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Life Insurance as Security for Support Obligations

I practiced family law for many years. Now in an estate litigation practice I have a primary focus on the property and support rights and obligations of spouses and former spouses on death and in particular dependent’s support claims.

As a family law practitioner the treatment of spousal and child support obligations on death is always a concern. The standard practice is to include a clause requiring that the support payor designate the recipient as an irrevocable beneficiary of a life insurance policy in an agreed upon amount in the separation agreement or final court order.  In addition, a clause confirming that the support obligation binds the estate of the support payor and is a first charge on the estate is recommended.

Given the Court of Appeal’s decision in Dagg v Cameron, 2017 ONCA 366 http://canlii.ca/t/h3l1m the following should now be apparent to all family law practitioners;

  1. The life insurance clause in the court order is not a guarantee that the recipient is entitled to a cheque (or judgment) for the specified face amount of the policy;
  2. The recipient will have to prove his or her entitlement to support-past and future, in the claim against the estate;
  3. This implies responding to the estate trustee’s requests for reduction in the amount payable based on material changes in circumstances, if applicable;
  4. The amount of the policy proceeds in excess of the recipient’s proven support claim – past and future, will be “clawed back” into the estate;
  5. The recipient is likely a dependent within the meaning of Part V of the Succession Law Reform Act (“SLRA”) and may have a claim available thereunder.

It is fair to say that these are not the outcomes that were generally contemplated by the inclusion of these life insurance clauses in separation agreements and court orders in the past.

The effect of Dagg is avoided in the following circumstances:

  1. Where the policy is owned jointly with the deceased by the recipient or a trust for the benefit of the recipient;
  2. Where the policy is solely owned by the recipient (This also ensures that the premiums will presumably always be paid);
  3. Arguably where the clause is contained in a separation agreement (see Dagg at paragraph 83 and Turner v. DiDonato 2009 ONCA 235 (CanLII).

Disputes will inevitably arise as older separation agreements and orders are considered upon the death of the support payor. A recent reported example is Larmer v. Birnie, 2018 ONSC 5313.

Larmer involves a motion for directions brought in the face of two competing proceedings stemming from the deceased’s failure to designate his first spouse as an irrevocable beneficiary of a $500,000 life policy pursuant to a 2004 Separation Agreement. Upon his death the deceased had various life policies in force totaling $1,885,000 without any designation in favor of the first spouse. As of the date of death he was in a second marriage (a long term relationship) and he stood in the place of a parent to the twenty year old son of his second spouse who was in post-secondary school.

In the court proceeding the first spouse is seeking judgment for the $500,000 face amount of the policy pursuant to the 2004 Separation Agreement. In the alternative she seeks an order for continued ongoing support pursuant to the agreement plus retroactive and go-forward increases. In the further alternative, she seeks dependent’s relief pursuant to part V of the SLRA.

The second spouse defends all claims by taking the position that the first spouse is entitled to make a claim under Part V only.

Determination of the claims of dependents under Part V is a highly discretionary exercise based on the numerous factors set out in section 62 of the Act.

The court set timelines for a summary judgment motion to be brought by the first spouse for the $500,000 and set out the various issues to be tried and the procedural framework in the event that the summary judgment motion is not granted.

Given the wide range of potential disputes and outcomes in these situations family lawyers are well advised to revisit these clauses and in particular when motions to change arise.

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