Saudi Arabia: IDC issues its judgment on COVID-19 business interruption losses in favour of insurers

Clyde & Co successfully defended a claim on behalf of Insurers in a landmark decision by the Insurance Disputes Committee (IDC) in the Kingdom of Saudi Arabia (KSA). The IDC First Instance found in favour of Insurers in determining that there was no cover under a Business Interruption Policy as a result of losses related to COVID-19. The IDC’s decision provides welcomed certainty to Insurers in the KSA market in line with international practices.

Business interruption cover

The insurance market globally has seen an influx of claims from policyholders for business interruption losses, as a result of various lockdown measures put in place by government authorities in response to the COVID-19 pandemic.

Although it is always dependent on the specific policy wording, the trigger for business interruption cover is usually contingent on there being material damage to property. This, is often expressed as being “accidental physical loss or damage”.

The Insured’s complaint

The insured presented a claim under a Property All Risks and Business Interruption Policy for losses exceeding SAR 285 million in respect of loss or revenue and wages due to restrictions on travel and lockdown measures, as well as the closure of the insured’s hotel on 5 March 2020, as a result of measures implemented by the KSA government in response to COVID-19.

The policy trigger for business interruption losses was contingent on there being “Damage” which was expressly defined in the policy as “accidental physical loss or destruction and/or damage.”

Recent decision by the Insurance Disputes Committee (IDC)

In the first decision of its kind, the IDC first instance dismissed the insured's claim for business interruption losses.

Importantly, the IDC accepted insurers’ defence that there was no “physical damage” to any of the insured’s property and as such, the insuring clause in the policy was not triggered.

The IDC’s focus was on the key principle that there was no evidence that the COVID-19 lockdown had caused any “physical” loss or damage to the insured’s property.

Significance of the IDC's recent decision

This is one of the first decisions issued by the IDC in relation to a claim for business interruption losses in relation to COVID-19.

Under KSA law, contracts, including insurance policies are interpreted in accordance with Saudi and Sharia law. In line with this, the IDC has sought to uphold the plain and ordinary language of the policy, on the basis that the insured had provided no evidence that COVID-19 caused ‘physical’ damage to the hotel.  

This is a very positive development for insurers in the region and brings welcomed clarity to what has previously been a matter of uncertainty for some time. The IDC’s view is also in line with the position adopted in other jurisdictions, in seeking to uphold the principle that business interruption cover is contingent on there being “material damage” in order to trigger cover.

The decision will also no doubt give comfort to regional insurers and global reinsurers who have an interest in the KSA market.

For more information, please contact Saud Alsaab.