20 POLICY Special edition 2023 On Insurance Contract Law and D&o Insurance By Uri Orland, Adv. Israel was among the first countries to adopt a consumer insurance law, the Insurance Contract Law-5741 1981 which has been in effect since 1982. But this law was not drafted by insurance experts, and it has lacunas in it. Over the years, several amendments were made - but its main weakness, the gap between the legal side and the insurance practice - has not yet been resolved. The difficulty may intensify when we deal with insurances that are international, and which cannot be subjected to a local system of laws. The drafters of the law, who were aware of this, excluded from its scope Marine and Aviation insurance, except when ‘there was no choice’ - like in the case of the right of subrogation. The D&O liability insurance is in a ‘gray area’ between Israeli and international insurances, but the provisions of the local insurance law apply to it in full. The policy wording is based on international wording and does not fully comply with the provisions of Israeli law. I will examine a several matters in which Israeli law and D&O Liability Insurance are not in sync. Here, the legal system gives specific answers to the problems brought before it, answers that sometimes puzzle those who trust legal practice. The basic difficulty is regarding the basis of the policy for the D&O Insurance. These policies are drawn up in Israel on ‘Claims Made’ basis, which is not recognized by the Insurance Contract Law. The law recognizes liability insurance on an ‘Occurrence’ basis. The legal system solved the problem by stating that the parties to the insurance contract are allowed to stipulate the basis of the insurance, therefore the ‘Claims Made’ basis is valid. However, the court decision is not enough, and the legal basis must be completed in the law, such as regarding what constitutes a notice of a claim. The Israeli insurance contract law recognizes ‘Insured’ and ‘Insurer’ but does not recognize ‘Policy Owner’ (‘Policy Holder’) who is not an insured party. ‘Policy Owner’ exists in Israeli law in the regulations established for group personal insurances (life, health, and personal accidents) but not for liability. However, Directors & Officers liability insurance is a group insurance where the ‘Policy Owner’ stands between the insurer and the insured, without this being regulated by law. Failure to regulate may have negative results for insurers, such as an insured’s claim that he was not provided with a policy, and therefore the exclusions do not apply to his claim. Here the jurisprudence in Israel, known for its ‘creativity’, found a solution according to which ‘insured’ is in the status of ‘beneficiary’, but this is a forced solution. The ‘elephant in the room’ in the insurance laws in Israel, when we deal with D&O Insurance policies, is the issue of an ‘innocent insured’. Here, the underwriting is not personal. an insured may discover in the event of a claim that he is covered under to the policy, but this is invalid due to the act or omission of others. When the policy is valid, and the difficulty concerns a specific claim, Israeli jurisprudence found a reasonable solution according to which if he was not involved, his rights according to the policy will not be reduced or denied. But what is the status of an insured when it turns out that the policy was purchased while misleading the insurer, without having a part in it? Common sense tells us that in this case the insurance is not valid, which is also true for the ‘innocent insured’. There is still no decision by court, but the general direction is the future recognition of the right of an ‘innocent insured’ under the D&O policy to insurance benefits. In Israeli law, the claim limitations period is usually seven years. In insurance claims, this period was shortened to three years. In liability insurance, the claims limitation period of three years was not changed, but the law stipulates that if the claim against the insured is not timebarred, so is the insured’s claims against his insurers. This solution in the law is relevant but does not solve the difficulty from which date the shortened limitation period is calculated. In the absence of an explicit legal provision, it is ruled that the shortened limitation period begins at the time a lawsuit is filed against the insured. But, as mentioned, the insurance contract law does not deal with the question of what is ‘filing a claim’ against the Insurer under a ‘Claims Made’ policy. Adv. Uri Orland’s book ‘Liability Insurance of Directors and officers in Israel’ was recently published in Hebrew by Polisa
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