Insurance syndicates at Lloyd's of London have suffered a humiliating multimillion-pound defeat in a legal battle with one of the world’s most reviled regimes — the North Korean Government of the dictator Kim Jong Il.

The insurers, including three Lloyd's syndicates, have agreed to pay more than €40 million (£35 million) to the North Koran state insurer after accusing the country of attempting to prop up its failing economy by making massive fraudulent claims.

After a series of defeats in the Commercial Court in London, reinsurers, including German, Italian, Egyptian and Indian firms, have agreed to pay 95 per cent of the claim and to withdraw all its accusations of fraud against the state-owned Korea National Insurance Corporation (KNIC).

The climbdown represents a rare moment of dignity for North Korea in the West, where it is usually vilified as a murderous and incompetent dictatorship, which oppresses, locks up and kills its own people. “KNIC are delighted by this settlement,” said Tim Brentnall, of the law firm Elborne Mitchell, which acts for the North Koreans. “It represents a total vindication.”

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The dispute stems from an incident in April 2005. In the North Korean account, a helicopter was dispatched from the capital, Pyongyang, to a remote island to transport a woman who was in labour with triplets. On the return flight it crashed into a warehouse on the outskirts of the city, causing a fire that destroyed food, shelter, medical equipment and other humanitarian relief supplies.

The KNIC settled an insurance claim by the airline, which had compensated the owner of the warehouse, and claimed this back from its London reinsurers. The contract stated that disputes were to be settled under North Korean law and in 2006 a court in Pyongyang ordered the foreign reinsurers to pay the North Korean company the €44 million. They refused.

According to a source close to the reinsurers, the comprehensiveness of the documentation provided by the North Koreans, including photographs of the accident site and exhaustive lists of all the materials lost, was unnatural and suspicious — even though the claims were authenticated by independent loss adjusters.

Lawyers for the KNIC said that, having received premiums for the previous nine years without any claims, the reinsurers were simply reluctant to pay out. They also suggested that when the contract was signed they may have failed to understand the difference between North Korea, one of the most repressive and isolated countries, and South Korea, its rich democratic neighbour.

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