Supreme Court Upholds Insurance Claim for Employee Dishonesty in Commodity Substitution Case

Introduction

Date of the Judgment: 12 February 2020
Citation: Not Available in the document

Judges: Justice Mohan M. Shantanagoudar and Justice R. Subhash Reddy.

Can an insurance company deny a claim under a Fidelity Guarantee Insurance Policy when the loss is due to the dishonest acts of its insured’s employees? The Supreme Court of India recently addressed this question in a case involving the substitution of mentha oil with water in a warehouse. The core issue was whether the insurance policy covered losses resulting from employee dishonesty. The judgment was delivered by a bench of Justice Mohan M. Shantanagoudar and Justice R. Subhash Reddy, with the opinion authored by Justice R. Subhash Reddy.

Case Background

The National Bulk Handling Corporation Pvt. Ltd. (the respondent), a Collateral Management Company, stores commodities pledged by farmers, traders, and manufacturers who are availing loans from banks. The company took a Fidelity Guarantee Insurance Policy from Oriental Insurance Co. Ltd. (the appellant) to cover losses of pledged commodities stored in their warehouses.

Three firms, S.K. Sales Corporation, Navbharat Commodities, and Navbharat Agro Products, stored commodities including urad and mentha oil in a warehouse at Gadarpur, Uttarakhand. The respondent was appointed as the Collateral Manager and had deployed security guards and field staff. On 06.11.2008, it was discovered that urad had been removed without authorization. An investigation revealed that the respondent’s employees colluded with borrowers. The respondent then shifted 601 barrels of oil to another godown at Bazpur, where a quality check revealed that the mentha oil had been replaced with water.

A claim was lodged with the appellant on 08.11.2008, and a police complaint was filed on 19.11.2008. The respondent claimed that the commodity substitution was an act of infidelity covered by their insurance policy.

Timeline

Course of Proceedings

The respondent filed a claim with the National Consumer Disputes Redressal Commission, seeking Rs. 4,17,84,213, which included the loss of urad and mentha oil. The National Commission allowed the claim of Rs. 3,46,87,113 for the loss of mentha oil, along with interest at 9% per annum, but rejected the claim for the loss of urad. The appellant, Oriental Insurance Co. Ltd., then filed an appeal against this order.

Legal Framework

The court discussed the nature of Fidelity Guarantee Insurance, stating that it is a contract where, for a consideration, one agrees to indemnify another against loss arising from the breach of honesty, integrity, or fidelity of an employee. The court quoted Black’s Law Dictionary’s definition of Fidelity Insurance as:

“Fidelity Insurance- Form of insurance in which the insurer undertakes to guarantee the fidelity of an officer, agent or employee of the assured or rather to indemnify the latter for losses caused by dishonesty or a want of fidelity on the part of such person.”

The court clarified that this type of insurance is intended to protect the assured against the contingency of a breach of fidelity by a person in whom confidence has been placed.

Arguments

Appellant’s Arguments (Oriental Insurance Co. Ltd.):

• The respondent failed to prove that any employee was involved in substituting mentha oil with water.
• The investigation reports did not show any tampering of seals, which would indicate external involvement.
• The respondent did not make the claim immediately, violating the terms of the insurance contract.

Respondent’s Arguments (National Bulk Handling Corporation Pvt. Ltd.):

• The survey report of the appellant indicated the removal of mentha oil and its substitution with water by borrowers in connivance with employees.
• The respondent filed a complaint, and the owners of the commodity and the respondent’s employees were charge-sheeted under Sections 420, 406, 405, 415, 427 of the Indian Penal Code.
• The survey report indicated the involvement of the respondent’s employees.
• The 100% sampling was completed on 12.11.2008, and the investigation report was submitted on 14.11.2008, and the matter was reported to the insurer on 18.11.2008, thus there was no delay.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the respondent-complainant has failed to prove that any employee is involved in removing/substituting mentha oil with water in 601 barrels, which was stored in the godown.

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The court noted that the judgments in Food Corporation of India Vs. New India Assurance Co. Ltd. [(1994) 3 SCC 324] and Gurshinder Singh Vs. Shriram General Insurance Co. Ltd. & Anr. [C.A. No. 653 of 2020]* related to insurance claims but had no direct bearing on the issues in this case.
• The court relied on the definition of “Fidelity Insurance” from Black’s Law Dictionary to explain the nature of the insurance policy.
• The court noted that the employees were charge-sheeted under Sections 420, 406, 405, 415, 427 of the Indian Penal Code for their involvement in substituting the mentha oil with water.

What weighed in the mind of the Court?

The Supreme Court emphasized the following points in its reasoning:

• Employee Involvement: The court gave significant weight to the evidence indicating the involvement of the respondent’s employees in the substitution of mentha oil with water. This was supported by the survey report, the police complaint, and the subsequent charges against the employees.
• Nature of Fidelity Guarantee Insurance: The court underscored that Fidelity Guarantee Insurance is specifically designed to protect against losses arising from the dishonesty of employees. This understanding of the policy’s purpose was crucial in the court’s decision.
• Timeliness of Claim: The court found that there was no delay in lodging the claim. The respondent acted promptly after discovering the substitution and completing the necessary investigations.

The court rejected the argument that the intact seals meant no employee involvement, stating that 100% sampling proved the substitution. The court also rejected the argument of delay in lodging the claim, as the claim was made after the 100% sampling and investigation report.

The court’s reasoning was based on the evidence presented, the nature of the insurance policy, and the timeline of events. It emphasized the purpose of Fidelity Guarantee Insurance to protect against employee dishonesty.

“The survey report dated 26.03.2009, itself indicates the involvement of employees of the respondent-Company in removing 601 barrels of mentha oil stored by the respondent-Company.”

“There is a specific observation in the survey report that the security guard of the respondent-Company had allowed Mr. Sanjeev Chhabra(owner) to lift the stock.”

“In that view of the matter, it cannot be said that there is any delay on the part of the respondent in lodging the claim, so as to accept that there is breach of condition no. 1 of the policy.”

Key Takeaways

• Fidelity Guarantee Insurance Coverage: The judgment clarifies that Fidelity Guarantee Insurance policies cover losses resulting from the dishonest acts of employees.
• Importance of Investigation Reports: The court relied heavily on the investigation and survey reports, highlighting the importance of thorough documentation in insurance claims.
• Timely Reporting: The court emphasized that the claim was made in a timely manner after the discovery of the substitution and the completion of the investigation.
• Employee Accountability: The judgment underscores the accountability of employees and the need for companies to take measures to prevent employee dishonesty.

Directions

No specific directions were given by the Supreme Court in this case. The appeal was dismissed, and the order of the National Consumer Disputes Redressal Commission was upheld.

Specific Amendments Analysis

There is no discussion of specific amendments in the judgment.

Development of Law

The ratio decidendi of this case is that a Fidelity Guarantee Insurance policy covers losses arising from the dishonest acts of employees, provided there is sufficient evidence of such dishonesty and the claim is made in a timely manner. This judgment reinforces the purpose of Fidelity Guarantee Insurance and provides clarity on the evidentiary requirements for such claims.

Conclusion

The Supreme Court dismissed the appeal, upholding the National Consumer Disputes Redressal Commission’s order. The court found that the evidence clearly indicated the involvement of the respondent’s employees in the substitution of mentha oil with water, thereby making the appellant liable under the Fidelity Guarantee Insurance policy. The judgment underscores the importance of employee accountability and the scope of Fidelity Guarantee Insurance policies in covering losses due to employee dishonesty.