On 15.9.2013 the Supreme Court of Israel handed down a significant judgment on the matter of breach of terms of the policy in Certain Underwriters at Lloyd`s vs. Mr. Eliyahu Slutzky.
The facts of the case are fairly straightforward and were not in dispute.
Insurers issued a homeowners insurance policy for Mr. Slutzky, which specifically stipulated that insurance coverage for jewelry would apply only if the jewelry was placed in a safe. A burglary took place and jewelry that had not been deposited in the safe was stolen.
Insurers declined the insurance claim on the basis of breach of the policy condition.
The case came before the Supreme Court on appeal by Insurers after the lower appeal court upheld the insured`s claim for benefits.
The Supreme Court`s premise is that the insured indeed breached the very clear condition to place jewelry in the safe. Furthermore, as the safe had not been found by the burglars, there was a clear causal connection between the breach of the policy and the subsequent loss.
The Supreme Court then presented the following query:
"Under these circumstances, is the insurance company liable for payment of insurance benefits, and if so, should it be liable in full or on a partial basis?"
Following analysis of the Insurance Contract Law 1981, the Supreme Court ruled in favor of the insured despite the obvious breach of the policy terms and concluded that "the insured is nevertheless entitled to the full amount of insurance benefits".
The Reasoning for the Slutzky Precedent - The Proportionate Remedy Rule
Israeli Insurance Law adopted a proportionate remedy rule. In essence, other than in cases of fraud, there is no automatic exemption of the Insurer from liability.
This consumer protective mechanism applies to the issues of misrepresentation, breach of risk-reduction requirements and failure to notify of an aggravation of the insured risk in property insurance.
The proportionate rule deviates from traditional Common Law principle of "all or nothing", cushioning the insured from the impact of the breach on the insurance coverage.
Under Israeli law, the insurer is entitled to a proportionate reduction of liability to the degree that the insured`s breach actually affected the event or the premium rate. Furthermore, the insurer bears the onus of proof of all elements of the remedy mechanism.
The Slutzky case is novel for its being the first Supreme Court case in which remedy for the insurer was denied outright on the basis of the onus of proof. The insurer had failed to provide the court with proof of the elements necessary to calculate and apply a reduction of liability and the result was that no remedy was awarded at all.
What Are the Elements an Insurer has to prove?
The Supreme Court detailed the mechanism of application and calculation of the proportionate remedy rule, as follows:
The court will consider the degree and effect of the insured`s breach and is authorized to reduce the insurer`s liability proportionately according to the ratio of the actual premium and a higher premium that would have been charged had the risk-reduction requirement not been included in the terms of the policy.
In other words, the insurer must provide proof that it would have charged a higher premium for issuing the policy without the risk-reduction measure in order to be entitled to a proportionate reduction of liability.
If the insurer proves that the policy would not have been issued without the risk-reduction condition, the Insurer must further show that no other "reasonable" insurer would have issued the same or alternately must show that a higher premium would have been charged by a "reasonable" insurer.
In other words, the insurer must adduce evidence of the insurance market trends regarding the particular risk-reduction requirement in question. The Slutzky precedent also allows for the insurer to prove the higher insurance premium rate that would have been charged by a "reasonable" insurer in order to reduce liability proportionately.
The Supreme Court noted that the burden of proof that the insurer must meet is not heavy. Nonetheless in the Slutzky case no attempt at all was made to show whether a policy would have been issued at a higher premium or not, by the insurer or by a "reasonable" insurer.
Thus, lacking any proof of the elements necessary for calculation of a proportionately reduced liability remedy, the Supreme Court ruled by default in favor of the insured.
The judgment`s impact on the Israeli insurance market was significant and has been under in-house and public review and discussion by insurers and representatives of policy holders alike since its publication.
The Slutzky judgment reiterated principles that are laid out in the Insurance Contract Law and in this sense is not innovative. However, the judgment took these principles and applied them in extreme circumstances by denying, by default, any remedy for the insurer despite the obvious and substantive breach by the insured.
Warranties and Conditions Precedent are not recognized under Israeli Law
The Slutzky case is furthermore an example of Israeli Insurance Law`s deviation from the black-and-white principles of traditional English Law, leaning towards the more moderate, consumer protective principles of Continental Law.
An important aspect of the Slutzky precedent is the Supreme Court`s explicit decree that the Insurance Contract Law does not recognize the doctrine of warranties or conditions precedent, a doctrine that in other jurisdictions absolves the Insurer entirely of liability solely by virtue of the insured`s breach.
The Supreme Court states clearly in the Slutzky case that the position taken by the insurer - that placing the jewelry in the safe is a “condition precedent” to coverage - is not acceptable under Israeli law.
Practical Steps – Going Forward
Israeli Insurers now face the practical implications of the Slutzky precedent. The main concern regards ensuring that they will be able to provide the courts in the future with the data necessary to enable calculation and application of the proportionate remedy.
Several ideas have been suggested, such as initially offering the insured the option to buy the policy without the risk-reduction requirement at a higher premium. This may not however be a practical solution in some fields of insurance. Other ideas include transfer of data regarding prevailing premium rates with and without risk-reduction measures. Whatever route is chosen, it is clear already that the proportionate remedy rule has been brought to the front stage of insurance litigation.