Court of Appeal decides whether deceased had severable interest in life insurance policy benefit/insurers’ duty to exercise discretion reasonably

The claimant, whose mother had died, applied under the Inheritance Act 1975 for an order that the court redistribute assets from her estate. The deceased had taken out a joint life insurance policy with her husband. The policy provided that the insurer would pay out on the first death of the couple and also that “on proof to the [insurer]’s satisfaction that the life insured is suffering from a terminal illness, we will bring forward the payment of the sum insured”.

The deceased separated from her husband (but was never divorced from him). She formed a relationship with another man and gave birth to their son in 2009. She was diagnosed with a terminal illness in February 2011 and died the following month. The insurers paid the insurance proceeds to her husband in May 2011, triggering this application to the court. The claimant sought to rely on section 9 of the 1975 Act which provides that if a deceased was “immediately before his death beneficially entitled to a joint tenancy of any property”, the court can order that the value of that severable share of property immediately before death be treated as part of the deceased’s estate.

At first instance, it was held that immediately before her death, the deceased had been beneficially entitled to a joint tenancy of the terminal illness benefit under the policy. On appeal, McCombe LJ (dissenting) agreed with that conclusion. He noted that an insurance policy and its proceeds are a chose in action and so the deceased had had an interest in the policy from its inception. He went on to hold that the deceased had had a severable share in the right to claim the terminal illness benefit at the moment immediately before death and the fact the money was paid by the insurer for another reason (i.e. death) did not negate the existence of that share for the purpose of section 9. He also referred to the policy condition that a claim had to be established to the satisfaction of the insurer and said that that “must be taken to mean its reasonable satisfaction; the insurer could not have rejected a claim out of whim or caprice”.

However, the other two Court of Appeal judges disagreed with the conclusion of McCombe LJ and the judge at first instance on section 9. Arden LJ said that it was correct to say that the deceased had had a severable interest in the terminal illness benefit. However, in this case, no claim had been made for the terminal illness benefit before death and therefore “the insurer was justified in paying the death benefit to the appellant. So the value of the severable interest in the terminal illness benefit immediately prior to death was nil”. McFarlane LJ agreed. Here, there had been only one sum to be paid out (either on death or on proof of terminal illness): “There were not two sums, each with a realisable value…… If payment of the sum insured was not brought forward to a time before the first death, then the deceased’s severable interest in the right to make a claim to bring it forward (the terminal illness benefit) evaporated and was of no value”.

Accordingly, the appeal was allowed and the deceased’s husband was allowed to keep the insurance proceeds.