Report No. 190

8.5 Interests of the policyholders

8.5.1 Supply of copies of proposal and medical reports Every insurer carrying on life insurance business is under an obligation to supply to the policyholder under section 51 certified copies of the questions put to him and his answers thereto contained in his proposal for insurers and in the medical report supplied in connection therewith, on an application by the policyholder and payment of the fee which shall not exceed Re.1. The fee prescribed is too inadequate. It would be appropriate if the fee which is to be charged for such purpose is prescribed in the regulations. Hence amendment to this effect may be made.

8.5.2 Notice to given of the options on the lapsing of the policy Every insurer carrying on life insurance business is required under section 50 of the principal Act to give notice to the holder of life insurance policy before the expiry of three months from the date on which the premium in respect of a policy of life insurance were payable but not paid, informing him of the options available unless these are set forth in the policy.

The notice given by the life insurer is certainly a notice given prior to the lapsing of the policy and in fact protect the interests of policyholders. But the provisions of this section do not mentioned of this notice if the options available to the assured on the lapsing of the policy are set forth in the policy. It is suggested that even if the policy details about options, such a notice is required because life insurance policies are long-term policies and in the ordinary course of business. These options are seldom noticed by the policyholder. Hence the words "unless these are set forth in a policy" may be omitted, which would make the notice requirement unconditional.

8.5.3 Policy not to be called in question on the ground of mis-statement after two years

8.5.3.1 Section 45 places restrictions on the right of the insurer to repudiate his liability under the policy. This section provides that a life insurance policy cannot be called in question after the expiry of two years from the date on which it was effected on the ground of misstatement in the policy unless it is shown that all the three conditions enumerated in second part of section 45 are satisfied, viz., (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, and (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.

8.5.3.2 The section was enacted to prevent immense loss and hardships caused to the insured and his legal representatives because the insurers avoided contract of life insurance policy due to incorrect statements whether material or not made by the insured even after the policy had been in force for several years and all the premium paid were 117forfeited in that case by the insurer. Thus the provision in effect mitigated the rule of uberrima fides, i.e., utmost good faith. The life insurance contracts are basically governed by this rule and obligation to deal fairly and honestly is upon both the parties equally.

8.5.3.3 The provisions of this section does not affect the insurer's right for a period of two years from the date of the policy, but thereafter, no policy can be challenged on the ground that mis-statement made in the proposal or in any report of the medical officer was inaccurate or false unless it was material to disclose and it was fraudulently made. However, the provisions of this section do not confirm any right on the insurer to repudiate a policy which has been in force for less than two years on the grounds as stated above irrespective of its materiality.

8.5.3.4 In the past, problems have arisen with misrepresentation or non-disclosure whenever personal characteristics are collected by insurance agents for risk classification. The legal questions involving this characteristic usually center on the disclosure of material information by the insured. In this context, the issue is when would failure to make such a disclosure render the contract void or voidable.

There have been several judgments of the Hon'ble Supreme Court in this regard which have underscored the importance of the 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. (For e.g., Mithoolal Nayak v. Life Insurance Corporation of India, AIR 1962 SC 814 and Life Insurance Corporation of India v. Smt. G.M. Channabasamma, (1991) 1 SCC 357).

8.5.3.5 In its 112th Report in 1985, the Law Commission of India dealt with the question of repudiation of claim by the LIC in the context of section 45 of the Act. After considering the views of the insurers and policyholders, as well as the judgment reports, the Commission suggested that section 45 be amended to provide that:

(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."

8.5.3.6 It is proposed that the changes recommended by the Law Commission in its 112th Report as stated above be once again recommended. This will, it is hoped, sufficiently protect the interests of the policyholders.

8.5.4 Policyholders to elect the directors of insurers Section 48 of the Act provides for election of one-fourth of the directors of the insurance company by the holders of life insurance policies and also as to the eligibility requirements of policyholders for such election. This section had become irrelevant since the nationalization and establishment of LIC, therefore should have been repealed long back. But in the changed economic scenario and private players in the field, the provisions again require the reconsideration, especially in the context of insurance cooperative society as insurers, where the directors are elected by not only the members of the society but even by policy holders because many of them would be member-policy holders.

The deletion of this section has been suggested in view of the regulations relating to the protection of policyholder's interest, which adequately ensure the protection of their interest. It may be noted here that the IRDA itself has a member to represent the consumers. Moreover, regulations relating to solvency margin and investments also secure their interest. If this section is repealed, consequently section 114 (2) (f) would be required to be deleted as it empowers the Central Government to make rules for the purposes of section 48. Further, Rules 13, 14 and 15 of Insurance Rules would have to be deleted as they laid down the procedure for election of the Director by the policyholders.

This suggestion may be considered but in case of insurance cooperative society, the directors are elected by the members of the society and would be elected even by policyholders because many of them would be member-policy holders. Hence, in view of this, the repeal of this section would not be appropriate.

8.5.5 Life Insurance agents not to be appointed as directors of life insurance companies

8.5.5.1 Section 48A prohibits life insurance agents to become or to remain as directors of any insurance company in order to protect the interests of policyholders. The disqualification prescribed in this section may also be made applicable to insurance agents of general insurance business. Therefore, the provisions of section 48A may be amended to that effect.

8.5.5.2 The words "or general insurance business" may be added after the words "life insurance business". Consequently, marginal note to the section would also require amendment. The word "Life" occurring in the marginal note may be omitted.

8.5.5.3 The words "and no chief agent or special agent" are required to be omitted. Similarly, the words, "carrying on life insurance business" need deletion, so also the proviso to this section.

8.5.6 Assignment and transfer of policies

8.5.6.1 Life insurance policies are held by the policyholders to secure their future as these policies create a vested interest and have been dealt as having the features of intangible property. Section 38 therefore provides for the transfer or assignment of a policy of life insurance by an endorsement upon the policy itself or by separate instrument signed by the transferor/ assigner or by any authorized agent and attested by one witness setting forth the fact of transferring 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 have been delivered both by this transfer and transferee to the insurer. 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.

8.5.6.2 Although section 38 resembles section 130 of the Transfer of Property Act, 1882, it excludes the operation of the latter provision from the field since the former (s.38 of the Insurance Act, 1938) is a specific statutory provision.

8.5.6.3 This section deals with both absolute and conditional assignments, the former transferring to the assignee all rights, title and interest which the assigner has in the policy without any defeasance clause, and the latter being a 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.

A question arises whether a conditional assignee is entitled to obtain a loan under, or surrender, the policy without the concurrence of the insured. If it is answered in affirmative, the conditional assignment would stand converted into an absolute assignment and defeat the object of the former. While any transfer is subject to the terms and conditions specified in the instrument of transfer, the specific provisions in sub-section (5) of section 38 may mean either or both of the following:

First, under sub-section (7), the assignor may become entitled to the policy money if the assignment becomes inoperative; second, 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. If the insured reserves the right to receive the policy money on maturity, the assignee cannot exercise the right to surrender.

8.5.6.4 The interpretation of sub-section (7) may create some difficulty in view of subsection (5), for example, a specified event during the life time of the insured may not refer to an event affecting the status etc of the assignee.

8.5.6.5 There is another difficulty if an assignment is duly executed but no notice has been delivered to the insurer under sub-section (2). The assignment is not invalid but the assignee will not have the right to sue the insurer. In this backdrop, the provisions of subsections (5) and (7) need reconsideration and revision so as to remove anomalies. However, a suggestion has been made that sub-section (7) should be dropped. This may, however, attract the application of section 130 of the Transfer of Property Act unless a proviso is made to exclude the application of section 130 of the Transfer of Property Act.

8.5.6.6 Section 38 (4) prescribes one rupee as the fee for acknowledgement of the notice of the transfer of assignment. This amount is wholly inadequate. Hence, the words one rupee may be replaced by the words "not exceeding an amount prescribed by the Authority in the Regulations".

8.5.7 Proposal for partial assignment of policies

8.5.7.1 The Act does not provide for partial assignment of policies required especially in case of assignments for collateral security for loans, where the sum assured is more than the amount of loan. It is, therefore, suggested that a new sub-section may be inserted to provide for partial assignment of policies with the rider that the original assignor is not allowed to further assign his residual rights to the third party with a view to prevent any clash of interest of several assignees at the time of making the claim.

8.5.7.2 The provisions of this section are applicable to only life insurance policies. It is desired that its application be extended to all personal lines of non-life insurance business.

8.5.8 Nomination by policyholder

8.5.8.1 Section 39 provides for nomination of life insurance policies. It enables the holder of the policy to nominate the person to whom money secured by the policy shall be paid in the event of death of the policyholder. Such a nomination can be made when effecting the policy or at any time before the policy matures and can be changed or cancelled by an endorsement or a will. However, any change or cancellation in this regard is to be notified to the insurer under sub-section (2); otherwise insurer would not be liable to make any payment to the nominee.

8.5.8.2 Sub-section 3 prescribes fee of Re.1 to be charged for written acknowledgement in respect of registration of nomination or any change thereof. The fee is inadequate and hence be enhanced. The maximum limit may be specified in regulations by the Authority. Accordingly, sub-section may be amended. Thus the words "amount as specified in the regulations by the Authority" be substituted for the words "one rupee".

8.5.8.3 Sub-section (4) contemplates automatic cancellation of a nomination in case of transfer and assignment of the policy except where the assignment is made in favour of insurer for advancement of loan. What about a situation where a policy is assigned to a non-insurer under section 38? In such cases, the problem of nomination and related matters may create difficulties. In order to deal with this problem it is appropriate that the existing proviso to this section may be given effect to cover this situation or another provision may be inserted to the effect that the nomination stands automatically revived when the policy is reassigned by the assignee in favour of the policyholder on repayment of loan other than on security of policy to the insurer.

8.5.8.4 Generally, upon reassignment of the policy, the policyholders forget to intimate insurer of any change of nomination or their intention to continue the same nomination which existed at the time of assignment of the policy. Hence an explicit provision may be inserted to the effect that nomination that existed at the time of assignment be restored or on assignment of the policy to the holder that very nomination shall be deemed to be in force till it is cancelled or changed as provided in sub-section (2).

This kind of additional provision would facilitate insurers in discharging their liabilities expeditiously in respect of policy money.

8.5.8.5 Sub-section (6) of the section provides that if a nominee survives the insured person, the amount of the policy money would be payable to such nominee-survivor/s. The section does not indicate clearly as to whether the nominee is entitled to retain the money so paid as the beneficial owner of the amount or he is merely the nominal owner of the money which forms part of the estate of the insured person so that his heirs, creditors, legatees may have claims on that money.

8.5.8.6 The case law on this issue reveals two trends. One is that section 39 (6) confers on the nominee merely the right to collect and receive from the insurer, the policy money. The other is that the nominee is not merely a recipient of the money but also the beneficial owner thereof. Various High Courts have adopted different approaches in interpretation of the provisions of sub-section (6) of section 39 giving rise to two views. The Gujarat, Calcutta, Karnataka, Kerala and Orissa High Courts adopted one view and the Andhra Pradesh and Allahabad High Courts took the other view.

8.5.8.7 The Law Commission of India in its 82nd Report in 1980, dealt with the issue of the rights of the nominee, heirs, creditors, legatees of the insured of the money secured by the policy of life insurance after it is paid to the nominee. The Commission surveyed the then existing case law and other legislative precedents. It also considered the aspect of social justice i.e. legitimate expectations of the near relatives, especially women, parents and children who deserve financial protection after the death of policy holder because death is like to have the deepest impact on their personal lives and found that the existing provisions fail to fulfil the same.

The Commission also noted that when a person makes a nomination, he cannot confer on any nominee any right higher than what he himself has and that this would accordingly determine the rights of the nominee in the sum assured under the life insurance policy. Accordingly, the Commission in its 82nd Report (1980) recommended the inclusion of the following provisions:

"(6A) Subject to the other provisions of this section, where the holder of a policy of life 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.

(6B) Subject as aforesaid, where the nominee, or if there are more nominees than one, a nominee or nominees, to whom sub-section (6A) 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.

(6C) Nothing in sub-sections (6A) and (6B) shall operate to destroy or impede the right of any creditor to be paid out of the proceeds of any policy of life insurance.

(6D) The provisions of sub-sections (6A), (6B) and (6C) shall apply to all policies of life insurance maturing for payment after the commencement of the Insurance (Amendment) Act....."

8.5.8.8 In Sarbati Devi v. Usha Devi AIR 1984 SC 346, the Hon'ble Supreme Court held that a mere nomination made unders.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. A very important observation made in this case is that the provisions of section 39 cannot alter the course of succession under the law. The observations in the aforesaid case were followed by various High Courts.

8.5.8.9 The above decision in Sarbati Devi's case was taken note of by the Law Commission when it submitted its 137th Report in 1990 on the Employees' Provident Fund Act. The Commission modified its earlier view and recommended as under:

5.11 On giving anxious consideration to all the relevant aspects, it appears possible to evolve a formula which would satisfy the demands of social justice and fairness besides according due weightage to the desire of the employee concerned. The solution strikes as eminently satisfactory is this. A statutory provision may be made to the effect that the amount payable under the Act and the Scheme will vest in the nominee who will be called the "beneficiary-nominee" unless the concerned employee has named some person as a "collector-nominee" for the specific purpose of collecting the amount on behalf of the members of the family as defined in Para 2(g) for disbursement as per Para 70(ii) of the scheme.

In other words, it would tantamount to giving an option to the workmen concerned who can name either a beneficiary nominee or a collector-nominee upon the significance of such nomination being explained to him. He may be required to express his option in clear terms stating that the nominees will be a beneficiarynominee and not a collector-nominee or vice versa. The same formula can also be evolved in respect of life insurance policies and the recommendation by the Law Commission in its 82nd Report may be reiterated with this modification.

5.12 Nomination under life insurance policie.- While it is outside the scope of the subject matter of this report it may not be in appropriate that a similar formula can be adopted in respect of nominations under life insurance policies in the context of the recommendation made by the Commission in its 82nd report presented more than a decade ago on 2nd February, 1980.

5.13 For, even in respect of life insurance policies, the public at large is perhaps unaware of the true legal position. Many of the persons seeking the protection of insurance policies may well be labouring under the misconception that the nominee would become an absolute beneficiary in his or her own right. The same would be the case with regard to those who are covered by the Act and the Scheme. It is, therefore, essential in the interest of all concerned that the position of law is settled.

As has been recounted earlier, the Commission has already recommended amendment of the Life Insurance Act with a view to making a nominee a person in whom the beneficial interest would vest to the exclusion of other heirs. Since, however, no decisions has been taken on the recommendation of the Law Commission, the matter is still not free from vagueness in the sense that the members of the public may not be full aware of the implications of nominations and the import of the decision of the Supreme Court in Sarbati Devi's case. That is why the course suggested in para 5.12 read with para 5.11 hereinabove deserves to be adopted.

The above recommendation is reiterated and views are invited on whether section 39 can be amended accordingly.

8.5.8.10 A suggestion has been made that, in case the policyholder dies after the maturity of the policy but is not able to encash the proceeds because of his death, a nominee may be entitled to the same. To this effect, a proviso may be added to make the nomination effectual for receiving policy money.

8.5.8.11 Another suggestion has come for enabling the insured person, by way of an option, to make a nomination that confers absolute ownership of policy money on the nominee upon the death of the life assured. According to this suggestion, such a nomination will place the nominee on the same status as that of a nominee under section 45ZA of the Banking Regulation Act, 1949.

8.5.9 Payment of money into court

Many a times, it is impossible for the insurer to satisfactorily discharge any life insurance policy for payment due to conflicting claims, or insufficiency or proof of title, to the amount secured thereby. In such situations, the insurer may, under the provisions of section 47, with the permission of the court and subject to conditions specified in sub-sections (3) and (4) of the section, make payment of the same (deposit) into the court.

The claimants in such cases would certainly like to engage lawyers and ultimately in this process the claimants become the victim rather beneficiary of the amount so claimed. It is, therefore, suggested that insurer may, in the circumstances as aforesaid, may deposit the amount with IRDA or the apparent tribunal as the case may be. It is appropriate if an Insurance Lok Adalat is constituted for disposing of such claims. Such a procedure would be in the interest of the claimants because disposal by Lok Adalat would be speedy and without any technicalities.

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