In the realm of insurance law, the concepts of assignment and nomination play a pivotal role in determining how benefits under an insurance policy are transferred or passed on. Both mechanisms aim to regulate the rights of parties who may receive benefits from an insurance contract. While assignment refers to the transfer of rights and benefits under a policy from the policyholder to another person, nomination allows a policyholder to name a person to receive the proceeds upon their death. These two legal tools serve distinct purposes and are governed primarily by the Insurance Act, 1938, and various judicial precedents in India.
I. Assignment of Insurance Policies
Definition and Legal Framework
Assignment is the legal transfer of rights, title, and interest in a life insurance policy from the policyholder (assignor) to another person or entity (assignee). Section 38 of the Insurance Act, 1938 governs assignments in India. It allows for two types of assignments:
- Absolute Assignment – Transfers complete ownership and rights to the assignee.
- Collateral or Conditional Assignment – Made for securing a loan or obligation; the assignee has rights only to the extent of the outstanding liability.
Procedure for Assignment
- Endorsement or Deed: Assignment can be made either by an endorsement on the policy document or by a separate assignment deed.
- Notice to Insurer: The insurer must receive written notice of the assignment. Until the insurer acknowledges the assignment, the assignee’s rights are not enforceable against the insurer.
- Registration: Once the insurer registers the assignment, the assignee becomes entitled to receive policy benefits.
Legal Consequences
- Upon assignment, the assignee gains full rights to the policy benefits (in absolute assignments).
- The assignor loses any legal right to claim the policy amount unless the assignment is conditional or revoked by mutual agreement.
- In the case of a conditional assignment (e.g., for a loan), once the obligation is discharged, the rights revert to the assignor.
Judicial Interpretation
In LIC of India v. Smt. Kanchan, the court held that once an assignment is made and registered, the insurer is bound to pay the proceeds to the assignee regardless of any subsequent nomination.
II. Nomination in Insurance Policies
Definition and Legal Framework
Nomination refers to the appointment of a person to receive the insurance proceeds in the event of the policyholder’s death. Section 39 of the Insurance Act, 1938 governs nominations in India.
Key Features
- A nomination can be made at the inception of the policy or any time before maturity.
- The nominee has no ownership rights during the lifetime of the policyholder.
- Nomination can be changed or canceled by the policyholder at any time by giving notice to the insurer.
Procedure for Nomination
- The nomination is typically made by filling the prescribed form and submitting it to the insurance company.
- Once accepted and recorded, the insurer acknowledges the nominee as the beneficiary in case of the policyholder’s death.
Types of Nominees
- Beneficial Nominee: A nominee who is a close relative (as defined under law – spouse, children, parents). Under the 2015 amendment to the Insurance Laws (Amendment) Act, beneficial nominees are presumed to be the beneficial owners of the policy proceeds.
- Collector Nominee: A nominee other than a close relative, who receives the policy amount as a trustee on behalf of legal heirs.
Legal Effect of Nomination
- Nomination does not override the rights of legal heirs unless the nominee is also a beneficial nominee.
- If the nominee is not a legal heir, they may be required to hand over the proceeds to the rightful heirs of the deceased policyholder, unless the nominee was made a beneficial nominee.
Judicial Standpoint
In Sarbati Devi v. Usha Devi (1984), the Supreme Court held that a nominee does not get ownership rights but merely holds the proceeds in trust for the legal heirs. However, the 2015 amendment now offers more protection to beneficial nominees.
IV. Conflict Between Nomination and Assignment
When both assignment and nomination exist, assignment takes precedence. An assignee’s rights override those of a nominee. The insurer must pay the assignee if a valid assignment has been made, even if a nomination exists. Hence, a nomination becomes ineffective after an assignment unless the policy is reassigned to the policyholder.
V. Practical Implications
- For Policyholders: Understanding the legal impact of assigning or nominating is essential to ensure their intent is carried out after death.
- For Insurers: Proper documentation, acknowledgment, and recording of assignments and nominations are critical to avoid litigation.
- For Legal Heirs: Awareness of the nominee’s role—especially whether the nominee is a beneficial nominee—is important in claiming policy benefits.
Conclusion
Assignment and nomination serve distinct but vital roles in insurance law. While assignment transfers ownership rights to another party, nomination ensures that the proceeds are paid to a chosen person upon the policyholder’s death. Legal clarity and careful execution of these mechanisms help prevent disputes and ensure that the intended parties receive the policy benefits. With evolving jurisprudence and legislative reforms, particularly the 2015 amendment, the law now better protects the rights of nominees and assignees alike, striking a balance between contractual obligations and familial expectations.
CONTRIBUTED BY ; LAKSHAY NANDWANI (INTERN)