Sep 24, 2018

The Art of Securing Support Payments - Part I - Life Insurance Clauses

Dagg v. Cameron Estate, 2017 ONCA 366 (CanLII)

Part I – Life Insurance Clauses

‘A bird in the hand is worth two in the bush’ -- English proverb

It’s a famous proverb within our profession that continues to haunt both counsel and clients. It's a concept that essentially means that things you already possess are more valuable and useful to you than that which could be potentially sought or hoped for. This is rarely the kind of thing clients want to have to consider with their counsel in the midst of a bitter matrimonial dispute. After all, what's the point of going to court at all if there's a possibility they might not collect what is properly owed to me?

This three-part series will outline the most practical options to ensure our clients get exactly what’s owed to them. Part I addresses the use of life insurance clauses through the lens of the most recent Ontario Court of Appeal decision in Dagg v. Cameron Estate. Part II explores how to direct the court to order security on a payor’s assets to protect your client’s support payments. Finally, Part III investigates the benefits of a non-depletion order under section 40 of the Family Law Act.

Part I – Life Insurance Clauses

A payor spouse can be ordered under section 34 (1)(i) of the Family Law Act to “designate the other spouse or child as the beneficiary irrevocably” on a life insurance policy they have and more generally under section 15.2(3) of the Divorce Act can be ordered to comply with any “terms, conditions, or restrictions in connection with the order as it thinks fit and just” in connection with a support order, which includes life insurance.

In Katz v. Katz (2014) ONCA 606, the Ontario Court of Appeal confirmed that both the provisions of the Family Law Act and Divorce Act are broad enough to permit a court to order a spouse to obtain, not just maintain, an insurance policy to secure payment of a support order.

The Court noted that where there is no existing policy in place, the issue should be addressed with caution and there should be evidence about insurability, availability and cost to ensure compliance is a realistic and fair for the support payor.

Dagg v. Cameron Estate (2017) ONCA 366 is a recent significant case that addresses the issue of insurance clauses in separation agreements that provide security for support and whether other dependents have a claim to the policy proceeds notwithstanding these beneficiary designations in the agreements.

At trial, the Court heard that the husband died at a young age and had separated from his first wife. He had named her as an irrevocable beneficiary of the insurance policy proceeds in accordance with a separation agreement. After separation, the husband had a child as a result of a new relationship. When he died, the estate was without funds, and the new spouse and child were the beneficiaries of the estate. As a result of the finances of the estate, the spouse (on behalf of herself and the child) made a claim under the Succession Law Reform Act against the insurance proceeds.

The Court concluded that although the first wife was the irrevocable beneficiary of the entire life insurance policy, the proceeds of the policy could be used to pay the second spouse and child as a result of section 72 (1) (f) of the Succession Law Reform Act ("SLRA") which provides remedies for dependents against “any amount payable under a policy of insurance affected on the life of the deceased and owned by him/her”.

Prior to the release of the Ontario Court of Appeal’s decision, the trial decision of Dagg caused considerable confusion and panic throughout the Ontario Bar. It came as no surprise that the Court of Appeal decided to weigh in on this topic despite this issue being resolved prior to trial, effectively making this hearing moot.

The Ontario Court of Appeal ultimately reversed the trial and motion court decisions in finding that they had misinterpreted section 72(7) of the SLRA and concluded the following:

“I conclude that where, at the time of his death, a spousal or child support payor owns a policy of insurance that is subject to a court order requiring the designation of the support recipient as the irrevocable beneficiary of the policy, s. 72(7) protects from the claw back of s.72(1) that part of a policy’s proceeds needed to satisfy the deceased’s obligations to the spousal and child support recipients, calculated in accordance with the support orders in place at the time of his death.” (para. 75)

The Court rejected the submission that where a court order uses language which requires a support payor to maintain the support recipient as a policy’s irrevocable beneficiary, the full amount of the policy is automatically excluded from the “claw back” of section 72(1) of the SLRA (para. 81).

Counsel now have to consider whether the standard approach of permitting the payor to own the policy presents an unacceptable risk. It has to be assumed that even with an irrevocable beneficiary designation in favour of your client, there is a serious risk that the policy proceeds may be subject to claims for other dependents if they have not been adequately provided for by the deceased under Part V of the SLRA.

To minimize this risk, counsel should consider advising clients to arrange for the recipient/beneficiary to be the owner of the policy. However, the risk with this option is that if the recipient/beneficiary predeceases the payor spouse, the insurance coverage and eventual payout terminates. This could be problematic if the insurance was intended to secure child support since the insurance would end while the children are still dependents.

If the parties are involved in litigation, another option would be to request from the Court to include in the support order specific provisions that would address the effect of the payor’s death on support obligations outstanding at the time or due to come into existence (para. 84). In citing the decision of Decean v. Decean (2013) ONCA 218, the Court of Appeal approved of the following passage:

“Spouses who wish to exclude life insurance proceeds from the reach of the SLRA can do so by transferring ownership to the dependent spouse or to a trustee. They can also transfer the ownership into their joint names with a right of survivorship. On the death of one of them, the ownership would then either revert to the life insurance or vest in the survivor beneficiary. In the latter circumstance, the policy proceeds would be excluded from SLRA claims because the policy would be owned by the beneficiary.” (para. 84)

In the alternative, counsel should explore whether an insurance trust might be appropriate in the circumstances of the case to avoid the issue of competing dependent claims, as well as eliminate the risk of the recipient/beneficiary policy owner predeceasing the payor.

Darryl is a partner at Jaskot Family Law practicing exclusively in all areas of family law.

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