The National Consumer Disputes Redressal Commission (NCDRC) also ordered the Life Insurance Commission of India to pay late woman's kin a compensation of Rs one lakh.
The NCDRC said the LIC had received the cheque of Rs 3,385 from the woman as the first premium through its agent but neither issued the policy nor returned the cheque immediately.
"LIC has failed to give any lucid explanation as to why the cheque was withheld for a period of 2 years and 9 months. The moment LIC got the cheque, it should have returned it to the deceased or written to her that the cheque stood accepted and (she should) fill up the proposal form.
"All these facts go to show the malafides on the part of the LIC. It cannot cheat the gullible persons," said the bench presided by Justice J M Malik.
The NCDRC gave its judgement dismissing the LIC's appeal against concurrent orders of Bihar State Consumer Commission and a Patna district consumer forum, both of which had asked the insurance company to pay Rs 1.02 lakh to the husband and son of deceased insurance applicant Sudha Kumari Sinha.
The district forum had awarded the amount on a complaint by Sudha's husband C P Sinha, who had said his late wife had paid the premium on January 31, 2002.
She had died on April 25, 2002 about three months after paying the amount, he had said adding his claim for assured amount of Rs one lakh was rejected by the LIC.
In its defence, LIC had contended the contract with Sudha Kumari was not concluded as the policy was not issued to her.
The NCDRC rejected the contention saying LIC grants insurance cover after receiving the money and "the insurance starts the moment the cheque is accepted."