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Arbitrability of insurance disputes – IRDAI clears the air

Recently, the Insurance Regulatory and Development Authority of India (“IRDAI”) has settled the ambiguity surrounding arbitrability of insurance disputes vide its circular titled Amendment of Arbitration Clause in General Insurance Policies dated October 27, 2023 (“Circular”)[1]. This issue stems from the All India Fire Tariff  (“AIFT”) issued by the Tariff Advisory Committee (“TAC”) on May 31, 2005.

Background

The erstwhile Section 64U of the Insurance Act, 1938 (“Act”) provided for the constitution of the TAC, endowing it with the power to notify tariff and other policy terms for insurers. In as much as legal effect was concerned, such circulars by the TAC were binding on all insurers. In 2015, Section 64U of the Act was repealed and the TAC was abolished. As a bridging provision, Section 64ULA of the Act provided that the circulars issued by the TAC would continue to be binding unless specifically de-notified by the IRDAI in the official gazette. Accordingly, the AIFT was issued by the TAC, which continues to be in force. AIFT provides a standard fire and perils policy form under Section II and an arbitration clause under Paragraph 13. This clause stipulates that the disputes relating to quantum of payment where liability has been accepted shall be referred to the decision of a sole arbitrator, independent of all other questions arising out of the dispute. The clause further provides a clarification that no dispute shall be referred to arbitration where the insurer has disputed or not accepted liability under the policy. The clause read as under: –

“If any dispute or difference shall arise as to the quantum to be paid under this policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be referred to a panel of three arbitrators, comprising of two arbitrators, one to be appointed by each of the parties to the dispute/ difference and the third arbitrator to be appointed by such two arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under or in respect of this policy.

It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator/ arbitrators of the amount of the loss or damage shall be first obtained.”

This arbitration clause created a distinction between disputes involving unaccepted liability and those with accepted liability, but quantum of payment being disputed.  The latter is arbitrable as per the arbitration clause while the former is not. This bifurcation invariably led to a plethora of cases where the subject matter was in the grey area of arbitrability and non-arbitrability. For instance, for policies where the claim was accepted for one of the two losses, it became a conundrum whether this was a dispute relating to ‘quantum of payment’ (since one part of the overall claim was accepted) or a dispute where liability was not accepted (since the relevant part of the claim was completely denied). Such instances initiated a pertinent query on whether this dichotomy created by the TAC was actually a false dichotomy since any dispute as to the denial of a claim was consequentially also a dispute as to the ‘quantum of payment’.[2] For instance, in the case of Charanjit Lal Sodhi v. Caledonian Insurance Co. Ltd.[3], the Delhi High Court harmoniously interpreted the arbitration clause and observed that the question of whether any claim exists is only an earlier step in the process of determining the ‘quantum of payment’, therefore, an arbitrator has to adjudicate upon both these aspects. However, in the case of Kohinoor Steel Private Limited v. Bajaj Allianz General Insurance Company Limited[4], the Calcutta High Court strictly interpreted the clause and rejected the arbitrability of a claim that was fully denied by the insurer since it was not related to the ‘quantum of payment’. In the case of Shivalaya Construction Co. Pvt. Ltd. Vs. National Insurance Company Ltd.[5], the Delhi High Court went a step ahead and put it upon the arbitrator to decide the question of arbitrability, further adding to the ambiguity already in existence.

The Supreme Court had the opportunity to examine this issue in a special leave petition in the matter of M/s NIC Vs. M/s Nippon Paper Foodpac Pvt. Ltd. [6] Vide an order dated January 9, 2023, the apex court observed that the extant dichotomy “invariably leads to confusion, multiple litigation, piecemeal decision and chances of conflicting orders.”

IRDAI circular on amendment of arbitration clause

Vide the Circular, the IRDAI has cleared all subsisting confusion and allayed the Supreme Court’s concerns about the multiplicity of litigations and chances of conflicting orders. The Circular provides the following –

  • All policies issued under the retail lines of business shall not have any arbitration clause. This essentially removes arbitration as a forum of redressal for retail policies and redirects a retail policyholder to more cost-friendly dispute resolution methods such as insurance ombudsman and the consumer fora.
  • For policies issued under the commercial lines of business, the Circular categorically provides that insurance policies shall have a clause stipulating that the parties to the contract may mutually agree and enter into a separate arbitration agreement to settle “any and all” disputes in relation to the policy. Such an arbitration has to be conducted in accordance with the provisions of Arbitration and Conciliation Act, 1996.
  • In order to ensure that the transition does not retrospectively affect the policies in place, the Circular ingeniously keeps the extant arbitration clause valid until a policy is renewed but provides the policyholder with the option to have it replaced with the new arbitration clause mentioned in the point provided above.

It is to be noted that the Circular provides that the provisions of Arbitration and Conciliation Act, 1996 (“Arbitration Act”) are to be adhered to. As per Section 7(1) of the Arbitration Act, an arbitration agreement can be entered into inter se policyholders and at the stage of issuance of the policy, during the continuation of policy and even after a dispute for claim has arisen. Given that it is prudent for policyholders to have an arbitration clause at the time of issuance of policy, insurers may develop a standard template for an arbitration agreement which can be entered into during the policy issuance itself.

It is also pertinent to note that unlike the previous regime, which specified an ad hoc arbitrator appointment method, the Circular does not specify either institutional or ad hoc mode of arbitration. Instead, the parties are free to choose any method they seem fit. However, for time and cost sensitive disputes, institutional arbitration may be preferred over ad-hoc arbitration by parties.

Implications on Retail Policyholders

With regards to the retail line of business, the policyholders had a multitude of forums to approach. It has been held by the Supreme Court in Emaar MGF Land Limited v. Aftab Singh[7], that the presence of a binding arbitration clause does not bar a consumer from approaching consumer fora for ‘defect in services’ under the Consumer Protection Act, 1986 (now replaced by Consumer Protection Act, 2019). Therefore, notwithstanding the arbitration clause in the policy document, the policyholders were free to approach consumer fora instead of instituting an arbitration. Moreover, there are other alternative dispute resolution mechanisms available to policyholders under the IRDAI (Protection of Policyholders’ Interests) Regulations, 2017. These mechanisms lay down the grievance resolution procedure for the insurers and provide that in case a grievance is not resolved, the insurer can ask the party to approach the Insurance Ombudsman. Under the Insurance Ombudsman Rules, 2017, disputes pertaining to all claims below INR 30 lakh can be referred to the Insurance Ombudsman for resolution. The mandated channel of arbitration in addition to these alternate channels of redressal caused confusion over jurisdiction as well as multiplicity of proceedings. In some instances, the disputes have been declared by the courts as non-arbitrable at a later stage, thus causing loss of time and resources for both policyholders as well as insurers. With the Circular coming into force, the channel of arbitration for retail policyholders is closed, allowing them to approach more cost-effective channels such as consumer fora and Insurance Ombudsman, without any confusion.

Implications on Commercial Policyholders

Under the new regime created by the Circular, commercial policyholders are spared the task of ascertaining whether a dispute pertains to the ‘quantum of payment’. If they enter into the arbitration agreement, they can settle “any and all” disputes relating to the policy, including those involving policy repudiations, claim denials and other policy-related aspects (subject to the arbitration agreement providing for the same).

Further, ‘party-autonomy’ is considered one of the most critical aspects of a valid and binding arbitration agreement. Under the erstwhile regime, the TAC-mandated insurers were required to have the arbitration clause in the policies, which did not permit a scenario where neither the insurer nor the insured intend to have such a clause. The Circular ensures the preservation of this aspect of ‘party-autonomy’ by allowing the policyholder and insurer to mutually decide, at their discretion,  whether or not to enter into an arbitration agreement.  It provides them the liberty to use their commercial wisdom to avail the arbitration route. Overall, it is a long-awaited move, likely to be hailed by all stakeholders in the insurance market.

Conclusion

The Circular is certainly a welcome step by IRDAI which does not only allay the concerns of the apex court but also provides the much-needed clarity for retail and commercial policyholders as well as the insurers.


[1] https://irdai.gov.in/document-detail?documentId=4043500

[2] Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd, (2018), Civil Appeal No. 2268 of 2018

[3] 1969 Acc C.J. 12 (Delhi)

[4] 2011 SCC OnLine Cal 3252

[5] MANU/DE/3568/2023

[6] Special Leave to Appeal (C) No(s). 225-226/2023

[7] Civil Appeal Nos. 23512-23513 of 2017, decided on 13-2-2018 (SC)

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Photo of Indranath Bishnu Indranath Bishnu

Indranath is a partner with Cyril Amarchand Mangaldas and is a part of the general corporate practice in the Mumbai region. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He…

Indranath is a partner with Cyril Amarchand Mangaldas and is a part of the general corporate practice in the Mumbai region. His work is focussed on the Insurance industry where he specializes in mergers and acquisitions and joint ventures and regulatory matters. He is currently  leading the team from Cyril Amarchand Mangaldas engaged to advise the Regulations Reforms Committee constituted by the Insurance Regulatory and Development Authority. He has advised various government bodies including Department of Financial Services (Ministry of Finance) and the Insurance Regulatory and Development Authority of India on reforms in the insurance sector. He currently serves as a member on the committee constituted by the Insurance Regulatory and Development Authority of India to study and recommend capital requirements for Insurance entities. On the transactional side, Indranath advises multiple corporations, both Indian and foreign, in relation to investments in the insurance sector as well as establishment, operation, management and control of insurance companies and intermediaries in India.  He can be reached at indranath.bishnu@cyrilshroff.com

Photo of Shravan Belsare Shravan Belsare

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. He joined the firm in the year 2021 after graduating from Gujarat National Law University, Gandhinagar. He regularly advises in matters relating mergers & acquisitions and private equity investments with…

Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. He joined the firm in the year 2021 after graduating from Gujarat National Law University, Gandhinagar. He regularly advises in matters relating mergers & acquisitions and private equity investments with focus on insurance sector and the international financial services centres. He advises on mergers & acquisitions, private equity, insolvency, and foreign investments in India. He advises both Indian and foreign companies, in relation to investments in the insurance sector as well as establishment, operation, management and control of insurance companies in India. He can be reached at shravan.belsare@cyrilshroff.com

Photo of Riddhiraj Sehgal Riddhiraj Sehgal

Associate in the General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Riddhiraj has joined the firm in the year 2023 after graduating from Jindal Global Law School. He can be reached at riddhiraj.sehgal@cyrilshroff.com