Life insurance can be a very desirable estate planning tool since the proceeds typically pass outside of probate, avoiding estate administration tax. However, one should take note that insurance policies are not interpreted the same way as wills, even though both are used for estate planning. One noteworthy difference between these two instruments is when it is permissible to use interpretive aids.
When interpreting a will, the court may be able to use interpretive aids, even if the will appears unambiguous. The armchair rule is an excellent example of this principle. Historically, the court could only use the armchair rule to put itself in the position of the testator and take surrounding facts and circumstances into considerationwhen construing a will if the testator's intention could not be ascertained from the plain language of the will. However, a few years ago, the Ontario Court of Appeal held in Ross v. Canada Trust Company, 2021 ONCA 161that the armchair rule is now "an over-arching framework" to be used for will construction. As such. it now appears that this aid can be used even if a will appearsunambiguous.
In comparison, when interpreting an insurance policy, interpretive aids may not be used if the language of the policy is unambiguous. Rather, the court is to give effect to the clear language, reading the contract as a whole. Conversely, in cases where the language is ambiguous, the court is to rely on general rules of contract construction, as affirmed by the Supreme Court of Canadain Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33.
Principles that are applicable when interpreting wills and other testamentary instruments do not apply to life insurance policies. This makes sense, given that the objective in these two contexts is not the same. Whereas the goal is to determine the deceased's intent when interpreting a will, the court's objective when interpreting an insurance policy is to ensure that "customers not suffer from the imbalance of power that often exists between insurers and the insured" while also ensuring that "customers obtain no greater coverage than they are prepared to pay for": see Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59.
Because of the approach that the courts take when interpreting life insurance policies, the outcome of life insurance disputes typically turns on how the pertinent documents are drafted. This point is aptly demonstrated by the Alberta Court of Appeal's recent decision in Thomson v. Ivari, 2023 ABCA 369. In this case, a wife had maintained a life insurance policy worth $1.3 million on her estranged husband for a decade, and then opted to convert the policy, even though conversion would reduce the death benefit to $400,000. After the policy conversion, the wife had a 10-day window to cancel. During this period, the husband died. The wife promptly cancelled the converted policy and claimed the original $1.3 million death benefit.
The insurance company denied her claim, taking the position that the cancellation period expired when the insured passed away, and that the wife could no longer cancel the converted policy or revive the prior policy.
Not surprisingly, litigation ensued. The court reviewed the language in the documents provided to the wife, asking whether she still had the right to cancel the policy conversion during the 10-day cancellation window, even after the insured had died. Following a summary trial, the original court decided in favour of the wife. This decision was upheld on appeal.
The Alberta Court of Appeal noted that whoever had drafted the cancellation policy had not contemplated theinsured dying during the 10-day cancellation period –there was no precondition which required the insured to be alive in order to cancel. Rather, the document advised that if the wife cancelled the policy conversion during the 10-day cancellation period, the converted policy would be rendered void as of the issue date.
The Court of Appeal went on to find that the 10-day cancellation provision was a condition subsequent and, if invoked, the conversion of the life insurance policy would be treated as if it never happened, in which case the original policy would be revived. While the insurance company tried to argue that the rights of a policy owner expired when the insured died, the court disagreed, holding that the policy could still be cancelled because "[o]nce the condition subsequent is acted upon, the Converted Policy is treated as if it never existed."
The court also rejected the insurer's arguments that the court could utilize interpretive aids, since such aids cannot be used "to make clear language ambiguous", as noted by the Supreme Court in Progressive Homes.
The insurer appealed the Alberta Court of Appeal's decision, but the Supreme Court of Canada dismissed the application for leave to appeal earlier this month: see Ivari v Janice Thomson, 2024 CanLII 64320 (SCC).
While the same principles for interpreting a life insurance policy ought to apply in Ontario, it is not clear whether court action would be necessary if the insured died during the cancellation period. Under the Replacement of Life Insurance Contracts, RRO 1990, Reg 674, one of the regulations to the Insurance Act, RSO 1990, c I.8, an applicant who converts a life insurance policy has a 20-day period to withdraw their application. It appears that if the insured were to die during the 20-day period, the prior policy would still be in effect, assuming that the converted policy would not begin until the applicant could no longer withdraw the conversion application. To date, this provision has not been interpreted, so there is no case law on point.
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