The First Premium

The article accentuates on a situation for payment of The First Premium to Life Insurance through cheque. The article is considering here a question What will happen if an applicant for life insurance policy, just after depositing the first premium through cheque(s) /cash, and the cheque(s) has been encashed by the insurance company, dies after that, without getting the policy? May be he has got a receipt or acknowledgment of the money deposited.

In legal parlance, Is mere acceptance of premium amount and issuance/non- issuance of receipt would mean acceptance of proposal? This will follow two more questions regarding above legal fact:

1. In such cases could the deceased dependants get the benefit of the policy?
2. Is it possible for the applicant or the one whose life is to be insured, to make some strong point to escape from such situations, before he dies?

As insurance is a social devise to reduce or eliminate risk of losses to the life and property or we can say that it is a provision that a prudent man makes against inevitable contingencies, losses and misfortune. Life insurance is a contract between the insurer and the insured and based on Utmost good faith (on mutual trust and confidence between the insurer and insured. Each should be legally obliged to reveal to the other all-material fact, which would influence mutual decisions).

To take an effecting Life Insurance policy one follows a procedure prescribed by life insurance:

1. Filling up the proposal form.
2. Declaration by the proponent.
3. Attachment of proof of age.
4. Presentation of proposals to the agent.
5. Medical examination
6. Report by the agent.
7. Scrutiny of proposal by the branch office.
8. Depositing of Premium.
9. Registration of proposal.
10. Sending the proposal to appropriate department.
11. Taking final decision to the proposal.
12. Issue of Acceptance or request letter.
13. Issue of insurance policy. etc.

After depositing the premium amount through cheque and after encashing the cheque company may issue or send:

1. Receipt-Simple acknowledgment of money deposited by the applicant.
2. Cover note or temporary policy- it is the evidence that the insurer has accepted the policy and the insured has remitted the premium.
3. Referred to the Head office for further approval- it may in the case of heavy amount, which is beyond the power of the authority of the company, to which the applicant had given the proposal along with cheque.
4. Money is in Suspense Amount-Simply information that the applicant’s money has been deposited in an account in which in future it may be refunded if the same is not appropriated or utilized for the purpose for which it was remitted.

As whole we see that generally the acceptance is to be made by the insurer. Sec 2(b) of the Contract Act defines acceptance as When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. The insurer on receiving the papers containing the proposal scrutinizes them and when they are found in order he signifies his assent thereto by a letter and the letter is called the letter of acceptance until this is sent there is no acceptance, though a cheque for the premium is sent and the money is received and retained after the death of the insured. 
The letter, which is printed, contains generally four clauses:

1. Accepted at ordinary rates.
2. Accepted with extra premium.
3. Accepted subject to satisfactory assessment by further examination after a lapse of time.
4. Not accepted.

I am giving here some facts of law and further few references of cases and the decisions made by the Courts.

Some facts of law relating this article:
1. Concerning to the main question Is mere acceptance of premium amount and issuance/non-issuance of receipt would mean acceptance of the proposal?
The stand of law in this regard is very clearly stated in Corpus-Juris Secundum-Vol.XLIV Page no. 986:

According to it the mere receipt and retention of premiums until after the death of applicant does not give rise to a contract, although the circumstances may be such that approval could be inferred from retention of the premium. The mere execution of the policy is not an acceptance to be complete, must be communicated to the offeree, either directly, or by some definite act, such as placing the contract in the mail. The test is not intention alone. When the application so requires the acceptance must be evidenced by the signature of one of the company’s executive officers.

2. A default in remitting the premium may because discharge of the insurance contract and the insurer shall be relieved from his liability.
3. The proposal for affecting an insurance policy is executed in the prescribed form.
4. In case of general insurance on depositing the premium by the proposer in time, constitute a legal contract between the parties.
5. In certain human relationship silence to a proposal might convey acceptance but in the case of insurance proposal silence does not denote consent and not binding contract arises until the person to whom an offer is made signify his acceptance. Mere delay in giving an answer cannot be construed as an acceptance as prima facie acceptance must be communicated to the offeror.
6. According to section-8 of Indian Contract Act ‘ performance of the conditions of the proposal or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal is an acceptance of the proposal. Now and with regard to the communication of the acceptance, this was the duty entirely to be complied with by the Life Insurance if the proposer’s dependant proves the deemed acceptance of the proposal by the life insurance. It was for the life insurance to establish that because there are more formalities to be satisfied the acceptance, which is not actually completed.

Case Referred:
1. Life Insurance Co-corporation of India, Trivandrum, Appellant Vs. Mrs. Prasanna Devaraj, Respondent. A.I.R. 1995 Kerala page no.88
Facts of the case- The proposer (husband of the respondent) filled up the form of proposal for insurance on his life for a sum of Rs. 2,00,000/- and sent the same along with the first premium to the divisional office of the life insurance co-orporation after getting himself medically examined by the doctor. The Divisional Manager encashed the cheque and acknowledged the same by granting the receipt. The cheque sent by the deceased was encashed and held in deposit in the ‘suspense account’ and not adjusted toward the premium. Since the proposal was sent for assurance of a sum of Rs.2 lakh the ultimate authority to consider its acceptance was the central office of the corporation. It took time to complete the process. The proposer however died before it was considered by the authority competent to accept the proposal.

Held that- There was not acceptance of the proposal creating a concluded contract firstly amount remitted was not treated as premium and secondly, the receipt nowhere spells out that receipt of the amount which was the initial deposit towards the premium

2. Life Insurance Corporation of India Vs. R.Vasireddy A.I.R. 1984 2 SCC 719
This is also a case in which matter is quite similar with the previous one. The question arising before the Supreme Court was, whether receipts and retention of the insurance premium and the delay in replying to the proposor could be treated as the acceptance thereof. 

Facts of the case- In this case the deceased filled a proposal of insurance on his life for Rs.50, 000 on 27.12.1960. He issued two cheques for Rs. 300 and Rs.220 respectively, which were got encashed by the Life insurance corporation by 11.01.1961. The deceased died the next day i.e. on 12.01.1961. In an action by the widow of the deceased to claim the amount the Life insurance corporation contended that the contract of insurance had yet to be completed. It was averred that since the proposal had yet to be accepted by the Divisional Manager, according to the prescribed procedure in such cases, the amount of the two cheques had been kept only in deposit in the suspense account and had not been credited towards the premium account, and therefore, the Life insurance corporation was not bound to pay the insured sum of Rs.50, 000. 

Held that- The contention of the life insurance corporation was accepted by the Supreme Court and since the contract had not yet been concluded the life insurance corporation was not liable to pay the sum claimed. (Also see the decision of the court in Life Insurance Corporation of India and other Appellants Vs Smt.Brazinha D’souza Respondent AIR 1995 Bombay page no.223).

3. Hindustan Co-operative Insurance Society Ltd-Defendant-Appellant Versus Shaym Sunder and others-plaintiffs-Respondent AIR 1952 Calcutta-691
Facts of the Case-The proposor at the request of an organizer of the company verbally agreed to insure his life on an endowment policy. The doctor employed by the company medically examined him and after the medical examination he was found first class. The organizer said him that if he submitted the proposal form and deposited the half-yearly premium without delay the company would accept his life for insurance and would issue a policy promptly. The proposal from was filled in, and was signed by the proposor and made over to the organizer with the cheque of first premium. The company encashed the cheque and just after few days the proposor died. The deceased dependents sued for the compensation.

Held that - The company by cashing the cheque and appropriating the money accepted the proposal. No communication was necessary to be made to the assured to complete the acceptance. The contract was made at the moment the money was appropriated. It was a concluded contract. No subsequent communication by one of the parties could open the matter again. So the subsequent letter by the company asking for a further report could not unmake the contract, which had been made by the appropriation of the money. Therefore the company was liable to pay the insurance money

Judges of Hon’ble court said, All papers namely, the proposal, the medical reports and the ‘friends’ reports were completed and sent to the insurance company and thereafter, with the knowledge of the completion of the papers, the insurance company cashed the cheque. The company knew that the organizer had no authority to receive the cheque as premium and therefore the cheque when it was sent to the company by the organizer had not been sent as premium. It was the company which could take it or not as premium.

Judges further said that, to us the position seems to be this the assured sent the proposal form with the cheque, and in effect said to the company I am sending herewith my proposal and the first half-yearly premium. The organizer cannot receive the cheque as premium. But you can, if you accept my proposal, cash the cheque.

On the other words the proposer in this case dispensed with express communication of the acceptance and from the nature of the transaction we may somewhat readily infer the offerer’s intention to dispense with the communication. The offeror in this case asked for an act on the condition of the offer becoming a promise, and that act was done by the company, namely, the cashing of the Cheques. We have no doubt therefore that the company by cashing the cheque and appropriating the money accepted the proposal. No communication was necessary to be made to the assured to complete the acceptance.

So as far as the question No.2 is concerned the escape route from such situations may be, the applicant at the time of submitting the filled proposal form along with the cheque(s) could enclosed his own letter, which would clearly state, that if the insurance company encash the cheque, then it would be seemed to be accepted proposal. And by giving the reference case mentioned just above of Hindustan co-operative society vs Shyam sunder the applicant’s dependants could easily win.

Is it right? Think over it.

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