Beneficiary Designations

Help clients review them regularly

by Glenn Stephens & Kevin Wark, June 2009

It seems that every couple of years, a court decision is released that serves to remind us of the importance of regularly reviewing insurance beneficiary designations to ensure they properly reflect the wishes of the policyowner. The most recent example is Ferguson, Estate Trustee v. Mew, a decision of the Ontario Supreme Court. This decision also provides a very useful analysis of what remedies may exist where a beneficiary designation is challenged on the basis that it does not reflect the intent of the policyholder.

The facts of the case are as follows. Michael and Stephanie married in 1965 and had two children, who were adults at the time of the court hearing. In 1992, they were divorced. Two years later, Michael married Anne. They had three children, the oldest of which was 14.

In 1994, Michael and Stephanie entered into a separation agreement. Michael agreed to irrevocably designate Stephanie as the beneficiary under an insurance policy for $100,000 with Canada Life and to maintain her as beneficiary until February 28, 1995. At that time it was expected the policy would expire. The agreement also contemplated that Michael might continue insurance on his life after February 28, 1995, payable to Stephanie, if required under a new agreement or court order.

Michael did in fact appoint Stephanie as the beneficiary of the Canada Life policy, but not irrevocably. As well, the policy was continued in force by Michael after February 28, 1995, and the beneficiary designation in favour of Stephanie was never altered. However, Anne stated in evidence that Michael had told her the insurance arrangement with Stephanie was "temporary" and Anne would be redesignated as beneficiary at a later date. As a result of this understanding, Anne continued to pay the premiums from her own funds after Michael became mentally incapacitated in 2000.

In 1998, Michael executed a will appointing Anne as his trustee and left all his estate to her. He also appointed her as his attorney under a power of attorney.

Michael died in 2007 and it was at this point that Anne learned that she was not the beneficiary of the Canada Life policy. She then brought this legal action on behalf of Michael's estate, claiming that the insurance proceeds should flow through his estate to her as sole beneficiary.

It is critical that insurance advisors assist their clients in the regular review of insurance beneficiary designations to ensure they reflect the clients' intentions.

Anne's counsel advanced two different arguments in support of her position. First, it was argued that Stephanie had been "unjustly enriched" by the receipt of the insurance proceeds and, therefore, the equitable remedy of constructive trust could be invoked. Alternately, it was argued that there was a "mistake" in the insurance designation and the court should "rectify" the matter by changing the beneficiary designation to reflect Michael's true intent.

In its analysis, the court started with the proposition that a beneficiary designation is "normally unassailable." The court noted a number of earlier legal decisions where the current wife of the deceased had challenged a beneficiary designation in favour of a former spouse. These decisions confirmed that an insurance designation survives divorce and should be given effect even where there may be clear evidence that the deceased would have wanted the insurance proceeds to be paid to someone other than the divorced spouse.

Other decisions, including the Ontario case of Gaudio v. Gaudio, were cited in support of the position that a general release contained in a separation agreement will not override or revoke a more specific beneficiary designation, as it does not constitute a valid declaration under the Insurance Act. This is true even if the beneficiary designation was not altered due to inadvertence or error on the part of the policyholder.

The court then considered two cases that had applied the equitable remedies of unjust enrichment and/or rectification to permit the insurance proceeds to be paid to someone other than the named beneficiary under the policy. It found they were "extreme" fact situations, where clearly it would be unfair to allow the insurance proceeds to be paid to the named beneficiary.

Applying this case law to the present facts, the court indicated it could not impose a constructive trust in favour of Anne. The designation of Stephanie as the beneficiary created a "juristic reason" for her to receive the insurance proceeds, even though this may have also deprived Anne of those proceeds.

Turning to the remedy of rectification, the court held that it has the power to rectify an insurance policy where there is clear evidence that it does not reflect the intention of the insurer and the insured. This power can extend to changing the beneficiary of an insurance policy. But in the present case, the court was of the view the circumstances did not establish with the necessary level of confidence that the insurance designation in favour of Stephanie was not intended by Michael. As a result, the facts did not justify the court rectifying the beneficiary designation as requested by Anne.

As can be seen from the foregoing, it is critical that insurance advisors assist their clients in the regular review of insurance beneficiary designations to ensure they reflect the clients' intentions. The case law clearly indicates a court will only interfere with a properly constituted insurance designation in the most "extreme" circumstances.



This article was published in the June 2009 issue of FORUM magazine. Posted with permission from the Financial Advisors Association of Canada (Advocis).

These resources are provided for reference only and do not necessarily represent the opinions of Guilfoyle Financial Inc. Please consult your own tax and legal advisors.