2018 (5) TMI 327 - SC - Indian Laws

Insurance arbitration clause doesn't apply when insurer fully denies liability via repudiation.

The court clarified that under Clause 13 of the insurance policy, if the insurer disputes or does not accept liability, arbitration cannot be pursued. The ... Compensation of damages occurred due to Cyclone - appellant failed to settle the claim of respondent (insured) - case referred to the arbitrator - Held that: - In the instant case, Clause 13 categorically lays the postulate that if the insurer has disputed or not accepted the liability, no difference or dispute shall be referred to arbitration. The thrust of the matter is whether the insurer has disputed or not accepted the liability under or in respect of the policy. The disputation squarely comes within Part II of Clause 13. The said Part of the Clause clearly spells out that the parties have agreed and understood that no differences and disputes shall be referable to arbitration if the company has disputed or not accepted the liability. 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. In the present case, we are not concerned with regard to whether the policy was void or not as the same was not raised by the insurer. The insurance-company has, on facts, repudiated the claim by denying to accept the liability on the basis of the aforesaid reasons. No inference can be drawn that there is some kind of dispute with regard to quantification. It is a denial to indemnify the loss as claimed by the respondent. Such a situation, according to us, falls on all fours within the concept of denial of disputes and non-acceptance of liability. It is not a situation where a stand is taken that certain claims pertain to excepted matters and are, hence, not arbitrable. The language used in the second part is absolutely categorical and unequivocal inasmuch as it stipulates that it is clearly agreed and understood that no difference or disputes shall be referable to arbitration if the company has disputed or not accepted the liability - the High Court has fallen into grave error by expressing the opinion that there is incongruity between Part II and Part III. Appeal allowed. Issues Involved:1. Interpretation of Clause 13 of the insurance policy.2. Applicability of arbitration in case of repudiation of liability by the insurer.3. Legal precedents regarding arbitration clauses in insurance contracts.Detailed Analysis:1. Interpretation of Clause 13 of the insurance policy:The core issue revolves around the interpretation of Clause 13 of the insurance policy, which states: “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... 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 court emphasized that the clause clearly indicates that if the insurer disputes or does not accept liability, no reference to arbitration can be made.2. Applicability of arbitration in case of repudiation of liability by the insurer:The respondent argued that the insurer's repudiation did not relate to disputing liability but rather to the quantum of the claim. However, the court found that the insurer's communication repudiating the claim, which cited reasons such as inventory shortage, no actual loss of stock, inherent vice, exaggerated maintenance costs, and no material damage, amounted to a total denial of liability. This repudiation falls within the second part of Clause 13, thereby precluding arbitration.3. Legal precedents regarding arbitration clauses in insurance contracts:The court referred to several precedents to support its interpretation:- General Assurance Society Ltd. v. Chandumull Jain: Emphasized that insurance contracts are commercial transactions and should be interpreted based on the words of the contract without the court creating a new contract.- Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Co-op. Bank: Stated that insurance policies should be construed based on the stipulations within them.- United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal: Held that terms of the policy govern the contract, and the parties are bound by them.- The Vulcan Insurance Co. Ltd v. Maharaj Singh: The court in this case found that if the insurer repudiates liability, the arbitration clause does not apply, and the insured must seek remedy through a civil suit.- M/s. Jumbo Bags Ltd v. M/s. The New India Assurance Co. Ltd: The Madras High Court held that if a claim is repudiated in toto, arbitration is not available, and the remedy lies in a civil suit.The court concluded that the High Court erred in its interpretation of Clause 13 by suggesting an incongruity between its parts. The correct interpretation, supported by legal precedents, is that the arbitration clause does not apply when the insurer disputes or does not accept liability. Consequently, the respondent's remedy lies in filing a civil suit.Conclusion:The appeal was allowed, and the High Court's order was set aside. The respondent was advised to file a civil suit within two months, with the benefit of Section 14 of the Limitation Act, 1963, applying to mitigate any time-bar issues.