No buy-sell agreement – where do insurance proceeds go?

Having a buy-sell agreement in writing that addresses what will happen with insurance proceeds at death is integral to a good business plan. Without an agreement, if a death occurs the question becomes who is entitled to the insurance proceeds? This was the issue in Brown v. Estate of Laurie 2018 ONSC 3071.

Brad Brown (B) and Lachlan Laurie (L) went into a retail jewellry business together. In their first year in business, L was diagnosed with brain cancer and died after a few weeks. When B and L entered into their business arrangement each was to have 50 percent of the business. B had owned and operated a jewelry business in the past. He proposed to operate their new venture with L under a dormant company. B’s parents had owned the numbered company and B had purchased the shares. According to B, the share purchase price was $92,000 comprised of $50,000 up front and the remainder secured by a promissory note of $42,000 signed by L in favour of B. Eventually the parties also signed a lease which B personally guaranteed. The parties began operating the business. L subsequently loaned money to the business and paid business costs.

L and B contacted an insurance advisor and had extensive discussions about buy/sell coverage with the advisor. L and B purchased insurance on the life of the other. B owned $250,000 coverage on L, and L owned $375,000 coverage on B. Their advisor made notes referencing the purpose of the insurance – buy/sell coverage. They also discussed that the insurance would be available to L and B’ s spouses because of a buy/sell arrangement. But ultimately, L and B never entered into any formal buy/sell arrangement.

When L learned that he had a serious illness he emailed B about the insurance policies and proceeds. L requested that the proceeds be used to do something good for his wife and daughter, so they could have stability to move forward with their lives.

When L died his estate argued that a simple buy/sell agreement existed and relied on the insurance advisor’s notes to prove the existence of the arrangement. The Court disagreed saying the notes never advanced beyond an initial discussion and that for a contract to exist there must be a meeting of the minds on the essential terms that can be determined with reasonable certainty. Subjective intentions are irrelevant without action. The Court also indicated that L’s email supported the view that no agreement existed. When L suggested B do the right thing and provide for his wife and daughter he too knew that no agreement existed.

While L’s estate tried to establish a constructive trust, the Court indicated that they would have to argue L was wrongfully deprived of his rights and that B was unjustly enriched by the receipt of the full payment of insurance proceeds. The Court did not find unjust enrichment or a constructive trust. The Court ordered that the insurance proceeds be paid to B.

Whatever B and L intended to happen with the proceeds was never captured in writing. L’s estate had no evidence to make a strong argument for a buy/sell arrangement.

What this case means for you

When clients question the importance of getting that buy/sell arrangement done in writing, discuss this case with them. It’s also important to document and discuss with clients that following through on plans is essential. Advisors should note that in this case the advisor’s notes were used in the litigation.