Can the proceeds of a life insurance policy be clawed back in 1975 Act claims?

 In Probate

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Life insurance claw back 1975 Act claimsWhat looks like joint property but isn’t joint property? The deflating answer to this not very Sphinxian riddle is a joint-life first-death life insurance policy. So held the Court of Appeal in Murphy v Murphy & ors [2003] EWCA (Civ) 1862, a decision that was recently revisited in Lim v Walia [2014] EWCA Civ 1076.

I(PFD)A 1975 and joint tenancies

Both Murphy and Lim concerned claims under the Inheritance (Provision for Family and Dependants) Act 1975 and, specifically, applications under section 9(1) of that Act, which provides that where the deceased held property on a joint tenancy before his death, the Court “may order that the deceased’s severable share of that property, at the value thereof immediately before his death, shall…be treated for the purposes of this Act as part of the net estate of the deceased.”

Section 9(4) of that Act makes it clear that the rule applies to intangible as well as tangible property, which includes a right to payment under a life insurance policy.

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Murphy v Murphy

In Murphy the deceased Mr Murphy and his then wife had taken out a policy on terms that the proceeds would be paid out once on either (a) the first death of the two lives insured or (b) the insurance company accepting that one of the lives insured had become terminally ill. The Murphys divorced but kept up the premium payments until Mr Murphy’s death. The 1975 Act claimant (Mr Murphy’s infant son by his subsequent partner) sought an order to recover Mr Murphy’s “severable share” of the insurance proceeds, which had been paid to Mrs Murphy under the terms of the policy.

The relief was granted at first instance but the decision was reversed on appeal. The Court of Appeal held by a majority that the deceased had not, immediately before his death, had a “severable share” of the right to receive the policy proceeds because Mr and Mrs Murphy’s rights under the policy had been held severally, not jointly. The Court found that the true effect of the policy was to grant each spouse a distinct and several right to receive payment on the death of the other. Therefore, when Mr Murphy died, his right did not pass by survivorship, but was simply extinguished and payment made to Mrs Murphy pursuant to her independent right.

In the leading judgment, Thomas LJ held (and Pill LJ agreed) that the “plain inference to be drawn was that the death benefit was intended by the parties to be payable to the survivor of either Mr or Mrs Murphy… They cannot have intended the right to that benefit was to be defeasible by a notice of severance”. Dissenting from the view of his brethren, Chadwick LJ considered that, on a true construction of the policy, the rights of the policyholders to receive the proceeds were the same whether the benefit became payable on death or terminal illness, and the money was in all events payable to whichever of Mr and Mrs Murphy was alive to receive it (if the qualifying event was the death of one of them, this would be the other by survivorship).

Lim v Walia

Lim concerned a similar life insurance policy with similar provisions for benefit on death and terminal illness. The important difference was that the deceased, Mrs Walia, had been terminally ill but had died before the terminal illness benefit could be claimed.

In Murphy the judges had at least been able to agree that the terminal illness benefit was held on a joint tenancy, and the Court of Appeal in Lim found, following Murphy, that the death benefit was not a joint right but the terminal illness benefit was. Therefore the 1975 Act claimant (Mrs Walia’s son by a subsequent partner) could, in principle, recover Mrs Walia’s severable share of the terminal illness benefit that had existed before her death.

The problem was that Mrs Walia died before exercising the terminal illness benefit and the money then became payable to Mr Walia as death benefit. The majority (McCombe LJ dissenting) held that the value of Mrs Walia’s severable share of the terminal illness benefit immediately before her death was nil, because it had to be taken into account that the right had ceased to be exercisable on her death. In consequence, there was no asset of value for the claimant to recover.

Conclusion

I would respectfully submit that the decisions in Murphy and Lim have set an unsatisfactory precedent for approaching similar claims in future. The real difficulties arise from the legal reasoning in Murphy, which tied the Court of Appeal’s hands in Lim and steered it toward the tendentious conclusion that the rights to receive payment on death and terminal illness were entirely separate. On the contrary it is clearly arguable that the policyholders had a uniform joint right to the proceeds, regardless of the “triggering” event on which these became payable. There are shades of this analysis in McCombe LJ’s judgment that “the fact that the Deceased’s severable share [of the terminal illness benefit] is represented by money paid by the insurer by another route cannot surely frustrate the section 9 exercise”.

As the Court of Appeal noted in both cases, the question is one of construction of the policy document. In future, differently worded policy documents may justify different treatment of the rights therein. In the meantime, practitioners recommending joint life insurance products ought to draw their clients’ attention to the differences between joint and several rights under the policy, and the implications these may have for family provision claims against their estates.

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