Module 3: LIFE INSURANCE CONTRACTS

There is no statutory definition of life insurance, but it may be defined as a contract in which the
insurer, in consideration of a certain premium, either in a lump sum or in any other periodical
payments, in return agrees to pay to the assured, or to the person for whose benefit the policy is
taken, a stated sum of money on the happening of a particular event contingent on the duration of
human life.

In Dalby v London and India Life Assurance Company, (1884) 15 CB 365 it is defined as a “contract to
pay a certain sum of money on the death of a person in consideration of the due payment of a
certain annuity for his life calculated according to the probable duration of life.”

The essential features of life insurance are the following:

1. It is a contract relating to human life.

2. There need not be an express provision that the payment is due on the death of the person.

3. The contract provides for payment of lump sum money.

4. The amount is paid at the expiration of a certain period or on death of the person.

Formation of life insurance contract

Offer and Acceptance:

The parties to an insurance contract are the insurance company and the applicant, who may become
the insured or may name another person to be insured. Unless otherwise indicated, it is assumed
that the applicant is the prospective insured.

1st Possibility-Offer:-

(a) An offer is a proposal that creates a contract if accepted by another party according to its terms. If
an applicant (Prospective Insured) gives the insurer (Company) a completed application and pays the
first premium, the application is an offer. If the policy is issued as applied for, the insurer accepts the
offer.

-No Offer:-

There is no offer if the applicant sends the application to the insurance company without payment of
the premium. Such an application is merely an invitation to the company to make an offer. The
insurance company makes an offer by specifying the premium. The applicant accepts it by paying the
first premium.

If an offer made by the Insurance company to proposer by specifying premium, period for the
specified Insurance amount. It is for the proposer to accept the offer or not. [This is exactly what
happens in online life insurance.]

2nd Possibility-Offer

(b) An advertisement in the newspaper about the availability of different life Insurance policies is an
invitation for an offer. If a proposer makes an application, then it will be offer from the applicant and

(i) the Insurance company may accept it…….

(ii) may not accept it……….

(iii) or may accept it with qualifications….

Acceptance-may accept it with qualifications….

 It may be noted that the insurer does not simply accept the proposer’s offer, but states that
acceptance is subject to payment of the first premium or fulfilling certain conditions. It is
clear that in law this generally amounts to counter-offer. So there is no binding contract until
the premium is in fact paid or fulfilling certain conditions.

 As a matter of general principle, until this act of acceptance, either party should be free to
withdraw

 However, the law appears to be that the insurer’s act constitutes a counter-offer which the
proposer may decline to accept

 In other words, the insurer is bound by its counter-offer so long as the risk remains the
same…

 If the risk changes, the tender of the premium by the insured constitutes a new offer that the
insurer is at liberty to reject it.

General principles of contract, counter-offer etc apply to formation of life insurance contract.
Premium must be paid in response to an offer for the insurance contract to be legally constituted and
enforceable, however it must be in accordance with the manner in which the insurer requires, to
fulfill a valid contract.

Utmost good faith- customers must disclose any new risk that arises during the offer- counter offer
process/period.

Change in risk- Generally, an insurance co. is bound by the counter offer so long as the risk remains
the same. Eg: if a prospective insured develops a heart condition after the medical examination, but
before the conclusion of the contract, and the counter offer she makes is through the proposal form
where no such information is to be mentioned, it shall still be her duty to disclose this new
information about her health to the insurer before the conclusion of the contract. The insurer is free
to accept or reject her proposal.

Online Insurance Contract- the method of formation of contract and its stages will not change in an
online format.

8th March 2021: Lecture 11

On-line Insurance Contract:

 The insured could be regarded as making an invitation to treat rather than an offer when
filling out an on-line proposal form.

 The insurer would make the offer by quoting the premium and inviting the insured to accept
it,

 and the insured would accept by clicking the appropriate button. Assuming that there
appears to have been an offer and an unqualified acceptance of that offer

Conclusion of Contract
  If the premium is paid with the application & conditional receipt is issued, the effective date
of the contract depends upon the provisions of the conditional receipt:-

(a) The condition may be that the Insurance becomes effective as of the date of the application or
medical examination whichever is later.

(b) The second type of conditional receipt used by a company is the approval form, which provides
coverage beginning with the date the application is approved by the company.

This form does not offer the insured protection for the period from the date of the application until it
is approved by the company.

(c) A third type of receipt is the unconditional binding receipt. According to this receipt the company
binds the Insurance from the date of the application until the policy is issued or the application is
rejected. This form of receipt is not widely used.

The insurer on receiving the papers containing the proposal scrutinises them and when they are
found in order, the insurer signifies assent thereto by a letter and the letter is called the letter of
acceptance. Until this is sent there is no acceptance, though a cheque for the premium is sent and
the money is received and retained till after the death of the insured. This letter is also usually in a
printed form. Generally, it contains four clauses, namely, (a) accepted at ordinary rates on the terms
proposed, (b) accepted with extra premium, (c) accepted subject to satisfactory assessment by
further examination after a lapse of time or (d) not accepted. The appropriate clause is retained and
the rest struck-off. If clause (a) or (d) is retained there is no difficulty. In the first case, it amounts to
acceptance and the contract is concluded and in the latter case the proposal is said to be rejected. If
the choice is on clause (b), the proposal may be said to be deferred; but if the choice is on clause (c)
it does not amount to acceptance, but amounts only to a counter-offer. An acceptance to be valid
and effective, should be absolute and unqualified and should be in the same terms as the offer. It is
then up to the assured to accept the additional terms, that is higher rates of premium prescribed in
the letter. Even when clause (a) is chosen, if the insurer adds, which the modern insurers do, the
clause that on payment of the first premium the contract is said to be concluded, it becomes only a
counter-offer and the payment of the first premium, according to the rates prescribed by the insurer,
becomes acceptance and concludes the contract.

Until the contract is concluded, each party can revoke the contract. In case of ambiguity in a contract
of insurance, the said ambiguity should be resolved in favour of the claimant and against the
insurance company. Mere submission of proposal form and cheque with the insurer would not
constitute a contract between the insurer and the insured unless and until the policy is issued to the
insured.

An encashment of cheque for the premium amount does not necessarily signify commencement of
the contract. It is subject to conditions such as medical check-up etc. Fulfillment of these conditions
may take place subsequently.

On the date of formal acceptance from the insurer risk coverage also commences. Generally the
insurer issues receipts which may stipulate certain conditions. eg - policy will commence on the date
of application for medical examination, whichever is later. There may be a further requirement of
formal undertaking by the manager.

Canning v Farquhar (1886) 16 QBD 727 (CA)

  A proposal for life insurance was ‘accepted’ on Dec-14 on the terms that, ‘no insurance is to
take effect until the first premium was paid’. The premium was tendered on Jan-9, but four
days previously the proposer had fallen and suffered serious injuries from which he
subsequently died.

 The court of appeal ruled that the insurer was not bound to pay:-

 Change in the risk:

 (1) If there is any material changes in the risk between the date of proposal and date of
conclusion of the contract, then it must be disclosed to the insurer in accordance with the
‘general duty of the disclosure’

 Failure to do so renders the contract voidable at the option of the insurer.

 But if the insurer accepts the insured’s offer unconditionally, he is there upon bound to pay,
even if the contract provides that the risk will not run until the premium is paid.

 (2) the proposal and intimation of its acceptance merely amounted to preliminary expression
of mutual willingness to enter into a contract and could not amount to acceptance.

 (2) the so called acceptance letter was in reality a counter offer, which cannot be considered
to have force after the risk has been changed and that

 (3) it was an implied condition that the risk should be the same, when the contract is
concluded

Facts:

 On 8 December 1883 Mr Canning’s agent, Mr Walters, forwarded to Sun Life Assurance

Society a proposal for life assurance which stated that Canning was in good health.

 On 14 December the insurer accepted the proposal and set an annual premium, but added
that, ‘No assurance can take place until the first premium is paid.’

 On 5 January, Canning fell over a cliff and was seriously injured; four days later, Walters
tendered the premium and told the insurers of the accident.

 They refused to accept the premium. Canning later died.

Decision: The Court of Appeal upheld the insurers denial of liability. They held that material change
must be disclosed in accordance with the genetal duty of disclosure. Insurance contracts are
contracts of utmost good faith- and they may be repudiated at the option of the insurance company
if utmost good faith hasn’t been exercised by the insured.

But if the insurance company accepted unconditionally then they are bound to pay.

LIC v Komalavalli, (1984) 2 SCC 719

  Rajareddy sent a proposal for insurance of Rs.50000 on his wife on 27-12-1960 and report of
his medical examiner and two cheques towards first premium.

 The cheques were encashed on 29-12-1960 and 11-01-1961

 He died on 12-01-1961 and his widow claimed the sum assured by the policy.

 The DM said that the proposal was not yet accepted. Acc. To financial powers standing order
1960 the DM was the competent authority to underwrite the proposal for Rs. 50000 and
above and he had not ordered acceptance of the proposal

 High Court held in favour of the Komalavalli

 LIC appealed against the order of the High court.

 Hon’ble SC dismissed the claim holding that the mere receipt and retention of the premium
until after the death of the applicant or mere preparation of the policy document is not an
acceptance. Acceptance must be signified by some act or acts agreed on by the parties or
from which the law raises a presumption of acceptance.

 SC- Mere receipt and retention of premium is not acceptance of proposal.

 Backdating Policy- It is beneficial as it saves some tax. Supposing one is buying a policy in
March 2021 (end of FY), he/she may go for backdating of policy.

LIC v. Brazinha, AIR 1995 Bom. 223

 The LIC received a proposal for insurance policy along with the necessary documents and
premium amount. The amount was acknowledged and kept in suspense for completion of
scrutiny of the papers before a decision to accept the proposal

 In the meantime the proposer died and his wife made a claim for the sum assured.

 LIC rejected the claim on thinsurable ine ground that mere acceptance of the amount and
issuance of receipt does not amount to acceptance of the proposal.

Elsa Tony Philip v. LIC, AIR 2009 NCC 785

 The court held that mere acceptance of cheque and encashment thereof is not sufficient for
formation of contract where insurance company has neither signified acceptance offer not
issued insurance policy.

Commencement of risk

 Whichever is later:-The risk under the corporation policies commences on the date of
receipt of the premium in full or the date of acceptance, whichever is later.

 If the acceptance of a proposal is conditional upon the proposer’s compliance with any
requirements, then the risk under the policy will commence on the date on which all
 requirements are satisfactorily complied with or on the date of receipt of the first premium
paid in full, whichever is the later.

Backdating Policies & Risk

 Normally policies can be backdated, if desired, within the financial year for a period not
exceeding three months without any extra charge

 Benefits:

 He shall get income tax benefits of the whole premium paid in a particular financial year etc.

 If it is so when the risk will commence in case of backdating policies?

LIC v Dharm Vir Anand (1998) 7 SCC 348

Facts:

a. Date of issue of policy- 31 March 1990 [+3 years= 31 March 1993]

b. Backdate issue of policy- 10 May 1989 [+3 years= 10 May 1992]

Suicide- 15 Nov 1992; which is witihin three years of (a) but not (b).

There was a clause in the policy, namely clause 4B which provided:-

 “Notwithstanding and agree that in the event of the death of life assured occurring as a
result of intentional self-injury, suicide or attempting to suicide....on or after the date on
which the risk under the policy has commenced, but before the expiry of the three years from
the date of this policy, the corporation’s liability shall be limited to the sum equal to the total
amount of premiums paid under the policy without interest”

 That if the policy holder dies of intentional self harm or suicide within three years of issuance
of policy, the corporation’s liability would be limited to the sum equal to the total amount of
premiums paid under the policy without interest.

 The assured committed suicide on 15-11-1992. The claim was repudiated on the ground that
the suicide had taken place within three years from the date of issue of policy i.e., on 31-03-
1990.

Petitioner contended that:

 It was admitted that the back dating the policy

was permissible under the law

 The acceptance of the proposal was conveyed on 31-03-1990 but one of the terms of
contract was that the same should be given effect from a back date i.e, on 10-05-1989 On
the completion of the contract all terms of the contract including the term for giving the back
 date effect came into force and the contract must be deemed to have come into force on 10-
05-1989

 Hence, suicide was not within three years from the date of policy.

 This view was upheld by the state commission also by the National commission

 The LIC, preferred an appeal to the Hon’ble Supreme Court.

 Undoubtedly the date on which the risk under the policy had commenced on 10-05-1989 but
the date of policy is 31-03-1990.

 The risk under the policy can be said to have commenced with effect from 10-05-1989 but
the date of the policy still remains the date on which the policy was issued or the date of
acceptance or date of conclusion of contract i.e, 31-03-1990.

 The death of the life assured having occurred as a result of the suicide committed by the
assured before the expiry of three years from the date of the policy, i.e, the terms contained
in clause 4B of the policy would be attracted.

 Therefore the liability arises would be limited to the sum equal to the total amount of
premium paid under the policy without interest and not the entire sum for which the life had
been insured.

LIC v. Mani Ram, (2005) 6SCC 274

 The policy was taken on 21-08-1995

 The policy effected from the back date i.e., from 28-04-1995

 The date of next premium was due on 28-04-1996

 If grace period one month is included, the next premium was payable by 28-05-1996

 The insured died in an accident on 02-08-1996

 The claim was repudiated as the premium was not paid even within the grace period and the
policy was lapsed.

 The contention of the complaint, however was that since the policy was effected on 21-08-
1995, the next premium was due on 21-08-1996, if grace period would have been taken into
consideration, this date would be 21-09-1996.

 The District forum observed that no doubt the policy was back dated but since the premium
was paid on 21-08-1995, the next premium was payable by 21-08-1996 and as the insured
died within the grace period, the LIC was liable to pay.

 The State and National commission also of the same view.

 The matter reached the Hon’ble Supreme Court, where the decision of Dharam Vir Anand’s
case was referred by the insurance company.

 The question was, whether on 02-08-1996 (the date when the insured died) the policy could
be said to be valid and subsisting ?
  The court referred to condition-2 of the policy that provided that, if the premium is not paid
before the expiry of the days of grace, the policy would lapse.

 The court observed that, the contention of the Insurance company was right in submitting
that one year came to an end on 28-04-1996 and the insured was liable to pay the premium
on the date as it became due.

 Taking into account of grace period of one month, the premium amount ought to have been
paid latest by 28-05-1996.

 Admittedly no premium was paid up to the aforesaid dates. Thus it was concluded that the
policy had lapsed.

10th March 2021: Lecture 12

LIC v. Sudha Jain, (2005) 2 CPJ 235

 The insured had two double benefit policies including insurance for life and accident benefit.
He met with an accident on 2-10-1993 and died on 8-2-1994.

 The insurance company claim was paid by the LIC, but accident benefit was denied on the
ground that the insured died after 120 days of accident.

 The evidence showed that the insured was in coma for 130 days.

 The reliance was mainly placed on clause 10(b) of the policy:-

 “The insurance company will pay an additional sum equal to the assured under the policy, if
the life assured sustain any bodily injury resulting solely and directly from the accident
caused by outward, violent and visible means and such injury causes death of the insured
within 90 days of the occurrence”

 The insurance company itself had waived this clause of policy because in the written version
it was alleged that the period of 90 days had been extended to 120 days after 15-9-1989

 Thus the commission observed, according to the own admission of Insurance company, this
term of the policy had been waived and had been extended to 120 days.

 The commission further observed that if by separate notification or direction, the period of
90 days could be extended to 120 days, it could be extended to 130 days.

 The victim had gone into coma and if it was his mistake that he died within 130 days the
complainant could not be blamed for that.

 In suitable cases this period of remaining into coma can be excluded.

Insurable Interest in Life Insurance

(i) In every contract of insurance, the insured or the person for whose benefit the insurance was
effected must have an interest in the subject matter.

(ii) The person for whose benefit the policy was effected shall not recover more than the value of
such insurable interest, and

(iii) Every policy shall contain the name of the person interested or for whose benefit the policy was
taken

 In life policies, having relationship by marriage, blood or adoption by contractual relationship

and by statutory duty have been recognized as having insurable interest.

 In life policies, the following persons have been recognized having insurable interest:-

(a) relationship by marriage, blood or adoption

(b) relationship by contract

(c) relationship by recognized under statutes

 Above relation exists between the following:-

 Husband and wife

 Parent and child

 A Hindu is under a legal obligation to maintain his parents. Sec-20 of HA and

M Act gives statutory to the legal obligation.

 The parents have, therefore, a right to maintenance

 However, the pecuniary interest is must, unless the parent is unable to

maintain himself or herself

 Creditors or debtor to the extent of debts

 A creditor has insurable interest in the life of his debtor up to the amount of the debt

 However this may not be satisfactory basis; for in the event of death of the debtor after the
debt has been repaid, the creditors would still be entitled to the policy moneys and thus can
be in a position to gain by the death of the debtor once the loan is repaid.

 The better arrangement would be for the debtor to take out a policy for the required amount
and mortgage the policy to the creditor. The creditor than cannot take under the policy
anything in excess of his dues

 Surety and principal debtor

 Partners of a partnership in the lives of co-partner

 A partner has insurable interest in the life of his co-partner to the extent of the capital to be
brought in by the latter.

 A surety has insurable interest in the life of his co-surety to the extent of the proportion of
his debt and also in the life of his principal debtor
  As a life insurance contract is not one of indemnity, the existence of insurable interest and
the amount thereof will have to be considered at the time of effecting the contract since the
lack such interest would render the contract void.

 Employers and employees

 An employer can create insurable interest in the lives of his employees by undertaking to
provide monetary benefit to the family or estate of the employees in the event of death.

 Group insurance effected by companies on the lives of their employees are on the basis of
insurable interest.

 As long as the employer-employee relationship continues- the insurable interest continues. If

the employee leaves the employment, then he/she has certain options as per the scheme.

 Landlord and tenants

 Shareholders and company

 Master and servants

 Principal and Agents

 Trustee and to trustee

Legal relationship + Economic Interest is must to establish insurable interest.

Human Life Value Index- Human Life Value (HLV) is the present value of all future income that you
could expect to earn for your family. It is defined as the total income an individual is expected to earn
until retirement. It indicates the economic loss a family would suffer in case of early demise of the
earning member. Human Life Value (HLV) helps in determining your life insurance needs on the basis
of your income, expenses, savings and liabilities.

Brahma Dutt v. LIC

 Mukhtar Singh, a school teacher on salary of Rs 20 took a policy for Rs 35,000 on his life
making false statements in the proposal and nominated a stranger Brahma Dutt for the
policy.

 The nominee paid the first two quarterly premiums by which time the life insured died. The
nominee intimated the insured's death and claimed the sum assured. It was found on
evidence that Brahma Dutt had taken the policy without any insurable interest in the life of
the deceased for his own benefit and that therefore it was void being a wagering agreement.

Liberty National Life Insurance v. Weldon

  In Weldon, an aunt-in-law obtained several life insurance policies on her 2 1/2-year-old
niece, paid the policies' premiums, and named herself the beneficiary of each policy. She
then poisoned the child to collect the insurance proceeds. The aunt-in-law was convicted of
the child's murder. The child's father filed suit against the insurance companies, arguing that
they knew or should have known that the aunt-in-law had no insurable interest in the life of
the child, that they failed to exercise "reasonable diligence" to ascertain whether an
insurable interest had existed even though they had a duty to do so, and that their failure to
perform that duty proximately caused the child's death.

 The Alabama Supreme Court found that the aunt-in-law did not have an insurable interest in
the life of her niece under Alabama law and, thus, was not an appropriate beneficiary.
Moreover, the court ruled, the insurance companies that had issued the policies had been
aware that the child did not live with the aunt-in-law, that the aunt-in-law did not support
the child, and that the child lived with her parents. Despite this knowledge, none of the
insurance companies required that the child's parents sign the insurance application on the
child's life. Indeed, the child's parents were not aware of the policies issued on their
daughter's life until after her death.

Representation and Warranty

 Andhra Pradesh High Court recognized this concept.

New India Assurance Co. Ltd v. Tambi Reddy and Sibhas Raghava Reddy, 1961 AP 295

 The practice in this country is to issue the policy on the understanding that the statements
made in the proposal are true.

 The contract is based on the warranty that the answers given by the proposer to the
questions are true so that it will not be necessary for the insurer to show whether the matter
warranted is or is not material to the risk.

 “Now, the aim of all life insurance is to make provision against the dangers which beset
human life. The subject matter of contract of life assurance is a human being who, according
to the law of nature, is bound to die some time or other. It is a most natural event but is
uncertain as to the point of time at which it will happen,

 Every man must face the risk of death although there are various facts contributing to its
happening sooner or later, the circumstances in which he is placed, habits, the mode of life,
his age, occupation and the host of other circumstance”

Non-Disclosure and Misrepresentation

Section 45, Insurance Act 1938 (before amendment)

45. Policy not to be called in question on ground of mis-statement after two years.—

No policy of life insurance effected before the commencement of this Act shall after the expiry of two
years from the date of commencement of this Act and no policy of life insurance effected after the
coming into force of this Act shall after the expiry of two years from the date on which it was
effected, be called in question by an insurer on the ground that a statement made in the proposal for
insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other
document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that
such statement [was on a material matter or suppressed facts which it was material to disclose and
that it was fraudulently made] by the policy-holder and that the policy-holder knew at the time of
making it that the statement was false [or that it suppressed facts which it was material to disclose]:

[Provided that nothing in this section shall prevent the insurer from calling for proof of age at any
time if he is entitled to do so, and no policy shall be deemed to be called in question merely because
the terms of the policy are adjusted on subsequent proof that the age of the life insured was
incorrectly stated in the proposal.]

This is applicable to life insurance contracts. It envisages two classes of policies.

Ground for Repudiation Before Two Years:-

 That statement made in the proposal

 Or in any report of a medical officer,

 Or referee,

 Or friend of the insured,

 Or in any other document leading to the issue of the policy, was inaccurate or false,

Repudiation after two Years

Grounds + Satisfy the following three conditions= Right to repudiate by Insurer

 (i) The statement must be on a material fact,

 (ii) There has been suppression of the material fact which it was material to disclose or the
facts have been fraudulently made by the policy holder,

 (iii) The policy holder must have known at the time of making the statement that it was false
or that it suppressed facts which it was material.

Burden of Proof

 Mithoolal Nayak v. Life Insurance Corporation of India, AIR 1962 SC 814, Life Insurance
Corporation of India v. Smt. G.M. Channabasamma, (1991) 1 SCC 357
  That burden of proof shifting to the insurer after the expiry of two years after the effective
date of the policy, if the insurer seeks to repudiate the claim on the basis of fraud or
suppression of facts which were material be disclosed.

12th March 2021: Lecture 13

Mithoolal Nayak v. LIC, AIR 1962 SC 814

 In 1942, one M sent a proposal for the insurance of his life. He was examined by Dr. D who
submitted two reports, one with the proposal form and other one as confidential.

 The confidential report showed that M was anaemic, had a dilated heart and his right lung
showed indications of an old attack of pneumonia or pleurisy and that he was a total physical
wreck.

 Nothing came out of this proposal and it was lapsed.

 In 1943, M consulted and was treated by one Dr. L for anaemia oedema of the feet,
diarrhoea and panting on exertion.

 In 1944, M made a second proposal for insurance of his life. Against the question in the
proposal form whether he had consulted any medical man for any ailment within the last five
years, he gave the answer, "No'.

 He also did not disclose any of his ailments. After medical examination by one Dr. K the
proposal was accepted and a policy for Rs. 25,000/- was issued commencing from January
10, 1945.

 The policy lapsed for non-payment of premium but was revived in July, 1946.

 In November, 1946 (It should be 1947), M died. His assignee, the appellant, made a demand
for Rs. 26,000/-but the Company on October 10, 1947, repudiated it on the ground that the
policy had been obtained by deliberate mis-statement and fraudulent suppression of
material facts.

 Held, that the policy-holder was guilty of fraudulent suppression of material facts relating to
his health and the Company was entitled to avoid the contract.

 Section 45 Insurance Act applied to the case as two years had lapsed since the policy was
effected; in view of the language of s.45 the two years could not be counted from the date of
the revival of the policy. The second part of s. 45 entitled the company to repudiate the
contract even after the expiry of two years if three conditions were fulfilled viz.

(a) the statement was on a material matter or there was suppression of facts which it was material to
disclose;

(b) the suppression was fraudulently made by the policy-holder, and

(c) the policy-holder must have known at the time of the making of the statement that it was false or
that it suppressed facts which it was material to disclose.

 When M was treated in 1943 by Dr. L he was suffering from serious ailments.

 He must have known that it was material to disclose, but made a false statement that he
had not been treated by any doctor for any serious ailment. There was deliberate
suppression fraudulently made by M.

 Even though the Company had got M examined by four doctors before issuing the policy, it
was not estoppled from questioning the policy. It had no means of knowing that M had
been treated by Dr. L for serious ailments.

 Held, further, that the appellant was not entitled even to a refund of the money paid as
premium as one of the terms of the policy was that all monies paid belonged to the company
if the policy was vitiated by fraudulent suppression of material facts.

LIC v. Smt. G.M. Channabasamma

 It is well settled that a contract of insurance is contract uberrima fides and there must be
complete good faith on the part of the assured.

 The assured is thus under a solemn obligation to make full disclosure of material facts which
may be relevant for the insurer to take into account while deciding whether the proposal
should be accepted or not.

 While making a disclosure of the relevant facts, the duty of the insured to state them
correctly cannot be diluted.

 Section 45 of the Act has made special provisions for a life insurance policy if it is called in
question by the insurer after the expiry of two years from the date on which it was effected.

LIC v. Smt. Asha Goel & Anr

 Late Naval Kishore Goel, husband of Smt. Asha Goel – respondent No.1, was an employee of
M/s Digvijay Woollen Mills Limited at Jamnagar as a Labour Officer.

 He submitted a proposal for a life insurance policy at Meerut in the State of U.P. on 29th
May, 1979, which was accepted and the policy for a sum of Rs.1,00,000 (Rs. One lakh) was
issued by the Corporation in his favour.

 The insured passed away on 12th December, 1980 at the age of 46 leaving behind his wife, a
daughter and a son.

 The cause of death was certified as acute Myocardial Infarction and Cardiac arrest.
  The respondent No.1 being nominee claimed the amount.

 The Divisional Manager by his letter dated 8th June, 1981 repudiated any liability under the
policy and refused to make any payment on the ground that the deceased had withheld
correct information regarding his health at the time of effecting the policy.

 The Divisional Manager drew the attention of the claimant that at the time of submitting the
proposal for insurance on May 29, 1979,

 The deceased had stated his usual state of health as good; That he had not consulted a
medical practitioner within the last five years for any ailment requiring treatment for more
than a week;

 and had answered the question if remained absent from place of your work on ground of
health during the last five years in the negative.

 Made wrong declarations

 Then the Division Bench scrutinized the materials produced by the parties before the Court,
perused the original documents, particularly the medical certificates produced by both the
parties the Court was of the opinion that the original records of the hospital will have to be
seen to come to a definite conclusion if there was any previous diagnosis of Myocardial
infarction of the insured.

 Appeal to Supreme court and Hon’ble SC upheld

Gowramma v. LIC

 The defense taken was that, the deceased did not remit the quarterly premium on time.

 Intermittently, there were certain lapses but the installments were paid later on with late
fee.

 As the deceased failed to pay one of the quarterly installments, the policy had lapsed which
was got renewed only five months prior to his death.

 It was further stated that insured had given a false declaration regarding the condition of his
health at the time of revival of the Policy.

 District Forum, vide its Order dated 31.12.2002, allowed the complaint and directed the LIC
to pay the insured amount of Rs.1,00,000/- along with interest @ of 12% p.a. from the date
of filing of the complaint.

 LIC filed an Appeal before the State Consumer Disputes Redressal Forum

 The State Commission, by the impugned Order, has dismissed the Appeal.

 The State commission observed that:-

  It is not disputed before us that the Policy was not repudiated on the ground that at the time
when initial Policy was taken, there was any misrepresentation or initial concealment of facts
by the deceased.

 In the present case, two years had elapsed after the issuance of the Policy and the burden to
prove that the deceased had concealed the facts was on the Insurance Company in terms of
Section 45 of the Life Insurance Act, 1938.

 LIC argued that relying upon a Judgment passed by a 4-Member Bench of this Commission in
L.I.C. of India and Another v. Parveeen Dhingra reported in II (2003) CPJ 70 (NC), contended
that the revival of the Policy constituted new contract between the parties and two years
have to be counted from the date of revival of the Policy.

 But this was not accepted in view of the law laid down by the Hon’ble Supreme Court of
India in Mithoolal Nayak v. Life Insurance Corporation of India, in which it was held that for
purposes of Section 45 of the Life Insurance Act, 1938, the period of two years has to be
counted from the date on which the Policy was originally effected and not from the date of
revival of the Policy.

 In the case before us the policy was issued on March 18, 1945 and it was to come into effect
from January 15, 1945. The amount insured was payable after January 15, 1968 or at the
death of the insured, if earlier.

 The respondent company repudiated the claim by its letter dated October 10, 1947.
Obviously, therefore, two years had expired from the date on which the policy was effected.
We are clearly of the opinion that S.45 of the Insurance Act applies in the present case in
view of the clear terms in which the section is worded

LIC v. S. Rajalalkshmi (2006) 4 CPJ 170

 The deceased had a life policy and died within 6 months of the commencement of the policy

 Allegedly due to heart attack.

 The appellants repudiated the contract on the ground that deceased suppressed the
material facts with regard to his health condition at the time of submitting the proposal.

 It was alleged by the LIC that the on investigation it was found that the deceased was
alcoholic, suffered from peptic ulcer prior to submitting the proposal

 As per the leave record with the employer, he had taken leave for 48 days for treatment of
peptic ulcer. This vital information was suppressed.

15th March 2021: Lecture 14

Amendment to S. 45
 The most significant of all the amendments is in respect of Section 45 of the Insurance Act,
1938. This section deals with the right of the insurance companies to repudiate a death claim
on the ground of misstatement of facts or of deliberate suppression of certain facts leading
to the acceptance of a proposal for life insurance by an insurer on terms as per the disclosed
facts regarding age, health, habit, family history, occupation and income, etc.

 The Insurance Act, 1938, provided that a policy cannot be called in question after expiry of
two years from the date on which it was effected. The Act, however, armed the insurers with
the right to challenge the bonafides of a proposal even after two years of commencement of
risk if the insurer could prove that the policy was taken on the basis of misrepresentation of
facts or suppression of such facts as were material to the basis of decision making by the
insurer for issuing a policy in the terms and conditions and the premium rate as incorporated
on the body of the policy bond.

 Fraudulent intentions were to be proved by the insurer with evidence and decision
communicated to the claimant. Every year, life insurers have been repudiating good number
of death or rider benefit claims under this provision of Act. However, there was nothing anti-
customer here. The spirit of this provision in the Act has been to protect the interest of
genuine customers against damages or bleeding of the insurance companies by
unscrupulous and fraudulent customers or intermediaries. But this provision has been
misunderstood as well as misused by the consumers, courts as well as the insurers.

 The 112th Law Commission suggested changes in S 45. The insurers were using S. 45 to
repudiate contracts after 4-5 years citing non-disclosure issues. Insurance companies did noy
even pay back the premium.

 However, the actual draft in 2008 and the draft of the 2015 amendment act did not have S 45
in favor of the insured but the insurance companies. The “date of policy” is the real catch.
Revival means playing of a fine to revive a policy. After the 2015 amendment, the insured
became safer.

 Mithoo Lal Nayak Case- SC held while interpreting the old provision, 2 years will be counted
from the date of issuance of policy only. The actual amendment nullified this SC judgment.

 Non-payment of premiums is quite common especially when cash or cheque is used as a

mode of payment. Basically, for the 3 years if all payments are made properly then the
insured is safe.

 The provisions under the new S 45 are not watertight and companies use it for their
advantage. Litigating is usually not an option for most people.

 When repudiating, the Insurance company must inform the insured in clear terms so that
he/she can challenge the decision. Mere silence doesn’t amount to repudiation of insurance
contract. The insured needs to prove that there is no fraud if they challenge the decision of
the insurance company.

 The insurance company must prove the following if they want to repudiate within 3 years
(Read section, this is just summary):
  Statements made/non-disclosure were actually material to the decision-making
process regarding issuance of policy.

 Disclosure was fraudulent in nature.

 The insurance buyer must be fully aware of the facts.

112th LCI Recommendation

 (1) No policy of life insurance shall be called in question after the expiry of three years from
the date on which the policy is effected or where the policy is revived after it has lapsed for
any reason, from the date on which it is so revived.

 (2) A policy of life insurance may be called in question at any time within three years from
the date on which the policy is effected or, as the case may be, the date on which it is
revived, on the ground that any statement being a statement material to the expectancy of
the life of the insured was incorrectly made in the proposal or other document on the basis
of which the policy was issued or revived.

The Insurance (Amendment) Act, 2015 (Read Section)

S. 45. (1) No policy of life insurance shall be called in question on any ground whatsoever after
the expiry of three years from the date of the policy, i.e.,

 from the date of issuance of the policy

 or the date of commencement of risk

 or the date of revival of the policy

 or the date of the rider to the policy, whichever is later.

(2) A policy of life insurance may be called in question at any time within three years

 from the date of issuance of the policy

 or the date of commencement of risk

 or the date of revival of the policy

 or the date of the rider to the policy,

 whichever is later, on the ground of fraud:

Provided that the insurer shall have to communicate in writing to the insured or the legal
representatives or nominees or assignees of the insured the grounds and materials on which such
decision is based.

Explanation I. —For the purposes of this sub-section, the expression “fraud” means any of the
following acts committed by the insured or by his agent, with intent to deceive the insurer or to
induce the insurer to issue a life insurance policy: —

a. the suggestion, as a fact of that which is not true and which the insured does not believe to
be true;
 b. the active concealment of a fact by the insured having knowledge or belief of thefact;

c. any other act fitted to deceive; and

d. any such act or omission as the law specially declares to be fraudulent. Explanation II. —
Mere silence as to facts likely to affect the assessment of the risk by the insurer is not fraud,
unless the circumstances of the case are such that regard being had to them, it is the duty of
the insured or his agent keeping silence, to speak, or unless his silence is, in itself, equivalent
to speak.

(3) Notwithstanding anything contained in sub-section (2), no insurer shall repudiate a life insurance
policy on the ground of fraud if the insured can prove that the misstatement of or suppression of a
material fact was true to the best of his knowledge and belief or that there was no deliberate
intention to suppress the fact or that such misstatement of or suppression of a material fact are
within the knowledge of the insurer:

Provided that in case of fraud, the onus of disproving lies upon the beneficiaries, in case the
policyholder is not alive.

Explanation. —A person who solicits and negotiates a contract of insurance shall be deemed for the
purpose of the formation of the contract, to be the agent of the insurer.

(4) A policy of life insurance may be called in question at any time within three years from the date of
issuance of the policy or the date of commencement of risk or the date of revival of the policy or the
date of the rider to the policy, whichever is later, on the ground that any statement of or suppression
of a fact material to the expectancy of the life of the insured was incorrectly made in the proposal or
other document on the basis of which the policy was issued or revived or rider issued:

Provided that the insurer shall have to communicate in writing to the insured or the legal
representatives or nominees or assignees of the insured the grounds and materials on which such
decision to repudiate the policy of life insurance is based:

Provided further that in case of repudiation of the policy on the ground of misstatement or
suppression of a material fact, and not on the ground of fraud, the premiums collected on the policy
till the date of repudiation shall be paid to the insured or the legal representatives or nominees or
assignees of the insured within a period of ninety days from the date of such repudiation.

Explanation. —For the purposes of this sub-section, the misstatement of or suppression of fact shall
not be considered material unless it has a direct bearing on the risk undertaken by the insurer, the
onus is on the insurer to show that had the insurer been aware of the said fact no life insurance
policy would have been issued to the insured.

(5) Nothing in this section shall prevent the insurer from calling for proof of age at any time if he is
entitled to do so, and no policy shall be deemed to be called in question merely because the terms of
the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in
the proposal.
17th March 2021: Lecture 15

Policy as Property: Nomination, Assignment or Transfer of Life Insurance policies

 The insured, who is the party to the contract is dead, the claimant will be required to furnish
satisfactory proof such as a succession certificate, letters of administration etc. from a
competent court of law to claim sum assured

 This always means delay and expense and defeats the benefits of life insurance to the
dependents of the deceased.

 In order to avoid this, life insurer agreed with the insured to name a person to receive the
benefits payable on the death of the insured.

 Section 38 of 1938 Act- Assignment

 Section 39 of 1938 Act- Nomination

Nomination

 What is the purpose of nomination? Can my friend be nominated as per my wish? Issue
arises mostly when the insured dies before maturity of the policy.

 Policy of life insurance- It is a property in the form of a security, like a stock. Life insurance
policy can be set as collateral against a loan. Insurance policy has two uses:

 Security measure for family.

 Used as Security (Property)

 Nomination can be changed many times but it is usually done when the insurance policy is
bought and there is space for the same is there in the proposal form. There is an option
available to allocate different shares of the policy amount.

 (Both the sections were amended substantially in 2015):-

Section Before 2015 Amendment (He literally just read through the sections and explained prima
facie stuff):

 Section 39 Nomination by policy-holder. —(1) The holder of a policy of life insurance on his
own life may, when effecting the policy or at any time before the policy matures for
payment, nominate the person or persons to whom the money secured by the policy shall be
paid in the event of his death:

Provided that, where any nominee is a minor, it shall be lawful for the policy-holder to appoint in the
prescribed manner any person to receive the money secured by the policy in the event of his death
during the minority of the nominee.
Note: Nomination may be done as many times as the insured wants before the maturity. Minor can
be a nominee. Minor cannot receive during subsistence of minority, a guardian will hold that money
till majority is reached. Practically, most proposal forms have an option to appoint a guardian if a
minor is being nominated.

 (2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of
the policy itself, be made by an endorsement on the policy communicated to the insurer and
registered by him in the records relating to the policy and any such nomination may at any
time before the policy matures for payment be cancelled or changed by an endorsement or a
further endorsement or a will, as the case may be, but unless notice in writing of any such
cancellation or change has been delivered to the insurer, the insurer shall not be liable for
any payment under the policy made bona fide by him to a nominee mentioned in the text of
the policy or registered in records of the insurer.

 (3) The insurer shall furnish to the policy-holder a written acknowledgement of having
registered a nomination or a cancellation or change thereof, and may charge a fee not
exceeding one rupee for registering such cancellation or change.

 (4) A transfer or assignment of a policy made in accordance with section 38 shall

automatically cancel a nomination:

Provided that the assignment, of a policy to the insurer who bears the risk on the policy at the time
of the assignment, in consideration of a loan granted by that insurer on the security of the policy
within its surrender value, or its reassignment on repayment of the loan shall not cancel a
nomination, but shall affect the rights of the nominee only to the extent of the insurer's interest in
the policy.

 (5) Where the policy matures for payment during the lifetime of the person whose life is
insured or where the nominee or, if there are more nominees than one, all the nominees die
before the policy matures for payment, the amount secured by the policy shall be payable to
the policy-holder or his heirs or legal representatives or the holder of a succession certificate,
as the case may be. (Important)

 (6) Where the nominee or, if there are more nominees than one, a nominee or nominees
survive the person whose life is insured], the amount secured by the policy shall be payable
to such survivor or survivors.

 (7) The provisions of this section shall not apply to any policy of life insurance to which
section 6 of the Married Women's Property Act, 1874 (3 of 1874) applies or has at any time
applied: Provided that where a nomination made whether before or after the
commencement of the Insurance (Amendment) Act, 1946, in favour of the wife of the person
who has insured his life or of his wife and children or any of them is expressed, whether or
not on the face of the policy, as being made under this section, the said section 6 shall be
deemed not to apply or not to have applied to the policy.

Section 6 of the MWPA (Still in force in India: Both Children and Wife Included)
Section 6 of the Married Women's Property Act (MWPA), 1874, provides that a policy of insurance
effected by any married man on his own life and expressed on the face of it to be for the benefit of
his wife, or of his wife and children, or any of them, shall ensure and be deemed to be a trust for the
benefit of his wife, or of his wife and children, or any of them according to the interests so expressed,
and shall not, so long as any object of the trust remains, be subject to the control of the husband, or
to his creditors, or form part of his estate.

As per Section 39(7)- a wife of the deceased (insured) will get the full property/ amount.

 This provision is not really popular and general nomination is preferred over married woman
nomination under Section 6 of MWPA (This act is still in force and came before the insurance
Act). If wife is nominated under S. 6, general nomination is not applicable.

 If wife is nominated under S. 6 and it is not general nomination, the wife will always get the
money and not even the assignee.

 If a wife is nominated under S. 6, even if the couple gets separated and gets divorce, the wife
will still get sum assured. Hence, everyone prefers general nomination.

 Nominee ultimately cannot enjoy the money of policy if he/ she is not an heir.

 LCI-82nd report on- ‘effect of nomination under Section 39 Insurance Act, 1938’ (1980).

 If the nominee is not a legal heir, then issue may arise if there are other legal heirs.

 Purpose hence becomes- -Covering situations where there is no legal heirs-In Sarbati Devu-
SC decided the status of nominee.

 Only the policy holder can nominate, and anyone can be a nominee.

Who can be nominated?

 This section does not prescribe any qualification for being a nominee.

 Hence any person or persons natural or legal related to the insured or a stranger can be
appointed as a nominee.

 If the nominee is a minor :The proviso to sub-section (1) empowers the insured to appoint
another person to receive the money secured in the event of insured dying during the
minority of the nominee as a minor cannot give valid discharge and release the insurer

 Only the holder of a policy of life insurance on his own life may make a nomination. Thus the
assignee of a policy cannot nominate.

 In a joint life policy the inured persons cannot nominate because the amount there under is
payable to the survivor on the death of the first of the assured lives and there is no need for
a nomination.
  A nomination may however be made to receive the sum assured in the event of the
simultaneous death of the joint lives.

Shreedevi Venugopal Nair v. Div. Man. LIC, (2001) 104 [Link].223: Legal Status of Nominee

 The appellant was legally wedded wife of the deceased insured (son of respondent No.2)

 Before the marriage i.e., on Dec-15, 1975 the deceased insured had obtained a policy on his
life in which he nominated his father (Respondent.2) as his nominee.

 The insured died on 1-2-1983

 The appellant informed the LIC that the payment of money under the policy be not made to
any one else as she is the only legal heir.

 The LIC was informed the appellant that U/s.39 of the Insurance Act,1938, it was bound to
make payment to the person who had been nominated unless there was any order of a
competent court restraining the LIC not to make the payment.

 On receipt of the letter the appellant approached the HC U/A.226 praying that the LIC be
directed to make payment and restrained to make payment to the father of the deceased-
insured.

 The single Judge rejected the petition on the ground that this court does not take upon itself
the duty to deal with all ‘civil disputes’ or a civil rights.

 This order was challenged before DB

 It was observed that:-

 There is no doubt as regards the legal position that in view of the policy of insurance and
legal effect of sec-39 of the insurance Act. Only the person named in the policy as a nominee
has a right to receive and collect the money.

 He merely collects it on behalf of the original claimants. If there is a will, the legatees under
the will would set it. If the policy holder died intestate, his legal heirs would get it.

 But it is for the civil court to decide as to who are legal heirs and not for this court to exercise
jurisdiction u/s.226 of the constitution.

Valid discharge of insurance money after the death of insured:

In this case, the court stated that nominee collects money on behalf of the legal heirs. Nominee has
no right over this money unless he/she is a legal heir. The heirs have complete right over this policy
money. It shall not be the headache of the insurer (Co.) to contract & wait for the heirs of the
insured. They will simply transfer to nominee. The legal heirs are known as beneficiary nominees.

Law Commission of India’s views

  Law Commission in its 82nd Report on Effect of nomination under Sec.39, Insurance Act,
1938 (1980):-

 “Where the holder of a policy of life insurance on his own life nominates his parents, or his
spouse, or his children, or any of them, the nominee or nominees shall be beneficially
entitled to the amount payable by the insurer to him or them under sub-section (6) unless it
is proved that the holder of the policy, having regard to the nature of his title to the policy,
could not have conferred any such beneficial title on the nominee.”

 The other recommendation was that where the nominee survives the policyholder but dies
before the amount is paid, such amount “shall be payable to the heirs or legal
representatives of the nominee or nominees or the holder of a succession certificate, as the
case may be, and they shall be beneficially entitled to such amount”.

 But govt. did not acted upon the above aforesaid recommendations

Sarbati Devi [Link] Devi, AIR 1984 SC 346

 It was held that the provisions of Sec.39 could not alter the position of succession under the
law. It was clarified that a mere nomination made under s.39 does not have the effect of
conferring on the nominee any beneficial interest in the amount payable under the policy on
the death of the assured.

 The court further observed that the nominee acquires no interest in the policy during the life
time of the policy holder, therefore, after the death of the policy holder, the amount under
the policy becomes payable to his legal heirs, the nominee is only the authorized person to
collect the payment so that insurer gets a valid discharge of its liability under the policy.

137th LCI recommendations

 The commission suggested that a proviso be added to make the nomination effectual for the
nominee to receive the policy money in case the policyholder dies after the maturity of the
policy but before it can be encashed.

(a) A clear distinction be made in the provision itself between a beneficial nominee and a collector
nominee.

(b) It is not possible to agree to the suggestion made by some of the insurers that in all cases the
payment to the nominee would tantamount to a full discharge of the insurer’s liability under the
policy and that unless the contrary is expressed, the nominee would be the beneficial nominee.

(c) An option be given to the policyholder to clearly express whether the nominee will collect the
money on behalf of the legal representatives (in other words such nominee will be the collector
nominee) or whether the nominee will be the absolute owner of the monies in which case such
nominee will be the beneficial nominee.

(d) A proviso be added to make the nomination effectual for the nominee to receive the policy
money in case the policyholder dies after the maturity of the policy but before it can be encashed.

Consultation paper and 190th report.

 To give effect to the above recommendations, the Law Commission is of the view that s.39
be recast as follows:- (He did not read through properly)

 (1) The holder of a policy of life insurance on his own life may, when effecting the policy or at
any time before the policy matures for payment, nominate the person or persons to whom
the money secured by the policy shall be paid in the event of his death:

Provided that, where any nominee is a minor, it shall be lawful for the policyholder to appoint in the
prescribed manner any person to receive the money secured by the policy in the event of his death
during the minority of the nominee.

 (2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of
the policy itself, be made by an endorsement on the policy communicated to the insurer and
registered by him in the records relating to the policy and any such nomination may at any
time before the policy matures for payment be cancelled or changed by an endorsement or a
further endorsement or a will, as the case may be, but unless notice in writing of any such
cancellation or change has been delivered to the insurer, the insurer shall not be liable for
any payment under the policy made bona fide by him to a nominee mentioned in the text of
the policy or registered in records of the insurer.

 (3) The insurer shall furnish to the policy-holder a written acknowledgment of having
registered a nomination or a cancellation or change thereof, and may charge such fee as may
be specified by regulations for registering such cancellation or change.

 (4) A transfer or assignment of a policy made in accordance with s.38 shall automatically
cancel a nomination:

Provided that the assignment of a policy to the insurer who bears the risk on the policy at the time of
the assignment, in consideration of a loan granted by that insurer on the security of the policy within
its surrender value, or its re-assignment on repayment of the loan shall not cancel nomination, but
shall affect the rights of the nominee only to the extent of the insurer's interest in the policy.

Provided that the transfer or assignment of a policy, whether wholly or in part, in consideration of a
loan advanced by the transferee or assignee to the policyholder, will not cancel the nomination but
shall affect the rights of the nominee only to the extent of the interest of the transferee or assignee
as the case may be in the policy.

Provided that the nomination, which has been automatically cancelled consequent upon the transfer
or assignment, the same nomination shall stand automatically revived when the policy is reassigned
by the assignee or retransferred by the transferee in favour of the policy holder on repayment of loan
other than on a security of policy to the insurer.
  (5) Where the policy matures for payment during the lifetime of the person whose life is
insured or where the nominee or, if there are more nominees than one, all the nominees die
before the policy matures for payment, the amount secured by the policy shall be payable to
the policy-holder or his heirs or legal representatives or the holder of a succession certificate,
as the case may be.

 (6) Where the nominee or if there are more nominees than one, a nominee or nominees
survive the person whose life is insured, the amount secured by the policy shall be payable
to such survivor or survivors.

 (5) Where the policy matures for payment during the lifetime of the person whose life is
insured or where the nominee or, if there are more nominees than one, all the nominees die
before the policy matures for payment, the amount secured by the policy shall be payable to
the policy-holder or his heirs or legal representatives or the holder of a succession certificate,
as the case may be.

 (6) Where the nominee or if there are more nominees than one, a nominee or nominees
survive the person whose life is insured, the amount secured by the policy shall be payable
to such survivor or survivors.

 (7) Subject to the other provisions of this section, where the holder of a policy of insurance on
his own life nominates his parents, or his spouse, or his children, or his spouse and children,
or any of them, the nominee or nominees shall be beneficially entitled to the amount payable
by the insurer to him or them under sub-section (6) unless it is proved that the holder of the
policy, having regard to the nature of his title to the policy, could not have conferred any such
beneficial title on the nominee.

 (8) Subject as aforesaid, where the nominee, or if there are more nominees than one, a
nominee or nominees, to whom sub-section (7) applies, die after the person whose life is
insured but before the amount secured by the policy is paid, the amount secured by the
policy, or so much of the amount secured by the policy as represents the share of the
nominee or nominees so dying (as the case may be), shall be payable to the heirs or legal
representatives of the nominee or nominees or the holder of a succession certificate, as the
case may be, and they shall be beneficially entitled to such amount.

 (9) Nothing in sub-sections (7) and (8) shall operate to destroy or impede the right of any
creditor to be paid out of the proceeds of any policy of life insurance.

 (10) The provisions of sub-sections (7), (8) and (9) shall apply to all policies of life insurance
maturing for payment after the commencement of this Act.

 (11) Every policyholder shall have an option to indicate in clear terms whether the person or
persons being nominated by the policyholder is/ are a beneficiary nominee(s) or a collector
nominee(s).

Provided where the policyholder fails to indicate whether the person being nominated is a
beneficiary nominee or a collector nominee it will be deemed that the person nominated is a
beneficiary nominee.

Explanation: For the purposes of this sub-section the expression ‘beneficiary nominee’ means a
nominee who is entitled to receive the entire proceeds payable under a policy of insurance subject to
other provisions of this Act and the expression ‘collector nominee’ means a nominee other than a
beneficiary nominee.

 (12) The collector nominee shall make payment the benefits arising out of policy to the
beneficiary nominee or his legal heirs or representative in accordance with the regulations
made by the Authority.

 (13) Where a policyholder dies after the maturity of the policy but the proceeds and benefit
of his policy has not been made to him because of his death, in such a case, his nominee
shall be entitled to the proceeds and benefit of his policy.

 (14) The provisions of this section shall not apply to any policy of life insurance to which s.6
of the Married Women’s Property Act, 1874, applies or has at any time applied:

Provided that where a nomination made whether before or after the commencement of this Act, in
favour of the wife of the person who has insured his life or of his wife and children or any of them is
expressed, whether or not on the face of the policy, as being made under this section, the said s.6
shall be deemed not to apply or not to have applied to the policy.

The Insurance (Amendment) Act, 2015 (Nomination: Please Read)

 39. (1) The holder of a policy of life insurance on his own life may, when effecting the policy
or at any time before the policy matures for payment, nominate the person or persons to
whom the money secured by the policy shall be paid in the event of his death:

Provided that, where any nominee is a minor, it shall be lawful for the policyholder to appoint any
person in the manner laid down by the insurer, to receive the money secured by the policy in the
event of his death during the minority of the nominee.

 (2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of
the policy itself, be made by an endorsement on the policy communicated to the insurer and
registered by him in the records relating to the policy and any such nomination may at any
time before the policy matures for payment be cancelled or changed by an endorsement or a
further endorsement or a will, as the case may be, but unless notice in writing of any such
cancellation or change has been delivered to the insurer, the insurer shall not be liable for
any payment under the policy made bona fide by him to a nominee mentioned in the text of
the policy or registered in records of the insurer.

 (3) The insurer shall furnish to the policyholder a written acknowledgement of having
registered a nomination or a cancellation or change thereof, and may charge such fee as may
be specified by regulations for registering such cancellation or change

 (4) A transfer or assignment of a policy made in accordance with section 38 shall

automatically cancel a nomination:

Provided that the assignment of a policy to the insurer who bears the risk on the policy at the time of
the assignment, in consideration of a loan granted by that insurer on the security of the policy within
its surrender value, or its reassignment on repayment of the loan shall not cancel a nomination, but
shall affect the rights of the nominee only to the extent of the insurer's interest in the policy:

Provided further that the transfer or assignment of a policy, whether wholly or in part, in
consideration of a loan advanced by the transferee or assignee to the policyholder, shall not cancel
the nomination but shall affect the rights of the nominee only to the extent of the interest of the
transferee or assignee, as the case may be, in the policy:

Provided also that the nomination, which has been automatically cancelled consequent upon the
transfer or assignment, the same nomination shall stand automatically revived when the policy is
reassigned by the assignee or retransferred by the transferee in favour of the policyholder on
repayment of loan other than on a security of policy to the insurer.

 Three Provisos were added in 2015 amendment.

 Surrender value of the policy before maturity. It is the amount the policyholder will get from
the life insurance company if he decides to exit the policy before maturity. Description: A
mid-term surrender would result in the policyholder getting a sum of what has been
allocated towards savings and the earnings thereon. Based on this, one can do the following:

 Policy can be surrendered subject to deductions.

 A loan can be taken against the value of the policy. (Proviso 2). For example, LIC can
deduct the loan amount when the policy matures. Additionally, it charges interest on
premium to grant the loan. When a loan is granted, LIC has been nominated to the
extent of loan value and only till that extent the right of the insured are affected.

 (5) Where the policy matures for payment during the lifetime of the person whose life is
insured or where the nominee or, if there are more nominees than one, all the nominees die
before the policy matures for payment, the amount secured by the policy shall be payable to
the policyholder or his heirs or legal representatives or the holder of a succession certificate,
as the case may be.

 (6) Where the nominee or if there are more nominees than one, a nominee or nominees
survive the person whose life is insured, the amount secured by the policy shall be payable
to such survivor or survivors.

 (7) Subject to the other provisions of this section, where the holder of a policy of insurance
on his own life nominates his parents, or his spouse, or his children, or his spouse and
children, or any of them, the nominee or nominees shall be beneficially entitled to the
amount payable by the insurer to him or them under sub-section (6) unless it is proved that
the holder of the policy, having regard to the nature of his title to the policy, could not have
conferred any such beneficial title on the nominee.

 (8) Subject as aforesaid, where the nominee, or if there are more nominees than one, a
nominee or nominees, to whom sub-section (7) applies, die after the person whose life is
insured but before the amount secured by the policy is paid, the amount secured by the
policy, or so much of the amount secured by the policy as represents the share of the
nominee or nominees so dying (as the case may be), shall be payable to the heirs or legal
representatives of the nominee or nominees or the holder of a succession certificate, as the
case may be, and they shall be beneficially entitled to such amount.

 (9) Nothing in sub-sections (7) and (8) shall operate to destroy or impede the right of any
creditor to be paid out of the proceeds of any policy of life insurance.

First preference is given to the assignee.

  (10) The provisions of sub-sections (7) and (8) shall apply to all policies of life insurance
maturing for payment after the commencement of the Insurance Laws (Amendment) Act,
2015.

This provision clarifies the effect of the amendment.

 (11) Where a policyholder dies after the maturity of the policy but the proceeds and benefit
of his policy has not been made to him because of his death, in such a case, his nominee
shall be entitled to the proceeds and benefit of his policy.

Nominee’s entitlement has been reaffirmed. Other than parents, spouse and children, anyone’s
name can be mentioned as nominee and he/she shall be entitled to the proceeds and benefit of his
policy where a policyholder dies after the maturity of the policy but the proceeds and benefit of his
policy has not been made to him because of his death. For example, the insured party dies just
before the transfer of money of his/her matured money. There are two possibilities, nominee can be
(i) X (stranger) or (ii) parents, spouse and children (beneficial nominees). The specialty of this section
is that even if the nominee (x) is a not a beneficial nominee, he will enjoy the policy money.

Why was this right given?

The logic is that the insured party never made an effort to make parents, spouse and children as
nominees during years he/she payed the premium. So, the legislative intent is to respect the wishes
of the insured.

 (12) The provisions of this section shall not apply to any policy of life insurance to which
section 6 of the Married Women's Property Act, 1874, applies or has at any time applied:

Provided that where a nomination made whether before or after the commencement of the
Insurance Laws (Amendment) Act, 2015, in favour of the wife of the person who has insured his life
or of his wife and children or any of them is expressed, whether or not on the face of the policy, as
being made under this section, the said section 6 shall be deemed not to apply or not to have
applied to the policy

Beneficiary Nominee and collector nominee as a concept were introduced in 2015 amendment. After
2015 amendment, children, spouse and parents were considered to be beneficiary nominees. Hence,
if any of the three are mentioned as nominees in the proposal form, they have absolute right to
enjoy the policy money. However, if any person other than three is nominated, the nominee is just
the collector and must give the money to the legal heirs.

19th March 2021: Lecture 16

Assignment

 As a policy of life insurance, though it is movable property, it is an actionable claim, the

transfer of which is regulated by sec.38 of the Insurance Act.

 The mere deposit of a policy will not create any charge in favour of the person with whom it
is deposited. Where, therefore a policy is offered as a security for loan, a written instrument
in the nature of an assignment will be necessary.
  Prior to 1939: The Indian Law of Assignment of the life policies contained in T P Act u/s. 130,
132, 135.

 The transfer of actionable claim could be effected only by an instrument in writing signed by
the transferor or by his duly authorized agent and there upon all rights and remedies of
transferor rest in the transferee whether the notice of transfer had been given or not.

38. Assignment and transfer of insurance policies. (Old Provision)

 (1) A transfer or assignment of a policy of life insurance, whether with or without

consideration, may be made only by an endorsement upon the policy itself or by a separate
instrument, signed in either case by the transferor or by the assignor or his duly authorized
agent and attested by at least one witness, specifically setting forth the fact of transfer or
assignment.

It talks about mode and transfer of assignment. It is a simple mode of transfer.

 (2) The transfer or assignment shall be complete and effectual upon the execution of such
endorsement or instrument duly attested but except where the transfer or assignment is in
favour of the insurer shall not be operative as against an insurer and shall not confer upon
the transferee or assignee, or his legal representative, any right to sue for the amount of
such policy or the moneys secured thereby until a notice in writing of the transfer or
assignment and either the said endorsement or instrument itself or a copy thereof certified
to be correct by both transferor and transferee or their duly authorized agents have been
delivered to the insurer Provided that where the insurer maintains one or more places of
business in India, such notice shall be delivered only at the place in India mentioned in the
policy for the purpose or at his principal place of business in India.

If policy is assigned back to the insurer, there are not many facilities. Otherwise, clause 2 must be
followed.

 (3) The date on which the notice referred to in sub- section (2) is delivered to the insurer
shall regulate the priority of all claims under a transfer or assignment as between persons
interested in the policy;

and where there is more than one instrument of transfer or assignment the priority of the claims
under such instruments shall be governed by the order in which the notices referred to in sub-
section (2) are delivered.

Assignment can be made as many times as possible as long it is legal. Assignee can also further assign
policy in favor of a third party. How the notice was delivered to the insurance office shall be the
reference point to claim the insurance money.

 (4) Upon the receipt of the notice referred to in sub- section (2), the insurer shall record the
fact of such transfer or assignment together with the date thereof and the name of the
transferee or the assignee and shall, on the request of the person by whom the notice was
given, or of the transferee or assignee, on payment of a fee not exceeding one rupee, grant a
written acknowledgement of the receipt of such notice; and any such acknowledgement
shall be conclusive evidence against the insurer that he has duly received the notice to which
such acknowledgment relates
  (5) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from
the date of the receipt of the notice referred to in sub- section (2), recognize the transferee
or assignee named in the notice as the only person entitled to benefit under the policy, and
such person shall be subject to all liabilities and equities to which the transferor or assignor
was subject at the date of the transfer or assignment and may institute any proceedings in
relation to the policy without obtaining the consent of the transferor or assignor or making
him a party to such proceedings.

Once the assignment is complete as per S. 38(5), assignee has full right over the policy. He can even
sue the insurance company for fulfilling the payment of insurance.

 (6) Any rights and remedies of an assignee or transferee of a policy of life insurance under an
assignment or transfer effected prior to the commencement of this Act shall not be affected
by the provisions of this section.

 (7) Notwithstanding any law or custom having the force of law to the contrary, an assignment
in favour of a person made with the condition that it shall be inoperative or that the interest
shall pass to some other person on the happening of a specified event during the lifetime of
the person whose life is insured, and an assignment in favour of the survivor or survivors of a
number of persons, shall be valid.

Conditional assignment: Assignment comes in effect on the occurrence of a specific event. This leads
to litigation as after occurrence of the event, the original nominees would claim the insurance
money.

 Notice of Assignment: The transfer/ assignment can be made in favour of the insurer also
but shall not confer upon the transferee or assignee or his legal representative any right to
sue for the amount secured under such policy until a notice in writing of the transfer has
been delivered both by the transferor and transferee to the insurer.

 More than one Assignment: There can be more than one transfer/ assignment as per sub-
section (3) of this section. In such cases the priority of claims shall be governed in the order
in which notices have been delivered.

 Clause (5) Absolute: transferring to the assignee all rights, title and interest which the
assignor has in the policy without any defeasance clause.

 Clause (7) Conditional Assignment: as contemplated under sub-section (7) which creates an
immediate vested interest in the assignee but which is liable to be divested on the
happening of events specified in the assignment.

Why was the amendment necessary?

A question was whether a conditional assignee is entitled to obtain a loan under, or surrender the
policy without the concurrence of the insured? [This question was unanswered in the old
provision.]
  If the said question is answered in the affirmative, the conditional assignment would stand
converted into an absolute assignment and defeat the object of the former.

 Illustration: A policyholder (A) obtains a loan from a financier (B) upon assignment of the
policy in favour of B.

 The assignment is on condition that upon repayment of the loan, B will reassign the policy to
A. Even before A can repay the loan to B, B borrows a loan from C by assigning the policy in
favour of C.

 This later assignment by B in favour of C renders the assignment by A in favour of B

unconditional and defeats the condition attached to that assignment.

 While any transfer is subject to the terms and conditions specified in the instrument of
transfer, the specific provisions in sub-section (5) of Sec.38 may mean either or both of the
following:-

 Firstly, under sub-section (7), the assignor may become entitled to the policy money, if the
assignment becomes inoperative (like when it does when the assignor repays the loan to the
assignee);

 Secondly, the insurer may not recognize the assignee as the only person entitled to benefit
under the policy, if the terms of assignment expressly or by implication do not confer on him
any particular right or benefit and treat the insured for such entitlement.

 For instance, if the insured reserves the right to receive the policy money on maturity, the
assignee cannot exercise the right to surrender.

 Thirdly, sub-section (7) recognises as valid assignment in favour of a person on condition that
“the interest shall pass to some other person on the happening of a specified event during
the life time of the person whose life is insured”.

 To illustrate, A assigns his life insurance policy in favour of B in consideration of B lending A a

certain sum of money.

 One condition stipulated in the assignment is that in the event of the death of A, the amount
payable under the policy would pass on to the wife and children of A. Such an assignment is
recognized by sub-section (7) as valid.

 Likewise an assignment by A in favour of his own survivors or any number of persons is also
valid.

Law Commission of India Recommendation

(a) Sub-section (7) of s.38 should be retained, with some modification for the purpose of greater
clarity.

(b) The contingencies under which an assignment or transfer would be treated as a conditional one
to be clearly spelt out. The provision be amended to indicate that except where the endorsement of
assignment or transfer expressly indicates that the assignment or transfer is conditional in terms of
Sec.38(7), every assignment or transfer will be deemed to be an absolute assignment or transfer and
the assignee or transferee as the case may be, will be deemed to be absolute assignee or transferee
respectively.

(c) A separate sub-section be inserted to indicate that in case of partial assignment or transfer of a
policy of insurance, the liability of the insurer shall be limited to the amount secured by the partial
assignment or transfer and such policy holder shall not be entitled to further assign or transfer the
residual amount payable under the same policy.

(d) The provision should be appropriately amended to extend its applicability to all personal lines of
non-life insurance business as well.

(e) The provision should be made with reference to conditional assignment as follows:-

Notwithstanding any law or custom having the force of law to the contrary, an assignment in favour
of a person made upon the condition that

(a) the proceeds under the policy will become payable to the policyholder or the nominee or
nominees in the event of either the assignee/ transferee predeceasing the insured; or

(b) the insured surviving the term of the policy;

shall be valid.

Provided that a conditional assignee shall not be entitled to obtain a loan on the policy or surrender
a policy.

[Link] v. LIC

 The husband of the petitioner died in an accident and the petitioner being nominee in the
insurance policy claimed the insured amount.

 It was contended by the insurance company that the policies were assigned in favour of the
bank by the policy holder.

 In view of Sec-38(4) of the Insurance Act, the LIC would recognize the transferee/assignee as
the only person entitled to the benefit under the policy

 Any by virtue of Sec-39(4) of the Act the nomination stands cancelled and ceased to be
nominee.

 Sec-38(5) was referred

20th March 2021: Lecture 17

LIC Of India v. Insure Policy Plus Services Pvt. Ltd.

  December 30, 2015

 The Insure Policy Plus Services Pvt. Ltd (IPPS) is in the business of accepting and dealing in
assignment of life insurance policies issued by the appellant.

 IPPS would obtain assignments of life insurance policies from the policyholders for a
determined consideration and in turn assign them further.

 LIC refused to register several of them on the basis of circular issued by it and IRDA to
prevent the large-scale assignment practice.

 On the grounds that the financial security and stability of the families of the policyholders,
and also the larger public interest.

 The respondents company challenged the circular before the Bombay High Court

 Interpretation of Sec-38, the Hon’ble HC ruled infavour of the respondent.

 The Hon’ble Supreme Court interpretation of Section 38 of the Act.

 The Insurance (Amendment) Act, 2015 passed.

 “It is thus neither a declaratory or clarificatory piece of legislation. The language of the
extant Section 38 cannot be interpreted to mean that this is what Section 38 had meant all
along. Furthermore, had the Legislature intended to amend Section 38 retrospectively, it
would have said so explicitly.

 Instead, it has incorporated sub-section (9), which protects rights and remedies of assignees
that arose prior to the commencement of the Amendment Act. It is thus clear that
Parliament intended to allow all previous assignments and transfers provided that they
complied with the requirements laid out in Section 38.”

 The Amendment Act is not in retrospective operation and hence Court dismissed the
appeal.

The Insurance (Amendment) Act, 2015 (New Provision)

 "38. (1) A transfer or assignment of a policy of insurance, wholly or in part, whether with or
without consideration, may be made only by an endorsement upon the policy itself or by a
separate instrument, signed in either case by the transferor or by the assignor or his duly
authorised agent and attested by at least one witness, specifically setting forth the fact of
transfer or assignment and the reasons thereof, the antecedents of the assignee and the
terms on which the assignment is made.

 (2) An insurer may, accept the transfer or assignment, or decline to act upon any
endorsement made under sub-section (1), where it has sufficient reason to believe that such
transfer or assignment is not bona fide or is not in the interest of the policyholder or in
public interest or is for the purpose of trading of insurance policy.

 (3) The insurer shall, before refusing to act upon the endorsement, record in writing the
reasons for such refusal and communicate the same to the policyholder not later than thirty
days from the date of the policyholder giving notice of such transfer or assignment.
  (4) Any person aggrieved by the decision of an insurer to decline to act upon such transfer or
assignment may within a period of thirty days from the date of receipt of the communication
from the insurer containing reasons for such refusal, prefer a claim to the Authority

 (5) Subject to the provisions in sub-section (2), the transfer or assignment shall be complete
and effectual upon the execution of such endorsement or instrument duly attested but
except, where the transfer or assignment is in favour of the insurer, shall not be operative as
against an insurer, and shall not confer upon the transferee or assignee, or his legal
representative, any right to sue for the amount of such policy or the moneys secured thereby
until a notice in writing of the transfer or assignment and either the said endorsement or
instrument itself or a copy thereof certified to be correct by both transferor and transferee
or their duly authorised agents have been delivered to the insurer:

Provided that where the insurer maintains one or more places of business in India, such notice shall
be delivered only at the place where the policy is being serviced

 (6) The date on which the notice referred to in sub-section (5) is delivered to the insurer shall
regulate the priority of all claims under a transfer or assignment as between persons
interested in the policy; and where there is more than one instrument of transfer or
assignment the priority of the claims under such instruments shall be governed by the order
in which the notices referred to in sub-section (5) are delivered:

Provided that if any dispute as to priority of payment arises as between assignees, the dispute shall
be referred to the Authority

 (7) Upon the receipt of the notice referred to in sub-section (5), the insurer shall record the
fact of such transfer or assignment together with the date thereof and the name of the
transferee or the assignee and shall, on the request of the person by whom the notice was
given, or of the transferee or assignee, on payment of such fee as may be specified by the
regulations, grant a written acknowledgement of the receipt of such notice; and any such
acknowledgement shall be conclusive evidence against the insurer that he has duly received
the notice to which such acknowledgement relates.

 (8) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from
the date of the receipt of the notice referred to in sub-section (5), recognise the transferee
or assignee named in the notice as the absolute transferee or assignee entitled to benefit
under the policy, and such person shall be subject to all liabilities and equities to which the
transferor or assignor was subject at the date of the transfer or assignment and may institute
any proceedings in relation to the policy, obtain a loan under the policy or surrender the
policy without obtaining the consent of the transferor or assignor or making him a party to
such proceedings.

Explanation.—Except where the endorsement referred to in sub-section (1) expressly indicates that
the assignment or transfer is conditional in terms of subsection (10) hereunder, every assignment or
transfer shall be deemed to be an absolute assignment or transfer and the assignee or transferee, as
the case may be, shall be deemed to be the absolute assignee or transferee respectively.

 (9) Any rights and remedies of an assignee or transferee of a policy of life insurance under
an assignment or transfer effected prior to the commencement of the Insurance Laws
(Amendment) Act, 2015 shall not be affected by the provisions of this section
 (10) Notwithstanding any law or custom having the force of law to the contrary, an
assignment in favour of a person made upon the condition that— (a) the proceeds under the
policy shall become payable to the policyholder or the nominee or nominees in the event of
either the assignee or transferee predeceasing the insured; or (b) the insured surviving the
term of the policy, shall be valid: Provided that a conditional assignee shall not be entitled to
obtain a loan on the policy or surrender a policy.

 (11) In the case of the partial assignment or transfer of a policy of insurance under sub-
section (1), the liability of the insurer shall be limited to the amount secured by partial
assignment or transfer and such policyholder shall not be entitled to further assign or
transfer the residual amount payable under the same policy.