Reportable  IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO__________OF 2010 (Arising out of SLP (C) No.23557 of 2008)

The Amravati District Central  Co-operative Bank Ltd. … Appellant

Vs.

United India fire & General Insurance  Co.Ltd. … Respondent

J U D G M E N T

R. V. Raveendran, J.

Leave granted.  Heard the learned counsel.  

2. In  pursuance  of  a  Banker’s  Indemnity  Insurance Proposal  dated  

1.7.1976 from the appellant (‘Bank’), the respondent (‘Insurer’) issued a  

Renewal Insurance Policy covering the period 1.7.1976 to 1.7.1977. The  

policy indemnified and insured the Bank against losses caused by acts or  

omission of the Bank’s employees to a limit of Rs.6 lacs (Basic cover)  

plus Rs. 9 lacs (cash in safe). The Bank furnished to the Insurer a list of  

its branches to be covered by the insurance which included Dhamangaon  

Branch and the names of the employees working in those branches. The  

operative portion of the policy is extracted below:-

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“THE COMPANY  HEREBY AGREES  subject  to  the  terms  and  conditions  contained  herein  or  endorsed  or  otherwise  expressed  herein that if the Insured shall discover any direct LOSS of Money  and/or Securities sustained by the Insured by CONTIGENCIES as  provided hereinafter at any time during the period of insurance stated  herein or any subsequent period in respect of which the Insured shall  have paid or agreed to pay and the company shall have accepted or  agreed to accept the premium required for the renewal thereof, the  company will  indemnify  the  Insured  in  respect  of  all  such direct  losses but not exceeding,

(a) the total sum insured hereby in respect of any loss or losses  caused  by  acts  or  omissions  of  any  one  person  whether  Officer,  Clerk  or  Employee  of  the  Insured  or  acts  or  omissions in which such person is concerned or implicated or  in  respect  of  any one casualty or event  irrespective of  the  total amount of such loss.  

(b) in any one period of insurance twice the total sum insured  hereby in respect of all such losses.”

In lieu of Cover Note No: RENEWAL Policy No:264/52/1/00402

Schedule

INSURED NAME:  THE  AMRAVATI  DISTT.  CENTRL COOP.  BANK  LTD.,  HEAD  OFFICE,  ADDRESS: AMRAVATI

Date  of  Proposal  &  Declaration 1.7.76

TOTAL  SUM  INSURED

Rs.6,00,000/- (Basic cover) And Rs.9,00,000/- (Cash in  Safe) H.O. Amravati

PREMIUM Rs. 34,443/-

EXCESS Rs.11,500/-

25%  on  each  and  every   claim  or  Rs.11,500/-whichever  is  higher  on  D.A.R.

RETRO-ACTIVE  DATE (PROVISO 3)  - 2 YEARS

PERIOD  OF  INSURANCE

From 1st July, 1976 to 1st July, 1977

SPECIAL  CONDITIONS

Contingency No.5 of the policy stand deleted.

x x x x x x

CONTINGENCIES INSURED

1. By reason of any Money and/or Securities for which the Insured  are responsible or the custody of which they have undertaken and  which now are or are by them supposed or believed to be or at  any time during the period of insurance may be in or upon their  own  premises  or  upon  the  premises  of  their  Bankers  in  any  recognised place of safe deposit in India or lodged or deposited  in the ordinary course of business for exchange, conversion or  

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registration with the issuers thereof, or with any agents of such  issuers or with any person employed to procure or manage the  exchange, conversion or registration thereof, being (while so in  or  upon  such  premises  or  so  placed,  lodged  or  deposited  as  aforesaid) lost, destroyed or otherwise made away with by Fire,  Burglary,  or  House  breaking,  Theft,  Robbery  or  Hold-up,  whether  with or  without  violence and whether  from within or  without and whether by the Officers, Clerks or Employees of the  Insured or any other person or persons whomsoever.

2. By reason of  any  Money and/or  Securities  being  lost,  stolen,  mislaid, misappropriated or made away with, whether due to the  negligence or fraud of the officers, Clerks or Employees of the  Insured  or  otherwise,  whilst  in  transit  in  the  hands  of  such  Officers, Clerks or Employees within India, such risk of transit to  commence from the moment when the person into whose hands  the same may be delivered on behalf of the Insured shall leave  the premises at which he receives the same and to continue until  delivery thereof at destination.  

3. By  reason  of  the  payment  made  whether  received  over  the  Counter or through the Clearing House or by Mail in respect of  forged  or  raised  Cheques  and/or  Drafts  or  (genuine)  Cheques  and/or Drafts bearing forged endorsements or the establishment  of any credit to any customer on the faith of such documents.  

4. By reason of the dishonest or criminal act of any Officer, Clerk  or Employee of the Insured with respect to the loss of  Money   and/or  Securities  wherever  committed  and whether  committed  directly or in connivance with others.  

5. [Deleted] x x x x x x

PROVISOS

“1.  EXCESS  –  The  Insured  shall  bear  the  amount  of  excess  stipulated in the Schedule in respect of each and every loss if the loss  is under Contingencies 1, 2 or 3 insured by the Policy. In respect of   losses under contingencies 4 or 5, the Insured shall bear 25% of the   amount of the loss or the amount of excess stipulated in the Schedule   whichever is the higher.”

x x x x x x

(emphasis supplied)

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3. An  employee  of  the  Bank  by  name  Lodaya  working  in  its  

Dhamangaon Branch committed a series of embezzlements. On receiving  

a report  dated 28.2.1977 from its  Special  Auditor  about the same, the  

Bank  reported  the  matter  to  the  police  and  also  to  the  Insurer.  The  

employee  concerned  was  suspended  on  16.3.1977  and  eventually  

dismissed from service on 19.3.1978.

4. The  Bank  claimed  indemnity  from  the  Insurer  in  terms  of  the  

policy in respect of Rs.3,58,000/- embezzled by the said employee. After  

prolonged  correspondence,  the  Insurer  informed  the  Bank  that  its  

assessors had assessed the reimbursable loss as Rs.29,000/- and offered  

the  said  sum  in  full  settlement  of  the  claim  subject  to  payment  of  

premium of Rs.538/-. The Bank was not agreeable and that gave rise to a  

dispute.  The Bank  sought  arbitration  and appointed its  arbitrator.  The  

Insurer however did not appoint its Arbitrator. Therefore, the Arbitrator  

appointed by the Bank entered upon the reference as sole arbitrator. In  

spite  of  due  notice,  the  Insurer  did  not  participate  in  the  arbitration  

proceedings.  

5. The  arbitrator  proceeded  ex  parte and  made  an  award  dated  

17.8.1983.  The  Arbitrator  found  that  there  were  a  series  of  

embezzlements by Lodaya, which were connected together by a common  

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modus operandi. The Arbitrator held that in all a sum of Rs.3,44,449/86  

was embezzled from the various accounts of Bank’s constituents with the  

Bank, by resorting to forgery. The Arbitrator found that the following  

amounts  were  embezzled  from  the  following  accounts  of  account  

holders/constituents of the Bank :

S.No. Name of the Account-holders    Amount embezzled

1. Purohit 44,615.84 2. Bhutada 60,751.80 3. Mohata 38,483.84 4. Kothari 46,293.24 5. Roy    8,423.01 6. Bhat 57,506.92 7. Jasraj Mundhada   1,916.35 8. Radhabai Mundhada    1,911.00 9. M.Darda    1,105.15 10. Kamlabai Darda   2,216.25 11. G.H. Darda    3,210.15 12. M.S. Coop. Bank 39,781.26

The Arbitrator held that these losses were covered under contingency (4)  

of  the policy.  He noted that  proviso (1)  of  the policy used the words  

“each and every loss” when referring to losses under contingencies 1, 2 or  

3  but  did  not  use  the  said  words  when  referring  to  losses  under  

contingency (4). Therefore, the Arbitrator held that the insurer could not  

apply the  Excess clause to each and every loss separately; that having  

regard  to  the  terms  of  the  policy,  the  amounts  embezzled  had  to  be  

aggregated; and that out of the total loss, the Bank had to bear 25% and  

the  insurer  was  liable  to  pay  the  balance.  The  Arbitrator  therefore  

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deducted  25% from Rs.3,44,449/86  and  made  an  award  directing  the  

insurer to pay Rs.2,58,337/40 to the Bank.

6. The Bank made an application under Sections 14 and 17 of the  

Arbitration Act, 1940 (‘Act’ for short) in January, 1984. The Insurer filed  

a petition under Section 30 of the said Act for setting aside the ex parte  

award.  Both  petitions  were  heard  together  and  the  Civil  Court  by  

Judgement dated 27.6.1990 upheld the award and dismissed the petition  

under Section 30 of the Act for setting aside the award and directed that  

the award be made a rule of the court.

7. Feeling aggrieved, the Insurer filed an appeal in the High Court of  

Bombay.  By  Judgment  dated  18.2.2008  the  appeal  was  allowed,  the  

judgment of the Civil Court and the award of the Arbitrator were set aside  

and  the  matter  was  remitted  to  the  Arbitrator  for  deciding  the  claim  

afresh, after granting due opportunity to both the parties to lead further  

evidence  and submit  their  statements  before  the  Arbitrator,  if  they  so  

desired.  The High Court following the decision of a learned Single Judge  

of that Court in Central Bank v. New India Assurance Co.Ltd. - AIR 1981  

Bombay 397, held that the Arbitrator ought to have considered each item  

of  embezzlement  separately  and  could  not  aggregate  the  amounts  

embezzled by Lodaya at Dhamangaon Branch, for the purpose of arriving  

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at the claim and fixing liability of the insurer. The High Court held that  

the  Excess  Clause in  the  policy  did  not  envisage  consolidation  or  

aggregation of several losses sustained by the acts of embezzlement by  

the employee and deduction 25% thereof to arrive at the liability of the  

insurer, but envisaged the deduction from every claim, that is every single  

amount  embezzled,  25%  of  the  amount  embezzled  or  Rs.11,500/-  

whichever was higher, to arrive at the liability of the insurer.   

8. The said judgment is challenged in this appeal by special leave.  

The  appellant  submitted  that  the  proviso  relating  to  Excess in  the  

Insurance  Policy  consists  of  two parts;  that  the  first  part  requires  the  

Insurer to bear the amount of excess stipulated in the Schedule in respect   

of each and every loss, if the loss was under Contingencies 1,2 and 3; that  

if the loss was under Contingency 4, the Insured was required to bear  

25% of the amount of the loss or the amount of excess stipulated in the  

Schedule  whichever  was  higher.  It  was  contended that  the  use  of  the  

words “each and every loss” in the first part of proviso (1) while referring  

the Contingencies 1, 2 and 3, and the omission to use the said words in  

the second part  thereof when referring to losses under Contingency 4,  

when considered with the use of the words “insured shall bear 25% of the  

amount of the loss or the amount of excess stipulated in the Schedule  

whichever is higher”, in regard to losses under contingency (4), would  

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clearly indicate  that  the  25% of the aggregate of  the losses had to be  

borne by the Bank and the balance had to be paid by the Insurer.  As  

Lodaya  had  embezzled  several  amounts  and  the  aggregate  of  such  

embezzlements during the period of the insurance, was Rs.3,44,449/86,  

having regard to Proviso (1) of the Insurance Policy, the Bank contended  

that  25% thereof  will  have  to  be  deducted  therefrom and  the  Insurer  

should  be  made  liable  to  pay  the  balance  of  Rs.2,58,337/40.  It  was  

therefore submitted that the High Court ought not to have set aside the  

well-reasoned award of the Arbitrator nor remitted the matter for fresh  

consideration, after nearly a quarter century.  

9. What  therefore  falls  for  consideration  is  the  interpretation  of  

Proviso (1) of the Insurance Policy. In General Assurance Society Ltd. v.   

Chandumull Jain (AIR 1966 SC 1644) a Constitution Bench of this Court  

laid down the principle relating to interpretation of Insurance Contracts.  

This Court held:  

“In interpreting documents relating to a contract of Insurance, the duty of  the court is to interpret the words in which the contact is expressed by the  parties, because it is not for the court to make a new contract, however  reasonable, if the parties have not made it themselves.”  

In  Oriental Insurance Co. Ltd vs. Sony Cheriyan – 1999 (6) SCC 451,  

this Court held :  

“The insurance policy between the insurer and the insured represents a  contract between the parties. Since the insurer undertakes to compensate  

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the  loss  suffered  by  the  insured  on  account  of  risks  covered  by  the  insurance policy, the terms of the agreement have to be strictly construed  to determine the extent of liability of the insurer. The insured cannot claim  anything more than what is covered by the insurance policy. That being  so,  the insured has also to act  strictly in  accordance with the statutory  limitations or terms of the policy expressly set out therein.”  

10. “Excess”  clauses  are  commonly  used  in  Insurance  contracts.  In  

insurance parlance, the term “EXCESS” in the Excess clause in the policy  

refers to “that part of the amount of loss, under each claim, which is not  

covered by  the  policy”  or  the  “amount that  the  policy  holder  has,  by  

agreement, to bear or contribute to each insurance claim”. In other words  

it limits the liability of the insurer in regard to each claim, only to the  

amount of loss, in excess of the sum specified in the Excess clause, which  

the  insured  has  agreed  to  bear  (either  himself  or  by  securing  other  

insurance coverage).

11. Excess clauses  in  insurance  policies  have  been  interpreted  in  

several English decisions. We may refer to one of them. In  Philadelphia  

National Bank v. Price  reported in (1938) 2 All ER 199, the Court of  

Appeal  was  concerned  with  a  case  where  a  policy  of  insurance  

indemnified  the  bank  against  loss  sustained  by  reason  of  making  

advances  against  forged or  invalid  documents  subject  to  an  excess  of  

$25,000 “by each and every loss and occurrence”. Credit facilities were  

granted by the Bank to a trader on the security of invoices assigned to the  

bank. Each day, the trader assigned a bundle of invoices and the Bank  

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advanced a sum corresponding to the total of the invoices. The invoices  

turned out to be false and the bank was unable to recover advances of  

over $400,000 in the aggregate, although no single daily loss amounted to  

more than $25,000. The Court of Appeal held that a separate loss had  

occurred in respect of each day’s advance and the loss cannot be treated  

as one loss, as each production of documents led to a fresh loss and must  

be treated as number of losses occasioned by a number of advances. The  

claim of the Bank was therefore dismissed as loss in each case was below  

the excess limit of $25000/-.  

12. A learned Single Judge of Bombay High Court in Central Bank of   

India  Ltd.  v.  New India  Assurance  Co.Ltd.  (AIR 1981  Bombay  397)  

interpreted the word ‘claim’ in the Excess clause therein,  which provided  

that the Bank shall be considered co-insurer to the extent of 25% subject  

to the minimum excess of Rs.25000/- for each and every claim. Negating  

the contention of the Bank that in view of the said clause, its liability as  

co-insurer was not in respect of each and every loss, but in regard to each  

claim (that is, the aggregate of several losses which constituted a ‘claim’),  

the learned Judge held :   

“The word is of common occurrence in the field of insurance and may  mean either the right to make a claim or an assertion of a right. The plain  object of the clause, as stated earlier, is to exempt the insurance company  from the liability to pay small claims which the Bank has to bear itself.  The word, “claim” in this clause means the occurrence of a state of facts  which justifies a claim on insurer and does not mean the assertion of a  claim on company. In other words, in my judgment, the operation of the  

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Excess Clause is determined by the facts which give rise to the claim and  not by the form in which the claim is asserted.

The employer committed several acts of fraud and defalcation and each  such  separate  act  caused  loss  and  gave  distinct  and  separate  cause  of  action  to  the  Bank.  It  is  true  that  all  these  acts  of  defalcation  were  discovered only on October 18, 1972 but the fact of discovery on one day  would  not  enable  the  Bank  to  claim  that  several  acts  of  defalcation  constitute one single or composite loss.………. The mere fact that several  acts  of  defalcation  were  discovered on  one day would  not  lead to  the  conclusion that several losses under different acts could be treated as one  composite loss.

In  accordance  with  the  objects  and  interpretation  of  the  terms  and  conditions  of  the  policy,  in  my  judgment,  the  Bank  is  liable  to  be  considered as co-insurer to the extent of 25% subject to minimum excess  of Rs.25,000/- in respect of each loss sustained by each set of defalcation  by its employee, and it is not permissible to aggregate the total loss for  working out of Excess Clause.”  

13. It is no doubt true that the first part of Proviso (1) uses the words  

“each  and  every  loss”  while  referring  to  the  losses  covered  by  

contingencies 1,2 and 3, and does not specifically repeat the said words  

in the second part of Proviso (1) relating to Contingency 4. But a careful  

reading of the shows that the non-repetition of the words was not because  

the intention was to apply those words only to losses under contingencies  

1,  2,  and 3,  but  because  the structure of  the sentence  did not  require  

repetition  of  the  words  and  the  context  showed  that  the  words  were  

applicable even to losses under contingency 4. This is also evident from  

the Schedule to the policy that ‘Excess” is specified as Rs.11500/- with a  

further stated “25% of each and every claim or Rs.11,500/- whichever is   

higher on DAR”. Proviso (1) also reiterates the position, both in regard to  

contingencies 1, 2 and 3 as also in regard to Contingencies 4 and 5. The  

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difference  between  the  two  parts  of  proviso  (1),  however,  is  this:  In  

respect of each and every loss under Contingencies 1,2 and 3, the Insurer  

had to bear the amount of excess stipulated in the Schedule, that is at the  

flat  rate  of  Rs.11,500/-.  But  in  regard  to  each  and  every  loss  under  

Contingency 4, the Insured had to bear 25% of the amount of the loss or  

the amount of excess (Rs.11,500/-) stipulated in the Schedule, whichever  

was higher. Proviso (1) was divided into two parts, that is the first part  

with reference to Contingencies 1,2 and 3, and the second part in regard  

to Contingencies 4 (and 5 where it was applicable), only to differentiate  

between the quantum that had to be borne by the Insured in respect of  

each and every claim which was a fixed Rs.11,500/- for each and every  

loss under Contingencies 1, 2 and 3, whereas it was 25% of the amount  

of the loss or Rs.11,500/- whichever was higher in regard to each and  

every claim under Contingency 4 (and 5).  

14. Having regard to the wording of Proviso (1), in regard to losses  

referable to Contingencies 1, 2 and 3, the Insured had to bear a fixed  

amount i.e. Rs.11,500/- in regard to each and every loss. Therefore the  

words “25% on each and every claim or Rs. 11,500/- whichever is higher  

on DAR” were not applicable in regard to the claims under Contingencies  

1,2 and 3 as what was to be borne in such cases was a fixed flat sum of  

Rs.11,500/- per every loss. The said words “25% on each and every claim  

or Rs.11,500/- whichever is higher on DAR” applied only in regard to  

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losses  referable  to  Contingencies  4  and  5;  and  in  regard  to  losses  

thereunder, what was to be borne by the Insured was 25% of the amount  

of  the  loss  or  the  amount  of  excess  stipulated  whichever  was  higher.  

Therefore, the words “each and every claim” were used in the Schedule  

with reference to losses under Contingency 4 by describing the Excess as  

“25% on each and every claim or Rs.11,500/-  whichever is  higher on  

D.A.R.”  This  also  clearly  shows  that  the  stipulated  exemption  from  

indemnity is in regard to each and every loss. We may illustrate the effect  

of this proviso by the following examples:

Amount  of  loss  of  insured  (each  claim)

Amount  of  loss  to  be  borne  in  case of Contingencies 1,2 and 3  (Excess is Rs.11,500)

Amount of loss to be borne in  case  of  Contingency  4  (Excess is 25% of the amount  of  loss  or  Rs.11500  whichever is higher)

To be borne by  Insured  

To be paid by  Insurer  

To  be  borne  by Insured

To  be  paid  by Insurer

Rs.10,000 10,000 - 10,000 - Rs.11,500 11,500 - 11,500

Rs.15,000 11,500 3500 11,500 3500 Rs.30,000 11,500 18,500 11,500 18,500 Rs.40,000 11,500 28,500 11,500 28,500 Rs.46,000 11,500 34,500 11,500 34,500 Rs.50,000 11,500 38,500 12,500 37,500

Rs.80,000 11,500 68,500 20,000 60,000

Rs.1,00,000 11,500 88,500 25,000 75,000

[Note : for any loss upto Rs.46,000/-, the amount of liability will be the  

same,  whether  the  loss  is  under  Contingency  1  to  3  or  under  

Contingency 4. But where the loss is more than Rs.46,000/-, the liability  

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of the insured will remain constant in regard to Contingencies 1, 2 and 3,  

whereas it will be 25% of the loss in regard to each claim in regard to  

Contingency No.4.]

15. It is therefore necessary to identify each act of embezzlement by  

Lodaya  in  regard  to  each  account,  as  the  loss  on  account  of  each  

embezzlement forms a separate claim.  The Bank has to bear 25% of the  

amount embezzled (or 11500/- whichever is higher) in regard to each and  

every embezzlement, and not by aggregation of the embezzlements. The  

Arbitrator has stated the total of the amount of embezzlements in regard  

to each account. He has not given the details of every embezzlement. For  

example with reference to the account of Purohit, the amount embezzled  

is  shown  as  Rs.44,615/84.  But  this  does  not  constitute  a  single  

embezzlement. The Arbitrator has stated thus in regard to this account :   

“The account of Shri Purohit:

On 22.6.76 Rs.4700/- were debited to the above T.D. ledger and credited  to an account opened in the name of Shri  Purohit.  The credit slip was  prepared by Shri Lodaya, who himself, signed in place of the Agent. Then  he withdraw and made away with same of this money. Similar misdeed  was repeated on 3.6.76 (Rs.4000/-) and 7.8.76 (Rs.1110-30).”

It is thus clear that the amount of embezzlement shown as Rs.44,615/84  

with reference to the account of Purohit is not a single act, but a series of  

embezzlements.  If in regard to each act,  the amount embezzled is less  

than Rs.11,500/- the Bank had to bear the entire amount and no part had  

to be borne by the Insurer. Only where a single act of embezzlement was  

in excess of Rs.11,500/-, the Insurer’s liability would arise. As noticed  

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above, as the matter falls under Contingency (4), the Insurer will have to  

bear 25% of the each and every claim or Rs.11,500/- whichever is higher  

on DAR.  

16. The award of the arbitrator is liable to be set aside as there is a  

clear error apparent on the face of the award. The award is a speaking  

award. It extracts the relevant clauses of the insurance policy including  

the excess clause. It then proceeds to put an interpretation thereon which  

is contrary to the express words of the contract and opposed to the well  

recognised  insurance  practices  and  principles.  Hence  the  award  was  

rightly set aside by the High Court.  

17. If the amount of each and every embezzlement had been separately  

recorded in the award of the Arbitrator, the court could have calculated  

the amount that was due, instead of remitting the matter to the Arbitrator  

for  fresh  decision.  But  that  is  not  possible,  as  the  particulars  are  not  

available.  

18. In view of the above, we uphold the decision of the High Court and  

dismiss  the  appeal.  If  however  the  appellant  is  not  interested  in  

proceeding afresh before the arbitrator after all these years, and is willing  

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to accept the sum of Rs.29,000/-, offered by the insurer, it may inform  

the insurer accordingly in which event, the insurer shall pay the same to  

the appellant -Bank, if it had not already been paid.

____________________J. (R V Raveendran)

New Delhi; ____________________J. April  15, 2010. (K S Radhakrishnan)  

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