In Freundeberger v IDI Insurance Co (August 2020 (CA 68012- 05-19)) the court dealt with the question of whether an insured is entitled to insurance benefits for the loss of their car by theft when it lacked the security measures required by the insurer.
The insured purchased by phone from direct insurer IDI an insurance policy which covered his car including against theft. During the sale conversation, the insured was told that he had to install three systems to protect the vehicle, including one ('parasite') which disconnects the electric stream for the ignition.
The insured installed only two systems and notified the insurer thereof, arguing that it was agreed during the conversation to not use the parasite system. The insurer sent notice that this was unacceptable and that the protective measures were a condition precedent to coverage against theft. In a later email, the insurer warned the insured that non-compliance with the protective measures requirement could lead to cancellation of the policy. The car was stolen while this system was not installed. The magistrate court dismissed the claim.
It is already binding precedent (Lloyds Underwriters v Slootzky) that the lack of safety measures required by a policy does not nullify the insurance contract and does not deny coverage as, according to Article 21 of the Insurance Contract Law, it is subject to the partial payment arrangement which applies to the aggravation of risk and non-performance of a condition aimed at mitigating the risk.
According to the court, Article 21 deserves a broad interpretation in order to protect insureds that will be unaware of the significance of non-performance of such a term leading in the end to non-coverage.
The court based its decision on the following reasoning:
- The insurance contract had been concluded with a direct insurer (without intermediaries) and by a telephone sale.
- According to Slootzky, requirements of safety measures are not a condition precedent to the validity of an insurance contract.
- This kind of policy is dictated by the regulator and cannot contain a condition precedent which contradicts the Insurance Contract Law.
The court, sitting as an appellate court, set aside the lower court's decision which drew a distinction between cases where there were no safety measures at all (as in this matter) and non-activating safety measures which existed at the time (as in Slootzky) and determined that the determination in Slootzky applies to both cases.
In addition, the court referred to a commissioner of insurance circular (13 November 2014) which prohibits the inclusion in a policy of any requirement which states that the activation of safety measures of any kind would be considered as a condition precedent to the coverage.
Further, the court found in the duty of good faith of the insurer, which continued to collect premium from the insured, thus creating a reasonable expectation of the insured to receive insurance benefits in case an insured event occurred. In this case, the company sent the insured warning letters concerning the absence of safety measures; however, these letters did not amount to a cancellation of the contract and therefore the policy continued to be valid.
According to Article 18(b) of the law, insurers are entitled to cancel a policy if they become aware of aggravation of risk (prior to an insured event occurring).
Finally, the court also referred to the insurer's argument that a reasonable insurer would not have agreed to cover this risk without the protective measures even for a higher premium. The burden to prove such an argument lies with the insurer (Article 18(c) of the law) and the evidence should be of external sources (underwriters or actuaries) and not a witness on behalf of the insurer.
Based on the above arguments, the court ordered the insurer to pay the full claim. The law enables the court to award partial benefits (Article 18), but the insurer presented no evidence to support the application of this remedy; therefore, full payment was imposed.
