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The Israeli Insurance Contract Law, which was legislated in 1981, created a significant change in the disclosure duties which apply to insureds. The insured's duty to initiate disclosure was reduced and the insurer's remedies in case of breach of disclosure duties were limited.
On8th February 2006 the Israeli Supreme Court handed down its judgement in the case of C.A. 10-64/03 Eliahu Insurance Co. Ltd. et al v. the Estate of Rachel Piementa and Aharon Piementa. In this judgement, the Supreme Court analysed the Insured's duty to initiate disclosure while interpreting the rules in the Insurance Contract Law - 1981.
Facts
In 1990 Mrs. Rachel Piementa was advised that she had cancer. Following this diagnosis, Mrs. Piementa underwent treatments which resulted in remission of the cancer.
In 1994, Mrs. Piementa and her husband, Mr. Aharon Piementa, tried to obtain a mortgage for the purchase of two apartments. The bank conditioned granting of the mortgage to presentation of a life insurance policy which would cover both Mr. and Mrs. Piementa. In fact, the bank, which had been advised about Mrs. Piementa's condition, recommended that the Piementas purchase a life insurance policy which was marketed by an insurance agency owned by the bank, and which did not require completion of a health declaration form. The Piementas accepted the recommendation, and purchased the life insurance policy.
The 'insured event' according to the policy, was the death of an insured or the insured's diagnosis as suffering from a terminal desease.
Three months after the policy was issued, Mrs. Piementa's cancer returned, worsened and a short time afterwards she was informed that her life expectancy is short. The insurers of the policy denied coverage on the basis that Mrs. Piementa had breached her duty of disclosure.
The Legislative Background
The insured's duty of disclosure is set out in section 6 of the Insurance Contract Law - 1981. The Insurance Contract Law distinguishes between two duties of disclosure on part of the insured:
(a) The duty to reply completely and in a straightforward manner, to questions presented to the insured concerning material matters (Section 6(a)).
(b) The duty not to conceal any information concerning material matters with fraudulent intent (Section 6 (c)). This duty was recognized by the Supreme Court as the duty to initiate disclosure, also in cases where the insured was not asked to do so (see for example: C.A. 282/89 Shmuel Rotenberg v. Clal Insurance Company Ltd., PD 46(2) 339).
The term "material matter" is defined by the law as any matter likely to affect the willingness of a reasonable insurer to conclude the insurance contract at all, or to conclude it under the conditions contained therein.
Under the circumstances, it was clear that the insurers did not present Mrs. Piementa with any questionnaire concerning her health condition. However, the insurers claimed that Mrs. Piementa concealed the fact that she had cancer with fraudulent intent, and thus breached her duty to initiate disclosure, as set in section 6(c) of the Insurance Contract Law.
The insurers claimed that had they known that Mrs. Piementa had cancer, they would not have agreed to insure her even for a higher premium. Therefore, they claimed that they are released of all liability (section 7 of the Insurance Contract Law).
The Supreme Court's Ruling: The Insured's Duty to Initiate Disclosure
At first, the Supreme Court stated that the Insurance Contract Law was enacted in light of the deep gap between insurers and insureds. The insurer is a strong and stable company which specializes in the insurance business, while the insured is usually a weak party with no expertise in insurance. The Insurance Contract Law was intended to protect the insureds, and thus it extended the liabilities imposed on insurers and limited those imposed on insureds.
This purpose is implemented also in the provisions of the law concerning the insured's duty to disclose.
Since insurers did not present Mrs. Piementa with any questionnaire concerning her medical condition, the Court examined whether Mrs. Piementa's silence in this respect constitutes a breach of her duty to initiate disclosure.
The Court set the terms under which an insurer can establish a breach of the insured's duty to initiate disclosure as follows:
(a) The insured concealed information from the insurer
The Court stated that in order to establish concealment of information, it is not sufficient to show that certain information was not disclosed. The insurer must prove that the insured's non-disclosure derived from an immoral motive. The Court stated however that almost always non-disclosure of information of which the insurer is aware of its material value, will be considered as concealment of information.
(b) The concealment of information was made with fraudulent intent
In order to prove the fraudulent intent of the insured, the insurer is required to prove that the insured concealed the information since he or she assumed that if the information was disclosed, the insurer would refuse to enter into the insurance contract. In other words, the insured believed that had insurers been aware of the actual situation, they would not have agreed to issue the policy.
(c) The insured was aware of the fact that the matter concealed was material.
A matter is considered "material" if it is likely to affect the decision of a reasonable insurer whether to accept the risk and if so, on what terms.
The insured's duty to initiate disclosure is breached only in cases where the insured was aware of the fact that the information concealed is material. Namely, the Court is required to determine the insured's state of mind at the time the policy was issued. The Supreme Court stated that when the information held by the insured is such that any intelligent person would understand its relevancy to the insurance, the burden of proof is shifted to the insured to prove that he was not aware of the materiality of the information.
As can be seen from the above, the insured's duty to initiate disclosure is limited. The Court stated that this policy will encourage insurers to present the insured with questions concerning any information which they feel is relevant to the issuance of the policy. The fact that an insurer decided not to present a certain question to the insured may lead the insured to the conclusion that the insurer is not interested in the information he may be able to provide.
In the circumstances of the claim, the Supreme Court ruled that the fact that Mrs. Piementa had cancer is a material matter, and that Mr. and Mrs. Piementa were aware of the relevancy of this information to their life insurers. However, the Court ruled that the insurers failed to prove that the Piementas acted with fraudulent intent especially in view of the fact that they revealed to the Bank Mrs. Piementa's disease. Therefore, the Court ruled in favor of the Piementas.
Comments
Although the insured was undisputedly aware of the materiality of the concealed information, the Court did not find 'fraudulent intent' on the part of the insured, due to the exceptional circumstances of this case.
However, this case illustrates the tendency of the Israeli Court to limit the duties which apply to insureds and to minimize insurers's ability to decline coverage based on the breach of such duties. According to the Piementa case, if an insurer does not present a specific question to the insured, it will be very difficult for it to prove that the insured breached its duties of disclosure.
Even if the insurer successfully proves that the insured withheld information while being aware of its materiality, the insurer may still be held liable under the policy.
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