When it comes to contracts, most lawyers will tell you that they are important tools used to establish the rights and responsibilities of parties to an agreement. A properly drafted contract, including insurance contracts, is intended to reduce ambiguity and provide clarity. However, as any regular reader of our blog would know, we often lean on the old saying “the devil is in the details” to explain that even the most carefully drafted contract can be looked at with scrutiny due to the limitless variables that life presents. In this article, we examine an Alberta Court of King’s Bench decision in which such a situation occurs, leading to litigation between an insurer and a beneficiary of an insurance policy over its validity.

Beneficiary to life insurance policy attempts to take advantage of window to increase value of policy

The plaintiff involved (“JT”) had purchased a life insurance policy covering her husband’s life from whom she was separated. The policy, issued by the defendants, was renewable and convertible, which means that it could be converted every 10 years when it was up for renewal. The initial contract had a death benefit of $1.3 million. However, upon renewal, JT had the option to convert to include a reduced death benefit of $400,000 while also carrying lower premiums. If JT decided to act on the opportunity to convert it, the contract stipulated she had 10-day window to reverse that decision.

When it came time to renew, JT decided to convert the policy to the option with the lower death benefit. In a stunning and unexpected turn of events, her estranged husband died after she converted it but before the 10-day window to reverse that decision had expired. JT decided to exercise her opportunity to cancel the revision and applied to do so within the time limit. 

The contract read in part, 

The Owner may, at any time within ten days after receipt of this policy, return it to ivari or the advisor through whom it was purchased for cancellation. This policy will be considered void as of the Issue Date if it is returned within those ten days, and any Premium paid will be refunded to the Owner.

Insurance company refuses to accept reversal of decision

The insurance company responded by denying JT’s claim for the higher benefit, stating that the death of her former husband caused the opportunity to cancel the converted policy to expire. Instead, they told JT they were willing to pay out the lesser amount contained in, the lower policy.

JT told the court that the plain and ordinary meaning of the words used in the cancellation policy does not prevent her from cancelling if her former husband died, recalling they state simply “at any time within ten days after the receipt of the converted policy.” Since no conditions were included, she argued that her former husband’s death could not cause the cancellation window to expire. 

The insurer’s position was that once the insured died, there was no longer a contract in place, referring to the contract’s termination policy which lists, amongst other causes of termination, “the date of the death of the life insured.”

But then the court pointed out that the final words of the termination policy, which state, “If this policy is terminated due to the failure of the Owner to pay a premium within the Grace Period specified in section 6 of this policy, then it is subject to reinstatement as specified in the same section.” The court found that there is an important distinction between an insurance policy and an insurance contract, specifically referring to the Insurance Act, which states that a contract between the insured and the insurer must contain a policy. Other items make up the contract in addition to the policy, including the obligation for the policyholder to pay premiums, for example. 

By following this logic, the court concluded that while the termination clause states that the policy is cancelled upon the insured’s death, there is no mention that the contract itself is terminated. Since the expiration window is contained in the contract but not the policy itself, it stands to reason that the insured’s death does not terminate the contract. 

The insurer then claimed that even if the contract was still in place, JT’s rights were extinguished because the contract matured on the date of the insured’s death, with the only remaining obligation on the part of the insurer being to pay out the money they owe her. Again, the court made a similar finding to the expiration argument, stating that the policy’s maturity does not void the rest of the contract. 

The court ultimately found that if the insurance company had intended the right to cancel a conversion to be no longer possible once the insured person died, they could have expressly stated so in the contract, adding that other parts of the contract expressly identify restrictions. In so far as the cancellation window goes, the court found that the only restriction was the 10-day time window, which JT could satisfy.  

Contact the experienced insurance team at HMC Lawyers if you have issues with your insurance contract

At HMC Lawyers, our experienced insurance lawyers have decades of collective experience in representing clients in matters related to insurance law, including those injured in motor vehicle accidents. We understand the risks involved in every step of the litigation process and work with our clients to help identify and avoid potential problems with their claims. To find out what you might be able to expect from an insurance-related dispute or to find out how we might be able to help you through the negotiation or litigation process, please don’t hesitate to contact us online or by phone at 403-269-7220.