Introduction
Facts
Decision
Comparative review
Comment
During an additional hearing held by the Supreme Court on 7 July 2021,(1) an extended panel of five judges considered whether a 23-year-old driver was entitled to coverage under a car insurance policy limited to drivers aged 30 and over.
The Supreme Court first determined in June 2019 that this situation should be considered as being within the scope of sections 17 and 18 of the Insurance Contract Law 1981, which deal with the aggravation of risk and entitle the insured to partial payment of the benefits.
In view of the decision's significant impact on the insurance market, the Court decided, on the insurer's request, to set an additional hearing before an extended panel of judges. The judgment in the additional hearing overturned the initial Supreme Court judgment and determined that the insurer, Hachshara, would be discharged of liability under the policy in view of the insured's breach of the age limitation.
The insured (a car owner) entered into an insurance policy with an age limitation clause that would allow him to pay a lower premium. Under the subheading "People who are Permitted to Drive" on the first page of the policy, it was expressly stated that no coverage would be afforded for accidents if the driver of the insured vehicle was younger than 30 years old.
The insured gave the car to his employee, Mr Pikaly, who was 23 years old at the time. Pikaly was later involved in an accident causing significant damage to the other car involved. The insured immediately called the insurer to report the accident and when asked whether the driver was over the age of 30, he answered in the affirmative.
After considering the claim filed by the other car owner against Pikaly and the insurer Hachshara, the Magistrates Court decided to discharge the insurer as the policy clearly excluded drivers under 30. The appellate court dismissed the appeal and similarly determined that the breach of the age limitation deprived the insured of coverage.
Pikaly subsequently submitted an appeal to the Supreme Court, arguing that the objective of the Insurance Contract Law is to soften the "all or nothing" approach by affording partial benefits in cases of a breach. The Supreme Court accepted this claim and determined that the case should be considered as an aggravation of risk, meaning that partial payment should be made.
Given that the result of this case would have wider implications for age limitations in policies in the car insurance market, the Supreme Court decided to hold an additional hearing to deal with the question of whether the breach of the age limitation should be regarded as a case of aggravation of risk or whether the insurer could be fully discharged.
On 7 July 2021, the judges presiding over the additional hearing determined that the breach of the age limitation was sufficient grounds to fully discharge the insurer.
Sections 17, 18, and 21 of Insurance Contract Law (dealing with measures for risk mitigation and aggravation) clearly provide for partial payment according to the ratio of the premium, which would have been charged for both the aggravated risk and the premium that was actually paid. However, the breach of the age limitation was not an aggravation of the agreed risk but rather a risk that differed from the agreed upon risk covered in the policy.
The judgment was based on a three-to-two majority, with the majority offering the following reasons for the dismissal of the insurance claim:
- The insured was offered various insurance options for the car and willingly chose the less expensive insurance sold for drivers over 30. Therefore, he could not amend his choice following the accident.
- Awarding partial benefits to such an insured would lead to a market failure in motor vehicle insurance, weaken the possibility of differentiating between drivers and developing new, bespoke insurance products. It could also lead to a trend of inappropriately purchasing cheaper insurance policies with the knowledge that a partial payment is always awarded, which in turn could lead to increase of rates and premiums.
- The wording in the sections of the Insurance Contract Law that deals with measures of risk mitigation relates to external means and external unforeseen changes concerning the insured property. The age of the driver or a matter under his control, therefore, could not be considered a measure to reduce risks.
- The car being driven by a younger driver was a breach of the contract, and hence the intention of the insured was irrelevant since a breach of a contract could also encompass the neutral issue of whether the agreed term was fulfilled or not.
- The Insurance Contract Law is aimed at regulating the bilateral allocation of risks between the parties in accordance with their agreement. Nevertheless, this objective should not disrupt the fundamentals of contracts nor impose on the insurer a risk that both parties had agreed was not applicable.
- The agreed risk was that of an accident occurring while the car was being driven by a 30-year-old driver and, therefore, a 23-year-old driving the car was not aggravation of the agreed risk but rather an additional risk that had not been agreed upon in the policy.
The Insurance Contract Law was inspired by civil laws, especially those of Argentina, France, Italy, Switzerland and the United Kingdom, and therefore the court reviewed approaches to the issue in some of these jurisdictions.
In Swiss law, aggravation of risk caused by external factors may result in partial payment, but where caused by the insured, it leads to the discharge of the insurer. Similarly, in French law, the freedom of contract prevails where the insured breached the agreed terms, thus depriving them from coverage.
In English law, the insurer is prevented from repudiating coverage in case of a breach of policy terms (section 11 of the Insurance Contract Act); however, this does not apply to terms limiting the age of the driver.
The conclusion drawn from the review is that the distinction between an agreed and unagreed risk would be the basis for discharging the insurer, even though the general approach to breaches is a relative one and not "all or nothing".
The minority opinion voiced by the remaining two judges on the panel emphasised the protective nature of the law and the harm caused to the insureds by the total discharge of the insurer. Age is a relevant factor when determining risk level and, therefore, the breach of the age limit should lead to a partial payment due to aggravation of risk.
This case reflects the tension between the general principles of insurance contracts on the one hand and the protection of the insured on the other.
The first judgment of the Supreme Court was in complete favour of the insured's protection, despite it being in breach of contract. However, the majority judgment in the additional hearing related to the insured's actions as being beyond the remit of the agreed risk and therefore no pay-out was granted to the insured, considering that aggravation of risk may be relevant only to the agreed risk.
For further information on this topic please contact Peggy Sharon at Levitan, Sharon & Co by telephone (+972 3 688 6768) or email ([email protected]). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.
Endnotes
(1) Additional Hearing 5325/19 Hachshara Insurance Company Ltd v Pikaly (7 July 2021).