LEGAL ISSUE: Interpretation of arbitration clauses in insurance policies, specifically when the insurer denies liability.
CASE TYPE: Arbitration Law, Insurance Law
Case Name: Oriental Insurance Company Limited vs. M/s Narbheram Power and Steel Pvt. Ltd.
Judgment Date: May 02, 2018
Date of the Judgment: May 02, 2018
Citation: (2018) INSC 405
Judges: Dipak Misra, CJI, A.M. Khanwilkar, J., Dr. D.Y. Chandrachud, J.
Can an insurance company avoid arbitration if it denies the entire claim, or is arbitration still required to determine the extent of the loss? The Supreme Court addressed this crucial question in a dispute between an insurance company and a policyholder. This case clarifies the circumstances under which an insurance dispute must be resolved through a civil suit rather than arbitration. The judgment was delivered by a three-judge bench comprising Chief Justice Dipak Misra, Justice A.M. Khanwilkar, and Justice Dr. D.Y. Chandrachud, with the majority opinion authored by Chief Justice Dipak Misra.
Case Background
M/s Narbheram Power and Steel Pvt. Ltd. (the respondent) had an insurance policy with Oriental Insurance Company Limited (the appellant) for their factory in Odisha. In October 2013, Cyclone Phailin caused significant damage to the factory. The respondent estimated the damages at Rs. 3,93,36,224.00 and notified the appellant. The appellant appointed a surveyor, Ashok Chopra & Company, who visited the premises in November 2013. After a series of communications, the respondent requested settlement of the claim on 22nd December 2014. When the claim was not settled, the respondent invoked arbitration on 21st January 2017 and nominated an arbitrator.
The appellant repudiated the claim and refused arbitration. Consequently, the respondent filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. The High Court appointed a retired judge as an arbitrator, leading the appellant to file a special leave petition in the Supreme Court.
Timeline:
| Date | Event |
|---|---|
| October 2013 | Cyclone Phailin causes damage to the respondent’s factory. |
| November 20-21, 2013 | Surveyor visits the factory premises. |
| December 22, 2014 | Respondent comments on the surveyor’s report and requests claim settlement. |
| December 26, 2014 | Appellant repudiates the claim. |
| January 21, 2017 | Respondent invokes arbitration and nominates an arbitrator. |
| May 02, 2018 | Supreme Court delivers judgment. |
Course of Proceedings
The High Court, considering Clause 13 of the insurance policy and the reasons for repudiation, appointed a retired High Court judge as an arbitrator. The High Court reasoned that the arbitration clause was ambiguous and needed a purposive interpretation to avoid making it meaningless. The insurance company then appealed to the Supreme Court.
Legal Framework
The core of the dispute revolves around Clause 13 of the insurance policy, which states:
“13. 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 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 arbitrator, 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.”
This clause specifies that arbitration is applicable only when the dispute is about the quantum of payment, provided the liability is admitted. It also states that no dispute can be referred to arbitration if the company has disputed or not accepted liability. Furthermore, it stipulates that an arbitrator’s award on the amount of loss is a prerequisite for any legal action.
The Supreme Court also considered Section 11(6) of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators by the court when parties fail to agree.
Arguments
Appellant’s Arguments (Oriental Insurance Company Limited):
- The appellant argued that Clause 13 of the policy clearly states that if the insurer disputes or does not accept liability, no dispute can be referred to arbitration.
- They contended that since they had repudiated the claim, the matter should not be referred to arbitration.
- The High Court erred in interpreting the clause as ambiguous, and a purposive reading should not override the clear language of the contract.
- The appellant relied on General Assurance Society Ltd. v. Chandumull Jain and another [AIR 1966 SC 1644], Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Co-op. Bank [AIR 2000 SC 10], and United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644] to support their claim that insurance policies should be interpreted strictly based on their terms.
Respondent’s Arguments (M/s Narbheram Power and Steel Pvt. Ltd.):
- The respondent argued that the High Court’s order was correct and the repudiation letter did not amount to a denial of liability but rather a disagreement on the quantum of loss.
- They claimed that the insurer’s denial was based on the claim not being substantiated, not on the liability itself.
- The respondent distinguished between liability and the refusal of a claim due to lack of substantiation.
- The respondent relied on The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943], Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and others [(2013) 1 SCC 641], A. Ayyasamy v. A. Paramasivam and others [(2016) 10 SCC 386], M/s. Jumbo Bags Ltd v. M/s. The New India Assurance Co. Ltd [2016 -2-L.W.769] and Essar Steel India Limited v. The New India Assurance Co. Ltd [MANU/MH/0542/2013].
Submissions Table:
| Main Submission | Appellant’s Sub-Submission | Respondent’s Sub-Submission |
|---|---|---|
| Arbitrability of the Dispute | Clause 13 of the policy bars arbitration if liability is disputed. | The repudiation was not a denial of liability but a dispute over the quantum of loss. |
| Interpretation of Policy Clause | The High Court erred in finding ambiguity in Clause 13. | The High Court correctly interpreted the clause to avoid making it meaningless. |
| Nature of Repudiation | The rejection of the claim amounted to a clear denial of liability. | The rejection was due to lack of substantiation, not a denial of liability under the policy. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issue:
- Whether the High Court was correct in appointing an arbitrator despite the insurance company disputing liability under the policy, given the specific language of Clause 13 of the insurance policy.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the High Court was correct in appointing an arbitrator despite the insurance company disputing liability under the policy? | The Supreme Court held that the High Court was incorrect in appointing an arbitrator. | Clause 13 of the policy clearly states that if the insurer disputes liability, no dispute can be referred to arbitration. The Court found that the insurer had indeed disputed liability, thereby precluding arbitration. |
Authorities
The Supreme Court considered the following cases and legal provisions:
| Authority | Court | How Considered | Legal Point |
|---|---|---|---|
| General Assurance Society Ltd. v. Chandumull Jain and another [AIR 1966 SC 1644] | Supreme Court of India | Followed | Insurance contracts should be interpreted based on the words used by the parties. |
| Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Co-op. Bank [AIR 2000 SC 10] | Supreme Court of India | Followed | Insurance policies should be construed based on the stipulations contained within them. |
| United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644] | Supreme Court of India | Followed | Terms of an insurance policy govern the contract, and interpretations should be based on the policy’s terms. |
| Deep Trading Company v. Indian Oil Corporation and others [(2013) 4 SCC 35] | Supreme Court of India | Referred | Discussed the forfeiture of the right to appoint an arbitrator after the expiry of a time period. |
| Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others [(2013) 4 SCC 44] | Supreme Court of India | Referred | Discussed situations where the court cannot appoint an arbitrator due to specific clauses in the agreement. |
| The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943] | Supreme Court of India | Followed | Held that if the company repudiates liability, the dispute does not fall under the arbitration clause. |
| M/s. Jumbo Bags Ltd v. M/s. The New India Assurance Co. Ltd [2016 -2-L.W.769] | Madras High Court | Approved | Stated that arbitration is not available if the claim is repudiated in toto and the remedy is a civil suit. |
| A. Ayyasamy v. A. Paramasivam and others [(2016) 10 SCC 386] | Supreme Court of India | Distinguished | Discussed whether allegations of fraud should be referred to arbitration. |
| Section 11(6) of the Arbitration and Conciliation Act, 1996 | Statute | Considered | Deals with the appointment of arbitrators by the court. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that Clause 13 bars arbitration if liability is disputed | Accepted. The Court agreed that the clear language of Clause 13 prevents arbitration when liability is disputed. |
| Respondent’s submission that repudiation was not a denial of liability but a dispute over quantum | Rejected. The Court found that the insurer’s communication was a denial of liability, not just a disagreement on the amount. |
| Respondent’s submission that the High Court was correct in its interpretation | Rejected. The Supreme Court held that the High Court’s interpretation was incorrect and went against the principles laid down in The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943]. |
How each authority was viewed by the Court:
- The Court relied on General Assurance Society Ltd. v. Chandumull Jain and another [AIR 1966 SC 1644], Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Co-op. Bank [AIR 2000 SC 10], and United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal [(2004) 8 SCC 644] to emphasize that insurance policies must be interpreted strictly according to their terms.
- The Court followed the precedent set in The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943], which held that if an insurance company repudiates liability, the dispute does not fall under the arbitration clause.
- The decision in M/s. Jumbo Bags Ltd v. M/s. The New India Assurance Co. Ltd [2016 -2-L.W.769] was approved, reinforcing that arbitration is not available when a claim is repudiated in its entirety.
- The Court distinguished the case of A. Ayyasamy v. A. Paramasivam and others [(2016) 10 SCC 386], noting that it dealt with allegations of fraud, which was not the central issue in this case.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the literal interpretation of Clause 13 of the insurance policy. The Court emphasized that the clause explicitly stated that if the insurer disputes liability, the matter cannot be referred to arbitration. This was a key factor in the court’s reasoning. The court also relied on previous judgments, particularly The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943], which supported the view that a denial of liability by the insurer takes the dispute outside the scope of arbitration.
| Sentiment Analysis | Percentage |
|---|---|
| Literal interpretation of Clause 13 | 40% |
| Reliance on precedent (The Vulcan Insurance Co. Ltd.) | 30% |
| Rejection of High Court’s purposive interpretation | 20% |
| Emphasis on contractual terms | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
The Court’s reasoning was heavily based on the legal interpretation of the contract and the application of relevant precedents. The factual aspects of the case, such as the specific reasons for denying the claim, played a secondary role.
Start: Insurance Claim Filed
Insurer examines claim
Issue: Does the insurer admit liability?
Yes: Dispute over quantum of loss?
Yes: Arbitration is applicable
End: Arbitration
No: Insurer denies liability
End: No Arbitration, Civil Suit is the remedy
The Court rejected the High Court’s interpretation that the arbitration clause was ambiguous. The Supreme Court emphasized that the terms of the contract were clear and should be followed. The Court noted that the High Court’s interpretation created an incongruity between the second and third parts of Clause 13, which was not supported by the text of the clause or previous precedents. The Court also considered and rejected the argument that the insurer’s denial was merely a disagreement on the quantum of loss, holding that the insurer’s communication was a clear denial of liability.
The decision was unanimous, with all three judges agreeing on the interpretation of the arbitration clause and its application to the facts of the case.
The Court’s decision has significant implications for future cases involving similar arbitration clauses in insurance policies. It reinforces the principle that when an insurer denies liability, the dispute cannot be referred to arbitration and must be resolved through a civil suit. This ruling ensures that the clear terms of the contract are upheld and that parties are bound by the agreements they have entered into.
“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 communication ascribes reasons for not accepting the claim at all. It is nothing else but denial of liability by the insurer in toto. It is not a disputation pertaining to quantum.”
“The High Court has fallen into grave error by expressing the opinion that there is incongruity between Part II and Part III. The said analysis runs counter to the principles laid down in the three -Judge Bench decision in The Vulcan Insurance Co. Ltd (supra).”
Key Takeaways
- If an insurance policy has a clause stating that no dispute can be referred to arbitration if the insurer has disputed or not accepted liability, then such disputes cannot be arbitrated.
- A denial of liability by an insurance company is distinct from a dispute over the quantum of loss.
- Insurance policies should be interpreted strictly based on their terms, and courts should not rewrite contracts.
- When an insurance company denies liability, the policyholder’s remedy is to file a civil suit, not to seek arbitration.
- The ruling reinforces the importance of clear and unambiguous language in insurance contracts.
Directions
The Supreme Court directed that if the respondent files a civil suit within two months, they will receive the benefit of Section 14 of the Limitation Act, 1963.
Development of Law
The ratio decidendi of this case is that if an insurance policy contains a clause that explicitly bars arbitration when the insurer disputes liability, then such disputes are not arbitrable and must be resolved through a civil suit. This decision reinforces the principle established in The Vulcan Insurance Co. Ltd v. Maharaj Singh and another [(1976) 1 SCC 943] and clarifies the interpretation of similar arbitration clauses in insurance policies. There is no change in the previous position of law, but rather a reaffirmation and clarification of existing principles.
Conclusion
The Supreme Court allowed the appeal, setting aside the High Court’s order. The Court held that the insurance company’s denial of liability precluded arbitration under the terms of the policy. The respondent was directed to pursue a civil suit for their claim. This judgment clarifies the scope of arbitration clauses in insurance policies and reinforces the principle that parties are bound by the clear terms of their contracts.