the distinctive purposes served by pension or

retirement benefits on the one hand, and disability benefits on the other hand, we
decline to hold that the General Assembly intended to include disability benefits
within the broad definition of marital property.

We emphasize, however, that when the facts of a particular case show that

a portion of a spouse’s “disability benefits” is actually representative of retirement

benefits, the amount received by the disabled spouse in lieu of retirement benefits
is marital property subject to distribution. This analytical approach is entirely
consistent with the statutory scheme which specifically designates retirement

benefits as marital property.

Applying these principles, we conclude that the Court of Appeals correctly

held that the disability benefits in this case are not marital property. There is no

evidence that Dr. Gragg’s disability insurance benefits were intended to provide

anything other than replacement for lost income. The record reflects that Dr.

Gragg and Ms. Gragg had separate individual retirement accounts. There is no

evidence to indicate that the disability benefits were intended to be supplemental

retirement funds. In fact, even assuming Dr. Gragg remains disabled, one of the

insurance policies will cease paying benefits upon his attainment of age sixty-five.

This policy provision seems to contemplate the existence of additional retirement

benefits. Although the other policy has no age restriction, benefits will be paid
only so long as Dr. Gragg remains unable to work. In sum, the record clearly

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indicates that these disability benefits were intended to provide only income

replacement in the event the husband, who was the primary income provider,
became unable to work because of disability. The fact that the premiums were
paid with marital funds is not controlling. The dispositive factor is that the disability

benefits at issue in this appeal operated only as a replacement for lost income.

CONCLUSION

After due consideration, we conclude that disability benefits from a private
disability insurance policy acquired with marital funds during the marriage are not
marital property subject to distribution upon divorce because the only purpose

served by these benefits is income replacement. Accordingly, we affirm the
judgment of the Court of Appeals which upheld the trial court’s judgment insofar

as it awarded to Ms. Gragg $2,500 per month alimony in futuro until death or

remarriage, and we remand this case to the trial court for any further proceedings
which may be necessary. Costs of this appeal are assessed equally between the
parties.

_____________________________________
FRANK F. DROWOTA, III,
JUSTICE

Concur:
Anderson, C. J.
Birch, Holder, Barker, JJ.

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