Saudi Arabia: Assessing Total Economic Loss Under Vehicle Finance Leases

Introduction

Determining whether a financially leased vehicle constitutes a total economic loss can have significant consequences for the lessor, lessee and insurer. Under Saudi Arabia’s financial leasing framework, a total loss may result in termination of the lease, making the assessment itself an important part of the process.

The Saudi Central Bank (SAMA) has provided additional clarity on this assessment through Circular No. 472055832, confirming that total economic loss assessments for financially leased vehicles must be carried out by valuation facilities licensed by the Saudi Authority for Accredited Valuers (Taqeem).

In an article for LexisNexis Middle East, Nadim Khan, Partner, and Abdullah Qureshi, Associate, examine the financial leasing framework in Saudi Arabia, the treatment of total loss and the practical implications of SAMA’s clarification for finance companies, insurers and lessees.

Financial leases and responsibility for loss

Under Saudi Arabia’s Financial Lease Law and its Implementing Regulations, a financial lease involves a lessor leasing an asset it owns, typically with provisions allowing ownership to transfer to the lessee at the end of the lease period or upon completion of payment. Financial leases must also be registered for the lessor’s ownership to be established against third parties.

The legal framework allocates different responsibilities between the parties. The lessee is responsible for ordinary use, operational maintenance and damage arising from regular use, while the lessor is responsible for basic maintenance, inherent defects and insurance. Unless a loss results from the lessee’s deliberate action or negligence, the lessor bears the consequences of the loss. If the asset is deemed a total loss, the lease terminates.

What SAMA’s clarification means in practice

The central practical issue is determining when damage to a financially leased vehicle amounts to a total economic loss.

SAMA’s clarification identifies Taqeem-licensed valuation facilities as the entities responsible for carrying out this assessment. It also emphasizes that repairs should be technically unfeasible or economically costly and that the lessor should take appropriate measures and exercise due diligence to determine whether continued use and benefit of the vehicle is possible before classifying it as a total economic loss.

The Circular does not change the underlying legal framework. Instead, it provides greater procedural certainty around how a total economic loss should be established.

Practical considerations

For finance companies and insurers, the clarification provides an opportunity to review claims procedures and confirm that assessments of total economic loss are obtained from Taqeem-licensed valuation facilities. Operational processes should also be reviewed to ensure that the required assessment and due diligence steps are properly reflected.

For lessors, lessees and insurers more broadly, the clarification provides greater certainty around where to turn for an assessment and reduces ambiguity in determining whether a financially leased vehicle should be treated as a total economic loss.

Read the full article

Read the article in the September/October issue of Lexis Middle East Law Alert: View the digital edition

Contact

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