If Insured Person Is To Exercise Due Diligence Everywhere, Purpose Of Insurance Would Fail: Karnataka HC Directs Insurer To Pay NTC

A Division Bench of Justice P.S. Dinesh Kumar and Justice T.G. Shivashankare Gowda observed, "Generally, a person enters into insurance policies or contracts to protect himself from certain risks or contingencies which cannot be foreseen or taken care of. Diligence has to be exercised wherever possible but if the insured person is expected to exercise diligence everywhere, the question of contingencies or perils would never arise and the entire purpose of insurance would fail."

Senior Advocate S.S. Ramdas appeared for NTC while Advocate O Mahesh appeared for the insurer.

The issue at hand pertained to a depot agreement between NTC and second defendant. The second defendant was appointed as a depot keeper for the State of Gujarat. While NTC had also obtained “Special Contingency Insurance Policy” from United Insurance Company to cover against any loss or damages to its property at any time during the currency of respective agreements with various depot keepers. Consequently, the depot defaulted payments whereby NTC invoked the bank guarantee, but the same turned out to be fake. Pursuant to which NTC lodged a complaint before the concerned jurisdictional police station.

Upon claiming the amount from the insurer, it denied the claim on the following grounds:

- that accrued, unrecovered arrears are not covered under the Policy

- that the second defendant has defaulted in making payment of balance dues which amounts to trade loss and the same is not covered under the Policy

-that NTC has not exercised its due diligence in verifying the genuineness of the bank guarantee.

The Trial Court had dismissed the suit for recovery of money against the insurer first. Aggrieved, an appeal was filed before the High Court.

The Bench held, "In the present case, NTC is a Government of India undertaking having several branches across the country. It has appointed various depot keepers. It is impractical to expect NTC to verify the genuineness of every bank guarantee and it is for the said reason NTC has taken the Policy. The insurer has covenanted to indemnify the NTC against any loss or damage occurring due to fraud or criminal act on the part of the depot keepers."

The Court also noted that NTC did exercise the necessary due diligence by lodging a complaint against the depot keeper in the jurisdictional police station and further placed reliance on the case of the Apex Court in Suraj Mal Ram Niwas Oil Mills (P) Ltd. Vs. United India Insurance Company and observed -

"There is no ambiguity in the conditions of the Policy and if the terms of the policy are strictly construed/interpreted, as held in Suraj Mal, NTC was only required to use due diligence in prosecuting the depot keeper which has been done by lodging a police complaint."

The Court also stressed upon a settled position that if there is any ambiguity, the interpretation would fall in favor of the insured person.

The Bench further also added that the issuance of a fake bank guarantee by second Defendant is a dishonest act and therefore, covered by the Policy, hence NTC would be entitled to the insurance claim from the insurer.

The Court, however, made the insurer liable to a sum of Rs.13 lakhs as opposed to the claim of 25 lakhs. In furtherance of the same, the bench added, “We say so because notwithstanding the contention urged by the insurer that the liability had not accrued whilst the Policy was in currency, NTC could have certainly recovered a sum of Rs.13 Lakhs by invoking the bank guarantee”.

Accordingly, the Court allowed the appeal in part.

Cause Title: National Textile Corporation Ltd. v. United India Insurance Co. Ltd. & Anr.

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