Mohamed El Hawawy Partner
The Dubai Court considers the nature of the indemnity under a construction insurance contract
In a recent judgment the UAE local court considered the nature of the indemnity under a Builder’s All Risks policy, namely whether the property under construction was insured on an agreed value basis.
The policyholder obtained builders risks insurance to insure a yacht under construction at a shipyard in the UAE. The policy provided for a Sum Insured of AED 50m. This figure was based on the survey report issued prior to inception of the policy which estimated the value of the yacht on completion to be AED 50 million.
Before construction was completed a fire occurred and the yacht was considered a total loss. The coverage was not disputed and the main issue between the parties was the quantum of the policyholder’s claim. According to the policyholder, much of the documentation relating to the construction of the yacht and supporting its claim for indemnity were on board the yacht at the time of the fire, and so had been destroyed. The policyholder claimed the indemnity of AED 50m, on the basis of the last survey report and contending that the AED50m sum referred to as the Sum Insured, was an ‘agreed value’ for insurance purposes.
The insurers’ position was that the survey report provided an estimated value on the completion of construction, which had not been completed at the time of the fire. Insurers also contended that the sum insured of AED 50m was the maximum amount of the indemnity available to the policyholder, rather than the agreed value of the yacht, and that the policyholder therefore had to prove the amount of the actual loss.
The policyholder commenced a claim before the Dubai Courts for AED 50m and sought interest on the claim at 9% commencing on the date the claim was made in the Dubai Courts.
Decision of the court of first instance
The Dubai Court of First Instance appointed a marine engineering expert who placed reliance on the limit of liability expressed in the policy and the last survey report, considering it sufficient evidence of the value of the yacht in circumstances where the policyholder contended that much of the documentation that would otherwise have been available to establish to support its claim under the policy, had been destroyed by the fire on board the yacht. Accordingly, the expert concluded that the value of the claim was AED 50m.
The insurers maintained their position that the policyholder was obliged to establish the actual loss by, as is practice in the Dubai Courts, documentary evidence. The insurers argued that there ought to have been some documentation that has not been affected by the fire at either the policyholder’s offices or the offices of the various contractors and suppliers. On the basis of the documentation that was available insurers conceded that the value of the claim that was supported, was approximately AED 14.5m.
On the interest issue the insurers argued that any interest ought to be calculated from the date of the final judgment on the basis that the claim amount would be a ‘compensation’ claim as opposed to a claim in debt. The first instance court however adopted the expert’s findings and ordered insurers to indemnify the policyholder AED 50m and pay interest on the indemnity at the rate of 9% from the commencement of the claim with the Dubai Courts.
Decisions of the court of appeal and court of cassation
An unsuccessful party in local first instance court litigation in the UAE can in essence file an appeal as of right provided the appeal is made within time. Often that appeal can result in a rehearing of the issues of the matters of fact and law determined by the first instance court. In this case, the insurers filed an appeal and they were able to persuade the Court of Appeal to appoint a committee of experts consisting of a marine expert, an insurance expert and an accountancy expert, to consider again the issue of the indemnity available under the policy.
The expert committee was engaged for over a year in its mission and adopted a comprehensive approach. The committee considered the available documentation and the various arguments and counter arguments raised by the insurers and the policyholder. Ultimately the committee concluded that insofar as the progress in the construction was concerned, the yacht was about 63% complete at the date of the fire and determined on this basis that the value at the date of the fire was AED 31.5m.
The policyholder rejected the committee’s findings arguing amongst other things that on the completion of construction the yacht’s value upon completion would have been AED 130m. The Court of Appeal adopted the expert committee’s findings on the value of the yacht at the date of construction, determining that the indemnity available to the policyholder was AED 31m (after application of the deductible). On the interest issue the Court of Appeal ruled that interest would run at 9% interest from the date of judgment rather than the commencement of the claim by the policyholder.
The Court of Appeal took the opportunity to affirm some important points on the nature of an indemnity available under an insurance policy and when the entitlement to interest accrues:
> An insurance contact is a contact of a compensatory nature that is mandatory and cannot be contracted out of.
> If the parties to a contract of insurance agree on a “Sum Insured,”it is an agreement on the maximum amount of any compensation that may be paid.
> The policyholder will be compensated within the parameters of the value of the items insured so that the policyholder is not enriched by receiving more than the actual loss suffered.
> The court has the power to take into consideration and rely on the court-appointed expert’s report rather than the party appointed consultant expert report, and on this basis the court was satisfied that the completion percentage of the yacht was about 63%.
> If the basis of the claim is one for compensation that is subject to the court’s discretion, interest is calculated from the date upon which the judgment becomes final not the date that the claim is commenced. A claim under an insurance policy is considered a compensation claim rather than a claim in debt.
The policyholder filed an appeal to the Dubai Court of Cassation, the highest appeal court in Dubai. The Dubai Court of Cassation upheld the Court of Appeal judgment and dismissed the policyholder’s appeal.
The Dubai Court of Appeal and Dubai Cassation Court judgments have affirmed that the Sum Insured under a Builder’s Risk policy is the maximum amount of compensation that may be payable to a policy holder in the event of a claim. In the circumstances of this particular case the court rejected the notion that the combination of the survey report and the Sum Insured value had the effect of creating an agreed value under the policy.
Construction insurance policies such as the Builder’s Risk policy often insure on the basis of a provisional value, which may increase during the course of the construction. This case provides a timely reminder that such provisional values act as the limit of liability under the policy only and that the policyholder is not relieved of the obligation to prove the quantum of the loss.
The insurance contract is of a compensatory nature so the interest is calculated from the date of the final judgment.
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