Blog: Bankruptcy agency must change tack on insurance

Senior Money Adviser Alan McIntosh makes the case for the Accountant in Bankruptcy returning money to families left in funeral poverty following landmark legal decision

It is ironic that as the Scottish Government make plans to introduce a new benefit to alleviate funeral poverty, one of its agencies, the Accountant in Bankruptcy (AIB), has been cashing in on life insurance policies of people that have passed away.

This has led to bereaved families being left with no funds to pay for the funeral costs of their loved ones, sometimes forcing them into funeral poverty.

The reason the AIB has been taking the money is because under Scottish bankruptcy law, the rules state that once someone is made bankrupt all their assets, including interests in life insurance policies, become the property of the trustee in bankruptcy.

So, if someone dies during their bankruptcy, their trustee can take the money from their life insurance policy.

However, because of changes to the law in 2008, it has now been held by the Scottish Sheriff Appeal Court, that between 2008 and 2015, when someone was released from their bankruptcy, the policy became theirs again. After 2015 it returns to them four years from the date of their bankruptcy.

Up until this decision of the court, however, the view of the AIB was the policies belonged to it, even after the deceased person was released from their bankruptcy.

In one case I dealt with, I challenged the Accountant in Bankruptcy’s interpretation of an obscure 105-year old law, arguing that a life insurance policy is what is known as a non-vested contingent interest.

My argument was that a life insurance policy wasn’t payable until someone died, and therefore, the sum assured could not belong to anyone until the death occurred.

The AIB, however, ruled in its own interests.

The only option available to my client was to challenge the AIB through the courts, which meant taking the risk that if she was unsuccessful, she would have to pay for her brother’s funeral and the AIB’s legal costs.

Understandably, the lady chose not to take the risk.

However the Scottish Sheriff Appeals Court has now held that this obscure area of law does in fact mean that interests in life insurance policies are non-vested contingent interests and are the property of the debtor once they are released from their bankruptcy, if made bankrupt after April 1, 2008; or if made bankrupt after April 1, 2015, after four years.

The question now needs to be asked, how many policies have been cashed in by the AIB after the debtor was released from their bankruptcy?

How many families have been left penniless on the death of a loved one, suffering funeral poverty and possibly debt by a government agency that is supposed to help people in debt?

It is incumbent on both the AIB and the Scottish Government Minister, Jamie Hepburn, to carry out a review of all policies that have been cashed in over the last five years and seek out the families that were denied funds they were legally entitled to.

It cannot be correct that a governmental body be allowed to benefit from its own mistakes, especially when those mistakes left families destitute on the passing of their loved ones.

For a Government that has stated it is intent on tackling the issue of funeral poverty, the first thing it can do is give people back the money that they were entitled to.