United India Insurance Co. Ltd. & Anr. v. Hyundai Engineering and Construction Co. Ltd. & Ors.
Background
A joint venture building a bridge over the River Chambal suffered a major collapse in 2009, and claimed over Rs.151 crore under a "Contractor's All Risk" insurance policy. The insurer, United India Insurance, rejected the claim entirely after surveyors and a government expert committee found the collapse was caused by faulty design and defective workmanship, which the policy excluded. When the insured tried to invoke the policy's arbitration clause to resolve the dispute, the insurer refused, arguing arbitration was unavailable once it had denied liability outright.
Decision Breakdown
The Supreme Court held that the arbitration clause in the policy only applied to disputes over the quantum of a loss where liability was otherwise admitted: it expressly did not cover situations where the insurer denied liability altogether. Since the insurer's 2011 letter was a total repudiation of liability (not a dispute about amount), the dispute fell outside the arbitration clause and was non-arbitrable. The Court therefore set aside the Madras High Court's order appointing an arbitrator, and dismissed the insured's arbitration petition, while giving it liberty to pursue its claim through a regular civil suit instead.
Lesson Learnt
An arbitration clause in an insurance policy is strictly construed: if an insurer flatly denies any liability rather than merely disputing the amount payable, the policyholder's remedy is typically a civil suit, not arbitration, unless the specific clause says otherwise.