Invocation of Arbitration Clause in Insurance Contracts

By: Jaishri Sharma and Ritvik Chouhan (Institute of Law, Nirma University, Ahmedabad)


The mere incorporation of an arbitration clause in an agreement, reading “All disputes arising from this Agreement are to be referred to arbitration…”, does not mean that any dispute raised out of that agreement will be addressed through arbitration. It should not be overlooked that “disputes” means a disagreement or conflict arising from a contractual transaction. Therefore, a non-disputable conflict arising from an agreement containing an arbitration clause cannot be resolved through arbitration.

The standard arbitration clause in insurance contracts in India reads, “If any dispute or difference shall arise as to the quantum to be paid under this policy (liability being otherwise admitted)…”

The arbitration clause inserted in the insurance policy has always been rigorously interpreted depriving the insured of the advantages of arbitration. Such clauses also pave a way for the insurers to completely disregard the claims and avoid arbitration proceedings. Therefore, the parties should be aware of such clauses and ensure that it includes every issue relating to their insurance policy, covering their claims for both liability and quantum while arbitrating their disputes.

In this blog post, the authors try to delineate invocation of an arbitration clause in insurance contracts in global as well as Indian perspectives and discuss how these policies create a conundrum for the insured while invoking arbitration clauses in their policies.

GLOBAL OUTLOOK AT A GLANCE

While analysing the specifics of the insurance contract globally, the arbitration clause (whether in the existing contract or as a separate agreement), reflects the intentions of the parties to bring any disputes to arbitration. However, it is always a cause of disagreement between parties to decide which dispute is arbitrable and which is not. In the case of disputes between the parties, the question of arbitrability always has a scope of “undeniably judicial determination,” unless the parties’ otherwise have clearly and unequivocally indicated. Many courts have decided that no party can be compelled to arbitrate a dispute if the party had not consented to submit that dispute to arbitration.

The option for arbitration has become more prevalent in insurance policies. The arbitration clauses in insurance policy contain wording that not only limits the rights of an insured but also disintegrates the established legal remedies in both statutory as well as in under common law. Under the conventional form of commercial insurance contracts, the Scott v. Avery clause forces the parties to submit their dispute on the agreed areas of their agreement, providing scope for mischief. According to this clause, there is no remedy available when the insurers deny the allegations to be “acceptable”. Therefore, when the insurer accepts its ‘liability’ and proposes a settlement, only then there will be no dispute over the quantum of the same and its arbitrability.

The striking observation in the global approach is that the inclusion of an arbitration provision does not give the right to invoke an arbitration clause automatically and threatens the protection of Insurance Consumers. There is no “dispute” that can be referred to arbitration once a party (Insurance Company) has not accepted its responsibility. However, in the case of Raytheon Co. v. National Union Fire Ins. Co. of Pittsburgh, it was held that the arbitration could not be excluded because the insurance company has “disputed or not recognised liability.”    

Therefore, any questions of dispute that are intertwined with the underlying and potentially latent claims should be resolved through arbitration. The global courts have applied a pro-arbitration approach and decided that if a clause refers to arbitration, the dispute is capable of settlement through the same.

VISIBILITY FROM INDIAN PERSPECTIVE

Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) deals with the appointment of arbitrator(s) for adjudication of a dispute and can be invoked when there is a difference or a dispute between the parties. However, there can be no arbitration in cases where the insurance company does not accept the liability under or in respect of the policy as that is the sine qua non for invoking the arbitration clause in the agreement.

In the case of Oriental Insurance Co Ltd v Narbheram Power and Steel Pvt Ltd, the Supreme Court held that where the insurance company has denied and repudiated the claim explicitly and unequivocally, the insured has to first file a civil suit to determine its liability and then only can refer the case to arbitration for determining the quantum of the claim. However, in insurance policies, the insured cannot file a civil suit without obtaining an arbitral award, as it is a condition precedent. Therefore, it can be implied that the insured becomes completely remediless and the insurer finds a way to escape their liability.

However, in the case of Ms Geo Chem Laboratories Pvt Ltd v United India Insurance Co Ltd, the insurance company denied that any dispute had arisen and thereby, prolonged the investigation. They also raised the plea of non-arbitrability because the objection was premature and questioned the maintainability of the dispute raised. These circumstances unwisely restrict the scope of dispute and disrupt the process and thus, the Delhi High Court stated that the party has to exhibit a prima facie case of non-existence of an arbitration agreement.

In Insurance Contracts, the arbitration clauses differ from case to case and the stipulations raised in the proceedings can either be relating to the quantum of the claim or ‘any’ dispute in the contract will result in arbitration. Albeit the different context and wordings of the contract, the disputable contract depends upon the express admission or denial of the claim by the insurer. This leads the national courts’ interference in the arbitration to ‘promote’ and ‘protect’ it from the disputes that are non-arbitrable at the stage of Section 8 and 11 of the Act.

The decisions described above illustrate the different approaches of the courts when it comes to admission/denial of insurance claims. In cases like the Geo Chemicals where a prima facie case needs to be established to constitute the non-existence of an arbitration agreement, however, the court urges the case to be referred to the tribunal. The question now is whether future courts will take the approach taken by the courts in Oriental Insurance or the pro-arbitration approach taken by Geo Chemical while examining the denial/admission of a claim under Section 11.

CONCLUSION

The Insurance companies will undoubtedly take note of the reliance on the provisions of the declinature letter, and there will be a question mark over whether a plain denial of a claim without explanation or identification of grounds will satisfy the Court, despite the absence of any statement to that effect.

The perusal of this arbitration clause would highlight its lack of coherence and inconsistency in global as well as Indian perspectives. This, however, indicates that the insured can only initiate arbitration in relation to the disputes on the quantum of claims and not on the denial of liability. The interpretation of this clause, therefore, requires a remedy for an insured if the insurer rejects the claim entirely.

Moreover, the judicial scrutiny shall be deferred to give more emphasis to arbitration and unless the challenge is to arbitration itself, the tribunal should deal with the dispute. It is exceedingly unsatisfactory if the parties have to incur the costs in the court proceedings when the contract should have been referred to arbitration. Hence, when it comes to the vested jurisdiction and non-arbitrability, it is prudent to balance the power between the tribunal and courts at the pre-reference stage. It is suggested that arbitration should not be excluded merely for non-recognition of liability from the insurance company and therefore, a robust approach has to be respected to fill the lacuna and favour arbitration.

GLOBAL OUTLOOK AT A GLANCE

While analysing the specifics of the insurance contract globally, the arbitration clause (whether in the existing contract or as a separate agreement), reflects the intentions of the parties to bring any disputes to arbitration. However, it is always a cause of disagreement between parties to decide which dispute is arbitrable and which is not. In the case of disputes between the parties, the question of arbitrability always has a scope of “undeniably judicial determination,” unless the parties’ otherwise have clearly and unequivocally indicated. Many courts have decided that no party can be compelled to arbitrate a dispute if the party had not consented to submit that dispute to arbitration. The option for arbitration has become more prevalent in insurance policies. The arbitration clauses in insurance policy contain wording that not only limits the rights of an insured but also disintegrates the established legal remedies in both statutory as well as in under common law. Under the conventional form of commercial insurance contracts, the Scott v Avery clause forces the parties to submit their dispute on the agreed areas of their agreement, providing scope for mischief. According to this clause, there is no remedy available when the insurers deny the allegations to be “acceptable”. Therefore, when the insurer accepts its ‘liability’ and proposes a settlement, only then there will be no dispute over the quantum of the same and its arbitrability. The striking observation in the global approach is that the inclusion of an arbitration provision does not give the right to invoke an arbitration clause automatically and threatens the protection of Insurance Consumers. There is no “dispute” that can be referred to arbitration once a party (Insurance Company) has not accepted its responsibility. However, in the case of Raytheon Co v National Union Fire Ins Co of Pittsburgh, it was held that the arbitration could not be excluded because the insurance company has “disputed or not recognised liability.” Therefore, any questions of dispute that are intertwined with the underlying and potentially latent claims should be resolved through arbitration. The global courts have applied a pro-arbitration approach and decided that if a clause refers to arbitration, the dispute is capable of settlement through the same.

VISIBILITY FROM INDIAN PERSPECTIVE

Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) deals with the appointment of arbitrator(s) for adjudication of a dispute and can be invoked when there is a difference or a dispute between the parties. However, there can be no arbitration in cases where the insurance company does not accept the liability under or in respect of the policy as that is the sine qua non for invoking the arbitration clause in the agreement.

In the case of Oriental Insurance Co Ltd v Narbheram Power and Steel Pvt Ltd, the Supreme Court held that where the insurance company has denied and repudiated the claim explicitly and unequivocally, the insured has to first file a civil suit to determine its liability and then only can refer the case to arbitration for determining the quantum of the claim. However, in insurance policies, the insured cannot file a civil suit without obtaining an arbitral award, as it is a condition precedent. Therefore, it can be implied that the insured becomes completely remediless and the insurer finds a way to escape their liability.

However, in the case of Ms Geo Chem Laboratories Pvt Ltd v United India Insurance Co Ltd, the insurance company denied that any dispute had arisen and thereby, prolonged the investigation. They also raised the plea of non-arbitrability because the objection was premature and questioned the maintainability of the dispute raised. These circumstances unwisely restrict the scope of dispute and disrupt the process and thus, the Delhi High Court stated that the party has to exhibit a prima facie case of non-existence of an arbitration agreement.

In Insurance Contracts, the arbitration clauses differ from case to case and the stipulations raised in the proceedings can either be relating to the quantum of the claim or ‘any’ dispute in the contract will result in arbitration. Albeit the different context and wordings of the contract, the disputable contract depends upon the express admission or denial of the claim by the insurer. This leads the national courts’ interference in the arbitration to ‘promote’ and ‘protect’ it from the disputes that are non-arbitrable at the stage of Section 8 and 11 of the Act. The decisions described above illustrate the different approaches of the courts when it comes to admission/denial of insurance claims. In cases like the Geo Chemicals where a prima facie case needs to be established to constitute the non-existence of an arbitration agreement, however, the court urges the case to be referred to the tribunal. The question now is whether future courts will take the approach taken by the courts in Oriental Insurance or the pro-arbitration approach taken by Geo Chemical while examining the denial/admission of a claim under Section 11.

CONCLUSION

The Insurance companies will undoubtedly take note of the reliance on the provisions of the declinature letter, and there will be a question mark over whether a plain denial of a claim without explanation or identification of grounds will satisfy the Court, despite the absence of any statement to that effect.

The perusal of this arbitration clause would highlight its lack of coherence and inconsistency in global as well as Indian perspectives. This, however, indicates that the insured can only initiate arbitration in relation to the disputes on the quantum of claims and not on the denial of liability. The interpretation of this clause, therefore, requires a remedy for an insured if the insurer rejects the claim entirely.

Moreover, the judicial scrutiny shall be deferred to give more emphasis to arbitration and unless the challenge is to arbitration itself, the tribunal should deal with the dispute. It is exceedingly unsatisfactory if the parties have to incur the costs in the court proceedings when the contract should have been referred to arbitration. Hence, when it comes to the vested jurisdiction and non-arbitrability, it is prudent to balance the power between the tribunal and courts at the pre-reference stage. It is suggested that arbitration should not be excluded merely for non-recognition of liability from the insurance company and therefore, a robust approach has to be respected to fill the lacuna and favour arbitration.


(The authors are third-year law students at the Institute of Law, Nirma University, Ahmedabad. They have a keen interest in Arbitration Law and other Corporate laws. They can be contacted at jaishri.sharma01@gmail.com and chouhan.law@gmail.com respectively.)

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