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This article is written by Anushka Singhal, a student of Symbiosis Law School, Noida. In this article, she discusses the forfeiture and non-forfeiture clauses in insurance law. 

Introduction

Life is very precious. With each life, we have three to four other lives connected. Therefore to ensure that with the death of one, the lives of the other three are not affected, we have the concept of ‘life insurance.’ Insurance can be defined as, ‘a plan by which a large number of people associate themselves and transfer to the shoulders of all, the risks that attach to an individual.’ Other things like motor vehicles, goods and property are bought after a lot of investment. Thus, to ensure that the money invested in them is not wasted due to an unforeseen situation, we have introduced the concept of insuring these assets too. Insurance has certain important clauses and an insurance buyer should be aware of them.

History of insurance in India

India has a long history of insurance. The classic texts of Manu, Rishi Yagnavalkalya and others mention insurance. The word, ‘Yogaksdhama’ is found in Rigveda which suggested that some kind of community insurance existed in India. The modern history of insurance started when the Oriental Life Insurance Company came up in Calcutta in 1818. Then the insurance business gained a good start and then a plethora of insurance companies showed up. In 1823, the Bombay Life Assurance company came into being, then we had the Bombay Mutual Life Insurance Society in the year 1870.

The nationalisation of insurance and the legislative Acts regarding the same came up in 1912 when the Indian Life Assurance Companies Act came up. Then we had the Indian Insurance Companies Act and the Insurance Act in 1928 and 1938 respectively. After independence, the Life Insurance Corporation Act, 1956 penned down a new chapter in the insurance history of India. When the insurance sector started growing, there arose a need for a regulating authority and then the Insurance Regulatory and Development Authority (IRDA) was set up. Today we have about 57 insurance companies in our country. 

Forfeiture clauses 

These clauses lay down that under certain conditions i.e. when a person has withheld some information, have given untrue information regarding his documents or have given false information under his proposal, such policy is subject to the provision of Section 45 of the Insurance Act 1938, wherever applicable, the policy shall be declared void and all claims to any benefits in virtue thereof shall cease. According to Section 45 of the Act, an insurer cannot question any life insurance policy on any grounds after three years from-

  1. The date of issuance of policy
  2. The date of risk commencement
  3. Date of the revival of policy in case of lapsation
  4. The date of rider to the policy

Reviving the policy

Nowadays, the insurance companies provide an option to the insured to revive their lapsed policy. It is similar to purchasing a new policy and new terms and conditions may be imposed on the insured. Most companies have their own revival policy and one can check it while entering into an insurance contract with the company. Before going for a revival one must pay all his due premiums under the policy along with the penalty that the insurance company may levy. The company may change the terms and conditions of the policy after revival and thus one should check the documents carefully. 

Validity of forfeiture clauses 

It was contended in the below-given cases that the forfeiture clauses under the insurance law went against Section 28 of the Indian Contract Act, 1872, it lays down that agreements in restraint of legal proceedings are void. An agreement is said to be in restraint of legal proceedings when it may restrict a party from approaching the court under any contract or which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability arising under or in respect of a contract. The Court has discussed this point in a number of cases. 

National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co.,1997

Facts

In this case, the Respondent firm had obtained two fire policies from the appellant’s insurance company for twelve months. There was a clause 19 in the contract which said that no claim can be entertained after 12 months of the loss caused. The Respondent suffered a loss and claimed insurance but his request was hit by clause 19 of the contract. The Respondent reached the contract pleading that clause 19 of the contract was in contravention of Section 28 of the Indian Contract Act, 1872. 

Judgment

The Court observed, “It is precisely to avoid delays and to discourage such belated claims that such insurance policies contain a clause like a clause 19. That is for the reason that if the claims are preferred with promptitude they can be easily verified and settled but if it is the other way round, we do not think it would be possible for the insurer to verify the same since evidence may not be fully and completely available and memories may have faded.” Thus it held that the clause was valid and was not against Section 28 of the ICA.

Girdharilal Honuman Bax v. Eagle Star and British Dominions,1923

Facts

In this case, the Plaintiff purchased insurance from the defendant company. It had a clause that if a claim has been made and then rejected, an action or suit shall be filed within three months of such rejection and if no suit is filed within this period, then all the rights of the Plaintiff under the policy would be forfeited. The plaintiff contended that such a clause in the contract was void and in contravention of Section 23 and Section 28 of the Indian Contract Act, 1872. 

Judgment

The Hon’ble Court held that the clause was valid and was not against Sections 23 and 28 of the Indian Contract Act. Thus, such forfeiture clauses in a policy that restrict the time in which a suit regarding insurance can be filed are completely valid and the courts do not interfere with them.

LIC v. Debasis Mishra, 2005

In this case, the Complainant had a money-back policy. He paid certain premiums but later was not able to pay the premiums due to some reason. He, therefore, wanted to end his policy and thus demanded his submitted premiums back. The insurance company said that since he failed to pay the premiums, the policy lapsed. As the policy lapsed, according to the clauses of the contract, he was not able to get his already submitted premiums back. His money was forfeited. The Court held that the clause was justified and thus it did not allow the Complainant to claim the already paid premiums. 

insolvency

Advantages and disadvantages of a forfeiture clause

They serve as a shield for the insurer. In case, a person enters into an insurance contract with a malicious intention, like if he is suffering from a disease and hides it from the insured, the insurer would not have to bear the brunt of such fraud. He can terminate the policy. Insurance fraud is a prevalent wrong in society and such forfeiture clauses assist in putting a full stop to such instances. Forfeiture clauses can be of a great disadvantage to the insured. Insurers can use it adversely. Forfeiture of insurance is a massive and disproportionate penalty in relation to the policyholder’s relatively harmless non-compliance with a condition in the insurance policy. 

Non-forfeiture clauses

It is a clause under a policy that enables you to choose how you receive the policy benefits in case of a lapsation due to non-payment of premiums. These clauses are included in life insurance policies. When a whole life insurance policyholder surrenders the policy, the non-forfeiture provision may become available. The clause may involve returning some portion of the total premiums paid, the cash surrender value of the policy, or a reduced benefit based upon premiums paid before the policy lapsed. It lays down that if the policy has run for at least 3 full years and subsequent premiums have not been paid the policy shall not be void but the sum assured will be reduced to a sum that will bear the same ratio as to the number of premiums paid to the total number of premiums payable.

Payout options under non-forfeiture clauses 

When a policy is terminated or surrendered, the policy owner does not forfeit the previous payments and is entitled to receive the policy’s cash value. Following are the payment options under a non-forfeiture clause- 

Cash surrender value 

Under this, the insurer has to pay the amount of the insured within six months of the surrender of the policy. The longer the duration of the policy, the better is the cash value.

Extended-term option

It allows the policy owner to buy an extended-term policy using the cash values from the previous policy. Sometimes the insurers provide an automatic extended-term option after the policy has lapsed.

Reduced-paid up insurance

In this option, the policy owner receives a lower amount of payments made as premiums for the original whole life insurance. In this way, the insurer is able to retain the policy benefits. 

LIC v. Raj Kumar Rajgarhia,1999

In this case, a loan was advanced to the Petitioner (deceased at the time of the case) under the terms and conditions entered into by the parties read with the terms of the loan bond. There was no mention of repayment time in the contract. There were certain important clauses in the loan bond pointing towards the time period of repayment. Then came the time of repayment of the loan, the Defendants did not rely on any of the clauses of the loan bond but instead, they solely relied on the automatic non-forfeiture clause which said that ‘all amounts due can be forfeited’. The Court said that while interpreting the words in a contract more weightage has to be given to the intention of the parties and one should not opt for the liberal interpretation. The Court interpreted the word ‘all amounts due’ to mean such amounts which have not only become due but payable under the contract. Therefore the defendant was not entitled to deduct the amount. 

Rights of beneficiaries under non-forfeiture clauses

Non-forfeiture clauses have become quite common in life insurance policies. Standard Life Insurance provides the insured with various options to choose from in case of default of a premium. There is a time period of three years given in most of the policies. If the insurer rejects an insured’s claim for money for some misrepresentation or fraud on his part, then the insured cannot do anything. But if the claim is rejected after the lapse of three years, the insured can still get the benefit and the insurer cannot do anything. Thus these non-forfeiture clauses help the policyholder to a great extent. This whole principle has been enshrined under Section 45 of the Insurance Act, 1938. There is an option of the revival of a policy after it lapses. A revival can be an ordinary revival i.e. effected within the first six months from the due of the first unpaid premium, it can be a revival on a medical basis or a revival on a non-medical basis. 

Conclusion

The forfeiture and non-forfeiture clauses play an important part in an insurance contract. While the forfeiture clauses protect the insurer from any fraud, the non-forfeiture clauses save the insured in a situation wherein he forgets to pay the premium. Before entering into a contract, the insured should carefully read the terms of the contract and should know about the revival policy in case a policy lapses. 

References


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