Very rarely do Israeli Courts address the interpretation of D&O Liability Insurance policies. Almost all insurance claims against D&O insurers are settled out of Court and therefore, there are very few Court judgements which refer to such policies. One of these judgements is C.A. (Haifa) 4600/07 Kenge Mansur v. Sahar Zion Insurance Co. Ltd. and the Carmel Local Council, which was handed down by the Haifa District Court on 28th September 2008.
During the years 1989 to 1998 the appellant, Mansur, served as the head of the Local Council of Osfia. In 1999 a defamation claim was filed against him in the Magistrates Court due to acts perpetrated by him while serving on the Local Council. At the time, Mansur was insured under a D&O Local Council Liability policy, however the insurer declined coverage, alleging that Mansur was aware of the potential claim against him prior to the inception date of the policy.
The Magistrates Court declined the defamation claim and ordered plaintiff to pay NIS 15,000 to Mansur as expenses.
The NIS 15,000 awarded to Mansur did not cover his actual costs and expenses, and Mansur filed a new claim against the Local Council and its D&O insurers in which he sought indemnification for the actual costs he incurred within the framework of the first claim, in a sum of NIS 61,000.
The Magistrates Court’s Decision
The Magistrates Court rejected Mansur’s claim against the insurers mainly based on the following:
(a) Prior knowledge:
The D&O Liability policy issued to the Local Council included a prior knowledge exclusion pursuant to which:
“This policy does not cover any claim arising from circumstances which preceded the insurance period of this policy and which the Municipality and/or the insured knew that they may lead to a claim against him …”
The Magistrates Court found that a year before the inception of the policy, Mansur received a letter from the plaintiff in the defamation claim in which he demanded an apology and stated that if no apology is provided within 7 days: “I will be forced to instigate legal proceedings against you.”
The Magistrates Court ruled that Mansur should have considered this letter as circumstances expected to give rise to a claim and thus was obliged to inform insurers thereof. Had he done so, no doubt the subsequent insurers would have excluded any claim arising from the demand and therefore the claim is not covered.
(b) The defence costs claimed by Mansur were exaggerated:
The Magistrates Court ruled that even if the case was covered, the defence costs claimed by Mansur were exaggerated. The insurers were not a party to the fee agreement reached between Mansur and his attorney in the defamation claim and therefore, they are not bound by this agreement and should not be required to indemnify Mansur for the costs arising therefrom.
Mansur appealed the Magistrates Court’s decision to the District Court which accepted the appeal and reversed the District Court’s decision, while determining as follows:
Declination based on the Prior Knowledge Exclusion requires proof that the insured actually knew of the claim
According to a well-based rule, the burden to prove the applicability of policy exclusion lies upon the insurer. In our case, the exclusion should be interpreted to apply only in case the Local Council and/or the insured actually knew that a claim would be filed against the insured. The demand letter was sent to Mansur one year before the claim was filed and was not necessarily considered by him as an actual threat that a claim was about to be filed.
If the policy excluded claims which the insured knew or should have known about, the insurer could be exempted from liability by proving that a reasonable insured should have known that the demand letter is likely to result in a claim, however according to the policy wording, insurers will be exempted from liability only if they successfully prove the insured’s prior knowledge and since – in this case – insurers failed to do so, then policy coverage applies.
The Prior Knowledge Exclusion is distinct from the insured’s disclosure duties
In the Magistrates Court’s decision, it stated that Mansur should have informed the D&O insurer of the demand letter and his failure to do so justifies applying the Prior Knowledge Exclusion. The District Court stated that this analysis was wrong.
According to the Insurance Contract Law, declination of coverage based on the insured’s breach of disclosure duties can be done only if the insured breached its duty to provide full and honest answers to questions presented by the insurer and only in cases where a reasonable insurer would not have agreed to insure the risk had it been aware of the actual situation. The insured’s duty to initiate disclosure is very limited and an insurer can decline coverage based on such breach only in extreme circumstances (such as fraud by the insured).
In our case, the D&O insurer did not present the Local Council with any questions and thus the failure of Mansur to notify insurers about the demand letter has no effect on policy coverage.
The District Court referred to the Supreme Court ruling in respect of Menorah Insurance Co. Ltd. v. Yuvalim in which it was determined that a liability policy does not cover a claim which the insured was aware of prior to its inception. The District Court stated that since, in that case, the insured was asked in a questionnaire whether he is aware of circumstances which may give rise to a claim and answered negatively, it is irrelevant to the circumstances of our case.
The declination in our case was based on the prior knowledge exclusion and thus the Magistrates Court was wrong in expanding Mansur’s disclosure duties.
Insurers’ liability to cover reasonable defence costs is not limited by the costs ordered in favour of the insured in the defamation claim
In the insurance claim, Mansur argued that his actual costs in the defamation claim were higher than the sum ordered in his favour and that he is entitled to indemnification for his expenses from the D&O insurers.
The District Court accepted Mansur’s argument stating that the insurers’ duty to cover the insured’s reasonable defence costs is not limited by the costs ordered in the defamation claim.
In addition, the Court ruled that since the D&O insurer chose to decline coverage and thus rejected Mansur’s request to cover his defence costs, it is estopped from arguing that the fee agreement reached between Mansur and his attorney was unreasonable or does not bind it.
To summarize, the Court ruled that the D&O insurance policy issued to the Local Council covers the actual defence costs incurred by Mansur within the framework of the defamation claim filed against him.
The above ruling emphasizes two points which should be considered by D&O insurers: the first is the importance of presenting a detailed questionnaire to the insured. The above ruling demonstrates the general tendency of the Israeli courts to almost never enable a declination based on prior knowledge or non disclosure in the absence of a specific question which was presented to the insured; and the second is the fact that once insurers decide to decline coverage, they “take the risk” that if the Court finds the declination unjustified, they will be obliged to cover the insured’s actual defence costs, although they had no control over them.