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The Right of Subrogation under Israeli Insurance Law
 
Section 62 of the Israeli Insurance Contract Law, enacted in 1981, affords the insurer any right of action the insured may have against a third party pertaining to the damage for which the insured received insurance benefits.
 
The statutory assignment of the insured`s right of action (usually in tort) is not subject to the insured`s consent and is derived as a result of payment of insurance benefits to the beneficiary, upon execution of such payment. 
 
It should be noted that according to section 22 of the Israeli Torts Ordinance – a relic of the British Mandate – the right of action in tort is not assignable other than by a specific provision of law.[1] Therefore, section 62 of the Israeli Insurance Contract Law forms the sole legal basis in modern Israeli Law for subrogation. The parties to the insurance contract are not at liberty to contract out of the provisions of this section unless their stipulations favor the insured. In other words, assignment can be limited by agreement but the boundaries of the right cannot be widened at the expense of the insured. Thus, stipulation to the effect that payment of insurance benefits is dependant on success of subrogation efforts would be contradictory to the provisions of section 62 and illegal. [1] Nonetheless, the view has been expressed in a District Court ruling that modern Israeli law should now abandon this rule, as has been done by English case law. C.F. 1860/90 Ellerman Lines plc. (J. Kling).
 
The Scope of the Subrogation Right

The insured`s right of action, having been statutorily assigned, then becomes the insurer`s autonomous right of subrogation against the third party. The right assigned is identical in all aspects to the original scope of the insured`s claim, the insurer receiving no less and no more than what was originally the insured`s. Thus, time-bar questions or contractual limitations which the insured may have agreed to prior to payment of the benefits (the time of formation of the assignment) will be determined as they would have been had the claim been filed by the insured. 
 
Notwithstanding the above, the Israeli Insurance Contract Law provides two `moral` restrictions to the insurer`s subrogation right:
 
a. The subrogation right cannot be used in a manner that will impair the insured`s right to collect from the third party compensation or indemnification in excess of the benefits he has received from the insurer. This provision raises serious practical questions as to the legality of stipulations, which are common in financial institution policies, according to which the insurer`s right for recovery takes precedent over the insured`s right for collection regarding the deductible.
 
A similar question arises where the third party has limited means – is the insurer entitled to collect its the full share of damages if the result will in effect leave the insured with a reduced source of compensation for damage sustained in excess of the benefits?
 
b. The subrogation right will not apply "where the event insured against was brought about unintentionally by a person from whom a reasonable insured would not claim compensation or indemnification by reason of a family relationship or employer-employee relationship between them."
 
This latter limitation recognizes two "special" relationships which the legislator protects against the insurer`s subrogation claim, allowing the insured to freely collect the insurance benefits without fear of the consequences regarding a family member or to his employer or employee. In other situations, where the insured particularly wishes to avert a suit being filed against the third party – being a friend, business partner, client or for whatever other reason – the insured will have to forgo the right to collect benefits in order to protect the third party from the subrogation claim.
 
The Actionable Amount
 
The right of subrogation pertains generally speaking to the amount of the benefits paid by the insurer. In addition, Israeli courts as a rule will also recognize as actionable insurers` costs incurred in investigation of the damage. Although it is accepted practice, the legal basis for this is unclear. These expenses were incurred by the insurer and cannot therefore be considered part of the insured`s right of action that was assigned. Recognition of these sums under the category of "legal expenses" is also doubtful as the expenses are usually incurred first and foremost in order to determine the insured`s right for insurance benefits and not for the purpose of a subrogation claim. Nonetheless, despite occasional arguments raised against it, it is normal practice to award insurer`s compensation for loss adjuster costs and other expenses incurred while assessing the insured`s claim.
 
Despite this relatively lenient approach to the question of expenses, the right of subrogation is based on the principle of restitution and therefore amounts in excess of the actual damage are not actionable. Subrogation applies to Property Insurance regarding restitution payments, but does not extend to benefits paid beyond that by virtue of a reinstatement clause – i.e., where `old` was replaced with `new`. 
 
Subrogation also applies to Liability Insurance, the subject of which is damage to third parties. Again, the right will not apply beyond the amount of actual damage caused – i.e., - the compensation the insured is obliged to pay the third party and legal defence expenses.
 
In light of the restitution basis of the subrogation right, it is easy to understand why subrogation does not apply to Life Insurance. The sum insured in life insurance policies is entirely voluntary and does not represent any assessment of "value". The insured is free to determine the amount insured regardless of the question of the damage that will be sustained in case of the insured`s death as life itself, the subject of the insurance, is considered priceless. Such is the case, generally speaking, also with regard to accident, sickness and disability insurance. Nonetheless, section 54(b) of the Israeli Insurance Contract Law provides that subrogation will apply if the insurance benefits for accident, sickness or disability insurance are paid based on restitution criteria – such as actual loss of income or health care bills.
 
  Are subrogation rights assigned to Foreign Insurers?
 
The Financial Services Control Law (Insurance) 1981 provides criteria for awarding a foreign entity an insurer`s license in Israel. A foreign insurer holding an insurer`s license in Israel comes under the definition of "insurer" according to the Control law. It therefore follows that section 62 of the Israel Insurance Contract Law which affords the subrogation rights to an "insurer" – applies equally to the native and foreign insurers who have been issued licenses in Israel.
 
The question of subrogation rights of a foreign insurer arises therefore regarding a foreign insurer, who does not hold an Israeli license but has insured a risk in Israel or abroad and wishes to file suit against the wrongdoer in Israel. Israeli case law is unclear on this question. In our view it could be reasonably argued that as section 22 of the Israeli Torts Ordinance does not recognize assignment of an action in tort, there would be no basis for subrogation action on the part of a foreign insurer who claims contractual assignment of the insured`s right of action in tort.
 
One Supreme Court ruling that should be studied carefully in this context is Zehava Cenaan v. The United States of America. Zehava Cenaan unknowingly bought two valuable original paintings by the famous Israeli painter Reuven Rubin, for a mere fraction of their true worth. The paintings turned out to have been stolen while on loan by the lawful owner to the government of the United States of America for an exhibition held there. The USA had self-insured the paintings and paid their full value to the owner. On discovering the paintings were in Zehava Cenaan`s possession the USA filed a subrogation claim against her in Israel to return the paintings.
 
The court determined that the USA was in fact assigned the ownership of the paintings by subrogation. Nonetheless it would be difficult to base arguments for subrogation rights of a foreign insurer on this ruling which deals in essence with transfer of a personal right, ownership, as opposed to the right of action in tort. This question is therefore still open for discussion in the Israeli courts and should be well noted by foreign insurers wishing to seek recovery against wrongdoers in Israel.
 
[1] Nonetheless, the view has been expressed in a District Court ruling that modern Israeli law should now abandon this rule, as has been done by English case law. C.F. 1860/90 Ellerman Lines plc. (J. Kling). 
 


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