Beware! Do you pay your insurance premium through your insurance agent? (Authority of an insurance)

If you hold a life insurance policy and are in the habit of making your premium payment through your insurance agent, then this article could be of help to you in understanding the issues concerning the same and the validity of such a payment in the eyes of law.

It is not uncommon to see cases of repudiation of claim on the following grounds:

a. that the policy was revived  / premium payment was made belatedly after the days of grace, that it is to say, after the policy had lapsed;

b. that the policy could be revived only during the lifetime of the policyholder and as the policyholder had died before the revival of policy, the payment received after the death of the life assured viz. the policyholder will not revive the policy that had already lapsed.

Such a scenario, in practice, may arise in the following contingencies:

a. the kith and kin of the deceased policyholder, would immediately look for his policies and make the pending premium payments, if any, normally on the date of death or immediately thereafter, in their anxiety to keep the policy in force but without revealing the death of the policyholder;

b. the premium would have, in fact, been entrusted to the agent to pay the same to the insurance company but unfortunately, the premium would not have been paid by him in time ( i.e., paid after the death of the policyholder).

You will see that in both the contingencies stated above, the basic facts remain the same – that the policy was revived after the death of the policyholder. The only difference between the two is that, in the latter case, the premium was tendered to the agent during the lifetime of the policyholder but was remitted late by the agent, after the death of the policyholder.  

In either case, the aggrieved nominee / claimant(s) / legal heirs of the deceased policyholder may seek to redress their grievance by challenging the repudiation. How good are their chances of success?

Well, it is settled law that the question of revival of a policy could arise only if the premium is paid during the lifetime of the insured (Supreme Court of India in  Harshad J. Shah & Anr  Vs  LIC of India & Ors – CA No.7202 & 7203 of 1196; reported in AIR 1997 SC 2459). In the said case the premium was alleged to have been tendered to the agent of LIC of India when the insured (policyholder) was alive but it was the agent who had remitted it late to LIC after the death of the insured. It was argued that by the conduct of the insurer, LIC, in receiving premium through its agents, the policyholders were induced to believe that acts of agents in receiving premium from the policyholders were within the scope of agent’s authority.

The Hon’ble Supreme Court held that by the mere fact that the agent had obtained a bearer cheque from the insured and after encashing the same had (belatedly) deposited the amount with LIC , it cannot be said that LIC induced the insured to believe that the agent was authorized to receive premium. It was held that the doctrine of apparent authority underlying Sec.237 of the Indian Contract act cannot be invoked.

The Hon’ble Court further held that the agent of LIC had neither an express or an implied authority to collect premium.

In this context, it is interesting to note the provisions of Section 64 VB (4) of the Insurance Act, 1938 which reads:

“Where an insurance agent collects a premium on a policy of insurance on behalf of an insurer, he shall deposit with, or despatch by post to, the insurer, the premium so collected in full without deduction of his commission within twenty‑four hours of the collections excluding bank and postal holidays.”

It could be argued that a bare reading of the sub-section mentioned above would imply that it does not place any restriction on an insurance agent in collecting premium but simply says ‘where an insurance agent collects a premium on a policy of insurance on behalf of the insurer’. It may be said, in fact, it enables an agent to collect premium on behalf of the insurer. Therefore, can it be construed to mean that any insurance agent who collects premium on behalf of the insurer, shall deposit the same with the insurer as stipulated above? In other words, does it not explicitly authorize an insurance agent to collect premium on behalf of his principal? Then, does it not confer an apparent authority on an insurance agent? If it could be construed so, and as the Insurance Act is applicable to all insurers in India, cannot a liability be clearly fastened on the insurer (LIC in this case)?

Or, does the sub-section deal with only those agents who are actually authorized by his principal, the insurer?

It has been held by the Hon’ble Supreme Court in Life Insurance Corporation of India  Vs  Jaya chandel  - CA No.1089/2008 ) also reported in I (2008) CPJ 81 (NC) that Section 43 of the Life Insurance Corporation Act, 1956 enumerates the various sections of the Insurance Act which are applicable to LIC and Section 64 VB is not one of them. Thus, it is important to note that the Section 64 VB is not applicable only to LIC.

Whereas, all other insurers are bound by that section.

Be that as it may. What if it could be proved that the insurer had indeed induced the policyholders by his conduct to believe that his agents are authorized to receive premium on his behalf?

The Hon’ble NCDRC had such a situation in ICICI Prudential Life Insurance Co Ltd  Vs  Gurmeet Singh (RP No.1059/2011, decided on 01.09.2011).

The facts of the case was that the insured had issued a self cheque to the agent towards remittance of premium. The insurer contested that by issuing a ‘self cheque’ the insured had contravened the policy condition which clearly stated that “any cash or cheque payment made towards First or Renewal Premium is deemed to be received by ICICI Prudential Life Insurance Company Ltd., only when the same has been received by any of its office or collection point and after an official printed receipt is issued by the Company”.   A plea was also advanced that an agent is adviser of the insured and not the agent of the company and, therefore, the Insurance Company was not liable for any acts of the adviser.  It was further averred by the insurer that the name of said agent had been removed from the list of authorized/approved agents prior to the date of issuance of cheque and, therefore, they were not liable for any act of omission or commission of a dismissed agent.

The Hon’ble NCDRC held that having garnered the policy through the agent, it did not behove the Insurance Company to say that the agent was adviser for the insured and hence had nothing to do with him.  As regards the reliance of the Insurance Company on the clauses in the policy document, it could only be said that the said terms in general were not explained to the insured and in this particular case it could conclusively be held that the agent had not explained the terms/clauses since he himself persuaded the insured to issue a ‘self cheque’ and subsequently encashed the same with an ulterior motive and neither issued a receipt nor deposit the amount with the Insurance Company. The concept of insurance is based on utmost good faith and if the insured had trusted the agent who had earlier obtained the policy document for him, the conduct of the Insurance Company resorting to such clauses to frustrate the claim of the insured cannot be sustained.

On the point of the agent having been dismissed or his name having been struck off from the list of authorized/approved agents, the same had to be rejected, firstly on the ground that the Insurance Company had failed to produce any evidence with regard to the date from which his name had been struck off and, secondly, also for the simple reason that the insured/complainant had not been informed/warned to refrain from dealing with the said agent.

I won’t be surprised if, after meditating on the subject, you prefer to play it safe by remitting your premium directly to the insurance company – perhaps by a simple on-line payment. In case, under unavoidable circumstances you give the premium to the agent, make sure that it reaches the insurer in time.

It is always better to avoid a litigation than winning it, whatever be your chances!