NEW INDIA ASSURANCE CO. LTD. vs THE FEDERAL BANK LTD.

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IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR. JUSTICE SATHISH NINAN
&
THE HONOURABLE MR.JUSTICE P. KRISHNA KUMAR
ND
MONDAY, THE 2 DAY OF MARCH 2026 / 11TH PHALGUNA, 1947
RFA NO. 202 OF 2017
AGAINST THE JUDGMENT AND DECREE DATED 10.01.2017 IN OS
NO.386 OF 2013 OF I ADDITIONAL SUB COURT,ERNAKULAM
APPELLANTS/DEFENDANTS:
1 NEW INDIA ASSURANCE CO. LTD.
87, M.G.ROAD, FORT, MUMBAI-400 001,REPRESENTED BY
ITS MANAGING DIRECTOR.
2 THE DIVISIONAL MANAGER
ERNAKULAM REGIONAL OFFICE,THE NEW INDIA ASSURANCE
CO.LTD.36/07,KANDAMKULATHY TOWERS, OPP.COLLEGE
GROUND, M.G.ROAD,P.B.NO.1049, ERNAKULAM, KOCHI -
682 011.
3 THE CHIEF MANAGER
CLAIMS HUB ERNAKULAM, THE NEW INDIA ASSURANCE
CO.LTD.,36/07, KANDAMKULATHY TOWERS, OPP.COLLEGE
GROUND,M.G.ROAD, P.B.NO.1049, ERNAKULAM, KOCHI-682
011.

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4 THE BRANCH MANAGER
THE NEW INDIA ASSURANCE CO.LTD.,P.B.NO.1912,
2ND FLOOR, YESORAM VICTORIA
TOWERS,KACHERIPADY, BANERJI ROAD,
KOCHI - 682 018.
BY ADVS.
SRI.GEORGE CHERIAN (SR.)
SMT.LATHA SUSAN CHERIAN
SMT.K.S.SANTHI
RESPONDENT/PLAINTIFF:
THE FEDERAL BANK LTD.
REGISTERED OFFICE,FEDERAL TOWERS, ALUVA,
ERNAKULAM,REPRESENTED BY ITS ASST.GENERAL
MANAGER.
BY ADV SHRI.MADHU RADHAKRISHNAN
THIS REGULAR FIRST APPEAL HAVING COME UP FOR HEARING ON
02.03.2026, THE COURT ON THE SAME DAY DELIVERED THE
FOLLOWING:

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C. R.
SATHISH NINAN & P. KRISHNA KUMAR, JJ.
= = = = = = = = = = = = = = = = = =
R.F.A.No.202 of 2017
= = = = = = = = = = = = = = = = = =
nd
Dated this the 2 day of March, 2026
JUDGMENT
Sathish Ninan, J.
The suit for money by a Bank, under a Banker's
Indemnity Policy of the defendant Insurance Company, was
decreed by the trial court. The Insurance Company is in
appeal.
2. Ext.A2 is the base insurance policy with its
addition/extension, availed by the plaintiff from the
defendant insurance company. It relates to the period
01.04.2012 to 31.03.2013. The plaintiff alleges that, during
the period from 11.04.2012 to 20.05.2012 there were various
fraudulent transactions in the plaintiff's ATMs across the
country, by fraudsters, by utilising ATM cards of other
banks. The plaintiff describes the modus operandi of the

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transactions thus;
“The modus operandi of such transactions is for the fraudster who may be
the customer of other banks request for a cash withdrawal for an amount
of Rs.10,000/- or less from the ATM centre of the plaintiff bank using the
ATM cards of the banks mentioned above. When the ATM dispenses the
requested amount, the fraudster will keep one or two currency notes in the
presenter intentionally and take the rest of the amount. For the purpose of
illustration, in the case of a withdrawal of Rs.10,000/-, the fraudster may
take only Rs.9,900/- allowing Rs.100/- note to be remained in the
presenter. The fraudster will intentionally allow the ATM to recapture the
note which will happen automatically after 42 seconds. After the above
mentioned predetermined time of 42 seconds, the remaining currency
note/s will be pulled back by the machine. But the notes so pulled back or
retracted will not be counted by the ATM and will be moved to the divert
tray.”
On such reversal, the entire amount will stand reversed in
the customers account. The plaintiff claims to have suffered
a total loss of Rs.83,34,600/- under such transactions. The
plaintiff seeks to be indemnified by the defendant insurance
company under Ext.A2 policy.
3. The defendant insurance company contended that the
alleged fraudulent transactions are not covered under Ext.A2

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policy. It was contended that the 'add-on cover' styled as
'fraud protection cover' is available only for the
plaintiff's debit card holders. Relying upon various clauses
in Ext.A2 policy, it is contended that no amount is payable
for the alleged incidents.
4. The trial court decreed the suit holding that the
transactions in question are fraudulent transactions which
are covered under Ext.A2 policy.
5. We have heard Sri.George Cherian, the learned
Senior Counsel for the appellant and Sri.Madhu
Radhakrishnan, the learned counsel for the respondent.
6. The points for determination in the appeal are:-
“(i) Is the plaint claim excluded under Ext.A2 policy?
(ii) Is the insurance company entitled to rely on the ‘excess’ clause in
Ext.A2 policy?
(iii) Does the decree and judgment of the trial court warrant any
interference?”
7. The claim was repudiated by the Insurance Company
relying upon two exclusion clauses in the policy. The

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clauses in Ext.A2 policy which are relevant for the case at
hand, are as under: -
“A. ON PREMISES
By reason of any money and/or securities for which the insured are
responsible or interested in 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
(including Mobile Offices) or upon the premises of the Bankers in any
recognised place of safe deposit or lodged or deposited in the ordinary
course of business for exchange, conversion with the issues thereof, or
with any agents of such issuers or with any person employed to procure
or manage the exchange, conversion registration thereof being (while so
in or on such premises or so placed, lodged or deposited as aforesaid)
lost, destroyed or otherwise made away by Fire, Riot and Strike,
malicious damage & Terrorist risks, Burglary or Housebreaking, Theft,
Robbery or hold up, whether within or without and whether by the
employees of the insured or any other person or persons whomsoever.”
…...........
EXCEPTIONS
The Company shall not be liable in respect of :
……..
(g) Losses attributable directly or indirectly to a manipulation or faulty
computer or other EDP system and/or any fraudulent use of the computer
or other EDP system by the employee or outsiders, irrespective of
whether the computer or EDP system belongs to the insured or it is

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shared by the insured with others on service contract basis or otherwise.
(i) Losses arising directly or indirectly out of any use of automated teller
machines”
The clauses in the Additional Cover Policy which are part of
Ext.A2:
“2. Additional limit for item A: Additional cover on money and/or
securities held on premises including ATMs & Coin vending machines,
authorized agents and employees. Money includes gold bullions held on
consignment basis.”
3. Additional limit for item B: Additional sum insured in transit includes
money and/or securities as described above.
ADD ON COVER
“ C. Fraud protection cover to Federal Bank Debit card holders :
Notwithstanding anything herein contained to the contrary, we the
underwriters undertake and agree, subject to the following items,
exclusions, limitations and conditions, to indemnify the assured in excess
of the amounts of the deductible stated to be applicable, and subject
always to the Limit of indemnity stated in the schedule, against such loss
as herein provided.
Maximum Sum insured of Rs.1,00,000/- per Federal bank debit card for
the financial loss sustained due to fraudulent transactions on the lost or
stolen Federal Bank Debit Card within 24 hours prior and post of the
reporting of loss/theft of Debit card to M/s Federal Bank. Fraudulent

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transactions means phishing, cloning of card, and wrong/unauthorized or
unknown use of pin code, usage of card after pilferage, stealing,
snatching, burglary and assault. Snatching away of money, drawn from
the Bank's ATM, from within its immediate vicinity and fraud by Bank's
ATM attendant also would be covered. The annual limit of indemnity for
this extension would be Rs.2,00,00,000/- and excess per claim is
Rs.2500/-”
8. Clause A above deals with the place of occurrence
and the nature of the occurrences that are covered under the
policy. That ATMs are covered under the policy, even under
the base policy and also the additional/extended policy, is
not in dispute. The question is whether fraudulent
transactions at the ATMs are covered under the policy.
Referring to clause (A), which relates to 'on-premises'
damage/loss, the learned counsel for the plaintiff argued
that the incidents in question, namely, fraudulent use of
ATMs falls within “theft” and “malicious damage” included
therein. He further referred to clause (2) of the additional
policy and contended that, money in ATMs are specifically
covered thereunder, irrespective of the nature of the

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incident which caused the loss, be it by fraudulent use of
ATM or other means.
9. The learned Senior Counsel appearing for the
defendants, on the other hand, contended that, the loss
resulting out of fraudulent use of ATMs are not included
under clause (A) and that, exceptions (g) and (i)
specifically excluded loss arising out of the use of ATMs,
including a fraudulent use. He also argued that the
additional/extended policy only enhanced the limits under
clause (A) ('on-premises' loss) and clause (B) (relating to
'in transit' loss), and that no additional item was brought
under the policy coverage except the Federal
Bank(plaintiff’s) debit card holders. It was further argued
that, even if the claim is considered as one falling within
the policy coverage, still, the 'PROVISO clause' which
stipulates that the insured has to bear the first 25% of
each loss or 2% of the basic sum insured, whichever is
higher, applies. None of the fraudulent transactions exceed

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Rs.10,000/-. The excess applicable is Rs.25,000/-. Hence the
insurance company is not liable to pay any amount, it is
argued.
10. In reply, the learned counsel for the plaintiff
argued that, under the additional policy, money in ATMs were
specifically secured and if the exception clauses relied on
by the defendants are held to apply, it will defeat the very
purpose/object of the additional policy; such clauses are to
be read down. It was also argued that, when the terms or
clauses of the policy are ambiguous, they are to be
interpreted in favour of the insured by applying the
doctrine of contra proferentem . Further, referring to the
PROVISO relied on by the defendants, the learned counsel
contended that, the modus operandi of all the incidents was
one and the same and it has to be treated as a single act.
He also argued that, at the relevant time the maximum
withdrawal limit from an ATM was Rs.10,000/- and the excess
being Rs.25,000/- every transaction would be within the

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excess. Therefore, in no case would the insurance company be
liable to indemnify. Such clauses are to be treated as void
and non-existent, and are to be eschewed from consideration.
He also relied on 'blue pencil rule' to contend that it is
possible that such offending clause in a contract is to be
treated as non-existent. It was further urged that, in the
letter of repudiation issued by the defendants, the excess
clause was not set up as a reason, and therefore they are
precluded from relying upon the same in the suit.
11. Since a determination of the questions involved
relate to a proper understanding of the terms of the policy,
we consider it appropriate to first refer to the principles
laid down by the Apex Court in that regard. Both the learned
counsel referred to a host of decisions; we proceed to refer
to the same:
In Haris Marine Products v. Export Credit Guarantee Corporation (ECGC)
Limited [AIR 2022 SC 3036] , it was held:
“It is entrenched in our jurisprudence that an ambiguous term in an

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insurance contract is to be construed harmoniously by reading the
contract in its entirety. If after that, no clarity emerges, then the term must
be interpreted in favour of the insured, i.e., against the drafter of the
policy.”
Therein the Apex Court had also referred to it earlier
judgments in:- General Assurance Society Ltd. v. Chandumull Jain [(1966)
3 SCR 500] :-
“ In other respects there is no difference between a contract of insurance
and any other contract except that in a contract of insurance there is a
requirement of uberrima fides i.e., good faith on the part of the assured
and the contract is likely to be construed contra proferentem that is
against the company in case of ambiguity or doubt... (I)n interpreting
documents relating to a contract of insurance, the duty of the court is to
interpret the words in which the contract 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.”
United India Insurance Co.Ltd. v. Pushpalaya Printers [(2004) 3 SCC 694]:-
“..........(I)t is also settled position in law that if there is any ambiguity or a
term is capable of two possible interpretations, one beneficial to the
insured should be accepted consistent with the purpose for which the
policy is taken, namely, to cover the risk on the happening of certain
event... Where the words of a document are ambiguous, they shall be
construed against the party who prepared the document.”

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In Sushilaben Indravadan Gandhi v. New India Assuraance Co.Ltd [(2021) 7
SCC 151] , wherein the explanation to the rule of contra
proferentem as provided under Halsbury's Laws of England
were referred to;
“Contra proferentem rule.--Where there is ambiguity in the policy the
court will apply the contra proferentem rule. Where a policy is produced
by the insurers, it is their business to see that precision and clarity are
attained and, if they fail to do so, the ambiguity will be resolved by
adopting the construction favourable to the insured. Similarly, as regards
language which emanates from the insured, such as the language used in
answer to questions in the proposal or in a slip, a construction favourable
to the insurers will prevail if the insured has created any ambiguity. This
rule, however, only becomes operative where the words are truly
ambiguous; it is a Rule for resolving ambiguity and it cannot be invoked
with a view to creating a doubt. Therefore, where the words used are free
from ambiguity in the sense that, fairly and reasonably construed, they
admit of only one meaning, the Rule has no application.”
In Haris Marine Products , the Apex Court after referring to the
above held:-
“The Rule of contra proferentem thus protects the insured from the
vagaries of an unfavourable interpretation of an ambiguous term to which
it did not agree. The Rule assumes special significance in standard form

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insurance policies, called contract d' adhesion or boilerplate contracts, in
which the insured has little to no countervailing bargaining power.”
In Export Credit Guarantee Corporation of India Ltd., v. Garg Sons
International [(2014) 1 SCC 686] ; the Apex Court held,
“Thus, it is not permissible for the court to substitute the terms of the
contract itself, under the garb of construing terms incorporated in the
agreement of insurance. No exceptions can be made on the ground of
equity. The liberal attitude adopted by the court, by way of which it
interferes in the terms of an insurance agreement, is not permitted. The
same must certainly not be extended to the extent of substituting words
that were never intended to form a part of the agreement.”
Therein the Apex Court referred to the judgments in, Oriental
Insurance Co. Ltd. v. Sony Cheriyan [(1999) 6 SCC 451] ; Polymat India (P)
Ltd. v. National Insurance Co.Ltd. [(2005) 9 SCC 174] ; Sumitomo Heavy
Industries Ltd. v. ONGC Ltd. [(2010) 11 SCC 296] ; and Rashtriya Ispat
Nigam Ltd. v. M/s. Dewan Chand Ram Saran [(2012) 5 SCC 306] , which
held:-
“The insured cannot claim anything more than what is covered by the insurance
policy. "...the terms of the contract have to be construed strictly, without altering
the nature of the contract as the same may affect the interests of the parties
adversely." The clauses of an insurance policy have to be read as they are...
Consequently, the terms of the insurance policy, that fix the responsibility of the

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Insurance Company must also be read strictly. The contract must be read as a
whole and every attempt should be made to harmonise the terms thereof, keeping
in mind that the Rule of contra proferentem does not apply in case of commercial
contract, for the reason that a clause in a commercial contract is bilateral and
has mutually been agreed upon.
The Court also referred to the judgment in Vikram Greentech (I)
Ltd. & Anr. v. New India Assurance CO.Ltd. AIR 2009 SC 2493, wherein it
was observed,
“The court while construing the terms of policy is not expected to venture
into extra liberalism that may result in rewriting the contract or
substituting the terms which were not intended by the parties.”

In United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8
SCC 644] , the Apex Court held thus;
“Therefore, it is settled law that the terms of the contract have to be
strictly read and natural meaning be given to it. No outside aid should be
sought unless the meaning is ambiguous.”
In Industrial Promotion & Investment Corporation of Orissa Ltd. v. New India
Assurance Company Ltd. And Ors. [AIR 2016 SC 3908]
, the Apex Court
observed thus;
“….... The Common Law Rule of construction “Verba chartarum fortius
accipiuntur contra proferentem” means that ambiguity in the wording of

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the policy is to be resolved against the party who prepared it.”
The Apex Court referred to the following passage in
MacGillivray on Insurance Law ,
“The contra proferentem Rule of construction arises only where there is a
wording employed by those drafting the Clause which leaves the court
unable to decide by ordinary principles of interpretation which of two
meanings is the right one. “One must not use the Rule to create the
ambiguity-one must find the ambiguity first.” The words should receive
their ordinary and natural meaning unless that is displaced by a real
ambiguity either appearing on the face of the policy or, possibly, by
extrinsic evidence of surrounding circumstances.”
The Court also referred to Colinvaux's Law of Insurance , wherein
the Rule of contra proferentem was explained thus;
“But a Clause is only to be contra proferentem in cases of real ambiguity.
One must not use the Rule to create an ambiguity. One must find the
ambiguity first. Even where a Clause by itself is ambiguous if, by looking
at the whole policy, its meaning becomes clear, there is no room for the
application of the doctrine. So also where if one meaning is given to a
clause, the rest of the policy becomes clear, the policy should be construed
accordingly.”
In Canara Bank v. United India Insurance Co. Ltd. And Ors.[(2020) 3 SCC
455]
, the Apex Court held thus;

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“The principles relating to interpretation of insurance policies are well
settled and not in dispute. At the same time, the provisions of the policy
must be read and interpreted in such a manner so as to give effect to the
reasonable expectations of all the parties including the insured and the
beneficiaries. It is also well settled that coverage provisions should be
interpreted broadly and if there is any ambiguity, the same should be
resolved in favour of the insured. On the other hand, the exclusion clauses
must be read narrowly. The policy and its components must be read as a
whole and given a meaning which furthers the expectations of the parties
and also the business realities. According to us, the entire policy should
be understood and examined in such a manner and when that is done, the
interpretation becomes a commercially sensible interpretation.”
In Shivram Chandra Jagarnath Cold Storage and Ors. v. New India Assurance
Company Limited and Ors. [(2022) 4 SCC 539] , the Apex Court,
referring to its earlier judgment in New India Assurance Co. Ltd.
v. Rajeshwar Sharma and Anr. [(2019) 2 SCC 671]
, held thus:
“The object of exceptions is to define with greater precision the scope of
the policy by making clear what is intended to be excluded and contrasting
with what is intended to be included.
Since exceptions are inserted in the policy mainly for the purpose of
exempting the insurers from liability for a loss which, but for the
exception, would be covered by the policy, they are construed against the
insurers with utmost strictness and it is the duty of the insurers to except
their liability in clean and unambiguous terms. The onus of proving that

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the loss falls within the exception lies upon the insurers, unless by proving
the language of the exception, the assured is expressly required to prove
that, in the circumstances, the exception does not apply.”
The Apex Court further observed,
“In New India Assurance (supra) , it was held that if there is no ambiguity
in the Clause exempting the insurer from a liability arising from an
excepted cause, the insurance claim can be rejected by the insurer.”
In Oriental Insurance Co. Ltd. v. Sony Cheriyan [(1999) 6 SCC 451] , the
Apex Court held thus;
“The insurance policy between the insurer and the insured represents a
contract between the parties. Since the insurer undertakes to compensate
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 determined the 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.”
In Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan and Ors. [(1987) 2
SCC 654] , the Apex Court held thus;
“.....When the option is between opting for a view which will relieve the
distress and misery of the victims of accidents or their dependents on the
one hand and the equally plausible view which will reduce the profitability
of the insurer in regard to the occupational hazard undertaken by him by

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way of business activity, there is hardly any choice. The Court cannot but
opt for the former view. Even if one were to make a strictly doctrinaire
approach, the very same conclusion would emerge in obeisance to, the
doctrine of 'reading down' the exclusion clause in the light of the 'main
purpose' of the provision so that the 'exclusion clause' does not cross
swords with the 'main purpose' high- lighted earlier. The effort must be to
harmonize the two instead of allowing the exclusion clause to snipe
successfully at the main purpose.”
In Cement Corporation of India v. ICICI Lombard General Insurance
Company Limited [2025 INSC 1444] , the Apex Court held thus;
“Additionally, in case of insurance contracts, the exclusion Clause must
be construed strictly and wherever there is any ambiguity between two or
more clauses in the contract, it must be interpreted in favour of the
insured.”
Therein it was also held thus;
“19. Another instance where exception clauses may be interpreted to the
benefit of the insured is when the exception clauses are too wide and not
consistent with the main purpose or object of the insurance policy.
xxxx xxxx xxxx
28. …... It is a trite law that the exclusions in the contract for insurance
must be read strictly.....”
In Shivram Chandra Jagarnath Cold Storage and Anr. v. New India

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Assurance Company Limited and Ors. [(2022) 4 SCC 539] relying on
Sangrur Sales Corporation v. United India Insurance Co. Ltd., [2020 SCC
ONLINE SC 63]
it was held that in the event two
constructions are possible or if there is any ambiguity, a
construction that is beneficial to the insured should be
adopted consistent with the purpose of the policy.
In United India Insurance Co. Ltd. v. Great Eastern Shipping Co. Ltd. [AIR
2007 SC 2556] , the Apex Court after referring to the case in
Shashi Gupta (Smt.) v. Life Insurance Corporation of India and Anr. [(1990) 18
ITR 481 (SC)]
held thus;
“As both the aforesaid interpretations are reasonably possible, we would
accept the one which favours the policy-holder, as the same advances the
purpose for which a policy is taken and would be in consonance with the
object to be achieved for getting lives assured.”
In Texco Marketing Pvt. Ltd. v. Tata AIG General Insurance Co.Ltd. and Ors
[(2023) 1 SCC 428] , the Apex Court held thus;
“9 . Adhesion contracts are otherwise called Standard-Form Contracts.
Contracts of Insurance are one such category of contracts. These
contracts are prepared by the insurer having a standard format upon
which a consumer is made to sign. He has very little option or choice to

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negotiate the terms of the contract, except to sign on the dotted lines. The
insurer who, being the dominant party dictates its own terms, leaving it
upon the consumer, either to take it or leave it. Such contracts are
obviously one sided, grossly in favour of the insurer due to the weak
bargaining power of the consumer.
10. The concept of freedom of contract loses some significance in a
contract of insurance. Such contracts demand a very high degree of
prudence, good faith, disclosure and notice on the part of the insurer,
being different facets of the doctrine of fairness. Though, a contract of
insurance is a voluntary act on the part of the consumer, the obvious
intendment is to cover any contingency that might happen in future. A
premium is paid obviously for that purpose, as there is a legitimate
expectation of reimbursement when an Act of God happens. Therefore, an
insurer is expected to keep that objective in mind, and that too from the
point of view of the consumer, to cover the risk, as against a plausible
repudiation.
Exclusion Clause
11. An exclusion Clause in a contract of insurance has to be interpreted
differently. Not only the onus but also the burden lies with the insurer
when reliance is made on such a clause. This is for the reason that
insurance contracts are special contracts premised on the notion of good
faith. It is not a leverage or a safeguard for the insurer, but is meant to be
pressed into service on a contingency, being a contract of speculation. An
insurance contract by its very nature mandates disclosure of all material
facts by both parties.
12. An exclusion Clause has to be understood on the touch-stone of the

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doctrine of reading down in the light of the underlining object and
intendment of the contract. It can never be understood to mean to be in
conflict with the main purpose for which the contract is entered. A party,
who relies upon it, shall not be the one who committed an act of fraud,
coercion or mis-representation, particularly when the contract along with
the exclusion Clause is introduced by it. Such a Clause has to be
understood on the prism of the main contract. The main contract once
signed would eclipse the offending exclusion Clause when it would
otherwise be impossible to execute it. A Clause or a term is a limb, which
has got no existence outside, as such, it exists and vanishes along with the
contract, having no independent life of its own. It has got no ability to
destroy its own creator, i.e. the main contract. When it is destructive to the
main contract, right at its inception, it has to be severed, being a
conscious exclusion, though brought either inadvertently or consciously by
the party who introduced it. The doctrine of waiver, acquiescence,
approbate and reprobate, and estoppel would certainly come into
operation as considered by this Court in N. Murugesan v. Union of India
[(2022) 2 SCC 25] .”
In Texco Marketing Pvt. Ltd. , the Apex Court after referring to
the case in Shivram Chandra Jagarnath Cold Storage v. New India
Assurance Co. Ltd. [(2022) 4 SCC 539], held thus;
“Another instance where exception clauses may be interpreted to the
benefit of the insured is when the exception clauses are too wide and not
consistent with the main purpose or object of the insurance policy. In B.V.

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Nagaraju v. Oriental Insurance Co. Ltd. [(1996) 4 SCC 647] , a two-
Judge Bench of this Court read down an exception Clause to serve the
main purpose of the policy.”
12. From the above precedents, the following principles
emerge:-
(a) Ambiguous terms in policy are to be construed
harmoniously, by reading the contract in full. If
harmonious construction is not possible, then
construe in favour of the insured.
(b) Construe the terms strictly. Court is not to
make out a new contract.
(c) In case of ambiguity, interpretation in favour
of the purpose for which the policy is taken is to
be adopted.
(d) Contra proferentem is to be applied only in
case of ambiguity. First, find the ambiguity. It
cannot be invoked to create an ambiguity.
(e) If on a fair and reasonable construction, the

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words admit of only one meaning, the Rule of Contra
proferentem does not apply.
(f) The rule has significance in standard form
contracts where the insured have no bargaining
power.
(g) In construing the terms, equity or liberal
attitude is not permitted.
(h) Only what is covered under the policy can be
claimed.
(i) Clauses to be strictly read and natural meaning
to be given. Words used to be given importance.
(j) Coverage provisions to be interpreted broadly
and exclusion clauses to be read narrowly.
(k) Exceptions define with precision, what is
excluded and included.
(l) The onus of proving an exception lies on the
insurer.
(m) Read down the exclusion clause when it cross

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swords with the main purpose. Effort must be to
harmonise the two. Exclusion clause to be
understood on the prism of the main contract.
(n) Even where a clause is ambiguous, when on
reading the whole contract it becomes clear, the
rule of contra proferentem is not to be applied.
(o) In purely commercial, negotiated contracts
between parties of equal bargaining power, contra
proferentem may have limited or no application.
Bearing the above principles in mind, we proceed to consider
the clauses of the policy, which are relevant and have been
extracted supra.
13. 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) quoted above, specifically excludes losses arising
out of the use of ATMs. It mentions, “any direct or indirect
use”. Therefore, losses occurring due to any direct or

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indirect use of ATMs are excluded under the clause. The
incidents in question, upon which damage resulted to the
plaintiff, have arisen out of the fraudulent use of the
ATMs. Plainly read, the exclusion clause covers the same.
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.
(g)
14. So also, exclusion clause in clause A,
specifically mentions about losses due to faulty or
fraudulent use of EDP (Electronic Data Processing) system.
It could not be contended that ATMs are not EDP systems.
15. Therefore, 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. This also appears to
be in consonance with the other incidents mentioned in

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clause A which reads, “ lost, destroyed or otherwise made away by Fire,
Riot and Strike, malicious damage & Terrorist risks, Burglary or Housebreaking,
Theft, Robbery or hold up.”
The word ‘theft’ is used along with,
“ Fire, Riot and Strike, malicious damage & Terrorist risks, Burglary or
Housebreaking, Theft, Robbery or hold up”,
indicating that, it is not
a loss caused due to use of the ATM that is intended.
Anyhow, in the light of the exclusion clauses above, the
instances in question, which have arisen out of the use of
ATM, are excluded from the policy cover.
16. The learned counsel for the respondent would refer
to Clause 2 of the Additional Cover Policy (which has been
extracted above) and contend that the Additional Policy
covers the money in the ATMs and hence the incidents in
question which resulted in loss of money, is covered under
the Additional Cover Policy.
17. The Additional or Extension Policy begins like
this:
“CONDITIONS ATTACHED TO AND FORMING PART OF POLICY

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NO.760702/46/12/04/00000002 PERIOD COVER : FROM 1.4.2012 TO
31.3.2013”
At the foot of the Additional Policy it is written thus:
“This Policy is subject to Bankers Indemnity policy clauses as attached.”
The above admits of no doubt, and it is not in dispute, that
the clauses in the base policy applies for the Additional
Policy also.
18. Clauses 1, 2 and 3 of the additional cover policy
indicate that the additional policy relates only to
additional limit for certain items covered under the
original Bankers Indemnity Policy. Clause-2 relates to
additional limit of Rs.50 crores for item-A and clause-3
relates to additional limit of Rs.10 crores for item-B. The
said items 'A' and 'B' are those mentioned as items 'A' and
'B' in the base Banker’s Indemnity Policy viz. “ON PREMISES”
and “IN TRANSIT”. Though the principal policy contains
further items 'C' to 'H' which are forgery or alteration,
dishonesty, hypothecated goods, registered postal sendings,

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appraisers, and Janata Agents/Chhoti Bachat Yojna agents,
Pygmy collectors, the additional limit is not extended to
such items. Therefore, it is evident that the additional
policy only adds an additional limit to the original policy.
Though money in premises including ATMs is specifically
mentioned in the additional policy, admittedly ATMs were
included even in the base policy. In other words, the
additional policy does not relate to any item which is not
included in the principal policy but only provides
additional limit.
19. The “policy schedule to Ext.A2”, which is the
facing sheet of the policy, reads:
Section-1 (Max.
limit Sum Insured
Basic cover Sum insured (Rs.)
Premium (Rs.)
Rs.2500000/-
Rs.150000/-
for Section I in
aggregate)
Additional cover for
Rs.500000000/- Rs.1500000/-
Money in premises
Additional cover for
Rs.100000000/- Rs.500000/-
Money in transit
Staff loading 8745 nos. Rs.188236/-
Infedility of caretaker 100 nos. Rs.16000/-

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From the above also it is evident that under the additional
policy there has only been an enhancement or addition in the
limit and that too for losses arising “in premises” and “in
transit”. Hence the argument that under the additional
policy even a fraudulent transaction in an ATM was brought
in as an additional item, cannot stand.
20. The conclusion as above is supported by yet
another factor. Under the original policy, as was already
noted, losses arising out of any use of ATMs, whether direct
or indirect have been excluded. However, in the additional
policy, protection is given to the debit card holders of the
plaintiff Bank alone, against fraudulent transactions. This
is specifically included as an add-on cover under the head
“ADD ON COVERS”. The add on covers under the additional
policy are only Caretaker Cover, Spurious Gold Cover and
Fraud Protection cover to Federal Bank Debit Card holders.
At the last page of the Additional Policy, the add-ons under
the policy are shown thus:

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Special conditions
As per annexure.
: ADDITIONAL COVER:

1 INFEDILITY OF THE
OUTSOURCED
CARETAKERS
2 COVER FOR SPURIOUS GOLD
ANY ONE ACCIDENT : Rs.20 lacs
PER BRANCH Rs.50 lacs
ANY ONE YEAR LIMIT : Rs.2 crores
Excess Rs.15000/- each and every claim
3 COVER FOR DEBIT CARD
Sum insured : Rs.1 lac per card
Annual limit : Rs.2 crores
Excess per claim : Rs.2500/-

Excess : Rs.25,000.00
This policy is subject to Bankers indemnity policy clauses as attached.
Therefore it is evident that the additional policy was only
for an additional limit for “in premises” and “in transit”
losses and for add-on cover for the three specific heads
indicated above.
21. On the above discussions we find that, the policy
excludes losses arising directly or indirectly out of the
use of ATMs including the transactions in question.
22. Now, we come to the contention of the learned
Senior Counsel with regard to the excess clause. The

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relevant clause in the policy reads thus,
“ (a) EXCESS: Insured shall bear the first 25% of each loss under items 'A'
to 'E' or 2% of the basic Sum Insured whichever is higher, but not exceeding
the amount specified in the Schedule. Each loss in respect of each dishonest
or criminal act shall be treated as a separate loss.
This excess will however not apply to loss or damage arising out of Fire,
Riot & Strike. In respect of item F, G, H of the policy (i.e.Registered Postal
sendings, Appraisers & Janata Agent etc.) the excess applicable will be 25%
of the claim amount ”
There is a similar clause in the additional policy, and it
reads thus;
“Insured shall bear the first 25% of each loss under item A to E or 2% of
the basic sum insured whichever is higher but not exceeding the maximum
of Rs.25,0000/-. Each loss in respect of each dishonest or criminal act shall
be treated as a separate loss.”
As per the said clause, the loss suffered up to 2% of the
basic sum insured is to be borne by the insured. So also,
each loss in respect of each act is to be treated as a
separate loss. Going by the basic sum assured, such amount
is Rs.25,000/-. Ext.A3 statement with regard to the
incidents and the losses, reveals that none of the

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transactions are above Rs.10,000/-. Therefore, if the excess
clause is applied, the insured is to bear the entire loss
and no amount is recoverable from the insurance company.
23. One of the contentions of the learned counsel for
the plaintiff is that, though the incidents have occurred at
different places in the country, it has to be taken as a
single act resulting in loss to the plaintiff. The learned
counsel relied on the “Unities Doctrine” propounded in the
famous Dawson's Field Arbitration, by its Arbitrator Mr.
Michael Kerr QC (Queen’s Counsel), and applied and developed
by Rix J. in Kuwait Airways Corporation v. Kuwait Insurance Co. [SAK
(1996) 1 Lloyd's Rep. 664] . In Dawson’s Field Arbitration case , four
planes were hijacked as part of a planned and co-ordinated
operation with the objective to bargain the demand for
release of prisoners. Since the negotiations did not
progress, three aircraft were blown up together as one
operation. Therein, it was observed thus;

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“Whether or not something which produces a plurality of loss or damage
can properly be described as one occurrence therefore depends on the
position and viewpoint of the observer and involves the question of degree
of unity in relation to cause, locality, time, and, if initiated by human
action, the circumstances and purposes of the persons
responsible……...The answer must be subjective. No one contended that
each explosion was a separate occurrence. In my view there was one
occurrence, one event, one happening; the blowing up of three aircraft in
close proximity more or less simultaneously, within the time span of a few
minutes, and as a result of a single decision to do so without any one being
able to approach the aircraft between the first explosion and their
destruction.”
24. In Kuwait Airways Corporation it was held that, to apply
the 'unities doctrine’, it has to be satisfied that; (i)
there was unity of time; (ii) there was unity of location;
(iii) there was unity of cause; and (iv) there was unity of
intent. The above was relied on by the High Court of
Justice, Queen's Bench Division, Commercial Court in an
arbitration claim between Aioi Nissay Dowa Insurance Company
Limited (formerly The Chiyoda Fire and marine Insurance Company Limited)
v. Heraldglen Limited and another, reported in (Neutral Citation Number)

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[2013] EWHC 154 (Comm) [England and Wales High Court Commercial
Court] . There, the claim related to loss sustained out of the
attack on the Twin Towers of the World Trade Center on
September 11, 2001. There the question was whether the loss
was caused by series of occurrences “arising out of one
event” for the purpose of applying the policy. The
arbitration tribunal held it to be separate events. The
Court, after elaborately considering the 'unities doctrine’,
held that there were separate causes for the losses, because
there were two hijacking of two air-crafts, causing separate
loss. It was also found that there was no unity of time and
location, to hold that the losses arose out of one event.
25. The occurrences in the present case have happened
at various parts of the country, in different ATMs, and
spread over a span of one month, the 'unities doctrine’ does
not apply to the facts at hand. So also there is no case of
unity of intent. Therefore, it cannot be held that the
losses arose out of one event.

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26. In Amravati District Central Cooperative Bank Limited v. United
India Fire and General Insurance Company Limited [(2010) 5 SCC 294] ,
there were series of embezzlement by an employee of a bank,
which were connected together by a common modus operandi ,
the Apex Court, considering a similar excess clause, held
that the loss on account of each embezzlement forms a
separate claim. Therein the Apex Court, explaining the
meaning of excess clauses in insurance contracts, held thus;
“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).”
Therefore, we negative the contention of the learned counsel
relying on the ‘unities doctrine’.
27. Now, coming to the argument regarding the “excess
clause”, if the clause is applied, no amounts are payable by

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the insurance company to the plaintiff since “each loss” is
not more than Rs.10,000/- and the excess being Rs.25,000/-.
Relying on the judgment of the Apex Court in Texco Marketing
Pvt. Ltd. v. Tata AIG General Insurance Co. Ltd. And Ors. [(2023) 1 SCC 428] ,
the learned counsel for the plaintiff argued that, by
applying the 'blue pencil rule’ , the excess clause is to be
eschewed from consideration since, otherwise it renders the
very indemnity under the policy nugatory and otiose. In
Texco Marketing Pvt. Ltd. , the Apex Court held that the “doctrine
of blue pencil” strikes off the offending clause in a
contract, it being void ab initio. It was observed,
“The said clause being repugnant to the main contract, and thus
destroying it without even a need for adjudication, certainly has to be
eschewed by the Court. The very existence of such a clause having found to
be totally illegal and detrimental to the execution of the main contract
along with its objective, requires an effacement in the form of declaration
of its non-existence, warranting a decision by the Court accordingly.”
The Apex Court relied on its earlier judgment in Beed District
Central Coop. Bank Ltd. v. State of Maharashtra [(2006) 8 SCC 514] , which

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referred to the evolution of the doctrine by the English and
American Courts, thus;
“ 10 . The "doctrine of blue pencil" was evolved by the English and
American courts. In Halsbury's Laws of England, (4th Edn., Vol. 9), p.
297, para 430, it is stated:
430. Severance of illegal and void provisions.--A contract
will rarely be totally illegal or void and certain parts of it
may be entirely lawful in themselves. The question therefore
arises whether the illegal or void parts may be separated or
'severed' from the contract and the rest of the contract
enforced without them. Nearly all the cases arise in the
context of restraint of trade, but the following principles are
applicable to contracts in general.
11. In P. Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edn. 2005, Vol.
1, pp. 553-54, it is stated:
Blue pencil doctrine (test).--A judicial standard for deciding
whether to invalidate the whole contract or only the offending
words. Under this standard, only the offending words are
invalidated if it would be possible to delete them simply by
running a blue pencil through them, as opposed to changing,
th
adding, or rearranging words. (Black, 7 Edn., 1999)
This doctrine holds that if courts can render an unreasonable
restraint reasonable by scratching out the offensive portions
of the covenant, they should do so and then enforce the

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remainder. Traditionally, the doctrine is applicable only if
the covenant in question is applicable, so that the
unreasonable portions may be separated. E.P.I. of Cleveland,
Inc. v. Basler [12 Ohio App 2d 16 : 230 NE 2d 552, 556].
Blue pencil rule/test.--Legal theory that permits a judge to
limit unreasonable aspects of a covenant not to compete.
Severance of contract; 'severance can be effected when the
part severed can be removed by running a blue pencil
through it without affording the remaining part'. Attwood v.
Lamont [(1920) 3 KB 571 : 1920 All ER Rep 55 (CA)].
(Banking)
A Rule in contracts a court may strike parts of a covenant not
to compete in order to make the covenant reasonable.
(Merriam Webster)
Phrase referring to severance (q.v.) of contract. 'Severance
can be effected when the part severed can be removed by
running a blue pencil through it' without affording the
remaining part. Attwood v. Lamont [(1920) 3 KB 571 : 1920
All ER Rep 55 (CA)]. (Banking)”
This Court has, in Ismail Hajee Essa Trust and Ors. v. Muslim
Educational Society and Ors. [2017 (1) KHC 916]
, referred to the rule

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and it was held thus;
“The 'doctrine of blue pencil' can be called in aid to severe the illegal and
void provisions from the contract in order to enforce the rest of it. The
offending parts are invalidated (if it would be possible to delete them) by
running a blue pencil through them as opposed to changing or
rearranging words.”
28. The very basis upon which the plaintiff seeks
invocation of the 'blue pencil rule’ is that, at the
relevant time, the maximum limit of withdrawal from an ATM
is Rs.10,000/- and hence, an excess clause of Rs.25,000/-
would render the very policy nugatory. The learned Senior
Counsel appearing for the defendants would refute such
claim. The plaintiff failed to adduce any evidence to
substantiate the factual basis regarding the same.
Therefore, though the argument of the learned counsel for
the plaintiff would appear attractive, it could not be
established that the rule applies to the facts of the case.
29. Relying on the judgments of the Apex Court in New
India Assurance Co. Ltd. and Ors. v. Mudit Roadways [(2024 (3) SCC 193] and

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Galada Power and Telecommunication Ltd. v. United India Insurance
Company Ltd. and Anr. [(2016) 14 SCC 161] , the learned counsel for
the plaintiff argued that the excess clause was not urged by
the insurance company in their letter of repudiation, and
having not chosen to urge the same in their repudiation
letter, it is not open for the insurance company to rely
upon the same in the suit. In Mudit Roadways (supra) referring
to Galada Power (supra) , it was held thus;
“Notably, in earlier cases like Galada Power and Telecommunication Ltd.
v. United India Insurance Co. Ltd. And Anr. [(2016) 14 SCC 161] and
Saurashtra Chemicals Ltd. v. National Insurance Co. Ltd. [(2019) 19 SCC
70], it was declared that new grounds for repudiation cannot be
introduced during the hearing if they were not included in the repudiation
letter. This legal principle was reiterated in JSK Industries Pvt. Ltd. v.
Oriental Insurance Co. Ltd. [2022: INSC: 1106].
xxxx xxxx xxxx
Canvassing supplementary arguments during the hearing, (beyond those
in the insurer's reputation letter), is explicitly prohibited. Consequently, it
is held that the insurer cannot introduce additional reasoning beyond
those detailed in their letter, to justify the repudiation.”
30. The learned Senior Counsel appearing for the

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insurance company argued that such restriction applies only
in invoking the repudiation clauses and not to the excess
clause in the agreement. Under the excess clause there is no
repudiation, and it has significance only in relation to
quantification of the liability, it is argued.
31. Under insurance law, repudiation of a claim is the
rejection of claim by the insurer. It could be on various
grounds including, lack of coverage under the policy, breach
of policy conditions, exclusion clauses. An “excess”, which
is the proportion of the loss that the insured has to bear,
could not be strictly said to be a repudiation, under which,
the very liability is disputed. It is essentially a
limitation on the quantum payable and not a denial of the
very liability. In a case where the excess clause is
applicable, there is no repudiation of the liability as
such. It only deals with the mode of computation of the
quantum payable by the insurance company. Such a question
would arise only when the insurance company is found liable.

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Therefore, generally, it may not be possible to say that the
excess clause operates as repudiation of liability and
hence, such ground ought to have been taken in the
repudiation letter issued by the insurance company.
32. However, in the case at hand, the insurance
company relies upon the excess clause to contend that no
amounts are payable to the plaintiff under the policy, the
loss being within the limit of excess. Such a contention
essentially amounts to denial of the claim in its entirety
and practically amounts to repudiation. Such contention was
available to the insurance company even at the time when
they issued the repudiation letter, however, not taken.
Therefore, on the facts of the present case, the reliance on
the excess clause essentially amounts to repudiation. 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. However, in the light of the
findings on the other points, the non applicability of the

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excess clause is of no avail to the plaintiff.
33. Therefore, though Sri. Madhu Radhakrishnan, the
learned counsel for the plaintiff, has not left any stone
unturned, the plaint claim is bound to fail.
In the result, the appeal is allowed. The decree and
judgment of the trial court are set aside and the suit will
stand dismissed. Parties to bear their respective costs.

Sd/-
SATHISH NINAN
JUDGE

Sd/-

P. KRISHNA KUMAR
JUDGE
yd