The recent Supreme court judgement in Shakti Yezdani & Anr vs Jayanand Jayant Salgaonkar & Ors has left life insurance policy holders worried.

They are worried whether a policyholder’s parents or spouse or children, whom he/she has appointed as nominee for his life insurance policy, in accordance with Section 39(7) of Insurance Act, 1938, will become owner of the claim amount payable by insurance companies or will receive this amount merely as trustees of all legal heirs as per the conventional legal understanding of the concept of nominee.

Let us understand this by way of an illustration. Ramesh has three children. In 2016, he nominated his wife in an insurance policy with the intention of making her sole owner of the proceeds, with their children having no claim over it. This was very well in accordance with Section 39(7).

However, the judgment under reference has cast a shadow of doubt over it. As per Section 39 (7), introduced in 2015, if the nominee(s) is/are parents or spouse or children, then they become owner of the policy proceeds and do not receive the amount merely as trustee on behalf of all other legal heirs.

But, the Supreme Court has not taken into account Section 39(7) while pronouncing the verdict. While deciding the legal position of nominee in a depository account, the SC declared that the nominee in a depository account is not the owner of the shares held in the account but was merely receiving it on behalf of legal heirs as their trustee.

The Court derived support from the position of nominee under life insurance policy as being merely a trustee of legal heirs. It has invoked its landmark judgement in Sarbati Devi vs Usha Devi of 1993, which held that nomination under Section 39 of the Life Insurance Act, 1938 does not create line of succession and any amount paid to a nominee on the policy holder’s death forms a part of the estate of the deceased policy holder. All his/her heirs are entitled to a share of it.

Air of confusion

According to Section 39(7) of Insurance Act,1938, if nominee(s) are parents, spouse or children, then they become owners of the policy proceeds. However, the Supreme Court Judgement says all nominees including parents, spouse or children are only trustee and not owner of proceeds. This is so because the opinion about nominee in insurance policies expressed by the apex court in the Shakti Yezdani case is part of ratio decidendi (reason for deciding) of the judgement and is not a mere opinion or obiter dictum (opinion not essential to the decision and therefore not legally binding as a precedent).

The fear is that this decision is not just a passing remark but is part of the Court’s reasoning in arriving at the conclusion, and hence may become a binding precedent — a stare decisis.

The Judgement has thus created confusion in the minds of existing life insurance policyholders — whether this decision, which is subsequent to 2015 amendment, tantamounts to writing down of the amendment [insertion of 39(7)] and will defeat their intention of making nominees owner of the policy money.

Life insurance companies and IRDAI ought to take up the matter with Supreme Court to seek clarification in the interest of large body of policyholders.

(The author is a lawyer and former investment banker)

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