An irrevocable beneficiary does not always get to keep the proceeds

In a previous issue of As a Matter of Law, Two competing beneficiaries – who wins and why?, we looked at the Ontario Court of Appeal decision in Moore v. Sweet. That case was appealed to the Supreme Court of Canada (SCC) and the decision was recently released (see Moore v. Sweet, 2018 SCC 52 (CanLII)).

The issue before the SCC was whether the named, irrevocable beneficiary would get to keep the insurance proceeds or whether a competing beneficiary, whose rights arose from a verbal agreement the insured had made with her, would succeed and override the irrevocable beneficiary’s right. The case is typical of many beneficiary designation disputes where a designation is made, then changed, the insured dies, and there are two competing beneficiaries left to litigate.

The facts of the case

In the Moore v. Sweet case, Lawrence Moore (L) purchased a life insurance policy for $250,000. He named his wife, Michelle Moore (M) as the revocable beneficiary. They paid the premiums for the policy from a joint account until the couple separated. L and M verbally agreed that the policy would remain in place and M would make the premium payments and receive the full insurance proceeds. The Moore’s eventually divorced 1 but their insurance arrangement was never addressed in writing.

After the divorce, L changed the designation on the life insurance policy to his common-law spouse, Risa Sweet (R), making her an irrevocable beneficiary. However, M continued to pay the insurance premiums for 12 years before realizing, at L’s death, that she was no longer entitled to the $250,000 of insurance proceeds. M brought an application and was successful at trial, lost on appeal, and appealed to the SCC.

The majority of the Court decided in her favour. M argued that R benefited at her expense and that no legal or juristic reason existed to entitle R to the insurance proceeds. M relied on the legal argument of unjust enrichment or an argument made on fairness. She asked the Court to determine that R held the proceeds in a constructive trust for her, a remedy that is often applied when an argument for unjust enrichment is made.

1 *Note: In Quebec, upon divorce, the beneficiary designation in favour of a spouse is automatically revoked, even if it is an irrevocable beneficiary designation.

What the Court said

Both R and M agreed that a verbal contract existed between the Moores. The question was whether the Insurance Act gave R a juristic or legal reason to keep the money regardless of the agreement that previously existed between the Moores. The majority of the judges indicated that while the Insurance Act permitted an irrevocable designation to be made, it did not override the rights an individual would have under a previously existing agreement or contract. The Court split on this point and the dissenting judges did not agree with the majority. The majority said that R would have received nothing if M had stopped paying the premiums and that R was unjustly enriched and could not keep the insurance proceeds.

The dissenting judges indicated that the only rights M had at the time of the insured’s death was for breach of

contract against the insured’s estate. They disagreed that M had established a claim in unjust enrichment on the facts and a constructive trust and said that R’s enrichment was not at the expense of M because R had a statutory entitlement to the proceeds. In their opinion, M’s deprivation – the inability to enforce her contractual rights – was not the opposite argument to R’s.

What the Insurance Act says

The dissenting judges added that the claim for unjust enrichment should fail at the first stage because the Insurance Act establishes a juristic reason for R’s enrichment. The Insurance Act is indifferent to who pays the premium and renders the actions of the payers irrelevant as far as the beneficiaries are concerned. As an irrevocable beneficiary, R is entitled to the proceeds over the claims of the insured’s creditors. Designating an irrevocable beneficiary ensures that the proceeds can be disbursed free from claims against the estate, giving certainty to the insured, insurer and the beneficiary. The Court also went on to say that allowing such litigation would mean beneficiaries could potentially have to wait for several years for the pay out of insurance proceeds and that was a concern for the dissenting judges.

What this case means for advisors and their clients

The dissenting judges’ opinion captures the spirit of the rights given under the Insurance Act. Moore v. Sweet diminishes the certainty of this legislation, which is troublesome.

If a client wants to change a beneficiary designation and name a new, irrevocable beneficiary, advisors should ask about whether any pre-existing agreements exist and discuss the outcome of this case as a warning to the client. While doing this may not prevent litigation, at least the client will be well informed about the potential risks of changing the designation.