Middle East reinsurers not liable for implied open-ended defence costs

The decision in the case of Al Buhaira National Insurance Company v Arab War Risks Insurance Syndicate provides important guidance for insurers, reinsurers and retrocessionaires operating across the MENA region marked on two fundamental issues: the law governing regional reinsurance contracts incorporating London market wording, and; the circumstances in which market custom can be used to imply additional liabilities into those contracts. 

Pinsent Masons acted for Arab War Risks Insurance Syndicate (AWRIS) in successfully appealing the first-instance finding on defence costs. 

The dispute

The dispute arose from the alleged disappearance of the M/T BETA, a crude oil tanker insured for $70 million under a marine hull war risks policy. The vessel was subsequently alleged to have appeared in Iran and to have been converted into the naval auxiliary vessel Makran. AWRIS provided 100% facultative reinsurance on the underlying war risks policy. 

Following extensive underlying litigation, Al Buhaira National Insurance Company (ABNIC) sought reimbursement from AWRIS of substantial legal costs incurred in dealing with the insured's claims, among other relief. 

The first-instance decision

At first instance, the DIFC Court held that there was an implied term in the reinsurance contract requiring AWRIS to indemnify ABNIC for costs and expenses properly incurred in claims brought by or against the insured. The court accepted evidence said to establish a Middle East reinsurance market practice under which a reinsured's litigation costs would be reimbursed by reinsurers according to their shares of the risk.

That finding attracted considerable attention within the regional insurance market. It appeared capable of imposing a substantial liability on reinsurers even where the reinsurance contract contained no express defence-costs provision. ABNIC was consequently awarded AED 4,563,051.74 ($1.24m) in costs and AWRIS appealed.

Court of Appeal: market custom cannot rewrite the bargain 

The Court of Appeal has now set aside the first-instance declaration concerning defence costs.

Critically, the appeal court accepted AWRIS' argument that the proposed implied term would expose the reinsurer to potentially unlimited defence-cost liability, despite contractual documents expressly identifying and limiting the reinsurer's maximum exposure. That mattered. The court concluded that an open-ended indemnity could not properly be implied where it was inconsistent with the express limits of the contractual bargain. The decision, therefore, draws an important distinction between evidence that a particular practice exists in a market and the much more demanding legal question of whether that practice is capable of becoming an implied contractual term. 

Market practice is not, without more, a licence to rewrite the reinsurance contract.

The court also accepted a further commercial concern advanced by AWRIS: regional reinsurance risks frequently move through subsequent layers into the London retrocession market. An unwritten obligation imposed through alleged Middle East custom may therefore create liability at one layer of the programme that is neither apparent from the contractual documents nor recoverable from the next. The court considered that imposing that burden on reinsurers simply because they write business in the Middle East was unreasonable.

The result was that AWRIS' appeal on the defence-costs issue succeeded and the first-instance declaration was set aside. 

English law and London Market wording 

The Court of Appeal also provided important guidance on governing law.

The reinsurance contract contained no standalone express governing-law provision. Nevertheless, it incorporated London market wording and standard clauses associated with English marine insurance practice. At first instance, the DIFC Court concluded that English law applied because the reinsurance contract was closely connected with English law. The DIFC Court of Appeal went further. It considered that the contractual materials provided a strong basis for finding an implied choice of English law, reflecting on the parties' common intention. 

That is an important development for regional insurers and reinsurers using international market wording. The physical location of the parties or insured risk will not necessarily determine governing law. The contractual architecture – including incorporated standard wording developed by the Institute of London Underwriters, London market terminology and internationally recognised wording – can be decisive. 

Why the decision matters

The judgement substantially changes the practical message. It does not mean that defence costs can never be reinsured. It means something more commercially important: if parties intend defence costs to be covered, the safest course is to say so expressly and define the scope of that cover. Reinsureds should consider whether wording clearly addresses defence costs, claims-control and claims-cooperation obligations, consent requirements and applicable limits. 

Reinsurers should equally ensure that their contractual exposure reflects the protection available under their retrocession arrangements. The decision is therefore likely to encourage much greater scrutiny of facultative wordings across the MENA market. 

Three lessons 

First, market custom has limits. Evidence of regional practice does not automatically justify implying a term into an insurance contract, particularly where the proposed term would create substantial or uncapped liabilities inconsistent with the written contract.

Second, wording matters. Defence-cost recovery should be addressed expressly rather than left to assumptions about market practice. 

Third, the entire reinsurance chain matters. When considering whether a proposed implied obligation is commercially reasonable, the interaction between primary insurance, reinsurance and retrocession cannot be ignored. 

For reinsurers operating across the Middle East, that is an important reset. The Court of Appeal's decision brings the analysis back to a fundamental proposition of reinsurance law: the written bargain matters.