assignment in insurance section

Assignment of insurance policies and claims | Practical Law

Assignment of insurance policies and claims

Practical law uk practice note w-031-6021  (approx. 19 pages).

Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

Topics Lawsuits Carriers Profit Loss Claims Louisiana Hurricane Homeowners

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Assignment under Insurance Policies

By J Mandakini, NUALS

Editor’s Note: This paper attempts to explore the concept of assignment under Indian law especially Contract Act, Insurance Act and Transfer of Property Act. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. Also, it explains how ICICI Bank faces certain problems in executing the same. 

INTRODUCTION

For any facility sanctioned by a lender, collateral is always deposited to secure the same. Such mere deposition will not suffice, the borrower has to explicitly permit the lender to recover from the borrower, such securities in case of his default.

This is done by the concept of assignment, dealt with adequately in Indian law. Assignment of obligations is always a tricky matter and needs to be dealt with carefully. The Bank should not fall short of any legally permitted lengths to ensure the same. This is why ambiguity in its security documents have to be rectified. 

This paper attempts to explore the concept of assignment in contract law. It seeks to appreciate why the assignment is made use of for securities of a facility sanctioned by ICICI Bank. The next section will deal with how ICICI Bank faces certain problems in executing the same. The following sections will talk about possible risks involved, as well as defenses and solutions to the same.

WHAT IS ASSIGNMENT?

Assignment refers to the transfer of certain or all (depending on the agreement) rights to another party. The party which transfers its rights is called an assignor, and the party to whom such rights are transferred is called an assignee. Assignment only takes place after the original contract has been made. As a general rule, assignment of rights and benefits under a contract may be done freely, but the assignment of liabilities and obligations may not be done without the consent of the original contracting party.

The liability on a contract cannot be transferred so as to discharge the person or estate of the original contractor unless the creditor agrees to accept the liability of another person instead of the first. [i]

Illustration

P agrees to sell his car to Q for Rs. 100. P assigns the right to receive the Rs. 100 to S. This may be done without the consent of Q. This is because Q is receiving his car, and it does not particularly matter to him, to whom the Rs. 100 is being handed as long as he is being absolved of his liability under the contract. However, notice may still be required to be given. Without such notice, Q would pay P, in spite of the fact that such right has been assigned to S. S would be a sufferer in such case.

In this case, that condition is being fulfilled since P has assigned his right to S. However, P may not assign S to be the seller. P cannot just transfer his duties under the contract to another. This is because Q has no guarantee as to the condition of S’s car. P entered into the contract with Q on the basis of the merits of P’s car, or any other personal qualifications of P. Such assignment may be done with the consent of all three parties – P, Q, S, and by doing this, P is absolved of his liabilities under the contract.

 1.1. Effect of Assignment

Immediately on the execution of an assignment of an insurance policy, the assignor forgoes all his rights, title and interest in the policy to the assignee. The premium or loan interest notices etc. in such cases will be sent to the assignee. [ii] However, the existence of obligations must not be assumed, when it comes to the assignment. It must be accompanied by evidence of the same. The party asserting such a personal obligation must prove the existence of an express assumption by clear and unequivocal proof. [iii]

 Assignment of a contract to a third party destroys the privity of contract between the initial contracting parties. New privity is created between the assignee and the original contracting party. In the illustration mentioned above, the original contracting parties were P and Q. After the assignment, the new contracting parties are Q and S.

 1.2. Revocation of Assignment

Assignment, once validly executed, can neither be revoked nor canceled at the option of the assignor. To do so, the insurance policy will have to be reassigned to the original assignor (the insured).

 1.3. Exceptions to Assignment

There are some instances where the contract cannot be assigned to another.

• Express provisions in the contract as to its non-assignability – Some contracts may include a specific clause prohibiting assignment. If that is so, then such a contract cannot be assigned. Assignability is the rule and the contrary is an exception. [iv]

Pensions, PFs, military benefits etc. Illustration

 1.4. enforcing a contract of assignment.

From the day on which notice is given to the insurer, the assignee becomes the beneficiary of the policy even though the assignment is not registered immediately. It does not wait until the giving of notice of the transfer to the insurer. [vi] However, no claims may lie against the insurer until and unless notice of such assignment is delivered to the insurer.

If notice of assignment is not provided to the obligor, he is discharged if he pays to the assignor. Assignee would have to recover from the assignor. However, if the obligor pays the assignor in spite of the notice provided to him, he would still be liable to the assignee.

The following two illustrations make the point amply clear:

Illustrations

1. Seller A assigns its right to payment from buyer X to bank B. Neither A nor B gives notice to X. When payment is due, X pays A. This payment is fully valid and X is discharged. It will be up to B to recover it from A

2. Seller A assigns to bank B its right to payment from buyer X. B immediately gives notice of the assignment to X. When payment is due, X still pays A. X is not discharged and B is entitled to oblige X to pay a second time.

An assignee doesn’t stand in better shoes than those of his assignor. Thus, if there is any breach of contract by the obligor to the assignee, the latter can recover from the former only the same amount as restricted by counter claims, set offs or liens of the assignor to the obligor.

The acknowledgment of notice of assignment is conclusive proof of, and evidence enough to entertain a suit against an assignor and the insurer respectively who haven’t honoured the contract of assignment.

1.5. Assignment under various laws in India

There is no separate law in India which deals with the concept of assignment. Instead, several laws have codified it under different laws. Some of them have been discussed as follows:

1.5.1. Under the Indian Contract Act

There is no express provision for the assignment of contracts under the Indian Contract Act. Section 37 of the Act provides for the duty of parties of a contract to honour such contract (unless the need for the same has been done away with). This is how the Act attempts to introduce the concept of assignment into Indian commercial law. It lays down a general responsibility on the “representatives” of any parties to a contract that may have expired before the completion of the contract. (Illustrations to Section 37 in the Act).

An exception to this may be found from the contract, e.g. contracts of a personal nature. Representatives of a deceased party to a contract cannot claim privity to that contract while refusing to honour such contract. Under this Section, “representatives” would also include within its ambit, transferees and assignees. [vii]

Section 41 of the Indian Contract Act applies to cases where a contract is performed by a third party and not the original parties to the contract. It applies to cases of assignment. [viii] A promisee accepting performance of the promise from a third person cannot afterwards enforce it against the promisor. [ix] He cannot attain double satisfaction of its claim, i.e., from the promisor as well as the third party which performed the contract. An essential condition for the invocation of this Section is that there must be actual performance of the contract and not of a substituted promise.

  1.5.2. Under the Insurance Act

The creation of assignment of life insurance policies is provided for, under Section 38 of the Insurance Act, 1938.

• When the insurer receives the endorsement or notice, the fact of assignment shall be recorded with all details (date of receipt of notice – also used to prioritise simultaneous claims, the name of assignee etc). Upon request, and for a fee of an amount not exceeding Re. 1, the insurer shall grant a written acknowledgment of the receipt of such assignment, thereby conclusively proving the fact of his receipt of the notice or endorsement. Now, the insurer shall recognize only the assignee as the legally valid party entitled to the insurance policy.

 1.5.3. Under the Transfer of Property Act

Indian law as to assignment of life policies before the Insurance Act, 1938 was governed by Sections 130, 131, 132 and 135 of the Transfer of Property Act 1882 under Chapter VIII of the Act – Of Transfers of Actionable Claims. Section 130 of the Transfer of Property Act states that nothing contained in that Section is to affect Section 38 of the Insurance Act.

 I) Section 130 of the Transfer of Property Act

An actionable claim may be transferred only by fulfilling the following steps:

• Signed by a transferor (or his authorized agent)

The transfer will be complete and effectual as soon as such an instrument is executed. No particular form or language has been prescribed for the transfer. It does not depend on giving notice to the debtor.

The proviso in the section protects a debtor (or other person), who, without knowledge of the transfer pays his creditor instead of the assignee. As long as such payment was without knowledge of the transfer, such payment will be a valid discharge against the transferee. When the transfer of any actionable claim is validly complete, all rights and remedies of transferor would vest now in the transferee. Existence of an instrument in writing is a sine qua non of a valid transfer of an actionable claim. [x]

 II) Section 131 of the Transfer Of Property Act

This Section requires the notice of transfer of actionable claim, as sent to the debtor, to be signed by the transferor (or by his authorized agent), and if he refuses to sign it, a signature by the transferee (or by his authorized agent). Such notice must state both the name and address of the transferee. This Section is intended to protect the transferee, to receive from the debtor. The transfer does not bind a debtor unless the transferor (or transferee, if transferor refuses) sends him an express notice, in accordance with the provisions of this Section.

III) Section 132 of the Transfer Of Property Act

This Section addresses the issue as to who should undertake the obligations under the transfer, i.e., who will discharge the liabilities of the transferor when the transfer has been made complete – would it be the transferor himself or the transferee, to whom the rest of the surviving contract, so to speak, has been transferred.

This Section stipulates, that the transferee himself would fulfill such obligations. However, where an actionable claim is transferred with the stipulation in the contract that transferor himself should discharge the liability, then such a provision in the contract will supersede Ss 130 and 132 of this Act. Where the insured hypothecates his life insurance policies and stipulates that he himself would pay the premiums, the transferee is not bound to pay the premiums. [xi]

FACILITIES SECURED BY INSURANCE POLICIES – HOW ASSIGNMENT COMES INTO THE PICTURE

Many banks require the borrower to take out or deposit an insurance policy as security when they request a personal loan or a business loan from that institution. The policy is used as a way of securing the loan, ensuring that the bank will have the facility repaid in the event of either the borrower’s death or his deviations from the terms of the facility agreement.

Along with the deposit of the insurance policy, the policyholder will also have to assign the benefits of the policy to the financial institution from which he proposes to avail a facility. The mere deposit, without writing, or passing of any document of title to such a claim, does not create any equitable charge. [xii]

ETHICS OF ASSIGNING LIFE INSURANCE POLICY TO LENDERS

The purpose of taking out a life insurance policy on oneself, is that in the event of an untimely death, near and dear ones of the deceased are not left high and dry, and that they would have something to fall back on during such traumatic times. Depositing and assigning the rights under such policy document to another, would mean that there is a high chance that benefits of life insurance would vest in such other, in the event of unfortunate death and the family members are prioritized only second. These are not desirable circumstances where the family would be forced to cope with the death of their loved one coupled with the financial crisis.

 Thus, there is a need to examine the ethics of:

• The bank accepting such assignment

The customer should be cautious before assigning his rights under life insurance policies. By “cautious”, it is only meant that he and his dependents and/or legal heirs should be aware of the repercussions of the act of assigning his life insurance policy. It is conceded that no law prohibits the assignment of life insurance policies.

In fact, Section 38 of the Insurance Act, 1938 , provides for such assignments. Judicial cases have held life insurance policies as property more than a social welfare measure. [xiii] Further, the bank has no personal relationship with any customer and thus has no moral obligation to not accept such assignments of life insurance.

However, the writer is of the opinion that, in dealing with the assignment of life insurance policies, utmost care and caution must be taken by the insured when assigning his life insurance policy to anyone else.

CURRENT STAND OF ICICI REGARDING FACILITIES SECURED BY INSURANCE POLICY, WITH SPECIFIC REFERENCE TO ASSIGNMENT OF OBLIGATIONS

This Section seeks to address and highlight the manner in which ICICI Bank drafts its security documents with regard to the assignment of obligations. The texts placed in quotes in the subsequent paragraphs are verbatim extracts from the security document as mentioned.

Composite Document for Corporate and Realty Funding

 “ 8 .   CHARGING CLAUSE

  The Mortgagor doth hereby:

iii) Assign and transfer unto the Mortgagee all the Bank Accounts and all rights, title, interest, benefits, claims and demands whatsoever of the Mortgagor in, to, under and in respect of the Bank Accounts and all monies including all cash flows and receivables and all proceeds arising from Projects and Other Projects_______________, insurance proceeds, which have been deposited / credited / lying in the Bank Accounts, all records, investments, assets, instruments and securities which represent all amounts in the Bank Accounts, both present and future (the “Account Assets”, which expression shall, as the context may permit or require, mean any or each of such Account Assets) to have and hold the same unto and to the use of the Mortgagee absolutely and subject to the powers and provisions herein contained and subject also to the proviso for redemption hereinafter mentioned;

(v) Assign and transfer unto the Mortgagee all right, title, interest, benefit, claims and demands whatsoever of the Mortgagors, in, to, under and/or in respect of the Project Documents (including insurance policies) including, without limitation, the right to compel performance thereunder, and to substitute, or to be substituted for, the Mortgagor thereunder, and to commence and conduct either in the name of the Mortgagor or in their own names or otherwise any proceedings against any persons in respect of any breach of, the Project Documents and, including without limitation, rights and benefits to all amounts owing to, or received by, the Mortgagor and all claims thereunder and all other claims of the Mortgagor under or in any proceedings against all or any such persons and together with the right to further assign any of the Project Documents, both present and future, to have and to hold all and singular the aforesaid assets, rights, properties, etc. unto and to the use of the Mortgagee absolutely and subject to the powers and provisions contained herein and subject also to the proviso for redemption hereinafter mentioned.”

 ICICI Bank’s Standard Terms and Conditions Governing Consumer Durable Loans

  “ insurance.

The Borrower further agrees that upon any monies becoming due under the policy, the same shall be paid by the Insurance Company to ICICI Bank without any reference / notice to the Borrower, but not exceeding the principal amount outstanding under the Insurance Policy. The Borrower specifically acknowledges that in all cases of claim, the Insurance Company will be solely liable for settlement of the claim, and he/she will not hold ICICI Bank responsible in any manner whether for compensation, recovery of compensation, processing of claims or for any reason whatsoever.

Reference has been made only to assignment of assets, rights, benefits, interests, properties etc. No specific reference has been made to the assignment of obligations of the assignor under such insurance contract.

THE ISSUE FACED BY ICICI BANK

Where ICICI Bank accepts insurance policy documents of customers as security for a loan, in the light of the fact that the documents are silent about the question of assignment of obligations, are they assigned to ICICI Bank? Where there is hypothecation of a life insurance policy, with a stipulation that the mortgagor (assignor) should pay the premiums, and that the mortgagee (assignee) is not bound to pay the same, Sections 130 and 132 do not apply to such cases. [xiv] With rectification of this issue, ICICI Bank can concretize its hold over the securities with no reservations about its legality.

RISKS INVOLVED

This section of the paper attempts to explore the many risks that ICICI Bank is exposed to, or other factors which worsen the situation, due to the omission of a clause detailing the assignment of obligations by ICICI Bank.

Practices of Other Companies

The practices of other companies could be a risk factor for ICICI Bank in the light of the fact that some of them expressly exclude assignment of obligations in their security documents.

There are some companies whose notice of assignment forms contain an exclusive clause dealing with the assignment of obligations. It states that while rights and benefits accruing out of the insurance policy are to be assigned to the bank, obligations which arise out of such policy documents will not be liable to be performed by the bank. Thus, they explicitly provide for the only assignment of rights and benefits and never the assignment of obligations.

Possible Obligation to Insurance Companies

By not clearing up this issue, ICICI Bank could be held to be obligated to the insurance company from whom the assignor took the policy, for example, with respect to insurance premiums which were required to be paid by the assignor. This is not a desirable scenario for ICICI Bank. In case of default by the assignor in the terms of the contract, the right of ICICI Bank over the security deposited (insurance policy in question) could be fraught in the legal dispute.

Possible litigation

Numerous suits may be instituted against ICICI Bank alleging a violation of the Indian Contract Act. Some examples include allegations of concealment of fact, fraud etc. These could be enough to render the existing contract of assignment voidable or even void.

Contra Proferentem

This doctrine applies in a situation when a provision in the contract can be interpreted in more than one way, thereby creating ambiguities. It attempts to provide a solution to interpreting vague terms by laying down, that a party which drafts and imposes an ambiguous term should not benefit from that ambiguity. Where there is any doubt or ambiguity in the words of an exclusion clause, the words are construed more forcibly against the party putting forth the document, and in favour of the other party. [xv]

The doctrine of contra proferentem attempts to protect the layman from the legally knowledgeable companies which draft standard forms of contracts, in which the former stands on a much weaker footing with regard to bargaining power with the latter. This doctrine has been used in interpreting insurance contracts in India. [xvi]

If litigation ensues as a result of this uncertainty, there are high chances that the Courts will tend to favour the assignor and not the drafter of the documents.

POSSIBLE DEFENSES AGAINST DISPUTES FOR THE SECURITY DOCUMENTS AS THEY ARE NOW

This section of the paper attempts to give defences which the Bank may raise in case of any disputes arising out of silence on the matter of assignability of obligations.

Interpretation of the Security Documents

UNIDROIT principles expressly provide a method for interpretation of contracts. [xvii] The method consists of utilizing the following factors:

This defence relates to the concept of estoppel embodied in Section 115 of the Indian Evidence Act, 1872. According to the Section, when one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representatives, to deny the truth of that thing.

If a man either by words or by conduct has intimated that he consents to an act which has been done and that he will not offer any opposition to it, and he thereby induces others to do that which they otherwise might have abstained from, he cannot question legality of the act he had sanctioned to the prejudice of those who have so given faith to his words or to the fair inference to be drawn from his conduct. [xviii] Subsequent conduct may be relevant to show that the contract exists, or to show variation in the terms of the contract, or waiver, or estoppel. [xix]

Where the meaning of the instrument is ambiguous, a statement subsequently interpreting such instrument is admissible. [xx] In the present case, where the borrower has never raised any claims with regard to non assignability of obligations on him, and has consented to the present conditions and relations with ICICI Bank, he cannot he cannot be allowed to raise any claims with respect to the same.

Internationally, the doctrine of post contractual conduct is invoked for such disputes. It refers to the acts of parties to a contract after the commencement of the contract. It stipulates that where a party has behaved in a particular manner, so as to induce the other party to discharge its obligations, even if there has been a variation from the terms of the contract, the first party cannot cite such variation as a reason for its breach of the contract.

Where the parties to a contract are both under a common mistake as to the meaning or effect of it, and therefore embark on a course of dealing on the footing of that mistake, thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them. [xxi]

The importance of consensus ad idem has been concretized by various case laws in India. Further, if the stipulations and terms are uncertain and the parties are not ad idem there can be no specific performance, for there was no contract at all. [xxii]

In the present case, the minds of the assignor and assignee can be said to have not met while entering into the assignment. The assignee never had any intention of undertaking any obligations of the assignor. In Hartog v Colin & Shields, [xxiii] the defendants made an offer to the plaintiffs to sell hare skins, offering to a pay a price per pound instead of per piece.

AVOIDING THESE RISKS

To concretize ICICI Bank’s stand on the assignment of obligations in the matter of loans secured by insurance policies, the relevant security documents could be amended to include such a clause.

For instances where loans are secured by life insurance policies, a standard set by the American Banker’s Association (ABA) has been followed by many Indian commercial institutions as well. [xxvi] The ABA is a trade association in the USA representing banks ranging from the smallest community bank to the largest bank holding companies. ABA’s principal activities include lobbying, professional development for member institutions, maintenance of best practices and industry standards, consumer education, and distribution of products and services. [xxvii]

There are several ICICI security documents which have included clauses denying any assignment of obligations to it. An extract of the deed of hypothecation for vehicle loan has been reproduced below:

“ 3. In further pursuance of the Loan Terms and for the consideration aforesaid, the Hypothecator hereby further agrees, confirms, declares and undertakes with the Bank as follows:

(i)(a) The Hypothecator shall at its expenses keep the Assets in good and marketable condition and, if stipulated by the Bank under the Loan Terms, insure such of the Assets which are of insurable nature, in the joint names of the Hypothecator and the Bank against any loss or damage by theft, fire, lightning, earthquake, explosion, riot, strike, civil commotion, storm, tempest, flood, erection risk, war risk and such other risks as may be determined by the Bank and including wherever applicable, all marine, transit and other hazards incidental to the acquisition, transportation and delivery of the relevant Assets to the place of use or installation. The Hypothecator shall deliver to the Bank the relevant policies of insurance and maintain such insurance throughout the continuance of the security of these presents and deliver to the Bank the renewal receipts / endorsements / renewed policies therefore and till such insurance policies / renewal policies / endorsements are delivered to the Bank, the same shall be held by the Hypothecator in trust for the Bank. The Hypothecator shall duly and punctually pay all premia and shall not do or suffer to be done or omit to do or be done any act, which may invalidate or avoid such insurance. In default, the Bank may (but shall not be bound to) keep in good condition and render marketable the relevant Assets and take out / renew such insurance. Any premium paid by the Bank and any costs, charges and expenses incurred by the Bank shall forthwith on receipt of a notice of demand from the Bank be reimbursed by the Hypothecator and/or Borrower to the Bank together with interest thereon at the rate for further interest as specified under the Loan Terms, from the date of payment till reimbursement thereof and until such reimbursement, the same shall be a charge on the Assets…”

The inclusion of such a clause in all security documents of the Bank can avoid the problem of assignability of obligations in insurance policies used as security for any facility sanctioned by it.

An assignment of securities is of utmost importance to any lender to secure the facility, without which the lender will not be entitled to any interest in the securities so deposited.

In this paper, one has seen the need for assignment of securities of a facility. Risks involved in not having a separate clause dealing with non assignability of obligations have been discussed. Certain defences which ICICI Bank may raise in case of the dispute have also been enumerated along with solutions to the same.

Formatted by March 2nd, 2019.

BIBLIOGRAPHY

[i] J.H. Tod v. Lakhmidas , 16 Bom 441, 449

[ii] http://www.licindia.in/policy_conditions.htm#12, last visited 30 th June, 2014

[iii] Headwaters Construction Co. Ltd. v National City Mortgage Co. Ltd., 720 F. Supp. 2d 1182 (D. Idaho 2010)

[iv] Indian Contract Act and Specific Relief Act, Mulla, Vol. I, 13 th Edn., Reprint 2010, p 968

[v] Khardah Co. Ltd. v. Raymond & Co ., AIR 1962 SC 1810: (1963) 3 SCR 183

[vi] Principles of Insurance Law, M.N. Srinivasan, 8 th Edn., 2006, p. 857

[vii] Ram Baran v Ram Mohit , AIR 1967 SC 744: (1967) 1 SCR 293

[viii] Sri Sarada Mills Ltd. v Union of India, AIR 1973 SC 281

[ix] Lala Kapurchand Godha v Mir Nawah Himayatali Khan, [1963] 2 SCR 168

[x] Velayudhan v Pillaiyar, 9 Mad LT 102 (Mad)

[xi] Hindustan Ideal Insurance Co. Ltd. v Satteya, AIR 1961 AP 183

[xii] Mulraj Khatau v Vishwanath, 40 IA 24 – Respondent based his claim on a mere deposit of the policy and not under a written transfer and claimed that a charge had thus been created on the policy.

[xiii] Insure Policy Plus Services (India) Pvt. Ltd. v The Life Insurance Corporation of India, 2007(109)BOMLR559

[xiv] Transfer of Property Act, Sanjiva Row, 7 th Edn., 2011, Vol II, Universal Law Publishing Company, New Delhi

[xv] Ghaziabad Development Authority v Union of India, AIR 2000 SC 2003

[xvi] United India Insurance Co. Ltd. v M/s. Pushpalaya Printers, [2004] 3 SCR 631, General Assurance Society Ltd. v Chandumull Jain & Anr., [1966 (3) SCR 500]

[xvii] UNIDROIT Principles, Art 4.3

[xviii] B.L.Sreedhar & Ors. v K.M. Munireddy & Ors., 2002 (9) SCALE 183

[xix] James Miller & Partners Ltd. v Whitworth Street Estates (Manchester) Ltd., [1970] 1 All ER 796 (HL)

[xx] Godhra Electricity Co. Ltd. v State of Gujarat, AIR 1975 SC 32

[xxi] Amalgamated Investment & Property Co. Ltd. v Texas Commerce International Bank Ltd., [1981] 1 All ER 923

[xxii] Smt. Mayawanti v Smt. Kaushalya Devi, 1990 SCR (2) 350

[xxiii] [1939] 3 All ER 566

[xxiv] Terrell v Alexandria Auto Co., 12 La.App. 625

[xxv] http://www.uncitral.org/pdf/english/CISG25/Pamboukis.pdf, last visited on 30 th June, 2014

[xxvi] https://www.phoenixwm.phl.com/shared/eforms/getdoc.jsp?DocId=525.pdf, last visited on 30 th June, 2014

[xxvii] http://www.aba.com/About/Pages/default.aspx, last visited on 30 th June, 2014

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• Insurance Terms & Definitions /
• Insurance Terms Starting With A

Assignment Insurance

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What is Assignment Insurance?

Assignment Insurance is a type of insurance that may refer to a variety of policies related to the transfer of risk from one party to another. Assignment Insurance typically involves an individual or business accepting responsibility for the financial risk associated with a particular situation, asset, or activity. In some cases, it may also refer to the transfer of ownership of an insurance policy from one party to another.

Assignment Insurance in More Detail

For example, Assignment Insurance may be used when an individual or business takes on the financial risk associated with a particular asset or activity, such as the purchase of a home or a business venture. In this case, the insurer pays out the agreed upon amount of money to the recipient of the policy in the event of a loss, such as a fire or a natural disaster.

Assignment Insurance may also be used when an individual or business transfers the ownership of an insurance policy from one party to another. This may occur when a policyholder decides to sell their policy to another person, such as someone who can make better use of the policy or who can afford to pay the premiums.

Assignment Insurance is useful for individuals and businesses who need to transfer the responsibility of a particular asset or activity from one party to another. It can help to protect both parties involved in the transaction, as well as provide assurance that the financial burden associated with the asset or activity will be covered in the event of a loss.

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Assignment vs Nomination in Life Insurance

Table of Content:

• Difference between nomination and assignment
• What is nomination in life insurance?

1. Beneficial Nominee

• 2. Minor Nominee

3. Non-Family Nominee

4. multiple nominees.

• 4. Changing Nominee
• 6.Successive Nominee
• Important things to know about nominations
• What is an assignment in life insurance?
• Types of assignment in life insurance

Important things to know about assignments

• Differences between nominations and assignments:

Difference between Nomination and Assignment

In life insurance products, two terms assignment and nomination are frequently used. While not many may understand them, it is imperative to know the meaning and the difference between assignment and nomination before purchasing any insurance plan. 

The primary difference is about policy ownership. While in nomination, the policy owner remains unchanged. However, in an assignment, the policy ownership is transferred from one person to another. The nominee (as in nomination) gets the benefit after the death of the life assured but the assignee (as in assignment) gets the benefits when the life assured transfers the rights and ownership of his/her policy to the assignee. These are some of the basic and common differences between nomination and assignment. 

Let us learn some more about assignment and nomination, and what role they play in insurance. 

What is Nomination in life insurance?

Nomination is one of the most essential processes of the life insurance policy. The policyholder has to make any one family member his/her nominee. The nominee is considered eligible to claim the benefits of the life insurance policy if the insured individual dies. In this way, the insurance company ensures that the family of the insured does not have to suffer financial problems even after an earning member of the family passes away. Hence, the policyholder should choose the nominee of his/her insurance policy carefully.

Types of nominees in life insurance  

The policyholder gets the choice of choosing one among the five types of nominees. Let’s understand them in detail. Here are the following five types of nominees in life insurance:

IRDA has introduced a new term ‘beneficiary nominee’ instead of the nominee. It means that the policyholder has the right to make anyone his/her nominee. The nominee can be the policyholder’s parent/ guardian, child, or companion. If the policyholder has already chosen his/her nominee, then no dispute will arise in getting the claim.

2. Minor Nominee

The policyholder can make his/her minor child the nominee of his/her life insurance policy to secure the child’s future in his/her absence. But if the insured individual dies untimely, the amount of the claim will be payable to the legal custodian or the appointee of the child. The child’s custodian hands over that money to the child when he/she turns 18 years old.

It is also possible for the policyholder to choose a non-family member as his/her nominee. However, this is generally not recommended.

Two or more two persons can be chosen by the policyholder under the multiple nominees of the insurance policy. In this case, the policyholder divides the share of the total amount between the two nominees. If the policyholder doesn’t divide the amount while filling the nomination form, then, the amount of the claim is divided equally between the nominees by the insurer.

5. Changing Nominee

Under this type of nominee, the policyholder is able to choose his/her nominee during the life insurance policy tenure.

6. Successive Nominee

Under many circumstances, people prefer choosing more than 1 nominee, in successive nominations, one can choose up to three nominees. After the death of the insured, the 1st nominee will receive the death benefit. In case the 1st nominee is also dead, the death benefit will go to the 2nd nominee and so on. 

Important Things to Know About Nominations  

There are a few quintessential things about the nominations that every policyholder must keep in mind. The important things that should be known about nominations are given below: 

• The life assured and the policyholder should be the same in the life insurance policy for the process of nomination. If they are two different persons, then, the claim benefits will be taken by the policyholder of the insurance plan.
• The nominee has no right to request any kind of change in the insurance policy.

What is an Assignment in Life Insurance?

Under Section 38 of the Insurance Act, 1938, there is a provision for assignment in life insurance. The policyholder transfers the rights of his/her policyholder to another person. The person who transfers the insurance rights is called the assignor and the person to whom the policy rights are transferred is called the assignee. In this way, the assignee becomes the owner of the insurance policy. 

Generally, the people choose banks for assigning their policy rights. The bank becomes the policyholder but the life assured of the insurance policy is not changed. The benefits of the claim are received by the bank (policyholder). 

Types of Assignment in Life Insurance  

There are two types of assignment in life insurance i.e. Absolute Assignment and Conditional Assignment.

1. Absolute Assignment

In the absolute assignment, the rights of the life insurance policy are given to another person (assignee) without any terms and conditions. Generally, this type of assignment is done by the policyholders to show love for someone or to repay the bank loan.

2. Conditional Assignment

In a conditional assignment, the policyholder (assignor) transfers the rights of the life insurance policy to another person (assignee) under certain terms and conditions. If the terms and conditions are fulfilled, only then, the ownership of the policy will be transferred. 

Check out the essential things about the assignment that you must not forget to keep in mind:

• Only the owner of the policy is changed in the assignment. The life assured will remain the same.
• The policyholder of each insurance plan can transfer the rights of the insurance policy to the assignee. Only the pension plan and the insurance plans that are bought under the Married Women’s Property Act (MWP) are excluded.
• The nomination of the insurance policy is cancelled if the policyholder gives the rights of his/her insurance policy to the insurance company for paying the insurance company’s loan.

Differences between Nominations and Assignments

The table given below gives you a quick insight into the several differences between nominations and assignments.

It is very important for the policyholder to know about assignment and nomination. This is because the nomination and assignment have their own benefits that the policyholder can enjoy without any ado. Therefore, a piece of complete information has been shared with the help of this article. It is recommended to the policyholder to choose the right life insurance policy that can serve their family members even in their absence.

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1. What is the meaning of endorsement in the assignment?

The policyholder has to sign the endorsement while transferring the rights of his/her insurance policy to the assignee. The sign of one witness is also required. Thereafter, the policyholder (assignor) has to mention precisely the reasons for transferring the rights of the insurance policy. The terms and conditions are also mentioned in the form (if any). Furthermore, the details of the assignee are also included in the form. 

2. What are the liabilities and rights of the assignee?

The liabilities and rights of the assignee are different on the basis of the types of assignment. In the absolute assignment, the right of policy ownership, responsibility to pay future insurance premiums, and the right of getting maturity benefits are transferred to the assignee. But in the conditional assignment, these rights and liabilities are determined as per the terms and conditions. 

3. When does the insurance company cancel the nomination in the assignment process?

When the assignor assigns the rights of the insurance policy to the assignee, then the nomination is cancelled by the insurance company. The nomination is not cancelled if the assignment is temporary. In that case, the rights of the insurance policy will be given back to the insured when he/she will pay the loan. 

4. Who can become the assignee of my insurance policy?

The assignee of the insurance policy can be a person or a financial institution. There should be an insurable interest between you and the person/financial institution. The assignee is either temporary or permanent. In some cases, the insured chooses the financial institution or insurance company as the assignee on some terms and conditions. But after some time, when the loan is paid, the insured will become the owner of the insurance policy again.

5. When does the insurance company accept the assignment?

If the insurance company finds that there is an insurable interest between the assignor and assignee, then the assignment is accepted. The insurance company makes sure that the assignment is not against the public interest and also not for trading purposes. The assignment should be in the interest of the policyholder only.

This article is issued in the general public interest and is for educational purposes only. The blogs should not be used as a substitute for competent expert advice from a licensed professional to best suit your needs. Insurance is a subject matter of solicitation. For more details on policy terms, conditions, exclusions, limitations, please refer/read policy brochure before concluding sale.

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Policy Cancellation & Refund

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Nomination and Assignment under Insurance Contracts

Published by siri k reddy on 30/01/2021 30/01/2021, introduction:.

The term assignment itself means you assign something to someone else. In term life insurance, the assignment of the policy describes the action of assigning legal rights as well as policy ownership to someone else. The person who assigns the policy is known as an Assignor and the person who has been assigned the policy is known as an Assignee.

Nomination under the insurance contract refers to nominate someone on your behalf in order to collect the benefit in your absence. A person who is trustworthy can be nominated upon the death of a person. The trustworthy person could be from the dead person’s family or close friends. Then that person is the nominee of the policy.

However in most of the cases, people choose their family member as the nominee of the policy but as per the insurance act of 1938, under section 39, the nomination of a particular person is not restricted to a family only. Any person who is considered as trustworthy and any person who will not misuse the policy are considered to be an ideal nominee of that particular policy.

Types of Assignment

There are two types of assignment of policies:

• Absolute assignment: under this particular type of assignment, the assignor is bound to transfer the ownership, title, legal interests and all the rights of the policy to the assignee. This type of transfer of the policy does not include the terms and conditions on the part of the assignee. The exact purpose of the absolute assignment is to repay the debts or to show affection to loved ones.
• Collateral assignment: collateral assignment refers to that particular assignment in which the policyholder assigns the policy on terms and conditions, and the assignee is restricted to avail the benefits of all the terms and conditions. The main purpose of the collateral assignment is to repay loans and liabilities.

Types of Nomination

There are three types of nominations, such as:

• Beneficiary nominee: in this particular nomination a particular person can be made beneficiary to the immediate family members like parents, children, and spouse. The beneficiary will be entitled to receive all the benefits of the policy legally only in case of unfavourable conditions.
• Minor nominee: since it is considered that a minor cannot deal with financial conditions, the guardian of that particular minor has to give the details of their selves only when the policyholder chooses his/her child as the nominee.
• Non-family nominee: a non-family member is that person who does not have blood relation with the policyholder such as close friends, a distant relative, a neighbour, etc. under section 39 of the insurance act of 1938; any trustworthy person can be a policy nominee.

Nomination and Assignment in Life Insurance Plans

As it is already known that insurance is a legal contract between the insurance company who is also called the insurer and the policyholder. An assignee is a person to whom the rights have been transverse to. An example of an absolute assignment is as follows: Mr Bharath owns a life insurance policy of 1 crore and he wants to gift this particular policy to his wife as ‘absolute assignment’ to her name. Once this absolute assignment is made to his wife’s name, she will be the owner of the policy. She also has the right to transfer this policy to someone else.

An example of a conditional assignment is as follows: Ms Supriya owns a term insurance policy of 900,000. She wants a home loan of the same amount. Hence her banker asked her to assign the term policy in their name in order to get the loan.  If Supriya meets an untimely death the banker is entitled to enjoy their money. An assignment deed or deed of assignment [DOA] is that deed through which rights can be transferred from one person to another.

Sections and Policies

SECTION 38- ASSIGNMENT AND TRANSFER OF INSURANCE POLICIES

The provisions under section 38 of the Insurance Law Act, 2015. The provisions of this particular section are as follows:

• This policy allows itself to be transferred with or without consideration.
• An assignment has a high chance of being affected by an endorsement upon the policy or by a separate instrument to the insurer.
• The instruments should reflect the assignment and the reasons for the transfer.
• An authorized agent or the transferor should sign the assignment.
• The transferor of the assignment should not be operative against an insurer until prior notice is issued
• The authority has the right to specify the fees that is paid for the transfer
• The insurer is also expected to give a written acknowledgement of receipt of the notice. Such notice acts as evidence for the future.
•  The notices shall be delivered only at one place where the policy is being served in order to avoid confusions. This arrangement is made as the insurer is involved in managing more than one business place.
• The insurer has the right to accept or deny acting upon any transfer or endorsement only if it is not bonafide or not in the public interest.
• Before denying the endorsement, the insurer should make a note of the reasons for the same.

SECTION 39- NOMINATION BY POLICYHOLDER

The provisions of this particular section are as follows:

• The policyholder can nominate a person to whom money secured by the policy shall be paid during the death.
• When in case of a minor, the policyholder can appoint any person to receive the money in the event of policyholder’s death during the minority of the nominee.
• Nomination can be made at any time before the maturity of the policy.
• The nomination can be incorporated or endorsed to the insurer.
• The provisions of section 39 are not applicable to any life insurance policy to which section 6 of the Married Women’s Property Act, 1874 applies.
• If the nominee dies before the policyholder, the money is payable to the legal representatives or the holder of succession certificate.

SECTION 45- Policy shall not be called in question on the ground of misstatement after three years

Provisions of this section are as follow:

• Any policy of life insurance shall not be called in question after the expiry of three years from the date of issuance of the policy, the date of commencement of risk, the date of revival, the date rider coming to the policy.
• Silence is not considered to be fraud unless it depends on the circumstances of the case.
• The insurer can call for age proof at any time only if he is entitled.
• No insurer can reject a life insurance policy on the grounds of fraud if the beneficiary can prove that the fraud was true to the best of his knowledge.

Difference between Nomination and Assignment

Assignment of Policies- Impact on Existing Nomination

• According to section 39(4) of the insurance act, 938, the assignment of an insurance policy automatically cancels the nomination.
• Here are the few circumstances under which the assignment does not automatically cancel nomination :

When the policy loan is taken from the life insurer who issues the policy, the policy has to be assigned in favour of the life insurer. Under such circumstances, assignments in favour of the life insurer do not automatically cancel the nomination.

On the other hand, where the policy is assigned by a debtor to creditor acts as collateral security for the loan taken by the policyholder from the assignee.

The nomination and assignments have their own uses and benefits as a separate topic under the insurance contracts. I have gained in-depth knowledge of what exactly is nomination and assignment along with minute differences between them. The differences between them have helped me gain much more understanding of the topic. Nomination protects the interests of the insured and the insurer. Whereas the assignment strives to protect the interests of the assignee in availing all the benefits.

References:

• INSURANCE LAWS IN INDIA- VARDHAMAN MAHAVEER, pg. 32. 54.
• RAJIV JAIN: INSURANCE LAW AND PRACTICE, pg. 44
• https://m.economictimes.com/nomination-and-assignment/articleshow/3320189.cms
• https://accountlearning.com/difference-nomination-assignment/
• https://accountlearning.com/assignment-in-insurance-policy-meaning-explanation-types/
• https://life.futuregenerali.in/life-insurance-made-simple/life-insurance/change-nominee-in-term-insurance

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How to assign a life insurance policy

​What is meant by assigning?

Interest in a life insurance policy can be transferred from the policyholder to a lender or relative by assignment of policy. Here the policyholder is known as the assignor and the person in whose favour the policy has been assigned is called assignee.

​Types of assignment

There are two types of assignment: Conditional assignment: This is done when the insured wishes to pass benefits of the policy to a relative in case of early death or certain conditions. The rights of the policyholder are restored once the conditions are fulfilled. Absolute assignment: This is done as a part of consideration for a loan in favour of the lender/bank/lending institution. In such an assignment, the insured loses his rights in the policy and the absolute assignee can deal with it independently.

​Notice of assignment

The insured needs to either endorse the policy document or make a deed of assignment and register the same with the insurer. A form prescribed by the insurers must be filled and signed. In case of conditional assignment, your reason needs to be mentioned as well.

​Documents required

Proof of income. Self attested copy of photo ID and address proof. Self attested copy of PAN card.

Fees and stamp duty

If the assignment is made by endorsement on the policy document, it is exempt from stamp duty. However, in case of a separate deed, stamp duty is payable.

​Acceptance and the right to reject

If the insurance company decides to register the assignment, it will record it and inform the assignor. On paying a fee, the assignee can obtain an acknowledgement. The insurer also has a right to reject if it believes that the assignment is not bona fide or against the interest of the policyholder or public interest or for the purpose of trading the insurance policy. (Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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• Assignments In Insurance Law

Introduction

• 1.1 Nature Of Insurance Policies

1.2 Assignment

• 2. Application Of English Law

2.1 Generally

• 2.2 Policies Of Assurance Act 1867

2.3 Marine Insurance Act 1906

3. marine insurance, 4. property insurance, 5. motor insurance, 6. life insurance, 6.1 legal assignment, 6.2 equitable assignment, 6.3 incomplete assignment, 6.4 priorities.

• 7.1 Assignment Of Insurance Policies
• 7.2 Assignment Of The Proceeds Of Insurance Policies
• 7.3 Assignment Of The Subject Matter Of Insurance Policies
• 7.4 Assignment By Operation Of Law

7.5 Conditions Prohibiting Assignment

8. conclusion, assignments in insurance law.

The concept of assignments in insurance law takes on many forms - firstly due to the various branches of insurance law and secondly due to the various components in an insurance transaction that can be assigned. The format of this discussion, therefore, is reflective of this framework.

Assignments are first discussed in the context of the following branches of insurance law:

(i) marine insurance,

(ii) property insurance,

(iii) motor insurance, and

(iv) life insurance.

The next stage of this discussion focuses on what may be assigned in an insurance transaction and how such assignments are legally effected, namely, the assignment of:

(a) an insurance policy,

(b) the proceeds of an insurance policy, and

(c) the subject matter of an insurance policy.

1.1 Nature of Insurance Policies

A. A. Tarr, Kwai-Lian Liew & W. Holligan writes:

“The origins of insurance date back thousands of years. For example, a central feature of insurance, that of risk interference, was incorporated in commercial arrangements effected by the Babylonians, Phoenicians, Greeks and Romans. However, the infancy of the modern insurance contract is founded on the practices adopted by Italian merchants in the 14th century. These merchants fostered the development of marine insurance and were reluctant to accept the numerous and diverse risks associated with the mercantile adventure of transporting goods across the sea; an early policy entered into in 1385 insured a ship and cargo against loss arising ‘from Acts of God, of the sea, of fire, of jettison, of confiscation by princes or cities or any other person, of reprisal, mishap or any other impediment’. Merchants in their relations with one another tended to uniformity on commercial matters and this tendency led to the rapid dissemination if marine insurance practices to other countries, and, in particular, to the low countries, Spain and England.” [1]

Lord Hailsham of St. Marylebone writes:

“Non-marine insurance first made its appearance in the form of life and fire insurance, but until the middle of the nineteenth century these three [2] types of insurance comprised, in practice, substantially the whole range of insurance.”

The practice of taking insurance and property and later, lives, has a long and rich history. Unsatisfied with leaving the health and safety of property and lives to the capricious whims of fate alone, our ancestors have sought to ‘hedge their bets’ by entering into an insurance transaction.

John Lowry & Philip Rawlings writes:

“The aim of insurance is to shift risk from one person (the insured) to another (the insurers): the owner of a house enters into a fire policy under which an insurer, in exchange for a premium paid by the insured, agrees to pay for damage caused to the property by fire.” [3]

Professor K. S. N. Murthy & K. V. S. Sarma writes:

“The aim of all insurance is to protect the owner from a variety of risks which he anticipates.” [4]

John Birds and Norma J. Hird observe that:

“It is suggested that a contract of insurance is any contract whereby one party assumes the risk of an uncertain event, which is not within his control, happening at a future time, in which event the other party has an interest, and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs.” [5]

In Rayner v Preston [6] , Brett L.J. explained the nature of a contract of insurance in the following terms:

“Now, in my judgment, the subject-matter of the contract of insurance is money, and money only. The subject-matter of insurance is a different thing from the subject-matter of the contract of insurance. The subject-matter of insurance may be a house or other premises in a fire policy, or may be a ship or goods in a marine policy. These are the subject-matter of insurance, but the subject-matter of the contract is money, and money only. The only result of the policy, if an accident which is within the insurance happens, is a payment of money. It is true that under certain circumstances in a fire policy there may be an option to spend the money in rebuilding the premises, but that does not alter the fact that the only liability of the insurance company is to pay money. The contract, therefore, is a contract with regard to the payment of money, and it is a contract made between two persons, and two persons, only, as a contact.” [7]

Poh Chu Chai writes:

“A contract of insurance constitutes a highly personal contract and as a general rule, such a contract is generally not assignable.” [8]

The insurer fixes the premium after considering the particular risks associated with the property and handling of the property in the hands of the insured. As such, as a general rule, an insurance policy is not casually assignable to another party. Nevertheless, assignments are not an unheard of option in an insurance transaction.

Before embarking on the discovery of how assignments in insurance law can be legally effected, it may prove beneficial to consider the nature of what is meant by this phrase which takes centre stage in this discussion, an ‘assignment’.

R. C. Kohli explains:

“Transfer of interest from one to another is called assignment. In insurance also when rights and obligation under the contract are transferred from one to another, the same is called assignment of the policy. There can be another assignment in insurance which is assignment of benefits under the policies. Assignment of policy and assignment of benefits are quite distinct. Whereas in the former all the rights and obligations are transferred, in the latter only benefits (i.e. money due under the policy etc) are transferred. In insurance the assignment means assignment of rights under the contract. An assignee for all purposes becomes the owner of the policy and enjoys all rights thereunder. However, by assignment no change is made in the subject matter insured by the policy and it remains unaltered.” [9]

David Norwood and John P. Weir writes:

“There is no special form of assignment document, no magic words which must be used to create a valid and effective legal assignment. As was expressed in one case [10] : ‘[An assignment] ... may be addressed to the debtor. It may be couched in the language of command, It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is clear.’

The only important point is that the instrument recording the assignment must make it clear that one party with a contractual right against another party is transferring their right of enforcement of the obligations of the contract to another person.” [11]

Malcolm A. Clarke writes :

“Assignment must have been intended. Intention is ascertained by the substance rather than the form of what is said or done.” [12]

2. Application of English Law

Another introductory matter which must be considered in this discussion is the source of law in the insurance arena in Malaysia.

The governing statute in Malaysia in the field of insurance law is the Insurance Act 1996 [13] . This Act, however, does not seem to mention the issue of assigning insurance policies. As such, the provisions of the Civil Law Act 1956 [14] may be referred to in order to provide valuable guidance on the matter.

Section 3 of the Civil Law Act 1956 provides:

“Save so far as other provision has been made or may hereafter be made by any written law in force in Malaysia, the Court shall -

(a) in West Malaysia or any part thereof, apply the common law of England and the rules of equity as administered in England on the 7 th day of April, 1956;...

Provided always that the said common law, rules of equity and statutes of general application shall be applied so far only as the circumstances of the States of Malaysia and their respective inhabitants permit and subject to such qualifications as local circumstances render necessary.”

Section 5(1) of the Civil Law Act 1956 makes particular reference to life and fire insurance. This section provides that :

“In all questions or issues which arise or which have to be decided in the States of West Malaysia ... with respect to the law of ... marine insurance, average, life and fire insurance ... the law to be administered shall be the same as would be administered in England in the like case at the date of the coming into force of this Act [15] , if such question or issue had arisen or had to be decided in England, unless in any case other provision is or shall be made by any written law.”

With the aid of these provisions, English law has often been referred to for guidance in resolving legal dilemmas in the field of insurance law and since the Malaysian Act on point does not seem to have covered the matter of the assignment of insurance policies, as will be discussed below, many academicians and Malaysian judges have relied on the principles enunciated in the English courts and Parliament on this matter.

2.2 Policies of Assurance Act 1867

There is one particular dilemma highlighted by Nik Ramlah Mahmood with regard to the applicability of the Policies of Assurance Act 1867 [16] of England with regard to the legal assignment of life policies. As this author explains :

“In England, a life policy can be legally assigned in accordance with the Policies of Assurance Act 1867 which deals specifically with such assignment or in accordance with section 136 of the Law of Property Act 1925 [17] which deals with the assignment of a chose in action. [18] ...

As there is no parallel local statute, the Policies of Assurance Act 1867 (UK) is assumed to be applicable in Malaysia and is generally regarded as the only basis for legal assignment of a life policy. The validity of this assumption, however, is questionable. There is in Malaysia a provision similar to section 136 of the Law of Property Act 1925 (UK). This is section 4(3) of the Civil Law Act 1956 which provides for the absolute assignment of a chose in action. The existence of this provision can have two possible effects on the law relating to legal assignment of life policies in Malaysia.

One possible effect is that contrary to popular belief and practice, the Policies of Assurance Act 1867 (UK) is in fact inapplicable in Malaysia. According to section 5 of the Civil Law Act 1856, an English Act like the 1867 Act can only be applied if there are no local statutory provisions on the related issue. As the assignment of a life policy is in fact the assignment of a chose in action and there is a local provision on this, there seems to be no valid justification for applying the Policies of Assurance Act 1867 in Malaysia.

The other possible effect is that there are, in Malaysia as in England, two different statutory provisions relating to the assignment of life policies, one under the Policies of Assurance Act 1867 (UK) and the other under the Civil Law Act 1956. As the Civil Law Act provision deals with the assignment of a chose in action generally, its existence should not prevent the application of an English statute which deals specifically with the assignment of life policies.

While a finding by a Malaysian court in favour of the first possible interpretation may alarm those in the insurance industry who have always regarded the Policies of Assurance Act 1867 of England to be the sole basis for the legal assignment of a life policy, such a finding may in the long term bring the practices of the industry in Malaysia in line with those in England where such assignments are now more commonly done under the Law of Property Act than under the Policies of Assurance Act.” [19]

There is no statute in Malaysia that deals exclusively with the area of marine insurance. As such, as Salleh Abas C.J. clarified in The “Melanie” United Oriental Assurance Sdn. Bhd. Kuantan v. W.M. Mazzarol [20] :

“... we must refer to ... the Marine Insurance Act 1906 of the United Kingdom. This Act is made applicable to Malaysia as part of our law by virtue of section 5(1) [21] of our Civil Law Act 1956.” [22]

The Marine Insurance Act 1906 [23] contains a few sections dealing with the concept of assignment in marine insurance. Section 50 of this Act states :

“(1) A marine policy is assignable unless it contains terms expressly prohibiting assignment. It may be assigned either before or after loss.

(2) Where a marine policy has been assigned so as to pass the beneficial interest in such policy, the assignee of the policy is entitled to sue thereon in his own name; and the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of the person by or on behalf of whom the policy was effected.

(3) A marine policy may be assigned by indorsement thereon or in other customary manner.” [24]

Section 51 of this Act reads :

“Where the assured has parted with or lost his interest in the subject-matter insured, and has not, before or at the time of so doing, expressly or impliedly agreed to assign the policy, any subsequent assignment of the policy is inoperative.

Provided that nothing in this section affects the assignment of a policy after loss.” [25]

In Colinvaux’s Law of Insurance , section 51 of this Act is explained as having the effect such that :

“This rule is an obvious corollary of insurable interest: if the assignor loses insurable interest, the policy lapses and there is thus nothing to assign. In the converse case, where the assured assigns the policy without assigning the subject-matter, the assignee has no insurable interest and is thus unable to sue on the policy.” [26]

Section 15 of this Act provides :

“Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there can be an express or implied agreement with the assignee to that effect.

But the provisions of this section do not affect a transmission of interest by operation of law.” [27]

In the book, Macgillivray & Parkington on Insurance Law - relating to all risks other than marine [28] , the position when the subject-matter insured is assigned is summarised as :

“If the assured voluntarily parts with all his interest in the subject-matter of the insurance policy, the policy lapses since the assured no longer has any insurable interest and can have suffered no loss [29] . The assignment must, however, be complete [30] and if the assured retains any insurable interest he will be able to recover under the policy; thus, if he enters into a contract to convey the subject-matter and the subject-matter is lost or damaged, the assured can still recover even though the risk has passed to the purchaser [31] ; until the vendor is paid he cannot be certain of receiving the purchase price and it is in effect this risk which, in such a case, is the subject of insurance. [32] The policy will probably remain in force ever after conveyance if the purchase price has not been paid, provided that the vendor has not parted with his lien. The lien will ensure that the assured still has an insurable interest. [33] An assured who enters into a contract of sale will often agree to transfer the insurance policy and, if he effectively does so, the transferee will be able to recover under it.”

Digby C. Jess writes:

“Property and liability insurances are personal contracts, and do not run with the property if it is sold or otherwise disposed of or with a transfer of liabilities of the insured. Therefore, both at common law and equity, as assignment of a policy of insurance can only be valid of the insurer consents to this course, whereby, in truth a new contract of insurance is effected between the assignee and the insurer, and that between the assignor (the original insured) and the insurer lapses.” [34]

In The North of England Pure Oil-Cake Company v The Archangel Maritime Insurance Company, [35] a firm insured a cargo of linseed to be transported by sea. The policy was to cover every stage of the voyage as if each stage of the voyage were separately insured and the policy of insurance was expressed to be for the benefit of the firm and the assignees. During the voyage, the firm sold the cargo. Part of the cargo was sunk due to perils within the terms of the policy. Later, the firm assigned the policy to the purchasers of the linseed.

Cockburn C.J. in this case held :

“We are agreed on one point, which entitles the defendants to judgment, viz. that, the policy not having been assigned until after the interest of the assignors had ceased, an effective assignment was impossible.” [36]

In Sadler’s Company and Badcock, [37] a lessee of a house insured the house from fire. After the lessee’s lease expired but while the insurance policy was still in effect, the house burnt down. Following the destruction of the house, the lessee assigned the policy to the landlords. The landlords then attempted to claim the benefit of the policy from the insurance company.

The Lord Chancellor in this case decided that a policyholder could not assign a policy at a point in time when the policyholder does not have any interest in the insured property. The lessee in this case was not able to assign the policy since at the time the lessee purported to assign the policy the lessee had no longer any interest in the house. In the words of the judge :

“And I am of opinion that the party insured ought to have a property in the thing insured at the time of the insurance made, and at the time of the loss by fire, or he cannot be relieved. Mrs. Strode [the lessee] had no property at the time of the fire, consequently no loss to her; and if she had no interest, nothing could pass to the plaintiffs [landlords] by assignment. ...

If the insured was not to have a property at the time of the insurance or loss, any one might insure another’s house, which might have a bad tendency to burning houses. Insuring the thing from damage is not the meaning of the policy, it must mean insuring Mrs. Strode from damage, and she has suffered none.” [38]

In The Ecclesiastical Commissioners for England v The Royal Exchange Assurance Corporation, [39] one ecclesiastical body sold a farm that was covered by a fire insurance policy to another ecclesiastical body. At the time of the sale, no mention was made about the assignment of the policy. After the sale, the farm burnt down and the purchaser seeks to claim on the policy.

The insurance company argues that there was no valid assignment of the policy and as such, the insurance company is not liable to the seller since the seller had no interest in the insured property and thus have no insurable interest at the time of the accident nor the purchaser since the policy has not been validly assigned to the purchaser. Charles J. in this case agreed with the arguments of the insurance company and held:

“The whole transaction was complete. Can anybody sue? The Commissioners [seller] cannot sue because there has been no assignment of the policy to them. ... In this case the vendors have conveyed away their property and received their consideration ... I must therefore give judgment for the defendants [insurance company], with costs.” [40]

In Collinridge v The Royal Exchange Assurance Corporation, [41] a company which owned a number of buildings insured the same against fire. These buildings were indeed destroyed by fire. However, before the fire took place, these buildings were in the process of being acquired by the Metropolitan Board of Works. There was no mention of an accompanying assignment of the fire insurance policy. The Board had yet to make payments for the conveyance. The insurance company disputes liability.

Mellor J. in this case held:

“It appears that the plaintiff at the time of the fire was in the position of unpaid vendor, and had possession of his premises. Under these circumstances, I think there is nothing to prevent him from bringing an action to recover the amount which he has insured.” [42]

Lush J. in this case concurred :

“The plaintiff is in the position of a person who has entered into a contract to sell his property to another. ... The contract will no doubt be completed, but legally the buildings are still his property. The defendants [insurance company] by their policy undertook to make good any loss or damage to the property by fire. There is nothing to shew that any collateral dealings with the premises, such as those stated in this case, are to limit his liability. If the plaintiff had actually conveyed them away before the fire, that would have been a defence to the action, for he would have then have had no interest at the time of the loss. But in the present case he still has a right to the possession of his property, and the defendants are bound to pay him the insurance money ...” [43]

In Rayner v Preston, [44] a set of buildings covered by a fire insurance policy were contracted to be sold. After the date the contract was signed but before the contract was completed, the buildings were damaged by fire. The contract contained no mention of the fire insurance policy. The insurance company made payments to the seller of the buildings. The purchaser seeks to claim this money or to compel the seller to apply the money received towards making repairs to the buildings.

The first argument proposed by the purchaser was that although the contract made no specific mention of the insurance policy, the contract gave the purchaser a right to all contracts related to the buildings. Cotton L.J. in this case was not in support of this contention and held :

“The contact passes all things belonging to the vendors appurtenant to or necessarily connected with the use and enjoyment of the property mentioned in the contract, but not, in my opinion, collateral contracts; and such, in my opinion, ... the policy of insurance is. It is not a contract limiting or affecting the interest of the vendors in the property sold, of affecting their right to enforce the contract of sale, for it is conceded that, if there were no insurance and the buildings sold were burnt, the contract for sale would be enforced. It is not even a contract in the event of a fire to repair the buildings, but a contract in that event to pay the vendors a sum of money which, if received by them, they may apply in any way they think fit. It is a contract, not to repair the damage to the buildings, but to pay a sum not exceeding the sum insured or the money value of the injury. In my opinion, the contract of insurance is not of such a nature as to pass without apt words under a contract for sale of the thing insured.” [45]

The next argument proposed by the purchaser was that between the time of the contract being made and the conveyance being completed, the seller was a trustee of the property for the purchaser and as such, the seller is a trustee for the purchaser with regard to the money received for the property during this period of trusteeship. This argument did not find favour with the court either and Cotton L.J. held:

“An unpaid vendor is a trustee in a qualified sense only, and is so only because he has made a contact which a Court of Equity will give effect to by transferring the property sold to the purchaser, and so far as he is a trustee he is so only in respect of the property contracted to be sold. Of this the policy is not a part. A vendor is in no way a trustee for the purchaser of rents accruing before the time fixed for completion, and here the fire occurred and the right to recover the money accrued before the day fixed for completion. The argument that the money is received in respect of the property which is trust property is, in my opinion, fallacious.” [46]

Brett L.J. in this case concurred :

“... I venture to say that I doubt whether it is a true description of the relation between the parties to say that from the time of the making of the contract, or at any time, one is ever trustee for the other. They are only parties to a contract of sale and purchase of which a Court of Equity will under certain circumstances decree a specific performance. But even if the vendor was a trustee for the vendee, it does not seem to me at all to follow that anything under the contract of insurance would pass. As I have said, the contract of insurance is a mere personal contact for the payment of money. It is not a contract which runs with the land. If it were, there ought to be a decree that upon completion of the purchaser the policy be handed over. But that is not the law. The contract of insurance does not run with the land; it is a mere personal contract, and unless it is assigned no suit or action can be maintained upon it except between the original parties to it... [47]

“I therefore, with deference, think that the Plaintiffs here [purchaser] cannot recover from the Defendant [seller], on the ground that there was no relation of any kind or sort between the Plaintiff and the Defendant with regard to the policy, and therefore none with regard to any money received under the policy.” [48]

James L.J. in this case gave a dissenting judgment on this point and held that :

“... the relation between the vendor and the purchaser became, and was in law, as from the date of the contract and up to the completion of it, the relation of trustee and cestui que trust , and that the trustee received the insurance money by reason of and as the actual amount of the damage done to the trust property.” [49]

In Castellain v Preston and Others, [50] the defendants owned a piece of land and buildings which were covered by a fire insurance policy. The defendants entered into negotiations to sell the premises to their tenants. In the midst of these negotiations, a fire broke out which damaged a part of the buildings. By the time of the fire the contract of sale was signed, a deposit was paid but the contract was not completely performed as yet. The insurance company made payments to the defendants on the insurance policy for the fire. The tenants paid the full purchase price and proceeded with the slae despite the fire. The insurance company brings the present action.

Brett L.J. commented on the foundation of insurance law :

“The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.” [51]

Cotton L.J. added :

“The policy is really a contract to indemnify the person insured for the loss which he has sustained in consequence of the peril insured against which has happened, and from that it follows, of course, that as it is only a contract of indemnity, it is only to pay that loss which the assured may have sustained by reason of the fire which has occurred. In order to ascertain what that loss is, everything must be taken into account which is received by and comes to the hand of the assured, and which diminishes the loss. It is only the amount of the loss, when it is considered as a contract of indemnity, which is to be paid after taking into account and estimating those benefits or sums of money which the assured may have received in diminution of the loss... [52]

Therefore the conclusion at which I have arrived is, that if the purchase-money has been paid in full, the insurance office will get back that which they have paid, on the ground that the subsequent payment of the price which had been before agreed upon, and the contract for payment of which was existing at the time, must be brought into account by the assured, because it diminishes the loss against which the insurance office merely undertook to indemnify them [53] .”

Mahinder Singh Sidhu observes :

“An assignment of the policy means a ‘change of interest’ i.e., somebody else is substituted for the original insured in the motor insurance contract. All motor policies can be validly assigned but the insurer’s prior consent is essential.” [54]

Mahinder Singh Sidhu also writes :

“A motor insurance contract is always personal in the sense that some human element is inevitably involved, and in a technical sense, the insurer’s decision to enter on the contract depends on the personal qualities of the insured and the insurer’s confidence in him. The insurers have the right to question and investigate the proposed insured and vary the terms of the contract. If an assignment takes place it is termed as a “novation”, since the assignment virtually creates a new contract with the assignee.

A valid assignment gives the assignee the right to sue and gives the insurance company a good legal discharge without the necessity of joining the assignor. Where there is a conditional sale of a car to the new purchaser, the ownership of the car still remains with the insured, and does not amount to any transfer of his insurable interest. But where there has been a complete sale and transfer of the vehicle and handing over of the policy documents to the purchaser, it does not create a valid assignment, though there is a transfer of interest of the subject matter of the insurance. The transfer of the insurable interest causes the policy to lapse, and the purchaser has no insurance cover if he drives the car and meets with an accident.” [55]

In Peters v General Accident Fire & Life Assurance Corporation Ltd. [56] , the owner of a motor van sold the vehicle to another person and purportedly assigned the motor insurance policy for the van to the purchaser. After the sale, the purchaser was involved in an accident and attempted to make a claim to the insurance company based on the motor insurance policy purportedly assigned. The insurance company disputed the purchaser’s right to claim under the insurance policy issued to the seller of the van.

Sir Wilfred Greene M.R. in this case decided that:

“Assuming in his favour that there was an intention to assign the policy, the fundamental remains : Is this policy one which is capable of assignment? The judge held that it was not, and I am in entire agreement with that.” [57]

The effect of the motor insurance policy was that the insurance company undertook to indemnify the policyholder in the case of an accident while the car was driven by the policyholder or anyone else driving the vehicle with the policyholder’s consent or permission.

Sir Wilfred Greene M.R. explained the effect of deciding that such a policy was assignable:

“It appears to me as plain as anything can be that a contract of this kind is in its very nature not assignable. The effect of the assignment, if it were possible to assign, was ... that, from and after the assignment, the name of Mr. Pope, the assignee [the purchaser], would have taken the place of that of Mr. Coomber [the seller] in the policy, and the policy would have to be read as though Mr. Pope’s name were mentioned instead of Mr. Coomber’s. In other words, the effect of the assignment would be to impose upon the insurance company an obligation to indemnify a new assured, or persons ordered or permitted to drive by that new assured. That appears to be altering in toto the character of the risk under a policy of this kind. The risk that A.B. is going to incur liability by driving his motor car, or that persons authorised by A.B. are going to cause injury by driving his motor car, is one thing. The risk that C.D. will incur liability by driving a motor car, or that persons authorised by C.D. will incur liability through driving a motor car, is, or may be, a totally different thing.” [58]

One reason given by Sir Wilfred Greene M.R. for deciding that an insurance policy of this kind was not capable of assignment was that :

“The insurance company in this case, as in every case, make inquiries as to the driving record of the person proposing to take out a policy of insurance with them. The business reasons for that are obvious, because a man with a good record will be received at an ordinary rate of premium and a man with a bad record may not be received at all, or may be asked to pay a higher premium. The policy is, in a very true sense, one in which there is inherent a personal element of such a character as to make it, in my opinion, quite impossible to say that the policy is one assignable at the volition of the assured.” [59]

The second reason given by the judge as the basis of his judgement was that the according to the Road Traffic Act 1930 [60] in the United Kingdom, it is unlawful for anyone to use a motor vehicle or permit anyone else to use the motor vehicle unless that user or other person permitted by the user is covered by a motor insurance policy for the use of the motor vehicle. [61] Additionally under the statute, if a judgment is obtained in respect of a liability covered by the policy against any person insured by the policy, then the insurance company is generally liable to make the required payment to the person who has the benefit of the judgment. [62]

The purchaser of the car in this case argued that he was driving the car with the permission of the policyholder [63] and as such, should receive the same benefit of coverage in terms of the insurance policy. Based on this rationale, the purchaser argued that since judgment was obtained against him in respect of the accident and since he was covered by the policy, the insurance company should be liable under the judgment and make payments to the party who obtained the judgment. The court, however, held that :

“At the date when the accident took place, the entire property in this car was vested in Pope [the purchaser]. He had bought the car. On the sale of the car, the property passed to him ... The property, therefore, passed to the purchaser long before this accident took place. The circumstance that he had not paid the whole of the purchase price is irrelevant for that purpose, because that circumstance does not leave in the vendor, Mr. Coomber, any interest in the car. There is no vendor’s lien, or anything of that sort. The car had become the out-and-out property of Pope. When Pope was using that car, he was not using it by the permission of Coomber [the seller]. It is an entire misuse of language to say that. He was using it as owner, and by virtue of his rights as owner, and not by virtue of any permission of Coomber.” [64]

In Smith v Ralph, [65] the scenario was basically the same as above, namely, that the purchaser of a motor vehicle again tried to claim the coverage of the insurance policy issued to the seller of the motor vehicle on the basis that the purchaser was driving the motor vehicle with the permission or consent of the policyholder.

Lord Parker of Waddington C.J. in this case similarly held that the purchaser was not covered by the policy as the policyholder could not assign any rights in the policy when he no longer had any interest in the vehicle covered by the policy. In the words of the judge :

“Any permission or authority given by the policyholder ... could not extend beyond the time when he ceased to be a policyholder in the sense of having any insurable interest.” [66]

In Nanyang Insurance Co. Ltd. v. Salbiah & Anor, [67] a car was bought on behalf of a company. The company then entered into negotiations to sell the car to the purchaser. The terms of the proposed sale in the written contract included the obligation of the purchaser to make an initial payment and thereafter to continue paying for the car in instalments. The parties varied this term by oral agreement when the purchaser did not make this initial payment in full by allowing him to make this initial payment in instalments. The car was involved in an accident and judgment was obtained against the driver of the car who was the purchaser. The insurance company disputed liability for the claim against them to honour the judgment obtained as they argued that the seller of the car no longer had any insured interest with the proposed sale of the car and as such, the insurance policy has lapsed.

Azmi C.J. in this case held:

“It is therefore quite clear in my view from the evidence, that the company intended to retain the property in the car until Abdul Karim [the purchaser] has paid in full the initial payment of $1,000 under the D.6 [the contract] when he could execute a hire-purchase agreement with a financial company. ...

For the above reason, I would therefore with respect, agree with the finding of the trial judge that the appellants [seller] had an insurable interest in the car on the date of the accident and the car was being driven by Abdul Karim with the permission of the insured.” [68]

In People’s Insurance Co. of Malaya Ltd. v Ho Ah Kum & Anor, [69] the driver of a van was sued by the estate of a deceased who was killed in an accident due to the negligent driving of this driver. The estate of the deceased obtained judgment against the driver of the van. The driver, it was alleged, was driving the van with the permission of the owner of the van who had an insurance policy on the van. The question that arose in this case was whether the driver was so driving with the permission of the owner or whether the owner of the van had sold the van to the driver and as such parted with possession of the van before the date of the accident.

The driver was actually an employee of the owner of the van who at the time of the accident was using returning from a delivery made on behalf of the employer in the course of his employment. The evidence showed that the owner told the driver that the ownership of the van would not be transferred unless and until the driver made full payment of the purchase price. The owner was aware that the reason the driver bought the van was to use the van in making these deliveries.

Wee Chong Jin C.J. in this case held on the facts that:

“In any event, having regard to the relationship between Foo [driver] and Yeo [owner] throughout the material times; to the purpose for which Foo agreed to purchase from Yeo the motor van; and most important of all to the uncontradicted evidence of Foo that when the accident occurred he was returning after delivering Yeo’s flour and there being no evidence to the contrary, I take the view that there is sufficient evidence on the record for me to find and I do find that at the time of the accident Foo was driving the van on the order of the insured.” [70]

In Tattersall v. Drysdale, [71] the driver of a car was involved in an accident and judgment was obtained against him. The driver had an insurance policy with the London & Edinburgh Insurance Company for a Standard Swallow Saloon car. This Standard car was sold to a company who was in turn selling the driver a Riley Saloon car belonging to the director of this company which was under a Lloyd’s Eclipse insurance Policy. The driver was in the process of having his insurance company, the London & Edinburgh Insurance Company, cover the Riley car and no longer cover the Standard car. However, this change was not made before the accident as yet. The question that arose was which insurance company was liable for the accident.

Goddard J. in this case held :

“As to the question of permission, I am clearly of opinion that he was driving with Gilling’s [the director of the company the Riley car was bought from] permission. ... The truth is that no bargain about insurance was ever made. Gilling, on handing over his car after the bargain had been made, wished the plaintiff [driver] to insure it and he was willing to do so, but he was allowed to drive it as he wished ...” [72]

Both insurance policies contained a clause that coverage is extended to indemnify a person driving the insured car with the assured’s permission provided that the driver is not entitled to indemnity under any other insurance policy. The next question that arose, as such, was whether the Riley car was covered by the insurance policy of the driver. The judge held that it did not. This insurance policy was stated to cover the Standard car which had been sold. The Riley car was not entered on this policy. The coverage was extended to the situation when the assured drove another car temporarily but it is the car stated in the policy which is the subject of the insurance. As such, this insurance policy in the name of the driver lapsed when the car the insurance policy was stated to cover, namely the Standard car, was sold.

The driver held to be driving the Riley car with the permission of the assured, namely the director of the company who owned this car with an insurance policy, the judge went on to direct that the insurance company of the director, namely, the Lloyd’s Eclipse insurance Policy, through the extension clause discussed above, covered the driver of the Riley car and as such, was liable on the judgment obtained for the accident.

In Roslan bin Abdullah v. New Zealand Insurance Co. Ltd, [73] there was a collision between 2 trucks. Judgment was obtained and the appellant then sought to claim against the insurance company who had issued an insurance policy on the respondent’s truck. The insurance company disputed liability as the judgment obtained was not entered against the assured as the assured was the previous owner of the truck and not the current owner, the respondent company.

Wan Suleiman F.J. [74] in this case, with regard to whether there was any assignment or novation of the insurance policy from the previous owner to the new owner, affirmed the following principles from the judgment of Goddard J. in Peters v General Accident Fire & Life Assurance Corporation Ltd. [75]

Goddard J. (as he then was) held:

(a) when the vendor sold the car, the insurance policy automatically lapsed.

(b) at the time of the accident, the purchaser could not be said to be driving the car by the order or with the permission of the vendor, as the car was then the purchaser’s property.

(c) the insured is not entitled to assign his policy to a third party. An insurance policy is a contract of personal indemnity, and the insurer cannot be compelled to accept responsibility in respect of a third party who may be quite unknown to them.” [76]

Wan Suleiman F.J., with regard to whether the driver, as an employee of the current owner of the truck was driving with the permission of the previous owner of the truck, held :

“We are informed by counsel for the appellant that Wee & Wee Realty Sdn. Bhd. [the previous owner of the truck] and United Malaysia Co. Ltd. [the current owner of the truck] the second defendant in C.S. K.124/76 are sister companies. Be that as it may they are distinct entities. The respondents were no longer the owners of the truck and therefore there cannot be any question of them ordering or permitting the first defendant [employee of the current owner of the truck] in C.S. K.124/76 to drive it.” [77]

S. Santhana Dass writes :

“Life insurance seeks to reduce the financial uncertainties arising from the natural contingencies in old age and death and to ease the burden in the case of possible misfortunes - injury and sickness. The principal function of life insurance business is to furnish protection against the financial needs which may be caused by disability and death. It provides food, shelter and clothing, when illness, injury or death cuts off the income of the breadwinner.” [78]

In the book, Colinvaux’s Law of Insurance , it is written:

“Life policies are to be considered something more than a contract. They are treated as securities for money payable at an uncertain but future date which is bound to occur.” [79]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus writes :

“A practical definition might be that a life assurance contract is one whereby one party (the insurer) undertakes for a consideration (the premium) to pay money (the sum assured) to or for the benefit of the other party (the assured) upon the happening of a specified event, where the object of the assured is to provide a sum for himself or others at some future date, or for others in the event of his death.” [80]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus also write with regard to the assignment of life policies that :

“An assignment of a life policy is a document or action which is effective to transfer the ownership of the policy from one person to another. Assignments may be made for a variety of reasons, including:

- Sale of exchange;

- Gift or voluntary transfer;

- Settlement, transferring the policy to trustees to give effect to successive or contingent interests;

- Transfer to existing trustees of a settlement or to beneficiaries in pursuance of the trusts;

- Mortgage; transfer of mortgage; or reassignment on repayment;or

- Assignment to a trustee for the benefit of creditors.” [81]

Nik Ramlah Mahmood writes:

“In relation to life insurance, an assignment means the transfer of one’s interest in the policy to another. Such an assignment commonly happens when an insured under an own life policy uses the policy, which is a valuable piece of property, as security for a loan and assigns it to the creditor. This usually takes the form of a conditional assignment whereby the policy would be reassigned to the insured once he has paid all his debts. Banks and other credit-giving institutions which lend huge sums of money to individuals normally insist that the borrower takes out a policy on his life and assigns it to them as security for the loan.

A life policy can also be unconditionally or absolutely assigned either as a gift or under a contract of sale. Such an assignment is absolute and does not leave any residual rights with the assignor.” [82]

In Dalby v. The India and London Life-Assurance Company, [83] the Anchor Life-Assurance Company insured the life of his late Royal Highness, the Duke of Cambridge. This policy was effected by Wright on behalf of the company.

Parke B. stated in this case:

“The contract commonly called life-assurance, when properly considered, is a mere contract to pay a certain sum of money on the death of a person, in consideration of the due payment of a certain annuity for his life, - the amount of the annuity being calculated, in the first instance, according to the probable duration of the life; and when once fixed, it is constant and invariable. The stipulated amount of annuity is to be uniformly paid on one side, and the sum to be paid in the event of death is always (except when bonuses have been given by prosperous offices) the same, on the other. This species of insurance in no way resembles a contract of indemnity.

Policies of assurance against fire ands against marine risks, are both properly contracts of indemnity, - the insurer engaging to make good, within certain limited amounts, the losses sustained by the assured in their buildings, ships, and effects... [84]

... a contract of indemnity only. But that is not of the nature of what is termed an assurance for life; it really is what it is on the fact of it, - a contract to pay a certain sum in the event of death [85] .”

S. Santhana Dass points out that:

“An assignee under a life insurance contract can re-assign the policy to the original owner.” [86]

The Policies of Assurance Act 1867 [87] defines a life insurance policy as “... ‘any instrument by which the payment of moneys, by or out of the funds of an assurance company, on the happening of any contingency depending on the duration of human life, is assured or secured’. [88] ”

The Policies of Assurance Act 1867 provides that an assignee can sue in his own name if [89] :

(i) the assignee has the right in equity to receive and the right to give a valid discharge to the assurance company for the policy money, that is, it was a precondition that the assignee be beneficially entitled to the policy money or entitled to receive the policy money as a trustee or mortgagee at the time of the claim;

(ii) the assignee has obtained an assignment, either by endorsement on the policy or by separate instrument, in the words or to the effect set forth in the Schedule to this Act; and

(iii) written notice of the assignment had been given to the insurance company.

Cotton L.J. in the case In re Turcan [90] commented :

“Before the Act of 1867 [91] (30 & 31 Vict. C. 144) a policy could not be assigned at law, but now it can ...” [92]

Section 4(3) of the Civil Law Act 1956 [93] states :

“Any absolute assignment, by writing, under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, shall be, and be deemed to have been, effectual in law, subject to all equities which would have been entitled to priority over the right of the assignee under the law as it existed in the State before the date of the coming into force of this Act [94] , to pass and transfer the legal right to the debt or chose in action, from the date of the notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor.”

S. Santhana Dass has summarised the requirements under section 4(3) of the Civil Law Act 1956 in order to effect a legal assignment of a life insurance policy as follows :

“The requirements for an absolute assignment of a life policy are as follows:-

(a) the assignment must be in writing and signed by the assignor (the insured);

(b) it must be absolute and not by way of charge only; and

(c) notice in writing of the assignment must be given to the insurer.” [95]

S. Santhana Dass goes on to explain:

“The common practice amongst insurers with respect to assignments (be it under the Section 4(3) of the Civil Law Act 1956 or the Policies of Assurance Act 1867 (U.K.) can be summarised as follows:-

(i) An assignment should be in writing and a life policy can be assigned absolutely or conditionally.

(ii) The written notice of assignment must be sent to the Head Office or the Principal Office of the insurer.

(iii) Upon receipt of the assignment notice the insurer registers each notice.

(iv) If there is no written notice given to the insurer and the insurer has made payment to a person other than the assignee, the insurers shall not be liable to the assignee thereafter. The assignee cannot sue the insurer for recovery of any benefit under the policy unless a notice of assignment has been sent to the insurer.

(v) An assignment can be done by effecting an endorsement and attaching it to the back of the policy. Otherwise it is effected by a separate deed signed by all parties concerned i.e. the assignor, assignee and the insurer.

(vi) If there is more than one assignment, the priority of claims by the assignor will depend upon the priority in the date of receipt of the notice by the insurer. Thus position has now been altered by Section 168(2) of the Insurance Act 1996 where priority is based on the date of the assignment rather than date of the notice.” [96]

Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus writes:

“Where there has not been a legal assignment but the assignee has given consideration , equity will (subject to the riles on priority) assist him to perfect his title against third parties, even though he may not have obtained formal assignment.

If, however, a voluntary assignee seeks the support of equity, he will succeed only where:

(1) the assignment is complete between assignor and assignee, ie everything necessary has been done to make a present transfer and render the assignment binding; or

(2) the assignor has constituted himself as trustee for the assignee.” [97]

Roy Hodgin writes :

“Assignment can be made in equity ... commonly, under the Policies of Assurance Act 1867, which requires that notice of such assignment be given in writing to the insurer. Under the 1867 Act, the assignment may be made either by an endorsement on the policy or by a separate document using the wording set out in the Schedule to the Act.” [98]

Cohen L.J. in Inland Revenue Commissioners v. Electric and Musical Industries, Ltd. [99] explained :

“It is quite true that as a matter of law there is no special form required to constitute an equitable assignment. Whether or not what has been done in any particular transaction amounts to an equitable assignment is a matter of inference from the facts and documents concerned ...” [100]

“There is no specific method of effecting an equitable assignment of a life policy. The only important requirement is that there must be a clear indication that the object of the transaction is to transfer the benefits in the policy from one party to another. No written document is necessary. A common way of effecting an equitable assignment is by the assignor depositing the policy of insurance with the assignee. An equitable assignee cannot enforce his rights directly against the insurer in his own name, he must either compel the assignor to sue on his behalf or sue the assignor and join the insurer to the action. The equitable assignee is thus not in a position to give a legal disharge to the insurer.” [101]

Tan Lee Meng writes:

“For the assignor to claim under the policy, the assignment must be complete.” [102]

In the case In re Williams [103] , an owner of an insurance policy paid the insurance premiums until his death. The court had to construe a purported assignment of the policy to his housekeeper through the following signed endorsement:

“’I authorise Ada Maud Ball, my housekeeper and no other person to draw this insurance in the event of my predeceasing her this being my sole desire and intention at time of taking this policy out and this is my signature.’” [104]

Lord Cozens-Hardy M.R. held:

“According to my construction it is not an assignment at all. The question whether in the circumstances there is a voluntary gift always involves the consideration not whether the donor might have given the property, but what is the form in which he has purported to give it. Take the case of shares in a limited company which are only transferable by deed, or the case of Consols which are only transferable at the Bank of England; it is quite clear that a mere letter not under seal in either of these cases purporting to assign the property would not have been complete, the donor would not have done all he could to perfect it, and the intended gift would have failed. Of course if there had been valuable consideration for the assignment the position would have been different.” [105]

Warrington L.J. in this case agreed:

“The assignee in the present case is a volunteer, and she claims to have received in the assignor’s lifetime the gift of a certain chose in action, namely, a policy of insurance, the amount secured by which is in its nature only to be paid on the death of the assured. It is a policy on the assignor’s own life. Claiming as she does as a volunteer and alleging that the assignor made this gift to her, she can only succeed if she can show that the assignor did everything which according to the nature of the property comprised in the assignment was necessary to be done in order to transfer the property and render the assignment binding upon him. ...

The question turns largely if not entirely on the construction of the document. Of course the mere form of words is immaterial if the assignor has used any form of words which expressed a final and settled intention to transfer the property to the assignee there and then. That would be sufficient. He need not use the word “give” or “assign” or any particular words.” [106]

Warrington L.J. construed the words of the endorsement and came to the conclusion that it merely created a revocable authority to receive the policy money after the assignor’s death which was a nullity as the authority would be revoked by the assignor’s death [107] . Lord Cozens-Hardy M.R. similarly construed the endorsement as either a mere: [108]

• power of attorney, though not under seal, authorising the person named to receive the money which power becomes inoperative on the death of the person conferring it; or

• mandate which ceased to be operative at death.

In Newman v. Newman, [109] section 3 of the Policies of Assurance Act 1867 was construed. This section states:

“No assignment made after the passing of this Act of a policy of life assurance shall confer on the assignee therein named, his executors, administrators, or assigns, any right to sue for the amount of such policy, or the moneys assured or secured thereby, until a written notice of the date and purport of such assignment has been given to the assurance company liable under such policy at its principal place of business for the time being; and the date on which such notice was received shall regulate the priority of all claims under any assignment; and a payment bona fide made in respect of any policy by any assurance company before the date on which such notice was received shall be as valid against the assignee giving such notice as if this Act had not been passed.” [110]

North J. in this case interpreted this section in the following manner:

“That Act was passed in order to avoid the necessity of joining the assignor of the policy in actions against the insurance office, and it provides that if a certain notice is given to the office then the assignee may sue without joining the assignor. Then these words occur ‘And the date on which such notice shall be received shall regulate the priority of all claims under any assignment.’ It was contended that these words went much further than was necessary for the protection of the insurance office, and affected the rights of the parties inter se . ... In my opinion that is not the meaning of the statute, which was not intended to give a simpler remedy against an insurance office, and also to give facilities to insurance offices in settling claims by enabling them to recognise as the first claim the claim of the person who first gave such notice as required by the statute. It was not intended in my opinion to enact that a person who had advanced money upon a second charge without notice of the first, and made subject to it, should be giving statutory notice of the office exclude the person who had the prior incumbrance.” [111]

In Spencer v. Clarke [112] , a life insurance policy was used as security for two separate loans from separate parties. The contention was then which party had priority in terms of the security.

Hall, V.C. held:

“I am of the opinion that as between the Plaintiffs [the second creditor] in this action and the Defendant Tranter [the first creditor], the Defendant Tranter is entitled to priority as to the policy in the Westminster and General Life Assurance Association . That policy was deposited with him by way of equitable security. He is first in point of time, and therefore first as regards his security.” [113]

The first creditor then contended that he obtained priority by giving notice to the insurance office of his claim first in accordance with the Policies of Assurance Act 1867 . However, Hall V.C. held on this point that :

“In order to bring the case within the statute, there must, according to the plain words of the statute and the explanatory form of assignment given in the schedule, be an assignment, and an agreement to assign upon request is not an assignment.” [11]

“In essence, whether there has been a valid assignment under the provisions of the Policies of Assurance Act or section 4(6) of the Civil Law Act, all claims to priority amongst the assignees and encumbrances of a policy are dealt with on the basis that all claimants are equitable assignees so long as the proceeds of a policy are with the insurers or have been paid into court. The priority of equitable assignment is dependent on the date of assignment and the fact that there has been notice of prior equities does not affect the position. However, if X is an equitable assignee for value and Y is the holder of a prior equity, X can claim priority over Y if he has no actual or constructive notice of the earlier assignment and if he has given formal notice to the insurers of the assignment before the insurers have come to know of Y’s interest or if X has been misled by Y into taking the assignment or if Y has by his negligence contributed to the creation of the assignment to X.” [115]

Robert M. Merkin writes with regard to priorities of assignments:

“... a number of basic principles may be stated. First, the general equitable rule is that assignments rank in priority in order of their date of creation, but this is subject to the further rule that, where one or more assignees have given notice to the insurer, priority is determined by the date of notice. Secondly, the giving of notice to the insurer will obtain priority only for an assignee, whether legal or equitable, who was unaware of earlier assignments at the date of his own assignment. Knowledge for these purposes may be actual or constructive; the fact, for example, that the assured cannot deposit the policy with the assignee has been held [116] to put him on notice that it may have been deposited by way of assignment earlier. ... Thirdly, it is possible to have a legal assignment only by the giving of notice to the insurer.” [117]

S. Santhana Dass points out that :

“This common law position has been altered by Section 168(2) of the Insurance Act 1996 ... Notice of assignment to the insurers are no more relevant for the purpose of determining priority which puts the insurer in a more difficult position. Do they have to ensure that there are no prior assignment before paying to an assignee? It would be impractical to impose such a duty on the insurers because they would have no means of getting such information. As long as they pay to the assignee, whose assignment they had notice, they would be free of liability in respect of any claim, provided they have no knowledge of any earlier assignment. It may be prudent for insurers to include in their standard assignment form, a declaration by the insured that he has not created any prior assignment in respect of the policy at the time of execution of the assignment.” [118]

Section 168(2) of the Malaysian Insurance Act 1996 [119] provides :

“Where more than one person are entitled under the security or the assignment, the respective rights of the persons entitled under the security or the assignment shall be in the order of priority according to the priority of the date on which the security or the assignment was created, both security and assignment being treated as one class for this purpose.”

7.1 Assignment of Insurance Policies

Francis Tierney and Paul Braithwaite writes:

“An insurance policy is a contract under which the insured has defined rights and obligations. An assignment of an insurance policy may be defined as follows:

An assignment of an insurance policy by an insured is the transfer of the rights and obligations of the insured under the policy to another who then becomes the insured in place of the original insured.” [120]

Ray Hodgin writes:

“Assignment of insurance policies has an important role in commercial life. A common example is where a mortgagee requires the mortgagor to effect a life policy to cover the extent of the loan should the mortgagor die before the loan is repaid. The policy is then assigned to the mortgagee [121] .”

Roy Hodgin points out the “... desire of the courts to make the policy assignable and therefore as flexible as possible ...” [122] In order to illustrate this point, this author discusses the United States case of Grigsby v Russell [123] where a life policy was taken out by someone on his own life. This person paid two premiums and no more as he required the money for medical care. This person assigned the policy to someone else for value and the assignee continued to pay the premiums. Upon the assignor’s death, the question that arose was whether the insurance company should pay the proceeds to the assignor’s estate or the assignee. The Supreme Court of the United Stated held that the proceeds should be paid to the assignee. Mr. Justice Holmes in this case commented:

“Of course, the ground suggested for denying the validity of an assignment for a person having no interest in the life insured is the public policy that refuses to allow insurance to be taken out by such persons in the first place ... the ground for the objection to life insurance without interest in the earlier English cases was not the temptation to murder but the fact that such wagers came to be regarded as a mischievous kind of gaming ... On the other hand, life insurance has become in our days one of the best recognised forms of investment and self-compelled savings. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property ... To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

This indication of the attitude of the American courts as quoted by an English writer is noteworthy. However, in Malaysia, the courts are bound by the beneficiary of a life policy proving that he/she has an insurable interest in the life insured under section 152 of the Insurance Act 1996. [124]

“For a valid assignment of personal contracts such as contracts of fire insurance and liability insurance, the insurer’s consent is required... [125]

To be valid, an assignment by the insured of a non-life policy must be contemporaneous with an assignment of the subject matter of insurance to the assignee. The insured will not be in a position to assign the policy at a later date as he will no longer have an insurable interest in the property, in respect of which the policy was issued [126] . ...

An assignor of a life policy, which is a valuable chose in action, may effect a legal assignment of his policy by virtue of the provisions of the Policies of Assurance Act [127] , which only concerns the assignment of life policies, or by virtue of the provisions of section 4(6) of the Civil Law Act [128] , which concerns the assignment of all choses in action including life policies [129] .”

S. Santhana Dass writes:

“’Choses in action’ or ‘things in action’ are assignable.

Assignment of chose in action take places when the liabilities imposed or the rights acquired under a contract between A and B are transferred to C who is not a party to the original contract.

The expression ‘chose in action’ or ‘thing in action’, in the literal sense, means a thing recoverable by suit or action in law. ...

Rights under a contract of insurance are choses in action.” [130]

As such, it would seem that with regard to property and motor insurance, the assignment or sale of the subject matter of the insurance is insufficient to transfer the insurance policy as well. The insurance company’s consent is required before the policy will change hands. In order for the insured or original policy holder to effect a valid assignment, the insurance company’s consent and resulting assignment of the insurance policy must be contemporaneous with the assignment or sale of the subject matter since once the assignment or sale of the subject matter is complete, the insured no longer has any insurable interest in the subject matter of the insurance and as such, no more insurable interest in the policy to assign.

Nik Ramlah Mahmood explains:

“The contract of insurance itself can only be assigned with the consent of the insurer. This amounts to the substitution of a new contract for the old - a novation - and is allowed under the Contracts Act 1950 [131] . Novation results in the formation of a new contract between the insurer and the assignee and the latter is subject to all the terms and conditions of the new contract and he effectively replaces the assignor as the insured under the policy.” [132]

The assignment of life insurance policies may be effected by the insured through a legal assignment, either under the Policies of Assurance Act 1867 [133] or section 4(3) of the Civil Law Act 1956 .

7.2 Assignment of the Proceeds of Insurance Policies

“The proceeds of a policy may be assigned either in equity or at law in accordance with the provisions of section 4(6) of the Civil Law Act [134] . The insured’s right to the proceeds of a policy is a valuable chose in action and it may be assigned either before or after the occurrence of a loss. For an assignment of the proceeds of a policy, which is distinct from an assignment of the contract or policy of insurance, the consent of the insurer is not required.”

In the case of an equitable assignment of the proceeds of the policy, an action to recover the said proceeds must be brought in the name of the insured.

Where the assignor has effected a legal assignment of the proceeds of the policy in accordance with the requirements of section 4(6) of the Civil Law Act, the assignee may sue in his own name. The assignment must be an absolute assignment in writing under the assignor’s hand and express notice of such assignment must be given in writing to the insurers.

The assignee of the proceeds of the policy cannot acquire rights which are superior to those of the assignor. It follows that all the defences which could have been raised by the insurer against the assignor are equally applicable against the assignee. Thus, the insurers may avoid liability on account of the assignor’s misrepresentation or non-disclosure. Furthermore, all terms which are conditions precedent to the insurer’s liability must be complied with and the insurer may avoid liability to the assignee of the proceeds of a policy on the ground of the assignor’s failure to comply with a condition precedent. For instance, in Re Carr & Sun Fire Insurance Co., [135] the insured’s failure to provide the insurer with proof of loss within the time stipulated under the terms of the policy precluded the trustee in bankruptcy from recovering the proceeds of the policy.” [136]

7.3 Assignment of the Subject Matter of Insurance Policies

E. R. Hardy Ivamy writes:

“Before the assignee of the subject-matter can in his own name enforce the contract contained in the policy, it is necessary that the policy should be validly assigned to him... [137]

On the completion of the assignment, the rights and duties of the original assured devolve on the assignee, who becomes, to all intents and purposes, the assured under the policy which he may accordingly enforce in his own name [138] .”

“The question of an assignment of the subject matter of insurance arises when the insured property has been sold or otherwise disposed of by the insured. It does not arise in the case of life and personal accident policies because the subject matter of such policies is unassignable.

An insured who has voluntarily and completely given up his interest in the subject matter of the insurance ceases to have an insurable interest in the insured property. Such an insured can no longer make a claim under the policy with respect to the property which has been given up as he will not be in a position to suffer any loss with regard to the property.” [139]

7.4 Assignment by Operation of Law

The case of Thomas v. National Farmer’s Union Mutual Insurance Society Ltd. [140] involved the property in hay and straw on a farm being passed from a tenant to a landlord by virtue of the Agricultural Holdings Act 1948 when the landlord served a notice to quit on his tenant. Diplock J. in this case explained:

“Where property passes automatically as the result of statutory provisions when certain circumstances arise, it seems to me that this is a passing of property by operation of law.” [141]

“The insured’s interest in the policy or in the subject matter of interest may be assigned by operation of law. For instance, such an assignment will occur in the event of the death or bankruptcy of the insured.

As far as the insured’s interest in the insured property is concerned, such interest vests in the insured’s personal representative in the event of the insured’s death. On the other hand, in the event of the bankruptcy of the insured, the insured’s interest in the insured property vests in the Official Assignee. In either of these situations, the continued effectiveness of the policy is not in doubt.

Where a loss occurs before an assignment by operation of law, the insured’s personal representatives or trustee in bankruptcy, as the case may be, has the right to claim against the insurers. The position is more complicated where a loss occurs after an assignment by operation of law and after the property has been distributed to those who are entitled to the same. Most policies avoid such complications by providing that the insurer shall indemnify the insured and all other persons to whom his interest in the insured property may pass by means of a will or by operation of law.” [142]

Myint Soe writes :

“The general principle is that on death and bankruptcy, both the subject matter insured and the policy itself pass to the personal representatives or the Official Assignee, as the case may be.

However, the personal representatives or the Official Assignee cannot have a better title than the deceased or the bankrupt. The claim would be liable to be defeated by any non-disclosure or misrepresentation or breach of condition on the part of the insured before the assignment takes effect.” [143]

“Any person who takes an insurance policy should find out whether there is any special clause prohibiting or restricting assignment. Some policies may prohibit the assignment of the subject matter during the currency of the policy. Some policies may prohibit assignment otherwise than by will or operation of law.” [144]

Kenneth Sutton writes :

“A policy of insurance is or evidences a contract and is therefore, like any other agreement, subject to the general law of contract as developed by the common law and modified by statute. In addition, special rules have been developed in relation to insurance contracts. Thus, they are the most common example of that special class of contract known as contracts uberrimae fidei, that is, of utmost good faith, and hence there are special rules in relation to non-disclosure, misrepresentation and the like in respect of them.” [145]

The legal standing of assignments in the field of insurance, thus, is not a straightforward question to answer. It depends on what is being assigned and how assignments are conducted in the various branches of insurance law.

In practical terms, insurance companies themselves may not be certain of the legal stand of various claimants who clamour at their doors demanding payment on insurance claims arising out of purported assignments. Insurance companies, therefore, may demand these eager voices to prove the validity of their claims in court. The insurance company then, will make payment on the claims as directed by the superior wisdom and authority of the court of law. As Irwin M. Taylor writes:

“Insurance companies are frequently presented with conflicting claims advanced by the original beneficiary and a subsequently designated beneficiary or assignee. Rather than pay to either one at its peril, it is the practice of insurance companies to bring both claimants into a law suit, deposit the money into court and leave the two claimants to fight the matter out themselves.” [146]

A. Vijayalakshmi Venugopal*

[*] Advocate & Solicitor

High Court of Malaya

[1] A. A. Tarr, Kwai-Lian Liew & W. Holligan, Australian Insurance Law , Second Edition, The Law Book Company Limited, 1991, at page 1.

[2] Namely marine, life and fire insurance.

[3] John Lowry & Philip Rawlings, Insurance Law: Doctrines and Principles , Hart Publishing (U.S.A), 1999, at page 3.

[4] Professor K. S. N. Murthy & K. V. S. Sarma, Modern Law of Insurance in India , N. M. Tripathi Private Limited (Bombay, India), 1995, at page 3.

[5] John Birds & Norma J. Hird, Birds’ Modern Insurance Law , Fifth Edition, Sweet & Maxwell (London), 2001, at page 13.

[6] (1881) 18 Ch.D 1.

[7] Ibid 9-10.

[8] Principles of Insurance Law , Fifth Edition, Butterworths Asia, 2000, at page 1193.

[9] R. C. Kohli, An Introduction to Insurance Practice and Principles in Singapore and Malaysia, Singapore Insurance Training Centre, 1982, at page 77.

[10] William Brandt’s Sons & Co. v. Dunlop Rubber Co. (1905) A.C. 454 (House of Lords) per Lord Macnaghten, at page 462.

[11] David Norwood & John P. Weir, Norwood on Life Insurance Law in Canada , Second Edition, Carswell Thomson Professional Publishing, 1993, at page 258.

[12] Malcolm A. Clarke, The Law of Insurance Contracts , Second Edition, Lloyd’s of London Press Ltd, 1994, at page 170.

[13] Act 553.

[14] Act 67 (revised 1972).

[15] This Act is declared to come into force on 7 April 1956.

[16] 30 and 31 Victoria, chapter 144.

[17] 15 and 16 Geo. V., chapter 20.

[18] A ‘chose in action’ has been defined by Erin Goh, Valerie Low and Low Kee Yang (editor) in Butterworths Law for Business Series - Insurance Law , Butterworths Asia, 2001, at page 191 in the following manner, “A chose in action is the right to demand payment of a sum of money or to recover damages under a contract.”

[19] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 207-208.

[20] [1984] 1 MLJ 260 (Federal Court).

[21] Quoted and discussed above.

[22] [1984] 1 MLJ 260 (Federal Court), at page 264.

[23] 6 Edw 7, c. 41 (United Kingdom).

[24] Halsbury’s Statutes of England and Wales, Fourth Edition, Volume 22, 2000 Reissue, Butterworths (London), 2000, at page 42.

[25] Ibid 43.

[26] Robert Merkin (Editor), Colinvaux’s Law of Insurance , Sixth Edition, Sweet & Maxwell (London), 1990, at pages 405-406.

[27] Halsbury’s Statutes of England and Wales, Fourth Edition, Volume 22, 2000 Reissue, Butterworths (London), 2000, at page 25.

[28] Michael Parkington, Nicholas Leigh-Jones, Andrew Longmore & John Birds (Editors), Macgillivray & Parkington on Insurance Law - relating to all risks other than marine, Eighth Edition, Sweet & Maxwell (London), 1988, at pages 714-715.

[29] The cases quoted in support of this proposition in this book, at page 714 are Rayner v. Preston (1881) 18 Ch. D. 1, at page 7 per Cotton L,J, Ecclesiastical Commissioners v. Royal Exchange Assurance Corporation (1895) 11 TLR 476, Robson v. Liverpool, London and Globe Insurance Co. (1900) The Times, June 23, Rogerson v. Scottish Automobile and General Insurance Co. Ltd. (1931) 48 TLR 17, Tattersall v. Drysdale [1935] 2 K.B. 174 and Boss and Hansford v. Kingston [1962] 2 Lloyd’s Rep. 431.

[30] The case quoted in support of this proposition, at page 714 of this book is Forbes & Co. v. Border Counties Fire Office (1873) 11 Macph. 278.

[31] The case quoted in support of this proposition in this book, at page 714 is Collingridge v. Royal Exchange Assurance Corporation (1877) 3 QBD 173.

[32] The cases quoted in support of this proposition in this book, at page 715 are Castellain v. Preston (1883) 11 QBD 380, at page 385 per Brett L.J. and A.R. Williams Machinery Co. v. British Crown Assurance Corporation Ltd . (1921) BCR 481.

[33] The case quoted in support of this proposition in this book, at page 715 is the judgment of Bowen L.J. in Castellain v. Preston (1883) 11 Q.B.D. 380, at pages 401 and 405. This author also comments that once the vendor is fully paid, however, his interest will cease and he will be unable to recover as was held in Bank of New South Wales v. North British and Mercantile Insurance Co. (1881) 2 NSWLR 239.

[34] Digby C. Jess, The Insurance of Commercial Risks Law and Practice , Second Edition, Butterworths (London), 1993, at page 15.

[35] (1875) LR 10 QB 249.

[36] (1875) LR 10 QB 249, at page 253.

[37] (1743) 1 Wils. KB 10; 95 ER 463.

[38] (1743) 1 Wils. KB 10, at page 10; 95 ER 463, at page 463.

[39] (1895) 11 TLR 476 (High Court).

[40] Id 476.

[41] (1877) 3 QBD 173.

[42] Ibid 176-177.

[43] Ibid 177.

[44] (1881) 18 Ch.D 1.

[45] Ibid 6.

[46] Ibid 6-7.

[47] (1881) 18 Ch.D 1, at page 11.

[48] Ibid 12.

[49] Ibid 16.

[50] (1883) 11 QBD 380 (Court of Appeal).

[51] (1883) 11 QBD 380 (Court of Appeal), at page 386.

[52] Ibid 393.

[53] Ibid 396-397.

[54] Mahinder Singh Sidhu, Casebook on Motor Insurance Law in Malaysia and Singapore - with synopsis and principles, International Law Book Services, 1995, at page 25.

[55] Ibid 31.

[56] [1938] 2 All ER 267 (Court of Appeal).

[57] Ibid 269.

[58] Ibid 269-270.

[59] Ibid 270.

[60] The equivalent Act in Malaysia is the Road Transport Act 1987 (Act 333).

[61] Refer to section 35 of the United Kingdom Act and section 90 of the Malaysian Act.

[62] Refer to section 10 of the United Kingdom Act and section 91 of the Malaysian Act.

[63] Who was the seller of the car.

[64] [1938] 2 All ER 267 (Court of Appeal), at pages 270-271.

[65] [1963] 2 Lloyd’s Rep. 439 (High Court).

[66] [1963] 2 Lloyd’s Rep. 439 (High Court), at page 440.

[67] [1967] 1 MLJ 94 (Federal Court).

[68] Ibid 96.

[69] [1967] 2 MLJ 134 (Federal Court).

[70] Ibid 136.

[71] [1935] 2 KB 174.

[72] Ibid 178.

[73] [1981] 2 MLJ 324 (Federal Court).

[74] This judgment was delivered by Lee Hun Hoe C.J. (Borneo).

[75] [1937] 4 All ER 628 (High Court). Discussed above is the Court of Appeal judgment.

[76] [1981] 2 MLJ 324 (Federal Court), at page 325.

[77] Ibid 325.

[78] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 1.

[79] Robert Merkin (Editor), Colinvaux’s Law of Insurance, Sixth Edition, Sweet & Maxwell (London), 1990, at page 178.

[80] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 1.

[81] Ibid 262

[82] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at page 206.

[83] (1854) 15 CB 365; 139 ER 465.

[84] Ibid page 387; 139 ER 465, at page 474.

[85] (1854) 15 C.B. 365, at page 391; 139 E.R. 465, at page 476.

[86] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 287.

[87] An Act in the United Kingdom.

[88] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 263.

[90] (1888) 40 Ch.D 5.

[91] The Policies of Assurance Act 1867.

[92] (1888) 40 Ch.D 5, at page 10.

[93] Act 56.

[94] This Act came into force in West Malaysia on 7 April 1956.

[95] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 276.

[96] Ibid 281-282.

[97] Robert J. Surridge, Sara Forrest, Noleen Dignan, Alison Broadberry & Duncan Backus, Houseman and Davies Law of Life Assurance , Eleventh Edition, Butterworths (London), 1994, at page 265.

[98] Ray Hodgin, Insurance Law - Text and Materials , Cavendish Publishing Limited (United Kingdom), 1998, at page 63.

[99] [1949] 1 All ER 120 (Court of Appeal).

[100] Ibid 126.

[101] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 206-207.

[102] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 415.

[103] (1917) 1 Ch.D 1 (Court of Appeal).

[104] Ibid 2.

[105] Ibid 7.

[106] Ibid 8.

[107] Ibid 8.

[108] Ibid 7.

[109] (1885) 28 Ch.D 674.

[110] Poh Chu Chai, Principles of Insurance Law , Fifth Edition, Butterworths Asia, 2000, at page 1208.

[111] (1885) 28 Ch.D 674, at pages 680 and 681.

[112] (1878) 9 Ch.D 137.

[113] Ibid 140.

[114] Ibid 141.

[115] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 417.

[116] The authority given in this book, at page D.1.2-04, for this proposition is the case of Re Weniger’s Policy (1910) 2 Ch.D 291.

[117] Robert M. Merkin, Kluwer’s Insurance Contract Law , Croner CCH, 2000, at page D.1.2-04.

[118] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 284.

[119] Act 553.

[120] Francis Tierney & Paul Braithwaite, A Guide to Effective Insurance , Second Edition, Butterworths Canada Ltd., 1992, at page 13.

[121] Ray Hodgin, Insurance Law - Text and Materials , Cavendish Publishing Limited (United Kingdom), 1998, at page 63.

[122] Ibid .

[123] 222 US 149 (1911).

[124] Act 553.

[125] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 411

[126] Ibid 413.

[127] According to footnote 27, at page 413 of this book, prior to the coming into force of the English Policies of Assurance Act 1867, a life policy could only be assigned in equity and not through a legal assignment. The equitable assignee could only sue by

having the assignor of the policy joined as a party to the action.

[128] The equivalent Malaysian provision is section 4(3) of the Civil Law Act 1956

[129] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 413.

[130] S. Santhana Dass, Law of Life Insurance in Malaysia , Alpha Sigma Sdn Bhd, 2000, at page 274

[131] Nik Ramlah Mahmood, at page 209, in footnote number 12 clarifies that she is referring to section 63 of the Contracts Act 1950 (Act 136) in this context which states, “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”

[132] Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at page 209.

[133] If that applies in Malaysia as discussed by Nik Ramlah Mahmood, Insurance Law in Malaysia , Butterworths, 1992, at pages 207-208.

[134] The equivalent Malaysian provision is section 4(3) of the Civil Law Act 1956 (Act 65).

[135] (1897) 13 TLR 186.

[136] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at pages 410-411

[137] E. R. Hardy Ivamy, General Principles of Insurance Law , Sixth Edition, Butterworths (London), 1993, at page 348.

[138] Ibid 353.

[139] Tan Lee Meng, Insurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at page 407.

[140] [1961] 1 WLR 386.

[141] [1961] 1 WLR 386, at page 392.

[142] Tan Lee Meng, Inssurance Law in Singapore , Second Edition, Butterworths Asia, 1997, at pages 430-431.

[143] Myint Soe, The Insurance Law of Malaysia , Quins Pte. Ltd., 1979, at page 62.

[144] Ibid .

[145] Kenneth Sutton, Insurance Law in Australia , Third Edition, LBC Information Services, 1999, at pages 11-12.

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What is Assignment and Nomination in Life Insurance?

‘Assignment’ and ‘Nomination’ are two most common terms used in a life insurance policy document. Let us understand the importance of these two terms in-detail.

By Future Generali. Updated On Oct 06, 2022

Your life insurance policy is a contract between you (insured) and the insurance company (insurer). The contract is filled with jargon. To the extent possible, we must understand all the terms mentioned in the policy bond (certificate). ‘Assignment’ and ‘Nomination’ are two most common terms used in the insurance world.

For instance, in the event that you plan to apply for a home loan, your home loan provider will surely use these terms. Hence, it is best to be sure and understand exactly what the terms mean before you make a decision to buy the policy.

What is assignment in life insurance?

A life insurance policy can be assigned when rights of one person are transferred to another. The rights to your insurance policy can be transferred to someone else for various reasons. The process is known as assignment.

An “assignor” (policyholder) is the person who assigns the insurance policy. An “assignee” is the person to whom the policy rights have been transferred, i.e. the person to whom the policy has been assigned.

In the event rights are transferred from an Assignor to an Assignee, the rights of the policyholder are canceled, and the Assignee becomes the owner of the insurance policy.

People often assign their life insurance policies to banks. A bank becomes the policy owner in this case, while the original policyholder continues to be the life assured whose death may be claimed by either the bank or the policy owner.

Types of Assignment

There are two ways to assign an insurance policy. They are as follows:

1. Absolute Assignment

During this process, the rights of the assignor (policyholder) will be completely transferred to the assignee (person to whom the policy rights have been transferred). It is not subject to any conditions.

As an example, Mr. Rajiv Tripathi owns a Rs 1 Crore life insurance policy. Mr. Tripathi wants to gift his wife this policy. Specifically, he wants to make “absolute assignment” of the policy in his wife's name, so that the death benefit (or maturity proceeds) can be paid directly to her. After the absolute assignment has been made, Mrs. Tripathi will own this policy, and she will be able to transfer it to someone else again.

2. Conditional Assignment

As part of this type of assignment, certain conditions must be met before the transfer of rights occurs from the Assignor to the Assignee. The Policy will only be transferred to the Assignee if all conditions are met.

For instance, a term insurance policy of Rs 50 Lakh is owned by Mr. Dinesh Pujari. Mr. Pujari is applying for a home loan of Rs 50 Lakh. For the loan, the banker asked him to assign the term policy in their name. To acquire a home loan, Mr. Pujari can assign the insurance policy to the home loan company. In the event of Mr. Pujari’s death (during the loan tenure), the bank can collect the death benefit and get their money back from the insurance company.

Mr. Pujari can get back his term insurance policy if he repays the entire amount of his home loan. As soon as the loan is repaid, the policy will be transferred to Mr. Pujari.

In the event that the insurer receives a death benefit that exceeds the outstanding loan balance, the bank will be paid from the difference between the death benefit and the loan and the balance will be paid directly to the nominee. In the above example, the remaining amount (if any) will be paid to Mr. Pujari’s beneficiaries (legal heirs/nominee).

Key Points to know Note About Assignment

In regards to the assignment, the following points should be noted:

• A policy assignment transfers/changes only the ownership, not the risk associated with it. The person assured thus becomes the insured.
• The assignment may lead to cancellation of the nomination in the policy only when it is done in favour of the insurance company due to a policy loan.
• Assignment for all insurance plans except for the pension plan and the Married Women's Property Act (MWP), can be done.
• A policy contract endorsement is required to effect the assignment.

What is nomination in life insurance?

Upon the death of the life assured, the nominee/ beneficiary (generally a close relative) receives the benefits. Policyholders appoint nominees to receive benefits. Under the Insurance Act, 1938, Section 39 governs the nomination process.

Types of Nominees

In a life insurance policy, the policyholder names someone who will receive the benefits in the event of the life assured's death. Here are a few types of nominees:

1. Beneficial Nominees

In accordance with the law, the beneficiary of the claimed benefits will be any immediate family member nominated by the policyholder (like a spouse, children, or parents). Beneficiary nominees are limited to immediate family members of the beneficiary.

2. Minor Nominees

It is common for individuals to name their children as beneficiaries of their life insurance policies. Minor nominees (under the age of 18) are not allowed to handle claim amounts. Hence, the policyholder needs to designate a custodian or appointee. Payments are made to the appointee until the minor reaches the age of 18.

3. Non-family Nominees

Nominees can include distant relatives or even friends as beneficiaries of a life insurance policy.

4. Changing Nominees

It is okay for policyholders to change their nominees as often as they wish, but the latest nominee should take priority over all previous ones.

Key Points to Note About Nomination

In regards to the nomination, the following points should be noted:

• In order to nominate, the policyholder and life assured must be the same.
• In the case of a different policyholder and life assured, the claim benefits will be paid to the policyholder.
• Nominations cannot be changed or modified.
• The policy can have more than one nominee.
• As part of successive nominations, if the life assured appoints person “A” as the first person to receive benefits. Now, in the event of the life assured’s death after person “A” dies, the claim benefits will be given to person “B”. The benefits will be available to Nominee “C” if Nominee “A” and Nominee “B” have passed away.

What is the difference between nomination and assignment?

Let's talk about the differences between assignment and nomination.

Nomination and Assignment serve different purposes. The nomination protects the interests of the insured as well as an insurer in offering claim benefits under the life insurance policy. On the other hand, assignment protects the interests of an assignee in availing the monetary benefits under the policy. The policyholder should be aware of both of them before buying life insurance.

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Nomination and assignment difference  

The words, assignment and nomination, are commonly used in life insurance policies . While not everyone understands them, it is critical to know the meaning and distinction between the two before acquiring any insurance plan.  

The primary distinction is one of policy ownership. The policy owner remains constant while under nomination. An assignment, on the other hand, transfers policy possession from one individual to another. The advantage is paid to the nominee (as in nomination) post the demise of the life assured, but the advantage is paid to the assignee (as in assignment) when the life guaranteed passes the rights and possession of his/her plan to the assignee. There are some fundamental and prevalent distinctions between the nomination and assignment. 

This article will elaborate some more about assignment and nomination, and the role played by them in insurance. 

What exactly is life insurance nomination?  

Among the most important aspects of a life insurance policy is nominating. The policyholder must designate a family member as their own nominee. If the insured person dies, the nominee is regarded as being qualified to receive the advantages of the life insurance policy. In this method, the insurance company makes sure that the insured’s family does not face financial difficulties even if a salaried member of the family dies. As a result, the insured should exercise caution while selecting the candidate for his or her insurance policy. 

Nominee types in life insurance  

The policyholder has the option of selecting one out of the five sorts of nominees. Let’s take a closer look at them. The five distinct kinds of nominees in life insurance are as follows: 

1. Beneficial Nominee  

Instead of the nominee, IRDA has coined the term “beneficiary nominee.” It indicates that the owner of the policy has the authority to appoint anyone as their nominee. The property owner’s guardian/parent, kid, or partner can be chosen as the nominee. If the insured has already picked a nominee, there will be no conflict in receiving the claim. 

2. Minor Nominee  

To ensure the future of the kid in their absence, a policyholder may designate his or her younger child the chosen beneficiary of his or her life insurance policy. However, if the insured person dies prematurely, the amount claimed will be paid to the child’s official guardian or an appointee. When the child reaches the age of 18, the caretaker transfers the money to him or her. 

3. Non-Family Nominee  

The insured may also select an outsider as his or her candidate. However, this is not usually advised. 

4. Multiple Nominees  

According to the insurance policy of multiple nominees, the policyholder may choose two or more people. In this situation, the owner of the policy splits the total sum among the two nominees. In case the policyholder fails to split the amount when filling out the nomination form, the insurance company divides the claim sum equally among the nominees. 

5. Changing Nominee  

The policy owner can choose his or her candidate under this sort of nominee during the term of the life insurance policy. 

6. Successive Nominee  

In many cases, people want to select multiple nominee; in consecutive nominations, one might select a maximum of three nominees. The benefit for death will be paid to the first candidate upon the demise of the insured. If the first nominee dies, the benefit for death will be paid to the second nominee, and so on. 

What you must know about nominations?  

There are quite a few fundamental aspects of nominations which any policyholder should be aware of. The following are the most crucial facts concerning nominations:  

• For the purpose of nominating, the life guaranteed and the insured should be the same under the life insurance contract. If they are two separate people, the claim for rewards will be utilized by the insurance scheme’s policyholder. 
• The candidate has no authority to propose changes to the insurance policy. 

What is a life insurance assignment?  

There exists an opportunity for assignment in life insurance as per Section 38 of the Insurance Act of 1938 . The policyholder transfers his or her policy owner’s rights to a different individual. The assignor is the individual that transfers the rights, and the assignee is the person to whomever the policy rights are passed. The assignee thereby acquires the legal proprietor of the policy of insurance.  

People typically select banks to assign their policy rights. The bank replaces the policyholder, while the insurance policy’s life assured remains same. The bank receives the advantages of the claim (policy owner). 

Life insurance assignment types  

In life insurance, there are two types of assignments: absolute assignment and conditional assignment. 

• Absolute Assignment   

The entitlements to a life insurance policy are granted to another individual (assignee) without any limitations and conditions in a complete assignment. In general, policyholders perform this type of task to express their affection for somebody or to return a bank debt. 

• Conditional Assignment  

The policy owner (assignor) assigns the entitlements to the life insurance coverage to another individual (assignee) according to the particular terms and conditions in a conditional assignment. Only when the terms and circumstances are met will the rights to the policy pass on. 

What you must know about assignments?  

Look at the most important aspects of the assignment you must always remember: 

• The assignment solely impacts the insurance policy’s owner. The life assurance will remain unchanged. 
• Each insurance plan’s owner has the option to transfer the rights to an assignee. Solely the insurance policies and pension plans that were purchased under the Married Women’s Property Act (MWP) are exempted. 
• If the policyholder transfers the entitlements to his or her insurance coverage to the insurance company in order to repay the insurance company’s loan, the authorization of the insurance policy is terminated. 

Nominations and assignments variances  

The table provided below offers a quick overview of the various distinctions between nominations and assignments.  

Conclusion   

It is critical for a policyholder to understand assignment and nomination. This is due to the fact that both nomination and assignment possess their own set of advantages that the policyholder can take advantage of immediately. As a result, with the assistance of this post, a whole piece of knowledge has been delivered. It is advised that policyholders get the correct life insurance coverage that will benefit their family members even if they are not present. 

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What Is Nomination And Assignment in Life Insurance?

Listen to What Is Nomination And Assignment in Life Insurance?

Life insurance is a contract between an insurer and a policyholder. An insurer guarantees a sum assured to the beneficiary/nominee on the policyholder's unfortunate demise in return for the premiums paid. When entering into any contract, it is necessary that both parties read and understand the fine print. While buying a life insurance policy, a potential policyholder may come across certain jargon that is difficult to understand for a layman. Entering into a contract without thoroughly reading or understanding the exact meaning of these terms can lead to disappointments in the future. Hence, before making a buying decision, it is best to read the fine print and know the exact meaning of all the terms. Nomination and assignment are two terms that many policyholders get perplexed with, but you must understand them before buying life insurance.

What is Nomination?

You might be familiar with the nomination facility in Savings Bank Account. Nomination in life insurance works in the same way. While buying a life insurance policy, the policyholder appoints a nominee to receive the insurance benefits. Upon the insured's death, the nominee receives the sum insured by the life insurance policy. Section 39 of the Insurance Act 1938 governs the nomination process.

So, a nomination is a right given to the policyholder/ insured to appoint a person (nominee), usually a close family member, to receive the insurance benefits in the event of the demise of the insured.

What are the types of Nominees?

Here are some of the types of Nominees:

1. Beneficial Nominees:

The Insurance Regulatory and Development Authority of India has introduced the new term 'beneficiary nominee' instead of 'nominee'. The policyholder has a right to make any of his/her close relatives, i.e., parent, guardian, child, or spouse, a nominee. Appointing the nominee eliminates the chances of any disputes arising at the time of claim settlement. Bear in mind that only your immediate family members can become beneficial nominees.

2. Minor Nominees:

Many policyholders prefer appointing their child/children as nominees for their life insurance policies. However, if the child has not completed 18 years and is still a minor, he/she does not meet the eligibility criteria to handle the claim amount. So, in case of an unfortunate demise of the insured, the claim amount is payable to the legal custodian or the child's appointee. The legal custodian hands over the sum to the child when he/she turns 18 years old.

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3. Non-family Nominees:

In certain exceptional situations, the nominee can choose a non-family member as his/her nominee. However, you should check the terms pertaining to the nomination with your insurer and know that appointing a non-family nominee is generally not recommended.

4. Changing Nominees:

The policyholder has the right to change the nominees as many times as he/she wants. But bear in mind that the latest nominee will supersede all the previous nominees.

5. Multiple Nominees:

The policyholder can choose to appoint more than one nominee to his/her life insurance policy. In the case of multiple nominees, the policyholder divides the share of the total amount between multiple nominees. If the policyholder has not divided the share/percentage of the policy, the claim amount is equally divided between nominees.

6. Successive Nominees:

The successive nomination allows the policyholder to choose more than one nominee in a successive manner. So, in case of the demise of the policyholder, the claim amount will go to the first nominee. In case of the demise of the first nominee, the claim amount will go to the second nominee, and so on.

What are the key points to note about the Nomination?

In order to appoint a nominee, the policyholder and insured must be the same.

If the policyholder and insured are different individuals, the claim benefits are paid to the policyholder.

Certain life insurance plans do not allow any change or modification in the nominee unless the demise of the nominee.

The policyholders are allowed to appoint more than one nominee.

What is an Assignment?

An assignment is transferring the rights, title, and ownership of the life insurance policy to another individual or entity. The policy can be assigned when the rights of one person are transferred to another.

The person who transfers the policy is called an assignor, and the person to whom the policy is transferred is called the assignee. The assignment is governed under Section 38 of the Insurance Act 1938.

There could be many reasons why a policyholder wants to transfer his/her policy to someone else. For example, in the case of a Loan Against a Life Insurance Policy, the policyholder assigns his/her life insurance policy to the bank. So, the bank becomes the policy owner, and in case of the demise of the assignor, the bank claims the insurance benefits.

What are the types of Assignments?

1. Absolute Assignment:

Under absolute assignment, the assignor transfers all the rights, titles, ownership, and interest to another person or entity. The ownership of the policy is transferred to the other party without any terms and conditions. This type of assignment is generally done for raising loans against life insurance policies.

2. Conditional Assignment:

As the name suggests, under conditional assignment, the assignor transfers the rights to the assignee depending on the terms and conditions. So, the policy is assigned only if the conditions are fulfilled.

What are the key points to note about an Assignment?

The assignment of the life insurance policy transfers only the ownership and not the risk associated with it.

The assignment may lead to cancellation of the nomination only when it is done in favour of the insurance company due to the policy loan.

The policyholder can assign any policy except a pension plan and a Married Women's Property Act (MWP).

In order to effect the assignment, a policy contract endorsement is required.

What are the key differences between Nomination and Assignment?

To conclude:

The basic difference between Nomination and Assignment is the purpose for which it is undertaken. While a nomination helps in protecting the interest of the policyholder and insurer in providing the claim benefits under a life insurance policy, an assignment helps in protecting the interest of an assignee for availing of the financial benefits under a life insurance policy. Knowing all such terms will help you choose the best-suited option for you and make the most of your life insurance policy.

Warm Regards, Ketki Jadhav Content Writer

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Home > Finance > How Is A Collateral Assignment Used In A Life Insurance Contract?

How Is A Collateral Assignment Used In A Life Insurance Contract?

Published: October 14, 2023

Discover how collateral assignments are utilized in life insurance contracts, providing financial security and peace of mind. Learn about the benefits and considerations involved in this strategic financial tool.

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Table of Contents

Introduction, what is a collateral assignment, understanding life insurance contracts, how a collateral assignment works, benefits and uses of collateral assignments, risks and considerations, limitations and restrictions, how to set up a collateral assignment.

When it comes to financial matters, having a solid understanding of various concepts and strategies is crucial. One such concept is a collateral assignment, which plays a significant role in the world of life insurance contracts. Understanding how a collateral assignment works can provide you with valuable insights into how to manage and leverage your life insurance policy to meet your financial needs.

A collateral assignment involves using your life insurance policy as collateral for a loan or other financial transaction. It allows you to borrow against the cash value of your policy without surrendering the policy itself. This strategy can be particularly useful if you need access to funds for a specific purpose, such as starting a business, financing education expenses, or facing unexpected medical bills.

In order to grasp the significance of collateral assignments, it’s important to have a solid understanding of life insurance contracts. Life insurance is a contractual agreement between a policyholder and an insurance company. The policyholder pays regular premium payments, and in return, the insurance company provides a death benefit to the policy’s beneficiaries upon the policyholder’s death. Additionally, certain types of life insurance policies, such as whole life or universal life insurance, accumulate a cash value over time.

The cash value in a life insurance policy can be used in various ways. One option is to surrender the policy and receive the accumulated cash value. However, this may result in the termination of the policy and the loss of its associated benefits. Another option is to take a policy loan against the cash value. This allows the policyholder to access funds while keeping the policy intact.

This is where a collateral assignment becomes relevant. Instead of taking a policy loan, a policyholder can use a collateral assignment to borrow money from a lender by assigning a portion of the life insurance policy’s death benefit as collateral. In this arrangement, the lender becomes the assignee of the policy and is entitled to receive a portion of the death benefit if the policyholder passes away before the loan is repaid. This arrangement provides security to the lender and allows the policyholder to access funds without surrendering the policy.

In the following sections, we will delve deeper into how a collateral assignment works, its benefits and uses, as well as the considerations, limitations, and steps involved in setting it up.

A collateral assignment is a legal agreement that allows a policyholder to assign a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation. It serves as a way to secure the loan by providing the lender with a potential source of repayment in the event of the policyholder’s death. This arrangement allows the policyholder to access funds without surrendering the policy or disrupting its financial benefits.

With a collateral assignment, the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit serves as collateral for the loan or debt, and if the policyholder passes away before the loan is repaid, the lender has the right to receive the assigned portion of the death benefit to satisfy the outstanding debt.

It’s important to note that a collateral assignment does not transfer ownership of the policy to the lender. Instead, it grants the lender a limited interest in the policy specifically for the purpose of securing the loan. Once the loan is repaid, the collateral assignment is released, and the policy returns to the full control of the policyholder.

A collateral assignment can be used for various financial purposes, including personal loans, business financing, or even as a form of security for a surety bond. The flexibility of this arrangement allows policyholders to leverage the accumulated cash value and death benefit of their life insurance policy to meet their financial needs without sacrificing the long-term benefits of the policy.

It’s worth noting that the availability and terms of collateral assignment can vary depending on the insurance company and the specific policy. Some policies may have limitations on the amount that can be assigned or require approval from the insurance company before the assignment can be made. It’s important to review the policy terms and consult with the insurance provider or a financial advisor to understand the specific guidelines and implications of a collateral assignment.

In the next section, we will explore how a collateral assignment works within the context of a life insurance contract.

Before delving deeper into how a collateral assignment works, it’s essential to have a solid understanding of life insurance contracts. A life insurance contract is a legal agreement between a policyholder and an insurance company, wherein the policyholder pays regular premium payments in exchange for financial protection for their loved ones in the event of their death.

Life insurance contracts come in various forms, but the two main types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the policyholder passes away during the term, the insurance company pays out a death benefit to the beneficiaries named in the policy. Permanent life insurance, on the other hand, provides lifelong coverage and includes a cash value component that accumulates over time.

The cash value in a permanent life insurance policy, such as whole life or universal life insurance, grows gradually over the years through premium payments and potential investment gains. This cash value can be accessed by the policyholder through withdrawals or policy loans, providing a source of liquidity that can be utilized for various financial needs.

One of the key advantages of permanent life insurance policies is their ability to accumulate cash value on a tax-deferred basis. This means that any growth in the cash value is not subject to immediate taxation, allowing the policyholder to potentially build a substantial cash reserve over time.

Furthermore, permanent life insurance policies often provide additional benefits such as the ability to participate in the insurance company’s profits through dividends, the option to increase or decrease the death benefit, and even the flexibility to adjust premium payments.

Given the unique features and advantages offered by permanent life insurance policies, they are often the type of policy chosen for a collateral assignment. The combination of death benefit protection and cash value growth make permanent life insurance policies an ideal asset to use as collateral for loans or other financial obligations.

Now that we have a basic understanding of life insurance contracts and their various components, let’s explore how a collateral assignment works in conjunction with a life insurance policy in the next section.

Now that we understand the basics of life insurance contracts, let’s dive into how a collateral assignment works within the context of these policies. A collateral assignment involves assigning a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation.

Here’s a step-by-step breakdown of how a collateral assignment typically works:

• The policyholder identifies a need for funds and seeks a loan or financing.
• The policyholder and the lender determine the amount of the loan and agree on the terms and conditions.
• A collateral assignment agreement is drafted, which outlines the terms of the assignment, including the assigned portion of the death benefit, the loan amount, and the repayment terms.
• The collateral assignment agreement is signed by the policyholder, the lender, and the insurance company, acknowledging the assignment and providing consent for the assignee to receive a portion of the death benefit in the event of the policyholder’s death.
• Upon the policyholder’s passing, the lender files a claim with the insurance company, providing necessary documentation to establish the validity of the claim.
• The insurance company verifies the claim and disburses the assigned portion of the death benefit to the lender to satisfy the outstanding debt.
• If there are remaining funds from the death benefit after repaying the loan, they are distributed to the designated beneficiaries of the policy.

It’s important to note that the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit is solely used as collateral for the loan, and the lender only has a claim to that specific portion.

It’s crucial for both the policyholder and the lender to understand the terms and conditions of the collateral assignment, including any limitations or restrictions set by the insurance company. Some common restrictions may include a maximum assignment amount, a requirement to maintain the policy in-force, or a provision for the policyholder to replace the collateral assignment with another form of security if requested by the insurance company.

By using a collateral assignment, the policyholder can access funds while keeping the life insurance policy intact. This can be particularly advantageous in situations where surrendering the policy would result in the loss of the accumulated cash value and other benefits.

In the next section, we will explore the various benefits and uses of collateral assignments within the realm of financial planning.

Collateral assignments offer several benefits and serve various uses within the realm of financial planning. Let’s explore some of the key advantages and common uses of collateral assignments:

1. Access to Funds

One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes. This allows individuals to meet immediate financial needs without disrupting their long-term insurance coverage.

2. Retention of Policy Benefits

Unlike policy loans, which require repayment with interest, collateral assignments allow policyholders to retain the full benefits of their life insurance policies. These benefits can include the death benefit for beneficiaries, potential cash value growth, and the ability to participate in policy dividends. By using a collateral assignment, policyholders do not have to forfeit these valuable features.

3. Lower Interest Rates

When compared to other types of loans, collateral assignments often offer lower interest rates. This is because the loan is backed by the assigned portion of the life insurance policy’s death benefit, providing additional security for the lender. Lower interest rates can result in significant cost savings for the policyholder over the life of the loan.

4. Flexible Repayment Terms

Collateral assignments provide flexibility in terms of loan repayment. Policyholders and lenders can negotiate repayment terms that align with the borrower’s financial capacity, allowing for customized repayment schedules. This flexibility can help borrowers manage their cash flow effectively and repay the loan on terms that suit their specific needs.

5. Diverse Financial Uses

Collateral assignments can be used for a wide range of financial purposes. Common uses include funding education expenses, starting or expanding a business, purchasing or renovating a property, financing a major purchase, or covering unexpected medical expenses. The versatility of collateral assignments allows policyholders to leverage their life insurance policies to meet various financial goals.

6. Potential Tax Advantages

Collateral assignments may offer potential tax advantages depending on the specific circumstances. For example, if the loan proceeds are used for investment purposes or to generate income, the interest paid on the loan may be tax-deductible. It’s crucial to consult with a tax advisor or financial expert to understand the tax implications of a collateral assignment in your specific situation.

By leveraging the benefits and uses of collateral assignments, policyholders can maximize the value of their life insurance policies and utilize them as a valuable financial asset. However, it’s essential to consider the potential risks and limitations associated with collateral assignments, which we will explore in the next section.

While collateral assignments offer several advantages, it’s important to fully understand the potential risks and considerations before entering into such an arrangement. Here are some key factors to keep in mind:

1. Impact on Death Benefit

Assigning a portion of the death benefit as collateral can reduce the overall amount payable to beneficiaries upon the policyholder’s death. It’s crucial to assess the impact of this reduction on the intended financial protection for loved ones and ensure that the remaining portion of the death benefit is still sufficient to address their needs.

2. Default Risk

If the policyholder fails to repay the loan, the lender may have the right to claim the assigned portion of the death benefit, potentially leaving beneficiaries with a reduced payout. It’s important to have a robust repayment plan in place and make timely payments to avoid default and the potential loss of policy benefits.

3. Policy Lapse

If the policy lapses due to missed premium payments or other reasons, the collateral assignment may become void, and the lender loses their security interest in the life insurance policy. Policyholders should ensure they have a sufficient plan in place to maintain premiums and keep the policy in force to protect the collateral assignment.

4. Limited Flexibility

Once a collateral assignment is in place, it restricts the policyholder’s ability to make changes to the policy, such as increasing or decreasing coverage, accessing the cash value, or changing beneficiaries. It’s important to evaluate whether the potential benefits of a collateral assignment outweigh the loss of flexibility in managing the life insurance policy.

5. Complex Documentation

Collateral assignments involve drafting and signing complex legal documents, including the collateral assignment agreement. It’s crucial to fully understand the terms and conditions of the agreement and consider seeking professional advice to ensure that all parties involved are clear on their rights and obligations.

6. Insurance Company Regulations

Each insurance company may have specific regulations and requirements regarding collateral assignments. It’s important to review the policy terms and consult with the insurance provider to understand any restrictions, limitations, or approval processes associated with collateral assignments.

Considering these risks and considerations is essential to make informed decisions when considering a collateral assignment. Seeking guidance from a financial advisor or insurance professional can help assess the suitability of a collateral assignment and its potential impact on your overall financial plan.

In the next section, we will explore any limitations and restrictions that may apply to collateral assignments.

While collateral assignments can be valuable tools, there are certain limitations and restrictions that policyholders should be aware of. These limitations can vary depending on the insurance company and the specific policy. Here are some common limitations and restrictions to consider:

1. Assignment Limits

Insurance companies often impose limits on the amount that can be assigned from a life insurance policy. This limit is typically a percentage of the policy’s death benefit. It’s essential to review the policy terms to understand the maximum allowable assignment amount.

2. Policy Approval

In some cases, insurance companies require policyholder approval before a collateral assignment can be implemented. This approval process may involve submitting an application, providing financial information, or meeting certain criteria determined by the insurance company.

3. Maintaining Policy In-Force

To retain the collateral assignment, policyholders must keep the life insurance policy in force, which includes paying premiums on time. If the policy lapses or is terminated, the collateral assignment may become void, and the policyholder may lose the associated benefits.

4. Replacement of Collateral

In certain situations, insurance companies may require the policyholder to replace the collateral assignment with another form of security if requested. This requirement ensures that the insurance company is adequately protected against potential losses.

5. Removing the Collateral Assignment

If the policyholder wishes to remove the collateral assignment, they will need to follow the specified procedure outlined by the insurance company. This often involves submitting a formal request, providing necessary documentation, and obtaining the insurance company’s approval.

6. Financial Institution Requirements

Financial institutions, such as banks or lenders, may have their own specific requirements for collateral assignments. These requirements may include minimum loan amounts, credit checks, or additional documentation. It’s important to familiarize yourself with the lender’s guidelines to ensure a smooth collateral assignment process.

7. Legal and Financial Advice

Due to the complex nature of collateral assignments, it’s wise to seek advice from legal and financial professionals. They can provide guidance on the legal implications, tax considerations, and overall suitability of a collateral assignment based on your specific circumstances.

Understanding these limitations and restrictions is crucial when considering a collateral assignment. It’s important to review the policy documents, consult with the insurance company and relevant professionals, and ensure compliance with all applicable regulations to navigate the process successfully.

In the next section, we will outline the general steps involved in setting up a collateral assignment.

Setting up a collateral assignment requires careful consideration and following specific steps. While the exact process may vary depending on the insurance company and the lender, here are some general guidelines to help you navigate the setup process:

1. Assess Your Financial Needs

Determine the amount of funds you need and the purpose for which you require the loan or financing. Assess your financial situation and ensure that a collateral assignment aligns with your overall financial goals and needs.

2. Identify the Lender

Research potential lenders that offer collateral assignments and select one that best meets your requirements. Consider factors such as interest rates, loan terms, and reputation when making your decision.

3. Consult with professionals

Seek the advice of financial and legal professionals who specialize in life insurance policies and collateral assignments. They can guide you through the process, provide expert recommendations, and ensure that you fully understand the implications and obligations associated with a collateral assignment.

4. Review Policy Terms

Review the terms of your life insurance policy, paying particular attention to any provisions related to collateral assignments. Understand the limitations, restrictions, and requirements set by your insurance company.

5. Draft the Collateral Assignment Agreement

Work with legal professionals to draft a collateral assignment agreement that outlines the terms and conditions of the assignment. This agreement should clearly specify the assigned portion of the death benefit, the loan amount, the repayment terms, and any other relevant provisions.

6. Obtain Signatures and Consent

Ensure that all parties involved, including yourself, the lender, and the insurance company, sign the collateral assignment agreement. The insurance company’s consent is crucial to acknowledge and approve the assignment.

7. Submit Documentation

Provide the necessary documentation to the insurance company and the lender to establish the collateral assignment. This may include copies of the collateral assignment agreement, policy documents, and any other requested information.

8. Stay Informed and Compliant

Keep track of your loan repayments and stay informed about any updates or changes related to the collateral assignment. Comply with the terms and conditions stated in the collateral assignment agreement, including making timely payments to the lender and maintaining the life insurance policy in force.

Remember that these steps are general guidelines, and the specific process may vary based on your unique situation and the requirements set by the insurance company and the lender. Consulting with professionals experienced in collateral assignments will ensure a smooth and successful setup process.

In the final section, we will conclude our discussion on collateral assignments and summarize the key points to remember.

Collateral assignments serve as a valuable tool in leveraging the benefits of a life insurance policy while accessing funds for various financial needs. By assigning a portion of the death benefit as collateral, policyholders can secure loans or financing without surrendering their policies or disrupting the benefits associated with them.

We began by understanding the basics of collateral assignments and the concept of life insurance contracts. We then explored how a collateral assignment works within the context of a life insurance policy, outlining the steps involved in setting one up.

Collateral assignments offer several benefits, including access to funds, retention of policy benefits, lower interest rates, flexible repayment terms, and diverse financial uses. However, it’s important to consider the potential risks and limitations associated with collateral assignments, such as the impact on the death benefit, default risk, limited flexibility, and complex documentation.

It’s essential to carefully evaluate your financial needs, consult with professionals, review policy terms, and draft a well-structured collateral assignment agreement. By following these steps and staying compliant with the agreement, you can navigate the collateral assignment process successfully.

To ensure a smooth and efficient setup process, it’s advisable to seek guidance from financial advisors, insurance professionals, and legal experts who can provide personalized advice based on your specific circumstances.

In summary, a collateral assignment can be a powerful strategy to utilize the accumulated cash value and death benefit of a life insurance policy while addressing immediate financial needs. However, it’s crucial to conduct thorough research, seek professional advice, and fully understand the implications and obligations associated with collateral assignments.

By carefully weighing the benefits, risks, and considerations, you can make informed decisions and effectively use collateral assignments to enhance your financial plan and achieve your goals.

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Pay no premium, but remain insurance covered – why a business idea has LIC in knots

Assignment of Life Insurance Policies is an accepted norm in many countries

How about a facility where you don’t have to pay your insurance premium, but continue to get the coverage benefits?

Seriously, ALIP or Assignment of Life Insurance Policies is an accepted norm in many countries, whereby policy holders get a way to receive the surrender value of their endowment insurance policies while keeping their life cover benefits intact by assigning their policies to a third party.

Mumbai-based firm Aceso deems to do exactly that with its ALIP service—though Life Insurance Corporation of India (LIC) recently came out with a circular that the state-run insurance behemoth is not associated with such entities.

Ironic, considering Aceso’s ALIP service is presently limited only to policy  holders of the very same LIC.

But Aceso officials are unfazed, and say it is business as usual. Aceso founder and director Ketan Mehta pointed out that as many as around half of LIC’s policies don’t reach maturity due to surrender or lapses. “ALIP addresses this by offering an alternative to surrendering  policies prematurely, allowing policyholders to access their policy’s value while safeguarding their future life coverage.”

ALIP is quite common in countries like the UK, Singapore etc., though in India, Aceso says it is the only company working this provision, and claims it will have immense scope once it catches on in the country. ALIP means that once a policy holder transfers their policy to an ALIP service provider like Aceso, they need not pay the premiums any longer but will continue to enjoy the coverage benefits. The ALIP service provider then becomes eligible to receive the maturity proceeds or death benefits, as the case may be, while the policy owner gets an amount equivalent to the surrender value that they would have got from LIC anyway.

The scope indeed is huge, as the value of surrendered policies of LIC last year alone came to 1.33 lakh crore rupees. 

However, the state-run corporation did throw a spanner in the works. “Related to entities offering to acquire (by sale, transfer or assignment) policies as an alternative to surrendering...we want to clarify that LIC is not associated with any such entity,” said a statement released by LIC on June 24. It added that “Any sale/transfer or assignment of LIC policies need to be undertaken in accordance with the Insurance Act 1938. Under applicable laws, LIC may decline to act upon any assignment of policies whereas LIC has reason to believe such transfer or assignment is not bona fide.”

However Aseco officials claim that as per a Supreme Court judgement in 2015, it was clear that policy holders had a right to assign their insurances. An insurance policy is an object of property of a citizen and can be transferred as per laws relating to property and is not necessarily governed by the Insurance Act or IRDA, they pointed out. 

Aseco officials also argued that despite the LIC circular, claims made by them on behalf of assignors were being honoured by LIC anyway. 

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