Life Insurance Corporation of India v. Dravya Finance Pvt. Ltd.

1. Under Section 38 of the Insurance Act, 1938 (for short, ‘the Insurance Act’), an insured who is holding a policy of life insurance issued by the appellant–Life Insurance Corporation of India (insurer) is entitled to transfer or assign the policy with or without consideration by an endorsement upon the policy itself or by a separate instrument duly signed by the transferor or by the assignor and attested by one witness. Unamended sub-Section (2) of Section 38 provided for service of notice in writing of transfer or assignment to the insurer in a manner set out therein. Unamended Sub-Section (4) of Section 38 provided that upon receipt of a notice of transfer or assignment under sub-Section (2) of Section 38, the appellant–insurer was under an obligation to record the fact of such transfer or assignment together with the date thereof and the name of the transferee or assignee. On request of the person who gives notice, the appellant–insurer was under an obligation to issue a written acknowledgement of the receipt of such notice on payment of a fee not exceeding Rs.1.

2. The appellant–insurer issued a circular on 24th April 2006 and imposed a registration charge of Rs.250 per assignment. The first respondent–Dravya Finance Private Limited, which is a finance company, challenged the said circular before the Bombay High Court on the ground that firstly, it is contrary to Section 38 of the Insurance Act and secondly, it is in violation of Article 265 of the Constitution of India as a levy of a tax or fee was sought to be made without any authority of law. There were other challenges, such as violation of Articles 14, 19(1)(g) and 300A of the Constitution of India.

3. By the impugned judgment, the High Court of Judicature at Bombay concluded that the levy of a sum of Rs.250/- for registration of assignment under the impugned circular was the levy of service charge or fee without there being any power to do so. Therefore, the impugned circular was held to be unconstitutional and was, accordingly, struck down.

SUBMISSIONS

4. The learned counsel appearing for the appellant–insurer invited our attention to Section 6 of the Life Insurance Corporation Act, 1956 (for short, ‘the LIC Act’). He submitted that under sub-Section (1) of Section 6, the appellant has a duty to carry on life insurance business. In fact, he relied upon sub-Section (3) of Section 6 of the LIC Act by pointing out that in the discharge of its functions, LIC has to act in accordance with business principles. He submitted that the appellant– insurer has placed on record before the High Court more than sufficient material indicating the large number of notices of assignments received by the appellant and the enormous expenditure involved in dealing with the same. He submitted that when the appellant–insurer issues a life insurance policy, it is a contract of insurance which is purely a business transaction. He submitted that for registration of assignments, service charges of Rs.250 per assignment are levied as a part of the business transaction between the insured and the appellant–insurer. He submitted that the levy of such a fee to meet the expenditure is a part of the business contract which will not attract Article 265 of the Constitution of India. The learned counsel appearing for the appellant urged that 95% of the surplus of the appellant is usually allocated to the policyholders. He submitted that under sub-Section (4) of Section 38, a fee of Rs.[1] is provided for issuing an acknowledgement of receipt of the notice of the assignment and what is sought to be charged under the impugned circular, is the fee or charge on account of administrative expenses incurred for recording the assignment. He would, therefore, submit that there is no illegality associated with the circular which was impugned before the High Court. The learned counsel appearing for the respondent supported the impugned judgment.

OUR CONCLUSION

5. Section 38 of the Insurance Act, before it was substituted by the Act 5 of 2015, read thus:

6. This Court in the case of Life Insurance Corporation of India v. Insure Policy Plus Services Private Limited and Ors.[1] has dealt with sub-Section (1) of Section 38 dealing with the assignment and transfer of the policy. In paragraph 11 of the said decision, this Court held that on transfer or assignment of a policy and on the requisite procedure being complied with, the assignee alone has an interest in the policy. It was held that the insurer was bound by the provisions of Section 38 to accept such transfer or endorsement. This Court also considered amended sub-Section (2) of Section 38 of the Insurance Act which enables the insured to decline to act upon any endorsement made under sub-Section (1), where it has sufficient reason to believe that such transfer or assignment is not bona fide or is not in the interest of the policyholder or public interest or for the purpose of trading of insurance policy.

7. In this case, we are not dealing with the issue when an insurer can decline to act upon endorsement of assignment. In this case, we are concerned with the impugned circular which prescribes fees for recording the assignment of policies. In the impugned circular dated 24th April 2006, it is stated thus: “At present, assignment of policies is being registered without any charges. However, the cost of the transaction of assignments/re-assignment of a policy is considerable. Therefore, it has now been decided to levy service charges of Rs.250/- transaction of effecting assignment under a policy......................................................................”

8. The question is whether the appellant–insurer is lawfully entitled to levy a service charge of Rs.250/- for a transaction of assignment of a life insurance policy. In the impugned order, the High Court, in detail, went into the question of whether the levy of Rs.250/- under the impugned circular was a tax or a fee. The High Court held that by the impugned circular, the appellant has provided for service charge or fee for the services to be rendered to the person requesting for registration of an assignment. This finding regarding the nature of the levy has not been assailed by the appellant–insurer.

9. Now, the only question is whether the appellant had a lawful authority to levy a service charge or fee for the transaction of assignment or transfer of policy. It is not the case of the appellant–insurer that in the contract of policy, there is any clause which allows such a levy. Moreover, the assignment or transfer of policy is governed by statutory provisions in the form of Section 38 of the Insurance Act. It is well settled that if the law requires a particular thing to be done in a particular manner, it must be done in that manner and not in any other manner. Section 38 does not authorise the levy of any such fee. Unamended sub-Section (2) of Section 38 of the Insurance Act provided for giving acknowledgement of a notice of transfer or assignment given in terms of sub-Section (2) of Section 38. It was specifically provided therein that the insurer can charge and levy a fee not exceeding Rs.[1] for giving such acknowledgement. Thus, it prescribed a fee for issuing acknowledgement of notice of assignment or transfer. Though, there was a specific provision made to levy a fee for giving acknowledgement of notice of transfer, the legislature, in its wisdom, has not provided any fee or charge for recording the assignment or transfer in the records of the insurer. Interestingly, in the substituted Section 38 of the Insurance Act, which was brought into force on 26th December 2014, the provision enabling the charging of a fee of Rs.[1] for acknowledgement has been done away with.

10. Under Section 48 of the LIC Act, the general rule-making power is vested in the Central Government. Under Section 49, the power to make regulations vests in the appellant–insurer. It is an admitted position that neither rules under Section 48 have been framed nor regulations under Section 49 have been made, authorising the appellant–insurer to levy a service charge or fee for recording the endorsement of transfer or assignment by the appellant–insurer. The rule-making power under Section 114 of the Insurance Act has not been exercised for this purpose. As mentioned earlier, even in the contract of policy, such a provision has not been made.

11. At this stage, we may note that the Insurance Regulatory and Development Authority of India (Fee for granting written acknowledgement of the receipt of Notice of Assignment or Transfer) Regulations, 2015 have been made in accordance with the powers conferred by Section 114A of the Insurance Act. The Regulations were brought into force on 29th April