Audit Report Alone Is Not Proof of Loss: Himachal Pradesh High Court Rejects ₹2.54 Crore Insurance Claim Filed by Co-operative Bank for Employee Fraud

“Discovery of loss must imply actual loss... mere audit summaries are not evidence” – In a detailed and sharply reasoned verdict delivered by Himachal Pradesh High Court refused to grant relief to the Himachal Pradesh State Co-operative Bank Limited in a ₹2.54 crore recovery suit filed against the National Insurance Company Limited. The bank had sought indemnity under three Bankers Indemnity Policies (BIPs) for losses allegedly caused by its own employee between 2003 and 2008, but the Court found that the plaintiff had failed to prove any actual, policy-covered loss, relying instead on unverified audit summaries and secondary evidence.

Observing that insurance claims must be backed by primary evidence, the Court ruled: “Mere exhibition of Ext. PW-5/B [the special audit report] will not be sufficient for plaintiff to discharge the burden.” Justice Satyen Vaidya firmly held that the claims were unsupported by documentary proof, not discovered within the prescribed policy period, and barred under valid policy exclusions.

The suit arose from allegations against one Visheshwar Lal Sanartu, an officer of the plaintiff bank, who was posted as in-charge of the Taklech branch in Shimla district during the years 2003 to 2008. According to the plaintiff, the said official had indulged in serious financial irregularities including embezzlement, misappropriation of funds, unauthorised issuance of bank guarantees and manipulation of bank accounts, leading to a cumulative loss exceeding ₹2.5 crore. The bank relied on a special audit report prepared in July 2009, which was subsequently forwarded to the insurer along with indemnity claims. However, the insurer repudiated all claims in March 2011 citing various breaches of the policy.

Rejecting the plaintiff's contentions, the Court held that the bank had failed to bring on record even the basic evidence necessary to substantiate its losses. “The plaintiff has failed to prove the loss,” the Court noted, adding, “the entries made in the tabulated audit report have not been proved in accordance with law, and no supporting documents or primary proofs have been placed on record.”

The plaintiff had argued that the bank’s BIPs covered losses caused by dishonest or criminal acts of its employees and that the actions of the said employee clearly fell within the purview of the policies. However, the Court pointed out that the claims failed on multiple grounds—procedural, evidentiary, and legal.

Insofar as the claims under the 2003–2004 policy were concerned, the Court held that they were clearly barred by the policy's retroactive discovery clause. “It is not in dispute that the policy had expired on 31.03.2004 and it had not been renewed. In this view of the matter, the claim of the plaintiff for the year 2003–2004 has rightly been rejected by the defendant,” the Court said. The loss was only discovered in July 2009, five years after the policy expired, and thus was outside the six-month discovery period mandated under the contract.

Further, the Court accepted the insurer’s reliance on the “excess clause” present in all three BIPs, which stipulated that no claim below ₹50,000 would be payable. “Claims repudiated by the defendant under the excess clause were less than ₹50,000 and cannot be said to be bad in law,” the Court held. The excess clause was found to be valid, enforceable, and directly applicable.

One of the more contentious issues in the case was the insurer’s allegation that the bank had violated a “dual control” clause which, according to the insurer, was a condition precedent to liability under the policies. However, the Court rejected this defence, finding that the insurer had failed to prove that such a clause even formed part of the agreed policy. “The existence of any such clause has not been proved on record,” Justice Vaidya observed, noting that the clause relied upon by the insurer was contained in a photocopied document (Mark D-2) without any signatures, acknowledgments or supporting witness testimony.

Even assuming such a clause existed, the Court noted that the acts alleged—issuance of unauthorised bank guarantees and misappropriation—did not fall within the categories requiring dual control, which covered items like dormant accounts, test keys and blank securities. “None of the acts of omission and commission on part of Visheshwar Lal Sanartu would fall under any of the aforesaid categories,” the Court clarified.

On the broader issue of proof of loss, the Court drew a crucial distinction between allegation and demonstration. “The discovery of loss has to be read so as to mean the loss actually caused to the insured,” the judgment read, further stating that the audit report merely summarised alleged losses but did not present any independent or supporting documentation. “The forwarding letter itself mentions that no photocopy of proofs was retained. None of the documents alleged to be proofs of irregularities and losses caused to the bank by alleged acts of Visheshwar Lal Sanartu have been placed on record,” the Court added.

On the insurer’s allegation that the bank had been negligent, the Court found no basis. “The fact that the alleged defalcations of record were not detected cannot be a lone ground to infer negligence,” the Court said, holding that annual audits had indeed been conducted and that failure to detect fraud alone does not establish breach of duty.

Rejecting the insurer’s other objections relating to limitation, non-joinder of parties, suppression of material facts, and jurisdiction, the Court held that the suit was filed within limitation, properly valued, and otherwise maintainable. “Nothing has been found on record amounting to suppression of material facts by plaintiff,” the judgment clarified.

Ultimately, the Court found that the plaintiff had failed to satisfy the fundamental condition for recovery under an indemnity policy—that of proving actual, quantifiable, and policy-covered loss within the policy’s operational framework. “Thus, I am of the considered view that the plaintiff has not been able to prove the claim in the suit against defendant,” the judgment concluded.

The suit was dismissed without costs. A decree was directed to be drawn accordingly.

Date of Decision: December 11, 2025