A high-profile dispute in Saudi Arabia has recently played a significant role in defining the application of warranties for Saudi insurers, says global legal firm Clyde & Co.
In a commentary on the law firm's website, Mr Saud Alsaab, a partner, highlights the new developments that are expected to set precedent for future warranty-related disputes in insurance policies governed by Saudi law.
Application of warranties in insurance law
A 'warranty' is a well understood term in the context of insurance law. An insured that provides a warranty effectively promises to the insurer that certain facts are true or untrue and/ or undertakes that certain conditions shall be fulfilled. However, the effect of a breach of warranty differs across various jurisdictions.
The Insurance Law and Regulations in Saudi Arabia are silent on the remedies available to insurers in instances where the insured breaches a warranty in an insurance policy. Accordingly, the remedies available to an insurer where the insured has breached a warranty under an insurance policy governed by the laws of Saudi Arabia were not abundantly clear.
Decision by the Insurance Disputes Committee (IDC)
In a recent high-profile case, the IDC Appeal upheld the decision of the IDC first instance to dismiss the insured's claim for physical and business interruption losses exceeding SAR84m ($32m) resulting from a warehouse fire, due to breach of warranty.
Importantly, the IDC expressly commented in its judgment that a warranty is an essential part of the policy and is equivalent to an undertaking by the insured which needs to be complied with throughout the duration of the policy in order for cover to be triggered. Failing to comply with a warranty is contrary to the parties' agreement and entitles the insurer to be discharged from its liabilities under the policy by rejecting the claim.
The IDC supported its conclusion by confirming its decision to be in line with the Shariah principle that a careless person shall bear the consequences of their carelessness. In an insurance context, this effectively means that where an insured would ordinarily be entitled to indemnity under the policy, but has carelessly breached a warranty by omitting to do certain actions, coverage will not be triggered and the insurer shall be entitled to reject the claim.
Significance of the decision
This is a very positive development for insurers in the region and brings welcomed clarity to what has previously been a matter of some uncertainty, says Mr Alsaab.