APEX COURT INTERPRETING EXCESS CLAUSE OF BANKER'S BLANKET POLICY - LITIGATION FOR 34 YEARS - WHO WINS ??

Here is an interesting Insurance claim decided by Apex Court on 15th April 2010 – that is pertains to the policy period 1976 – 77 makes a very sad reading though. In the Apex Court, the Civil appeal was preferred by the Amravati Dist Central Coop Bank Ltd against United India Fire & General Insurance Co Ltd (not many would still remember that it was the name of United India Insurance Co those days)

The claim arose under Banker’s Indemnity Policy for the period 1.7.76 – 77 which was to indemnify the Bank against losses caused by acts or omission of bank’s employees to a limit of Rs.6 lakhs; + cash in safe of Rs.9 lakhs. The Policy was to indemnify all direct losses but not exceeding the total SI in respect of any one person in respect of any one casualty and twice the total SI in respect of all such losses in any one period of insurance. The Policy Excess was 25% on each and every claim with a minimum of Rs.11500/-

An employee of the Bank committed a series of embezzlements and based on a report dated 28 2 1977 from its Special Auditor, the Bank complained to the Police and suspended the employee during March 1977. The employee was eventually dismissed from service on 19.3.1978. The Bank preferred a claim arising out of this embezzlement for Rs.3,58,000/- and after prolonged correspondence, the Insurer offered to reimburse Rs.29000/- in full and final settlement of the claim, subject to further deduction of premium of Rs.538/-

The Bank did not agree and appointed an arbitrator. As the Insurer did not appoint theirs, this arbitrator turned the sole arbitrator. The Insurer did not participate in the proceedings. An ex parte award was made during Aug 1983. The Arbitrator felt that all the embezzlements were connected and in all a sum of Rs.344450/- was defrauded from various accounts of the bank. The Arbitrator held that these losses were covered under the contingency envisaged under the Policy and held that Excess clause could not apply to each and every loss separately, the amount had to be aggregated and the Bank had to bear 25% as Excess – Insurer liable to pay the balance.

The Bank made an application in Civil court under Sec 14 & 17 of Arbitration Act 1940 in Jan 1984. The Insured filed a petition under Sec 30 seeking setting aside of ex parte award. Both the petitions were heard together and during June 1990 the Civil Court upheld the award. Feeling aggrieved, the Insurer filed an appeal in the High Court of Bombay.

This appeal was decided in favour of the Insurer on 18.2.2008 and the award of the Arbitrator was set aside. Case was remitted to the Arbitrator for deciding the claim afresh granting due opportunity to parties. The court held that acts of embezzlements are to be considered separately and not aggregated for computing the liability of the Insurer. The High Court held that the Policy envisaged deduction from every claim, that is every single amount embezzled – 25% of the embezzled amount of Rs.11500/- which was higher was to be deducted to arrive at the liability. This was challenged by special leave submitting that the High Court ought not to have set aside the well reasoned award of Arbitraor nor remitted the matter for consideration, after nearly a quarter century.

It was the interpretation of Excess clause which was to be considered. In General Assurance Society Ltd. v. Chandumull Jain (AIR 1966 SC 1644) a Constitution Bench had laid down the principle relating to interpretation of Insurance Contracts.

The Court had held that “In interpreting documents relating to a contract of Insurance, the duty of the court is to interpret the words in which the contact is expressed by the parties, because it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves." The Insurance Policy representing a contract between the parties and the terms of the agreement have to be strictly construed to determine the extent of liability of the Insurer.

Excess clauses are commonly used in Insurance contracts and in insurance parlance, the terms refers to "that part of the amount of loss, under each claim, which is not covered by the policy" or the "amount that the policy holder has, by agreement, to bear or contribute to each insurance claim". It is the amount the Insured has agreed to bear either by his volition or by the terms of the Policy.

In a famous English decision (Philadelphia National Bank v. Price reported in (1938) 2 All ER 199) the Policy provided indemnity to bank against loss sustained by reason of making advances against forged or invalid documents subject to an excess of $25,000 "by each and every loss and occurrence". Credit facilities were granted by the Bank to a trader on the security of invoices assigned to the bank. Each day, the trader assigned a bundle of invoices and the Bank advanced a sum corresponding to the total of the invoices. The invoices turned out to be false and the bank was unable to recover advances of over $400,000 in the aggregate, although no single daily loss amounted to more than $25,000. The Court of Appeal held that a separate loss had occurred in respect of each day's advance and the loss cannot be treated as one loss, as each production of documents led to a fresh loss and must be treated as number of losses occasioned by a number of advances. The claim of the Bank was therefore dismissed as loss in each case was below the excess limit of $25000/-.

In another case, the learned Single Judge of Bombay High Court (Central Bank of India Ltd. v. New India Assurance Co.Ltd. (AIR 1981 Bombay 397)) held that the word Excess meant that the Bank is to be considered as co-insurer to the extent of 25% subject to minimum excess stipulated. It was interpreted that the word is of common occurrence in the field of insurance and may mean either the right to make a claim or an assertion of a right. The plain object of the clause, as stated earlier, is to exempt the insurance company from the liability to pay small claims which the Bank has to bear itself. The word, "claim" in this clause means the occurrence of a state of facts which justifies a claim on insurer and does not mean the assertion of a claim on company. In other words, by the judgment, the operation of the Excess Clause is determined by the facts which give rise to the claim and not by the form in which the claim is asserted.

When an employee committing several acts of fraud & defalcation, each such separate act caused loss and gave distint and separate cause of action though all these could be discovered at a later stage together. The discovery at a later date are not to be treated as one composite loss. When treated this way losses below Rs.11500/- would not be payable at all – for losses above Rs.46000/- Insured will have to bear straight 25% of the loss. This way it is necessary to identify each act of embezzlement and not the aggregation of the misdeeds, which the Arbitrator had done.

In the instant case, it was series of embezzlements defrauding the account holders, the Bank had to bear the entire amount when no single act was more than the minimum excess.

The Apex Court held that the award of the arbitrator is liable to be set aside as there is a clear error apparent on the face of the award. Contending that award of the High Court is a speaking award as it extracts the relevant clauses of the insurance policy including the excess clause. It placed on record that if the amount of each and every embezzlement had been separately recorded in the award of the Arbitrator, the court could have calculated the amount that was due, instead of remitting the matter to the Arbitrator for fresh decision.

The Apex Court upheld the decision of the High Court and dismissed the appeal. It concluded that if however the appellant is not interested in proceeding afresh before the arbitrator after all these years, and is willing to accept the sum of Rs.29,000/-, offered by the insurer, it may inform the insurer accordingly in which event, the insurer shall pay the same to the appellant -Bank, if it had not already been paid.

To the Insurers it would sound music as its terms have been very logically atomised in the summit Court of Law. The quantum and merits of the case certainly do not deserve spending 34 years in Courts. Though the policy was a Banker’s Blanket policy, the contingency primarily was Employee dishonesty. Individual Fidelity Guarantee policies or those under Package section, mostly have only the limit of liability set out and does not have any specified excess. Here are the different wordings prevalent :

1) As stated in a FG Policy : No deductible specified, the Policy adds that “ All Loss arising out of the same and all interrelated Wrongful Acts shall be deemed one Loss, and such Loss shall be deemed to have originated in the earliest Policy Period in which a notice is first given to the Company ”

2) Seen in a Banker’s Blanket Policy : Excess. Insured shall bear the first 25% of each loss under items “A” to “E” or 2% of the Basic Sum Insured whichever is higher, but not exceeding Rs.50,000/-. Each loss in respect of each dishonest or criminal act shall be treated as a separate loss. The Excess will however not apply to loss or damage arising out of fire, riot and strike, burglary and house-breaking. In respect of loss under Sections F, G & H the Insured shall bear the first 25% of each loss. { Legend : This being a Package Policy covers various contingencies. They are A) On premises; B) In transit; C) Forgery / Alternation; D) Dishonesty ; E) Hypothecated goods F) Registered Postal sendings ; G) Appraisers ; H) Janata Agents / Pygmie collectors.}

3) A Policy of Foreign Insurer : “ The Underwriters shall be liable only in excess of the deductible of the applicable Insuring Clause stated in Item 7 of the Schedule. In the event that more than one Insuring Clause shall be applicable then the largest deductible relating to the applicable Insuring Clause shall apply. The deductible shall apply to the Ultimate Net Loss sustained by the Assured subsequent to the Retroactive Date.

4) The Policy which was the subject matter of this Judgment : EXCESS - The Insured shall bear the amount of excess stipulated in the Schedule in respect of each and every loss if the loss is under Contingencies 1, 2 or 3 insured by the Policy. In respect of losses under contingencies 4 or 5, the Insured shall bear 25% of the amount of the loss or the amount of excess stipulated in the Schedule whichever is the higher."

Here 1) money / security for which Insured is responsible or custody undertaken 2) money / security in transit 3) forged or raised cheques 4) dishonest or criminal act of offier, clerk or employee & 5) …….. deleted.

As could be seen, the impugned Policy has a slightly different wording for contingencies 1,2,3 as against 4 & 5 – which became the subject matter of litigation all through. There are lessons for every body.

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With regards – S Sampathkumar.