Commitment to Maintain Life Insurance in Separation Agreement May be Stand-Alone Entitlement

Written on behalf of Shariff & Associates

Parties can negotiate separation agreements that require a payor to maintain a policy of life insurance so there is a source of funds available in the event of the payor’s death. These funds can secure the payor’s child support and spousal support obligations. While this is common, not every life insurance requirement in a separation agreement will only be intended as security of payment obligations. As such, it is open to the parties to include life insurance as a stand alone benefit.

Life Insurance Requirement May be Added to Separation Agreement to Secure Support

The case of Turner v. DiDonato dealt with the interpretation of a separation agreement that was signed by Mr. DiDonato and his first wife in 1995. According to the agreement, Mr. DiDonato was to pay spousal support until Ms. DiDonato reached the age of 65, and he was also required to maintain a life insurance policy benefitting her in the amount of $100,000 until he no longer had to contribute to her support.

Upon Mr. DiDonato’s death, he had life insurance in place, but only $43,507.15 was designated for the benefit of Ms. DiDonato. At the time of his death, she was only 56 years old, putting Mr. DiDonato in breach of his obligations. Consequently, she commenced a claim against Mr. DiDonato’s estate and his second wife, claiming she was entitled to the shortfall in the insurance proceeds. The trial judge awarded the full amount to be paid out of the estate.

Second Wife Argues Insurance Policy is Not Independent Benefit

Mr. DiDonato’s second wife, Ms. Turner, appealed the decision. She argued the insurance policy was not an independent benefit, but merely acted as security for outstanding support obligations in the event of Mr. DiDonato’s death. Consequently, as Ms. DiDonato received over $43,000 under the policy, and that amount was greater than the outstanding support obligations, it was argued that Ms. DiDonato should not be entitled to anything further from the estate. Ms. Turner argued the likely intention underlying the agreement was that the life insurance benefit did not extend beyond the obligation to make support payments.

The trial judge accepted that Mr. DiDonato was in breach of the agreement and had he maintained the correct amount of insurance, Ms. DiDonato would have received $100,000. The trial judge also noted that when a contract is breached, the innocent party is entitled to be put into the position they would have been in if the contract had been performed. Moreover, courts have found that an estate can be liable for a deceased’s failure to maintain insurance.

Failure to Maintain Life Insurance Breaches Separation Agreement

The Court of Appeal considered the agreement and determined that the wording of the contract did not support Ms. Turner’s position. “The fact that the commitment to maintain the insurance coverage came to an end at the same time as the support obligations does not, in itself, connect that commitment to the support obligations”. There was no clear language in the agreement that the insurance was only intended as security for outstanding support obligations. Instead, the agreement precluded Mr. DiDonato from adjusting the amount of insurance in favour of Ms. DiDonato in accordance with diminishing future support obligations. This was specifically inconsistent with Ms. Turner’s argument. If the parties intended the insurance simply as security, it would have been unreasonable to prohibit Mr. DiDonato from adjusting the insurance as the amount of his outstanding support obligation declined.

Overall, Ms. Turner’s view of the agreement would have led to a result that was in conflict with the intention of the agreement. If Mr. DiDonato complied with the agreement, then Ms. DiDonato would have received $100,000 under the policy. As the court noted, it was unlikely the parties intended for her to receive less in the event of Mr. DiDonato’s breach of the agreement than if he had complied with it. While it may be common for separation agreements to “link the obligation to maintain life insurance to the obligation to pay support”, that was not what the parties intended with this agreement. The court agreed with the trial judge’s conclusion that Ms. DiDonato was entitled to receive the full $100,000 even if the amount exceeded the outstanding support obligations.

Insurance Clause May do More Than Simply Secure Support Payments

In Birnie v. Birnie, the court considered the circumstances in which a payor’s estate may be required to compensate a recipient according to the insurance requirement of the separation agreement. Mr. Birnie entered into a separation agreement with his former wife in which he agreed to maintain a life insurance policy of $500,000 and to name her as the beneficiary. However, he failed to obtain the insurance, and died at the age of 61. Ms. Birnie sought summary judgement in the amount of $500,000, arguing that the estate is required to satisfy the deceased’s contractual obligations and was liable for the $500,000 insurance commitment. Ultimately, she argued that the requirement for Mr. Birnie to obtain insurance in the agreement was a stand-alone clause and was not just to secure his support payments.

In contrast, Mr. Birnie’s second wife and the estate trustee, Ms. Larmer, opposed summary judgement, and argued that where insurance proceeds act as security for support, only the portion of funds required to secure the support payments should be paid to the recipient. Accordingly, she argued that the remainder of the funds were the property of the estate.

Interpretation of Separation Agreement is Important

Central to this case was the interpretation of the separation agreement and whether Mr. Birnie’s requirement to maintain life insurance was solely for the purpose of securing support payments. Section 72(1)(f) of the Succession law Reform Act (also referred to as the “SLRA”) provides that an amount payable under a policy of insurance effected on the life of the deceased and owned by him or her is deemed to be part of the deceased’s estate. However, in Dagg v. Cameron Estate, the Ontario Court of Appeal decided that where a court order requires a payor to name a support recipient as a beneficiary, the portion of the insurance proceeds that are needed to satisfy support payments are not subject to the clawback provisions of the Succession law Reform Act. In Dagg, Justice Brown recognized that orders for a payor to maintain a life insurance policy makes available a pool of money that can satisfy the support payor’s obligations. Importantly, the case also recognized that the insurance requirement may not always only be intended as security for support. The court noted that “should parties intend a life insurance policy to operate as a kind of “stand alone” benefit upon the payor’s death, not linked to his obligation to pay child or spousal support, it is open to them to strike such a bargain and memorialize it in a separation agreement”. Following this, the outcome in Birnie depended on whether the insurance requirement in the parties’ separation agreement was intended to secure Mr. Birnie’s spousal support obligation, or whether it was a stand-alone benefit.

Court Considers Intention of Parties

The judge looked to Turner v. DiDonato and the court’s interpretation of the purpose of the insurance requirement in that agreement. From that case, it was clear that “the test to be met is one of whether the SOLE purpose of the insurance clause is to act as “security” for support obligations”. Here, the court found that “absent such singularity of purpose” the clause will be intended as a stand-alone clause. This interpretation recognizes that an insurance clause may not only be intended to secure support but can also “provide other forms of compensation to a recipient spouse”.

In this instance, the parties’ intended to settle their affairs and release each other and their estates from further litigation and it suggested the insurance requirement was a stand-alone clause. First, the agreement lacked express language that the insurance was solely intended to secure support. The release section also indicated it was a final settlement, which likely included Succession law Reform Act matters. If the insurance was intended solely as security, it left open the possibility of future litigation under the Succession law Reform Act, which was inconsistent with asserting the agreement was a final settlement of their issues. Finally, the agreement did not contain a clause permitting Mr. Birnie to lower his insurance as his support obligations lessened. For the court, these factors weighed in favour of finding that the insurance was not solely intended as security. Consequently, summary judgement was granted in favour of Ms. Birnie.

Ensure Your Separation Agreement Reflects Your Intentions

Parties can include a life insurance requirement in their separation agreement as a stand alone benefit that is not connected to the payor’s support obligations. However, parties should make sure that their actual intentions are being met when they are drafting their agreement.

Contact Shariff & Associates for Trusted Advice on Separation Agreements and Spousal Support Obligations

The compassionate family law lawyers at Shariff & Associates regularly work with clients to advise them on their rights and responsibilities regarding spousal support claims and other issues ariisng out of separation and divorce. We help clients avoid delays and disputes over spousal support by preparing comprehensive domestic agreements early in your relationship. Our firm proudly represents clients throughout Markham, Richmond Hill, Zephyr, Uxbridge, Pickering, Ajax and Whitby. To speak with a member of our team regarding your family law questions, please reach out to us online or call us at 905-591-4545.