The National Consumer Disputes Redressal Commission clarified that when a bank lawfully assigns a policy under the SARFAESI Act, the insurer cannot be held liable for deficiency of service for surrendering the policy without the original policyholder’s consent. The decision also directs the bank to release the surrender proceeds within a month, with interest thereafter, reshaping the approach to consumer claims involving assigned insurance policies.
Background & Facts
The Dispute
The petitioner, identified as complainant 3, obtained a life insurance policy from the respondents - LIC of India (the insurance company) - on 28.12.2001. The policy carried a sum assured of Rs 5,00,000 and a maturity date of 08.12.2026. Subsequently, the petitioner secured a credit limit of Rs 79,000 from IDBI Bank Ltd. (the bank) by assigning the policy as security.
Key Facts
- 28.12.2001: Insurance policy issued to the petitioner.
- 06.12.2007: Letter of assignment executed by the petitioner, transferring all rights in the policy to the bank.
- 15.11.2011: Bank informed the petitioner that it had no objection if the insurance company continued the policy.
- 05.10.2011: Insurance company issued cheque No. 249287 for Rs 2,26,325 as surrender value to the bank.
- 17.11.2011: Petitioner received the cheque; by then he had cleared the bank loan on 15.11.2011.
- 22.03.2012: Petitioner sent a legal notice to both the bank and the insurer seeking revival of the policy.
- 15.06.2016: Insurer circulated a notice about a campaign for revival of lapsed policies, allowing renewal within five years.
- 04.02.2015: District Consumer Disputes Redressal Commission (District Commission) allowed the complaint, ordering reinstatement of the policy and directing the bank to refund Rs 2,26,325 to the insurer.
- 21.09.2016: State Consumer Disputes Redressal Commission (State Commission) set aside the District Commission’s order as to the insurer, holding that the bank’s assignment gave it control over the policy.
- 01.12.2016: Bank sent a pay order for Rs 2,26,325 to the petitioner, which remained unencashed because the petitioner had closed his accounts.
- 02 August 2026: NCDRC disposed the revision petition.
Procedural History
- 04.02.2015: Complaint filed before the District Commission (Consumer Complaint No. 257 of 2012). Order reinstating the policy and directing refund.
- 21.09.2016: Appeal filed before the State Commission; order set aside insofar as it related to the insurer.
- 02 August 2026: Revision petition (RP No. 3591 of 2016) filed before the National Consumer Disputes Redressal Commission; present order delivered.
Parties' Positions
- Petitioner: Asserted that the insurer surrendered the policy without his consent, causing loss of the sum assured; sought reinstatement of the policy.
- Insurance Company (Respondent 1 & 2): Contended that the policy had been lawfully assigned to the bank; surrender was executed on the bank’s instructions; no deficiency of service.
- IDBI Bank Ltd. (Respondent 3): Maintained that the assignment was valid under Section 5 of the SARFAESI Act, 2002; therefore it was entitled to surrender the policy and receive the surrender value.
Relief Sought
The petitioner prayed for a direction to the insurer to reinstate the policy and for compensation for alleged deficiency of service.
The Legal Issue
Whether, under Section 21(b) of the Consumer Protection Act, 1986, the insurer can be held liable for deficiency of service when a policy has been lawfully assigned to a bank under Section 5 of the SARFAESI Act, 2002, and whether the bank must refund the surrender proceeds to the petitioner.
Arguments Presented
For the Petitioner
- The petitioner argued that the surrender was effected without his explicit consent, violating the insurer’s duty of service under the Consumer Protection Act.
- He relied on the insurer’s internal policy allowing renewal of lapsed policies within five years, contending that the surrender amounted to a lapse rather than a lawful assignment.
- The petitioner cited the legal notice dated 22.03.2012 as evidence of his demand for revival of the policy.
For the Respondents
- The insurance company and the bank relied on the assignment dated 06.12.2007, asserting that the bank, as the assignee, acquired full rights to direct surrender under the SARFAESI Act.
- They highlighted the State Commission’s finding that the bank exercised control over the policy, negating any duty to issue a separate notice to the original policyholder.
- The respondents pointed to the provisions of the SARFAESI Act, which empower a secured creditor to assign its security and to enforce surrender without further consent from the borrower.
The Court's Analysis
The Commission examined the scope of Section 21(b) of the Consumer Protection Act, 1986, which deals with deficiency of service. It held that a service provider is liable only when it fails to perform a duty owed to the consumer. Here, the insurer’s duty was to act on the lawful instructions of its assignee, the bank.
The Commission noted that the assignment executed on 06.12.2007 was in compliance with Section 5 of the SARFAESI Act, 2002, a non-obstante clause that recognises the right of a secured creditor to assign its financial assets. Precedents such as ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd. were relied upon to affirm the validity of such assignments.
The insurer’s surrender of the policy and issuance of cheque No. 249287 for Rs 2,26,325 were therefore deemed to be in accordance with the bank’s lawful direction. The Commission observed that the insurer had no independent obligation to obtain the petitioner’s consent once the policy was assigned.
"there is no deficiency of service on the part of the insurance company and they have acted as per the rules and procedure."
Consequently, the petition for reinstatement was dismissed. However, the Commission found that the bank had retained the surrender proceeds in a suspense account and had not released them to the petitioner. In the interest of equity, the Commission directed the bank to release the amount within a month, with interest at 6 % per annum accruing thereafter.
The Verdict
The revision petition was disposed. The insurer was absolved of any deficiency of service. The bank was ordered to release the surrender amount of Rs 2,26,325 to the petitioner within one month from the date of the order; failing which, interest at 6 % per annum shall accrue from the expiry of that month. No costs were awarded.
What This Means For Similar Cases
Assignment Determines Liability
- Practitioners must verify the existence and validity of any assignment of an insurance policy before alleging deficiency of service against the insurer.
- A valid assignment under the SARFAESI Act transfers the insurer’s duty to the assignee, shielding the insurer from liability for actions taken on the assignee’s instructions.
Consumer Claims Must Address Secured Creditors
- When a consumer’s loan is secured by an insurance policy, the bank’s rights under the SARFAESI Act supersede the consumer’s direct contractual rights with the insurer.
- Counsel should advise clients to raise any grievance against the bank rather than the insurer, unless the insurer acted outside the scope of the assignment.
Interest and Timelines Are Enforceable
- The Commission’s direction to pay interest at 6 % per annum after a one-month grace period sets a clear precedent for quantifying post-judgment interest in consumer disputes involving monetary refunds.
- Failure to comply within the stipulated period invites automatic accrual of interest, reinforcing the importance of strict adherence to court-mandated timelines.
