Lawyers in Israel are not bound by law to purchase a professional indemnity policy, but most do. The question sometimes arises of whether certain behaviour amounts to negligence (covered by a professional indemnity policy) or whether it amounts to a breach of trust and is thus excluded from the policy.
This dilemma was examined in Migdal Insurance Company Ltd v Adv Tal Shacham.(1) The Tel Aviv District Court decided that a lawyer who favoured his own personal interest over his client's was not entitled to insurance benefits under professional liability insurance. Said judgment was recently approved by the Supreme Court.(2)
In March 2005 Tal Shacham prepared a sale agreement under which his uncle sold a residential unit in Herzeliya.
At the time, Shacham's uncle faced financial difficulties and his rights in the unit were mortgaged to Hapoalim Bank. In February 2005, prior to the agreement, Shacham lent his uncle IS415,000.
The buyer paid Shacham's uncle IS940,000 for the unit on the date on which the sale agreement was signed by the parties, both represented by Shacham. According to the agreement, the payment of Shacham's uncle's debt to the bank should have been made in 24 monthly instalments, thus enabling the buyer to receive the unit free of any mortgage.
To ensure that Shacham's uncle fulfilled his obligations under the agreement, the buyer was provided with two securities:
- an apartment in Tel Aviv registered in Shacham's name, which was subject to a previous mortgage of $136,000; and
- rights in a warehouse in Tel Aviv which was owned by Shacham's cousin.
Shacham's uncle fled Israel in December 2005 without paying his debt to the bank and the buyer discovered that the securities which he had provided were worthless, as Shacham had not registered them with the Land Registration Office.
Further, it transpired that Shacham and his cousin had sold the two assets which had served as securities and that Shacham had taken the money received as payment of the loan which he had given to his uncle. In 2007 the bank executed the mortgage registered in Shacham's name on the unit and sold it to a third party.
The buyer filed a claim against Shacham regarding the loss. Shacham approached Migdal Insurance Company Ltd, which had issued him professional liability insurance. The insurer declined coverage under the policy arguing that his behaviour in handling the transaction exceeded negligence and amounted to recklessness or even an intentional act.
In 2011 the buyers' claim against the lawyer was accepted. The court ruled that Shacham had been negligent, but that the allegation of fraud had not been proven. Shacham then filed a separate claim against the insurer.
The magistrate court accepted Shacham's claim, ruling that the insurer was bound by the judgment of the buyer's claim due to the estoppel (res judicata) principle. As Shacham was found to be negligent rather than fraudulent, the insurer had to indemnify him for amounts paid to the buyer. The insurer filed an appeal with the Tel Aviv District Court.
The appeal was affirmed by a panel of three judges in the district court. It ruled that the insurer was subject to the findings of the first judgment. However, estoppel applies if a question was explicitly resolved in the first judgment and when that question was essential for the decision. The rejection of the fraud allegation in the buyer's claim was not based on a positive finding, but rather on an absence of proof. Further, this question was not essential for the first judgment. Hence, the insurer was not bound by the legal conclusion regarding the unproved fraud.
The district court pointed out that the discussion regarding the issue of alleged fraud was unnecessary for deciding whether Shacham was liable towards the buyer. Based on the findings in the buyer's claim, Shacham acted in conflict of interest, which is considered a breach of trust and therefore excluded from coverage.
It was further ruled that Shacham favoured his personal interest, his uncle's interest and his cousin's interest over that of the buyer:
- Shacham knew that his uncle faced financial difficulties. He was a creditor of his uncle and knew that competition could arise between himself and the buyer regarding the apartment which served as security if his uncle did not pay off his debts;
- Shacham knew that the second security given to the buyers (the warehouse) was worthless, as it had been previously mortgaged to a third party. Shacham had handled the previous registration of the mortgage himself;
- Shacham did not register a mortgage in favour of the buyers on the first security (the apartment) and instead sold the apartment and pocketed the money received; and
- Shacham convinced the buyers that the apartment was appropriate security in case his uncle did not pay off his debt to the bank.
The court summarised that error, omission and negligence should not be confused with a conscious breach of trust while favouring self interest or foreign interest over the client's interest. Such conscious breach of trust cannot be insured.
For further information on this topic please contact Aviv Klepner 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.
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