Insurer should reimburse a stock exchange for broker defaults

Trade Guarantee Fund can be used for meeting commitments, obligations and liabilities to clearing house

The Bombay Stock Exchange Limited (BSE) had obtained a Default Insurance Policy from New India Assurance. The policy provided coverage to indemnity against losses at the time of settlement due to defaults committed by its members, whose names were specified in a list. The policy also covered the BSE's Trade Guarantee Fund (TGF). A premium of Rs 1.39 crore was paid for the policy.

Two BSE members, Orient Shares and Stock Brokers and Share-Deal Financial Consultants, defaulted in making payment of their settlement obligations. The erring brokers were not formally declared defaulters and were given three months to clear their liability. Meanwhile, BSE utilised Rs 1.46 crore from the TGF to meet the settlement obligations, these brokers. Later, when these brokers did not clear their dues even after three months, they were formally declared defaulters. The process to dispose off their assets and securities then commenced.

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Meanwhile, due to market fluctuation, the value of their assets and securities diminished, putting BSE to a loss, for which a claim was lodged under the policy. The claim was rejected by the insurance company, contending payment from the TGF had been made prior to declaring the brokers as defaulters - a breach of the BSE's byelaws. The resultant time interval of over three months between the date of payment and the declaration as defaulters had caused a loss. If the process to dispose the assets and securities had commenced at the time when payment was made, loss due to market fluctuation would have been minimised.

BSE pointed out that Securities and Exchange Board of India (SEBI) had approved an amendment to its bye-law to permit utilising the TGF for meeting commitments, obligations and liabilities to the clearing house without declaring a member a defaulter. This was considered an investor friendly approach.

The insurance company then appointed a preliminary surveyor and subsequently a final surveyor. However, the claim was neither settled nor repudiated but kept pending for a long time. So, BSE filed a complaint before the National Commission, seeking a direction to the insurance company to settle the claim, with interest, compensation and costs.

The insurance company reiterated its stand that it was not liable to pay for the loss which had occurred due to the time interval between BSE making payment from the TGF and declaring the brokers to be defaulters. It was also argued that the terms of the policy had been breached by amending the bye-laws. The insurer claimed the complaint was also time-barred.

The National Commission observed that though the incident had occurred in 2001, there was protracted correspondence. Limitation would run from the time a final decision is taken on the complaint. The claim had not been repudiated but clarifications and documents were sought by the insurance company even as late in July 2010. So, the complaint filed in November 2010 was held to be in time.

The Commission observed BSE had utilised the TGF without declaring the erring members as defaulters and had given them an opportunity to clear their dues within three months. This was within the scope of BSE's authority, and also permissible under the terms of the policy.

Accordingly, by its order of March 2 this year, delivered by the Bench of Justice V K Jain and B C Gupta, the National Commission held the New India liable to settle the claim, and ordered the insurance company to pay Rs 2.03 crore with 9 per cent interest from May 1, 2002, till payment.

Delay in payment of legitimate claims only serves to put insurance companies in a bad light, and they end up wasting public money on frivolous litigation.

The author is a consumer activist