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The
First Premium
The article accentuates on a situation for payment of
The First Premium to Life Insurance through cheque. The article is
considering here a question What will happen if an applicant for
life insurance policy, just after depositing the first premium through
cheque(s) /cash, and the cheque(s) has been encashed by the insurance
company, dies after that, without getting the policy? May be he has got a
receipt or acknowledgment of the money deposited.
In legal parlance, Is mere acceptance of premium amount and issuance/non-
issuance of receipt would mean acceptance of proposal? This will follow two
more questions regarding above legal fact
1. In such cases could the deceased dependants get the benefit of the policy?
2. Is it possible for the applicant or the one whose life is to be insured,
to make some strong point to escape from such situations, before he dies?
As insurance is a social devise to reduce or eliminate risk of losses to the
life and property or we can say that it is a provision that a prudent man
makes against inevitable contingencies, losses and misfortune. Life insurance
is a contract between the insurer and the insured and based on Utmost good
faith (on mutual trust and confidence between the insurer and insured. Each
should be legally obliged to reveal to the other all-material fact, which
would influence mutual decisions).
To take an effecting Life Insurance policy one follows a procedure prescribed
by life insurance:
1.
Filling up the proposal form.
2. Declaration by the proponent.
3. Attachment of proof of age.
4. Presentation of proposals to the agent.
5. Medical examination
6. Report by the agent.
7. Scrutiny of proposal by the branch office.
8. Depositing of Premium.
9. Registration of proposal.
10. Sending the proposal to appropriate department.
11. Taking final decision to the proposal.
12. Issue of Acceptance or request letter.
13. Issue of insurance policy. etc.
After depositing the premium amount through cheque and after encashing the
cheque company may issue or send:
1. Receipt-Simple acknowledgment of money deposited by the applicant.
2. Cover note or temporary policy- it is the evidence that the insurer has
accepted the policy and the insured has remitted the premium.
3. Referred to the Head office for further approval- it may in the case of
heavy amount, which is beyond the power of the authority of the company, to
which the applicant had given the proposal along with cheque.
4. Money is in Suspense Amount-Simply information that the applicant’s money
has been deposited in an account in which in future it may be refunded if the
same is not appropriated or utilized for the purpose for which it was
remitted.
As whole we see that generally the acceptance is to be made by the insurer.
Sec 2(b) of the Contract Act defines acceptance as When the person to whom
the proposal is made signifies his assent thereto the proposal is said to be
accepted. The insurer on receiving the papers containing the proposal
scrutinizes them and when they are found in order he signifies his assent
thereto by a letter and the letter is called the letter of acceptance until
this is sent there is no acceptance, though a cheque for the premium is sent
and the money is received and retained after the death of the insured.
The letter, which is printed, contains generally four clauses:
1. Accepted at ordinary rates.
2. Accepted with extra premium.
3. Accepted subject to satisfactory assessment by further examination after a
lapse of time.
4. Not accepted.
I am giving here some facts of law and further few references of cases and
the decisions made by the Courts.
Some facts of law relating this article:
1. Concerning to the main question Is mere acceptance of premium amount
and issuance/non-issuance of receipt would mean acceptance of the proposal?
The stand of law in this regard is very clearly stated
in Corpus-Juris Secundum-Vol.XLIV Page no. 986:
According to it the mere receipt and retention of premiums until after the
death of applicant does not give rise to a contract, although the
circumstances may be such that approval could be inferred from retention of
the premium. The mere execution of the policy is not an acceptance to be
complete, must be communicated to the offeree, either directly, or by some
definite act, such as placing the contract in the mail. The test is not
intention alone. When the application so requires the acceptance must be
evidenced by the signature of one of the company’s executive officers.
2. A default in remitting the premium may because
discharge of the insurance contract and the insurer shall be relieved from
his liability.
3. The proposal for affecting an insurance policy is executed
in the prescribed form.
4. In case of general insurance on depositing the
premium by the proposer in time, constitute a legal contract between the
parties.
5. In certain human relationship silence to a proposal
might convey acceptance but in the case of insurance proposal silence does
not denote consent and not binding contract arises until the person to whom
an offer is made signify his acceptance. Mere delay in giving an answer
cannot be construed as an acceptance as prima facie acceptance must be
communicated to the offeror.
6. According to section-8 of Indian Contract Act ‘
performance of the conditions of the proposal or the acceptance of any
consideration for a reciprocal promise which may be offered with a proposal
is an acceptance of the proposal. Now and with regard to the communication of
the acceptance, this was the duty entirely to be complied with by the Life
Insurance if the proposer’s dependant proves the deemed acceptance of the
proposal by the life insurance. It was for the life insurance to establish
that because there are more formalities to be satisfied the acceptance, which
is not actually completed.
Case Referred:
1. Life Insurance Co-corporation
of India, Trivandrum, Appellant Vs. Mrs. Prasanna
Devaraj, Respondent. A.I.R. 1995 Kerala page no.88
Facts of the case- The proposer (husband of the respondent) filled
up the form of proposal for insurance on his life for a sum of Rs. 2,00,000/-
and sent the same along with the first premium to the divisional office of
the life insurance co-orporation after getting himself medically examined by
the doctor. The Divisional Manager encashed the cheque and acknowledged the
same by granting the receipt. The cheque sent by the deceased was encashed
and held in deposit in the ‘suspense account’ and not adjusted toward the
premium. Since the proposal was sent for assurance of a sum of Rs.2 lakh the
ultimate authority to consider its acceptance was the central office of the
corporation. It took time to complete the process. The proposer however died
before it was considered by the authority competent to accept the proposal.
Held that- There was not acceptance of the proposal
creating a concluded contract firstly amount remitted was not treated as
premium and secondly, the receipt nowhere spells out that receipt of the
amount which was the initial deposit towards the premium
2. Life Insurance Corporation of India Vs.
R.Vasireddy A.I.R. 1984 2 SCC 719
This is also a case in which matter is quite similar
with the previous one. The question arising before the Supreme Court was,
whether receipts and retention of the insurance premium and the delay in
replying to the proposor could be treated as the acceptance thereof.
Facts of the case- In this case the deceased filled a proposal of insurance
on his life for Rs.50, 000 on 27.12.1960. He issued two cheques for Rs. 300
and Rs.220 respectively, which were got encashed by the Life insurance
corporation by 11.01.1961. The deceased died the next day i.e. on 12.01.1961.
In an action by the widow of the deceased to claim the amount the Life
insurance corporation contended that the contract of insurance had yet to be
completed. It was averred that since the proposal had yet to be accepted by
the Divisional Manager, according to the prescribed procedure in such cases,
the amount of the two cheques had been kept only in deposit in the suspense
account and had not been credited towards the premium account, and therefore,
the Life insurance corporation was not bound to pay the insured sum of Rs.50,
000.
Held that- The contention of the life insurance corporation was accepted by
the Supreme Court and since the contract had not yet been concluded the life
insurance corporation was not liable to pay the sum claimed. (Also see the decision
of the court in Life Insurance Corporation of India
and other Appellants Vs Smt.Brazinha D’souza Respondent AIR 1995
Bombay page no.223).
3. Hindustan Co-operative Insurance Society
Ltd-Defendant-Appellant Versus Shaym Sunder and others-plaintiffs-Respondent
AIR 1952 Calcutta-691
Facts of the Case-The proposor at the request of an organizer of the company
verbally agreed to insure his life on an endowment policy. The doctor
employed by the company medically examined him and after the medical examination
he was found first class. The organizer said him that if he submitted the
proposal form and deposited the half-yearly premium without delay the company
would accept his life for insurance and would issue a policy promptly. The
proposal from was filled in, and was signed by the proposor and made over to
the organizer with the cheque of first premium. The company encashed the
cheque and just after few days the proposor died. The deceased dependents
sued for the compensation.
Held that; - The company by cashing the cheque and
appropriating the money accepted the proposal. No communication was necessary
to be made to the assured to complete the acceptance. The contract was made
at the moment the money was appropriated. It was a concluded contract. No subsequent
communication by one of the parties could open the matter again. So the
subsequent letter by the company asking for a further report could not unmake
the contract, which had been made by the appropriation of the money.
Therefore the company was liable to pay the insurance money.
Judges of Hon’ble court said, All papers namely,
the proposal, the medical reports and the ‘friends’ reports were completed
and sent to the insurance company and thereafter, with the knowledge of the
completion of the papers, the insurance company cashed the cheque. The
company knew that the organizer had no authority to receive the cheque as
premium and therefore the cheque when it was sent to the company by the
organizer had not been sent as premium. It was the company which could take
it or not as premium.
Judges further said that, to us the position seems to be this the
assured sent the proposal form with the cheque, and in effect said to the
company I am sending herewith my proposal and the first half-yearly
premium. The organizer cannot receive the cheque as premium. But you can, if
you accept my proposal, cash the cheque.
On the other words the proposer in this case dispensed
with express communication of the acceptance and from the nature of the
transaction we may somewhat readily infer the offerer’s intention to dispense
with the communication. The offeror in this case asked for an act on
the condition of the offer becoming a promise, and that act was done by
the company, namely, the cashing of the Cheques. We have no doubt therefore
that the company by cashing the cheque and appropriating the money accepted
the proposal. No communication was necessary to be made to the assured to
complete the acceptance.
So as far as the question No.2 is concerned the escape route from such
situations may be, the applicant at the time of submitting the filled
proposal form along with the cheque(s) could enclosed his own letter, which
would clearly state, that if the insurance company encash the cheque, then it
would be seemed to be accepted proposal. And by giving the reference case
mentioned just above of Hindustan co-operative society vs Shyam sunder the
applicant’s dependants could easily win.
Is it right? Think over it.
Article was earliet published in one of the
reputed legal website.
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