Posts tagged ‘insurance’

January 23, 2016

Don’t spend that life insurance money too quickly!

Life insurance can be an effective way to leave a legacy.  It allows you to benefit a loved one and, unless the insured’s estate is the beneficiary, avoids the requirement that funds pass through probate.  However, life insurance proceeds are not entirely free and clear of estate obligations in Ontario – so beware before spending that money (and do not disregard notice of court proceedings) – as one man’s daughter learned in the recent case of Bormans v. Bormans Estate.

Sections 72(1) (f) and (f.1) of the Ontario Succession Law Reform Act deem life insurance proceeds to be an estate asset for the purpose of determining the rights of a dependant to support from the estate.  Insurance proceeds therefore may be available to pay support if the other assets of the estate are insufficient to do so.  In Bormans, Mr. and Mrs. Bormans divorced after 38 years of marriage.  Mr. Bormans was to pay support to Mrs. Bormans and warranted to her that she was named as beneficiary of his company life insurance policy.  When he died, without assets, Mr. Bormans was in arrears of his support obligations.  To Mrs. Bormans’ surprise, the company policy had been cancelled but Mr. Bormans had purchased another life insurance policy, naming his daughter as beneficiary.  The proceeds of that policy had been paid to the daughter.  The daughter, despite notice of a  court application by Mrs. Bormans for dependant’s relief, proceeded to dispose of most of the insurance proceeds.

The Court found that Mrs. Bormans was a dependant of Mr. Bormans’ estate.  As a result, the Judge determined that most of the policy proceeds paid to the daughter should have been available to satisfy the estate’s support obligations to Mrs. Bormans.  The Court placed emphasis on the fact that Mr. Bormans had warranted that Mrs. Bormans was the beneficiary of a life insurance policy.  The daughter was ordered to pay to Mrs. Bormans most of the insurance proceeds, with the exception of some amounts spent prior to her receiving notice of the court application.  As the daughter had already used a large part of these proceeds, she became personally liable to repay these amounts.

November 26, 2014

Whose Life Insurance is it Anyway?

A trial decision from the British Columbia Supreme Court recently caught my eye because it dealt with the interesting interplay between life insurance policies and separation agreements.  In Milne Estate v. Milne, a separation agreement required a husband to maintain a life insurance policy in his name, naming the wife as beneficiary.  He later changed the beneficiary to a new common law spouse.  This is not an entirely uncommon occurrence.  The husband died before his obligations under the separation agreement ceased.

The issues in the case were as follows:

  1. Because the husband was required by the separation agreement to name the wife as beneficiary, could the new beneficiary be deemed to hold the insurance proceeds as constructive trustee for the wife?
  2.  Was the estate liable for breach of contract?
  3. If the estate was liable for breach of contract, what is the measure of damages? – the full amount payable under the policy or only such amounts as are required to meet the policy holder’s obligations under the separation agreement?

In dealing with the issue of a constructive trust, the Court cited and followed the Supreme Court of Canada decision in Soulos v. Korkontzilas.  Soulos holds that, under the umbrella of good conscience, constructive trusts are recognized as a remedy for wrongful acts such as fraud and breach of duty of loyalty, as well as to remedy unjust enrichment. However, the Court went on to state that the remedy should be used restrictively, and set out four criteria for the imposition of a constructive trust:

  1. The defendant must have been under an equitable obligation, being one recognized by courts of equity, in relation to the activities giving rise to the assets in her hands
  2. The assets held by the defendant must have resulted from a breach of her equitable obligation to the plaintiff;
  3. The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to her duties; and
  4. There must be no factors which would render imposition of a constructive trust unjust in the circumstances.

In the context of this action, the Court found that these criteria were not met.  While it found that relationships between separated spouses can (in the right circumstances) result in fiduciary obligations, once formalized in a separation agreement, the obligations are primarily contractual and equity will not apply.  That was the finding in this case and the Court was therefore unwilling to impose a constructive trust on the new beneficiary.  The new beneficiary was entitled to the insurance proceeds.

As for the issue of contract, the Court did find that the failure to maintain the life insurance policy in the name of the former spouse resulted in a breach of the separation agreement for which the estate was liable for damages.  The issue was the measure of damages – was it the full amount payable on death under the insurance policy, or only such amounts as the deceased was liable for under the separation agreement, being primarily support obligations?

After reviewing relevant Court of Appeal decisions in Ontario and British Columbia, the Court concluded that the level of damages depended on the wording of the separation agreement.  If the separation agreement stated that the life insurance policy was to act as security for the obligations of the deceased under the separation agreement, the level of damages would be determined by and limited to those obligations.  However, if the obligation to maintain an insurance policy was not stated to be security for the obligations of the deceased, the level of damages for the breach is the full amount payable under the policy.

In this case, while there were certain connections in the separation agreement between support obligations and the requirement to maintain the insurance, it was not clearly stated in the agreement that the policy was to act as security for the performance of the husband’s obligations.  Following the Ontario Court of Appeal in Turner v. DiDonato, the Court found that the obligation to maintain life insurance was a stand-alone obligation; i.e. not security for the husband’s obligations under the separation agreement.  As result, the wife’s entitlement to damages against the estate was the full amount payable upon death under the life insurance policy.

The end result is certainly interesting as the death benefit is in effectively payable twice.