Arbitration clauses are not valid in consumer insurance

  1. On 27th October 2023 the Insurance Regulatory and Development Authority of India (IRDAI) released a circular entitled ‘Amendment of Arbitration Clause in General Insurance Policies’ which clarified the issue of arbitrability of insurance disputes by stating that arbitration clauses in insurance policies should only be used for commercial lines of business.

The IRDAI was of the view that retail/individual policy holders should be exempted from the application of an arbitration clause as they have alternative forums such as the Insurer’s Grievances System, the Insurance Ombudsman, and the Consumer and Civil Courts for the redressal of their grievances.

Impact of the circular

The IRDAI through its powers under Clause (i) sub-Section (2) of Section 14 of the IRDA Act, 1999 directed the following –

  • All policies issued under retail lines of business should not have any arbitration clauses.
  • All policies issued under commercial lines of should have an arbitration clause as follows:

“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.

Arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996.”

In relation to transitory provisions, it was stated that:

a) for all new policies issued on or after the date of the circular:

  • The arbitration clause would be deemed deleted from all retail policies.
  • The clause above should be deemed to be the arbitration clause in the general conditions of all commercial insurance policies.

And b) for all existing policies:

  • An existing arbitration clause will remain valid till the term of the policy unless a policyholder specifically requests the insurer to replace it with the specimen clause above.
  • Unless a policyholder expressly requests that the insurer replace the arbitration language with the language above, the clause will remain in effect for the duration of the policy.

So, the circular effectively maintains the validity of an existing arbitration clause while giving the policyholder the option to replace it with the new arbitration clause specified above, ensuring that the transition does not retrospectively affect policies in place.


The IRDAI had issued this circular in reference to the Supreme Court’s judgement in M/s NIC Vs. M/s Nippon Paper Foodpac Pvt. Ltd where they had observed that the arbitration clause present in the guidelines issued by the Tariff Advisory Committee in 2015 had led to a lot of confusion, multiple litigation proceedings and even conflicting orders.

In that case, the clause stated that if there was a dispute related to the quantum of payment and the insurance company agreed that the claim was valid, then this issue would be decided by a sole arbitrator and their decision would be independent of all other questions arising out of the dispute.

But no dispute would be referred to arbitration if the company had disputed or not accepted liability under or in respect to the policy.

The arbitration clause had therefore created a distinction between two types of disagreements in insurance claims –

  1. Disputes Over Amount (Quantum of Payment). These are cases where the insurance company agrees that the claim is valid, but there’s a disagreement over how much money should be paid. These disputes can be settled by an arbitrator.
  2. Disputes Over Liability.  These are cases where the insurance company does not accept that the claim is valid at all. These disputes are not allowed to go to arbitration.

But this distinction led to confusion in cases where it wasn’t clear which category the dispute fell into. For example, if an insurance claim included two different losses and the insurer agreed to pay for one loss but denied the other, it was unclear whether this should be treated as a disagreement over the payment amount (which can go to arbitration) or as a complete denial of part of the claim (which cannot go to arbitration).

It even led to contrary judgements. For example, the Delhi High Court in Charanjit Lal Sodhi v. Caledonian Insurance Co. Ltd held that all disputes, even if the insurer denies a claim, are essentially about the payment amount and should go to arbitration.

Whereas the Calcutta High Court in Kohinoor Steel Private Limited v. Bajaj Allianz General Insurance Company Limited (2011 SCC OnLine Cal 3252) held that if an insurer completely denies a claim, the issue would not be about the amount and should not go to arbitration.

The Supreme Court observed that the situation had led to inconsistent decisions and multiple conflicting lawsuits hence the need for clarification by the IRDAI. The circular now brings certainty to when arbitration is available in insurance disputes.


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