Legal and procedural framework

In what fora are insurance disputes litigated? How is the appropriate forum determined?

There are no exclusive procedures or judicial venues for resolution of insurance disputes. Insurance disputes, in the absence of an arbitration clause, can be litigated before the civil/commercial courts or consumer fora, depending on the nature and value of the claim. The option to approach consumer fora, however, lies only with the insured. The civil and consumer courts have territorial and pecuniary jurisdiction to adjudicate disputes, with jurisdiction decided based on the place where the insurer is located, the place where the dispute has arisen and the quantum of the dispute. In the absence of any reference to arbitration under the terms of a policy, an insured can approach a civil/commercial court or, if the dispute so qualifies, a consumer court. If the dispute is such that an insured can bring it before a consumer forum, then such a right can be exercised, at the insured's discretion, even where an arbitration agreement exists.

The consumer commissions have a three-tier hierarchy with district commissions at the lowest rung followed by a state commission (for every state) and a National Commission at the apex. District commissions have the jurisdiction to deal with complaints arising out of a contract, for services or goods involving allegations of 'deficiency in service', where the consideration paid does not exceed 5 million rupees (around US$56,000). For the state commissions, the threshold is between 5 million rupees and 20 million rupees (around US$223,000), whereas the National Commission can adjudicate original complaints where the consideration paid is above 20 million rupees. The district and the state commissions must also possess the necessary territorial jurisdiction. An appeal against the decisions of a district commission is heard by the relevant state commission and an appeal against the decision of a state commission is heard by the National Commission. No further appeal lies from the decisions passed by the National Commission in an appeal, and only a writ petition under article 227 of the Constitution of India or a special leave petition under article 136 of the Constitution can be filed before the High Court and the Supreme Court of India, respectively. However, these petitions can be entertained only in limited circumstances. Decisions of the National Commission in original complaints are heard in appeal by the Supreme Court of India.

The consumer forum follows a summary procedure to assist in swift adjudication of disputes, which generally entails that there is no examination or cross-examination of witnesses and adjudication is based on a review of documents.

For the quick resolution of commercial disputes, commercial courts were set up by the legislature in 2015 through the Commercial Courts Act. These courts are, effectively, civil courts with a specific mandate to adjudicate only commercial disputes. The Commercial Courts Act defines 'commercial disputes' to include insurance and reinsurance disputes. Commercial courts can adjudicate disputes of values that exceed 300,000 rupees (around US$3,300). Insurance and reinsurance disputes that exceed 300,000 rupees, if not heard before the consumer fora, will be adjudicated by commercial courts. Insurance and reinsurance disputes below 300,000 rupees would go to an ordinary civil court having appropriate pecuniary and territorial jurisdiction.

There are fixed timelines that all commercial courts are required to follow, and the legislation is meant to expedite the adjudication process. The statute also provides for compulsory mediation for parties before filing a commercial suit, except where a party seeks urgent interim relief. The urgent interim relief sought must be genuine and bona fide and not a mere attempt to wriggle out of mediation (see Patil Automation (P) Ltd v Rakheja Engineers (P) Ltd 2022 INSC 841).

The commercial courts are governed by the Code of Civil Procedure 1908 (the Code) and the Commercial Courts Act. If there is a conflict between the two, the Commercial Courts Act would generally prevail.

Appeals against the orders of the commercial courts of first instance lie before the relevant commercial appellate court or the commercial appellate division of the concerned high court (as the case may be); the Commercial Courts Act does not allow for any further appeals from the orders of either the commercial appellate court or the commercial appellate division of a high court.

In the ascending order of their hierarchy, civil courts in India are divided into district courts, high courts and the Supreme Court. There are roughly 688 district courts and 25 high courts; the Supreme Court is the highest court in India. Five of the 25 high courts – Delhi, Bombay, Madras, Calcutta and Himachal Pradesh – have original jurisdiction to decide matters, including commercial matters, where the quantum of dispute is higher than an ascertained pecuniary value and, in the case of Calcutta and Madras, within a designated territorial limit from the High Court.

Alternatively, the insured can also approach the grievance redressal cell of the IRDAI (depending on the nature of the grievance) for complaints against an insurer in case the insured receives no response from the grievance redressal cell of such insurer within 15 days, or the insured is dissatisfied with the insurer’s response. Although an insured can approach the IRDAI for assistance, advocates, agents and other third parties are not allowed to approach the IRDAI. An insured can also approach the Insurance Ombudsman under the Insurance Ombudsman Rules 2017 for resolution of its dispute relating to deficiency of services arising out of the policy or any other violation of the Insurance Act (or any rules, regulations or guidelines issued thereunder) against the insurer or insurance intermediaries provided the claim value is under 5 million rupees (around US$56,000), and either the complaint is made within one year of the date of rejection of the complaint by the insurer, or a month has lapsed since filing the complaint and the insurer has failed to reply. The jurisdiction of the Ombudsman is determined based on the territorial limits as specified by the Council for Insurance Ombudsmen.

What causes of action are available to both insureds and insurers? When do insurance causes of action arise?

Under the Indian Limitation Act 1963, the cause of action for the purposes of calculating the limitation for filing a suit against the insurer will commence from the time when the insured’s claim is rejected (in part or in full) by the insurer or from the date on which the claim arose, as may be applicable. The prescribed limitation period for filing a claim in the civil or commercial court or arbitration is three years, whereas the limitation period for filing a complaint before the consumer fora is two years.

What preliminary procedural and strategic considerations should be evaluated in insurance litigation?

Preliminary procedural considerations include issues of limitation and the jurisdiction of the court or fora, including subject matter, pecuniary and territorial jurisdiction. Any potential issues concerning the above must be raised as preliminary objections.

In the event any preliminary objection involves mixed questions of law and fact, then such objections will be decided only after completion of the stage of evidence and at the time of final disposal of the matter.

In relation to strategic considerations, objections such as non-disclosure of the cause of action, existence/ non-existence of an arbitration agreement, insufficient court fees and inadequacy of stamp duty on the subject agreement should also be raised at the earliest opportunity before the appropriate forum where the case is sought to be litigated.

A seven-judge bench of the Supreme Court of India in a curative petition titled In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and The Indian Stamp Act 1899 2023 INSC 1066 has held that unstamped or inadequately stamped arbitration agreements are inadmissible in evidence but not void. The Supreme Court found that a court will not deny reference to arbitration merely because of non-payment of stamp duty and any objection in relation to the stamping of the agreement falls within the ambit of the arbitral tribunal.

Recently, the Supreme Court in SBI General Insurance Co Ltd v Krish Spinning 2024 INSC 532 and further in Aslam Ismail Khan Deshmukh v Asap Fluids Pvt Ltd 2024 INSC 849 has refined the role of a court hearing a petition for the appointment of an arbitrator under section 11 of the Arbitration Act, limiting it to only the assessment of the existence of an arbitration agreement and ensuring that the section 11 petition is within the limitation period. This marks a shift from the earlier position, which allowed the court to assess substantive questions of whether claims are non-arbitrable and time-barred in view of execution of settlement agreement and discharge voucher, leaving such questions to be determined by the arbitral tribunal.

Litigation proceedings in India are often time-consuming. Consequently, there has been a growing preference for alternative dispute resolution methods such as arbitration. The IRDAI, through a circular dated 27 October 2023, has also taken note of this trend and recommended a compulsory arbitration clause in all commercial insurance policies that stipulates that 'the parties to the contract may mutually agree and enter into a separate Arbitration Agreement to settle any and all disputes in relation to this policy'. This clause allows parties to agree on a separate arbitration agreement to resolve disputes under the policy. In case parties mutually agree on an arbitration agreement, then the arbitration proceedings will be conducted as per the provisions of the Arbitration Act. The circular has further deleted arbitration clauses from all polices under the retail lines of business prospectively. For the existing retail policies, the existing arbitration clause shall remain valid till the term of the policy expires, unless a policyholder specifically requests the insurer to replace it with the clause as mandated by the IRDAI. This also applies to all existing policies issued under the commercial lines of business.

What remedies or damages may apply?

Typically, the relief that may be sought will be in relation to specific performance, indemnification of an unpaid or rejected portion of a claim, costs and damages by way of mental agony — among other things. The court/forum/arbitral tribunal also has the power to pass interim injunctions against any party, which includes requiring deposit of or securing the amounts claimed, or part thereof.

To elaborate, a court may also make an order for the purpose of staying and preventing the alienation, sale, removal or disposition of a property in appropriate cases. The court also has the power to order the interim sale of any movable property that is the subject matter of the proceedings when such property is subject to speedy and natural decay or for any other just and sufficient cause. In the insurance context, interim relief could include ordering the insurer to pay the insured the admitted sums under the policy so that only the disputed amount remains to be adjudicated upon. It is for the court to decide whether any interim relief should be granted, the terms on which it should be granted and the duration of such relief.

These remedies are discretionary and a grant of such relief is based on various factors, the existence and applicability of which must be demonstrated to the satisfaction of the court/forum/arbitral tribunal.

Indian courts and tribunals have the discretion to award interest from the date when the cause of action arose until the actual payment of any money directed to be paid. Interest rates vary depending on several factors, including the forum in question and the underlying facts of the matter, and typically range between 6 per cent and 12 per cent. Interest rates may also extend up to 18 per cent based on conduct.

An arbitral tribunal also has the discretion to award interest and typically an award carries interest between 11 per cent and 18 per cent. However, interest awarded can also be lower or higher than this range. The arbitral tribunal is required to justify within its award the interest rate awarded. The Arbitration Act states that, unless otherwise directed in the award, a party is required to pay interest on the award at the rate of 2 per cent above the prevalent bank rate.

The courts may also award the successful party its costs, but the award is at the court’s discretion and, if awarded, is typically fairly far removed from the actual costs incurred. In arbitrations, awarding of costs is discretionary, and costs are typically only to cover the costs of the arbitrators and administrative expenses of the arbitration.

For vexatious litigation, the Code prescribes the upper limit at 3,000 rupees (around US$34). The Supreme Court has suggested that the Parliament should consider raising this limit to 100,000 rupees (around US$1,117).

The Commercial Courts Act has expanded the definition of 'costs', which includes the fees and expenses of the witnesses, the legal fees and any other expenses incurred in connection with the proceedings. It is, nonetheless, at the discretion of the court.

In cases of vexatious litigation under the Commercial Courts Act, the statutory upper limit set out above has been excluded. However, even in relation to litigation under the Commercial Courts Act, costs, if awarded, typically would be reasonable costs as opposed to actual costs incurred.

Under what circumstances can extracontractual or punitive damages be awarded?

Indian contract law does not permit the award of extra-contractual or punitive damages. In cases where no liquidated damages have been stipulated in a contract, the courts award reasonable damages that can be proved to have been suffered by a party.

Even in contracts that contemplate liquidated damages, such damages must be proved or if it is such that the loss cannot be quantified, then as well there is a degree of reasonableness attached to the amount that may ultimately be awarded. Damages by way of penalty are not allowed under the Indian Contract Act 1872.

In some rare instances, courts have awarded punitive damages. These, however, relate to specific circumstances, such as infringement in intellectual property rights, environmental damage, abuse of authority by a public authority leading to infringement of rights, or negligence when loss of life is involved.

In Magma Fincorp Limited v Rajesh Kumar Tiwari 2020 INSC 574, the Supreme Court held that a consumer forum may award punitive damages. However, the Court clarified that punitive damages should be granted only in exceptional circumstances and where the conduct of a party is so reprehensible that punishment is warranted.