Dear Friends,
The insurance provides us short range as well as long range relief. The short-term relief is aimed at protecting the assured from loss of property and life. The long-term object being industrial and economical growth of country and the society.
Insurance has become one of the most important necessities in our life. As we have seen from previous two years, whole humanity has suffered huge loss of life due to COVID-19 pandemic. This pandemic has ruined various families and claimed their bread-and-butter earners. Many people have forced to expend their hard-earned savings on medical bills and become financial vulnerable.
We are purchasing insurance policies for safety to yourself, your family and financial independence. The insurance policies are of various types and provide by various types of insurance companies.
There are life insurance, general insurance and health insurance companies with their products in market. Through Insurance, we reduce our risk or transfer our risk to insurers by paying a small amount of premium. Insurance companies keep you financially protected against insured risks and protect your life and property.
Some insurance policies only provide risk cover and some are used to provide risk cover as well as investment options. The life insurance policies generally provide insurance as well as investment options, on the other hand general insurance products provides only safety against risk.
As you know that the life insurance contract can provide creditors with a guarantee for the payment of a debt or credit. Therefore, the policyholder and the creditor, e.g., the lending bank, may pledge the life insurance contract as a security.
It can also be used as a financial instrument, but in real sense it is not a financial instrument.
When there's a collateral on a life insurance contract, the policyholder gives his life insurance policy as a guarantee to a creditor. In exchange he obtains a claim (within the limits of the provisions of the contract). It ensures the creditor is paid in priority if the borrower/debtor's fails to meet his obligations.
Pledging a life insurance contract refers to the policyholder handing it over to a creditor, as security for a debt.
In this article we are going to understand the real person to whom insurance company will pay insurance claim and discharge itself from liability.
The Insurance Act, 1938 is based on insurance rules and regulations applicable in England, various provisions of insurance law have been taken from laws enforced in England. Since the Insurance Act, 1938 has been promulgated before independence of India.
The Insurance Act, 1938 after its promulgation has come through various amendments and changes to cope with changing customs and requirements of Indian Society.
The transfer or assignment of policies of insurance are governed by the provisions of the Transfer of Property Act, 1882 (as amended from time to time). Provisions of Section 38, of the Insurance Act, 1938 applied only to life insurance policies. The provisions of the Transfer of Property Act, 1882 apply to all types of insurance policies.
Prior to the enactment of the Insurance Act, 1938 the position regarding assignment and transfer of the insurance policies was the same as that, in England. Even with the enactment of the Insurance Act, 1938 the legal position of a nominee remains more or less same as contemplated in Section 132 and 135 of the Transfer of Property Act, 1882 except to the extent in Section 39 of Insurance Act, 1938.
SECTION 3 OF THE TRANSFER OF PROPERTY ACT, 1882, DEFINES
"Actionable Claim" as : " Actionable Claim", means a claim to any debt ,other than a debt, secured by mortgage of immovable property or by hypothecation or pledge of immovable property, or to any beneficial interest in movable property not in possession either actual or constructive of the claimants ,which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent ,accruing, conditional or continent."
SECTION 132 IN THE TRANSFER OF PROPERTY ACT, 1882
Liability of transferee of actionable claim. —The transferee of an actionable claim shall take it subject to all the liabilities and equities and to which the transferor was subject in respect thereof at the date of the transfer.
Illustrations
(i) A transfers to C a debt due to him by B, A being then indebted to B. C sues B for the debt due by B to A. In such suit B is entitled to set off the debt due by A to him; although C was unaware of it at the date of such transfer.
(ii) A executed a bond in favour of B under circumstances entitling the former to have it delivered up and cancelled. B assigns the bond to C for value and without notice of such circumstances. C cannot enforce the bond against A.
SECTION 135 IN THE TRANSFER OF PROPERTY ACT, 1882
Assignment of rights under policy of insurance against fire.—Every assignee by endorsement or other writing, of a policy of insurance against fire, in whom the property in the subject insured shall be absolutely vested at the date of the assignment, shall have transferred and vested in him all rights of suit as if the contract contained in the policy has been made with himself.
SECTION 39 IN THE INSURANCE ACT, 1938
39 Nomination by policy-holder. —
(1) The holder of a policy of life insurance on his own life, when effecting the policy or at any time before the policy matures for payment, nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death:
Provided that, where any nominee is a minor, it shall be lawful for the policy-holder to appoint in the prescribed manner any person to receive the money secured by the policy in the event of his death during the minority of the nominee.
(2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of the policy itself, be made by an endorsement on the policy communicated to the insurer and registered by him in the records relating to the policy and any such nomination may at any time before the policy matures for payment be cancelled or changed by an endorsement or a further endorsement or a will, as the case may be, but unless notice in writing of any such cancellation or change has been delivered to the insurer, the insurer shall not be liable for any payment under the policy made bona fide by him to a nominee mentioned in the text of the policy or registered in records of the insurer.
(3) The insurer shall furnish to the policy-holder a written acknowledgement of having registered a nomination or a cancellation or change thereof, and may charge a fee not exceeding one rupee for registering such cancellation or change.
(4) A transfer or assignment of a policy made in accordance with section 38 shall automatically cancel a nomination:
Provided that the assignment, of a policy to the insurer who bears the risk on the policy at the time of the assignment, in consideration of a loan granted by that insurer on the security of the policy within its surrender value, or its reassignment on repayment of the loan shall not cancel a nomination, but shall affect the rights of the nominee only to the extent of the insurer's interest in the policy.
(5) Where the policy matures for payment during the lifetime of the person whose life is insured or where the nominee or, if there are more nominees than one, all the nominees die before the policy matures for payment, the amount secured by the policy shall be payable to the policy-holder or his heirs or legal representatives or the holder of a succession certificate, as the case may be.
(6) Where the nominee or, if there are more nominees than one, a nominee or nominees survive the person whose life is insured, the amount secured by the policy shall be payable to such survivor or survivors.
(7) The provisions of this section shall not apply to any policy of life insurance to which section 6 of the Married Women's Property Act, 1874 (3 of 1874) applies or has at any time applied:
Provided that where a nomination made whether before or after the commencement of the Insurance (Amendment) Act, 1946, in favor of the wife of the person who has insured his life or of his wife and children or any of them is expressed, whether or not on the face of the policy, as being made under this section, the said section 6 shall be deemed not to apply or not to have applied to the policy.
SECTION 6 IN THE MARRIED WOMEN'S PROPERTY ACT, 1874
Insurance by husband for benefit of wife: -
(1) A policy of insurance effected by any married man on his own life, and expressed on the face of it to be for the benefit of his wife, or of his wife and children, or any of them, shall endure and be deemed to be a trust for the benefit of his wife, or of his wife and children, or any of them, according to the interest so expressed, and shall not, so long as any object of the trust remains, be subject to the control of the husband., or to his creditors, or form part of his estate. When the sum secured by the policy becomes payable, it shall, unless special trustees are duly appointed to receive and hold the same, be paid to the Official Trustee of the State in which the office at which the insurance was affected is situated, and shall be received and held by him upon the trusts expressed in the policy, or such of them as are then existing. And in reference to such sum, he shall stand in the same position in all respects as if he had been duly appointed trustee thereof by a High Court, under Act No. XVII of 1864 to constitute an office of Official Trustee, section 10.
Nothing herein contained shall operate to destroy or impede the right of any creditor to be paid out of the proceeds of any policy of assurance that may have been effected with intent to defraud creditors.
(2) Notwithstanding anything contained in section 2, the provisions of sub-section (1) shall apply in the case of any policy of insurance such as is referred to therein which is affected-
(a) by any Hindu, Muhammadan, Sikh or Jain-
(i) in Madras, after the thirty-first day of December, 1913, or
(ii) in any other territory to which this Act extended immediately before the commencement of the Married Women's Property (Extension) Act 1959, after the first day of April, 1923, or
(iii) in any territory to which this Act extends on and from the commencement of the Married Women's Property (Extension) Act, 1959, on or after such commencement;
(b) by a Buddhist in any territory to which this Act extends, on or after the commencement of the Married Women's Property (Extension) Act, 1959:
Provided that nothing herein contained shall affect any right or liability which has accrued or been incurred under any decree of a competent court passed-
(i) before the first day of April, 1923, in any case to which sub-clause ( i ) or sub-clause (ii) of clause (a) applies; or
(ii) before the commencement of the Married Women's Property (Extension) Act, 1959 (61 of 1959), in any case to which sub-clause (iii) of clause (a) or clause (b) applies.
NOMINATION
In life insurance policy, the policyholder nominates a person to whom an insurer must pay policy proceeds in case of his demise. A nominee is the person to whom insurer recognize at the time of paying proceeds of the insurance. No other person will be entertained if there is a nomination. A nominee can be any people such as your parents, spouse or children, relatives or friends etc., but insurance companies generally avoid registering unrelated parties as nominee due to lack of insurable interest of those unrelated parties in the life of the insured.
Generally, insurers are in practice to take nominee's details in proposal form and the nomination will be printed on the insurance policy. If insured has not nominated at the time of taking insurance, then he can do so during tenure of insurance policy and before his/her demise. The nomination can be made through endorsement and it can be changed many times during life time of insured and tenure of the policy.
It is duty of insurance company to inform the insured through written letter about nomination.
Please note that a nominees must be major and of capable to enter into any contract. A minor will be nominated if a policyholder appoints a custodian, who will administrate the insurance proceeds after demise of insured till minor become major.
Please Note That; The successive nomination is also allowed, you will nominate more than one person, such as suppose Mr. A has three sons X, Y, Z he can nominate as first Mr. X failing him Mr. Y and failing him Mr. Z. It means in this case policy proceeds first payable to Mr. X and if he is not alive then it will be paid to Mr. Y and so on.
Mr. A can also distribute policy proceeds among nominees such as Mr. X, Mr. Y & Mr. Z will receive policy proceeds in ratio of 20:30:50 and same will be endorsed on the policy documents by insurance company.
Please Note That; a policyholder can change his nomination many times during his life time and tenure of the policy. Insurance company is required to register each nomination and last nomination made by insured/policyholder will be valid and considered at the time of payment of proceeds. An insurance company will inform insured each time nomination details in writing.
Beneficial Nominee
This will include the immediate relatives of a policyholder, if a policyholder nominates his spouse, parents or children then in this case these are the beneficial nominees of the policyholder. Generally, insurance companies are paying insurance proceeds to the nominees and legal heirs of deceased claim their right from nominee. Now even though legal heirs claim benefits from the insurer, the insurer will pay the insurance proceeds to the beneficial nominees only.
In absence of nomination, it will be difficult to decide true legal heir and person able to received insurance proceeds after demise of the insured. Insurance companies in this case requires certificate of Administration, Succession Certificate from court, this process is lengthy and tedious. So, for better management of your insured amount, nomination is necessary. In absence of nomination the objective of immediate relief to the family of the demised insured will be defeated. The proceeds will not be given to legal heirs unless there will be consent will be there.
SOME JUDICIAL DECISIONS DEFINES POSITION OF A NOMINEE
- Sabita Devi Vs. Usha Devi [ AIR 1984 SC 346]- it was held by the Supreme Court that a nominee has merely the power to collect the money under the policy but the nomination does not confer any title on the nominee in the money received. The nominee has right to give a valid discharge to the insurer and has right to sue. The nominee holds money in trust for the benefit of legal representatives.
- In this case the insured has nominated his mother and on her death his widow and legal heirs, the LIC after death of the insured refused the payment of claim because of two counter claims by his widow and his mother and son. In this case the nominee widow of the deceased has claimed as absolute right to the policy money in exclusion of other i.e., his son and mother. The apex court did not hold her absolute right on the basis of mere nomination under provisions of Section 39 of the Insurance Act, 1938 and stated that the nomination does not confer any beneficial interest to the nominee as the nomination only specified the person authorized to receive payment on the death of the assured to give valid discharge the liability of insurance company. The amount received in the hands of nominee will be payable to legal heirs or representatives in accordance with the law of succession which governs them.
- Supreme Court added that provisions of Section 39 does not operate as a necessary third kind of succession which is styled as "Statutory Testamentary".
- Sarojini Amma Vs. Neelkhantha Pillai [ AIR 1962 ALL 355] it had been held by Hon'ble Allahabad High Court that a nominee has a bare right to collect the money the money due on the policy and to give discharge to the insurer but the nominee is not the owner of the money which has to be made over to the legal representatives of the assured as the nominee acts as a receiver.
- Delhi High Court had given contrary decision of the cases referred above in Uma Vs. Dwarka as [AIR 1982, Del 36]. It was held that Section 39 not lay down that the nominee has any liability to account for any person. The court added that the obvious meaning of Sub Section (1) and (6) of Section 39 is that the insurer must pay to the nominee and the nominee left to deal with it in any manner he decides. In this case the court had not considered natural justice the legal representatives of deceased or person opted for insurance policy has right to claim their share in the amount of insurance proceeds.
CONCLUSION
The decision of Supreme Court in the case of Sabita Devi Vs. Usha Devi as referred above has decided the contentious issue of utilization of insurance proceeds in the hands of a nominee. Please note that nomination is necessary to get proceeds of insurance in time and without any dispute. The insurance company in case of nomination, pay the insurance proceeds to the nominee and discharge its liability. Now here the nominee is responsible to distribute the insurance proceeds among the legal heirs or legal representatives of insured according to prevailing or applicable succession law on the family.
DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.
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