Assignment of a life insurance policy – 8

 Trading in policies

The matter reproduced below is from a news item that appeared in the Times of India. For full news please read the Times of India.

Life insurance policies can be traded: HC

Shibu Thomas, TNN Mar 26, 2007, 12.27am IST

MUMBAI: Life insurance policies can be traded and assigned freely, the Bombay High Court has ruled. In an important judgment that will give a boost to the growing business of assigning insurance policies, Justice F I Rebello and Justice Anoop Mohta last week held that such policies were "movable property" and can be traded in by the policy holder.

The court also struck down two circulars by the Life Insurance Corporation of India (LIC) that barred its policies from being transferred to a third party which traded in insurance policies.

Transfer or assignment is a method by which a policy holder can transfer his interest in the life insurance policy to another person or institution. It could be as security for a house loan or just emergency cash against the policy. The benefits, in the form of tax exempted returns would go to the institution and can mean "windfall gains" according to LIC.

Worldwide, acquisition and trade in life insurance policies is a profitable business — its size in the US market is estimated to be around $143 billion, while in the UK it is two billion sterling pounds. In India, the business is growing and Insurance Policy Plus Services (IPPS) — the company which dragged LIC to court over its circulars - claims to have spent Rs 358 lakh on the business and another Rs 183 lakh on marketing and software development in the last four years.

The company purchases insurance policies from policy holders and then sells it to banks and financial institutions.

LIC's counsel Rafique Dada argued that IPPS's business of trading in insurance policies is "speculative" and defeats the social purpose of the policy by making it akin to a fixed deposit. He contended that the business would be detrimental to the interest of the policy holder as well as take away the security net provided for the widow or the dependent. However, Navroz Seervai, advocate for IPPS, argued that Section 38 of the Insurance Act allows for free trade in insurance policies.

The court agreed with the latter's view. "Whether the other policy holders would be denied a share in the surplus or assignee is entitled to windfall gains is irrelevant," said the court and held that insurance policies were "movable property" and the policy holder was free to assign it for a consideration. The court also considered the laws as well judgments in countries like the US that supported the practice. "An insurance policy as understood both in this country and other countries following the common law, as well as in the US, is that life insurance has become one of the best recognised forms of investment and self compelled saving," said the judges, adding, "It is set out (in the Insurance Act) that the policy is movable property and the policy holder being the sole owner of that property, has right to deal with it in any manner which benefits him/his family."

The following is from a news item in the Business Standard. For full material please read Business Standard.

alaknaaz Syed  |  Mumbai  

April 27, 2007 Last Updated at 00:00 IST

LIC to move SC over policy trading issue

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The Life Insurance Corporation of India (LIC) will soon file a special leave petition (SLP) before the Supreme Court to prevent trading in life insurance policies. Last month, LIC had lost a case in the Bombay High Court to bar Insurance Policy Plus Services (IPPS), a Mumbai-based insurance policies trader, from trading in life insurance policies.  A division bench of Justice FI Rebello and Justice Anoop Mohta had ruled that insurance policies were 'movable property' and can be traded in by a policyholder.  The High Court had given six weeks to LIC for filing a SLP.

The matter given below is taken from a news item that appeared in Live Mint. For full material please read Live Mint.

SC to decide LIC policy trading issue as per RBI norms

First Published: Sun, May 11 2008. 12 29 PM IST

PTI

New Delhi: The Supreme Court will be guided as per RBI norms while deciding whether a lapsed life insurance policy can be revived by a third party for pecuniary benefits.

While hearing the plea of Life Insurance Corporation of India (LIC) challenging the trading of life insurance policies in the secondary market by private players, a bench headed by Justices S H Kapadia said, “We have to be bit cautious. We would see that it is within the purview of the RBI guidelines.”

The issue assumes importance as such trading, if it gets legal sanction, would give boost to the growing business of assigning insurance policies.

Acquisition and life insurance policies trading is a profitable business abroad. The US market is pegged at $143 billion (Rs5,72,000 crore), while in the UK it is £2 billion.

The court, while directing one of the respondents, Insure Policy Plus Services (India) Pvt Ltd (IPPS), a Mumbai-based bulk trader in insurance policies, to submit details about its income tax returns, balance sheets and documents related to other financial details, said: “No interim order. Contempt is stayed.”

Earlier, it had allowed the registration of assignments by Bachraj Finance Pvt Ltd, another respondent, on the condition that no further claims would be made by it.

IPPS, which acquires lapsed policies, said that the policyholder loses all the benefits under the policy including the death benefit.

“The assignment recorded is only for the financial value of the policy and the status of the policy whether live or lapsed has no relevance as no other benefits are accrued to the new assignee,” the affidavit filed by IPPS director Ketan Mehta stated.

Stating the job carried out by its registered company was legal, he said, “The company acquires only endowment and money-back policies issued by LIC. The policies constitute 80% of its business. These policies are purely in the nature of investments as the policyholder is entitled for bonus as an investment return on policy.”

The affidavit of Insure Policy came in reply to the LIC’s petition which opposed trading or mortgaging of its policies sold to policy holders.

IPPS, which buys insurance policies from policyholders and then sells it to banks and financial institutions, had dragged LIC to court over its official order banning such trade claims to have spent Rs35.8 million on the business and another Rs18.3 million on marketing and software development in the last four years.

Challenging the Bombay High Court judgement that ruled in favour of trading LIC policies, LIC said such illegal trading was opposed to the public policy and defeated the very object of the insurance policy.

An interim order of the Supreme Court is available on the following link:

http://shodhganga.inflibnet.ac.in/bitstream/10603/3223/13/13_chapter%206.pdf

“…Subject to  above terms and  conditions LIC is directed to grant a provisional registration of  first assignment in favour of the respondent company which will be subject to  the rights of the parties in the special leave petition.”

Please read the full order.