In a recent ruling handed down by the District Court of Tel Aviv - C.C. 18565/08 (Tel Aviv District Court) The Official Receiver in his capacity as the liquidator of the Trade Bank Ltd. v. Moshe Leibowitz and Others (handed down on 13th November 2008), the insurance policy served as a major factor in the Court's decision regarding a settlement agreement brought to it for approval.
The Israeli Trade Bank Ltd. collapsed following an embezzlement perpetrated by one of its clerks, Mrs. Etti Alon. In the framework of the embezzlement an amount of NIS 250 million (approximately $60 million) was stolen from the Trade Bank.
As a result of the Bank's collapse the Official Receiver, who acted as the Bank's liquidator and the Special Manager appointed by the liquidation court, filed a claim against the Bank's directors due to their alleged failure to prevent the embezzlement or to discover it in its early stages.
After prolonged negotiations, the Official Receiver and the Special Manager reached an agreement with the directors and their D&O Liability insurer - New Hampshire Insurance Co. Ltd. According to the settlement agreement, the defendants were to pay into the liquidation account a total amount of NIS 12 million (approximately $3 million) out of which the D&O Liability policy which was limited to $2 million, was to pay $2.4 million (limits of liability + 20% legal expenses) and the balance was to be borne personally by the directors
The Bank's primary creditor - the Bank of Israel (which compensated the Bank's customers and consequently became its primary creditor) agreed to the suggested settlement.
Despite the Bank of Israel's support and in spite of the fact that a relatively high amount of money was to be borne by the Directors themselves out of their own private financial means, the Court was not inclined to approve the settlement, stating that the settlement amount seemed insufficient especially given the public interest in this affair.
One of the main issues which affected the ruling was the limit of liability set in the Directors Liability policy. The Court was not pleased with the fact that the limit of liability could be eroded in respect of the liability payments as well as for the legal expenses.
The Court stated that enabling the D&O to use the policy limits for payment of legal expenses might discourage potential plaintiffs from filing claims since:
(a) Insurers have no incentive to limit the payments of legal expenses in cases where the claim against the directors appears well founded;
(b) Insurers will actually benefit from the continuation of the proceeding since the longer the proceeding lasts, the more pressure would be placed on plaintiff to settle the claim in an attempt to receive payments from insurers rather than to rely on the personal financial means of the insureds.
Another issue which bothered the Court was the actual liability of the directors. The Court stated that it cannot help wondering how embezzlement in such amounts was perpetrated over such a long period of time without the directors noticing it.
The Court was presented with information regardind the D&Os financial condition, and was convinced that if the policy limit is exhausted by payment of defence costs, then plaintiffs will not be able to recover their loss from the D&Os personal means. In view of the above and despite its doubts as to its reasonability, the Court approved the said settlement.
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