TMI Blog2007 (3) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... to as IRDA. According to the petitioners, their business involves acquiring life insurance policies from the policyholders by paying value consideration to the policyholder. An insurance policy would be assigned by the policyholder to the 1st petitioner in lieu of valid consideration. The assignment will be registered and recorded in the books of the 1st respondent. The 1st petitioner would further assign the said insurance policy to a third party for consideration. The said further assignment would again be registered and reflected in the books of the 1st respondent. This business of assignment of life insurance policy is important and essential characteristics of the life insurance contracts. A life insurance policy is the personal movable property of the policyholder. The assignment of policies has led to the business of acquisition of life insurance policies the world over and has been prevalent including in India for a considerable period of time. In U.K. the current size of the business is estimated to be 2 billion sterling pounds (approximately Rs. 15,000 crores). The size of U.S. Market is estimated at 134 billion dollars. European market has an exclusive Endowment Fund of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the Life Insurance Policy and the assignment can be way of purchase, sale or natural love and affection. In spite of correspondence, various authorities of the 1st respondent have continued to refuse registration of assignment made in favour of respondent No. 1. Apart from the petitioner No. 1, the policyholders also have addressed communica-tions to respondent No. 1. The petitioners also addressed complaints to the 2nd respondent about the behaviour of respondent No. 1 to refuse to register the assignment of Life Insurance Policies. The respondent No. 2 by letter of 3-3-2004 after examining the provisions of the Insurance Act, 1938, has opined, that the respondent No. 1 should register the assignment of policies. Relying on the said letter of 3-3-2004 the respondent No. 1 was requested to register the assignments. The respondent No. 1, however, refused to assign the insurance policies. After the petition was filed the respondent No. 1 has issued another circular on 2-3-2005 reiterating what was set out in the circular dated 22-10-2003. 3. It is the petitioners case that merely because the petitioners have no insurable interest in the life of the assured, does not make th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of blood or marriage to him as will justify a reasonable expectation of advantage or benefit from the continuance of his life or a loss arising out of the extinction of such life. Every contract of life insurance must have a reasonable ground founded upon the relations of parties to each other, to expect some benefit or advantage from the continuance of the life of the assured. In the absence of such reasonable ground, the contract is a mere wager as such policies have a tendency to create a desire for the event and, therefore, independently of any statute on the subject, ought to be condemned as being against the public policy. The assignments which the petitioners seek to register are mere wagering contracts in the absence of any insurable interest in the lives assured and such contracts are expressly declared to be null and void under section 30 of the Indian Contract Act. The major distinguishing factor is risk of loss. In insurance, the assured is moved to effect a policy by the risk of loss and does not create the risk of loss by the contract itself, as in the case of a pure wager. The sole objective of the 1st petitioner in seeking registration of the assignment is to tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof, even if it is in favour of a family member or a bank. Section 38 of the Insurance Act, it is submitted, is merely a procedural provision and cannot control substantive right of policyholders of the life assured. The policy which has lapsed can be revived only in accordance with the terms of the policy and revival is at the sole discretion of the 1st respondent. The challenge to the scheme dated 22-1-2003 and also subsequent Circular it is submitted, is misconceived as such circular has been issued by the 1st respondent in exercise of its powers, duties and functions to safeguard the interests of the policyholders, which is a statutory obligation cast upon the 1st respondent. Implementing public policy and laws enforced in India in discharge of the 1st respondent s statutory obligations for the protection of the policyholders cannot be the subject-matter of any challenge a formulated by the petitioners. Life Insurance coverage is against disablement or in the event of death of the insured, economic support for the dependants and social security for their livelihood. Reference is then made to what is known as viatical policies . From the reply filed by the petitioners it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the policy which is called the surrender value can be calculated. A policy of insurance is a present contract in the hands of the assured of which he has a present right to the benefit although the fruits are to be enjoyed in future. A life assurance policy as such would be property. Coitton, L.J. in Tucan (1888) 40 Ch. D 5 remarked "It was contended that the policies did not came within the term property but in my opinion, they may be considered as acquired by purchase during his life. They are contracts by which the policyholder has a right to recover certain sums of money from the insurance office in certain events, and the premium which he pays may be considered as an investment so as to obtain for him a benefit of the policyholder." Life policies are now construed not as contracts of indemnity but to pay a certain sum in a certain event depending on the duration of human life. 7. We may now examine the nature of Life Insurance Policies issued by respondent No. 1 under Life Insurance Corporation Act, 1956. As the preamble states, it is an act to provide for the nationalisation of Life Insurance in India by transferring all such business to a Corporation establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the constitutional animation and conscience of socio-economic justice adumbrated in the Constitution. Life Insurance coverage it was held is against disablement or in the event of death of the insured, economic support for the dependants. At the relevant time a monopoly existed in the Life Insurance Corporation to carry on the business of Life Insurance Corporation and issue policies by virtue of section 30 of the L.I.C. Act. Payments were guaranteed by the Central Government. 8. An amendment to the Act, came to be introduced by Act 41 of 1999, which introduced section 30A, whereby the exclusive privilege of carrying on life insurance business given to the Corporation, ceased from the commencement of the Insurance Regulatory and Development Authority Act, 1999, hereinafter known as Insurance Regulatory Act. The Corporation which was carrying on life insurance business in accordance with the provisions of the Insurance Act, 1938 ceased to have monopoly on Life Insurance business. Consequent thereupon various private companies are in the business of issuing life insurance policies. Under section 43 of the Life Insurance Act, only certain provisions were made applicable. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity. However, persons trading in life insurance policies will not only derive windfall gains from such trading but will also claim exemption from income-tax. Reliance is next placed on section 60( kb ) of the Code of Civil Procedure, 1908 to contend that all moneys payable under a policy of insurance on the life of the judgment debtor are declared to be free from attachment and sale in the execution of any decree of a Civil Court. At this stage itself it may be pointed out, that for life insurance policies issued by the private sector also, the provisions of section 10( 10D ) of the Income-tax Act and section 60( kb ) of the Code of Civil Procedure, 1908 apply and those policyholders and assignees derives the same benefit. If the Government has stood as guarantor for the policies issued by L.I.C. that was considering the monopoly created in favour of the Corporation. The Corporation by virtue of sections 28 and 28A was also bound to part with part of the profits in favour of the Government. Consequent to private entry in the business of life insurance it will no longer be possible to contend that the Corporation carries on business of issuing policies as a measure of social securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again quoted from Sir William Anson s on Law of Contract as under: ". . . the law may either actually forbid an agreement to be made, or it may merely say that if it is made the Courts will not enforce it. In the former case it is illegal, in the later only void; but inasmuch as illegal contracts are also void, though void contracts are not necessarily illegal, the distinction is for most purposes not important, and even judges seem sometimes to treat the two terms as interchangeable." The learned Author then proceeds to observe as under: "Wagers being only void, no taint of illegality attached to a transaction, whereby one man employed another to make bets for him; the ordinary rules which govern the relation of employer and employed applied in such a case." Tracing the law of wager in ancient India and considering the common law of England, the Supreme Court observed, that the common law of England and that of India, have never struck down contracts of wager on the ground of public policy; indeed they have always been held to be not illegal notwithstanding the fact that the statute declared them void. Even after the contracts of wager were declared to be void in England ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is sought to be enforced would decide the factum, the nature and the degree of the injury. It is contrary to the concept of public policy to contend that it is immutable, since it must vary with the varying needs of the society. What those needs are would depend upon the conscious value judgment of the enlightened sections of the society. These values may sometimes get incorporated in the legislation, but sometimes they may not . . . ." (p. 76) This preposition, considering the judgment in Gherulal Parakh s case ( supra ) will be of no assistance to extend the public policy doctrine to a contract of life insurance which is alleged, amounts to a wagering contract, if assigned to a person having no insurable interest. 11. We may now consider some judgments, cited at the Bar, as to how the law on insurable interest is understood in the United States. In the Aetna LIC v. David France and Lucetta P. , 94 US 1876, one Andrew J. Chew had taken out a policy, with a stipulation and agreement that the money shall be payable to Lucetta, his sister. On death of Andrew, Lucetta took out an action on failure by the insurance Company to honour the terms of the policy. One of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the event. They are, therefore, independently of any statute on the subject condemned as being against public policy. The assignment of a policy to a party not having an insurable interest is as objectionable the taking out of a policy in his name. Nor is its character changed because it is for a portion merely of the insurance money. To the extent in which the assignee stipulates for the proceeds of the policy beyond the sums advanced to him, he stands in the position of one holding a wager policy. . . ." The judgment in Aetna Life Ins. Co. s case ( supra ) and Warnock s case ( supra ) came up for consideration before the U.S. Supreme Court in Brigsby v. Russel, 222, US 149. The issue arose on an interpleader suit brought by the Insurance Company as to whether proceeds of the policy should be paid to his administrator or to an assignee. Justice Holmes, writing the opinion observed : "The very meaning of an insurable interest is an interest in having the life continue and so one that is opposed to crime. And, what perhaps is more important, the existence of such an interest makes a roughly selected class of persons who by their general relations with the person whose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain policy of term life insurance issued by fidelity Mutual Life Insurance Company. The policy was assigned by Butterworth to one G. Locke Tarlton. Tarlton by another assignment assigned the policy to himself, O.E. Schaefer and the Trust Company as Trustees. G. Locke Tarlton died testate. Butterworth purported to assign his interest in the policy to the Trust Company and M.E. Turner, as Trustees of the Butterworth Trust. On November 5, 1947 Asa C. Butterworth died testate and the policy became payable. On December 15, 1947 the Trust Company as co-trustee of the Tarlton Trust, collected the amount of the policy and accrued dividends. The proceedings were initiated at the instance of the heirs of Butterworth. One of the contentions urged was that Tarlton Trust had no insurable interest in Butterworth and that Tarlon Trust was engaged in a wager transaction contrary to public policy. The Court stated thus: "Simply stated, it is widely held to be against public policy to permit the temptation to speculate in human life by means of the beneficiary securing a contract of insurance in which the beneficiary may profit solely by the death of the insured. A man may not take out insurance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es referred to by respondent No. 1 which are not assignable, have nothing to do with the policy, but because of the specific prohibition in the specific statute which prohibits the assignment of such policies. In the written submissions the petitioners have pointed out, to 8 policies including the seven referred to by respondent No. 1 which are not assignable and the reason thereof. The policies issued in favour of the minors cannot be assigned as minors cannot contract. Similarly the other policies cannot be assigned in view of the provisions of Contract Act, 1872. The policy for handicapped dependents is governed by the provisions of section 80DDA of the Income-tax Act, 1961. It is, therefore, clear that the policies issued by the respondent No. 1 and which are not assignable are because the law itself, requires that such policies cannot be assigned. The argument, therefore, to contend that section 38 is not mandatory relaying on these policies would be of no assistance. 14. We may now turn to the next contention as to whether section 38 is a substantive provision as contended by the petitioners or is merely procedural, as contended on behalf of the respondents. We may gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fe insurance policy, has a statutorily conferred vested right to assign that policy either with or without consideration. It is further submitted that the assignment of policy between assignee and assignor is complete by virtue of section 38(1), even before any notice is given to LIC under section 38(2). The purpose of giving such a notice to the Insurance Company is only for intimate to the insurance company that insurance policy issued by it had been assigned so that the insurance company can record the same in its own record. On the other hand on behalf of the Corporation it is submitted that section 38 of the Insurance Act, is not a substantive provision but is procedural and recognizes that the terms of the contract of insurance must also be given effect to. It is submitted that section 38 of the Insurance Act, recognises that the terms of the contract of insurance which fasten liabilities and equities upon the policyholder, must be given effect to, and the aim, purport and effect of section 38 is purely procedural and does not govern any substantive rights. It only enables a transfer/assignment but does not create a right to transfer. Dealing with section 38(7) it is submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l now examine the various sub-sections of section 38. Section 38(1) unequivocally provides the procedure by which assignment of a policy of life insurance can be done. The contract of insurance issued by the insurer is a contract between the insured and the insurance company. Sub- section (2), then sets out, that once a transfer or assignment is made in the manner prescribed by section 38(1), the transfer or assignment is complete and effectual on the execution of the endorsement or by a separate instrument. However, such transfer or assignment is not binding as against the insurer until and unless intimation in writing of the transfer or assignment in the prescribed manner, has been delivered to the insurer. Sub-section (3) determines the priority of claims, on the Insurance Policy by operation of law. Therefore, if the insured had effected the transfer or assignment and had given notice to the insurer, that would be determinative as to who is entitled to the moneys payable under the policy of insurance. Once the notice is received, by virtue of sub-section (4), the insurer is bound to record the fact of transfer or assignment together with the date thereof and the name of the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the person who takes under the defesance clause is equally an absolute interest." It would be clear from the judgments of this Court and of the Madras High Court that on transfer or assignment and on the procedure being complied, it is the assignee alone who has absolute interest in the same. It is true that the effect of the transfer or assignment would be a novation of the contract, but such a novation is expressly recognised by law. By operation of law the insurer is bound to accept the transfer and/or endorsement, if notice is given to the insurer and the procedure followed. Considering the terminology of the section, it is not open to the insurer, to dispute the right of the insured to transfer or assign the policy and/or the right of the assignee pursuant to the transfer or assignment to have interest in the policy. The judgments referred to would make it clear that once the transfer or assignment is effected and noted, it is the assignee alone, in the terms of the transfer deed who has complete interest. In fact the definition of the policyholder under sub-section (2) of section 2 includes a person to whom the whole of the interest of the policyholder in the policy is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving. It has been held to be property. Courts have held that so far as reasonable safety permits, it is desirable to give life insurance policies the ordinary characters of property ( See Grigsby). Ordinarily in commercial matters unless our Statute specifically provides otherwise, the law as recognised internationally should ordinarily be considered as the true interpretation of similar law in our country. The effect of an assignment is that it operates to completely divest the assignor of any right under it. The social concept had been developed, considering that the business carried on by the respondent No. 1 before section 30A was introduced in the L.I.C. Act, was by virtue of the monopoly created in its favour by the L.I.C. Act. It is in that context that the Supreme Court considered the matter in L.I.C. of India ( supra ). By virtue of Act 41 of 1999, that exclusive privilege has ceased and private players have been allowed in this field of business. It is no doubt true that the respondent No. 1 continues to be a body under the control of the Union of India and as such would have to carry on its business not only as a prudent business person, but in furtherance of the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent No. 1. The Central Government has, however, conferred the power to issue notifications to make the provisions applicable therein. Once, section 30A was enacted the respondent No. 1 is bound to carry the insurance business in accordance with the provisions of the Insurance Act. Even though section 43 has not been repealed, the effect of section 30A would necessarily necessitate that the respondent No. 1 carries on business in the manner provided by the Insurance Act, 1938 which includes section 113 of the Act. This would be an indication that the law itself envisages that the monies paid by the insured even if the policy lapses, in the event the insurer had paid premium for at least three consecutive years acquires a guaranteed surrender value to which the surrender value is to be added the subsisting bonus. Section 38 does not bar assignment of such policy as the assignee becomes the policyholder and would be entitled to the surrender value. Section 113(2), mandates that the policy which has acquired a surrender value shall not lapse, but shall be kept alive to the extent of the paid up sum insured and includes revisionary benefits. The only bar is that such a policy whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the policy or a term of the contract between the insurer and the insured. The policy can be revived only in the hands of the policyholder. It cannot be said as an illustration that in case of an assignee who is a policyholder by virtue of law, such a clause would not apply or that in spite of the clause it is open to the respondent No. 1 to take a policy decision not to revive the lapsed policies if it is done at the instance of the party like the petitioner. The clause is a term of contract between the insured and respondent No. 1. The respondent No. 1 can refuse to exercise discretion only in terms of the contract. An arrangement between a person like the petitioner No. 1 and the insured may be to advance money for revival of the policy. The contract between the petitioner and the insured can only be looked into by respondent No. 1, if in terms of its contract with the insured, it has a discretion to do so. Otherwise the respondent No. 1 will have to confine itself to the terms of the policy. Apart from the mandatory requirement of section 113, how to conduct their business would be that of the insurer. It may be open to the insurer to provide terms of contract as to reviva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to vary the terms unilaterally, it would not be open to respondent No. 1 to, under the guise of "policy decision" to refuse to register a transfer or assignments, which otherwise is legally valid under section 38. In our opinion the respondent No. 1 is bound by the terms of its contract with the insurer and the subsequent assignee as a policyholder. That contention, therefore, must also be rejected. 19. A further submission is made that even if the insured expired, the policy in the hands of the transferee, would be allowed to run up to its maturity and it would confer on the petitioners, unjust monetary gains at the expenses of families of the lives assured. We presume that once the policy has been transferred to the assignee it is the assignee who becomes the policyholder. Such policyholder would be bound by the terms of the policy including the effect of the death of an insured. If such assignee seeks to claim benefit in spite of the death of the original insured, in our opinion, to that extent, the assignee would only be entitled to the benefits as on the day of the death of the original insured when the policy becomes payable in terms of the contract. That submission is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down. 21. Petitioners had sought to contend that respondent No. 1 is subject to the general supervision and control of the Insurance Regulatory and Development Authority (IRDA). The IRDA it is submitted had issued a directive on 3-3-2004 to direct the respondent No. 1 to register the assignment without looking into the nature of the business of the financial company which has sought registration. We had served notice on IRDA. After hearing IRDA and perusing the record, it is clear that no directive has been issued as required by the provisions of the Insurance Regulatory and Development Authority Act and that being the case it is not necessary for us to go into the various arguments canvassed before us on that aspect. 22. In the course of the arguments respondent No. 1 had referred to the issuance of policies to persons who are ill and elderly and the effect on the insurance industry and the business done in such policies like the petitioners. The petitioners point out that in business parlance such policies are known as viatical policies and such policies are not sold by insurance companies in India including by respondent No. 1. Though in the oral arguments it is debatabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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