DIFC Court rules defence costs recoverable from reinsurers in the Middle East

Clyde & Co successfully acted for Al Buhaira National Insurance Company in a significant marine insurance claim with wide-reaching implications for (re)insurers operating in the Middle East.

In an important ruling for the Middle East insurance and reinsurance market, the DIFC Court has held that there is a market practice in the Middle East, which entitles insurers to recover costs incurred in defending claims under an insurance policy from reinsurers, even where there is:

•    ultimately no indemnity payable under the underlying insurance policy; or 
•    no express provision addressing defence costs in the reinsurance contract.

The judgment was handed down by H.E. Justice Michael Black KC in favour of Al Buhaira National Insurance Company (‘ABNIC’), represented by Clyde & Co (led by Len Soudagar and Robert James), in its claim against Arab War Risks Insurance Syndicate^₁ (‘AWRIS’). The judgment can be found here.

Background

This is a further judgment in a longstanding piece of litigation concerning claims brought by Horizon Energy LLC (‘Horizon’) and Al Buhaira International Shipping Inc. (‘ABIS’, together the ‘Insureds’) under Marine Hull and War Risks policies issued by ABNIC, covering a fleet of vessels including the tanker m/t ‘BETA’.  The insured value of the tanker was USD70 million. The tanker disappeared in 2019, and the Insureds alleged that it had reappeared in Iran, under the name m/v ‘MAKRAN’, where it had apparently been converted into a Naval Auxiliary Vessel in the service of the Iranian navy.  The Insureds claimed that the vessel had been captured and that triggered cover under the war risks policy.

The DIFC Court had previously confirmed it had jurisdiction over the dispute between the Insureds and ABNIC, and, in a subsequent ruling, that ABNIC was entitled to avoid the Hull and War Risks Policies on grounds of a ‘deliberate or reckless breach by the Insureds of their duty of fair presentation'^₂. The judgment can be found here. 

Reinsurance issues

The War Risks policy was reinsured on a 100% facultative basis by AWRIS in Bahrain, incorporating by reference the English Institute Time Clauses Hulls and the Institute War & Strike Risk Clauses, which provided that the insurance was ‘subject to English law and practice’.

ABNIC notified AWRIS of the claim promptly and sought to recover its costs of the litigation (in the DIFC and Sharjah Courts) from AWRIS as its reinsurer.  AWRIS refused to confirm cover under the reinsurance contract or that it would support ABNIC in the defence of the claim under the direct policy. Faced with a USD70 million claim under the direct insurance, ABNIC was forced to commence proceedings against AWRIS for declarations that AWRIS was liable (i) to indemnify ABNIC for any liability it may have to the Insureds under the direct policy and (ii) indemnify ABNIC for its costs of defending claims by or against the Insureds under the direct policy.

Court’s findings

The Judge held that, although there was no express governing law clause, the reinsurance contract was governed by English law. Therefore, the position with regard to recovery of costs under the reinsurance contract needed to be considered in accordance with English law.  

The English law position has long been established that, absent an express term in the reinsurance contract, it would be necessary to establish a ‘trade practice or usage’ in the relevant insurance market in order to imply a term into the contract that an insurer’s costs of defending an insurance claim are recoverable from reinsurers³. Further English judgments have held that reinsurers will only be liable where there is an insurable interest under the reinsurance policy_⁴.

AWRIS contended (amongst others) that:

• as the reinsurance contract was governed by English law, the relevant market was the London Market; and 
• since the original insurance policies had been successfully avoided, there was no insurable interest that applied under the reinsurance contract, and therefore no obligation to pay ABNIC’s costs of defending the claims brought under the underlying insurance policies.

The Court held that the fact the reinsurance contract was governed by English law did not import London Market (re)insurance practice.  

Upon being presented with ABNIC’s expert evidence on Middle East market practice, the Court held that, on the basis of the expert evidence before the Court, ‘there is a market practice in the Middle East reinsurance market that any litigation fees incurred by a reinsured (together with any associated costs incurred in dealing with the claim) will be reimbursed by reinsurers in accordance with their respective shares of the risk’.  Accordingly, there was an implied term in the reinsurance contract that such costs would be recoverable from reinsurers, and that the only logical and commercial interpretation was that such implied term persists in the event of successful proceedings enabling the insurer to avoid the underlying policies.

Finally, as the successful party, the Court awarded ABNIC 100% of its costs of the proceedings. 

Commentary

Defence costs
The DIFC Court’s findings provide a welcome confirmation of what has certainly appeared to be a well-founded practice in the Middle East market, whereby reinsurers typically reimburse the insurer’s defence costs incurred in defending a claim, including circumstances where the claim is rejected and/or the underlying policy avoided.  

The court held that a ‘full reinsurance clause’ in a ‘Placement Document’ that had been issued by ABNIC to AWRIS did not form part of the reinsurance contract, and accordingly did not consider whether the full reinsurance wording would amount to an express contractual term requiring reinsurers to reimburse the costs incurred by the insurer.  Furthermore, no distinction was drawn in the judgment between proportional and non-proportional reinsurance, and the Judge made it clear that the factual position that applies to each situation would need to be considered.

In our experience in the Middle East market where there is a well-established practice of reinsurers taking on a very substantial portion of the risk (including as in this case 100% of the risk), and in the absence of any express wording to the contrary, we would consider there to be a good case for insurers to recover costs from their reinsurers whether English or UAE law applies.  Whilst it would be useful to include an express term in the reinsurance policy making this clear, other factors that could be relied upon would include:

• a ‘full reinsurance’ clause in the reinsurance policy;
• reinsurers being entitled to exercise ‘claims control’ or insurers being subject to ‘claims co-operation’ with their reinsurers; 
• active involvement by reinsurers in the adjustment and investigation of the claim; and
• a clear and unambiguous choice of law and jurisdiction clause in the reinsurance policy.

It is important to note the finding that, although the evidence in this case established a clear market practice in the Middle East that any litigation fees incurred by a reinsured (together with any other associated costs incurred in dealing with the claim) will be reimbursed by reinsurers, this was a finding of fact based on the evidence before the Court in this particular case. 

Costs of the proceedings
It is noteworthy that, following a 4-day trial, and written costs submissions by the parties, the Judge immediately assessed ABNIC’s costs in the sum of AED 4,563,051.74 (i.e. 100% of ABNIC’s claimed costs) and ordered AWRIS to make payment within 14 days. 

While the Judge noted with surprise that AWRIS’s costs were 20% higher than ABNIC’s despite ABNIC having a larger and more senior legal team, with higher charge out rates, and it being expected that the claimant’s costs would be higher than the defendant’s, the key takeaway appears to be that the Judge had no difficulty in awarding ABNIC its costs in full on the basis that: (i) ABNIC was the successful party; (ii) ABNIC’s costs were not disproportionate, unreasonably incurred or unreasonable in amount given the importance and complexity of the case; and (iii) there was no conduct on behalf of ABNIC which would justify a reduction in any costs awarded.    

This gives comfort to litigants in the DIFC that when they prevail there is scope to recover all of the costs that have been incurred in pursuing the claim. This is in contrast to the ‘onshore’ courts in the UAE where a successful party can, in practice, only recover a nominal sum. 

For any enquiries, please contact Len Soudagar or Robert James. 

ABNIC was represented by Nicholas Craig KC, of 3VB, and Len Soudagar, Robert James, Shadi Kousa and Masa Abu-Issa of Clyde & Co

^{[1] CF-013-2024}

_{[2] CFI-098-2021}

_{[3] Baker v Black Sea & Baltic General Insurance Co Ltd [1988] 1 WLR 974}

_{[4] [2007] EWHC 896 (Comm)}