Competing Life Insurance Claims – And the Winner Is…?
In separation and divorce life insurance can be a useful tool to secure support obligations, commonly used to ensure that a support recipient is adequately provided for in the event of a payor’s death before the support obligation has been fulfilled. Accordingly, an obligation to maintain a life insurance policy for the benefit of a support recipient is often part of a comprehensive resolution of parenting, support and/or property issues arising from relationship breakdown, which settlement is typically formalized in a written separation agreement and then confirmed by way of court order.
What happens when a support payor breaches his/her legal obligation to maintain life insurance for the benefit of the support recipient and instead designates someone else as the beneficiary of a life insurance policy, such as a new partner or spouse? Who is the rightful recipient of the life insurance proceeds in the event of the payor’s death before the support obligation has been fulfilled? Is it the support recipient or named beneficiary who should prevail? Both have arguments for legal entitlement.
The Honourable Madam Justice S.L. Hunt McDonald recently grappled with this issue in the Alberta Court of King’s Bench case of Manufacturers Life Insurance Company v. Senesouma, 2016 ABQB 495. In that case, there was a written separation agreement which required the support payor husband to maintain life insurance in the name of his first wife in trust for his children from his first marriage, which obligation was subsequently confirmed in a court order. However, at the time of the husband’s death his second wife was the sole designated beneficiary of two separate life insurance policies and both claimed entitlement to the life insurance proceeds.
In order to determine the competing claims, Mme. Justice Hunt McDonald first examines whether the separation agreement operates to create an express trust over the life insurance proceeds. In particular, the operative paragraphs of the separation agreement provided as follows:
Life Insurance
10.1 As long as Trevor is obligated to pay child support to Michelle, and as long as the life insurance is available to him through his employment at a reasonable cost, he will maintain Michelle, in trust for the children, as beneficiary of the life insurance.
10.2 When Trevor’s obligation to pay child support for the children ends, Trevor shall be free to change the beneficiary designations on this policy.
Mme. Justice Hunt McDonald reviews the 3 requirements for a valid express trust, specifically certainty of intention, certainty of subject and certainty of object. Although Mme. Justice Hunt McDonald finds certainty of intention to create a trust by virtue of the separation agreement and court order and finds certainty of object in that it is clearly the children who were intended to benefit from the life insurance proceeds, there was uncertainty of subject since a particular life insurance policy was not described in the separation agreement and there were two insurance policies in existence at the time of the husband’s death. It was uncertain as to which of the two life insurance policies was to benefit the children, and there was no formula or method for determination provided in the separation agreement, so ultimately there could be no express trust.
Finding no express trust, Mme. Justice Hunt McDonald proceeds to examine whether the life insurance proceeds could be subject to a constructive trust. Constructive trust is an equitable remedy pursuant to which beneficial ownership of property may be vested in a non-owner to remediate unjust enrichment or other inequitable wrongdoing. Mme. Justice Hunt McDonald reviews the 3 requirements to establish unjust enrichment, in particular:
- a benefit or enrichment to one party of the other;
- a corresponding detriment to the party providing the enrichment to the other; and
- no juristic reason for the enrichment.
The first wife’s unjust enrichment claim to the life insurance proceeds cannot succeed because there is a juristic reason for the enrichment, being that the second wife is the designated beneficiary, even if in breach of the separation agreement.
In the absence of unjust enrichment, Mme. Justice Hunt McDonald confirms that a constructive trust may still be imposed to remedy other wrongdoing and refers to the Supreme Court Of Canada case of Soulos v. Korkontzilas, [1997] 2 SCR 217, at paragraph 45 for the four conditions that should generally be met to establish a constructive trust based on wrongful conduct, which conditions are:
- the defendant must have been under an equitable obligation, that is, an obligation of the type courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
- the assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
- 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 their duties and;
- there must be no factors which would render imposition of a constructive trust unjust in all of the circumstances of the case; eg. the interests of intervening creditors must be protected.
Mme. Justice Hunt McDonald determines that these 4 factors clearly applied to the husband, given that he clearly had a contractual obligation to designate the first wife as beneficiary of life insurance in trust for the children, thereby creating an equitable obligation, and but for his breach of that equitable obligation the second wife would have no claim to the life insurance proceeds. The first wife had a legitimate reason to expect that the husband would have fulfilled his contractual and equitable obligations and there is nothing that would render the imposition of a constructive trust unjust in all of the circumstances, noting that the second wife was named as the sole beneficiary of the other life insurance policy. Ultimately, Mme. Justice Hunt McDonald concluded that the constructive trust takes priority over the beneficiary designation, directing that the life insurance proceeds be paid to the first wife in trust for the children.
This debacle could have been avoided if the separation agreement had particularly identified the insurance policy to be maintained for the benefit of the children, if in existence at the time, or if the wife had been a joint owner of the policy, which is the better option. As a joint owner, the wife’s consent would be required to make any beneficiary designations or changes to the policy and the wife would be notified in the event of any lapse to the policy or other issues that could arise.