The Nominee, the Bank and the Late Premium
Rekha Bora, 41, took a 20-year endowment policy with a sum assured of Rs 50,00,000 on 1 April 2022. Her brother Dhruba was named nominee. In June 2022 she assigned the policy to a bank as security for a Rs 35,00,000 housing loan; the assignment deed was executed and delivered to the insurer, which registered it in August 2022 but never removed the nominee's name from the policy record. The annual premium of Rs 42,000 fell due on 1 April 2023 and was paid on 20 April 2023. Rekha died on 12 September 2023 in a road accident while travelling in a friend's car. The outstanding loan on the date of death was Rs 22,60,000 and all instalments were current. The proposal form described her occupation as 'teacher' and her income as Rs 6,00,000 a year, but she had left teaching in 2021 and was running a small trading business earning about Rs 9,00,000. Both the bank and Dhruba have written claiming the full Rs 50,00,000. The insurer is also weighing repudiation for misstatement of occupation.
1. Who is entitled to how much of the Rs 50,00,000, and why?
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The assignment, not the nomination, governs payment. An assignment under Section 38 of the Insurance Act transfers the rights under the policy to the assignee. The bank therefore has a first charge on the policy money to the extent of its interest, that is, the outstanding loan of Rs 22,60,000. The balance of Rs 27,40,000 is not the brother's to keep beneficially: a nominee under Section 39 receives the money as a trustee for the legal heirs of the policyholder. Dhruba must collect it and distribute it according to the law of succession applicable to Rekha; he cannot claim it for himself merely because his name sat on the record.
The insurer's record-keeping error does not change this. Registration is an administrative act; the assignment was complete on execution and notice. The insurer's failure to strike off the nominee is its own lapse and cannot be used to defeat the assignee's statutory right.
The insurer should pay the bank against a discharge and the balance to the nominee as trustee, taking an indemnity, and must not pay the whole sum to either claimant. Interpleader or a court deposit is the safe route if the two claims cannot be reconciled.
2. Was the policy in force when Rekha died, given that the premium due on 1 April 2023 was paid on 20 April 2023?
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Yes, the policy was in force. Under the IRDAI (Protection of Policyholders' Interests) Regulations 2017, an annual-mode premium may be paid within a grace period of 30 days from the due date. Payment on 20 April 2023 falls well within that window, so the policy never lapsed and the risk continued uninterrupted from the original commencement date.
The distinction matters because a lapse would have required revival, and revival brings its own underwriting: a fresh declaration of health, a fresh suicide exclusion period and a fresh contestability clock. None of that applies here.
Two practical consequences follow. First, the death claim is an ordinary claim under a policy in force, not a revival dispute. Second, the insurer cannot argue that the risk was not covered between 1 April and 20 April 2023; during the grace period the cover subsists, and if death had occurred on 10 April the claim would still have been payable after adjustment of the unpaid premium.
The insurer should confirm from its renewal register that no lapse notice or forfeiture was issued in the interim; a wrongly issued lapse notice would itself be a deficiency in service.
3. Can the insurer repudiate for misstatement of occupation and income? Frame the Section 45 test and apply it.
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The statutory test. Section 45 of the Insurance Act, as amended, gives a life insurer two windows. Within three years of commencement, revival or rider addition, the policy may be called in question on the ground of fraud or of misstatement or suppression of a material fact – but the insurer must communicate its decision in writing within 15 days of receiving the claim. After three years, only fraud can reopen the policy. Rekha died about 17 months after commencement, so the insurer is inside the first window.
Application. The insurer must show that the statement was material, that it was made fraudulently or was a material misstatement, and that a prudent underwriter would have declined or rated the risk differently. Here the misstatement is about occupation and income: teacher versus small trader, Rs 6 lakh versus Rs 9 lakh. The declared income is lower, not higher, and a trading business is not a hazardous occupation. The cause of death – a road accident – has no causal link with the misdescribed occupation.
Likely outcome. A repudiation on these facts is weak and would probably be set aside. A stronger insurer would have sought the proposal, the agent's report and the underwriting manual, and would repudiate only if the manual shows a declinature rule for the true occupation. Written reasons are mandatory, and the claimant may go to the Insurance Ombudsman.