Arbitration and Insurance Disputes

Man is faced with the possibility that one or more of the hazards which form part of life may befall him at any time and may cause him pecuniary loss. The occurrence of these misfortunes like fire outbreak, accident or even death is beyond human control. It is the fear that these events may befall individuals and companies alike that therefore necessitates taking out insurance policies.

Very few people really take the time and trouble to read through their insurance policies with a view to ascertaining and/or noting the terms and conditions of the policy, until it is time to try to make a claim. It is invariably at that point that they notice, amongst many other things, that they have agreed to an arbitration clause in the policy. Of the few who notice the arbitration clause, only a small proportion of them actually understand the clause or indeed understand what arbitration is. The result is that when an insurer wrongfully denies coverage, the first thing people do is to commence court proceedings.

This post considers some issues that may arise when arbitration is used to resolve insurance disputes so that when an arbitration provision shows up in an insurance policy, policyholders know to seek the advice of a lawyer and/or their broker in order to determine if the provision threatens to reduce the very coverage that they want to buy into.

Arbitration is generally used to describe the methods and procedures used to resolve disputes either as an alternative to the traditional disputes mechanism of the court or in some cases as supplementary to such mechanism. It is also a process by which parties consensually submit a dispute to an independent third party, called an arbitrator, to hear their dispute and render a binding decision resolving the dispute.

A contract of insurance is a contract whereby one person called "the insurer or assurer" undertakes in return for an agreed consideration called "the premium" to pay another person called "the insured or assured" a sum of money or its equivalent on the happening of a specific event. The Nigerian Court of Appeal, per Dennis Edozie, JCA (as he then was) in Liberty Insurance Co Ltd v John (1996) 1 NWLR (pt 423) 192 CA explained insurance to mean a contract whereby the insurer agrees to compensate the insured for the loss the latter may sustain through the happening of the event upon which the insurer' s liability may arise.

In Nigeria, the insurance industry is governed by the Insurance Act 2003. Insurance is also an item on the exclusive legislative list of the 1999 Constitution of the Federal Republic of Nigeria.

The primary form of disputes that arise in the context of insurance policies are ‘coverage disputes’. These tend to arise when an insured files an insurance claim – that is, he or she says that the event for which he or she has insured against has arisen – but the insurance company refuses to pay out under the policy. In the normal course of things, the insurance company will first conduct their own investigations of what happened to determine matters such as whether the event has actually taken place as claimed by the insured, and how much of the claim they will be obliged to pay under the policy. In certain cases, the insurance company will deny the claim completely on the basis that the loss that the insured seeks to be indemnified for is not covered by the insurance. There might be no insurance cover because for example, the insured has failed to satisfy certain conditions which are prerequisite to the insurer being liable to indemnify the insured, or it may be that as a matter of properly interpreting the insurance policy, the specific event relied on by the insured does not fall within the insured events. In other circumstances, the insurance company may offer a settlement lower than what the policyholder claims.

When an insurer wrongfully denies insurance coverage, one of the first things that come to mind is to file an action in court. However more and more, insurance policies contain arbitration clauses that call for the policyholder to arbitrate any dispute over insurance coverage (as opposed to going to court). There are many reasons for an insurance contract to elect arbitration over court proceedings, including arbitration of insurance disputes is desirable since it offers some measure of confidentiality, provides for consideration of the issues by industry-seasoned and insurance savvy individuals.

While arbitration clauses can be found in some insurance policies in Nigeria, the terms of each company's clause may vary to the extent that they are enforceable and to the extent that they may be negotiated out of the insurance policy. An example is the arbitration clause in Leadway Assurance Company Ltd’s "Private Motor Insurance Policy" which can be found on their website The clause says that:

"All differences arising out of this policy shall 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 Arbitrators one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties or in case the Arbitrators do not agree of an Umpire appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meetings and the making of an award shall be a condition precedent to any right of action against the Company. If the Company shall disclaim liability to the Insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder"

Too often policyholders buying insurance coverage are only focused on obtaining coverage against risks, they fail to consider the consequences of being compelled to arbitrate if and when a dispute arises. Some don't even as much as read the arbitration clause, there are occasions where the policyholder had no idea that there is an arbitration clause included in the policy. The insurance intermediaries merely draw the policyholder's attention to the necessary columns to fill in their names and other personal details without drawing their attention to other clauses and provisions on the form as in the arbitration clause.

Policyholders are well advised to read all the clauses and provisions on the policy before agreeing to buy into the policy and also seek the advice of their lawyers.

Policyholder's and brokers should bear it in mind that arbitration clauses like any other aspects of an insurance contract can be the subject of negotiation. For example, when a dispute arises, the policyholder may negotiate the forum, number of arbitrators, cost-sharing and whether the prevailing party will be entitled to legal fees. Also if the clause permits the policyholder to select an arbitrator, he can get the benefits associated with the selection of a neutral party with subject matter expertise.

Due to the confidential nature of arbitration proceedings, the presence of an arbitration clause may work to the policyholder's advantage where he would prefer not to have the coverage dispute made public. For example, where the facts related to the underlying claim involves private or sensitive data or proprietary business information. On the other hand, the confidentiality of arbitration proceedings might mean that insurance companies, who are often very careful about public perception and their reputations, might be more willing to deny coverage on spurious or overly technical grounds that they otherwise would rely on if the dispute was to be resolved in the public forum of a courtroom.

The key however is this. At the time of agreeing the contract of insurance, the insured really should read all of the terms and conditions, and carefully consider the effect of any dispute resolution clause contained in it. If it does not contain an arbitration clause, and the insured is of the view that he will be best served by including one, then that is the time to seek to negotiate one into the contract. Conversely, if it includes an arbitration clause and the insured considers that his circumstances are such that would be disadvantaged by an arbitration clause, the it is time to try to negotiate it out. One must however bear in mind that as with any negotiation, the fact that you can enter into a negotiation does not mean that you will necessarily be successful in achieving your end.

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