The saga of Dagg v. Cameron Estate has finally arrived at a conclusion that is very reassuring for family law lawyers and clients. The Ontario Court of Appeal recently released a decision that restores the validity of life insurance provisions that are regularly used to secure child and spousal support.
On May 5th, Justices Michael Brown, David Doherty and Bradley Miller issued their judgment, and the family law bar breathed a collective sigh of relief upon reading Dagg v. Cameron Estate, 2017 ONCA 366. Both the application judge and the Divisional Court held that a life insurance policy taken out in accordance with a separation agreement could be "clawed back" into the estate for a dependant support claim under the Succession Law Reform Act by a subsequent spouse. The Court of Appeal on May 5th overturned the lower courts’ rulings.
The facts of the case were fairly straightforward. Stephen Cameron and Anastasia were married and had two children. They separated in 2012. There were several consent orders made that required Stephen to maintain Anastasia as irrevocable beneficiary on any life insurance policies that he held to secure his child and spousal support obligations. Stephen had re-partnered and his spouse at the time of his death, whom he had not married, namely Evangeline Dagg, was expecting a baby. Several years after Stephen's death, Evangeline brought a dependant support application under s. 72(1) of the Succession Law Reform Act (the "SLRA") on her behalf and on behalf of her 3-year-old son, and sought that the entirety of the life insurance policy be "clawed back" into Stephen's estate. Other than the life insurance policy of $1.0 million, Stephen's estate was insolvent.
The term "clawed back" means that the entire life insurance policy would be deemed to be part of the estate, and it could then be charged for the purposes of dependant support. Both the application judge and the Divisional Court permitted this claim. The so-called "claw back" provision of s. 72(1) of the SLRA, while powerful, is restricted by s. 72(7) of the SLRA, which states, "This section does not affect the rights of creditors of the deceased in any transaction with respect to which a creditor has rights." Both lower courts found that while Anastasia was an unsecured creditor of the estate, she was not a creditor in accordance with s. 72(7) of the SLRA.
Justice Brown of the Ontario Court of Appeal disagreed. The Family Law Act and the Divorce Act both provide authority for a court to order a support payor to designate the support recipient as the irrevocable beneficiary of a life insurance policy to provide funds at the time of a payor's death to satisfy the support obligations in a support order. Justice Brown held that the Divisional Court erred by holding that Anastasia was not a creditor in accordance with s. 72(7) of the SLRA. Money was required to be available to Anastasia to satisfy his support obligations to her. The amount of money necessary to satisfy Stephen's support obligations would be protected from s. 72(1) of the SLRA. The creditor amount was not unlimited, however, and any excess could be clawed back into the estate for the purposes of dependant support.
The irrevocable beneficiary designation is not intended to be a windfall, but the Ontario Court of Appeal upheld that it is intended to secure support obligations. The appeal was allowed, but notably, the appeal was moot because Anastasia and Evangeline settled it after Anastasia received leave to appeal to the Court of Appeal. Due to the importance of the issues, the parties asked the court to allow the appeal to proceed based on the following test:
(i) whether the issues can be well and fully argued by the parties who have a stake in the outcome;
(ii) the concern for judicial economy;
(iii) the need for the court to remain alive to the proper limits of its law-making function in order to avoid intrusions into the role of the legislative branch.
In order clear up controversy on this far-reaching issue, the appeal was argued by Philip Epstein, Aaron Franks and Michael Tweyman of Epstein Cole LLP on behalf of the first family appellants, and by Queen's University law professor, David Freedman, on behalf of the second family.
The discretion to hear the appeal was allowed because the parties argued with vigour (as if the matter had not been moot); the issue might not arise again at the Court of Appeal due to the costly three-stage appeal process and there was a significant public interest in resolving this legal issue; and the court was not deciding an abstract question or intruding into the legislative realm. The issue to be resolved was based on a full and complete public record.
The novel issue in this case is whether the first wife, Anastasia, benefited from the exception as a "creditor" under s. 72(7). What rights did Anastasia have in respect of the life insurance policy? Justice Brown's analysis is practical by examining the support orders in place and protecting the "claw back" of the SLRA in an appropriate amount from being claimed against the estate. Favouring a second spouse's support over a first spouse who had security given for support was an incorrect decision from a public policy point of view. The lower-court decisions jeopardized thousands of separation agreements and court orders with irrevocable life insurance beneficiary designations where a spouse had re-partnered; however, those decisions have now been overturned and the validity of such life insurance provisions to secure support in separation agreements and court orders has been restored.
The Ontario Court of Appeal has now reinstated what the family law bar thought was the case in the first place.
The take-away messages from the saga of Dagg v. Cameron Estate are as follows:
a. Family law lawyers and clients should be reassured that the provisions in separation agreements and court orders with security of support obligations through irrevocable life insurance beneficiary designations will be upheld in court;
b. The above designations are not airtight because a court may intervene in a "windfall" situation to a former spouse where a further spouse makes an SLRA dependant support claim;
c. If separating spouses want to exclude life insurance from being captured under the SLRA in the future, they may choose to make the life insurance policy jointly owned because jointly-owned policies of life insurance are not captured by the SLRA;
d. It would be prudent to build into separation agreements a regime for the use of insurance proceeds as security for support so that the calculation of the amount of support is codified. The use of an asset, such as a life insurance policy, should be on the same level as the use of any asset to secure indebtedness;
e. Changes to the Family Law Act and the Succession Law Reform Act are likely pending to provide provisions for support when life insurance proceeds are not available. Your family law lawyer, and estate lawyer, need to be aware of legislative and case-law changes and inform you of the risks associated with security for support;
f. Taking time and consideration to establish enforceable security for support obligations in your family law matter will help avoid future estate litigation;
g. As always, ensure that the irrevocable life insurance designation requirements in separation agreements and court orders are followed. Immediately exchange the documentation that proves that the required life insurance is in place, and ensure that directions and authorizations are in place so that each party can verify that life insurance is maintained in good standing at any time.
h. To address how long support is to be paid and how to discount it for contingencies, it may be prudent to create an “insurance trust” where the amounts of child and spousal support are accurately calculated in accordance with a separation agreement. Insurance trusts may direct that the trustee continue to pay the amounts under the agreement and direct the excess to the payor’s estate, or as the payor directs. An insurance trust is an option to avoid the unknowns about calculating what amount of life insurance is needed as security for support.