UAE: Ripe for insurance reform?

The Maritime Code governs and regulates all shipping practices in the UAE, including, under Chapter 6, contracts of marine insurance for both vessels and marine cargo. In 2016, 35 years since the Maritime Code was first enacted, the provisions of Chapter 6 look increasingly outdated and out-of-step with the realities of the 21^st century commercial practice and modern marine insurance underwriting, which poses the question: Is it time for a reform? 

A federal committee has been mandated under UAE Federal Transport Authority Resolution No 1 of 2015, to review and update the Maritime Code to bring it in line with international best practices and business needs.

Already, the Committee, headed by H.E Khamis Buamim, vice chairman of the Maritime Transport Technical Council and chairman of the Dubai council for Marine and Maritime Industries, has indicated that it intends to reform the Maritime Code in light of changes and developments in international conventions and treaties, as well as by benchmarking with the maritime laws of other developed Gulf Cooperation Council (GCC) states.

While it remains to be seen whether the review of the Maritime Code will include reforms to the marine insurance provisions under Chapter 6, the revised maritime law would arguably benefit from amendment in three broad areas in order to achieve a better balance between the interests of the assured and the insurer in today’s modern marine insurance market.

That said, such reform could be difficult to achieve against the backdrop of the UAE’s civil law system and developing insurance market.

Good faith

Under the current Maritime Code, marine insurance contracts are contracts of utmost good faith. Article 385 of the Maritime Code places a positive duty upon the assured, at the time the contract is concluded, to disclose all relevant facts and not to remain silent or misrepresent relevant facts, which allow the insurer to assess the level of the risk. The burden here, lies squarely on the assured to identify and disclose all the relevant circumstances material to the risk.

It will certainly be interesting to see whether the Committee may seek to modify the duty of utmost good faith which underlies marine insurance contracts in the UAE, and require insurers placing marine risks to adopt a more active approach to assessing the risks they underwrite rather than a passive stance in relying on the assured to provide all relevant information.

On the one hand, this could be a positive development to promote greater dialogue between the assured and marine insurers and encourage insurers to identify the information they require in order to underwrite the risk.

On the other hand, however, that would be an important departure from the existing law, and possibly difficult to reconcile with the UAE insurance market where cover is often ‘fronted’ through local insurance companies, who may not necessarily have the relevant expertise to underwrite the risk on a technical basis, and where the reinsurance structure has been put in place by the broker and presented to the local fronting insurer late in the day to facilitate the placement.

Remedies for non-disclosure

Currently, under Article 388 of the Maritime Code, an insurer is entitled to avoid the entire contract in the event that there is a failure by the assured to disclose all material information. There is no requirement for the undisclosed information to relate to the damage suffered. The law as set out in the Maritime Code does not provide for an intermediate remedy.

Assuming the Committee elects to update the existing law to align with best practice in the modern insurance market, this could see a more proportionate system of remedies for breach of the assured’s pre-inception duties of disclosure, to reflect what the insurer would have done had he known of the undisclosed information before entering into the contract.

A system based on the objective of putting the parties into the position they would have been in, had an accurate presentation of the risk been made, would be less draconian than the primary (and only available) remedy of avoidance currently found under the Maritime Code.

However, in coverage litigation in the UAE, where proceedings are almost entirely document based and witness evidence ordinarily viewed as unreliable and self-serving, it could prove challenging for insurers to establish the course their underwriters may have elected to take, hypothetically speaking, particularly where contemporaneous written evidence of inducement is limited.

Warranties

Like many civil law systems, there are no specific provisions in UAE law that give special effect to the concept of warranties in contracts of marine insurance or insurance generally. Given this, under UAE law, breach of marine insurance warranties does not necessarily result in automatic discharge of the insurer from liability under the contract.

In the absence of a well-defined or clearly understood legal meaning of warranties, it can be confusing to understand how such provisions should operate in practice under UAE law and to predict with certainty the effects of a warranty breach in a litigated coverage dispute.

The new maritime law would arguably benefit from codified provisions, to clarify the status of warranties in marine insurance contracts and clearly define the remedies for warranty breach.

Indeed, the reform of the Maritime Code allows an opportunity for increased certainty regarding the use of warranties in marine insurance policies in the UAE and a new regime to soften the traditional harsh consequences of a warranty breach.

Grant Pilkington is a senior associate at Clyde & Co. His practice focuses on dispute resolution, mostly within the marine, energy, construction and engineering sectors. He can be contacted on +971 4384 4351 or grant.pilikington@clydeco.com.