INTRODUCTION
We have often heard that it is beneficial to nominate someone in your financial assets, primarily to secure the next of kin or the ones otherwise dependent on you. Nomination is also commonly seen as a method to transfer financial assets without necessarily involving lengthy legal procedures. Different laws apply for the nomination of different financial assets. For example, the nomination of shares of a company is provided for under Section 72 of the Companies Act, 2013; the nomination of bank accounts is provided for by Section 45ZA of the Banking Regulation Act, 1949; nomination of mutual fund units is provided under SEBI Mutual Fund Regulations 1996. The lack of any uniform practice and procedures where nomination is concerned often leads to prolonged processes and sometimes adversarial litigation for staking rightful claim.
LAW RELATING TO NOMINATION OF INSURANCE POLICIES – PRIOR TO 2015 AMENDMENT
The law in India with respect to the nomination of a life insurance policy is codified under Section 39 of the Insurance Act, 1938 (“Insurance Act”). As regards the rights of a nominee of a life insurance policy, the provisions of Section 39(6) of the Insurance Act state:
(6) Where the nominee or, if there are more nominees than one, a nominee or nominees survive the person whose life is insured, the amount secured by the policy shall be payable to such survivor or survivors.
Pursuant to this provision, it was a common notion that the nominee should be entitled to the proceeds of the insurance policy on maturity, to the exclusion of all others, such as the legal heirs of the policyholder. This was particularly considered the correct position when the nominees were immediate family members such as parents, spouses, or children.
In keeping with this notion, the Law Commission of India (“Law Commission”) in its 82nd Report, released in January 1980, proposed changes to the provisions of Section 39 of the Insurance Act. It was recommended that the provisions of Section 39 be amended to state that the nominee, if he survives the insured as on the date of maturity of the policy and if he is a parent, spouse, or child of the insured, he should be “beneficially entitled” to the amount secured under the policy. The rationale for the proposed change was that this would carry out the real intent of the parties, it would also be desirable from a social justice perspective, and it was similar to the amendments made by the legislature for laws dealing with provident funds.
Despite the recommendations of the Law Commission in its 82nd Report, no changes were made to the statutory provisions under Section 39 of the Insurance Act. This meant that the original language of the section, which did not use the words “beneficially entitled,” continued on the statute books. This also led to a diversion of opinion amongst High Courts regarding the true interpretation of Section 39(6) and whether the nominee was indeed a beneficial owner or merely a custodian of the insurance proceeds.
The controversy was put to rest by the Hon’ble Supreme Court of India (“Supreme Court”) in the case of Sarbati Devi vs. Usha Devi when it settled the legal position by stating that a mere nomination under Section 39 of the Insurance Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured, and the nomination only indicates the hand which is authorised to receive the amount. The Supreme Court also held that nomination does not intend to act as a third mode of succession, to the existing two modes i.e., testamentary and intestate.
This to an extent established a quietus on the debate regarding the rights of a nominee over an insurance policy, especially in light of the fact that the changes proposed by the Law Commission in its 82nd Report were not carried into effect.
2015 AMENDMENT TO INSURANCE ACT
Subsequently, with a view to carry out a substantial review of the Insurance Act as well as The Insurance Regulatory and Development Authority Act, 1999, the Law Commission prepared a consultation paper in June 2003 and discussed the same with various stakeholders comprising of public and private sector insurance companies, consumer organisations, and a wide range of experts in the field of law and insurance. The consultation paper and the responses received thereto led to the preparation of the 190th Report of the Law Commission.
The 190th Law Commission Report, **inter alia**, proposed amendments to Section 39 of the Insurance Act to clearly differentiate between a ‘beneficial nominee’ and a ‘collector nominee.’ The Law Commission reiterated the changes suggested in the 82nd Report, recommending that in cases of nomination in favor of parents, spouses, or children, the nominee would be “beneficially entitled” to the amount payable under the policy. The only condition attached to these rights was that the nominee would not be beneficially entitled if the policyholder could not have conferred beneficial ownership due to the nature of the policyholder’s title to the insurance policy.
The Law Commission also proposed that every policyholder should have the option to indicate whether the nominated person is a “beneficiary nominee” or a “collector nominee,” and if no indication was made, the nominee would be presumed to be a beneficiary nominee. The term ‘beneficiary nominee’ was defined as a nominee entitled to receive the entire proceeds payable under the policy, subject to other provisions of the Insurance Act. A ‘collector nominee,’ on the other hand, was defined as a person other than a beneficiary nominee.
To ensure complete clarity, the Law Commission recommended an additional insertion to Section 39, stating that a ‘collector nominee’ would be required to pay the benefits arising out of the policy to the ‘beneficiary nominee,’ or in their absence, to the legal heirs or representatives.
Pursuant to the recommendations made by the Law Commission in its 190th Report, the provisions of Section 39 of the Insurance Act were amended with effect from 26 December 2014 (“2015 Amendment”) to specifically provide that in the case of nomination, where the holder of the policy nominates parents, spouse, children or any of them, the nominees are beneficially entitled to the amount payable unless it is proved that the holder of the policy i.e., the insured could not have conferred a beneficial title. While the first part of the recommendations of the Law Commission were accepted and provisions of Section 39 were amended to provide for the above, the distinction between ‘beneficiary nominee’ and ‘collector nominee’ which was also a part of the recommendations by the Law Commission were not a part of the amendments.
While the amendments to the provisions of Section 39 of the Insurance Act were laudatory, the exclusion of the Law Commission recommendations which provide for a specific distinction between ‘beneficiary nominee’ and ‘collector nominee’ has added some degree of confusion to the beneficial entitlement of a nominee where the nominee(s) is the parent, spouse or child. Perhaps it could still be argued that the legislature deliberately did not provide for this definition as it never meant that the words “beneficially entitled” were meant to mean that the nominee such as parents/ spouse/ spouse and children should take in exclusion to the other legal heirs.In simpler terms, where the nominee is either a spouse or a parent, it could be argued that one of them cannot take to the exclusion of the other, as both could be considered as legal heir of the policy holder.
While the amendments to the provisions of Section 39 of the Insurance Act were laudatory, the exclusion of the Law Commission recommendations which provide for a specific distinction between ‘beneficiary nominee’ and ‘collector nominee’ has added some degree of confusion to the beneficial entitlement of a nominee where the nominee(s) is the parent, spouse or child. Perhaps it could still be argued that the legislature deliberately did not provide for this definition as it never meant that the words “beneficially entitled” were meant to mean that the nominee such as parents/spouse/spouse and children should take in exclusion to the other legal heirs. In simpler terms, where the nominee is either a spouse or a parent, it could be argued that one of them cannot take to the exclusion of the other, as both could be considered as legal heir of the policy holder.
JUDICIAL DECISIONS RELATING TO THE 2015 AMENDMENT
The Rajasthan High Court in the case of Ramgopal and Ors vs. General Public was dealing with an appeal from a rejection of an application for a succession certificate under Section 372 of the Indian Succession Act, 1925. In the appeal, reliance was placed on the provisions of the Insurance Act as amended by the Insurance Laws (Amendment) Act 2015 to contend that the nominee, being the wife of the policyholder, was beneficially entitled to the proceeds from the insurance policy. However, the Rajasthan High Court rejected this contention, holding that the policy matured on the death of the holder, and since the holder died on 14 December 2013 (prior to the coming into force of the Insurance Laws (Amendment) Act 2015), the amended provisions did not apply.
Subsequently, an opportunity to consider the question regarding the true purport of the amendments to Section 39 of the Insurance Act arose before the Delhi High Court in the case of Shweta Huria vs. Santosh Huria. In this case, the Delhi High Court was considering an appeal filed by the daughter-in-law against the preliminary decree passed by the trial court. The preliminary decree was passed in favor of her mother-in-law, who claimed that she was entitled to the proceeds of the insurance policy taken by her son in accordance with the rules governing intestate succession as applicable to the deceased son. The daughter-in-law, as the nominee under the insurance policies, claimed that she was beneficially entitled to the insurance proceeds pursuant to the amendment to the Insurance Act in 2015. Reliance was also placed on the case of Sarbati Devi vs. Usha Devi by the mother-in-law.
Although the Delhi High Court acknowledged the amendments to the Insurance Act in 2015 and the distinction between a beneficiary nominee and a collector nominee, it relegated the matter back to the trial court to be considered afresh, as the trial court had not examined the arguments concerning the amendments to the Insurance Act. Thus, the issue remained inconclusive as far as the Delhi High Court was concerned.
CONCLUSION
Given that there is no clear judicial ruling on the beneficial entitlement of nominees resulting from the amendment to Section 39 of the Insurance Act, it remains to be seen if the true purport of the amendment will eventually be upheld. It is important to note that despite the recommendations of the Law Commission as part of its 190th Report, which aimed to establish a distinction between ‘beneficiary nominee’ and ‘collector nominee,’ the legislature did not incorporate these recommendations into the amending statute. Consequently, whether there was a deliberate attempt to exclude nominees from receiving beneficial entitlement to the insurance proceeds remains uncertain.
Furthermore, when the terms “parents,” “spouse,” and “children” are used together in the amended provisions of Section 39, it presents a significant test of social justice for the courts to decide in favor of one set of legal heirs over the other. Another crucial aspect that the courts will need to consider is whether the amendments to Section 39 create a third mode of succession (as famously articulated by the Supreme Court in Sarbati Devi) since it includes the term “parents” as a type of nominee. This consideration will be particularly relevant when the nominee is the “father” of the policyholder, who would otherwise be classified as a Class II legal heir under the provisions of the Hindu Succession Act, 1956 in cases of intestate succession.
It will therefore be intriguing to observe how this issue is ultimately resolved by the Supreme Court or if further amendments will be made to the Insurance Act to incorporate the remaining recommendations of the Law Commission.
Priyanka Desai Partner, The Fort Circle.
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