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A. Preamble
1. Claims-made policies are commonly used in the Israeli insurance market.
However, until recently the valfidity of the claims-made provisions in Israel have been questioned and have never been referred to by the Israel Supreme Court (the only Israeli instance whose rulings have a binding effect on the lower courts). The lower courts, which were occasionally required to discuss claims involving claims-made provisions, handed down contradicting decisions concerning their validity.
2. Recently, the Supreme Court, for the first time, referred in its ruling to a policy on a claims-made basis. The validity of the claims-made provision was not the issue of this case; however, from the ruling it is clear that the Supreme Court recognizes claims-made provisions as a legitimate basis of insurance.
We will first review the lower courts' judgments concerning the validity of the claims-made condition, and will examine their applicability in view of the latest Supreme Court's decision.
B. Claims-made Policies - General
In most cases, claims-made policies provide coverage for liability arising from claims which comply with the following three conditions:
(a) The 'claim' was first made during the policy period.
(b) The alleged wrongful act was perpetrated during or prior to the insurance period, but subsequent to the retroactive date provided (if such a date was inserted in the policy).
(c) The claim was notified to insurers during the policy (or discovery period).
C. Magistrates and District Courts - Contradictory Rulings
On various occasions, each of the three above mentioned conditions has been challenged before the Israeli courts, and their validity under the Israeli Law has been questioned, as follows:
The first condition - the date on which the claim was first made:
3. The validity of this condition was challenged by insureds who were sued after the policy period expired, due to their liability which arose during the policy period or after the retroactive date. These insureds argued that the claims-made policies constitute unlawful stipulation against the Israeli Insurance Contract Law - 1981 (hereinafter: the Insurance Contract Law), contradict public policy and are prejudicing conditions according to the Standard Contracts Law - 1982.
More specifically, it was alleged that the first condition contradicts provisions of the Insurance Contract Law, which may not be stipulated against, concerning the prescription period and late notification.
The Limitation Period Provision in the Insurance Contract Law
4. According to section 70 of the Insurance Contract Law, in liability insurance "... the claim for insurance benefits does not prescribe as long as the Third Party claim against the insured has not yet become time-barred". Section 70 cannot be stipulated against.
Several insureds argued that insurers under the claims-made policies are obliged to cover claims filed after the expiry of the policy period. Since the third party's claim against them had not yet prescribed, declination of liability by the insurer, based on the claims-made provision, constitutes an unlawful stipulation against section 70 of the Insurance Contract Law.
The Courts which dealt with these arguments reached contradicting conclusions. In Cuba v. Weisblatt [1], for instance, the Tel Aviv Magistrate Court held that a "claims-made provision in a liability insurance policy is invalid". On the other hand, in Menorah Insurance Co. Ltd. v. Musach Yossi [2], the Tel Aviv District Court upheld this provision based on the general principles of freedom of contract.
The Late Notification Provision
5. Under the Insurance Contract Law (sections 22-24), late notification cannot serve as a defence for insurers unless they can prove that it prejudiced their rights. These sections may also not be stipulated against.
On several occasions the Courts were required to determine whether the claims-made provision constituted an unlawful stipulation against sections 22-24. In this respect too, the Courts handed down contradicting rulings:
In Leo Goldberg v. Aryeh Insurance Co. of Israel Ltd [ 3], (Tel Aviv District Court) the insured - a motor car importer - was required to compensate a claimant for damage due to defects detected in the car she had purchased. The claim was lodged two years after expiry of the policy, and the notification was sent to insurers a short time thereafter.
The Court stated "there is no dispute that the insured event occurred during the insurance period". Therefore, the only problematic issue is the notification after expiry of the policy. The Court ruled that since the insurer's rights were not prejudiced 64 the late notification, the policy covers the claim.
However, in other cases [4] , the Courts declined the argument that a claims-made provision contradicts the late notification provisions. According to these rulings, claims-made policies constitute an agreement between the parties to consider as the "insured event" the claim filed against the insured, and not the occurrence which is the basis of the claim.
Section 65 of the Insurance Contract Law, provides that "The event insured against occurs on the day on which the basis of liability arises". Section 65 may be stipulated against, and actually the claims-made provision defines the insured event as the claim filed against the insured.
Therefore, in cases where the claim was filed after the policy period, we are not dealing with late notification concerning an insured event, but rather with an insured event which did not occur during the policy period, and thus is not covered under the policy.
The Second Condition - the period in which the Wrongful Act was perpetrated:
6. The Courts ruled that the requirement whereby both the Wrongful Act and the claim were made during the policy period, is unreasonable, and therefore these conditions should be interpreted alternatively. Namely, the policy covers cases where either the Wrongful Act or the claim was made during the policy period.
In Ben-Iluz v. Moshe Raz [5], the Court stated:
"It is unreasonable to assume that the policy drafters intended the policy to apply only in the situation, which is quite rare, that once a cause of action is created, the injured party will file his claim within a year or less. And what if the cause of action was created on the last day of the policy? And what if the damage has not crystallized within the policy period?"
It should be emphasized that in the above case the policy wording enabled the Court to interpret the first and second condition, as alternative conditions.
In Anolik v. Kibbutz Malkia[6] the Haifa District Court stated that in cases where the insured is in distress and has no other coverage (which was not the case in this judgment), then the Court may consider the terms as alternative even if such consideration clearly contradicts the policy wording.
In this cases the Court ordered insurers to cover claims although the Wrongful Acts which were the subject matter of the claims, occurred prior to the policy period or the retroactive date.
The Third Condition - the date on which the claim was notified to insurers:
7. As noted, the Insurance Contract Law does not consider late notification in itself, as a sufficient reason to decline coverage unless Insurers rights have been prejudiced as a result thereof (in which case insurers will be required to pay insurance benefits only to the extent that they would have been required to had the notification duty been fulfilled).
In other words, if a claim was filed against an insured during the policy period, and the insured notified insurers only after the policy has expired, then insurers will not be entitled to decline coverage unless they have sustained damage due to the late notification.
D. The Supreme Court Ruling
8. In December, 2003 the Supreme Court handed down its ruling in the matter of Eshed v. Hamagen [7]. The issue was the applicability of a Professional Indemnity and Third Party Liability insurance policy issued by Hamagen Insurance Co. Ltd. to a claim filed against the insured (Eshed) within the framework of arbitration proceedings. The relevant policy was on a claims-made basis, however the disputes between the parties did not concern the claims-made provision, but rather other conditions and exclusions of the policy.
9. The Supreme Court stated:
"Generally, there are two types of definitions of an "insured event" in liability insurance. The first type defines the insured event as the damaging occurrence or the negligent act which occurred during the policy period (occurrence basis). This type corresponds with the way in which an insured event was defined in Section 65 of the Insurance Contract Law. However, Section 65 is not included among the provisions of the Insurance Contract Law which may not be stipulated against, and therefore the parties to the contract are free to define the insured event in a different way. The second type is the definition of the insured event as a demand or claim filed by a third party against the insured during the policy period (claim basis)'.
10. From the above it is clear that the Supreme Court considers claims-made as a legitimate provision i.e. that the "insured event" under the policy will be on the day the claim against the insured was filed.
E. The Implications of the Supreme Court Ruling
11. We hold the view that the Supreme Court ruling should end the uncertainty regarding the validity of the first condition, in that it actually sets aside the argument that such policies are contrary to the Insurance Contract Law provisions.
12. As to the second condition, according to which the policy applies only to claims arising from wrongful acts perpetrated during the policy period or after the retroactive date (if applicable), we believe that the Supreme Court judgment did not change the legal situation.
There is a possibility that, under certain circumstances, the Israeli courts may consider this condition as unreasonable, and as contradicting the public policy. For example, in a case where an insured was continuously insured under claims-made policies, then the Israeli court will not leave him uncovered in case a claim against him was filed for wrongful acts perpetrated prior to the retroactive date stated in one of the policies.
13. As to the third condition, it is our opinion that this condition may be regarded as invalid, since it stipulates against the law provision regarding late notification. This position was enforced in the Supreme Court judgment which determined that the insured event under a claims-made policy is the third party's claim. Therefore, once such claim is filed during the policy period, the policy should apply to the claim. Thus, if the notification to insurer is sent after the expiry of the policy period, the insurer will not be automatically released from coverage. This will be considered as a mere late notification case which according to the Insurance Contract Law will require proof of prejudice in order to exempt insurers of liability.
[1] C.C. (Tel Aviv) 66789/94; PM 5759(3), p. 673.
[2] C.A. (Tel Aviv) 2508/99.
[3] C.A. (Tel Aviv) 1492/93.
[4] See for example: C.A. (Tel Aviv) 2508/99 Menorah Insurance Co. Ltd. v. Musach Yossi.
[5] C.A. (Haifa) 258/84.
[6] C.F. ( Haifa ) 643/00.
[7] C.A. 3182/02.
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