On 24 April 2009 the Haifa District Court handed down its decision in an insurance claim filed by Sky Club Ltd - C.F.270-00. In its decision, the District Court ruled that an insurer which failed to pay insurance benefits on time may be obliged to compensate the insured for the damage it suffered as a result of the delay.
Facts
On 24 April 1999 an aircraft which was leased by a parachute club took off with nine parachutists. A few seconds after taking off the aircraft crashed as a result of which the pilot and three parachutists died and the remaining six parachutists were injured.
Sky Club Ltd. was the owner and manager of the parachute club however the aircraft was operated by Barak Aviation Ltd. which was also responsible for the pilots.
Pursuant to the fatal crash several claims for compensation were filed by the injured parachutists and by the estates of the parachutists who died. In addition, a claim was filed by Sky Club against its insurer under an All Risks insurance policy.
The insurer declined coverage based on the allegation that a precedential term of the policy was breached by Sky Club. Notwithstanding the said declination during the Court trial and six years after its inception, all parties reached a compromise agreement which included payment of compensation for Sky Club in respect of the aircraft which was totally destroyed in the crash. The insurer's share in the said compromise settlement was 60%.
After the above settlement agreement was reached, Sky Club filed a claim against its insurer for the damages it allegedly suffered as a result of the delay in payment of the insurance benefits. Sky Club contended that the delay caused its financial destruction and had forced it to sell the parachute club.
The Insurance Dispute
The insurer's declination of coverage was made based on Section B in Chapter 4 of the All Risks policy it issued. According to the said section:
"Condition Applicable to All Sections General
1. The due observance and fulfillment of the terms, conditions and endorsements of this policy shall be a condition precedent to any liability of the insurers to make any payment under this policy.
2. The insured shall at all times use due diligence and do and concur in doing everything reasonably practicable to avoid or diminish any loss hereon.
3. The insured shall comply with all air navigation and airworthiness orders and requirements issued by any competent authority affecting the safe operation of the Aircraft and shall assure that:
(a) the Aircraft is airworthy at the commencement of each flight
(b) all Log Books and other records in connection with the aircraft which are required by any official regulations in force from time to time shall be kept up to date and shall be produced to the insurers or their agents on request.
(c) the employees and agents of the insured comply with such order and requirements."
The insurer's first declination letter was sent on 15th September 1999 and stated:
"The insurers would rather determine their final position regarding the claim after the publication of the Civil Aviation Authority's report regarding the causes of the accident. According to newspaper publications, the report is expected to be published soon. If you demand that insurer's position be provided at this stage, I will inform you, on behalf of insurers, of the declination of your claim due to the breach of policy conditions and the non-fulfillment of precedential terms for insurer's liability under the policy".
Several days after issuing the declination of coverage letter the Civil Aviation Authority published its report pursuant to which the accident was mainly as a result of the pilot's mistake. In addition, the report stated that the maintenance of the aircraft was improper and the aircraft had taken off with over-weight.
Almost three months after the report was published, the insurer sent its final declination of coverage letter in which it stated that after perusal of the Civil Aviation Authority's report it appears that there is a causal connection between the breach of the flight terms of the aircraft and the accident, and thus a precedential policy term was breached.
The Court's Ruling
In its ruling the Court examined whether the insurer's declination was justified. The Court found that all breaches of the law, the various acts of negligence, the pilot's mistake and the excess weight of the aircraft were not within the scope of responsibility which lies with the insured (Sky Club). The insured was not the operator of the aircraft but rather contracted these tasks to another company. Therefore, even if the insured was negligent in supervising Barak, such negligence does not justify a declination of coverage, and thus Sky Club's loss was covered under the policy.
Based on this conclusion, the Court examined whether the insurer's failure to timely pay the insurance benefits can lead to its liability to pay the consequential damage arising from such delay. The insured argued that extra contractual damages can apply only if the declination of cover was unreasonable and was made in bad faith and - in any case - such compensation is limited to the special interest set under Section 28A of the Insurance Contracts Law.
Section 28A provides that the Court may impose on an insurer in personal lines insurance, which has failed to pay in a timely manner insurance benefits which were not disputable, special interest at a rate that may reach three times the legal interest rate set by the law.
The Court refused to accept the insurer's interpretation of the law, and denied the allegation that an insurer's liability for a wrongful denial is limited to the sanction set out under Section 28A. Section 28A was intended to provide an insured that faced a wrongful denial with an additional remedy other than the remedies provided under the general contracts laws, and not to limit the remedies to which it is entitled. According to the said section, an insurer who declined coverage in bad faith is exposed to payment of punitive damage (special high interest) even in cases where the wrongful denial did not cause damage to the insured. However, it does not bar an insured from filing a claim for consequential damages caused as a result of a wrongful denial of coverage.
Section 10 of the Contracts Law (Remedies for the Breach of Contract) - 1970 provides that a party which suffered damage as a result of a breach of contract is entitled to compensation for such damage which the breaching party foresaw or could have foreseen at the time the contract was breached.
The Court ruled that this Section also applies to insurance contracts and therefore an insurer may be forced to compensate an insured for consequential damages resulting from a wrongful denial which it could have expected at the time it entered into the insurance contract.
The Court stated that the presumption at the basis of a property insurance contract is that if an insured event occurs, the insured will use the insurance benefits to replace the property destroyed. In cases where the insured property is the main element of the insured's business, the insurer should expect that the non-payment of the insurance benefits may lead to the collapse of the insured's business. This is the case here. The insurer could have expected that if the aircraft (which was the only aircraft in the insured's business) is destroyed, a denial of coverage will lead to collapse of Sky Club's business.
The main question which this case presents is whether consequential damages arising from a wrongful denial can also be imposed in cases where the wrongful denial was made in good faith, namely based on the insurer's honest belief that no coverage applies.
Although no coherent answer was given, the Court opined that basically it believes that an insurer should be forced to bear the insured's consequential damages which should have been expected also in case its declination was made in good faith. The Court supported its conclusion with the following reasoning:
(a) An insurer's failure to pay insurance benefits on time constitutes a breach of contract. According to the general contracts laws, the party which breached a contract is liable for the damages which could have been foreseen resulting therefrom no matter if it acted in good faith or not.
(b) Due to the economic disparity between the insured and the insurer, there is no reason for the insured to bear the consequences arising from the insurer's mistake. The Court quoted a Californian Court ruling which stated:
"An insurer who denies coverage does so at its own risk, and although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract ... The insurer should not be permitted to profit by its own wrong."
(c) When an insured event occurs the insured is vulnerable and totally depends on the insurer. While the insured can suffer heavy consequential damages as a result of the delay in payment of insurance benefits, the insurer has an obvious interest to postpone the payment for as long as possible.
(d) There is no basis for the insurer's allegation that imposing liability on an insurer for consequential loss deprives it from its right to bring its arguments to the decision of the Courts. The insurer has two alternatives: to decline coverage and take the risk that if its declination is found unjustified it will be required to bear the insured's expected consequential losses; or alternatively to pay the disputable insurance benefits and file a claim against the insured afterwards. The Court furthermore stated that the insurer can pay the insurance benefits in consideration for collateral which will guarantee its ability to collect the money from the insured if the Court agrees with its declination.
Although the Court opined that an insurer should be liable to pay consequential damages arising from its wrongful denial even in cases where the denial was made in good faith, under the circumstances of this specific case, the Court found that the insurer's declination was not entirely in good faith.
Therefore, the Court stated that it is not required to determine whether the same ruling applies also in cases where the insurers' behaviour was entirely in good faith.
In its judgement the Court mentioned the possibility of imposing liability on an insurer for damages which it could not have foreseen and which arose from its wrongful denial. The Court stated that such possibility may exist only in cases where the insurer acted in bad faith.
Since, under the circumstances the insurer could have expected that its denial will cause the collapse of the insured's business, the Court ordered the insurer to compensate the insured for the damages arising therefrom.
Comment
The said decision is a District Court decision which does not constitute a binding precedent. Notwithstanding the above, this decision reflects the general tendency of the courts to extend insurer's liability.
The decision referred to a first party loss, and its applicability to third party policies has not been addressed by the Court. In any case, this ruling necessitates a review of declination procedures, and requires insurers to consider, before declining coverage, whether the declination is well founded, and to what consequential damages they may be exposed if the declination is found to be unjustified.
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