Are you certain you know what you have underwritten in the Kingdom of Saudi Arabia?
The insurance industry has long sought contract certainty through the development of standard market wordings. The underwriting of large non-personal lines risks in the Kingdom of Saudi Arabia (KSA) is no different as various well-known market wordings, particularly London market wordings, are commonly used.
The lack of local wordings can be understood as the KSA insurance market is still heavily reliant on foreign reinsurance support, and foreign reinsurers naturally wish to underwrite on the basis of familiar wordings. However, the question that must be asked is whether the use of international market wordings does in fact result in greater certainty in the context of KSA insurance, or is a new approach required? This article considers some of the issues that are relevant to this question and, although focused on KSA, it is of broader relevance as similar issues arise throughout most of the jurisdictions in the Middle East.
The direct impact of the KSA regulatory regime
KSA's insurance regulator, the Saudi Arabian Monetary Authority (SAMA), has enacted various instructions and regulations that have a direct general impact on insurance. There are also SAMA regulations that apply to specific lines of business (as defined by the regulations). Notwithstanding the existence of specific regulations, in our experience, a number of the regulations that impact directly on the onshore energy insurance business are not particularly well-known such as, say, the September 2016 circular in relation to "Engineering Insurance" (the Engineering Insurance Guidance).
The Engineering Insurance Guidance provides detailed instructions on a broad range of covers including machinery breakdown, business interruption from machinery breakdown, comprehensive project, advance loss of profits etc. In many instances the Engineering Insurance Guidance is non-mandatory, but in other instances it contains very specific instructions that KSA insurers must follow. A number of these instructions have a direct impact on cover. For example, the issuance of a wording described as a "Machinery Breakdown" or "Boiler and Pressure Vessel" policy will have an assumed standard level of cover, as prescribed by the Engineering Insurance Guidance.
While the Engineering Insurance Guidance is still untested, it appears that KSA insurers are able to underwrite on terms that will extend or broaden the scope of the assumed standard level of cover, but KSA insurers are unable to limit the scope of cover in respect of certain classes of business, or to provide an indemnity on a basis that is not in accordance with the "assumed standard level".
The Engineering Insurance Guidelines contain a number of further prescriptive requirements, for example, instructions on minimum deductibles or waiting periods (and maximum deductibles for CAR/EAR covers). In many instances the SAMA instructions can simply be considered to be good underwriting practice. However, in other instances there are specific instructions that can significantly impact on the intended cover. Further instructions relevant to energy insurance are expected in the not too distant future, so the direct impact of KSA's regulatory regime on energy underwriting is likely to become even more pronounced.
The indirect impact of the KSA regulatory regime
Other, more general, KSA insurance regulations are perhaps better known. By way of example, an underwriter insuring risks in KSA is likely to know that all insurance policies must be issued in Arabic and that pre-approval is required from SAMA before a policy can be issued.
Notwithstanding a greater awareness on the need for an Arabic wording and policy approval, it still appears there is very little understanding by underwriters of the risks and potential difficulties if they simply seek to rely on literal translations of standard market wordings. It would appear for this reason little consideration is given to whether it would be more appropriate to prepare bespoke Arabic wordings.
The significant unintended consequences and the inherent risk in relying on literal translations will be apparent from the various examples that we have noted from past disputes, as highlighted below.
"All risks" indemnity clauses
It is common to see plant and machinery or construction all risks covers with an indemnity clause that provides:
"…insures against all risks of direct, sudden and accidental physical loss or damage except as hereinafter excluded…"
The terminology "direct, sudden and accidental" in the context of an "all risks" policy is well understood in common law jurisdictions. The indemnity clause and the individual words making up the indemnity clause have been considered in a number of court judgments, which serves as precedent for future reference.
Underwriters familiar with the approach in common law jurisdictions will interpret the indemnity on the basis that each of the elements referred to must be present to trigger an indemnity for loss or damage (i.e. the question is not simply whether there has been loss or damage, as the indemnity for loss or damage is qualified). The effect of the phrase direct, sudden and accidental therefore has the effect of limiting the "all risks" cover to exclude, for example, inevitable damage.
If translated into Arabic, there is however a significant risk that the translation of the terms "direct, sudden and accidental physical loss" will not narrow the scope of cover in relation to damage, and that all damage will be covered irrespective of how it occurred. This risk exists because a literal Arabic translation may not qualify the scope of the indemnity in the same manner as in the original English indemnity clause. Moreover, it has been acknowledged by the Insurance Disputes Committees, on the basis of the wording of "all risk policies", that all risks are covered, unless specifically excluded. A very different outcome may therefore result in the event of a dispute before the Insurance Disputes Committee and cover may consequently be interpreted to be far broader for "loss or damage" than likely to be appreciated by underwriters.
Similar issues arise where a policy contains reference to a "condition precedent" and this is translated into Arabic. When translating the word "condition" into Arabic, the word "shart" is generally used. The Arabic word "shart" simply means "condition" or "term" with no concomitant legal notion of the importance that attaches to the relevant "condition" as understood, say, in an English law insurance context.
If the full phrase "condition precedent" is translated literally then, typically, it may be translated as "shart tamheedi" or "shart musbaq". Again such terminology would not convey the correct English law meaning at all as "shart tamheedi" means introductory/preparatory/preliminary condition, while the use of "shart musbaq", which would convey the notion of a "prior condition" or "precondition", would not convey the imperative nature of a condition precedent. It would therefore be necessary to add an explanatory phrase along the lines of the "obligatory precondition", to ensure the correct meaning is conveyed in Arabic. However, this would not occur where a literal translation is prepared.
The term warranty has a well understood meaning in the context of insurance law. In particular, a party providing a warranty effectively guarantees that certain facts or conditions are true and which, if untrue, will automatically discharge insurers from liability (in certain jurisdictions). However, the common literal translation of the word warranty into Arabic is "dhaman", which means "undertaking", and clearly does not have the same meaning in an insurance context. The result is that, if a literal translation is applied, then the breach of a warranty will simply have the same effect as the breach of any other condition.
Contingent business interruption
Another well-known phrase in the insurance context that causes translation difficulties is ''Contingent Business Interruption'''. Literal translations we have seen have resulted in the Arabic meaning being translated into ''Urgent Business Interruption'' or ''Conditional Business Interruption". Again a literal translation into Arabic results in a very different meaning for a concept that is in any event likely to be poorly understood in KSA.
Basis of loss settlement clauses also give rise to translation issues. By way of example, it is common for an indemnity payable to be calculated on the basis of the cost of the "reinstatement of the damage", which is commonly translated into Arabic as "i'ada ila almansib alasli", which means "returning to the original status".
The intention behind the use of the phrase "reinstatement of damage" in most market wordings is to confirm that the indemnity payable is no more than would otherwise be payable for ensuring the damaged item, when repaired, is in a similar condition to what it was immediately before an incident. However, the KSA courts on the basis of literal translations have on occasion considered the "original" position to be the "as new" cost. Accordingly, in circumstances where say machinery has been in operation for a number of years, this can lead to significant differences between the indemnity that was intended, and the indemnity that may be awarded by the Insurance Disputes Committee.
It should be apparent from the issues noted above that obtaining contract certainty in KSA involves a lot more than simply relying on market wordings, even if well tested in other jurisdictions. The KSA insurance regulatory regime has both a direct and indirect effect on how policies may be interpreted and underwriters will be well advised to consider such matters to avoid surprises.
There are solutions to many of the issues we have noted. However, to achieve contract certainty requires underwriters to consider solutions at the time the cover is written, rather than when a claim or dispute arises.