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CASE NO.: Appeal (civil)  4492 of 2000

PETITIONER: Life Insurance Corporation of India & Anr.

RESPONDENT: Smt. S Sindhu

DATE OF JUDGMENT: 04/05/2006

BENCH: B N Srikrishna & R V Raveendran

JUDGMENT: J U D G M E N T

RAVEENDRAN, J.

       The short question that arises for consideration in this  appeal is whether in the case of a lapsed life insurance policy,  the Life Insurance Corporation of India (’the LIC’ for short)  while paying the reduced sum payable by treating it  as a paid- up policy, is liable to pay interest in regard to premiums paid  from the respective dates of payment of premiums to date of  settlement.  

2.      A policy of insurance dated 11.3.1994 for an assured sum  of Rs.5 lakhs with risk commencing from 4.12.1993 was issued  in regard to the life of K. Thankachan under the ’money back  policy’ scheme for a period of 20 years. The premium payable  was Rs.8,306/- every quarter. The conditions of the policy  made it clear that the policy will be in force only if the  premiums were paid regularly, every quarter, and that if the  premium was not paid before the expiry of the grace period  provided, the policy will lapse. K. Thankachan paid the  premiums till 4.6.1994 and did not pay the premiums thereafter.  In August, 1996, he opted for revival of the policy by paying  the arrears of premium from 4.9.1994 to 4.6.1996 with interest.  Accordingly, the policy was revived and he paid the premium  till 4.12.1996. Thereafter, the policy again lapsed from 4.3.1997  as premium was not paid. K. Thankachan died on 5.12.1997  and his widow/nominee (the respondent herein) made a claim  for payment of the amount under the policy, by letter dated  1.1.1968.

3.      Condition No.4 of the policy contains the exceptions to  lapsing of the policy. The portion of the said condition relevant  for our purpose, is extracted below :-

"4. Non-forfeiture Regulations: If, after atleast three full  years premiums have been paid in respect of this Policy,  any subsequent premium be not duly paid this policy shall  not be wholly void, but shall subsist as a paid-up policy  for a reduced sum payable on the Date of Maturity or at  the Life Assured’s prior death provided the paid up sum  assured is not less than Rs.250. The amount of paid up  assurance for integral number of years’ premiums paid will  be calculated as per Table given below. The policy so  reduced shall thereafter be free from all liability for  payment of within mentioned premium but shall not be

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entitled to participate in future profits. The existing bonus  additions if any, will remain attached to the reduced paid  up policy.                                         (Emphasis supplied)

4.      The ’paid up value’ of the policy was arrived at   Rs.1,13,750/- as per Condition (4) of the policy and was paid  by the LIC to the respondent on 26.3.1998, on her executing a  full and final settlement discharge. As the policy of insurance  with profit plan was eligible for bonus only if premiums are  paid at least for a period of 5 years and as the insured had paid  premium only for a period of three and quarter years, the policy  was found to be ineligible for bonus.

5.  The respondent approached the Consumer Disputes  Redressal Forum, Kollam, on 30.4.1998, praying for a direction  to the LIC to pay her the entire sum assured under the policy  namely, Rs.5 lacs with accrued bonus and interest at 12% per  annum, as also Rs.25,000/- as compensation for  deficiency of  service and Rs.5,000/- as costs.  

6.      The Appellant (LIC) resisted the said claim pointing out  that it had released the paid-up value of Rs.1,13,750/- in terms  of the policy, in full and final settlement and it had no liability  either to pay the assured sum or bonus or any interest. The  District Forum by order dated 28.8.1998 rejected the contention  of the respondent that she is entitled to the assured sum of Rs.5  lacs or bonus. It held that the respondent was only eligible for  payment of Rs. 1,13,750/- as paid-up value in terms of  Condition No.4 of the policy. The District Forum, however,  directed the LIC to pay interest at 15% per annum (on the sum  of Rs.1,13,750/-) from the respective dates of receipt of the  amounts of premium to date of settlement. For grant of such  interest, the District Forum relied on the decision of this Court  in Harshad J. Shah v. L.I.C. of India [1997 (5) SCC 64].

7.      An appeal was filed by the LIC before the Kerala State  Consumer Disputes Redressal Commission contending that it  was not liable to pay interest from the date of receipt of the  premiums, and the decision in Harshad J. Shah (supra) did not  require payment of such interest. The Commission allowed the  appeal in part, on 31.3.1999. It held that the direction to pay  interest from the dates of payment of premium was in  accordance with the decision in Harshad J. Shah (supra) and  did not call for interference. The rate of interest was, however,  reduced from 15% to 12% per annum. The revision filed by  LIC against the order of the State Commission was rejected by  the National Commission on 2.11.1999, on the ground that  order of the State Commission did not suffer from any illegality  or jurisdictional error. The said order is challenged in this  appeal.  

8.      At the outset, what should be noticed, is that the amount  that is paid by LIC in regard to a lapsed policy, is not "refund of  the premiums paid on various dates", but a reduced lump sum  (calculated as per condition no. 4 of the policy) instead of the  assured sum. When what is paid by LIC is not refund of  premiums, the question of treating the amount paid by LIC as  refund of premiums paid and then directing payment of interest  thereon from the respective dates of payment of premium does  not arise. That would amount to treating the premiums paid in  respect of a policy which lapsed by default, as fixed deposits  repayable with a hefty rate of interest. Surely, the intention is

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not to reward defaulting policy holders. Moreover, the courts  and Tribunals cannot rewrite contracts and direct payment  contrary to the terms of the contract, that too to the defaulting  party. Be that as it may.   

9.      We will now examine whether award of interest can be  sustained in any manner. It is now well-settled that interest  prior to the date of suit/claim (as contrasted to pendente-lite  interest and future interest) can be awarded in the following  circumstances : (a)     Where the contract provides for payment of  interest; or

(b)     Where a statute applicable to the transaction/  liability, provides for payment of interest; or

(c)     Where interest is payable as per the  provisions of the Interest Act, 1978.

10.     In this case, the contract, that is the insurance policy,  provides that if the premium is not paid (after regularly  paying  premiums for a period of three full years), the policy shall  subsist only as a paid up policy for a reduced sum (calculated as  per Table given in Condition No. (4) of the policy) payable on  the date of maturity or at the prior death of the life assured. It  does not provide for payment of interest on the premiums paid.  In fact, the operative portion of the policy specifically provides  that no interest will be paid. The relevant portion extracted  below :  

"The Life Insurance Corporation of India \005 do by this  policy agree, in consideration of and subject to the due  receipt of the subsequent premiums as set out in the  Schedule, to pay the sum assured (together with such  further sum or sums as may be allocated by way of Bonus  in the case of ’with profits’ policies) but without interest,  \005to the person or persons to whom the same is payable in  terms of the said Schedule \005 This policy of assurance shall  be subject to the condition and privileges printed on the  back hereof\005"                                         (emphasis supplied)

Payment of interest on the premium amounts, from the  respective dates of remittance of premiums, is alien to the  concept of life insurance. In this case, the assured died on  5.12.1997 prior to the date of maturity. Therefore the reduced  sum as a paid up policy became due and payable without any  interest on 5.12.1997. The claim was settled by payment of  Rs.113,750/- on 26.3.1998, within three months from the date  of intimation of death. Therefore, under the contract, no interest  is payable by LIC.  

11.     Where a statute provides for payment of interest, such  interest will have to be paid in accordance with the provisions  of such statute. Admittedly there is no enactment, or rules made  under any enactment, either relating to contracts in general or  insurance in particular, which provides for payment of interest  in regard to amount payable under such a policy.

12.     Let us now consider the provisions of Interest Act, 1978  (’Act’ for short) which deals with payment of interest upto the  date of suit/claim. The Act was enacted to consolidate and  amend the law relating to the allowance of interest in certain  cases. The objects and reasons states that the Act was enacted to

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prescribe the general law of interest in a comprehensive and  precise manner, which becomes applicable in the absence of  any contractual or statutory provision specifically dealing with  interest. Sub-section (1) of  Section 3 of the Act provides that in  any proceedings for the recovery of any debt or damages, or in  any proceedings in which a claim for interest in respect of any  debt or damages already paid is made, the Court may, if it  thinks fit, allow interest to the person entitled to the debt or  damages or to the person making such claim, as the case may  be, at a rate not exceeding the current rate of interest, for the  whole or part of the following period, that is to say, --

(a) if the proceedings relate to a debt payable by virtue of a  written instrument at a certain time, then, from the date when  the debt is payable to the date of institution of the proceedings;

(b) if the proceedings do not relate to any such debt, then, from  the date mentioned in that regard in a written notice given by  the person entitled or the person making the claim to the person  liable that interest will be claimed, to the date of institution of  the proceedings.

Sub-section (3) of Section 3 makes it clear that nothing in  Section 3 shall apply in relation to any debt or damages upon  which interest is payable as of right, by virtue of any  agreement, or any debt or damages upon which payment of  interest is barred, by virtue of an express agreement. Clause (a)  of section 2 of the Act defines ’court’ as including a tribunal  and an arbitrator; clause (c) of Section 2 defines ’debt’ as any  liability for an ascertained sum of money and includes a debt  payable in kind but does not include a judgment debt; and  clause (b) defines ’current rate of interest’. Sub-section (1) of  Section 4 of the Act provides that notwithstanding anything  contained in section 3, interest shall be payable in all cases in  which it is payable by virtue of any enactment or other rule of  law or usage having the force of law. Sub-section (2) of section  4 provides that notwithstanding what is stated in section 3 or  section 4(1) of the Act, in the cases of money deposited as  security for performance of an obligation, interest is payable  from the date of deposit; and in the case of money payable by  virtue of a fiduciary relationship, money/property obtained/  retained by fraud and money due as dower/maintenance,  interest is payable from the date of cause of action. A claim for  interest on the amounts of premium paid, from the respective  dates of payment of premium to date of settlement of claim,  does not find support from any of the provisions of the Act.  

13.     Even assuming that interest can be awarded on grounds  of equity, it can be awarded only on the reduced sum to be  quantified and paid from the date when it becomes due under  the policy (that is on the date of death of the assured) and not  from any earlier date. We do not propose to examine the  question as to whether interest can be awarded at all, on  equitable grounds, in view of the enactment of Interest Act,  1978 making a significant departure from the old Interest Act  (of 1839). The present Act does not contain the following  provision contained in the proviso to section (1) of the old Act :  "interest shall be payable in all cases in which it is now payable  by law." How far the decisions of this Court in Satinder Singh  v. Umrao Singh etc. [AIR 1961 SC 908] and Hirachand  Kothari (D) by LRs. v. State of Rajasthan & Anr. [1985 Supp  SCC 17] and the decision of the Privy Council in Bengal  Nagpur Railway Co. Ltd., vs. Rultanji Ramji [AIR 1938  PC.67], holding that interest can be awarded on equitable

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grounds, all rendered with reference to the said proviso to  section (1) of old Interest Act (Act of 1839), will be useful to  interpret the provisions of the new Act (Act of 1978) may  require detailed examination in an appropriate case.

14.    In this case, we have already noticed that the reduced sum  calculated as per the Table in Condition No. (4) of the Policy,  became due only on the death of the assured. No interest is  payable either under the contract of insurance, or under any  statute, or under the Interest Act, 1978 from the respective dates  of payment of premium to date of settlement of claim.  Therefore the District Forum, the State Commission and the  National Commission committed a serious error in awarding  such interest.

15.     This takes us to the question whether the decision in  Harshad J. Shah (supra) lays down any principle of law  that  LIC should pay such interest on the premium amounts, from the  dates of payment of premium, as assumed by the Consumer  Forum, State Commission and National Commission. We have  carefully examined the said decision and find that no such  principle is enunciated therein. In that case, one J. took out four  insurance policies on 6.3.1986 through a general agent of LIC.  The insured paid the first and second premiums. The third half- yearly premium which fell due on 6.3.1987 was not paid within  the prescribed period. On 4.6.1987, the general agent of LIC  obtained from J a bearer cheque dated 4.6.1987 for Rs.2,730/-,  (being the half-yearly premium in regard to the four policies),  encashed the cheque through his son, and deposited the  premium with LIC on 10.8.1987. In the meanwhile, the insured  died on 9.8.1987. The widow of the deceased, as the nominee  under the policy, made a claim with LIC for payment of the  sum assured under the four policies. It was repudiated by the  LIC on the ground that the policies had lapsed on account of  non-payment of half-yearly premium which fell due on  6.3.1987, within the grace period. The widow of the insured  submitted a complaint to the State Commission claiming the  sum assured under the said 4 policies, namely, Rs.4,32,000/-.  The State Commission held that LIC was negligent in its  service to the policyholder and directed LIC to settle the claim.  On the other hand, the National Commission held that the  Insurance Agent was not acting as agent of LIC in receiving the  bearer cheque from the insured and therefore, LIC was not  liable. That order was challenged by the claimant before this  Court. The question that arose for consideration of this Court in  that case was whether the payment of premium in respect of a  life insurance policy by the insured to the general agent of the  LIC can be regarded as payment to the insurer so as to  constitute a discharge of liability of the insured. This Court  answered the said question in the negative. No other question  was raised or considered by this Court. Consequent to its  decision, the appeal was disposed of by this Court with the  following directions :

"For the reasons aforementioned, we are unable to uphold  the claim of the appellants. No ground is made out for  interfering with the decision of the National Commission  that Respondent 3 in receiving the bearer cheque for  Rs.2730 from the insured was not acting as an agent of the  LIC. But keeping in view the facts and circumstances of  the case we direct the LIC to refund the entire amount  of premium paid to the LIC on the four insurance  policies to Appellant 2 along with interest @ 15% per  annum. The interest will be payable from the date of  receipt of the amounts of premium. "

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[Emphasis supplied]

What requires to be noticed in that case, is that the default  having occurred after payment of premium for only one year,  there was no question of application of any ’non-forfeiture  provision’, nor was it permissible to treat the policy as  subsisting as a paid-up policy for a reduced sum. Therefore  nothing was payable by LIC under the policy. Consequently  there was no direction to pay any amount under or in pursuance  of the policy, nor any direction for payment of interest. The  claim based on the policy was completely rejected. This court  however found that a sum of Rs.2730/- had been remitted after  the death of the insured, which was not legally due or payable  to LIC. Therefore, it directed refund of the said sum of  Rs.2730/- wrongly paid as ’premium’ with interest from the  date of its payment. Therefore what was awarded was not  interest on any sum payable by LIC under the policy or in  pursuance of the policy, but interest on the sum of Rs.2730/-  which was found to have been remitted to LIC, de hors the  policy, on 10.8.1987, to retain which, LIC had no legal right.  The sum of Rs.2730/- though paid as ’premium’ on 10.8.1997  and referred to by this Court as ’premium’ for convenience, was  not really due to LIC as ’premium’ as the policy had lapsed and  the insured had died before that date. There was no claim for  refund of Rs.2730/- and the question relating to refund or  S.2730/- was not the subject matter of the claim. Therefore, it is  clear that the direction to refund Rs.2730/- with interest from  the date of its payment was not by way of elucidation of any  principle of law nor based on interpretation of any contractual  term. This Court while rejecting the claim in toto, apparently, in  exercise of power under Article 142, to do complete justice  between the parties, directed refund of Rs.2730/- with interest  from the date of its payment, on the special facts of that case.  

16.     As contrasted from Harshad J. Shah’s case (supra), in  this case the amount paid (Rs.1,13,750/-) is a contractual  liability of LIC under condition No.4 of the policy to pay a  reduced sum by treating the policy as a paid up policy, on  default. The award of interest in Harshad J. Shah’s case  (supra), being followed by the forum and commissions, is a  classic case of a direction issued by this Court in exercise of  Article 142 on the special facts, being wrongly interpreted as a  general principle of law laid down by this court.  

17.     We, therefore, allow this appeal and hold that the LIC is  not liable to pay any interest on the sum of Rs.1,13,750/-.  

18.     However, we find that the following order had been  passed on 7.8.2000 while granting leave :  

"Learned Solicitor General has placed on record copy of  the communication received by the instructing counsel  dated 26th July, 2000, according to which amount payable  to the respondent, as per directions of the Consumer  Disputes Redressal Commission, have already been paid. It  is submitted that irrespective of the result of the appeal, the  amount which stands paid, shall not be sought for any  adjustment, in the peculiar facts and circumstances of the  case and no relief would be sought in that behalf against the  respondent. It is submitted that the question of law involved  in the case is of great importance and likely to arise in other  cases."

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In view of it, this decision does not render the respondent liable  to refund any amount already received in pursuance of the order  of the consumer forum, even though we have held that the  respondent is not entitled to any interest on Rs.1,13,750/-. We  may clarify the contents of this para is purely based on a  concession made on 7.8.2000.