Arbitration: How It Works
Arbitration in general insurance: what the traditional clause covered, how IRDAI's October 2023 circular changed it for retail and commercial policies, and how an arbitration runs under the Arbitration and Conciliation Act, 1996.
What arbitration is
Arbitration is a way of resolving a dispute before an independent arbitrator, or a panel of arbitrators, whose award is binding. In India it is conducted under the Arbitration and Conciliation Act, 1996. It is a private process: the parties choose it by agreement, and they pay for it.
The traditional clause and the 2023 change
General insurance policies traditionally carried a clause sending disputes to arbitration. The clause was narrow. It applied only where the insurer had admitted liability and the disagreement was about the amount payable, known as quantum. A dispute over whether the claim was payable at all was outside it.
IRDAI's circular of 27 October 2023 changed this. It removed the arbitration clause from retail general insurance policies, so a retail policyholder is no longer bound to arbitrate. In commercial lines the parties may agree to arbitrate under a separate agreement. Older material that describes arbitration as a standard condition of every policy is out of date.
How an arbitration runs
Where arbitration has been agreed, it begins with a written notice to the other party invoking the arbitration agreement and asking for the dispute to be referred. This is section 21 of the Act. The agreement's own procedure for appointing the arbitrator is then followed.
The parties can agree on a sole arbitrator. In a three-member tribunal each party appoints one arbitrator and the two of them appoint the third, who presides, under section 11(3). Costs are for the tribunal to allocate under section 31A.
The award is binding. It can be set aside only on the limited grounds listed in section 34, for example that it conflicts with the public policy of India, and the application must be made within three months of receiving the award. A court hearing such an application is not rehearing the dispute.
Arbitration and the other routes
Arbitration involves arbitrators' fees. For an individual policyholder with a disputed claim, the Insurance Ombudsman charges no fee and needs no lawyer. It is open to individuals, sole proprietors and micro enterprises, and can award up to ₹50 lakh. A large company's commercial policy is outside the Ombudsman's scope.
The routes also exclude each other at a given time: a matter cannot be before the Ombudsman while it is pending before an arbitrator, court or consumer commission.
Rules at a glance
A quantum dispute in a commercial policy
Illustration: a paper mill in Vapi holds a commercial fire policy, and the mill and the insurer have a separate agreement to arbitrate. After a fire the insurer admits liability but assesses the loss well below the mill's figure. The mill sends a written notice invoking the agreement. Each side appoints an arbitrator, and those two appoint a third to preside. The tribunal hears the surveyors and valuers and makes an award, including a direction on costs. If either side wishes to challenge it, the application under section 34 must be made within three months of receiving the award, and only on the limited grounds the section lists.
Key points
- Insurance arbitration is conducted under the Arbitration and Conciliation Act, 1996, and the award is binding.
- The traditional policy clause applied only where liability was admitted and the amount was disputed.
- Since IRDAI's circular of 27 October 2023, retail general insurance policies carry no arbitration clause.
- In commercial policies arbitration rests on a separate agreement between the parties.
- Arbitration begins with a written notice invoking the agreement (section 21).
- An award can be set aside only on the limited grounds in section 34, on an application within three months.
Common misunderstandings
- Arbitration is no longer a standard condition of a retail policy: the clause was removed by IRDAI's circular of 27 October 2023.
- The traditional clause did not cover every dispute: it applied to the amount, where liability was admitted.
- A section 34 application is not an appeal on the merits: the award can be set aside only on limited grounds.
- Arbitration is not free: there are arbitrators' fees, while the Insurance Ombudsman charges none.
Questions people ask
Can a commercial policyholder still arbitrate?
Yes, where the parties agree to arbitrate under a separate agreement. The arbitration is then conducted under the Arbitration and Conciliation Act, 1996.
Who appoints the presiding arbitrator in a panel of three?
The two arbitrators appointed by the parties appoint the third, who presides, under section 11(3).
Who bears the costs?
Costs are for the tribunal to allocate under section 31A.
What this lesson relies on
- Arbitration and Conciliation Act, 1996 — sections 11(3), 21, 31A and 34
- IRDAI circular of 27 October 2023 on the arbitration clause in general insurance policies
- Insurance Ombudsman Rules, 2017 (as amended 2023)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.