Writing and reinsuring business from and within the Kingdom of Saudi Arabia has always presented challenges to the (re)insurance markets, particularly the London markets, where it is common to use London Market Wordings for ceded risk.
Historically, Saudi Arabia, unlike the United Arab Emirates have not had the benefit of a codified civil law and in the absence of such a framework, (re)insurers have relied on industry specific (re)insurance law frameworks, such as the "Law On Supervision of Co-operative Insurance Companies, Royal Decree No M/32 of 2 Jumada Thani 1424 Hejra (31 July 2003) and its Implementing Regulations (Insurance Law) and reliance on the policy terms and conditions as a matter of contract - Saudi Arabia law is based essentially on Islamic sharia principles and recognises to a large extent the freedom of the parties to contract. The Saudi legal system has taken on the entire body of Islamic jurisprudence (fiqh) of the Hanbali school of thought as its domestic law and is supplemented with statutes promulgated by the respective Saudi Ministries from time to time. This has placed much reliance on the construction and interpretation of market wordings and policy terms and conditions, which sometimes presents material risks in respect of Saudi insurance litigation and disputes.
The new Saudi legal Civil Code came into effect on May 23, 2021, and applies to all civil and commercial transactions carried out on or after this date. The new code replaces the previous Code of Civil Procedure, which had been in existence since 2001.
The Kingdom of Saudi Arabia's new Civil Legal Code has several implications for (re)insurance coverage including policy wordings and their construction and interpretation, which will no doubt result in potential disputes.
One of the significant changes brought about by the new Civil Legal Code is the introduction of a new concept of "Inexcusable Error" or "Gross Negligence," which has the potential to impact how insurers and reinsurers interpret policy wordings. Under the new code, where the insured party's error is deemed inexcusable, the insurer may not be obliged to pay the claim. This is akin and like a breach of warranty under a policy of (re)insurance, which is also recognised under Saudi law as a matter of contract, although this has only been a recent development. This highlights the importance and need of clear and unambiguous policy wordings for insurers and reinsurers to avoid disputes related to what constitutes "Inexcusable Error" or "Gross Negligence." We see the market adopting the use of these words within their coverage terms to mitigate the risk of (re)insurers.
Another significant change is the increased emphasis on good-faith practices, which already exists under Saudi law and is commonly used by the (re)insurance market to establish a breach of the coverage terms, such as non-disclosure and misrepresentation. The new code requires all parties to adhere to good faith principles during their dealings to avoid any ambiguity and disputes. This underscores the importance of clear and accurate communication between insurers, reinsurers, and policyholders to prevent misunderstandings that may lead to disputes. Essentially, while "Good Faith" was always historically implied into Saudi law between contracting parties, it is now codified to avoid aby doubt. (Re)insurance will need to use this legal principle to sit within their coverage terms to trigger lack of disclosure and misrepresentation events, where they wish to rely on such provisions to avoid coverage or declinature of the claims or any part thereof.
In addition, the new code introduced provisions that enable insurers or reinsurers to seek recovery of their payment, which resulted from errors committed by insured parties, although this is not entirely clear whether this relates to claims paid and recoveries thereafter by the (re)insurers. Encouragement of alternative dispute resolution methods such as arbitration and mediation are also contained in the new Civil Code, which will encourage alternative dispute forums away from the Saudi courts, which lessens the risk to the (re)insurance markets, as the Saudi legal system does not recognise the concept of precedent and civil procedural rules around discovery and disclosure of documents.
Overall, the new Civil Legal Code underscores the importance of clear and concise policy wording for insurers and reinsurers in Saudi Arabia. Given the changing legal landscape, it is essential for insurers and reinsurers to review and update their policies regularly to ensure that they align with the new code's requirements and avoid the potential for disputes.
In general, the new Civil Code is intended to align Saudi Arabia's legal framework with international best practices and promote greater transparency in commercial transactions.
However, the new code is not expected to have retrospective effects, meaning that it applies only to transactions that occur on or after May 23, 2021. For transactions that occurred before this date, the previous Code of Civil Procedure will continue to apply.
We would recommend that insurers and reinsurers carry out coverage policy terms and condition reviews and where necessary, reinsurers should work with their cedent partners to align their back-to-back coverage terms to avoid and mitigate risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
