Tuesday, July 23, 2013

Insurance Contracts Under Oman Law - No Payment, No Cover?

Previous posts have dealt with the relevant regulations relating to the conduct of insurance business in the Sultanate of Oman.

The terms of the actual contracts of insurance entered into require specific consideration, particularly with regard to liability in circumstances of non-performance of those terms and subsequent termination.

A contract of adhesion

Under Oman law such contracts are deemed to be “contracts of adhesion”: those in which one party to the contract (namely the insurance company) is considered to have the strongest bargaining power of the two, usually setting the terms of the contract/policy with little or no room for negotiation or changes to be made by the insured.  The law provides a safeguard in such situations allowing the courts to amend the terms and conditions, or relieve the adhering party from them, according to the requirements of justice.  This is particularly so where the ‘weaker’ party is an individual.

The parties entering into contracts of adhesion are not entitled to ‘contract out’ of such overriding legal principles, any term in the agreement to the contrary being considered null and void.  As such, it is important for both parties, the insurer and the insured, to understand their rights and obligations in relation to insurance contracts and those terms of the contract which are likely to be upheld and those which are not.

Non-performance and subsequent termination

An important issue concerns the performance of such obligations by the parties and their right to terminate the insurance contract.  This is particularly so in relation to the failure of the insured to pay the insurance premium and the making of a subsequent claim under such circumstances.

In the absence of specific legislation, the position would seem to be that in order for an insurance company to rely on the fact that no premium was paid (and so negating its obligation to provide cover for any subsequent incident), the insurance company must provide specific notice to the insured of the suspension of the policy and the outcome of such a suspension.

In 1996 the Commercial Court gave a judgment in Case No. 888/95, the content of which set out the procedure required for the insurer to be able to rely on a policy having lapsed for the non-payment of the premium required in order to lawfully refuse to pay compensation.  The court stated as follows (as translated):

“Non-payment of the premium or the delay thereof does not mean that the contract is lapsed.  The insurer may, however, notify in writing the insured and set out the outstanding amount of the premium and its due date.  Such letters should mention that failure of such payment within 30 days of the acknowledgment of receipt of the letter will lead to the suspension of the policy and, if after ten days thereafter the premium has not been received, the contract will be void.  If any claim was filed during the suspension, the insurer will not be liable for it and will resume the insurance coverage only after the premium has been paid.  If no notification is made, the insurer will still be obliged to perform his duties set out under the contract.”

This case indicates the willingness of the court to impose an additional obligation on the insurer to notify the insured of the outcome of non-payment of the required premium (i.e., there being no cover).  However, the specific facts of this case are of particular interest given that the parties involved were in a dispute concerning an existing policy which had already expired and the refusal by the insurer to accept payment of a premium for the new cover until such time as the pre-existing dispute had been resolved.  During negotiations between the parties, the incident giving rise to a claim occurred.

Further, in an earlier case, numbered 460/90, judgment of which was given in 1991, the court held that it was not possible for the insurer to negate its obligation to cover the insured risk unless a specific judgment to that effect was issued by the court.  This follows the standard principle that the termination of a contract requires a court order.

As such, not only will an additional obligation likely be placed on the ‘stronger’ party in an insurance contract, i.e., the insurer (requiring notification to the insured of the insurer’s intent to suspend the policy), but it will also require the confirmation of the court in the termination of (and so no liability under) the policy itself.

Conditions precedent/Premium Payment Warranty (PPW)

The inclusion in most insurance contracts today of a conditions precedent or a PPW should assist in clarifying the position, and likely outcome in such instances, for both parties.

Such clauses provide that cover will not be in place until receipt of the payment of the required premium.  Accordingly, the insurer could be able to rely on such specific terms of the contract in order to avoid liability of cover in circumstances where no premium has been received, so changing the normal outcome that the outstanding premium be offset against the amount of the subsequent claim.

However, this is based on the assumption that the contract is not considered to be one of adhesion and, instead, is considered to be a bilateral contract (where the parties were considered to have equal bargaining strength when entering into it).  This may be considered to be the position where the insured is, for example, a company and, further, that it took advice, i.e., from an insurance expert or broker, in relation to the insurance policy to be taken.  If so, then the usual legal principle may apply insofar as the contract is the law of the parties: where one party does not perform its obligations thereunder the other may seek the assistance of the court demanding the required performance, or seeking termination, of the contract.

In any event, the involvement of the court will be required in confirming a proper termination of the contract.  As such, it is considered prudent, for the benefit of both parties, that any PPW included as a term in the insurance contract expressly refers to the outcome of a failure to pay the premium in clear terms: i.e., that the policy cover will not become effective until receipt of the payment of the premium.