Sunday, March 22, 2015

Trading on Insurance Policies in the Secondary Market

[The following guest post is contributed by Ammu Charles, who is an Associate at K Ramakumar and Associates]

The Insurance Laws (Amendment) Bill, 2015 was passed by Parliament on March 12, 2015, replacing the ordinance promulgated last year. The Bill was first introduced on December 22, 2008 and seeks to amend the provisions in the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972, and the Insurance and Regulatory Development Authority of India Act, 1999.

One of the major changes brought about by way of amendment is with regard to assignment of policy of insurance. Section 38 of Insurance Act, 1938 dealt with assignment and transfer of insurance policies. According to the section, a transfer or assignment of a policy of insurance, wholly or in part and whether with or without consideration was allowed. It may be made 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.

The relevant provisions of Insurance Act, 1938 state:

 38. (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, and 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 in India mentioned in the policy for the purpose or at his principal place of business in India.

(3) The date on which the notice referred to in subsection (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.

(4) Upon the receipt of the notice referred to in subsection (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 acknowledgement relates.

(5) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from the date of receipt of the notice referred to in subsection (2), recognise 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.”

[Emphasis added]

This indicates that an insurance policy has been identified as movable property and the insurer must acknowledge the transfer and cannot question the right of the insured to transfer the policy. This was under challenge before the Bombay High Court in Insure Policy Plus Services (P) Ltd  v. The Life Insurance Corporation Of India [2007 (109) Bom L R 559]. The petitioner company was engaged inter alia in the business of assignment of life insurance policies issued by the respondent corporation. An insurance policy would be assigned by the policy holder to the petitioner in lieu of valid consideration. The assignment will be registered and recorded in the books of the respondent. The 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 respondent. During the year 2003, the respondent refused to accept notices of assignments lodged by the petitioner and issued a circular directing that the assignment in favour of companies trading in insurance policy should be declined. This circular and inaction of the respondent was challenged before the court.

The petitioner argued that policies were movable property and the policyholder enjoys full ownership and control over the life insurance policy and the assignment can be way of purchase, sale or out of natural love and affection. The respondent argued that the activity of the petitioner was not permissible as such trading of policy to third parties was devoid of insurable interest. It was nothing but a wagering contract, which is null and void under section 30 of the Indian Contract Act, 1872. It was also argued that the policies were issued by the respondent as a measure of social security for the family members of the life assured, and that engaging in its trade would be against public policy. These arguments of the respondent were however rejected and it was held that policies were the sole property of the insured, who could transfer it and the insurer was bound to register such transfers. This decision is now under challenge in the Supreme Court. But now amendments to the above provision indicate that the insurer is no longer bound to register transfers.

The substituted provision according tot the amendment as is as follows

“38. (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 policy-holder or in public interest.

(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 policy-holder not later than thirty days from the date of the policy-holder 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.”

[Emphasis added]

This is in accordance with the views of the Law Commission as expressed in its 190th Report on “The Revision of the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999” (para 6.1.19). The Report of “The KPN Committee on Provisions of the Insurance Act, 1938” had also suggested the addition of the following provision:

(9) Notwithstanding anything to the contrary contained in any other law for the time being in force, the Authority may, in the interests of policyholders or of the public prohibit, restrict or regulate certain types of assignments as may be specified by regulations made by the Authority.

These views were recommended to allay apprehensions of misuse of life insurance policy trading. However, it can be seen that the grounds for refusal as per the amendments and recommendations are very wide. The insurer can now decline to accept a transfer if such transfer is in the opinion of the insurer not bona fide, in interest of policyholder or in public interest. The only remedy available for the insured is to challenge it. The impact of this amendment is that it could seriously deter any growth in trading of policies in secondary market.

This step appears to be out of tune with developments in the international scenario. In the UK and Australia, free trading of policies are allowed. In U.S., there is no requirement of insurable interest at the time of transfer of assignment and policy trading is accepted with regulations in place. Considering policies more as an investment and less as a security could boost its value and the insured could gain more from selling it to a third party rather than surrendering it for a lesser value with the insurers. An overhaul of legislation in this area is required in India to implement the progressive step taken by the judiciary and tap the potential of policy trading in secondary markets.


- Ammu Charles

2 comments:

vswami said...

To share own reaction (tentative):

While the headline bears out that the subject matter of discussion is ‘trading’, the write-up is seen to have mixed up so many related aspects; hence, fails to bring any clarity on those aspects as desired.
For instance, ‘insurance policy’ is no doubt, per se, a ‘movable property’, in the sense of an ‘actionable claim’ (within its legal meaning), in general. But, in one’s quick perception/ perspective, the most essential factor to be borne in mind, in regard to its assign- ability/transferability, permissible in whose favor and / or in what circumstances, so on and so forth, is, - the ‘subject matter’ insured, from which the insured interest will derive its complexion . Broadly viewed, that could be ‘life’ or ‘property’ of any kind, movable or immovable. As such, neither the law and its amendments, or case law, for a fruitful discussion and completeness, calls for a detailed analysis having essential regard to the type of ‘indemnity’ and to which it relates /attaches, etc.
Hence it might be worthwhile for experts to examine the whole matter in proper light on the indicated lines, if agreed to be not without substance.

vswami said...

To share further thoughts:

Out of sheer passion to get to know more on the topic discussed, and inspired by innate curiosity verging on anxiety, one may wish to go through the referred 2015 Bill of amendments of the present law on insurance.
As is noted on a quick reading, for a proper appreciation of the quite significant changes brought about, the relevant amendments as made in section 45 of the Bill (-the substituted sections 38, 39 and 40) require to be closely studied ; and be done so, by an intelligent comparison with the erstwhile sections 38,39 and 40. It is felt that, , then alone anyone interested or concerned, including advising professionals, will be in a position to make an appraisal of and form his own honest opinion,- also purposefully share with the rest, - on inter alia the far reaching consequences the amended law has in store for the future.
Incidentally, one honestly feels, the purport and import of the personal suggestions of the writer in the concluding paragraph, -more so of validity /acceptability, or otherwise, of any of them, from the viewpoint of societal welfare, do require to be independently analysed and understood in better light , with an altruistic frame of mind.
To give a hint, if so done, anyone may have good reasons not to agree but disagree with the writer’s personal view that, - “considering policies more as an investment and less as a security could boost its value and the insured could gain more from selling it to a third party rather than surrendering it for a lesser value with the insurers”. The implied suggestion that any insurance product is to be regarded as an ‘investment’, as intuitively viewed, does not seem to carry courage of conviction. On the contrary, one is provoked to recall the bitterness the buyers of a particular insurance product were left with, not long before. Reference is to the turf war between SEBI and IRDA waged not long ago, to the chagrin and disappointment of the consumers at large, for no fault of theirs. To refresh memory, the published article @ "SEBI V IRDA – Unfolding Turf War - TaxGuru" may come in handy.
(May have more to share)