2007 (3) TMI 384 - HC - Companies Law

Court Invalidates Circulars, Upholds Insurance Policy Assignability

The court declared the circulars issued by respondent No. 1 as illegal and null and void. It affirmed the transferability and assignability of life ... Insurance policies - Assignment and transfer of Issues Involved:1. Legality of the assignment of life insurance policies.2. Insurable interest in the assignment of life insurance policies.3. Validity of circulars issued by the respondent.4. Substantive vs. procedural nature of Section 38 of the Insurance Act, 1938.5. Effect of the assignment on the terms of the insurance policy.Detailed Analysis:1. Legality of the Assignment of Life Insurance PoliciesThe petitioners argued that their business of acquiring and assigning life insurance policies was legally permissible under Section 38 of the Insurance Act, 1938. The respondent No. 1 initially accepted these assignments but later issued circulars refusing to register such assignments, claiming they were not permissible for companies trading in insurance policies. The court examined the nature of life insurance policies and concluded that a life insurance policy is personal movable property and can be assigned, aligning with the petitioners' stance.2. Insurable Interest in the Assignment of Life Insurance PoliciesThe respondent No. 1 contended that the petitioners did not have any insurable interest in the lives assured, making the assignments wagering contracts and thus void under Section 30 of the Indian Contract Act. The court, referencing various judgments, noted that while there must be an insurable interest when the policy is initially taken, there is no requirement for such interest at the time of assignment. The court rejected the contention that assignments without insurable interest amount to wagering contracts, stating that the law does not strike down such contracts on public policy grounds.3. Validity of Circulars Issued by the RespondentThe petitioners challenged the circulars dated 22-10-2003 and 2-3-2005, arguing they were illegal and violated the provisions of the Insurance Act, 1938. The court held that the circulars, which directed the refusal to register assignments of life insurance policies, were contrary to the mandatory provisions of Section 38 of the Insurance Act. Consequently, the circulars were declared illegal and null and void.4. Substantive vs. Procedural Nature of Section 38 of the Insurance Act, 1938The court analyzed whether Section 38 is substantive or merely procedural. Section 38(1) allows the assignment of life insurance policies, and Section 38(5) mandates that the insurer recognize the assignee as the only person entitled to the benefits under the policy. The court concluded that Section 38 is substantive, providing a statutory right to assign policies, and not merely procedural. This interpretation means that the insurer must accept assignments if the procedural requirements are met, subject to the terms of the policy.5. Effect of the Assignment on the Terms of the Insurance PolicyThe court noted that the assignment of a policy transfers all benefits and liabilities to the assignee, making them the policyholder. The respondent No. 1's argument that the assignment would convert the policy into a mere fixed deposit and deny other policyholders a share in the surplus was deemed irrelevant. The court emphasized that the assignee is bound by the terms of the policy, and the insurer must honor the assignment as long as it complies with Section 38 and the policy terms.Conclusion:The court declared the circulars issued by respondent No. 1 on 22-10-2003 and 2-3-2005 illegal and null and void. It affirmed that life insurance policies are transferable and assignable in accordance with the Insurance Act, 1938, and the terms of the contract. The court held that Section 38 is a substantive provision, thereby ensuring that assignments must be recognized by the insurer if the procedural requirements are met. The petition was made absolute in terms of the reliefs sought by the petitioners.