LEGAL RIGHTS OF A NOMINEE: A SHIFT AFTER THE INSURANCE AMENDMENT ACT 2015

Author: Aditi Mishra

Year of study: Third year
Institute of affiliation: NMIMS University, School of Law, Mumbai

ABSTRACT

The debate regarding the rights of a nominee vs. the rights of a legal heir has come up in courts several times. While there have been contradictory judgments, it has been settled that the rights of the legal heir will prevail over that of the nominee. It is accepted that nomination is only a temporary arrangement so that the deceased’s property is not ownerless till the legal heirs claim it.

In Sarbati Devi v. Usha Devi (1984), the Supreme Court explicitly stated that a nominee does not have any beneficial right over the life insurance proceeds. It merely acts as a trustee/agent for the valid discharge of the insurer’s liability. However, an Insurance Act Amendment in 2015 introduced a new concept of “beneficial nominee”. This article seeks to understand how this concept has altered the position of law laid down in Sarbati Devi.

Keywords: Nominee, Legal Heir, Insurance Act, Life Insurance Proceeds

INTRODUCTION

A Life Insurance is an enforceable contract that involves multiple parties such as the policyholder, the insurer, and the nominee. S. 39(1) of the Insurance Act 1938 defines a nominee as a person who the policyholder nominates to receive the money secured under the policy upon the death of the policyholder.

Initially, the transaction seems straightforward; that is, upon the death of the policyholder, the nominee will receive the life insurance proceeds, and the insurer’s liability would stand discharged. However, conflicts arise when the payment of the proceeds to the nominee is challenged by the legal heir(s) of the policyholder/deceased on the ground that they should be entitled to payment of proceeds by succession laws.

S. 39(6) the Insurance Act as it stood before the 2015 Amendment (“Amendment”) read:

“(6) Where the nominee or, if there are more nominees than one, a nominee or nominee survive the person whose life is insured, the amount secured by the policy shall be payable to such survivor or survivors.”

The provision set out above did not specify whether nomination will lead to the nominee becoming the ‘beneficial owner’ of the proceeds or whether it will form a part of the deceased’s estate. This ambiguity contributed to a lot of conflicting judgments until it was settled by the Supreme Court in Sarbati Devi v. Usha Devi wherein it was explained that a nominee acts as a mere trustee or agent for the valid discharge of the insurer’s liability and thus has no beneficial right over the proceeds.

However, S. 39 was amended in 2015. This amendment introduced the concept of a ‘beneficial nominee’, thereby creating a new class of nominees that was different from a mere ‘collector nominee.’ Hence, this article aims to examine how/if the introduction of a ‘beneficial nominee’ has altered the position of law clarified by the Supreme Court in the Sarbati Devi case.

2015 AMENDMENT OF THE INSURANCE ACT

As mentioned in the previous section, S. 39 of the Insurance Act as it stood before the Amendment did not specify whether the nominee was to receive the proceeds in a beneficial capacity. This led to certain High Courts wrongly presuming nomination to be the third mode of statutory succession. However, ultimately, the Sarbati Devi case decided that S. 39 was not competent to change the direction of succession. Thus, the legal heirs of the deceased were the rightful beneficial owners of the life insurance proceeds. The rights of the nominee were significantly diluted by way of such judicial precedents.

In 2015 a new sub-section i.e., sub-section (7) was added to Section 39, which provides that if the nominees are parents, spouse, children, or children and spouse or any of them of the policyholder then, they will be beneficially entitled to the life insurance proceeds (to the exclusion of legal heirs). Hence, the amendment created a new category of nominees.

It is important to note, however, that said protection from legal heirs does not extend to rights of creditors to obtain their dues from the proceeds []. Also, if the policy is read with Section 6 of the Married Women Property Act 1874, the proceeds will belong solely to the nominee and the creditor(s) will have no right [].

Further, the newly amended Section also provides that where it can be proved, given the nature of the title to the policy, that the policyholder could not have conferred any beneficial title on the nominee, then such beneficial rights will not vest with the nominee []. The phrasing of the Section opens up the chance of expected questions concerning which class of nominee will not be beneficially entitled, notwithstanding being a parent, spouse or child of the policyholder.

SARBATI DEVI READ WITH THE 2015 AMENDMENT

It is worth noting that before the clarification afforded by the Supreme Court in Sarbati Devi, the disputes between legal heirs and nominees that were brought to Court can be divided into two categories:

  1. Class 1 Heir vs. Non-Class 1 Heir Nominee: A person who was not a Class 1 Heir as per the Hindu Succession Act was made the nominee by the deceased policyholder and now the actual Class 1 Heirs were disputing the payment of proceeds to the nominee on the ground of Hindu succession laws.
  2. Non-Nominated Class 1 Heir vs. Class 1 Heir Nominee: Similarly, there were also disputes between nominated Class 1 Heirs and non-nominated Class 1 Heirs. The former claimed that they were entitled to the proceeds to the exclusion of other non-nominated Heirs, while the latter claimed that they were also entitled to an equal share in the proceeds.

Per pre-2015 insurance law, for the first scenario, the Class 1 Heirs would have been the rightful beneficial owners of the life insurance proceeds over the nominee. Accordingly, for the second scenario, the non-nominated Class 1 Heirs would also have been entitled to the proceeds because of the succession scheme laid down in the Hindu Succession Act.

However, after the Amendment, this position stands slightly modified. Two important changes to note are:

  1. If the wife, parent, and/or children are nominated, then other family members such as non-nominated Class 1 Heirs cannot claim proceeds on account of them being the legal heirs.
  2. The Amendment also works out an exception for the nominated Father. A Father can now be beneficially entitled to the proceeds to exclude other legal heirs despite being a Class 2 Heir as per the Hindu Succession Act.

Recently, in a case before the Rajasthan High Court, it was argued that after the Amendment only the nominee gets the amount on account of the death of the assured and hence, no other legal heir can claim the same. Section 39(10) of the amended Insurance Act was also cited to explain that the provision of the beneficial nominee in Section 39(7) will apply to all life insurance policies maturing for payment after the commencement of the amended Act. The court opined that since the insured died before the commencement of the amended Insurance Act the said amended provisions will not apply. However, in the same case, the law laid down in Sarbati Devi was distinguished from the Amended provisions, and it was stated that wherever the amended provisions are applicable, the nominee shall have beneficiary interest to the exclusion of all non-nominated legal heirs.

In another case, the Delhi High Court allowed the appeal and remanded the matter back to the trial court, which had erroneously failed to consider the Amendment while deciding the case. While the court stated that it had not expressed any opinion on the merits of the case, it acknowledged the contention of the Respondent counsel citing the Sarbati Devi case and at the same time also considered the alterations made by the Amendment to the concept of a nominee under the Insurance Act.

Hence, it can be said that though the original understanding of a ‘nominee’ has not changed, the Amendment has certainly brought about some variation to the same.

CONCLUSION

The article explored the rights of the nominee vs. the rights of the legal heir vis-à-vis life insurance proceeds. The effect of nomination on the rights of legal heirs has been a vexatious question of law in the past, leading to conflicting judgments of several High Courts. However, the same was settled by the Apex Court in Sarbati Devi v. Usha Devi, wherein it was held that the nominee acts only as an agent/trustee and has no beneficial interest in the proceeds. However, an amendment to the Insurance Act in 2015 brought about a new concept of ‘beneficial nominee’ thus, altering the traditional understanding of the collector status of the nominee.

Taking everything into account, it can be said that the Amendment, to some extent, modified the understanding of a ‘nominee’ as compared to the explanation that the Apex Court gave in Sarbati Devi v. Usha Devi. While the Amendment did not shift the initial understanding of a nominee being a simple trustee or agent, it accommodated the idea of a ‘beneficial nominee’ in relation to the payment of life insurance proceeds.

Further, it is accepted that the parties’ rights have to be decided as per the law and statutory provisions in force when the cause of action arises. On account of the same principle, recent judgments have noted the difference in the understanding of the rights of a nominee post Amendment.   

Source of Photo: https://images.app.goo.gl/KfUkgSewHozrCUdP7

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