The full text of a judgment handed down by the Federal Supreme Court of Abu Dhabi in June 2001 recently became available and provides an insight into the manner in which the UAE courts approach the question of insurers' rights of subrogation.


A UAE insurance company sought to recover from a third party, amounts it had paid out on a household policy claim for fire damage caused to the insured premises. The cause of the fire was attributed to an electrical fault in the premises' main air conditioning unit. The respondents had installed the unit. The insurance company sought to recoup the amount paid out from the respondents. Liability was not in issue at the appeal stage.


Facts arising on appeal
The court of first instance awarded the insurance company damages in the sum of approximately Dh1.7 million.

On appeal, the Sharjah Court of Appeal reduced the damages payable to just over Dh1 million. The reduction was a result of the court-appointed expert's criticism of the insurance company's loss adjustment report on the basis that it:

  • made no allowance for depreciation in the value of certain items;
  • included inflated replacement costs; and
  • contained no supporting evidence for some of the insured's own expenses.

At the Federal Supreme Court the insurance company argued that the expert had disregarded the terms of the insurance contract which, in common with many other household policies, provided cover on a 'new for old' basis. The insurance company claimed that since it was obliged to replace damaged goods on this basis, it was entitled to recover the monies incurred from the contractors.

The court rejected this argument and affirmed the Court of Appeal judgment. Referring to Articles 1030, 1034 and 1037 of the UAE Civil Code, the court stated that:

"An insurance contract is a compensatory contract, which is subject to the principle of compensation because the objective of the contract is to compensate the insured for the damage caused by the realization of the risk insured against. On this basis, compensation is to be assessed by reference to the damage which actually occurred, irrespective of the sum insured, so that the sum insured does not result in the insured's unjust enrichment. The insured should not be in a better position than he was prior to materialization of the risk. The sum insured constitutes the maximum compensation which the insured may receive upon realization of the risk."

The court affirmed that, irrespective of the policy provisions and amounts paid, the insurance company was entitled to recover no more from the third party than that to which the insured would have been entitled to claim. The court ruled that in such cases it will take into account any depreciation in the value of older, damaged goods as well as the insurer's lack of evidence in support of its claim, if any.

The insurance company also challenged the basis on which interest was awarded. The fire occurred in October 1993. The insurers claimed interest at 12% (the statutory limit) on the amount claimed as of December 20 1994 (the date of payment of the insured's claim) until final payment of the judgment. The Federal Supreme Court affirmed the discretion exercised by the Court of Appeal in awarding interest at a reduced rate of 9% and only from the date of final judgment. The court refused to recognize the damages claimed as a specific liquidated amount; it held that the amount of damages only crystallized on the date of final judgment and, accordingly, interest could be awarded only from that date.

Under UAE law the date of final judgment was that of the Court of Appeal judgment (ie, April 1999). Thus, the insurers were not entitled to interest on the sum awarded between 1994 and 1999.

Title to sue
Title to sue was not in issue on appeal, but it is interesting to note that the recovery action was brought by the insurers in their own name rather than in that of the policyholder to whose rights they were subrogated. This confirms the view that Article 1030 of the UAE Civil Code (which broadly governs the right of subrogation) may be interpreted to require recovery proceedings to be brought in the insurer's name. As a precaution, it is recommended that recovery proceedings be commenced in both the insured and insurer's name.


The case required no consideration of whether the insurers could have made a deduction for depreciation from the insured's claim, notwithstanding the 'new for old' basis of the cover. Neither was the Federal Supreme Court asked to consider whether the court-appointed expert's approach was reasonable in view of the practical difficulty of replacing many household items on a like-for-like basis. However, these points could be in issue following the Federal Supreme Court's judgment.

What is clear from the Federal Supreme Court's judgment is that it is not sufficient for insurers simply to assume that they will recover the same amount paid to the insured by way of claim payment under a policy, without producing acceptable evidence of the underlying damage. In particular, where the only expedient means of replacing older items (eg, used equipment or furniture) is to replace them with new items (irrespective of the policy wording in place), then the adjustment of the loss ought to deal with this point.

Moreover, in order to enhance the prospects of a successful recovery from a third party, insurers would do well to ensure that their own adjustment of the claim requires the insured to produce suitable evidence to support the amounts claimed and losses sustained. This case demonstrates that the courts will not simply accept the insurance company's original adjustment of the claim (even if a professional adjuster's report is obtained) when assessing damages payable by a third party.

Other issues such as the award of interest and title to sue are also likely to be of interest to local insurers and ought to be considered before deciding to commence recovery proceedings.

For further information on this topic please contact Wayne Jones at Clyde & Co by telephone (+971 4 3311102) or by fax (+971 4 3319920) or by email ([email protected]).