Insurance Contract Law: Policyholder Rights Worth Knowing

Insurance Contract Law: The Policyholder’s Shield

The Insurance Contract Law, 5741-1981, is the primary law that governs the relationship between a policyholder and an insurance company in Israel. This law was enacted to protect the policyholder, who is considered the weaker party in the contract, and to prevent exploitation by insurance companies. After 40 years, its principles still constitute the basis of every insurance claim in Israel.

Dozens of sections in the law cover topics such as: the duty of disclosure, policy interpretation, payment dates, interest on delay, compensation for bad faith, and more. Knowledge of the relevant sections can save thousands of shekels in a claim.

The Core Principle: Interpretation in Favor of the Policyholder

A general provision in the policy is interpreted in favor of the policyholder. This is one of the fundamental principles of the law, and is anchored in Section 25. Insurance companies sometimes use general wording in certain provisions. If there is ambiguity in the wording, the interpretation favorable to the policyholder prevails.

This principle also applies when the insurance company claims that a certain condition “was not included in the coverage.” If the policy does not explicitly exclude the coverage, and there is ambiguity, the court will interpret it in favor of the policyholder. Therefore, every rejection of a claim must be based on explicit wording and not on expansive interpretation.

Mutual Duty of Disclosure of Both Parties

The policyholder is required to disclose every material fact at the time of joining. However, the insurance company is also required to disclose what is and what is not included in the coverage. A violation of the duty of disclosure by the insurance company entitles the policyholder to bring a claim. Under Section 22 of the law, if the insurance company did not clarify certain conditions, it cannot enforce them against the policyholder after the fact.

Important principle: non-disclosure by the policyholder justifies cancellation of coverage only if two conditions are met: first, that the policyholder knew of the fact that was not disclosed. Second, that the fact was material and influenced the decision to insure. Cancellation of coverage due to non-disclosure of a fact that the policyholder could not know is not lawful.

Payment Dates and Their Significance

The insurance company is required to pay insurance proceeds within 30 days of submission of all required documents. A delay entitles the policyholder to arrears interest. A prolonged unjustified delay entitles the policyholder to additional compensation. What constitutes “submission of documents”? Insurance companies tend to repeatedly request additional documents, thus delaying the clock. Under case law, requests for unnecessary documents do not delay the payment period.

What is “delay in good faith”? The insurance company can delay payment if it has reasonable doubts about the claim. However, it must inform the policyholder of the reasons for the delay and examine the claim within a reasonable time. An unjustified prolonged delay creates liability for interest and possibly punitive damages.

Limitation on Exclusion of Coverage

The insurance company may not cancel coverage in any condition. Non-disclosure justifies cancellation of coverage only if two conditions are met. First, that the policyholder knew the undisclosed fact. Second, that the fact was material and influenced the insuring decision. Cancellation of coverage due to fraudulent non-disclosure is lawful. However, cancellation of coverage due to non-disclosure of a minor fact is not lawful under Section 16 of the law.

In most cases, the insurance company is only entitled to reduce the compensation in proportion to the risk that was added. For example, if the policyholder did not disclose a pre-existing condition, the insurance company may reduce the compensation in proportion to the additional risk, but may not cancel the entire coverage.

Practically Useful Rights Worth Knowing

Right to receive the decision in writing: every rejection of a claim must be given in writing, with reasons. A company that rejects a claim verbally or without reasons is acting in bad faith. Right to inspect the file: the policyholder is entitled to receive a copy of all documents that the insurance company collected about him, including medical opinions.

Right to choose your doctor: when the insurance company sends a doctor on its behalf, the policyholder is entitled to obtain a contrary opinion. The court will weigh both opinions. In practice, the opinion of a private doctor is often worth more than many think.

When Can One Sue Beyond the Policy Limits

There are cases in which the court will award compensation beyond the policy amount. This occurs when the insurance company acted with blatant bad faith. The Supreme Court ruling in the Ahalmah case (2010) established that punitive damages can be sought in insurance claims when the company acted fraudulently.

Examples of bad faith: conveying false information to the policyholder about the scope of coverage, rejecting a claim on a pre-existing condition grounds when knowing the policyholder could not know the information, concealing medical details collected by the company’s doctor.

Conflict Between the Policy and the Law: Who Wins

When a condition in the policy contradicts the provisions of the Insurance Contract Law, the law prevails. Therefore, any condition that limits rights that the law grants the policyholder is void from the outset.

Frequently Asked Questions

Can an insurance company change the terms of a policy that has already been purchased?

Yes, but with limitations. Changes that are adverse to the policyholder require advance notice of at least 30 days. If the policyholder does not agree to the change, they are entitled to cancel the policy without penalty. Favorable changes to the policyholder may be implemented immediately.

What to do when the insurance company refuses to give details about the reason for rejection?

This is a violation of the law. Approach the Capital Market, Insurance and Savings Commissioner, who is the regulator of insurance companies. The commissioner is authorized to compel the company to provide a detailed explanation and impose fines for non-compliance.

How long is available to file a lawsuit after rejection of a claim?

Under the Insurance Contract Law, the statute of limitations is 3 years from the day the policyholder knew or should have known about the cause of action, and not from the date of the event itself. Under Section 31 of the law, this period begins running from the day the policyholder knew or should have known about the cause.

Is it possible to cancel a life insurance policy and receive premium refunds?

It depends on the type of policy. Risk insurance (death only, without savings) generally cannot be refunded, as it is based on pooled risk. A life insurance policy with a savings component (such as interest) can be cancelled with receipt of the redemption value.

Can children file a claim under a deceased parent’s life insurance?

Yes. The policy beneficiaries, who are usually the spouse and children, are entitled to receive the insurance proceeds without any connection to the estate. Life insurance money is not part of the estate and is not subject to inheritance laws, but passes directly to the beneficiaries designated in the policy.

What happens when an insurance company goes bankrupt?

In Israel there is a partial protection mechanism. The Insurance Guaranty Fund is required to protect policyholders in certain cases. Regarding life insurance, there is a special provision that requires companies to maintain sufficient reserves. Contact the insurance commissioner for specific information about rights.

For assistance with an insurance claim, contact the insurance claims attorney at the Lev-Taieb firm: 072-2428822.