Canada: What Happens When You Pay Premiums On Your Spouse's Life Insurance And Unbeknownst To You He Changes The Beneficiary Designation To Someone Else?

Background to the Dispute

Michelle and her former husband Lawrence agreed that Michelle pay Lawrence's life insurance premiums and in exchange Michelle would be named as beneficiary of the policy upon Lawrence's death. After Michelle and Lawrence separated, Lawrence executed a change of beneficiary form designating Risa, his common law spouse, as irrevocable beneficiary of the policy.

Pursuant to the Insurance Act, an irrevocable beneficiary is given much more protection than a revocable beneficiary because whereas an insured may alter or revoke a revocable beneficiary designation, an irrevocable beneficiary designation cannot be revoked or altered without the designated beneficiary's consent. Section 191 of the Insurance Act stipulates that when a valid irrevocable beneficiary designation is made, an insured ceases to maintain control over the insurance money, the money is not subject to the claims of the insured's creditors, and the proceeds do not form part of the insured's estate.

Lawrence did not advise Michelle of the change. As such, Michelle continued to pay the premiums which amounted to approximately $7,000 between the years 2000-2013.

Lawrence died in 2013 and his estate had not significant assets. The insurance proceeds, which totaled $250,000, were payable by the insurance company to Risa.

Upon learning that she was not the designated beneficiary under the policy, Michelle commenced an application seeking the opinion, advice and direction of the Ontario Superior Court of Justice as to her entitlement to the proceeds of the policy.

Unjust Enrichment

At the core of the decision is the doctrine of unjust enrichment. The doctrine of unjust enrichment is an equitable legal remedy. In order to be successful, the claimant has to show that another person has been enriched at the claimant's expense for no juristic reason.

The Majority Reasons at the Supreme Court

Justice Coté wrote the decision for the majority. She framed the issues as follows: 

  1. Has Michelle made out a claim in unjust enrichment by establishing: 
    • Risa's enrichment and her own corresponding deprivation; and
    • The absence of any juristic reason for Risa's enrichment at her expense?
  2. If so, is a constructive trust the appropriate remedy?

In this case, there were two specific issues that the Court had to address: 

(1)  What is the proper measure of Michelle's deprivation, and in what sense does it "correspond" to Risa's gain?

(2)  Does the legislative framework at issue provide a juristic reason for Risa's enrichment and Michelle's corresponding deprivation, and if not, can such juristic reason be found on some other basis?

Côté J. reviewed the first two elements of the cause of action in unjust enrichment: the defendant's enrichment and the plaintiff's corresponding deprivation. Both elements require a straightforward economic approach, with the moral and policy considerations only coming into play in the juristic reason stage of the analysis. Noting that Michelle and Lawrence entered into an oral contract and that Michelle had upheld her end of the bargaining in paying the premiums, the measure of Michelle's deprivation was not limited to her out-of-pocket expenditures. Michelle was deprived of the very thing for which she paid – the right to claim the $250,000.

Côté J. further concluded that a necessary correspondence existed between this deprivation and Risa's gain. Risa's enrichment came at Michelle's expense because not only did Michelle's payment of the premiums make Risa's enrichment possible, but Risa received the insurance proceeds as a consequence of statute despite Michelle's agreement with Lawrence. Risa therefore received the benefit that would otherwise have accrued to Michelle.

Turning to whether there was any justification in law or equity for Risa's enrichment, the main issue was whether the provisions under the Insurance Act justified the fact that Risa was enriched at Michelle's expense.

Côté J. stated, "[n]othing in the Insurance Act can be read as ousting the common law or equitable rights that persons other than the designated beneficiary may have in policy proceeds." In other words, the Insurance Act operates to designate beneficiaries who may become statutorily entitled to insurance proceeds, but it does not preclude contractual or equitable rights in insurance proceeds once they have been paid to that beneficiary.

An irrevocable beneficiary designation under the Insurance Act does not constitute a juristic reason for Michelle's deprivation. This is because the applicable statutory scheme does not oust, either expressly or implicitly, prior contractual or equitable rights and claims that third parties may have. "Put simply, the statute required that the Insurance Company pay Risa, but it did not give Risa a right to keep the proceeds as against Michelle, whose contract with Lawrence specifically provided that she would pay all of the premiums exclusively for her own benefit."

Moving to the second stage in the analysis which affords the defendant an opportunity to rebut the plaintiff's prima facie case by establishing that there is some residual reason to deny recovery, the majority was of the view that Risa's designation could not take precedence over a prior contractual right. The residual considerations favoured Michelle because her contributions towards the premiums kept the insurance policy alive, and it would be bad policy to ignore the fact that she was essentially tricked into continuing with these payments by Lawrence.

In the result, the majority concluded that Michelle had made out each of the requisite elements of the cause of action of unjust enrichment, and that a constructive trust ought to be imposed to the full extent of the proceeds in Michelle's favour.

The Dissenting Reasons at the Supreme Court

In dissent, Gason and Rowe JJ. found that there was no basis to impose a constructive trust, and parted ways with the majority as to whether Michelle had established a claim for unjust enrichment. In their view, Michelle had not established a proprietary or equitable interest in the proceeds themselves. Rather, she had only established a contractual expectation, and there could be no correlative deprivation between those failed expectations and Risa's enrichment. The dissenting justices found no support that unjust enrichment protects an individual's contractual expectations against innocent third parties.

Implications and Take-Aways

The decision constitutes a major development in the law of unjust enrichment, clarifying that this cause of action may be commenced against third parties. The decision is equally important for its interpretation of the concept of "juristic reason" in light of a statutory scheme – the statutory authorization of an enrichment must be unequivocal.

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