Teva Pharmaceutical Industries (Teva) was insured under a global insurance policy issued by a foreign insurer, National Union Fire Insurance Company of Pittsburgh PA (the foreign insurer). The policy covered worldwide losses and included Israel. Teva had an agreement with a security company (Goshen) to safeguard its premises. A malfunction in one of its freezers led to the loss of stored material in the sum of $5.6 million. The foreign insurer indemnified Teva and raised the argument that Goshen had failed to carry out its services and that had led to the loss.
The question dealt with by the Supreme Court was whether a foreign insurer is entitled to file a subrogation claim against the wrongdoer.
In view of a previous judgment, the claim against Goshen was filed by Teva in its own name and on behalf of its foreign insurer.
Previous judgment relevant to this issue
The Teva claim involved a judgment of the Central District Court in VIG Vienna Insurance Group v Sharon Drainage Authority on 13 October 2015. The appeal of this case was denied on 23 January 2017.
VIG, a foreign insurer, paid insurance benefits to its insured for damage caused in Israel, and then sued the wrongdoers. The defendants requested the Central District Court to strike out the claim, arguing that the foreign insurer was not entitled under Israeli law to submit a subrogation claim in Israel in the absence of a licence under the Supervision of Financial Services (Insurance) Law 1981 (the Supervision Law).
The Central District Court accepted the motion and struck out the claim, stating that the subrogation right is provided only to an insurer that complies with the Supervision Law.
At the end of the judgment, the judge recommended that, in similar cases, the insured should file a claim against the wrongdoer and hold the awarded damages in trust for the benefit of the foreign insurer.
The Supreme Court did not intervene in the VIG judgment and stated in a short and unreasoned judgment that no legal mistake was found in the judgment of the first instance.
In line with this judgment, Teva sued Goshen (and its liability insurer) in its name and on behalf of the foreign insurer. The defendants argued that the foreign insurer was not entitled to file a subrogation claim, nor was the insured on its behalf, as the recommendation of the Central District Court was a side remark and not part of the rationale of the judgment. The District Court in the Teva claim decided to strike out part of the claim which related to the foreign insurer.
Teva appealed the judgment before the Supreme Court. On 13 December 2021 the Supreme Court overturned the VIG judgment.
Triangle: insured – insurer – wrongdoer
The payment of insurance benefits to the insured releases the wrongdoer from its obligation towards the injured party but this does not mean that it is right to release the wrongdoer from any liability. On the contrary, the insurer – which fulfilled its obligation to the injured party – will be entitled to a recourse against the wrongdoer for its payment.
Subrogation, considered as an assignment of right by law, enables the insurer to claim indemnification from the wrongdoer.
The law of unjust enrichment sets out the main objectives of subrogation (ie, to avoid the unlawful enrichment of the wrongdoer on account of the insurer).
The subrogation may be based on either a provision of the law or on the general principle of the law of unjust enrichment.
Article 62 of the Insurance Contract Law requires proof of three elements – duty towards the insured under a valid policy, payment and liability of a third party– to indemnify the insured due to an insured event.
Where an insurer does not fulfil these requirements – for example, in cases of non-valid insurance, where an insured event did not occur or an exclusion is applicable – it cannot enjoy the mechanism of subrogation provided by the Insurance Contract Law. However, such insurer can sue for recovery based on the law of unjust enrichment as it had released the wrongdoer from its liability.
The claim based on unjust enrichment stands side by side with the mechanism of subrogation, being two parallel arrangements which serve the same objectives in law.
Position of foreign insurer under Supervision Law
In the current case, the foreign insurer had a global insurance contract with Teva, an Israeli company. The contract covered losses that occurred in Israel. The question of whether, in issuing this policy, the foreign insurer breached the prohibition of the Supervision Law, was not raised by the parties and therefore was not dealt with by the court of first instance. The Supreme Court was also not called to deal with it; it was enough to point out the difficulty which the case raised concerning the application of the Supervision Law on policies purchased by global corporations that also operate in Israel. For this case, it was sufficient to say that the foreign insurer did not meet the definition of "insurer" in the Supervision Law.
Position of foreign insurer under Insurance Contract Law
The Insurance Contract Law defines the transactions to which it applies. It defines an "insurance contract" as:
a contract between an insurer and insured which obliges the insurer against payment of premium, to pay the beneficiary insurance benefits, upon the occurrence of an insured event.
The law does not define "insurer"; nor does it refer to the definition in the Supervision Law (the association which was proposed during the Knesset discussions on the legislation of the Insurance Contract Law was specifically rejected).
The Supreme Court interpreted the term "insurer" in the Insurance Contract Law in a substantive way (ie, by checking the relationship between the parties). The definition of "insurer" under the Insurance Contract Law is broader than that under the Supervision Law. Therefore, for example, an Israeli insurer whose licence was revoked, or a company that does insurance business without a licence, or even a person who is engaged in an insurance business are not defined insurers in the Supervision Law, but they should be subject to the terms of the Insurance Contract Law. This interpretation is aimed at protecting the insured parties.
Where the policy is subject to Israeli law and the insured received insurance benefits from the foreign insurer, the latter is entitled to sue the wrongdoer in a subrogation claim according to article 62 of the Insurance Contract Law, or, by virtue of the law of unjust enrichment. Alternatively, the insured may sue on behalf of the foreign insurer. This is because the position of the foreign insurer is no different from that of an Israeli insurer.
Where the policy is not governed by Israeli law, the foreign insurer is entitled to file a subrogation claim by virtue of the general principle of the law of unjust enrichment.
This judgment rectifies the wrong decision of the VIG judgment that, for the past five years, has placed unnecessary and unjustified difficulties in the way of foreign insurers in recovery actions. The law is now clear: the foreign insurer is entitled to file a subrogation claim in Israel, just like an Israeli insurer.
The principles of the law of unjust enrichment, which are based on the ideas of justice, can afford solutions where the application of the law creates unjust results to assist the wrongdoer to evade liability, as in this case.
As a matter of practice, Israeli companies occasionally purchase insurance policies directly from foreign insurers. This practice is based on the interpretation of the Supervision Law, which says that the issuance of a policy to an Israeli insured, without being engaged in any actual business in Israel (including solicitation), is not considered as engagement in insurance business in Israel and thus does not require a licence.
The Supreme Court did not discuss this practice, and nor did it deal with the interpretation of the Supervision Law. Nevertheless, in a side remark, the Court noted that there is a question about the legality of a policy when issued by a foreign insurer to cover an Israeli risk without a licence.
While the Court decided not to address this issue, it stated that even if such foreign insurer acts unlawfully from the regulator perspective, this does not affect its right of subrogation.
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.