Supreme Court on Conflict in Arbitration Agreement of Insurance Policy

[Nikhil Singh is a 2nd Year B.A., LL.B. (Hons.) Student at The West Bengal National University of Juridical Sciences, Kolkata]

Introduction

Recently, a three-judge bench of the Supreme Court in the case of Oriental Insurance Co Ltd v. Narbheram Power and Steel Pvt Ltd analysed a contentious dispute redressal clause commonly found in insurance agreements. The Court, while finding in favor of Oriental Insurance Co Ltd (“Oriental Insurance / Insurer”), interpreted the language of the insurance policy and clarified that the Court cannot refer the parties to arbitration in case of a dispute if such dispute is not covered within the scope of the arbitration agreement.

Facts

Narbheram Power and Steel Pvt Ltd (“NPSL/ Company”) and the Insurer had entered into a fire industrial all risk policy, whereby the latter had agreed to indemnify the former against losses caused in respect of the said factory of the Company. In October 2013, there was a cyclone which affected large parts of Odisha including the factory of NPSL. NPSL estimated damages to the tune of Rs 3,93,36,224 and intimated the insurer which accordingly appointed a surveyor. Based on the surveyor report, NPSL requested the Insurer to settle the claim. As the claim was not settled by the Insurer, NPSL invoked the arbitration agreement. The Insurer repudiated the claim and also declined to refer to arbitration. NPSL, thereafter, filed an application under section 11(6) of the Arbitration and Conciliation Act, 1996. The High Court heard the matter and appointed a retired judge of the High Court as arbitrator. The Insurer appealed against the order of the High Court.

Arguments

The Insurer argued that the relief for appointment of an arbitrator cannot be granted by the Court for two reasons. First, as per part two of clause 13 of the policy, “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 Insurer pleaded that it was a case of denial of liability and hence cannot be referred to arbitration, as per part two of clause 13 of the agreement. Second, the Insurer argued that the High Court had adopted an erroneous approach in the interpretation of the said clause. The clauses should be interpreted in the exact terms as provided in the contract and no artificial far-fetched meaning should be given to them.

NPSL, however, argued that the letter of repudiation does not relate to denial of liability, but, in fact, amounts to denial of claim that pertains to quantum. It seeks to draw a distinction between liability and refusal of claim not having been substantiated.

The Contentious Dispute Redressal Clause

Clause 13 which provides for the dispute redressal clause can be broadly classified into the following three parts:

  1. Disputes with regards to quantum of claim shall be referred to an arbitrator, to be appointed by the procedure prescribed therein.
  2. No reference to arbitration if the insurer denies its liability.
  3. Obtaining of arbitral award to be condition precedent to initiating any right of action or suit against the policy.

The conflict in the above clause is that it only provides arbitration as the dispute redressal mechanism in case of disputes with regard to quantum of claim and specifically excludes cases where the insurer completely denies its liability. On the other hand, the assured cannot initiate a suit proceeding without obtaining an arbitral award. So, it can be implied that the assured becomes completely remediless in case the insurer denies its liability.

Judgement and Analysis

The Supreme Court, reversing the order of the High Court, said that the High Court had assumed that the second and the third part of clause 13 do not have harmony and, in fact, sound a discordant note. Referring to the authorities cited by the parties, the Court said that the terms of the contract shall prevail and the parties are bound by the clauses enumerated in the policy and Court does not transplant any equity to the same by rewriting a clause. 

The Court analysed the dispute redressal clause in the policy and observed that once the Insurer disputes its liability under or in respect of the policy, there can be no reference to arbitrator. This is contained in the part 2 of clause 13. After analysing part 2 and part 3 of clause 13, the Court, while refuting the findings of the High Court, held that there is no incongruity between the two. The part which makes obtaining an award a condition precedent to initiation of any right against the insurer is generally called as ‘Scott v. Avery clause’.

The Court thereafter dealt with its observation in the Vulcan Insurance Co. Ltd. Case, which authoritatively covers and supports the objection raised by the insurer about appointment of the arbitrator. The Supreme Court, in that case, while reversing the judgement of the high Court, observed as follows:

But in this case on a careful consideration of the matter we have come to the definite conclusion that the difference which arose between the parties on the company’s repudiation of the claim made by Respondent 1 was not one to which the arbitration clause applied and hence the arbitration agreement could not be filed and no arbitrator could be appointed under Section 20 of the Act. Respondent 1 was ill-advised to commence an action under Section 20 instead of instituting a suit within three months of the date of repudiation to establish the company’s liability.

Notably, while rejecting the contention of the company, the Court observed that in cases where the arbitration clause specifically excludes certain circumstances, disputes arising out of such circumstances cannot be adjudicated by arbitration, and the only remedy available to the assured is to initiate a civil suit in accordance with law.

In light of the above observation of the Court and the communication between the parties, the Court opined to the fact that the disputation is nothing but denial of liability, and would squarely fall within part 2 of clause 13. The Court ruled that the language used in the second part is absolutely categorical and unequivocal inasmuch it clearly says that no dispute would be referred to arbitration if the company has disputed or not accepted liability under the policy.

The Court also clarified that part 3 of clause 13, which makes obtaining an arbitral award a condition precedent to initiating a civil suit, would not prevent NPSL from approaching the court. It ruled that if the Insurer repudiates its liability, then there is no obligation on the assured to arbitrate as to amount before commencing a suit proceeding. The assured is not required to initiate two different proceeding, one to be decided by arbitrator and other by the Court. The Court, therefore, held that the only remedy available to the company would be to initiate a civil suit for mitigation of the grievances.

Conclusion

The Supreme Court has made a distinction between cases where the insurer has completely repudiated its liability, and cases where the insurer has not disputed its liability but denied the claim that pertains to quantum. The position now stands crystal clear. As soon as there is a denial of liability, the only remedy available to the assured is to initiate a civil suit against the insurer to establish its liability, and then refer to arbitration under the arbitration agreement to determine the quantum of claim.

Nikhil Singh

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