Nominee’s rights over proceeds from a life insurance policy

The rights of a nominee vis-à-vis proceeds from a life insurance policy have lacked clarity in the past. Questions have arisen previously as to whether the nominee has title over such proceeds or a mere right to receive as a trustee / agent. Further, whether the nominee has any right at all or is the nominee a mere conduit for the insurer to discharge its liability and avoid disputing claims before it? The Supreme Court in 1984 had settled this position in the Sarbati Devi case[1], wherein it stated that mere nomination does not amount to beneficial interest in the amount payable under a life insurance policy on the death of the policy holder but only indicates the hand authorized to receive the same for a valid discharge of the insurer’s liability.  However, an amendment to the insurance laws in 2015 (“Amendment”) brought about the concept of a beneficial nominee which changed the above-mentioned position in certain ways[2].

The Insurance Act, 1938 (“Act”) provides for the policyholder’s ability to appoint a nominee to receive proceeds of the policy upon his / her death. Section 39 of the Act provides that the proceeds upon the maturity of the policy shall be payable to the policy holder during his/ her lifetime and to the nominee(s) after the policy holder’s death. However, prior to the Amendment, this provision did not clarify whether the nominee(s) was beneficially entitled to the proceeds payable to it. In certain scenarios, Section 39 of the Act was misconstrued to be a third mode of succession and was also pronounced by various High Court decisions as such[3]. Such conflicting judicial opinions were addressed to by the Supreme Court in the Sarbati Devi case which clarified the position as mentioned in the paragraph above.

While the rights of a nominee were watered down judicially, the Amendment introduced the position of nominees as beneficiaries to life insurance policies in some circumstances. If the nominees are parents, spouse, children, or children and spouse (or any of them) of the policy holder then, pursuant to the Amendment, they are beneficially entitled to the policy proceeds[4]. Here, it is pertinent to note the language of a carve out in Section 39(7) of the Act which was brought about by the Amendment and which states that where it can be proved, given the nature of the title to the policy, that the policy holder could not have conferred any beneficial title on the nominee, then such beneficial rights will not vest with the nominee. This carve out opens the doors to potential disputes as it does not clearly distinguish the class of nominees who will not be beneficially entitled despite being a parent, spouse or child of the policyholder. It is also pertinent to note here that rights of a beneficial nominee cannot destroy or impede the right of any creditor to be paid out of proceeds of the life insurance policy of the deceased policy holder.[5]

On the other hand, pursuant to the Amendment read with the Supreme Court order in the Sarbati Devi case, it is clear that while other types of nominees (i.e., nominees other than parents, spouse or children) do play a role in disbursal of the proceeds from a life insurance policy, they do not have beneficial rights over such policy proceeds. Accordingly, such nominee has a right to receive the money on the death of the policy holder and a corresponding duty of holding such proceeds in trust and ensuring distribution of the same as per applicable succession laws. In this regard, one must keep in mind that the Act requires the insurer to pay the proceeds under a life insurance policy to the nominee(s), if they are appointed and if he/she survives the policy holder[6] and payment of the policy proceeds to the nominee(s) also gives a good discharge to the insurer’s liability. Hence having nominees for life insurance policies is preferred by insurers as it provides them a relatively uncontentious mode of disbursal of insurance proceeds.

In conclusion, it can be said that the Amendment led to some variation of the concept of a nominee in relation to proceeds of a life insurance policy as compared to the historical position set out by the Supreme Court. Whilst the Amendment did not vary the original understanding of a nominee being a mere trustee / agent (which concept was upheld by the Supreme Court), it did provide for the concept of a ‘beneficial nominee’ in relation to disbursal of proceeds from a life insurance policy.

Authors:

Kunal Kumbhat, Partner
Soumil Desai, Associate

Footnotes:

[1] Sarbati Devi v. Usha Devi (1984) 1 SCC 424.
[2] Insurance Laws (Amendment) Act, 2015, amended Section 39 of the Act which deals with “Nomination by Policy Holders”.
[3] Fauja Singh v. Kuldeep Singh AIR 1978 Del 276, Uma Sehgal v. Dwarka Dass Sehgal ILR (1981) IL Delhi and Kesari Devi v. Dharma Devi AIR 1962 ALL 355.
[4] Section 39 (7) of the Act (as it currently stands).
[5] Section 39 (9) of the Act (as it currently stands).
[6] Section 39(6) of the Act (as it currently stands).

Date: June 19, 2020