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Critical illness benefit payment determined to be compensation for "pain and suffering" and exempt from distribution in bankruptcy.

Upon assignment into bankruptcy, a bankrupt's property vests in the bankruptcy trustee to be distributed to creditors. However, the courts have identified certain exceptions to this general principle, including in a recent decision out of Alberta.

In Cooke (Re), 2018 ABQB 628, Ms. Cooke had been diagnosed with breast cancer, and was undergoing treatment. Ms. Cooke was required to leave her full time employment as a health care aide, and applied for a "critical illness benefit" available to her under her employer's insurance.

A month after applying for the critical illness benefit, Ms. Cooke assigned into bankruptcy. During her bankruptcy, her application was approved, and she received $25,000 on account of the critical illness benefit. She disclosed the benefit to her trustee but did not pay the benefit to the trustee.

The Trustee took the position that the benefit was "income", and therefore part of the bankrupt estate that vested in the trustee.

At Ms. Cooke's application for discharge from bankruptcy, the court was required to consider the nature of the critical illness benefit. In doing so, the court recognized that certain property of a bankrupt is not subject to the operation of the Bankruptcy and Insolvency Act. The relevant example provided by the court was to the well-settled principle that creditors cannot recover out of damages received by a debtor/bankrupt on account of pain and suffering or other such damages that are "personal" to the bankrupt.

The court was of the view that such a principle could also apply to a contractual benefit, like the critical illness benefit, finding that it was "designed to provide some form of relief, as money, for an illness which the insured suffers". As such, the benefit was payable for the pain and suffering associated with the illness, and not the loss of income or earning power that likely resulted from the illness. The court could find no reason to distinguish between a tort claim, where someone has caused the pain and suffering, and a contractual entitlement, for which there is no need to prove anyone was at fault. In the words of the court: "as long as the pain and suffering remain with the bankrupt, so does the compensation for it".

Insurance payments, settlements, and judgments sometimes arise on the eve of or in the midst of a bankruptcy. While circumstances are always fact dependent, experienced insolvency counsel can help ensure property is properly characterized as part of a bankrupt estate or exempt from the estate.

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