The ₹2 crore keyman policy and a partner who walked out
Two years ago, Kiran Deshmukh and three partners formed a Pune-based auto-components firm. The firm took a keyman life policy on Kiran, the operations partner, for ₹2 crore, paying an annual premium of ₹2.6 lakh. The firm's chartered accountant documented the business's exposure to Kiran's death as roughly ₹80 lakh - covering a bank guarantee, the cost of replacing him, and a temporary dip in orders.
Last November Kiran resigned from the partnership to start his own venture. On his way out, the partners assigned the keyman policy to Kiran personally for a nominal ₹1 lakh, and the insurer recorded the assignment. Kiran continued paying the premiums from his own account.
Eight months later Kiran died in a road accident. His wife, the nominee, claimed ₹2 crore. The insurer is willing to pay, but the firm argues the money should come to it, because the policy was always meant to protect the business and the firm's real exposure was only ₹80 lakh.
1. The firm argues that because its actual exposure was only ₹80 lakh, it - and not the family - should receive the ₹2 crore. Assess this claim.
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Short answer: the ₹80 lakh figure proves the firm had an insurable interest; it does not cap what the policy pays.
- Life insurance is not a contract of indemnity. A fire or marine policy restores a measured loss; a life policy pays the sum assured agreed when the contract was made, whatever the beneficiary's actual loss turns out to be.
- Insurable interest - the firm's genuine exposure to losing Kiran - is needed when the contract is formed. Without it the policy would be void; with it, the contract is valid. A bank guarantee, replacement cost and order disruption comfortably satisfy that test.
- Interest need not equal the sum assured. ₹2 crore against ₹80 lakh of exposure is a moral-hazard question for the underwriter and possibly a tax question for the firm's deduction. It is not a reason to reduce the claim to ₹80 lakh.
- By the time of death the firm no longer owned the policy. It had assigned the contract for ₹1 lakh and the insurer had recorded the assignment. The firm's grievance is commercial, against its former partner's estate - not a claim on the insurer.
The insurer should pay the sum assured to the person entitled under the policy and leave the partners to their separate dispute.
2. Was the assignment to Kiran valid, and can the insurer refuse to pay because the firm's interest had ceased eight months before death?
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Yes - the assignment is valid, and the later loss of the firm's interest does not affect it.
- Section 38 of the Insurance Act, 1938 allows a life policy to be transferred by endorsement on the policy or by a separate instrument. The insurer must be notified and must record the assignment; here it did, so the transfer is complete and the insurer is bound to deal with the assignee.
- Insurable interest is tested at inception. Once a life policy is validly issued and later validly assigned, the contract does not collapse because the original proposer's interest disappears. This is exactly why keyman cover needs an exit plan.
- On Kiran's death the money goes to the nominee under Section 39. Under the 2015 amendment a nominee who is a close family member - spouse, parent, child - takes beneficially, so the insurer pays Kiran's wife and is discharged.
- The insurer should not pay the firm. If the partners believe they were poorly advised at the time of assignment, their remedy is a civil claim over the ₹1 lakh nominal consideration or a claim for breach of the partnership deed.
The firm's real mistake was leaving a ₹2 crore policy in force on a man who no longer worked for it.
3. What should the agent have done at the moment the partnership ended?
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At that moment the agent served two principals and should have said so plainly.
- To the firm: keyman cover exists only while the keyman is a keyman. The options are to surrender and take the surrender value, reduce the sum assured, or keep a term plan that ends on his exit. Leaving the policy in force is speculation, not protection.
- To Kiran: buying the policy back is legitimate and often sensible, but he should understand that he now pays ₹2.6 lakh a year for a contract underwritten on the firm's exposure, not his family's needs.
- To the insurer: the assignment must be sent on the insurer's prescribed form with the reason recorded, and any change in occupation or income should be informed.
- Documentation: written confirmation from all partners, a note of the advice given, and an acknowledgment that the agent is not acting for both sides without their informed consent.
Had this been done, the dispute would not exist. An agent who arranges a keyman policy and stays silent at the keyman's exit has left the client with a two-crore problem.