Source: Karnataka High Court 

Why in News? 

Recently, Justice Anant Ramnath Hegde  has held that a nominee under Section 39 of the Insurance Act does not override legal heirs' succession rights. 

• The Karnataka High Court held this in the matter of Neelavva @Neelamma v.  Chandravva & Others. (2025). 

What was the Background of Neelavva @Neelamma v. Chandravva & Others. 2025? 

• Sri. Ravi Somanakatti subscribed to two Life Insurance Policies with benefits of Rs.19,00,000/- and Rs.2,00,000/- respectively, nominating his mother as the sole beneficiary in the event of his death. 
• At the time of taking these policies, Sri. Ravi Somanakatti was unmarried, but he later married and had a son without updating the nomination in his insurance policies. 
• Following Sri. Ravi Somanakatti's death on 20th December, 2019, a dispute arose regarding the distribution of the insurance benefits between his mother (the nominated beneficiary) and his widow and minor son. 
• The widow and minor son of the deceased filed a lawsuit against the mother, claiming their rightful share in the insurance benefits despite the mother being the sole nominee. 
• The mother contended that as the nominated beneficiary under Section 39 of the Insurance Act, 1938 as amended in 2015, she was entitled to receive the entire benefit to the exclusion of other legal heirs. 
• The respondents argued that the mother, as a nominee, was merely a custodian of the funds and was obligated to distribute them to all legal heirs according to personal succession laws. 
• The trial court rejected the mother's claim to the entire benefit, decreeing that each party (the mother, widow, and minor son) was entitled to a one-third share of the insurance proceeds. 
• Aggrieved by this judgment, the mother (defendant no. 1) filed an appeal in the Karnataka High Court, challenging the trial court's decision. 
• The core legal issue in the case centered on whether the 2015 amendment to Section 39 of the Insurance Act created a new mode of succession that could override the personal laws of succession. 

What were the Court’s Observations? 

• The Karnataka High Court observed that the Law Commission of India had recommended a clear distinction between "beneficiary nominee" and "collector nominee" in insurance policies, but Parliament did not incorporate this distinction when amending Section 39 of the Insurance Act, 1938.  
• The Court noted that Parliament did not accept the Law Commission's suggestion to provide policyholders with an option to declare whether the nominee would be a beneficiary nominee or a collector nominee, which suggests Parliament did not intend for nomination to override succession laws. 
• The High Court observed that Insurance and Succession occupy different fields of legislation in the Constitutional Scheme, with Insurance falling under Entry 47 in List-I and Succession under Entry 5 in List-III of the Seventh Schedule. 
• The Court observed that the Insurance Act was not conceived to provide law relating to succession, and treating certain nominees as exclusive successors would defeat the very purpose of insurance, which is to cover the risk of the policyholder's family and dependents. 
• The High Court held that the term "beneficial interest" in Section 39(7) and "beneficial title" in Section 39(8) should be interpreted to mean that the nominee gains beneficial title only if the legal heirs do not claim benefits from the insurance policy. 
• The Court determined that under Section 39(7), a nominee has no obligation to distribute benefits to legal heirs only if there is no claim by them, but if legal heirs make a claim, the nominee's claim must yield to personal law governing succession. 
• The High Court acknowledged that some courts (Andhra Pradesh and Rajasthan) had taken a different view, but noted several factors that led to its conclusion, including the absence of clear legislative intent to override succession laws. 
• The Court observed that the trial court had not considered the amended Section 39 in decreeing the suit for partition, but nonetheless confirmed the judgment based on the reasoning that Section 39 does not override personal succession laws. 
• The High Court proposed better legislative practices, including clear statements of purpose in Objects and Reasons, explicit declarations about retrospective or prospective application, inclusion of illustrations for clarity, timely amendments to resolve conflicting interpretations, and drafting laws in simple language. 
• The Court concluded that the mother, despite being the nominee, could not claim absolute ownership over the insurance benefits as the widow and minor son (Class-I heirs) had also laid claim to the benefits under the Hindu Succession Act.

What is Section 39 of the Insurance Act 1938?

• Section 39 of the Insurance Act, 1938 establishes the provisions for nomination by a policyholder in life insurance policies. 
• The section permits the holder of a life insurance policy to nominate a person or persons who will receive the money secured by the policy in the event of the policy-holder's death. 
• This nomination can be made either at the time of purchasing the policy or at any time before the policy matures for payment. 
• When a nominee is a minor, the policyholder is legally permitted to appoint another person to receive the policy benefits in case the policyholder dies during the nominee's minority. 
• For a nomination to be valid, it must either be incorporated in the policy text itself or be made through an endorsement on the policy that is communicated to and registered by the insurer. 
• The policyholder retains the right to cancel or change the nomination at any time before the policy matures, either through an endorsement, further endorsement, or a will. 
• The insurer is not liable for payments made in good faith to a nominee mentioned in the policy text or registered in the insurer's records, unless the insurer has received written notice of any cancellation or change. 
• Insurers must provide written acknowledgment of registering a nomination, cancellation, or change, and may charge a nominal fee not exceeding one rupee for registering such changes. 
• Any transfer or assignment of a policy under Section 38 automatically cancels a nomination, with a specific exception for assignments to the insurer for loan purposes. 
• If the policy matures during the lifetime of the insured person or if all nominees die before the policy matures, the policy amount becomes payable to the policy-holder, their heirs, legal representatives, or the holder of a succession certificate. 
• If one or more nominees survive the insured person, the policy amount becomes payable to such surviving nominee(s). 
• Section 39 does not apply to policies covered under Section 6 of the Married Women's Property Act, 1874, except when nominations expressly state they are made under Section 39.

Landmark Judgments on Insurance Nomination 

• Sarbati Devi v. Usha Devi (1984): 
  • The Supreme Court held that a nominee under Section 39 is merely a receiver of the policy money and is expected to distribute it among legal heirs according to succession laws. The judgment established that nomination doesn't confer beneficial ownership to the nominee. 
• Shakti Yezdani v. Jayanand Jayant Salgaonkar (2016): 
  • The Supreme Court affirmed that nomination under various statutes does not override the law of succession, even when provisions use terms like "vests absolutely" or "notwithstanding anything contained in any law." This case set a precedent that nomination serves a limited purpose of receiving the amount. 
• Karanam Sirisha v. IRDA (2022):  
  • The Andhra Pradesh High Court took a different view, holding that the amended Section 39(7) and 39(8) of the Insurance Act overrides provisions of law relating to non-testamentary succession, giving absolute rights to beneficiary nominees. 
• Mallela Manimala v. Mallela Lakshmi Padmavathi (2023): 
  • The Andhra Pradesh High Court again ruled that the 2015 amendments to Section 39 override personal succession laws, allowing the nominee to claim absolute ownership over insurance benefits.