Subrogated recoveries in Israel
Israeli law is now more aligned to allow subrogated recoveries by foreign insurers to be pursued in the insured’s name, but it will be some time before policy wordings catch up.
The Israeli Supreme Court ruled in Vienna Insurance Group v The Drainage and Rivers Authority (Sharon District) and others (CA 8044/15) a “foreign insurer” (ie, one that is not licensed by the state of Israel and supervised by the Israeli Insurance Controller) is unable to pursue a subrogated recovery in its own name in Israel.
Global insurers have been slow to adopt to this important judgment, which altered the status quo drastically. But there are practical solutions for “foreign insurers” hoping to circumvent the above decision and subrogate in Israel.
Vienna Insurance Group (VIG), an Austrian insurer, insured The Mondi Group, an Austrian company with an Israeli subsidiary, Hadera Paper Printing and Writing Papers. Following heavy rainfall in January 2013, Hadera’s paper manufacturing plant sustained significant flooding damage. VIG indemnified Hadera and pursued a subrogated recovery of its outlay of Shekel32m ($8.9m) from the Drainage and Rivers Authority and others through the Israeli courts.
Before this case, once an insured had been fully indemnified under its insurance policy, recoveries in Israel would be pursued in the name of the subrogating insurer (unless an insured joined the claim as a co-claimant to recover uninsured losses).
The question of whether “foreign insurers” can subrogate in Israel had been considered in lower courts previously, producing conflicting decisions. This time the question was considered by the Supreme Court.
VIG asserted an entitlement to pursue a subrogated recovery pursuant to the following:
- s62 Israeli Insurance contract Law Act 1981;
- Unjust enrichment rules (ie, the tortfeasor would otherwise escape any requirement to compensate the wronged party); and
- The terms of the release signed by Hadera on receiving the indemnity from VIG.
The defendants made a preliminary strikeout application on the basis VIG was a “foreign insurer” and did not have the requisite licence from the state of Israel. As such, the defendants argued VIG fell outside the defined scope of an “Israeli or foreign insurer” under the Financial Services Supervision (Insurance) Act 1981 and consequently was prohibited from subrogating pursuant to s62 of the Israeli Insurance Contract Law Act.
The defendants further argued if any entitlement to subrogate was ruled out, there could also be no claim of “unjust enrichment”. Finally, the defendants asserted the release did not provide the basis for a cause of action – the release was subject to the “rules and regulations” of Israel and under Israel’s Torts Ordinance, a tortious right cannot be assigned to another party.
VIG sought a wider definition of “insurer” under s62 of the Israeli Insurance Contract Law Act, arguing a more functional construction should apply to capture any party that has made an insurance payment following an occurrence.
Further, VIG, argued it would be unfair to allow the defendants to benefit from a technicality if an insurer (foreign or otherwise) has indemnified a wronged party. It also said s86 of the Tort Ordinance supports the assertion insurers have the right to recover for their losses in the framework of a subrogation claim.
The District Court, in a ruling that was later adopted by the Supreme Court, held entitlement to subrogate was a unique statutory right under the Israeli Insurance Contact Law Act and, on balance, acknowledged an “insurer” under s62 could only be defined as one being “supervised” by the Israeli Insurance Controller. A “foreign insurer” should therefore be prevented from subrogating in Israel, unless it had the appropriate licence and fell under the supervision of the controller. In part, this was to ensure local Israeli insurers retain parity in terms of regulation by the controller.
Further, the court held Hadera’s entitlement to sue could not be assigned to insurers pursuant to the Tort Ordinance, owing to the principle of champerty. Ultimately, such assignments are not recognised under Israeli law.
Equally, the court held one could not extend the provisions of s62 of the Israeli Insurance Contract Law Act to create an alternative right under the general principles of unjust enrichment. The law had restricted insurers’ entitlement to subrogate specifically and one could therefore not extend this right on account of a general principle.
However, although determining an insurer requires the requisite Israeli licence to subrogate and the entitlement to sue a third party therefore remains with the insured (in this case Hadera), it is also clear to the extent that the insured recovers any sums, insurers (in this case, VIG) would ordinarily be entitled to recover such sums pursuant to the terms of its release.
Although not yet tested in the courts, “foreign insurers” wishing to subrogate in Israel should consider the following measures:
- Use an Israeli insurer as a fronting company. Local insurers are regulated by and fall under the supervision of the controller and can pursue subrogated recoveries in Israel, even in a fronting capacity;
- Stipulate in its policy a specific right to pursue a subrogated claim in the name of the insured. This should include an express entitlement for the insurer to claw back its outlay from the insured if it fails to co-operate reasonably;
- When settling the first-party claim, draft an appropriate release before providing an indemnity. Particularly, the release should stipulate the insured’s duty to permit a recovery claim in its own name and contain the same co-operation conditions as 2) above.
- The release should also stipulate any recovery proceeds paid to the insured are held on trust for the benefit of the insurer at the earliest opportunity, ring-fencing such sums from potential claims by other creditors.
Israeli law now appears to be more aligned to this jurisdiction, in which subrogated recoveries are pursued in the insured’s name. It may, however, take some further time before underlying policy wordings are adapted accordingly.
In the meantime, “foreign insurers” ought to take the above precautions when pursuing subrogated recoveries in Israel.
This article first appeared in Insurance Day on 18 March 2019.
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