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For many Canadians, whether the purpose is to fund payment of anticipated estate liabilities, to assist in the financial support of one’s dependants, to honour support payment obligations, to equalize the distribution of an estate between multiple children, or to provide a direct benefit to one or more designated beneficiaries, life insurance policies represent an important component of an estate plan. If the beneficiary designation of a policy cannot be honoured following the insured’s death, this may result in the complete frustration of his or her testamentary wishes and prevent the estate plan from being implemented in the manner that was intended.  In some circumstances, if the proceeds of a life insurance policy cannot be paid out to the intended beneficiaries, estate assets that beneficiaries intended to retain in specie, such as cherished family heirlooms or multigenerational real property, may need to be sold to fund payment of estate liabilities and one’s survivors may be left in need of financial support in any event. 

In a time when many Canadians are facing their mortality and taking the pause from normal life as an opportunity to review and update estate plans, many Canadians are turning their minds to life insurance, with applications for new life insurance policies doubling during the pandemic,[i] highlighting the role of insurance in planning for the unexpected during this period of uncertainty.

From time to time, decisions of courts in Ontario and other provinces have impacted how Canadians have been able to use life insurance as part of their plans.  For example, the 1985 decision of the Ontario High Court of Justice in Shannon v Shannon[ii] saw the enforcement of a separation agreement to provide a surviving separated spouse with the proceeds of a life insurance policy to the exclusion of its designated beneficiaries. More recently, the Ontario Court of Appeal[iii] considered the issue of support obligations secured in the form of a life insurance policy pursuant to court order in the context of a dependant’s support application against the estate and the policy proceeds. This article will focus on the impact that the Supreme Court of Canada’s decision in Moore v Sweet[iv] has had on life insurance planning, including the ability of Canadians to rely upon irrevocable beneficiary designations and the enforceability of agreements regarding insurance proceeds that are inconsistent with such designations.  As outlined below, Moore v Sweet has clarified the limitations of irrevocable beneficiary designations, providing guidance to estate planners, family lawyers, and insurance professionals alike.

The Facts of Moore v Sweet

The facts of Moore v Sweet were relatively straightforward. The applicant had been married to the deceased and they had separated in late 1999. In 2000, the applicant and the deceased entered into an oral agreement (which finding was never appealed) regarding the insurance policy that had been held on the deceased’s life since 1985, valued at $250,000.00. The applicant had at that time already been designated as the beneficiary of the policy and the premiums had been paid out of the couple’s joint bank account leading up to their separation. The applicant and the deceased agreed that, going forward, the applicant would pay all of the premiums for the policy and, in exchange, she would remain its beneficiary.  

Shortly after the oral agreement was made, unbeknownst to the applicant, the deceased breached the agreement by naming the respondent, his new common-law spouse, as irrevocable beneficiary of the life insurance policy. The applicant complied with her obligations under the agreement and paid all premiums on the life insurance policy until the deceased’s death approximately thirteen years later.  

Decisions of the Lower Courts

At the time of the deceased’s death, his estate was insolvent and the applicant was, accordingly, unable to pursue a claim in damages for breach of contract.  She commenced an application for the opinion, advice, and direction of the Court as to her entitlement to the proceeds of the life insurance policy. Justice Wilton-Siegel of the Ontario Superior Court of Justice found that the respondent had been unjustly enriched[v] and imposed a constructive trust benefitting the applicant upon the policy proceeds.

The respondent successfully appealed the finding of unjust enrichment to the Ontario Court of Appeal. While the Court of Appeal found that the applicant had satisfied the first two parts of the test for unjust enrichment, it disagreed with Justice Wilton-Siegel that there had been no juristic reason for the respondent’s retention of the proceeds of the policy. The Court considered the irrevocable beneficiary designation in a manner consistent with the requirements of the Insurance Act[vi] to be a juristic reason (falling under the category of “disposition of law”)[vii] that permitted what otherwise would have been considered a remediable unjust enrichment. The applicant’s claim for a constructive trust over the policy proceeds on the basis of good conscience was, similarly, dismissed.      

Appeal Before the Supreme Court

The applicant subsequently applied for and was granted leave to appeal to the Supreme Court of Canada. She asserted that a beneficiary designation under the Insurance Act, whether revocable or irrevocable, could not in all circumstances constitute a juristic reason, and that, even if the test for unjust enrichment could not be satisfied, she was entitled to a constructive trust remedy on the basis of good conscience.

The Supreme Court of Canada released its decision in late 2018 and ruled 7-2 in favour of the applicant. Justice Côté, writing for the Majority, agreed that the test for unjust enrichment is flexible and permits courts to use it in the promotion of justice and fairness where required by good conscience. The Court clarified that the juristic reason permitting an unjust enrichment needs to justify not only the enrichment of one party but also the corresponding deprivation of the other party. While the irrevocable beneficiary designation may have required the payment of the proceeds of the policy to the respondent, it could not be considered as also requiring the applicant’s deprivation of the proceeds to which she was entitled under the oral agreement.  

The Court found that a designation of an irrevocable beneficiary under the Insurance Act precludes claims by creditors of an estate, but it does not state “with irresistible clearness” that it also precludes a claim in unjust enrichment by a party who has a contractual or equitable interest in the proceeds:

At issue in this case…is whether a designation made pursuant to ss. 190(1) and 191(1) of the Insurance Act provides any reason in law or justice for [the respondent] to retain the disputed benefit notwithstanding [the applicant’s] prior contractual right to remain named as beneficiary and therefore to receive the policy proceeds. In other words, does the statute preclude recovery for a plaintiff, like [the applicant], who stands deprived of the benefit of the insurance policy in circumstances such as these? In my view, it does not. Nothing in the Insurance Act can be read as ousting the common law or equitable rights that persons other than the designated beneficiary may have in policy proceeds. As this Court explained in Rawluk v. Rawluk, [1990] 1 S.C.R. 70 (S.C.C.), at p. 90, the “legislature is presumed not to depart from prevailing law ‘without expressing its intentions to do so with irresistible clearness'”…for example, the British Columbia Court of Appeal found that the Personal Property Security Act, R.S.B.C. 1996, c. 359, provided a “complete set of priority rules” that was “designed to replace convoluted common law, equitable and statutory rules that beset personal property security law with complexity and uncertainty” (paras. 21 and 27, citing Innovation Credit Union v. Bank of Montreal, 2010 SCC 47, [2010] 3 S.C.R. 3 (S.C.C.)). In those circumstances, there was no “room for priorities to be determined on the basis of common law or equitable principles” (para. 22). By contrast, while the Insurance Act provides the mechanism by which beneficiaries can be designated and therefore become statutorily entitled to receive policy proceeds, no part of the Insurance Act operates with the necessary “irresistible clearness” to preclude the existence of contractual or equitable rights in those insurance proceeds once they have been paid to the named beneficiary.[viii]

The Court did not consider it necessary to address the issue of whether a constructive trust remedy may be available in the absence of a finding of unjust enrichment, as the applicant had satisfied the tripartite analysis. The potential implications of this conclusion are referred to in greater detail below.  

While reaching the opposite result, the dissent acknowledged that this was a difficult appeal, in which both parties were innocent and had strong moral claims to the proceeds of the life insurance policy.  

This recent Supreme Court decision has provided necessary clarification of the juristic reason component of the test for unjust enrichment. It has also confirmed the circumstances in which a constructive trust remedy is appropriate within the context of unjust enrichment.   

Constructive Trust Remedies in Other Contexts

As it made a finding of unjust enrichment, it was not necessary for the Court in Moore v Sweet to consider the second issue before it, being whether, in the absence of unjust enrichment, a constructive trust could nevertheless be imposed in the circumstances on the basis of “good conscience”. As it was not addressed by the Supreme Court of Canada, the state of the law with respect to the limitations of remedial constructive trusts remains somewhat uncertain.

In 1997, the Supreme Court released its decision in Soulos v Korkontzilas[ix].  That case considered situations that may give rise to a constructive trust remedy. In referring to the categories in which a constructive trust may be appropriate, which were noted to historically include where it was otherwise required by good conscience, Justice McLachlin, as she then was, stated as follows:

I conclude that in Canada, under the broad umbrella of good conscience,  constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation…Within these two broad categories, there is room for the law of constructive trust to develop and for greater precision to be attained, as time and experience may dictate.[x]

Since 1997, Soulos and the above excerpt have been interpreted differently by scholars and Courts of Appeal throughout Canada: in some instances, Canadian courts have interpreted Soulos as having broadened the law with respect to the applicability of remedial constructive trust, whereas in others, courts have cited Soulos as having abolished the good conscience constructive trust and restricting the availability of constructive trust to a very limited set of circumstances.[xi]

In choosing not to address the issue of the availability of constructive trust remedies outside of the unjust enrichment context, Justice Côté stated as follows:

This disposition of the appeal renders it unnecessary to determine whether this Court’s decision in Soulos should be interpreted as precluding the availability of a remedial constructive trust beyond cases involving unjust enrichment or wrongful acts like breach of fiduciary duty. Similarly, the extent to which this Court’s decision in Soulos may have incorporated the “traditional English institutional trusts” into the remedial constructive trust framework is beyond the scope of this appeal. While recognizing that these remain open questions, I am of the view that they are best left for another day.

It will be interesting to see if and when the Supreme Court ultimately chooses to determine “the open questions” regarding the availability of the remedial constructive trust. Until then, it appears that some debate regarding the circumstances in which it may be imposed will remain. Depending on how the law may develop in the future, it is certainly possible that the proceeds of a life insurance policy will be subject to the imposition of a constructive trust even in the absence of a finding of unjust enrichment or a wrongful act.

Practical Considerations

When assisting clients with estate planning (particularly in the circumstances of a separated or divorced client) or in negotiating separation or divorce terms, it is important to remember that life insurance policies may be subject to claims that result in the imposition of a constructive trust, preventing their proceeds from being paid out to designated beneficiaries. 

In Moore v Sweet, the Supreme Court of Canada confirmed that the designation of an irrevocable beneficiary in accordance with the provisions of the Insurance Act does not preclude the existence of other rights that may take priority over those of an irrevocable beneficiary. 

Typically, in family law proceedings, the rights of separated or divorced parties to the proceeds of an insurance policy are clearly set out as terms of a separation agreement and may be subsequently confirmed within a court order that requires one party to maintain a life insurance policy for the benefit of the other party and/or the children of the relationship. For example, in Dagg v Cameron Estate[xii], a court order confirmed that support obligations were to be satisfied out of life insurance proceeds upon the predeceasing spouse’s death and the interest of the surviving spouse was deemed to have been protected (to the extent of the deceased’s support obligations) against a claim for dependant’s support. However, the presence or absence of a formal written agreement or a court order securing one’s interests in a life insurance policy may not necessarily mean that the proceeds are insulated from claims that will take priority over the rights of an irrevocable beneficiary. 

The outcome of Moore v Sweet confirms that a constructive trust can be imposed with respect to the proceeds of a life insurance policy regardless of the irrevocable nature of a beneficiary designation and regardless of whether there is a written agreement clearly setting out the rights of the parties vis-à-vis the policy. 

Professionals and lawyers assisting clients with marital breakdown and/or life insurance planning should inquire as to the background and purpose of the policy and any related agreements between the client and other individuals (including and beyond what may be contained within a separation agreement) so that they can advise clients in a manner that reflects the most likely disposition of the asset after death. While any claim against the policy may ultimately need to be assessed by the court, it is important to remember that the Insurance Act does not preclude rights outside of its provisions unless it is “irresistibly” clear that it was the intention of the legislature to do so. 

Questions family law and estate planning professionals may wish to consider asking clients include the following:

       i.         What was the purpose of the life insurance policy when it was first obtained?  Was this objective subject to an oral or written agreement?  

     ii.         Has there been any change in the intended purpose of the life insurance policy?  If so, has any pre-existing agreement regarding the policy been formally amended to reflect that intention?

    iii.         Who pays the premiums of the life insurance policy?  Is he or she under a legal obligation to do so?

    iv.         If premiums are paid from a joint account, who contributes toward the account and is it impressed with a resulting trust in favour of only one of the joint account holders?

     v.         Is the life insurance policy subject to an assignment (either legal or equitable)?  Has the contract been assigned as security, and if so, to what extent?  Has the insured retained the ability to designate an irrevocable beneficiary of the policy? 

    vi.         Have the proceeds of the life insurance policy been promised to any individual? If so, has any consideration been provided?

   vii.         Is there any court order referring to the life insurance policy and/or any related obligations?

 viii.         Is the beneficiary designation in place for the policy revocable or irrevocable?  If revocable, is it understood by the insured and the beneficiary that the insured is at liberty to designate a new beneficiary (either revocable or irrevocable)?

    ix.         Are the proceeds of the life insurance policy required for the support of one or more dependants who are anticipated to survive the insured?

Addressing these issues as part of separation or divorce negotiations or contemporaneous estate planning discussions may assist in preventing litigation surrounding a life insurance policy and its proceeds after death.

Conclusion 

In light of the significant impact that new case law can and does continue to have on the ability of Canadians to freely designate beneficiaries of life insurance policies, it is best for family law professionals, estate planners, and others who deal with life insurance to remain apprised of meaningful developments as they occur. Many individuals rely upon life insurance as an integral part of their estate plans, and absent adequate consideration of the claims that may be made against a policy after death, a client’s testamentary wishes may not be capable of being fulfilled.


[i] Juliette Baxter, “Life insurance costs are on the rise because of COVID-19. Here’s how you can still get coverage” Financial Post[online], July 10, 2020, available at: <https://bit.ly/3k2PaY4>.

[ii] 50 OR (2d) 456, 19 ETR 1.

[iii] Dagg v Cameron Estate, 2017 ONCA 366.

[iv] 2018 SCC 52.

[v] The elements of unjust enrichment applied by all levels of court were consistent, being those set out by the Supreme Court of Canada in Pettkus v Becker, [1980] 2 SCR 834: (1) an enrichment; (2) a corresponding deprivation; and (3) the absence of any juristic reason.  

[vi] RSO 1990, c I.8.

[vii] This category of juristic reason and others were recognized in Garland v Consumers’ Gas Co., [2004] 1 SCR 629, which employed a new analytical framework for the third element of the test for unjust enrichment that courts have subsequently applied.

[viii] Supra note 4 at para 70.

[ix] [1997] 2 SCR 217 [Soulos].

[x] Ibid at para 43.

[xi] See, for example, BNSF Railway Company v Teck Metals Ltd, 2016 BCCA 350; KPMG (Trustee in Bankruptcy of Ellingsen) v Hallmark Ford Sales Ltd, 2000 BCCA 458; Tracy v Instaloans Financial Solutions Centres (BC) Ltd, 2010 BCCA 357.

[xii] Supra note 3.



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