Compensation For Loss of Future Profits Due to Late Payment of Undisputed Insurance Benefits
By Adv. Aviv Klepner
In 2005, a restaurant owner by the name of Ehad Aham Food and Investments Ltd. filed a claim against Hadar insurance company regarding a business insurance policy that was issued by Hadar (C.C 1056/05). On 20th Oct. 2010 the Tel Aviv District Court handed down its judgment, ordering Hadar to compensate Plaintiff for extensive loss of profits due to late payment of undisputed insurance benefits that caused the inability of the Insured to reinstate the business.
Facts:
Ehad Aham Food and Investments Ltd. (hereinafter: "Plaintiff") operated a restaurant in Tel Aviv for several years. Plaintiff and the owner of the building (hereinafter: "owner") signed a rental contract that was valid until 31st May 2004, in which Plaintiff was given the option to extend the rental period until 31st May 2009.
According to the contract, Plaintiff was obligated to insure the rented property and the restaurant activity. Hadar insurance company (hereinafter: "Insurer") issued a commercial policy in favor of Plaintiff which covered fire perils both to the contents and the building as well as limited loss of profit for 3 months. Insurer also issued a separate policy in favor of the owner of the building, covering the building.
On 18th April 2003 there was an attempt to set fire in the restaurant but only slight damage occurred. The following night, on 19th April 2003 the restaurant was set on fire and was completely burned.
On 14th May 2003 Plaintiff filed a demand in the sum of NIS 1.33 million to the insurer for its damages. The insurer approved coverage only for the used value of the contents of the restaurant. Immediately thereafter the Insurer notified Plaintiff that the policy would be cancelled on 28th May 2003.
On 14th July 2003 the property owner notified Plaintiff that his rental contract was cancelled as Plaintiff failed to provide a valid insurance policy.
On 16th July 2003 Insurer paid to Plaintiff the amount of NIS 316,509, representing the value of the contents as appeared in the balance sheet, stating that Plaintiff is not entitled to reinstatement value, as he did not start to reinstate the restaurant.
After a lengthy dispute regarding who is entitled to the proceeds of the building insurance on 24th Sep. 2003 Plaintiff and the owner signed an agreement between themselves regarding the allocation of the insurance benefits regarding the building.
Following the above Plaintiff filed a claim against the insurer demanding insurance benefits for the contents damage based on reinstatement value, for loss of profits for several years, claiming that the delay in payment of the insurance benefits based on reinstatement value have caused the Insured extensive losses for which the Insured should pay.
Plaintiff's and Insurer's Arguments:
Plaintiff argued that insurer was obligated to pay insurance benefits for contents damage based on reinstatement value as opposed to the value of used equipment. Insurer argued that Plaintiff did not start to reinstate the restaurant within the period that was set in the policy, and therefore does not have the right to receive the insurance benefits for such value.
Plaintiff demanded insurance benefits for loss of profits for 3 months which is the maximum period that was set in the policy. Insurer paid insurance benefits for 35 working days explaining that this period is sufficient to renovate and resume the restaurant's operations.
Plaintiff further argued that due to insurer's cancellation of the policy Plaintiff could not fulfill its obligation to insure the property, as other insurance company refused to insure the burned property. Moreover, Plaintiff could not raise the money that was required for the renovation of the restaurant due to the late payment of insurance benefits by the insurer. Insurer alleged that following the two attempts to set the restaurant on fire, the risk became greater. Therefore in accordance to the policy and the law, insurer had the right to cancel the policy.
Court's ruling:
Regarding the reinstatement value, the court ruled that the insurer was late in payment of the undisputed insurance benefits that should have been paid within 30 days of the insured's notification. Therefore the insurer must be liable for Plaintiff's lack of funds that were needed for the renovation of the restaurant. Consequently the Insurer is obligated to pay the reinstatement value of the contents.
As for the building damage, the court ruled that as the Insurer paid the insurance benefits to the owner and as the owner transferred partial benefits to Plaintiff in accordance to the agreement between Plaintiff and owner, the Insurer has no further obligation with this respect to Plaintiff.
Regarding insurance benefits for loss of profits, the court ruled that according to the policy the insured is entitled to receive up to 3 months compensation for the interruption of his business. As Plaintiff's income ceased completely and part of the interruption was due to the insurer who did not pay undisputed insurance benefits on time, the court awarded Plaintiff with a compensation amount for 3 months i.e. the maximum period of loss of profit stated in the policy.
Insurance Liability to Pay Extra contractual Losses:
The court ruled that the late payment of undisputed insurance benefits caused the delay in the renovation. Consequently, other insurance companies refused to insure the damaged property and the owner was therefore entitled to cancel the rental agreement. The court found the insurer liable for the loss of Plaintiff's business, its reputation and its future profits. As Plaintiff had the option to extend the rental agreement, insurer was ordered to compensate Plaintiff for loss of profits until the end of the option period i.e. for almost 6 years beginning August 2003 until May 2009, over and above the remedies that were ruled in virtue of the policy.
Plaintiff was found as contributory liable for 20% of this damage as he did not try to take a loan for the reestablishment of the business.
Comment:
The insurer filed an appeal on the above mentioned judgment to the Supreme Court – a decision has yet to be given. However, the decision given by the court is another example of the court's ability to extend the insured's liability beyond the policy limits, when it believes that the Insureds' rights were prejudiced.
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