Harshad J. Shah and Anr. v. L.I.C. of India and Ors.

Harshad J. Shah & Anr v. L.I.C. of India & Ors.

1997 (5) SCC 64

(Ostensible Authority, Section 237 of Indian Contract Act)

FACTS:

A bearer-cheque, with the name of agent on it, towards the payment of premium was handed over to a general agent (R3) of the LIC (R1). (This payment was being made after the lapse of the grace period). The agent encashed the cheque and deposited it with the LIC. However, the insured meanwhile met an accident and died (Aug 9) the day before actual deposition took place (Aug 10). The widow of the insured (A2), (as the nominee under the policies), submitted a claim to the LIC in Gujarat State Consumer Disputes Redressal Commission. LIC refused to pay claiming a default in payment of premium.

ISSUES:

1. Whether payment of premium by the insured to the general agent of the LIC can be regarded as payment to the insurer so as to constitute a discharge of liability of the insured?
2. Whether the LIC can be held liable on the basis of the doctrine of apparent authority?

JUDGMENT(S):

State Commission (Maharashtra State Consumer Disputes Redressal Commission[1])

Contentions

• Appellant: The amount of premium collected by R3 from the insured was collected by him on behalf of the LIC.
• LIC: The amount of premium collected by the General Agent cannot be said to have been received by the LIC as it was stated that the agents are not authorized to collect the premium amount.

Held

In order to collect more business the agents of the LIC collect the premiums from the policyholders either in cash or by cheque and then deposit the money so collected in the office of the LIC and that this practice had been going on directly within the knowledge of the LIC administration despite the departmental instructions that the agents are not authorized to collect the premiums. It implies that LIC was negligent in its service towards the policyholder and was hence liable.

• Appeals were filed against the said judgment of the state commission by the appellants (not satisfied with the damage awarded) as well as by respondents(1&2).

National Commission (The National Consumer Disputes Redressal Commission)

1. It dismissed the appeals filed by the appellants and allowed the appeal filed by R1&2.
2. It held that the R3 w.r.t his act was not acting as the Agent of the LIC nor could it be deemed that the LIC had received the premium on the date the bearer cheque was received by R3.

• Appellants filed appeals in the SC.

SUPREME COURT:

Contentions

Appellants (Naresh S. Mathur )

1. Since the payment had already been made to R3, the policies did not lapse on account of non-payment of the premium and that in any event that said policies could be revived on payment of the interest payable for the delayed payment of the premium amount.
2. Since the agents receive commission on the amount of premium, the said act of R3 was within the scope of their authority and the limitation imposed (by regul’n and appointm’t letter) cannot be binding as against third parties viz., the policyholders.
3. Since, LIC by its conduct induced the policyholders to believe in the authority of the agent w.r.t the said act; LIC was liable under S.237[2] of the ICA.
4. Since LIC is ‘state’ under Article 12 of the Constitution it has a duty to act fairly in view of the mandate contained in Article 14 of the Constitution. ( LIC of India and Anr. v. Consumer Education & Research center and Ors.)

Respondent (Harish Salve)

1. R3 had not been empowered by LIC Regulations and his appointment letter to receive payment from the insured.
2. The grace period had already expired (on April 6) without due payment and the policies had lapsed. The revival of the policies was subject to LIC’s discretion and could arise only if the premium can be said to have been paid to the LIC during the life time of the insured (before August 9).
3. The agent had neither express (letter of appointment) nor implied authority (regulation 8(4)), which shows that collection of premium was neither necessary nor incidental. The issuance of the receipt for the said amount by LIC in the name of the insured does not indicate that the amount was received through R3 and that on the basis of the said receipt it cannot be said that the LIC had induced the insured.

HELD (S.C. Agrawal and G.B. Pattanaik, JJ)

Judges found considerable merit in Salve’s submission.

1. (w.r.t 3^rd contention of the Appellants) LIC did not do any sort of inducement. Doctrine of apparent authority underlying S. 237 can’t be invoked especially when the LIC has been careful in making an express provision in the Regulations/Rules, which are statutory in nature.
2. (w.r.t 4^th contention of the appellants) This constitutional obligation has no bearing on the present case. In disclaiming its liability the LIC was acting in accordance with the Regulations/Rules. The said provision has been made in public interest in order to protect the Corp. from any fraud on the part of an agent and LIC was acting quite fairly.

LAW POINTS:

Actual authority

Actual authority results from a manifestation of consent that he should represent or act for the principal made by the principal to the agent himself. It may be express or implied.

Implied authority

Implied authority may arise in the form of incidental authority, i.e., authority to do whatever is necessarily or normally incidental to the activity expressly authorised, or usual authority, i.e., authority to do whatever an agent of the type concerned would usually have authority to do, or customary authority, i.e., authority to act in accordance with such applicable business customs as are reasonable.

Apparent Authority

The doctrine of apparent authority involves the assumption that there is in fact no authority at all. Under this doctrine where a principal represents, or is regarded by law as representing, that another has authority, he may be bound as against a third party by the acts of that other person within the authority which that person appears to have though he had not in fact given that person such authority or had limited the authority by instructions not made known to the third party.