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SCC rules on importance of irrevocable beneficiary designation

A recent Supreme Court of Canada (SCC) case shows the importance of an irrevocable beneficiary designation for spouses hoping to secure support payments using life insurance, Toronto wills and estates lawyer Elinor Shinehoft tells AdvocateDaily.com.

A 7-2 majority of the nation’s top court ruled that the common-law partner of a deceased insurance policyholder was unjustly enriched when she was named its beneficiary even though the dead man’s ex-wife had been paying the premiums for more than a decade.

The ruling overturned a majority decision by the Ontario Court of Appeal, which found that the deceased provided a “valid juristic reason” for his common-law wife to receive the $250,000 payout by designating her the irrevocable beneficiary under the policy.

Shinehoft, principal of Shinehoft Law, says the result finally went the right way but adds that the whole saga could have been avoided if the ex-wife had negotiated to be named the irrevocable beneficiary when the policy was first taken out.

“When life insurance is purchased by a payor to secure their support payments, we always recommend that an irrevocable beneficiary designation is made in favour of the recipient,” she says. “It’s a good protective measure, especially for someone who is going to be making all the premium payments.

Alternatively, she says an ex-spouse could require regular updates from the insurance company proving that they are still named as the beneficiary and a condition of continuing to pay premiums.

The case dates back to the end of the 20-year marriage between the successful appellant and the deceased in 1999. As part of an oral agreement made after their separation, the woman agreed to continue paying the premiums on his life insurance policy on the understanding that she would receive the proceeds when he died.

However, according to the decision, the deceased reneged on the agreement just nine months later, when he changed the beneficiary designation on the policy in favour of his common-law spouse, who was still living with him at the time of his death. 

At the trial level, a Superior Court judge ruled in favour of the ex-wife, but a 2-1 majority of the province’s appeal court overturned that decision, finding that the irrevocable designation made under the Insurance Act, provided a “juristic reason” for the common-law spouse’s windfall, defeating the unjust enrichment claim.

But at the Supreme Court, the majority sided with the ex-wife, concluding that the earlier agreement meant that the irrevocable designation was no longer the deceased’s to make.

According to Shinehoft, the case is a must-read for counsel who advance or defend these matters.

“I’m always cautious when advising on unjust enrichment cases, but from my perspective, this was the right decision by the court,” she says.

Writing for the majority, Justice Suzanne Côté, found that the oral agreement was binding, and could not be automatically overridden by an irrevocable designation under the Insurance Act.

As a result, she concluded that all three elements of the test for unjust enrichment — which require the defendant to be enriched, the plaintiff to suffer a corresponding deprivation, and the absence of a juristic reason for the enrichment — were met.

“Because each of [the ex-wife’s] payments kept the policy alive, and given that [the common-law spouse’s] right as designated beneficiary necessarily deprived [the ex-wife] of her contractual entitlement to receive the entirety of the insurance proceeds, I would impose a constructive trust to the full extent of those proceeds in [the ex-wife’s] favour,” Côté added.

The dissenting judges said in their reasons that they would have disallowed the unjust enrichment claim on the basis that the deprivation and enrichment in this case did not correspond well enough to one another. They would instead have considered the ex-wife a creditor of the deceased’s estate with no claim on the policy proceeds.

Shinehoft says the dissenting and appeal court majority were likely influenced by the sympathetic nature of the common-law spouse of the deceased, who is disabled and impecunious.

“I felt bad for her if she was legitimately expecting a payout, but I’m glad the court didn’t just split the money by giving the first wife back her premiums. Instead, they acknowledged what she would be giving up and that she had paid those sums in order to get the full proceeds of the policy,” she says.  

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