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In the case of “Harshad J. Shah v. LIC” of India, the Supreme Court went to great lengths to examine the issue of an agent’s apparent or ostensible power. When determining whether a LIC agent had the apparent authority to collect premium payments from policy-bearers, the Court considered provisions in appointment letters of agents as well as the LIC of India (Agents) Regulations, 1972, to determine the scope of the agent’s ability to act on behalf of LIC. The State Consumer Disputes Redressal Commission originally heard the dispute, but the National Consumer Disputes Redressal Commission reversed its ruling. The National Commission then filed a Supreme Court appeal in the matter.
FACTS OF THE CASE
Shah had invested Rs 25,000 in four insurance products from India’s Life Insurance Corporation (LIC). The same insurance broker acquired all of them on March 6, 1986, and they all had two unintended side effects. Every six months, the premium must be paid in full. The semi-annual agiotage was due on March 6, 1987. However, it was not paid on time. The agent later visited Shah and obtained from him a bearer cheque for Rs 2,730 with a date of June 4, 1987, as payment for the prize on all four insurances. The agent’s son cashed the check the next day, but it took several days for LIC to process and credit the payment. Shah, meanwhile, was killed on August 9 as a result of a horrible accident. As a result, the widow filed a complaint against the insurance agent and LIC with the Consumer Education & Research Society (CERS). She said that before Shah died in an accident, the broker had already collected the premium from LIC. According to LIC, the premium paid to the agent could not be regarded as having been paid to LIC because agents were not allowed to collect the premium. The Maharashtra State Commission discovered that agents would collect cash or checks for premium payments from policyholders, deposit the money at the LIC office, and then repeat the procedure to boost business. The LIC officials were aware of this behaviour even though departmental guidelines said that the agents were not permitted to collect premiums. As a consequence, it was determined that LIC was careless. The Commission subsequently gave LIC the order to satisfy the claims stemming from the four policies, minus the interest necessary to treat the policies as still in force.
LIC disagreed with the National Commission’s finding that the agent who accepted a bearer check as payment for the premium from the insured was not acting as LIC’s agent. The date that LIC received the premium, not the agency, has to be considered as a result. Because the agent paid the premium one day after the insured’s passing, the coverage had already run out. The National Commission reversed the State Commission’s judgement and rejected the case as a result. Shah’s widow subsequently contacted the Supreme Court, which looked at the 1972 Life Insurance Corporation of India (Agents) Regulations. An agent cannot accept any risk for or on behalf of the LIC following Regulation 8(4). Additionally, the broker’s letter of engagement contains this condition. In light of this ruling, the Supreme Court decided that an agent lacked any express or implied authority to take a premium on LIC’s behalf. Money paid to the agent cannot be construed as payment to LIC to establish LIC’s liability in the event of a claim.
Additionally, it was decided that the policy did not cover church attendance because the insured went away a day before the premium was due. A lapsed insurance policy may be reinstated only while the insured is still alive; this is impossible after he dies.
The SC ruled that the widow had no legal right to assert a claim under the policies. However, due to the peculiar facts and circumstances of the case, LIC was mandated to refund the full premium amount, 15% per year in interest, and costs totalling Rs 10,000.
ISSUES BEFORE THE COURT
- Is the insured released from further duties when they pay the premium to the LIC’s general agent instead of the insurer?
- Can the doctrine of apparent authority be used to hold the LIC accountable?
Implied Authority: – The power to carry out any necessary or customarily incidental actions to the activity expressly authorised is known as incidental authority. Other types of implied authority include usual authority, which is the power to carry out any usual actions an agent of the type in question would be authorised to carry out, and customary authority, which is the power to act in conformity with any reasonable and appropriate business customs.
Actual Authority: Before the agent can represent or act on behalf of the principal, the principal must give the agent his or her approval. This approval could be direct or indirect.
Apparent Authority: – The concept of apparent authority is based on the idea that no real authority exists. This doctrine holds that even if the principal did not explicitly grant authority to a person or restricted their authority through an undisclosed agreement, the principal may still be held responsible to a third party for the actions of that person, as long as those actions fall within the scope of the apparent authority that the person appears to possess.
(S.C. Agrawal and G.B. Pattanaik, JJ)
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- In response to the appellants’ third claim, LIC offered no inducement. The theory of apparent authority under S.237 cannot be used, particularly when the LIC has taken care to include an express provision in the Regulations/Rules that are of a judicial nature.
- (Relating to the appellant’s fourth point) The current circumstance has nothing to do with this constitutional obligation. By refusing its obligation, the LIC complied with the Regulations/Rules. The aforementioned provision was made in the public interest to protect the Corp. from any agent fraud, and LIC was truthful when it was developed.
After carefully weighing all the pertinent information, the two-judge panel of the Honourable Supreme Court of India concluded that the LIC department could not rely on the doctrine of apparent power because it was also responsible for carrying out the judicially linked provisions. The concept of apparent authority is predicated on the idea that there is no real authority. This doctrine states that even if the principal did not give the other person the authority or had limited the authority by a covert agreement, the principal may still be held responsible against a third party for the actions that person took while acting within the bounds of the apparent authority that person possesses.
The Court cited Section 237 of the Indian Contract Act, 1872, which states that if an agent acts or assumes duties on the behest of their principal and also the principal has caused third parties to believe that those acts and obligations are within the agent’s authority, then the principal is obligated to follow those acts and duties. The Gujarat State Consumer Disputes Redressal Commission forwarded the complaint in this case to the Maharashtra State Consumer Disputes Redressal Commission in Bombay. Despite departmental directions to the contrary, the later panel concluded that the agent for LIC accepted policyholder premium payments in cash or by check and deposited the funds in the LIC administration office to expand the business. In the end, the Supreme Court held that the principal is responsible for any activities conducted by their agent, whether or not the principal has allowed them, following Section 237 of the Indian Contract Act of 1872.
 AIR 1997 SC 2459.
 Indian Contract Act 1872, (India).
Written by Sidhant Singh