SBI to pay Hyderabad family Rs 1.6 lakh after ‘wrongfully’ recovering dead man’s loan

“Failure to prove that a personal intimation of cancellation reached the proposer, the policy is deemed to be active and subsisting at the time of an incident or claim. Failure on the part of Insurance company to inform about the non- acceptance or cancellation of the policy to the borrower amounts to deficiency of
service,” the commission said on May 27, dismissing the appeals filed by the insurer and the bank.

The Telangana State Consumer Commission directed SBI to return the original title deeds of the property and issue a loan closure-cum-no dues certificate to the family. (Image generated using AI)

What commission ordered

The commission directed SBI Life Insurance to reimburse the complainants for the entire outstanding loan amount paid by them after the death of the principal borrower, along with interest at 6 per cent per annum from the date of the last payment until realisation.

The insurer was, however, not made liable for penalties paid by the borrower during his lifetime.

The commission also directed SBI to return the original title deeds of the property and issue a loan closure-cum-no dues certificate to the family.

Additionally, SBI and SBI Life were jointly and severally directed to pay Rs 1 lakh as compensation for mental agony and inconvenience, Rs 10,000 towards litigation costs and Rs 50,000 towards appeal costs.

Home loan, insurance cover, family’s expectations

The dispute began on August 4, 2011, when Hyderabad resident J Chinna Venkata Ramana obtained a housing loan of Rs 8.38 lakh from the then State Bank of Hyderabad, now State Bank of India.

Along with the housing loan, the bank sanctioned an additional loan of Rs 45,000 towards a loan protection insurance policy known as “Suraksha Loan” and another Rs 7,000 towards building insurance, taking the total sanctioned amount to Rs 8.90 lakh.

According to the complaint, the borrower was advised by the bank to take the insurance cover so that the housing loan would be cleared in the event of his death.

Ramana continued paying EMIs but later suffered from multiple health issues. He died on September 12, 2018, due to multiple organ failure.

His wife, Junnu Sujatha, subsequently approached the bank expecting the insurance policy to settle the outstanding home loan. Instead, she was allegedly informed about loan dues and was threatened with recovery proceedings.

RTI reveals insurance proposal was treated as rejected

After receiving repeated demands from the bank, Sujatha sought information under the Right to Information Act.

The bank informed her that SBI Life had cancelled the policy years earlier.

According to the insurer, a discrepancy relating to the interest rate mentioned in the proposal form had led to a request for clarification in 2011.

SBI Life claimed that no response was received from the borrower, and therefore, the proposal was not accepted.

The insurer further stated that the initial premium deposit of Rs 8,958 was refunded to the loan account in September 2011 itself, meaning no valid insurance contract had come into existence.

The company argued that since no insurance certificate had ever been issued, it was not liable to settle the loan after the borrower’s death.

Commission finds no proof of communication

The state commission, however, found a critical flaw in the insurer’s defence.

While SBI Life produced a copy of the letter allegedly seeking clarification from the borrower, the commission noted that it had failed to establish that the letter was ever served on him.

“Mere filing of the office copy of the letter by itself will not prove that the said letter was served on the borrower,” the commission said.

The bench also noted that the bank was the master policyholder under the group insurance arrangement and had forwarded the membership documents to the insurer.

If there was any ambiguity regarding the loan interest rate, it was for the bank and insurer to resolve the issue rather than leave the borrower uninformed, the commission said.

Bank also pulled up for its conduct

The commission was equally critical of the bank’s role in the matter.

It noted that despite the alleged rejection of the insurance proposal, the bank continued collecting interest on the Rs 45,000 loan sanctioned specifically for payment of insurance premiums.

The bench questioned why the bank continued charging interest on the insurance-related loan if it had indeed received information about the rejection years earlier.

The commission also held that the bank had a responsibility to inform the borrower that the insurance proposal had been rejected and that no cover was in force.

Family continued paying loan after death

The complainants argued that they kept paying EMIs after the death of the borrower because they were under constant pressure from the bank and feared losing their home.

The family maintained that they had never been informed that the insurance proposal had been rejected and reasonably believed that the loan remained protected under the insurance scheme.

The commission accepted this contention and held that the cause of action arose only after the borrower’s death when the family discovered that the insurer was refusing to honour the claim.

Appeals by SBI, SBI Life rejected

The district consumer commission had earlier directed the bank and insurer to settle the loan and pay compensation.

Both SBI and SBI Life challenged that order before the state commission, while the complainants sought enhanced relief, pointing out that they had continued repaying the loan even during the pendency of the proceedings.

After examining the evidence, the state commission dismissed the appeals filed by the bank and insurer and partly allowed the family’s appeal.

Relief after nearly eight years

The ruling brings an end to a dispute that effectively began after the borrower died in 2018 and revolved around a loan-linked insurance cover purchased nearly 15 years ago.

For the family, the decision means not only recovery of the loan repayments made after the death of their loved one but also recognition that consumers cannot be penalised for communication failures between banks and insurance companies.