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Estates & Wills & Trusts, Family

Agreements around insurance premiums, benefits should be in writing

A recent Supreme Court of Canada decision highlights the value of conducting periodic “legal checkups,” Ottawa family and estates lawyer Timothy N. Sullivan tells

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 spouse to receive the $250,000 payout by designating her the irrevocable beneficiary under the policy.

Sullivan, principal of SullivanLaw, believes justice was done in the end but says that if either of the deceased’s former partners had consulted a lawyer at an earlier stage, they could have saved themselves the expense of a protracted court battle.  

“It can easily cost you $100,000 to get to the SCC to fight over $250,000. None of this is new law, and it could have been prevented for $400 worth of advice,” he says. “I think everyone should have a family lawyer like they have a family dentist, where they go for periodic checkups.

“As things develop, you can pick up the phone and get some answers from a lawyer who knows you and your situation,” Sullivan adds.

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 SCC, 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.

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.

“The case provides a good description of the remedy of a constructive trust and when it is permissible,” Sullivan says.

However, he adds that the ex-wife would have been in a much stronger position had she formalized her oral agreement with the deceased after their separation.

“Separation agreements are fraught with difficulties when you don’t do things properly,” Sullivan says. “When you reach one, it has to be signed, dated and witnessed — especially when it’s dealing with something as important as life insurance. If you have an agreement that one party is to pay the premiums and receive the benefit of the policy, then it should be in writing, and you should tell the insurance company to make an irrevocable beneficiary designation in that person’s favour.”

Judges at all levels also expressed sympathy for the common-law spouse of the deceased, who is disabled and impecunious, and Sullivan says she too would have been well-served by some legal advice before the death of her partner.

“She was an innocent party who was relying on the statute to benefit from the policy, but she also knew that she wasn’t making any payments,” Sullivan says.

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