In a recent decision, the Supreme Court clarified the boundary between maintaining the commissioner of insurance's directive requiring the full grounds and reasons for dismissing a claim to be included in a letter of declination and insurers' right to provide additional details in their statement of defence. The Supreme Court accepted the insurer's position that it is acceptable to elaborate on declination arguments raised in a letter of declination.
In 1998 the commissioner of insurance issued a directive, according to which a declination letter sent by an insurer with regard to an insurance claim submitted thereto must include all of the reasons of declination in order to enable the insured to properly assess its position and decide what steps to take.
A reason for declination which is not included in a declination letter cannot be raised in future proceedings. The Supreme Court has upheld this directive; therefore, it has a binding effect on all insurers as a legal precedent.
In view of this requirement, numerous court cases have dealt with the question of whether an argument raised in a statement of defence was previously mentioned in a declination letter or should instead be struck out from the pleadings.
After numerous lower-instance court judgments have ordered the striking out of sections from insurers' statements of defence because they extended the defence beyond the points raised in the declination letters (thus preventing the insurers from handling their defence in the best way possible), the Supreme Court has finally clarified that it is possible to elaborate in a statement of defence the declination reasons stated in a letter of declination, provided that the essential points were included in the letter of declination as required.
The above decision was given in the framework of an appeal against a Central District Court decision which had struck out several clauses in the statement of defence submitted by Lloyds Underwriters in response to a claim that was filed with the Central District Court by Modiin Ezrachi. The basis of this determination was that Lloyds Underwriters had failed to comply with its duty under the commissioner of insurance's directive to provide a full and detailed position in respect of each allegation raised in its declination letter. As such, the Central District Court ruled that the explanations and interpretations in its statement of defence, which were not mentioned in the declination letter, should be deleted from the statement of defence.
In the appeal filed on behalf of Lloyds Underwriters, it was alleged that the letter of declination fulfilled its duty as per the commissioner's requirements and that no additional explanations were required for the declination of coverage. Lloyds Underwriters argued that the Central District Court's decision to strike out sections from its statement of defence had created a high standard, according to which the letter of declination – which was intended to inform the insured of Lloyds Underwriters' full position regarding its claim – should be as detailed as the statement of defence. This standard places a heavy burden on insurers, which is inconsistent with the rationale of the commissioner's instructions. Lloyds Underwriters argued that the court must distinguish between cases in which insurers argue in their statement of defence that another term of the policy was violated by the insured and omitted from the declination letter and cases in which a technical explanation or additional details concerning the points included in the declination letter were raised in the statement of defence. Lloyds Underwriters further argued that the striking out of arguments and clauses from its statement of defence had damaged its right to provide the court with the full details required for its defence, whereas the insured's right had been undamaged, as it could raise arguments in its statement of response regarding the alleged new arguments.
The insured argued that providing general reasoning in respect of conditions that are violated in an insurer's declination letter is insufficient, and that it is necessary for insurers to elaborate their arguments in a detailed manner in order to avoid a situation in which the wording of a declination letter will be general and laconic in a manner that may harm the insured's right to plan its action in a future suit.
Judge Grosskopff of the Supreme Court discussed the arguments raised by both sides in the motion and accepted Lloyds Underwriters' position, ruling that despite the commissioner's instructions, letters of declination should include all of the reasons for rejecting a claim. However, this does not mean that the level of detail required in the declination letter must extent to all information held by an insurer.
The Supreme Court determined that the purpose of insurers' obligatory duty to provide explanations in a declination letter is to enable the insured to lay plans to file a claim for insurance benefits and prevent bad faith on the part of insurers. As such, a letter of declination cannot be laconic. On the other hand, the court held that "the Commissioner's instructions should be interpreted reasonably and in consideration of the circumstances".
Therefore, insurers should not be expected to invest similar resources to those invested in defending a claim when sending a declination letter. Further, insureds should not use an insurer's obligation to provide explanations in a declination letter as a tool to tie its hands in legal proceedings.
For example, it should not be expected that a letter of declination will lay out all of the insurer's future defence arguments (including alternative defence arguments) in the event that a statement of claim is filed by the insured. Moreover, it should not be expected that insurers will elaborate in a declination letter issues concerning the interpretation of the terms of the policy or include all of the facts and data used as grounds for their defence.
Under these circumstances, the appeal was approved in full and it was determined that the original statement of defence filed by Lloyds Underwriters will remain as is, despite the fact that it includes details and explanations beyond those provided in the letter of declination.
