All About Estates

Insurance Policies, Separation Agreements, and Death

The process of separating from one’s spouse is never easy. Beyond the emotional toll, assets must be divided and it may be necessary to make plans for ongoing spousal and child support. Even after a settlement has been reached, death can derail the best laid plans. Such was the case in Dagg v Cameron (Estate), 2015 ONSC 6134.

Stephen Cameron died in 2013 of cancer. He was residing with Evangeline at the time, who was pregnant with their son (who would be born three months after Stephen died). Stephen and Evangeline had plans to get married as soon as Stephen’s divorce from his first wife, Anastasia, was finalized. Stephen and Anastasia had been negotiating the terms of their divorce for some time, and there were several court orders in place which had been reached on consent (“Consent Orders”). The Consent Orders directed Stephen to maintain his existing life insurance policy with Anastasia as the named beneficiary.

Evangeline brought the present application to determine whether the life insurance policy could be clawed back into the estate pursuant to s. 72(1) of the SLRA for the support of all of Stephen’s dependants. The parties agreed that Anastasia, her two children, and Evangeline’s son were “dependants” of Stephen’s estate within the meaning of Part V of the Succession Law Reform Act (“SLRA”; There was some dispute as to whether Evangeline was also a dependant). The parties also agreed that Stephen had failed to make adequate provision for his dependants on his death.

Anastasia opposed the application. She took the position that the Consent Orders (i) meant Stephen no longer “owned” the insurance policy at the time of his death, thereby excluding it from s. 72(1) of the SLRA; (ii) that the Consent Orders created a debtor/creditor relationship between her and Stephen and as a creditor, Anastasia had priority to the proceeds from the insurance policy pursuant to s. 72(7) of the SLRA; and (iii) Stephen had contracted to provide Anastasia with the proceeds of the life insurance policy and must be held to that bargain.

The Court addressed the issue of “ownership” first. Justice Douglas held that although the Consent Orders restricted Stephen’s ability to change the beneficiary designation of the policy, it did not strip him of ownership rights. The Court found that it is possible, and in fact common, to have ownership rights without having complete control over the item owned. Freedom to change a beneficiary designation is only one element of ownership. Stephen continued to “own” the life insurance policy even though his ability to change the beneficiary had been limited.

Next, the Court considered whether Anastasia was a “creditor” within the meaning of s. 72(7) of the SLRA. Section 72(7) reads: “This section does not affect the rights of creditors of the deceased in any transaction with respect to which a creditor has rights.” Anastasia argued that she became a “creditor” as soon as Stephen was obliged to make payments to her in the family law proceedings. She further argued that the Consent Orders created a security interest in the life insurance policy, such that s. 72(7) was triggered to exclude the policy from being an asset available for the support of Stephen’s dependants.

Justice Douglas rejected Anastasia’s argument. It held that the Consent Orders could have explicitly required that the insurance policy be held as “security” for Stephen’s support payments to Anastasia, but they did not do so. All they did was restrict Stephen’s ability to name a new beneficiary. Since Anastasia had no security interest in the life insurance policy, she could not be a “creditor” within the meaning of s. 72(7). The Court further held that it would be improper to extend the meaning of “creditor” to include Anastasia if it had the effect of restricting access to an asset by some of the dependants of the estate in favour of another dependant of the estate.

Anastasia’s final argument was that by agreeing to the Consent Orders, Stephen had contracted with Anastasia to provide her with the full benefit of the insurance policy. If the insurance policy is clawed back into the estate, the contract has been breached and Anastasia is owed damages in the amount of the policy. The Court rejected Anastasia’s final argument. It found that the meaning of the Consent Orders was not to provide Anastasia with support to the detriment of Stephen’s other dependants. In addition, it was not open to Stephen to contract out of his obligation to provide support to his other dependants. Finally, s. 63(4) of the SLRA provides that an order for support of a dependant may be made “despite any agreement or waiver to the contrary.” As a result, the Court held that the Consent Orders did not prohibit the life insurance policy from being clawed back into the estate pursuant to s. 72(1) and made available for the payment of support to all of Stephen’s dependants.

Death does not render separation and divorce proceedings meaningless. Although the Court in Dagg v Cameron (Estate) held that the insurance policy could be clawed back into the estate and made available to pay for the support of the deceased’s dependants, Anastasia has a second chance to argue that she should be paid the full amount of the insurance proceeds. The Court ordered a further hearing to determine the amount of support to be paid to Stephen’s dependants, including Anastasia. Section 62(1)(m) of the SLRA requires a court, when determining the amount of support to be paid to a dependant, to take into account “any agreement between the deceased and the dependant.” In deciding the issue, the court will consider whether the separation agreement continues to be fair in death as it may have been in life.

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About Gillian Fournie
Gillian is a lawyer with de VRIES LITIGATION LLP. Her practice focuses on the area of trusts and estates litigation.