Doctrine of unjust enrichment may deprive named beneficiaries of life insurance proceeds

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Designated beneficiaries of a life insurance policy have traditionally been entitled to a high degree of certainty that they would be entitled to the policy proceeds upon the death of the insured. This certainty has been jeopardized in a recent Supreme Court of Canada (“SCC”) decision, Moore v Sweet, 2018 SCC 52.

The facts

Michelle Moore (“Michelle”) continued to pay the premiums of a life insurance policy on the death of her ex-husband (the “Policy”), Lawrence Moore (“Lawrence”), after the couple separated. This was in accordance with an oral agreement between Michelle and Lawrence. In exchange, Michelle would be entitled to the Policy proceeds upon Lawrence’s death.

Lawrence later designated his subsequent common law spouse, Risa Sweet (“Risa”), as the irrevocable beneficiary of the Policy, pursuant to sections 190(1) and 191(1) of the Ontario Insurance Act, RSO 1990, c I.8 [Insurance Act]. Michelle had no knowledge of this.

Michelle kept her end of the oral agreement by paying the premiums up until Lawrence’s death. 

The decision

The SCC considered whether Michelle’s prior contractual claim to the Policy proceeds precluded Risa’s entitlement to the proceeds, as the irrevocable beneficiary. It did. In a 7-2 decision, the majority of the SCC held that Michelle was entitled to the Policy proceeds. Otherwise, Risa would be unjustly enriched.

The three necessary elements of unjust enrichment were affirmed by the SCC – the plaintiff must show that:

  • the defendant was enriched;
  • the plaintiff suffered a corresponding deprivation; and
  • there is no justification in law or equity for the enrichment and corresponding deprivation.

Should Risa take the proceeds, she would clearly be enriched. However, whether Michelle would suffer a corresponding deprivation was more contentious given the fact that the Policy proceeds of $250,000 were significantly greater than Michelle’s out-of-pocket deprivation in paying about $7,000 in premiums since the couple’s separation.

The key fact was the existence of the couple’s oral agreement. Côté J, writing for the majority, emphasized that “Michelle’s entitlement under the Oral Agreement is what makes it such that she was deprived of the full value of the insurance payout” (at para 47).

In holding this, the majority of the SCC extended the concept of deprivation to include “a benefit that was never in the plaintiff’s possession but that the court finds would have accrued for his or her benefit had it not been received by the defendant instead” (at para 44).

With respect to the third element of unjust enrichment, the majority of the SCC held that an irrevocable beneficiary designation made pursuant to the Insurance Act did not provide a juristic reason for the enrichment and corresponding deprivation. Nothing in the Insurance Act provided “the necessary “irresistible clearness” to preclude the existence of contractual or equitable rights” in insurance proceeds designated to an irrevocable beneficiary (at para 70).

In other words, the Insurance Act does not clearly specify that a beneficiary designation under sections 190(1) and 191(1) overrides prior contractual claims. Therefore, the majority of the SCC held that there was not a sufficient reason to limit such prior claims and award the proceeds to the designated beneficiary.

The majority of the SCC held that the appropriate remedy was the imposition of a constructive trust over the Policy proceeds for Michelle’s benefit.

The takeaway

Persons with a contractual or equitable right to life insurance proceeds may be entitled to such proceeds despite the existence of a designated beneficiary pursuant to a provincial Insurance Act. A beneficiary designation, including an irrevocable designation, is not determinative.

Unfortunately, this results in some uncertainty and risk for designated beneficiaries who expect to receive the proceeds upon the insured’s death.

In another sense, it is hard to imagine how the SCC would have otherwise remedied the unfairness that would have resulted had the proceeds been awarded to Risa, the irrevocable beneficiary.