Supreme Court settles Insurance Contract Formation in Accidental Death Claim: Bhumikaben N. Modi vs. LIC (2024)

Date of the Judgment: May 08, 2024

Citation: 2024 INSC 395

Judges: A. S. Bopanna, J., C.T. Ravikumar, J.

Can an insurance company deny a claim if the policyholder dies shortly after paying the premium but before the formal policy is issued? The Supreme Court of India recently addressed this critical question in a case involving a life insurance claim. This judgment clarifies when an insurance contract is considered legally binding, particularly in cases of accidental death shortly after premium payment. The bench comprised Justices A. S. Bopanna and C.T. Ravikumar, with Justice C.T. Ravikumar authoring the judgment.

Case Background

The case revolves around the claim made by the appellants, the widow and children of Mr. Narendra Kumar Kantilal Modi (the deceased). Mr. Modi tragically died due to an electric shock on July 14, 1996. Prior to his death, on July 6, 1996, he had submitted a proposal for a life insurance policy with the Life Insurance Corporation of India (LIC). He paid the first premium of Rs. 3388 via a cheque dated July 8, 1996, which was cleared on July 12, 1996. The LIC issued an “Acceptance-cum-First Premium Receipt” on July 9, 1996, with Policy No. 832471906, indicating the policy’s commencement date as June 28, 1996. However, after Mr. Modi’s death, LIC blocked the policy on July 15, 1996, and repudiated the claim, stating that no contract had been concluded.

Timeline

Course of Proceedings

The appellants initially filed a complaint with the District Forum under Section 11 of the Consumer Protection Act, 1986. The District Forum ruled in favor of the appellants on July 19, 2001, directing LIC to pay the full insurance amount with 12% interest, along with compensation for mental agony and costs. LIC appealed to the State Commission, which dismissed the appeal on July 25, 2006, upholding the District Forum’s order. LIC then filed a revision petition before the National Consumer Disputes Redressal Commission (NCDRC). The NCDRC reversed the concurrent orders of the lower forums, dismissing the complaint and offering an ex-gratia payment of Rs. 1 lakh, which led to the present appeal before the Supreme Court.

Legal Framework

The case primarily involves the interpretation of contract law principles in the context of insurance. The Consumer Protection Act, 1986, under which the complaint was initially filed, aims to protect consumer rights. Section 21 of the Act outlines the jurisdiction of the National Commission. Specifically, Section 21(b) grants the NCDRC revisional powers to call for records and pass appropriate orders in consumer disputes where the State Commission has acted illegally or with material irregularity. The court also considers the general principles of contract law, particularly regarding offer and acceptance, and the specific nature of insurance contracts as contracts of utmost good faith.

Section 21 of the Consumer Protection Act, 1986 states:

“21. Jurisdiction of the National Commission. — Subject to the other provisions of this Act, the National Commission shall have jurisdiction — (a) to entertain — (i) complaints where the value of the goods or services and compensation, if any, claimed exceeds [rupees one crore]; and (ii) appeals against the orders of any State Commission; and (b) to call for the records and pass appropriate orders in any consumer dispute which is pending before or has been decided by any State Commission where it appears to the National Commission that such State Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity.”

Arguments

Appellants’ Arguments:

• The appellants contended that the LIC had accepted the first premium and issued an “Acceptance-cum-First Premium Receipt” on July 9, 1996.
• They argued that this receipt constituted an acceptance of the proposal, and therefore, a contract was concluded.
• The appellants pointed out that the receipt stated the corporation would assume risk from the date of the receipt.
• They also highlighted that the LIC had even processed the commission for the agent, indicating acceptance.
• The appellants argued that the policy should be effective from the date of commencement of risk i.e. June 28, 1996.

Respondent’s Arguments:

• The respondent, LIC, argued that the policy was not communicated to the deceased and was blocked on July 15, 1996, after his death.
• They contended that the mere receipt of the premium and preparation of the policy did not constitute acceptance of the proposal.
• LIC argued that there was no concluded contract between the deceased and the corporation.
• They relied on the judgment in Life Insurance Corporation of India v. Raja Vasireddy Komala valli Kamba and Ors. [1984] 2 SCC 719, to support their position that silence or delay does not denote consent in insurance contracts.

Sub-Arguments:

• Appellants: The “Acceptance-cum-First Premium Receipt” explicitly stated that the corporation was on risk from the date of the receipt, and the LIC’s actions, including the commission payment, further indicated acceptance.
• Respondent: The LIC maintained that the policy was blocked due to the death of the proposer, and the offer of ex-gratia payment was not an admission of liability but a gesture of goodwill.

Innovativeness of the argument: The appellants innovatively argued that the “Acceptance-cum-First Premium Receipt” explicitly stated that the corporation was on risk from the date of the receipt, and the LIC’s actions, including the commission payment, further indicated acceptance. This was a strong counter to the LIC’s argument that mere receipt of premium does not constitute acceptance of the proposal.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the NCDRC was justified in reversing the concurrent orders of the forums below and in dismissing the complaint.

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 authorities:

Cases:

• Life Insurance Corporation of India v. Raja Vasireddy Komala valli Kamba and Ors. [1984] 2 SCC 719 – The Court discussed this case, which held that silence does not denote consent in insurance contracts.
• D. Srinivas v. SBI Life Insurance Co. Ltd. & Ors. [2018] 3 SCC 653 – The Court distinguished the Raja Vasireddy case, stating that it laid down a flexible formula to determine whether there was a clear indication of acceptance of insurance.
• Gokal Chand (D) Thr. LRs v. Axis Bank Ltd. and Anr. [2022] SCC OnLine 1720 – The Court followed the D. Srinivas case and rejected a defense relying on the Raja Vasireddy case.
• Murthy v. State of Karnataka & Others [2003] 7 SCC 517 – The Court cited this case to support the principle that a Supreme Court decision applies to all cases irrespective of their stage of pendency.
• Sudesh Dogra v. Union of India & Ors. [2014] 6 SCC 486 – The Court referred to this case to define “ex gratia” as an act of gratis not connected with legal liability.
• Kongaraananthram v. Telecom Distt. Engineer, Ma-Habubnagar [1990] SCC OnLine NCDRC 24 – The Court referred to this case to highlight the limited revisional powers of the NCDRC under Section 21(b) of the Consumer Protection Act, 1986.

Legal Provisions:

• Section 11 of the Consumer Protection Act, 1986 – This section deals with the procedure for filing complaints with the District Forum.
• Section 21 of the Consumer Protection Act, 1986 – This section outlines the jurisdiction of the National Commission, specifically its revisional powers under Section 21(b).

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court distinguished Life Insurance Corporation of India v. Raja Vasireddy Komala valli Kamba and Ors. [1984] 2 SCC 719, stating that the facts of the present case showed a clear indication of acceptance, unlike in the cited case.
• The Court followed D. Srinivas v. SBI Life Insurance Co. Ltd. & Ors. [2018] 3 SCC 653, emphasizing that a flexible approach is needed to determine acceptance.
• The Court followed Gokal Chand (D) Thr. LRs v. Axis Bank Ltd. and Anr. [2022] SCC OnLine 1720, to support its position that the Raja Vasireddy case should not be rigidly applied.
• The Court cited Murthy v. State of Karnataka & Others [2003] 7 SCC 517, to support the principle that a Supreme Court decision applies to all cases irrespective of their stage of pendency.
• The Court referred to Sudesh Dogra v. Union of India & Ors. [2014] 6 SCC 486, to define “ex gratia” as an act of gratis not connected with legal liability.
• The Court referred to Kongaraananthram v. Telecom Distt. Engineer, Ma-Habubnagar [1990] SCC OnLine NCDRC 24, to highlight the limited revisional powers of the NCDRC under Section 21(b) of the Consumer Protection Act, 1986.

What weighed in the mind of the Court?

The Court’s reasoning was heavily influenced by the factual circumstances of the case, particularly the issuance of the “Acceptance-cum-First Premium Receipt” and the subsequent actions of the LIC. The Court emphasized that the receipt itself stated that the corporation was on risk from the date of the receipt. The Court also noted the absence of any evidence of non-realization of the cheque amount and the fact that the LIC had processed the commission for the agent. The Court found the LIC’s attempt to block the policy after the death of the proposer to be inconsistent with the principle of utmost good faith in insurance contracts.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

The Supreme Court considered the arguments of both sides and the factual matrix of the case. It noted that the NCDRC had erred in reversing the concurrent orders of the District Forum and the State Commission. The Court emphasized that the “Acceptance-cum-First Premium Receipt” explicitly stated that the corporation was on risk from the date of the receipt. The court also considered the fact that the LIC had processed the agent’s commission, indicating an acceptance of the proposal. The court further noted that there was no evidence to suggest that the cheque issued by the deceased was dishonoured. The court also noted the incongruity in the LIC’s stand that the policy was prepared on 15.07.1996 when the first premium receipt was issued earlier. The Supreme Court referred to the case of D. Srinivas v. SBI Life Insurance Co. Ltd. & Ors. [2018] 3 SCC 653, which held that a flexible approach is needed to determine acceptance and that the circumstances of the case can create a presumption of acceptance. The court distinguished the case of Life Insurance Corporation of India v. Raja Vasireddy Komala valli Kamba and Ors. [1984] 2 SCC 719, stating that the facts of the present case were different and showed a clear indication of acceptance, unlike the cited case. The Court held that the NCDRC had acted beyond its revisional jurisdiction under Section 21 (b) of the Consumer Protection Act, 1986, by overturning the concurrent findings of the lower forums. The Court also noted that the NCDRC had issued a contradictory order by dismissing the complaint and at the same time ordering ex gratia payment. The Supreme Court set aside the order of the NCDRC and restored the order of the District Forum, which was confirmed by the State Commission. The Court also gave two months’ time to the respondent to make the payment.

The Court quoted from the judgment:

• “The acceptance of this payment places the corporation on risk with effect from the date of this Acceptance cum First Premium Receipt…”
• “The opponent have not produced their own record to prove that after the receipt of the proposal and cheque of premium of Rs3388/ – dated 09.07.1996, the decision to accept the proposal was not taken on 09.07.1996 or immediately within reasonable period 213 days and took only on 15.07.1996.”
• “In the circumstances, the impugned order is set aside and the order of the District Forum in complaint No.1044 of 1997 dated 19.07.2001 which was confirmed by the State Commission as per order dated 25.07.2006 in appeal No.464 of 2002 is restored.”

There were no minority opinions in this case.

Key Takeaways

• An “Acceptance-cum-First Premium Receipt” can be considered as evidence of acceptance of an insurance proposal, especially when the receipt explicitly states that the corporation assumes risk from the date of the receipt.
• Insurance companies cannot deny claims by relying on the technicality that the formal policy document was not issued if a premium receipt has been issued and the premium has been realized.
• The principle of utmost good faith is applicable to both the insurer and the insured.
• The NCDRC has limited revisional powers and cannot overturn concurrent findings of lower forums without sufficient reasons.
• Insurance contracts are concluded when there is a clear indication of acceptance, which can be inferred from the conduct of the parties and the documents issued.

Directions

The Supreme Court directed the respondent to make the payment in terms of the order of the District Forum, which was confirmed by the State Commission, within two months.

Development of Law

The ratio decidendi of this case is that the issuance of an “Acceptance-cum-First Premium Receipt” by an insurance company, which explicitly states that the corporation assumes risk from the date of the receipt, constitutes acceptance of the insurance proposal, even if the formal policy document is not issued. This judgment clarifies that the principle of utmost good faith applies to both the insurer and the insured and that insurance companies cannot deny claims based on technicalities when there is a clear indication of acceptance. This case also clarifies that the NCDRC has limited revisional powers and cannot overturn concurrent findings of lower forums without sufficient reasons. This judgment also clarifies the position of law as to when an insurance contract is concluded.

Conclusion

The Supreme Court set aside the NCDRC’s order, which had dismissed the insurance claim of the appellants. The Court restored the concurrent orders of the District Forum and the State Commission, which had ruled in favor of the appellants. The Supreme Court held that the issuance of the “Acceptance-cum-First Premium Receipt” constituted acceptance of the insurance proposal, and the insurance company was liable to pay the claim. This judgment reinforces the principle that insurance companies must act in good faith and cannot deny claims based on technicalities when there is a clear indication of acceptance of the proposal.