L.I.C. of India and Anr v. Consumer Education and Research Centre and Ors

Section 2(11) of the Insurance Act, 1938 defined life insurance business as “business effecting contracts of insurance upon human life, including any contract where by the payment of money is assured upon death.” Life Insurance Corporation of India (LIC), a state owned insurance company, took out its cheapest life insurance policy, “Table 58”. It was offered only to “persons in Government or quasi-Government organisation or a reputed commercial firm”, thus excluding the said policy from the reach of most people.

A study of LIC’s insurance policies was conducted and reported in 1980 by the Sezhivan Committee (the Report). The Report recommended making the policy available to wider sections of the people. The Report concluded that the cost of life insurance policies is high and beyond the means of a large section of the population both in urban and rural areas. It further concluded that the benefit of the policy was restricted mainly to higher income/salaried people due to its saving component. The Report specifically recommended the introduction of a level premium policy.

The said policy was challenged in the Gujarat High Court, under Article 226 of the Constitution (original jurisdiction of the High Court) as being in violation of Article 14 (right to equality), Article 19(1)(g) (right to freedom of profession) and Article 21 (right to life). The High Court upheld the policy generally. It, however, held the clause about obtaining assurances “only from persons in Government or quasi-Government organisation or a reputed commercial firm which can furnish details of leave taken during the preceding year under Table 58 as subversive of equality and, therefore, constitutionally invalid.”

The decision of the High Court was appealed before the Supreme Court to decide whether LIC was “justified in law in restricting the term policy only to the specified class, namely, salaried persons in Government, quasi-Government or reputed commercial firms.”

Due to the fact that LIC was a state owned company, the Court characterized policies of LIC as State action. The Court invoked, amongst others, Articles 14 (right to equality), 21 (right to life), 38 (Directive Principle establishing the welfare nature of the state), 39 (right to livelihood and health of workers), 41 (right to social security) and 47 (duty of the state to improve standard of living and public health) to hold that India was a welfare state and every action of the state should be a step towards establishing socio-economic justice. To buttress it’s reasoning, the Court also highlighted India’s international obligations under Article 25 of the Universal Declaration of Human Rights, 1948 (right to a standard of living adequate for health and well being of a person) and Article 7 of the International Covenant on Economic, Social and Cultural Rights, 1966 (right to enjoyment of just and favourable conditions of work).

Regarding the intersection of private law (insurance law) and public law (constitutional law), the Court held that where the nature of private law is such that it “bears an imprint of public interest element” the distinction between private and public law narrows down. The Court further held that even though the insurer was free to create policies based on business principles, but since insurance was a “social security measure” it must be in consonance with the socio-economic ideals in the Constitution.

The Court rejected LIC’s argument that its classification based on employment qualified as reasonable classification thus satisfying the requirement of Article 14 of the Constitution. The Court held that the policy could indeed be targeted towards a particular group but a classification based on employment had the “insidious and inevitable effect of excluding lives in vast rural and urban areas” and hence was offending to Article 14 of the Constitution and socio-economic justice. The Court held that particular clause to be unfair and untenable and further held that contracts which were unfair or had unfair clauses were subject to judicial review.

The Court held that where a contract or a clause in it was “unreasonable or unfair or irrational” the relative bargaining power of the parties must be looked at to ascertain whether the weaker party had enough bargaining power. The Court also held that actions of private companies had to be informed by concern for workers and that Directive Principles were a reasonable restriction on the freedom of trade and profession under Article 19 (1)(g). Stating that the Court had the power to severe an unfair clause in the contract, the Court held that LIC could enforce the policy, Table 58 except the unconstitutional clause which restricted the policy to a class of people based on their employment.

“The appropriate life insurance policy within the paying capacity and means of the insured to pay premia is one of the social security measures envisaged under the Constitution to make right to life meaningful, worth living and right to livelihood a means for sustenance.” Page 12.

“[T]he actions of the State, its instrumentality, any public authority or person whose actions bear insignia of public law element or public character are amendable to judicial review and the validity of such an action would be tasted on the anvil of Article 14.” Page 19.

“[I]n issuing a general life insurance policy of any type, public element is inherent in prescription of terms and conditions therein. The appellants or any person or authority in the field of insurance owe a public duty to evolve their policies subject to such reasonable, just and fair terms and conditions accessible to all the segments of the society for insuring the lives of eligible persons. The eligibility conditions must be conformable to the Preamble, fundamental rights and the directive principles of the Constitution.” Page 35.