R R Chokhani Stock Brokers, a private limited company headed by Ramakant Chokhani, was engaged in arbitrage between the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE). The Securities and Exchange Board of India (SEBI) made it mandatory to obtain insurance coverage. So the broker took a policy of Rs 1 crore through New India Assurance, and renewed it each year. The policy included "fidelity" coverage.
The broker had engaged Nilesh Patel as a key permanent employee to be in-charge of the entire arbitrage operations, including back office work, and preparation of trade data and reports. In view of the nature of the work, Nilesh was debarred from trading either on his own or through someone else.
On March 15, 2000 the broker noticed some fraudulent transactions made by Nilesh for his personal benefit. When the broker tried to contact him, he was not available. The following day, Nilesh spoke to another employee and admitted having committed the fraud. On March 18, Nilesh committed suicide, and left a note confessing to the fraud.
The broker registered a first information report (FIR) with the police and lodged a claim with New India for the loss of Rs 2.5 crore suffered due to the fraud. The surveyor called for details. Even after all the documents were furnished, the surveyor repeatedly kept calling for the same information. This was brought to the notice of New India.
Later, New India rejected the claim on July 19, 2002 on the ground that the employee who had committed the fraud had indulged in speculative trading which was outside the scope of the policy. The insured represented that the claim ought to be paid as the policy covered the risk of fraud and infidelity by its employees, regardless of the nature of the transaction.
Since the insurer refused to settle the claim, a complaint was filed before the National Commission, for the direction to settle the claim for the loss of Rs 1 crore. New India contested the case, contending that Nilesh was not an employee as he was working on commission basis and was not being paid a salary. The insurer also argued that no proof had been submitted to show that he intentionally committed a fraud. The insurer blamed the broker for being careless, and also for hampering the surveyor from submitting a survey report by failing to produce evidence in support of the claim.
The Commission noted that the correspondence revealed that the surveyor was needlessly delaying the claim by seeking the same information over and over again, and held it to be a deficiency in service. The Commission also observed that the policy defined an employee to include officers, clerks, servants and other employees, and that Nilesh's name appeared in the salary statement. The Commission further noted that Nilesh had confessed to his misdeeds and had even committed suicide, so it was evidently a fraud committed by him during the course of his employment, which would be covered under the policy’s "fidelity" clause. As regards negligence on the broker’s part, the Commission pointed out that the volume of transactions was very high, more than 10,000 a day, so it could not be faulted merely because it relied on Nilesh, who was senior and experienced in the field.
Accordingly, by its order of February 4, 2021 delivered by S M Kantikar for the Bench headed by Justice R K Agrawal, the National Commission ordered New India to settle the claim by paying Rs 1 crore along with 12 per cent interest compounded quarterly and Rs 1 lakh towards costs.