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Arbitration under Insurance Law
The purpose of this sub-section is to give detail about ADR involvement in insurance as a contract and discuss in general and specifically the extent parties’ right to waive their right to institute 1st instance substantive litigation, differentiating insurance matters which could be taken to ADR and not. In addition, we will discuss the types of ADR which are recognized in settling insurance disputes and selecting the one which is best, and also discuss as to how the number and identity of third parties which are involved are determined including their role, qualification and steps followed by them by referring to legal provisions and the practical facts we have realized during our interviews and case study.
The insurance relationship is a contract that may involve more than two persons, the insurer, in exchange for the payment of consideration (called premium) agrees to pay for loss caused by specific events. The beneficiary is the person to whom the insurance proceeds are payable. The insured is the person whose life is covered by a life insurance policy or the person who acquires insurance on property in which he\she possesses an insurable interest (Law for Business, seventh edition, A. James Barnes, Terry Moretied Dowrkin, Eric L. Richard ).
When the parties agree and sign an insurance policy which contains Arbitration clause, it is presumed that they have consented to be bound to settle their dispute by Arbitration. The agreement of insurance presupposes the meeting of mind of the parties that any reservation or restriction by one party shall not affect his agreement unless it is communicated to the other.
Kinds of ADR Recognized in Insurance
Types of ADR means are not few in number. However, the most widely used are three in number. The first one is Negotiation, a consensual bargaining process in which the parties attempt to reach agreement on a disputed on potentially disputed matter. And secondly Mediation is a method of non- binding dispute resolution involving a neutral third party who tries to help the disputing parties reach a mutually agreeable solution. And the last one is Arbitration which is a method of dispute resolution involving third parties who are usually agreed to by the disputing parties and whose decision is binding. Accordingly we will discuss how the above methods are applied in dispute arising in relation to insurance contract.
- A. Negotiation
It is a mechanism by which the parties solve their problems without the involvement of third parties. In this processes the parties’ diligence, commitment and confidentiality is substantial. And this shows that Negotiation is consensual means of ADR. Most of the time insurance companies prefer Negotiation to solve their disputes in order to maintain their customers and to preserve their future relationship with the insured. The insurance company uses different ways of communication to invite the insured in order to negotiate with them. Such as, through phone communication and by giving notice. This is the most efficient method especially during the policy issuance time and the first stage of most kind of disputes. In the latter case if they fail to agree, they will proceed to the other advanced kind of dispute settlement mechanism.
- B. Mediation
It is a mechanism whereby the parties nominate a third party and willingly produce their case before him in order to resolve their dispute. Most of the time insurance companies use Mediation in order to solve a dispute which arises between the insured and third party. Though most companies recognize arbitration in their policy as a means of dispute settlement, in effect, they start with mediation and some time if mediation fails to pull the parties together, court proceeding starts. The elders of the community or some times experienced lawyers will be called to serve as a mediator. The effect, the procedure and other matters there under will be regulated under the general provisions we have since the policy said nothing about mediation, but only about arbitration.
- C. Arbitration
It is a mechanism by which parties submit their case to the third party who renders binding decision. Most of the insurance companies in Ethiopia as stated in their insurance policy adhere to the settlement of disputes through Arbitration (Insurance policy of Nile Insurance Company, Nib Insurance Company, Hibret Insurance Company ).
The way of nominating an arbitrator depends on the wordings of their arbitration clause in their insurance policy. The insurance policy of some insurance companies suggests the appointment of the arbitrators by both parties. For instance we can see the content of Arbitration clause No.4.11 of Nib Insurance Company (S.Co.):-
“All differences in amount arising out of this policy shall be referred to the decision of an arbitrator to be appointed by both parties. If they are unable to agree on a single arbitrator then two arbitrators will be appointed each party appointing one arbitrator within one month of being require so to do by the other party. Failing that the party demanding Arbitration shall proceed with a sole arbitrator appointed by him. Where two arbitrators are elected by the parties they shall jointly appoint an umpire who will preside over all their meetings. The conduct of the Arbitration shall be as provided by the relevant law.”
Some other insurance companies even if they include Arbitration clause in their insurance policy, the policy fails to determine the way of nomination of arbitrators and their numbers. Rather it refers the provisions of the Civil Code (Article 3331 of the Civil Code ) to be applied with these factors as the case may be (Insurance Policy of Nile Insurance Company ). The arbitrators may be any person as far as the parties are consented and most of the time the arbitrators are expertise in the area of the dispute. The decision rendered by an arbitrator is final and binding up on the parties.
Question: Which kind of ADR do you think is best to settle insurance disputes and why? Can we employ different kings of ADR according to (depending on) the nature of the dispute?
220.127.116.11. Insurance Matters Which Could Be Taken to ADR.
In principle, when a dispute arises it is the court which is expected to solve such dispute. But there is also other means of solving a dispute, i.e. ADR. When we take the matters which can be taken to ADR in to consideration, all disputes cannot be resolved by ADR. Here, the question is all about whether there is public interest in the outcome of the dispute. As the interest of the general public cannot be determined by individuals who are not responsible to the public, we have to refrain from taking such kind of matters to ADR. Putting this general idea in mind, we are going to see the matters especially related to insurance. In insurance a dispute may arise from two different matters:-
- A. Between the insured and the insurer
In any kind of business transactions including insurance the occurrence of dispute is inevitable and in insurance, dispute could happen between the insured and the insurer. In order to resolve such dispute parties can take their case either to the court of law or to ADR. But before deciding in such matter parties must adhere to the policy which the insurance company issues and signed by them.
In terms of subject matter which can be taken to arbitration, most insurance policies allow “all differences” while others only “differences in amount”.
“If any difference arises as to the amount of any loss or damages such difference shall, independent of all other questions, be referred to the decision of an arbitrator…” (AWASH, UNITED, Workmen’s Compensation Policy, Conditions No. 14)
“If any difference arises in connection with this Policy such difference shall independent of all other questions be referred to the decision of arbitrator…” (AWASH Fire and Lightening Policy, Conditions No. 18))
So, if there is Arbitration clause in their insurance policy a dispute that arises between them must be first taken to Arbitration. In the absence of such clause it is up to the discretion of the parties to choose the means to resolve their problem. But when we see the practice of the insurance companies, I meet in Dire Dawa, Companies prefer to solve their dispute by ADR rather than the exhaustive court litigation in order to maintain their customers.
Here is a case about the interpretation of the policy and which matters can be taken to Arbitration decided by the federal first instance court of Addis Ababa Lideta division given on 17 April 1997 E.C (file No 42694 in the case Ato Ayenew Abebe Vs united insurance company).
Ato Ayenew Abebe is the owner of lorry plated 3-14740 E.T. The car get insured in the defendant company by policy No 01-4-03574 on 6 February 1987 E.C where by the company undertakes to pay all damages the car may face. The value of the car at that time was 400,000 birr and it was so in the renewal of 1996 E.C also. Art 8 of the policy reads as '' All differences arising out of the policy shall be referred to arbitrations decision''.
Unfortunately the car get crushed and totally come out of use on 6 may 1996 E.C while travelling from Addis Ababa to Gondar around Abbay Bereha falling to 130 meters cliff with its 150 quintal cement on it. The driver of the car escapes from the disaster by jumping out of the car when it is falling in to the cliff. The police of the Wereda made investigation about the event that the peril is covered by the policy for the reason that the car faces the accident in normal course of movement.
The insured immediately come and request the recovery from the insurer company on 14 July 1996 E.C. The insured Ato Ayenew gave notice to the insurer demanding reimbursement of total damager of birr 400,000 birr. Unlike this situation the company kept silent on the notice and all requests of the plaintiff remained unanswered.
On his defence for the court claim of the plaintiff, the defendant raised many objections among the objections raised by the company is that the court has no jurisdiction because the case has to be referred to arbitration pursuant to the arbitration clause. The court over ruled this preliminary objection of jurisdiction and continued to entertain the subject matter of the case until final decision is given on 29 September 1999 E.C.
The court takes into the meaning of the term of arbitration clause of the policy as presented to it in Amharic translation. The Amharic version of the policy has been considered to mean a difference "....arising on...." instead of “arising out of” the policy. The court used “arising on” to interpret and come to conclude that it is a dispute only about the terms or on the face of the contract. When continuing the analysis the court stated that there is no disagreement about the terms written on the contract. It has said that the plaintiff instituted his claim basing on and in accordance with the contract and this means there is no disagreement about the policy and so the arbitration clause cannot be applied.
Disputes subject to arbitration, according to the court's reasoning, are those composed of disputes on the wording of the contract. The case in hand doesn't contain such disputing word in the contract and so it is with the validity and wording of the contract so that it is not subject to arbitration.
It seems that, the court departs from the principle of interpretation of the contract. When we see the reasoning of the court on deciding the matter as not arbitrable, the court read the translation as “dispute arising on the contract ". This leads us to mean that disputing parties have to quarrel on the wordings written under the contract. When interpreting the term “arising on" to mean disputes on the wording of the contract, the court departs from the rule of interpretation of contracts specified under Arts.1732-39 of the C.C.
Art. 1734 of the C.C. obliges the court to search out the common intention of parties. Here, it means that what was to mean in saying that word in each of the parties' mind is determinant job, the interpreter has to figure out parties' understanding to the word is essential in interpreting the contract. In our case at hand what parties intended when saying “arising out of” or “arising on” (in translation) has to be ascertained first. The intention of both parties towards the cause of the dispute is clear, that is about the liability or not of the defendant as per the contract to the plaintiff and to what extent. This can be required only after the happening of the event.
I would like to raise another important issue as to which version of the policy should be considered overriding in case of disparity between the original English version and the interpreted Amharic version. In most, if not all, instances insurance policies are prepared in English version and only when required before authorities that it will be interpreted to Amharic version.
- B. Between the Insured and third party
A dispute may arise between the insured and third party in a case where the insured or his property causes damage to a third party. In this case, the insurance policy will not govern the matter since the third party injured is not a party to it (Principle of Privity of contract - terms of a contract will only be binding as between the parties to the contract.). Instead, provisions of the Commercial Code, for instance, Liability insurance provisions will apply (Articles 685-688). Thus, pursuant to Article 685 of the Commercial Code, matters as between the insured and the third party injured may be settled either in the court or by amicable settlement.
When we see the practice of the insurance companies (particularly Dire Dawa, for instance, Nib Insurance Company), most of the time those companies which have vested interest and allowed by the law to intervene (Article 41 of the Civil Procedure Code, See also Article 687 (1) of the Commercial Code) chooses Mediation to solve such dispute between the insured and third party. For the reason of the companies’ desire to maintain their future relationship with the insured and to preserve the good attitude of the public towards them Mediation is preferable.
Parties’ Rights to waive their Right to institute 1st instance substantive litigation
As a principle any party who claims that his right has been infringed have a right to take his case to the court with good cause (Article 33(2) of Civil Procedure Code ). But this does not mean that parties have no right to settle arguments between them by means other than court litigation. Because of the time, money and personal resources that get tied up in litigation, businesses and individuals are increasingly turning to alternative to trials to settle disputes.
Disputants have absolute right to agree to settle any dispute among them by ADR means as they enter in to a contract, that is in their agreement or they even can agree for such means after such dispute arises. In insurance contract, the insurance company and the insured shall agree as to their relationship by a document called an insurance policy (Article 657(1) of the Commercial Code ).
Under their insurance policy, many companies found in Ethiopia incorporate a clause that stipulates the handling of any differences, or some times only the claim over the amount of payment, that in case may happen between them and their customers. In such clause most of them prefer Arbitration means to settle disputes arising out of their insurance policy. (Insurance Policy of Nile, Nib, Hibret, Awash, United Insurance Companies).
“All differences arising out of this Policy shall be refered to the decision of an arbitrator to be appointed in writing by the parties in difference, or if they cannot agree up on 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 thirty days after having been required so to do in writing by the other party. In case either party shall refuse or fail to appoint an arbitrator within thirty days after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint a 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 I writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings. In the event of the death of an arbitrator or umpire, another shall in each case be appointed in his stead by the party or arbitrators (as the case may be) by whom the arbitrator or umpire so dying was appointed. 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 the loss or damage if disputed shall be first obtained.” (UNITED I. C., Private Vehicle, Commercial Vehicle Policy, Condition No. 8).
“If any difference arises as to the amount of any loss or damages such difference shall, independent of all other questions, be referred to the decision of an arbitrator…” (AWASH and UNITED Insurance Companies, Workmen’s Compensation Policy, Conditions No. 14).
“If any difference arises in connection with this Policy such difference shall independent of all other questions be referred to the decision of arbitrator…” (AWASH I. C., Fire and Lightening Policy, Conditions No. 18)).
The binding nature of such clause is unquestionable. It is clearly stipulated that terms included in a contract by mutual agreement of the parties will be binding between them as if it is law (Article 1731(1) of the Civil Code ). Thus, insurance contract being a contract, terms included in the insurance policy binds both parties and if they choose to settle their differences by Arbitration, such must be the first means to be taken when dispute arise between the parties. Whether viewed in terms of morality or of economic efficiency, the law should enforce as far the parties make their own law by the terms of their agreement. It is unnecessary to look outside rules as regulators of their conduct and they will probably find the results more satisfactory than if such rules were thrust up on them (Commercial Law by Roy Goode ).
Furthermore, courts also often require parties involved in certain kinds of disputes to try alternatives in an effort to get the parties to settle before trial. Since our law follows the theory of declaration of will (intention) (George Krzeczunowich, Formation and Effect of Contract in Ethiopia Law, FOL A.A.U 1983, pg.13 ), the court in order to decide the cases brought before it must look first of all at the parties’ concrete expression (Article 1680(1) of the Civil Code).
In one case decision (Ato Chanie Markoss Vs Hibret Insurance Company, Federal 1st Instance Court, Dire Dawa, File No.10560) the court have dismissed a case instituted before it by reasoning that the parties have agreed to settle any differences between them which arises based on the insurance policy by Arbitration. The court said that the parties have to exhaust this first, meaning that before coming to the court they have to try to settle their disputes by Arbitration in accordance to their agreement.
Ato Chane Markos, in this case, is the owner of code 00018Dr. FIAT BUS which is insured in the defendant company by policy no 06-24-0005. Unfortunately the car collided on 6 Dec. 1996 E.C. in Alemaya Wereda. After a lots of notices by the plaintiff to get compensated, lastly the plaintiff instituted file demanding 77,894 birr before federal first instance court of Dire Dawa on 28 Sept. 1997 E.C.
The defendant objected the jurisdiction of the court arguing that the case has to be seen to arbitration as it was referred by the policy. In defending this objection the plaintiff, in his counter defence, argued that the clause (Art.9 of the policy) is simply a policy written by the defendant where the plaintiff gives no willingness to be bounded by it that it shall not bind me. Secondly, even said binding, there is no officially established arbitrator in the country and the clause can not be implemented in such circumstance. Thirdly, the court should sustain preliminary objections only those listed under Art. 244 of C. Pr. C., and so on.
The court decided in favour of the defendant saying that the case has to be referred to arbitrator(s). The court tried to support its decision with reasons that parties agreed to refer all their disputes to arbitrators before taking it to court of law. As per Art 1731 of C.C. it is a law between them and so their case has to be referred to arbitration. As regards the counter claim of the plaintiff, that it has to be specified under Art. 244 of the C.Pr.C, the court said that the said article is illustrative than exhaustive. It is not prohibited to accept other objections which are not listed there. As the principle of Civil laws, all not prohibited are permitted. Therefore, the case has to be seen by arbitrator(s) before court litigation.
The court, in my view, made a surprising analysis with the appropriate law to reach decision. The answer for the argument of the plaintiff that the policy is prepared only by the defendant and the plaintiff gives no consent to be bound, is really appropriate. This means the plaintiff had sufficient information about the arbitration clause in the time of the conclusion of the policy. It is beyond our objective to discuss about the validity of insurance policy as a contract, and hence it is better to pass over this part of the argument.
But the problem, I can see is that, the court failed to answer the argument that there is no state established arbitrator. Actually this may be for the reason that it is easy and obvious. As we have discussed in chapter one and as the definition infers arbitration involves choosing a judge to one self. This directly takes us to conclude the existence of state established arbitrator worth's nothing for arbitration clause to be implemented. Even there were established arbitrators, they couldn't see the case between the parties unless the latter agreed to refer to them. But if the plaintiff wants establish arbitrator for any other center as already established arbitrator in the country.
Moreover, the court effectively interprets Art. 244 C. Pr. C. but failed to apply. The court understood Art. 244 C. Pr. C. to be illustrative than exhaustive and this is well constructed legal analyze (Robert Allen Sedler Ethiopia civil procedure pp.174 ). Those listed under the said article as a ground for preliminarily objection, are not exhaustive and the courts can sustain other preliminary objections out of listed under the article. When we come to its application to the case in our hand, it worth nothing whether it is illustrative or exhaustive. The court's conclusion that, the objection is out of the list, is not correct. Art. 244(2) (a) & (g) are talking about this type of objections. Therefore, the objection is among those listed under the article. The decision of the court sustaining the objection is right that the case has to be subjected to arbitration. But this is not for the reason that Art. 244(2) is illustrative than exhaustive. This is because the principle is listed under Art. 244 (2) (a) & (g) of C. Pr. C.
After the decision of the court both parties have nominated arbitrators each and the dispute is now in the hands arbitrators.
All in all, the parties have a right to waive their right to institute 1st instance substantive litigation by stipulating a clause in their insurance policy which states that differences between them will be settled by ADR means, Arbitration in our case, and this clause as discussed above have a binding effect as between them and must be the first resort to turn to solution. The court it self should try to enforce the policy which manifests the interest of the parties.
ADR is a mechanism that encourages disputants to arrive at a mutually negotiated understanding with a minimum outside help. In business transaction the existence of dispute is inevitable and in order to solve such dispute parties use ADR as a means instead of going to court litigation which is costly and exhaustive. Parties to an insurance contract may agree and include Arbitration clause in their insurance policy or they may agree after the occurrence of the dispute. The existence of such clause in their policy makes the decision given by the arbitrators binding as that of court. Without exhausting the remedy available in the Arbitration they cannot take their case to the court. They may also resolve their dispute by Negotiation before even going to Arbitration and to the court, in the absence of any Arbitration clause in the insurance policy. If in any case third party is involved the matter will be resolved by Mediation.