The Insurance Disputes Law Review: India
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 participants, along with various foreign participants exploring options for setting up insurance joint ventures in India and several overseas reinsurers setting up branch offices in India, including Lloyd's of London, which has set up a branch office in India under the Lloyd's India Regulations. Recently, with the notification of Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 (the Amendment Rules), the limit on foreign direct investment (FDI) in insurance intermediaries has been further increased, from 49 per cent to 100 per cent. This move is expected to help the growth and development of the Indian insurance sector.
It is also relevant to note that with insurers being permitted to issue products under the 'use-and-file' process for commercial risks, there has been an increase in product development and innovation in India. The IRDAI (Regulatory Sandbox) Regulations 2019 and the 'Guidelines on operational issues pertaining to Regulatory Sandbox' of 22 August 2019 have been issued to facilitate the creation of a regulatory sandbox environment for testing new business models, processes and proposals or applications, to strike a balance in the orderly development of the insurance sector by facilitating both innovation and, at the same time, the protection of policyholders' interests. In this regard, various innovative proposals have been granted the IRDAI's blessings in tranches over the past few months. Furthermore, to address the covid-19 pandemic situation that has gripped the world, and with a view to ensuring the business continuity of Indian insurers and other insurance entities, and ensuring proper service to policyholders, commencing March 2020, the IRDAI has also issued directions on, inter alia, the handling of covid-19 claims, extension of grace periods for premium payments, relaxation of regulatory timelines and expeditious servicing of insurance policies.
Over the past few years, there has been an upsurge in the frequency and severity of claims, specifically those made under professional indemnity (PI), directors and officers liability (D&O), employment practice liability (EPL) and cyber policies. We see this trend only going upwards in the years to come as the awareness of risks associated with any business increases and particularly as the legal and regulatory framework tightens.
However, we do see the government taking initiatives to improve the business environment; 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 five and seven years. With the setting up of the commercial courts, there is the expectation that these timelines will be substantially reduced.
The legal framework
i Sources of insurance law and regulation
Insurers, reinsurers and insurance intermediaries in India are governed by the 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 governing the licensing and functioning of insurers, reinsurers and insurance intermediaries. Appeals against orders issued and decisions made by the IRDAI may be referred to the Securities Appellate Tribunal in accordance with the procedural rules notified in this regard.
The year 2019 was significant for the insurance sector as several regulations and guidelines issued by the IRDAI were notified, including the following.
The Amendment Rules were notified, which increased the limit on FDI in insurance intermediaries from 49 per cent to 100 per cent. Furthermore, the IRDAI (Insurance Intermediaries) (Amendment) Regulations 2019 were issued to stipulate additional conditions, compliance with which is required of an insurance intermediary where the majority stake is held by foreign investors. Additionally, a circular on 'Withdrawal of Indian owned and controlled condition for insurance intermediaries' of 19 November 2019 was issued by the IRDAI to withdraw the applicability of Indian owned and controlled norms for insurance intermediaries.
The IRDAI (Non-Linked Insurance Products) Regulations 2019 and the IRDAI (Unit Linked Insurance Products) Regulations 2019 (collectively, the 2019 Product Regulations) were issued. The 2019 Product Regulations superseded the erstwhile 2013 regulations governing issuance of linked and non-linked life insurance products in India.
The IRDAI (Regulatory Sandbox) Regulations 2019 and the 'Guidelines on operational issues pertaining to Regulatory Sandbox' were issued to facilitate the creation of a regulatory sandbox environment for testing new business models, processes and proposals or applications, or both.
The first amendment to the IRDAI (Insurance Brokers) Regulations 2018 was notified, under which the restriction on a subsidiary company being a promoter in an insurance broker was relaxed.
The IRDAI (Health Insurance) (Amendment) Regulations 2019 and the IRDAI (Third Party Administrator – Health Services) Regulations 2019 have been notified.
In addition to the above, to address the covid-19 pandemic situation and with a view to ensuring business continuity and to limit the impact of the pandemic on policyholders, the IRDAI has also issued directions on, inter alia, the handling of covid-19 claims, extension of grace periods for premium payments, relaxation of regulatory timelines and expeditious servicing of insurance policies.
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, which 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. If the insured suffers a loss or derives benefit, he or she has an insurable interest in the subject matter of the insurance contract. The courts have held that 'insurable interest is not complete ownership. It need not necessarily even strictly be title and interest in the object insured.'
Further, Paragraph 6(b) of the 'Guidelines 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. Accordingly, the results of a criminal act will typically not fall for cover under an insurance policy and no benefits extend 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 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. The restrictions on non-admitted insurers mean 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 courts 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 that decide the matter will vary according to the value of the dispute and the geographical limits of the defendant insurance company within which the cause of action for the dispute arises.
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 until recently could accept claims up to a value of approximately 2 million rupees. There are 36 state consumer disputes redressal commissions, which were accepting 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), accepting matters with a value of over 10 million rupees and appeals against the decisions of the state commissions.
However, the central government recently introduced the Consumer Protection Act 2019 (the CPA 2019), which has revised the aforementioned pecuniary jurisdiction of the consumer courts. The CPA 2019 was brought into force on 20 July 2020. In accordance with the revised jurisdiction, the District Commission now has the jurisdiction to entertain complaints where the 'value of goods and services paid as consideration' does not exceed 10 million rupees. The term 'value of goods and services paid as consideration' refers to the premium paid by an insured to obtain a policy. The state consumer disputes redressal commissions can entertain complaints where the premium paid to obtain a policy is valued at above 10 million rupees and up to 100 million rupees, and where a premium of over 100 million rupees has been paid, the complaints will need to be filed before the NCDRC.
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.
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 recently ruled that if the arbitration clause covers quantum disputes only, then disputes on liability cannot be arbitrated. 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. 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. Similarly, in United India Insurance Co Ltd v. Antique Art Exports Pvt Ltd, 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, 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.
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. 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 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. 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 Pradesh 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, is relevant.
There are numerous case laws dealing with subrogation, of which we consider the Economic Transport Organization v. Charan Spinning Mills (P) Ltd 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 Ors 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 as such any rules 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 the 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.
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 the law governing 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 these 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. To enforce a foreign judgment, a suit in terms of the foreign decree has to be filed. Prior to enforcement, the courts will examine whether the judgment or decree was 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 that 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.
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 claims severity is also on the rise. The sort of numbers that are at 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 hold the largest share, we believe that cyber claims will 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 evidence 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, but we have recently seen claims being made in India, with high-value settlements demanded.