Judgement against SBI Life Insurance in the Allahabad High Court when a 67 year old man was mis sold a policy.

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Judgment reserved on 02.5.2014
Judgment delivered on 29.5.2014
WRIT PETITION NO.8879 (M/B) OF 2013
Dr. Virendra Pal Kapoor vs. Union of India & ors
Hon'ble Sunil Ambwani, J.
Hon'ble D.K. Upadhyaya, J.
1. We have heard Shri Dhruv Kumar, learned counsel appearing
for the petitioner. The office of Assistant Solicitor General of India,
Lucknow Bench of Allahabad High Court has accepted notice on
behalf of Union of India. Mohd. Altaf Mansoor appears for Insurance
Regulatory and Development Authority-respondent No. 2, Shri
Sudeep Seth has accepted notice on behalf of State Bank of India-
respondent no.3. Shri Sachin Garg appears for SBI Life Insurance
Company Limited-respondent no.4.
2. Dr. Virendra Pal Kapoor-the petitioner is a senior citizen aged
72 years. He retired as a Scientist of National Botanic Research
Institute and is settled at Lucknow. He invested Rs.50,000/- in the
year 2007 in SBI Life - “UNIT PLUS II – Single”, a Unit Linked
Product offered by SBI Life Insurance Company Limited with an
option of a limited term of five years (from 9.1.2007 to 9.1.2012), on
the basic sum assured for life with risk cover at 625% of
Rs.3,12,500/-, with a choice of investment in growth fund (100%).
The petitioner survived the term of the policy of five years. On its
maturity he was paid only Rs.248/- as a balance in the fund, on
which the policy was terminated.
3. By this writ petition the petitioner has prayed for directions to
declare Circular No.032/IRDA/Act/Dec-2005 dated 21.12.2005 as
ultra vires the Insurance Act, 1938 so far as it relates to the deduction

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of charges from the policy holders fund; to issue a writ of mandamus
commanding the State Bank of India-respondent no.3 not to allow
use of Logo, Branch Name i.e. SBI, their Banking Branches, their
employees etc. for the purpose of selling or soliciting the insurance
business of the respondent no.4-SBI Life Insurance Company
Limited. He has also prayed for a direction in the nature of
mandamus commanding the Insurance Regulatory and Development
Authority (IRDA) to ensure that the commission is not paid to the
insurance agents and intermediaries etc. from the investment
component under ULIP policies and further a direction to State Bank
of India not to give publicity to the fact that it does not underwrite
the risk or act as an insurer as provided under Clause (g) of
Regulation 9 of Licensing to Corporate Agents Regulations, 2002.
The petitioner has also prayed for a writ of mandamus commanding
the IRDA to redress the grievance of the petitioner as contained in
petitioner's representation dated 8.2.2012.
4. It is submitted by Shri Dhruv Kumar, appearing for the
petitioner that the petitioner was misled by SBI Insurance Company
Limited, of which the policies are sold by the employees of the State
Bank of India, in the premises of State Bank of India to opt for the
Unit Linked Product – SBI Life - “UNIT PLUS II – Single” which
also offered an option of investment in the mutual fund to be
managed by the so-called experts of the company and for which they
charge the fund administrative charges and fund management
charges from the subscribers.
5. In the counter affidavit of Shri Rohit Kumar, A.G.M.
(Personnel Banking-I),LHO, State Bank of India, Lucknow it is
stated that the State Bank of India is a statutory corporation formed
under the State Bank of India Act, 1955. It derives its name from
Section 3 (1) of the State Bank of India Act, 1955. Its logo/emblem is

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duly registered under the Copyright Act, 1957. The State Bank Life
Insurance Company Limited (SBI Life) is a subsidiary of State Bank
of India. It is a joint venture between State Bank of India and BNP
Paribas, Cardiff, England. The State Bank of India owns 76% of the
total capital and BNP Paribas, Cardiff has the remaining 24%. The
SBI has the authority to carry out life insurance business in terms of
the guidelines issued by IRDA, the licensing authority. The
Government of India holds 62.3130% of the issued equity shares in
State Bank of India. The holding of State Bank of India in SBI Life
being 76%, the indirect holding of Central Government, in SBI life is
less than 50%, as such, the opposite party no.4 does not come within
the purview of the term State under Article 12 of Constitution of
India, 1950. In the composition of board of directors of SBI Life,
four directors are from State Bank of India; two from BNP Paribas
and four independent directors. The State Bank of India does not
have majority of directors in the board of directors of SBI Life and
that the Government of India does not have any direct or pervasive
control over the affairs of SBI Life.
6. It is stated that in terms of Regulation 4 of Insurance
Regulatory and Development Authority (Licensing of Corporate
Agents) Regulations, 2002 the State Bank of India entered into an
agreement with SBI Life on 19.2.2005, in terms of which the SBI
expressed its willingness to be appointed as a corporate agent of SBI
Life for the purposes of soliciting and procuring life insurance
business and selling of life insurance products. As per Clause 1.1.3 of
the agreement which defines “Corporate Insurance Executive” to
mean one or more of its officers or employees so designated by SBI,
who possesses the requisite qualification and practical training and
has passed such an examination as required under the regulations.
Clause 1.1.6 of the agreement defines an insurance agent to mean a

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person soliciting or procuring life insurance business for SBI life
whether or not employed by SBI and as defined in Section 40 (1A) of
the Insurance Act, 1938. Clause-2 of the agreement specifies that the
SBI has accepted the appointment as a corporate agent of SBI Life
to procure and solicit life insurance business for and on its behalf
with professional diligence through all or some of SBI branches and
to promote the sale and distribution of the life insurance policies
being sold by SBI Life. The work performed by SBI as a corporate
agent is subject to the provision of IRDA, Regulations/Insurance Act,
1938 and to the mutual agreement executed between the parties.
7. Clause 5.2 of the agreement provides that SBI can market and
attend to the queries of the customers and render efficient customer
service required from a distribution agent without risk participation
to the policy holders. Clause 5.6 provides that SBI cannot publish or
circulate any advertisement, pamphlet, or any other printed material
concerning the business of SBI Life without obtaining its prior
written consent.
8. Clause 8 of the agreement provides that SBI Life would be
responsible for bearing all the expenses relating to designing,
printing of proposal/subscription forms, cost of training courses of its
own staff and travel expenses of trainers of of answering opposite
party. Clause 11 of the agreement provides that SBI Life shall be
solely responsible for any claim made by any policy holder and
further provides that the SBI Life undertakes to indemnify and hold
the answering opposite party, harmless from any loss, damage,
claims, liabilities, charges, cost or expenses that may arise or be
caused by reason of the SBI acting as a corporate agent of SBI Life
and to defend any suit, action, claim, litigation or other proceeding.
The other terms of the agreement are not relevant for the purpose of
this case except Schedule-1 of the agreement which provides for the

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usage guidelines of the SBI trade mark and logo; Schedule-2 which
provides for details of the trade marks which are under the exclusive
usage and ownership of answering opposite party; Schedule-3, which
provides for logo of SBI to be used for SBI Life and Schedule-4
which provides for royalty fee to be paid to SBI by SBI Life for
using the SBI name and logo, which will be 0.20% of the total
income or 2% of profit after tax, whichever is higher.
9. In para-13 of the counter affidavit filed on behalf of SBI it is
stated that Unit Linked Life Insurance Products are different from the
traditional insurance products, and are subject to risk factors. The
premium paid in unit linked life insurance policies are subject to
investment risks associated with capital markets and the net annual
values of the units may go up or down based on the performance of
funds and factors influencing the capital market and the policy holder
is responsible for his/her decisions. The SBI Life issued the policy to
the petitioner for an insurance cover of Rs.3,12,500/- at 625% of the
investment, for a period of five years from 9.1.2007 to 9.1.2012. The
policy clearly indicated that the unit linked life insurance product is
only a name of the unit linked life insurance contract and does not in
any way indicate the quality of the contract, its future prospects for
returns. As per the instructions of the petitioner the entire insurance
premium after deducting the initial expenses will be invested in the
growth funds amongst other available funds. The growth funds has a
risk profile of medium to high, meaning thereby that in case of a
successful investment the returns can be very high but in the
eventuality of unsuccessful investment, the chances of sustaining a
loss are also high. The insurance cover granted on the life of the
petitioner provided for expenses and charges like mortality charges
for covering the insurance on the life of the insured to be recovered
from the funds like cancelling the appropriate number of units from

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the funds value. The deductions were made as per the terms and
conditions of the policy for providing continuous risk cover for the
entire term of policy. In the present case the age of the petitioner was
64 and half years on the date of proposal and insurance cover was for
a sum of Rs.3,12,500/-, and thus for the petitioner as an elderly
person, the mortality charge were higher than those of young person
and with an option for a life cover of 625% of the single premium of
Rs.50,000/- which comes to Rs.3,12,500/- the cover benefit being the
insurance cover and the returns purely incidental, the petitioner
cannot complain of receiving less return under the policy.
10. It is submitted on behalf of the SBI and SBI Life that the
policy documents issued to the petitioner contained all the options
including fund management charges, administration charges and
mortality charges etc. The policy provided for “free look period” of
15 days from the receipt of the policy documents to review the terms
and conditions of the policy documents to review the terms and
conditions of the policy where the insured disagreed to any of the
terms and conditions he had an option to return the policy giving
reasons. In that case he would be entitled for refund of the amount in
the manner prescribed. The petitioner did not return the policy
documents to the insurer. If he was not satisfied he could have raised
objections or expressed his reservations in that regard. The policy did
not offer any guaranteed return and the benefits available under the
policy and the charges to be levied were clearly stated in the terms
and conditions of the policy.
11. It is stated by the State Bank of India that the SBI Life had
intimated the petitioner vide its letter dated 12.9.2011, 18.10.2011,
16.11.2011 and 13.12.2012, about the queries made in respect of the
policy, its execution and operations. Besides having the maturity
value the petitioner had also agreed to the valuable risk cover for the

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premium paid by him under the risk and maturity of the policy and
his contention and allegations are baseless.
12. In the counter affidavit of Shri Nehal Ahmad, Head Processing
Centre, S.B.I. Life Insurance Company Ltd, Lucknow almost a
similar stand has been taken as that of SBI. It is stated that SBI Life
is a company incorporated under the Companies Act. It is not a State
within the meaning of Article 12 of Constitution of India and thus no
writ petition under Article 226 of Constitution of India lies against it.
The SBI Life is not a administrative or statutory public authority to
be amenable to the writ jurisdiction of the Court. The State Bank of
India holds 76%, and BNP Assurance holds 24% of the share capital
in the respondent-company. Since the Central Government holds
62.3130% of the issued equity shares in SBI, and SBI holds only
76% of the share in SBI Life Insurance Co. Ltd, the indirect holding
of the Central Government is less than 50%. Hence the SBI Life is
not a State. In the board of directors of SBI Life there are four
directors from the State Bank of India; two directors are from BNP
Assurance and four independent directors. The Central Government
does not have deep or pervasive control in the affairs of SBI Life. On
the terms and conditions of the policy the stand taken by SBI Life is
the same as that of SBI. It is further stated in paras 13, 17, 18 and 19
as follows:-.
“13. That as per Schedule II, Point No.4 Creation of units, Clause no.
(j) of policy bearing no.25003820001, 'NAV of the units of each
fund may fluctuate depending on the factors and forces
affecting the markets from time to time and may also be
affected by changes in the prevalent rates of interest. (k) There
is no guaranteed return on this product.”
17. That the policy bearing no.25003820001 matured on
09.01.2012. As per the clause no.d, maturity benefit of the Schedule I
of the policy,

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(i) In the event that the Life Assured survives up to the date of
maturity hereinbefore stated, the maturity benefit will become
payable. The maturity benefit is equal to the fund value (based on the
NAV prevailing on the date of maturity).
(ii) At maturity, all future rights and benefits (including rider
benefits) under this Policy will automatically cease.”
18. The answering respondent had intimated the petitioner vide
letters dated 12.9.2011, 18.10.2011, 16.11.2011 and 13.12.2011
respectively about maturity of the policy and had requested him to
submit the necessary documents for processing the maturity payment.
19. That the maturity benefit payable under the policy is equal to
the fund value prevailing on the date of maturity. The calculation of
maturity value under the policy as on the date of maturity i.e.
9.1.2013 is as given below:-
Policy no.25003820001
20. That besides the maturity value, the petitioner has also availed
the valuable risk cover till maturity of the policy, for the single
premium paid by him under the policy. Thus the allegations raised by
the petitioner are baseless and does not have the sanction of law. The
complaint is therefore illegal and unjust and is not maintainable.
21. That a contract has to be interpreted as per the terms and
conditions of the document evidencing the contract. The policy bond
is the evidence of the contract of insurance and both the insurer and
the insured are bound by the terms and conditions of the contract. The
maturity value is payable as per the terms and conditions of the policy
and there is no contractual obligation on the part of the opposite
parties to pay any other amount.”
13. In substance both SBI and SBI Life have defended the prayers
of the writ petition on the ground that SBI Life is not State within the
meaning of Article 12 of Constitution of India, and is not amenable
to the jurisdiction of the High Court under Article 226 of
Constitution of India. The SBI Life is not the instrumentality of the
State. The insurance policy subscribed by the petitioner was linked
with the investment made by the petitioner carrying a risk in
investment portfolio to be born by the policy holder. He was aware

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of the terms and conditions of the policy and was informed about the
details and deductions of charges at the time of subscription with a
15 days' free look period. The petitioner had subscribed to the policy
with open eyes and which provided for various charges including the
fund administrative charges, fund management charges and the
mortality charges. Since the petitioner entered into the insurance term
of five years at the age of 64 and half years the risk factor associated
with the policy at such advanced stage increasing every year from 65
years to 71 years, provide for deductions of the charges on monthly
basis from the NAV of the fund reducing the fund to the balance of
the investment which was paid to the petitioner.
14. Shri Dhruv Kumar, learned counsel for the petitioner submits
that the petitioner is a retired Scientist from NBRI, Lucknow. He has
lost the entire investment of Rs.50,000/- which he had saved for his
retired life. The State Bank of India as a statutory corporation has a
controlling interest in SBI Life. It is not correct to state that with
Government of India holding 62.3130% of the issued equity shares in
State Bank of India the holding of State Bank of India in SBI Life is
less than 50% and thus it will not come within the purview of the
term 'State' under Article 12 of Constitution of India. With more than
50% of issued equity shares of SBI Life subscribed by State Bank of
India which statutory corporation, the SBI Life is a State amenable to
writ jurisdiction of the High Court.
15. It is submitted that the SBI Life has created a magic in which
the investment of a senior citizen of Rs.50,000/- after five years was
reduced to final payment of Rs.248/- thereby playing fraud with him
and millions of similarly placed citizens specially senior citizens in
robbing them of the savings of their life. There were two options for
minimum sum assured for which the approval of IRDA was sought
by SBI Life. The IRDA in its letter dated 21.6.2006 had categorically

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objected that two options for minimum sum assured cannot be given.
As a regulatory authority it had directed the insurer to re-examine the
terms of his policy regarding the minimum sum assured on the lines
given in the Unit Linked Policy Guidelines of IRDA dated
21.12.2005. The SBI Life in its letter dated 23.6.2006 had assured
that it had modified the product namely 'SBI Life -Unit Plus II
Single', according to Guidelines dated 21.12.2005 and Circular dated
26.5.2006. The undertaking was given by the MD & CEO as well as
Appointed Actuary of SBI Life.
16. It is submitted that despite clear directions of IRDA and the
assurance given by SBI Life, it did not amend the two minimum sum
assured options. During the course of argument of the writ petition
this anomaly came to light on which learned counsel appearing for
SBI Life stated that SBI Life had again submitted the revised
application under 'file and use guidelines' with minimum two sum
insured options to the prospective customer. Despite categorical
undertaking given by SBI Life vide their letter dated 23.6.2005 at
page-49 of the Supplementary Counter Affidavit filed by SBI Life,
the two options were not removed. The SBI Life has violated the
guidelines of IRDA dated 21.12.2005 and the letter of IRDA dated
21.6.2006. It cannot, therefore, be said to be a bonafide approval of
the product in tune of the guidelines having statutory force. The
contract is thus illegal and has been rendered void ab-initio.
17. Shri Dhruv Kumar submits that the petitioner was hoodwinked
by the management of SBI Life in subscribing to higher risk in the
policy without any caution given in the policy form of the danger of
dissipation of the entire amount in the resultant higher amount
payable as mortality charges. The consent of the petitioner to a
higher insurance risk was taken without disclosing the hidden
agenda. The proposal form contained an option of a request to tick in

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the boxes for either 125% or 625% SP of the sum assured. The form
did not disclose that in case of option of 625% SP, the mortality
charges at a increasing rate beginning from Rs.27 per thousand
would be charged to be deducted on monthly basis reducing the
amount from NAV of the fund and thereby reducing the amount
invested drastically every month. The proposal form was couched in
a manner which concealed the malafide intention avoiding
mentioning 'minimum basic sum assured 125% of single premium'.
The SBI being a statutory corporation was under a statutory
obligation in accordance with the guidelines of IRDA to design the
proposal mentioning minimum sum assured 125% of single premium
as per guidelines dated 21.12.2005 notified by IRDA.
18. It is stated by Shri Dhruv Kumar that the insurance contracts
are to be entered with utmost bonafide intention. These contracts
should not have any hidden purpose or charges. Instead of clear
declaration in the proposal form that in case the insurer opts for
higher sum assured over and above 125% of the single premium, the
mortality charges deducted from NAV every month would be at a
higher rate. A simple option of ticking two options in the box were
given with no caution nor did the agent, who is an employee of the
SBI, explained that with an option of 625% of single premium,
which was not authorised by IRDA in its guidelines dated
21.12.2005, the entire sum at the end of five years will be reduced to
a negligible amount.
19. Shri Dhruv Kumar states that the unit linked insurance policy
in breach of the guidelines dated 21.12.2005 notified by IRDA was
in gross violation of 'Point of Sale' Regulation 3 (2) & (3) of IRDA
(Protection of Policyholders) Regulation 2002, which provides that
material information must enable the prospect to decide on the best
cover that would be in his/her interest and must be given

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dispassionate advice. Regulation 3 (2) and (3) of IRDA (Protection
of Policyholders) Regulation 2002 made in exercise of powers
conferred by clause (zc) of sub-section (2) of Section 114A of
Insurance Act, 1938 read with Sections 14 and 26 of the Insurance
Regulatory and Development Authority Act, 1999, are quoted as
below:-
“(2) An insurer or its agent or other intermediary shall provide all material
information in respect of a proposed cover to the propose to enable the
prospect to decide on the best cover that would be in his or her interest.
(3) Where the prospect depends upon the advice of the insurer or agent
or an insurance intermediary, such a person must advise the prospect
dispassionately.”
20. Shri Dhruv Kumar submits that the object of leading the
petition higher sum assured was with the preconceived motive to
deduct higher mortality charges to the financial benefit of SBI Life.
The mortality table used for the purpose of IAL (Indian Assured
Life) 1994-96 prescribed by the IRDA as bench mark was loaded by
25% by the SBI Life so as to allow higher mortality charges leading
to higher profit at the cost of policyholder. The standard mortality
table as prescribed by the IRDA was based on mortality experience
of policyholders in the period 1994 to 1996. The same should have
been adjusted for improvement i.e. the multiplier factor should have
been less than 1 (for example 0.75 instead of 1.25), if at all
adjustments were required particularly when the product was being
priced in 2006, when the life expectancy was substantially improved
than the levels in 1994-96. There was no logic behind loading the
standard mortality rates by 25% which allowed SBI Life to deduct
large amount of mortality charge leading to larger profits to itself.
The product was a 'non-participating' product under which no profit
of the insurer can be shared with the policyholder and which proves

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the complicity. The Executive Director of IRDA at the time of
approval raised this point and asked for justification. The justification
given was that same method i.e. loading by 1.25 has been used by
SBI earlier for other products. It is submitted that this lame
justification was given to IRDA with motive to deceive the
policyholders. The relevant query and the answer is reproduced as
below:-
10 Item No.14 (a) please
justify the mortality
rates which are 125% of
IAL 1994-96
• Existing “Unit Plus -Single” product
assumes 125% of IAL 1994-96 mortality,
which was approved by IRDA. We would
like to continue with the same practice.
• We are selling this product through all our
distribution channels and to general public
without any restrictions.
• Our non-medical limits are also very high
viz. Rs.10 lacs and Rs.15 lacs for general
public and employees respectively.
(Pg. no.2 of letter dated 30/06/2006 of the list
of documents filed by the SBI-Life)
21. Shri Dhruv Kumar submits that the policyholders were not
informed and were taken of surprise at the end of the policy with
unilateral amendments in the policy and IRDA advice vide letter
dated 7.5.2009. The SBI Life had realised that with the higher
charges, namely administrative charges, the fund management
charges and the mortality charges the size of the fund value of the
investor was sinking day by day and that under the terms of the
policy the policyholder was entitled to refund with the fund value at
shrunk to Rs.10,000/- by terminating the policy. Since the SBI Life
did not want to lose hold of even that minimum amount of
Rs.10,000/-, it conspired to get the permission from IRDA to delete
sub-clause 4 (h) of not only of the petitioner's SBI Life – Unit Plus II
Single policy but three other policies namely SBI Life Unit Plus II
Regular; SBI Life Horizon II and SBI Life Horizon II Pension by

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virtue of Automatic Policy Termination Condition vide letter dated
7.5.2009. The IRDA in its letter dated 7.5.2009 directed the SBI Life
to offer switch over option to all policy holders. Relevant part of the
letter dated 7.5.2009 of IRDA provided “2. Submission of copy of the
communication to the existing policy holders regarding the proposed
change, offering them the option to switch over to new clause.”.
22. It is submitted that no such switch over offer was given to the
petitioner, which is evident in the letter dated 23.10.2009, alleged to
have been sent to the petitioner. In para-11 of the writ petition the
petitioner has denied receipt of any such communication and in any
case this communication did not give option of switch over. The term
of the policy in sub-clause 4 (h) to terminate the policy when the
fund value is shrunk to Rs.10,000/- with an option under the
directions issued by the IRDA to switch over was not given to the
petitioner. In fact this unilateral amendment carried out with a
malafide intention had virtually escaped the attention of IRDA,
which has a statutory duty to protect the investor's interest. The
IRDA found it sufficient that a switch over option is given to all
policyholders in place of the term of termination of policy when the
policy value is reduced to Rs.10,000/- and this resulted into robbing
the petitioner of the benefits of the policyholders at least to a
minimum of Rs.10,000/-. The result of deleting sub-clause 4 (h),
reduced the value of the policy to a petty amount of Rs.248/-, at the
end of the term of the policy.
23. Shri Dhruv Kumar further submits that the charges, namely
administrative charge, fund management charge, switch over charge,
mortality charge are the hidden charges, which are not properly
explained to the policyholders. It is by virtue of these charges the
SBI Life despite being a company owned and controlled by SBI, is

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making huge profits at the cost of policyholders. The Insurance Act,
1938 does not allow any charges from the policyholders fund. The
IRDA, however, has issued guidelines without any safety
regulations. The deductions of the charges are in complete violation
of the IRDA policy dated 21.12.2005, which was not followed by
SBI Life.
24. These charges even otherwise from petitioner's fund are
approximately 20% from the total fund. The charges are thus
exorbitant and are detrimental to the interest of the policyholders.
25. Shri Dhruv Kumar has also assailed the payment of
commission on investment portion, which is not in tune of Section
40-A of the Insurance Act, 1938. In the policy in question the units
are the combination of (a) investment and (b) insurance risk. The
investment portion of the fund does not cover the risk of life,
however, insurance portion covers the risk of life. Section 40-A of
the Act, 1938 permits commission on the policy of life insurance.
The insurer does not consider the investment portion as premium. In
fact the insurance company paid service tax on the premium portion
covering the life of the assured. It adopts two different yardsticks for
paying service tax liability which they compute on payable insurance
premium only, but when it comes to payment of commission to the
agent, the insurance company considers both insurance premium and
investment portion as one entity. Section 40A of the Insurance Act
provides as follows:-
“40-A Limitation of expenditure on commission.—
(1) No person shall pay or contract to pay to an insurance agent, and no
insurance agent shall receive or contract to receive by way of commission
or remuneration in any form in respect of any policy of life insurance
issued in India by an insurer after the 31st day of December, 1950, and
effected through an insurance agent, an amount exceeding—
(a) where the policy grants an immediate annuity or a deferred annuity in

16. 16
consideration of a single premium, or where only one premium is payable
on the policy, two per cent. of that premium,
(b) where the policy grants a deferred annuity in consideration of more
than one premium, seven and a half per cent. of the first year’s premium,
and two per cent. of each renewal premium, payable on the policy, and
(c) in any other case, thirty-five per cent. of the first year’s premium
seven and a half per cent. of the second and third year’s renewal premium
and thereafter five per cent. of each renewal premium payable on the
policy:
Provided that in a case referred to in clause (c) an insurer, during the first
ten years of his business, may pay to an insurance agent, and an insurance
agent may receive from such an insurer, forty per cent. of the first year’s
premium payable on the policy:
Provided further that in a case referred to in clause (c), where the rate of
commission payable on the first year’s premium is equal to or less than
twenty-one per cent. thereof, and the rate on the fourth and fifth years’
premiums does not exceed six per cent. thereof, the Life Insurance
Corporation of India may pay to an insurance agent, and the insurance
agent may receive from it, commission on the sixth and subsequent years’
renewal premiums payable on the policy at a rate not exceeding six per
cent. of each renewal premium.”
26. In the present case 35% commission on the first year's
premium permitted by the Act when paid as commission on the
investment portfolio is not in terms of Section 40-A of the Insurance
Act. It is submitted that Section 40-A of the Insurance Act, 1938 also
prohibits payment of infrastructure/administrative expenses. The SBI
Life is regularly paying infrastructure/administrative expenses to
State Bank of India, which is violative of Section 40-A of the
Insurance Act, 1938. It is evident from the agreement between the
State Bank of India and SBI Life annexed to the counter affidavit.
Clause-3 of the agreement provides for commission about other
considerations for selling the policies at the rates as may be mutually
agreed. In addition the SBI Life under the agreement also pays other
considerations against the insurance policies sold by SBI at such
rates as may be mutually agreed. They are siphoning of the

17. 17
policyholders' fund illegally in contravention to Section 40-A of the
Insurance Act, 1938.
27. Shri Dhruv Kumar submits that the inspection team of IRDA
had pointed out payment of illegal administrative expenses to State
Bank of India to the extent of Rs.204 crores on which the IRDA had
imposed a penalty of Rs.70 crores as provided under Section 102 (b)
of the Insurance Act, 1938. The amount was given back and adjusted
in favour of the policyholders.
28. It is submitted that if the argument advanced by SBI Life and
SBI is accepted, the SBI Life under the agreement with SBI is
misleading the customers on the reputation of the SBI by using name
and logo of SBI creating a perception in the minds of general public
that the SBI is the insurer and this leads a common unwary customer
to fall into the trap of the policy, which contradicts the terms and
conditions imposed of IRDA. The SBI as a statutory corporation
entered into the agreement with SBI Life into a dangerous arena of
claim, with the investment of investors and thereby cornering the
profits to its directors, who are the directors in SBI Life. They are
earning fat salaries and profits of policyholders on a
misrepresentation made that the SBI is the insurer. It is false to say
that the SBI does not have a controlling interest in SBI Life. The
management of the statutory corporation should not be allowed to
mislead the customers and to earn in illegal manner cornering the
benefits to itself. The penalties imposed by IRDA and SBI Life
should have allowed the directors of SBI in SBI Life to resign long
ago. They have, however, continued under the cover of the logo and
printed name of SBI to attract general public. The present case is a
classic example where the investment of petitioner of Rs.50,000/- has
been reduced to Rs.248/- at the end of five years' terms and the entire
amount has been appropriated despite the increase in NAV of the

18. 18
investment by deducting illegal charges, which have been pocketed
by SBI Life and its Directors. They have played fraud on
policyholders and have attracted criminal liability of cheating and
fraud which cannot be avoided and hidden behind the corporate
cover.
29. It is submitted that the SBI to disassociate itself from SBI Life
and instead the Chairman of State Bank of India is the Chairman of
SBI Life and as per shareholders' agreement, the SBI has retained the
right to appoint 4 Directors including the Managing Director and
Chief Executive Officer of SBI Life, giving a perception to the
general public that the State Bank of India is the insurer. These facts
are clearly violative of Regulation 9 (1) (g) of IRDA (Licencing of
Corporate Agents) Regulations, 2002.
30. Shri Dhruv Kumar states that the petitioner as a senior citizen
has been agitating on the reduction of his investment of Rs.50,000/-
to a petty amount of Rs.248/- under the cover of the agreement
entered into between SBI and SBI Life and deduction of hidden
charges in complete violation of IRDA Regulations. The 'Utmost-
Good Faith' which is a fundamental principle of insurance has been
violated. He submits that this Court must take cognizance of the
fraud played by the Chairman and Managing Director of SBI and to
direct for initiation of criminal proceedings against him.
31. It is submitted that the prime duty of IRDA is to protect the
interest of policyholders in the matter relating to terms and
conditions of the policy and claim settlement as provided in Section
14 (2) (b) of IRDA Act 1999. It is not carrying out statutory duties
and responsibilities and is allowing the insurance company under the
logo of SBI Life to play fraud on the innocent persons who fall in the
trap.
32. In United India Insurance Company Limited vs. Manubhai

19. 19
Dharmasinhbhai Gajera and others (2008) 10 SCC 404 it was
held that the IRDA is entitled to redress the grievance of the
individual. The petitioner had lodged a complaint with IRDA with
the hope that it will take cognizance of the case and analyse as to
how the investment of Rs.50,000/- was reduced to Rs.248/- within
five years. The IRDA, however, submitted a routine and mechanical
reply ignoring the gravity of violation of its own unit link guideline
dated 221.12.2005 by the SBI Life and its repercussions on millions
of policyholders. The regulator has abdicated its regulatory powers
and has rather become facilitator in unethical practices of insurance
companies, giving up its prime duty to work as watchdog on the
activities of the insurance companies. The matter must be referred by
this Court to the Ministry of Corporate Affairs to conduct an enquiry
by the serious fraud office to bring back the confidence of the masses
on the insurance policies issued by the insurance companies in India.
33. It is submitted that the IRDA must be directed to have a close
look on all policies launched by SBI Life specially SBI Life
Dhanraksha (three time costlier than its own policy with similar
cover) to trap its home loan borrowers. Million of persons are falling
into the trap without full disclosure and the protection of IRDA. The
IRDA had found SBI and SBI Life guilty of mis-selling as no
informed choice was given to the members of these groups of
insurance policies as envisaged under Regulation 3 (2) and (3) of
IRDA (Protection of Policyholders' Interest) Regulation 2002 and
had directed the SBI Life to refund Rs.275 crores to 7.5 lacs home
loan borrowers by its letter dated 11.3.2014.
34. Shri Sachin Garg, appearing for SBI Life has filed a written
note explaining the magic with which SBI Life reduced the
investment of Rs.50,000/-, of which the NAV in the growth fund has
risen from 17.1500 on 9.1.2007, to 19.2396 on 9.1. 2012, to a petty

20. 20
amount of Rs.248/-. He has tried to explain the reduction of the
amount to the higher risk cover by the unit linked insurance policy by
deducting monthly mortality charges payable by a person at the age
of 64 and 1/2 years progressively upto the age of 70 years from
Rs.24.40 per thousand sum assured per annum on the sum at risk
namely Rs. 312500/- minus the invest of Rs.50000/- with addition of
service tax @ 12.36% in the first year. He submits that the terms of
the policy are strictly in accordance with the approval given by
IRDA and that the policy was not put into force until such approval
was received. He submits that point no.4 in Schedule II of the
proposal clearly provided that NAV of the unit of each fund may
fluctuate depending on the factors and was not affecting the market
from time to time and may also be affected by the changes in the
prevalent rate of interest. Further there is no guaranteed return on the
product. He submits that the petitioner had clearly opted for 625% of
the single premium. There was no hidden charges. If the petitioner
was not satisfied he could have returned the policy in the free look
period of 15 days and for deleting the condition of terminating the
policy when the amount falls below Rs.10,000/- with switch over
option. The intimation was given in time in writing to the petitioner.
35. We have given our anxious consideration to the facts brought
before us in which a senior citizen having invested Rs.50,000/- in a
unit linked product with an option of growth has lost his entire
money except Rs. 248/-; in five years despite the rise of NAV of his
investment on growth fund on account of charges including the
mortality charges which were not explained to the petitioner. He had
time and again and repeatedly asked and has also averred in the writ
petition that at the time of persuasion to subscribe to the policy
despite his repeated requests he was never informed that even if the
NAV rises his entire amount invested in mutual fund will be

21. 21
consumed by the charges amongst which the mortality charge is so
high that there was absolutely no chance of getting any amount
higher than the amount invested.
36. The SBI Life with common Chairman and CEO, with SBI and
with directors nominated by the Chairman and CEO, the SBI has a
controlling interest of more than 50% in SBI Life. The SBI with 76%
of the issued and paid up capital in SBI Life, has a direct deep and
pervasive control over the management of SBI Life. It is difficult to
understand as to how the SBI Life is defending itself not to be the
State, when the SBI has a control of 76% in its shareholding and in
turn the Government of India holds 62.3130% of the issued equity
shares in SBI. No formula in mathematics can reduce the contract of
SBI in SBI Life to less than 50%. Once a statutory corporation holds
more than 50% paid up shares in a Company, such Company
becomes a subsidiary company of the statutory corporation and
would fall within the meaning of State under Article 12 of
Constitution of India. The argument raised by learned counsel
appearing for the SBI and SBI Life in this regard is not worthy of
consideration.
37. We have considered the submissions and gone through the
provisions of the Insurance Act, 1938; the IRDA (Protection of
Policyholders Interest) Regulations, 2002 and find that the terms and
conditions of the policy providing for two options for minimum sum
assured did not have approval of IRDA. The IRDA had directed the
insurer to re-examine the minimum sum assured on the lines given in
unit linked policy guidelines dated 21.12.2005. Despite clear
directions of IRDA the SBI Life did not amend the option. The
explanation given by SBI Life to the file and use guidelines relating
to the sum assured was not accepted by IRDA. The SBI Life had thus
clearly violated the guidelines of IRDA dated 21.12.2005 and had

22. 22
acted in contravention with the letter of IRDA dated 21.6.2006.
38. We find considerable force in the submission of learned
counsel appearing for the petitioner, that since the top management
of the SBI Life had already decided to obtain consent on 625% sum
assured of single premium basis, targeting senior citizens the any
modification would have taken away the advantage of deducting
mortality charges at a higher rate depriving SBI Life of the benefit of
profits. The entire exercise was to hoodwink the investors. Learned
counsel appearing for the SBI Life took considerable time to explain
that the policy document was an open document, which should have
been read by the petitioner. He, however, could not satisfactorily
reply as to whether the terms and conditions of the policy were
properly explained by the insurance agent, who was an employee of
the SBI to the petition. The acceptance of option at 625% SP at the
entry level at 64 years, was required to be explained to the petitioner.
In case the calculations were explained, he would certainly not have
opted for a policy which would ultimately lead to completely wiped
out his investment. No prudent person, if he was explained with the
consequence of deduction of mortality charges at 625% risk, would
have subscribed to the policy, which in any case even if the NAV had
risen, would not give any return at all.
39. The petitioner had invested Rs.50,000/- in a mutual fund
option of 'growth'. Even if the NAV had fallen to 50%, he was
entitled to return of the sum after deducting the insurance premium.
The deductions made of the mortality charges at the risk factor,
which was not explained to the petitioner on monthly basis by
reducing the amount of NAV was clearly in violation of IRDA
Guidelines dated 21.12.2005.
40. The petitioner had agreed with a clear term of termination of
the policy when the value of investment had fallen to Rs.10,000/-. It

23. 23
was a safeguard which was absolutely essential to protect the
investment. The IRDA appears to have completely overlooked the
pitfalls of the details of the clause proposed by SBI Life in the
middle of the terms of the policy, with an option of switch over. The
SBI Life never advertised the deletion of sub-clause-4 (h) of the
policy in the newspapers. The letters written individually had a high
risk of distribution at the end. In the present case the petitioner had
clearly denied that he received any such letter or an option for switch
over informing him that his investment had fallen to Rs.10,000/-.
We may observe again that no prudent person, even if he had taken
the risk of investment in mutual fund with an insurance policy may
not have switched over, if he had been communicated an option
when his investment fell below Rs.10,000/-. Clause provided for
termination of the policy, if the investment fell below Rs.10,000/-. It
could not have been changed unilaterally even on the advice of
IRDA. The written consent of the policy holder was required for
deletion of the clause. Mere information sent by post is not sufficient
to enforce a clause, which protects the policy holder.
41. The IRDA, has in this case failed to examine the terms of the
policy critically. The acceptance of the letter dated 30.6.2006 written
by SBI Life to IRDA did not have an informed approval. The IRDA
does not appear to have examined the effect of the revision of the
second option of the increased risk cover by 625%, on the investment
with deduction of high rate of mortality charges. The acceptance
letter dated 30.6.2006 by IRDA without adverting to the reasons
given to retain the two options clause was in breach of its statutory
duty to protect the insured. Further the IRDA completely failed in
exercise of its statutory duty in allowing the unilateral amendments
in the policy vide its letter dated 7.5.2009 on a mere advice of a
switch over option to all the policy holders. Such unilateral

24. 24
amendment on the advice of IRDA was not permissible until the
consent of each policy-holder was obtained. The IRDA is a
regulatory body. It represents the policyholders interests and not his
rights. An advice of IRDA could not be the basis of change in the
policy, which is a contract unless written consent of policyholder was
obtained. The IRDA failed to carry out its statutory duties in
allowing such unilateral change by mere information without
insisting upon written consent of the policy holder as a condition for
deletion of sub clause-4 (h) of the policy.
42. Once this matter in which the investment of a senior citizen of
Rs.50,000/- has been reduced to Rs.248/- in five years, by a
Corporation, which is owned and controlled by the Statutory
Corporation, acting in breach of the IRDA Regulations has come to
our notice, we find it appropriate to issue a direction to the IRDA to
critically examine each and every policy of the SBI Life. If it finds
that the SBI Life, which has suffered penalties in the past, for its
defaults has acted in breach of its guidelines it would be appropriate
for it to direct the SBI Life to discontinue its policies and to wind up
its business. The Central Government will do well to ensure that the
investors are not cheated in a manner as in the present case, in which
the entire investment of the senior citizen has been lost on the pretext
of the policy being in tune with IRDA guidelines. The 'Serious
Fraud', Department of Ministry of Corporate Affairs must examine
these policies and unlawful gains made by the Company and its
Directors including the Directors of SBI, in the Company, by
cheating the policyholders on the pretext that its policies are in
compliance with IRDA regulations.
43. In United India Insurance Company Limited vs. Manubhai
Dharmasinhbhai Gajera and others (2008) 10 SCC 404 the
Supreme Court, explaining the statutory objects and purposes of the

25. 25
Insurance Regulatory and Development Authority Act 1999 and
Insurance Regulatory and Development Authority (Termination of
Policyholders Interest) Regulations 2002, with reference to
Regulations 4, 5, 7 and 11, held that roles of the private player and
State are different. A private player may not be bound to comply
with the constitutional requirements of the equality clause but the
appellant insurers (United India Insurance Company Limited and
other National Insurance Companies) are. There exists a distinction
between private player in the field of insurance and a public sector
insurance company. Whereas a private player in the field is only
bound by the statutory regulations operating in the field, the public
sector insurance companies are also bound by the directions issued
by General Insurance Corporation as also the Central Government.
These directions cannot be ignored. The object of the IRDA is to
regulate the insurance companies to offer a fair deal and all the terms
and conditions of their offer must be transparent. There should not be
any hidden agenda. They should not take recourse to “ticking
contract”. When the terms of a new product or revised product
require the approval of IRDA, prima facie, the same would mean that
they are fair and reasonable. The action on the part of the authorities
in such case will not be questionable. Regulations, guidelines and
circulars are binding on the insurance companies.
44. The Supreme Court further held that a balance has to be struck
between the human rights as contained in the Universal Declaration
of Human Rights as also the right of a State and others who perform
public utility provisions like insurance companies. Ordinarily a
contract of insurance services would not come within the purview of
the public utility services as defined under, the Legal Services
Authorities Act, 1987, as amended in 2002, says so in terms of
Section 22(b) or 22(c) thereof creating new volumes which would

26. 26
easily be accessible to the service recipient. The Supreme Court
directed the IRDA to issue appropriate directions keeping in view the
Universal Declaration of Human Rights and particularly in view of
the fact that the Government of India does not provide for any social
security by way of compulsory (health) insurance. Unlike the
provisions of the Motor Vehicles Act, 1988 such compulsory (health)
insurance does not find a place in any statute book. The IRDA must,
therefore, lay down clear guidelines by way of the Regulations which
would be applicable to all the players in the field.
45. In LIC of India and another vs. Consumer Education &
Research Centre and others (1995) 5 SCC 482 the Supreme Court
distinguished the contracts in relations to the State, its
instrumentality, public authorities or those acts bear insignia of
public element, action to public duty or obligation are enjoined in a
manner i.e. fair, just and equitable, after taking objectively all the
relevant options into consideration and in a manner that is
reasonable, relevant and germane to effectuate the purpose for public
good and in general public interest and it must not take any irrelevant
or irrational factors into consideration or arbitrary in its decision.
Duty to act fairly is part of fair procedure envisaged under Articles
14 and 21. Every activity of the public authority or those under
public duty or obligation must be informed by reason and guided by
the public interest. It is the exercise of the public power or action
hedged with public element becomes open to challenge. If it is shown
that the exercise of the power is arbitrary unjust and unfair, it should
be no answer for the State its instrumentality, public authority or
person whose acts have the insignia of public element to say that
their actions are in the field of private law and they are free to
prescribe any conditions or limitations in their actions as private
citizens, simplicitor, do in the field of private law.

27. 27
46. The Supreme Court held that the standard forms of contracts
are 'Contracts of Adhesion' of Government or its instrumentality with
private persons on the basis of its standard terms and conditions, if
unreasonable, unfair and irrational is open to judicial review. The
action of public authority must be in public interest and should not be
arbitrary, unjust and unfair. Such actions are amenable to judicial
review.
47. In the present case, we find that the petitioner as a senior
citizen entered into a contract with SBI Life in the premises of SBI
under its banner and logo and was misled by an agent of SBI acting
under an agreement between the SBI and SBI Life, in leading the
petitioner to enter into a contract which had both the investment and
insurance aspects. The contract from the very beginning considering
the age of the petitioner with twin options which was clearly
prohibited by the regulations of IRDA misled the petitioner into
signing a standard form 'Adhesian Contract' purportedly approved by
IRDA, without explaining its contents which led the petitioner from
its very inception to trap in which at the end of five years, taking into
consideration the administrative charges, the fund management
charges and mortality charges, the amount of investment, even if
prudently invested in the best option of 'Growth' reduced from
Rs.50,000/- to a negligible amount of Rs.248/-. The clause of
termination of the contract when the investment was reduced to
Rs.10,000/- was cleverly deleted, with only an information given to
the investors/insured persons, without verifying the receipt of the
communications and obtaining any written consent from the
policyholder. The entire act was preconceived and premeditated to
dilute the entire investment by imposing a high rate of charges in the
name of mortality charges. The contract was clearly unconscionable
with its clauses purportedly in tune with IRDA guidelines, leading

28. 28
the policyholder with a total loss of his investment. The petitioner
was, in the name of free look over policy and a switch over option,
never explained, warned or cautioned that his investment will fall
dangerously to the level where it will almost vanish at the end of the
term of five years. The petitioner was handed over only Rs.248/-
without adequate explanation for which he had run from pillar to post
and filed this writ petition after seeking replies under RTI Act, in
which the counter affidavit also did not explain the terms and
conditions which magically took away his entire investment. It was
only during the course of extended hearing that the counsel appearing
for SBI Life initially trying hiding behind the cloak of a private
contract, tried to unsuccessfully explain that the terms and conditions
had tacit approval of IRDA and that the clause of termination of
contract, if total amount falls below Rs.10,000/- was removed with
the approval of IRDA by giving an information of which the proof of
receipt was never produced.
48. On the aforesaid facts and circumstances we are constrained to
hold that the SBI Life is a subsidiary of SBI and that “SBI Life Unit
Plus II – Single” a unit linked product on a standard form of contract
did not have the approval of IRDA to its twin options in which the
higher option reduced the entire investment of a senior citizen with
high rate of mortality charges. It was an unconscionable contract and
was thus arbitrary, illegal and void document. It did not bind the
petitioner.
49. On the aforesaid discussion we hold that the terms of the 'SBI
Life Unit Plus II – Single' policy to be unconscionable and declare
the contract of policy to be illegal and void. The SBI Life will return
the original amount of Rs.50,000/- to the petitioner within a month.
The Insurance Regulatory and Development Authority-respondent
no.2 is directed to re-examine each and every policy, even if it has

29. 29
been approved by it, and to bring all such policies offered by SBI
Life in terms with its guidelines. It will examine the policies with an
object as to whether terms have any hidden agenda or terms and
conditions and charges which are detrimental to the policyholders. If
it finds that any of the policies are not in terms with its guidelines, or
have hidden term and charges have any object to deceive the
policyholder, it will direct the SBI Life to discontinue such policies
and to return the entire amount invested to the investors. In such case
it will be open to the Central Government to initiate prosecution
against the management of SBI Life in accordance with the law. The
SBI Life is directed to pay Rs.10,000/- as cost of pursuing the writ
petition to the petitioner
50. The writ petition is disposed of.
Dt.29.5.2014
RKP/