Kerala High Court Holds ATM Fraud Losses Not Covered Under New India Assurance Policy, Dismisses Federal Bank Suit

The Kerala High Court has recently held that losses caused by fraudulent use of ATMs were excluded under the Banker's Indemnity Policy issued by New India Assurance Co. Ltd. to Federal Bank, setting aside a trial court decree that had directed the insurer to indemnify the bank.

A Division Bench of Justice Sathish Ninan and Justice P. Krishna Kumar allowed the appeal filed by the insurance company and dismissed the bank's suit seeking indemnification under the policy.

Federal Bank had filed a suit claiming indemnity under a banker's indemnity policy issued by New India Assurance after alleging that fraudsters misused its ATMs across the country between April 11, 2012, and May 20, 2012, using cards issued by other banks.

According to the bank, the fraudsters withdrew cash from its ATMs but intentionally left one or two currency notes in the presenter tray. After 42 seconds, the ATM machine would recapture the remaining notes. However, the entire withdrawal amount would be reversed and credited back to the customer's account, even though most of the cash had already been taken. The bank claimed it suffered a total loss of Rs 83,34,600 through such transactions.

The insurance company rejected the claim, contending that fraudulent ATM transactions were excluded under the policy and that the add-on fraud protection cover applied only to debit cards issued by Federal Bank itself.

The trial court had decreed the suit, holding that the transactions were covered under the policy. New India Assurance then challenged the decision before the High Court.

Examining the policy clauses, including the base Banker's Indemnity Policy and the additional cover taken by the bank, the High Court observed that at first glance the incidents could appear to fall within the risks of “theft” or “malicious damage” covered under Clause A of the policy.

However, the bench noted that the exception clause (i) specifically excluded losses arising directly or indirectly from the use of automated teller machines.

“On a first blush it would appear that the instances in question are a form of 'theft' or 'malicious damage' under clause 'A' of the policy. But, the exception clause (i) specifically excludes losses arising out of the use of ATMs,” the Court said.

The Bench further noted that the policy's add-on cover specifically protected fraudulent transactions involving Federal Bank's own debit cards.

“The fact that fraudulent use of the plaintiff Bank's debit cards are specifically included in the Add-on cover taken under the additional/extended policy, implies that, there is no coverage with regard to fraudulent use of other debit cards,” the Court observed.

Clarifying the scope of coverage, the court said the policy covered theft occurring at the ATM premises or malicious damage to the ATM, but did not extend to fraudulent use of the ATM itself.

“It is evident that what is covered under the policy is, a theft occurring in the premises of the ATM counter and malicious damage of the ATM; it does not extend to a fraudulent use of the ATM,” the Bench said.

The Court also rejected the bank's argument that the additional policy brought fraudulent ATM transactions within coverage. It held that the additional policy merely enhanced the monetary limits for losses occurring “in premises” and “in transit” and did not expand the scope of risks covered under the original Banker's Indemnity Policy.

The Bench also examined the policy's excess clause. It said each fraudulent withdrawal had to be treated as a separate loss. Under the terms of the policy, the bank was required to bear the first 25% of every loss, or 2% of the basic sum insured, whichever amount was higher, subject to the maximum limit specified in the policy.

Since each transaction was below the applicable threshold, the losses would in any event have to be borne by the bank itself if the excess clause were applied. However, the Court observed that the insurer had not relied on the excess clause in its repudiation letter.

“The defendants having not relied upon the same in their letter of repudiation, cannot be permitted to fall back upon it to deny the claim in its entirety,” the Court said.

Nonetheless, the bench held that this did not assist the bank because the losses themselves were excluded from coverage under the policy.

“The non applicability of the excess clause is of no avail to the plaintiff,” the Court said.

Accordingly, the High Court allowed the appeal, set aside the trial court's decree, and dismissed Federal Bank's suit for indemnification.

For Appellants: Senior Advocate George Cherian, Advocates Latha Susan Cherian and K.S Santhi

For Respondent: Advocate Madhu Radhakrishnan