The family law bar must be breathing a sigh of relief after reading the Court of Appeal’s decision in Dagg v. Cameron Estate, 2017 ONCA 366. Both the application judge and the Divisional Court (discussed on this blog, respectively, here and here) held that a life insurance policy taken out pursuant to a separation agreement could be clawed back into the estate for a dependant support claim by the subsequent spouse. Justice Brown, writing for a unanimous panel of the Court of Appeal, concluded that the proceeds needed to satisfy the deceased’s obligations to the existing spousal and child support recipients would be protected from the claw back.
The facts were not controversial. Stephen and Anastasia were married with two children. They separated in 2012. Several consent orders were made holding that Stephen would maintain Anastasia as irrevocable beneficiary on any life insurance policy. After Stephen died, his subsequent spouse Evangeline brought a dependant support application. She sought the entirety of the life insurance policy to be ‘clawed back’ into the estate pursuant to s. 72(1) of the Succession Law Reform Act (the “SLRA”). ‘Clawed back’ simply means that the life insurance policy would be deemed part of the estate and could be charged for the purposes of dependant support. Both the application judge and the Divisional Court permitted this.
While many arguments were raised in the courts below, Justice Brown focused the issue on what happens where a support payor dies with a life insurance policy who was required by court order to name a spousal or child support recipient as the irrevocable beneficiary of the policy. In this case, what rights does the support recipient have to the policy’s proceeds in the face of a competing claim for dependant support?
The ‘claw back’ provision of s. 72(1) of the SLRA is very powerful, even “Draconian”. It is limited by s. 72(7) of the SLRA which states: “This section does not affect the rights of creditors of the deceased in any transaction with respect to which a creditor has rights.” The remedial purpose of s. 72 was to prevent “a testator from frustrating an outstanding support obligation by transferring assets out of his own name.” Both lower courts found that while Anastasia was an unsecured creditor of the estate, she was not a creditor for the purposes of 72(7) of the SLRA.
Justice Brown disagreed. Under the Family Law Act or the Divorce Act, a court can order a support payor to designate the support recipient as the irrevocable beneficiary of a life insurance policy to ensure funds exist at the time of the payor’s death to satisfy his (or her) support obligations specified in the support order. Justice Brown found that the Divisional Court erred by holding that Anastasia was not a creditor pursuant to s. 72(7). The consent orders’ requirement that Anastasia be irrevocably designated as a beneficiary provided for a pool of money to be available to her to satisfy Stephen’s support obligations. As such, an amount necessary to require Stephen’s family law support obligations would be protected from s. 72(1). The creditor status was not unlimited: any amount in excess could be clawed back into the estate for the purposes of dependant support. The irrevocable beneficiary designation was not supposed to be a windfall, but was intended to secure the payor’s obligations.
Justice Brown noted that if separating parties wished to exclude life insurance proceeds from the reach of the SLRA, they could make the life insurance policy jointly owned (the SLRA does not capture jointly-owned policies of insurance as set out in the Ogilvie Estate case). However, where the parties had not taken the appropriate steps, Justice Brown’s framework would govern.
Justice Brown therefore allowed the appeal. Interestingly enough, however, the appeal was moot. Anastasia and Evangeline settled it after Anastasia received leave to appeal to the Court of Appeal. However, given the importance of the issues, the parties asked the court to allow the appeal to proceed.
Justice Brown found that the whether or not the court should exercise its discretion to hear a moot appeal, is guided by the following test: (i) whether the issues can be well and fully argued by parties who have a stake in the outcome; (ii) the concern for judicial economy; and (iii) the need for the court to remain alive to the proper limits of its law-making function in order to avoid intrusions into the role of the legislative branch.
Justice Brown exercised his discretion to hear the appeal because: (i) the parties argued with vigour (as if the matter was not moot); (ii) the issue might not otherwise arrive at the Court of Appeal due to the costly three-stage appeal process and there was a strong public interest in resolving this legal issue; and (iii) the court was not deciding an abstract question (thus intruding into the legislative sphere) but was resolving an issue based on a complete record.
It has been a long standing practice in family law to include provisions that a support recipient be named as an irrevocable beneficiary in separation agreements and court orders. The Court of Appeal provided helpful clarity on the extent that this designation protects the first spouse from a subsequent dependant support claim.