The Kerala High Court has ruled that losses suffered by a bank due to fraudulent withdrawals from its ATMs are not covered under a Bankers’ Indemnity Insurance Policy when the policy explicitly excludes losses arising from the use of ATMs.
The ruling came in a dispute between Federal Bank Ltd and New India Assurance Co. Ltd, where the bank sought indemnification for losses caused by fraudulent ATM transactions.
A Division Bench comprising Justice Sathish Ninan and Justice P. Krishna Kumar allowed the insurer’s appeal and set aside a trial court decree that had earlier directed the insurance company to compensate the bank.
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Fraudulent ATM withdrawals led to bank losses
Federal Bank had approached the court claiming indemnity after fraudsters allegedly exploited its ATMs across the country between April 11 and May 20, 2012.
According to the bank, the fraudsters used debit cards issued by other banks to withdraw money from Federal Bank ATMs. The perpetrators reportedly left one or two currency notes in the machine’s presenter tray after withdrawing cash.
After 42 seconds, the ATM would automatically recapture the remaining notes. However, the full withdrawal amount would be reversed and credited back to the customer’s account even though most of the cash had already been taken.
The bank claimed it suffered a total loss of ₹83,34,600 through such transactions.
Insurance claim rejected by insurer
The insurance company rejected the claim, arguing that the Bankers’ Indemnity Policy excluded losses arising from the use of ATMs.
It also stated that the additional fraud protection cover applied only to fraudulent transactions involving Federal Bank’s own debit cards, not cards issued by other banks.
Although a trial court initially ruled in favour of the bank and directed the insurer to pay the claim, the insurance company challenged the decision before the High Court.
Court interprets policy exclusion clauses
After examining the policy terms, the High Court observed that while the incidents might appear to fall within theft or malicious damage provisions, the policy contained a clear exclusion.
The Court noted: “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 specifically excludes losses arising out of the use of ATMs.”
The Bench further clarified that the policy covered theft occurring at ATM premises or damage to the ATM machine, but not fraudulent use of the ATM.
The Court stated: “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.”
Add-on policy did not expand coverage
The bank had also argued that an additional insurance policy expanded the coverage to include ATM-related losses.
However, the High Court held that the add-on policy merely increased the monetary limits for losses occurring “in premises” or “in transit”, without extending coverage to fraudulent ATM transactions.
The Bench observed: “The fact that fraudulent use of the plaintiff Bank’s debit cards are specifically included in the Add-on cover… implies that there is no coverage with regard to fraudulent use of other debit cards.”
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Bank’s suit dismissed
Based on the interpretation of the policy clauses, the High Court concluded that the losses claimed by Federal Bank were excluded from the insurance coverage.
The court therefore allowed the insurer’s appeal, set aside the trial court’s judgment, and dismissed the bank’s suit seeking indemnification.
About the author – Rehan Khan is a law student and legal journalist with a keen interest in cybercrime, digital fraud, and emerging technology laws. He writes on the intersection of law, cybersecurity, and online safety, focusing on developments that impact individuals and institutions in India.
