Support Obligations and Life Insurance: Unforeseen Benefits and Hidden Liabilities

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1 Support Obligations and Life Insurance: Unforeseen Benefits and Hidden Liabilities Julie K. Hannaford JK Hannaford Barristers (Professional Corporation) Contact: Julie Hannaford JK Hannaford Barristers (Professional Corporation) 151 Yonge Street, Suite 1800 Toronto, Ontario M5C 2W7 Tel Fax Families use estate planning and insurance policies in order to secure their financial well being if one or both spouses die. When families separate or divorce, they confront a new dimension of financial security concerns. Because child and spousal support obligations survive death, a child or spouse may sue the estate if the deceased spouse had not made the proper provisions to address support needs. Life insurance has become a standard component of separation agreements and divorce orders. Life insurance addresses the uncertainty associated with the value of the payor s estate. The November 2007 version of the Standard Form Separation Agreement includes standard form provisions relating to life insurance. Recently, Courts have been confronted with determining whether life insurance benefits are in place to provide security for support obligations or are meant to be lump sum, independent obligations. In the result, some ex-spouses and children are benefitting from large, unforeseen and unintended windfalls that far exceed outstanding support obligations. At the other end of the spectrum, courts are being asked to make orders for life insurance security for new support obligations. However, there must be 1

2 some checks and balances in place to ensure both that the payor spouse complies with the court order and that the life insurance clauses in agreements reflect the true intentions of the parties. Life insurance clauses are often inserted into separation agreements in order to secure child and spousal support obligations. Some individuals already have insurance policies while others are required to obtain new policies under their separation agreements. All too often, these provisions are given less time and attention than the provisions that deal with custody and access and other property issues. Under the Family Law Act, 1 courts also have the discretion to order parties to obtain insurance policies to secure support obligations. Similarly, in pleadings, and in finalizing obligations in settlements, security provisions (related to life insurance) are given shorter shrift. Section 34(1)(i) of the Family Law Act grants the Courts the authority to order a party to secure spousal/child support with an insurance policy. Specifically Section 34(1)(i) states Section 34. POWERS OF COURT (1) In an application under section 33, the Court may make an interim or final order, (i) requiring that a spouse who has a policy of life insurance as defined in the Insurance Act designate the other spouse or a child as the beneficiary irrevocably. 2 In interpreting this section of the Family Law Act, Justice MacKenzie in Laczko v. Laczko explained that: I am satisfied that the use of the word has in clause (i) contemplates a life insurance policy in existence and there is no possibility of rational Acknowledgment: I would like to thank Aliya Ramji (Queen s Faculty of Law 2007) and Eric Pardu (2011 LL.B. candidate) for their research and collaboration on this paper. 1 Family Law Act, R.S.O., c. F-13 2 Ibid., section 34. 2

3 inference from such words that a child support payor could be ordered to obtain or purchase a life insurance policy where no policy existed at the date the relief was sought. 3 From Justice MacKenzie s ruling, it appears that the Ontario Legislature did not contemplate the purchase of insurance policies under Section 34 (1)(i) of the Family law Act. However, Courts have interpreted section 34(1)(k) as the section that gives the Courts jurisdiction in compelling the purchase of life insurance. Section 34(1)(k) states: Section 34. POWERS OF COURT (1) In an application under section 33, the Court may make an interim or final order, (k) requiring the securing of payment under the order, by a charge on property or otherwise. 4 Laczko v. Laczko is the leading case on life insurance as security for support payments. In Laczko, a settlement of all the issues with respect to divorce, custody of the children, access and support obligations had been reached. However, counsel for the wife brought a motion to have the Court order the husband to purchase a life insurance policy in order to secure child support payments. The issue before the Court was whether the Court had the jurisdiction to order the payor spouse to purchase a life insurance policy to secure child support payments. 5 The Court held that although there is no provision under the Divorce Act enabling the Court to order a child support payor to secure payments by an irrevocable designation of a beneficiary under an existing life insurance policy, the Court could do so under the 3 Laczko v. Laczko (1999), 176 D.L.R. (4 th ) 507 (O.N. S.C.), para Ibid., para Ibid., para. 1. 3

4 Family Law Act. 6 Under section 34(1)(i) of the Family Law Act, the Court can order a spouse to designate the other spouse or a child as the beneficiary irrevocably to an existing life insurance policy. However, this section does not contemplate an order compelling the payor spouse to purchase a life insurance policy. Justice MacKenzie relied on the decisions of Celi v. Eagle 7 and Dunham v. Dunham 8 to determine the jurisdiction to order the purchase of a life insurance policy. In Celi v. Eagle, the applicant sought an order requiring the respondent to take out a life insurance policy of $250,000 to secure support payments. The applicant argued that the Court, under section 34(k), could require the security of payment by a charge on property or otherwise. The Court accepted this argument that section 34(1)(k) granted the Court the jurisdiction to make such an order by virtue of the words or otherwise. 9 In Dunham v. Dunham, there were numerous issues before the court including issues of custody and access, equalization of family property, and child and spousal support. 10 In dealing with the child support issues, the Court ordered that the payor spouse purchase a life insurance policy with the custodial parent named as an irrevocable beneficiary. 11 As in the Celi v. Eagle case, the payor spouse did not have a life insurance policy. In its reasoning, the Court held that the procurement of the life insurance policy was for the purpose of securing child support payments: 6 Ibid., para Ibid., para Ibid., para Celi v. Eagle (2009), 23 O.T.C. 89, at para (Ont. Gen. Div). 10 Dunham v. Dunham, [1998] O.J. No (Ont. Gen. Div). 11 Ibid., para

5 Mr Dunham does not have any life insurance coverage. If he were to die, Miss Dunham could be left without any funds to assist in the support of herself and the children. Mr. Dunham shall have one month to obtain a life insurance policy on his life with Miss Dunham named as the irrevocable beneficiary. He shall be obliged to maintain insurance coverage with Miss Dunham named as beneficiary during such time as he is obliged to support Miss Dunham or either of the children pursuant to this judgment or any subsequent court order. 12 It is reasonable to assume, from the case law, that the purpose of compelling a life insurance policy is to ensure that the recipient spouse and children are protected should a payor spouse die prior to meeting all his support obligations. The Courts have gone one step further to demonstrate that the intention of life insurance is to secure support payments. In Rolland v. Rolland, the husband suggested that the responsibility for funding the life insurance required to secure his obligation to pay spousal support should be shared. He suggested that the parties share the cost on a 50/50 basis because their incomes were equal. The Court held that because there is no case law to offer guidance, the case had to be determined on first principles. The husband was obliged to pay spousal support pursuant to an agreement between the parties and therefore it was illogical and irrational for the wife to partly fund the security obtained to guarantee his obligation. The Court was clear that it has the jurisdiction to require that a payor spouse obtain and maintain life insurance to secure support payments. 13 From the case law it is clear that the Court has the jurisdiction to order a payor spouse to obtain a life insurance policy. Moreover, it appears as though life insurance policies are intended to secure payments of child and spousal support. And further, when ordering 12 Ibid. 13 Rolland v. Rolland, [2008] W.D.F.L (ON S.C.). 5

6 life insurance policies, courts have not clearly linked life insurance from support payments. One of the difficulties the courts have had is ensuring compliance with court orders and provisions of separation agreements. The courts have not established protocols through which they can effectively monitor life insurance policies. Also, an impediment to using life insurance to secure support payments is the uninsurability of payor spouses because of financial stability and health care concerns. s. The Annotated Standard Form Separation Agreement contains what should be done when the payor is uninsurable. It states that if a life insurance policy is terminated for health reasons, the parties may have to use a dispute resolution mechanism to establish a new insurance policy if the parties are not on amicable terms. However, if the payor s life insurance cannot be replaced because of his/her ailments, the former beneficiary may have no recourse to turn to, and the support payments would no longer be insured. There is case law suggesting the courts willingness to supervise this area of family law. In the Celi v. Eagle, the Court required the respondent to provide written evidence to the court that the life insurance policy had been issued and to produce annual, written evidence that the policy was in full force and effect. 14 The Celi v. Eagle case demonstrates that the courts desire to monitor compliance with these types of orders. This is likely because the quality of life of the payee spouse and children depends on compliance. However, there are other cases where the court has not exercised a supervisory role and as a result payor spouses fail to comply with life insurance orders and separation agreement clauses. 14 Supra 9, para

7 In Steeves v. Steeves, in the divorce proceeding, the husband was ordered to pay spousal support to the wife for an indefinite period of time. To ensure adequate support in the event of the husband s death, the husband was ordered to maintain the wife as a beneficiary to his life insurance policy. Subsequently, the husband changed the designated beneficiary from his first wife to a woman with whom he was co-habiting and later married. The husband failed to comply with a court order to redesignate the first wife as a beneficiary under the policy. The first wife brought a motion for contempt, but the husband died before the motion could be heard. The first wife then brought a motion against the second wife in her capacity as executor of the estate and as a named beneficiary of the insurance policy. 15 Because the deceased husband failed to comply with the court order, and because wrongful conduct was present in the refusal or failure of the husband to comply with the court order, the first wife was entitled to judgment against the estate of the husband. The Court was of the view that a constructive trust had been created and that the plaintiff s first wife had an equitable lien on the proceeds of the insurance policy. 16 A similar situation occurred in Adams v. Adams. A separation agreement between the husband and the wife required the husband to secure child and spousal support with a life insurance policy in the amount of $200,000. In the event that the husband failed to maintain the life insurance policy, he was to notify the wife of his default and was to provide her with the opportunity to maintain the policy. The husband remarried and on 15 Steeves v. Steeves (1995), 168 N.B.R. (2d) 226 (N.B. Q.B.). 16 Ibid., para

8 his death, he had bequeathed his entire estate to his second wife and appointed her executor and trustee of the estate. The will contained no provisions for the first wife and the husband had died without a life insurance policy. 17 The court held that the husband clearly breached the insurance clause of his separation agreement and therefore the wife and children were entitled to recover damages in the amount of the value of the policy from the husband s estate. The court also held that although the life insurance policy was intended to replace support payments in the event of the husband s death, it was also an independent obligation designed to provide for the welfare of the children. The court is clear that life insurance obligations are not simply for the purpose of security for support payments; they are effectively independent obligations. Moreover, in situations where a payor spouse is in violation of a court order or separation agreement, the Court will endeavour to find an equitable or other appropriate remedy. But there may be situations where a remedy is impractical or impossible. There are also situations where the intentions of the parties are unclear in separation agreements and as a result, courts have had to interpret the provisions as written. In the 2009 case of Turner v. DiDonato, the husband and wife signed a separation agreement which required the husband to pay spousal support to the wife until the wife reached age 65. The agreement required the husband to designate the wife as the sole beneficiary to a life insurance policy of $100,000. When the husband died, the amount 17 Adams v. Adams (Estate), 2001 ABQB

9 designated for the wife was approximately $43, As the wife was only 56 years old, the deceased husband was in breach of the terms of his insurance obligations under the agreement. 18 The wife, brought an application against the husband s estate and the husband s second wife claiming shortfall in insurance funds. Ms. Turner, the second wife, argued that the first wife was receiving a windfall beyond the negotiated agreement between the husband and the first wife. The second wife argued that the life insurance was intended as security for any outstanding support obligations at the time of death and not a lump sum payment on death. The court held that the wife was entitled to the full $100,000 and awarded the outstanding amount to be paid out of the estate. The trial judge explained that the provisions in the agreement relating to the life insurance were not unambiguous. 19 The clauses of the separation agreement pertaining to the life insurance read as follows: (1) The husband owns or has an interest in a London Life policy of life insurance through his employment at Ontario Hydro in the amount of approximately $220, (2) The husband warrants that he has not borrowed against the policy and that the full face value of the policy is available. (3) The husband shall irrevocably designate under this policy: the wife as the sole beneficiary of $100,000.00, Mark DiDonato as the sole beneficiary of $50, and the wife in trust for Riccardo DiDonato as the sole beneficiary of $50, The husband shall file these designations with the insurer as provided by the Insurance Act. The husband will give the wife a true copy of these designations within fourteen (14) days from the execution of this Agreement. (4) The husband shall maintain the policy and shall maintain each of the aforementioned as beneficiary as set out in paragraph 12(3) hereof as long as the husband is obligated to support such beneficiary as provided in this Agreement following which the husband may then deal with the applicable portion or portions of the policy as he wishes and the wife 18 Turner v. DiDonato, 2009 ONCA Ibid. 9

10 will then sign any document necessary to change or revoke the applicable designation or designations of beneficiary. (5) At the wife s request, the husband shall annually provide proof that the policy remains in effect and that he has not transferred it, borrowed against it, or pledged it as security. (6) If the policy of insurance is no longer available to the husband through his employment, he shall immediately obtain replacement insurance (ensuring that there is no gap in coverage beyond his control) for the amount referred to in paragraph 12(4) hereof, and shall maintain the replacement policy for the period referred to in paragraph 12(4) hereof, and shall designate the beneficiary in accordance with the terms of paragraph 12(3) hereof. (7) If the husband defaults in payment of the premiums, the wife may pay any premiums and may recover them from the husband, together with all her costs and expenses, including her solicitor and client costs with respect to collection of the above. (8) If the husband dies without his insurance in effect contrary to the Agreement, his obligation to contribute to the support of the wife and children shall be a first charge on his estate. 20 The life insurance clauses in the Standard Form Separation Agreement state: (1) The parties will jointly apply for two life insurance policies ( the policies ) on the husband s life, each in the amount of $[amount]. The husband will take any medical examinations or tests required to obtain the policies. (2) The husband will pay all policy premiums when due. If he does not and the wife pays any premiums, interest or penalties to prevent the policies lapsing, those amounts will be considered child support and enforceable against the husband. If the policy lapses because the husband failed to pay the premiums, the husband will also pay the wife all necessary costs incurred by her to reinstate the policy. (3) As long as the husband is obligated to pay child support to the wife, the parties will: (a) keep a policy in force for each child (b) ensure that each policy remains unencumbered, (c ) designate and keep [name of beneficiary] as beneficiary of each policy under the terms of this Agreement for at least one year after the husband s obligation to pay child support ends in accordance with the child support termination provisions in this Agreement. After that, the husband can deal with the policy as he wishes, (d) maintain [independent third party] as trustee for the policies on the following terms [set out proposed scheme of distribution of capital proceeds and income such as the following]: (i) until a child is 23 years old, the proceeds will be used to pay the child support. Any income from the proceeds not used in one year will be added to capital. The trustee may use capital for the child s needs, and (ii) pay to the child the remaining proceeds when the child turns [age]. (4) When the husband s obligation to pay child support for a child ends, the wife will transfer her interest in this policy to the husband. If she does not, the husband may obtain 20 Ibid. 10

11 a court order transferring the wife s interest in the policy to the husband. The wife will be responsible for the costs the husband incurs in obtaining the order. (5) The husband will keep a life insurance policy ( the policy ) on his life in the amount of $[amount], naming the wife as the irrevocable beneficiary. The husband will not borrow against the policy while he is obligated to pay spousal support. (6) If [When] spousal support ends, the husband s obligation to maintain the policy ends. When it does, the wife will provide the husband s insurer with a direction to withdraw the policy s irrevocable designation. If she does not, the husband may obtain a court order directing the insurer to do so. The wife will be responsible for the costs the husband incurs in obtaining the order. (7) Within 14 days of signing this Agreement, the husband will provide the wife with a copy of the policy and the irrevocable beneficiary designation. The husband will sign the direction in the attached Schedule ( Authorization and Direction ), permitting the wife to confirm directly with the husband s insurer that the policy is unencumbered and in force. (8) Within 14 days of the policy s anniversary date, the husband will give the wife proof that he has paid the premium. Both the Turner/DiDonato and the Standard Form Separation agreement explicitly state that the life insurance policy is for the sole benefit of the beneficiary. However, the Turner agreement goes one step further by stating that in the event that the husband dies without an insurance policy (contrary to the agreement), the beneficiaries right to the payment would be first charge on his estate, ahead of any other creditors. This type of clause can pose a challenge to other creditors attempting to be remunerated for any outstanding payments if they are given lower priority than the deceased s family in collecting any balances owed. Both separation agreements contain a provision mandating the husband to provide proof on an annual basis that the policy remains in full force and effect. Both of the separation agreements also state that should the payee have to pay the insurance premiums on the policy for any reason, the payor must fully reimburse the payee, with costs (if applicable). 11

12 In the case of Turner, essentially, the first wife did receive a windfall as a result of the death of her husband prior to her 65 th Birthday. The wife was to receive $500 per month until her 65 th Birthday. Upon the husband s death, the first wife had attained the age of 56. As such, the balance of the husband s support would have totalled approximately $57,000, not the full $100,000. It is questionable whether it was the true intention of the parties that the wife would receive the full $100,000 or whether the insurance policy was meant as a security for any outstanding support obligations. It could not have been the intention of the husband to leave his first wife with the full $100,000 if he had died only days or months before her 65 th birthday. Clearly, the true intentions of the parties had not been properly reflected in the above separation agreement. It is the court s duty to interpret the provisions of agreement as written and in the context of agreements rather than by their guess as to what the true intentions of the parties are or were. As such, one cannot disagree with the court s interpretation of the separation agreement. This case is very relevant in situations where lawyers are drafting life insurance clauses for separation agreements. Certainly, lawyers must recognize the implications of poorly drafted separation agreements and must take this case as a warning. More attention should be paid to the wording of life insurance policy clauses and lawyers drafting such agreements should ensure that their party s specific intent is reflected in the agreements. 12

13 In Turner v. Didonato, the Court was clear that the separation agreement did not express that the life insurance policy was security for the support payments, nor did the separation agreement reduce the amount of insurance as support obligations diminished. Had the life insurance policy been non-existent, the estate would have been liable for only the remaining support payments. Instead the entire $100,000 was given to the first wife. Because of the way the separation agreement was drafted, the payor spouse was liable for much more than he would have been, had he lived until the wife turned 65. Moreover, because separation agreements are riddled with more pressing matters such as custody, division of assets and interim support obligations among other things, life insurance clauses take a back seat to these more substantial issues. If life insurance policies are intended to be linked to support payments, lawyers must be explicit and spell this out directly in agreements. The lesson learned from Turner v. DiDonato by lawyers is that we must clarify client s intentions and put those explicitly in writing. Because all individuals may not be able to access life insurance policies based on age or limited income, Family Sure 2000 takes an innovative approach to insurance and is geared specifically towards securing spousal support, rather than providing a generic life insurance policy. Should the payor die, Family Sure s policy maintains the monthly support payments for the period set out in the separation agreement. Thus, the beneficiary does not receive a lump-sum, windfall payment from an insurance company that may far exceed the remaining support payments owed by the payor. 13

14 Life insurance policy orders and clauses in separation agreements are important for ascertaining that there is security for spousal and child support obligations upon the death of a payor spouse. It is important for courts to be able to secure support in the event of an untimely death. Nevertheless, there must be a manner in which courts can monitor compliance by policy purchasers. The courts have demonstrated a desire to play a supervisory role in the provision of child and spousal support connected to life insurance policies. However, this has been difficult and the proper infrastructure is not in place. Furthermore, courts are required to interpret clauses in separation agreements as they are written, without guessing what the intentions of the parties had been. As a result beneficiaries are receiving windfalls that are unintended and unforeseen. Lawyers, as drafters of separation of agreements, need to be more mindful of the exact intentions of their clients and draft agreements in this light. F:\_Julie's Article\Support Obligations Final version.doc 14