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A. Insurance of Liability and Casualty

Insurance policies in Israel are governed by the Insurance Contract Law - 1981 (hereinafter: the Law). The Law defines liability insurance as follows (Section 65):

"In liability insurance, the insurer should indemnify the Assured for financial obligations which the Assured may be liable towards a third party. The Insurance event occurs on the date the cause of action for the said liability occurs."

The Law, which is consumer protection driven, contains several provisions in respect of liability insurance which cannot be stipulated against unless for the benefit of the assured. The most significant provisions are as follows:

* Limit of Liability; Costs in Addition - a Liability insurance policy covers reasonable defence costs borne by the assured, even if such costs exceed the policy limit of liability.

In view of this provision, in those policies which cover legal liability, the insurers has to take into account the possibility that the scope of indemnity will exceed the policy limits. Until today the question of what is considered reasonable costs, has not yet been tested in the courts. the lack of court precedents raises the following questions:

In the event that the claim amount is far larger than the policy limits, what will be regarded as reasonable costs?

Is the policy limit dedicated to payment of the loss (net of costs) while costs are always in addition to the limits?

In our opinion a reasonable interpretation of the provision is that only once the limit of liability has been exhausted (either by payment of the loss or legal costs), and the assured incurs additional and reasonable legal costs, the insurer is obligated to pay him further insurance benefits. We hold the view that the additional limits to which the insurer may be exposed, should be between 10-20% of the policy limit of liability, regardless of the actual exposure.

This interpretation of the provision is based on various other enactments and the custom according to which insurance companies remunerate defence counsels.

Direct Privity with the Third Party - Section 68 of the Law provides that a liability insurer may pay the insurance benefits due to its assured, directly to the third party, to whom the assured is obligated. The assured must be informed, in advance, that the insurer intends to pay the third party, and has a right to object to it. The Law also provides that any defence or contention which the insurer may have against the assured, will also be applicable vis-a-vis the third party.

Limitation Period - in principle, the standard limitation period in torts under Israeli law is seven years. The Insurance Contract Law set a different limitation period for claims for insurance benefits. Such claims prescribe three years after the insured event occurs.

However, with respect to liability insurance, where the assured is exposed to the risk of a claim being filed against him during a much longer period, the "Law" provides that in liability insurance the assured's claim against its insurer does not prescribe as long as the claim of the third party against the assured has not prescribed.

In other words, the third party has seven years to lodge its claim against the assured which is equivalent to the time the assured has against the insurer.

The said provision was recently dealt with by the Supreme Court in C.A. 6945/98 Hamishmar Insurance Co. Ltd. v Kastiel et al (not yet published), (hereinafter: the Kastiel matter).

In this matter, the third party's claim against the assured was pending in court for eight years during which time the assured never notified his insurer about the claim. Only at the end of eight years the assured filed a third party notice against his public liability insurers. The court examined the question of whether the claim against his liability insurers was time-barred.

 

The Supreme Court held that in liability insurance the insured event which creates the assured's right to indemnification from his insurer, occurs on the day the cause of action of the third party against the assured, arises. Therefore, it rejected the appeal, and held that he appellant's claim against its insurer, had prescribed.

 

The ruling in the Kastiel matter gave rise to a lot of controversy among scholars, who have highlighted the problem which this decision created. One example derives from the practical aspects of the court litigation. A third party's claim against the assured can be filed shortly before prescription of the limitation period. A claim may remain pending in court for many years before the assured's liability will be determined. The ruling in the Kastiel case obliges the assured to file a claim against his insurer (and incurs legal costs) before his liability becomes evident.

B. Professional Liability - Legal Sources for Imposition of Liability

"Where a person does an act which in the circumstances a reasonable and prudent person would not do, or fails to do an act which in the circumstances such person would do, or fails to use such skill or take such care in the exercise of any occupation as a reasonable and prudent qualified person would exercise in such occupation, in the circumstances, this would constitute carelessness; and a person's carelessness as aforesaid in relation to another person to whom he owes in the circumstances, a duty of care constitutes negligence. Any person who causes damage to another person by his negligence, commits a civil wrong".

Section 36 to the Torts Ordinance provides that the duties imposed by virtue of Section 35, are owed towards any person, which a reasonable person ought to have foreseen, in the circumstances, may be affected, in the usual course of things, by such person's acts or omissions.

 

Supreme Court precedents have established the elements which constitute the tort of negligence, as follows:

(a) the existence of a duty of care on the part of the wrongdoer towards the wronged party

(b) breach of the said duty of care

(c) the existence of damage

(d) the existence of a causal connection between the damage sustained and the breach of duty of care

[In this respect see: C.A.145/80 Vaknin v. The Local Council of Beit-Shemesh et al, PDI 37(1), p.113; C.A. 243/83 The Municipality of Jerusalem v. Gordon, PDI 39(1), p.113]

2. Contract Laws

Compared to liability under the torts laws, the liability under contract is more confined and restricted. Whilst the tortious professional liability applies both towards a client and towards third parties, the contractual liability ony exists between the parties to the contract.

The Israeli Contracts Law (General Part) - 1973 is based on the continental principles of the Contract Law and mainly the German B.G.B. The main principles of the Contract Law are:

(a) "Umerima Fide" i.e. the parties must conduct their negotiations towards their contractual relationship, as well as the performance of the contract, in good faith.

 

(b) The importance of preservation of the contract. The court will try its utmost to preserve the contract which the parties intended to reach, rather than to allow its cancellation on technical grounds.

In order to achieve the above principles, one must ascertain the intention of the parties when they concluded the contract, and whether the wording of the contract indeed reflects the said intention.

Supreme Court precedents have placed great emphasis on the intentions of the parties to the contract when interpreting its provisions, as well as the purpose which the contract was intended to achieve, including its commercial goals and the market in which the parties operate. When interpreting a contract, a court should avoid an interpretation which leads to absurd or unreasonable results, even when these correspond with the linguistic meaning of the words chosen by the parties to the contract.

The courts have given liberal interpretations to contractual provisions, even where such interpretations negated the specific and clear wording of the provisions, in order to reach, what they considered to be, the reasonable true objectives which the parties had in view (C.A.4628/93 The State of Israel v Aprofim, PDI 49(2), 265).

C. Specific Professional Liability Aspects

1. Lawyers' Professional Liability

 

Currently in Israel, there are 26,000 active attorneys registered with the Israel Bar Association. During 2002, over 700 claims were filed in Israeli courts against lawyers. An average claim cover by Lawyers Professional Liability policies was concluded by payment of $9,000-$11,000 above the deductible stipulated in the policy (the deductible amount ranges between $3,500 and $7,000).

 

The relationship between a lawyer and his client is governed by a contract, either in writing or implied. Any such contractual relationship includes the implied condition that the lawyer who takes upon himself to represent a client, has the appropriate knowledge, skill and practice required in his profession, and that he undertakes to use these in the client's best interests. (See C.A. 37/86 Levy et al v. Sherman et al, PDI 44(4), p.446)

The scope of the duty of care required from a lawyer (and from any other experienced professional) is established in accordance with the nature of his profession and the level of skill and knowledge which were generally acceptable at the time the professional services were rendered.

 

Israeli Court precedents have listed the duties imposed on a lawyer towards his client. This list includes the duty to be skillful and cautious, to provide advice in all relevant matters, to safeguard the client's interests, to consult with the client, to inform the client as may be reasonably required, to have knowledge of the law, to be constantly updated of law and case law, meet timetables, etc.

 

This list is not a closed list. As the level of professionalism and expertise required from lawyers increases, so does the level of knowledge and skill required from them in order to meet their duties. Moreover, the relationship between a lawyer and his client, which is based on heightened trust, dictates strict standards of care.

Side by side with the tendency of the courts to broaden the duty of care required from lawyers, another trend (although limited) has recently been introduced by the courts: imposition of contributory negligence on the client. For example, where the client does not inform the lawyer of relevant information (C.A. 420/75 Cohen v. Eisen, PDI 30(3), p.29), where the client does not inform his lawyer of his whereabouts, thus preventing the lawyer from updating him in respect of his legal matters (C.C. (Tel Aviv) 95181/96 Ben-Mayor v. Kagnovsky (not yet published)).

Throughout the years, the courts have recognised the existence of a lawyer's duty of care, not only towards his client, but also towards third parties. Thus, for example, when a lawyer represents one party to a transaction, and the other party is not represented by a lawyer, an increased duty of care and skill is required from the lawyer when making representations to the non-represented party. (C.A. 37/86 Levy et al v. Sherman et al, PDI 44(4), p.446). A lawyer also owes a duty of care towards a represented third party and towards the lawyer representing the third party (C.C. (Tel Aviv) 30113/94 Klach v. Gelbard et al (not yet published).

The courts have also imposed liability on lawyers based on the doctrine of a contract in favour of a third party. For example - where a lawyer representing a party to a real estate transaction undertook to ensure registration of a mortgage in favour of the bank which extended the loan, the courts ruled that the lawyer breached his contractual duties and duty of care towards the bank, where he failed to meet his undertaking.

(See: C.C. (Tel Aviv) 91612/96 Discount Mortgage Bank Ltd. v. Gelert (not yet published); C.C. (Beersheva) 3086/98, Bank Hapoalim LeIsrael Ltd. v. Israel Land Administration et al (not yet published)).

The Supreme Court drew an important distinction between a lawyer's negligence and his error in judgement. It held that a lawyer's error in judgement when attending to matters of his client, does not in itself constitute negligence imposing liability on the lawyer. Only where the lawyer did not use his skills and knowledge in an acceptable and reasonable manner, he would be liable to compensate his client for damage sustained as a result. The mere fact hat at the end of the day the lawyer failed to achieve the optimal results for his client, does not suffice to impose liability on the lawyer, as long as he exercised reasonable care and competence and took into consideration all relevant circumstances, even if eventually the lawyer's judgement was found to be mistaken. (In this respect see: C.A. 735/75 Reutman v. Aderet et al, PDI 30(3), p. 75; C.A. 4707/90 Mayorax et al v. Baranowitz et al, PDI 47(1), p.17)

The statistics relating to claims experience in the field of lawyers' professional liability, demonstrate that more than 40% of the claims relate to real estate transaction (registration, tax aspects, failure to ensure rights, etc.). About 20% of the cases relate to negligence when representing a client in court (failure to meet the time frame prescribed by the law, negligent cross-examinations, etc.). The remaining claims relate to various subject matters, such as execution proceedings, drafting of agreements, estate management, etc.

The standard professional indemnity policies for lawyers which are issued in Israel, are on a claims-made basis, and cover any negligence, error or omission carried out by the lawyer within the framework of his activities as a lawyer. The policies exclude any dishonest, fraudulent or malicious acts by the assured, any claim for restitution of legal fees, any activity which is not an integral part of the lawyer's profession (such as activities as a director or officer in a company).

2. Accountants' Legal Liability

The liability of accountants is considered to be even stricter than that of lawyers or doctors. It appears that the reason for this strict approach is that the potential damage resulting from an accountant's negligence may be enormous in scale and influence a large spectrum of parties, whereas a lawyer's or a doctor's negligence will usually only implicate their client or third parties directly connected to their client.

 

Financial reports audited by accountants serve as a reliable source, relied upon by many, such as the company's shareholders, potential investors, regulating authorities, tax authorities, etc.

The activities of accountants in Israel are regulated by law and regulations. Section 24 of the Accountants Regulations (Method of Operation of an Accountant) - 1973 provides that an accountant who acts pursuant to the applicable standards, instructions or guidelines of the Israeli Accountants Association, is deemed to have acted in accordance with the acceptable standards, unless it is proven that, in the circumstances, his actions were not reasonable. Section 21 to the Regulations provides that an accountant may deviate from the acceptable standards where he is convinced that it is correct to do so, in view of acceptable professional considerations.

Similarly to other fields of professional liability, the main sources of liability under Israeli law in respect of accountants, are torts and contracts.

 

Accountants today perform activities and services which are not considered to be the traditional activities of an accountant. In the modern corporate world, accountants are often appointed by the courts as administrative managers to companies which are in financial difficulties, (similar to Chapter 11 of the U.S. Bankruptcy Code), accountants provide tax consultation services, risk management services, and perform of business forecasts and evaluation of companies or assets.

Simultaneously with the expansion of their fields of activities, accountants are more and more exposed to professional liability claims. In recent years, the most significant phenomena in litigation of accountants professional liability disputes, relates to claims, (including class actions), filed against the accountants of companies which have become insolvent.

In a recent judgement handed down by the District Court of Tel Aviv (CC 1134/95 Shemesh et al v. Reichart et al (not yet published), the judge surveyed legal publications issued in the U.S.A. following the collapse of Worldcom and Enron, and suggested that in order to prevent fraudulent misrepresentations in a public company's financial reports, the regulations regarding auditing and supervision by accountants, should be stricter than the current regulations.

Moreover, the judge offered her opinion that the independence and efficiency of auditors should be secured by establishment of an independent body to supervise the auditing of public companies and by restricting the services rendered by accountants to the companies whose financial reports are audited by them, similarly to the solutions offered by the Sarbanes Oxley Act of 2002 enacted in U.S.A.

 

The scope of liability of an accountant has been broadened by the courts to apply not only towards the client, but also towards third parties, including those who rely on the financial reports audited by the accountant. (C.A. 2910/94 Ernest Yafet v. The State of Israel, PDI 50(2), 271).

Notwithstanding the above, the Courts emphasized the importance of the balance between obliging an accountant to perform audits in the highest level of professionalism and care, and on the other hand - avoiding the establishment of standards which cannot be met (C.A. 709/78 The State of Israel v. unnamed persons PDI 34(3), p. 673).

 

3. Engineers' Professional Liability

The general rules applied by the Israeli courts in matters relating to the professional liability of engineers, are similar to those detailed above with respect to lawyers or accountants professional liability.

 

The reasonability of the engineer's behaviour should not be examined in view of the outcome of his professional decisions. The question which should be asked is whether this behaviour was reasonable at the time, based on the circumstance then known (CC (Tel Aviv) 169/94 Pachmas v. Livneh et al, (not yet published)).

An engineer is not liable in respect of a conspicuous mistake, which his client noticed or should have noticed (O.M. 106/54 Weinstein v. Kadima, PDI 8, p.1317). This principle corresponds with the doctrine according to which a professional opinion is considered negligent only where the person who relied upon it did not and was not expected to carry out an additional, independent examination. (See for example: C.A. 790/81, American Microsystems Inc. v. Elbit Computers Ltd., PDI 39(2), p. 765).

An interesting judgement, which demonstrates the Courts' inclination to favour the assureds' interests over those of insurers, was handed down by the Supreme Court in May 2002, in the matter of C.A. 2016/00 Rosenzweig v. Rosenblit et al (not yet published). It related to a professional liability claim filed against a construction engineer of a building project, in which cracks were discovered after completion of the skeleton.

The engineer issued a third party notice against his professional liability insurer. The policy provided coverage for claims filed against the assured for breach of his professional duties, originating from his negligence, errors or omissions. An exclusion of the policy provided that no coverage will be afforded in respect of claims resulting from any criminal fraudulent or dishonest acts or omissions by the assured. The assured admitted that he had knowingly deviated from the applicable standards established by the Israel Standards Institution in respect of building materials. He maintained that he used cheaper materials in order to please his clients, and that he believed that the materials he had used would be sufficiently strong and reliable.

 

The Supreme Court rejected the Insurer's reliance on the above mentioned exclusion in its declination of coverage. It was held that, by its nature, a professional liability policy is intended to cover the assured against the results of his wrongful acts.

Although the engineer's decision to use materials in deviation from the Standards constitutes a criminal offence, the Court held that when excluding criminal acts, the policy does not exclude offences of strict liability, such as the one committed by the engineer. Where the insurer wishes to exclude such offences, it should stipulate so specifically, and a mere exclusion of "criminal acts" would not suffice. Moreover, the judge held that since the engineer did not breach his professional duties for the purpose of receiving insurance benefits, his acts will not be considered as fraudulent or dishonest. Moreover, an insurer will not be liable to indemnify the assured in respect of gross negligence, only where it was specifically stipulated so in the policy.

Naturally, this judgement implicates all types of professional liability insurance policies in Israel, most of which contain the same insuring clause and exclusion as those referred to in the judgement