A high-profile dispute in the Kingdom of Saudi Arabia (KSA) has recently played a significant role in defining the application of warranties for Saudi insurers. This article highlights the new developments that we expect should set precedent for future warranty-related disputes in insurance policies governed by KSA 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 the KSA 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 the KSA were not abundantly clear.
Recent 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 SAR 84 million 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 its 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 IDC's recent decision
It appears as though the IDC is taking a similar approach to the application of warranties under English law. 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.
This decision is in line with a number of recent previous decisions that we have seen made by the IDC and we are hopeful that this approach will set precedent for future warranty-related disputes in insurance policies governed by KSA law.
Originally published 04 May, 2020
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