In RCA 1219/18 Shay Peretz v. (1) Shlomo Insurance Company (2) Ron Zohar (18 June 2018), the Supreme Court dealt with the issue of whether Article 25 of the Insurance Contract Law, 1981 which discharges the Insurer in case the Insured or the beneficiary submitted a fraudulent claim, applies also to the third party’s direct claim filed against the liability Insurer where the third party’s claim is in good faith.
Facts
A bicycle rider, Peretz, was hit by a car driven by Zohar whose car was insured against third party (property) claims with Shlomo Insurance Company. After the occurrence, Zohar approached his Insurer to obtain insurance benefits for the damage caused to his car and claimed that the damage to his car was caused by an unsuccessful parking. Later, when Peretz approached Shlomo Insurance Company in a claim concerning the damage caused to his bicycle, it transpired that the event in which the damage occurred was a car accident with the bicycle rider and not an unsuccessful parking. When this became evident to Shlomo Insurance, the third party’s claim was declined. Peretz, the third party, filed a court claim against Zohar and Shlomo Insurance Company for the damage to his bicycle. Shlomo Insurance declined the claim and also claimed for recovery of the benefits paid previously for the damage to the car.
The Magistrates’ Court decided that the Insurer was not liable to pay the Insured, Zohar, any benefits because of his untruthful notification and therefore, according to Article 25 of the Insurance Contract Law, Shlomo is entitled to receive the money previously paid to Zohar for the damage to the car.
As to the claim filed by the third party, Peretz, the Magistrates’ Court approved the claim as his claim was in good faith.
The District Court in an appeal, reversed the judgement and determined that the discharge of the Insurer according to Article 25 applies also to a third party claim even where such third party is in good faith.
In the leave for appeal before the Supreme Court, it was decided that the issue raises a principle question concerning which contradicting judgements were granted by the lower instances, and therefore, the Supreme Court dealt with the issue as an appeal.
The Judgement
The Supreme Court was divided into a majority opinion which decided that the third party claim should not be paid by the Insurer, notwithstanding the fact that he acted in good faith and, according to the dissenting opinion, such a third party claim should not be declined. Judges D. Minz and Y. Wilner, the majority judges, described the liability policy as an insurance which is aimed at protecting the Insured against being exposed to a monetary liability towards a third party. Such third party is not considered as a beneficiary and the insurance contract is not considered as being a contract for the benefit of a third party.
Although the Insurance Contract Law in Article 68 grants the third party a direct cause of action against the liability Insurer of the tortfeasor, the object of this privity is to avoid a situation where the Insured seeks insurance benefits and refrains from passing them to the third party. The third party’s right against the Insurer cannot be stronger than the Insured’s right against his Insurer. The direct privity is only a procedural vehicle aimed at utilizing the substantive right of the Insured which stems from his contract with his Insurer. There is no dispute that the Insured gave a false description of the occurrence with a fraudulent intent in order to obtain insurance benefits and therefore the Insurer is discharged from any liability towards the Insured according to Article 25. In these circumstances, where the basis of payment of insurance benefits to the Insured falls away, the third party claim also collapses.
The fact that there is no causal connection between the third party claim and the fraud does not alter the conclusion, as according to Article 25, no causal connection is required for the discharge of the Insurer, vis a vis the Insured. Hence, also lack of causal connection between the fraud and the third party claim will not alter the result. Therefore, the third party’s claim was dismissed. The dissenting opinion of Judge Y. Amit was based on his view that the third party’s right is a substantive right which accrued at the moment of the occurrence and therefore a later, false act by the Insured should not harm it.
Comment
In this judgement the Supreme Court clarifies the law concerning Article 25 in two aspects. The first, that fraud by the Insured will affect also a bona fide third party claim and second, that the total discharge of the Insurer in case of a fraudulent claim does not require a causal connection to be proven between the fraud and the liability of the Insurer.
