ATM Fraud Losses Arising Out Of Other Banks' Cards Not Covered When Banker's Indemnity Policy Excludes Such Losses: Kerala High Court

The Division Bench comprising Justice Sathish Ninan and Justice P. Krishna Kumar set aside a trial court decree that had directed the insurer to indemnify the bank for losses caused by ATM fraud.

The case arose from a suit filed by Federal Bank seeking recovery of  ₹83,34,600 from New India Assurance under a Banker's Indemnity Policy covering the period from April 2012 to March 2013.

The bank alleged that between April and May 2012, fraudsters carried out multiple transactions at its ATMs across the country using ATM cards issued by other banks. The modus operandi involved partially collecting dispensed cash and deliberately leaving a note in the ATM presenter slot so that the machine would retract the note without counting it. This triggered an automatic reversal of the full withdrawal amount to the customer's account, causing loss to the bank.

The trial court held that the loss constituted a fraudulent transaction covered under the policy and decreed the claim. The present appeal was filed against this finding by the Insurance Company.

The Court examined whether losses arising from fraudulent ATM transactions fall within the coverage of a Banker's Indemnity Policy despite exclusion clauses that bar liability for losses arising out of the use of ATMs or electronic data processing systems.

The Court examined the policy terms and emphasised established principles governing interpretation of insurance contracts, including, insurance policies must be interpreted strictly based on their terms; ambiguities may be resolved in favour of the insured under the contra proferentem rule when genuine ambiguity exists; and exclusion clauses must be narrowly construed, though clear exclusion must be given effect.

The Bench noted that the policy contained an exclusion clause stating that the insurer would not be liable for losses attributed to manipulation or fraudulent use of computer or other electronic data proceeding (EDP) systems, and the losses arising directly from use of ATMs.

“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…..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.” Court noted.

The Court thus held that the losses in question arose from fraudulent use of ATMs and hence they fell within the exclusion clause.

The Court also observed that the policy's add-on “Fraud Protection Cover” applied only to Federal Bank's own debit card holders. The transactions at issue involved cards issued by other banks, meaning the add-on cover was inapplicable.

“In the additional policy, protection is given to the debit card holders of the plaintiff Bank alone, against fraudulent transactions… we find that, the policy excludes losses arising directly or indirectly out of the use of ATMs including the transactions in question.” Court held

The Court rejected the bank's argument that the additional cover extended protection to ATM-related losses, the Court clarified that the extension merely enhanced the monetary limits for existing coverage categories (“on premises” and “in transit”) and did not introduce new risks into the policy.

The bank further argued that all fraudulent withdrawals formed part of a single coordinated scheme and should therefore be treated as a single occurrence under the “unities doctrine”.

The Court rejected this contention, by relying on Kuwait Airways Corporation v Kuwait Insurance Co.[SAK (1996) 1 Lloyd's Rep. 664], noting that the incidents occurred at different locations, over multiple dates and through separate transactions.

“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.” Court held

The Court also examined the policy's excess clause. The insurer contended that no amounts are payable to the plaintiff under the policy since the loss is within the limit of excess that is up to ₹25,000 per claim. The Court held that the insurer could not rely on it because it was not mentioned in the original repudiation letter.

“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, this did not affect the outcome since the claim itself was outside the policy coverage.” Court observed

The Court further added that the non-applicability of the excess clause is of no avail in the present instance to the plaintiff.

The Court thus allowed the appeal and held that the bank's losses were excluded from the scope of the insurance policy and dismissed the suit.

Case Title: New India Assurance and Ors. v The Federal bank Ltd.

Case No: RFA 202/ 2017

Citation: 2026 LiveLaw (Ker) 132

Counsel for Appellants: George Cherian (Sr.), Latha Susan Cherian, K S Santhi

Counsel for Respondent: Madhu Radhakrishnan