[Mahim Raval and Cheenar Shah are law students at Gujarat National Law University in Gandhinagar]
Introduction
Insurance disputes involving contested liability in India have long been shrouded in confusion about whether they could be settled through arbitration. The confusion stemmed from unclear wording in the All India Fire Tariff (“AIFT”), a 2005 guideline issued by the Tariff Advisory Committee. Insurance Regulatory and Development Authority of India’s (“IRDAI”) recent circular (“circular’), titled “Amendment of Arbitration Clause in General Insurance Policies” dated October 27, 2023, aims to bring much-needed clarity to this issue.
In this post, the author will first examine the ambiguity around the AIFT clause, second comprehensively analyze the interpretation of the clause done by various courts in India and finally, analyze the key changes introduced by the circular and potential implications of the same.
TAC’s Enduring Legacy: The AIFT Clause and Partial Liability’s Grey Area
Prior to 2015, the Tariff Advisory Committee (TAC) held significant regulatory sway in the Indian insurance landscape, empowered by Section 64U of the Insurance Act, 1938, to issue circulars determining tariff and policy terms for insurers. In 2015, section 64U was scrapped and the TAC was abolished. However, a new section, 64ULA, was created to keep the old TAC circulars valid until the IRDAI specifically cancelled them. One of these circulars is the AIFT. The TAC’s legacy document, the AIFT, issued in 2005, established a standardized fire and perils policy form, including a pivotal arbitration clause under Paragraph 13. The clause is 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.”
Upon analysing the above clause, the disputes arising under a general insurance policy based on the insurer’s stance on liability can be classified as below:
Accepted Liability:
If the insurer admits liability but contests the quantum of payment, the dispute falls within the ambit of arbitration.
Denied Liability:
If the insurer entirely rejects liability under the policy, arbitration is deemed unavailable.
On its face, this dichotomy seems straightforward. However, the practical application of the clause proved far more nuanced. The seemingly clear distinction between “quantum” and “liability” blurred in cases where the insurer accepted partial liability, denying certain aspects of the claim.
Consider a scenario where an insured claims under a fire insurance policy for two buildings, and the insurer accepts liability for only one. Is this a dispute solely about the “quantum” (amount payable for the accepted building), triggering arbitration, or does it fall into the realm of “liability” for the denied building, precluding arbitration? This creates a confusing grey area: what about when the insurer admits some liability but disagrees on the exact amount? Some courts say such disputes can be arbitrated, others say not. This confusion led to multiple conflicting decisions.
Judicial Discord: Liability or Quantum First?
In Charanjit Lal Sodhi v. Caledonian Insurance Co. Ltd., the Delhi High Court adopted a holistic interpretation, viewing the “quantum” determination as inextricably linked to the initial “liability” question, thus favoring arbitration. Later in Vulcan Insurance Co. Ltd. v. Maharaj Singh, the apex court held that the dispute is amenable to arbitration only if the company has not disputed the liability and accepted it. Conversely, the Calcutta High Court, in Kohinoor Steel Private Limited v. Bajaj Allianz General Insurance Company Limited, adhered to a strict interpretation, deeming the claim entirely non-arbitrable due to the insurer’s partial denial. The apex court in United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Company Ltd. (“United India Insurance”) held that “…there can be no arbitration in cases where the insurance company disputes or does not accept the liability under or in respect of the policy.”
Relying on United India Insurance, the Delhi High Court in Geo Chem Laboratories Pvt Ltd v. United India Insurance Co. Ltd., held that scope of arbitration clause is limited to quantum of damages only in the eventuality that the liability to pay is admitted by the insurance company, there can be no arbitration if the liability is denied. Further complicating matters, recently the Delhi High Court in Shivalaya Construction Co. Pvt. Ltd. v. National Insurance Company Ltd., entrusted arbitrators with deciding the very question of arbitrability, further fuelling the ambiguity.
The Supreme Court, recognizing the confusion and inconsistency, intervened in M/s NIC Vs. M/s Nippon Paper Foodpac Pvt. Ltd. (“Nippon Paper”) issued notice to the IRDAI and aptly described the AIFT clause’s dichotomy as leading to “multiple litigation, piecemeal decision and chances of conflicting orders,” necessitating clarification.
Key Proposals and Implications
Pursuant to the observation of the apex court in Nippon Paper, the IRDAI issued a circular for clarity. It not only addresses the long-standing confusion surrounding AIFT clause, but also adopts a novel approach by bifurcating between retail and commercial policy disputes.
Retail Policies: Prioritizing Cost-Effectiveness
For retail policyholders, the mandatory arbitration clause previously embedded in policies is excised, ushering in a streamlined dispute resolution landscape. This empowers retail policyholders by privileging cost-effective avenues like consumer forums and the Insurance Ombudsman, particularly advantageous for smaller claims. privileging cost-effective avenues like consumer fora and the Insurance Ombudsman for claims under INR 30 lakh. This aligns with the Supreme Court and NCDRC’s stance in Emaar MGF Land Limited v. Aftab Singh and Dr. Satpal Kaur Nalwa v. M/S. Emaar MGF Land Limited, where the presence of an arbitration clause didn't preclude consumer forum recourse for service deficiencies.
Commercial Policies: Opting for Arbitration
For commercial policyholders, the Circular offers a more nuanced approach. Arbitration remains an option, but only under the aegis of a “mutually agreed upon, separate arbitration agreement” encompassing all potential disputes. This signifies a shift towards party-autonomy, empowering both insurer and insured to tailor the dispute resolution mechanism to their specific commercial sensitivities. Notably, the Circular abandons the preordained mode of arbitrator appointment, embracing institutional or ad hoc arbitration depending on the parties’ preferences. This flexibility caters to the demands of complex, often time-sensitive disputes prevalent in the commercial realm.
Conclusion
In conclusion, the IRDAI’s circular on arbitration in general insurance policies offers a nuanced resolution to the protracted ambiguity surrounding the AIFT clause. Recognizing the practical challenges posed by the “quantum-liability” dichotomy, the circular adopts a bifurcated approach. For retail policyholders, it democratizes access to accessible and efficient dispute resolution mechanisms. For commercial policyholders, it fosters flexibility and contractual autonomy, paving the way for bespoke solutions tailored to individual needs. This targeted approach, balancing accessibility with party autonomy, promises greater clarity, efficiency, and ultimately, a more equitable and responsive dispute resolution landscape for all stakeholders in the Indian insurance sector.