Holding

The surrender value must be calculated in accordance with Section 113 of the Insurance Act and the policy’s Condition 7 using the approved actuarial factor, and LIC’s computation was therefore correct.

Summary

The appellant purchased a 25‑year endowment life insurance policy in 1993, paid premiums for 31 quarters, and in 2001 took a loan of Rs 15,000 against the policy before stopping premium payments. He sought the surrender value, and LIC offered Rs 2,268 after deducting the loan and interest, which the District Consumer Forum and State Commission rejected, ordering a higher payment; the National Consumer Disputes Redressal Commission reversed that order. The Supreme Court examined whether LIC’s method of computing the surrender value—applying a 32.92% actuarial factor to the total paid‑up value (including vested bonus) and then deducting the loan—complied with Section 113 of the Insurance Act, 1938 and Condition 7 of the policy. The Court explained that surrender value is a share of the insurer’s reserve, not the total premiums paid, and that Section 113 requires the inclusion of the bonus’s surrender value and the use of an authority‑approved formula. It held that the actuarial factor and the computation were consistent with the statutory provisions and the policy terms. Consequently, the appeal was dismissed and the National Commission’s decision upheld.

Issues considered

Whether the surrender value of a life insurance policy must include the full vested bonus or only its surrender value as mandated by Section 113 of the Insurance Act, 1938.
Whether the formula employing a 32.92% surrender‑value factor, as approved by the authority, is permissible under Section 113 and Condition 7 of the policy.
Whether the deduction of the outstanding loan and interest from the computed surrender value is proper.
Whether the award of Rs 29,888 by the consumer forums was legally justified.

Legislation cited

Insurance Act, 1938s. 113
Life Insurance Corporation Act, 1956s. 49(2)
Life Insurance Corporation Regulations, 1959s. Regulation 18(2)

Subjects

life insurancesurrender valueInsurance Act 1938policy conditionactuarial factorconsumer protectionloan against policypaid‑up value

Judgment

210 [2019]
SUPREME COURT 5 S.C.R. 210
REPORTS [2019] 5 S.C.R.

A ANANDRAO RAMCHANDRA SALUNKE
v.
LIFE INSURANCE CORPORATION OF INDIA & ANR.
(Civil Appeal No.2568 of 2019)
B MARCH 07, 2019
[DR. DHANANJAYA Y CHANDRACHUD AND
HEMANT GUPTA, JJ.]
Insurance Act, 1938 – s.113 – Life Insurance Policies –
”Surrender Value”– Appellant obtained life insurance policy in
C
November, 1993 – Sum insured was Rs.75,000/- – Term of the policy
was twenty five years – Policy envisaged the payment of quarterly
premium of Rs 775/-, spread over hundred quarters during the term
of the policy – Last premium was payable in August, 2018 and the
policy was to mature in November, 2018 – In 2001, the appellant
D took loan of Rs.15,000/- by pledging the policy – In August, 2001
the appellant stopped paying the premium and applied for the refund
of the surrender value – Corporation offered surrender value of
Rs.2268/-, after deducting the loan amount and outstanding interest
– Complaint filed by the appellant – Allowed by the District
Consumer Forum and State Commission – Reversed by National
E
Commission – On appeal, held: There are popular misconceptions
about the concept of ‘surrender value’ in the sphere of life insurance
– In a policy of fire insurance, a policy holder has no expectation
of a surrender value – In contrast, a holder of a policy of life
insurance may believe (as the appellant in the present case) that
F their surrender value will be equal to the total amount paid as
premium – This expectation is misconceived – Life insurance
operates on the basis of the law of averages – Premium is collected
from all policy holders in order to create a common fund – Payouts
from the fund are received only by those who suffer the peril which
is insured – Premia are fixed by the insurer on the basis of expected
G
mortality rates – Mortality rates increase with age – Hence, when
an insurer initially collects premium from individuals of a younger
age, the amount it collects is higher than the amount it pays out
towards claims – Difference between them is the ‘reserve’ – Thus if
a policy holder wishes to discontinue a policy before the end of the
H
210
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 211

term, they will only be entitled to their share of the ‘reserve’ as a A
surrender value – Since the value of the ‘reserve’ is the amount
which the insurer collects as premium from policy holders from which
it deducts the amount of the claims it pays out, the surrender value
payable to a policy holder can never be equal to the premia paid by
them – Surrender value of the subsisting bonus attached to the policy
B
cannot be the bonus which would have been payable had the policy
continued to its full term – In deducting the surrender value of the
bonus which was payable to the appellant, the respondent applied
the surrender value factor of 32.92% to the total paid up value of
the policy – Factor of 32.92% has been duly explained on the basis
of the actuarial table governing surrender values – What was C
payable to the insured was computed after deducting the loan which
was taken against the policy together with the outstanding interest
– Method by which the computation was carried out was in
accordance with the accepted and duly approved formula and was
consistent with the provisions of s.113 of the 1938 Act as they stood
D
at the material time as well as condition 7 of the policy document –
Life Insurance Corporation Act, 1956 – s.49(2) – Life Insurance
Corporation Regulations, 1959 – Regulation 18(2) .
The appellant obtained life insurance policy in November,
1993. The sum insured was Rs.75,000/-. Term of the policy was
twenty five years. Policy envisaged the payment of quarterly E
premium of Rs 775/-, spread over hundred quarters during the
term of the policy. Last premium was payable in August, 2018
and the policy was to mature in Nov. 18. In 2001, the appellant
took loan of Rs.15,000/- by pledging the policy. In August, 2001
the appellant stopped paying the premium and applied for the F
refund of the surrender value. The Corporation offered surrender
value of Rs.2268/-, after deducting the loan amount and
outstanding interest. Appellant filed complaint before the District
Consumer Forum, which was allowed. The State Commission
affirmed the said decision, which was reversed by National
Commission in revision. Hence, the present appeal. G

Dismissing the appeal, the Court
HELD: 1.1 There are popular misconceptions about the
concept of ‘surrender value’ in the sphere of life insurance. In a
H
212 SUPREME COURT REPORTS [2019] 5 S.C.R.

A policy of fire insurance, a policy holder has no expectation of a
surrender value. In contrast, a holder of a policy of life insurance
may believe (as the appellant in this case does) that their
surrender value will be equal to the total amount paid as premium.
This expectation is misconceived. Life insurance operates on
the basis of the law of averages. Premium is collected from all
B
policy holders in order to create a common fund. Payouts from
the fund are received only by those who suffer the peril which is
insured. The economic loss suffered by few is divided amongst
many. Premia are fixed by the insurer on the basis of expected
mortality rates. Hypothetically, if mortality rates of all individuals
C were to be equal irrespective of age and everyone paid the same
premium, the discontinuance of a policy during its term would
not entitle the insured to a surrender value since the common
fund would be depleted on a regular basis. In reality, the mortality
rates increase with age. Actuarial tables provide a guide to the
insurer. Hence, when an insurer initially collects premium from
D
individuals of a younger age, the amount it collects is higher than
the amount it pays out towards claims. The difference between
them is the ‘reserve’. Thus if a policy holder wishes to discontinue
a policy before the end of the term, they will only be entitled to
their share of the ‘reserve’ as a surrender value. Since the value
E of the ‘reserve’ is the amount which the insurer collects as
premium from policy holders from which it deducts the amount
of the claims it pays out, the surrender value payable to a policy
holder can never be equal to the premia paid by them. In
computing the surrender value of any subsisting bonus, reference
ought to be made to the stipulations contained in Section 113,
F
Insurance Act, 1938. The first proviso to Section 113(1) provides
that the requirement of the addition of the surrender value of the
bonus attaching to the policy at surrender is deemed to have
been fulfilled where the method of calculating the guaranteed
surrender value makes provision for the surrender value of the
G bonus attaching to the policy. The second proviso stipulates that
the requirement of showing the guaranteed surrender value on a
policy is deemed to have been complied with where the insurer
shows on the policy the guaranteed surrender value by means of
a formula which is accepted by the authority as satisfying the
H
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 213

requirements under the third proviso. The requirement of A
showing the guaranteed surrender value shall not take effect until
six months have expired from the date of publication of the
notification in the Official Gazette. [Paras 11, 13 and 16]
[220-D-G; 221-C; 223-B-C]
1.3 Condition 7 of the policy document specifically provides B
that the surrender value is equal to 30% of the total premiums
paid, excluding premiums for the first year and all extra premiums
and/or additional premiums for accident benefits that may have
been paid. The paid up value of the policy on that basis was
computed by taking into account the premiums that were paid by
the insured. The paid up value of the policy worked out to Rs C
23,250/-. The factor of 32.92% has been duly explained on the
basis of the actuarial table governing surrender values which has
been placed on record. The vested bonus which accrued, stood
at Rs 42,187/- at the rate of Rs 562.5 per Rs 1,000/-, according to
the bonus chart for endowment policies as on 31 March 2001. D
There was no error on the part of the respondent in computing
the surrender value of the subsisting bonus, on the basis on which
it has been computed. The surrender value of the subsisting bonus
attached to the policy cannot be the bonus which would have been
payable had the policy continued to its full term. In deducing the
surrender value of the bonus which was payable to the appellant, E
the respondent applied the surrender value factor of 32.92% to
the total paid up value of the policy. The total paid up value
comprised of the paid up value (Rs 23,250/-) and the vested bonus
(Rs 42,187/-). Hence, the total paid up value of the policy was
Rs. 65,437/- to which the surrender value factor of 32.92% was F
applied. This resulted in a surrender value of Rs 21,542/-. What
was payable to the insured was computed after deducting the
loan which was taken against the policy together with the
outstanding interest. The method by which the computation was
carried out was in accordance with the accepted and duly approved
formula. It was consistent with the provisions of Section 113 of G
the Act as they stood at the material time as well as condition 7 of
the policy document. [Paras 17-20] [223-D-H; 224-A-E]
Branch Manager, LIC of India v. A Paulraj (1969) 2
CPJ 69 – referred to.
H
214 SUPREME COURT REPORTS [2019] 5 S.C.R.

A “Modern Law of Insurance in India”, N.M Tripathi
Private Limited, First Edition (1978) – referred to.
Charles C. Bulingham v. Charles M. Crouse 228 U.S.
459 (1913); In re McKinney 15 Fed. Rep. 535, 537 –
referred to.
B Case Law Reference
(1969) 2 CPJ 69 referred to Para 4
CIVIL APPELLATE JURISDICTION: Civil Appeal No.2568 of
2019.

C From the Judgment and Order dated 28.04.2014 of the National
Consumers Disputes Redressal Commission, New Delhi in RP No.2822
of 2013.
L.D. Doshi, Amol Nirmalkumar Suryawanshi, Advs. for the
Appellant.
D Ashok Panigrahi, Anmol Tayal, S. Vinay Ratnakar, Advs. for the
Respondents.
The Judgment of the Court was delivered by
DR DHANANJAYA Y CHANDRACHUD, J. 1. Leave
granted.
E
2. This appeal arises from a decision of the National Consumer
Disputes Redressal Commission1 reversing a judgment of the Maharashtra
Consumer Disputes Redressal Commission2.
3. The appellant obtained a policy of life insurance on 11
F November 1993. The sum insured was Rs 75,000. The term of the
policy was twenty five years. The policy envisaged the payment of a
quarterly premium of Rs 775, spread over a hundred quarters during the
term of the policy. The last premium was payable on 11 August 2018
and the policy was to mature on 11 November 2018. On 27 May 2001,
the appellant took a loan of Rs 15,000 from the Ratnagiri Branch of the
G Life Insurance Corporation by pledging the policy. In August 2001, the
appellant stopped paying the premium. Thereafter, he applied for the
refund of the surrender value. The Corporation offered a surrender value
of Rs. 2268, after deducting the loan amount and outstanding interest.
1
“National Commission”
H 2
“StateCommission“
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 215
[DR. DHANANJAYA Y CHANDRACHUD, J.]

4. The appellant filed a complaint before the District Consumer A
Disputes Redressal Forum, Sangli3. The District Forum allowed the
complaint and directed the respondent to pay an amount of Rs 29,888
together with interest at 9% p.a. with effect from 21 July 2004. The
decision of the District Forum was challenged in appeal by the respondent.
The State Commission affirmed the decision. In revision, the National
B
Commission reversed the decision, relying on its earlier decision in Branch
Manager, LIC of India v A Paulraj4.
5. The controversy involved in the present case turns on the
interpretation of the provisions of Section 113 of the Insurance Act, 19385
and Clause 7 of the policy document. Section 113 of the Act, as it stood
at the material time was in the following terms: C

“113. Acquisition of surrender value by policy-
(1) A policy of life insurance under which the whole of the benefits
become payable either on the occurrence, or at a fixed interval
or fixed intervals after the occurrence, of a contingency which is D
bound to happen, shall, if all premiums have been paid for at least
three consecutive years in the case of a policy issued by an
insurer, or five years in the case of a policy issued by a provident
society defined in Part III, acquire a guaranteed surrender value,
to which shall be added the surrender value of any subsisting
bonus already attached to the policy, and every such policy issued E
by insurer shall show the guaranteed surrender value of the
policy at the close of each year after the second year of its
currency or at the close of each period of three years throughout
the currency of the policy: Provided that the requirements of this
sub-section as to the addition of the surrender value of the bonus F
attaching to the policy at surrender shall be deemed to have been
complied with where the method of calculation of the guaranteed
surrender value of the policy makes provision for the surrender
value of the bonus attaching to the policy: Provided further that
the requirements of this sub-section as to the showing of the
guaranteed surrender value on a policy shall be deemed to have G
been complied with where the insurer shows on the policy the
3
“District Forum”
4
(1996) 2 CPJ 69. The National Commission approved the calculation of cash value of
bonus payable in accordance with the surrender value factor.
5
“the Act” H
216 SUPREME COURT REPORTS [2019] 5 S.C.R.

A guaranteed surrender value of the policy by means of a formula
accepted in this behalf by the Authority as satisfying the said
requirements: Provided further that the provisions of this sub-
section as to the showing of the guaranteed surrender value on a
policy shall not take effect until after the expiry of six months
from such date as the Authority may, by notification in the
B
official Gazette, appoint in this behalf.
(2) Notwithstanding any contract to the contrary, a policy which
has acquired a surrender value shall not lapse by reason of the
non-payment of further premiums but shall be kept alive to the
extent of the paid-up sum insured, and the paid-up sum insured
C shall for the proposes of this sub-section include in full all subsisting
reversionary bonuses that have already attached to the policy,
and shall, where the policy is one on which the maximum number
of annual premiums payable is fixed and the premiums are of
uniform amount, be before the inclusion of such bonuses not less
D than the amount bearing to the total sum insured by the policy
exclusive of bonuses the same proportion as the total period for
which premiums have already been paid bears to the maximum
period for which premiums were originally payable.
(3) A policy kept alive to the extent of the paid-up sum insured
E under sub section (2) shall not be entitled by virtue of that sub-
section to participate in any profits declared distributable after the
conversion of the policy into a paid-up policy.
(4) Sub-section (2) and sub-section (3) shall not apply -
(a) where the paid-up sum insured by a policy being a policy issued
F by an insurer, is less than one hundred rupees inclusive of any
attached bonus or takes the form of an annuity of less than twenty-
five rupees, or where the paid-up sum insured by a policy, being a
policy issued by a provident society as defined in Part III, is less
than fifty rupees inclusive of any attached bonus or take the form
G of an annuity of less than twenty-five rupees, or
(b)where the parties after the default has occurred in the payment
of the premium agree in writing to some other arrangement, or
(c) to policies in which the surrender value is automatically applied
under the terms of the contract to maintaining the policy in force
H after its lapse through non-payment of premium.”
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 217
[DR. DHANANJAYA Y CHANDRACHUD, J.]

Section 113 was amended on 20 March 2015, with effect from A
26 December 2014.6. For the purposes of this case, we are concerned
with the pre-amended provision.
6. Condition 7 of the policy document reads thus:
“7. Guaranteed surrender value
This policy can be surrendered for cash after the premiums have B
been paid for at least three years. The minimum surrender value
allowable under this policy is equal to 30% of the total amount of
the mentioned premiums paid excluding premiums for the first
year and all extra premiums and/or additional premiums for
accident benefits that may have been paid. The cash value of any C
existing vested bonus additions will also be allowed.”
(emphasis supplied)
7. The basis on which the respondent arrived at the surrender
value which was payable to the appellant is reflected in the following
computation:
D
COMPUTATION:
· Sum Assured : Rs 75,000
· Mode – Quarterly Premium : Rs 775
· Total No. of Premia Payable : 100 Quarters (i.e. 25 years) E
1
Following the amendment, Section 113 is as follows:
“113. Acquisition of surrender value by policy-
(1) A policy of life insurance shall acquire surrender value as per the norms specified
by the regulations.
(2) Every policy of life insurance shall contain the formula as approved by the Authority
for calculation of guaranteed surrender value of the policy. F
(3) Notwithstanding any contract to the contrary, a policy of life insurance under a
non-linked plan which has acquired a surrender value shall not lapse by reason of non-
payment of further premiums but shall be kept in force to the extent of paid-up sum
insured, calculated by means of a formula as approved by the Authority and contained
in the policy and the reversionary bonuses that have already been attached to the
policy:
G
Provided that a policy of life insurance under a linked plan shall be kept in force in the
manner as may be specified by the regulations.
(4) The provisions of sub-section (3) shall not apply—
(i) where the paid-up sum insured by a policy, inclusive of attached bonuses, is less
than the amount specified by the Authority or takes the form of annuity of amount less
than the amount specified by the Authority; or
(ii) when the parties, after the default has occurred in payment of the premium, agree in H
writing to other arrangement.”
218 SUPREME COURT REPORTS [2019] 5 S.C.R.

A · Date of commencement of the policy : 11.11.1993
· Premium paid upto 11.08.2001 : 31 Premia
· Duration of premium paid : 7 years 9 Months (i.e. 31
Quarters)
B · Loan of Rs 15,000 taken on 27.05.2001
· Paid-Up Value : (No. of paid premia multiplied by Sum
Assured)/Total No. of Premia i.e. (31 multiplied by Rs.75,000)/
100 = Rs 23,250
· Vested Bonuses : Rs 42,187 (at the rate of Rs 562.5 per
C 1,000 as per Bonus chart for endowment policy as on 31.03.2001
(Annexure-4)
· Total paid up value : paid up value + vested bonus i.e.
Rs 23,250 + 42,187 = Rs 65,437 ( as per condition no. 4 as per
the policy)
D
· Surrender Value Factor : 32.92% (as per Surrender value
Table No.1A applicable to endowment policy (Annexure-5)
· Surrender Value Payable as on 14.05.2004 : total Paid-Up
Value multiplied by Surrender Value Factor i.e. Rs 65,437 mul-
tiplied by 32.92% = Rs 21,542
E
· Outstanding Loan amount with interest : Principal + Interest
i.e. Rs 15,000 + Rs 4,274 = Rs 19,274
· Net amount payable as on 14.05.2004 : Surrender Value
Payable - Outstanding Loan Amount with interest i.e. Rs
F 21,542-19,274 = 2,268/-
· Guaranteed Surrender Value (as per condition No. 7 of the
policy)- 30% of the total premium paid excluding premium paid
for the first year and all extra premiums that may have been
paid i.e. 30% multiplied by (Total Premium paid - 1st year pre-
G mium) : 30% multiplied by(Rs 24,025-Rs 3,100)= Rs6,277
· Cash value of the vested bonus : 32.92% of the Vested
Bonus i.e. 32.92% of Rs 42,187 = 13,888
· Total Guaranteed Surrender Value : Rs 20,165

H
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 219
[DR. DHANANJAYA Y CHANDRACHUD, J.]

· Net Amount Payable as on 14.05.2004 : Guaranteed A
Surrender Value Payable – Outstanding Loan amount with in-
terest : Rs 20,165-Rs 19,274 = Rs 891/-.
8. Learned counsel appearing on behalf of the appellant submits
that the appellant has a grievance in regard to the manner in which the
computation of the surrender value of the bonus payable was arrived at. B
According to the submission, the respondent has applied a factor of
32.92% in arriving at the surrender value not only with reference to the
premia which were paid but also in regard to the bonus to which the
appellant claims to be entitled. The following findings of the District
Forum were relied upon during the course of arguments:
C
“Considering the terms and conditions in the policy and calculations
by the respondent at exhibit 5/6, it is observed that the respondent
has stated that 32.92% of the Premium amount and Bonus amount
put together is payable. The respondent has not brought to notice
any term or condition in the policy providing for 32.92% reduction
in amount of Bonus. Therefore, as per calculations of the D
respondent at exhibit 5/6 32.92% of the premium of Rs.23250/-
i.e. premium of Rs.6975/- is payable. Further, it is clear that the
amount at the end of calculations against exhibit 5/6 i.e. Bonus
minus loan amount of Rs.19274, is due from the respondent.
Therefore, it is clear that 32.92% of the entire amount payable, E
plus amount of bonus payable, minus amount of outstanding loan
(6975+42187-19274=29888) is the amount payable.”
While affirming this finding, the State Commission held that the
formula for the purpose of the guaranteed surrender value was required
to be approved by the competent authority under Section 113. The State F
Commission held that no material was produced before it to indicate that
the surrender value formula was approved by the competent authority.
9. Assailing the above submission, learned counsel appearing on
behalf of the respondent has placed reliance on the reply which was
filed by the Life Insurance Corporation in the proceedings before the G
District Forum to explain the basis of computing the surrender value.
Learned Counsel urged that Section 113 does not speak about the payment
of the full value of the subsisting bonus. On the contrary, it specifically
adverts to only its surrender value. Learned counsel submitted that the
first proviso to Section 113 provides that the requirements of the section
H
220 SUPREME COURT REPORTS [2019] 5 S.C.R.

A shall be deemed to have been complied with where the method of
calculation for computing the guaranteed surrender value of the policy
makes a provision for surrender value of the bonus attached to the policy
as well. The second proviso provides that the requirement as to the
showing of the guaranteed surrender value shall be deemed to have
been complied with where the insurer shows on the policy the guaranteed
B
surrender value by means of a formula accepted by the authority as
specifying the requirement. The third proviso, it has been submitted,
provides that the second aspect of Section 113 relating to the requirement
of showing the guaranteed surrender value of the policy shall not take
effect until the expiry of six months from the date of notification in the
C Official Gazette.
10. The rival submissions need to be analysed.
11. There are popular misconceptions about the concept of
‘surrender value’ in the sphere of life insurance. In a policy of fire
insurance, a policy holder has no expectation of a surrender value. In
D contrast, a holder of a policy of life insurance may believe (as the appellant
in this case does) that their surrender value will be equal to the total
amount paid as premium. This expectation is misconceived. Simply put,
life insurance operates on the basis of the law of averages. Premium is
collected from all policy holders in order to create a common fund.
Payouts from the fund are received only by those who suffer the peril
E
which is insured. The economic loss suffered by few is divided amongst
many. Premia are fixed by the insurer on the basis of expected mortality
rates. Hypothetically speaking, if mortality rates of all individuals were
to be equal irrespective of age and everyone paid the same premium,
the discontinuance of a policy during its term would not entitle the insured
F to a surrender value since the common fund would be depleted on a
regular basis. In reality, the mortality rates increase with age. Actuarial
tables provide a guide to the insurer. Hence, when an insurer initially
collects premium from individuals of a younger age, the amount it collects
is higher than the amount it pays out towards claims. The difference
between them is the ‘reserve’. Thus if a policy holder wishes to
G
discontinue a policy before the end of the term, they will only be entitled
to their share of the ‘reserve’ as a surrender value.
12. In his treatise on the subject, tilted “Modern Law of Insurance
in India” K.S.N. Murthy has elucidated on the concept of “surrender
value” in life insurance policies in the following terms:
H
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 221
[DR. DHANANJAYA Y CHANDRACHUD, J.]

“Life insurance is based on the cooperative principle in the sense A
that the premiums paid by the policy holders are pooled together
and after meeting the preliminary expenses of administration, etc.,
the balance is formed into or added to a fund which is invested in
good business or which attracts an accumulated interest. On that
basis when the calculations are made, and if one of the policy
B
holders withdraws from such a cooperative enterprise, the
remaining policy holders suffer a set-back and it is the duty of the
seceding policy holder to make good not only the administrative
expenses, etc., incurred, but something more must be deducted:
but that amount also must be fair and equitable.”7
13. Since the value of the ‘reserve’ is the amount which the insurer C
collects as premium from policy holders from which it deducts the amount
of the claims it pays out, the surrender value payable to a policy holder
can never be equal to the premia paid by them.
14. In a decision of 1913 in Charles C. Burlingham v Charles
M. Crouse8, the Supreme Court of the United States was tasked with D
interpreting a provision of the Bankruptcy Code in relation to ownership
of life insurance policies. Justice Day, who delivered the opinion of the
Court, drew a distinction between insurance policies which have a
surrender value and policies which do not have a surrender value:
“…Life insurance, may be given in a contract providing simply E
for payment of premiums on a calculated basis which accumulates
no surplus for the holder. Such insurance has no surrender value.
Policies, whether payable at the end of a term of years or at
death, may be issued upon a basis of calculation which accumulates
a net reserve in favor of the policy-holder and which forms a
consequent basis for the surrender of the policy by the insured F
with advantage to the company upon the payment of a part of this
accumulated reserve.”
The Court cited the decision of the Court of the Southern District
of New York, in In re McKinney9 to elucidate on the concept of
surrender value. Justice Brown had held thus: G
“The first of these elements, the surrender value of the policy,
arises from the fact that the fixed annual premium is much in
7
Modern Law of Insurance in India, N.M. Tripathi Private Limited, Bombay, First
Edition (1978).
8
228 U.S. 459(1913)
9
15 Fed. Rep. 535, 537
H
222 SUPREME COURT REPORTS [2019] 5 S.C.R.

A excess of the annual risk during the earlier years of the policy, an
excess made necessary in order to balance the deficiency of the
same premium to meet the annual risk during the latter years of
the policy. This excess in the premium paid over the annual cost
of insurance, with accumulations of interest, constitutes the
surrender value. Though this excess of premiums paid is legally
B
the sole property of the company, still in practical effect, though
not in law, it is moneys of the assured deposited with the company
in advance to make up the deficiency in later premiums to cover
the annual cost of insurance, instead of being retained by the
assured and paid by him to the company in the shape of greatly
C increased premiums, when the risk is greatest. It is the ‘net reserve’
required by law to be kept by the company for the benefit of the
assured, and to be maintained to the credit of the policy. So long
as the policy remains in force the company has not practically
any beneficial interest in it, except as its custodian, with the
obligation to maintain it unimpaired and suitably invested for the
D
benefit of the insured. This is the practical, though not the legal,
relation of the company to this fund.
“Upon the surrender of the policy before the death of the assured,
the company, to be relieved from all responsibility for the increased
risk, which is represented by this accumulating reserve, could well
E afford to surrender a considerable part of it to the assured, or his
representative. A return of a part in some form or other is now
usually made…”
15. The issue before the Court is as to whether the provisions of
Section 113 of the Act and condition 7 of the policy document were duly
F observed by the insurer. Section 113(1) is in two parts:
(i) A policy of life insurance under which the whole of the ben-
efits become payable either on the occurrence of a contingency which
is bound to happen or at fixed intervals, acquires a surrender value if all
the premiums have been paid for at least three consecutive years. The
G surrender value of any subsisting bonus already attached to the policy is
to be added to the guaranteed surrender value;
(ii) Every such policy which is issued by an insurer must show the
guaranteed surrender value of the policy at the close of each year after

H
ANANDRAO RAMCHANDRA SALUNKE v. L I.C. OF INDIA 223
[DR. DHANANJAYA Y CHANDRACHUD, J.]

the second year of its currency or at the close of each period of three A
years throughout the currency of the policy.
16 In computing the surrender value of any subsisting bonus,
reference ought to be made to the stipulations contained in Section 113.
The first proviso to Section 113(1) provides that the requirement of the
addition of the surrender value of the bonus attaching to the policy at B
surrender is deemed to have been fulfilled where the method of
calculating the guaranteed surrender value makes provision for the
surrender value of the bonus attaching to the policy. The second proviso
stipulates that the requirement of showing the guaranteed surrender value
on a policy is deemed to have been complied with where the insurer
shows on the policy the guaranteed surrender value by means of a formula C
which is accepted by the authority as satisfying the requirements under
the third proviso. The requirement of showing the guaranteed surrender
value shall not take effect until six months have expired from the date of
publication of the notification in the Official Gazette.
17. In exercise of the powers conferred by Section 49(2) of the D
Life Insurance Corporation Act, 1956, the Central Government notified
the Life Insurance Corporation Regulations 195910. Regulation 18(2)
empowers the Executive Committee to accept the surrender of any
insurance or annuity and to purchase or redeem any insurance or annuity
and to waive the forfeiture of any insurance on such terms as the E
Executive Committee may deem fit. The respondent has placed on the
record a copy of the Minutes of the Seventy-seventh meeting of the
Executive Committee of the Life Insurance Corporation of India held on
19 August 1959. At that meeting, the Executive Committee approved of
the proposed scale of surrender values. The note on the basis of which
the approval was granted has also been annexed. F

18. We have considered the basis of the computation which has
been placed before the Court and which has been extracted in the earlier
part of this judgment. Condition 7 of the policy document specifically
provides that the surrender value is equal to 30% of the total premiums
paid, excluding premiums for the first year and all extra premiums and/ G
or additional premiums for accident benefits that may have been paid.
The paid up value of the policy on that basis was computed by taking
into account the premiums that were paid by the insured. The paid up
value of the policy worked out to Rs 23,250.
10
“the Regulations” H
224 SUPREME COURT REPORTS [2019] 5 S.C.R.

A 19. The real dispute in the present case arose because of the
claim of the appellant that he was entitled to the entirety of the bonus
and not 32.92% of the total bonus that would have accrued had the
policy continued to its term of maturity. The factor of 32.92% has been
duly explained on the basis of the actuarial table governing surrender
values which has been placed on record. The vested bonus which
B
accrued, stood at Rs 42,187 at the rate of Rs 562.5 per Rs 1,000, according
to the bonus chart for endowment policies as on 31 March 2001. There
was no error on the part of the respondent in computing the surrender
value of the subsisting bonus, on the basis on which it has been computed.
The surrender value of the subsisting bonus attached to the policy cannot
C be the bonus which would have been payable had the policy continued
to its full term. In deducing the surrender value of the bonus which was
payable to the appellant, the respondent applied the surrender value factor
of 32.92% to the total paid up value of the policy. The total paid up value
comprised of the paid up value (Rs 23,250) and the vested bonus (Rs
42,187). Hence, the total paid up value of the policy was Rs 65,437 to
D
which the surrender value factor of 32.92% was applied. This resulted
in a surrender value of Rs 21,542. What is payable to the insured was
computed after deducting the loan which was taken against the policy
together with the outstanding interest.
20. For the above reasons, we are of the view that the method by
E which the computation was carried out was in accordance with the
accepted and duly approved formula. It was consistent with the provisions
of Section 113 of the Act as they stood at the material time as well as
condition 7 of the policy document.
21. We, therefore, do not find any merit in the appeal. The appeal
F is, accordingly, dismissed. There shall be no order as to costs.

Divya Pandey Appeal dismissed.

G

H