Bank Refunded Insurance Premium After Borrower’s Death, Claim Rejected: Consumer Commission Orders Relief

A consumer commission in Jammu and Kashmir (J&K) has granted relief to the family of a borrower after finding fault with the handling of an insurance premium linked to his bank loan.

The dispute arose after Mohammad Ayoub Dar took a cash credit loan from Jammu and Kashmir Bank for a garment business. At the time of processing the loan, Rs 16,000 was deducted from his account towards an insurance premium.

Dar died on June 1, 2022. After his death, the Rs 16,000 deducted earlier was credited back to the account. The family was then told that there was no valid insurance cover against the loan.

The bank also started proceedings for recovery of the outstanding dues.

Dar’s widow, Shahzada Begum, along with their three minor children, challenged the matter before the District Consumer Disputes Redressal Commission.

Premium Was Deducted Before Borrower’s Death

One of the main issues before the commission was the fact that the insurance premium had already been deducted while Dar was alive.

The commission observed that once money had been taken specifically towards insurance, the borrower had reason to believe that the required cover had been arranged, according to a recent report by The Times of India.

Refunding the amount only after his death could not, by itself, take away the benefit that the family expected from the insurance arrangement.

The commission also took the view that a consumer should not be made to bear the consequences of lapses or lack of coordination between a bank and an insurance company.

It said that if no insurance policy had actually come into force, the bank and insurer needed to establish this clearly and also show that the borrower had been informed of the position before his death.

The post-death refund of the premium was held to amount to deficiency in service and unfair trade practice.

Insurance Proceeds To Be Adjusted Against Loan

The commission directed that Dar be treated as insured under the loan-linked insurance arrangement.

PNB MetLife India Insurance was asked to pay the applicable insured amount after adjustment of the Rs 16,000 premium. The amount will carry interest at 5 per cent from the date of filing of the complaint until payment.

The bank and the insurer were also directed to jointly pay Rs 2 lakh as compensation to the family and Rs 30,000 towards litigation expenses.

The insurance amount is to be first adjusted against the outstanding loan liability.

The order also said that any amount already recovered from the family, or sought to be recovered, would have to be dealt with in accordance with the applicable policy terms and law.

The parties were given four weeks to comply with the order. In case of delay, the amount awarded would attract interest at seven per cent from the date of the order until payment.

The case highlights why borrowers should retain loan statements, premium deductions and insurance documents, particularly when insurance is bundled with a loan.

FAQs

1. Can a bank refund an insurance premium after the borrower’s death and deny the claim?

The commission held that a post-death refund alone cannot take away expected insurance benefits when the premium had already been deducted while the borrower was alive.

2. What happens to the insurance payout if the borrower still has an outstanding loan?

The insurance proceeds can first be adjusted against the outstanding loan amount, with any remaining entitlement handled according to the policy terms and law.

3. What documents should borrowers keep for loan-linked insurance?

Borrowers should retain loan statements, proof of premium deductions, policy documents and communication from the bank or insurer to avoid coverage disputes later.