Full Judgment Text
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 2568 OF 2019
(Arising out of SLP(C) No. 1689 of 2015)
Anandrao Ramchandra Salunke …Appellant
VERSUS
Life Insurance Corporation of India & Anr. …Respondents
J U D G M E N T
Dr Dhananjaya Y Chandrachud, J
1 Leave granted.
2 This appeal arises from a decision of the National Consumer Disputes
1
Redressal Commission reversing a judgment of the Maharashtra Consumer
2
Disputes Redressal Commission .
3 The appellant obtained a policy of life insurance on 11 November 1993.
Signature Not Verified
Digitally signed by
NEELAM GULATI
Date: 2019.03.27
10:27:04 IST
Reason:
The sum insured was Rs 75,000. The term of the policy was twenty five years.
“National Commission”
1
2 “State Commission”
2
The policy envisaged the payment of a quarterly premium of Rs 775, spread
over a hundred quarters during the term of the policy. The last premium was
payable on 11 August 2018 and the policy was to mature on 11 November
2018. On 27 May 2001, the appellant took a loan of Rs 15,000 from the
Ratnagiri Branch of the Life Insurance Corporation by pledging the policy. In
August 2001, the appellant stopped paying the premium. Thereafter, he applied
for the refund of the surrender value. The Corporation offered a surrender value
of Rs. 2268, after deducting the loan amount and outstanding interest.
4 The appellant filed a complaint before the District Consumer Disputes
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Redressal Forum, Sangli . The District Forum allowed the complaint and
directed the respondent to pay an amount of Rs 29,888 together with interest at
9% p.a. with effect from 21 July 2004. The decision of the District Forum was
challenged in appeal by the respondent. The State Commission affirmed the
decision. In revision, the National Commission reversed the decision, relying on
4
its earlier decision in Branch Manager, LIC of India v A Paulraj .
5 The controversy involved in the present case turns on the interpretation of the
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provisions of Section 113 of the Insurance Act, 1938 and Clause 7 of the policy
document. Section 113 of the Act, as it stood at the material time was in the
following terms:
“District Forum”
3
4 (1996) 2 CPJ 69. The National Commission approved the calculation of cash value of bonus payable in
accordance with the surrender value factor.
5 “the Act”
3
“113. Acquisition of surrender value by policy-
(1) A policy of life insurance under which the whole of the benefits
become payable either on the occurrence, or at a fixed interval or
fixed intervals after the occurrence, of a contingency which is bound
to happen, shall, if all premiums have been paid for at least three
consecutive years in the case of a policy issued by an insurer, or five
years in the case of a policy issued by a provident society defined in
Part III, acquire a guaranteed surrender value, to which shall be
added the surrender value of any subsisting bonus already attached
to the policy, and every such policy issued by insurer shall show the
guaranteed surrender value of the policy at the close of each year
after the second year of its currency or at the close of each period of
three years throughout the currency of the policy : Provided that the
requirements of this sub-section as to the addition of the surrender
value of the bonus attaching to the policy at surrender shall be
deemed to have been complied with where the method of calculation
of the guaranteed surrender value of the policy makes provision for
the surrender value of the bonus attaching to the policy: Provided
further that the requirements of this sub-section as to the showing of
the guaranteed surrender value on a policy shall be deemed to have
been complied with where the insurer shows on the policy the
guaranteed surrender value of the policy by means of a formula
accepted in this behalf by the Authority as satisfying the said
requirements: Provided further that the provisions of this sub-section
as to the showing of the guaranteed surrender value on a policy shall
not take effect until after the expiry of six months from such date as
the Authority may, by notification in the official Gazette, appoint in
this behalf.
(2) Notwithstanding any contract to the contrary, a policy which has
acquired a surrender value shall not lapse by reason of the non-
payment of further premiums but shall be kept alive to the extent of
the paid-up sum insured, and the paid-up sum insured shall for the
proposes of this sub-section include in full all subsisting reversionary
bonuses that have already attached to the policy, and shall, where
the policy is one on which the maximum number of annual premiums
payable is fixed and the premiums are of uniform amount, be before
the inclusion of such bonuses not less than the amount bearing to the
total sum insured by the policy exclusive of bonuses the same
proportion as the total period for which premiums have already been
paid bears to the maximum period for which premiums were
originally payable.
(3) A policy kept alive to the extent of the paid-up sum insured under
sub section (2) shall not be entitled by virtue of that sub-section to
participate in any profits declared distributable after the conversion of
the policy into a paid-up policy.
(4) Sub-section (2) and sub-section (3) shall not apply -
(a) where the paid-up sum insured by a policy being a policy issued
by an insurer, is less than one hundred rupees inclusive of any
attached bonus or takes the form of an annuity of less than twenty-
five rupees, or where the paid-up sum insured by a policy, being a
policy issued by a provident society as defined in Part III, is less than
fifty rupees inclusive of any attached bonus or take the form of an
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annuity of less than twenty-five rupees, or
(b)where the parties after the default has occurred in the payment of
the premium agree in writing to some other arrangement, or
(c) to policies in which the surrender value is automatically applied
under the terms of the contract to maintaining the policy in force after
its lapse through non-payment of premium.”
6
Section 113 was amended on 20 March 2015, with effect from 26 December 2014.
For the purposes of this case, we are concerned with the pre-amended provision.
6 Condition 7 of the policy document reads thus:
“7. Guaranteed surrender value
This policy can be surrendered for cash after the premiums have
been paid for at least three years. The minimum surrender value
allowable under this policy is equal to 30% of the total amount of the
mentioned premiums paid excluding premiums for the first year and
all extra premiums and/or additional premiums for accident benefits
that may have been paid. The cash value of any existing vested
bonus additions will also be allowed.” (emphasis
supplied)
7 The basis on which the respondent arrived at the surrender value which was
payable to the appellant is reflected in the following computation:
COMPUTATION:
6 Following the amendment, Section 113 is as follows:
“113. Acquisition of surrender value by policy-
(1) A policy of life insurance shall acquire surrender value as per the norms specified by the regulations.
(2) Every policy of life insurance shall contain the formula as approved by the Authority for calculation of
guaranteed surrender value of the policy.
(3) Notwithstanding any contract to the contrary, a policy of life insurance under a non-linked plan which has
acquired a surrender value shall not lapse by reason of non-payment of further premiums but shall be kept in force to the
extent of paid-up sum insured, calculated by means of a formula as approved by the Authority and contained in the policy
and the reversionary bonuses that have already been attached to the policy:
Provided that a policy of life insurance under a linked plan shall be kept in force in the manner as may be
specified by the regulations.
(4) The provisions of sub-section (3) shall not apply—
(i) where the paid-up sum insured by a policy, inclusive of attached bonuses, is less than the amount specified by
the Authority or takes the form of annuity of amount less than the amount specified by the Authority; or
(ii) when the parties, after the default has occurred in payment of the premium, agree in writing to other
arrangement."
5
Sum Assured : Rs 75,000
Mode – Quarterly Premium : Rs 775
Total No. of Premia Payable : 100 Quarters (i.e. 25 years)
Date of commencement of the policy : 11.11.1993
Premium paid upto 11.08.2001 : 31 Premia
Duration of premium paid : 7 years 9 Months (i.e. 31
Quarters)
Loan of Rs 15,000 taken on 27.05.2001
Paid-Up Value : (No. of paid premia multiplied by Sum
Assured)/Total No. of Premia i.e. (31 multiplied by
Rs.75,000)/100 = Rs 23,250
Vested Bonuses : Rs 42,187 (at the rate of Rs 562.5 per
1,000 as per Bonus chart for endowment policy as on
31.03.2001 (Annexure-4)
Total paid up value : paid up value + vested bonus i.e. Rs
23,250 + 42,187 = Rs 65,437 ( as per condition no. 4 as per
the policy)
Surrender Value Factor : 32.92% (as per Surrender value
Table No.1A applicable to endowment policy (Annexure-5)
Surrender Value Payable as on 14.05.2004 : total Paid-Up
Value multiplied by Surrender Value Factor i.e. Rs 65,437
multiplied by 32.92% = Rs 21,542
Outstanding Loan amount with interest : Principal + Interest
i.e. Rs 15,000 + Rs 4,274 = Rs 19,274
Net amount payable as on 14.05.2004 : Surrender Value
Payable - Outstanding Loan Amount with interest i.e. Rs
21,542-19,274 = 2,268/-
Guaranteed Surrender Value (as per condition No. 7 of the
policy)- 30% of the total premium paid excluding premium
paid for the first year and all extra premiums that may have
st
been paid i.e. 30% multiplied by (Total Premium paid - 1
year premium) : 30% multiplied by(Rs 24,025-Rs 3,100)=
Rs6,277
Cash value of the vested bonus : 32.92% of the Vested
Bonus i.e. 32.92% of Rs 42,187 = 13,888
Total Guaranteed Surrender Value : Rs 20,165
Net Amount Payable as on 14.05.2004 : Guaranteed
Surrender Value Payable – Outstanding Loan amount with
interest : Rs 20,165-Rs 19,274 = Rs 891/-.
8 Learned counsel appearing on behalf of the appellant submits that the
appellant has a grievance in regard to the manner in which the computation of the
surrender value of the bonus payable was arrived at. According to the submission,
the respondent has applied a factor of 32.92% in arriving at the surrender value not
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only with reference to the premia which were paid but also in regard to the bonus to
which the appellant claims to be entitled. The following findings of the District
Forum were relied upon during the course of arguments:
“Considering the terms and conditions in the policy and calculations
by the respondent at exhibit 5/6, it is observed that the respondent
has stated that 32.92% of the Premium amount and Bonus amount
put together is payable. The respondent has not brought to notice
any term or condition in the policy providing for 32.92% reduction in
amount of Bonus. Therefore, as per calculations of the respondent at
exhibit 5/6 32.92% of the premium of Rs.23250/- i.e. premium of
Rs.6975/- is payable. Further, it is clear that the amount at the end of
calculations against exhibit 5/6 i.e. Bonus minus loan amount of
Rs.19274, is due from the respondent. Therefore, it is clear that
32.92% of the entire amount payable, plus amount of bonus payable,
minus amount of outstanding loan (6975+42187-19274=29888) is the
amount payable.”
While affirming this finding, the State Commission held that the formula for the
purpose of the guaranteed surrender value was required to be approved by the
competent authority under Section 113. The State Commission held that no
material was produced before it to indicate that the surrender value formula was
approved by the competent authority.
9 Assailing the above submission, learned counsel appearing on behalf of the
respondent has placed reliance on the reply which was filed by the Life Insurance
Corporation in the proceedings before the District Forum to explain the basis of
computing the surrender value. Learned Counsel urged that Section 113 does not
speak about the payment of the full value of the subsisting bonus. On the contrary, it
specifically adverts to only its surrender value. Learned counsel submitted that the
first proviso to Section 113 provides that the requirements of the section shall be
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deemed to have been complied with where the method of calculation for computing
the guaranteed surrender value of the policy makes a provision for surrender value
of the bonus attached to the policy as well. The second proviso provides that the
requirement as to the showing of the guaranteed surrender value shall be deemed
to have been complied with where the insurer shows on the policy the guaranteed
surrender value by means of a formula accepted by the authority as specifying the
requirement. The third proviso, it has been submitted, provides that the second
aspect of Section 113 relating to the requirement of showing the guaranteed
surrender value of the policy shall not take effect until the expiry of six months from
the date of notification in the Official Gazette.
10 The rival submissions need to be analysed.
11 There are popular misconceptions about the concept of ‘surrender value’ in
the sphere of life insurance. In a policy of fire insurance, a policy holder has no
expectation of a surrender value. In contrast, a holder of a policy of life insurance
may believe (as the appellant in this case does) that their surrender value will be
equal to the total amount paid as premium. This expectation is misconceived.
Simply put, life insurance operates on the basis of the law of averages. Premium is
collected from all policy holders in order to create a common fund. Payouts from the
fund are received only by those who suffer the peril which is insured. The economic
loss suffered by few is divided amongst many. Premia are fixed by the insurer on the
basis of expected mortality rates. Hypothetically speaking, if mortality rates of all
individuals were to be equal irrespective of age and everyone paid the same
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premium, the discontinuance of a policy during its term would not entitle the insured
to a surrender value since the common fund would be depleted on a regular basis.
In reality, the mortality rates increase with age. Actuarial tables provide a guide to
the insurer. Hence, when an insurer initially collects premium from individuals of a
younger age, the amount it collects is higher than the amount it pays out towards
claims. The difference between them is the ‘reserve’. Thus if a policy holder wishes
to discontinue a policy before the end of the term, they will only be entitled to their
share of the ‘reserve’ as a surrender value.
12 In his treatise on the subject, tilted “Modern Law of Insurance in India” K.S.N.
Murthy has elucidated on the concept of “surrender value” in life insurance policies in
the following terms:
“Life insurance is based on the cooperative principle in the sense that
the premiums paid by the policy holders are pooled together and after
meeting the preliminary expenses of administration, etc., the balance
is formed into or added to a fund which is invested in good business
or which attracts an accumulated interest. On that basis when the
calculations are made, and if one of the policy holders withdraws from
such a cooperative enterprise, the remaining policy holders suffer a
set-back and it is the duty of the seceding policy holder to make good
not only the administrative expenses, etc., incurred, but something
more must be deducted: but that amount also must be fair and
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equitable.”
13 Since the value of the ‘reserve’ is the amount which the insurer collects as
premium from policy holders from which it deducts the amount of the claims it pays
out, the surrender value payable to a policy holder can never be equal to the premia
paid by them.
7 Modern Law of Insurance in India, N.M. Tripathi Private Limited, Bombay, First Edition (1978).
9
8
14 In a decision of 1913 in Charles C. Burlingham v Charles M. Crouse , the
Supreme Court of the United States was tasked with interpreting a provision of the
Bankruptcy Code in relation to ownership of life insurance policies. Justice Day, who
delivered the opinion of the Court, drew a distinction between insurance policies
which have a surrender value and policies which do not have a surrender value:
“…Life insurance, may be given in a contract providing simply for
payment of premiums on a calculated basis which accumulates no
surplus for the holder. Such insurance has no surrender value.
Policies, whether payable at the end of a term of years or at death,
may be issued upon a basis of calculation which accumulates a net
reserve in favor of the policy-holder and which forms a consequent
basis for the surrender of the policy by the insured with advantage to
the company upon the payment of a part of this accumulated
reserve.”
The Court cited the decision of the Court of the Southern District of New York, in In
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re McKinney to elucidate on the concept of surrender value. Justice Brown had
held thus:
"The first of these elements, the surrender value of the policy, arises
from the fact that the fixed annual premium is much in excess of the
annual risk during the earlier years of the policy, an excess made
necessary in order to balance the deficiency of the same premium to
meet the annual risk during the latter years of the policy. This excess
in the premium paid over the annual cost of insurance, with
accumulations of interest, constitutes the surrender value. Though
this excess of premiums paid is legally the sole property of the
company, still in practical effect, though not in law, it is moneys of the
assured deposited with the company in advance to make up the
deficiency in later premiums to cover the annual cost of insurance,
instead of being retained by the assured and paid by him to the
company in the shape of greatly increased premiums, when the risk
is greatest. It is the 'net reserve' required by law to be kept by the
company for the benefit of the assured, and to be maintained to the
credit of the policy. So long as the policy remains in force the
company has not practically any beneficial interest in it, except as its
custodian, with the obligation to maintain it unimpaired and suitably
invested for the benefit of the insured. This is the practical, though not
228 U.S. 459(1913)
8
9 15 Fed. Rep. 535, 537
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the legal, relation of the company to this fund.
"Upon the surrender of the policy before the death of the assured,
the company, to be relieved from all responsibility for the increased
risk, which is represented by this accumulating reserve, could well
afford to surrender a considerable part of it to the assured, or his
representative. A return of a part in some form or other is now usually
made…”
15 The issue before the Court is as to whether the provisions of Section 113 of
the Act and condition 7 of the policy document were duly observed by the insurer.
Section 113(1) is in two parts:
(i) A policy of life insurance under which the whole of the benefits become
payable either on the occurrence of a contingency which is bound to happen
or at fixed intervals, acquires a surrender value if all the premiums have been
paid for at least three consecutive years. The surrender value of any
subsisting bonus already attached to the policy is to be added to the
guaranteed surrender value;
(ii) Every such policy which is issued by an insurer must show the guaranteed
surrender value of the policy at the close of each year after the second year of
its currency or at the close of each period of three years throughout the
currency of the policy.
16 In computing the surrender value of any subsisting bonus, reference ought to
be made to the stipulations contained in Section 113. The first proviso to Section
113(1) provides that the requirement of the addition of the surrender value of the
bonus attaching to the policy at surrender is deemed to have been fulfilled where the
method of calculating the guaranteed surrender value makes provision for the
11
surrender value of the bonus attaching to the policy. The second proviso stipulates
that the requirement of showing the guaranteed surrender value on a policy is
deemed to have been complied with where the insurer shows on the policy the
guaranteed surrender value by means of a formula which is accepted by the
authority as satisfying the requirements under the third proviso. The requirement of
showing the guaranteed surrender value shall not take effect until six months have
expired from the date of publication of the notification in the Official Gazette.
17 In exercise of the powers conferred by Section 49(2) of the Life Insurance
Corporation Act, 1956, the Central Government notified the Life Insurance
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Corporation Regulations 1959 . Regulation 18(2) empowers the Executive
Committee to accept the surrender of any insurance or annuity and to purchase or
redeem any insurance or annuity and to waive the forfeiture of any insurance on
such terms as the Executive Committee may deem fit. The respondent has placed
on the record a copy of the Minutes of the Seventy-seventh meeting of the
Executive Committee of the Life Insurance Corporation of India held on 19 August
1959. At that meeting, the Executive Committee approved of the proposed scale of
surrender values. The note on the basis of which the approval was granted has also
been annexed.
18 We have considered the basis of the computation which has been placed
before the Court and which has been extracted in the earlier part of this judgment.
Condition 7 of the policy document specifically provides that the surrender value is
equal to 30% of the total premiums paid, excluding premiums for the first year and
10 “the Regulations”
12
all extra premiums and/ or additional premiums for accident benefits that may have
been paid. The paid up value of the policy on that basis was computed by taking
into account the premiums that were paid by the insured. The paid up value of the
policy worked out to Rs 23,250.
19 The real dispute in the present case arose because of the claim of the
appellant that he was entitled to the entirety of the bonus and not 32.92% of the total
bonus that would have accrued had the policy continued to its term of maturity. The
factor of 32.92% has been duly explained on the basis of the actuarial table
governing surrender values which has been placed on record. The vested bonus
which accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according
to the bonus chart for endowment policies as on 31 March 2001. There was no error
on the part of the respondent in computing the surrender value of the subsisting
bonus, on the basis on which it has been computed. The surrender value of the
subsisting bonus attached to the policy cannot be the bonus which would have been
payable had the policy continued to its full term. In deducing the surrender value of
the bonus which was payable to the appellant, the respondent applied the surrender
value factor of 32.92% to the total paid up value of the policy. The total paid up
value comprised of the paid up value (Rs 23,250) and the vested bonus (Rs
42,187). Hence, the total paid up value of the policy was Rs 65,437 to which the
surrender value factor of 32.92% was applied. This resulted in a surrender value of
Rs 21,542. What is payable to the insured was computed after deducting the loan
which was taken against the policy together with the outstanding interest.
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20 For the above reasons, we are of the view that the method by which the
computation was carried out was in accordance with the accepted and duly
approved formula. It was consistent with the provisions of Section 113 of the Act as
they stood at the material time as well as condition 7 of the policy document.
21 We, therefore, do not find any merit in the appeal. The appeal is, accordingly,
dismissed. There shall be no order as to costs.
…..............................................................J.
(Dr DHANANJAYA Y CHANDRACHUD)
…….............................................................J.
(HEMANT GUPTA)
NEW DELHI;
MARCH 07, 2019