Ensuring that life insurance documents properly reflect clients' wishes may seem obvious. However, a recent decision from the Ontario Court of Appeal (OCA) shows how gaps between assumptions and what actually is in an insurance policy can lead to stunning outcomes following an insured's death.

In the OCA case, the former spouse of a policyholder who had continued to pay the premiums on her ex-husband's policy after separation, lost the death benefit because her ex-husband secretly changed the policy's beneficiary. As a result, his more recent partner received the benefit, which had a value of $250,000.

The ex-wife specifically noted in her evidence that she and her former spouse (the policyholder) had decided the funds from the life policy would benefit their three children.

Further, the ex-husband had failed to make many of his child-support payments and was considered financially irresponsible by the ex-wife.

The split OCA decision chronicles a tale in which legal opinion is clearly divided on what the outcome should be: two judges of the OCA held for the more recent partner and one judge agreed with a lower court that the benefit should go to the ex-wife on the principle of unjust enrichment.

The facts of the case might arise in any financial advisor's practice.

After a 20-year marriage, Michelle Moore and Lawrence Moore separated in 1999. Soon after, Lawrence entered into a relationship with Risa Sweet, whom he met at the Donwood Institute, a Toronto clinic for those dealing with substance abuse and mental health issues.

Lawrence Moore and Sweet lived together on Lawrence's disability pension of about $5,000 a month for 13 years, until Lawrence's death in 2013.

At the time of the Moores' separation, they agreed orally that Michelle would continue to pay the premiums of $507.50 annually on a life policy owned by Lawrence. That the oral agreement existed and that it was intended to benefit their three children was not contested in the case.

According to Michelle's view, summarized in the decision: "The policy was entered into due to the deceased's financial irresponsibility and the understanding the deceased and she shared, which was that the policy was required in order to support their children in the event of the deceased's passing."

However, shortly after Lawrence's relationship with Sweet began, he altered the life policy by making Sweet the irrevocable beneficiary.

Unaware of the change, Michelle continued to maintain the policy, which was underwritten by RBC Life Insurance Co. The change was properly recorded with the insurer.

The OCA's majority decision notes that the beneficiary change was "not carried out surreptitiously without consultation. It was effected through the offices of, and after discussions with, Ms. Moore's brother-in-law, a life insurance broker who is married to Ms. Moore's sister."

The OCA decision outlines the Moores' further difficulties: Lawrence fell into arrears on child support payments and had his pension garnisheed; and joint debt of $70,000, accumulated by Lawrence, led to both former spouses declaring bankruptcy in 2000.

Michelle retained the family home, where she still lives.

The OCA dealt with a range of complex issues, including the application of the principle of "constructive trust" in situations in which there may be unjust enrichment or deceit.

The principle of "equitable assignment of contractual rights" also was considered. In addition, the OCA decision delves into the application of the Ontario Insurance Act in circumstances such as these.

In holding for Sweet, the OCA's majority decision notes that the case, in their view, is not one in which the equities were heavily weighted in favour of Michelle. While noting that she received the matrimonial home upon separation, apparently without a payment to Lawrence, and that Sweet appeared to be in financial need, Justice Robert Blair stated: "[I]t cannot be said that Ms. Sweet is no more than a volunteer who gave nothing in exchange for being named irrevocable beneficiary, or that she is simply the recipient of a windfall. She was a 13-year spouse with heavier than normal caregiving duties."

The court concluded that in these circumstances, Michelle's claim of unjust enrichment failed in the face of the irrevocable beneficiary designation provisions of the Insurance Act.

In arriving at this conclusion, Blair summarized the legislative intent of the relevant provisions of that act: "[T]he insurer is protected in making payment to the beneficiary, the irrevocable beneficiary by the statutory right to remain as the named beneficiary entitled to receive the insurance monies unless he or she consents to being removed. The regime is designed to provide an element of certainty and predictability for those statutory rights and protections."

Justice Peter Lauwers, the dissenting judge, took an opposing view of the law dealing with unjust enrichment and constructive trusts, noting: "This case is the regrettable outcome of the fact, noted by the application judge, that 'each of the parties trusted the deceased, who betrayed that trust by acting duplicitously'."

And, while noting that Sweet provided the deceased with a supportive home, Lauwers added: "True enough, but these benefits to the deceased would not be as significant if he had died the day after signing the irrevocable designation in the appellant's favour. In my view, they are not equities that are relevant to the outcome."

Lauwers concluded that he would have found for Michelle: "Equity asks a pertinent question in the difficult dilemma posed in the disappointed beneficiary cases [referring to an extensive review of case law in the decision]: which of the two claimants has the superior claim to the life insurance proceeds? Equity's answer, all things being equal, is to assist the one with the superior right in equity."

In this case, Lauwers' dissent concluded, that is Michelle.

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