Contract Law

Harshad J. Shah v. Life Insurance Corporation of India

(1997) 5 SCC 64

Facts

A policyholder had a life-insurance policy issued by LIC.
Premiums were ordinarily required to be paid directly at an authorised LIC office or through an approved method.
On one occasion, an LIC agent collected a premium from the policyholder but failed to deposit it with LIC.
The policy subsequently lapsed for non-payment.
After the insured’s death, the claimants argued that payment to the agent should be treated as payment to LIC.
They relied on:
actual or implied authority;
apparent authority under Section 237;
LIC’s past practice of allowing agents to assist policyholders with premium deposits.
LIC argued that its regulations and agency terms did not authorise the agent to receive premiums on its behalf.

Whether receipt of premium by the LIC agent amounted to receipt by LIC.
Whether LIC’s conduct created apparent authority or an estoppel binding it to the agent’s unauthorised collection.

Under Sections 186–188, an agent binds the principal only when acting within actual express or implied authority.
Under Section 237, a principal may also be bound where its words or conduct induce a third party reasonably to believe that the agent possesses authority.
Apparent authority must arise from a representation attributable to the principal, not merely from the agent’s own claim.
Mere permission for agents to assist in depositing money does not necessarily authorise them to receive premiums as collecting agents.

The relevant LIC regulations restricted the agent’s authority.
The agent’s role primarily involved soliciting insurance business and servicing policyholders; it did not automatically include authority to receive premium payments on LIC’s behalf.
No receipt issued by the agent could substitute for the official acknowledgement required from LIC.
The claimants had to prove that LIC itself:
represented that agents could collect premiums; or
consistently acted in a way that reasonably conveyed such authority.
The Court found no sufficient evidence of such holding out.
The mere fact that an agent might take money from a policyholder and physically deposit it at an LIC office was not enough.
In that situation, the agent could be acting as the policyholder’s messenger rather than LIC’s collecting representative.
Apparent authority could not be inferred solely from convenience or past private dealings between the policyholder and agent.
Since the agent acted outside his authority, his receipt of the money did not amount to receipt by LIC.
There was also no ratification because LIC never knowingly adopted the unauthorised act.

The Supreme Court held that LIC was not bound by the agent’s unauthorised collection.
The premium had not been validly paid to LIC, and the lapsed policy could not be enforced on that basis.
Use this case for: apparent authority must result from the principal’s representation; an insurance agent’s private collection of premium does not automatically bind the insurer.