November 28, 2011

Pitfalls of issuing policies in the UAE

UAE laws relating to contracts of insurance impose strict formality requirements on insurance policies issued in the UAE.  Failure to adhere to these formalities can either make such policy terms void, unenforceable or subject them to ambiguities in interpretation which the UAE Courts will, more often than not, confirm in favour of the insured.  The validity of policy conditions and an insurer’s ability to rely upon them in the UAE courts is a key risk management issue for any insurer. Insurers and reinsurers issuing policies in the UAE (or that are subject to UAE law) should therefore ensure that they are familiar with the relevant legislative provisions.  Brokers too should be mindful of these requirements and the consequences of non-compliance.  In this article we will look at some of the pitfalls of UAE law in relation to the form and content of insurance policies and how these can be avoided by best practice.

UAE laws relating to contracts of insurance impose strict formality requirements on insurance policies issued in the UAE.  Failure to adhere to these formalities can either make such policy terms void, unenforceable or subject them to ambiguities in interpretation which the UAE Courts will, more often than not, confirm in favour of the insured.  The validity of policy conditions and an insurer's ability to rely upon them in the UAE courts is a key risk management issue for any insurer. Insurers and reinsurers issuing policies in the UAE (or that are subject to UAE law) should therefore ensure that they are familiar with the relevant legislative provisions.  Brokers too should be mindful of these requirements and the consequences of non-compliance.  In this article we will look at some of the pitfalls of UAE law in relation to the form and content of insurance policies and how these can be avoided by best practice.

The relevant legislation

As a starting point, the source of laws governing the operation of cover afforded under insurance contracts is to be found in a series of codes, along with bespoke legislation that covers, for example, the functions of insurance companies.  In particular, the provisions of the UAE Civil Code (Federal Law 5 of 1985) and the Insurance Law (Federal Law 6 of 2007) and the provisions of the regulations issued under the Insurance Law and its predecessor (Law 9 of 1984), some of which are still in effect, contain relevant provisions in relation to the required content and effect of particular clauses in local insurance policies. 

UAE insurance policy requirements

UAE law relating to insurance contracts imposes the following key formalities (which we have digested into two sections) that should be observed in respect of any direct policy wording that is issued in the UAE:

(a) Under the Insurance Law regulations the policy wording ought to be issued in Arabic. Failure to issue a policy in Arabic will not generally affect the validity of the policy, but it creates more uncertainty when it comes to policy interpretation in the event of a claim, particularly if a policy dispute is before the UAE courts.  An English translation may be attached to the Arabic wording, but in the event of a dispute, the UAE courts will always look to the Arabic version (either provided at the time or a translation subsequently provided to the Court) in respect of the resolution of any claims that arise. 

In practice, we are aware of an increasing number of insurers complying with this requirement, though it is difficult to say with certainty what level of general take-up there is across the market.  As a matter of best practice, it is worth insurers putting every effort in to having a sound Arabic translation of the wordings they are using for UAE policies.

On a related point, the UAE Insurance Authority requires that policies are submitted to it for approval before being issued, which in turn requires that the policy is in Arabic to facilitate that review.  Though this requirement is not presently being met across the board, there is a drive for pro-forma policies being submitted with greater regularity for approval by the Insurance Authority.  Again, this is a matter of best practice that insurers should bear in mind.

(b) The Civil Code contains specific provisions relating to insurance, including, amongst other things, as to the content of insurance policies issued in the UAE.  Of particular importance in this context is Article 1028, which makes void (by operation of law) clauses in an insurance policy that provide in one or more ways for limitation or curtailment of the rights of the insured (see below).  The rationale behind these provisions is generally understood to be the Shari'a principle of Gharar which prohibits trades that are considered to have excessive risk due to uncertainty, and to preserve the interests and intentions of the insured.

The specific types of offending clauses can be summarised as follows:

  • Any exclusion clause in an insurance policy not "shown conspicuously". The Insurance Law provides expressly in relation to exclusions that such a clause should be printed legible letters in a different font style, or in bold text, or in a different colour, or in a larger text size than the other clauses.  It is generally considered that these formatting functions would be sufficient for an exclusion clause to be "conspicuous" under the Civil Code.  As a matter of best practice to minimise the risk of an exclusion being held void, it is recommended that such clauses should incorporate a combination of one or more of these elements.

Given the importance of exclusion clauses to insurers, and that a policy will invariably contain a number of exclusion clauses which insurers may seek to rely on in a coverage dispute, this is arguably the most relevant formality requirement to be aware of for practical purposes.  This requirement is also one that frequently comes up in argument in policy coverage disputes before the UAE Courts, so the Courts are very much alive to it.  

The Insurance Law also provides that all pages of a policy that contain exclusion clauses should be initialled by the insured (to indicate its express acceptance of clauses that limit its interests under the policy).  While an exclusion clause not initialled is automatically void (in contrast to the "shown conspicuously" provision in the Civil Code), it is nonetheless best practice for an insurer to insist that this is done for the avoidance of doubt. 

  • Any arbitration clause relating to an insurance contract that is not set out separately to the main printed conditions of the insurance contract.  This is generally accepted to require that there is a separate agreement between the insurer and the insured in relation to disputes arising under the relevant policy. Where an arbitration clause in a UAE policy is held to be void, the alternative dispute forum will be the more uncertain environment of UAE court litigation; it is therefore fundamental for insurers to comply with this formality if an arbitration clause is to be upheld in the UAE courts. Against that background, and given that the significant majority of UAE policies we see containing arbitration clauses do not do so in a separate arbitration agreement, insurers with a preference for arbitration would be well-advised to review their policy documentation to ensure compliance with this requirement.
  • Any arbitrary clause, the breach of which would have no effect on the occurrence of the peril insured against.  Examples of offending provisions could include warranty-type clauses or conditions precedent relied upon by insurers to avoid cover in circumstances where there is (and could be) no causative link between a loss and an insured's breach of the clause.
  • Any provision which provides that the right to insurance shall lapse by reason of a breach of the law unless the breach involves a felony or a deliberate misdemeanour.  This prevents insurers from excluding cover for a loss on the basis that the facts surrounding it might give rise to civil or 'low level' criminal liabilities on the part of the insured.  An every-day example would be in a motor policy where an insurer may not exclude liability for damage to the insured vehicle and third party property in an accident that results from a (non-deliberate) low level breach of traffic laws by an insured.  In contrast, an insurer may exclude liability (at least for first party loss) under the same motor policy where the insured was found to be under the influence of alcohol at the time of the accident; drink-driving being an aggravating factor that leads to a much more serious criminal offence. 
  • Any provision whereby the right of the insured shall lapse by failure to give notice of a loss within a specified period where there is a reasonable excuse for the delay.  What constitutes a reasonable excuse is likely to be judged on the particular facts of a given case.  This complements the general position under UAE law that the majority of statutory prescription periods are subject to exceptions where reasonable excuse can be shown by a claimant why it has not taken the necessary action within the prescribed period.    

It might be said that a strict technical application of insurance policy formalities under UAE law is unfair on insurers, but the UAE Courts are generally perceived as insured-friendly and such an outcome is not unusual.  This is not difficult to reconcile in the mind of the legislature or the judiciary where the steps required for compliance with the formalities are generally not onerous on insurers and should be familiar to them. 

It is imperative for good underwriting practice that insurers are aware of the pitfalls specific to the UAE that potentially may result in clauses not being upheld and/or not being enforceable under UAE law.  It is recommended best practice that insurers ensure that legal formalities are complied with in every policy that is issued in the UAE by implementing effective systems (and checks) to make this happen.