The concept of good faith is pervasive in all contracts of insurance and reinsurance in the United Arab Emirates. Whilst in Common Law jurisdictions, such as the UK and US, the doctrine of utmost good faith has been devised and developed through reported decisions of the courts, the concept is codified in the UAE Civil Code. Such codification means that there is inherently less guidance than in Common Law jurisdictions, but there are aspects of the doctrine that differ to the Common Law position.
The UAE Civil Code
Article 246 of the Civil Code provides that all contracts (and not just insurance and reinsurance contracts) must be performed "in a manner consistent with the requirements of good faith." However, Article 246 also expands on this concept to say that duty of good faith is not limited to obligations expressly contained in the contract between the parties, but also extends to obligations connected to such contracts by virtue of law, custom and the nature of the transaction. Unlike the much narrower UK version of the doctrine, the UAE concept of good faith is difficult to define, but in general, it means that the parties must not seek unfair advantage or exploit the other, must cooperate, and if possible, avoid conflicts. There is an implied obligation to perform not just what is contained in the contract, but what is connected to it by law, custom or the nature of the transaction is set out in the same article of the Civil Code as the good faith doctrine and can be considered as linked to it. The doctrine means that a party cannot rely on a strict interpretation of the words of a contract to do exactly what it has contracted to do and no more.
In the context of contracts of insurance, Article 1032 of the Civil Code further provides that an insured is required to:
- Disclose at the time of concluding the contract all information needed to be known by the insurer to enable him to assess the risks for which he assumes liability.
- Notify the insurer of whatever occurs during the period of the contract and which leads to the enhancement of such risks.
Although the text of the Civil Code is understood to also apply to contracts of reinsurance, to the extent that the provisions are relevant, it is clear that there is both a duty of disclosure at the time of placement of the reinsurance and on an ongoing basis.
By Article 1033 of the Civil Code, an insurer may terminate a contract of insurance, but retain the premium paid by the insured, in the event of the "concealment of any matter in bad faith" or the presentation of a "false statement that underestimates the risk". The insurer may terminate in the absence of fraud or bad faith on the part of the insured, but must return the premiums.
DIFC
Due to the limited substantive reinsurance law in the DIFC, it is common to apply for an alternative choice of law (such as English law) to apply. The scope of the duty of utmost good faith would therefore often fall to be determined by the applicable choice of law. However, where DIFC law is the applicable law of a reinsurance agreement, the Law of Obligations provides the only substantive (re)insurance law in the DIFC. It is limited to duty of disclosure and the duty of utmost good faith.
In relation to disclosure, Article 61 of the Law of Obligations provides that the insured has a duty to:
"...disclose to the insurer every fact within his knowledge which would influence the judgment of a prudent insurer in determining the terms and conditions of the contract or in determining whether to enter into the contract of insurance."
Article 62 of the Law of Obligations also provides that all parties to a contract of (re)insurance are under a duty to act honestly and with the utmost good faith. Whilst this includes the obligations on the cedant to make disclosure of every fact that is relevant to the contract of (re)insurance and not to make misrepresentations, it also requires that the parties must intend to carry out, and carry out, its obligations with the utmost good faith. A material breach of these obligations allows for the avoidance of the contract of reinsurance by the other party in addition to any other remedies that may be granted by the DIFC courts.
(Re)insurers would do well to note that these obligations of disclosure and utmost good faith are broader than in most other types of contracts under DIFC law.
Wrongful denial of claims
The potentially wider scope of the duty of good faith in the UAE can often aid Insurers in pricing risk more accurately and avoiding wrongful claims, However, insurers should remember that the duty of good faith applies equally to the payment of legitimate claims.
In theory, an insurer found to have wrongfully denied a legitimate claim might be exposed to a damages claim. This is on the basis that, under Article 1034 of the Civil Code, an insurer is legally required to pay the indemnity or the sum due to the insured in the manner agreed upon, when the risk materializes or when the time specified in the contract arrives. Such obligations are supplemented by the Code of Conduct issued by the Federal Insurance Authority pursuant to Board Resolution No. 3 of 2009. Claims for extra-contractual damages could be based upon concepts equivalent to the Common Law theories of contract and tort claims. However, in practice, there are restrictions the limit the scope of either type of claim for extra-contractual damages:
Firstly, contract claims are restricted by the fact that the UAE Civil Code provides that where the amount of damages is not fixed by law or by the contract it shall be payable only in respect of damage that was a "natural" result of the non-performance of the obligation. Absent fraud or a situation where the insurer is "grossly" at fault for denying the claim, the insurer would normally only be liable to compensate for damage which was foreseeable at the time of contracting.
Secondly, if faced with a "tortious" claim, an insurer could be held liable to compensate an insured for all direct and consequential losses suffered as a result of the wrongful denial of the claim, although to receive compensation for consequential loss, the insured would have to demonstrate that the insurer's denial of the claim was "malicious".
It would therefore be an extremely rare case where a litigant could recover consequential losses and/or punitive damages from an insurer. In practice, there have not been any claims of which the authors are aware for extra-contractual damages under UAE whether under a theory of bad faith akin to that used in the United States or otherwise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.