Beneficiary Nomination Under Insurance Act Can't Override Succession Law: Karnataka HC Suggests 'Better Practices' To Follow While Enacting, Amending Law

The Karnataka High Court has held that the amended Section 39 of the Insurance Act is not intended to override the provisions of law relating to succession.

In doing so the court said that a mother cannot, by virtue of being a beneficiary nominee under Section 39, claim absolute ownership over the benefits flowing from her son's insurance policy in view of the claim laid by the heirs of the deceased.

The court held that if the legal heirs of the deceased policy holder make a claim on the holder's policy, then the "nominee's claim has to yield to the personal law governing succession". 

Section 39(7) states that subject to other subsections, where the policy holder nominates his parents, spouse, children, or his spouse and children or any of them, the nominee/s shall be beneficially entitled to the amount payable by the insurer unless proved that the policy holder could not have conferred any such beneficial title. 

Section 39(8) thereafter states that if the nominee dies after the insured, but before the amount secured by the policy is paid, the amount shall be payable to the heirs or legal representatives of the nominee/s or the holder of a succession certificate, as the case may be. 

While ruling that the Insurance Act doesn't deal with issues of succession, Justice Anant Ramnath Hegde said that this should not mean that amendments to Section 39 are rendered otiose. 

It thereafter said, that the “beneficial interest” appearing in Section 39(7) and “beneficial title” appearing in Section 39(8) should be interpreted to say, that such nominee/s or their legal representatives recognised in Sections 39(7) and 39 (8) will get beneficial title over the benefits flowing from the insurance policy, if the testamentary and non-testamentary heirs do not claim the benefits flowing from the insurance policy.

"To put it differently, under the unamended provision, the nominee had an obligation to distribute the benefits flowing from the policy to the legal heirs. Under Section 39(7), there is no such obligation as long as there is no claim by the legal heirs. In the absence of any claim by legal heirs, the title vests in beneficiary nominee. However, if there is a claim by the legal heir/s, then the nominee's claim has to yield to the personal law governing succession," the court said. 

Dismissing the mother's appeal and upholding the trial court order, the high court said, “Appellant who is the mother of late Ravi Somanakatti, the insured, is one of the Class-I heirs, along with widow and minor son of the insured. Since this Court has taken a view that the Section 39 of the Act of 1938 does not override the provisions of Hindu Succession Act, 1956, the appellant who is the nominee described in Section 39 (7) of the Act of 1938 cannot claim absolute ownership over the benefits flowing from the insurance policy as other Class-I heirs of the deceased have also laid a claim over the benefits flowing from the policy”. 

Notably, in another case concerning the Succession Act, the high court had held if a nomination is made during the lifetime of a deceased, it does not amount to divesting of title after the death of the deceased, notwithstanding the legal heirs. It stated that after death, whatever the estate/amount is there, it is devolved to the legal heirs of the deceased as per the governing law of inheritance.

Background

In the present case, the court was considering whether “certain nominee/s” named in Section 39(7) and (8) of the Insurance Act who is/are conferred “beneficial interest” over the benefits under an insurance policy, would exclude the heir/s from succeeding to the benefits flowing from the insurance policy? 

The court was hearing an appeal filed by Neelavva, the mother of the deceased policyholder holder who had named her as the sole nominee for two insurance policies before his marriage. After his marriage and the birth of his child, he did not update the nomination. Following his death in 2019, a dispute arose between the mother and daughter-in-law over payout of the policy amount.

The wife and child moved a suit, which came to be decreed by the trial court holding that each of the plaintiffs and 1st defendant (mother) is entitled to 1/3rd share despite nomination. Against this, the mother moved the high court. 

The mother's counsel contended that the amended Section 39 confers an absolute right in favour of a certain class of nominees, who are termed as 'beneficiary nominees'. He argued that as the mother is falling under the category of beneficiary nominee, it would thus exclude all other heirs under the personal law–which governs the parties–from claiming any right over the benefits payable to the nominee (mother) under the insurance policy.

The counsel for the deceased son's wife submitted that the mother who is the nominee under the policies is only a custodian entitled to receive the benefits under the policy, on behalf of all the heirs, and the nominee (mother) owes a duty to disburse the amount to the legal heirs as per the personal law governing the succession.

Findings

Insurance Act doesn't deal with issues relating to Succession

The bench referred to the 190th Report of the Law Commission of India which has suggested the amendment to Section 39. It noted that reasons for amendment to Section 39 are not specifically mentioned in the Objects and Reasons for the amendment.

Then it said “The amended provision does not incorporate the clause to declare the nature of the nominee (beneficiary or collector) as suggested by the Law Commission. The clause to treat the nominee as the beneficiary nominee in the absence of any declaration by the policy holder as to the nature of nomination, suggested by the Law Commission, is also not found in the amended provision.”

Perusing the suggestions of the Law Commission (not found in the amended provision) the court said that the same indicate's that the Law Commission wanted certain class of nominee/s to exclude the heirs under law from claiming rights, suggesting an explanation of the term “beneficiary nominee”.

However, the court observed, that the Parliament has not chosen to incorporate the same."These circumstances suggest that the parliament did not want the provision relating to nomination to override the law relating to nomination," the court said. 

Emphasising that the Insurance Act 1938, was not conceived to provide law relating to Succession over the benefits flowing from the insurance policy the court said:

"The Insurance Act does not deal with issues relating to Succession. The whole object of providing insurance is to cover the risk of the “family of the insured”. Treating certain class of nominee/s as exclusive successors to the benefit flowing from the policy, to the exclusion of heirs who are not named in the nomination form, will defeat the very purpose of the Act of 1938 which seeks to cover the risk of the family/dependents of the policy holder," the court underscored. 

Noting that certain recommendations of the Law Commission are not part of the amended Section 39 it said “There are few more circumstances which suggest that the Parliament did not intend to override the law relating to succession by amending Section 39 of the Act of 1938”. 

Following which it held “It is difficult to hold that the 2015 amendment is good enough to recognize a “third mode of succession” other than non testamentary and testamentary succession provided under the law relating to succession.”

It added “The provision meddling with the law of succession does not fit in the Scheme of the Act of 1938 which occupies a different field in the Seventh Schedule as compared to “Succession'' which is found in a different List and Entry. It is difficult to hold that the Parliament has enacted a parallel law relating to succession in so far as benefits flowing from the policy of insurance.”

Better Practices to follow for enacting, amending law

The bench opined that one comes across many situations where various Courts express different views interpreting the same law. This happens because of ambiguity or lack of clarity in the language of law. The provision relating to nomination vis-à-vis law relating to succession is one such instance. Conflicting views by various Courts create confusion, lead to multiplicity of litigation, and cause delays in the disposal of cases, it said

Being conscious of the fact that Courts do not have legislative power, the high court invited the attention of stakeholders to certain "better practises" to be followed when it comes to "enacting or amending law":

(i) The Objects and Reasons for enacting or amending a law must contain clear unambiguous statements as to why the law is introduced, what is the mischief sought to be remedied by way of amendment.

(ii) Whenever the law is amended, the law must in clear specific terms state as to whether the amendment is prospective or retrospective in its operation. Whether the amendment is prospective or retrospective should not be left to speculation or interpretation by resorting to tools/rules of interpretation by interpreting the terms like “inserted” “amended” “substituted” and the like which are used to amend the law. Rules of interpretation cannot have a universal application and it will have its own limitation in ascertaining the intention of the legislator.

(iii) Acts like the Indian Contract Act, Transfer of Property Act, Indian Evidence Act etc have plenty of illustrations which explain the law with clarity and precision. Wherever needed, the law should be explained with illustrations which provide clarity to the provision of law. The practice appears to have been completely forgotten, and it is high time that such good practice is revived to bring in much needed clarity in law.

(iv) Whenever different High Courts take a different view in interpreting the law, the law maker should spring into action and clarify the position by way of an amendment and should not wait for the issue to be resolved by the Apex Court as the process may take a considerably long time. To cite an example, the controversy, whether Section 6 of the Hindu Succession Act, 1956 as amended in 2005, is prospective or retrospective is finally resolved in 2019, 14 years after the amendment. As soon as different High Courts took a different view, an amendment clarifying the position would ensure the timely resolution of many cases.

(v) There should be a conscious endeavor to frame/structure the law in simplest and easy to follow short sentences. The wholly undesirable practice of framing law, with long and complicated sentences is to be discarded at any cost. After all, the law is meant for a common man to understand and follow. The law should never be a riddle or puzzle to be solved by a trained legal mind.

Appearance: Advocate N M Patil for Appellant.

Advocate Chandrashekar M Hosmani for R1& R2,

Advocate Mrutyunjaya Tata Bangi for R3 and R4.

Citation No: 2025 LiveLaw (Kar) 93

Case Title: Neelavva @Neelamma AND Chandravva & Others.

Case No: RFA NO.100471 OF 2023

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