An Ontario MPP recently introduced a private Member’s bill that would amend the Ontario Insurance Act[1] (the “Act”). The amendment purports to amend the prohibition on trading and trafficking in insurance policies so that it does not apply if the policy is sold or assigned by the original policyholder or a transferee, used as collateral security or donated to a charity. The provisions in the Bill that deal with the donation of a policy to a charity exempt donations of life insurance policies from the prohibition on trading or trafficking in insurance policies if the insurance has been held for more than two years. The Bill has been referred to the Standing Committee on Finance and Economic Affairs.
We think this bill is problematic for several reasons. First, by creating this exemption, MPP Rudy Cuzzetto appears to be accepting that, under the current Act, the transfer of an insurance policy to a charity constitutes trading or trafficking. The regulator in Ontario has not previously taken that position publicly and thus the need for the provision is questionable. The Bill would also introduce into Ontario a regime which would permit the sale of insurance policies – commonly known as life settlement or viatical transactions. Generally these types of transactions are prohibited in Canada. Such a dramatic change to the landscape should, in our view, only be considered after public consultation and careful consideration by the government.
With respect to donations of life insurance to charities, donors have used life insurance to facilitate charitable giving for years. One common giving method allows a donor to leave a legacy gift, naming a charity as the beneficiary of their life insurance policy. When the donor passes, the recipient charity receives a gift which is higher in value than the cost to the donor. While the Act does not explicitly recognize charities as potential beneficiaries, it is the position of the Financial Services Regulatory Authority of Ontario (“FSRA”) (previously the Financial Services Commission of Ontario) that a policyholder can name a charity as beneficiary.[2] The other methods involve a donor purchasing a new policy and naming a charity as owner and beneficiary and a policyholder transferring a paid-up or partially paid-up policy to a charity. While perhaps less common than beneficiary designation alone, these two giving methods are long-established. FSRA has not historically targeted for regulation any of these methods of donation used. This said, it is true that transfers of insurance policies to charities have become a topic of discussion in the charitable sector after they were called into question by the provincial regulator in British Columbia.
Letters were received by two charities in British Columbia from the BC Financial Services Authority (“BCFSA”) which appeared to question the legality of gifts of life insurance through the transfer of a policy. BCFSA’s unexpected statement was met with much confusion and criticism, stemming from a concern that it may limit donations of life insurance policies. BCFSA attempted to clarify its position in a subsequent bulletin, stating that charities are not generally prohibited from soliciting nor accepting donations of life insurance. However, as discussed in our previous article, the regulator did not explain how it would interpret the anti-trafficking provisions with respect to transfers to charities.
Why this Bill, and why now? The preamble to the Bill states that the amendments will modernize the Act to allow life settlements and life loans, providing Ontario seniors with an alternative financial resource. The addition of the provision with respect to charitable donations is less understood. In fact, it would create a limit on donations of insurance policies to charities that does not exist today. Frankly we think the Bill leaves more questions than answers and suggest that these topics are of public importance and that public consultation should be had before the Bill proceeds. We will follow the development of the Bill as it proceeds through debate and public hearings.
[1] R.S.O. 1990, c. I.8.
[2] All About Beneficiaries. Financial Services Regulatory Authority of Ontario (previously the Financial Services Commission of Ontario). <http://www.fsco.gov.on.ca/en/insurance/Pages/beneficiaries-life.aspx#display>
