Report No. 190

(ix) The final recommendations of the Law Commission in regard to section 45 are:

(a) The period beyond which no repudiation of a life insurance policy on any ground whatsoever be fixed at five years. This should be a sufficient period for an insurer to check the veracity of the details provided by the insured at the time of issuance of the policy. After a period of 5 years after the coming into force of a life insurance policy, i.e., the date of issuance of the policy or the date of commencement of such policy or the date of the revival of such policy or the date of the rider to such policy whichever is later, no insurer can repudiate a claim thereunder on any ground whatsoever.

(b) The insurer can repudiate a policy of life insurance at any time before the expiry of a period of five 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. The insurer will have to communicate in writing to the insured or the legal representatives/ nominees/ assignees of the insured the grounds and materials on which such decision is based. The claimants will in such instance not be entitled to either the policy amount or the premium amounts.

(c) The insurer can repudiate a policy of life insurance at any time before the expiry of a period of five years from the date 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 the insured had made a misstatement of or suppressed a material fact, i.e., a fact material to the assessment of the risk, either in the proposal form or any other document on the basis of which the life insurance policy was issued or revived or a rider issued to it.

While such repudiation will result in the claimants forfeiting the policy amount it will not entail their forfeiting the premium amounts collected on the policy. Thus 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 will be liable to be returned to the insured or the legal representatives/ nominees/ assignees of the insured.

(d) The misstatement of or suppression of fact will 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.

(e) No repudiation of the policy to be permitted on the ground of fraud where the insured can prove that the suppression or misstatement of the material fact made 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 was within the knowledge of the insurer or the agent of the insurer.

(f) A person who solicits and negotiates a contract of insurance should be deemed for the purpose of the formation of the contract, to be the agent of the insurers, and that the knowledge of such person should be deemed to be the knowledge of the insurers.

(g) The insurer will have to communicate in writing to the insured or the legal representatives/ nominees/ assignees of the insured the grounds and materials on which the decision to repudiate a policy on the ground of misstatement or suppression of a material fact is based. [para 5.1.39]

(x) section 45 be amended to reflect the changes recommended above. section 45 be recast as indicated in para 5.1.40.

(xi) In relation to section 38 of the Insurance Act, 1938 concerning assignment or transfer of policy, the final recommendations of the Law Commission are:

(a) Sub-section (7) of section 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 section 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) Both terminologies, viz., assignment and transfer be retained in section 38 and they be used in the alternative to enable greater flexibility in the working of these provisions.

(d) 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.

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

(f) section 38 be amended to build in certain safeguards. The policy holder will have to disclose reasons for the assignment, the antecedents of the assignee and the exact terms on which the assignment is being made. There will be an obligation upon the insurer to get the credentials of the assignee verified at the cost of the insured. If the insurer is not satisfied that the assignment is bonafide, there would be an option to decline to register the assignment or transfer upon reasons in writing to be communicated to the policyholder subject to such decision being challenged by way of petition before the Grievance Redressal Authority. [para 6.1.18]

(xii) section 38 be amended to reflect the changes recommended above. section 38 be recast as indicated in para 6.1.19.

(xiii) In relation to section 39 concerning nominations, the final recommendations of the Law Commission are:

(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. [para 7.1.14]

(xiv) section 39 be amended to reflect the changes recommended above. section 39 be recast as indicated in para 7.1.15.

(xv) The final recommendation of the Law Commission in regard to penalties and certain other provisions are as under:

(a) The amount of penalties prescribed in sections 102-105C be enhanced so that it is of a deterrent nature. A minimum penalty be indicated in each of these provisions.

(b) The penalties will be adjudicated and levied after an enquiry by the Adjudicating/ Investigating Officer to be appointed by the IRDA as indicated in para 4.3.8 above. The provisions will be accordingly amended to indicate this position.

(c) In relation to section 53 (2) (b) which deals with the grounds on which the IRDA can apply for winding up by the court, since clauses (i), (ii) and (iii) of sub-section (2) are the very grounds on which the IRDA can cancel the registration of an insurance company under s.3 (4), these clauses may be omitted. However, clause (iv) may be retained. In sub-section (1) of section 53, reference to Companies Act, 1913 be substituted by Companies Act, 1956.

(d) In relation to section 54 concerning voluntary winding up, the provision be amended to the effect that an insurance company should not be wound up except on the ground that by reason of its liabilities it cannot continue its business.

(e) In relation to section 58 concerning the scheme for partial winding up in sub-sections (3) and (4), reference to the Companies Act, 1913 may be substituted by the Companies Act 1956. In sub-section (4), the words 's.12 of the Indian Companies Act, 1913' be substituted by 's.15 of the Companies Act, 1956' and the words 'Sections 15 and 16' be replaced by 's.17'.

(f) In relation to sections 52A to 52G which deal with the management by an administrator, the provisions be amended to provide that if the IRDA after giving an opportunity to the insurer and after taking into consideration the interest of policy holders, is of the opinion that it is necessary and proper to appoint an administrator to manage the affairs of the insurer carrying on life insurance business, the IRDA may, by an order, do so. The administrator shall receive such remuneration as the IRDA may direct. The IRDA may appoint some other person as an administrator if the one appointed earlier is not able to manage the affairs of the insurer. Sub-sections (1), (2) and (3) of section 52A be amended to give effect to the aforesaid recommendations.

(g) section 52A be amended to provide for the period for which an administrator will initially be appointed. It may be appropriate if the limit in this regard is provided in the statute subject to the proposed provisions of section 52D. Since section 52BB (9) which vests in the administrator powers of the civil court, section 52A be amended to indicate that the administrator so appointed should be qualified and competent to exercise such powers.

(h) section 52BB (2) be amended to provide that the appeal against the order of the Administrator will lie to the IRDA.

(i) section 52D dealing with termination of appointment of administrator be amended to confer the power of cancellation of the order of appointment on the IRDA.

(j) The punishment by way of fine for withholding documents of property from the Administrator under section 52F be enhanced to Rs.5,000/-.

(k) The protection of action taken in good faith, as provided for in section 52G, be extended to the officers of the IRDA.

(l) In light of the above amendments, section 52E be amended to substitute the word "Central Government" with 'IRDA'.

(m) Sections 52H to 52N be deleted in view of the changed policy whereby private players have been permitted to carry on insurance business.

(n) The words and digits "or section 98" occurring in section 59 relating to return of deposits, be omitted.

(o) In view of the express provision that no insurer other than an Indian insurance company shall begin to carry on any class of insurance business in India, the provisions relating to external companies, sections 62 to 64, be repealed.

(p) Section 64UL be amended to substitute the word "Central Government" by "IRDA".

(q) Section 113 (1) relating to acquisition of surrender values be amended to indicate that the IRDA may from time to time notify the minimum amount of the paid up value and annuity. [para 8.1.2]

(xvi) Given the scope of the present reference and the nature of the issues involved, the Law Commission does not consider it appropriate to make any recommendations in regard to the provisions concerning surveyors and loss assessors; investments, tariffs, shareholders' and policyholders' funds and extent of foreign shareholding, [paras 9.1.10 to 9.1.20].

10.1.2 We acknowledge the extensive contribution made by Dr. S. Muralidhar, Part-time Member of Law Commission, in preparing this Report as well as Consultation Paper.

We recommend accordingly.

Justice M. Jagannadha Rao
Chairman

Dr. N.M. Ghatate
Vice-Chairman

Dr. K.N. Chaturvedi
Member-Secretary

Dated: 1st June, 2004

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