Background

In 2006 Malibu Construction Company (the contractor) won a tender for the construction of an underground passage beneath the railway tracks in Akko. Attached to the tender was a soil engineer's professional opinion stating that groundwater might be found at the worksite. After trial drilling next to the worksite, groundwater was found at a certain depth. The tender therefore related specifically to work which should be conducted with the aim of lowering the groundwater level. The contractor carried out the work, but in April 2009, during excavations 10 metres below ground level, groundwater suddenly flooded into the worksite and the contractor was required to re-pump the groundwater. In November 2009 additional damage occurred as a result of the infiltration of groundwater through the sealing layers that had been built. This led the contracting company to carry out numerous repairs, amounting to damage totalling approximately IS13.3 million as assessed by the loss adjuster.

Before work had commenced, an insurance contract was issued by Ayalon, Malibu's insurer. The contract stipulated that the insureds were entitled to insurance benefits following an insurance event, which was defined in the policy as 'sudden and unforeseeable physical damage'.

The insurer argued that as part of the allocation of risks between the insurer and the insured, the contractor should be responsible for any damage caused by groundwater flooding. According to the insurer, it was known that groundwater existed before the construction work had commenced. Any damage caused as a result of groundwater was therefore foreseeable and not covered.

The insured denied this and claimed that the policy included no exclusion for groundwater damage. Moreover, the groundwater breakthrough was a specific, sudden event that caused unforeseen physical damage.

The Lod Central District Court (Judge Oren Schwartz) determined that the controversy lay in the interpretation of the insurance contract, which should be interpreted in a manner consistent with the object of the insurance policy. Based on the expert opinions presented, the court found in favour of the insured. The court accepted most of the heads of damage and ruled that Ayalon should indemnify Malibu IS7.3 million. Ayalon appealed to the Supreme Court.(1)

Supreme Court decision

The Supreme Court judges unanimously declined the appeal. The ruling was based on the contract's language, which reflected the manner in which the parties allocated risk.

The District Court found as a fact, based on the evidence and the documents presented by the parties, that the contractor's work to reduce the groundwater in 2006 had met the required standards. Hence, the subsequent groundwater outbreak was unexpected. The Supreme Court accepted the ruling and confirmed that the flooding was unforeseeable. The Supreme Court noted that the contractor's professional bodies believed that:

  • the works performed for handling the groundwater problem were appropriate;
  • the risk of groundwater flooding in 2006 was removed; and
  • the additional damage caused by the groundwater in April 2009 and November 2009 was unforeseen and therefore covered.

The court therefore declined the appeal.

Comment

The court examined the contract's language to search for the contract's purpose based on the parties' intention before the insurance event. The court denied the insurer's allegation that the flooding damage was not physical and ruled that in the absence of any indication in the policy or circumstances, the simple meaning of the term 'physical damage' included flooding damage.

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For further information on this topic please contact Peggy Sharon at Levitan, Sharon & Co by telephone (+972 3 688 6768) or email (peggysh@levitansharon.co.il). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.

Endnotes

(1) Ayalon Insurance Company Ltd v Malibu Construction Company (CA 8776/15, December 2017).