Case: ANANDRAO RAMCHANDRA SALUNKE Vs. LIFE INSURANCE CORPORATION OF INDIA

3. The appellant obtained a policy of life insurance on 11 November 1993. The sum insured was Rs 75,000. The term of the policy was twenty five years.The policy envisaged the payment of a quarterly premium of Rs 775, spread over a hundred quarters during the term of the policy. The last premium was payable on 11 August 2018 and the policy was to mature on 11 November 2018. On 27 May 2001, the appellant took a loan of Rs 15,000 from the Ratnagiri Branch of the Life Insurance Corporation by pledging the policy. In August 2001, the appellant stopped paying the premium. Thereafter, he applied for the refund of the surrender value. The Corporation offered a surrender value of Rs. 2268, after deducting the loan amount and outstanding interest4. The appellant filed a complaint before the District Consumer Disputes Redressal Forum, Sangli . The District Forum allowed the complaint and directed the respondent to pay an amount of Rs 29,888 together with interest at 9% p.a. with effect from 21 July 2004. The decision of the District Forum was challenged in appeal by the respondent. The State Commission affirmed the decision. In revision, the National Commission reversed the decision, relying on its earlier decision in Branch Manager, LIC of India v A Paulraj 1996) 2 CPJ 69. The National Commission approved the calculation of cash value of bonus payable in accordance with the surrender value factor.5. The controversy involved in the present case turns on the interpretation of the provisions of Section 113 of the Insurance Act, 1938and Clause 7 of the policy document. Section 113 of the Act, as it stood at the material time was in the following terms:113. Acquisition of surrender value by policy(1) A policy of life insurance under which the whole of the benefits become payable either on the occurrence, or at a fixed interval or fixed intervals after the occurrence, of a contingency which is bound to happen, shall, if all premiums have been paid for at least three consecutive years in the case of a policy issued by an insurer, or five years in the case of a policy issued by a provident society defined in Part III, acquire a guaranteed surrender value, to which shall be added the surrender value of any subsisting bonus already attached to the policy, and every such policy issued by insurer shall show the guaranteed surrender value of the policy at the close of each year after the second year of its currency or at the close of each period of three years throughout the currency of the policy: Provided that the requirements of this sub-section as to the addition of the surrender value of the bonus attaching to the policy at surrender shall be deemed to have been complied with where the method of calculation of the guaranteed surrender value of the policy makes provision for the surrender value of the bonus attaching to the policy: Provided further that the requirements of this sub-section as to the showing of the guaranteed surrender value on a policy shall be deemed to have been complied with where the insurer shows on the policy the guaranteed surrender value of the policy by means of a formula accepted in this behalf by the Authority as satisfying the said requirements: Provided further that the provisions of this sub-section as to the showing of the guaranteed surrender value on a policy shall not take effect until after the expiry of six months from such date as the Authority may, by notification in the official Gazette, appoint in this behalf(2) Notwithstanding any contract to the contrary, a policy which has acquired a surrender value shall not lapse by reason of the non- payment of further premiums but shall be kept alive to the extent of the paid-up sum insured, and the paid-up sum insured shall for the proposes of this sub-section include in full all subsisting reversionary bonuses that have already attached to the policy, and shall, where the policy is one on which the maximum number of annual premiums payable is fixed and the premiums are of uniform amount, be before the inclusion of such bonuses not less than the amount bearing to the total sum insured by the policy exclusive of bonuses the same proportion as the total period for which premiums have already been paid bears to the maximum period for which premiums were originally payable(3) A policy kept alive to the extent of the paid-up sum insured under sub section (2) shall not be entitled by virtue of that sub-section to participate in any profits declared distributable after the conversion of the policy into a paid-up policy(4) Sub-section (2) and sub-section (3) shall not apply(a) where the paid-up sum insured by a policy being a policy issued by an insurer, is less than one hundred rupees inclusive of any attached bonus or takes the form of an annuity of less than twenty- five rupees, or where the paid-up sum insured by a policy, being a policy issued by a provident society as defined in Part III, is less than fifty rupees inclusive of any attached bonus or take the form of an annuity of less than twenty-five rupees, or(b)where the parties after the default has occurred in the payment of the premium agree in writing to some other arrangement, or(c) to policies in which the surrender value is automatically applied under the terms of the contract to maintaining the policy in force after its lapse through non-payment of premiumSection 113 was amended on 20 March 2015, with effect from 26 December 2014.For the purposes of this case, we are concerned with the pre-amended provision6. Condition 7 of the policy document reads thus:7. Guaranteed surrender value This policy can be surrendered for cash after the premiums have been paid for at least three years. The minimum surrender value allowable under this policy is equal to 30% of the total amount of the mentioned premiums paid excluding premiums for the first year and all extra premiums and/or additional premiums for accident benefits that may have been paid. The cash value of any existing vested bonus additions will also be allowed7. The basis on which the respondent arrived at the surrender value which was payable to the appellant is reflected in the following computation:Assured : Rs 75,000

Reasoning:
11. There are popular misconceptions about the concept of surrender value in the sphere of life insurance. In a policy of fire insurance, a policy holder has no expectation of a surrender value. In contrast, a holder of a policy of life insurance may believe (as the appellant in this case does) that their surrender value will be equal to the total amount paid as premium. This expectation is misconceived. Simply put, life insurance operates on the basis of the law of averages. Premium is collected from all policy holders in order to create a common fund. Payouts from the fund are received only by those who suffer the peril which is insured. The economic loss suffered by few is divided amongst many. Premia are fixed by the insurer on the basis of expected mortality rates. Hypothetically speaking, if mortality rates of all individuals were to be equal irrespective of age and everyone paid the same premium, the discontinuance of a policy during its term would not entitle the insured to a surrender value since the common fund would be depleted on a regular basis. In reality, the mortality rates increase with age. Actuarial tables provide a guide to the insurer. Hence, when an insurer initially collects premium from individuals of a younger age, the amount it collects is higher than the amount it pays out towards claims. The difference between them is the reserve. Thus if a policy holder wishes to discontinue a policy before the end of the term, they will only be entitled to their share of the reserve as a surrender value13. Since the value of the reserve is the amount which the insurer collects as premium from policy holders from which it deducts the amount of the claims it pays out, the surrender value payable to a policy holder can never be equal to the premia paid by them.16. In computing the surrender value of any subsisting bonus, reference ought to be made to the stipulations contained in Section 113. The first proviso to Section 113(1) provides that the requirement of the addition of the surrender value of the bonus attaching to the policy at surrender is deemed to have been fulfilled where the method of calculating the guaranteed surrender value makes provision for the surrender value of the bonus attaching to the policy. The second proviso stipulates that the requirement of showing the guaranteed surrender value on a policy is deemed to have been complied with where the insurer shows on the policy the guaranteed surrender value by means of a formula which is accepted by the authority as satisfying the requirements under the third proviso. Therequirement of showing the guaranteed surrender value shall not take effect until six months have expired from the date of publication of the notification in the Official Gazette17. In exercise of the powers conferred by Section 49(2) of the Life Insurance Corporation Act, 1956, the Central Government notified the Life Insurance Corporation Regulations 1959 . Regulation 18(2) empowers the Executive Committee to accept the surrender of any insurance or annuity and to purchase or redeem any insurance or annuity and to waive the forfeiture of any insurance on such terms as the Executive Committee may deem fit. The respondent has placed on the record a copy of the Minutes of the Seventy-seventh meeting of the Executive Committee of the Life Insurance Corporation of India held on 19 August 1959. At that meeting, the Executive Committee approved of the proposed scale of surrender values. The note on the basis of which the approval was granted has also been annexed18. We have considered the basis of the computation which has been placed before the Court and which has been extracted in the earlier part of this judgment. Condition 7 of the policy document specifically provides that the surrender value is equal to 30% of the total premiums paid, excluding premiums for the first year and all extra premiums and/ or additional premiums for accident benefits that may have been paid. The paid up value of the policy on that basis was computed by taking into account the premiums that were paid by the insured. The paid up value of the policy worked out to Rs 23,25019. The real dispute in the present case arose because of the claim of the appellant that he was entitled to the entirety of the bonus and not 32.92% of the total bonus that would have accrued had the policy continued to its term of maturity. The factor of 32.92% has been duly explained on the basis of the actuarial table governing surrender values which has been placed on record. The vested bonus which accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according to the bonus chart for endowment policies as on 31 March 2001. There was no error on the part of the respondent in computing the surrender value of the subsisting bonus, on the basis on which it has been computed. The surrender value of the subsisting bonus attached to the policy cannot be the bonus which would have been payable had the policy continued to its full term. In deducing the surrender value of the bonus which was payable to the appellant, the respondent applied the surrender value factor of 32.92% to the total paid up value of the policy. The total paid up value comprised of the paid up value (Rs 23,250) and the vested bonus (Rs 42,187). Hence, the total paid up value of the policy was Rs 65,437 to which the surrender value factor of 32.92% was applied. This resulted in a surrender value of Rs 21,542. What is payable to the insured was computed after deducting the loan which was taken against the policy together with the outstanding interest.