Middle Eastern Update: Cedant’s Costs Indemnifiable Under Reinsurance Arrangements

A recent decision of the Dubai International Financial Centre (DIFC) Courts¹, handed down on 9 September 2025, held that the cedant’s own costs incurred in connection with the claim under the direct insurance were recoverable from the reinsurers under an implied term of the reinsurance contract. Although this judgment was concerned with a specific type of reinsurance (marine hull war risks), given the evidence presented in the case, it has potentially broader implications.

The Facts

This was a claim by a cedant against a reinsurance syndicate, in connection with the syndicate’s 100% facultative reinsurance of a marine hull war policy issued by the cedant to the owners of a vessel that allegedly disappeared. The cedant sought to avoid the war policy (and a related hull policy) and commenced proceedings before the DIFC Courts.

Following a jurisdictional dispute, the DIFC Courts found that they did have jurisdiction and proceeded to also find substantively in favour of the cedant that it could avoid the policies (albeit the insureds did not appear in the substantive DIFC Court proceedings).

In parallel, the insureds commenced proceedings via the onshore UAE process (first, via the Insurance Dispute Resolution Committee (IDRC) and then via the onshore Courts). The onshore proceedings were stayed pending the outcome of the DIFC Court proceedings and then recommenced. At the time of writing, the onshore proceedings have not yet concluded.

During this period, the cedant also commenced proceedings before the DIFC Courts against the reinsurance syndicate, seeking various declarations.

Recovery of Defence Costs: Custom, Practice, and Wider Implications

Having determined that the applicable contractual law was English law, the judgment went on to address a number of issues, including requirements for obtaining declarations, breaches of the duty of fair presentation under the Insurance Act 2015, timebar, late notification, and proof of loss.

However, perhaps the most important point arising from this judgment relates to the judge’s findings on the ability of a cedant to recover, under its reinsurance arrangements, costs incurred in either defending proceedings brought against it by an insured or in pursuing remedies against the insured arising in connection with the direct cover.

In this case, the cedant had incurred costs both in defending the onshore UAE proceedings and in pursuing the DIFC Court proceedings against the insureds. The cedant maintained that recovery of such costs from the reinsurance syndicate was an implied term of the reinsurance contract. Initially, the cedant also argued that it was entitled to recover these costs under the Institute Clauses but did not ultimately pursue this argument at trial.

The leading English law authority on the recoverability of a cedant’s own costs is the House of Lords case of Baker v Black Sea². In Baker v Black Sea, the claimant advanced its case on three grounds, which were all ultimately unsuccessful:

• The first was that the defendant reinsurer was liable for its share of the costs under the follow the settlement wording. In the present case the judge held in a separate section of the judgment that the contract did not incorporate follow the settlement wording so this point did not arise.

• The second ground was that a term on recoverability of costs should be implied into the contract, in order to give the contract business efficacy or because it is what the parties must have intended. This argument failed in Baker v Black Sea and was not considered in any detail by the judge in this case.

• The third ground was that the term was implied by reason of trade practice or usage/custom. In Baker v Black Sea, the Court held that:
  
  “What was needed [to imply a term by custom] was evidence of a universal and acknowledged practice of the market for reinsurers to pay such costs whether this is expressly provided for in the treaty or not; or (to put it another way) that it is well understood by underwriters that if it is not intended that the indemnity should extend to the legal costs and expenses of the reinsured, these need to be expressly excluded“.
  
  On the facts of Baker v Black Sea, the Court was not prepared to find the existence of such a custom.
  
  In the subsequent case of Goshawk v Tyser³, the Court held that in order to imply a term it must be:
  
  “sufficiently clear, invariable and well known that those who practice, or seek to practice, in the relevant market must be taken to know that it is implicit in the contracts that they make; and it must not be so lacking in reason that effect should not be given to it“.
  
  It was not sufficient that parties concerned had often acted in accordance with the term that one party was seeking to imply; this did not by itself demonstrate the existence of a custom. The Court in Goshawk heard expert evidence on this issue and held that the difference of view between the experts did not give the impression that there was a well-known custom, recognised by everyone except for the dissenting expert. As such, any market practice was not “elevate[d]… to the status of a freestanding contract arising by custom“.

In this case, both the cedant and the reinsurance syndicate presented expert evidence on the third ground i.e. that a term may be implied due to the existence of a custom.

Based on the evidence presented, the judge ultimately found that there was “a market practice in the Middle East reinsurance market that any litigation fees incurred by a reinsured (together with any other associated costs incurred in dealing with the claim) will be reimbursed by reinsurers, in accordance with their respective shares of the risk“⁴.

Addressing the criteria set out in the English authorities, the judge accepted the evidence of the cedant’s expert that if reinsurers did not want to provide such cover (for example because their own retrocession arrangements in other jurisdictions would not permit recovery higher up the chain), then reinsurers would expressly contract out of this, or impose other limiting wording e.g. requiring consent to be obtained before costs are incurred. This satisfied the requirement to elevate custom to a freestanding contract as, if there were no freestanding contract, parties would not need to exclude this cover. As such, the judge held that, in this case, expenses properly incurred in defending or bringing claims against the insureds arising in connection with the direct cover were recoverable under an implied term of the reinsurance arising out of market practice.

It is important to be aware that the judge caveated his judgment on this point. Whilst the judge did not criticise either party’s expert, he found that the syndicate’s expert did not have the expertise to opine on Middle Eastern market practice, whilst the evidence from the cedant’s expert was “credible…. and impressive.” The cedant’s expert evidence was therefore uncontradicted (albeit it was challenged in cross-examination). The judge was careful to emphasise that his decision was a finding of fact based on the evidence presented in the case and that the decision could not bind a Court faced with different evidence.

Key Takeaways

• Where English law applies, cedants in the Middle East now have some judicial support to seek to recover costs incurred in defending claims from, or pursuing claims against, an insured in connection with the direct cover under their reinsurance unless the parties expressly contract out of this.

• Although this specific case related to marine hull war risks cover, the evidence of the cedant’s expert (which the judge accepted) was that the practice was much broader than this. This may be subject to challenge in future cases, in light of the judge’s comments regarding the cedant’s evidence being effectively uncontradicted.  

• Onshore UAE law also recognises that terms can be implied by custom or usage and the cedant’s primary case was that onshore UAE law applied. Although English law was held to apply, the arguments and evidence put forward in this case and accepted by the judge may also have wider relevance to claims where the contract is governed by onshore UAE law.

• Overall, the decision is a reminder of the importance of policy wording, claims management, and an acute awareness of evolving market practice.

Footnotes

1. DIFC Case No: CFI 013/2024
2. Baker v Black Sea & Baltic General Insurance Co Ltd [1998] 1 WLR 974.
3. Goshawk Dedicated Limited & Ors v Tyser & Co Limited & Anor [2005] EWHC 461 (Comm).
4. [161]