NCDRC Holds National Insurance Company Liable For Deficiency In Service
The National Consumer Disputes Redressal Commission, presided over by Dr. Inder Jit Singh and Dr. Sadhna Shanker Jain, held that the repudiation of claim after expiry of four years from the date of filing amounts to deficiency in service.
Brief Facts of the Case
The complainant, engaged in warehousing and collateral management, had taken a fidelity guarantee policy from National Insurance Company/insurer to protect against employee fraud. They used warehouses in Junagadh to store cumin seeds belonging to 13 clients, who later took loans from Dena Bank based on the storage receipts issued by the complainant. The complainant was liable to ensure the safety and quality of the stored goods as part of its agreement with the bank. One night, a fire broke out in the warehouses. Upon inspection, it was discovered that the cumin seeds had been stolen and replaced with husk and waste. The theft was allegedly committed by an outsider with the help of the complainant’s outsourced employee. The complainant informed the insurer, filed an FIR, and later submitted a claim of around ₹3.97 crore under the fidelity policy. Police investigations confirmed fraud and collusion by the employee. The first surveyor assessed the loss at ₹3.14 crore and found it covered under the policy. Despite this, the insurer rejected the claim after four years, saying the loss was indirect and linked to a contract with Dena Bank. The complainant filed a complaint before the National Commission and asked the Commission to set aside the insurer’s repudiation, declare it invalid, and direct the insurer to pay ₹3.96 crore along with interest of 12% per annum from the date of loss till realisation, aggregating to over ₹6.05 crore.
Contentions of National Insurance Company
The insurer argued that the complainant is not a consumer as it runs a commercial business. It claimed that the loss was not due to an employee’s fraud alone but also involved an outsider, who was not covered under the policy. The insurer said the fidelity guarantee policy only covers direct pecuniary loss caused by the dishonesty of the complainant’s own employees, not third parties. It further claimed the loss arose from the complainant’s contractual liability under its collateral agreement with Dena Bank, which the insurer was not part of. The insurer said the damage was an indirect loss, which is not covered. It also argued that the loss was due to a planned fraud involving a non-employee, and the storage of husk instead of cumin seeds happened with the knowledge of the complainant’s local staff. The insurer relied on the second surveyor’s report to deny liability, saying the loss was not purely due to the infidelity of the employee. It also cited precedents such as Bajaj Allianz v. Mukul Aggarwal, National Insurance Co. v. Chief Electoral Officer, and Oriental Insurance Co. v. Sony Cherian to argue that insurance contracts must be strictly interpreted and that it was not liable for any third-party losses.
Observations by the National Commission
The National Commission observed that the insurer repudiated the claim only on the ground that the loss was “indirect” as it arose from the collateral agreement with Dena Bank. It noted that the repudiation letter did not mention the involvement of a third party or raise any other ground. The Commission held that an insurance company cannot later add new grounds beyond what is stated in the repudiation letter. The Supreme Court ruled in National Insurance Co. Ltd. v. Harsolia Motors (2023) 8 SCC 362 that insurance contracts are indemnity contracts and are not exempt from consumer protection, even if they are taken out by commercial firms, making it clear that the complainant is a consumer even though they are a commercial entity. The Commission concluded that the complainant’s line of work was to ensure the quantity and quality of the goods that were kept in storage. One risk covered by the fidelity policy was the loss of goods as a result of employee fraud, regardless of whether the employee was directly employed or contracted out. When the policy was issued, the insurer was aware of the complainant’s line of work. The insurer knew the nature of the complainant’s business when it issued the policy. It further held that the loss suffered was a direct pecuniary loss, as the complainant was liable as bailee and had to compensate Dena Bank. The insurance policy was meant to cover such risks. The insurer’s argument that the claim was due to a third-party agreement was rejected. The Commission relied on several judgments cited by the complainant like National Bulk Handling Corporation Ltd. v. Oriental Insurance Co. Ltd. 2016 SCC OnLine NCDRC 1889 and New India Assurance Co. Ltd. v. Pradeep Kumar (2009) 7 SCC 787 to support the view that liability caused due to employee fraud is covered when the policy provides for direct pecuniary loss and the insured suffers the loss directly.
The Commission held the insurer liable for deficiency in service for a delay of four years in repudiation of the insurance claim. It directed it to pay the loss of ₹3,14,96,268 as assessed by the first surveyor was accepted.
Case Title: National Bulk Handling Corporation Vs. National Insurance Company Ltd.
Case Number: C.C. No. 3687 of 2017
