Loan Insurance: When a bank provides a loan to a customer, it often arranges insurance upon the customer’s request. This insurance helps protect the customer from financial strain in case of unexpected events. But is it mandatory for customers to get this insurance, and is the bank responsible for arranging it? This issue was recently brought before the court, and a decision has now been made.
Shree Shakti Foam, a company needing financial assistance, applied to Canara Bank for a cash credit facility backed by their stock. Before granting this facility, the bank verified the stock and conducted a physical inspection of the goods in the storage. They also arranged insurance for the stock and the storage area, charging the customer Rs 13,771 for the insurance premium.
However, on the night of October 20, 2017, a fire broke out and destroyed the stock. The fire was reported to both the police and the bank. It was then discovered that the insurance policy had expired, leaving the stock uninsured.
Feeling that the bank had failed in its duties, Shree Shakti Foam filed a complaint with the Uttar Pradesh State Commission. They claimed that the bank had not informed them about the insurance details. Upon investigation, it was revealed that the previous insurance policy, with a coverage of Rs 25 lakh, was from National Insurance Company and was valid only from July 12, 2016, to July 11, 2017. The customer argued that the bank should have renewed the policy to ensure continuous coverage and sought compensation for the loss of Rs 39,19,527.52, along with interest, compensation, and litigation costs.
In response, the bank argued that it was the customer’s responsibility to secure insurance or request a policy renewal. They denied any fault, stating that they had merely facilitated the insurance process and were not responsible for its renewal.
The State Commission ruled in favor of the customer, directing the bank to pay Rs 25 lakh, plus 8% interest, Rs 20,000 in compensation, and Rs 5,000 for litigation costs. Both parties appealed this decision: the customer sought more compensation, while the bank challenged the ruling.
The bank relied on a clause in the Cash Credit Agreement, which stated that it was the customer’s responsibility to obtain and maintain insurance coverage. The bank argued that their role was limited to that of a financier and they had not sold or managed insurance policies.
The National Commission reviewed the case and determined that the main issue was whether the bank was liable for not maintaining insurance coverage on the hypothecated goods. They noted that the customer had been informed about the policy details and had a primary responsibility to ensure continuous coverage. Thus, the bank was not found to be at fault.
On September 2, 2024, the National Commission, led by Dr. Sadhna Shankar and the Bench headed by Subhash Chandra, overturned the previous decision, ruling that the bank was not liable for the lapse in insurance coverage.
Alway duty of insured to insure his stock and aware