It is not uncommon for separating couples to specify that proceeds from life insurance policies are to be used as security for spousal and child support.
But when one person starts another family, can the spouse from the new family “claw back” the life insurance proceeds?
The Ontario Court of Appeal was tasked with answering this question in the recent decision Dagg v. Cameron Estate.
Anastasia and Stephen Cameron married in September 2003. They had two children together, and in 2010 Stephen took out a $1 million policy of insurance on his life. Stephen was the owner of the policy and he designated Anastasia as the sole beneficiary.
When Anastasia and Stephen separated in 2012, the terms of one of the consent orders stated that Anastasia should remain the “irrevocable beneficiary” of any life insurance policy.
Following the separation, Stephen began a relationship with Evangeline Dagg. In November 2013, Stephen was diagnosed with cancer, and passed away only a few weeks later. Evangeline gave birth to their child three months after his death. Before he died, Stephen had executed his last Will and Testament, which changed the life insurance beneficiary so that it was split between Anastasia (10%), his children from the marriage (17% and 19.4%), and finally Evangeline (53.6%).
When Stephen’s former spouse Anastasia learned of the Will, she brought a motion to restore her designation as sole beneficiary, which was successful. Canada Life Assurance Company amended the policy accordingly, making Anastasia the only beneficiary. Stephen passed away three days after Canada Life made the change, leaving an insolvent estate.
In March 2014, Evangeline applied for dependant’s relief, under the Succession Law Reform Act (SLRA), seeking to add the proceeds of the life insurance – valued at $1 million – to Stephen’s estate. This would make the funds available for a dependant support claim. At trial, the judge found that the policy did in fact form part of the estate, and that Stephen was the owner of the policy at the time of his death. The trial judge also found that since Anastasia had no security interest in the life insurance policy, she could not be characterized as a “creditor” within the meaning of the SLRA.
Divisional Court decision
Anastasia appealed the decision, but this was dismissed by the Divisional Court, affirming that she did not have “creditor rights”, and so had a reduced entitlement to the policy funds.
Ontario Court of Appeal
At appeal, Anastasia argued that, given the consent orders, she was entitled to the entire $1 million of the life insurance policy. Evangeline, on the other hand, argued that – as a dependant – she was entitled to the proceeds under the SLRA.
In the end, the parties settled prior to the hearing; however, the appeal proceeded anyway, as it was an issue that the appeal panel believed had important implications for family and estates law in Ontario.
The court was tasked with resolving one main issue: when someone has a life insurance policy that names one sole beneficiary, how do you deal with competing support claims? And, specific to this case, does Anastasia have creditor rights to the proceeds?
Justice Brown concluded that Anastasia was in fact a “creditor” as defined under the SLRA. The Courts have recognized that the obligation to make a support payment under the Divorce Act or the Family Law Act creates a debtor-creditor relationship. It was not imperative that Anastasia be a secured creditor to qualify for the protection of s. 72(7) of the SLRA.
Justice Brown held that the proceeds from the insurance policy are to be used to cover any existing arrears, as well as the present value of any future support obligations, calculated by reference to the terms and duration of the support order in place at the time of Stephen’s death. However, Anastasia is not entitled to a windfall. The balance of the insurance proceeds would be available as part of Stephen’s net estate to satisfy any support granted to Evangeline under Part V of the SLRA.
Many family law lawyers have applauded this decision, as it upholds the validity of life insurance provisions that are often used to secure child and spousal support. It also protects this designation from a later dependant support claim.
For estates lawyers, it provides clarification on how the courts will treat claims by dependants for the proceeds of life insurance policies.
If you have any questions about insurance proceeds and your estate, contact our Wills and Estate Group.