Supreme Court holds Finance Company Liable for Delay in Insurance Policy Issuance: Ashatai vs. Shriram City Union Finance Ltd. (2019)

Introduction

Date of the Judgment: April 16, 2019
Citation: (2019) INSC 364
Judges: Uday Umesh Lalit, J., Indu Malhotra, J.

Can a finance company be held responsible for a delay in obtaining an insurance policy for a borrower, especially when the borrower dies soon after taking the loan? The Supreme Court of India recently addressed this question in a case where a borrower’s family sought relief after his untimely death, arguing that the finance company’s delay in securing the insurance policy led to their financial loss. This case explores the responsibilities of financial institutions in ensuring timely insurance coverage for their borrowers. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Indu Malhotra, with the opinion authored by Justice Indu Malhotra.

Case Background

On February 27, 2015, Anand Duparte, the husband of the Appellant, obtained a personal loan of Rs. 2,00,000 from Shriram City Union Finance Ltd., the Respondent. The loan agreement was completed, and all legal formalities were fulfilled. The finance company secured the loan by arranging an insurance policy through its sister concern, M/s Shriram General Insurance Company Ltd. However, the insurance policy’s cover note listed the finance company as the insured party, not the borrower. The policy was a group insurance plan covering multiple borrowers, with Mr. Duparte listed at Serial No. 263. The loan was to be repaid in 48 monthly installments of Rs. 7,933 each, with the first installment paid on March 7, 2015. Mr. Duparte also paid Rs. 400 as the insurance premium. The group insurance policy was issued for the period from March 30, 2015, to March 29, 2016. Tragically, Mr. Duparte passed away on March 17, 2015, just 18 days after obtaining the loan. Following his death, the finance company issued a notice to the Appellant for repayment of the loan. The Appellant requested that the loan be recovered through the insurance policy. The finance company denied having received the premium and claimed that Rs. 2,120 was deducted from the loan amount towards processing fees and stamp charges. The Appellant filed a consumer complaint, arguing that the finance company was deficient in service for delaying the insurance policy, which led to the loan not being covered upon her husband’s death. She sought a restraint on the finance company from recovering the loan and compensation for her mental agony.

Timeline:

Course of Proceedings

The District Consumer Disputes Redressal Forum, Nanded, allowed the Appellant’s consumer complaint on February 27, 2017, holding that the finance company was negligent in obtaining the insurance policy late. The District Forum noted that the insurance premium was paid soon after the loan was sanctioned, and the delay in forwarding the premium to the insurance company was a deficiency of service. They ordered that the finance company could not recover the loan from the Appellant and awarded compensation of Rs. 10,000 for mental agony and Rs. 3,000 for costs. The State Consumer Disputes Redressal Commission, Mumbai, dismissed the finance company’s appeal on September 19, 2017, agreeing that the insurance premium was deducted from the loan account. However, the National Consumer Disputes Redressal Commission set aside the orders of the District Forum and the State Commission on November 30, 2018, in a revision petition filed by the finance company. The National Commission held that there was no evidence of the payment of the insurance premium or its deduction from the loan account and that the finance company was not negligent in rendering services. Aggrieved by the order of the National Commission, the Appellant filed the present Civil Appeal before the Supreme Court.

Legal Framework

The Supreme Court considered Section 64VB(2) of the Insurance Act, 1938, which states:

“For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.”

This provision specifies that the insurance coverage commences from the date the premium is paid to the insurer. The Court interpreted this to mean that once the premium is paid, the risk is covered from that date.

Arguments

Appellant’s Arguments:

• The Appellant contended that her husband had paid the insurance premium and that the finance company had deducted the premium from the loan amount.
• It was argued that the finance company was deficient in service for delaying the insurance policy. Had the policy been issued when the loan was advanced, the amount would have been recovered through the insurance.
• The Appellant submitted that the loan was sanctioned on 27.02.2015 and the amount was credited to the loan account after deducting the insurance premium.
• The Appellant relied on the fact that the finance company obtained the insurance policy from its sister concern on 30.03.2015.
• The Appellant argued that the risk should have been covered from the date of payment of the premium, as per Section 64VB(2) of the Insurance Act, 1938.

Respondent’s Arguments:

• The finance company contended that the Appellant had taken a contradictory stand regarding payment of the insurance premium in her legal notice dated 16.12.2015.
• It was argued that there was no document evidencing receipt of the Demand Draft of Rs. 400 towards payment of premium.
• The finance company further contended that there was no evidence of any deduction of the insurance premium from the loan account.
• The finance company stated that the amount of Rs. 2,120 was deducted from the loan amount towards processing fee and stamp charges, not towards the insurance premium.
• The Respondent argued that they were not negligent in rendering services.

The Appellant argued that the finance company was negligent in delaying the insurance policy, which should have been in place from the date of premium payment. The Respondent, on the other hand, denied receiving the premium and claimed there was no deduction for the insurance. The Respondent also stated that the deduction of Rs. 2,120 was for processing fees and stamp charges, not for the insurance premium. The finance company’s argument was that the Appellant had contradicted herself by claiming that the premium was paid by Demand Draft, whereas the company had no record of it.

The innovativeness of the argument made by the Appellant was that the finance company, being the beneficiary of the insurance policy, had a duty to ensure that the insurance policy was in place from the date of payment of premium.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame the issues, but the core issue was:

• Whether the National Commission was justified in setting aside the concurrent findings of the District Forum and the State Commission, which had held the finance company liable for deficiency of service due to the delay in obtaining the insurance policy.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following legal provision:

• Section 64VB(2) of the Insurance Act, 1938: This provision states that the risk is covered from the date of payment of the premium. The court relied on this provision to hold that since the premium was paid by the deceased, the risk was covered from the date of payment.

The Supreme Court also considered the following cases:

• Galada Power and Telecommunication Limited v. United India Insurance Company Limited & Anr., (2016) 14 SCC 161: The Supreme Court referred to this case while explaining the limited revisional jurisdiction of the National Commission.
• Rubi (Chandra) Dutta v. United India Insurance Co. Ltd., (2011) 11 SCC 269: This case was also cited to explain the limited scope of revisional jurisdiction of the National Commission.

Judgment

How each authority was viewed by the Court?

• Section 64VB(2) of the Insurance Act, 1938: The Court relied on this provision to determine that the risk was covered from the date of payment of the insurance premium.
• Galada Power and Telecommunication Limited v. United India Insurance Company Limited & Anr., (2016) 14 SCC 161: The Court used this case to reiterate that the National Commission’s revisional jurisdiction is limited.
• Rubi (Chandra) Dutta v. United India Insurance Co. Ltd., (2011) 11 SCC 269: The Court cited this case to emphasize the limited scope of revisional jurisdiction of the National Commission.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The finance company’s own admission of receiving the Demand Draft for the insurance premium, which contradicted their claim that no premium was paid.
• The fact that the finance company deducted Rs. 2,120 from the loan amount for processing, which was linked to the insurance policy.
• The clear deficiency of service on the part of the finance company in delaying the insurance policy, especially considering that the premium was paid and the policy was to secure the loan.
• The application of Section 64VB(2) of the Insurance Act, 1938, which states that the risk is covered from the date the premium is paid.

The Court emphasized that the National Commission had erred in setting aside the concurrent findings of the District Forum and the State Commission, as the National Commission’s findings were factually incorrect. The Court also noted that the finance company was the beneficiary of the insurance policy, which was issued by its sister concern, making it a composite transaction. The Court was also concerned about the plight of the widow who was unnecessarily dragged through legal proceedings.

Logical Reasoning:

The Supreme Court found that the National Commission had erred in its assessment of the facts and law. The Court held that the finance company was responsible for ensuring that the insurance policy was in place from the date of payment of the premium. The Court also noted that the finance company was the beneficiary of the insurance policy, which was issued by its sister concern. The Court observed that the finance company had admitted to receiving the Demand Draft for the insurance premium in its Revision Petition before the National Commission, which was a crucial factor in the Court’s decision. The Court also relied on the fact that the finance company had deducted Rs. 2,120 from the loan amount towards processing of the composite transaction, which included insurance. The Court also noted that the finance company was the beneficiary of the insurance policy, which was issued by its sister concern, making it a composite transaction. The Court also considered the plight of the widow who was unnecessarily dragged through legal proceedings.

The Supreme Court did not consider any alternative interpretations and directly applied the provisions of Section 64VB(2) of the Insurance Act, 1938, to the facts of the case. The Court also relied on the admissions made by the finance company in its Revision Petition before the National Commission. The Court’s decision was based on the facts of the case and the relevant legal provisions. The Court’s decision was based on the principle that the finance company was responsible for ensuring that the insurance policy was in place from the date of payment of the premium.

The Supreme Court concluded that the finance company was deficient in service for delaying the insurance policy. The Court also held that the finance company was liable to pay compensation to the Appellant for the mental agony and costs of litigation. The Court’s decision was based on the principle that the finance company was responsible for ensuring that the insurance policy was in place from the date of payment of the premium.

“The deceased husband of the Appellant had fulfilled his part of the transaction, by depositing Rs. 400/­ by way of the Demand Draft towards the insurance premium, and also the charges of Rs. 2,120/­ towards processing of the loan transaction.”

“Hence, there was a clear deficiency of service by the Respondent – Finance Company in delay in obtaining the insurance policy from its sister concern.”

“As a consequence, the risk would be covered from the date of payment of the insurance premium. The loan was secured from the date on which the insurance premium was paid.”

Key Takeaways

• Financial institutions are responsible for ensuring timely issuance of insurance policies linked to loans.
• Delay in obtaining insurance policies can be considered a deficiency of service.
• Insurance coverage commences from the date of payment of the premium, as per Section 64VB(2) of the Insurance Act, 1938.
• Finance companies cannot deny liability by claiming that the premium was not received when they have themselves admitted to receiving it.
• The National Commission has a limited revisional jurisdiction and cannot set aside concurrent findings of the lower forums unless there is a jurisdictional error, illegality, or material irregularity.

Directions

The Supreme Court directed the Respondent – Finance Company to pay compensation of Rs. 50,000 and costs of Rs. 25,000 to the Appellant.

Specific Amendments Analysis

There was no discussion on specific amendments in this judgment.

Development of Law

The ratio decidendi of this case is that a finance company is liable for deficiency of service if it delays the issuance of an insurance policy linked to a loan, especially when the premium has been paid by the borrower. The Court has clarified that the risk is covered from the date of payment of the premium, as per Section 64VB(2) of the Insurance Act, 1938. This case reinforces the principle that financial institutions have a responsibility to ensure that the insurance policies they arrange for their borrowers are in place from the date of premium payment. This decision also clarifies the limited revisional jurisdiction of the National Commission.

Conclusion

The Supreme Court allowed the appeal, setting aside the order of the National Commission. The Court held that the finance company was deficient in service for delaying the insurance policy, and directed the finance company to pay compensation and costs to the Appellant. The Court’s decision was based on the finance company’s own admissions, the provisions of Section 64VB(2) of the Insurance Act, 1938, and the principle that financial institutions are responsible for ensuring timely insurance coverage for their borrowers.

Category

Parent Category: Consumer Law

Child Category: Deficiency of Service

Child Category: Insurance

Child Category: Section 64VB, Insurance Act, 1938

Parent Category: Insurance Act, 1938

Child Category: Section 64VB, Insurance Act, 1938

FAQ

Q: What does this judgment mean for borrowers?

A: This judgment means that financial institutions are responsible for ensuring that insurance policies linked to loans are issued promptly. Borrowers should ensure that their insurance premiums are paid and that the policy is in place from the date of payment.

Q: What is deficiency of service?

A: Deficiency of service refers to any fault, imperfection, shortcoming, or inadequacy in the quality, nature, and manner of performance that is required to be maintained by a service provider under any law or contract.

Q: What is the significance of Section 64VB(2) of the Insurance Act, 1938?

A: Section 64VB(2) of the Insurance Act, 1938, specifies that the risk is covered from the date the premium is paid to the insurer. This means that once the premium is paid, the insurance coverage is effective from that date.

Q: What should borrowers do if the finance company delays the insurance policy?

A: Borrowers should immediately contact the finance company and the insurance company to ensure that the policy is issued. If there is a delay, they can file a consumer complaint against the finance company for deficiency of service.

Q: What is the revisional jurisdiction of the National Commission?

A: The National Commission’s revisional jurisdiction is limited. It can only interfere with the orders of the State Commission if the State Commission lacked jurisdiction, acted with illegality, or material irregularity.