Pursuant to directions from the Supreme Court, IRDAI has now substantially recast the regulatory position: (i) tariff-based Scott v. Avery–style clauses in fire, engineering, motor and other tariff products have been expressly de‑notified with effect from 27 October 2023, and (ii) for new retail policies, IRDAI has directed that there shall be no arbitration clause at all, while commercial policies may have only a very narrow “may agree to arbitrate” clause that no longer operates as a unilateral, policy‑imposed precondition to suit. This aligns Indian insurance arbitration more closely with modern pro‑arbitration policy under the Arbitration and Conciliation Act, 1996 (ACA 1996), while responding to concerns of access to justice and consumer protection.

Historical Evolution and the Scott v. Avery Doctrine

In Scott v. Avery (1856) 10 ER 112), the House of Lords upheld a clause providing that no action should be brought until the amount of loss had been determined by arbitrators, effectively making an award a condition precedent to litigation and validating such clauses despite the traditional rule against ouster of the court's jurisdiction. Later English and Commonwealth commentary and legislation continue to treat “Scott v. Avery” clauses, understood as clauses postponing the accrual of the cause of action until an award is made, as generally valid, subject to statutory controls (e.g. Section 55 of the New South Wales Commercial Arbitration Act 1984, explicitly recognising Scott v. Avery clauses).

Reception in Indian insurance forms

Indian fire and engineering policies historically adopted tariff wordings modelled on English forms, combining: (i) a limitation/forfeiture clause requiring suit within a short period after rejection and (ii) an arbitration clause confined to “differences as to the amount of any loss or damage”, followed by a Scott v. Avery sentence: “it shall be a condition precedent to any right of action or suit that the award … shall be first obtained”. These provisions became embedded as “general regulations, terms, conditions, clauses, warranties, policy and endorsement wordings” of fire, engineering, motor and other tariffs under Indian law.

Insurance Arbitration in India: From Nationalisation to Privatisation

After nationalisation of general insurance, the tariff regime under the Tariff Advisory Committee standardised fire and engineering policies: standard conditions (including Clauses 13, 18, 19 in Vulcan) governed forfeiture, arbitration limited to quantum, and Scott v. Avery wording. IRDA (now IRDAI) in 2006 permitted de‑tariffing for rating but kept tariff general regulations, terms, conditions, clauses and wordings in force “until further orders”, thereby preserving these legacy arbitration clauses well into the liberalised era.

Post‑2000 privatisation

Post‑2000 market liberalisation saw private insurers using tariff‑derived wordings, often retaining the liability/quantum split and Scott v. Avery language, leading to repeated litigation on (i) what disputes fell within the arbitration clause and (ii) whether an award was a condition precedent to suit. This spawned the modern Supreme Court jurisprudence discussed below.

The Scott v. Avery Clause in Indian Insurance Law

Nature and legal characteristics

In Vulcan, the Supreme Court explicitly recognised the last part of the standard arbitration clause – making an award a condition precedent to any action or suit – as a “Scott v. Avery clause”. The Court accepted that such clauses are generally valid where the arbitration agreement is wide enough to cover all disputes under the policy, in which case an award must precede litigation. However, it stressed that where the clause is restricted to quantum, it cannot be relied upon to bar suits on questions of liability.

Access to justice and the liability/quantum distinction

Reading the forfeiture clause (Clause 13) together with the arbitration clause (Clause 18), the Court in Vulcan held that upon repudiation of the claim, the insured's only remedy is to commence a suit within three months to establish liability; only after liability is established does the arbitration clause operate to determine quantum, if disputed. Repudiation in toto does not generate a “difference as to the amount of loss or damage” and therefore is outside the arbitration agreement; the Scott v. Avery condition cannot be invoked to force arbitration where the underlying dispute is non‑arbitrable under the clause.

Later, in Narbheram, the Court construed a similar clause (Clause 13) in a “Fire Industrial All Risks” policy and reaffirmed that the arbitration agreement is conditional: it is “kindled” only where liability is admitted and the dispute is confined to quantum; repudiation in toto falls within an “excepted category” not referable to arbitration. This approach reflects a conscious balancing between party autonomy and access to courts.

Commercial justification of the distinction today

The liability/quantum split was historically justified on the basis that liability questions (fraud, coverage, breach of warranties) were seen as more appropriate for courts, while quantum disputes (valuation, adjustment) benefited from technical arbitral expertise. Modern large commercial insureds, however, often prefer a single arbitral forum for both liability and quantum under broad, institutional clauses; the Indian Supreme Court's restrictive reading simply reflects the narrow drafting of legacy clauses rather than a hostility to arbitration. IRDAI's reforms (discussed below) effectively signal that, for standardised products, the historic distinction is no longer desirable as a regulatory default.

Judicial Interpretation: Key Cases and the ACA 1996

Scott v. Avery and English cases in Indian reasoning

In Vulcan, the Supreme Court drew extensively on Scott v. Avery, Jureidini v. National British & Irish Millers, Heyman v. Darwins, Viney v. Bignold, Caledonian Insurance v. Gilmour and O'Connor v. Norwich Union to distinguish between wide arbitration clauses (covering liability and quantum) and narrow quantum‑only clauses, and to hold that Scott v. Avery wording cannot bar a suit where the underlying dispute is outside the arbitration agreement.

Vulcan Insurance Co. Ltd. v. Maharaj Singh [1976] 2 S.C.R. 62

a) The policy's Clause 18: arbitration “if any difference arises as to the amount of any loss or damage”, plus Scott v. Avery wording making an award a condition precedent

b) The insurer repudiated liability entirely under Clause 13; the Court held that no “difference as to the amount of loss” arose, and the arbitration clause did not apply. Section 20 of the 1940 Act (analogous in function to s 11 ACA 1996 in appointment cases) could not be invoked.

c) The Scott v. Avery condition precedent could not be enforced where the dispute was non‑arbitrable under the clause itself.

Oriental Insurance Co. Ltd. v. Narbheram Power & Steel Pvt. Ltd.

[2018 4 S.C.R. 826

The Court, in a s 11(6) ACA 1996 application, interpreted Clause 13 of a fire policy (pari materia with earlier tariff clauses) and reaffirmed that: (i) the clause only permits arbitration where liability is admitted and the dispute relates to quantum; (ii) repudiation in toto falls within the excepted category; and (iii) the Scott v. Avery phrase requiring an award as condition precedent applies only where a dispute is within the arbitration clause. The Court held that the remedy was a civil suit, not arbitration.

United India Insurance Co. Ltd. v. Hyundai Engineering & Construction Co. Ltd.

[2018] 12 SCR 1089

Relying on Vulcan and Narbheram, a three‑Judge Bench again construed a standard clause (“liability being otherwise admitted”) and held that: (i) the arbitration clause is activated only when liability is unequivocally admitted and the dispute is confined to quantum; (ii) repudiation of liability in toto renders the clause “ineffective and incapable of being enforced, if not non‑existent” for that dispute; and (iii) such repudiation gives rise to a remedy in suit.

Sections 7, 8 and 11 of the ACA 1996

These cases demonstrate the Court's approach to:

a) Section 7: The arbitration agreement is interpreted strictly; where the clause is limited to quantum and expressly excludes disputes where liability is denied, the agreement does not “exist” for a repudiation dispute.

b) Section 8: Courts will refuse reference to arbitration where the issue raised (insurer's liability in toto) falls outside the scope of the agreement; the Scott v. Avery wording cannot enlarge the substantive reach of the clause.

c) Section 11: Appointment of arbitrators will be declined where, on a prima facie examination, the dispute is non‑arbitrable under the clause (as in Narbheram and Hyundai), notwithstanding the general pro‑arbitration mandate post–2015 amendments.

Supreme Court's Intervention and IRDAI Circulars

Reference to IRDAI and policy concerns

In Special Leave Petition (Civil) Nos. 224-226 of 2023 titled National Insurance Company v. Nippon Paper Foodpac Pvt. Ltd., by order dated January 9, 2023, the Supreme Court acknowledged the confusion caused by the distinction between quantum and liability disputes, leading to “multiple litigation, piecemeal decisions, and chances of conflicting orders.” It referred the matter to the IRDA, directing the Regulator to justify the inclusion of such restrictive arbitration clauses in insurance policies.

IRDAI's 2023 circular expressly states that, “On reference made by the Hon'ble Supreme Court of India, IRDAI undertook a comprehensive review of the extant Arbitration Clause prevalent across various lines of business in the General Insurance Industry”. The Authority concluded that existing clauses were “limited in scope” and required amendment, and that retail/individual policyholders should be kept out of arbitration clauses altogether because they have adequate redressal fora (insurer grievance systems, Ombudsman, consumer fora and civil courts).

IRDAI's 2023 circular on amendment of arbitration clauses

Key features of the 27 October 2023 circular include:

a) Retail business: “All policies issued under the Retail Lines of Business shall not have any Arbitration Clause.”

b) Commercial business: All policies “shall have an Arbitration Clause” in a new, minimalist form: the parties “may mutually agree and enter into a separate Arbitration Agreement” to settle disputes, and any arbitration shall be under the ACA 1996.

c) Transitory regime: Existing arbitration clauses remain for the policy term unless the policyholder specifically requests substitution; for renewals on or after the circular date, the new clause is deemed to have replaced the old one in commercial policies, while retail policies are deemed to have the arbitration clause deleted.

2024 de‑notification of tariff arbitration provisions

By notification dated 22 January 2024 under s 64‑ULA Insurance Act, IRDAI de‑notified the arbitration‑related provisions in “tariff general regulations, terms, conditions, clauses, warranties, policy, add‑ons, endorsement wordings and proposal form applicable to the risks of insurance business governed by the erstwhile tariffs”, with effect from 27 October 2023. Hence the Scott v. Avery–type tariff arbitration clauses for fire, engineering, motor, workmen's compensation and other tariff classes are formally withdrawn as a regulatory mandate.

Comparative Jurisdictions

England

English law accepts Scott v. Avery clauses as a species of arbitration agreement that may postpone the right of action until an award is obtained. Modern English arbitration law [(English) Arbitration Act 1996] does not invalidate such clauses per se, but courts increasingly construe them in light of statutory pro‑arbitration policy and doctrines on separability and competence‑competence. Recent commercial cases on competing jurisdiction and arbitration clauses e.g. decisions concerning reinsurance contracts, illustrate an interpretative, rather than categorical, approach: whether such a clause in practice ousts the court depends on its language and contractual context.

Singapore

Singapore courts have applied Scott v. Avery–type clauses strictly in insurance contexts, emphasizing that where compliance with an arbitration clause is a condition precedent, failure to arbitrate within the stipulated time may bar the claim, but only where the clause clearly covers the dispute. The Singapore Academy of Law's annual review notes that parties are free to stipulate time‑limits and Scott v. Avery wording, but courts will not extend such clauses to disputes outside their express scope.

Australia

Australian legislation (e.g. Commercial Arbitration Act 1984 (NSW) s 55) expressly addresses the “effect of Scott v. Avery clauses”, preserving their validity while integrating them into the statutory stay and enforcement regime. Case‑law, particularly in construction and shipping, applies such clauses but subjects them to public policy limits (including consumer/insurance protections and access‑to‑court guarantees).

Hong Kong

Reform reports on Hong Kong's Arbitration Ordinance discuss Scott v. Avery clauses and confirm that they are recognised as valid mechanisms making an award a condition precedent to suit, again subject to statutory controls and court powers to stay or intervene where appropriate.

United States

In the United States, insurance arbitration is analysed primarily under the Federal Arbitration Act and state law. Clauses functionally similar to Scott v. Avery (requiring arbitration before suit) are generally enforced in commercial contexts, but heavily scrutinised or invalidated in consumer insurance and adhesion contracts where they operate as de facto waivers of judicial remedies or conflict with state insurance codes and unconscionability doctrines.

Critical Issues

Party autonomy vs. contracts of adhesion

Party autonomy is the cornerstone of arbitration, resting on the premise that parties voluntarily and knowingly choose arbitration as their preferred method of dispute resolution. However, this principle sits uneasily with contracts of adhesion, such as standard-form insurance policies, where the insured has little or no bargaining power to negotiate contractual terms. Scott v. Avery clauses are typically embedded in pre-drafted boilerplate policy wordings offered on a “take-it-or-leave-it” basis, leaving policyholders with no realistic opportunity to reject or modify the arbitration provision. Consequently, the insured's consent to arbitration is often formal rather than informed or negotiated. Such clauses can therefore operate not as genuine expressions of party autonomy but as mechanisms of procedural control, enabling insurers to defeat or delay claims on technical grounds before the merits are considered. The restrictive interpretation adopted by the Supreme Court of India and the subsequent retail carve-out introduced by Insurance Regulatory and Development Authority of India reflect an institutional recognition that compulsory arbitration clauses in mass-market insurance contracts should not be equated with freely negotiated arbitration agreements between commercial parties of equal bargaining strength.

Consumer protection and public policy

Consumer protection is an important facet of public policy, particularly in sectors such as insurance where there is a significant imbalance in bargaining power between insurers and policyholders. By removing arbitration clauses from retail insurance products and stipulating that commercial insureds may be referred to arbitration only through a separate, mutually negotiated arbitration agreement executed after the dispute has arisen, the Insurance Regulatory and Development Authority of India has sought to ensure that arbitration is founded on genuine consent rather than contractual compulsion. These reforms reflect a public policy preference for preserving consumers' access to statutory remedies and preventing standard-form arbitration clauses from becoming barriers to the effective enforcement of insurance claims. They also align Indian insurance regulation with broader international consumer protection trends, which increasingly scrutinise mandatory arbitration, particularly Scott v. Avery clauses—where the costs, procedural complexities, choice of arbitral seat, or other practical impediments may discourage or effectively deny weaker parties access to justice. The regulatory approach therefore seeks to strike an appropriate balance between promoting arbitration as an efficient dispute resolution mechanism and safeguarding the fundamental public policy objective of ensuring fairness and meaningful access to justice.

Institutional/specialist insurance arbitration

The existing jurisprudence and regulatory changes leave space for sophisticated commercial parties to design bespoke, institutionally administered insurance arbitration clauses (including emergency arbitration, consolidation and multi‑party mechanisms), but only by express agreement rather than regulatory fiat.

Comparative practice reinforces this direction of travel. In London, specialist lists and sector‑focused arbitral communities, most prominently bodies organised on the model of the London Maritime Arbitrators Association (LMAA) and specialist insurance/reinsurance panels under mainstream institutions, demonstrate that when parties deliberately opt into a curated pool of arbitrators with deep market expertise, arbitration can deliver a high degree of commercial certainty, consistency of outcome and predictability in the construction of standard‑form wordings. Similarly, Singapore's experience with insurance‑related arbitrations under the SIAC Rules, supported by a judiciary that rigorously enforces time‑bar and condition‑precedent clauses only where they clearly fall within the scope of the parties' arbitration agreement, shows how a specialist, institutionally anchored arbitral ecosystem can coexist with robust judicial supervision and respect for contractual allocation of risk. Recent law‑reform and practice papers on Singapore's international arbitration framework further indicate that questions of consolidation, multi‑party practice and cost allocation in complex arbitrations are increasingly addressed at the level of institutional rules and tailored drafting, rather than through blunt, one‑size‑fits‑all devices like Scott v. Avery clauses.

Against this backdrop, the Indian shift away from mandatory tariff arbitration towards opt‑in, party‑designed clauses can be understood not as retrenchment, but as an invitation to develop similarly sophisticated, specialist insurance arbitration mechanisms grounded in genuine consent.

Draft of a modern Model Clause (Commercial Policies)

Drawing from the Supreme Court's insistence on clarity and the IRDAI circular, a model clause for large commercial insurance could:

a) Define a broad arbitration agreement covering “any dispute arising out of or in connection with the policy, including any question as to its existence, validity or termination”, thereby avoiding the liability/quantum ambiguity that plagued legacy clauses.

b) Designate a neutral seat (e.g. Mumbai), institutional rules (e.g. SIAC/MCIA), and provide for emergency arbitrator and interim relief consistent with Part I ACA 1996.

c) Expressly address multi‑party and consolidation issues, allowing consolidation of arbitrations involving co‑insurers, reinsurers and insureds where agreements are compatible.

d) Include a carefully drafted condition precedent clause, if commercially desired, but limited to disputes clearly within the arbitral remit and subject to reasonable time‑limits and savings for consumer/retail business.

Recommendations and the Road Ahead

a) Legislative clarification: Parliament could consider targeted amendments (either to the Insurance Act or ACA 1996) clarifying the status of arbitration clauses in insurance, drawing on comparative models (e.g. Australian s 55) to ensure that Scott v. Avery‑type provisions do not operate oppressively in consumer contexts.

b) IRDAI standard commercial clauses: IRDAI may, beyond simply de‑notifying legacy clauses, prescribe model optional arbitration clauses for commercial policies, with separate variants for domestic and international programmes and guidance on seat, rules and consolidation.

c) Specialist insurance arbitral panels: In collaboration with arbitral institutions, IRDAI and industry bodies could foster specialist insurance arbitration panels in India, analogous to London insurance lists, to support complex commercial disputes where parties have genuinely chosen arbitration.

d) Consumer carve‑outs: The current regulatory policy excluding retail policies from arbitration clauses should be preserved and monitored; empirical work could assess whether consumer outcomes improve under this regime.

The trajectory from imported Scott v. Avery clauses, through the Supreme Court's nuanced case‑law in Vulcan, Narbheram and Hyundai, to IRDAI's recent circulars and de‑notification of tariff arbitration clauses, marks a significant recalibration of insurance arbitration in India. India's courts have consistently refused to allow narrow, tariff‑derived clauses to oust judicial determination of coverage and liability, while remaining receptive to well‑drafted, broad arbitration agreements in genuinely commercial settings.

The regulatory reforms which involve removing mandatory arbitration from retail insurance and replacing legacy Scott v. Avery devices with a consensual, opt‑in model for commercial policies, are far from being complete, and going forward, harmonising insurance law with India's pro‑arbitration policy will depend less on relic tariff wording and more on sophisticated, transparent clause drafting and the development of credible specialist arbitral fora.

Author is a Senior Advocate at Supreme Court of India. Views are personal.