Sanghi Industries Ltd. vs United India Insurance Company Limited

Akil Kureshi, J.—The petitioner seeks appointment of an arbitrator to resolve certain disputes which have arisen between the petitioner and the respondent out of an insurance policy dated 3.3.2010 which had a validity period between 5.3.2010 to 4.3.2011. The petitioner is a company registered under the companies Act and is engaged in manufacturing of cement. For the purpose of its industrial activity, it has installed plant and machinery. To cover such plant and machinery against any accidental damage and damage due to other causes, the petitioner obtained a comprehensive policy of insurance from the respondent United India Insurance Company Limited. Such policy contained arbitration clause as under:

Clause 12

If any difference shall arise as to the quantum to be paid under this policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of an arbitrator to be appointed in writing by the parties in difference, or if they cannot agree upon a single arbitrator, to the decision of two disinterested persons as arbitrators of whom one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party in accordance with the provisions of the Arbitration Act, 1940, as amended from time to time and for the time being in force. In case either party shall refuse or fail to appoint an arbitrator within two calendar months after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint sole arbitrator and in case of disagreement between the arbitrators, the difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under or in respect of this policy.

It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator, Arbitrators or umpire of the amount of loss or damage shall be first obtained.

The boiler plant of the petitioner''s manufacturing unit at Kuch was severely damaged when due to an accident the boiler burst. The petitioner thereupon communicated such incident to the respondent insurance company through an e-mail dated 14.8.2010. It was conveyed as under:

Dear Sir,

We have noticed Boiler Explosion at around 18:00 hours on 14 August 2010, the explosion has completely damaged boiler. The cost of repairs would be in corers. You are requested to appoint the surveyor at the earliest.

It appears that the petitioner''s claim for insurance on account of such accident was in two parts. The petitioner claimed reimbursement of damage caused to its machinery due to blast and also put insurance company to the notice that because of the break down of the machinery, the petitioner''s manufacturing unit had to be suspended for a fairly long period of time which resulted into loss of profit. From the letter dated 29.12.2010 written by the petitioner to the respondent, it emerges that the respondent had serious reservation about accepting any claim of the petitioner for loss of profit. Following extracts of such communication would clarify this position:

The subject boiler was part of Thermal Power Plant and was covered under IAR policy which was not extended to cover Loss of profit arising out of Machinery Breakdown/Boiler explosion losses. The policy was therefore subject to Special Exclusion 1.4 applicable to Section II which was as under "Damage to boilers, economizers, turbines or other vessels, machinery or apparatus in which pressure is used or their contents resulting from their explosion or rupture."

The surveyor assessing the Material Damage claim has indicated in his correspondence that loss incident came within Machinery Breakdown section of the policy which gave a hint that any Business Interruption loss arising out of the incident will not be admissible as the same was not covered under the policy.

The damage to Boiler has in fact resulted into partial loss of production as power to that extent was not available and also caused additional expenditure as diesel generator power had to be used, which was more expensive against power generated by captive power plant.

After a careful examination of the policy and available other literature regarding such a loss we are of the view that the loss should be considered within All Risk Section of the Policy and not breakdown and hence admit out resulting business interruption loss.

Xxxx

We would request you to accept our above submission and consider the loss as part of An Risk and Fire section of the IAR policy which would make us eligible for Business Interruption loss.

One more letter was written by the petitioner to the respondent on 26.7.2011 quantifying its loss of profit due to the accident at Rs. 15 crores which was conveyed as under:

Further to the letter referred above, we would like to submit our claim for Fire Loss of Profit. As you are aware that the said Boiler got restored/reinstated on 3rd of November 2010. During this period we lost huge production due to less availability of Power. The loss estimated is in tune of around Rs. 15 Crores for Loss of Profit and increased cost of working.

You are requested to get the loss assessed.

In response to the aforesaid two letters dated 29.12.2010 and 26.7.2011, the respondent replied under its communication dated 14.9.2011 to the petitioner and conveyed as under:

Dear Sir,

We are in receipt of your response dated 02/09/2011 to our letter/representation dated 29/12/2010. We firmly believe that loss is payable and the detailed reasoning given by us on 29.12.2010 vide letter Ref No SIL/INS/Boiler/8/10-11 to support the loss.

We would request you to again look into the claim, specifically keeping in mind the nature of our loss and revert with technical reasoning on our submission.

Sir, if required we are ready to represent our case with your technical team at Head Office in order to bring clarity in the issue.

We are re-forwarding the letter as well as our submission for your kind perusal.

The petitioner ignoring the stand of the respondent insurance company continued to press its claim which is clear from its letter dated 24.9.2012 in which it was stated as under:

Dear Sir,

We would invite your kind attention to our letter dated 14.09.2011 in connection with our outstanding business interruption claim dated 14.08.2010. As this has not evoked any favourable response from your side our management has expressed concern for lack of consideration on your side.

We had explained in our representation that subject boiler was under start up and hence it was not carrying any steam pressure as in the case of the pressure vessel. The explosion in the furnace area was due to ignition of unburnt gas and not due to any physical pressure condition. The damage due to explosion arising from ignition of unburnt gas would qualify to fall within scope of fire policy and not machinery breakdown policy. Just because the affected item in our case was boiler furnace it should not alter the admissibility principle.

In view of the above we would again request you to have a positive review of our claim. We have been associated with your company for a long time and last few years the claims are under control. We have taken steps in recent time to minimise losses which have produced positive results.

We would like to continue our long standing relationship with you and hence seek favourable relook at the above claim.

We await your early response in the matter.

Under letter dated 5.3.2011, the petitioner made a detailed case for reimbursement of loss of profit and questioned the repudiation of the respondent of such claim. In such communication it was mentioned that against the material damage claim of Rs. 7,50,80,496/-, the insurance company had settled the claim at Rs. 6,83,45,000/-. It was asserted that the business interruption loss was also required to be covered.

Few more letters were dispatched by the petitioner to the respondent. On 9.7.2013, the respondent replied to the petitioner and conveyed as under:

We refer to your letter dt. 14th June 2013 on the captioned subject and would like to intimate that the above said claim is not admissible under Business interruption section of IAR policy issued and held by you at the time of said loss. This has already been communicated to you vide our letter dated 02.09.2011.

We once again reproduce hereunder the Special exclusion to Section II i.e. Business Interruption of the policy issued which reads as under

This policy does not cover loss resulting from interruption of or interference with the business directly or indirectly attributable to

1.4 Damage to boilers economizer''s turbines or other vessels machinery or apparatus in which pressure is used or their contents resulting from their explosion or rupture.

Finally the petitioner issued through its advocate notice dated 3.7.2013 invoking the arbitration clause and conveyed to the respondent that the insurance company should agree to appointment of Justice Shri K.N. Vyas (retired), as the nominee arbitrator of the petitioner, calling upon the respondent to nominate a person of its choice to constitute an arbitration Tribunal.

The respondent replied to such notice under communication dated 3.9.2013, contending that under a communication dated 2.9.2011, the claim was already repudiated. In terms of clause-12 of the agreement, the claim is not arbitrable.

From the above, the question therefore, arises is whether in terms of agreement between the parties, the issues are required to be referred for arbitration. Counsel for the petitioner would strongly contend that in face of the arbitration agreement and in view of the fact that disputes with respect to the petitioner''s insurance claim having arisen, appointment of arbitrator should be made. He submitted that the respondent had not repudiated the entire claim. The issue pertains to quantum of reimbursement. In that view of the matter, the arbitration clause was not ousted.

One may however, peruse the arbitration clause more minutely. It provides that if any difference arises as to the quantum to be paid under the policy (liability being otherwise admitted) such difference shall be independently all of the other questions to be referred to an arbitrator. The focus therefore, is on the difference relating to the quantum to be paid when there being no dispute about the liability by the respondent. What can be referred therefore, for arbitration is the difference in quantum between the parties when the liability is admitted by the insurance company. The intention between the parties was not to resort to arbitration when the parties disagreed on the fundamental question of the liability of the insurance company itself. In other words, if there was any dispute about the liability, the parties cannot fall back on the arbitration clause and would have to resort to the Court procedure for resolution of dispute. Learned counsel Shri Chudgar for the petitioner however, submitted that this manner of looking at arbitration clause would lead to unjust result and the insurance company would merely repudiate the claim in order to avoid reference to an arbitration. To my mind, any such apprehension would not cover the interpretation of the arbitration clause. To me what is clear is that the parties agreed for limited arbitration contract. They decided to resort to arbitration only in case if it was a dispute with respect to the quantum to be paid in terms of the policy as long as the liability itself was admitted. I must interpret the arbitration agreement on the plain language used and the emerging intention of the parties. The intention was clear and to resort to arbitration only in case when there was no dispute about the liability.

In this context we may appreciate the resistance of the respondent for reference to an arbitrator. The petitioner''s claim was in two parts. Part of the claim was for loss and damage suffered due to the accident which primarily included the damage to the plant and machinery. Substantial portion of such claim was cleared by the insurance company. Against the total claim of Rs. 7,50,80,496/- the insurance company paid a sum of Rs. 6,83,45,000/-. One may clarify that the difference between the said two figures is not at issue. So much was in fact fairly stated before me by Shri Chudgar after taking specific instruction on this aspect. The second claim of the petitioner pertained to loss of profit and other loss on account of shut down of the plant due to the accident and resultant damage to the machinery. From the outset the insurance company has disputed such claim. Case of the insurance company was that the terms of policy did not envisage securing the petitioner against any such loss or damage. I am not judging the validity of the insurance company�s stand. I am only holding that the insurance company did not accept its liability in this respect. In that view of the matter, it cannot be stated that the disputes between the parties was only with respect to the quantum to be paid under the policy and that liability was admitted by the insurance company. To my mind, the admission of liability has to be seen on the basis of the specific issue. In the present case, there were two different and distinct issues with respect to the claim of the petitioner. First issue was with respect to the loss due to damage to the plant and machinery towards which the liability was admitted and against the quantum paid, no dispute is raised by the petitioner. The second issue was with respect to the loss suffered due to closure of the plant towards which liability was never admitted by the insurance company. It was from the outset and all along disputed.

I am unable to accept the contention of counsel for the petitioner that merely because insurance company admitted its liability for payment towards the loss to plant and machinery due to the accident, it must be understood that the entire liability is admitted and that therefore, this is merely a question of dispute in quantum to be paid. In my opinion, there were two separate and distinct claims. For one of them the insurance company admitted its liability and paid the compensation which the petitioner accepted. Regarding the second claim, the insurance company disputed the liability. The petitioner seeks reference to the arbitration for this second claim. The arbitration clause would not cover the situation. Under the circumstances, this Arbitration petition is dismissed.