Above and Beyond

The mere fact an issue is raised before a court can be enough reason to pay it attention. Win or lose, someone was willing to take a costly journey through the legal system.

This was my reaction to the Gish v. Hooper Insurance and Financial Services Inc. case recently decided by the British Columbia Court of Appeal. The key issues on the appeal were whether a life insurance policy was actually cancelled, and whether a duty of care was owed to a beneficiary to allow for the policy to continue.

Robert and Margaret Gish ran a jewelry business for over 20 years, winding it up in 2004. On October 7 of that year, they met with their insurance broker, Bernard Hooper, to discuss their five-policy insurance portfolio with Transamerica, which included two life insurance policies on Mr. Gish. Hooper suggested they maintain the coverage, and the couple asked him to gather details for a later discussion.

On October 22, Mr. Gish called Transamerica to cancel his two life insurance policies, but was told written notice of cancellation was required. He then faxed over a cancellation notice.

Transamerica confirmed the cancellations in writing on October 23, 2004. Mrs. Gish was suspicious, called Transamerica, and learned the policies had been cancelled — much to her displeasure.

Unaware the policies had been cancelled, on October 28 Hooper faxed a request to Transamerica for information concerning the premiums on all policies held by Mr. and Mrs. Gish.

Hooper learned in a November 3, 2004 email response that the two life insurance policies on Mr. Gish had been cancelled on October 22. The email also noted the cancellations were effective November 15 and 22, respectively — the paid-to dates of the policies.

In subsequent consultations with the Gishes, Hooper did not discuss the cancellation of the two life insurance policies, nor note the effective date of the cancellations. The Gishes didn’t raise the issue of the cancelled policies, nor express concern over their cancellation. Robert Gish died in spring 2005.

After her husband’s death, Mrs. Gish brought a lawsuit against Hooper, his brokerage and Transamerica, claiming there had been a breach of duty to her as beneficiary.

Under the Insurance Act, certain parties, including a beneficiary, may pay premiums when the insured fails to do so — provided the payments are made within the late-payment grace period — to avoid the policy lapsing and being terminated for non-payment. This assumes the policy has not been intentionally cancelled.

Mrs. Gish claimed there was a duty to inform her of this aspect of the governing legislation, which she wanted to use to keep the policies in force. The trial judge rejected Mrs. Gish’s argument, stating that the policies were not terminated because of the non-payment of a premium; rather, Mr. Gish cancelled the policies, which was his right as owner. The appeals court confirmed this finding.

This seems like an easy case for the judge to decide, as the facts show Mr. Gish cancelled the coverage. But what if the facts were different? As the appeals court judge commented, an insurer’s relationship with an insured is constrained to the terms of the policy and the governing legislation. The position of an insurance agent or broker is not so clearly delineated.

In previous cases, lawyers have been found liable to disappointed beneficiaries due to an error or omission in drafting wills.

Similarly, financial advisors have been found liable to disappointed beneficiaries where there was a failure to properly complete a registered plan beneficiary designation. In both cases, the professional was engaged in providing a service to a client, and the beneficiary’s claim would have required the services of that professional.

Would the law go so far as to impose an obligation on an advisor to seek out and advise a beneficiary of a right to pay a premium on a lapsed policy? I don’t know, but if I were an advisor encountering a potential lapse situation, I’d have Compliance on speed dial.

Doug Carroll, JD, LLM(Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Trimark Ltd.