The Bombay high court has ruled that Life Insurance Corporation of India has to honour claims made by lenders, that is banks, non-banking finance companies and financial institutions, if an LIC policyholder defaults in repaying the loan to the lender.

Also, LIC cannot insist that lending institutions furnish a declaration stating that they are not in the business of trading in life insurance policies.For obtaining a loan, often, a policyholder may mortgage insurance policy(s) with banks and NBFCs by assigning (read transfer the rights/benefits) to the lender. This is called assignment under valuable consideration.

The order came over a petition filed in November 2004 by Bachraj Finance Pvt Ltd, an NBFC providing financial assistance against securities. Then, the company had already loaned against 1,200 LIC policies, which were duly recorded and their assignments registered by LIC. However, when claims were made by Bachraj Finance, risk firm refused to honour the claim.

Bachraj Finance Director Ketan B Mehta, said: "LIC is a just a registering authority. When the loan is taken, the insurance contract is between the lender and the policyholder."

But LIC asked us to provide all audited balance sheet of the company, details of the nature of the business, copy of the IT returns of last three years, profit and loss account, attested copies of the certificate of registration and incorporation, which no insurance company ever asked us."