The “Truth” About Insurance Arbitration

Arbitration law and its processes, may not be an area where many in insurance are familiar with. In a time of increasing disputes by aware insureds, there is need to have clarity on what arbitration is really about. As already known arbitration can invoked only on issues relating to quantum. People are often upset the arbitration outcome did not go the way they expected. The following points may make matters clearer.

1. First of all, Arbitrators are chosen by the parties – the policy condition states “a sole arbitrator to be appointed in by the parties”. Hence it depends on the maturity of the parties to select a well reputed and knowledgeable arbitrator. If the insured and insurer differ, they appoint their respective arbitrators, who thereupon will select the presiding arbitrator or on reference the concerned High Court will appoint the presiding arbitrator.

Hence the underlying feeling expressed that arbitrator may not be neutral does not have a leg to stand on, unless the parties have selected arbitrators foolishly.?It is accepted under law that the Arbitrator should be impartial. The UK Supreme Court of UK in a recent case Halliburton Company (Appellant) v Chubb Bermuda Insurance Ltd (2020) stated as follows: (Para 1) “1. It is axiomatic that a judge or an arbitrator must be impartial; he or she must not be biased in favour of or against any party in a litigation or reference. A judge or arbitrator, who is not in fact subject to any bias, must also not give the appearance of bias: justice must be seen to be done.”

2. Neutral award is not what should come out of an arbitration award. Experienced Arbitral Experts are unanimous that the objective of arbitration is to find the truth, just like the courts do. There are two versions of the truth as understood by the parties that is presented before the arbitrator/s. It is their duty to sift through all the statements, evidences given and documents filed before the Tribunal and then make a reasoned award. Naturally the award will rarely be a 50:50. It would appear that insurers who would have studied the file for long are convinced about the truth of their decision, but when arbitrators hear the version of the insured with all evidences and arguments, the arbitrators may be compelled to agree that the insured’s view is right and an award is made in their favour.

3. The awards may go either way. Some examples can be given:

a. The claimant was a large chemical manufacturer and had a mega policy. On a date within the policy period an accident occurred due to runway reaction in an Evaporator. The explosion made the equipment fly across the factory and caused various damage. The surveyor opined that the claim was payable under the accident section of the mega policy but the insurer found that it was payable only under the Machinery Breakdown. The insured who was in manufacturing in the last 33 years had appointed an internal committee which also found the loss to be an accident. Vouchers was sent by the insurer without giving reasons and in the case of material damage the amounts whether under accident or MB were the same, but in the case of LOP / BI the deductible was much higher and so the insured was paid Rs. 55 lakhs less.

The insurer’s counsel made very good arguments that the loss had to be assessed only under the MB policy. However, the surveyor had a different view and the insured presented their internal report which indicated that the claim had to be assessed under the accident section. The counsel for the claimant made a strong argument that the loss fell under the accident section, but even if it is seen that it also fell under the MB section, then the insured had to be given the full claim under the accident section under the principle of ‘contra proferentem’ as held by the Supreme Court in the case General Assurance Society v. Chandmull Jain (1966) and United India Insurance v. Pushpalaya Printers (2004).

It was noted by the Arbitrators that the insurer was deficient in their conduct. On finding that Rs. 55 lakhs less was paid, the insured wrote to the Divisional Office of the insurer for an explanation and justification, but they received no reply. After some time, they wrote to the Regional Office and again received no reply. Finally, the MD of the insurer wrote to the CEO of the insurer and still no reply came from the insurer explaining the basis of the loss. Hence, it was concluded that as the insurer themselves could not explain their stand, the plea of contra proferentem stood proved.

b. It is not that insurers always lose. In an arbitration award examined by the Delhi High Court in the case Iffco-Tokio General Insurance Co ... vs Indo-Rama Synthetics Ltd (2015), further appealed and heard again by a Division Bench in 2019, it was found that in the Business Interruption policy issued, in the claim that arose the insured claimed Rs.72,94,16,362/, but the assessment by the insurer’s surveyor was only for Rs.5,11,31,567/. Insured thereafter appointed their own surveyor who assessed the loss for Rs. Rs.35,79,42,559/. In the Arbitration that followed the Arbitrator allowed a claim of Rs.34.70 crores.

The insurer filed a case before the Delhi HC, and relied on the Tariff Advisory Committee's (TAC) General Regulation 1 on Consequential Loss (Fire) Insurance?Section 1?which read as under: "Policy to constitute contract of Indemnity: Every policy shall constitute a contract of indemnity only." The HC was clear that they were interfering in the award not merely on a question of interpretation, but that the reasoning of the arbitrator was clearly affecting the larger public policy governing the law of insurance more particularly the business interruption insurance which are based of assessment of loss of profits as a consequence of the peril insured.?The HC ruled in favour of the insurer. The insured appealed before the Division Bench, but there was no change in the decision of the High Court.

c. There are cases where the insurer does not seem to be aware of the basic insurance norms, being guided by some deep-rooted ideas. One such case was examined by the Division Bench of the Chennai High Court in the case M/S.Oriental Insurance Co. Ltd vs M/S. Monotech Systems Ltd (2019): “18. The Arbitral Tribunal which consisted of three members, framed the following issues for its consideration:(Issue) viii. Whether the Surveyor is justified in applying depreciation @5% upto 75% based on the age of the machines?

83. The majority view however while answering Issue No.8 regarding the “depreciation” has held that “in respect of stock in trade, the value of acquisition is a value which has to be indemnified and therefore they do not attract depreciation”. As per the majority view of the Arbitral Tribunal, there is no question of applying “depreciation”.

84. While agreeing with the view of the Arbitral Tribunal and the learned Single Judge that there is no question of applying “depreciation”, we are constrained to hold that it would be incorrect to conclude that an assured is entitled to compensation based on the purchase value or the acquisition value.” It may be seen from the above that, not only the Tribunal, but also the Single Judge and the Division Bench ruled that there was no question of depreciation for stock.

The principle relating to stock is that if there is a buyer, the market value is that and if there is no buyer at all, it becomes dead stock. The Supreme Court in the case Canara Bank v. United India, was clear that the market value as on date of loss has to be paid, even if it is more that the value of the stock as on date of insurance, subject to the adequacy of the sum insured.

d. Some arbitrators blindly follow the surveyors and their reports. ?The Delhi High Court in the case Bharat Heavy Electricals Limited ... vs Bajaj Allianz General Insurance (2017), examined a case where the arbitrator interpreted the basic impact damage and the add on: In consideration of an additional premium it is hereby agreed and declared that the policy is extended to cover loss and/or damage caused due to impact by direct contact to Insureds property caused by Insureds own Rail/Road Vehicles, Forklifts, cranes, stackers and the like and articles dropped therefrom."

During the policy period a Gas Turbine Rotor (GTR) weighing 50MT, while being moved to the assembly section by a lifting beam hooked to crane was lifted to height of approximately 4 metres. While moving to a distance of 20M, the said GTR suddenly slipped from lifting beam and fell on the shop floor. It resulted in substantial damage from the impact of contact with the ground. The insured claimed Rs. 21,93,00,000. The surveyor in his report had concluded: "In this case there is no impact by any other insureds vehicle or crane etc, on the EOT crane of 80 MTs capacity moving along with the rotor and as a result of such an impact, the rotor did not fall down. As per the eye witness statements and our survey carried out within a few hours of the reported occurrence, we did not find any evidence to prove that some other Insureds vehicle or crane has collided and/or hit the EOT crane lifting and carrying the rotor and/or the rotor itself resulting in the rotor falling down....."

The Delhi HC court said: 35. It is not possible to accept the submissions on behalf of the Respondent that no part of the impugned award can be said to be opposed to the fundamental policy of Indian Law. The interpretation adopted by the learned Arbitrator is contrary to the express provisions of the contract. The learned Arbitrator appears to have based his conclusion only on the Surveyors report on interpretation of impact damage clause, which was not necessarily binding on the learned Arbitrator. In this context the following observations of the Supreme Court in New India Insurance Co. Ltd. v. Pradeep Kumar (supra) are relevant: "In other words although the assessment of loss by the approved surveyor is a prerequisite for payment or settlement of claim of twenty thousand rupees or more by insurer, but surveyor's report is not the last and final word. It is not that sacrosanct that it cannot be departed from; it is not conclusive. The approved surveyor's report may be the basis or foundation for settlement of a claim by the insurer in respect of the loss suffered by the insured but surely such report is neither binding upon the insurer nor insured."

Conclusion

In the UK Supreme Court case: Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) said in (para 35) that “when deciding whether to accept a claim under an existing contract, the insurer’s position is very different. He has no discretion, because he is already bound. The only question properly before him is whether to acknowledge a liability that if it exists at all, exists already, whether or not he realises it. Ultimately, his assessment is simply an attempt to predict what a court would decide.”

Hence what is required in a claim is that the insurer has to act like a court would do, and if they do not do this, then the arbitrator has to do it and if the arbitrator also fails, courts have to step in subject to the provisions of the Arbitration Act.