In Shay Peretz v Shlomo Insurance Company,(1) the Supreme Court examined whether Article 25 of the Insurance Contract Law 1981, which discharges insurers of liability where an insured or beneficiary submits a fraudulent claim, also applies to a third party's direct claim filed against an insurer where the third party's claim is in good faith.
Peretz, a cyclist, was hit by a car driven by Ron Zohar, whose car was insured against third-party (property) claims with Shlomo Insurance Company. Following the accident, Zohar approached his insurer regarding the damage caused to his car, which he claimed had been caused while parking. When Peretz subsequently approached Shlomo to claim for the damage caused to his bicycle, it became apparent that the damage to Zohar's car had been caused by an accident involving a cyclist and not while parking. However, Shlomo declined Peretz's claim. As a result, Peretz filed a claim in court against Zohar and Shlomo for the damage to his bicycle. Shlomo rejected the claim and claimed for the benefits paid previously for the damage to Zohar's car.
The Magistrates' Court decided that Shlomo was not liable to pay Zohar any benefits due to his untruthful claim. Therefore, under Article 25 of the Insurance Contract Law, Shlomo was entitled to receive the money previously paid to Zohar for the damage to his car. The court also approved Peretz's claim, as it had been made in good faith.
On appeal, the district court reversed the decision and found that the discharge of an insurer under Article 25 also applies to third-party claims, even where they are made in good faith.
In the leave for appeal before the Supreme Court, it was decided that the issue raised an important question concerning which contradicting judgments were granted by the lower-instance courts. Therefore, the Supreme Court dealt with the issue as an appeal.
The Supreme Court majority opinion decided that Shlomo should not pay the third-party claim, notwithstanding the fact that Peretz had acted in good faith and, according to the dissenting opinion, such a third-party claim should not be declined. Judges Minz and Wilner, the majority judges, described the liability policy as an insurance which aims to protect insureds against exposure to liability towards third parties, who are not considered beneficiaries. Further, they held that the insurance contract is not considered a contract for the benefit of a third party.
Although Article 68 of the Insurance Contract Law grants third parties a direct cause of action against liability insurers of tortfeasors, the object of this privity is to avoid insureds seeking benefits and refraining from passing them to a third party. The right of third parties against insurers cannot be stronger than the right of insureds against their insurers. Direct privity is a procedural vehicle aimed at utilising the substantive right of insureds, which stems from their contract with their insurers.
There was no dispute in Shay Peretz that the insured had given a false description of what had happened with fraudulent intent to obtain insurance benefits. As a result, the insurer was discharged from any liability towards the insured under Article 25. In these circumstances, where the basis for the payment of insurance to an insured is removed, third-party claims also collapse.
The fact that there was no causal connection between the third-party claim and the fraud did not alter this conclusion under Article 25, as no causal connection was required for the discharge of the insurer's liability towards the insured. As a result, Peretz's claim was dismissed. Judge Amit's dissenting opinion was based on his view that third-party rights are substantive rights accrued when an insurance incident occurs. Therefore, a later false act by an insured should not harm such rights.
The Supreme Court's decision has clarified that:
- fraud by an insured will also affect bona fide third-party claims; and
- the total discharge of an insurer in case of a fraudulent claim does not require a causal connection between the fraud and the insurer's liability to be proven.
For further information on this topic please contact Peggy Sharon at Levitan, Sharon & Co by telephone (+972 3 688 6768) or email (email@example.com). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.
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