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Insurers Must Provide Their Insureds a Detailed Coverage Position Letter

In 1998 the Commissioner of Insurance issued a directive pursuant to which an insured who demands insurance benefits is entitled to receive, in writing, the complete and detailed position of the insurer. In cases where a claim is denied by an insurer, the latter must, on the first opportunity, detail in writing all the reasons for repudiation of liability. Any reason which is not detailed on the first opportunity may not be raised at a later stage by the insurer.

Since then several courts were requested to implement this directive and to determine that the insurer is precluded from pleading defence arguments which were not raised in the denial letter.

In C.A. 12838/02 ILD Insurance Company Ltd. vs. Field Crops Netofa the District Court of Haifa ruled that the sanction on insurance companies dictated by the Commissioner of Insurance should not apply where it expands coverage to risks which the policy did not intend to cover. In this case the insured demanded insurance benefits for loss of cotton crops. This risk was specifically excluded under the policy, however the insurer did not raise this argument in the letter to the insured. Cover was denied based on other arguments. The court ruled that the insurer may rely on a specific policy exclusion, although such exclusion was not mentioned in the denial letter. The court determined that, notwithstanding the desire to protect the interests of insureds, it should be assumed that they check their rights before submitting their insurance demand to insurers and not claim for insurance benefits in respect of risks which are excluded in the first place.

Furthermore, an insurer may rely on an additional reason for denial of coverage where new relevant facts or circumstances arose after the position letter repudiating liability was sent, or in cases where the insurer could not have been aware of such facts or circumstances at that time.

The court also emphasized that the exceptions for application of the sanction included in the directive do not constitute a "closed list".

In the case of D.S.A.L Ltd. vs. Menorah Insurance Company Ltd (C.C. 4673/03 Magistrate Court), Menorah argued in its statement of defence that the insured`s claim was fraudulent. This argument was not included in prior correspondence between Menorah and the insured, in which Menorah declined the insurance claim. The court accepted the insured`s motion to strike out Menorah`s arguments relating to fraud. This decision was appealed and reversed by the District Court which held that allegation of fraud falls within the exceptions to application of the directive of the Commissioner of Insurance. In addition, based on the basic legal principle that "fraud annuls everything" (fraus omnia corrumpit), Menorah should not be estopped from relying on the fraud defence argument (R.L.A. 1636/04 District Court of Haifa).

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