The Appeal Tribunal overturned a decision by the Ombudsman for Long-term Insurance (OLTI), directing an insurer to pay the proceeds of a life insurance policy to a minor child who was the nominated beneficiary.
The ruling was one of two appeals against the Ombudsman’s decisions that were upheld last year. It was reported in the National Financial Ombud Scheme’s 2024 annual report, which was released last week.
The case, which centred on a disputed beneficiary nomination, highlights that contractual obligations must be strictly followed, particularly regarding the communication of changes to beneficiary nominations.
The ruling clarifies that an insurer’s duty is to honour the terms of the contract as they stood at the time of the insured’s death, rather than attempting to interpret the deceased’s intentions posthumously.
Background of the case
The case revolved around a life insurance policy issued by Liberty Life, with the complainant, a minor child represented by her mother, named as the sole beneficiary. The policyholder and life assured was the complainant’s father, who was divorced from her mother.
The father died in March 2020, triggering a dispute over the rightful recipient of the policy’s death benefits.
In February 2020, according to the father’s broker, the father had requested a change of beneficiary form. However, no signed form was returned to either the broker or the insurer during the father’s lifetime.
After the father’s death, a signed beneficiary change form, dated 23 February 2020, was discovered in a drawer at his workplace. This form nominated a family trust as the new beneficiary. On 20 May 2020, the broker sent the form to Liberty Life, and on 26 May 2020, informed the insurer of the policyholder’s death. After verifying the authenticity of the signature on the form, Liberty Life paid the policy proceeds to the family trust.
The complainant, through her attorney, contested this decision, arguing that she remained the nominated beneficiary at the time of her father’s death, as recorded by the insurer.
The attorney asserted that Liberty had breached its contractual obligations by paying the trust, because the policy’s terms required that any change or removal of a beneficiary be completed prior to the insured’s death.
The complainant’s grievance was that the insurer had disregarded its own contractual requirements, which stipulated that a beneficiary nomination must be formally communicated to the insurer to be effective.
The Ombudsman’s initial ruling
The matter was brought before the OLTI, which was tasked with determining whether the beneficiary change form, allegedly signed by the deceased on 23 February 2020, was valid.
In its provisional ruling, the Ombudsman dismissed the complaint, reasoning that resolving the validity of the form would affect a third party – the family trust – which fell outside the Ombudsman’s jurisdiction.
The Ombudsman noted that it lacked the authority to join the trust as a party to the proceedings and concluded that the dispute was better suited for resolution in a court of law, in accordance with its procedural rules.
In response to the provisional ruling, the complainant’s attorney argued that the complaint was strictly about the contractual relationship between the complainant and Liberty Life, and the trust was not a party to the contract.
The attorney emphasised that the issue was whether the insurer had fulfilled its contractual obligations to the complainant, who was the recorded beneficiary at the time of the insured’s death.
The attorney further contended it was unnecessary to involve the trust, because no relief was sought against it, and any subsequent dispute between the insurer and the trust could be resolved separately.
Final Ombudsman ruling
The matter was reviewed at an adjudicators’ meeting, which upheld the provisional ruling as the final determination. The meeting concluded that determining the true intention of the deceased regarding the beneficiary change would require investigating disputed facts, a process for which the Ombudsman’s office was not equipped.
Specifically, the Ombudsman lacked the authority to subpoena or cross-examine third-party witnesses, which would be necessary to ascertain the validity of the beneficiary change form. Consequently, the complaint was dismissed.
Application for leave to appeal
The complainant’s attorney applied for leave to appeal the Ombudsman’s decision.
The attorney reiterated that the complaint fell within the Ombudsman’s jurisdiction, because it concerned whether the deceased had validly revoked the complainant’s nomination as beneficiary prior to his death, in accordance with the policy’s contractual requirements. The attorney argued that if this issue was resolved in the complainant’s favour, the insurer was contractually obliged to pay the policy proceeds to her.
The application for leave to appeal was granted.
The Appeal Tribunal’s judgment
An Appeal Tribunal, comprising three retired judges, was constituted to hear the appeal.
The Tribunal reframed the core issue of the complaint, clarifying it was not about the validity of the beneficiary change form but whether Liberty Life had complied with its contractual obligations to the complainant.
The Tribunal noted that no material facts were in dispute, and there was no need to involve the trust, because it was not a party to the contractual relationship between the insurer and the insured.
For the purposes of the appeal, the Tribunal accepted the authenticity of the beneficiary change form and its signature. However, it emphasised that the critical fact was that the substitution of the beneficiary had not been communicated to Liberty before the insured’s death. This lack of communication was pivotal to the Tribunal’s reasoning, which was grounded in the policy’s contractual terms and general principles of contract law.
Key contractual provisions and Tribunal’s reasoning
The Tribunal’s judgment rested on an analysis of the policy’s terms and the legal principles governing insurance contracts:
Contractual terms on beneficiary nomination
The policy stipulated that “when the life assured dies, the death benefits will be paid to any nominated beneficiaries who survive the life assured”. The Tribunal interpreted “nominated” to mean a beneficiary who has been formally named to the insurer, implying that the nomination must be communicated to the insurer to be effective.
Beneficiary rights
The Tribunal explained that a nominated beneficiary gains a right to become a party to the insurance contract upon the insured’s death, provided the beneficiary accepts this right by communicating acceptance to the insurer. Until the insured’s death, no rights accrue to the beneficiary, and the policyholder retains the ability to change or remove the beneficiary without their consent.
Policy clause on beneficiary changes
The policy allowed the policyholder to “at any time before the death of the life assured appoint, change, or remove one or more beneficiaries without the consent of the life assured or beneficiary”. The Tribunal emphasised that for such a change to be effective, it must be communicated to the insurer, because this is necessary to achieve consensus – the mutual agreement required to alter a contract.
Requirement of consensus
The Tribunal underscored that a contract, including any alteration to it, requires consensus between the parties, which can be only achieved through communication of mutual intent.
When a policyholder substitutes a beneficiary, and the insurer accepts the substitution, the contract is altered to reflect that the new beneficiary will receive the proceeds upon the insured’s death. In this case, no such consensus was reached between the policyholder and Liberty to substitute the trust as the beneficiary before the insured’s death.
Timing of communication
The Tribunal noted that the policyholder’s intention to change the beneficiary to the trust was not communicated to Liberty until after his death, when the broker submitted the form on 20 May 2020. By this time, the complainant’s right to the policy proceeds had already accrued upon her father’s death, because she was the nominated beneficiary at that point. The Tribunal held that the insurer was contractually obligated to honour this right.
Insurer’s role
The Tribunal rejected the notion that an insurer could act like an executor of a will, assessing the deceased’s wishes posthumously. Instead, it emphasised that an insurance policy is a bilateral agreement, and the insurer must adhere to the terms agreed upon at the time of the insured’s death. In this case, the contract remained unaltered at the time of death, with the complainant as the nominated beneficiary.
Tribunal’s conclusion
The Tribunal concluded that the Ombudsman erred in declining to determine the complaint, because the issue was squarely within its jurisdiction to resolve.
The complaint concerned the insurer’s contractual obligations, not the validity of the beneficiary change form or the trust’s rights. By failing to communicate the beneficiary change to Liberty before his death, the policyholder did not alter the contract, and the complainant remained entitled to the policy proceeds.
The Tribunal, acting in the Ombudsman’s stead, directed Liberty to pay the policy benefits to the complainant, affirming her contractual rights as the nominated beneficiary at the time of her father’s death.
