The National Consumer Disputes Redressal Commission (NCDRC) has ruled that banks can surrender life insurance policies pledged as loan security without informing the original policyholder. According to the NCDRC order dated August 2, 2026, once a policy is assigned to a bank as security, the bank may surrender it without the policyholder's consent or notice to recover outstanding dues. The ruling came in the case of Amar Singh from Kharkhoda, Haryana, who had pledged his LIC policy worth ₹5,00,000 as collateral for a ₹79,000 credit limit from IDBI Bank. As per Mint, the NCDRC held that there was no deficiency in service on the part of Life Insurance Corporation of India (LIC) after it surrendered the policy on the instructions of the bank to which the policy had been assigned.
On October 5, 2011, LIC surrendered Singh's policy for ₹2,26,325 without his consent and sent the amount to the bank. Singh had been regularly paying premiums but had never expressed any intention or consent to surrender the policy. The policy was originally purchased on December 28, 2001, with a maturity date of December 8, 2026. According to Mint, Singh had duly assigned the policy to the bank on December 6, 2007, and the bank surrendered it because the loan remained unpaid. The insurance company acted on the basis of assignment and the request of the assignee, calculating the surrender value as on date and duly sending the amount outstanding on the policy.
The bank's counsel argued that the assignment of the LIC policy was effected under Section 5 of the SARFAESI Act, 2002, which recognises the right of a secured creditor to assign its financial assets. Citing Supreme Court rulings in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., the counsel stated that "assignment of debts by a financial institution does not require the consent of the borrower" and that "the assignment in favour of bank was lawful and valid." The NCDRC observed that there was no deficiency of service on the insurance company's part and they acted as per the rules and procedure. According to Mint, the State Commission held that once the policy had been assigned to the bank, the bank exercised control over the policy and LIC was not required to issue a separate notice to Singh before acting on the bank's instructions.
The NCDRC directed IDBI Bank to release ₹2,26,325 from its suspense account, which had been lying there because Singh had closed his accounts with the bank before the cheque could be encashed. The bank was told to release the amount with accrued interest within one month, failing which it would pay 6% interest per annum on the outstanding sum. The District Commission had earlier ruled in Singh's favour on February 4, 2015, directing LIC to reinstate the policy and the bank to refund ₹2,26,325 with interest, along with ₹10,000 for mental agony and litigation costs. However, as per Mint, LIC challenged the decision before the Haryana State Consumer Disputes Redressal Commission on September 21, 2016, which set aside the District Commission's order against LIC. The State Commission held that the matter did not involve a lapsed policy but was a surrender by the duly appointed assignee because the loan had not been repaid.
Singh's case highlights a critical reality for policyholders who pledge their life insurance policies as loan security. According to the NCDRC order, when a policy is assigned to a bank as loan security, the policyholder effectively transfers control over it. The insurer is not obligated to inform the original policyholder before acting on the assignee's instructions. Even if the loan is cleared, once the policy has been surrendered, the insurer is under no obligation to reinstate it. Singh's policy, taken in 2001 with a maturity date of December 2026, was surrendered in 2011 for just ₹2,26,325, less than half the sum assured, and cannot be revived. The case also demonstrates the importance of understanding the legal effect of policy assignment, as a policyholder who assigns the policy to a bank may no longer retain unrestricted control over the policy. Where the assignment is valid and recognised by the insurer, the assignee can exercise rights under the policy in accordance with the law and the terms of the assignment.
