PER BHARATKUMAR PANDYA, MEMBER

1.         The parties are referred to as arrayed in the complaint. This appeal arises from the order dated 24.09.2013 passed by Maharashtra State Consumer Disputes Redressal Commission, Mumbai (in short, ‘the State Commission’) in CC no. 200 of 2012 whereby the complaint of the complainant is dismissed and therefore the aggrieved complainant is before us in this first appeal. M/s Tulsidas Khlinji (P) Ltd., a company engaged in storage, clearing, forwarding, and logistics, filed a consumer complaint through its director, Mr. Rajen S. Bhatia, against IFFCO Tokio General Insurance Co. Ltd., alleging deficiency of service for repudiating an insurance claim under a Fidelity Policy. The Complainant Company had subscribed to the policy No. 41012312 from 01.10.2009 to 30.09.2010, covering 250 permanent employees with a sum insured of ₹75,00,000. The policy, initially obtained in 2006, was renewed annually. One of the employees of the complaianant, Ms. Rakhee Prabhudas Zandani, Assistant Manager - Accounts, Audit & Vigilance, misappropriated Rs.60,62,748/- of the company’s funds between December 2007 and April 2010, which was discovered on 23.08.2010. Following the discovery, her services were terminated on 26.08.2010, and a new auditor was appointed to verify transactions, who confirmed the fraudulent activity. Ms. Zandani had been issuing fictitious payments by altering authorized cheques. The fraud was promptly reported to the insurance company, and a claim for Rs.60,62,748/- was lodged on 25.11.2010. The Opponent Insurance Company appointed surveyor Padmsey P. Shah & Co. who submitted his report on 15.02.2011. The insurer repudiated the claim on 23.09.2011, citing Condition No. 3 of the policy, which requires notification of any changes in circumstances. The same is reproduced as under:

“3) Changes in Circumstances Unless WE are advised and OUR written approval be obtained, WE shall not be liable under this Policy

In the event of any change in the nature of YOUR business or if the duties and conditions of service of employee shall be changed or if the remuneration of the Employee be reduced or its basis altered or if the precautions stated by YOU with regard to accounting be not duly followed or if YOU shall continue to entrust the employee with the monies or goods after having knowledge of any fact bearing on the honesty of the employee.

In the event of Checks for securing accuracy of accounts and stocks stated in the proposal not being duly observed."

2.         Aggrieved, the Complainant filed a complaint before the State Commission of Maharashtra Mumbai alleging illegal and wrongful repudiation and consequent deficiency in service and seeking Rs.60,62,748/- along with 15% interest from 28.02.2011, and additional damages of Rs.5,00,000/- for mental agony and Rs.1,00,000/- as litigation costs. In its defense, the Opponent Insurance Company stated that the fraud was the result of lapses in the Complainant’s internal controls, specifically that services of Ms. Zandani had been hired without verifying her antecedents, despite she having committed a fraud in her previous employment. Furthermore, the company's internal auditors were, as per extant guidelines, required to check and verify payments only exceeding Rs.5 lakh, a loophole Ms. Zandani exploited to commit fraud in manipulated payments by keeping them below Rs. 5 lacs. The insurance company also highlighted that the Complainant Company had failed to maintain dual control for payments to vendors.  Despite the floating policy for 250 permanent employees, the number of employees actually working were found to be 259 without notifying the insurer about such an increase, violating policy clause 3. The surveyor appointed by the insurance company confirmed the fraudulent activities, identifying recoverable amounts from Ms. Zandani’s frozen bank accounts, provident fund, and dues. The surveyor further noted that the policy provided only Rs.2,00,000/- coverage per employee, and that the complainant company failed to adhere to Condition No. 3, which required reporting any changes in the number of employees or any change regarding audit and accounting safeguards. The Opponent Insurance Company, based on the Survey report, stated that the claim was invalid and there was violation of condition 3(b). The Complainant Company continues to pursue its claim, asserting the insurance company’s deficiency in service for denying coverage under the policy and for wrongful repudiation of claim. The State Commission dismissed the complaint as per the following order:

“(10) We have given thoughtful consideration to the arguments advanced by the Ld. Advocates of the parties, perused the documents available on record and written version, affidavit of evidence filed by both the parties. The proposal form is a part of contract. Acceptance of proposal form constitutes valid contract between the parties. Insurance policy is a document to read contract between the parties. The Complainant Company did not comply the condition of carrying out the internal audit on quarterly basis of amounts upto 5,00,000/-, though the statutory audit was carried out excluding expenditure of '5,00,000/-and- below. It was also stated across the Bar that statutory audit, was regularly carried out, however, in the reports of the auditors no misappropriation was noticed. It was only on getting calls from certain vendors for not settling their dues, the Complainant Company suspected about factual position of the payments and therefore, ordered to carry out detailed audit Inspection. The first defalcation/misappropriation occurred in the month of December, 2007 which continued till 2010. The Complainant Company admitted that no regular audits of all the expenditure were carried which is contrary to the undertaking given in the proposal form. Policy Condition 3 (b) stipulates for carrying out audit checks. The terms and conditions of the policy for carrying out the regular audit were well within the knowledge of the Complainant Company. Complainant Company failed to observe this vital condition to prevent embezzlement/misappropriation by the accused employee. It is also necessary to note the stipulations from the policy about the compensation of 2 lac only for misappropriation/defalcation per employees. Since the entire embezzlement/misappropriation attributed to the infidel nature of one employee, the claim of 60,62,748/- raised by the Complainant is not covered under the policy terms and conditions. FIR indicts eight employees including the accused Ms.Rakhi Zandani. However, it is not the case of Complainant attributing defalcation to those employees except Ms.Rakhi Zandani. We observe that mandatory condition to carry out quarterly audit was not fulfilled by the Complainant Company. Statutory auditor (through test audit) could not detect defalcation for such a long ' period is unacceptable proposition. Therefore, repudiation of the claim for violation of condition no.3 by the Insurance Company cannot therefore be faulted with as the Complainant Company failed to substantiate their claim.

(11) In view of the aforesaid observations, we have come to the conclusion that the repudiation of the insurance claim for violating policy condition no.3 (b) cannot be faulted with and therefore, no deficiency in service can be attributed against the Opponent Insurance Company. We hold accordingly and pass the following order:

ORDER                                                

Complaint is dismissed. No order as to costs.”

3.         Inter alia, the following main grounds are raised:

1. The State Commission erred by focusing solely on the proposal form while ignoring the actual terms of the issued insurance policy. The appellant contends that the ambiguous terms of the policy should have been interpreted in favor of the insured, which is a well-established legal principle.
2. The Commission’s decision is based on assumptions and presumptions rather than a proper application of the law to the facts and evidence on record. The Commission failed to consider the explanatory letters and other documents which clarified the reasons, basis and validity for the insurance claim and the illegal and wrong repudiation by the insurer.

4.         Upon reviewing the arguments raised in this appeal and after carefully considering the order passed by the Maharashtra State Consumer Disputes Redressal Commission, we note that the State Commission has held that the complainant violated Condition No. 3(b) of the Fidelity Insurance Policy, which mandated regular quarterly audits, particularly concerning amounts up to ₹5,00,000. It has also been noted by us that after the insurer repudiated the claim, the appellant made a detailed representation explaining each and every ground of repudiation on 25.10.2011. The insurer, rather than responding point to point, issued a brief reiteration response. Such representation and the correctness or otherwise of the same has not been looked into or evaluated by the State Commission. The complainant submitted that such quarterly audits as was mentioned in the proposal form  was conducted regularly and also, yearly statutory audits, as mentioned in the proposal form were also carried out. As per the internal audit policy, the transactions below Rs.5 lakhs were excluded from the internal audit but were in any case verified on random test check basis. The State commission also observed, as noted, that the failure of the insurer with regard to audit directly contributed to the misappropriation remaining undetected for an extended period from 2007 to 2010. Since this condition was crucial for preventing the fraud, the insurance company’s repudiation of the claim based on this violation was held justified. The repudiation letter is reproduced as under :

“REGISTERED A.D

23.09.2011

Dear Sir,

Re: Fidelity Guarantee insurance Policy No. 41012312

Claim No. 41000511

Your claim for Rs.60,62,748/-

We refer to your letter dated 3.6.2011

On a careful perusal of the information and documents provided by you and the details available on survey and verification we find that:

1.            Vide the e-mail message dated 1.10.2009 sent to Mr. Pranav Shah of your intermediary. M/s Alliance Insurance Brokers P. Ltd. by our Mr. Aseem Aganval the renewal of the FG Policy No. 41009916 was approved on the following terms:

"Unnamed floater cover for 250 employees

Total Sum Insured: Rs. 75 lacs

Rate: 4%o + Rs. 10 per capita

Excess: 5% of limit of indemnity subject to a minimum of Rs. 25,000/- for each and every claim

Limit Per Person: Rs. 2 lacs

Limit ADA: Rs. 5 lacs

Since the cover will be on unnamed basis, please make sure that the entire strength of a cadre is covered. We'll not allow any selectivity. The client must maintain daily attendance records and make the same available on request. If at the time of the claim it is discovered that persons In a designation are more than covered under the policy, the claim will be repudiated and no requests for accommodation will be entertained. Further, no contract employees or any other employees not on permanent-rolls of the client will be covered under the policy. All other terms and conditions except as mentioned/waived as per ITGI's FG Policy."

2.          It has been ascertained that on the date of discovery of the loss, there were on your rolls 259 employees. As per the terms approved at renewal of the policy therefore the claim is not admissible.

3.           Further the Condition no. 3 of the policy states that:

"Change in circumstances:

Unless WE are advised and OUR written approval be obtained, WE shall not be liable under this Policy.

…..if the precautions stated by YOU with regard to accounting by not duly Followed….”

4.          It has been reported that although an Internal Audit system exists, the internal auditors were not given any mandate to check the vendor payments. Further the internal auditors were also not required to check any payment less than Rs.5,00,000/-

5.          It has also been reported that there was a lack of dual control for making vendor Payments. The standard operations procedure for vendor payment as described by you was not being followed. There is thus a breach of condition no. 3 of the policy.

6.           The policy issued by us does not contain any retroactive period. Thus the loss suffered by acts of employee/ s prior to commencement of the current policy are not within the scope of insurance.

In view of the above, we regret that the claim preferred by you is not admissible and the respect is hereby repudiated.

Thanking you

 Yours faithfully,

For IFFCO-Tokio Ger surance Co. Ltd”

5.         The representation dated 25.10.2011 sent by the appellant and response thereto also reproduce as under:

“Dear Sir,

Re: Fidelity Guarantee insurance Policy No. 41012312

Claim No. 41000511

Your claim for Rs.60,62,748/-

With reference to the above, received your letter dated 23.09.2011 and were shocked to know that you had denied our valid claim on the following grounds:

A) In your letter you have written that "It has been ascertained that on the date of discovery of the loss, there were on your rolls 259 employees. As per the terms approved at renewal of the policy therefore the claim is not admissible."

At the outset we do not understand how you can deny our valid claim stating "As per the terms approved at the renewal of the policy" without referring to any terms & conditions in the policy and hence we would request you to review your decision.

Assuming that you have missed few points we would also like to draw your attention to the following:

B) The Fidelity Guarantee Policy does cover only the permanent / confirmed employees of an organisation & not the contract employees or any other employees not on permanent -roll of the client.

c) in spite of verifying our records, conveniently your surveyor, in his survey report, did not specify the breakup of permanent & temporary / or contract employees. Moreover, three Directors of the company are also incorporated as employees covered under the policy.

Thus it can be seen that the number of permanent employees on our roil, never exceeded the number of employees covered under the insurance policy.

In case the surveyor has Inadvertently missed the above & would like to re-verify & confirm the same, kindly ask the surveyor to once again visit our office & verify the books to confirm the above.

It also may not be improper to bring to your notice at this juncture that you have incorporated a Premium Adjustment clause, Sr. No 11, in the policy for upward or downward revision of employees & collecting additional premium or making over refund as well. With this clause in the policy, you could have asked for additional premium if warranted for alleged extra employees rather than repudiation of our valid claim.

With this clause in the policy, in fact we are entitled for refund of premium for last four years.

Thus the subject claim needs to be admitted with positive attitude and corresponding refund needs to be made over for excess premium collected.

D) After denial of claim, under Point numbers 3, 4 & 5 you have mentioned about breach of condition number 3 of the policy. Here you have noted the following:

" Change in the circumstances:

Unless WE are advised and OUR written approval be obtained. WE shall not be liable under this policy.

…if precautions stated by YOU with regard to accounting by not duly followed …"

In this regard we hereby affirm & reiterate that there are no changes in any of the circumstances in our organisation over the policy periods increasing your exposure which warranted your attention & seeking your written approval.

You have also mentioned that we had not given mandate to auditors to check the vendor payments, internal auditors were not required to check payments less than Rs. 5,00,000/, there was lack of dual control for making vendor payments & standard operating procedure was not being followed.

Here we would like to bring to your notice that the audit is always done on sample basis & not on an "all exhaustive basis" viz. ail vouchers are never verified by auditors in any organisation anywhere in the world. It would be interesting to note whether in your own organization, audit of "every payment" is made either by Internal or external auditor?

Moreover, there is neither any statutory or legal requirement in this respect nor any policy condition making us obligatory for an internal auditor to check 100% of the transactions.

The culprit had manipulated the process by creating the lack of dual control or not following the process. It was found to be the modus operandi of the culprit.

As such there was no change in circumstances warranting reference to condition no 3 at all. As such, this reference to condition number 3 is of no consequence as there was no change in any of the circumstances worth communicating to you & seeking your approval.

E) You have in point no 6 noted that the policy does not contain, any retroactive period.

Here we would bring to your kind notice that the Retroactive Date means the date when the policy is taken first or risk incepted first and thereafter renewed without break in the period of insurance cover. Thus in our case the Retroactive Date is 01.10.2006 & Retroactive Period is 01.10.2006 to 30.09.2010.

The policy by definition contains Retroactive date however not noted by you on the schedule.

However it is not clear if it is your company practice not to put a retroactive date or it is an error. Apparently your Fidelity Guarantee Policy schedule format does not have a column for retroactive date at all & as such seems to be a formatting / design error or flaw of your software system.

In this regard, we also draw your attention to the following:

• Sr. No. 13 of the policy deals in terms of Retroactive date in both "What is covered" & "What is not covered"

• It also says retroactive period as defined elsewhere in the policy and nowhere in policy you have defined retroactive date (in any of the four policies issued by your good office to us since 2006, none of the policy has this definition)

• In the policy issued by you, under "Definition of Words" defines 12 items but does not define Retroactive Date

• It may be a printing error or is your IRDA filed product faulty or you have issued a non IRDA approved product?

• In the proposal form, we had sought IRDA approved product

Thus, as it can be seen, retroactive period is the inbuilt clause of your Fidelity Guarantee policy and by understanding it always exists.

Hence we are of opinion that the same is also of no consequence.

Further we would also bring to your notice the following:

• You have referred to your e mail dated 01.10.2009 addressee to Ms Alliance Insurance Brokers Pvt Ltd. (which was never received by us) in the opening paragraph of your repudiation letter.

• First & foremost, this e mail is not a part of the policy for the sake of any Interpretation & claim should not be referred to.

• The mail is sent on 01.10.2009 i.e. after accepting the premium & inception of the risk.

• The proposal form issued by ITGI specifically cautions us to ensure that the correct amount of Insurance is fixed for each employee is adequate to get full protection. To the contrary, when vye sought appropriate coverage - ITGI denies claim by way of internal mail without incorporating the same in contract of insurance.

In view of the above reasons recorded, we would earnestly request you to review the subject claim within the terms & conditions of the policy & confirm your views about admissibility of the claim. Thanking you. Yours truly, forTulsidas Khimji Pvt. Ltd.”

6.         We observe that the detailed representation of the insured has been responded only by a brief reply without going into the merits of the representation. The appellant was permitted to file the copy of the quarterly internal reports vide order dated 07.01.2014 and accordingly the appellant has filed such copies of reports on 10.02.2014 for the period January 2008 to March 2011. We have perused the same. After going through the State Commission’s order we have noted that the State Commission has agreed primarily with the ground of repudiation based on violation of the  policy condition 3(b), which states that if the approval of the insurer is not obtained for change of circumstances in the event of checks for securing accuracy of accounts and stocks stated in the proposal is not being duly observed, the insurer shall not be liable. We have examined the proposal form dated 28.09.2006 submitted by the insurer for applying for the policy for 2006-07 which was subsequently and continuously renewed (page 63). With regard to the maintenance of accounts and audit, there are three statements made by the insured. Bank reconciliation and internal audit is done quarterly, books are balanced yearly and quarterly internal audit is the tool used to discover any irregularities. The only objection of the surveyor and the insurer with regard to the internal audit is that the internal auditors were not given mandate to check the vendor payment or to check payments less than Rs.5 lakhs. The response of the insured mentions that the internal audit or for that matter statutory audit is always on test check basis and there is neither any statutory requirement nor any policy condition nor any undertaking in the proposal form which obligates the insured to check each and every transaction. The quarterly internal audit is carried out regularly and the red flags suggested by the auditors are duly addressed. There is no “change of circumstance” which required any intimation to the insurer under clause 3(b) which has not been so provided. We find merit in the submissions of the appellant. The appellant is a large and experienced company having a turn over, as per the internal audit  reports on record, of more than Rs. 40 crore having its own internal audit policy. The audits reports of A J Shah & Co. for the period 01.01.2008 to 31.03.2011 have been placed on record. The commitment in proposal form for quarterly audit is admittedly duly adhered to. Considering its own size, it is for the insured to devise its own internal audit policy. The Complainant is right  that the audits are generally on test check basis and after considering the volume of work it is reasonable that appropriate threshold for verification be kept. The insured’s internal audit policy as such cannot be questioned or dictated by the insurer simply because a Fidelity policy cover has been offered unless any particular express condition is incorporated in the policy. The insured is obliged to adhere to the checks undertaken in the proposal form only. Accordingly, we find no justification in the ground of repudiation based on violation of condition 3(b). Therefore, the State Commission’s Order can not be sustained on that ground.

7.         Further, The Complainant categorically informed in his letter dated 25.10.2011 that the surveyor has wrongly taken the number of employees to be 259 while permanent employees were only between 114 to 201 during the period October 2006 to October 2010. We have verified the survey report, particularly para 9 of his report titled “liability and warranties”. Firstly the surveyor has referred to email sent by the insurer to the complainant's broker which was allegedly sent subsequently by registered post on 23.09.2011 to the complainant. The Complainant in reply dated 25.10.2011 has stated that the said email cannot form part of the policy. Apart from this, the surveyor simply mentioned that the payroll  of the insured disclosed 259 employees without specifying whether permanent, contractual or otherwise. It was therefore suggested by the surveyor that the culprit Rakhi Zandani may be considered not covered under the policy. Though such number of employees in excess of 250 employees covered under the floating policy is taken to be breach of  condition “for renewal of the policy” by the insurer for repudiating the claim, the State Commission has not considered this aspect. We are of the considered opinion that after the communication of the insured dated 25.10.2011, the insurer should have deputed the surveyor for verification. It is noted by us that as per the letter of the insurer dated 23.09.2011, the contract employees and any other employees not on the permanent roll of the client are not covered under the policy implying that non-permanent employees are neither covered nor are significant for the purpose of considering the breach of 250 employee limit in the policy.. Therefore also it was obligatory on the insurer to ensure that reverification is done. After considering that such re-verification of number of permanent employees has not been resorted to by the insurer and that the alleged infraction or excess is less than 4% of the 250 covered employees, we would want to resolve this issue also in favour of insured. 

8.         With regard to objection of lack of dual control regarding vendor payments as raised by the insurer, we are unable to locate any vendor payment procedure “as described by the insured” as referred to in para 5 of the repudiation letter. The surveyor also in his report  does not appear to have mentioned any adverse findings on this count. We have no option but to agree with the complainant that the allegation in the repudiation letter is unfounded. The statement in the repudiation letter that the policy does not cover retroactive period also, as elaborated in the insured’s letter, equally appears to be wholly baseless. The scope of the policy (clause 12) of describing “what is covered” and “what is not covered” clearly mentioned that the loss suffered within the retroactive period “as defined elsewhere in the policy” is covered under the policy. It is for the insurer to have demonstrated how and under what stipulation such benefit of coverage for retroactive period has been excluded. Mere absence of the definition of retroactive period in the policy, without any express exclusion, has to be read contra proferentem. Apart from mentioning in the repudiation letter, the insurer has not brought any evidence on record to justify the contents of para 6 of the repudiation letter to justify denial of retroactive period benefit.

9.         We therefore are for the considered opinion that the State Commission has erred in approving the repudiation. On the basis of evidence on record we are of the considered opinion that the loss is established and there is no breach of any policy condition and therefore the claim is unlawfully repudiated resulting in deficient service. The benefit of the retroactive period clause is also available to the insured which also is wrongly denied. The order of the State Commission therefore needs to be set aside and the complaint needs to be partially allowed. However, because the insurer’s letter dated 25.10.2011 mentions the limits of insurer’s liability (for the current policy period) thus: per employee liability at Rs. 2 lakhs, AOA limit of Rs.5 lakhs and excess to be at 5% of limit of indemnity (minimum Rs.25000/-). The liability of the insurer for indemnifying loss due to fraud by only one employee across three policy periods (December 2007 to April 2010) is thus required to be quantified keeping in mind the similar and expressly provided limits of liability of the Insurer, which we will direct the insurer to do and then pay,  Therefore we would pass the following Order.       

 ORDER

Appeal is partly allowed. The Insurer Iffco-Tokio General Insurance Co. shall admit the claim of the appellant  and compute its liability giving benefit of retroactive clause and after applying excess and other limits as expressly provided in the policy for the respective policy periods. Such computation shall be provided to the insured-complainant within one month from the date of this order. After considering the objections to such computation, if any, received from the insured within one month thereafter, the insurer shall make the due payment along with compensatory simple interest at 9% for the period 01.07.2011 till the date of payment, within one month thereafter. Insurer shall also pay cost of Rs. One lakh.