Where the car insurance was bought for a driver over 30 years old – will the insurer be obliged to cover the accident caused while the car was driven by a 23 years old driver?
The Supreme Court of Israel
LCA 9849/17 Pically v. Hachshara Insurance Company Ltd.
Before Justices Y. Amit, D. Barak-Erez, O. Grosskopf
(Summary by Adi Ann Berkovic)
Where a vehicle owner purchases a motor insurance policy, which includes a driver age limit (beyond 30 years) for a lower premium, and the car was damaged while being driven by a person who does not meet the policy age limit: will the policy holder be completely denied of remedy, or should this be considered an “aggravation of risk” under which the insured is entitled to partial indemnification, according to the ratio of the premium paid to the premium that would have been charged?
The Majority opinion (Justice Barak-Erez and Justice Grosskopf) held that failing to meet the policy age limit is an aggravation of risk under which the insured is entitled to partial indemnification. This has been decided, inter alia, according to article 18 of The Insurance Contract Law, 1981 as was interpreted by the Court in the past, in light of the principle of proportionality and the pro-consumer objective of The Insurance Contract Law. The pro-consumer approach of The Insurance Contract Law tries to improve the imbalance of powers between the stronger insurer and the weaker insured and can be seen in doctrines such as the “interpretation against the drafter” rule and the “interpretation according to the insured’s reasonable expectations”. In order to protect the insured, the lawmaker stipulated that the insurer cannot evade his liability based on “small letters” and “hidden limitations” in the policy.
Justice Grosskopf states that a change relating to the driver’s age (that is below the age limit) will be considered “material change” according to article 17(b)(1) of The Insurance Contract Law. However, based on a prior Supreme Court decision, certain limitations in the insurance contract, such as a limitation stipulating that in case the driver’s age is under 30 the insurer will not be liable in a case of an accident, may not overcome the statutory arrangement of aggravated risk. This arrangement can be stipulated against only for the benefit of the insured or beneficiary, according to article 39(b) of The Insurance Contract Law. Therefore, a contractual provision contrary to the law will not prevail. Therefore, the fact that a younger driver was involved will not exempt the insurer from liability. Even if the insured did not notify the insurer of an aggravated risk, he can be eligible for partial compensation. Justice Grosskopf adds two exceptions under which the insurer will be exempt of liability: (1) in case the insured did not notify the insurer of an aggravation of risk with a fraudulent intent; and (2) in case the younger driver does not hold a valid driver license. He emphasizes that there should be a distinction between an aggravation of an existing risk – such as when the driver’s age is lower than specified in the age limitation – and a creation of a new risk – which does not include the age or driving experience of the driver (but includes a driver who drives without a valid license). Justice Grosskopf adds that while such approach may likely cause an increase in demand for cheaper policies with an age or driving experience limit, this will not necessarily have negative consequences. A comprehensive policy (without age limit, for example) is voluntary, and there is no reason not to let potential insureds choose between various products which offer partial coverage for a lower cost. He stresses, however, that an insured who tries to deceive the insurer, and get full coverage at the cost of partial coverage, will get no coverage at all.
Between the majority opinion judges, there was a disagreement over the question, at what point does the insured’s conduct becomes fraudulent and denies him from receiving damages.
Justice Barak-Erez held that the mere knowledge of the use of a car by a younger driver is not enough to constitute fraudulent behaviour. Only when the failure to meet the age limit is the result of the insured’s continuous behaviour (e.g. when a parent occasionally lets his son drive the car as a part of the family routine), this type of conduct is considered fraudulent and denies insurance coverage. This stands in contrast to a situation where incompliance with the age limit was caused by a one-time occurrence (e.g. if a daughter drives instead of a parent that feels unwell, this behaviour is not fraudulent).
Justice Barak-Erez added that in sum, the rule of proportional compensation is meant to benefit those who acted with negligence, not fraudsters who attempted to deceive the insurer. She differentiates between two situations: (1) the insured intentionally purchased a policy that does not suit his needs, in a planned manner in order to pay a lower premium than he ought to; and (2) the insured purchased a policy that suits his needs and in a moment of neglect or momentary mistake he fails to meet the policy requirements. The second situation is an aggravation of risk whereas the first is not covered. The distinction between the two situations – a priori intention to disrespect the limitation on one hand and a one-time occurrence due to emergency or negligence on the other hand, suits The Insurance Contract Law‘s main principles. Justice Barak-Erez reassures that a “systematic” or routine behaviour will not allow the driver to receive partial damages. Justice Barak-Erez states that this way, the concern of wide negative consequences in the insurance industry will be minimized, and that this approach stands in line with the pro-consumer objectives of The Insurance Contract Law, which strives for the protection of honest insureds.
Justice Grosskopf, on the other hand, held that the fraud exclusion should be interpreted in a narrower manner, and be limited only to cases in which the insured tried to deceive the insurer by failing to disclose information that is necessary to determine the insurer’s liability. Justice Grosskopf uses the following definition of fraud: “nondisclosure of information in a fraudulent manner of a material fact that is considered as an incomplete and dishonest answer”. In this view, fraud includes only cases in which the insured knew of an aggravation of risk and acted with an indecent motive. For example, a case where an accident occurred and the insured intentionally failed to disclose that at the time of the accident, the person who drove the car was of younger age than required, in order to get full compensation. In this case, the insured’s conduct is fraudulent and prevents insurer from obtaining knowledge of a material fact, i.e. the aggravation of risk. When doing so, instead of being entitled to partial damages, the insured will not be covered at all. Same goes for an insured who at the pre-contractual stage, intentionally provides the insurer with wrong information regarding the age or driving experience of a certain person, in a wrongful attempt to pay a low premium for a higher, more costly risk.
Justice Amit, in his dissent, stated that failing to meet the age limit exempts insurer from liability from the outset. Justice Amit discusses the pro-consumer objective of The Insurance Contract Law and doctrines mentioned above, whose purpose is to protect the weaker party, the insured. The “reasonable expectations” doctrine’s main objective is to ensure the receipt of agreed benefits an insured expected, will not be deprived of him. On the other hand, this proposition has a mirror image according to which an insurer should not be asked to pay coverage that has not been agreed upon. According Justice Amit, an insured who purchases a reduced-price policy which includes an age limit, knowingly chooses a limited and defined insurance product, and thus draws the limits of the insured risk. Additionally, Justice Amit raised the concern that posing a duty on insurance companies to indemnify in situations where an age limit was not met, might cause negative wide consequences both on the insurance market (e.g. upsurge of policy premiums); and both on insureds’ behavior.
On July 31st 2019, AIDA Israel will hold a meeting dedicated to Pically v. Hachshara which is of high interest and importance to insurers and insureds alike. Adv. John Geva and Adv. Shlomi Hadar, the attorneys who represented the insured will give a lecture and afterwards there will be an open discussion.
The AIDA Israel meeting will be held on Wedensday, July 31st at 13:00 at the Ayalon Insurance Seminar Hall, 12 Aba Hillel Silver St., Ramat Gan.
