An extract from The Insurance Disputes Law Review, 4th Edition
Disputes between the insured and the insurer usually arise when the insured's claim, which the insured believes is covered under the policy, is rejected in part or in full by the insurer. There can be disagreement between the insurer and the insured in relation to the scope of the insuring clauses or extensions, the applicability of exclusions or compliance with the policy terms and conditions, and the quantum payable under the policy if liability is admitted.
The manner of computing the limitation period for insurance claims is given under Article 44(b) of the Limitation Act 1963, which states that time is to be calculated from 'the date of the occurrence causing the loss or, where the claim on the policy is denied either partly or wholly, the date of such denial'. The prescribed limitation period for filing a claim in the civil court or an arbitration is three years, whereas the limitation period for filing a claim in the consumer court is two years.
As discussed above, in the absence of an arbitration clause in the policy, an insured can approach a commercial court or (if the dispute qualifies) a consumer court. An insurer can only approach a commercial court. The remedies available are either specific performance of the contract or claims for damages. Indian courts also award interest and costs to the winning party. Interest is usually awarded at a rate of 8 per cent to 11 per cent from the date of the cause of action till the date of recovery. Costs remain at the discretion of the courts.
If the policy contains an arbitration clause, the courts in India will direct the parties to arbitrate. If disputes relating to liability are excluded from an arbitration clause, then such a dispute is not arbitrable. The Supreme Court of India has ruled that if the arbitration clause covers quantum disputes only, then disputes on liability cannot be arbitrated.7 Following the amendments introduced in 2015 to the Arbitration and Conciliation Act 1996, the role of the court is now limited to examining the existence of the arbitration agreement only.8 However, recently while considering an arbitral reference made under an insurance policy in an application under Section 11 of the Arbitration and Conciliation Act 1996, the Supreme Court held that since the insurer had denied liability, the arbitration clause could not be triggered.9 Similarly, in United India Insurance Co Ltd v. Antique Art Exports Pvt Ltd,10 the Supreme Court denied an arbitral reference since a discharge voucher had already been executed. The position in Antique Art has been diluted by a judgment of a three-judge bench of the Supreme Court in Mayavati Trading v. Pradyuat Deb Burman,11 The Supreme Court has clarified that the jurisdiction of the court in deciding an application for arbitral reference is very narrow and limited to examining only the existence of an arbitration agreement. All other questions relating to the arbitrability of the dispute have to be decided by the arbitral tribunal. Therefore, execution of a discharge voucher is no longer grounds to deny arbitration itself. On 9 August 2019, the Arbitration and Conciliation (Amendment) Act 2019 came into force, introducing further changes to the Arbitration and Conciliation Act 1996. The tribunal now has a time frame of six months for the completion of pleadings and 12 months thereafter to conclude the arbitration proceedings. This period can be extended by another six months upon the consent of the parties, but further extensions can only be granted by a court.
The presence of the arbitration clause, however, does not exclude the jurisdiction of the consumer courts. This principle was settled by a full bench of the NCDRC and subsequently confirmed by the Supreme Court of India.12 The reasoning adopted is that since the consumer courts are special courts constituted to serve a social purpose, the Arbitration and Conciliation Act 1996 does not bar their jurisdiction.
Sections 19 and 20 of the Marine Insurance Act 1963 set out the requirements of good faith and non-disclosure in the following terms:
19. Insurance is uberrimae fidei. – A contract of marine insurance is a contract based upon the utmost good faith, and if the utmost good faith be not observed by either party, the contract may be avoided by the other party.
20. Disclosure by assured. – (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract
The above principles are applicable to all classes of insurance and, as they show, the remedy for non-disclosure or misrepresentation under Indian law is avoidance of the policy from the beginning. Even though a policy may not expressly say so, all insurance policies are based on this principle. This duty of disclosure and not to misrepresent facts arises when: (1) a new policy is being taken; (2) an existing policy is being renewed; or (3) an existing policy is amended. An insurer can lose the right to avoid by affirmation and waiver.
We have often seen insurers defend or reject claims for non-disclosure and misrepresentation, and some of the reported and notable cases include the following.
In Reliance Life Insurance v. Rekhaben Nareshbhai Rathod (decided on 24 April 2019), a division bench of the Supreme Court of India extensively dealt with the insured's disclosure obligation and observed that:
The object of the proposal form is to gather information about a potential client, allowing the insurer to get all information which is material to the insurer to know in order to assess the risk and fix the premium for each potential client. Proposal forms are a significant part of the disclosure procedure and warrant accuracy of statements. Utmost care must be exercised in filling the proposal form. In a proposal form, the applicant declares that she/he warrants truth. The contractual duty so imposed is such that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer. The system of adequate disclosure helps buyers and sellers of insurance policies to meet at a common point and narrow down the gap of information asymmetries. This allows the parties to serve their interests better and understand the true extent of the contractual agreement.
The finding of a material misrepresentation or concealment in insurance has a significant effect upon both the insured and the insurer in the event of a dispute. The fact it would influence the decision of a prudent insurer in deciding as to whether or not to accept a risk is a material fact. As this Court held in Satwant Kaur (supra) 'there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance'.
Notification requirements are set in the policy document and vary from one policy to another. While some policies require immediate notice, some stipulate a specific time period and others say that notice should be given as soon as practicable. Depending upon the language used, it needs to be assessed whether timely notification is provided.
While the IRDAI has issued circulars, we believe that the latest position with respect to the consequences of delay is set out in an August 2018 judgment delivered by a three-judge bench of the Supreme Court in Sonell Clocks and Gifts Ltd v. The New India Assurance Co Ltd.13 The Supreme Court upheld repudiation on the basis of delayed notification and observed that the notification requirement 'is not a technical matter but sine qua non for a valid claim to be pursued by the insured, as agreed upon between the parties'.
The Supreme Court in Bajaj General Insurance Company Ltd v. State of Madhya Pradesh14 has emphasised imparting a reasonable business-like meaning to insurance contracts. It ruled that principles of construction applicable to commercial contracts apply and the intention of the parties has to be upheld. The courts cannot form a new contract between parties or increase the exposure of the insurer.
Indian law recognises the concept of subrogation by which the insurer is entitled to pursue recoveries in respect of losses suffered by the insured that the insurer has indemnified. This right arises pursuant to both statute and case law. As for statute, the Marine Insurance Act 1963, specifically Section 79,15 is relevant.
There are numerous case laws dealing with subrogation, of which we consider the Economic Transport Organization v. Charan Spinning Mills (P) Ltd16 decision to be the most prominent. This case was decided in 2010 by the highest court of India, the Supreme Court. The Supreme Court explained that subrogation is inherent, incidental and collateral to a contract of indemnity, which occurs automatically when the insurer settles the claim under the policy, by reimbursing the loss suffered by the insured.
We are not aware of any Indian statute or case law that prescribes or limits the types or rights or claims that can be pursued under a subrogation action. The only limitation being that the insurer cannot claim anything more than the amount indemnified to the insured. The insurer becomes subrogated as an indemnifier to all the rights and remedies that the insured has against any third parties. The insurer can exercise these rights either in the name of the insured or as a subrogee-cum-attorney holder on behalf of the insured. While the right is inherent to an indemnity contract, nevertheless, in certain circumstances parties may execute a subrogation letter or subrogation-cum-assignment deed, which sets out the precise rights and obligations of the parties (e.g., the costs sharing arrangement).
In the event that the insured fails to preserve its recovery rights, waives them or generally acts in breach of the subrogation clause, then the remedies available to insurers were explained in EID Parry (India) Ltd v. Far Eastern Marine Transport Co Ltd and Ors17 in the following terms:
As is laid down in the policy of insurance, the insurer's liability is only to succeed to and not in any way supersede any claim which the insurer may be entitled to make on any carriers or their agents. It is also laid down therein that it is the duty of the assured and the agents in all cases to take such measures as may be reasonable for the purpose of averting or minimising a loss and to ensure that all the rights against the carriers, bailees or other third parties are properly observed and exercised. In particular, the assured or their agents are required to take these steps and failure to comply with this requirement may prejudice any claim under this policy. Under the law of Insurance, the right of the Insurer on payment of the loss to the assured is to be subrogated to the rights of the assured so as to enable the insurer to proceed against the third party and indemnify itself. It is therefore incumbent upon the assured to keep alive his remedies against the carrier or other third party and any default committed by the assured either by allowing the remedy to get time-barred or by abdicating or abandoning, his rights against the carriers or the third party will deprive the insurer of its remedies against the third party for indemnity. In such cases, it is open to the insurer to repudiate the liability under the policy, the loss is not paid to the assured or to lay a counter-claim against the assured for damages if it has paid the loss to the assured.
We do not believe that there are any rules as such governing the insurer's duty to defend, and whether such a duty exists depends on the policy language. The policy will set out whether the insured or the insurer has that duty, and that will govern the manner in which a claim is to be managed. Insurance carriers that use a duty-to-defend clause in their policies have the obligation to manage the litigation process from the notification of the claim. At the same time, insurers have the right to select the defence counsel who would be appointed. The insured usually has no control over the defence counsel assigned.
The duty-to-defend clause in an insurance policy essentially states that in the event a claim being made against the named insured for an alleged wrongful act, the insurance company providing coverage at the time has the duty to defend the claim, even if it is subsequently found to be groundless, false or fraudulent. Therefore, although the claim lacks merit, the insurer still has an obligation to defend the claim.
Trends and outlook
While the focus used to be on more traditional lines of insurance, such as catastrophe, life, health and motor insurance, over the past decade or so the Indian insurance market has evolved and we have seen liability products such as PI, D&O, cyber policies and EPL come to the forefront. There is familiarity and demand for these products and consequently significant claims activity. Among the liability products, in our experience over the past five years, there has been a steady upward trend in claims made under PI policies and it remains the busiest claims area, followed closely by D&O. In fact, PI and D&O claims make up at least half of the total claims that we have seen being made under liability policies.
Not only has there been an upsurge in the frequency of claims, but there has also been a sharp increase in the quantum being claimed by the insured, which means that claim severity is also on the rise. The sorts of numbers in play can be gauged from the recent settlements entered into by Indian technology and pharmaceuticals companies in the United States that have attracted media attention. Another reason for increased exposure is the high legal fees that have to be spent in the defence of claims, which may run for a number of years because of the delays inherent within the court system.
While PI and D&O claims are likely to continue to make up the largest share, we have recently seen a steep rise in cyber claims and these will continue to grow at a fast pace in the coming years. The number of cyber incidents has increased and these range from automated telling machine fraud and phishing attacks to ransomware attacks. We say this specifically in light of the enactment of the General Data Protection Regulation, the ramifications of which are evidenced by the terms of the penalties imposed, the notification costs arising therefrom, etc. Another area of interest is EPL, where previously claims were usually made in outside jurisdictions; however, recently we have seen claims being made in India, with high-value settlements demanded.