Life insurance policy uses restricted by recent change

By Aakanksha Joshi and Siddharth Walawalkar, Economic Laws Practice
0
1270

Life insurance policies have always been regarded as measures of security for the insured and their dependants, safeguarding their interest in the event of death as a result of a covered contingency. Subject to compliance with the terms and conditions of the policy, the insurer is, on the death of the insured or maturity of the policy, required to pay the sum assured to the person entitled to it under the policy.

Aakanksha Joshi
Aakanksha Joshi

Due to the certainty of the payment of an assured sum on a predetermined date, life insurance policies are increasingly being used for the purposes of creating security or trusts, being transferred for consideration and forming the subject of bequests, like other forms of property.

Right to assignment

In India prior to the enactment of the Insurance Act, 1938, the provisions relating to assignment of life insurance policies were contained in sections 130 to 132 and 135 of the Transfer of Property Act, 1882 (TOPA). Under these provisions, the transfer of an insurance policy was treated as a transfer of an actionable claim and all rights and remedies of the transferor would vest in the transferee on the transfer being made as per the provisions of TOPA, whether notice of such transfer had been given or not. After the Insurance Act was enacted to regulate the business of insurance in India, an exception was incorporated in section 130 of TOPA expressly excluding transfers of life insurance policies.

Section 38 of the Insurance Act lays down the procedure for transfer of life insurance policies. Prior to an amendment made in 2015, a life insurance policy could be transferred by a simple endorsement on the policy itself or by a separate instrument signed in either case by the transferor or by their authorized agent and attested by at least one witness. The insurer, on being duly notified of the transfer of the policy, was bound to accept it and recognize the transferee or assignee as the person entitled to the benefit under the policy.

By virtue of the Insurance Laws (Amendment) Act, 2015, section 38 of the Insurance Act now entitles the insurer to decline a transfer or assignment of a policy, if the transfer or assignment: (i) was done in bad faith; (ii) is contrary to the interest of the policy holder; (iii) is against public interest or (iv) was done only for the purpose of trading of the policy.

Supreme Court decision

In the recent case of LIC of India v Insure Policy Plus Services Pvt Ltd and Ors, the Supreme Court was presented with an interesting question as to whether the amended provisions of the Insurance Act were prospective in nature and further whether the provisions of the Insurance Act, prior to their amendment, permitted the insurer to decline assignments of policies. The question arose out of a writ petition filed by Insure Policy Plus Services, an entity engaged in the business of assignment of policies, against the actions of Life Insurance Corporation of India (LIC) refusing registration of policy assignments on the basis of its circular dated 22 October 2003, aimed towards curbing trading in insurance.

Siddharth Walawalkar
Siddharth Walawalkar

On appeal from Bombay High Court’s judgment allowing the petition, the Supreme Court observed that, prior to the 2015 amendment, section 38 of the Insurance Act permitted the transfer or assignment of a policy, provided the transfer or assignment was in accordance with the terms of the policy and the procedure set out under the Insurance Act. The court further held that the provisions of the section, before the amendment, were mandatory and substantive and left no scope for the insurer to dispute the right to transfer or assign the policy. The policies executed prior to the amendment were thus freely tradable and assignable.

The court also held that had the legislature intended to amend section 38 retrospectively, it would have done so explicitly. Instead, the newly incorporated sub-section (9) to section 38 expressly saves the rights of transferees under an assignment affected prior to the commencement of the amendment act.

The court concluded by holding that LIC could not by its actions take a position opposite to what the statute permitted at that time and be permitted to nullify the provisions of law. Only transfers post the amendment act may be refused.

Conclusion

Life insurance policies have through time gained recognition as a form of saving and investment. The free tradability of policies under the former insurance law regime permitted investments in the insurance market. The above amendment curtails the freedom of policyholders to reap benefits from their right to assign their policies, in line with the primary use of life insurance as security for the insured’s dependants rather than a tradable investment.

Aakanksha Joshi is an associate partner and Siddharth Walawalkar is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.

ELP_Logo_Black

109 A Wing, Dalamal Towers

Free Press Journal Road

Nariman Point, Mumbai – 400 021, India

Tel: +91 22 6636 7000

Fax: +91 22 6636 7172

Email: AakankshaJoshi@elp-in.com

SiddharthWalawalkar@elp-in.com

Mumbai | New Delhi | Ahmedabad | Pune | Bengaluru | Chennai