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Features

THE ESSENTIAL NEED TO INTRODUCE A COMMON ALTERNATIVE DISPUTE RESOLUTION (“ADR”) CONDITION IN ALL THE INSURANCE CONTRACTS.
by L.F. ONG LL.B (Hons) (London), CLP, ACII, AMII, MCI Arb, MMCI Arb. Chartered Insurance Practitioner, Arbitrator & Mediator

Introduction

In the matter of disputes between parties or a multiple of parties, there have been a remarkable and commendable development in the recent times on the Alternative Dispute Resolution (“ADR”) in the world at large.

ADR is an alternative platform to litigation which is conducted in an adversarial manner.

ADR comprises Mediation, Arbitration and Adjudication. The sanctity of confidentiality of information so disclosed is granted cognizance in ADR.

The purport and objective of ADR is to resolve matters in dispute amicably and fairly to the best satisfaction of the parties in dispute at a reasonable cost and within a scheduled time frame, all conducted in privacy.

Nowadays, parties are keen to insert the ADR Condition in the Contracts of Agreement for expediency and cost-saving purposes. On this note, the insurance contract is devoid of the Mediation Clause whereas the existing Arbitration Clause is dysfunctional.

The Laws governing Mediation, Arbitration and Adjudication.

Within the Malaysian context, the kick-off point was the Arbitration Act 1952 (Act 93), (“AA 1952”) which was repealed by the Arbitration Act 2005 (Act 646) (“AA 2005”), followed by the Construction Industry Payment and Adjudication Act 2012 (Act 746) (“CIPAA 2012”), which is applicable only to the Construction industry, and the Mediation Act 2012 (Act 749) (“MA 2012”).

The Arbitration (Amendment) (No: 2) Act 2018 (gazetted on 4th May 2018) is amended in Section 2 under “arbitral tribunal” by insering the words “an emergency arbitrator,” before the words “a sole arbitrator or a panel of arbitrators”. The said Amendment does not define “an emergency arbitrator”.

On 30 June 2016, the Malaysian Judiciary, in tandem with worldwide practice, initiated mediation by issuing a Practice Direction No. 4 of 2016 under the heading of “Practice Direction on Mediation” complete with a 2-page Procedure marked Annexures “A”, “B” and “C”and a specimen “Agreement to Mediate” (Form 1). In a nutshell, the Court would not proceed with litigation unless and until the contesting parties have in the first instance attempted to resolve the case by mediation.

The Ombudsman for Financial Services ( “the OFS”) is a creature of the Financial Services Act 2013 (Act 758) (“FSA 2013”) and the Islamic Financial Services Act 2013 (“IFSA 2013”) “to provide a fair and efficient avenue for financial consumers to resolve disputes against financial service providers” (per Press Release by Bank Negara Malaysia on 28 September 2016).

It would be a fallacy to construe the OFS as a mediator. The OFS which had mutated
from the Financial Mediation Bureau (“FMB”) (now defunct), since 1 October 2016, have the characteristics of an adjudicator with quasi-supervisory authority. The word “Mediation” in FMB is a misnormer.

Contrary to the Adjudicator’s decision in the CIPAA 2012 which is binding on all the parties in dispute, the OFS’s decision is binding on the financial service providers only but not on the financial consumers who have the liberty to proceed to arbitration or litigation.

Mediation Clause

The current insurance contract has no Mediation Clause.

The MA 2012 has no specimen of the Mediation Clause for reference.

The recommended wording of the Mediation Clause would read as follows:-

“Any difference arising as to the amount of loss or damage such difference shall be referred to mediation as a condition precedent to arbitration, litigation or any other available legal or equitable avenue.

A Mediator shall be appointed in writing by the parties in difference or if they cannot agree on a single Mediator, the other party shall appoint a Mediator within 30 calendar days after having required so to do in writing by the other party, the Mediators shall act jointly in the mediation.

A Mediator shall possess the relevant qualifications, knowledge and experience in mediation through training or formal tertiary education.

The Mediator before accepting the appointment shall disclose any and all facts, whether material or otherwise, that would likely to affect his/her impartiality as a Mediator.

All Costs shall be borne by the party appointing a single Mediator.”

Costs:

Costs are a sensitive issue. As such, this issue must be addressed at the outset.

Form 1 has no provision for costs, thus, leaving a lacuna for the mediator to first and foremost obtain parties’ written mutual agreement on this.

Section 17 (1) and (2) of the MA 2012 on Costs read:-

17 (1) The costs of a mediation shall be borne equally by the parties.

17 (2) Notwithstanding subsection (1), the parties may agree on the amount of costs to
be borne by each party.

Generally speaking, it would be unfair and unreasonable for an aggrieved party (willing to mediate) to bear a part of or the entire costs. In the spirit of fairness, the mediator’s role is to advise the party at fault, in caucus, that in the event of litigation, the aggrieved party would be most likely to be awarded Costs.

The guiding principle is that the party who has prompted the dispute ought to bear the Costs. An illustration is the case of Insurer offering an amount of settlement below the claimant’s expectation which prompted the dispute to arise.

Arbitration Clause

There are 3 types of Arbitration Clauses in existence in the Insurance Contracts, namely,

Type 1

“If any difference arises as to the amount of any loss or damage such difference shall independently of all other questions 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 disinterested persons as Arbitrators, of whom one shall be appointed in writing by each of the parties within two (2) calendar months 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 two (2) calendar months 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 in writing before entering on the reference, and who shall sit with the Arbitrators and preside at their meetings. The death of any party shall not revoke or affect the authority or powers of the Arbitrator, Arbitrators or Umpire respectively, and 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. The costs of the reference and of the award shall be in the discretion of the Arbitrator, Arbitrators or Umpire making the award. And 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”.

Type 2

“If any difference shall arise as to the amount to be paid under this policy (liability being otherwise admitted) such difference 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 so to do by either of the parties, or, in case the Arbitrators do not agree, of an Umpire to be appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meetings. The making of an award shall be condition precedent to any right of action against the Insurers”.

Types 1 and 2 relate to difference on quantum of loss, the policy liability being admitted.

Type 3

“All differences arising out of this Policy shall be referred to the arbitration of some person to be appointed by both parties or if they cannot agree upon a single arbitrator to the decision of two arbitrators one to be appointed in writing by each party and in case of disagreement between the arbitrators to the decision of an umpire who shall have been appointed in writing by the arbitrators before entering on the reference and an award shall be a condition precedent to any liability of the Company or any right of action against the Company”.

Type 3 relates to the differences on the policy liability and the quantum of loss.

Types 1, 2 and 3 have a common usage of the word “Umpire”.

The Clauses so mentioned above were clearly based on the provisions of the AA 1952 which had since been repealed and replaced by the AA 2005.

The article entitled “Arbitration Clause : A Dysfunctional Agreement” which was published by the Malaysian Insurance Institute in their INSURANCE magazine, Issue no. 36 (October-December 2016) highlighted the defects prevailing in the Clause. No useful purpose would be served to repeat the contents of the article.

By perusing the AA 2005 as a guide, the recommended wording of the Arbitration Clause would read as follows:-

“If any difference arises as to the amount of any loss or damage such difference shall independently of all other questions be referred to the decision of an emergency arbitrator or a sole arbitrator as the Presiding 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 disinterested persons as Arbitrators, of whom one shall be appointed in writing by each of the parties within two (2) calendar months after having required so to do in writing by the other party. In case either party shall refuse or fail to appoint an Arbitrator within two (2) calendar months after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint the Presiding Arbitrator; and in case of disagreement between the Arbitrators, the difference shall be referred to the decision of the third Arbitrator as the Presiding Arbitrator , who shall have been appointed by them in writing before entering on the reference, and who shall sit with the Arbitrators and preside at their meetings as the Chairman of the Arbitral Tribunal. The death of any party shall not revoke or affect the authority or powers of the Arbitrator, Arbitrators or Presiding Arbitrator respectively, and in the event of the death of an Arbitrator or Presiding Arbitrator, 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 Presiding Arbitrator so dying was appointed. The costs of the reference and of the award shall be in the discretion of the Arbitrator, Arbitrators or Presiding Arbitrator making the award. And 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 Presiding Arbitrator of the amount of the loss or damage if disputed shall be first obtained”.

A person who is approached for possible appointment as an arbitrator or Presiding Arbitrator shall without delay disclose any circumstances likely to give rise to justifiable doubts as to that person’s impartiality or independence.

It is a pre-requisite that the arbitrator or Presiding Arbitrator shall possess the relevant qualifications and experience in arbitration through training or formal tertiary education”.

The Allianz case is much more specific regarding requirement of certain qualifications or experience as mentioned under Annexe A2.

Costs of the arbitration are at the discretion of the Arbitrator, Arbitrators or Presiding Arbitrator which is generally premised on the basis of Costs follow the event.
An arbitrator is a professional having a primary and a secondary disciplines. The primary discipline is the profession or a multiple of professions qualified earlier. The secondary discipline is arbitration by examinations,training and experience.

A professional who does not have a secondary discipline is an unfit person to act as an arbitrator, and it would be a mockery and an abuse of the legal process to appoint such a person as an arbitrator, akin to appointing a Judge without legal education, training and experience.

Recommended format for insurance contract.

For ease of reference, the recommended format of the wording of Mediation and Arbitration is set out in the attached Annexe “A”.

Key elements of the MA 2012 and AA 2005 have been incorporated into the Mediation and Arbitration clauses to reflect the current laws in force.

Conclusion

Needless to say, the cost of mediation is much more economical than arbitration and litigation. Further, the contesting parties could directly participate in mediation guided by the mediator, with or without the presence of the parties’ legal advisers.

If adopted, the proposed Mediation wording is the first ADR clause ever to be introduced in the insurance contracts in Malaysia thus creating a historic and unprecedented event.

The proposed Arbitration wording represents a gigantic leap forward from the past to the present and the future.

With the incorporation of the new proposed ADR clauses, Malaysia would perhaps be the only and first country in the world to advance ADR in its insurance contracts.

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Copyright © Ong Lim Fatt (2018).

L.F. Ong is a Chartered Insurance Practitioner. He is an Associate of the Chartered Insurance Institute and the Malaysian Insurance Institute and a Member of the Chartered Institute of Arbitrators and the Malaysian Institute of Arbitrators.

L.F. Ong is a practising Arbitrator and Mediator. He has some 45 years of experience in the insurance industry. He was the General Manager of an insurance company and the former Chairman of the Association of Malaysian Loss Adjusters (AMLA), and the Chartered Institute of Arbitrators, Malaysia branch and a Director of the Malaysian Insurance Institute.

He can be contacted at [email protected]