ANANDRAO RAMCHANDRA SALUNKE versus LIFE INSURANCE CORPORATION OF INDIA & ANR. on 7 March 2019

SUPREME COURT REPORTS

[2019] 5 S.C.R.

ANANDRAO RAMCHANDRA SALUNKE

A

v.

LIFE INSURANCE CORPORATION OF INDIA & ANR.

(Civil Appeal No.2568 of 2019)

B MARCH 07, 2019

[DR. DHANANJAYA Y CHANDRACHUD ANDHEMANT GUPTA, JJ.]

Insurance Act, 1938 – s.113 – Life Insurance Policies –”Surrender Value”– Appellant obtained life insurance policy inCNovember, 1993 – Sum insured was Rs.75,000/- – Term of the policywas twenty five years – Policy envisaged the payment of quarterlypremium of Rs 775/-, spread over hundred quarters during the termof the policy – Last premium was payable in August, 2018 and thepolicy was to mature in November, 2018 – In 2001, the appellantDtook loan of Rs.15,000/- by pledging the policy – In August, 2001the appellant stopped paying the premium and applied for the refundof the surrender value – Corporation offered surrender value ofRs.2268/-, after deducting the loan amount and outstanding interest– Complaint filed by the appellant – Allowed by the DistrictConsumer Forum and State Commission – Reversed by NationalECommission – On appeal, held: There are popular misconceptionsabout the concept of ‘surrender value’ in the sphere of life insurance– In a policy of fire insurance, a policy holder has no expectationof a surrender value – In contrast, a holder of a policy of lifeinsurance may believe (as the appellant in the present case) thatFtheir surrender value will be equal to the total amount paid aspremium – This expectation is misconceived – Life insuranceoperates on the basis of the law of averages – Premium is collectedfrom all policy holders in order to create a common fund – Payoutsfrom the fund are received only by those who suffer the peril whichis insured – Premia are fixed by the insurer on the basis of expectedGmortality rates – Mortality rates increase with age – Hence, whenan insurer initially collects premium from individuals of a youngerage, the amount it collects is higher than the amount it pays outtowards claims – Difference between them is the ‘reserve’ – Thus ifa policy holder wishes to discontinue a policy before the end of theH

term, they will only be entitled to their share of the ‘reserve’ as asurrender value – Since the value of the ‘reserve’ is the amountwhich the insurer collects as premium from policy holders from whichit deducts the amount of the claims it pays out, the surrender valuepayable to a policy holder can never be equal to the premia paid bythem – Surrender value of the subsisting bonus attached to the policycannot be the bonus which would have been payable had the policycontinued to its full term – In deducting the surrender value of thebonus which was payable to the appellant, the respondent appliedthe surrender value factor of 32.92% to the total paid up value ofthe policy – Factor of 32.92% has been duly explained on the basisof the actuarial table governing surrender values – What waspayable to the insured was computed after deducting the loan whichwas taken against the policy together with the outstanding interest– Method by which the computation was carried out was inaccordance with the accepted and duly approved formula and wasconsistent with the provisions of s.113 of the 1938 Act as they stoodat the material time as well as condition 7 of the policy document –Life Insurance Corporation Act, 1956 – s.49(2) – Life InsuranceCorporation Regulations, 1959 – Regulation 18(2) .

Conclusion

The appellant obtained life insurance policy in November,1993. The sum insured was Rs.75,000/-. Term of the policy wastwenty five years. Policy envisaged the payment of quarterlypremium of Rs 775/-, spread over hundred quarters during theterm of the policy. Last premium was payable in August, 2018and the policy was to mature in Nov. 18. In 2001, the appellanttook loan of Rs.15,000/- by pledging the policy. In August, 2001the appellant stopped paying the premium and applied for therefund of the surrender value. The Corporation offered surrendervalue of Rs.2268/-, after deducting the loan amount andoutstanding interest. Appellant filed complaint before the DistrictConsumer Forum, which was allowed. The State Commissionaffirmed the said decision, which was reversed by NationalCommission in revision. Hence, the present appeal.

Dismissing the appeal, the Court

HELD: 1.1 There are popular misconceptions about theconcept of ‘surrender value’ in the sphere of life insurance. In a AB

C

D

E

F

G

[2019] 5 S.C.R.

Apolicy of fire insurance, a policy holder has no expectation of asurrender value. In contrast, a holder of a policy of life insurancemay believe (as the appellant in this case does) that theirsurrender value will be equal to the total amount paid as premium.This expectation is misconceived. Life insurance operates onthe basis of the law of averages. Premium is collected from allBpolicy holders in order to create a common fund. Payouts fromthe fund are received only by those who suffer the peril which isinsured. The economic loss suffered by few is divided amongstmany. Premia are fixed by the insurer on the basis of expectedmortality rates. Hypothetically, if mortality rates of all individualsCwere to be equal irrespective of age and everyone paid the samepremium, the discontinuance of a policy during its term wouldnot entitle the insured to a surrender value since the commonfund would be depleted on a regular basis. In reality, the mortalityrates increase with age. Actuarial tables provide a guide to theinsurer. Hence, when an insurer initially collects premium fromDindividuals of a younger age, the amount it collects is higher thanthe amount it pays out towards claims. The difference betweenthem is the ‘reserve’. Thus if a policy holder wishes to discontinuea policy before the end of the term, they will only be entitled totheir share of the ‘reserve’ as a surrender value. Since the valueEof the ‘reserve’ is the amount which the insurer collects aspremium from policy holders from which it deducts the amountof the claims it pays out, the surrender value payable to a policyholder can never be equal to the premia paid by them. Incomputing the surrender value of any subsisting bonus, referenceought to be made to the stipulations contained in Section 113,FInsurance Act, 1938. The first proviso to Section 113(1) providesthat the requirement of the addition of the surrender value of thebonus attaching to the policy at surrender is deemed to havebeen fulfilled where the method of calculating the guaranteedsurrender value makes provision for the surrender value of theGbonus attaching to the policy. The second proviso stipulates thatthe requirement of showing the guaranteed surrender value on apolicy is deemed to have been complied with where the insurershows on the policy the guaranteed surrender value by means ofa formula which is accepted by the authority as satisfying the H

requirements under the third proviso. The requirement ofshowing the guaranteed surrender value shall not take effect untilsix months have expired from the date of publication of thenotification in the Official Gazette. [Paras 11, 13 and 16][220-D-G; 221-C; 223-B-C]

1.3 Condition 7 of the policy document specifically providesthat the surrender value is equal to 30% of the total premiumspaid, excluding premiums for the first year and all extra premiumsand/or additional premiums for accident benefits that may havebeen paid. The paid up value of the policy on that basis wascomputed by taking into account the premiums that were paid bythe insured. The paid up value of the policy worked out to Rs23,250/-. The factor of 32.92% has been duly explained on thebasis of the actuarial table governing surrender values which hasbeen placed on record. The vested bonus which accrued, stoodat Rs 42,187/- at the rate of Rs 562.5 per Rs 1,000/-, according tothe bonus chart for endowment policies as on 31 March 2001.There was no error on the part of the respondent in computingthe surrender value of the subsisting bonus, on the basis on whichit has been computed. The surrender value of the subsisting bonusattached to the policy cannot be the bonus which would have beenpayable had the policy continued to its full term. In deducing thesurrender value of the bonus which was payable to the appellant,the respondent applied the surrender value factor of 32.92% tothe total paid up value of the policy. The total paid up valuecomprised of the paid up value (Rs 23,250/-) and the vested bonus(Rs 42,187/-). Hence, the total paid up value of the policy wasRs. 65,437/- to which the surrender value factor of 32.92% wasapplied. This resulted in a surrender value of Rs 21,542/-. Whatwas payable to the insured was computed after deducting theloan which was taken against the policy together with theoutstanding interest. The method by which the computation wascarried out was in accordance with the accepted and duly approvedformula. It was consistent with the provisions of Section 113 ofthe Act as they stood at the material time as well as condition 7 ofthe policy document. [Paras 17-20] [223-D-H; 224-A-E]

Branch Manager, LIC of India v. A Paulraj(1969) 2CPJ 69 – referred to.

A

BC

D

E

F

G

H

A“Modern Law of Insurance in India”, N.M TripathiPrivate Limited, First Edition(1978) – referred to.Charles C. Bulingham v. Charles M. Crouse 228 U.S.459 (1913); In re McKinney15 Fed. Rep. 535, 537 –referred to.

Case Law Reference

B

(1969) 2 CPJ 69

referred toPara 4

CIVIL APPELLATE JURISDICTION: Civil Appeal No.2568 of

2019.

CFrom the Judgment and Order dated 28.04.2014 of the NationalConsumers Disputes Redressal Commission, New Delhi in RP No.2822of 2013.L.D. Doshi, Amol Nirmalkumar Suryawanshi, Advs. for theAppellant.DAshok Panigrahi, Anmol Tayal, S. Vinay Ratnakar, Advs. for theRespondents.

The Judgment of the Court was delivered by DR DHANANJAYA Y CHANDRACHUD, J. 1. Leavegranted.E

2. This appeal arises from a decision of the National ConsumerDisputes Redressal Commission[1] reversing a judgment of the MaharashtraConsumer Disputes Redressal Commission[2].

3. The appellant obtained a policy of life insurance on 11FNovember 1993. The sum insured was Rs 75,000. The term of thepolicy was twenty five years. The policy envisaged the payment of aquarterly premium of Rs 775, spread over a hundred quarters during theterm of the policy. The last premium was payable on 11 August 2018and the policy was to mature on 11 November 2018. On 27 May 2001,the appellant took a loan of Rs 15,000 from the Ratnagiri Branch of theGLife Insurance Corporation by pledging the policy. In August 2001, theappellant stopped paying the premium. Thereafter, he applied for therefund of the surrender value. The Corporation offered a surrender valueof Rs. 2268, after deducting the loan amount and outstanding interest.

1 “National Commission”H2 “StateCommission“

1 “National Commission”H2 “StateCommission“

4. The appellant filed a complaint before the District ConsumerDisputes Redressal Forum, Sangli[3]. The District Forum allowed thecomplaint and directed the respondent to pay an amount of Rs 29,888together with interest at 9% p.a. with effect from 21 July 2004. Thedecision of the District Forum was challenged in appeal by the respondent.The State Commission affirmed the decision. In revision, the NationalCommission reversed the decision, relying on its earlier decision in BranchManager, LIC of India v A Paulraj[4].

5. The controversy involved in the present case turns on theinterpretation of the provisions of Section 113 of the Insurance Act, 1938[5]and Clause 7 of the policy document. Section 113 of the Act, as it stoodat the material time was in the following terms:

“113. Acquisition of surrender value by policy-

(1) A policy of life insurance under which the whole of the benefitsbecome payable either on the occurrence, or at a fixed intervalor fixed intervals after the occurrence, of a contingency which isbound to happen, shall, if all premiums have been paid for at leastthree consecutive years in the case of a policy issued by aninsurer, or five years in the case of a policy issued by a providentsociety defined in Part III, acquire a guaranteed surrender value,to which shall be added the surrender value of any subsistingbonus already attached to the policy, and every such policy issuedby insurer shall show the guaranteed surrender value of thepolicy at the close of each year after the second year of itscurrency or at the close of each period of three years throughoutthe currency of the policy: Provided that the requirements of thissub-section as to the addition of the surrender value of the bonusattaching to the policy at surrender shall be deemed to have beencomplied with where the method of calculation of the guaranteedsurrender value of the policy makes provision for the surrendervalue of the bonus attaching to the policy: Provided further thatthe requirements of this sub-section as to the showing of theguaranteed surrender value on a policy shall be deemed to havebeen complied with where the insurer shows on the policy the 3 “District Forum”

4 (1996) 2 CPJ 69. The National Commission approved the calculation of cash value ofbonus payable in accordance with the surrender value factor.

5 “the Act”

ABC

DEFG

H

A

B

C

D

E

F

G

H

guaranteed surrender value of the policy by means of a formulaaccepted in this behalf by the Authority as satisfying the saidrequirements: Provided further that the provisions of this sub-section as to the showing of the guaranteed surrender value on apolicy shall not take effect until after the expiry of six monthsfrom such date as the Authority may, by notification in theofficial Gazette, appoint in this behalf.

(2) Notwithstanding any contract to the contrary, a policy whichhas acquired a surrender value shall not lapse by reason of thenon-payment of further premiums but shall be kept alive to theextent of the paid-up sum insured, and the paid-up sum insuredshall for the proposes of this sub-section include in full all subsistingreversionary bonuses that have already attached to the policy,and shall, where the policy is one on which the maximum numberof annual premiums payable is fixed and the premiums are ofuniform amount, be before the inclusion of such bonuses not lessthan the amount bearing to the total sum insured by the policyexclusive of bonuses the same proportion as the total period forwhich premiums have already been paid bears to the maximumperiod for which premiums were originally payable.

(3) A policy kept alive to the extent of the paid-up sum insuredunder sub section (2) shall not be entitled by virtue of that sub-section to participate in any profits declared distributable after theconversion of the policy into a paid-up policy.

(4) Sub-section (2) and sub-section (3) shall not apply -

(a) where the paid-up sum insured by a policy being a policy issuedby an insurer, is less than one hundred rupees inclusive of anyattached bonus or takes the form of an annuity of less than twenty-five rupees, or where the paid-up sum insured by a policy, being apolicy issued by a provident society as defined in Part III, is lessthan fifty rupees inclusive of any attached bonus or take the formof an annuity of less than twenty-five rupees, or (b)where the parties after the default has occurred in the paymentof the premium agree in writing to some other arrangement, or

(c) to policies in which the surrender value is automatically appliedunder the terms of the contract to maintaining the policy in forceafter its lapse through non-payment of premium.”

Section 113 was amended on 20 March 2015, with effect from26 December 2014.[6]. For the purposes of this case, we are concernedwith the pre-amended provision.

6. Condition 7 of the policy document reads thus:

“7. Guaranteed surrender value

This policy can be surrendered for cash after the premiums havebeen paid for at least three years. The minimum surrender valueallowable under this policy is equal to 30% of the total amount ofthe mentioned premiums paid excluding premiums for the firstyear and all extra premiums and/or additional premiums foraccident benefits that may have been paid. The cash value of anyexisting vested bonus additions will also be allowed.”

(emphasis supplied)

7. The basis on which the respondent arrived at the surrendervalue which was payable to the appellant is reflected in the followingcomputation:

COMPUTATION:

· Sum Assured : Rs 75,000

· Mode – Quarterly Premium : Rs 775

· Total No. of Premia Payable : 100 Quarters (i.e. 25 years)

1 Following the amendment, Section 113 is as follows:

“113. Acquisition of surrender value by policy-

(1) A policy of life insurance shall acquire surrender value as per the norms specifiedby the regulations.

(2) Every policy of life insurance shall contain the formula as approved by the Authorityfor calculation of guaranteed surrender value of the policy.

(3) Notwithstanding any contract to the contrary, a policy of life insurance under anon-linked plan which has acquired a surrender value shall not lapse by reason of non-payment of further premiums but shall be kept in force to the extent of paid-up suminsured, calculated by means of a formula as approved by the Authority and containedin the policy and the reversionary bonuses that have already been attached to thepolicy:

Provided that a policy of life insurance under a linked plan shall be kept in force in themanner as may be specified by the regulations.

(4) The provisions of sub-section (3) shall not apply—

(i) where the paid-up sum insured by a policy, inclusive of attached bonuses, is lessthan the amount specified by the Authority or takes the form of annuity of amount lessthan the amount specified by the Authority; or

(ii) when the parties, after the default has occurred in payment of the premium, agree inwriting to other arrangement.”

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

· Date of commencement of the policy : 11.11.1993

· Premium paid upto 11.08.2001 : 31 Premia · Duration of premium paid : 7 years 9 Months (i.e. 31 Quarters)

· Loan of Rs 15,000 taken on 27.05.2001

· Paid-Up Value : (No. of paid premia multiplied by SumAssured)/Total No. of Premia i.e. (31 multiplied by Rs.75,000)/100 = Rs 23,250

· Vested Bonuses : Rs 42,187 (at the rate of Rs 562.5 per1,000 as per Bonus chart for endowment policy as on 31.03.2001(Annexure-4)

· Total paid up value : paid up value + vested bonus i.e.Rs 23,250 + 42,187 = Rs 65,437 ( as per condition no. 4 as perthe policy)

· Surrender Value Factor : 32.92% (as per Surrender valueTable No.1A applicable to endowment policy (Annexure-5)

· Surrender Value Payable as on 14.05.2004 : total Paid-UpValue multiplied by Surrender Value Factor i.e. Rs 65,437 mul-tiplied by 32.92% = Rs 21,542

· Outstanding Loan amount with interest : Principal + Interesti.e. Rs 15,000 + Rs 4,274 = Rs 19,274

· Net amount payable as on 14.05.2004 : Surrender ValuePayable - Outstanding Loan Amount with interest i.e. Rs21,542-19,274 = 2,268/- · Guaranteed Surrender Value (as per condition No. 7 of thepolicy)- 30% of the total premium paid excluding premium paidfor the first year and all extra premiums that may have beenpaid i.e. 30% multiplied by (Total Premium paid - 1[st] year pre-mium) : 30% multiplied by(Rs 24,025-Rs 3,100)= Rs6,277

· Cash value of the vested bonus : 32.92% of the VestedBonus i.e. 32.92% of Rs 42,187 = 13,888

· Total Guaranteed Surrender Value : Rs 20,165

· Net Amount Payable as on 14.05.2004 : GuaranteedSurrender Value Payable – Outstanding Loan amount with in-terest : Rs 20,165-Rs 19,274 = Rs 891/-.

8. Learned counsel appearing on behalf of the appellant submitsthat the appellant has a grievance in regard to the manner in which thecomputation of the surrender value of the bonus payable was arrived at.According to the submission, the respondent has applied a factor of32.92% in arriving at the surrender value not only with reference to thepremia which were paid but also in regard to the bonus to which theappellant claims to be entitled. The following findings of the DistrictForum were relied upon during the course of arguments:

“Considering the terms and conditions in the policy and calculationsby the respondent at exhibit 5/6, it is observed that the respondenthas stated that 32.92% of the Premium amount and Bonus amountput together is payable. The respondent has not brought to noticeany term or condition in the policy providing for 32.92% reductionin amount of Bonus. Therefore, as per calculations of therespondent at exhibit 5/6 32.92% of the premium of Rs.23250/-i.e. premium of Rs.6975/- is payable. Further, it is clear that theamount at the end of calculations against exhibit 5/6 i.e. Bonusminus loan amount of Rs.19274, is due from the respondent.Therefore, it is clear that 32.92% of the entire amount payable,plus amount of bonus payable, minus amount of outstanding loan(6975+42187-19274=29888) is the amount payable.”

While affirming this finding, the State Commission held that theformula for the purpose of the guaranteed surrender value was requiredto be approved by the competent authority under Section 113. The StateCommission held that no material was produced before it to indicate thatthe surrender value formula was approved by the competent authority.

9. Assailing the above submission, learned counsel appearing onbehalf of the respondent has placed reliance on the reply which wasfiled by the Life Insurance Corporation in the proceedings before theDistrict Forum to explain the basis of computing the surrender value.Learned Counsel urged that Section 113 does not speak about the paymentof the full value of the subsisting bonus. On the contrary, it specificallyadverts to only its surrender value. Learned counsel submitted that thefirst proviso to Section 113 provides that the requirements of the section A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Ashall be deemed to have been complied with where the method ofcalculation for computing the guaranteed surrender value of the policymakes a provision for surrender value of the bonus attached to the policyas well. The second proviso provides that the requirement as to theshowing of the guaranteed surrender value shall be deemed to havebeen complied with where the insurer shows on the policy the guaranteedBsurrender value by means of a formula accepted by the authority asspecifying the requirement. The third proviso, it has been submitted,provides that the second aspect of Section 113 relating to the requirementof showing the guaranteed surrender value of the policy shall not takeeffect until the expiry of six months from the date of notification in theCOfficial Gazette.

10. The rival submissions need to be analysed.

11. There are popular misconceptions about the concept of‘surrender value’ in the sphere of life insurance. In a policy of fireinsurance, a policy holder has no expectation of a surrender value. InDcontrast, a holder of a policy of life insurance may believe (as the appellantin this case does) that their surrender value will be equal to the totalamount paid as premium. This expectation is misconceived. Simply put,life insurance operates on the basis of the law of averages. Premium iscollected from all policy holders in order to create a common fund.Payouts from the fund are received only by those who suffer the perilEwhich is insured. The economic loss suffered by few is divided amongstmany. Premia are fixed by the insurer on the basis of expected mortalityrates. Hypothetically speaking, if mortality rates of all individuals wereto be equal irrespective of age and everyone paid the same premium,the discontinuance of a policy during its term would not entitle the insuredFto a surrender value since the common fund would be depleted on aregular basis. In reality, the mortality rates increase with age. Actuarialtables provide a guide to the insurer. Hence, when an insurer initiallycollects premium from individuals of a younger age, the amount it collectsis higher than the amount it pays out towards claims. The differencebetween them is the ‘reserve’. Thus if a policy holder wishes toGdiscontinue a policy before the end of the term, they will only be entitledto their share of the ‘reserve’ as a surrender value.

12. In his treatise on the subject, tilted “Modern Law of Insurancein India” K.S.N. Murthy has elucidated on the concept of “surrendervalue” in life insurance policies in the following terms:H

ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA[DR. DHANANJAYA Y CHANDRACHUD, J.]

“Life insurance is based on the cooperative principle in the sensethat the premiums paid by the policy holders are pooled togetherand after meeting the preliminary expenses of administration, etc.,the balance is formed into or added to a fund which is invested ingood business or which attracts an accumulated interest. On thatbasis when the calculations are made, and if one of the policyholders withdraws from such a cooperative enterprise, theremaining policy holders suffer a set-back and it is the duty of theseceding policy holder to make good not only the administrativeexpenses, etc., incurred, but something more must be deducted:but that amount also must be fair and equitable.”[7]

13. Since the value of the ‘reserve’ is the amount which the insurercollects as premium from policy holders from which it deducts the amountof the claims it pays out, the surrender value payable to a policy holdercan never be equal to the premia paid by them.

14. In a decision of 1913 in Charles C. Burlingham v CharlesM. Crouse[8], the Supreme Court of the United States was tasked withinterpreting a provision of the Bankruptcy Code in relation to ownershipof life insurance policies. Justice Day, who delivered the opinion of theCourt, drew a distinction between insurance policies which have asurrender value and policies which do not have a surrender value:

“…Life insurance, may be given in a contract providing simplyfor payment of premiums on a calculated basis which accumulatesno surplus for the holder. Such insurance has no surrender value.Policies, whether payable at the end of a term of years or atdeath, may be issued upon a basis of calculation which accumulatesa net reserve in favor of the policy-holder and which forms aconsequent basis for the surrender of the policy by the insuredwith advantage to the company upon the payment of a part of thisaccumulated reserve.”

The Court cited the decision of the Court of the Southern Districtof New York, in In re McKinney[9]to elucidate on the concept ofsurrender value. Justice Brown had held thus:

“The first of these elements, the surrender value of the policy,arises from the fact that the fixed annual premium is much in 7 Modern Law of Insurance in India, N.M. Tripathi Private Limited, Bombay, FirstEdition (1978).

8 228 U.S. 459(1913)

9 15 Fed. Rep. 535, 537

A

B

C

D

E

F

G

H

Aexcess of the annual risk during the earlier years of the policy, anexcess made necessary in order to balance the deficiency of thesame premium to meet the annual risk during the latter years ofthe policy. This excess in the premium paid over the annual costof insurance, with accumulations of interest, constitutes thesurrender value. Though this excess of premiums paid is legallyBthe sole property of the company, still in practical effect, thoughnot in law, it is moneys of the assured deposited with the companyin advance to make up the deficiency in later premiums to coverthe annual cost of insurance, instead of being retained by theassured and paid by him to the company in the shape of greatlyCincreased premiums, when the risk is greatest. It is the ‘net reserve’required by law to be kept by the company for the benefit of theassured, and to be maintained to the credit of the policy. So longas the policy remains in force the company has not practicallyany beneficial interest in it, except as its custodian, with theobligation to maintain it unimpaired and suitably invested for theDbenefit of the insured. This is the practical, though not the legal,relation of the company to this fund.

“Upon the surrender of the policy before the death of the assured,the company, to be relieved from all responsibility for the increasedrisk, which is represented by this accumulating reserve, could wellafford to surrender a considerable part of it to the assured, or hisrepresentative. A return of a part in some form or other is nowusually made…”

E

15. The issue before the Court is as to whether the provisions ofSection 113 of the Act and condition 7 of the policy document were dulyFobserved by the insurer. Section 113(1) is in two parts:

(i) A policy of life insurance under which the whole of the ben-efits become payable either on the occurrence of a contingency whichis bound to happen or at fixed intervals, acquires a surrender value if allthe premiums have been paid for at least three consecutive years. TheGsurrender value of any subsisting bonus already attached to the policy isto be added to the guaranteed surrender value;

(ii) Every such policy which is issued by an insurer must show theguaranteed surrender value of the policy at the close of each year after H

the second year of its currency or at the close of each period of threeyears throughout the currency of the policy.

16 In computing the surrender value of any subsisting bonus,reference ought to be made to the stipulations contained in Section 113.The first proviso to Section 113(1) provides that the requirement of theaddition of the surrender value of the bonus attaching to the policy atsurrender is deemed to have been fulfilled where the method ofcalculating the guaranteed surrender value makes provision for thesurrender value of the bonus attaching to the policy. The second provisostipulates that the requirement of showing the guaranteed surrender valueon a policy is deemed to have been complied with where the insurershows on the policy the guaranteed surrender value by means of a formulawhich is accepted by the authority as satisfying the requirements underthe third proviso. The requirement of showing the guaranteed surrendervalue shall not take effect until six months have expired from the date ofpublication of the notification in the Official Gazette.

17. In exercise of the powers conferred by Section 49(2) of theLife Insurance Corporation Act, 1956, the Central Government notifiedthe Life Insurance Corporation Regulations 1959[10]. Regulation 18(2)empowers the Executive Committee to accept the surrender of anyinsurance or annuity and to purchase or redeem any insurance or annuityand to waive the forfeiture of any insurance on such terms as theExecutive Committee may deem fit. The respondent has placed on therecord a copy of the Minutes of the Seventy-seventh meeting of theExecutive Committee of the Life Insurance Corporation of India held on19 August 1959. At that meeting, the Executive Committee approved ofthe proposed scale of surrender values. The note on the basis of whichthe approval was granted has also been annexed.

18. We have considered the basis of the computation which hasbeen placed before the Court and which has been extracted in the earlierpart of this judgment. Condition 7 of the policy document specificallyprovides that the surrender value is equal to 30% of the total premiumspaid, excluding premiums for the first year and all extra premiums and/or additional premiums for accident benefits that may have been paid.The paid up value of the policy on that basis was computed by takinginto account the premiums that were paid by the insured. The paid upvalue of the policy worked out to Rs 23,250.

10“the Regulations”

A

B

C

D

EF

G

H

A19. The real dispute in the present case arose because of theclaim of the appellant that he was entitled to the entirety of the bonusand not 32.92% of the total bonus that would have accrued had thepolicy continued to its term of maturity. The factor of 32.92% has beenduly explained on the basis of the actuarial table governing surrendervalues which has been placed on record. The vested bonus whichBaccrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, accordingto the bonus chart for endowment policies as on 31 March 2001. Therewas no error on the part of the respondent in computing the surrendervalue of the subsisting bonus, on the basis on which it has been computed.The surrender value of the subsisting bonus attached to the policy cannotCbe the bonus which would have been payable had the policy continuedto its full term. In deducing the surrender value of the bonus which waspayable to the appellant, the respondent applied the surrender value factorof 32.92% to the total paid up value of the policy. The total paid up valuecomprised of the paid up value (Rs 23,250) and the vested bonus (Rs42,187). Hence, the total paid up value of the policy was Rs 65,437 toDwhich the surrender value factor of 32.92% was applied. This resultedin a surrender value of Rs 21,542. What is payable to the insured wascomputed after deducting the loan which was taken against the policytogether with the outstanding interest.

20. For the above reasons, we are of the view that the method byEwhich the computation was carried out was in accordance with theaccepted and duly approved formula. It was consistent with the provisionsof Section 113 of the Act as they stood at the material time as well ascondition 7 of the policy document.

21. We, therefore, do not find any merit in the appeal. The appealFis, accordingly, dismissed. There shall be no order as to costs.

G

Divya Pandey

Appeal dismissed.

H