The Indian insurance industry has seen significant growth and development in recent years. The removal of the requirement to seek an approval from the government of India to increase the foreign investment cap from 26 per cent to 49 per cent in insurers and insurance intermediaries is one of the factors that has led to an increase in the quantum of economic investments in existing Indian players, along with various foreign players exploring options of setting up insurance joint ventures in India. Moreover, there has been a noteworthy increase in the number of players in the reinsurance space, where several foreign reinsurers have recently been permitted to set up branches in India. Lloyd's of London has set up a branch office in India under the Lloyd's India Regulations. It is also relevant to note that with insurers being permitted to issue products under the 'use-and-file' process for commercial risks, there is an increase in product development and innovation in India.
Over the past two to three years, there has been an upsurge in the frequency and severity of claims, specifically those made under professional indemnity, directors' and officers' liability, employment practice liability and cyber policies. We see the trend only going upwards in the years to come as the awareness of risks associated with any business increases.
However, we do see the government taking initiative to improve the business environment as, for instance, the setting up of commercial courts for adjudicating commercial disputes including insurance and reinsurance disputes is a development that we hope would have a positive impact on timelines for adjudication of disputes. The average time taken by an Indian court of first instance to decide a case is anywhere between six and seven years. With the setting up of the commercial courts, there is the expectation that these timelines will be substantially reduced.
II THE LEGAL FRAMEWORK
i Sources of insurance law and regulation
Insurers, reinsurers and insurance intermediaries in India are governed by the Insurance Regulatory and Development Authority of India (IRDAI). The primary legislation regulating the Indian insurance sector comprises the Insurance Act 1938 (the Insurance Act) and the Insurance Regulatory and Development Authority Act 1999 (the IRDA Act). Pursuant to the powers granted to it under both of these statutes, the IRDAI has issued various regulations for governing the licensing and functioning of insurers, reinsurers and insurance intermediaries.
The IRDAI has also released the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd's) Regulations 2015, which govern the establishment and functioning of branch offices in India set up by foreign reinsurers (foreign reinsurer branch), and notified regulations pertaining to the entry of Lloyd's into the Indian market.
Although the Insurance Laws (Amendment) Act 2015, which was passed in March 2015, introduced a plethora of changes to the Insurance Act and the insurance regulatory framework in general, the primary insurance regulator continues to be the IRDAI. Appeals from orders issued and decisions made by the IRDAI may be referred before the Securities Appellate Tribunal (SAT). Subsequently, the procedural rules for filing appeals from the IRDAI orders or decisions with the SAT were also notified.
The year 2017 was significant for the insurance sector as it witnessed the notification of several regulations and guidelines issued by the IRDAI, including:
- The IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017, which were issued to prescribe the norms applicable to insurers with regard to arrangements with third-party service providers regarding such activities that an insurer is ordinarily required to perform itself. These regulations also expressly set out the list of activities that an insurer is prohibited from outsourcing to third-party service providers.
- The IRDAI (Protection of Policyholders' Interests) Regulations 2017 (Policyholder Regulations) were issued to revise the standards for the sale, servicing and claim procedure to be followed with respect to insurance policies.
- The IRDAI (Insurance Web Aggregators) Regulations 2017 were issued to replace the erstwhile IRDA (Web Aggregators) Regulations 2013.
- The IRDAI (Insurance Brokers) Regulations 2018 were issued to replace the previous IRDA (Insurance Brokers) Regulations 2013.
The IRDAI also notified the Guidelines on Motor Insurance Service Providers of 31 August 2017 (the MISP Guidelines) to regulate the role of the automobile dealers in the distribution and servicing of motor insurance products. Pursuant to the notification of the MISP Guidelines, a duly registered motor insurance provider is permitted to solicit, procure and service motor insurance policies for insurers or insurance intermediaries, as the case may be, in accordance with the provisions of the MISP Guidelines.
The IRDAI also issued the Exposure Draft on Insurance Regulatory Authority of India (Reinsurance) Regulations 2018 of 5 January 2018 (the Reinsurance Exposure Draft), which proposes to prescribe a new Order of Preference of cessions for Indian insurers that will replace the old Order of Preference and describe the new hierarchy between various entities with which an insurer can place its reinsurance business. These regulations are much awaited.
ii Insurable risk
As is the case under English law, Indian law also requires a person entering into an insurance contract to have insurable interest in the subject matter of the contract. Insurable interest must be present in all types of insurance, failing which it would be a wagering contract that is void.
Neither the Insurance Act nor the IRDAI regulations set out precisely what constitutes insurable interest or an exhaustive list of risks that can and cannot be insured. However, there is guidance provided by way of other statutes, court judgments and the IRDAI regulations.
'Insurable interest' has been defined under Section 7 of the Marine Insurance Act 1963 as follows:
Insurable interest defined – (1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.
(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.
To have an insurable interest in anything, there must be subject matter to insure, the insured should have some legally recognised relationship with the subject matter and the loss of the property should cause pecuniary damage to the insured.2 If the insured suffers a loss or derives benefit, he or she has an insurable interest in the subject matter of the insurance contract.3 The courts have held that '[i]nsurable interest is not complete ownership. It need not necessarily even strictly be title and interest in the object insured.'4
Further, paragraph 6(b) of the Guidelines5 on Product Filing Procedures For General Insurance Products of 18 February 2016 states that '[t]he product should be a genuine insurance product covering an insurable risk with a real risk transfer. “Alternate risk transfer” or “financial guarantee” business in any form shall not be accepted including indirect insurance products such as insurance derivatives.'
There are specific requirements as far as trade credit policies are concerned, as for instance they cannot cover (1) factoring, reverse factoring and bill discounting; and (2) any receivable arising from a financial service or consultancy service.
Further, Indian law recognises the principle that the law will not help a criminal to recover any kind of benefit from or for his or her crime.6 Accordingly, the results of a criminal act will typically not fall for cover under an insurance policy and no benefits extended to the perpetrator.
Non-admitted insurers are not permitted to directly insure property situated in India or any ship or other vessel or aircraft registered in India. However, a person resident in India is permitted to take or continue to hold a health insurance policy issued by an insurer outside India provided the aggregate remittance does not exceed the limits prescribed by the Reserve Bank of India (RBI). In this regard, a person resident in India may take or continue to hold a life insurance policy issued by an insurer outside India, subject to certain foreign exchange requirements stipulated in the Master Direction – Insurance of 1 January 2016 (as amended) issued by the RBI. Similarly, a person resident in India may take or continue to hold a general insurance policy issued by an insurer outside India, provided that the policy is held subject to the conditions provided under the Foreign Exchange Management (Insurance) Regulations 2015.
In addition to the above, foreign reinsurers are now allowed to access the Indian market and are permitted to set up branch offices in India or operate through service companies set up in India under the IRDAI (Lloyd's India) Regulations 2016. Non-admitted insurers who are listed with the IRDAI as cross-border reinsurers can reinsure risks in India in accordance with the IRDAI's regulations on the reinsurance of life and general insurance business and subject to compliance with the order of preference for cessions. Further, the IRDAI has recently issued the Reinsurance Exposure Draft, which will apply to both life insurers and general insurers and proposes to revise the norms to be followed for reinsurance placements, and also proposes a revised order of preference of cessions for reinsurance placements by Indian insurers.
The restrictions on non-admitted insurers means that cross-border insurance disputes involving insurers and insureds are scarce in this jurisdiction. Further, even in the case of policies obtained by Indian residents from insurers residing abroad, the Insurance Act 1938 gives policyholders a right to override contrary policy terms in favour of Indian law and jurisdiction as long as the insurance business is transacted in India.
iii Fora and dispute resolution mechanisms
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 court or consumer forums. The option to approach the consumer forums, however, lies only with the insured in the event of a dispute. The civil and consumer courts have territorial and pecuniary jurisdiction to adjudicate disputes. The civil courts, or consumer forums before which the matter is decided, depend on the value of the dispute and the geographical limits of the defendant insurance company that the cause of action for the dispute arises within.
India has a three-tier hierarchy of courts to hear civil disputes. There are approximately 600 district courts at the lowest level, 24 high courts in the middle and the Supreme Court of India at the top of the pyramid. The high courts of Delhi, Mumbai, Chennai and Kolkata have original jurisdiction to hear matters over a certain pecuniary value, so the civil courts and judges under them do not hear matters involving values higher than that limit. In all other cases, district courts and the competent courts of first instance have an unlimited pecuniary jurisdiction to hear any insurance dispute. There is no right to a hearing before a jury, and cases are decided by judges.
The Indian legislature enacted in 2015 the Commercial Courts Act, 2015 (the Commercial Courts Act) for fast-track resolution of commercial disputes. Special commercial courts were set up under the Commercial Courts Act for exclusive adjudication of commercial disputes. The Commercial Courts Act defines a commercial dispute to include insurance and reinsurance disputes over the value of approximately 300,000 rupees. Recent amendments to the Commercial Courts Act have proposed compulsory mediation for parties before filing a commercial suit. The authority responsible for conducting mediation has not been designated yet.
The insured also has the option to approach the consumer courts, set up under the Consumer Protection Act 1986 (the Consumer Protection Act). The Consumer Protection Act lists insurance as a service and provides for a three-tier hierarchy to hear consumer disputes. There are 626 district consumer disputes redressal commissions, which can accept claims up to a value of approximately 2 million rupees. There are 36 state consumer disputes redressal commissions, which can accept claims of up to approximately 10 million rupees and appeals against the decisions of the district commissions. At the apex is the National Consumer Disputes Redressal Commission (NCDRC), which accepts matters with a value of over 10 million rupees and appeals against the decisions of the state commissions.
As a mechanism of alternative dispute redressal, the insured can also approach the Insurance Ombudsman for disputes that do not exceed 2 million rupees in value. The Insurance Ombudsman is not a judicial authority and does not have power to enforce its decisions against the insurer.
III RECENT CASES
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, the quantum payable under the policy, the applicability of exclusions or compliance with the policy terms and conditions.
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 9 per cent to 12 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 recently ruled that if the arbitration clause covers quantum disputes only, then disputes on liability cannot be arbitrated.7
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.8 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:
- Recently in Charanjit Singh v. Life Insurance Corporation of India and Ors,9 the NCDRC upheld the repudiation of a claim on the above basis and observed that:
- The 'contract of insurance is in the nature of “uberrima fides” i.e. utmost good faith and the person purchasing the insurance policy is under legal obligation to furnish every material information which could have influence on the decision of the Insurance Company to accept or not to accept the proposal'.
- The 'insured had taken insurance cover by practising fraud and concealing the material information regarding her physical health. Therefore, the repudiation of the insurance contract justified.'
- Similarly, in Max New York Life Insurance Co Ltd v. Gitaben Rajeshbhai Kanparia,10 the NCDRC held that non-disclosure of information in the proposal form amounts to concealment of material fact. The NCDRC relied on Satwant Kaur Sandhu v. New India Assurance Co Ltd,11 and observed that '[g]ood faith forbids either party from nondisclosure of the facts which the party privately knows, to draw the other into a bargain, from his ignorance of that fact.'
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.12 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'.
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 79,13 is relevant.
There are numerous case laws dealing with subrogation, of which we consider the Economic Transport Organization v. Charan Spinning Mills (P) Ltd 14 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).
We do not believe that there are as such any rules governing insurer's duty to defend, and whether such a duty exists depends on the policy language. The policy will set out whether the insured has the duty or insurer, 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.
IV THE INTERNATIONAL ARENA
Overseas insurers are barred from writing direct insurance business in India; however, cross-border reinsurers can reinsure risks written by Indian insurance companies in compliance with the relevant IRDAI regulations. Therefore, international disputes in the insurance sector are disputes relating to or arising out of reinsurance policies.
Indian courts give prominence to party autonomy when it comes to choice of jurisdiction and governing law of contracts. If the contract is silent on governing law and jurisdiction then conflict of rules principles apply, and the Indian courts will examine the law and place where the dispute has its closest nexus to determine such questions. Given the restrictions on overseas insurers in writing business in India, these issues have not been considered by the courts in an insurance context.
The Indian Code of Civil Procedure 1908 lays down the procedure for enforcement of foreign judgments and decrees in India. For enforcing a foreign judgment, a suit in terms of the foreign decree has to be filed. The courts before enforcement will examine if the judgment or decree is passed on the merits of the case by a competent court, principles of natural justice were followed, no fraud was involved, and the judgment is not against the public policy of India. If India has a reciprocal arrangement with a foreign country, then judgments pronounced by the courts of such a country can be enforced as a decree passed by the Indian courts.
India is a signatory to the New York and Hague Convention for the enforcement of foreign arbitration awards and a foreign award obtained in a signatory country can be enforced in terms of these conventions. Indian courts have increasingly followed a hands-off approach when it comes to arbitration and will enforce foreign arbitration awards. The courts in India have limited scope to refuse enforcement of a foreign award and the usual grounds available under the New York Convention dealing with incapacity of a party's natural justice, suspension of award, scope of the arbitration clause and public policy apply. Under Indian law, public policy has an expansive definition, but in the context of a foreign arbitration this has been watered down to mean fundamental policy of Indian law, fraud, interests of justice and morality.
V TRENDS AND OUTLOOK
While the focus used to be on more traditional lines of insurance, such as catastrophe and motor insurance, over the past decade or so the Indian insurance market has evolved and we have seen liability products such as professional indemnity (PI), directors and officers (D&O), cyber policies and employment practice liability (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 against the insured, which means that claims severity is also on the rise. The highest value claim that we saw in 2017 was four times the highest value claim seen in 2014. The sort of numbers that are at play can be gauged from the recent settlements entered into by Indian tech companies in the United States that have attracted media attention. Another reason for increased exposure is the high legal fee that needs to be spent in the defence of a claim, which could 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 hold the largest share, we believe that cyber claims will grow at a fast pace in the coming years. We say this specifically in light of the enactment of the General Data Protection Regulation, the ramifications of which are yet to be seen. Another area of interest is EPL, where earlier claims used to usually be made in outside jurisdictions, but we have recently seen claims being made in India, with high-value settlements demanded.
1 Neeraj Tuli is a senior partner and Rajat Taimni is a partner and head of dispute resolution at Tuli & Co.
2 New India Assurance Co Ltd v. GN Sainani (1997) 6 SCC 383.
3 OIC v. Sham Lal AIR 2006 J&K 103.
4 New India Assurance Company Ltd v. TT Finance Ltd and Ors 2013 ACJ 997.
5 Ref No. IRDAI/NL/GDL/F&U/030/02/2016.
6 Srinivasan M N, Principles of Insurance Law, 9th ed.
7 Oriental Insurance Company Limited v. Narbheram Power and Steel Pvt Ltd (2018) 6 SCC 534.
8 Emaar MGF Land Limited & Anr v. Aftab Singh [Civil Appeal No. 23512 – 23153 of 2017].
11 (2009) 8 SCC 316.
13 79. Right of subrogation. – (1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, insofar as the assured has been indemnified, according to this Act, by such payment for the loss.
14 (2010) 4 SCC 114.