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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL   APPEAL No. 2568 OF 2019 (Arising out of SLP(C) No. 1689 of 2015)

Anandrao Ramchandra Salunke                                …Appellant

VERSUS

Life Insurance Corporation of India & Anr.                       …Respondents

J U D G M E N T  

Dr Dhananjaya Y Chandrachud, J

1 Leave granted.

2 This appeal arises from a decision of the National Consumer Disputes

Redressal  Commission1 reversing a judgment of  the Maharashtra Consumer

Disputes Redressal Commission2.

3 The appellant obtained a policy of life insurance on 11 November 1993.

The sum insured was Rs 75,000. The term of the policy was twenty five years.

1 “National Commission” 2 “State Commission”

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The policy envisaged the payment of a quarterly premium of Rs 775, spread

over a hundred quarters during the term of the policy. The last premium was

payable on 11 August 2018 and 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 the Life Insurance Corporation by pledging the policy. In

August 2001, the appellant stopped paying the premium. Thereafter, he applied

for the refund of the surrender value. The Corporation offered a surrender value

of Rs. 2268, after deducting the loan amount and outstanding interest.

4 The appellant  filed a complaint  before the District  Consumer Disputes

Redressal  Forum,  Sangli3.   The  District  Forum  allowed  the  complaint  and

directed the respondent to pay an amount of Rs 29,888 together with interest at

9% p.a. with effect from 21 July 2004.  The decision of the District Forum was

challenged in appeal by the respondent.  The State Commission affirmed the

decision. In revision, the National Commission reversed the decision, relying on

its earlier decision in Branch Manager, LIC of India v A Paulraj4.

5 The controversy involved in the present case turns on the interpretation of the

provisions of Section 113 of the Insurance Act, 19385 and Clause 7 of the policy

document.   Section 113 of  the Act,  as  it  stood at  the material  time was in  the

following terms:

3 “District Forum” 4 (1996)  2  CPJ  69.  The  National  Commission  approved  the  calculation  of  cash  value  of  bonus  payable  in accordance with the surrender value factor. 5 “the Act”

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“113. Acquisition of surrender value by policy- (1) A policy of life insurance under which the whole of the benefits become payable either on the  occurrence, or at a fixed interval or fixed intervals after the occurrence, of a contingency which is bound to  happen, shall, if all premiums have been paid for at least three consecutive years in the case of a policy  issued by an insurer, or five years in the case of a policy issued by a provident society defined in Part  III,   acquire  a guaranteed surrender  value,  to  which shall  be added the surrender value of any subsisting bonus  already attached to the policy, and every such policy issued by  insurer shall show the guaranteed surrender  value of the policy at the close of each year after the second year of its currency  or at the close of each period of three years throughout the currency of the policy:  Provided that the requirements of this sub-section as to the addition of the surrender value  of  the  bonus  attaching  to  the  policy  at  surrender  shall  be deemed  to have been complied with where the method of calculation of the guaranteed surrender value of the policy makes provision for the surrender value of the  bonus attaching to the policy: Provided further that the requirements of this sub-section as to the showing of the guaranteed surrender  value on a policy shall be deemed to have been  complied  with  where  the  insurer  shows  on  the  policy  the guaranteed surrender  value of  the policy  by  means of  a   formula accepted  in  this  behalf  by  the  Authority  as   satisfying  the  said requirements:  Provided further that the provisions of this sub-section as to the showing of the guaranteed surrender value  on a policy shall not take  effect until after the expiry of six months from such date  as the Authority may, by  notification in the official Gazette, appoint in this behalf. (2) Notwithstanding any contract to the contrary, a policy which has acquired a surrender value shall  not  lapse by reason of the non- payment of further premiums but shall be kept alive to the extent of the paid-up  sum insured, and the paid-up sum insured shall for the proposes of this sub-section include in full all  subsisting reversionary bonuses that have already attached to the policy, and shall, where the policy is one on which the maximum number of annual premiums payable is fixed and the premiums are of uniform  amount, be before the inclusion of such bonuses not less than the amount bearing to the total  sum insured  by   the  policy  exclusive  of  bonuses  the  same proportion as the total period for which premiums have already  been paid  bears  to  the  maximum  period   for   which  premiums  were originally payable. (3) A policy kept alive to the extent of the paid-up sum insured under sub section (2) shall not be  entitled by virtue of that sub-section to participate in any profits declared distributable after the conversion  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 issued by  an insurer,  is  less  than  one hundred rupees  inclusive  of  any attached 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 a policy  issued by a provident society as defined in Part III, is less than fifty rupees inclusive of any attached bonus or take the  form of an

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annuity of less than twenty-five rupees, or  (b)where the parties after the default has occurred in the payment of the premium agree in  writing to some other arrangement, or   (c) to policies in which the surrender value is automatically applied under the terms of the  contract to maintaining the policy in force after its lapse through non-payment of premium.”   

Section 113 was amended on 20 March 2015, with effect from 26 December 2014.6

For the purposes of this case, we are concerned with 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 have been paid for at least three years.  The minimum surrender value allowable under this policy is equal to 30% of the total amount of the mentioned premiums paid excluding premiums for the first year and all extra premiums and/or additional premiums for accident benefits that  may have been paid.  The cash value  of  any  existing  vested bonus additions will also be allowed.”       (emphasis supplied)

7 The basis on which the respondent arrived at the surrender value which was

payable to the appellant is reflected in the following computation:

COMPUTATION:

6 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  specified by the regulations. (2)  Every  policy  of  life  insurance shall  contain  the  formula  as  approved  by  the  Authority  for  calculation  of

guaranteed surrender value of the policy. (3) Notwithstanding any contract to the contrary, a policy of life insurance  under a non-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 sum insured, calculated by means of a formula as approved by the Authority and contained in the policy and the reversionary bonuses that have already been attached to the policy:

Provided that a policy of life insurance under a linked plan shall be kept in  force in the manner 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 less than the amount specified by

the Authority or takes the form of annuity of amount less than the amount specified by the Authority; or (ii)  when  the  parties,  after  the  default  has  occurred  in  payment  of  the  premium,  agree  in  writing  to  other

arrangement."

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 Sum Assured : Rs 75,000  Mode – Quarterly Premium : Rs 775  Total No. of Premia Payable : 100 Quarters (i.e.    25 years)  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  Sum

Assured)/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 per 1,000  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 per the policy)

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

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

 Outstanding Loan amount with interest : Principal + Interest i.e. Rs 15,000 + Rs 4,274 = Rs 19,274

 Net  amount  payable as on 14.05.2004 :  Surrender Value Payable  -  Outstanding  Loan Amount  with  interest  i.e.  Rs 21,542-19,274 = 2,268/-

 Guaranteed Surrender Value (as per condition No. 7 of the policy)- 30% of the total premium paid excluding premium paid for the first year and all extra premiums that may have been paid i.e. 30% multiplied by (Total Premium paid - 1st

year premium) :  30% multiplied by(Rs 24,025-Rs 3,100)= Rs6,277

 Cash value of  the vested bonus :  32.92% of  the  Vested Bonus 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  :  Guaranteed

Surrender Value Payable – Outstanding Loan amount with interest : Rs 20,165-Rs 19,274 = Rs 891/-.

8 Learned  counsel  appearing  on  behalf  of  the  appellant  submits  that  the

appellant has a grievance in regard to the manner in which the computation of the

surrender value of the bonus payable was arrived at. According to the submission,

the respondent has applied a factor of 32.92% in arriving at the surrender value not

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only with reference to the premia which were paid but also in regard to the bonus to

which  the  appellant  claims to  be  entitled.   The following  findings  of  the  District

Forum were relied upon during the course of arguments:

“Considering the terms and conditions in the policy and calculations by the respondent at exhibit 5/6, it is observed that the respondent has stated that 32.92% of the Premium amount and Bonus amount put together is payable.  The respondent has not brought to notice any term or condition in the policy providing for 32.92% reduction in amount of Bonus.  Therefore, as per calculations of the respondent 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 the amount at the end of calculations  against  exhibit  5/6  i.e.  Bonus  minus  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  the  formula  for  the

purpose of  the guaranteed surrender value was required to be approved by the

competent  authority  under  Section  113.   The  State  Commission  held  that  no

material  was produced before it to indicate that the surrender value formula was

approved by the competent authority.

9 Assailing the above submission, learned counsel appearing on behalf of the

respondent has placed reliance on the reply which was filed by the Life Insurance

Corporation in the proceedings before the District  Forum to explain the basis of

computing the surrender value. Learned Counsel urged that Section 113 does not

speak about the payment of the full value of the subsisting bonus. On the contrary, it

specifically adverts to only its surrender value. Learned counsel submitted that the

first proviso to Section 113 provides that the requirements of the section shall be

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deemed to have been complied with where the method of calculation for computing

the guaranteed surrender value of the policy makes a provision for surrender value

of the bonus attached to the policy as well.  The second proviso provides that the

requirement as to the showing of the guaranteed surrender value shall be deemed

to have been complied with where the insurer shows on the policy the guaranteed

surrender value by means of a formula accepted by the authority as specifying the

requirement.  The third proviso, it  has been submitted, provides that the second

aspect  of  Section  113  relating  to  the  requirement  of  showing  the  guaranteed

surrender value of the policy shall not take effect until the expiry of six months from

the date of notification in the Official 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 fire insurance, a policy holder has no

expectation of a surrender value. In contrast, a holder of a policy of life insurance

may believe (as the appellant in this case does) that their surrender value will be

equal  to  the  total  amount  paid  as  premium.  This  expectation  is  misconceived.

Simply put, life insurance operates on the basis of the law of averages. Premium is

collected from all policy holders in order to create a common fund. Payouts from the

fund are received only by those who suffer the peril which is insured. The economic

loss suffered by few is divided amongst many. Premia are fixed by the insurer on the

basis of expected mortality rates. Hypothetically speaking, if  mortality rates of all

individuals  were  to  be  equal  irrespective  of  age  and  everyone  paid  the  same

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premium, the discontinuance of a policy during its term would not entitle the insured

to a surrender value since the common fund would be depleted on a regular basis.

In reality, the mortality rates increase with age. Actuarial tables provide a guide to

the insurer. Hence, when an insurer initially collects premium from individuals of a

younger age, the amount it collects is higher than the amount it pays out towards

claims. The difference between them is the ‘reserve’. Thus if a policy holder wishes

to discontinue a policy before the end of the term, they will only be entitled to their

share of the ‘reserve’ as a surrender value.

12 In his treatise on the subject, tilted “Modern Law of Insurance in India” K.S.N.

Murthy has elucidated on the concept of “surrender value” in life insurance policies in

the following terms:

“Life insurance is based on the cooperative principle in the sense that the premiums paid by the policy holders are pooled together and after meeting the preliminary expenses of administration, etc., the balance is formed into or added to a fund which is invested in good business or which attracts an accumulated interest.  On that basis when the calculations are made, and if one of the policy holders withdraws from such a cooperative enterprise, the remaining policy holders suffer a set-back and it is the duty of the seceding policy holder to make good not only the administrative expenses, 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 insurer collects as

premium from policy holders from which it deducts the amount of the claims it pays

out, the surrender value payable to a policy holder can never be equal to the premia

paid by them.  

7 Modern Law of Insurance in India, N.M. Tripathi Private Limited, Bombay, First Edition (1978).

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14 In a decision of 1913 in Charles C. Burlingham v Charles M. Crouse8, the

Supreme Court of the United States was tasked with interpreting a provision of the

Bankruptcy Code in relation to ownership of life insurance policies. Justice Day, who

delivered the opinion of  the Court,  drew a distinction between insurance policies

which have a surrender value and policies which do not have a surrender value:

“…Life  insurance,  may be given in  a  contract  providing simply  for payment of premiums on a calculated basis which accumulates no surplus  for  the  holder.  Such  insurance  has  no  surrender  value. Policies, whether payable at the end of a term of years or at death, may be issued upon a basis of calculation which accumulates a net reserve in favor of the policy-holder and which forms a consequent basis for the surrender of the policy by the insured with advantage to the  company  upon  the  payment  of  a  part  of  this  accumulated reserve.”

The Court cited the decision of the Court of the Southern District of New York, in In

re McKinney9 to elucidate on the concept of surrender 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 excess of the annual  risk during the earlier  years of the policy,  an excess made necessary in order to balance the deficiency of the same premium to meet the annual risk during the latter years of the policy. This excess in  the  premium  paid  over  the  annual  cost  of  insurance,  with accumulations  of  interest,  constitutes  the surrender  value.  Though this  excess  of  premiums  paid  is  legally  the  sole  property  of  the company, still in practical effect, though not in law, it is moneys of the assured  deposited  with  the  company  in  advance  to  make up  the deficiency in later premiums to cover the annual cost of insurance, instead of  being  retained by  the  assured and paid  by  him to  the company in the shape of greatly increased premiums, when the risk is greatest. It is the 'net reserve' required by law to be kept by the company for the benefit of the assured, and to be maintained to the credit  of  the  policy.  So  long  as  the  policy  remains  in  force  the company has not practically any beneficial interest in it, except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the insured. This is the practical, though not

8 228 U.S. 459(1913) 9 15 Fed. Rep. 535, 537

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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 increased risk, which is represented by this accumulating reserve, could well afford to surrender a considerable part of  it  to the assured, or his representative. A return of a part in some form or other is now usually made…”

15 The issue before the Court is as to whether the provisions of Section 113 of

the Act and condition 7 of the policy document were duly observed by the insurer.

Section 113(1) is in two parts:   

(i) A policy  of  life  insurance  under  which  the  whole  of  the  benefits  become

payable either on the occurrence of a contingency which is bound to happen

or at fixed intervals,  acquires a surrender value if all the premiums have been

paid  for  at  least  three  consecutive  years.   The  surrender  value  of  any

subsisting  bonus  already  attached  to  the  policy  is  to  be  added  to  the

guaranteed surrender value;

(ii) Every such policy which is issued by an insurer must show the guaranteed

surrender value of the policy at the close of each year after the second year of

its  currency  or  at  the  close  of  each period  of  three  years  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 the addition of the surrender value of the

bonus attaching to the policy at surrender is deemed to have been fulfilled where the

method  of  calculating  the  guaranteed  surrender  value  makes  provision  for  the

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surrender value of the bonus attaching to the policy.  The second proviso stipulates

that  the  requirement  of  showing  the  guaranteed  surrender  value  on  a  policy  is

deemed to have been complied with where the insurer shows on the policy the

guaranteed  surrender  value  by  means  of  a  formula  which  is  accepted  by  the

authority as satisfying the requirements under the third proviso. The requirement of

showing the guaranteed surrender value shall not take effect until six months have

expired from the date of publication of the notification in the Official Gazette.  

 17 In exercise of the powers conferred by Section 49(2) of the Life Insurance

Corporation  Act,  1956,  the  Central  Government  notified  the  Life  Insurance

Corporation  Regulations  195910.   Regulation  18(2)  empowers  the  Executive

Committee to accept the surrender of any insurance or annuity and to purchase or

redeem any insurance or annuity and to waive the forfeiture of any insurance on

such terms as the Executive Committee may deem fit. The respondent has placed

on  the  record  a  copy  of  the  Minutes  of  the  Seventy-seventh  meeting  of  the

Executive Committee of the Life Insurance Corporation of India held on 19 August

1959.  At that meeting, the Executive Committee approved of the proposed scale of

surrender values.  The note on the basis of which the approval was granted has also

been annexed.   

18 We have considered the basis  of  the computation which has been placed

before the Court and which has been extracted in the earlier part of this judgment.

Condition 7 of the policy document specifically provides that the surrender value is

equal to 30% of the total premiums paid, excluding premiums for the first year and 10 “the Regulations”

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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 taking

into account the premiums that were paid by the insured.  The paid up value of the

policy worked out to Rs 23,250.

19 The  real  dispute  in  the  present  case arose  because of  the  claim of  the

appellant that he was entitled to the entirety of the bonus and not 32.92% of the total

bonus that would have accrued had the policy continued to its term of maturity. The

factor  of  32.92%  has  been  duly  explained  on  the  basis  of  the  actuarial  table

governing surrender values which has been placed on record. The vested bonus

which accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according

to the bonus chart for endowment policies as on 31 March 2001. There was no error

on the part of the respondent in computing the surrender value of the subsisting

bonus, on the basis on which it has been computed. The surrender value of the

subsisting bonus attached to the policy cannot be the bonus which would have been

payable had the policy continued to its full term. In deducing the surrender value of

the bonus which was payable to the appellant, the respondent applied the surrender

value factor of 32.92% to the total paid up value of the policy.  The total paid up

value  comprised  of  the  paid  up  value  (Rs  23,250)  and  the  vested  bonus  (Rs

42,187). Hence, the total paid up value of the policy was Rs 65,437 to which the

surrender value factor of 32.92% was applied.  This resulted in a surrender value of

Rs 21,542. What is payable to the insured was computed after deducting the loan

which was taken against the policy together with the outstanding interest.

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20 For the above reasons,  we are of  the view that  the method by which the

computation  was  carried  out  was  in  accordance  with  the  accepted  and  duly

approved formula.  It was consistent with the provisions of Section 113 of the Act as

they stood at the material time as well as condition 7 of the policy document.

  21 We, therefore, do not find any merit in the appeal. The appeal is, accordingly,

dismissed. There shall be no order as to costs.

…..............................................................J.                 (Dr DHANANJAYA Y CHANDRACHUD)

…….............................................................J.      (HEMANT GUPTA)

NEW DELHI; MARCH 07, 2019