Premium: payment, days of grace, forfeiture and return

1. Definition

Clause (13BC), inserted in section 2 of the Insurance Act by the 2025 amending Act, defines premium as “the amount paid or payable as consideration to the insurer by the policyholder for a contract of insurance.” It is the consideration for the insurer’s promise to bear the risk. The amount depends on the probability and size of the loss, the sum insured, the period, and the insurer’s expenses. In life insurance it is fixed by age, health, term and plan; in general insurance by the nature of the property and its exposure. Since detariffing in 2007 general insurance premiums are fixed by insurers within IRDAI’s product rules, except motor third-party premium, which the Central Government prescribes in consultation with the Authority (s.147(2), Motor Vehicles Act as amended).

2. Payment: section 64VB

• s.64VB(1): no insurer shall assume any risk in India in respect of any insurance business on which premium is ordinarily payable in India unless and until the premium is received, or is guaranteed to be paid in the prescribed manner, or a prescribed deposit is made in advance.
• s.64VB(2): where premium can be ascertained in advance, the risk may be assumed not earlier than the date on which premium has been paid in cash or by cheque. If the premium is sent by postal money order or cheque by post, the risk may be assumed from the date the money order is booked or the cheque posted.
• s.64VB(3): refunds on cancellation must be paid directly to the insured, never credited to the agent.
• s.64VB(4): an agent who collects premium must deposit it in full, without deducting commission, within twenty-four hours, excluding bank and postal holidays.

Methods of payment are now set by IRDAI regulations on receipt of premium: cash within limits, cheque, demand draft, card, net banking, UPI and other electronic modes. Section 150(2)(c) of the Motor Vehicles Act, as amended in 2019, lets the motor insurer defend a third-party claim on the ground that premium was not received as required by s.64VB.

3. Dishonoured cheques

Three Supreme Court decisions show the line.

• Oriental Insurance Co. Ltd. v. Inderjit Kaur, 1997 INSC 792, (1998) 1 SCC 371. A bus was insured against a cheque that bounced; the insurer did not cancel the policy, and an accident followed. The insurer was held liable to the third-party victims, because the policy had been issued and the certificate was in force; its remedy was against the owner.
• National Insurance Co. Ltd. v. Seema Malhotra, 2001 INSC 97, (2001) 3 SCC 151. A car policy was issued against a cheque that was dishonoured; the car met with an accident and the owner died. The Court held that the insurer had no liability under the contract (an own-damage and owner’s claim), because the promise to pay premium is the consideration and the insurer is not bound to perform when the insured fails to perform his part.
• Deddappa v. Branch Manager, National Insurance Co. Ltd., 2007 INSC 1269, (2008) 2 SCC 595. The cheque bounced, the insurer cancelled the policy and informed the owner and the registering authority before the accident. The insurer was held not liable even to third parties.

So: for the insured’s own claim, no premium means no contract. For a third party under the Motor Vehicles Act, the insurer remains liable until it cancels the policy and communicates the cancellation; after that it is not.

4. Days of grace

A life policy is usually paid by instalments. If an instalment is not paid on the due date the policy does not lapse at once. The insured has a grace period within which he may pay without penalty, and the cover continues during it. Under IRDAI rules the grace period is thirty days for yearly, half-yearly and quarterly modes and fifteen days for the monthly mode. If the insured dies within the grace period, the claim is paid after deducting the unpaid premium.

Health and general policies are annual, so “grace” there means the period after expiry within which renewal preserves continuity of benefits (waiting periods already served) though there is no cover for the gap.

5. Lapse, forfeiture, non-forfeiture and revival

If premium is not paid even within the days of grace, the policy lapses, and premiums paid may be forfeited. The law softens this in two ways.

• Non-forfeiture: section 113. A life policy acquires a surrender value as per IRDAI norms (s.113(1)). Every policy must contain the approved formula for the guaranteed surrender value (s.113(2)). A non-linked policy that has acquired a surrender value does not lapse for non-payment of further premiums; it continues as a paid-up policy for a reduced sum insured worked out by the approved formula, plus bonuses already attached (s.113(3)). The insured may instead surrender it for cash.
• Revival. A lapsed policy may be revived within the period allowed by the policy and IRDAI rules, on payment of arrears with interest and, where required, proof of continued good health. Revival restarts the three-year period under s.45 (“the date of revival” is one of the starting points).

6. Return of premium

The governing idea is failure of consideration: the premium is the price of the risk, so if the insurer never bore any risk it must return the premium, unless the insured was guilty of fraud or illegality. The Marine Insurance Act states the rules in ss.82–84, which courts use as a guide for all classes.

• Return by agreement (s.83), for example on cancellation by the insured, on a pro rata or short-period scale.
• Total failure of consideration without fraud or illegality (s.84(1)): the risk never attached.
• Void or avoided policy (s.84(3)(a)): returnable unless the insured was fraudulent; but if the risk is not apportionable and has once attached, not returnable.
• Subject matter never imperilled (s.84(3)(b)).
• No insurable interest throughout the risk (s.84(3)(c)), except a wagering policy.
• Over-insurance under an unvalued policy, or double insurance: a proportionate part is returnable (s.84(3)(e), (f)).
• Free-look cancellation of a life or health policy within the period fixed by IRDAI after receipt of the policy document, subject to small deductions.
• Life policy repudiated under s.45(4) for misstatement, not fraud: premiums collected to the date of repudiation must be paid within ninety days.

Premium is not returned where the insured was fraudulent, where the contract is illegal and the insured knew it, or where the risk has run even for a moment and is not divisible.

7. Assignment of the subject matter

The policy insures a person’s interest, not the thing. If the insured sells or otherwise parts with the property, the policy does not pass with it: section 17 of the Marine Insurance Act says an assured who assigns his interest does not thereby transfer his rights under the contract unless there is an agreement to that effect. A fire or motor policy can be transferred to the buyer only with the insurer’s consent, normally by endorsement. (For motor vehicles the law is different: s.157 of the Motor Vehicles Act deems the certificate of insurance and the policy to be transferred to the transferee for third-party purposes.) Assignment of the policy itself, as a chose in action, is governed by s.38 of the Insurance Act and s.52 of the Marine Insurance Act and is dealt with in the Unit III note on life policies.

8. Problem

P pays the first premium on his motor policy by cheque on 1 June. The cheque is dishonoured on 10 June. The insurer takes no step. On 20 June P’s car injures a pedestrian. Advise the insurer.

Issue. Whether the insurer is liable to the injured third party when the premium cheque has bounced.

Law. Section 64VB requires premium to be received before risk is assumed, and s.150(2)(c) of the Motor Vehicles Act lets the insurer defend on non-receipt of premium. But where the policy has been issued and not cancelled, the insurer remains liable to third parties (Inderjit Kaur); only cancellation communicated before the accident frees it (Deddappa).

Application. The insurer issued the policy and did nothing after the dishonour. The certificate was outstanding on 20 June.

Conclusion. The insurer must satisfy the award in favour of the pedestrian and may recover the amount from P. P himself has no claim for damage to his own car (Seema Malhotra).

How this is examined

“What is premium? Under what circumstances can it be recovered back?” (June 2025) is answered from sections 1, 2 and 6. “Days of grace” was a short note in June 2025. The dishonoured-cheque problem appears in motor-insurance questions as well.