Separation Agreements or court orders following marriage breakdown may include a clause requiring one former spouse to maintain a life insurance policy on his or her life, naming the other as the beneficiary. Life insurance is a good way to either secure spousal or child support payments, or to replace the payments, in case the former spouse required to pay support dies. But what happens if, contrary to the agreement or court order, the party required to maintain the life insurance cancels the policy or changes the beneficiary?
The Supreme Court of British Columbia recently considered this issue in Milne Estate v. Milne 2014 BCSC 2112. Following the breakdown of their relationship, Scott Milne agreed to maintain his $500,000 life insurance with Sherry Milne as the beneficiary for so long as he was required to pay child or spousal support to Ms. Milne. Mr. and Ms. Milne agreed to include this term in a consent court order. In breach of the order, Mr. Milne changed the beneficiary to his new partner, Albertina Vincente. Mr. Milne died on August 4, 2013, while still obligated to pay child support to Ms. Milne for their son.
Ms. Milne claimed that she was entitled to the insurance proceeds because Mr. Milne was in breach of the consent order. If she wasn’t entitled to the proceeds, then she claimed that she was entitled to the $500,000 she would have received if Mr. Milne had not changed the beneficiary out of his estate.
Madam Justice Fleming held that Ms.Vincente was entitled to retain the insurance proceeds, but that Ms. Milne was entitled to receive the $500,000 from Mr. Milne’s estate.
In denying Ms. Milne’s claim to the insurance proceeds, Madam Justice Fleming rejected her argument that because Mr. Milne was in breach of the consent order when he made Ms. Vincente his beneficiary, it would be against good conscience for Ms. Vincente to retain the proceeds, and that the court may impose a remedial constructive trust on the proceeds in favour of Ms. Milne.
Madam Justice Fleming found that the conditions set out by the Supreme Court of Canada in Soulos v. Korkontzilas,  2 S.C.R. 217, for a court to impose a constructive trust on the basis that it would be against good conscience to allow a party to retain property were not met. Those conditions are set out by Madam Justice McLachlin (now Chief Justice) at paragraph 45 of the judgment:
(1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
(2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
(3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties and;
(4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.
Madam Justice Fleming found that Mr. Milne’s relationship with Ms. Milne following the consent order was not of such a nature that the law imposes a high duty of loyalty on Mr. Milne to protect Ms. Milne. He was not a trustee or other fiduciary. That being the case, there was no basis for the Court to impose a good conscience constructive trust on the insurance proceeds.
Ms. Milne was successful in her claim against Mr. Milne’s estate, and Madam Justice Fleming awarded her $500,000 out of the estate to compensate her for Mr. Milne’s breach of the consent court order.
Although the reasons for judgment do not state the value of Mr. Milne’s estate, it appears that there will likely be substantial assets for Ms. Milne to recover the $500,000 judgement. But in other circumstances, a former spouse relying on support payments or life insurance proceeds in lieu of support if the payor former spouse dies, could be left with nothing if the courts will not impose a constructive trust on insurance proceeds. This will happen if the former spouse whose obligation it was to keep the other former spouse as the beneficiary dies leaving little or no estate from which to pay any judgement for failing to maintain the life insurance beneficiary designation. This may occur even if the now deceased had substantial assets, but structured his or her affairs so that they pass outside of the estate, such as by holding a residence and investment accounts in joint tenancies with a new partner.
Madam Justice Fleming was careful to leave open the possibility that the court might find that a separated or divorced spouse may have fiduciary duties to the other, but she found that the facts in this case did not warrant such a finding.
This decision is consistent with the Court of Appeal decision in Ladner v. Wolfson, 2011 BCCA 370, which Madam Justice Fleming applied in reaching her decision. But are
British Columbia courts taking too narrow of
a view when a constructive trust is available as a remedy?
The context in which the remedy of constructive trust s most often applied is unjust enrichment, which involves one party being enriched to another’s detriment, without any requirement that the enriched party had fiduciary duties to the other. In a case where there are insufficient assets in the estate to compensate the former spouse for the deceased’s wrongful conduct in changing a beneficiary of the life insurance, it seems to me that as between the wronged former spouse and the new beneficiary, the equities favour the former spouse. Settlements are the product of negotiations and trade-offs. Almost invariably the spouse for whose benefit the life insurance is to be maintained has given up something in return, while the proceeds are likely to be a pure gift to the new beneficiary. It may be that the former spouse has a claim in unjust enrichment, but even if not, surely the law is flexible enough for the courts to impose a constructive trust in these cases by analogy to both unjust enrichment and good conscience constructive trusts.
In practice, a separated spouse might own the life insurance on the other’s life and pay the premiums so that she or he can ensure that the life insurance is maintained for her or his benefit. Any spousal support or division of property could be adjusted to reflect the costs of the insurance.