Insurance Arbitration Clause: Supreme Court Clarifies Non-Arbitrability in Disputed Liability Cases

The case of United India Insurance Co. Ltd. & Anr. vs. Hyundai Engineering and Construction Co. Ltd. & Ors. revolves around an insurance dispute concerning the enforcement of an arbitration clause in a contract. The Supreme Court was called upon to decide whether a clause in an insurance policy could invoke arbitration when the insurer had denied liability altogether.

Background of the Case

The case stemmed from a contract awarded to a joint venture (JV) for the design and construction of a bridge across the Chambal River. The construction was insured under a Contractor All Risk (CAR) Insurance Policy issued by United India Insurance Co. Ltd. However, during construction, an accident occurred, leading to a claim of Rs.1,51,59,94,543 filed by the JV.

The insurer appointed a surveyor who assessed the loss at Rs.39,09,92,828 but concluded that the damages were due to faulty design and improper execution of work. Consequently, the insurance company repudiated the claim on April 21, 2011. The JV, contesting the rejection, invoked the arbitration clause, but the insurer refused, citing that no arbitration could be initiated when liability was disputed.

Petitioners’ (United India Insurance Co.) Arguments

• The arbitration clause in the policy was conditional. Arbitration was applicable only if there was a dispute on the quantum payable, and liability was admitted.
• Since the insurer had completely denied liability, arbitration could not be invoked.
• The High Court had erroneously ruled in favor of arbitration, despite the explicit clause excluding arbitration in case of disputed liability.
• The insurer relied on the Supreme Court’s previous rulings in Oriental Insurance Company Limited vs. Narbheram Power and Steel Private Limited and Vulcan Insurance Co. Ltd. vs. Maharaj Singh, which had similar insurance clauses.

Respondents’ (Hyundai Engineering & Construction Co.) Arguments

• The arbitration clause was broad and covered all disputes arising under the policy.
• The insurer had initially appointed a surveyor, thereby acknowledging the existence of a claim.
• The High Court rightly held that post the amendment of the Arbitration and Conciliation Act, 1996, courts were required only to examine the existence of an arbitration agreement.
• The insurer’s refusal to arbitrate amounted to unfair denial of contractual obligations.

Supreme Court’s Observations

The Supreme Court examined the arbitration clause in the policy, which stated:

“If any difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted), such difference shall be referred to arbitration.”

The Court emphasized that:

• For arbitration to be invoked, liability had to be “otherwise admitted.”
• The insurer had categorically denied liability, meaning arbitration could not be triggered.
• The respondents should have filed a civil suit within three months of the insurer’s repudiation.
• The High Court had misapplied the ruling in Duro Felguera S.A. vs. Gangavaram Port Limited, which dealt with arbitration agreements in a different context.

Supreme Court’s Judgment

After reviewing the case, the Court ruled:

• The arbitration clause was inapplicable because the insurer had denied liability in full.
• The claim should have been pursued through a civil suit, not arbitration.
• The High Court’s decision was incorrect and was set aside.
• The appeal by United India Insurance Co. was allowed.
• The respondents were given liberty to pursue their claim through civil litigation.

Legal Precedents Considered

• Oriental Insurance Company Limited vs. Narbheram Power and Steel Private Limited – Confirmed that arbitration clauses in insurance policies apply only when liability is admitted.
• Vulcan Insurance Co. Ltd. vs. Maharaj Singh – Held that repudiation of an insurance claim nullifies the arbitration clause.
• Duro Felguera S.A. vs. Gangavaram Port Limited – Differentiated between general arbitration clauses and specific conditions requiring admitted liability.

Impact of the Judgment

This ruling sets a precedent for insurance contracts and arbitration agreements. It establishes that:

• Arbitration cannot be invoked where liability is denied in full.
• Policyholders must carefully assess arbitration clauses before proceeding with claims.
• The ruling protects insurers from being forced into arbitration where disputes concern liability, not just quantum.

Conclusion

The Supreme Court’s decision in United India Insurance Co. Ltd. vs. Hyundai Engineering and Construction Co. Ltd. reinforces the principle that arbitration clauses must be interpreted strictly. The judgment clarifies that when liability is denied entirely, arbitration is not an available remedy. Instead, claimants must seek relief through civil litigation.

Petitioner Name: United India Insurance Co. Ltd. & Anr..
Respondent Name: Hyundai Engineering and Construction Co. Ltd. & Ors..
Judgment By: Justice Dipak Misra, Justice A.M. Khanwilkar, Justice Dr. D.Y. Chandrachud.
Place Of Incident: Madras.
Judgment Date: 21-08-2018.

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