Bank is liable for deficiency in service, when it fails to get insurance for entire set of hypothecated assets; Supreme Court

The SC on May 20, 2020 {Canara Bank v. Leatheroid Plastics Pvt. Ltd.} held that the Commission   was   right   in   holding   that   the complainant   had   suffered   loss   because   of   inaction and   negligence   on   the   part   of   the   Bank.  It was held that this constituted deficiency in service. It was also held that any loss arising out of   such   deficiency   was   compensable   under   the provisions   of   the   Consumer   Protection  Act,   1986.

It was held by the SC Bench, comprising of Justice U.U. Lalit &  Justice Aniruddha Bose, that going through the two clauses, 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. It was held that the bank could absolve themselves from any obligation in the event the claim was rejected wholly or in part. It was held that 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. It was observed that 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……”. It was held that 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 borrower’s policy would have covered as per the terms of the deeds or agreements.

The question falling for consideration before the SC in present case was  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. In the present case, there   was   a   fire   in   the   premises   of   the respondent, which caused damage to their stocks and machineries. As the insurance undertaken by Bank for respondent did not cover plant, machinery   and   accessories   etc. -  forming part of set of hypothecated assets. Therefore, the claim apropos them was not processed by the Insurance Company and the respondent did not get any compensation for those items.

It was held by the SC that the borrower’s 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. It was held 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   held that it is a   case   of underinsurance.   It was observed   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. It was held that would constitute part of services   the   bank   were   rendering to   the   borrower. It was further held that effecting insurance was not their absolute obligation. It was held but   such   obligation   they   had   taken   it   upon themselves in present case.   

The SC concluded that 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. It was held that no such case has been   made   out.

In   such   circumstances,   the SC held that it  finds  no reason to interfere with the order under appeal. The appeal was dismissed.