Garnishment of structured settlements?

November 28, 2017

In the past, creditors of structured settlement recipients have served Notices of Garnishment upon the life insurers making the payments to those recipients.  Some life insurers have, in fact, redirected payments in accordance with those.  It is likely, however, that the courts issuing the Notices of Garnishment and the life insurers acceding to them did so incorrectly.

By complying with Notices of Garnishment, life insurers have arguably breached the terms of the structured annuity contract. This contract includes an irrevocable payment direction, made by the owner of the contract (who is the defendant’s casualty insurer or its assignee, not the structure recipient).  Making the payments to anyone other than the contractual recipient is likely a breach of the life insurer’s obligations to the owner.

If the structure recipient, after losing his/her payments, were to sue to enforce the terms of the settlement, the owner may presumably then advance a claim against the life insurer, for incorrectly redirecting the payments.

Structured settlements are unique because the recipient of the payments is neither the owner of annuity nor the insured, as defined in the Insurance Act. On the other hand, the structure recipient is almost certainly a beneficiary, as defined in the Insurance Act and under the very broad interpretation of this definition by the Ontario Court of Appeal, since the policy specifically provides that the structure payments are irrevocably directed to the recipient.

There is case law and literature indicating that a payment pursuant to a Notice of Garnishment may violate Sections 196 and 216 of the Insurance Act.  Justice Perell, in the case of Salna v. Hie (88 O.R. (3d) 202 (2007) found that a structured settlement annuity is not exigible by virtue of those two sections of the Insurance Act.  In the case, Justice Perell went on to address the question of whether a structure could be set aside as a fraudulent conveyance, intended to defeat creditors.  Based on the reasons in that case, it would be a rare case which would constitute a fraudulent conveyance, since the life insurer (and presumably the owner of the annuity) would have to be aware of any fraudulent intent on the part of the structure recipient.

Arguably, the analysis in Salna only applies in cases where the legislation pursuant to which the Garnishment has been issued relates to debt obligations. In some cases, for example a requirement to pay from the Canada Revenue Agency or the Ontario Family Responsibility Act, the Garnishment attaches to an “amount payable”.  In our view, a structure payment is certainly not a debt owed by the life insurer to the structure recipient.  On the other hand, it may be an amount payable. 

To our knowledge, none of the courts which have issued Notices of Garnishment and few of the life insurance companies on which they have been served have engaged in this detailed analysis.  In many cases, if Notices of Garnishment were contested by the structure recipient and the matter thoroughly argued before the court, there would ultimately be no redirection of the structured settlement payments.  The reality, however, for most structure recipients is that they do not have the financial resources to fund such a contest.

In our view, based on the provisions of the Insurance Act, the courts should not properly issue Notices of Garnishment in most cases in respect of structured settlement annuities.  The fact that they seem to be willing to do it in some instances is likely due to a lack of understanding of the intricacies of structured settlements.  Further, the life insurers place themselves at significant risk in acceding to such Notices.

What is clear is that structured settlements provide much greater protection and a much more effective chance of preserving the settlement funds from creditors than do lump sum settlements, which are far more accessible by them.