ASSIGNMENT

Assignment Clause is expressed in section 38 of the Insurance Act, 1938. The policy holder
who assigns the policy (transfers the rights) is known as “Assignor” and
the person to whom the policy is assigned is known as “Assignee”. After the assignment of
the life insurance policy, the assignor loses his rights over the policy and the assignee
becomes the owner of the policy. It is everywhere assignable except as restricted by law,
by the provisions of the policy, or by collateral agreement.
Courts in India have taken a view - in the absence of a specific clause restricting the transfer
of a contract, the intention of the parties has to be taken into account, which can be gathered
from the nature of the agreement and the surrounding circumstances. Where a contract is
silent or incomplete as regards the parties’ intention concerning the assignment, one will have
to rely on the provisions of the Indian Contract Act, 1872, and the principles of assignment
enshrined therein.
The judicial trend in India has reiterated this position and laid down that rights under
a contract are capable of assignment unless (a) the contract is personal in nature; or (b) the
rights are incapable of assignment either under law or under an agreement between the
parties.
Khared and Co Ltd v Ramonand Co Pvt Ltd observed that, as a rule, obligations under a
contract cannot be assigned except with the consent of the promisee. Where such consent is
obtained, it will be considered as a deemed novation, resulting in the substitution of liabilities
and obligations to the assignee.
In case of assignment of a life insurance policy, along with the instance of the insured,
consent of insurer is also required.
PURPOSE OF ASSIGNMENT
An assignment of a life policy is a document or action which is effective to transfer the
ownership of the policy from one person to another. Assignments may be made for a variety
of reasons, including:
• Sale of exchange;
• Gift or voluntary transfer;
• Settlement, transferring the policy to trustees to give effect to successive or contingent
interests;
• Transfer to existing trustees of a settlement or to beneficiaries in pursuance of the trusts;
• Mortgage; transfer of mortgage; or reassignment on repayment; or
• Assignment to a trustee for the benefit of creditors.
• A life policy can also be unconditionally or absolutely assigned either as a gift or under a
contract of sale. Such an assignment is absolute and does not leave any residual rights with
the assignor.
TYPES OF ASSIGNMENT
1. Absolute Assignment
means complete Transfer of Rights. Hence Absolute Assignment meanscompletely
transferring whole and sole rights of the policy from the Assignor to the Assignee without
any further terms and conditions applicable. The process of assignment is complete only
when the original Policy Document has been endorsed or a fresh Policy Document has been
issued in favour of the Assignee.
Procedure:
The Assignment must be in writing and a notice to that effect must be given to the insurer.
Assignment of a life insurance policy may be made by making an endorsement to that effect
in the policy document (or) by executing a separate ‘Assignment Deed’. In case of
assignment deed, stamp duty has to be paid. An Assignment should be signed by the assignor
and attested by at least one witness.
Once the formalities prescribed by section 38 of the Insurance Act 1938 are completed,
subject to the terms and conditions of the transfer, the insurer shall recognize the assignee as
the only person entitled to the claim under the policy. The assignee steps into the shoes of the
assignor, in the sense that he will not only be entitled to all the rights of the assignor but will
also be liable to all the duties of the assignor towards the insurer. Thus section 38 of the
Insurance Act, 1938, implies that the ownership rights of the life insurance policy can be
legally transferred in the name of a third party in exchange for money value. The law
approves the selling of insurance rights to a third party.
In India the assignment must be in a written mode -38 (1).
Attestation has special significance and is much more than merely witnessing the document
because if the assignor does not accept the execution of the document, S. 68 of the Evidence
Act states that the one attesting witness is called to prove the execution.
Section 38 (2)Notice of Assignment:
The transfer or assignment will be complete and effectual once the execution of such
endorsement is duly attested. But it would become operative only after a notice in writing of
the transfer or the endorsement or its certified copy is delivered to the insurer.
As per section 38 (3),
The insurer upon receiving the notice is required to recognise the transferee or assignee
named in the notice as the only person entitled to benefit under the policy even though the
assignment is not registered immediately.
Section 38 (4)
Requires the insurer to record the assignment along with the date of transfer and the names of
the parties (upon receiving the notice of assignment).
The assignee shall be subject to all the liabilities and equities to which the transferor or
assignor was subject at of date of the transfer or assignment and may institute any
proceedings in relation to the policy without obtaining the consent of the transferor or
assignor or making him a party to such proceedings, this has been a mandate under section 38
(5)of the Act.
If there are more than one instrument of transfer/assignment, the priority of claims shall be
governed by the order in which the notices are delivered to the insurer.
Section 38 (6)
states that the provisions of the Act would remain inapplicable to the cases of
transfer/assignment which was effected before the commencement of the Insurance Act,
1938.
2. Conditional Assignment
Under this type of assignment, the transfer of rights will happen from the Assignor to the
Assignee subject to certain conditions. If the conditions are fulfilled then only the Policy will
get transferred from the Assignor to the Assignee.
Section 38 (7)
rendered valid any assignment made with the condition ‘that it shall be inoperative or that the
interest shall pass to some other person on the happening of a specified event during the
lifetime of the insured’.
Such an assignment commonly happens when an insured under an own life policy uses the
policy, which is a valuable piece of property, as security for a loan and assigns it to the
creditor. This usually takes the form of a conditional assignment whereby the policy would
be reassigned to the insured once he has paid all his debts.
Any type of life insurance policy is acceptable for conditional assignment, provided the
insurance company allows assignment for the particular policy. A permanent life insurance
policy with a cash value allows the lender access to the cash value to use as loan payment if
the borrower were to default.
With the addition in Insurance Act 2015, an insurer has the right to accept or decline
assignment of the policy. This addition in the insurance act was made because of the use of
assignment of life insurance policy as a profit-making business. The clause restricting the
assignment of an insurance policy can be waived by the insurer or can be amended upon
equitable agreement.- Cook v. Cook.
REVOCATION
Assignment, once validly executed, can neither be revoked nor canceled at the option of the
assignor. To do so, the insurance policy will have to be reassigned to the original assignor
(the insured).
EFFECTS
Immediately on the execution of an assignment of an insurance policy, the assignor forgoes
all his rights, title and interest in the policy to the assignee. The premium or loan interest
notices etc. in such cases will be sent to the assignee. However, the existence of obligations
must not be assumed, when it comes to the assignment. It must be accompanied by evidence
of the same. The party asserting such a personal obligation must prove the existence of an
express assumption by clear and unequivocal proof. Assignment of a contract to a third party
destroys the privity of contract between the initial contracting parties. New privity is created
between the assignee and the original contracting party.
EXCEPTIONS
There are some instances where the contract cannot be assigned to another.
 Express provisions in the contract as to its non-assignability – Some contracts may
include a specific clause prohibiting assignment. If that is so, then such a contract
cannot be assigned. Assignability is the rule and the contrary is an exception.
 Contracts which are of a personal nature – Rights under a contract are assignable
unless the contract is personal in its nature or the rights are incapable of assignment.
 Pensions, PFs, military benefits etc.
Illustration
Under a contract with a painter named P to paint for D, P cannot assign it to anyone else,
since D engaged P for the latter’s specific qualities as a painter. A unique relationship had
been created between P and D.
EXTRA
The creation of assignment of life insurance policies is provided for, under Section 38 of the
Insurance Act, 1938.
 Endorsement has to be made on the policy or on a separate document, signed by
assignor (or agent authorized by him), attested by at least one witness specifying the
fact of the assignment. The assignment is complete and effectual with the execution of
such a document. However, it will not be operative against the insurer (no assignee
has the right to sue for any policy amount from the insurer) unless the above-
mentioned endorsement or separate policy has been delivered to the insurer.
 When the insurer receives the endorsement or notice, the fact of assignment shall be
recorded with all details (date of receipt of notice – also used to prioritise
simultaneous claims, the name of assignee etc). Upon request, and for a fee of an
amount not exceeding Re. 1, the insurer shall grant a written acknowledgment of the
receipt of such assignment, thereby conclusively proving the fact of his receipt of the
notice or endorsement. Now, the insurer shall recognize only the assignee as the
legally valid party entitled to the insurance policy.
Only a life insurance policy can be assigned without the permission of the insured.