Oldfield v. Transamerica Life Insurance Co. of Canada, [2002] 1 S.C.R. 742, 2002 SCC 22
Transamerica Life Insurance Co. of Canada Appellant
v.
Maria Oldfield Respondent
Indexed as: Oldfield v. Transamerica Life Insurance Co. of Canada
Neutral citation: 2002 SCC 22.
File No.: 28163.
2001: November 8; 2002: March 8.
Present: McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ.
on appeal from the court of appeal for ontario
Insurance law — Life insurance — Public policy — Insurer refusing to pay proceeds of life insurance policy to beneficiary after insured died accidentally while committing a crime — Whether beneficiary’s claim barred — Whether public policy precludes recovery by innocent beneficiary where death of insured was caused by his criminal acts.
When the respondent and her husband P separated, they agreed that P would maintain sufficient life insurance coverage in lieu of child and spousal support, and that the respondent would be named the beneficiary until their two children became 18 years old. P died while carrying 30 cocaine‑filled condoms in his stomach. One burst, causing a heart attack. The respondent claimed the proceeds of P’s life insurance policy. The appellant insurer refused to pay, saying her claim was barred by the public policy principle that a person should not be allowed to insure against his own criminal act. Ruling on a special case submitted by the parties, the trial court concluded that no public policy or rule of contractual interpretation barred the respondent’s claim. The Court of Appeal upheld that decision.
Held: The appeal should be dismissed.
Per McLachlin C.J. and Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ.: It is not against public policy to permit an innocent beneficiary to obtain the proceeds of a life insurance policy where the insured accidentally dies during the course of a criminal act. The public policy rule at issue is that a criminal should not be permitted to profit from crime. The rule extends to those who claim through the criminal’s estate. The respondent has not asserted her right to the insurance proceeds as a successor of the insured, however, but as an ordinary beneficiary, with the result that her claim is not tainted by any illegality on the part of her husband.
Section 118 of the Ontario Insurance Act, which states that “a contravention of any criminal or other law in force in Ontario or elsewhere does not, by that fact alone, render unenforceable a claim for indemnity under a contract of insurance”, and then provides an exception with respect to life insurance, does not stand for the broader proposition that a contravention of any criminal or other law renders life insurance contracts unenforceable. The principle behind s. 195 of the Act, which permits a beneficiary to enforce an insurance contract for his or her own benefit, but provides that the insurer may set up any defence that it could have set up against the insured, is that the third party can be in no better position than the insured. Where the beneficiary is not otherwise barred by the public policy rule, the concluding words of s. 195 would not extend that rule to him or her.
It is consistent with justice that innocent beneficiaries not be disentitled to insurance proceeds merely because an insured accidentally dies while committing a criminal act. To deny recovery would penalize the victim for the insured’s anti‑social behaviour. To permit recovery in such circumstances will not create a new cottage industry where insurance companies vie to insure criminal activities. If an insurance contract purported to cover an illegal activity, the contract would be unlawful and could not be enforced. By contrast, where the agreement is lawful on its face but carried out in an illegal manner, exceptions to the public policy apply. Public policy does not bar the respondent’s claim. It might be appropriate to modify the public policy rule so as to permit an innocent person who claims through the criminal’s estate to take insurance proceeds.
Per L’Heureux‑Dubé J.: The forfeiture rule, which is based on the public policy that although a wrongdoer cannot profit from his or her crime, neither should an insurance company be allowed to abrogate its responsibilities under a contract by invoking a rule of public policy, should be applied strictly and narrowly. Any relaxation of the rule should be left to the legislature. While a crime may prevent a person from benefiting from that crime, it cannot affect the rights of innocent third persons, which is precisely the case in this appeal. Competing public policies should be balanced to avoid injustices. Every time coverage is precluded pursuant to the forfeiture rule, an innocent victim is left uncompensated for his or her suffering and an otherwise enforceable contractual obligation is extinguished without consideration. In that sense, there is no reason to distinguish between named innocent beneficiaries and innocent beneficiaries claiming from the wrongdoer’s estate.
Cases Cited
By Major J.
Approved: Stats v. Mutual of Omaha Insurance Co. (1976), 14 O.R. (2d) 233, aff’d [1978] 2 S.C.R. 1153; considered: Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87; distinguished: Home Insurance Co. of New York v. Lindal, [1934] S.C.R. 33; Charlton v. Fisher, [2001] E.W.J. No. 271 (QL); referred to: Cleaver v. Mutual Reserve Fund Life Association, [1892] 1 Q.B. 147; Beresford v. Royal Insurance Co., [1938] 2 All E.R. 602, aff’g [1937] 2 All E.R. 243; Demeter v. Dominion Life Assurance Co. (1982), 35 O.R. (2d) 560; Kerslake v. Gray, [1957] S.C.R. 516; Hardy v. Motor Insurers’ Bureau, [1964] 2 Q.B. 745; Moore v. Woolsey (1854), 4 El. & Bl. 241, 119 E.R. 93; Vandepitte v. Preferred Accident Ins. Co., [1933] 1 D.L.R. 289; Post Office v. Norwich Union Fire Insurance Society Ltd., [1967] 2 Q.B. 363; McCormick v. National Motor and Accident Insurance Union, Ltd. (1934), 40 Com. Cas. 76; Amicable Society v. Bolland, [1824‑34] All E.R. Rep. 570 (1830); Bird v. John Hancock Mutual Life Insurance Co., 320 S.W.2d 955 (1959); In the Estate of Crippen, [1911‑13] All E.R. Rep. 207 (1911); Weeks v. New York Life Ins. Co., 122 S.E. 586 (1924); Saunders v. Edwards, [1987] 1 W.L.R. 1116; Dunbar v. Plant, [1997] 4 All E.R. 289; Troja v. Troja (1994), 33 N.S.W.L.R. 269.
By L’Heureux‑Dubé J.
Referred to: Troja v. Troja (1994), 33 N.S.W.L.R. 269; Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87; Cleaver v. Mutual Reserve Fund Life Association, [1892] 1 Q.B. 147; Standard Life Assurance Co. v. Trudeau (1900), 31 S.C.R. 376; Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2.
Statutes and Regulations Cited
Forfeiture Act 1982 (U.K.), 1982, c. 34, s. 2(2).
Insurance Act, R.S.O. 1990, c. I.8, ss. 118, 188(1), 195.
Narcotic Control Act, R.S.C. 1985, c. N‑1, s. 3(1), (2).
Third Parties (Rights against Insurers) Act, 1930 (U.K.), 20 & 21 Geo. 5, c. 25.
Authors Cited
Brown, Craig. Insurance Law in Canada, vol. 1, loose‑leaf ed. Scarborough, Ont.: Carswell, 1999 (updated 2001, release 2).
Chitty on Contracts, vol. 1, 28th ed. London: Sweet & Maxwell, 1999.
Lowry, John, and Philip Rawlings. Insurance Law: Doctrines and Principles. Oxford: Hart Publishing, 1999.
MacGillivray on Insurance Law, 9th ed. by Nicholas Legh‑Jones. London: Sweet & Maxwell, 1997.
Sutton, Kenneth. Insurance Law in Australia, 3rd ed. Pyrmont, Australia: LBC Information Services, 1999.
Wuehler, Russell B. “Rethinking Insurance’s Public Policy Exclusion: California’s Befuddled Attempt to Apply an Undefined Rule and a Call for Reform” (2001), 49 U.C.L.A. L. Rev. 651.
APPEAL from a judgment of the Ontario Court of Appeal (2000), 49 O.R. (3d) 737, 135 O.A.C. 177, 21 C.C.L.I. (3d) 72, [2000] I.L.R. ¶ I‑3877, [2000] O.J. No. 2793 (QL), upholding a judgment of the Ontario Court (General Division) (1998), 43 O.R. (3d) 114, 10 C.C.L.I. (3d) 123, [1999] I.L.R. ¶ I‑3631, [1998] O.J. No. 5343 (QL). Appeal dismissed.
Paul J. Bates, Kirk F. Stevens and Simon Clements, for the appellant.
Alfred M. Kwinter and Ron Weinberger, for the respondent.
The judgment of McLachlin C.J. and Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ. was delivered by
1 Major J. – Paul Oldfield carried 30 cocaine-filled condoms in his stomach. One burst, causing his death. His former spouse, Maria Oldfield, claimed the proceeds of Paul Oldfield’s life insurance policy, in which she is named the beneficiary.
2 The insurance company resisted payment, submitting it would be against public policy because it would be tantamount to permitting a criminal to benefit from his or her own crime.
3 I conclude it is not against public policy to permit an innocent beneficiary to obtain the proceeds of a life insurance policy, where the life insured accidentally dies during the course of a criminal act.
I. Facts
4 Paul and Maria Oldfield separated in January 1995. They agreed that Paul Oldfield would maintain sufficient life insurance coverage in lieu of child and spousal support, and that Maria Oldfield would be named the beneficiary until their two children became 18 years old.
5 In the present appeal, only one policy is at issue. In the policy, Transamerica Life Insurance Company of Canada insured Paul Oldfield’s life for $250,000. Maria Oldfield was named the beneficiary. The policy stated that “[i]n the absence of fraud this policy will be incontestable after it has been in force during the Insured’s lifetime for 2 years from the date of issue, or the date of reinstatement or change, whichever is latest, except for non-payment of premiums.” The policy did not address whether proceeds were payable when the insured died as a result of his own criminal act.
6 On April 27, 1996, Paul Oldfield died in Bolivia. He died because one of 30 condoms of cocaine found in his stomach broke open, causing a heart attack. The parties to the appeal agree that to ingest cocaine in the manner Paul Oldfield did is contrary to Bolivian and Canadian law (ss. 3(1) and 3(2) of the Narcotic Control Act, R.S.C. 1985, c. N-1).
7 Maria Oldfield claimed the proceeds of the insurance policy. Transamerica refused to pay, saying her claim was barred by the public policy principle that a person should not be allowed to insure against his own criminal act, regardless of who the ultimate beneficiary of the policy is, innocent or not.
8 The parties submitted a special case to the court. Among other questions, the parties asked whether there was “a public policy rule precluding recovery by the innocent beneficiary where the death of the owner/life insured was caused by his criminal acts”.
9 Both the Ontario trial and appeal courts concluded that no public policy or rule of contractual interpretation barred Maria Oldfield’s claim: see Oldfield v. Transamerica Life Insurance Co. of Canada (1998), 43 O.R. (3d) 114 (Ont. Ct. (Gen. Div.)), per Ferguson J., aff’d (2000), 49 O.R. (3d) 737 (C.A.), per Borins J.A. (Feldman J.A. concurring).
II. Analysis
10 There are two issues in this appeal:
1. Is there a public policy rule that renders a life insurance contract unenforceable where the insured dies accidentally as a result of his or her own crime, regardless of who the beneficiary is?
2. If there is such a public policy rule, is the rule inapplicable because the insurance contract was obtained pursuant to a bona fide contract for value?
(1) Generally
11 The public policy rule at issue is that a criminal should not be permitted to profit from crime. Unless modified by statute, public policy operates independently of the rules of contract. For example, courts will not permit a husband who kills his spouse to obtain her life insurance proceeds, regardless of the manner in which the life insurance contract was worded. As Ferguson J. held in the court below, public policy “applies regardless of the policy wording — it is imposed because of the courts’ view of social values” (p. 119).
12 Generally, though, an insurer seeks the shelter of public policy rules because they have failed to specifically provide for the contingency that gives rise to the dispute. In the present appeal, the insurance policy did not provide for the result that would occur if the insured died while committing a criminal act. If the policy specifically excluded coverage, there would be no need to resort to public policy.
13 The public policy rule that prevents criminals from profiting from crime has existed for many years. In Cleaver v. Mutual Reserve Fund Life Association, [1892] 1 Q.B. 147 (C.A.), Fry L.J. held that “no system of jurisprudence can with reason include amongst the rights which it enforces rights directly resulting to the person asserting them from the crime of that person” (p. 156). The refrain was adopted in Beresford v. Royal Insurance Co., [1938] 2 All E.R. 602 (H.L.), where Lord Atkin held that “a man is not to be allowed to have recourse to a court of justice to claim a benefit from his crime, whether under a contract or under a gift” (p. 607).
14 Canadian courts have recognized the public policy rule. In Demeter v. Dominion Life Assurance Co. (1982), 35 O.R. (2d) 560 (C.A.), MacKinnon A.C.J.O. held that “[t]he basic rule of public policy which is not disputed is that the courts will not recognize a benefit accruing to a criminal from his crime” (p. 562). In Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87, Sopinka J. held that “a person should not be allowed to insure against his or her own criminal act irrespective of the ultimate payee of the proceeds” (p. 94).
15 The rule extends to those who claim through the criminal’s estate. In Cleaver, Fry L.J. held that “the rule of public policy should be applied so as to exclude from benefit the criminal and all claiming under her” (p. 159 (emphasis added)). Technically, the reason why no distinction is drawn between the criminal and his or her estate is that the estate’s claim is equivalent to a claim brought by the criminal. In Beresford v. Royal Insurance Co., [1937] 2 All E.R. 243 (C.A.), Lord Wright M.R. explained (at p. 249):
. . .the plaintiff, as personal representative, stands in the shoes of the assured ... . [T]he present claim is equivalent technically to a claim brought by a murderer, or his representative or assigns, on a policy effected by the murderer on the life of the murdered man. In that latter case, it is, we think, clear that neither the murderer nor his estate nor his assigns could take a benefit under the policy.
16 However, innocent beneficiaries are neither criminals nor claim through the criminal’s estate. Because of that, the public policy rule is inapplicable. Section 195 of Ontario’s Insurance Act, R.S.O. 1990, c. I.8, states that “[a] beneficiary may enforce for the beneficiary’s own benefit . . . the payment of insurance money made payable to him, her or it in the contract . . . .” In Kerslake v. Gray, [1957] S.C.R. 516, the Court held that insurance money paid to an ordinary beneficiary does not form part of the insured’s estate. In Borins J.A.’s words, Maria Oldfield “has not asserted her right to the insurance proceeds as a successor of the insured, but as an ordinary beneficiary, with the result that her claim is not tainted by any illegality on the part of her husband” (p. 748).
17 The distinction between a claim by a beneficiary as opposed to a claim through the estate developed in decisions like Hardy v. Motor Insurers’ Bureau, [1964] 2 Q.B. 745 (C.A.), where Lord Diplock held (at p. 768):
[The insurance contract] is capable of giving rise to legally enforceable rights if, apart from the [public policy] rule, the rights of the assured are capable of becoming vested in a third party other than one who is regarded in law as the successor of the assured . . . .
18 In Cleaver, Fry L.J. held (at p. 159):
I think that the rule of public policy should be applied so as to exclude from benefit the criminal and all claiming under her, but not so as to exclude alternative or independent rights.
19 A distinction between the criminal’s estate and innocent beneficiaries was adopted in Stats v. Mutual of Omaha Insurance Co. (1976), 14 O.R. (2d) 233 (C.A.), aff’d on other grounds [1978] 2 S.C.R. 1153. In that case, an insured named her sister the beneficiary of an accident insurance policy. The insured became grossly intoxicated, drove her car into a building, and was killed. The insured’s sister sought to obtain the benefits of the insurance policy. The insurance company resisted payment. It was argued that no one, including an innocent beneficiary, should be permitted to profit from crime.
20 The Ontario Court of Appeal disagreed and ordered the insurance company to pay the proceeds to the innocent beneficiary, concluding (at p. 243):
Since the insured personally or indirectly through her estate did not and could not benefit from her crime, it follows that the general rule of public policy would not be infringed by paying to the appellant beneficiary the proceeds to which she is entitled under the policy.
21 Borins J.A. concluded Stats was applicable to Maria Oldfield’s claim in this case. He held (at p. 749):
In my view, the circumstances of this case come within the decision in Stats where this court held that where a crime is committed by the insured, and the insured did not intend to cause her death through the commission of the crime, the beneficiary named in a policy insuring against accidental death, not being the estate of the insured, was not precluded from taking the insurance proceeds because the rule of public policy did not apply.
22 I agree with Borins J.A.’s analysis.
(2) Brissette Estate v. Westbury Life Insurance Co.
23 In Brissette, supra, Sopinka J. held that it is consistent with public policy “that a person should not be allowed to insure against his or her own criminal act irrespective of the ultimate payee of the proceeds” (p. 94). Applied literally, it would prevent insurance proceeds from being paid to any innocent beneficiary named in an insurance policy so long as the insured event was occasioned while the insured committed a criminal act. In this case, it would prevent Maria Oldfield’s claim.
24 Feldman J.A. recognized at the Court of Appeal that Sopinka J. did not hold that insurance contracts contain an implied term that criminal acts committed by the insured automatically exclude coverage even where the act is not committed with the intention of causing the insured loss. Likewise, he did not hold that there is a public policy rule that forbids payment to all beneficiaries, innocent or not, whenever the insured commits a criminal act. In Brissette, the insurance contract named the surviving spouse as beneficiary. The husband who murdered his wife committed a deliberate act intended to cause the insured event. There was no question that the husband was barred from receiving the proceeds; the Court had to decide whether the contract could be interpreted so as to vest the proceeds in the estate of the wife, or failing that, whether the device of a constructive trust could achieve the same result. The Court answered both of these questions in the negative. In contrast to Brissette, the insured in the present appeal did not intend to cause the loss. Nor does Maria Oldfield, who was expressly designated as beneficiary under the contract, need to resort to trust principles in order to receive the proceeds.
25 In total, Sopinka J.’s decision in Brissette demonstrated that he did not intend to displace the principle that innocent beneficiaries who do not take through the criminal’s estate should not be affected by public policy. In Brissette, Sopinka J. held that “[t]here is nothing unjust in refusing to pay the proceeds of insurance to a beneficiary not designated by the insurance contract when to do so would allow the insured to insure against his own criminal act” (p. 95 (emphasis added)). Sopinka J. reinforced this statement during his consideration of Cleaver, supra, in which the insured took out an insurance policy on his own life with his wife as beneficiary. The wife‑beneficiary then murdered the husband-insured. By statute, the proceeds were declared payable to the estate of the insured, to be held in trust for the beneficiary. Public policy prevented any payment from being made to the felonious wife‑beneficiary but, in Sopinka J.’s words, “[p]ublic policy was not allowed to abrogate a right that the estate had by virtue of the statute” (p. 95). Applying this case to the facts in Brissette, Sopinka J. held that “the result in Cleaver cannot be achieved in the absence of a provision, statutory or in the contract, providing for payment to the estate of the wife” (pp. 95‑96 (emphasis added)). Because these passages appear after Sopinka J.’s earlier statement that “a person should not be allowed to insure against his or her own criminal act irrespective of the ultimate payee of the proceeds” (p. 94), it is clear that the earlier statement was not intended to be an open-ended change to the traditional public policy rule.
26 A universal rule that “a person should not be allowed to insure against his or her own criminal act irrespective of the ultimate payee of the proceeds” would have serious repercussions for bona fide creditors who provide value to obtain an interest in life insurance. Creditors in numerous instances such as a mortgage and other debt instruments will insist on obtaining an assignment of an insurance policy or being the named beneficiary sufficient to discharge the debt to protect their interest in the event of the debtor dying insolvent.
27 If Sopinka J.’s statement was given the broad interpretation that Transamerica seeks, bona fide creditors would be unable to obtain insurance proceeds where an insured died while committing a criminal act. To do so would run contrary to a long-standing principle that there is “no illegality in a stipulation that, if the policy should afterwards be assigned bona fide for a valuable consideration, or a lien upon it should afterwards be acquired bona fide for valuable consideration, it might be enforced for the benefit of others, whatever may be the means by which death is occasioned . . . .” (Moore v. Woolsey (1854), 4 El. & Bl. 241, 119 E.R. 93 (K.B.), at p. 98); see also Beresford (H.L.), supra, at pp. 607‑8, per Lord Atkin, and at p. 611, per Lord Macmillan; Stats, supra, at p. 240; Hardy, supra, at p. 760, per Lord Denning M.R., and at p. 768, per Diplock L.J. (“an assignee for value before the occurrence of the event would not be prevented from enforcing the contract notwithstanding that the event was caused by the anti-social act of the original assured”). The exception was not mentioned or considered in Sopinka J.’s decision.
28 In Brissette, Sopinka J. did not intend to eliminate long-established exceptions to the public policy rule. Brissette does not bar a claim by an innocent beneficiary where the insured does not intend the insured loss.
(3) Home Insurance Co. of New York v. Lindal, [1934] S.C.R. 33
29 In Lindal, a passenger was injured when the intoxicated driver crashed his car. The passenger obtained judgment against the driver. The driver had insufficient assets to satisfy the judgment. Accordingly, the passenger brought an action to obtain indemnity from the insurer under s. 180 of Alberta’s Insurance Act, S.A. 1926, c. 31. As well, the driver brought an action against the insurer to require it to indemnify him against his liability to the passenger. The Court held that the insurance company was not liable because it would be against public policy to indemnify the insured.
30 Transamerica argues that Lindal stands for the general proposition that where an insured contravenes any law, the insurance contract is unenforceable regardless of the identity of the beneficiary or claimant. It submits that it applies to Maria Oldfield’s claim so that her claim as beneficiary is against public policy.
31 I agree with the Court of Appeal for Ontario’s decision in Stats that Lindal is distinguishable. In short, Lindal had nothing to do with innocent third party beneficiaries. For the insurance company to have provided the indemnity asked for in Lindal would have given a benefit to the criminal, namely, a discharge of the judgment the passenger had obtained against him. The passenger’s claim against the insurer under s. 180 would have forced her to “stand in the shoes” of the insured in order to recover. As I have already stated, the public policy rule bars claims of those claiming through the wrongdoer. By contrast, where an innocent beneficiary is named in the insurance policy, no benefits accrue “to the insured or her estate as a result of the criminal act” (Stats, supra, at p. 244).
(4) Section 118 of Ontario’s Insurance Act
32 Transamerica relied on s. 118 of Ontario’s Insurance Act, which states:
118. Unless the contract otherwise provides, a contravention of any criminal or other law in force in Ontario or elsewhere does not, by that fact alone, render unenforceable a claim for indemnity under a contract of insurance except where the contravention is committed by the insured, or by another person with the consent of the insured, with intent to bring about loss or damage, but in the case of a contract of life insurance this section applies only to disability insurance undertaken as part of the contract.
33 Unless the contract otherwise provides, s. 118 of the Insurance Act requires the insured to contravene a law and intend to bring about loss or damage for a claim for indemnity to be unenforceable. The exception does not apply to life insurance except for disability insurance undertaken as part of the contract.
34 Transamerica argues that s. 118 modifies the public policy rule as it applies to indemnity insurance but does not modify public policy as it applies to life insurance contracts. To explain the state of the public policy rule as it existed prior to s. 118 of the Insurance Act, Transamerica referred to this Court’s decision in Lindal, supra. Section 118 was first enacted in 1948 and was thought by some to be a legislative response to the Lindal decision. Transamerica argued that insofar as life insurance contracts are concerned, the public policy principles stated in Lindal continue unabated.
35 As shown above, the first answer to this submission is that Lindal is distinguishable and provides no assistance to Transamerica. Moreover, s. 118 simply addresses the effect that public policy is to have on indemnity contracts. Although s. 118 states that “a contravention of any criminal or other law in force in Ontario or elsewhere does not, by that fact alone, render unenforceable a claim for indemnity under a contract of insurance . . .”, it does not stand for the broader proposition that a contravention of any criminal or other law renders life insurance contracts unenforceable. Simply put, s. 118 addresses how public policy does not affect indemnity insurance. It does not address how public policy affects life insurance.
36 If “a contravention of any criminal or other law in force in Ontario or elsewhere” alone rendered life insurance contracts unenforceable, as Transamerica urges, the public policy rule would be significantly broadened. Section 118 is not limited to criminal acts. It includes the contravention of any law in force in Ontario or elsewhere. Therefore, if jaywalking was the proximate cause of the life insured’s death, the public policy rule submitted by Transamerica’s interpretation of s. 118 would prevent the proceeds from being paid to the insured’s family. It is for that reason that the public policy rule is limited to acts that are “sufficiently anti‑social to justify the court’s refusing to enforce that right” (Hardy, supra, at p. 767).
(5) Section 195 of Ontario’s Insurance Act
37 Section 195 of Ontario’s Insurance Act states:
195. A beneficiary may enforce for the beneficiary’s own benefit, and a trustee appointed pursuant to section 193 may enforce as trustee, the payment of insurance money made payable to him, her or it in the contract or by a declaration and in accordance with the provisions thereof, but the insurer may set up any defence that it could have set up against the insured or the insured’s personal representative.
38 Section 195 permits a beneficiary to enforce an insurance contract for his or her own benefit. The provision was added to permit a beneficiary to escape the consequences of the doctrine of privity of contract, which Transamerica argued would otherwise only permit the insured to enforce the insurance contract (Vandepitte v. Preferred Accident Ins. Co., [1933] 1 D.L.R. 289 (P.C.)).
39 Section 195 states that where a beneficiary seeks to enforce the insurance contract, “the insurer may set up any defence that it could have set up against the insured or the insured’s personal representative”.
40 In the present appeal, Transamerica argued that s. 195 permits the insurer to refuse coverage to the beneficiary for the same reasons it would refuse coverage to the insured. Because there is a public policy rule that prevents a criminal from benefiting from his crime, which would have prevented Paul Oldfield from recovering the insurance proceeds, Transamerica sought to set up that defence against Maria Oldfield, the beneficiary.
41 The principle behind s. 195 is that “[t]he third party can be in no better position than the assured” (MacGillivray on Insurance Law (9th ed. 1997), at p. 784). As Harman L.J. held, the third party cannot “pick out the plums and leave the duff behind” (Post Office v. Norwich Union Fire Insurance Society Ltd., [1967] 2 Q.B. 363 (C.A.), at p. 376).
42 A similar statutory provision to s. 195 exists in England. As described by the Court of Appeal there, the Third Parties (Rights against Insurers) Act, 1930 (U.K.), 20 & 21 Geo. 5, c. 25, provides that “the third party simply stands in the shoes of the assured” (Charlton v. Fisher, [2001] E.W.J. No. 271 (QL) (C.A.), at para. 92). In McCormick v. National Motor and Accident Insurance Union, Ltd. (1934), 40 Com. Cas. 76, the Court of Appeal held that a third party suing under the 1930 Act would be subject to any defence available to the insurer as against the insured, such as misrepresentation. Scrutton L.J. held, at p. 82:
Now, what is transferred? The rights under the contract. You cannot take the rights under the contract separate from defences under the contract.
43 In Charlton, Rix L.J. considered whether the insurance company could only rely on defences “which arise from terms of the contract itself, or from general principles of contract law such as those dealing with repudiation, avoidance and so forth” (para. 93), or whether it could equally rely on public policy defences that are independent from contract. He concluded that public policy defences applied to assignees with a merely derivative claim (at para. 94):
. . . an assignee with a merely derivative claim stands in the guilty person’s shoes for the purpose not only of an ordinary contractual defence, but also of the ex turpi causa defence which is personal to the guilty party: and that is so despite the innocence of the assignee himself.
44 Likewise, Laws L.J. held (at para. 27):
. . . I agree . . . that this appeal should be allowed on the footing that any recourse by the claimant to the second defendant insurers . . . would require her (strictly, by force of the Third Parties (Rights against Insurers) Act 1930) to stand in the shoes of the first defendant insured; but that cannot avail her, since public policy deprives the first defendant of any claim under the policy of insurance to be indemnified against a liability arising from his own intentional criminal act. Accordingly he possesses no rights under the policy capable of enuring to the benefit of the claimant.
45 Charlton is distinguishable. The Court of Appeal concluded that the insured intentionally caused the loss when he deliberately rammed his car into the claimant’s car. The court stated that “an insured cannot recover under his motor policy, even if it would otherwise cover the risk, where he claims in respect of a liability which he has incurred as a result of his deliberate and wilful criminal act of intentional damage or injury” (para. 81). Moreover, because the incident did not occur on a road, the Court of Appeal was dealing with a “merely derivative claim” (para. 94) under the Third Parties (Rights against Insurers) Act, 1930. Both Rix L.J. and Laws L.J. made it clear that a party with an independent and direct right of action is not required to stand in the shoes of the criminal insured party. It follows that the 1930 Act does not operate to transfer the public policy defence to the innocent third party in such a case.
46 The intentional taking of one’s own life used to be treated as a barrier to recovery in most cases. In Ontario, that question is now dealt with in s. 188(1) of the Insurance Act. It is not necessary to say any more about this academic issue, as both courts below concluded that the insured’s death was accidental.
47 I agree with Blair J.A.’s decision in Stats, where he explained the distinction between defences that the insurer can set up against a beneficiary and defences it cannot (at p. 245):
. . . these concluding words [of s. 195] should not be stretched to encompass aspects beyond this their clearly evident purpose. They are intended to preserve defences which might be prejudiced if the beneficiary were not bound by the policy conditions; they cannot be taken to extend the scope of defences which have no connection with the policy conditions and to which the beneficiary would not be subject even if she were bound by the policy conditions. The rule of public policy is applied by the Courts quite apart from the requirements laid down as conditions in the insurance contract and the two should not be confused. Therefore, where the beneficiary, as in this case, is not otherwise barred by the public policy rule, the concluding words of [s. 195] would not extend that rule to her. [Emphasis in original.]
(6) Rationale for the Public Policy Rule
48 Two reasons have been advanced to support the public policy rule. One is that to enforce certain illegal contracts would “take away one of those restraints operating on the minds of men against the commission of crimes, namely, the interest we have in the welfare and prosperity of our connections” (Amicable Society v. Bolland, [1824‑34] All E.R. Rep. 570 (1830) (H.L.) (“Fauntleroy’s Case”), at p. 572).
49 In the present appeal, Transamerica seized the rationale of the first reason, and argued that to permit an innocent beneficiary to obtain insurance proceeds obtained through the commission of crime would encourage criminals to commit crimes. The argument goes that the criminal would enjoy a certain peace of mind if he or she knew that innocent beneficiaries would be protected and with that peace of mind, the criminal would be encouraged or would be more likely to commit crimes. Conversely, Transamerica argued that if a criminal knows that an innocent beneficiary will obtain no insurance proceeds where the criminal dies while committing a criminal act, crime might be discouraged.
50 Over time, courts have criticized the idea that a less than strict application of public policy would encourage crime. In Hardy, supra, Diplock L.J. held (at p. 770):
It seems to me to be slightly unrealistic to suggest that a person who is not deterred by the risk of a possible sentence of life imprisonment from using a vehicle with intent to commit grievous bodily harm would be deterred by the fear that his civil liability to his victim would not be discharged by his insurers. I do not myself feel that by dismissing this appeal we shall add significantly to the statistics of crime.
51 American courts too have criticized the rationale:
The possibility that an affirmance of the judgment will promote evil or cause any considerable number of insureds to commit depredations on the public because of the comforting reassurance that their beneficiaries will collect the insurance if they are killed in the commission of crime is remote, speculative and theoretical. Both the public and the insurer have “a guaranty against increasing the risk insured, by that love of life which nature has implanted in every creature.”
(Bird v. John Hancock Mutual Life Insurance Co., 320 S.W.2d 955 (Mo. Ct. App. 1959), at p. 958)
52 The second reason for the public policy rule simply recognizes that a court will not permit injustice. In Cleaver, Fry L.J. explained that “no system of jurisprudence can with reason include amongst the rights which it enforces rights directly resulting to the person asserting them from the crime of that person” (p. 156). Similarly, in In the Estate of Crippen, [1911-13] All E.R. Rep. 207 (1911), Evans P. held that “[t]he human mind revolts at the very idea that any other doctrine could be possible in our system of jurisprudence” (p. 209).
53 It is consistent with justice that innocent beneficiaries not be disentitled to insurance proceeds merely because an insured accidentally dies while committing a criminal act. Many decisions have recognized the long-standing principle (see e.g. Cleaver, at pp. 159-60). To deny recovery would penalize the victim for the insured’s anti-social behaviour (C. Brown, Insurance Law in Canada (loose-leaf ed.), vol. 1, at pp. 8-28 to 8-29).
(7) Exceptions to the Public Policy Rule Will Not Encourage Crime
54 To permit an innocent beneficiary to be entitled to insurance proceeds where an insured accidentally dies while committing a criminal act will not create a new cottage industry, where insurance companies vie to insure criminal activities. If an insurance contract purported to cover an illegal activity, the contract would be unlawful and could not be enforced. There is a distinction between a contract that is illegal ab initio and a contract that is lawful in its inception but where the loss has arisen out of unlawful conduct (K. Sutton, Insurance Law in Australia (3rd ed. 1999), at p. 1016):
The cases fall into two main categories: first, situations where the policy indemnifies the assured against the kind of loss he or she has suffered but such loss has, in the particular circumstances of the case, arisen out of conduct by the assured which is unlawful; and secondly, situations where the contract of insurance is itself illegal as infringing some common law or statutory provision. In the first category the contract is not itself unlawful but the claim based upon it may be, while in the second type of case it is the insurance contract itself which is called in question.
55 The distinction is further explained by reference to an example similar to the conduct at issue in this appeal (Sutton, supra, at p. 1043):
At common law the contract may clearly be unlawful, as in the case of insurance while in transit of an illegal consignment of drugs or cover against loss of profits if the operation of an illegal casino is disrupted by police action, and in such a case neither party has any cause of action under the contract. It would not lie in the mouth of either insurer or assured to allege that he was unaware of the illegality of the transaction. Where, however, the agreement is lawful on its face but is carried out in an illegal manner, the intentions of the parties are paramount, and a party who has not participated in the unlawful performance and whose intention is perfectly innocent may be able to enforce the contract. Even a guilty party may be able to rely on the contract where the illegal act is held to be incidental to the main purpose of the contract.
56 Another textbook states that “[a] contract of insurance is illegal if it constitutes a contract to commit an illegal act or to reward someone for doing so, as if, for instance, the insurers undertook to indemnify the assured against the consequences of crimes which they knew he intended to commit . . .” (MacGillivray on Insurance Law, supra, at p. 320).
57 Chitty on Contracts (28th ed. 1999), vol. 1, states, at p. 839:
Illegality may affect a contract in a number of ways but it is traditional to distinguish between (1) illegality as to formation and (2) illegality as to performance. Broadly speaking the first refers to the situation where the contract itself is illegal at the time it is formed, whereas the latter involves a contract which on its face is legal but which is performed in a manner which is illegal. In this latter situation it is possible for either both or only one of the parties to intend illegal performance. Where a contract is illegal as formed, or it is intended that it should be performed in a legally prohibited manner, the courts will not enforce the contract, or provide any other remedies arising out of the contract.
58 In the United States, some courts have concluded there is a world of difference between an insurance contract that explicitly insures crime and one that does not. In Weeks v. New York Life Ins. Co., 122 S.E. 586 (1924), the Supreme Court of South Carolina held that the position that “because an express contract to insure against death by legal execution would contravene public policy, an ordinary life policy which does not except death from such a cause should be declared unenforceable on grounds of public policy, is . . . clearly untenable” (p. 588). Where an insured “takes out an ordinary life insurance policy, to be matured by death from any cause, no basis in reason or experience exists for assuming that the insured had any intent at the time of making the contract to accelerate the maturity of the policy” by committing a crime (p. 588).
59 If an insured and the insurer agreed to insure against the risk of death while carrying cocaine bags in the insured’s stomach, the contract could not be enforced by anyone, innocent beneficiary or not. By contrast, where the agreement is lawful on its face but carried out in an illegal manner, exceptions to the public policy apply. After all, public policy “does not make the policy void, it merely makes it unenforceable by the criminal” (J. Lowry and P. Rawlings, Insurance Law: Doctrines and Principles (1999), at p. 168).
(8) Is There a Need to Reform the Public Policy Rule?
60 For the purposes of the present appeal, it is sufficient to conclude that an innocent beneficiary named in an insurance policy should not be disentitled to insurance proceeds where the insured dies while committing a criminal act and does not intend the loss. Public policy does not bar Maria Oldfield’s claim.
61 Nevertheless, the distinction between an innocent beneficiary and those who claim through the criminal’s estate should be considered. Public policy has consistently refused to permit the criminal or those who claim through the criminal to obtain insurance proceeds. Those who claim through the criminal are denied, while innocent beneficiaries named in the policy are not. Ferguson J. noted and I agree that the distinction seems arbitrary. As he held, “it is difficult to explain why a criminal can benefit his family by naming them as beneficiaries in an insurance policy but not by naming them in his will” (p. 128). That there is an arbitrary distinction suggests the need to loosen the public policy rule rather than restrict it.
62 The public policy rule has gradually been modified. A trickle of reform occurred in Hardy, supra. In Hardy, Diplock L.J. proposed a public policy test that would balance the public policy interests at stake. He held (at pp. 767‑68):
The court’s refusal to assert a right, even against the person who has committed the anti-social act, will depend not only on the nature of the anti‑social act but also on the nature of the right asserted. The court has to weigh the gravity of the anti-social act and the extent to which it will be encouraged by enforcing the right sought to be asserted against the social harm which will be caused if the right is not enforced.
63 In Saunders v. Edwards, [1987] 1 W.L.R. 1116 (C.A.), Bingham L.J. expressed a similar balancing test (at p. 1134):
. . . it is unacceptable that the court should, on the first indication of unlawfulness affecting any aspect of a transaction, draw up its skirts and refuse all assistance to the plaintiff, no matter how serious his loss nor how disproportionate his loss to the unlawfulness of his conduct.
64 In England, the public policy rule has been modified by the Forfeiture Act 1982 (U.K.), 1982, c. 34. Under the Act, the court can modify the public policy rule, “having regard to the conduct of the offender and of the deceased”, “to such other circumstances as appear to the court to be material” and to “the justice of the case” (s. 2(2)).
65 Although the rule was modified by statute, Phillips L.J. held that “the judges would themselves have modified the rule” if the legislature had not done so (Dunbar v. Plant, [1997] 4 All E.R. 289 (C.A.), at p. 310). He added that “the only logical way of modifying the rule would have been to have declined to apply it where the facts of the crime involved such a low degree of culpability, or such a high degree of mitigation, that the sanction of forfeiture, far from giving effect to the public interest, would have been contrary to it” (p. 310).
66 Other courts have declined to modify the public policy rule, holding that it is up to the legislature to do so (Troja v. Troja (1994), 33 N.S.W.L.R. 269 (C.A.)).
67 It might be appropriate to modify the public policy rule so as to permit an innocent person who claims through the criminal’s estate to take insurance proceeds. Indeed, in Hardy, Diplock L.J. thought that the public policy rule could be modified to permit the criminal to take insurance proceeds, depending on “the nature of the anti‑social act” and “the nature of the right asserted” (p. 768). Under England’s Forfeiture Act 1982, courts can modify the effect of the forfeiture rule even where a person who has unlawfully killed another seeks to acquire a benefit in consequence of the killing. I leave the question to be decided either by the legislature or in another case where the issue arises.
III. Conclusion
68 In conclusion, public policy does not apply to bar a claim by an innocent beneficiary named in an insurance policy merely because the insured dies while committing a crime. Maria Oldfield’s claim is not barred by public policy or by any rule of contractual interpretation. In that light, I need not consider whether public policy rules are inapplicable because the insurance contract was obtained pursuant to a bona fide contract for value.
69 The appeal is dismissed with costs.
The following are the reasons delivered by
70 L’Heureux-Dubé J. — The question in this case is whether an insurer is obliged to pay the innocent beneficiary of an insurance policy issued to someone who died unintentionally while committing a criminal act where the insurance contract did not contain an exception for such criminal act. The whole issue turns around the forfeiture rule, its rationale and the policy concerns it raises.
71 I have had the benefit of reading my colleague Major J.’s reasons and I agree with the result he reaches. My concern relates to his analysis and application of the forfeiture rule.
72 The purpose of the forfeiture rule was best summarized by Kirby P., now of the High Court of Australia, dissenting, but not on this point, in Troja v. Troja (1994), 33 N.S.W.L.R. 269 (C.A.), at p. 286:
The forfeiture rule is, in reality, an application to what would otherwise be the operation of law of the equitable principles which deny persons from gaining benefits from their own morally culpable conduct. To prevent that happening, a court of equity is authorised to impose a constructive trust to prevent the perpetrator’s gain. The trust will be imposed by the court to achieve a just result and to prevent the unjust enrichment of the wrongdoer. [Emphasis added.]
73 Absent the forfeiture rule or specific exclusions in the insurance contract, the insurer would have to abide by the insurance contract and simply pay the designated beneficiary the amount stipulated in the insurance policy for which the insured paid the premiums. As put by R. B. Wuehler in “Rethinking Insurance’s Public Policy Exclusion: California’s Befuddled Attempt to Apply an Undefined Rule and a Call for Reform” (2001), 49 U.C.L.A. L. Rev. 651, at pp. 652‑53:
More succinctly, insurance is merely a contract for indemnity from loss. The risk of loss shifts from one party to a party that is more capable of managing that risk because of its ability to distribute the risk among similarly situated persons. With few limitations, agreeing parties are free to contract for the transfer of any risk they choose.
74 The forfeiture rule is based on the public policy that “although a wrongdoer cannot profit from his or her crime, neither should an insurance company be allowed to abrogate its responsibilities under a contract by invoking a rule of public policy” (Cory J., dissenting but not on this point, in Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87, at p. 107, citing Cleaver v. Mutual Reserve Fund Life Association, [1892] 1 Q.B. 147 (C.A.). See also Standard Life Assurance Co. v. Trudeau (1900), 31 S.C.R. 376).
75 This is why the forfeiture rule should be applied strictly and narrowly. Any relaxation of the rule should be left to the legislature which sets public policy, as was done in England. While a crime may prevent a person from benefiting from that crime, it cannot affect the rights of innocent third persons, which is precisely the case in this appeal.
76 Competing public policies must be balanced to ensure that no injustice will result from a blindfold application of a public policy rule. As Wilson J. indicated in Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2, at p. 12, if the application of a rule leads to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to ameliorate its ill effects on a case‑by‑case basis.
77 I am in agreement with Borins J.A. in this case ((2000), 49 O.R. (3d) 737) that what is at issue here is the balancing of two rules of public policy. However, it is not so much a question of which public policy prevails but rather ensuring that the objectives of competing public policies be conciliated and that a just result ensues, as Borins J.A. states (at p. 750):
In Gray v. Barr, [1971] 2 Q.B. 554 at p. 582, [1971] 2 All E.R. 949 (C.A.), which concerned the public policy rule in the context of an indemnity policy, Salmon L.J. pointed out: “Public policy is not static.” In Dunbar, at p. 304, Phillips L.J. considered it important to observe that the public policy rule is not absolute, and went on to demonstrate this from his review of the development and evolution of the rule. I see no reason to conclude that the rule should be regarded differently in Canada. I have found nothing in the reasons of Sopinka J. in Brissette Estate to suggest that it is different in Canada. Brissette Estate was not decided on the application of any rule of public policy, but on the interpretation of the insurance contract.
And at pp. 749-50, he applied this reasoning to the facts of this case in the following terms:
Penalizing Mrs. Oldfield is not going to achieve the public policy goal of the enforcement of the law pertaining to unlawful possession of drugs and narcotics. Mr. Oldfield will not be deterred from committing further drug offences as he is dead. As I have indicated, Mrs. Oldfield neither slew her benefactor, nor was she implicated in his death, nor did he kill himself to generate the insurance proceeds for his widow.
78 Wuehler, supra, puts it this way, at p. 654:
Certainly there is some merit to the position that wrongdoers should not be indemnified by insurance carriers, but instead should be punished for their wrongdoing. On the other hand, however, every time coverage is precluded pursuant to this theory, an innocent victim is left uncompensated for his or her suffering and an otherwise enforceable contractual obligation is extinguished without consideration. As these two interests collide, the dispositive question that surfaces is, what level of misconduct constitutes a significant enough violation of public policy to render an insurance agreement void because it overcomes the competing public policy considerations that favor extending coverage?
79 In that sense, there is no reason to distinguish between named beneficiaries and beneficiaries claiming from the wrongdoer’s estate.
80 A policy which would enable a person to benefit from his own wrongdoing should not be addressed through the relaxation of the forfeiture rule: it is conceptually contradictory to relax the rule to permit wrongdoers to benefit from their own unlawful act since the rule’s purpose is precisely to deny persons from gaining benefits from their own wrongdoing. As for the application of the forfeiture rule, the best approach, in my view, is to balance competing policies to avoid injustices, such as here, where the beneficiary is innocent.
81 I would dismiss the appeal.
Appeal dismissed with costs.
Solicitors for the appellant: Lerner & Associates, Toronto.
Solicitors for the respondent: Singer, Kwinter, Toronto.