When it comes to paying the annual or renewal premium on our policies, we want to avoid the botheration of visiting the insurance company. Most of us expect the agent to collect the premium from us and deposit it with the company. We feel the agent has a duty to provide this “service” as he is earning commission on our policy. Is this expectation justified? What are the repercussions if, for some reason, the agent fails to deposit our premium in time?
Case Study: Shah had taken four insurance policies, of Rs 25,000 each, from the Life Insurance Corporation (LIC) of India. All of them came with double accidental benefits and were taken on March 6, 1986 through the same insurance agent. The premium was payable on a half-yearly basis.
The half-yearly premium due on March 6, 1987 was not paid in time. Later, the agent met Shah and obtained from him a bearer cheque worth Rs 2,730 and dated June 4,1987 towards the premium on all four policies. The cheque was encashed by the agent’s son the following day, but the premium was deposited with LIC much later, on August 10. Meanwhile, Shah met with a fatal accident on August 9 and died the same day.
Shah’s widow, who was the nominee under the policies, claimed the amount payable under the policies. LIC repudiated the claim saying the policies had lapsed on account of non-payment of premium in time or even thereafter, within the grace period.
So the widow, along with the Consumer Education & Research Society (CERS), filed a consumer complaint against LIC as well as the insurance agent. She claimed that the premium was paid to the agent on behalf of LIC, much before Shah met with an accident and expired. On the other hand, LIC contended that agents were not authorized to collect the premium, and so the premium paid to the agent could not be considered as having been paid to LIC.
The Maharashtra State Commission observed that in order to garner more business, agents collected the premiums from policyholders, either in cash or by cheque, and then deposited the money collected in the LIC office. The administration of LIC was aware that this practice was being followed, despite departmental instructions that the agents were not authorized to collect premiums. In view of this, LIC was held to be negligent. Accordingly, the Commission directed LIC to settle the claims in respect of the four policies, after deducting the amount of interest necessary to treat the policies as surviving.
LIC challenged the judgement before the National Commission, which held that the agent receiving a bearer cheque from the insured for the payment of the premium was not acting as LIC’s agent. Hence, the date of receipt of premium by LIC had to be considered and not the date of receipt of the premium by the agent. Since the premium was deposited by the agent a day after the death of the insured, the policy had lapsed. So, the National Commission set aside the order of the State Commission and dismissed the complaint.
Shah’s widow then approached the Supreme Court, which considered the provisions of the Life Insurance Corporation of India (Agents) Regulations, 1972. According to Regulation 8 (4), an agent does not have the authority to collect money or accept any risk for or on the behalf of LIC. This condition is also stated in the letter of appointment issued to agents. Hence, the Supreme Court ruled that an agent did not have any express or implied authority to receive premium on LIC’s behalf. Consequently, payment to the agent cannot be regarded as payment to LIC so as to make it liable in case of a claim.
It was further held that as the insured had died a day prior to the payment of the premium, the policy had lapsed. It is possible to revive a lapsed policy only during the lifetime of the insured and not after his death.
The SC said the widow was not entitled to a claim under the policies. However, in view of the peculiar facts and circumstances of the case, LIC was directed to refund the entire amount of premium, along with interest at 15 per cent a year, and costs of Rs 10,000. [Harshad J Shah & Anr v/s LIC & Ors – III (1997) CPJ 9 (SC)]
Impact: Consumers must ensure the premium is paid directly to the insurance company in time
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