Life, Death and Insurance Contracts

In the journey of life, where uncertainties lurk around every corner, planning for the future using tools, such as utilizing strategic estate planning tools and obtaining a life insurance policy, can be an important step. One crucial element in this forward-thinking approach is securing the financial well-being of your loved ones, especially your spouse.

If one spouse decides to reduce the amount of the life insurance policy for the other spouse because the costs are too high, but subsequently finds out that the other spouse is dead and tries to cancel the new policy, are they entitled to receive a larger payout under the previous policy? This question was recently put before the Court of Appeal of Alberta in the matter of Thomson v Ivari.

Husband dies days after life insurance policy is revised

In the case of Thomson v Ivari, the plaintiff wife (the “plaintiff”) owned a renewable and convertible life insurance for her husband, which named herself as the sole beneficiary. The policy also included a death benefit in the amount of $1.3 million. When the initial 10-year term was set to expire in December 2017, the plaintiff changed the policy in order to reduce the premium, which also reduced the death benefit to $400,000. The new policy had a 10-day cancellation period.

When the plaintiff’s husband unexpectedly died a few days later, the plaintiff cancelled the new policy as she was within the cancellation period. She then sought to recover the larger death benefit, claiming that the previous policy was still in effect.

Insurance company claims cancellation period expires upon death of the insured

The defendant insurance company (the “defendant”) did not agree with the plaintiff and denied her claim for the higher policy. The defendant argued that the cancellation period expired when the plaintiff’s husband passed away, so the plaintiff could not thereafter cancel the new policy. Further, cancelling the new policy did not automatically revive the previous policy. As such, the defendant was only prepared to pay the lower benefit under the new policy.

The plaintiff’s claim was based on the terms of the insurance contract, which she understood to mean that she was within her full rights to cancel the new policy within 10 days of its amendments. In opposition, the defendant argued that because the plaintiff’s husband had already died, cancellation of the policy was impossible because life insurance policies are intended to prepare for an event that has not yet occurred.

Distinguishing between the “contract” and the “policy”

The defendant argued that when the plaintiff cancelled the previous policy, there was no contractual relationship left between the parties. However, when the matter was before the Court of King’s Bench of Alberta, the Court came to a different conclusion by focusing on the specific terms of the Termination Clause in the contract, as well as the technical difference between the legal terms of “contract” versus “policy” relying on definitions outlined in the Insurance Act. Ultimately, the Court decided that the Wife’s contractual rights remained intact.

Commercial Reasonableness cannot prevent the cancellation

The Court agreed with the wife’s argument that the plain and ordinary meaning of the words in the Cancellation Attachment allowed her to cancel the new policy “at any time within ten days after receipt of the Converted Policy.” On the other hand, the defendant argued that the language in the Cancellation Attachment must be read in the context of the entire agreement, including the agreement’s nature as a contract of insurance. As such, the defendant argued that the right to cancel the policy was conditional on the plaintiff’s husband still being alive when the cancellation was sought. The defendant advanced its arguments on the basis of contractual termination, the insurance principles of maturity and fortuity, and commercial reasonableness.

The Court, however, rejected the defendant’s arguments due to lack of precedent. The Court also used common principles of insurance law in its approach. Due to the unequivocal language of the Termination Clause, it ruled in favour of the plaintiff as there was no specific language used to exclude cancellation when the plaintiff was already aware of her husband’s death.

In conclusion, the Court ruled that the plaintiff was entitled to cancel the new contract.

Was the previous insurance policy still in effect?

The Court went on to examine whether cancelling the new contract also rendered it void. In other words, was the plaintiff still able to claim a death benefit under the previous life insurance contract? Based on the definition of “rescind”, the Court ruled that the previous contract was still in force once the second was cancelled. Again, this was due to the specific terms of the insurance policies as provided by the defendant.

Accordingly, as the previous policy was still in effect, it automatically renewed under its existing terms, and the plaintiff was entitled to receive the death benefit of $1.3 million.

Court of Appeal upholds trial judge’s decision

The Insurance Company appealed this decision and a key issue before the Court of Appeal was distinguishing between an insurance contract and policy as defined by the Insurance Act. The appeal also included new arguments that had not been brought before the trial judge. Despite this, the Court of Appeal affirmed the trial judge’s decision and found in favour of the respondent wife. The Court of Appeal based its decision on the Fair Practices Regulation, principles of insurance law, and the precedent which held that the voiding of a replacement life insurance policy revived the original policy. The Court of Appeal ultimately ruled that, due to the wording of the Cancellation Clause provided by the Insurance Company, the original contract remained in force, and the respondent wife was entitled to the higher death benefit amount.

This case shows just how complex and interconnected legal disputes can become. In this matter, it was necessary for the Court to examine the underlying principles of contract law, applicable legislation and regulations, as well as a closely scrutinized interpretation of the wording of the contract and its attachments. This matter also dealt with the issue of an estranged spouse collecting a death benefit from their deceased spouse. Finally, this decision underscores the importance of ensuring that you have a well-drafted contract in place with clear and unambiguous terms for any transaction you may enter into.

Contact the Litigation Lawyers at DBB Law in Calgary for Pragmatic Litigation Solutions

The skilled team of litigation lawyers at DBB Law understand that a seemingly simple legal dispute can quickly become complex and intertwined with other areas of law, which is why we work closely with our clients to understand their needs and provide them with practical legal advice and the knowledge to help them make informed decisions in pursuit of dispute resolution. Based in Calgary, DBB Law provides trusted legal representation for clients in a variety of civil and commercial litigation matters, including contract disputes, family law disputes, and estate litigation. To speak with a member of our team about your litigation needs, contact us online or by phone at 403-265-7777.