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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Grace v. Peterson (1/13/2012) sp-6633

Grace v. Peterson (1/13/2012) sp-6633

        Notice: This opinion is subject to correction before publication in the PACIFIC  REPORTER. 
        Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 
        303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email 
        corrections@appellate.courts.state.ak.us. 

                 THE SUPREME COURT OF THE STATE OF ALASKA 

JAMES M. GRACE,                                    ) 
                                                   )    Supreme Court No. S-13768 
                        Appellant,                 ) 
                                                   )    Superior Court No. 3AN-06-05493 CI 
        v.                                         ) 
                                                   )    O P I N I O N 
LAUREL J. PETERSON, P.C. and                       ) 
KATHLEEN GRACE,                                    )   No. 6633 - January 13, 2012 
                                                   ) 
                        Appellees.                 ) 
                                                   ) 

                Appeal from the Superior Court of the State of Alaska, Third 
                Judicial District, Anchorage, Sen K. Tan, Judge. 

                Appearances: Kenneth P. Jacobus, Kenneth P. Jacobus, P.C., 
                Anchorage, for Appellant. Herbert M. Pearce, Law Office of 
                Herbert M. Pearce, Anchorage, for Appellee Grace.              Notice 
                of non-participation filed by Appellee Laurel J. Peterson, P.C. 

                Before:    Carpeneti,   Chief   Justice,   Winfree,   Christen,   and 
                Stowers, Justices.     [Fabe, Justice, not participating.] 

                CHRISTEN, Justice. 

I.      INTRODUCTION 

                James Grace suffered permanent brain injuries when his helmet failed after 

he braked to avoid hitting a dog and was thrown over the handlebars of his motorcycle. 

Grace and his wife, Kathleen, filed personal injury and loss of consortium claims against 

the   helmet   retailer   and   manufacturer.   After   receiving   confessions   of   judgment   and 

----------------------- Page 2-----------------------

assignments   of   rights   from   the   retailer   and   manufacturer   of   the   helmet,   the   Graces 

received   disbursements   from   the   receiver   of   one   of   the   manufacturer's   second-tier 

insurance providers that had filed for bankruptcy and gone into liquidation.  The Graces 

also filed a bad faith insurance claim against the manufacturer's third-tier insurance 

carrier, and ultimately entered into a settlement agreement with the carrier. 

                 James and Kathleen separated at some point after the accident, divorced for 

one month in 2000, but then remarried.              They have continued to live separately since 

their remarriage.      Except for a partial disbursement of funds that occurred while their 

final divorce hearing was pending, the Graces have been unable to agree upon how the 

remaining settlement and insurance proceeds should be divided.                    The Graces' lawyer, 

Laurel Peterson, filed an action for interpleader asking the superior court to determine 

how to divide the remaining funds.            After a one-day trial, the superior court concluded 

                                                                                             1 
that: (1) based on the "analytic" approach articulated in Bandow v. Bandow,  the portion 

of the recovery from the receiver for the manufacturer's second-tier insurance carrier that 

was allocated for "past economic loss," "past medical loss," and "rehabilitation services" 

was marital property and should be divided equally; and (2) the recovery from the third- 

tier insurance carrier was the result of a jointly-assigned bad faith insurance claim and 

belonged to both parties. 

                 James appeals.      We affirm the superior court's division of the proceeds 

from the second-tier insurance carrier, but reverse its division of the proceeds from the 

third-tier insurance carrier. 

        1        794 P.2d 1346, 1348 (Alaska 1990). 

                                                    -2-                                                 6633 

----------------------- Page 3-----------------------

II.     FACTS AND PROCEEDINGS 

        A.      Facts 

                1.      Accident and resulting litigation 

                In   July   1984,   James    Grace   was   thrown    over   the  handle    bars  of  his 

motorcycle after he braked to avoid hitting a dog.             James was wearing a helmet that 

"failed and fractured" upon impact. It had been purchased from Ocelot Engineering, Inc. 

(Ocelot) and manufactured by Bell Helmets (Bell).               James suffered head injuries that 

resulted in permanent impairment. 

                At the time of the accident, Bell had multiple layers of insurance:   the first 

layer   was   a   $100,000   self-insured   retention;   Bell   also   had   primary   insurance   from 

Mission   National   Insurance   Co.   (Mission);   Bell's   excess   coverage   was   by   Integrity 

Insurance Co. (Integrity) for the first $5.1 million in liability exposure for manufacturing 

defects; Bell had an additional $10 million in excess coverage by Insurance Company 

of North America (INA).         Both Mission and Integrity became insolvent in 1987. 

                The accident resulted in three separate claims: (1) a claim by James against 

the dog's owner that settled for $310,000; (2) a claim by James and his wife, Kathleen, 

                                                2 
against Ocelot, Bell, and James's doctor ; and (3) a claim by INA naming the Graces as 

defendants individually and as assignees of Ocelot and Bell and seeking a declaratory 

ruling that INA had no   obligation to provide any coverage until Bell first paid $5.1 

million from its own assets. 

        2       The claim against James's doctor was for medical malpractice.  It was later 

dismissed. 

                                                  -3-                                               6633 

----------------------- Page 4-----------------------

               2.      Confessions of judgment and assignments of rights 

               In July 1991, Ocelot settled with the Graces, entering into a confession of 
judgment     based   on  an  anticipated   verdict  of  $8,120,920.3    Including   interest  and 

attorney's fees, the judgment exceeded $15,000,000.4           As the manufacturer, Bell was 

required to completely indemnify Ocelot for any liability.   Ocelot assigned to the Graces 

all rights to indemnification from Bell or its insurers. In exchange, the Graces agreed not 
to execute on the judgment against Ocelot for a set period of time.5 

               Two years later, Bell agreed to enter into a confession of judgment in the 

same amount as Ocelot, with then-accrued interest and attorney's fees.  This resulted in 
a final judgment in excess of $17,000,000.6       The Graces accepted an assignment of all 

        3      This figure was based upon expert analysis of expected damages in the 

underlying case.    It included: 

               $ 2,890,843             Past Economic Loss 

               $     60,697            Past Medical Loss 

               $ 1,644,380             Rehabilitation Services 

               $    475,000            Past Pain & Suffering 

               $ 1,200,000             Future Pain & Suffering 

               $   850,000             Loss of Enjoyment of Life 

               $ 1,000,000             Loss of Consortium 

        4      Grace v. Ins. Co. of N. Am., 944 P.2d 460, 463 (Alaska 1997). 

        5      The    assignment    agreement    stated  that  Ocelot   would   pay   the  Graces 

$500,000 per year for ten years "beginning the [f]ifth annual anniversary of the execution 
of   this  document,"    but  that  "all  sums  received   from  any   source,  pursuant   to  the 
assignments stated herein" would be credited to Ocelot's annual obligation. 

        6      Grace, 944 P.2d at 463. 

                                               -4-                                          6633
 

----------------------- Page 5-----------------------

rights against Bell's insurance carriers and agreed not to execute on the judgment against 
Bell.  The superior court ruled the settlement was reasonable and made in good faith.7 

                3.      INA litigation 

                In   1991,   INA   filed  a  lawsuit   against   the  Graces   individually    and   as 

assignees of Ocelot and Bell seeking a declaration that INA had no obligation to provide 

any    coverage     until  Bell   paid   $5.1   million   from    its  own   assets.    The    Graces 

counterclaimed   seeking       a  declaration   that   INA   was   obligated   to   pay   all   of   Bell's 

liabilities in excess of $5.1 million, even if the $5.1 million was never paid, and claiming 

that Bell's failure to seek INA's approval of its settlement with the Graces was excused 

because INA had a duty to provide additional coverage due to the insolvency of the other 
carriers; i.e. a duty to "drop down."8       INA objected to the settlement and amended its 

complaint to allege that the settlement was the product of collusion.9 

                After the superior court concluded that Bell's settlement with the Graces 

voided     INA   coverage,   the   Graces    appealed.    They    claimed    that   even  though    the 

settlement breached a cooperation clause in the INA policy, the breach was excused by 
INA's improper acts.10      Our court reversed the superior court's ruling. We held that INA 

had no duty to "drop down" to defend Bell or to tender its policy limits in settlement, and 

the settlement between Bell and the Graces breached Bell's agreement with INA.  But 

we also decided there was a genuine issue of material fact that prevented us from ruling 

        7       Id. 

        8       Id. 

        9       Id. 

        10      Id. 

                                                 -5-                                            6633
 

----------------------- Page 6-----------------------

on whether INA first repudiated its obligations by refusing to respond until $5.1 million 
was actually paid on the Graces' claim.11 

                On January 29, 1999, INA settled with the Graces.12                 The Graces paid 

litigation costs and attorney's fees out of the proceeds from the settlement of the bad faith 

claim against INA and purchased an annuity for James using some of the remaining 

funds.   On March 30, 1999, the remaining proceeds were placed in an account at First 

National Bank of Alaska. 

                4.      Interim payments from Integrity's receiver 

                Both     Mission    and   Integrity    went   into   receivership    and,   ultimately, 

liquidation.   Mission's receiver exhausted Mission's $500,000 limit defending against 

the Graces' litigation.  Integrity's receiver recognized the claims made against Integrity 
and a damages amount for the Graces' claim was agreed upon.13                    Integrity's receiver 

made six payments to the Graces beginning in April 1999.                These funds, less one-third 

attorney's fees, were deposited in the Graces' First National Bank account. 

                5.      Divorce, partial disbursement, and remarriage 

                On   October   19,   1999,   Kathleen   filed   for   divorce.  Judge   Eric   Sanders 

granted a bifurcated divorce and reserved property issues for trial.                The Graces then 

agreed to a partial disbursement of the funds in the First National Bank account, leaving 

        11      Id. at 468. 

        12      All prior claims made against Mission and Integrity were reserved. 

        13      One of the lawyers who represented the Graces in the underlying case, 

Laurel   Peterson,   stated   during   trial   in   the   interpleader   action   that   the   money   from 
Integrity was the "result of a claim being filed that alleged the injuries sustained and the 
liability of their insured, pre-liquidation, pre-receivership." 

                                                  -6-                                             6633
 

----------------------- Page 7-----------------------

the remaining balance in the account pending the court's final property division.14                 But 

the   Graces    decided    to  remarry    before   the   hearing   on   property    division,   and   on 

September 25, 2000, Judge Sanders dismissed the divorce/property division case for lack 

of jurisdiction.   It appears from the record available to our court on appeal that the 
Graces have remained married, but have continued to live separately, since late 2000.15 

The record is void of evidence indicating whether they have operated as a joint economic 

unit since their remarriage. 

        B.      Proceedings 

                On February 24, 2006, Laurel Peterson filed a complaint for interpleader 

of funds, requesting that the balance remaining in the First National Bank account be 

deposited with the clerk of the court and that the court determine how   the proceeds 

should be disbursed to the Graces. 

                On   May   9,   2007,   Kathleen   filed   a   motion   to   divide   and   disburse   the 

remaining funds, claiming that she was entitled to one-half of the funds because she and 

James were "equal holders of the assignments."  James filed an opposition to Kathleen's 

motion, claiming that the assignments from Ocelot and Bell were made "without any 

allocation of individual right or individual shares," that the settlement funds from INA 

were intended to compensate James for his personal injuries, that Kathleen's only claim 

was for loss of consortium, and that the funds should therefore not be disbursed equally. 

                The superior court held a non-jury trial on August 17, 2009, and issued its 

decision on September 15, 2009.          After finding that the bank account contained funds 

from two distinct sources (INA and Integrity), the court applied the "analytic" approach 

        14      These disbursements are not at issue in this case. 

        15      The date when the Graces began to live separately and the details of the 

separation are unclear from the record before us.  See infra Part IV.A. 

                                                  -7-                                               6633 

----------------------- Page 8-----------------------

articulated by our court in Bandow v. Bandow16 to classify the portions of the Integrity 

recovery allocated for "past pain and suffering," "future pain and suffering," and "loss 

of enjoyment in life" as James's separate property.            The portion allocated for "loss of 

consortium" was classified as Kathleen's separate property, and the portions allocated 
for   "past   economic   loss,"17   "past   medical   loss,"   and   "rehabilitation   services"   were 

classified as marital property to be divided equally.          The court concluded that the INA 

recovery was for "the insurance bad faith claim, and not for the underlying personal 

injury claim."    The superior court divided the remaining INA recovery equally. 

                James appeals. 

III.    STANDARD OF REVIEW 

                The parties agreed that principles applicable to division of marital property 

should control the allocation of the proceeds from the underlying accident.               Therefore, 

we look to standards of review applicable to cases involving the division of marital 

property. 

                The trial court's characterization of property as separate or marital in a 
divorce proceeding is reviewed for abuse of discretion.18         "However, when the trial court 

makes a legal determination in the course of carrying out this step, that determination is 

        16      794 P.2d 1346, 1348 (Alaska 1990). 

        17      The superior court's decision uses the term "past economic loss," but the 

exhibit upon which this figure is based states that this figure was actually an estimate of 
"Net Past and Future Period Economic Loss." (Emphasis added.) 

        18      Fortson v. Fortson, 131 P.3d 451, 456 (Alaska 2006) (citing Martin v. 

Martin, 52 P.3d 724, 726 (Alaska 2002)). 

                                                  -8-                                           6633
 

----------------------- Page 9-----------------------

reviewed de novo."19    Under this standard, it is this court's duty to "adopt the rule of law 

that is most persuasive in light of precedent, reason, and policy."20     Any factual findings 

the superior court made in determining whether to classify settlement proceeds as marital 
property "will not be disturbed unless clearly erroneous."21 

               The superior court's ultimate distribution of assets in a divorce proceeding 

is likewise reviewed for abuse of discretion and will be reversed only if the distribution 
is clearly unjust.22 

IV.    DISCUSSION 

               On appeal, James raises two arguments:  (1) under Bandow, it was error to 

classify the portion of the Integrity recovery allocated for "past economic loss," "past 

medical losses," and "rehabilitation services" as marital property without taking into 

account the fact that the Graces have lived separately since 1991; and (2) it was error to 

conclude that the INA settlement proceeds were paid to resolve an insurance bad faith 

claim that was a "separate and distinct cause of action" from James's original personal 

injury claim. 

        19     Lundquist v. Lundquist, 923 P.2d 42, 47 (Alaska 1996); see also Fortson, 

131 P.3d at 456. 

       20      Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979). 

        21     Hatten v. Hatten, 917 P.2d 667, 672 n.11 (Alaska 1996) (quoting Bays v. 

Bays, 807 P.2d 482, 485 n.4 (Alaska 1991)). 

       22      Martin, 52 P.3d at 726;see also Harrelson v. Harrelson, 932 P.2d 247, 253 

(Alaska 1997) ("We have held that trial courts have broad discretion in dividing property 
and that such decisions will not be disturbed unless clearly unjust."). 

                                               -9-                                         6633
 

----------------------- Page 10-----------------------

        A.	     The Superior Court Did Not Err By Failing To Consider The Parties' 
                Physical Separation When Dividing The Integrity Proceeds. 

                1.	     The superior court did not err by declining to use the Graces' 
                        date of physical separation to differentiate assets. 

                The superior court divided the proceeds received from Integrity's receiver 

by classifying each category of damages upon which the confessions of judgment were 

based as "separate" or "marital" property using the "analytic" approach we adopted in 
Bandow v. Bandow.23        The superior court recognized that, under Bandow, tort recovery 

compensating for "losses to the marital estate, such as pre-divorce earnings," is marital 

property.    The court also recognized that tort recovery compensating for "post-divorce 

earnings"   and   for   "non-economic   damages   such   as   pain   and   suffering"   is   separate 
property.24   The Graces were legally married at the time of the interpleader action and the 

superior court did not establish a date of separation to distinguish between recovery 

intended   to   compensate   for   marital   expenses   and   losses,   and   recovery   intended   to 

compensate for "post-marital" expenses and losses. 

                Both   parties   agree   that   the   "analytic"   approach   articulated   in  Bandow 

controls   the   classification   of   the   recovery   received   from   Integrity,   even   though   the 
Graces are married.25       But James argues that the court should have taken the Graces' 

"permanent separation" in 1991 into account when dividing the funds remaining in the 

First National Bank account because "the [proper] date for determining whether property 

        23	     794 P.2d 1346, 1348 (Alaska 1990). 

        24      Id. at 1348-50. 

        25      James argues on appeal, "Logically, this is an accounting case and not a 

divorce case.     However, since the parties have been separated for many years without 
formally divorcing, the principles of property division in a divorce   make sense and 
should be applied." 

                                                  -10-	                                           6633
 

----------------------- Page 11-----------------------

is marital or non-marital is the date that the marriage has terminated as a joint enterprise, 

that is, the date of separation."        Kathleen counters that James waived this argument 

because he did not raise the Graces' separation as an issue to be considered at trial or 

"present any evidence as to the duration of the parties' separation, or to the reasons 

behind why the parties had decided to live in separate residences" in his pleadings or at 

trial.  Kathleen   argues   in   the   alternative   that   "the   fact   that   [the   Graces]   have   lived 

separately has no merit or bearing on the issues before this Court" because the Graces 

were married when the injury occurred, when the original lawsuit was filed, when they 

signed the assignments of rights with Ocelot and Bell, and when INA filed the lawsuit 

against them, and they remain married today, with divorce neither pending nor likely. 

                Under some circumstances, a long-term separation - even in the absence 

of divorce - might influence the characterization of an asset as either separate or marital 

property.    But as we stated in Bandow, "to the extent that the parties do not provide 

sufficient evidence to make a reasonable allocation to a separate estate, the award should 
be classified as marital property."26        James argued at trial that the Graces' permanent 

separation should be considered when dividing the Integrity proceeds,27  but the record 

does not include any evidence supporting his assertion on appeal that the parties stopped 

        26      794 P.2d at 1350 (citing Landwehr v. Landwehr, 545 A.2d 738, 744 (N.J. 

1988)). 

        27      Counsel for James stated: "Even though they're married you can't treat this 

as a marital unit because they separated years ago," and "regardless of what Mr. Grace 
believes,   I   believe   that   the   only   reason   they're   legally   married   is   that   Ms.   Grace   is 
hanging [o]nto this to make the claim. . . ."   About the category of recovery allocated to 
"economic loss," he argued:  "It's marital but it should not be divided equally, it should 
be divided based upon life expectancy and the date of separation." 

                                                  -11-                                             6633
 

----------------------- Page 12-----------------------

operating as a joint economic unit.28         The absence of evidence regarding how the parties 

have configured their finances since they began living apart is   significant:                    James's 

counsel asserts that James has borne his own living expenses and the Integrity settlement 

should therefore be allocated to him; Kathleen contends that the expenses associated with 

James's injury "depleted the marital estate" - in other words, she maintains that the 

expenses have been borne jointly, and that the Integrity recovery should be treated as 

marital property.      The record does not allow us to determine whether the parties paid 

their living expenses separately or as a joint economic unit.  James argued - incorrectly 
- that Kathleen bears the burden of proof on this issue.29                  It was James's burden to 

prove that the Integrity recovery should be treated as his separate property.30 

                 Because   the   Graces   remain   married,   because   they   did   not   divide   their 

property at the time they briefly divorced, and because James failed to offer any evidence 

at   trial   regarding   the   date   or   financial   circumstances   of   the   Graces'   separation,   the 

        28       James asserts in his appellate brief that the trial testimony established that 

Kathleen   and   James   separated   in   1991   and   Kathleen   "supported   herself   for   the   last 
eighteen years and continues to do so without James's financial involvement."  He also 
argues the parties have "had no economic interaction since the date of separation" and 
neither party "has contributed to the other's financial needs since the 1991 separation." 
But Kathleen's brief counters that   the   trial   record does not include any evidence to 
support these assertions, and, in his reply brief, James concedes that he did not raise the 
issue of "when the parties separated" in the superior court because "the issue was not 
relevant until the trial court assigned items to Kathleen . . . which should not have been 
assigned to her." 

        29       Bandow, 794 P.2d at 1350 (holding that, absent sufficient evidence of the 

allocation of a tort recovery to one spouse's separate estate, the spouse asserting that a 
portion of the recovery is indeed separate bears the burden of proof). 

        30       Id. 

                                                    -12-                                              6633
 

----------------------- Page 13-----------------------

superior court did not err by declining to use the Graces' 1991 physical separation to 

differentiate "marital and post-marital" property. 

                2.	      It   was   not   an   abuse     of  discretion     to  classify    "past 
                         economic loss," "past medical loss," and "rehabilitation 
                         services" as marital property under Bandow. 

                James also argues that the superior court's classification of the Integrity 

proceeds for "past economic loss," "past medical losses," and "rehabilitation services" 

as marital property was incorrect because these categories of recovery were meant to 

compensate for losses to James's separate estate.             Kathleen responds that the superior 

court correctly classified these proceeds as marital property underBandow because "[a]ll 

medical     expenses     occurred    during    the  marriage"     and   "Mr.   Grace's     rehabilitation 

expenses are expenses of the marital estate that decrease the net worth of the marital 

estate." 

                In Bandow, we held that a tort recovery for "medical expenses" could be 

"a   combination   of   marital   and   separate   property:     marital   property   to   the   extent   it 

compensates        for  pre-divorce     expenses     [and]    separate    property    to  the   extent   it 
compensates for post-divorce expenses."31             Here, the category of damages allocated to 

"past medical loss" was based on the actual expenses the Graces had incurred for medical 
services as of the time the first offer of judgment was made in 1991.32                  Because these 

damages   compensated   for   expenses   incurred   prior   to   the   Graces'   1991   "permanent 

        31      Id. at 1348-49. 

        32      Mr.   Peterson   testified:    "We   knew   for   a   fact   the   exact   amount   of   the 

medicals . . . as a result of Mr. Grace's being hospitalized and treated." 

                                                  -13-                                                6633 

----------------------- Page 14-----------------------

separation,"      recovery    for   "past   medical    loss"   was    properly    classified   as   marital 

           33 
property. 

                 The category of damages allocated to "rehabilitation services" in 1991 was 

based on an analysis done by a rehabilitation counselor to prepare for negotiating the 

confession of judgment.          The analysis provided high and low estimates of expected 

rehabilitation costs for James, including projected future costs for   drugs, vocational 

training, future medical and surgical care, and residential care.  It is unclear what portion 

of these damages can fairly be attributed to compensation for rehabilitation services costs 

incurred after the Graces' permanent separation; the record is silent on expenses incurred 

after 2000. As explained, the superior court was not required to take the parties' physical 

separation into account or treat it as a de facto divorce for purposes of characterizing 

recovery for post-separation expenses because "the parties [did] not provide sufficient 

evidence to make a reasonable allocation to a separate estate, [so] the award should be 
classified as marital property."34  Under these circumstances, we cannot say the trial court 

abused its discretion by classifying the recovery allocated to "rehabilitation services" as 
marital property.35 

        33       See Bandow, 794 P.2d at 1348-49.             Expenses incurred during a marriage 

are presumptively marital.         See Jones v. Jones, 942 P.2d 1133, 1137 (Alaska 1997) 
(holding that doctor's fees incurred during the marriage should be included in the marital 
estate). 

        34      Bandow, 794 P.2d at 1350. 

        35       James     attempts    to  argue   that  "past   medical     loss"  and   "rehabilitation 

services" should be classified as separate property because, like damages for pain and 
suffering, James's rehabilitation costs are "intimately [and] directly related to James 
Grace alone," and past medical expenses are "personal to James Grace" because "[h]e 
incurred the injuries."       But this court's   discussion in Bandow  of losses that are "so 
personal   to   the   claimant   spouse   that   classifying   them   as   marital   property   would   be 
                                                                                           (continued...) 

                                                   -14-                                              6633
 

----------------------- Page 15-----------------------

                We affirm the superior court's classification and distribution of the funds 
received from Integrity's receiver.36 

        B.      It Was Error To Divide The INA Proceeds Equally. 

                The     superior   court    ruled   that  the   funds   received    from    INA    were 

compensation for settling the insurance bad faith claim that was assigned to the Graces, 

not compensation for the Graces' personal injury and loss of consortium claims against 

Ocelot and Bell. The court treated the INA proceeds as marital and equally divided them 

between   the   parties.    In   reaching   this   ruling,   the  superior   court   reasoned   that   the 

insurance bad faith cause of action was "separate and distinct from the underlying tort 

action" and that the assignment implied both Graces were to "share the benefits as well 

as the burden" of litigation against INA.  James argues that the funds from INA should 

be treated as a "personal injury recovery" - and thus his separate property - because 

"[t]here is no logical distinction . . . between a personal injury recovery which is paid 

voluntarily . . . and a recovery   based   on personal injury which requires litigation to 

enforce payment."       Kathleen argues that "the INA funds are the result of the Grace[s'] 

willingness to accept an assignment of rights from [Bell and Ocelot] to pursue a 'bad 

faith' insurance claim against [INA]" and should therefore be treated as a bad faith 

        35(...continued) 

inequitable" referred only to damages for "pain and suffering, mental anguish," and other 
"non-economic loss." Bandow, 794 P.2d at 1349. We noted in Bandow that, in contrast, 
"the diminution of the marital estate by loss of past wages or expenditure of money for 
medical expenses" is "truly shared" among married parties.  Id. 

        36      James's brief lists "past economic loss" in the heading that precedes the 

presentation of his argument that the court incorrectly classified some of the losses that 
resulted from James's accident as "marital," but he did not separately argue that the 
superior court erred by treating "past economic loss" as a marital loss. 

                                                  -15-                                            6633
 

----------------------- Page 16-----------------------

insurance claim and divided equally between the parties.   We agree with James, at least 

in part. 

                 The    nature    of  the  separate    bad   faith  claim    is  not  dispositive    of  the 

classification of this asset.       In Alaska, classification of tort recoveries for purposes of 

marital property division depends on the loss the recovery was intended to replace, not 
the nature of the cause of action giving rise to recovery.37            In Bandow, we explained the 

"analytic approach" to classification of tort recoveries for purposes of dividing marital 

estates: 

                 [T]he purpose for which the recovery is received controls its 
                 classification; a recovery, or portion thereof, being classified 
                 as  that   which   it   is   intended   to   replace.  To the extent   the 
                 recovery   compensates for losses to the marital estate, it is 
                 marital property. To the extent the recovery compensates for 
                 losses to a spouse's separate estate, it is his or her separate 
                 property.[38] 

                 Here, Bell assigned to the Graces "any rights, causes of action, or claims 

that Bell has or may have resulting from the breach of the fiduciary, duty of good faith, 

or contractual duties existing between Bell and any insurance carrier."                   But in order to 

acquire those rights and the resulting recovery against INA, the Graces gave up the right 

to execute on the judgment entered   against Bell on the claims arising from James's 
personal injuries, including Kathleen's loss of consortium claim.39               The Graces' recovery 

        37       Bandow, 794 P.2d at 1348. 

        38       Id. (emphasis added; internal citations omitted). 

        39       Grace   v.   Ins.   Co.   of   N.   Am.,   944   P.2d   460,   463   (Alaska   1997)   ("Bell 

confessed judgment based on an anticipated verdict of $8,120,920. . . . In return, the 
Graces agreed not to execute the judgment against Bell."). 

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against INA was "intended to replace"40 the underlying claims of both parties and should 

be classified as a combined recovery for personal injury and loss of consortium.   It 

should be divided in the proportions identified by the expert analysis of the anticipated 
verdict prepared at the time of the settlement with Ocelot.41 

                The superior court correctly ruled that the Integrity proceeds attributable 

to Kathleen's claim for loss of consortium should be classified as her separate property. 

But only some components of James's claim for personal injury - specifically, the 

portions allocated for "past pain and suffering," "future pain and suffering," and "loss 

of enjoyment in life" - are his separate property because this recovery was clearly 

intended   to   compensate   for   damages   he   alone   sustained.    The   other   components   of 

James's personal injury   recovery - those allocated for "past economic loss," "past 

medical loss," and "rehabilitation services" - were properly considered marital because 

the   superior   court   did   not   have   evidence   that   the   Graces   stopped   operating   as   an 

economic unit following their physical separation.  The superior court also did not have 

evidence showing how much of the total recovery was spent on expenses falling into 

each of these categories since the date of the recovery. 

V.      CONCLUSION 

                We AFFIRM the superior court's division of the Integrity proceeds, but 

REVERSE   its   division   of   the   INA   proceeds.     We   remand   for   division   of   the   INA 

recovery based on Bandow. 

        40      Bandow, 794 P.2d at 1348. 

        41      See supra note 3. 

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