Extra Contractual Damages due to Unjustified Declination of Insurance Claim

Dror Zamir Adv. & Hadas Adler, Adv.

C.C 3168/09 The Third Step Ltd. v. the Israel Phoenix Insurance Co. Ltd

General Background

Plaintiff is a company engaged in the business of import and marketing of women’s footwear. In December 2006 a fire broke out in Plaintiff’s rented storeroom and totally destroyed it and its contents.

The storeroom was insured by the Israel Phoenix Insurance Co. Ltd, which declined liability under the policy, arguing that the cause of the fire was intentional arson by Plaintiff or someone on its behalf.

The plaintiff claimed that the insurance company’s refusal to pay insurance benefits resulted in the collapse of the business and filed a claim for their property damage and for consequential damage due to non-payment of the insurance benefits in the amount of approximately NIS 8 million.

Plaintiff’s Arguments

The plaintiff argued that the insurance company’s refusal to pay benefits was unjustified and in bad faith. According to Plaintiff, it acted as a reasonable insured, installed all the preventive and protective measures as required by the Insurer, and received confirmation from its surveyor.

The burden to prove that the fire was staged or that arson was committed by the insured lies on the insurance company, and it failed to prove the same. There was no evidence that this was arson, and even if it was, there is no way to determine that the insured was involved or had a motive. On the contrary: The plaintiff argued that the business was profitable and provided sufficient income for six families that were supported by it. The fire destroyed their income and deteriorated their financial situation.

Plaintiff claimed that the insurance company must pay insurance benefits for the damages under the policy, and additional compensation for the damage they suffered as a result of its failure to pay in real-time, which led to various legal proceedings, execution proceedings, receivership and bankruptcy of the business. In addition, Plaintiff requested the Court to impose on the insurance company special interest according to section 28A in the Israeli Insurance Contract Law-1981, which provides the Courts the authority to impose increased interest up to twenty times the standard interest on an Insurer that failed to pay undisputed benefits in bad faith.

The Insurer’s Arguments     

The Insurer claimed that Plaintiff’s financial reports indicate that the business was unsuccessful and suffered great losses and that the Plaintiff deliberately caused the fire for the purpose of collecting insurance money. A fire investigator appointed by the Insurer determined that the cause of the fire was arson. In addition, the Insurer claimed that Plaintiff failed to meet the requirements regarding the prevention measures it was obligated to install and that no reasonable Insurer would agree to insure the storeroom in view of that, even for a higher premium.

The Court’s Analysis and Ruling     

The Israeli Insurance Contract Law-1981 (clause 26) exempts Insurers from liability to pay for an insured event deliberately caused by the insured. The burden to prove the insurance event (in this case the fire) lies on the Insured and the Insurer has to prove that exclusion applies. In this case, the Insurer had to prove that the cause of the fire was arson and that the insured (Plaintiff) was involved in it. Since the allegations relate to a criminal act, the level of proof required is higher than the regular level in civil claims (i.e. higher than 51%). The Insurer will have to prove that the fire was caused by arson and that the insured had motive and opportunity, and that will be sufficient for the purpose of exemption of liability.

The Court reviewed the various experts’ opinions that were brought and reached the conclusion that it is possible that the fire broke out due to an electrical failure, and that this possibility was not properly examined and ruled out. Therefore, the Insurer failed to prove that arson was committed. In addition, the Court determined no motive of the Plaintiff or interest to set the storehouse on fire was proven. Finally, the Court decided that the Insurer did not prove that Plaintiff failed to satisfy the requirements regarding the preventive measures it was obligated to install, nor a causal connection between that and the outbreak of the fire.

Accordingly, the Court ruled that the insurance company did not discharge its burden of proof that the exclusion applies, and therefore ordered it to compensate Plaintiff for its full damages regardless of the policy limit including extra-contractual damages. However, the Court determined that the insurance company’s refusal to acknowledge liability was not in bad faith, as it based its declination on experts’ opinion, and therefore did not impose special interest.