Insurance regulator IRDAI on Friday asked general insurance companies to keep retail/individual policyholders out of the provisions of the arbitration clause in their policy document.

The move is expected to simplify policy wordings and plug a legal loophole where in case the insurance company has not accepted the policy liability then no dispute can be referred for arbitration, limiting the choice for the insured.

The arbitration clause is a paragraph tucked away within the lengths of policy wordings of a general insurance policy. It typically states that if there is any dispute or difference to the amount payable under the policy, arbitration shall be conducted under the provisions of the Arbitration and Conciliation Act, 1996.

A two-judge bench of the Supreme Court in a judgment dated October 5 observed that consumer disputes fall under the category of non-arbitrable disputes and should be kept away from private fora such as ‘arbitration’ unless both parties are willing to opt for arbitration over the remedy before public fora.

This prompted IRDAI to undertake a comprehensive review of the extant arbitration clause across various lines of business in the general insurance industry.

Accordingly, the regulator in a communication to the general insurance companies said that all policies issued under retail lines of business shall not have any arbitration clause.

For commercial lines of business, a mutual agreement can be entered separately to settle any disputes in relation to the policy under the provisions of the Arbitration and Conciliation Act, 1996.

For new policies issued on or after October 27 (date of circular), arbitration clause shall be deemed deleted. For existing policies, the clause shall remain valid till the term of the policy unless the policyholder specifically requests the insurance company to replace it.