Supreme Court of Canada denies leave to appeal of Alberta ruling on post-death life insurance conversion

This is the first in a two-part Thought Leadership series on a recent life insurance case out of Alberta, and the implications for life insurers.

By Michelle Chai and Liz Campbell¹

The Supreme Court of Canada (“SCC”) recently denied an insurer’s application for leave to appeal the 2023 Alberta Court of Appeal (“ABCA”) decision in Thomson v ivari (“Thomson”). In Thomson, the ABCA found that the conversion of a life insurance policy to one with a lower death benefit could be cancelled within a 10-day “free look” period, even after the death of the insured, leaving the beneficiary with the higher death benefit.

The decision to deny leave means the SCC won’t be addressing this unusual development in the law, creating some uncertainty for lower courts — and for the insurance industry.

Unlike Alberta, the Atlantic provinces do not have legislation in place that provides for a free look period before a consumer decides to purchase an insurance contract. However, free look periods are still a standard practice in the industry. Insurers may need to adjust their approach to this practice to ensure that a policy owner does not have the option to cancel a replacement policy and revive an older policy in the unlikely event of circumstances similar to those in Thomson.

This article is Part I of a two-part series. It will set out some background, the ABCA’s decision, and takeaways for insurers. Part II will discuss how Thomson may create a conflict in the law regarding the distinction between an insurance “policy” and an insurance “contract”, and provide some additional takeaways for insurers.

Background

Janice Thomson owned a life insurance policy with a $1.3 million death benefit, which covered the life of her husband, James Thomson (the “Term Policy”). She opted to convert it to a universal life insurance policy with a lower premium and a reduced death benefit of $400,000 (the “Converted Policy”). The contract for the Converted Policy included a 10-day free look period during which she could cancel it and revert back to the Term Policy.

Mr. Thomson died unexpectedly during the free look period. Ms. Thomson exercised her option to cancel the Converted Policy, and made a claim under the original $1.3 million Term Policy. The insurer, ivari (spelled with a lower-case “i”), denied the claim on the basis that the cancellation period had expired when Mr. Thomson died.

The Alberta Court of Queen’s Bench (“ABQB”) decided in favour of Ms. Thomson.

ivari unsuccessfully sought to rely on a termination clause in the contract providing that the Converted Policy would terminate when the insured life died. ivari argued that the option to cancel, as part of the policy, was also terminated. The ABQB rejected this argument and held that an insurance “policy” and an insurance “contract” are different, and that the cancellation period was not part of the “policy” but was instead part of the “contract.” The contract, along with the option to cancel, continued to exist after the policy was terminated. (Part II of this series will further explore the difference between “contract” and “policy.”)

The ABQB further held that cancelling the new policy had the effect of reviving the Term Policy, relying on its decision in Moss v Sun Life. In Moss, the ABQB found that the cancellation of a converted policy revives the old policy where the conversion constitutes a single transaction. The contracts in Moss and Thomson provided for both the cancellation of the old policy and the issuance of the converted policy. Thus, the ABQB held revoking the converted policy during the free look period would also reverse the cancellation of the old policy.

The appeal

The ABCA upheld the trial court’s decision. Interestingly, the ABCA also applied section 5 of Alberta’s Fair Practices Regulation, which had not been raised at trial. Section 5 of the Fair Practices Regulation provides:

5 (1) A person who buys a contract of life insurance, accident and sickness insurance or, subject to subsection (2)(b), travel insurance underwritten by an insurer may rescind the contract within 10 days after receiving the insurance policy or within any longer period specified in the contract.

…

(3) A person who rescinds a contract under subsection (1) is entitled to receive from the insurer a refund of the whole premium has been paid.²

The ABCA held that this section applies to replacement life insurance policies. According to the ABCA, the life insurer bears the risk that an insured may die during the 10-day period:

The situation is that during the 10-day cancellation period, there is a fortuitous and unpredictable risk about the life of Mr. Thompson. He might survive the 10 days without event, or suffer a life-altering change to his health, or actually die. Which of these fortuitous and unpredictable events actually occurs represents the risk underlying the policy. During the 10-day cancellation period, the insurer is essentially at risk that there might be a material change in the insured’s health. The imposition of that risk on the insurer is inherent in the 10-day cancellation right. However, the fact that the insured might die within the 10-day period, as opposed to shortly after its expiry, does not materially alter the nature of the risks being insured against.

The ABCA relied on the clear wording in the contract that the Converted Policy could be cancelled “at any time” during the free look period, noting that the contract did not state that this option could only be exercised if the insured was still alive.

The ABCA, citing Moss, found that the replacement of the Converted Policy and the cancellation of the Term Policy was a single transaction, which had the effect of reviving the Term Policy once the cancellation right was exercised. The ABCA said that insurers can avoid this result by treating the issuance of a converted policy and the cancellation of an old policy as “two separate transactions”.

Takeaways for insurers

The ABCA noted that insurers may be able to prevent a policy owner from using the free look period to revive an old policy by treating the replacement of the converted policy and the cancellation of the old policy as two separate transactions. This may be achieved by:

• creating two separate transactions, one for the issuance of the new policy and the other for the cancellation of the old policy (for example, by having the insured complete two different forms and processing them separately);
• requiring proof of insurability at the time the policy is converted; and
• having the policy explicitly state that the option to cancel, convert, etc. may only be exercised when the insured life is still alive – and that the option expires if the insured life dies.

In Part II of this Thought Leadership series, coming later this week, we compare the ABCA’s approach to what other courts have done, and what this potentially means for insurers going forward.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Insurance Group

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1 With assistance from Jennifer Taylor (Associate) and Grace Longmire (summer student).
2 Although other provinces may not have similar provisions in their insurance legislation, most life insurance policies do include some kind of cancellation or “free look” period.