Supreme Court holds Insurance Company liable despite Postponement Letter: Gokal Chand vs. Axis Bank (2022)

Introduction

Date of the Judgment: 15 December 2022

Citation: 2022 INSC 716

Judges: K.M. Joseph, J., Hrishikesh Roy, J.

Can an insurance company avoid paying a claim by issuing a backdated letter postponing the policy after the insured has died, especially when the premium was paid, and a medical test showed no issues? The Supreme Court of India recently addressed this question in a case involving a home loan and a linked life insurance policy. This case revolves around whether an insurance company can deny a claim by issuing a backdated letter postponing the insurance policy after the insured’s death, despite having received the premium and conducted a medical test with normal results. The Supreme Court bench, comprising Justices K.M. Joseph and Hrishikesh Roy, delivered the judgment.

Case Background

Gokal Chand and his wife applied for a home loan from Axis Bank (respondent No. 1). As a prerequisite for the loan, the bank required Gokal Chand to obtain a life insurance policy from Max Life Insurance Corporation (respondent No. 2). On 25 July 2017, the bank sanctioned a home loan of ₹70,99,172 and deducted ₹6,24,172 as insurance premium, which was paid to the insurance company on behalf of Gokal Chand. Gokal Chand underwent a medical test on 30 July 2017, which showed no health issues. Unfortunately, he passed away due to cardiac arrest on 8 August 2017. When the appellants filed an insurance claim, the insurance company refused to settle the claim. The loan account was eventually settled by the borrowers on 19 March 2020, during the pendency of the appeal.

Timeline:

Course of Proceedings

The appellants initially filed a Consumer Complaint before the State Consumer Disputes Redressal Commission, Haryana. The State Commission dismissed the complaint, stating that there was no privity of contract between the insurer and the insured. The appellants then appealed to the National Consumer Disputes Redressal Commission, which also dismissed the appeal. This led to the present appeal before the Supreme Court of India.

Legal Framework

The case primarily revolves around the interpretation of contract law and consumer protection principles in the context of insurance. The Supreme Court examined the terms of the loan agreement and the conduct of the insurance company. The relevant clause 4.1(k) of the home loan document issued by the bank to the applicant Gokal Chand reads as follows:

“(k) comprehensively insure and keep insured, with the Bank as a sole beneficiary, (i) the Property for its full market value or replacement cost, and (ii) whenever required by the Bank, the risk of death and injury of the Borrower, and

– shall assign in favour of the Bank and submit to the Bank the original insurance policy document(s) and premium/payment receipts;

– Shall promptly inform the Bank of any loss or damage to the Property due to any force majeure or Act of God;

– shall do all acts as may be required to maintain the Bank’s status of sole beneficiary (under the said insurances) and receive money thereon;”

The applicant’s declaration in the Loan Letter also stated that:

“Opting for the loan amount along with life/property insurance in the loan downsize letter shall be considered as the written intent of the customer to avail the insurance. Such selection shall be considered to be explicit instruction from the borrower to the bank in writing to disburse the premium to the insurance company directly and will become effective only on the borrower complying with the all formalities as required by the insurance company …”

Arguments

Appellants’ Arguments:

• ✓ The appellants argued that the insurance company acted in bad faith by issuing an ante-dated letter postponing the insurance proposal after being informed of Gokal Chand’s death.
• ✓ They contended that the insurance company retained the premium for some time after the death and refunded it only after receiving the death intimation.
• ✓ The appellants pointed out that the medical test results were normal, and there was no valid reason to postpone or reject the insurance policy.
• ✓ They argued that the insurance company’s actions were an afterthought, triggered by the death of the insured.

Respondent No. 2 (Insurance Company) Arguments:

• ✓ The insurance company argued that the proposal was postponed by six months due to the treadmill test finding and eventually declined.
• ✓ They submitted that no concluded life insurance policy existed as the proposal was still at the proposal stage.
• ✓ They argued that unless the proposal is accepted and a policy is issued, there is no insurer-insured relationship.

Respondent No. 1 (Bank) Arguments:

• ✓ The bank supported the insurance company’s stand, stating that they had forwarded the proposal and remitted the premium to the insurance company before Gokal Chand’s death.
• ✓ They argued that they were not deficient in service to either the complainant or the insured.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issue:

1. Whether the insurance company was justified in repudiating the insurance claim, given the circumstances of the case, including the collection of premium, medical test, and the subsequent issuance of an ante-dated letter postponing the proposal after the death of the insured.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

Legal Provisions:

The court referred to the terms of the loan agreement and the insurance policy, specifically clause 4.1(k) of the loan document and the applicant’s declaration in Loan Letter.

Judgment

How each authority was viewed by the Court?

• ✓ Life Insurance Corporation of India vs. Raja Vasireddy Komalavalli Kamba and Others [1984] 2 SCC 719:* The Court distinguished this case, stating that while it laid down a general principle, the specific facts of the present case indicated acceptance of the policy.
• ✓ D. Srinivas vs. SBI Life Insurance Company Limited and Others [2018] 3 SCC 653:* The Court relied on this case, which clarified that the unique facts of each case must be considered to determine whether there is a presumption of acceptance of the policy by the insurer.

What weighed in the mind of the Court?

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

• ✓ The fact that the insurance company issued an ante-dated letter postponing the insurance proposal only after being informed of the insured’s death.
• ✓ The fact that the medical test results of the insured were normal, and there was no valid reason to postpone or reject the insurance policy.
• ✓ The fact that the insurance company retained the premium for some time after the death and refunded it only after receiving the death intimation.
• ✓ The Court’s emphasis on the principle of good faith in insurance contracts.

Fact:Law Ratio

The Court’s reasoning was primarily based on the factual circumstances of the case, particularly the conduct of the insurance company after the death of the insured. While legal principles were considered, the factual matrix played a more significant role in the Court’s decision.

Logical Reasoning

Key Takeaways

✓ Insurance companies cannot avoid claims by issuing backdated letters after the death of the insured, especially when the premium has been paid, and medical tests have been conducted with normal results.

✓ The principle of good faith is paramount in insurance contracts, and any action that appears to be an afterthought to avoid liability will be scrutinized by the courts.

✓ The acceptance of premium and conduct of medical tests can be construed as an implicit acceptance of the insurance proposal.

✓ The courts will look at the surrounding circumstances to determine if there was an implicit acceptance of the insurance policy.

Directions

The Supreme Court directed the insurance company (respondent No. 2) to process the complainant’s insurance claim and remit the payable sum.

Development of Law

The Supreme Court’s judgment reinforces the principle that insurance contracts require utmost good faith from both parties. The judgment clarifies that the acceptance of a premium and the conduct of a medical test without any adverse findings can create a presumption of acceptance of the insurance policy. The court also emphasized that an insurance company cannot unilaterally postpone or reject a policy after the insured’s death, particularly when the company’s actions appear to be an attempt to avoid liability. This case clarifies the position of law laid down in Life Insurance Corporation of India vs. Raja Vasireddy Komalavalli Kamba and Others and reiterates the position laid down in D. Srinivas vs. SBI Life Insurance Company Limited and Others.

Conclusion

The Supreme Court allowed the appeal, setting aside the judgments of the lower consumer forums. The court held that the insurance company was deficient in service and acted in bad faith by issuing an ante-dated letter postponing the insurance proposal after being informed of the insured’s death. The court directed the insurance company to process the insurance claim and remit the payable sum to the appellants. This judgment underscores the importance of good faith in insurance contracts and protects the rights of consumers against unfair practices by insurance companies.