Should Divorce Revoke The Beneficiary Designation In An Insurance Policy?

In Ontario, when a person gets divorced and then dies his/her  bequest in their will to the former spouse is revoked.¹ The law reads the will as if the former spouse died first.  So what happens when someone owned an insurance policy that designated the former spouse as the beneficiary – or what about the RRSP?  Does divorce automatically revoke those designations?  Let’s review the Richardson Estate v. Mew case² which addresses this question.

In this case Michael married Stephanie.  Their marriage lasted 26 years and they had two adult children by the time they divorced.   In their separation agreement Michael agreed that Stephanie would be irrevocably designated as the beneficiary under a specific life insurance policy. However, the separation agreement indicated that the policy of insurance was to expire on February 28, 1995. Instead, possibly through inadvertence, the policy remained in effect after February 28, 1995 and the designation of Stephanie as the beneficiary was never revoked.

After Michael divorced Stephanie he married Anne and had three children with her.   The premiums for this life insurance policy was paid out of Anne and Michael’s joint account.  When Michael was diagnosed with Alzheimers, Anne paid the premiums out of her own money believing she was the beneficiary. Michael died.  Justice Strathy was asked to decide who got the life insurance proceeds.

Stephanie said she was the beneficiary of the policy and Anne cried foul.  Her lawyers argued that the equitable remedy for constructive trust should be invoked to prevent unjust enrichment and that there was an alternate claim for rectification³.

Stephanie, the first wife, relied upon section 190(2)⁴ of the Insurance Act Ontario  R.S.O. 1990, c. I.8.  She said that there are certain steps the legislation requires for the beneficiary designation to be changed.  Michael never took those steps so Stephanie was still the beneficiary. To fully appreciate the argument Justice Strathy briefly reviewed the history of this legislation.

His Honour pointed out that at prior to its repeal in the 1970s Ontario’s Insurance Act provided that divorce revoked the designation of a spouse as a beneficiary of a life insurance policy.  That provision was absent in the new version of the Insurance Act.  The new law was considered in a number of cases⁵ that concluded that  the legislature intended that the designation of the beneficiary in the insurance policy should continue unless and until altered regardless of any moral qualms about the first wife receiving a “windfall”.    But what if the spouses specifically signed an agreement that had in mind that neither of them should be the beneficiary of each other’s insurance?

Justice Strathy pointed out that in one these cases⁶ the spouses agreed in minutes of settlement that neither party had a claim against the insurance policies owned by the other party.  This provision was incorporated in the decree nisi and judgement.  However, under the Insurance Act, the owner of the policy has to make a “declaration”,  as defined by the Act, to change the beneficiary. The husband never changed the designation on the policy and the court ruled that the divorce judgment did not fall into the definition of “declaration⁷” in the Insurance Act.  The former spouse received the proceeds of insurance.  The courts have followed the same results with RRSPs.⁸

As I read these cases I understand why people might be bothered by the disinclination of courts to use equity to override the strict interpretation of the Insurance Act.  To some, strict compliance with the formalities of the act seem unjust.  On the other hand, as Justice J.J. Clarke said in one of these cases, “….it is not the role of the court to speculate as to what the deceased may have intended to do or may have thought that he had done.”⁹

As pointed out by Justice Strathy, there were several cases relied upon by Ann where more of an equitable approach was taken by the court¹⁰ O.J. No. 2892 (Ont. Gen. Div.) and Roberts v. Martindale (1998), 162 D.L.R. (4th) 475, (1998) B.C.J. No. 1509 (B.C. C.A.).]. In one case, Newport v. Mountainside Medical Pharmacy Ltd.¹¹ the owner of a business designated the business as the beneficiary of a life insurance policy.  The business was sold. Thereafter, the vendor died.  The purchasers of a business claimed entitlement to the proceeds of the life insurance policy as an asset of the business. The vendor never intended for the insurance policy to be sold as an asset of the business.  The purchasers never intended to buy the policy nor did they pay anything for it, but they made the same argument as Stephanie.  The purchasers argued that regardless of the parties’ intention, by virtue of the obligation to strictly comply with the formalities of the Insurance Act and given the absence of a “declaration” the purchasers were entitled to the life insurance proceeds. In this case Justice Adams was prepared to order the rectification of the contract to reflect the true intentions of the parties and he allowed recovery based on the doctrine of unjust enrichment.¹²

In our case Justice Strathy rejected Anne’s argument.  He suggested the other line of cases where unjust enrichment called for the overriding of the provisions of the Insurance Act did not apply in this case.  He referred to Newport v. Mountainside Medical Pharmacy Ltd. as an extreme case¹³.   On the issue of rectification Justice Strathy had this to say,

“While I have jurisdiction to rectify the policy in this case, I am unable to say, with anything approaching the level of confidence necessary to grant rectification, that the evidence establishes that the continuation of Stephanie as the beneficiary of the policy was a mistake and that Michael’s true intent was to name Anne as the beneficiary.”¹⁴

Anne’s motion was dismissed.  She appealed and Justice Strathy’s decision was affirmed on appeal.¹⁵

This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice.  When one compares the end results of Justice Strathy’s decision in  Richardson Estate v. Mew to Justice Adam’s decision in  Newport v. Mountainside Medical Pharmacy Ltd. it should be clear that every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. In this case, had Anne convinced Justice Strathy that the continuation of Stephanie as a beneficiary was a mistake then he might have been inclined to rectify the contract. The bottom line – nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.