Significant developments have occurred in class actions, following legislation of the Class Action Law that came into effect in Israel in March 2006.
Prior to legislation of the new Class Action Law - 2006 ("the Class Action Law") the procedure of filing a claim on behalf of a group of unspecified plaintiffs was not governed by any comprehensive law in Israel. Only a few specific laws (9 laws) permitted the filing of a class action, based on their breach (e.g.: the Securities Law, the Consumer Protection Law, the Supervision of Insurance Law, etc.). For many years, plaintiffs who wished to file class actions for breach of laws other than these specific 9 laws, tried to base their action on a general provision of the Civil Procedure Regulations, which permits the filing of a joint claim by several interested parties (Regulation 29). Israeli courts rejected most of these class action applications, mainly due to the absence of sufficient legislative guidelines regulating causes of actions which may be filed by a representative plaintiff.
On April 2nd,2003, the Supreme Court handed down its decision in the matter of A.C.A 3126/00 The State of Israel v. E.S.T. Project Managements, and held that class actions may no longer be based on Regulation 29. Only class action applications pursuant to the aforesaid specific laws could be approved. The Court urged the legislator to proceed with the enactment of a long overdue comprehensive class action law.
In March 2006, the Class Action Law was finally published. This new law presents, for the first time in Israel, a general framework applicable to class actions in various areas and sets out the rules pursuant to which such actions may be filed and approved.
Some of the reforms of the Class Action Law are:
The Law provides a closed list of causes of action which may serve as the basis for a class action. This list significantly broadens the scope for class actions, compared to the few specific laws which previously permitted this.
One of the causes of actions in respect of which the new Law allows a class action, is a claim against an insurer or an insurance agent, in respect of any dispute between them and a client, whether a transaction has been concluded or not.
The Law provides rules and restrictions specific to the filing of class actions against the State and against its authorities.
Clear criterion has been established for the approval of a claim as a class action: the claim must raise material issued common to the entire class, the court must be convinced that there is reasonable probability that the issued will be decided in favour of the class and that a class action is the most fair and efficient method to conduct the claim and finally, that the representative plaintiff will represent the class properly and in good faith.
In case more than one plaintiff files a class action on the same matter, the court must decide which plaintiff is more appropriates to be approved as class representative.
With respect to class action applications filed against an entity providing vital services to the public (such as: a bank, an insurer or the stock exchange) the court has discretion to take into consideration public interests. If the court is convinced that the mere conduct of the claim by way of a class action may cause severe damage to the public requiring the defendant entity`s services because of the potential damage to its financial stability, compared to the expected benefit to the class and the public, the court may consider this issue when deliberating whether to approve the class action application.
Once a class action application is submitted to court, the plaintiff may not withdraw it without court approval. Settlement of class actions must be approved by the court, after all material information regarding the settlement has been fully disclosed. The State Attorney General may file an objection to the settlement. In any event, the court may not approve any settlement unless an expert appointed by the court qualified in the specific matter in dispute, opines that the settlement is appropriate.
If a class action is successful, the representative plaintiff will be rewarded for his efforts. Such award will be in addition to his proportionate share of the monetary award imposed on defendants.
The legal fees of the representative plaintiff`s attorney are determined solely by the court. He is not permitted to receive any additional or other remuneration from his clients.
A special fund has been established to assist in the finance of class action applications which have public and social significance.
Following enactment of the Class Action Law, the number of class action applications has increased dramatically, in practically all areas where class actions are now permitted.
Insurers are Prohibited from Settling Claims with Third Parties Without the Insured`s Consent
Pursuant to the Israeli Insurance Contract Law – 1981 a third party who sustained a loss as a result of the insured`s negligence has direct privity with the insured`s liability insurer. A third party may file a claim against the insurer alleging that the insured is liable towards him and that the insurer is obliged to indemnify him directly for his loss.
In practice, on many occasions, the insurer decides to settle with the third party, however omits to obtain the insured`s consent prior to such settlement. This could be the result of an inadvertent omission or based on the mistaken assumption that since the insured is not making any out of pocket payment, he has no real interest or no say in the proposed settlement.
The Insurance Contract Law provides that insurers must notify the insured in writing about a potential settlement with a third party. The insured may object to such settlement within 30 days.
In several recent cases, Israeli courts have made it clear that insurers must obtain the insured`s prior consent to settlement of a third party claim.
The courts emphasized that in matters involving liability insurance the insured`s interest is often not solely monetary, but also an interest in maintaining his reputation or various other legitimate interests.
Several courts have ruled that insurer`s failure to obtain the insured`s consent to the settlement, results in forfeit by insurers of their right to demand payment of the deductible by the insured.
Insurers should bear in mind that although third parties may file their claims directly against insurers, the policy was issued to the insured for the purpose of protecting his interests. Therefore, the insured must be involved in, or at least advised of, any anticipated settlement with the third party.
The Insured may Admit Liability to Third Parties without Insurers` Approval
A judgment handed down by the Magistrate`s Court of Tel-Aviv in November 2006 (C.C. 207463/02 A.M. Property Improvement Ltd. v. Hamagen Insurance Co. Ltd.), took the Israeli insurance industry by surprise.
Plaintiff, a construction company, was insured by the Defendant insurer under a professional indemnity policy. In one of the renovation projects carried out by the insured, defects were discovered in some of the constructions works. The defects were a result of faulty design by the insured`s employees. The insured`s clients demanded that the insured rectify the defects, and consequently the insured carried out damage control measures and repair works over and above the extent that had originally been agreed with the insured`s client, all at the insured`s expense.
The insurer contended that since no court claim was submitted against the insured, it is not entitled to insurance benefits.
In accepting the insured`s claim, the court commented that insurer`s argument, according to which in order for the professional indemnity policy to apply, the insured should not have carried out any actions, but should have waited until its clients filed a claim against it, is completely unacceptable. The Judge accepted the insured`s position that a letter of demand sent to the insured by his clients constitutes a claim which triggers the policy.
The court praised the insured for taking steps to mitigate its losses and not waiting for a court claim to be filed against it, thus preventing unnecessary and costly litigation.
Insurance companies have expressed concern that this judgment may encourage insureds to admit liability and act independently in settling third party claims against them, without obtaining the insurer`s prior approval and enabling insurer to participate in the loss mitigation efforts.