Before the Insurance Contract Law 1981 was enacted, failure to take protective measures could lead to a complete loss of benefits. However, following its entry into force, most court rulings have applied Article 21 of the law, which provides that if the insured fails to take risk mitigation measures as stipulated in the insurance contract, the insurer may be entitled to reduce the insured's benefits or even be discharged from liability.
In Lloyds Underwriters v Slutzky,(1) the Supreme Court's first binding ruling on this matter, the insured failed to lock his jewellery in a safe as preconditioned in the insurance policy. The jewellery was subsequently stolen in a burglary.
The Supreme Court ruled that Article 21 should also apply where a protective measure is taken but not used, and that failure to take or apply a protective measure should be examined using the following criteria:
- Does the insurer market a policy which does not require the risk mitigation measure in question? If so, the benefits should be proportional to the premiums charged for this alternative policy.
- If such an alternative policy is not marketed, the question is whether a reasonable insurer would issue a policy which does not require said protective measure. If so, the benefits would be proportional to the estimation of premiums to be charged for this hypothetical alternative policy.
- If both questions above are answered in the negative, the insurer will be free from liability.
The burden of proof in this analysis lies with the insurer. In order to prove that no reasonable insurer would issue a hypothetical alternative policy, a testimony by an actuary or other insurance professional stating that he or she is unaware of such a policy being marketed in Israel will suffice.
In Pollack Brothers Import Agencies Ltd v The Phoenix Insurance Co,(2) the insured was an importer-exporter whose business was insured under a policy which covered content and inventory damage, burglary and robbery risks and structural damage. The business had been broken into during the previous year and the insured was indemnified to the sum of IS600,000.
The new policy stipulated, as a precondition to the insurer's liability for burglary and robbery risks, that an authorised person must perform an internal inspection of the place of business in the case of an intruder alert. Further, the insured's manager was obliged to sign a commitment to conduct such a search as a condition for the continuation of insurance coverage.
On the night of December 18 2012, the business was burgled again. The authorised person arrived and patrolled the scene with a security guard, but did not conduct an internal inspection. They saw nothing suspicious and left the premises. Later that night, the alarm went off again and two security guards surveyed the area, but neither the insured nor its authorised person were informed of this occurrence at that time. The insured learned of the burglary on the morning of December 19 2012.
The magistrate court dismissed the insured's claim and rejected the authorised person's argument that an internal search of the premises might have put lives in danger. The court emphasised that the authorised person had not argued that he had feared for his safety(3) and stated that even if it applied the principles of good faith and public policy, this would at best limit the interpretative scope of the risk mitigation condition in the policy and not cancel it. The insured was found to have acted in bad faith regarding the compensation received following the first burglary for:
- consciously signing a personal and explicit commitment by a manager to meet the risk mitigation condition; and
- arguing against the condition.
Further, the court accepted the testimonies of the insurer's underwriter and an expert on insurance risk and security surveys. According to both, neither the insurer nor another reasonable insurer would have insured the business without the risk mitigation condition.
The insured appealed to the district court on the following grounds:
- the risk mitigation condition was unlawful, unreasonable and should be cancelled;
- the insurer failed to meet the burden of proof as required by the Lloyds Underwriters ruling; and
- there was no contributory negligence.(4)
The district court dismissed the appeal, finding that the insured's conduct had been in bad faith and that he should be estopped from raising those arguments. The court also found that:
- the risk mitigation condition was common and well accepted;
- there were no circumstances which justified cancellation on the grounds of public policy; and
- the insurer had met the burden of proof with the testimonies submitted.
The insured requested leave to appeal to the Supreme Court, but the claim was dismissed. The Supreme Court saw no reason to interfere with the magistrate and district court judgments. It considered the legality of the risk mitigation condition and the testimonies of the insurance professionals as sufficient to satisfy the burden of proof. Further, the Supreme Court concurred with the magistrate and district courts that the risk mitigation condition could have been met by calling the police to the scene of the burglary and that the insured had acted in bad faith.
For further information on this topic please contact Peggy Sharon or Alon Katz at Levitan, Sharon & Co by telephone (+972 3 688 6768) or email (firstname.lastname@example.org or email@example.com). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.
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