Life Insurance Corporation is not entitled to levy a service charge or fee for endorsing the assignment or transfer of policy: Supreme Court of India.

Life Insurance Corporation is not entitled to levy a service charge or fee for endorsing the assignment or transfer of policy: Supreme Court of India.

(Life Insurance Corporation of India Versus Dravya Finance Pvt. Ltd. & Ors, Civil Appeal No.4095 of 2012, decided on September 06, 2023) The Hon’ble Supreme Court held that the Life Insurance Corporation (LIC) is not entitled to levy a service charge or fee for endorsing the assignment or transfer of policy. The factual aspect of the present case was that under Section 38 of the Insurance Act, 1938, an insured who is holding a policy of life insurance issued by the Appellant (Life Insurance Corporation of India) was entitled to transfer or assign the policy with or without consideration by an endorsement upon the policy itself or by a separate instrument duly signed by the transferor or by the assignor and attested by one witness. Sub-Section (2) of Section 38 provided for service of notice in writing of transfer or assignment to the insurer in a manner set out therein. Sub-Section (4) of Section 38 provided that upon receipt of a notice of transfer or assignment under sub-Section (2) of Section 38, the Appellant–Insurer was under an obligation to record the fact of such transfer or assignment together with the date thereof and the name of the transferee or assignee. On request of the person who gives notice, the Appellant (Insurer) was under an obligation to issue a written acknowledgement of the receipt of such notice on payment of a fee not exceeding Rs.1. The Appellant (Insurer) issued a circular on 24th April 2006 and imposed a registration charge of Rs.250 per assignment. The First Respondent (Dravya Finance Private Limited) which is a finance company, challenged the said circular before the Hon’ble Bombay High Court on the ground that firstly, it is contrary to Section 38 of the Insurance Act and secondly, it is in violation of Article 265 of the Constitution of India as a levy of a tax or fee was sought to be made without any authority of law. There were other challenges, such as violation of Articles 14, 19(1)(g) and 300A of the Constitution of India. By the impugned judgment, the High Court of Judicature at Bombay concluded that the levy of a sum of Rs.250/- for registration of assignment under the impugned circular was the levy of service charge or fee without there being any power to do so. Therefore, the impugned circular was held to be unconstitutional and was accordingly struck down. The order of the Hon’ble Bombay High Court was under challenge before the Hon’ble Supreme Court in the present case. The Respondent supported the order of the Hon’ble Bombay High Court while the Appellant contended the following:

1. As per sub-Section (1) of Section 6, the Appellant has a duty to carry on life insurance business and as per sub-Section (3) of Section 6 , LIC has to act in accordance with business principles.
2. It has placed on record before the Hon’ble High Court more than sufficient material indicating the large number of notices of assignments received by the Appellant and the enormous expenditure involved in dealing with the same.
3. When it issues a life insurance policy, it is a contract of insurance which is purely a business transaction. For registration of assignments, service charges of Rs.250 per assignment are levied as a part of the business transaction between them Insured and the Appellant
4. The levy of such a fee to meet the expenditure is a part of the business contract which will not attract Article 265 of the Constitution of India.
5. Its 95% of the surplus is usually allocated to the policyholders. Under sub-Section (4) of Section 38, a fee of Rs.1 is provided for issuing an acknowledgement of receipt of the notice of the assignment and what is sought to be charged under the impugned circular, is the fee or charge on account of administrative expenses incurred for recording the assignment.
6. There is no illegality associated with the circular which was challenged before the Hon’ble Bombay High Court.

The Hon’ble Supreme Court while dismissing the Appeal, has made the following observations: “Section 38 does not authorise the levy of any such fee. Unamended sub-Section (2) of Section 38 of the Insurance Act provided for giving acknowledgement of a notice of transfer or assignment given in terms of sub-Section (2) of Section 38. It was specifically provided therein that the insurer can charge and levy a fee not exceeding Rs.1 for giving such acknowledgement. Thus, it prescribed a fee for issuing acknowledgement of notice of assignment or transfer. Though, there was a specific provision made to levy a fee for giving acknowledgement of notice of transfer, the legislature, in its wisdom, has not provided any fee or charge for recording the assignment or transfer in the records of the insurer. Interestingly, in the substituted Section 38 of the Insurance Act, which was brought into force on 26th December 2014, the provision enabling the charging of a fee of Rs.1 for acknowledgement has been done away with.” “Under Section 48 of the LIC Act, the general rule-making power is vested in the Central Government. Under Section 49, the power to make regulations vests in the appellant–insurer. It is an admitted position that neither rules under Section 48 have been framed nor regulations under Section 49 have been made, authorising the appellant–insurer to levy a service charge or fee for recording the endorsement of transfer or assignment by the appellant–insurer. The rule-making power under Section 114 of the Insurance Act has not been exercised for this purpose.” The Hon’ble Supreme Court also noted that the Insurance Regulatory and Development Authority of India (Fee for granting written acknowledgement of the receipt of Notice of Assignment or Transfer) Regulations, 2015 have been made in accordance with the powers conferred by Section 114A of the Insurance Act which prohibits the Insurer from collecting any fee for services such as, recording the fact of the transfer or assignment or any other services connected to the assignment or transfer prescribed in Section 38 of the Insurance Act.       Read the full Judgment here