The cost of opting for arbitration proceedings could be as high as Rs10 lakh to Rs15 lakh, excluding lawyers’ fees. Therefore it is advisable to go in for arbitration only in cases where the claim amount is significantly higher than the cost. Since an insurance policy is a contract, the insurance company should bear the cost of arbitration, says Sudhir Gudal, director at Magus Corporate Advisors Pvt Ltd

Moneylife (ML): What is the remedial frame-work for insurance in India?

Sudhir Gudal (SG): The insurance industry is regulated by the Insurance Regulator and Development Agency (IRDA). It is set up by the Government of India (GOI). IRDA has laid down rights of policyholders (PH) like the claims should be settled within six months from the date when it was made for both life and non-life policies.

For claims above Rs2 lakh, a surveyor is appointed who submits a report in 30 days. On receiving the surveyor’s report and assessment, the insurance company makes a settlement offer to the policyholder in 30-70 days from the day of receipt of the surveyor’s report.

ML: What are the options available for an individual to redress his dispute?

SG: The government has appointed an Ombudsman to address any dispute arising out of ‘individual risk policies’ for claims of up to Rs20 lakh. Alternatively the individual can also approach the Consumer Grievance Redressal Forum.

ML: This means that the policyholder has three options—the IRDA, the Ombudsman and consumer forums. Is there any hierarchy between these three that needs to be followed? Where is the policyholder supposed to go first?

SG: Ideally, the policyholder should first approach the in-house grievance redressal cell of the insurer. This is also the pre-requisite for all—IRDA, Ombudsman and the consumer forum. If the policyholder feels that his grievances were not addressed by the insurer, he should then approach either of the three. There is no particular hierarchy that needs to be followed. However, the policyholder cannot approach all three simultaneously.

ML: The Insurance Ombudsman has a pecuniary jurisdiction of Rs20 lakh. Does the consumer forum or IRDA have any such pecuniary jurisdiction?

SG: The consumer forum is a three-tier mechanism, district-level forum, state commission and the national commission. The district-level forum takes up matters up to Rs20 lakh, state commission from Rs20 lakh to Rs1 crore and the national commission takes up cases of Rs1 crore and above.

IRDA too has an in-house redressal grievance cell. But IRDA, on its own, does not act as a mediator nor does it actively take a reconciliatory role. All it does is refer the grievance back to the insurance company and ask their opinion on what has been done to resolve the dispute. So unfortunately IRDA has become a redundant body for grievance redressal.

ML: When arbitration is used for redressing grievance?

SG: Arbitration is available only if the insurance company has accepted its liability under the policy and the dispute is only on the quantum aspect. Thus, if the company out rightly refuses or rejects the claim, then the option for arbitration is not available. In such outright denial of claims the policyholder can either go to the civil courts or the consumer forum.

ML: Is Arbitration being actively used as a recourse measure by policyholders?

SG: Although there is a clause under the policy, insurers are reluctant to accept arbitration. Because once the quantum is in dispute but the liability has been admitted by the company it sends a discharge voucher, which clearly says that the amount specified is the full and final settlement. In case if the policyholder discharges the voucher conditionally saying, ‘I accept the voucher but in part settlement’, the insurer does not settle the claim. They insist settling the claim as ‘full and final’. If the policyholder discharges the voucher in full and final, then under the law, the claim has been settled and there is no future liability on the insurer, which brings an end to the contract.

After accepting the voucher, in case, the policyholder invokes the arbitration clause the company denies it. This is becoming common today. Resisting the arbitration clause makes it difficult for the policyholder to go for arbitration. It has been observed in various cases that the insurer plays on emotions and the financial capacity of the policyholder.

ML: What if the policyholder had to accept the discharge voucher due to financial duress? In such case, can he invoke the arbitration clause? If no, what recourse does he have?

SG: In such a case, the policyholder can send a legal notice to the insurance company giving them 15 to 30 days time to resolve the dispute. After the time limit, the policyholder has to go to the high court for appointment of an arbitrator.

ML: What is the point of dispute in the high court?

SG: The reason for going to the high court is to decide whether an arbitrator is required or not. If yes, the court decides on who would be the arbitrator. In this case the court considers two points—if there is a valid contract between the parties or not and whether the policy contains an arbitration clause or not? After being convinced on these two points, the high court will approve the appointment of an arbitrator.

ML: In case the high court approves arbitration, does the insurer have an opportunity to appeal in the Supreme Court?

SG: Yes, many insurance companies do appeal in the Supreme Court through Special Leave Petitions for blocking arbitration.

ML: What is the time taken by the high court to decide whether an arbitrator is required or not?

SG: The Bombay High Court has kept one day in the week for insurance matters. The HC takes up cases of arbitration during the second session of that day. So there is little time for such cases and it may take six months to 2-3 years to decide on whether arbitration is required or not in a particular case.

ML: What about the costs of such litigations? Does the court award costs or are the borne by the parties themselves?

SG: By the time the high court judgement comes, one would have spent at least a lakh of rupees. However, what is striking is that none of these courts awards costs even if it founds that an arbitrator was required.

In my view this is complete violation of the Contract Act. The insurer should ideally pay the costs if the HC says that arbitration is required in the case, because for the company the cost may be minor but for an individual, Rs1 lakh is quite a huge amount.

ML: what is the arbitration process? How is the arbitrator chosen?

SG: The arbitration clause of the policy clearly reads that either party who wishes to invoke arbitration should send a legal notice to the other party suggesting the name of the arbitrator he wishes to have. If the other party does not accept to this choice of an arbitrator then each party proposes the name of one arbitrator each and then these two arbitrators would nominate the name of a third arbitrator. In such cases there is a panel of three arbitrators.

ML: What are the running costs during the hearing during the arbitration process?

SG: The arbitrators appointed are either former judges from the high court or other lower courts or chartered accountants. The act makes it compulsory that all arbitrators appointed have to take the same amount of fees.

In case if it is a single arbitrator, he may charge between Rs50,000 to Rs1 lakh per hearing and in case of a three-bench arbitrators, each arbitrator charges between Rs30,000 to Rs1 lakh per hearing.

The fees include both reading fees and hearing fees. The time taken for completing an arbitration is between one to two years and the cost involved for the whole arbitration may go to as high as Rs10 lakh to Rs15 lakh. Apart from these costs, the lawyers’ fees are to be incurred. As consultants we discourage policyholders to go for arbitration for claims between for Rs5 lakh to Rs10 lakh.

ML: What is the advantage of going for arbitration as against going to a consumer forum?

SG: The technical aspect, exchange of information and understanding of subject matter is lot more in-depth and thorough. The tribunal analyses the matter very clearly and arrives at a more precise order. The Arbitration and Conciliation Act, 1996, provides that the arbitrators can award: -

a) The principal amount with interest, and

b) the costs of arbitration.

The arbitration award needs to be executed with 30 days of the verdict of the arbitration.

ML: What is the scope for appeal in case of arbitration award?

SG: Section 34 of the Arbitration Act provides the opportunity to either party to appeal the arbitration award in the high court. However the grounds for appeal are very limited. It has been experienced that the arbitration award are reasonably respected by the insurance companies.

ML: What are the drawbacks of alternate dispute redressal system (ADR) of the insurance sector?

SG: Delays and costs. ADR were incorporated to tackle these two issues, but unfortunately these two issues are still present. Arbitrators are generally former judges of the high court who have many commitments. They handle much arbitration together. The arbitration gaps therefore are between three to four months. On the contrary, the Act says that the arbitration should be completed within four months.

ML: What are your suggestions to make ADR mechanism for the insurance sector more efficient?

SG: I would say…
1) Increase the pecuniary jurisdiction of the Ombudsman and also allow him to take up commercial matters up to some limit. Also, decrease his territorial jurisdiction and increase the number of Ombudsmen across the country.

2) There should be an appellate body which should have a final say on the matter.

3) Incorporate the suggestions made in the 190th Law Commission Report to enhance the ADR mechanism of the industry.