Indian High Court Clarifies Independent Duty of Banks as Master Policy Holder

Indian High Court Clarifies Independent Duty of Banks as Master Policy Holder

In its recent judgment of Branch Manager, State Bank of India v Rashmi Shrivastava 2026 SCC OnLine Chh 12969, the Chhattisgarh High Court has reaffirmed an important distinction between an insurer's contractual liability and a bank's independent obligations while facilitating insurance under a group insurance scheme. The judgment underscores that although an insurance contract arises only upon acceptance of the proposal by the insurer, a bank acting as a Master Policyholder cannot escape liability for its own negligence in rendering banking services.

Brief Facts

The dispute arose when a borrower (Insured/Respondent No. 1) obtained a housing loan from the State Bank of India (Petitioner/Bank) and opted for insurance under the SBI Life Rinn Raksha Scheme. While the premium was deducted and remitted to SBI Life Insurance Company (Insurer/Respondent No. 2), the insurer sought additional medical documents during the underwriting process. Upon the insured's failure to furnish the documents, the proposal was rejected and the premium was refunded to the bank. However, the bank neither informed the borrower of the rejection nor returned the refunded premium during his lifetime. Following the borrower's death, his legal heir sought discharge of the outstanding loan under the proposed insurance cover, which was denied on the ground that no policy had come into existence.

Arguments and Court’s Verdict

The High Court accepted the Insurer's defence that no concluded contract of insurance had been formed, reiterating the settled principle that payment of premium or submission of a proposal does not create insurance coverage unless the proposal is accepted by the insurer. Consequently, the insurer could not be held liable. The Court, however, distinguished the Bank's position. It observed that once the bank voluntarily undertook the responsibility of facilitating insurance under a group policy as a Master Policyholder, it assumed a corresponding duty to communicate all material developments to the borrower. Having received the insurer's rejection and the refunded premium, the bank was obliged to promptly inform the borrower and facilitate compliance with the insurer's requirements. The bank’s failure deprived the borrower of an opportunity to secure insurance coverage and amounted to a clear deficiency in service under the Consumer Protection Act, 2019. Therefore, the Bank was directed to adjust the outstanding home loan amount together with applicable interest and close the loan account.

In reaching this conclusion, the Court relied upon Canara Bank v United India Insurance Co Ltd (2020) 3 SCC 455, wherein the Supreme Court held that a bank voluntarily undertaking to procure insurance owes a duty of reasonable care in performing that obligation, and negligence in discharging that obligation constitutes deficiency in service. 

Conclusion

The judgment is significant for banks offering bundled financial products. It clarifies that the role of a Master Policyholder extends beyond collection and remittance of premiums. Banks must diligently communicate proposal deficiencies, rejection of coverage, and refund of premiums to its borrowers. While the insurer's liability continues to depend upon the formation of a valid insurance contract, the bank may nevertheless incur independent liability for negligent discharge of its obligations as a Master Policyholder. The decision therefore reinforces consumer protection without unsettling the settled principles governing the formation of insurance contracts.