Payment by cheque as good as by cash

No insurance firm assumes risk in respect of any insurance business unless the premium payable thereon has been received by it. Section 64 VB of the Insurance Act, 1938 states so.

According to sub-section (2) of the aforesaid Section, the premium can be paid in cash or cheque. Explanation to the Section further provides that "where the premium is tendered by postal money order or cheque sent by post, the risk may be assumed on the date on which the money order is booked or the cheque is posted, as the case may be".

But what happens if the cheque amount is not credited in the account of the insurance company and an adverse event takes place in the intervening period? Is the insurer liable to indemnify the insured against the risk? The National Consumer Disputes Redressal Commission considered this question in 2003.

Shailash had taken out a Janata Personal Accident Insurance Policy from the National Insurance Co on March 25, 1996 for Rs 5 lakh on which a sum of Rs 1,800 was paid as premium through a cheque dated March 25, 1996 drawn on Bank of Baroda, Nasirabad. The insurance company issued the policy on the following day.

The insurance company sent the cheque to its banker UCO Bank for collection on March 26, 1996. UCO Bank however, sent it for collection by its letter dated April 4, 1996 to the Bank of Rajasthan which was acting as a clearing house and which received the cheque on April 9, 1996. On the same day, Bank of Rajasthan sent the cheque to Bank of Baroda. But it was returned on the ground that the account holder had since expired though there was sufficient balance in Shailash's account with the bank.

Shailash died on April 2, 1996 in a car accident. His wife Anita lodged a claim with the insurance company. But it was repudiated on the ground that the premium remained unpaid. Aggrieved by the decision, Anita filed a consumer complaint.

By its order reported at 2003 CTJ 40 ( P) the National Consumer Commission held the insurance company liable to pay the amount as the policy was duly issued and the defaulting bank was acting as its agent.

Invariably, on receipt of premium by cheque, insurance companies issue a receipt on which is written that "payment by cheque will be valid subject to realisation of the cheque". But payment by cheque is as good as payment in cash, provided it is honoured. Payment by cheque, in fact, dates back to the date on the cheque or to the time when it is given. It is not material when the cheque is encashed.

Yet another important question arises as to when actually the life insurance contract gets concluded. This aspect was lucidly dealt with by the Supreme Court in LIC of India v. Raja Vasireddy Kamalavali Kamba AIR 1984 SC 1014 by holding that an insurance contract gets completed when the proposal is accepted and the policy document issued.

Mere receipt and retention of insurance premium until after the death of the insured has no value. This line of approach was followed by the National Consumer Commission in two recent cases viz. Kotla Vijyavati v. LIC 2010 CTJ 665 (CP) and LIC v.Bhoomikaben 2011 CTJ (CP).

In both cases the proposals and premiums were duly received but the same were still in process and the insured died before the policy bonds were issued. The Commission held the repudiation of the claims as justified.

Keeping the above legal position in view, consumers of insurance services must ensure that their proposals are accepted as early as possible.

The author is an advocate and editor of Consumer Protection & Trade Practices Journal (CTJ)  Email: rosykumar2000@ yahoo. com

Courtesy: Mail Today