Life Insurance Policy Beneficiary Designations Are Not Sacrosanct

I have been to presentations where the speaker describes all manner of claims that can be made to dispute someone’s Will, and then suggests that people would be much better advised to arrange that their affairs so that their wealth is transferred to their beneficiaries on death by some other means, such as a trust, joint accounts, or through life insurance products. The unstated messages of these presentations are that Wills get challenged a lot, and other types of estate planning tools are somehow immune from challenge. Neither of these unstated messages are true.

I agree that a Will is just one of many tools for transferring wealth at death, and it may make sense in some circumstances to structure one’s affairs to transfer wealth outside of the estate, particularly when the beneficiary is a spouse. I also agree that in British Columbia, Wills are vulnerable to claims under the Wills Variation Act from spouses and children. However, in many cases, no one has any reason to challenge a Will.

Nor are other estate planning tools immune from attack. Take life insurance policy designations.

Joan Mary Martindale designated her then husband John Edward Martindale as the beneficiary of a group life insurance policy in 1979. Joan and John Martindale later separated and in January 1981, they signed a separation agreement dividing the family assets. The separation agreement provided that each gave up any further claim to the other’s property. They later divorced.

Joan Martindale died in July 1994.

Before her death, Joan Martindale told friends and colleagues that she arranged her affairs so that her sister Georgina Roberts would get everything. She told her sister a few days before she died that she did not need to fill in a change of beneficiary form for the life insurance policy, and that she had taken care of everything.

However, Joan Martindale never did change the designated beneficiary of the life insurance, and after her death her ex husband John Martindale claimed the insurance proceeds. He collected the proceeds and transferred them to Linda Martindale.

Georgina Roberts, who was also the executor of Joan Martindale's Will, sued John and Linda Martindale for the life insurance benefits. The trial judge held that because Joan Martindale mistakenly believed she had changed the beneficiary of the life insurance policy, John Martindale was not entitled to the proceeds, which then fell into Joan Martindale’s estate.

John and Linda Martindale appealed to the British Columbia Court of Appeal. In Martindale Estate v. Martindale, (1998), 162 D.L.R. (4th) 475; (1998), [1999] 1 W.W.R. 778; (1998), 55 B.C.L.R. (3d) 63, 1998 CanLII 4561, Madam Justice Southin rejected the trial judge’s analysis, but arrived at the same result.

The Insurance Act, RSBC 1979, c. 200, [now RSBC 1996, c. 226], required that a designation or change in designation of a beneficiary be in writing and signed by the insured. According to the Insurance Act, where a beneficiary is designated, the insurance money “is not part of the estate of the insured and is not subject to the claims of creditors of the insured.”

According to Southin J., Joan Martindale’s intent was not relevant. To change the beneficiary, the insured had to sign a change of beneficiary form.

However, because John Martindale had signed a separation agreement giving up any further claim to Joan Martindale’s property, it was against good conscience for him to receive the insurance proceeds, and the court imposed a constructive trust on the life insurance proceeds for Joan Martindale’s estate.

Southin J.A. stated:

[25] There is in this proposition the very great danger of judges invoking their personal predilections. "Good conscience" is an infinitely variable concept upon which reasonable men and women, and therefore reasonable judges, may have widely divergent opinions.

[26] But I am comfortable in this case in saying that it would be against good conscience for the appellants to keep this money because Mr. Martindale had, by the separation agreement, surrendered any right he might have had to the property of the deceased. A policy of life insurance is a species of property of the insured, albeit the amount payable under the contract
of insurance does not fall into possession until the insured's death, and, by law, cannot be taken by the insured's creditors.

[27] For the appellant, Mr. Martindale, to claim from the insurer the proceeds was a breach of the separation agreement and such a breach is sufficient, in my opinion, to call in aid the doctrine of the remedial constructive trust. To put it another way, it is not the mistaken belief of Mrs. Martindale which gives rise to a remedy; it is the bargain which Mr. Martindale made.

Martindale v. Martindale Estate proves that despite the clear language of the Insurance Act, life insurance policy designations are not immune from challenge in appropriate circumstances.