Saturday, March 15, 2008

Life Insurance Beneficiary Designations Do Matter

I like to write about court decisions that may go against conventional wisdom.

I think most people, including lawyers and insurance agents, would say that if you designate someone as the beneficiary of your life insurance policy, the beneficiary will be entitled to the proceeds. The rules in British Columbia set out in Part 3 of the Insurance Act, RSBC 1996, c. 226, appear to make written beneficiary designations unassailable.

But, as I wrote in “Life Insurance Policy Beneficiary Designations are not Sacrosanct,” there are cases where the courts have held that a beneficiary is not entitled to keep the insurance benefits.

On the other hand, in many cases, conventional wisdom is right. As I once read on a sign in a cafeteria, “The race doesn't always go to the swift and the strong. But that’s the way to bet.”

Gordon Neilson had little contact with his daughter Kelly Rainsford for many years, as a result of his separation from her mother. He had a very close relationship with his sister.

Mr. Neilson had named his daughter as a beneficiary of his life insurance when she was a child, but later changed the designation to his sister.

A few months before Mr. Neilson died, his daughter reestablished contact with him. He also came to believe that his sister had improperly taken money and some personal effects from him. (The court did not make any findings as to whether the sister had done anything improper.)

Mr. Neilson decided to change the beneficiary of his life insurance, as well as his pension plan and his will to his daughter. He made a new will. He also signed a Public Service Pension Plan Nomination of Beneficiary, naming his daughter as his beneficiary. Mr. Neilson apparently believed that this form would also change his life insurance beneficiary, but he was mistaken.

Mr. Neilson never did complete a new life insurance declaration naming his daughter as his beneficiary.

After Mr. Neilson’s death, both his sister and his daughter claimed to be entitled to the insurance proceeds.

Mr. Justice Masuhara in Rainsford v. Gregoire, 2008 BCSC 310, held that the sister was entitled to the insurance proceeds as the designated beneficiary.

The court considered Ms. Rainsford argument that the insurance policy should be rectified to reflect Mr. Neilson’s intent to change the designation. Mr. Justice Masuhara rejected this argument on the basis rectification would only be available if both Mr. Neilson and the insurer acknowledged a mistake in the policy, which was not the case here.

The court also rejected the argument that Mr. Neilson’s sister held the insurance proceeds on a resulting trust for his estate. The argument is that there is a presumption that a beneficiary who receives insurance proceeds gratuitously holds the funds in trust for the deceased life insurance owner’s estate. The court found that Mr. Neilson did not intend for his daughter to be the beneficiary at the time he signed the beneficiary designation in favour of his sister. (It is implicit in the judgment that the court found that Mr. Neilson intended to make a gift to his sister at the time he designated her as the beneficiary.)

Mr. Justice Masuhara also held that there was no reason in equity to deprive Mr. Neilson’s sister of the insurance proceeds. This case is distinguishable from Roberts v. Martindale Estate, (1998), 55 B.C.L.R. (3d) 63 (C.A.)(discussed in my post “Life Insurance Policy Beneficiary Designations are not Sacrosanct”). In Roberts, the Court of Appeal found that it was against good conscience to allow an ex-spouse who had signed a separation agreement in which he expressly gave up any claim to any benefits on his former wife’s death to keep the insurance proceeds.

Rainsford highlights how important it is to sign a change of beneficiary designation form if you want to change the beneficiary of your life insurance.

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