ANANDRAO RAMCHANDRA SALUNKE versus LIFE INSURANCE CORPORATION OF INDIA & ANR.

Citation: [2019] 5 S.C.R. 210 · Decided: 07-03-2019 · Supreme Court of India · Bench: D.Y. CHANDRACHUD · Disposal: Dismissed

Judgment (excerpt)

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SUPREME COURT REPORTS
[2019] 5 S.C.R.
ANANDRAO RAMCHANDRA SALUNKE
v.
LIFE INSURANCE CORPORATION OF INDIA & ANR.
(Civil Appeal No.2568 of 2019)
 MARCH 07, 2019
[DR. DHANANJAYA Y  CHANDRACHUD AND
HEMANT GUPTA, JJ.]
Insurance Act, 1938 – s.113 – Life Insurance Policies –
”Surrender Value”– Appellant obtained life insurance policy in
November, 1993 – Sum insured was Rs.75,000/- – Term of the policy
was twenty five years – Policy envisaged the payment of quarterly
premium of Rs 775/-, spread over hundred quarters during the term
of the policy – Last premium was payable in August, 2018 and the
policy was to mature in November, 2018 – In 2001, the appellant
took loan of Rs.15,000/- by pledging the policy – In August, 2001
the appellant stopped paying the premium and applied for the refund
of the surrender value – Corporation offered surrender value of
Rs.2268/-, after deducting the loan amount and outstanding interest
– Complaint filed by the appellant – Allowed by the District
Consumer Forum and State Commission – Reversed by National
Commission – On appeal, held: There are popular misconceptions
about the concept of ‘surrender value’ in the sphere of life insurance
– In a policy of fire insurance, a policy holder has no expectation
of a surrender value – In contrast, a holder of a policy of life
insurance may believe (as the appellant in the present case) that
their surrender value will be equal to the total amount paid as
premium – This expectation is misconceived – Life insurance
operates on the basis of the law of averages – Premium is collected
from all policy holders in order to create a common fund – Payouts
from the fund are received only by those who suffer the peril which
is insured – Premia are fixed by the insurer on the basis of expected
mortality rates – Mortality rates increase with age – Hence, when
an insurer initially collects premium from individuals of a younger
age, the amount it collects is higher than the amount it pays out
towards claims – Difference between them is the ‘reserve’ – Thus if
a policy holder wishes to discontinue a policy before the end of the
      [2019] 5 S.C.R. 210
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term, they will only be entitled to their share of the ‘reserve’ as a
surrender value – Since  the value of the ‘reserve’ is the amount
which the insurer collects as premium from policy holders from which
it deducts the amount of the claims it pays out, the surrender value
payable to a policy holder can never be equal to the premia paid by
them – Surrender value of the subsisting bonus attached to the policy
cannot be the bonus which would have been payable had the policy
continued to its full term – In deducting the surrender value of the
bonus which was payable to the appellant, the respondent applied
the surrender value factor of 32.92% to the total paid up value of
the policy – Factor of 32.92% has been duly explained on the basis
of the actuarial table governing surrender values – What was
payable to the insured was computed after deducting the loan which
was taken against the policy together with the outstanding interest
– Method by which the computation was carried out was in
accordance with the accepted and duly approved formula and was
consistent with the provisions of s.113 of the 1938 Act as they stood
at the material time as well as condition 7 of the policy document –
Life Insurance Corporation Act, 1956 – s.49(2) – Life Insurance
Corporation Regulations, 1959 – Regulation 18(2) .
The appellant obtained life insurance policy in November,
1993. The sum insured was Rs.75,000/-. Term of the policy was
twenty five years. Policy envisaged the payment of quarterly
premium of Rs 775/-, spread over hundred quarters during the
term of the policy. Last premium was payable in August, 2018
and the policy was to mature in Nov. 18. In 2001, the appellant
took loan of Rs.15,000/- by pledging the policy. In August,  2001
the appellant stopped paying the premium and applied for the
refund of the surrender value. The Corporation offered surrender
value of Rs.2268/-, after deducting the loan amount and
outstanding interest. Appellant filed complaint before the District
Consumer Forum, which was allowed. The State Commission
affirmed the said decision, which was reversed by National
Commission in revision. Hence, the present appeal.
Dismissing the appeal, the Court
HELD: 1.1 There are popular misconceptions about the
concept of ‘surrender value’ in the sphere of life insurance. In

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