CS(OS) NO.1445/2002 Page No.1 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI + CS(OS) No. 1445 of 2002 % Date of Decision : January 23rd, 2009. M/S. GAMMA INVESTMENTS .... Plaintiff. Through Ms.Anuradha Mukherjee, advocate. VERSUS NATIONAL INSURANCE COMPANYLTD. .... Defendant. Through Mr.Trideep Pais and Mr.L.K.Tyagi , advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not ? Yes. 3. Whether the judgment should be reported Yes. in the Digest ? SANJIV KHANNA, J: 1. Gamma investments (hereinafter referred to as the plaintiff) is a partnership firm engaged in the business of stock broking. National Insurance Company Ltd., the defendant is an insurance company which had on payment of premium issued ―stock brokers‘ indemnity insurance policy‖, Exh. P-1 CS(OS) NO.1445/2002 Page No.2 for the period 1st June, 2000 to 31st May, 2001 in favour of the plaintiff. The plaintiff has filed the present suit for recovery of Rs.46,22,795.30 against the defendant on account of loss covered by the policy and Rs.14,02,036.82 towards interest. Plaintiff has also claimed damages for pain and suffering amounting to Rs.1 lac. 2. The plaintiff, had sold 7,96,900 shares of M/s. Jindal Vijayanagar Steel Ltd. (hereinafter referred to as the shares, for short) as a broker for their clients Mr.Gunjan Jain and Mr.Vishnu Kumar. These shares were subsequently lodged for transfer but the Registrar of M/s.Jindal Vijayanagar Steel Ltd. refused to register the transfer on the ground that they were partly paid up shares and the sticker of ―fully paid up‖ affixed thereon was forged. 3. The plaintiff lodged police complaints, Exh. PW 1/2 & PW 1/3, and FIR(s) was registered against Mr.Gunjan Jain and Mr.Vishnu Kumar. They were arrested. 4. The plaintiff was required to make good and replace the forged/bad delivery of shares with new shares. The plaintiff replaced and purchased new shares of M/s Jindal Vijaynagar Steel Ltd. from the market and in this process suffered losses. They made claim(s) under the policy which CS(OS) NO.1445/2002 Page No.3 was rejected. The plaintiff also approached Ombudsman and National Consumer Disputes Redressal Commission but their claim was not entertained on the ground of lack of jurisdiction. 5. The defendant has repudiated the claim of the plaintiff on two grounds (1) the transaction was done without following and complying with the guidelines of the Security & Exchange Control Board of India (SEBI, for short) and (2) there was breach of requirement to take reasonable care. In the written statement it is also stated that as per policy the liability of the defendant is limited to Rs. 25 lacs. 6. On the basis of the pleadings of the parties, the following issues were framed on 22nd September, 2004: ―1. Whether the plaintiff is registered partnership firm and the suit instituted by a authorised person on behalf of the plaintiff? OPP. 2. Whether the clam of the plaintiff in the present suit is not maintainable in view of the preliminary objection No.1 taken by the defendant in the written statement in regard to the non-compliance of the condition precedent by the plaintiff? OPD. 3. Whether the defendant has validly repudiated the claims raised by the plaintiff under the Insurance Policy? OPD. 4. If issue No.3 is answered in affirmative whether the defendant was entitled to seek any further clarification after submission of CS(OS) NO.1445/2002 Page No.4 a joint survey report from only one of the surveyors, if so, to what effect? OPD. 5. Whether the plaintiff has suffered any loss after February 21, 2001, and if so, to what amount the defendant is liable to compensate the plaintiff for the same? OPD. 6. Whether the plaintiff is entitled to damages, if so, to what amount? OPD. 7. Whether the claim of the plaintiff would be limited to the amount of Rs.25 lacs in view of the stipulations in the policy? OPP 8. Whether the plaintiff is entitled to any interest, if so, at what rate and on what amount and for what period? OPP. 9. Relief.‖ 7. The plaintiff has produced one witness Col. (retd.) G.S. Gujral-PW.1 and the defendants have examined three witnesses Mr. J.N. Vats DW-1, Sr. Divisional Manager of the defendant, Mr.Dinesh Kr. Jain, DW-2, Surveyor working with M/s.Mehta and Padamsey Surveyors Pvt. Ltd. and Mr.Shyamal Bhadra DW-3, Surveyor working with M/s. Bhadra and Associates Pvt. Ltd. ISSUE NO.1 8. PW-1, Col. (retd.) G.S. Gujral has proved Form-B issued by Registrar of Firms, Government of NCT of Delhi, Exhibit PW1/1, stating inter alia, that the firm M/s. Gamma Investments is duly registered and Col (retd) Gurnam Singh CS(OS) NO.1445/2002 Page No.5 Gujral, Mohini Gujral and Ankush Singh Gujral are partners of the said firm. This portion of the testimony of PW-1 remains unchallenged in the cross examination. Accordingly, issue no.1 is decided in favour of the plaintiff and against the defendant. ISSUE NOS. 2, 3 & 4 9. These issues pertain to terms of the insurance policy and interpretation of the insurance document. Insurance is a contract whereby an insurer undertakes to pay to the insured a sum of money or its equivalent on happening of a specified event. In case of a liability policy which is in the nature of indemnity, as in the present case, the insurer agrees to pay to the insured on happening of the peril, loss or damages which may be occasioned. Insurance contract is a matter of intention of the parties, which is to be gathered from the language and words used in the written contract to express their intention. It is therefore necessary to refer to the relevant terms of the insurance policy. 10 The insurance policy consists of five sections, Section I, Section IA, Section IB, Section IC and Section II. They have exclusions general as well as specific to each of the five sections. There are also general conditions CS(OS) NO.1445/2002 Page No.6 applicable to the entire policy and those applicable to Section I and Section II. It appears that both the parties have lost distinction between the five Sections of the Policy and the subject matter of insurance covered by the five sections. 11. Section IA of the Policy deals with loss resulting from dishonest or fraudulent acts by employees. Similarly, Section IB pertains to computer crime indemnity. No claim has been made under the said Section and therefore is not required to be examined. Section IC deals with legal fee, which again is not a subject matter of the claim/suit. 12. Section I of the policy relates to direct financial loss suffered by the plaintiff during the period of insurance pertaining to, connected with or dealing in transactions through National Stock Exchange ―only complying with the laid down norms and procedures in respect of transactions made through National Stock Exchange‖. Section I relates to First Party liability, as is apparent from the reading of the said section, which is as under :- ―SECTION – I NOW WE the Company hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Insured, as stated in the Insuring Clauses, or in any emendatory CS(OS) NO.1445/2002 Page No.7 endorsements attached thereto, in excess of the amounts of the deductible stated to be applicable, such direct financial loss sustained by the Insured subsequent to the Retroactive Date and discovered by the Insured during the period of the Policy subject to the clause 3(c) of General conditions applicable to Section I and subject to the Policy Limits as stated in the Schedule or in any emendatory endorsements attached thereto provided that such losses arise only out of or pertain to or are connected with or result from dealings or transactions through National Stock Exchange only complying with laid down norms and procedures in respect of transactions made through National Stock Exchange.‖ 13. Section I of the Policy relates to losses and damages suffered by the plaintiff i.e. the First Party or the insured, in dealings and transactions in the National Stock Exchange as a trader. 14. The relevant portion of Section II reads as under: ―SECTION II INSURING CLAUSE This Section subject to its terms, exclusions, limitations and conditions provides an indemnity to the Insured in respect of the Insured‘s legal liability to third parties for any third party claim which meets the following requirements. Any third party claim must (i) be for compensatory damages, such Indemnity to include claimant costs and expenses, including such damages and costs and expenses as a result of the CS(OS) NO.1445/2002 Page No.8 Assured‘s physical loss of or damage to documents or Securities, but excluding however the intrinsic value or any property or the fact value or costs of reconstruction of any documents or any loss compressible under a Bankers Blanket Bond or equivalent policy irrespective of the amount thereof and whether or not such a policy is actually maintained by the Assured; and (ii) be first made against the Insured during the Policy period; and (iii) a) be for financial loss caused by a negligent act, negligent error or negligent omission on the part of an officer or Employee of the Insured; b) be for financial loss caused by a dishonest or fraudulent act or omission on the part of an officer of Employee of the Assured; and (iv) arise out of the ordinary course of the provision by the Insured of the transactions conducted and recorded on the National Stock Exchange complying with laid down norms and procedure; and (v) be brought other than wholly or partly within the United States of America and/or Canada; and (vi) arise other than from any negligent act, negligent omission or dishonest or fraudulent act or omission which was or may have been or is alleged to have been committed or omitted (as the case may be) wholly or partly within the United States of America and/or Canada. (vii) relate other than to a negligent act, negligent error or negligent omission which was or may have been or is alleged to have been committed or omitted (as the CS(OS) NO.1445/2002 Page No.9 case may be) before the Retroactive Date specified in the Schedule hereto.‖ 15. Section II of the Policy provides indemnity to the plaintiff against legal liabilities to Third parties i.e. liability of the insured to Third Parties to pay damages or loss arising out of transactions conducted and recorded on the National Stock Exchange, complying with the laid down norms and procedure. The insurance Policy therefore combines both loss/damage suffered by the insured as a First Party and loss/damage which the insured may have to pay to third parties. 16. Section I will not apply as no loss or damage has been suffered by the plaintiff i.e. the insured in connection with or as a result of their transaction as a purchaser or seller of shares in the National Stock Exchange. The plaintiff had not sold or purchased any shares as a trader in their name. The plaintiff had acted as a broker in the transactions or sales of shares made by Mr.Gunjan Jain and Mr.Vishnu Kumar. The plaintiff became liable to third parties i.e. the purchaser because of bad delivery, as they had acted as brokers and in terms of the Rules and Regulations of the National Stock Exchange. CS(OS) NO.1445/2002 Page No.10 17. The defendant has made an error by referring to terms and conditions of Section IA, which deals with loss due to and directly from dishonest and fraudulent act of employees of the insured i.e. the plaintiff. The plaintiff has also referred to section 1 and 1A in the plaint. However, the plaintiff has also referred to the insurance policy and parties have lead evidence with reference to the entire policy. Language of Section II is similar to the stipulation in section 1 relied upon by the defendant and therefore no prejudice is caused to defendant. For a claim to covered by Section II it should ―arise out of the ordinary course of the provision by the Insured of the transactions conducted and recorded on the National Stock Exchange complying with laid down norms and procedure.‖ Section1 also states ―such losses arise only out of or pertain to or are connected with or thereto provided that such losses arise only out of or are connected with or result from dealings or transactions through National Stock Exchange only complying with the laid down norms and procedures in respect of transactions made through National Stock Exchange.‖ Reasonable Care Clause CS(OS) NO.1445/2002 Page No.11 18. The Policy under the heading ―General Conditions applicable to this policy‖ in Clause 9 relating to reasonable care states as under: ―Reasonable Care : The Policy is subject to the duty of care on the part of the Insured and the Insured shall extend all due diligence care and concern having due regard to the market practice to protect and safeguard the legitimate interest of the Insurer, Duty of care as applicable to the Insured shall be deemed to extend to their agencies and their Employee also. The Insured shall initiate disciplinary or legal action as and when warranted on his own initiative &/or as advised by the Insurer. The Insured shall also cooperate with the Insurer in all legitimate manner in all criminal or civil proceedings that are so warranted.‖ 19. Clause 9 required the plaintiff to extend due diligence, care and concern having regard to the market practice to protect and safeguard legitimate interest of the insurer, i.e. the defendant and nothing more. The said Clause makes specific reference to market practice. Onus to establish that the plaintiff had acted without due diligence having regard to the market practice was on the defendant. Statements of the three witnesses produced by the defendant do not show that the plaintiff had acted in a manner contrary to market practice. In fact they do not aver and state what was the CS(OS) NO.1445/2002 Page No.12 market practice and in what manner the plaintiff has failed to extend due diligence and concern to safeguard interest of the defendant. Insurance is taken to protect the insured against uncertain events befalling on the insured. Negligence on the part of the insured is not a relevant consideration and a ground to avoid claims on the insurer. Reasonable care clauses protect the insurer against deliberate or reckless acts by the insured and not acts which can be categorised as negligent. Negligent acts normally do not absolve insurance companies for one of the objects of insurance is to protect the insured against consequences of negligence. Wilful acts, misfeasance, or deliberate acts amounting to misconduct may constitute exceptions under the ‗reasonable care‘ clause but these have to be distinguished from acts of negligence. Clause 12 of General Definitions of policy defines ―Dishonest or fraudulent act or omission‖ as follows: ―Dishonest or fraudulent act or omission‖ means an act or omission on the part of the any officer or employee of the assured which was committed with manifest intent of cause a third part to whom assured may be held legally liable, to sustain loss. ‖ CS(OS) NO.1445/2002 Page No.13 20. Section II, as quoted above, specifically states that financial loss caused to a third party by a negligent act, negligent error or negligent omission is covered by the Policy. The defendant therefore cannot deny payment under the Policy on the ground of negligence in view of Clause 9. 21. The second ground therefore raised by the defendant has no force and is liable to be rejected for even if the plaintiff or their employees had been negligent, the defendant would be liable to indemnify loss/damage suffered. There is no allegation and evidence to establish and show that the plaintiff was reckless or had deliberately induced losses. Mere allegation of negligence even if proved will not absolve the defendant from liability under the insurance Policy. “Norms and Procedure” 22. Section II of the Policy covers compensatory damages claimed by third parties arising out of ordinary course of transactions conducted and recorded on the National Stock Exchange complying with the laid down norms and procedures. The requirement of the said Clause is that the transaction should be conducted and recorded in the National Stock Exchange. There is no dispute between the parties that the transactions on which the loss was CS(OS) NO.1445/2002 Page No.14 occasioned was due to sale of shares by Mr.Gunjan Jain and Mr. Vishnu Kumar. These were made through the plaintiff as a broker and were recorded and conducted through the National Stock Exchange. 23. Learned counsel for the defendant submitted that there was violation of guidelines issued by the Securities and Exchange Board of India (SEBI for short) and therefore the transactions were made without complying with laid down norms and procedure. My attention was drawn to the following SEBI Guidelines: ―Due care may be exercised when a member broker is introducing/delivering broker for shares in the market. In all such cases the transferor(s) or seller(s) signature(s) should be witnessed either by the member broker himself or by any of his SEBI authorised sub brokers through whom concerned sale has been effected. If transfer deed are witnessed by a third party, insist on signature of seller being witnessed by the concerned sub-broker also. Do not make payment by issuing a cheque in a name other than the name of the shareholder when a member-broker is an introducing broker. Proper enquiries may be made when the names of the selling clients and names appearing on share certificates delivered against sales are different. Proper record should be kept for explaining the reasons for difference. No adjustment between one client account to another should be made unless express CS(OS) NO.1445/2002 Page No.15 authority has been obtained from the clients. Such authority should be preserved by the broker.‖ 24. SEBI Guidelines are not mentioned and referred to in the insurance Policy. The words and language used in policy are relevant and material. There is no specific pre-condition or requirement in the Insurance Policy for compliance of SEBI Guidelines and/or failure to do so the Policy shall become void or the claim will be repudiated. Section II quoted above relates to subject matter of insurance. Section II has to be read as a common man to give effect to the specific words used therein. A reasonable reading of the above Clause is that the transactions should have been conducted and recorded on the National Stock Exchange as per the norms and procedures of the National Stock Exchange. In other words, private transactions or transactions in other exchanges or transactions which are not conducted/recorded in the National Stock Exchange would not be a covered by the peril or risk. These transactions were excluded and what was covered or the subject matter of the Policy was the transactions recorded and conducted in the National Stock Exchange as per the prescribed norms and procedure of the said Stock Exchange. Guidelines issued by SEBI cannot be regarded as a ―norms and CS(OS) NO.1445/2002 Page No.16 procedure‖ of National Stock Exchange. The above reasoning will equally apply to a claim under section I. 25. If there is any doubt or ambiguity in a clause of the insurance contract, the Rule of Verba Chartarum Fortius Contra Proferentem Accipiuntur applies. The contract was drafted by the defendant and in case of ambiguity and doubt in any clause the said clause is to be interpreted to the advantage and benefit of the insured. SEBI guidelines and affect of failure to comply with the same are not mentioned in the contract of insurance. They cannot be incorporated and read into the said contract. Even there is a doubt as to whether or not ―norms and procedure‖ includes SEBI guidelines benefit has to be given to the insured. 26. Failure to follow and take precautions as per SEBI Guidelines may amount to lapse or even negligence. But, as already stated above, the Policy in Section II covers negligent acts also. Section II of the policy covers negligent act, negligent error or omission. Negligence will include failure to take due care and caution as per SEBI guidelines. Any other interpretation would make the provisions relating to negligence and the liability of the defendant in case of negligence nugatory and meaningless. CS(OS) NO.1445/2002 Page No.17 27. In preliminary objection no.1 the defendant has referred to Section I of the Policy of insurance and stated that the plaintiff had failed to comply with the condition precedent mentioned in the said Section. As already stated above, Section I of the Policy is not applicable and subject matter of insurance in the present case is not the first party liability but third party liability which is covered by Section II of the Policy. However, Section I and Section II of the Policy are similarly worded in so far as they both refer to transactions conducted/recorded in the National Stock Exchange complying with laid down norms and procedures. 28. Law of Insurance makes a distinction between warranty clauses and conditions for payment of a claim. Warranty clauses are those stipulations which are the most fundamental term of the Policy and constitute the essential promise made to the insurer by the insured. Warranty in insurance contracts is opposite and invert of warranty as understood in contracts for sale of goods etc. Good faith, existence of subject matter of insurance, identification of subject matter in the Policy and insurable interest of the insured are normally regarded as implied warranty clauses. Insurance contract can also incorporate express warranty clauses to protect interest of the insurer. Warranty clause CS(OS) NO.1445/2002 Page No.18 can relate to a condition precedent to the contract of insurance, promissory conditions to be performed in future and conditions to be performed after the event/loss. In case of violation of condition precedent, subject to statutory provision to the contrary, (see section 45 of the Insurance Act, 1938), the contract of insurance is void abinito. Breach of a future promissory condition, in absence of any statutory provision, makes the contract of insurance void at the instance of the insurer from the date of the breach but not for the prior period. Defendant has not pleaded or alleged that breach of a warranty clause has made the contract void or voidable and was terminated. Plea and contention raised in the written statement is that the claim of the plaintiff was repudiated as not covered by the policy. The question of ―subject matter‖ of the policy has been examined above with reference scope of Section I and II and it has been held that transactions conducted and recorded in the National stock exchange are covered. Repudiation of a claim is different and distinct from a policy being void/voidable on breach of a warranty clause. Repudiation of a claim does not make the policy void/voidable but the claim is denied. ―Repudiation of the claim‖ is reiterated by the witness DW-1 Mr. J.N. Vats, Sr. Divisional Manager who in his affidavit by way of CS(OS) NO.1445/2002 Page No.19 evidence has stated that the letter of repudiation, Exhibit P-3 was written denying the claim for good and justified reasons (see statements made in paragraphs 9 and 10 of the affidavit). 29. I need not examine the question of warranty as this is not pleaded or alleged by the defendants in their evidence. The defendant has pleaded and alleged repudiation of the claim made by the plaintiff on the ground of non-compliance of the term of the Policy i.e. SEBI guidelines. However as held above compliance with SEBI guidelines is not a term of the insurance contract and therefore the claim cannot be repudiated on this ground. 30. Learned Counsel for the defendant had urged that the Registrar of M/s Jindal Vijayanagar Steel Ltd. had rejected the share certificates as signatures on the transfer forms did not tally and match specimen signatures and therefore non compliance with SEBI guidelines was relevant. The plaintiff disputes the said contention on merits also. The shares sold