Arbitration in Insurance Claims Disputes in India

The need to write this article was felt when I was commenting on an article discussing an insurance claim arbitration on LinkedIn. Because of the space constraints on comments, and some back and forth required (comments on comments), my views were expressed over four comments. I found that I disagreed not only with the author on one particular aspect, but possibly also with most of the insurance industry in India. I just wanted to consolidate all that and add whatever remained unsaid. The target audience in my mind is the non-lawyer insurance buyers, particularly corporates who are most likely to have insurance disputes that could go for arbitration. Lawyers, please excuse all the repetitions and what may appear as unnecessary clarifications. I do, however, look forward to comments by lawyers, particularly those that disagree with me.

Point of contention – Can there be an arbitration in case of an insurance claim dispute in India when the admissibility of the claim has been denied by the insurer?

What does the arbitration clause in Indian insurance policies say? It limits the arbitration to any dispute or difference as to the quantum to be paid under the policy (liability being otherwise admitted).

The issue arose out of a discussion on a claim dispute between a large public sector engineering company and its insurer. The insurer denied admissibility of the claim. Subsequently, the insured asked for the matter to be referred to arbitration. The insurer agreed to the request.?

At this stage, I must disclose that the merits of the insured’s claim and the insurer’s repudiation are not relevant for the purpose of my article. I seek to discuss only the part related to the arbitrability of the dispute. It was said that the dispute not being one of quantum, was not arbitrable. It was suggested that the insurer was not right in agreeing to the request for arbitration under the given circumstances.

I differ from this position. And I will discuss here the basis of my opinion.

Arbitration is one of the alternative modes of resolution of disputes. It depends on the agreement of the parties, whether they wish to enter into an arbitration agreement to resolve their disputes. This absolute freedom of the parties, on whether to arbitrate or not, is subject to certain statutory / regulatory provisions pertaining to certain types of contracts. A standard arbitration clause is attached to insurance policies in India. This clause, as referred to above, allows for arbitration of disputes on quantum only. That is, if the dispute is one of admissibility of the claim, it does not fall under the arbitration clause contained in the policy. So, in case there is no dispute on quantum, if the insured invokes arbitration under the arbitration clause under the policy, the insurer may rightfully refuse to submit to arbitration. If the dispute was one of quantum, and the insurer refused to the proposal for arbitration, it can be compelled by through the courts to submit to arbitration.

In the case being discussed, the dispute was not of quantum, but of admissibility. The insurer could have refused to submit to arbitration, and it could not have been compelled by the courts to do so.

But the insurer here decided not to refuse to arbitrate. The issue here is whether the insurer was wrong in agreeing to submit to arbitration. I am making the point that if ‘wrong’ here means the legality of the decision, it was not. If by ‘wrong’ we mean only the advisability of the act in terms of strategy, there can be as many opinions as there are heads. If there is no problem as to legality, the insurer must be considered to have acted in its best interest, perhaps finding it a better option than contesting the matter in a Consumer Court, where the matter would certainly have landed after its refusal to arbitrate.

Now, about the legality of the decision to submit to arbitration in a situation where the insurer was not bound to. The widely prevalent view seems to be that an insurance claim dispute in India cannot be arbitrated if the dispute is one of admissibility, and not of quantum. I hold the opinion that while the insurer can be forced to submit to arbitration in case of a quantum dispute, it cannot be compelled in case of a dispute on admissibility. However, if the insured proposes to refer the dispute on admissibility of the claim to arbitration, and the insurer agrees to such proposal, there is nothing either in law, or in the insurance contract, to suggest that such an arbitration is not valid.

The law also provides for an arbitration where no arbitration agreement prior to the contract was in existence. Sec 7(1) of the Arbitration & Conciliation Act, 1996 reads -

In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

While arbitration on disputes 'which may arise' falls under a pre-dispute agreement (covered by an arbitration clause forming part of the contract, or subsequently added to it before a dispute arose), disputes referred to as 'which have arisen' fall under the post-dispute agreement. There is nothing in law that stops an insurer from entering into a post-dispute agreement. This post-dispute agreement may also be under a contract which did not contain an arbitration clause (pre-dispute agreement) but the particular dispute was not arbitrable as per that clause. The decision to submit to arbitration, where it was not required by the clause, has the effect of novation of the arbitration clause. The parties are free to do it, even as one party has no right to compel the other to agree. Any non-statutory constraint imposed under the arbitration clause in the policy (for example, the non-arbitrability of disputes on admissibility) will not apply to the post-dispute agreement, unless specifically mentioned.

Sometimes doubts are expressed on whether there can be a post-dispute arbitration agreement. These doubts are based simply on the observation of the person saying so, as he / she has never ever seen any such case. Having already referred to the law on this matter, I would just like to add that it is not unusual to find tort claims being arbitrated, which by their very nature, cannot be covered by a pre-dispute arbitration agreement.?

Coming back to the arbitration clause contained in the policy (the language is same under all insurance policies in India), is there anything else to suggest that a dispute on admissibility is not arbitrable?

The clause contains this para -

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.?

The keywords here are ‘as hereinbefore provided’, which refers to the arbitration clause contained in the policy. It only means that the acceptance of liability is a condition precedent for an arbitration to be conducted under the arbitration clause contained in the policy. It is binding on the insurer to submit to such arbitration. But in the subject case, the respondent party agreed to the proposal for arbitration without laying down any conditions. The Arbitration & Conciliation Act, 1996 allows it. Even as the original clause did not permit an arbitration unless liability was accepted by the insurer, the constraint was not one imposed by statute. The effect of the insurer’s agreement to submit to arbitration in case of dispute on admissibility would be that of a novation of the original arbitration agreement.

Should the claimant propose arbitration in case of a dispute on admissibility? It is up to the claimant to decide, depending on what appears in their best interest under the circumstances. They need not be constrained by the fact that the dispute is one of admissibility, and not of quantum, or whether the policy contained an arbitration clause or not. They just have to remember that the post-dispute arbitration agreement cannot be forced on the insurer against its will.

Should the insurer submit to the insured’s proposal for arbitration in case of a dispute on admissibility? It is up to the insurer to decide, depending on what appears in its best interest under the circumstances. They need not be constrained by the fact that the dispute is one of admissibility, and not of quantum. They just have to know that the post-dispute arbitration agreement cannot be imposed on them against their will. But they may, under specific circumstances, find arbitration to be a better option than a litigation in a Consumer Court / Civil Court.

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