An out-of-date beneficiary designation in a life insurance policy can throw a wrench in an estate plan. Where a beneficiary is designated, the insurance money does not form part of the deceased’s estate. Failure to update a beneficiary designation after a significant life event such as marriage, separation, or divorce may leave grieving loved ones in for an unpleasant surprise.
Competing claims over proceeds to a life insurance policy
Recent Vancouver litigation in Knowles v. LeBlanc, 2021 BCSC 482 pitted the sole beneficiary of a $100,000 life insurance policy (the estranged ex-wife) against a “disappointed beneficiary” (the deceased man’s common-law spouse). Peter Knowles passed away in 2019 at 68 years of age. His common-law wife of almost 30 years reported his death to the life insurance company and was shocked to discover that she was not the designated beneficiary. Instead, Peter’s first wife—whom he had been divorced from for almost 30 years—was named as sole beneficiary.
No change of designation after divorce
Peter had obtained the life insurance policy in 1987 when he was still married to his first wife, Barbara. Peter and Barbara separated in the late 1980s and finalized their divorce in 1991. Their divorce was acrimonious. Peter and Barbara did not communicate in the almost three decades between their divorce and his death. He also became estranged from the two children he shared with Barbara, deliberately disinheriting them in his 2012 Will. After his divorce, Peter formed a new relationship with Marie. They lived in an exclusive common-law relationship from 1993 until Peter’s death in 2019. During their time together, Peter and Marie shared expenses and jointly contributed to the cost of their family property. Peter continued the monthly payments on the life insurance policy with automated withdrawals from the joint chequing account he shared with Marie. Both Peter and Marie believed that Peter had updated the beneficiary designation to name Marie as the sole beneficiary of the life insurance policy instead of Barbara. It was not discovered until after his death that he either forgot or neglected to do so.
Vancouver litigation to resolve entitlement to insurance proceeds
Barbara’s position was that by reason of being the sole designated beneficiary, she was the sole valid claimant under the policy and the proceeds should be paid to her. Marie’s competing claim was that Barbara held the life insurance proceeds in trust for her. Luckily for Marie, there was strong evidence of Peter’s wishes for his estate, and the circumstances singularly pointed toward Peter’s intention to leave all of his property to Marie after his passing. He left his entire estate to Marie in his Will. Marie received all of his other assets by way of right of survivorship and she was the designated beneficiary of every other insurance policy, mutual fund, and pension plan that Peter held.
Ex-wife holds insurance proceeds for common-law spouse’s benefit
Marie argued that Barbara would be unjustly enriched if she was permitted to keep the insurance proceeds and asked the court to impose a constructive trust in her favour to remedy the situation. The judge was satisfied that all three elements of the test for unjust enrichment were met:
- An enrichment of the defendant. Barbara would benefit at Marie’s expense if she received the life insurance proceeds.
- A corresponding deprivation of the plaintiff. Marie had clearly suffered a deprivation. The premiums of the life insurance policy were automatically deducted from her joint account with Peter for many years. The contributions amounted to $136 per month or $1,632 per year. Marie believed that Peter had changed the policy to designate her as the beneficiary. This arrangement was predicated on the mutual understanding between Peter and Marie that she would be the beneficiary under the life insurance policy.
- An absence of juristic reason for the enrichment. There was no contract between Barbara and Peter that would defeat Marie’s claim, nor was there any statute requiring proceeds to be paid to Barbara in the face of Marie’s corresponding deprivation. Further, Barbara could not have had a subjective—let alone objectively reasonable—expectation that she would benefit from her ex-husband’s insurance policy many years later in 2019 after the two had long since moved on with their lives. Barbara had no involvement at all in Peter’s life after their divorce and they had each agreed to retain their own property in their 1991 consent divorce order.
The judge found in favour of Marie and imposed a constructive trust over the $100,000 insurance proceeds. The life insurance company was directed to pay the full amount to Marie.
Bottom line on claims in unjust enrichment and the constructive trust remedy
The disappointed beneficiary succeeded in securing a constructive trust over the insurance proceeds in Knowles v. LeBlanc. She had good facts on her side; there was no ambiguity in her deceased husband’s intention that all of his property go to her on his death, and his ex-wife had no reason to expect she should benefit from the policy in question. Competing claims and disputes over insurance proceeds can be avoided by reviewing beneficiary designations from time-to-time and ensuring that designations are changed or revoked after significant events such as separation, divorce, and remarriage.