Tuesday, January 12, 2016

Assignability of Life Insurance Policies

The controversial practice of companies taking out “dead peasants” insurance on the life of their employees was depicted by Michael Moore in his film “Capitalism: A Love Story”. In this, companies took insurance policies on the lives of their employees and also paid the premium on them. In case of the death of their employees, the claims would be paid out to the employer, and the family of the deceased would not receive any amounts whatsoever. In fact, it seems the case that neither the employees nor their family would even know of the existence of such an insurance policy. Although derided, the practice has its own share of supporters.

A somewhat different practice that evokes similar sentiment was the subject matter of a recent decision of the Supreme Court of India in LIC of India v. Insure Policy Plus Services Pvt Ltd. The respondent company Insure Policy Plus Services Pvt Ltd (IPPS) is in the business of accepting and dealing in assignment of life insurance policies issued by the appellant, Life Insurance Corporate of India (LIC). IPPS would obtain assignments of life insurance policies from the policyholders for a determined consideration and in turn assign them further. Although LIC was notified of the assignments, the dispute arose because LIC refused to register several of them on the basis of circular it issued to prevent the large-scale assignment practice. This it did so on the basis of broader policy considerations given that it affected the financial security and stability of the families of the policyholders, and also the larger public interest. IPPS challenged LIC’s stance before the Bombay High Court, which ruled on the interpretation of the Insurance Act, 1938 that life insurance policies are actionable claims within the meaning of the Transfer of Property Act, 1882 and hence transferable in nature. After examining the position in other jurisdictions, particularly the United States, it found the prevalence of such practice. LIC appealed against the decision of the High Court.

The principal issue before the Supreme Court was whether life insurance policies are freely tradable and assignable. In order to address this issue, the Court interpreted the provisions of section 38 of the Insurance Act, which deals with assignment and transfer of insurance policies. This provision was the subject matter of amendment in 2015. Under the pre-amendment position, a policyholder is free to assign the policy, which only requires to be registered with the insurance company (which did not possess any discretion to refuse registration). The Court observed:

It is thus clear that on transfer or assignment of a policy and on the requisite procedure being complied with, the assignee has an absolute interest in the policy. The insurer was bound by the provisions of Section 38 to accept such a transfer or endorsement. The only limitations placed on transferring a policy were in terms of the procedure laid down in Section 38, and subject to the terms of the policy itself. The Section left no scope for the insurer to dispute the right to transfer or assign the policy. Section 38 was thus clearly mandatory and substantive. …

Section 38 was amended by the Insurance Laws (Amendment) Act, 2015 and now confers discretion upon the insurer to accept or decline any assignment “where it has reason to believe that such transfer or assignment is not bona fide or is not in the interest of the policyholder or in the public interest or is for the purpose of trading of insurance policy”. Given this amendment, the question before the Court was whether such discretion could be read into Section 38 in the absence of an express stipulation. The Supreme Court answered this in the negative. It noted:

It is neither a declaratory or clarificatory piece of legislation. The language of the extant Section 38 cannot be interpreted to mean that this is what Section 38 had meant all along. Furthermore, had the Legislature intended to amend Section 38 retrospectively, it would have said so explicitly.

In other words, the amendment conferring discretion upon the insurer suggests that such discretion was hitherto non-existent. In that sense, the Supreme Court largely dealt with the issues as a matter of statutory interpretation and considers the nature of insurance policy as property. It refused to be swayed by the broader public policy considerations, which are trickier to rule on. For example, the Court observed:

We also think it is not appropriate to import the principles of public policy, which are always imprecise, difficult to define, and akin to an unruly horse, into contractual matters. The contra preferentem rule is extremely relevant inasmuch as it is the Appellant who has drafted the insurance policy and was therefore well-position to include clauses making it specifically impressible to assign policies. In the absence of any such covenant, the Appellant cannot be heard to say that such transfers or assignments violate public policy. In any event, as we have seen above, the general global practice is to permit assignments of insurance policies.

The result of the decision may not be long lasting, as it will not apply to assignments that occur after the 2015 amendment to section 38 of the Insurance Act. In any event, if insurance companies wish to restrict assignments beyond that prescribed in the amended section 38, they will have to reconsider the scope of the assignment term in the policy document.


1 comment:

vswami said...

OFFHAND

Attention may be drawn to the posted comments @ http://www.moneylife.in/article/red-tape-vs-red-carpet-ndashpart3/40798.html

As viewed:
The stand initially taken by the 'Insurer' (as set out in the write-up) is quite sound and valid, both legally and legitimately; and accords/in tune with the basic concept of 'INSURANCE'. On that premise, in one's conviction, the idea of directly or indirectly 'trading on (IN?)'any kind of 'insurance product' is anathema, hence deserves to be eschewed. If so, the whole matter, to be precise the wisdom or absence of it in the amendments of the law, ought not but be revisited and be frightfully reviewed from all its inter-connected (-woven) angles.