Canada's top court ends hedge funds' years-long battle with insurers

by Leo Almazora05 Nov 2021

A long-drawn battle between several Canadian hedge funds and insurance companies over the proper use of decades-old life insurance policies has officially come to an end.

The challenge, which was advanced by hedge fund firms Atwater Investment LP, Ituna Investment LP, and Mosten Investment LP against BMO, Manulife, and iA Financial Group, concerned decades-old life insurance contracts that had side accounts with high guaranteed interest rates.

The limited partnerships had used to use those life insurance contracts essentially as high-interest deposit accounts. By placing millions of dollars in the side accounts of the contracts – which they had bought from policyholders in Saskatchewan, where secondary life insurance sales were allowed – they sought to get massive returns on interest far exceeding what’s possible in today’s low-rate environment.

At one point, some suggested the scheme would put bring the insurance industry to its knees by putting firms on the hook for potentially unlimited amounts of interest payments. But the ensuing legal battle to determine whether investors had the right to use the side accounts in that fashion – which spanned several years and saw numerous provinces make changes to legislation around life insurance policies – ended in insurers’ favour.

In a March 10 ruling, the Saskatchewan Court of Appeal found that they could not be used to hold deposits in excess of what would reasonably be expected necessary for a policyholder to pay the premiums for their coverage.

The three hedge funds had sought to take their case to the Supreme Court of Canada. But in a decision released yesterday, the country’s top court denied their request.

“We are pleased that the Supreme Court has decided not to hear these appeals which means this litigation is over,” said Stephen Frank, president and CEO of the Canadian Life and Health Insurance Association (CLHIA).

“In recent years, provinces including Ontario, Prince Edward Island, Quebec, Alberta, New Brunswick and Nova Scotia have all passed legislation to protect consumers by further clarifying the separation of banking and insurance,” Frank said. “We are pleased that governments continue to support a clear and reliable regulatory framework for our industry and its consumers and will continue to work to have legislation updated in the remaining provinces.”

The sentiment was echoed by iA Financial Group in a separate statement.

“iA Financial Group has always maintained that the position taken by Ituna was legally unfounded and that life insurance contracts were never intended to be used as deposit accounts and for purposes unrelated to life insurance,” the company said in its reaction to the supreme court decision.