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Increeased Discloser Duties in Professional Indemnity Policies with Retroactive Cover

The Supreme Court has held that an assured owes increased disclosure duties toward his professional indemnity insurers, where retroactive cover is sought. In its ruling, in C.A. 1530/02;4993/02 Menorah v. Yovalim et al., the Supreme Court determined that an insured`s prior knowledge with respect to circumstances which may lead to a professional indemnity claim against it, which were not fully disclosed to the insurer, entitle the insurer to deny coverage.

The case involved a claim filed by 16 plaintiffs who appointed a civil engineering company ("the Insured") to manage and overlook the construction of a condominium on their behalf. Following completion of the project, plaintiffs discovered numerous defects in their apartments and demanded compensation from the Insured, and from the construction company. Plaintiffs issued a letter of demand to the Insured on July 1990.

More than four years later, on October 3, 1994, Plaintiffs filed their statement of claims against the construction company.

At the same time, the Insured negotiated the terms of its professional indemnity policy with Menorah Insurance Company Ltd. ("Menorah") and signed an insurance proposal dated November 13, 1994. The period of insurance was January 1, 1995 – December 31, 1995 and the policy included retroactive cover from January 1, 1982. In the insurance proposal the Insured did not disclose the possible claim by Plaintiffs.

In January 1995 Plaintiffs amended their statement of claims and adjoined the Insured as an additional defendant.

In a majority ruling, the Supreme Court held that the Insured`s failure to disclose its prior knowledge of a possible claim, entitles Menorah to deny coverage based on the prior knowledge exclusion. The Supreme Court further ruled that when dealing with retroactive cover, i.e. cover for past occurrences, the Insured owed Menorah greater disclosure duties and that "any other decision would completely disrupt the risk calculation of Menora when it agreed to insure the risk". The Insured knew about Plaintiffs` allegations and failed to disclose them to Menorah, thus Menorah is exempt from any obligation towards the Insured.

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