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There is an apocryphal tale attributed to the Courtroom genius, Nani Palkhivala. Once, while arguing before Chief Justice Gajendrakar, he is reported to have said,
“If I were appointed the dictator of a country, in the short period between my appointment and my assassination, I would definitely impose a law making international arbitration practices compulsory. Arbitration would help to transform character, towards less confrontation and more consensus, less litigiousness and more understanding and above all else finality to the dispute”.
Why this preamble? Palkhivala would be turning in his grave if he were privy to the approach of licensed general insurance companies, including the public sector entities. There appears to be a dedicated effort to avoid agreeing to settle disputes through arbitration.
For, the insurers are convinced, with empirical or on notional basis, that arbitration is skewed against their interests. They appear convinced from ‘experience’ that once the dispute is referred to arbitration, an award against them is a foregone conclusion, and together with interest and costs, they face certain financial liability, which they need to avoid ‘at all costs’.
It is true that the precept and practice of insurance is not healthy or happy in India. The consumers of insurance products view them as ‘expenses’ and not as ‘investments’ to protect themselves in the wake of a fire accident, flood, earthquake, terrorist strike, or a simple theft, pilferage et al. There is an effort by business entities to cut down on the ‘costs/premium’, with the result that they rue their parsimony when a tragedy takes over.
That is why the insurance penetration, in India, according to the regulator Insurance Regulatory and Development Authority (IRDA), is an unhappily low 3.69% in 2017 from 2.61% in 2001 before privatisation.
Be that as it may, it is the insurer, who in the very scheme of things has a higher responsibility. As insurers, they have knowledge, expertise, and inputs and experience. As Supreme Court said in the Skandia Insurance case (1987),
“the business of insurance is to provide relief in times of distress. It is their business to arrange their affairs prudently to be commercially viable”.
Contextually, therefore, the acts of insurers to deny claims is founded on their anxiety to avoid being “sucked into the vortex of arbitration proceedings”, as a retired insurance official put it. So, what do they do?
The reason that insurers always offer to deny claims outright is that “claims are exaggerated and hence tainted by fraud”. Why this course?
The answer is simple. Under the standard form of commercial insurance contracts, there is an age-old clause christened as the Scott v. Avery clause, which offers room for mischief. As per the said clause, if the insurers deny the claims as not ‘admissible’, there is no remedy available for arbitration. Only when the insurer admits ‘liability’ and offers settlement, would there arise a dispute on quantum and its ‘arbitrability’.
In order to deny liability, the insurers can invoke a term, clause, condition, exclusion, warranty of convenience. As someone once put it, “The insurer would offer to cover a fall from a height, but would exclude an actual fall on the ground”. Or as Lord Denning waxed eloquent,
“The insurance contract is a strange beast. What the bigger clauses yield, the smaller clauses take away. So beware”.
The Supreme Court has consistently held that once ‘liability’ is denied, the remedy of arbitration is ousted. The claimants need to go the dreaded long winding civil suit route, vide the Maharaj Singh case (1973), leading up to the Hyundai case (2018). So the insurers appear eager to latch on to any and every clause to deny claims.
Of late, the instances are too many, as burgeoning suits and consumer complaints reveal, and the one clause that offers immense scope for insurers to go this route, is alleged ‘exaggeration’ in claims.
Standard insurance contracts have a clause that if the claim was ‘exaggerated’, the insurers would be entitled to deny the claim as ‘fraudulent’. The meaning and interpretation attached to it by insurers is loose and convenient. In the seventeenth century, Lord Mansfield said,
“It is a matter of common knowledge and human instinct to exaggerate an insurance claim just so that they may get the actual loss, for the insurer is bound to beat it down no matter what, which is their commercial instinct”.
If that be so, then in the 21st Century, to rely on that elusive clause as an elastic one, seems unfair.
Aware of the proclivity of insurers to indulge in ‘creative repudiations’ and to insist on discharge vouchers in ‘full and final settlement’, while holding the bargaining chips, IRDA issued two circulars dated September 24, 2015, and June 6, 2016, pursuant to intervention by the Delhi High Court. It was made clear that insurers should not compel the insureds to give a full discharge to receive even admitted indemnity. The insureds should be allowed to exercise their legal remedies.
Having been cornered, the insurers appear to have decided that they can, after all, exercise their ‘discretion to decide on admissibility’ and deny claims rather than be compelled to face the remedy of arbitration. If the insureds are forced to seek the route of a civil suit – which is expensive and time-consuming – many a claimant falls by the wayside at the very thought of it.
Add the compulsive inclination of insurers to file appeals against the arbitration awards, as a matter of routine, the finality of awards take an eternity. The precept and practice of alternate dispute resolution viz. arbitration as an expeditious remedy, goes for a toss.
The time may have come for the regulator IRDA to take note of such acts of insurers. To begin with, it must compile the number of claims repudiated in the recent past and have them examined by a committee of experts as to whether the denials passed muster or there was an effort to deny by stretching their defences.
More importantly, it may be time for IRDA to direct the insurers to incorporate an arbitration clause which would take within its fold, a dispute on ‘liability’ also, rather than confining it to ‘quantum’ alone. Maybe IRDA could conceive and implement the resolution of disputes to arbitration, by itself, forming a panel of domain experts with integrity and independence.
The time for such a surgical remedy may well have arisen, for denial of insurance claims, when the industry needs it most, causes immense harm not only to the unit, but has its cascading effect on the economy too.
Or do we need a Nani Palkhivala to be born again as the dictator he dreamed to be?
The author is practising advocate at the Madras High Court.
Image taken from here.