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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8542 OF 2009

LIC OF INDIA …APPELLANT

VERSUS

INSURE POLICY PLUS SERVICES PVT. LTD. & ORS …RESPONDENTS

J U D G M E N T

VIRKAMAJIT SEN, J.

1 This Appeal assails the judgment of the learned Division Bench of the

High Court of Judicature at Bombay dated 22.3.2007, which allowed the writ

petitions of the First and Second Respondent herein. In this detailed and indeed

lucid Judgment it has been clarified that the insurance policies issued by the

Appellant “are transferable and assignable in accordance with the provisions of

the Insurance Act, 1938 and in terms of the contract of life insurance.”

2 The First Respondent is a company which is engaged, inter alia, in the

business of accepting and dealing in assignment of life insurance policies issued

by the Appellant. The Second Respondent is the Director and shareholder of the

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First Respondent. The Third Respondent is a statutory authority established

under Section 3 of the Insurance Regulatory & Development Authority Act,

1999, and is hereinafter referred to as IRDA. The business of the First

Respondent is to acquire life insurance policies from policy holders by paying

them consideration. The assigned policy is registered and recorded in the books

of the Appellant, and is then further assigned to a third party for consideration.

Upon registration in the books of the Appellant, it could then be further

assigned.

3 In January 2003, several branches of the Appellant refused to accept

notices of assignment lodged by the First Respondent. A Circular was issued on

22.10.2003, the content of which is reproduced below for facility of reference:

“There have been reports in the Press recently of the existence of

firms that are in the business of buying of Insurance policies which

are lapsed after acquiring paid-up value, from the original

policyholders by paying them an attractive sum over and above the

surrender value. The firm then becomes the assignee and is

entitled to all the rights of the policy be it maturity claim/death

claim, etc.

The above practice if it becomes prevalent would not only

undermine the real purpose of life insurance but also allow third

parties to make windfall gains by such wagering contracts.

Therefore, it is felt necessary to introduce measures to safeguard

the principles of life insurance and the larger interest of our

policyholders.

·If any Agent/employee is found to be involved in assisting

such Companies in respect of data acquisition of lapsed

policies for revival and subsequent assignment, strict

action may be initiated against him.

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·The Branch Offices would have to be more vigilant in case

of revival of policies that have been lapsed for longer

duration say over 3 years. In such cases, strict control on

non-acceptance of third party cheques, strict adherence to

medical requirements, quality of medical examination etc.

would be required. Wherever it is clear that a TIP company

is involved, the revival may be outrightly rejected.

·If there are a number of assignments in the same Branch

Office/Divisional Office in favour of the same Financial

Company, the nature of the business of the Company may

be investigated.

·If the Branch Office already has information that the nature

of business interest of the Financial Company is trading in

insurance policies only, the assignments in favour of such a

Company may be declined.

·Such policyholders may be educated through a specially

designed communication on the implications of “absolute

assignments”. This may be done to safeguard the interest

of those who may become innocent victims of third parties

indulging in this business.

The Branches may be instructed to start sending the data on

absolute assignment to the controlling Divisions cause-wise to

keep a vigil on trading of policies.

4 The Appellant also stated in a letter to the First Respondent that

assignments in favour of companies who are only trading in insurances would

not be permissible. The various complaints by the First Respondent elicited a

response by IRDA dated 3.3.3004, in which it opined that the Appellant should

register the assignments. The Appellant, however, refused to do so, and instead

issued another Circular dated 2.3.2005 reiterating the contents of the previous

circular, and laying down a procedure for “uniform implementation by all the

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offices of the Corporation”. A portion of this Circular is reproduced, as it lays

down the rationale behind the refusal to register these policies:

Life Insurance Policies, in general, are a measure of social

security for the family members of the life assured and in the

absence of adequate savings or securities, these Policies are often

the only financial security available to the family members of the

deceased life assured. The Government of India has guaranteed

the Sum Assured with Bonus in all LIC Policies under Section 37

of the Life Insurance Corporation Act, 1956 to ensure the

availability of financial security to the family of the deceased.

In this connection, the Hon’ble Supreme Court of India in

Life Insurance Corporation of India Vs. Consumer Education and

Research Centre (reported in AIR 1995 SC 1811) has ruled that the

LIC discharges important Constitutional functions and the Policies

issued by it are a measure of social security for the family of the

life assured.

Between April 2002 to July 2003, our Offices at various

places received several Policies for registration of assignments in

favour of some entities. Newspaper articles also appeared in

September 2003 about some Companies carrying on trading in

insurance Policies. The Corporation had to take urgent notice of

such a remarkable spurt in the registration of assignments in

respect of such Policies and the Corporation then noticed that these

Policies were being purchased and traded in like saleable securities

of a stock market. It was also noticed by the Corporation that the

only purpose for which such assignment was being obtained, was

with a view to trading in them by further selling them, which could

continue indefinitely without reference to the life assured.

The Corporation had noticed that this process of trading,

without any reference to the life assured, is in the nature of

speculation and weighing in as much as none of the subsequent

assignees would have either the means or the inclination to find out

whether the life assured was still alive. This, in turn, would means

that even if the life assured died a premature death, the Policies

would continue in circulation by means of such trading until its

date of maturity and the Corporation would then have to pay the

final/ultimate assignee, the entire maturity amount/value instead of

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the family members of the life assured, benefiting there under and

despite the fact that the death may have occurred several years

prior thereto.

Such trading in the Corporation’ Policies offends the very

essence of the Life insurance contract and leaves the family of the

life assured totally unprotected in the event of death of the life

assured. Hence, in order to prevent such speculation and wagering

which causes harm to millions of families all over India, the

Corporation has taken a policy decision to refuse the registration of

assignments which are in the nature of trading. For this purpose,

the Corporation has evolved a procedure to identify such

transactions so as to preserve and protect the interests of genuine

policyholders of the Corporation, and to leave untouched the

genuine assignments by the life assured.

5 The First and Second Respondent before us filed a writ petition before the

High Court seeking a Declaration that the insurance policies issued by the

Appellant are freely tradable and assignable in accordance with the provisions

of the Insurance Act, 1938, and that the Circulars dated 22.10.2003 and

2.3.2005 and the actions of the Appellant in refusing to register the assignment

of life insurance policies in favour of the First Respondent are illegal, null and

void.

6 The High Court, vide its impugned order, allowed the writ petition. It

noted that life insurance policies are the personal, movable property of the

policy holder, and can be said to be an actionable claim within the meaning of

Section 3 of the Transfer of Property Act. The High Court also recorded that the

business of assignment of such policies is prevalent the world over. While

noting that this Court in LIC of India vs. Consumer Education & Research

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Centre (1995) 5 SCC 482 has held that insurance is a social security measure, as

was also reflected in the Statement of Objects and Reasons of the Life Insurance

Corporation Act, 1956 (LIC Act), the High Court held that consequent to private

entry into the business of life insurance it is no longer possible to contend that

life insurance remained a measure of social security. It then went on to discuss

the decision of the Supreme Court of the United States of America in Basil P.

Warnoc vs George Davis 104 US 771, wherein it was held that “…in all cases

there must be reasonable ground, founded upon the relations of the parties to

each other, either pecuniary or of blood or affinity, to expect some benefit or

advantage from the continuance of the life of the assured. Otherwise the

contract is a mere wager, by which the party taking the policy is directly

interested in the early death of the assured. Such problems have a tendency to

create a desire for the event. They are, therefore, independently of any statute on

the subject condemned as being against public policy.” This decision came up

for consideration before the U.S. Supreme Court in Grigsby vs Russell 222 US

149. Grigsby did not agree with Warnoc, finding instead that life insurance is a

form of investment and savings, and to deny the right to sell it would diminish

its value. It was held that the rule of public policy that forbids the taking out of

insurance by one on the life of another in which he has no insurable interest

does not apply to the assignment by the insured of a valid policy to one not

having an insurable interest. In the impugned Judgment, the High Court noted

that the law in the U.S.A. after Grigsby is that though there has to be an

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insurable interest at the inception when the policy is taken out, subsequent

thereto there is no requirement of insurable interest at the time of transfer or

assignment. The argument raised by the First and Second Respondent was that

Section 38 of the Insurance Act is a substantive right, whereas the Appellant

contended that it is merely procedural. On an examination of the Section and the

manner in which it operates, it was held that once the insured transfers or

assigns the policy in favour of the assignee, the assignment is complete between

them. The insurer clearly has no choice or option in law but to accept the

transfer or assignment, provided the procedure laid down by Section 38 is

followed. The High Court therefore held that Section 38 is a substantive and not

a procedural provision. Section 38 makes it clear that the Legislature did not

treat life insurance as a security for protection of the widow or children of the

life assured, but as a form of investment and self-compelled saving. It is

therefore desirable to impart to it all the common characteristics of property.

The Appellant is the only player in the market which is refusing to accept such

assignments. It was held that if the terms of the contract between the Appellant

and the insured barred assignment, the assignee would also remain bound by

this covenant. However, in the absence of any such contractual term the

Appellant cannot unilaterally vary the terms of the contract under the guise of a

policy decision, thereby endeavouring to disallow transfers that are legally valid

under Section 38. As Section 38 is mandatory, it is not open to the Appellant to

issue any policy decision that is contrary to it. The Circulars dated 22.10.2003

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and 2.3.2005 were found to be illegal and it was held that insurance policies are

transferrable and assignable.

7 The question for us to decide is whether insurance policies are freely

tradable and assignable. To this end, it would be apposite to reproduce Section

38 of the Insurance Act as it stood prior to its amendment in 2015:

“38. Assignment and transfer of insurance policies.— (1) A

transfer or assignment of a policy of life insurance, whether with or

without consideration may be made only by an endorsement upon

the policy itself or by a separate instrument, signed in either case

by the transferor or by the assignor, his duly authorised agent and

attested by at least one witness, specifically setting forth the fact of

transfer or assignment.

(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 sub-section (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.

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(4) Upon the receipt of the notice referred to in sub-section

(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 sub-section (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.

(6) Any rights and remedies of an assignee or transferee of a

policy of life insurance under an assignment or transfer effected

prior to the commencement of this Act shall not be affected by the

provisions of this section.

(7) Notwithstanding any law or custom having the force of

law to the contrary, an assignment in favour of a person made with

the condition that it shall be inoperative or that the interest shall

pass to some other person on the happening of a specified event

during the lifetime of the person whose life is insured, and an

assignment in favour of the survivor or survivors of a number of

persons, shall be valid.”

This section has subsequently been amended by The Insurance Laws

(Amendment) Act, 2015, and Section 38(2) now reads thus:

(2) The 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

policyholder or in public interest or is for the purpose of trading of

insurance policy.

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This, along with the other changes introduced in the Section, indicates that the

law as it currently stands gives the Appellant a discretion as to whether or not to

accept an assignment provided its decision is predicated on the transfer or

assignment being (a) mala fide or (b) contrary to the interest of the policy holder

or (c) against public interest or (d) only for trading in the policy. The question

before us, however, is limited to the law as it stood prior to this statutory

amendment.

8 The Appellant has contended that only certain first assignments, in which

the policy is a pledge or collateral for a loan, would be acceptable. Based on an

undertaking to this effect, we have disposed of Civil Appeal No. 8543 of 2009

which was being heard along with this Civil Appeal. The Order dated

10.12.2015 passed by us reads thus:

“The Affidavit filed on behalf of the Respondent No.1 is taken

on record. Learned Senior Counsel appearing for the Appellant

also submits that the Undertakings may be accepted by the Court.

The Undertakings furnished in the said Affidavit are accepted by

the Court. The affiant is cautioned that if any of the Undertakings

are breached, apart from any other consequences, the Contempt of

Courts would be attracted to the Respondent.

In view of the above, the Interim Orders passed on 4th April,

2008 are recalled. The provisional registration shall be accorded

permanence and/or full registration. It is clarified that the

Undertakings shall stand extended to any fresh Applications for

registration that may now be moved by the Respondents for

transactions, assignments and transfers effected prior to the

Amendment of Section 38, viz. with effect from 26th 2 December,

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2014; in other words, these Applications shall be processed with

expedition as per the unamended Section 38.

It is further clarified that in view of the disposal of this

Appeal, in the circumstances mentioned above, the Appellant will

be liable to pay interest at the prevailing Bank rate (without penal

interest) as per Section 8 sub-section(5) of the Insurance

Regulatory and Development Authority (Protection of Policy

Holder Interest) Regulations, 2002. The disposal of this Appeal is

without prejudice to other Appeals in which arguments have been

closed.

The Civil Appeal is disposed of with no Order as to costs.”

The Appellant has argued that if multiple assignments are permitted the assignee

will not know if the insured has died, and trading in the policy may continue

even after he has. Furthermore, allowing parties in the position of the First

Respondent to revive a lapsed policy would amount to wagering. Regarding the

prevailing law in other jurisdictions, it has been submitted that the law in the

U.S. is not based on Grigsby, as the U.S. legal system it is a federal one. Even if

Grigsby were taken as the prevailing interpretation of the law, it does not state

that all assignments must be accepted regardless that they are in bad faith. The

fact that the Government provides tax deductions under Section 80C of the

Income Tax Act, 1961, that Life Insurance is not liable to be attached and sold in

execution of a decree under Section 60 of the Civil Procedure Code, and that

Life Insurance is guaranteed by the Central Government under Section 37 of the

LIC Act indicates that it is a measure of social security, so the power to refuse

‘bad faith’ assignments should be allowed on the grounds of public policy.

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Finally, it has been argued once again that Section 38 is merely procedural, and

the substantive law is to be found and extrapolated from Common Law.

9 The First and Second Respondent, on the other hand, have contended that

Section 38 recognises all assignments that comply with the requirements stated

therein. Insurance is intrinsically a matter of contract, and the Appellant

cannot, by way of a Circular, amend a contract and interfere with contractual

rights and obligations. An insurable interest is a precondition or essential

element at the time of taking out the scheme but not thereafter, including at the

point of any reassignment. Section 38 is substantive, not procedural, so there is

no reason to advert to common law, as the Insurance Act was passed well after

the two American Supreme Court decisions alluded to above. Subsection (9) of

the post-amendment Section 38 was relied upon, which reads as follows:

(9) Any rights and remedies of an assignee or transferee of a

policy of life insurance under an assignment or transfer effected

prior to the commencement of the Insurance Law (Amendment)

Act, 2015 shall not be affected by the provisions of this section.

Thus this sub-section protects the existing rights of the First Respondent. Even

in the absence of this sub-section, Section 6 of the General Clauses Act, 1897

would have come to the aid of these Respondents. It has also been alleged that

the only reason that the Appellant is averse to allowing re-assignment of

policies is because it wants to protect its own interests and repudiate its

contractual liability.

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10It would be apposite for us to begin our analysis by discussing the

operation of Section 38 of the Insurance Act as it stood prior to its amendment.

Section 38(1) prescribed the procedure by which assignment were to be

effected, namely, by way of an endorsement or by means of a separate

instrument. Sub-section (2) stated that once a transfer or assignment was made

in the manner prescribed by sub-section (1), it was complete and effectual.

However, this transfer or assignment only became binding upon written notice

thereof being given by the transferor and transferee to the insurer. Sub-section

(3) determined the priority of claims on the Insurance Policy by operation of

law. Sub-section (4) directed that upon receipt of the notice referred to in

sub-section (2), the insurer became bound to record the transfer or assignment

together with the date thereof and the name of the transferee and the assignee;

and if so requested grant a written acknowledgment of the receipt of such

notice. Sub-section (5) mandated the insurer to recognise the transferee or

assignee named in the notice as the only person entitled to the benefit under the

policy and such person would be subject to all liabilities and equities.

Sub-section (6) and (7) provided for some other contingencies with which we

are not immediately concerned.

11It is thus clear that on transfer or assignment of a policy and on the

requisite procedure being complied with, the assignee alone has an absolute

interest in the policy. The insurer was bound by the provisions of Section 38 to

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accept such a transfer or endorsement. The only limitations placed on

transferring a policy were in terms of the procedure laid out in Section 38, and

subject to the terms of 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. The erstwhile Section 39(4) also deserves

reproduction in this vein, as it further indicated the mandatory character of

Section 38. It reads thus:

(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.

12The Appellant has argued that Section 38 could result in scenarios where

it was bound to accept fraudulent policies since it had not been bestowed with

discretionary powers. We do not find any content in this contention, for the

reason that in cases of fraud, the assignment could be challenged on that ground

even after being recorded. Furthermore, when the Appellant encountered a fraud

inter alia in reviving lapsed policies, such as in cases of reviving the policy of

an insured who is already deceased, it could refuse to recognize the revival,

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which it is well within its rights to do as a contractual clause to this effect forms

part of the policy.

13The amendment to the Insurance Act by the Insurance Laws

(Amendment) Act, 2015, is significant. As previously discussed, Section 38 as it

now stands gives the insurer the discretion to decide whether or not to accept a

transfer or assignment of an Insurance Policy. The Amendment Act, according

to its Statement of Objects and Reasons, is “An Act further to amend the

Insurance Act, 1938 and the General Insurance Business (Nationalisation) Act,

1972 and to amend the Insurance Regulatory and Development Authority Act,

1999.” It is thus 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. Instead, it has

incorporated sub-section (9), which protects rights and remedies of assignees

that arose prior to the commencement of the Amendment Act. It is thus clear

that Parliament intended to allow all previous assignments and transfers

provided that they complied with the requirements laid out in Section 38. In the

face of this clear legislative intent, no other interpretation of Section 38 is

possible. It is accordingly not incumbent for us to discuss whether insurance

policies partake of the nature of social security, or whether the transfer of such

policies tantamount to wagering contracts.

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14In our considered opinion it is not open to the Appellants to charter a

course which is different to the postulation in the Insurance Act, by means of its

own Circulars. We need not go beyond mentioning the decision of this Court in

Avinder Singh v. State of Punjab (1979) 1 SCC 137 wherein it has been held

that the Legislature cannot efface itself by delegating its plenary powers unless

the delegate functions strictly under its supervision. If the delegate is allowed

to function independently it would tantamount to “usurpation of legislative

power itself.” This view came to be reiterated to decades later in Agricultural

Market Committee v. Shalimar Chemical Works Ltd. (1997) 5 SCC 516. This

Court held that “....... Power to make subsidiary legislation may be entrusted by

the legislature to another body of its choice but the legislature should, before

delegating, enunciate either expressly or by implication, the policy and the

principles for the guidance of the delegates”. The position that obtains today is

diametrically opposite inasmuch as the statute permitted, at the relevant time,

the assignment and/or transfer of life insurance policies, but the delegate,

through its Circulars, has attempted to nullify that provision of law. We

conclude, therefore, that the circulars are ultra vires the Statute and must

therefore be made ineffectual.

15We also think that 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 proferentem rule is extremely

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relevant inasmuch as it is the Appellant who has drafted the insurance policy

and was therefore well-positioned to include clauses making it specifically

impermissible 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.

16It is for these manifold reasons and in view of the analysis of the law

prior to as well as post the amendments carried out in the Insurance Act that we

find the Appeal to be devoid of merits. The impugned Judgment is well

-reasoned and takes within its sweep all the relevant documents raised. The

Appeal is accordingly dismissed.

.................................................J.

(VIKRAMAJIT SEN)

.................................................J.

(SHIVA KIRTI SINGH)

New Delhi,

December 29, 2015.