Significant amendment has been made to the Israeli Contracts Law, but uncertainty over Insurance policies remain

Last week, a significant amendment was passed to the Israeli Contracts Law concerning the interpretation of contracts under Israeli law. The importance of this amendment lies in the increased certainty it provides to contracting parties, particularly in the commercial context. Parties to a contract may now determine how their contract will be interpreted, without the court being required to speculate as to their intent at the time of execution. However, the wording of the law is not clear whether an insurance policy constitutes a ‘commercial contract’, as the amendment does not include a definition.

The amendment distinguishes between different types of contracts and establishes distinct interpretive rules for each of them.

A commercial contract that does not contain provisions regarding interpretation will be interpreted solely based on its wording, unless one of the following applies:

1. the wording of the contract alone leads to an absurd result; or
2. the wording of the contract alone gives rise to an internal contradiction between its provisions.

By contrast, a non-commercial contract, a standard-form contract (even if otherwise agreed), as well as an employment contract or collective agreement, shall be interpreted in accordance with the parties’ intent as inferred from both the contract and the surrounding circumstances.

While it is unclear whether an insurance policy constitutes a ‘commercial contract’, in our view, certain insurance policies may qualify as ‘commercial contracts’ for the purposes of this provision.

The insurance sector in Israel is governed by a specific legislative framework, headed by the Insurance Contract Law and Financial Services Regulation Law (Insurance). Notwithstanding the foregoing, insurance policies are, in practice, contracts between an insurer and an insured, and therefore, the rules of interpretation apply to such engagements. Accordingly, this amendment may have a significant impact on the Israeli insurance sector.

For example, a project-specific contractors’ insurance policy issued in connection with the construction project appears to constitute a commercial contract. In Israel, such a policy is typically issued following a tender process conducted among several insurers, with the assistance of an insurance advisor, such that, in practice, no material imbalance of bargaining power exists between the insured and the insurer. In our opinion, such a policy would be interpreted solely in accordance with its wording, as a ‘commercial contract.’

Underwriters engaged in placement project-specific construction insurance policies for large-scale projects, which are typically based on the underlying construction agreement, must exercise particular precision in the wording of the policy and leave as little room for ambiguous wording as possible, since the interpretation of such a policy, under the rationale of newly amended clause 25 of the Contracts Law, will be determined solely based on the wording (and other rules of the Insurance Contract Law).

The same applies to underwriters involved in placing liability insurance for large insureds, namely, large commercial companies, which often utilise insurance consultants to procure their policies.

The amendment was passed on 5 January 2026, and it remains to be seen how Israeli courts will apply these new provisions in future judicial decisions.