Neeraj Tuli Saket Satapathy May 22 2018 Arbitration where insurer denies liability Tuli & Co | Insurance - India Neeraj Tuli, Saket Satapathy Insurance FactsSupreme Court decisionCommentOn May 2 2018 in Oriental Insurance Company Limited v Narbheram Power and Steel Pvt Ltd the Supreme Court upheld the validity of a quantum-only arbitration clause and affirmed that once an insurer has denied liability, arbitration is no longer an option (unless the insurer and insured come to an independent agreement to arbitrate).FactsThe insured was covered under a fire industrial all-risk policy for its factory in Odisha. In October 2013, Cyclone Phailin caused damage. On January 21 2017, and before a decision had been taken on the claim, the insured served an arbitration notice.The Oriental Insurance Company Limited (OIC) replied to the arbitration notice by denying liability and repudiating the claim on various specified grounds. Considering the denial of liability, the OIC also denied the applicability of the policy's arbitration clause and rejected the arbitration notice under the arbitration clause (Clause 13), which in material part read as follows:"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. [Part I]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. [Part II]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 [Part III]."The insured filed an application before the Calcutta High Court under Section 11 of the Arbitration and Conciliation Act 1996, requesting the court to appoint an arbitrator.The Calcutta High Court felt that the policy's arbitration clause applied even though liability had been denied by the OIC. The OIC appealed to the Supreme Court.Supreme Court decisionThe Supreme Court found that the arbitration clause was clear enough. Although the Calcutta High Court had said that there was a conflict between Parts II and III (as indicated above), the Supreme Court found no conflict but stressed the importance of reviewing an insurer's declinature letter to properly assess whether liability had been denied or accepted.Having reviewed the OIC's declinature letter, the Supreme Court said:"On a reading of the communication, we think, 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… 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… The parties are bound by the terms and conditions agreed under the policy and the arbitration clause contained in it.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. The said analysis runs counter to the principles laid down in the three-Judge Bench decision in The Vulcan Insurance Co. Ltd (supra). Therefore, the only remedy which the respondent can take recourse to is to institute a civil suit for mitigation of the grievances. If a civil suit is filed within two months hence, the benefit of Section 14 of the Limitation Act, 1963 will endure to its benefit."CommentInsurers will no doubt take note of the reliance placed on the terms of the declinature letter. Further, although unstated, there will be a question over whether the bare denial of a claim without reasoning or identification of grounds will satisfy the court.For further information on this topic please contact Neeraj Tuli or Saket Satapathy at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected] or [email protected]). The Tuli & Co website can be accessed at www.tuli.co.in.