Irrevocable beneficiaries in life insurance policies are not as irrevocable as you may think
According to section 191(1) of the Insurance Act, once an individual is an irrevocable beneficiary in an insurance policy, they can only be removed if the irrevocable beneficiary consents to the removal. This is in contrast to a revocable beneficiary, whereby the owner of the policy can remove or add beneficiaries without the beneficiary’s consent. The SCC in Moore v Sweet put a twist in this rule by, effectively, removing the irrevocable beneficiary without consent from him or her.
The ex-wife and the late husband at the time of their separation had an oral agreement that she would remain on the husband’s life insurance policy if she pays the premiums. Unknown to the ex-wife, the late husband removed the ex-wife and designated his new spouse as an irrevocable beneficiary. After the husband died, the proceeds, pursuant to the policy, were payable to the new spouse and not the ex-wife who had an oral contract that she would remain on the policy.
The ex-wife argued on the basis of unjust enrichment that the court should impose a constructive trust in her favour on the proceeds of the policy. The SCC found the elements of an unjust enrichment claim were proven. It was proven that:
1. the new spouse was enriched;
2. the ex-wife suffered a corresponding deprivation; and
3. there was no juristic reason for the enrichment and the corresponding deprivation.
The majority found that the first two elements were met by virtue of the new spouse enriched by receiving the full amount of the policy at the expense of the ex-wife.
Absence of Juristic Reason
The third element of the test is where the court grappled with a bit. The court here is looking if there is a juristic reason for enrichment and the deprivation. In determining whether there is a juristic reason, the court performed a two-step inquiry:
1. Can the new spouse keep the proceeds based on one of the established categories of juristic reason? If so, then,
2. the onus shifts to the other side to demonstrate that there is a residual reason to deny recovery. The court narrowed in on two considerations: the parties’ reasonable expectations and public policy.
The new spouse argued that section 190(1) and 191(1) of the Insurance Act gave her a juristic reason for the enrichment. The court ultimately concluded that these sections did not oust any contractual or equitable right the ex-wife may have once the proceeds are paid to the new spouse.
The second step of the inquiry looks at if the new spouse may have reasonable expectations or policy considerations to justify her retaining the proceeds. The court here held that the new spouse’s expectation should not take priority over the ex-wife’s oral agreement that gave her a right to those proceeds given that it was done before the new spouse was added as a beneficiary. Additionally, the court found that the residual considerations also favour the ex-wife because she kept the policy alive by paying the premiums.
Uncertainty and Opportunity
This case has fostered some uncertainty in this area of the law since irrevocable beneficiaries can be revoked and someone else can be added by virtue of the equitable doctrine of unjust enrichment. The dissenting minority argued that the Insurance Act should have been regarded as the juristic reason for the new spouse to keep the proceeds. To some degree, the dissenting’s opinion is well taken because the Insurance Act was designed to inject certainty in this area, which has now taken, in some fashion, away by the courts.
On the other hand, this is also an opportunity for individuals who are not named or should have been named as beneficiaries, or even creditors to obtain the proceeds of a life insurance policy.