Case: CANARA BANK Vs. M/S LEATHEROID PLASTICS PVT. LTD

policy, statement of other relevant papers regarding the policies and payments used to be supplied by the bank to the respondent company whenever their directors used to visit bank premises. To sustain their case that the duty to insure rested with the borrower, clause 18 of the sanction letter has been relied upon by the bank, which stipulates:- 18. The fixed assets such as Building, Plant and Machinery and the prime securities to be insured for the adequate value as per our banks guidelines. 12. What we have to adjudicate here is as to whether there was any deficiency of service on the part of the bank in not covering the whole set hypothecated assets under the insurance policy. The respondent companys stand has been that they had been asking for copies of the policies but they were not given particulars thereof. The premium for the same was deducted by the bank from their account. In their counter affidavit, payment of insurance premium from their account has been shown in the following table:- table 13. It has been the respondents case that two letters were sent dated 11 th June, 2001 and 2 nd July, 2001 seeking copies and the status of the Insurance Policy but there was no reply to such letters. These two letters dated 11 th June, 2001 and 2 nd July, 2001 have been annexed at pages 71 and 72 of the Counter Affidavit of the respondent-company filed in connection with the subject appeal. 14. Turning to clause 9 of the respective deeds/agreements, we find that it was the duty of the respondent to obtain the insurance policy. But liberty was with the bank also to effect such insurance at the risk, responsibility and expenses of the borrower only to the extent of the value of the securities as estimated by the bank. In the event of rejection of the claim wholly or in part irrespective of the fact as to whether the claim was made by the bank or the borrower, the banks responsibility ceased. What emerges from a plain reading of clause 9 of the respective documents is that the duty to effect insurance was with the borrower, and the bank could not be held responsible if there was any loss or damage to the hypothecated assets which was not adequately covered by insurance taken by the borrower. Bank also would not remain responsible if the claim was rejected, whether in whole or part thereof. But the question that arises for adjudication in this appeal is that if the bank themselves effected the insurance and left significant part of hypothecated assets out of it without any intimation to that effect to the borrower, could such omission be held to be a lapse on the part of the bank? Going through the said two clauses, in our opinion, their proper construction would be that once the bank exercised the liberty to effect the insurance, it was implicit that such insurance ought to have covered the entire set of hypothecated assets, against which the credit facilities were extended. The bank could absolve themselves from any obligation in the event the claim was rejected wholly or in part. If, however, the bank in exercise of their liberty effected the insurance, then it became their obligation to cover the entire set of hypothecated assets. The clause under which liberty is given to the bank to effect insurance starts with the phrase – The bank is at liberty and is not bound to effect such insurance…… The employment of the adjective such in this clause demonstrates that if the bank effected insurance, that policy would have to carry the features which a borrowers policy would have covered as per the terms of the deeds or agreements. The borrowers liability in such a situation to repay to the bank could arise in the event of rejection of the claim or part thereof, such claim arising on account of loss/damage to the hypothecated assets. But the grievance of the borrower here is that though the bank effected such insurance, part of the hypothecated securities was left out from the coverage. It was a case of underinsurance. We have already construed the relevant clauses to mean that if the bank had exercised liberty to effect insurance, it was their duty to take out policies covering the entire set of hypothecated assets. That would constitute part of services the bank were rendering to the borrower. Effecting insurance was not their absolute obligation. But such obligation they had taken it upon themselves. The contractual terms also envisaged banks option or liberty to take up such obligation. 15. This being the position of law, in our opinion, the Commission was right in holding that the complainant had suffered loss because of inaction and negligence on the part of the Bank. This constituted deficiency in service. Any loss arising out of such deficiency was compensable under the provisions of the Consumer Protection Act, 1986. Before the Commission, certain decisions of the Commission were relied upon. The bank sought to distinguish these decisions, again relying on certain order of the Commission. But we have considered this case independently, on its own factual basis and accept the view of the Commission. The position could have been different in the event the Bank had alerted borrower at the time of effecting the policy that the entire set of assets was not being covered by the policies being effected by them. No such case has been made out. On the other hand, the Bank remained silent to the two letters of the respondent seeking particulars of the policy. The banks stand that the policies and statements were made available to the Directors of the respondent-Company is also not backed by any material. No particulars thereof has been furnished. We also do not find any reason as to why once the Bank had exercised their liberty or option for effecting insurance chose not to cover the entire set of hypothecated assets.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]These two letters dated 11 th June, 2001 and 2 nd July, 2001 have been annexed at pages 71 and 72 of the Counter Affidavit of the respondent-company filed in connection with the subject appeal14. Turning to clause 9 of the respective deeds/agreements, we find that it was the duty of the respondent to obtain the insurance policy. But liberty was with the bank also to effect such insurance at the risk, responsibility and expenses of the borrower only to the extent of the value of the securities as estimated by the bank. In the event of rejection of the claim wholly or in part irrespective of the fact as to whether the claim was made by the bank or the borrower, the banks responsibility ceased. What emerges from a plain reading of clause 9 of the respective documents is that the duty to effect insurance was with the borrower, and the bank could not be held responsible if there was any loss or damage to the hypothecated assets which was not adequately covered by insurance taken by the borrower. Bank also would not remain responsible if the claim was rejected, whether in whole or part thereofGoing through the said two clauses, in our opinion, their proper construction would be that once the bank exercised the liberty to effect the insurance, it was implicit that such insurance ought to have covered the entire set of hypothecated assets, against which the credit facilities were extended. The bank could absolve themselves from any obligation in the event the claim was rejected wholly or in part. If, however, the bank in exercise of their liberty effected the insurance, then it became their obligation to cover the entire set of hypothecated assets. The clause under which liberty is given to the bank to effect insurance starts with the phrase – The bank is at liberty and is not bound to effect such insurance…… The employment of the adjective such in this clause demonstrates that if the bank effected insurance, that policy would have to carry the features which a borrowers policy would have covered as per the terms of the deeds or agreements. The borrowers liability in such a situation to repay to the bank could arise in the event of rejection of the claim or part thereof, such claim arising on account of loss/damage to the hypothecated assets. But the grievance of the borrower here is that though the bank effected such insurance, part of the hypothecated securities was left out from the coverage. It was a case of underinsurance. We have already construed the relevant clauses to mean that if the bank had exercised liberty to effect insurance, it was their duty to take out policies covering the entire set of hypothecated assets. That would constitute part of services the bank were rendering to the borrower. Effecting insurance was not their absolute obligation. But such obligation they had taken it upon themselves. The contractual terms also envisaged banks option or liberty to take up such obligation15. This being the position of law, in our opinion, the Commission was right in holding that the complainant had suffered loss because of inaction and negligence on the part of the Bank. This constituted deficiency in service. Any loss arising out of such deficiency was compensable under the provisions of the Consumer Protection Act, 1986. Before the Commission, certain decisions of the Commission were relied upon. The bank sought to distinguish these decisions, again relying on certain order of the Commission. But we have considered this case independently, on its own factual basis and accept the view of the Commission. The position could have been different in the event the Bank had alerted borrower at the time of effecting the policy that the entire set of assets was not being covered by the policies being effected by them. No such case has been made out. On the other hand, the Bank remained silent to the two letters of the respondent seeking particulars of the policy. The banks stand that the policies and statements were made available to the Directors of the respondent-Company is also not backed by any material. No particulars thereof has been furnished. We also do not find any reason as to why once the Bank had exercised their liberty or option for effecting insurance chose not to cover the entire set of hypothecated assets.