The end of social security claims in the construction industry?
A settlement mechanism between the National Insurance Institute and insurance companies
Apr 16, 2023
By:Itzick Simon
Section 328(a) of the National Insurance Law allows the National Insurance Institute (NII) to claim compensation from insurance companies when it is obligated to pay benefits and there is a cause of action against them as a third party.
Car accident as a work accident – a case of a fall
A classic case of this is an accident in which the injured party is entitled to compensation both from the vehicle's insurance company (by virtue of the Compensation for Road Accident Victims Law, PALTAD) and from National Insurance, while being recognized as a work-related injury.
Israeli law states that injured parties are not entitled to double compensation, and therefore the compensation provided (or to be provided) by the National Insurance Institute is offset against the compensation amounts for which the insurance company is obligated. Section 328(a) described above opens the door for the National Insurance Institute to file a claim for compensation for these amounts against the insurance company.
Ministry of Finance: Fix "a very, very inefficient mechanism"
In 2018, it was decided to deal with the matter by waiving individual claims, and an arrangement was drafted whereby the National Security Agency would not have to sue the insurance companies for each and every procedure separately, and would instead receive a fixed annual amount to be derived from the premiums collected on mandatory car insurance policies.
The National Insurance Coordinator in the Budget Division of the Ministry of Finance addressed this in discussions in the Knesset Labor Committee, defining the situation that preceded this arrangement as "
The implementation of the arrangement was delayed due to political instability and the COVID-19 pandemic. It was recently approved (with some changes) as part of the budget transfer, and it was decided that it would enter into force gradually from 2023.
I will now examine whether regulating a settlement mechanism is appropriate not only for the auto insurance industry but also for the construction insurance sector, and I will explain why, after in-depth professional discussions and a broad examination of the issue, I have come to the conclusion that the answer is "
By:Itzick Simon
Section 328(a) of the National Insurance Law allows the National Insurance Institute (NII) to claim compensation from insurance companies when it is obligated to pay benefits and there is a cause of action against them as a third party.
Car accident as a work accident – a case of a fall
A classic case of this is an accident in which the injured party is entitled to compensation both from the vehicle's insurance company (by virtue of the Compensation for Road Accident Victims Law, PALTAD) and from National Insurance, while being recognized as a work-related injury.
Israeli law states that injured parties are not entitled to double compensation, and therefore the compensation provided (or to be provided) by the National Insurance Institute is offset against the compensation amounts for which the insurance company is obligated. Section 328(a) described above opens the door for the National Insurance Institute to file a claim for compensation for these amounts against the insurance company.
Ministry of Finance: Fix "a very, very inefficient mechanism"
In 2018, it was decided to deal with the matter by waiving individual claims, and an arrangement was drafted whereby the National Security Agency would not have to sue the insurance companies for each and every procedure separately, and would instead receive a fixed annual amount to be derived from the premiums collected on mandatory car insurance policies.
The National Insurance Coordinator in the Budget Division of the Ministry of Finance addressed this in discussions in the Knesset Labor Committee, and defined the situation that preceded this arrangement as " a very, very inefficient mechanism " that " requires a lot of input from the National Insurance Institute, and it must be said - input that is not at the core of its business."
The implementation of the arrangement was delayed due to political instability and the COVID-19 pandemic. It was recently approved (with some changes) as part of the budget transfer, and it was decided that it would enter into force gradually from 2023.
I will now examine whether regulating a settlement mechanism is appropriate not only for the auto insurance industry but also for the construction insurance sector, and I will explain why, after in-depth professional discussions and a broad examination of the issue, I have come to the conclusion that the answer is " Yes, of course! ".
The extent of accidents in the construction industry
The construction industry is unfortunately characterized by a very large volume of work accidents. According to the Safety Administration's 2021 report, approximately 57% of fatalities in work accidents in Israel come from the construction industry, approximately 28% of which occur on sites that were not reported to the Administration. The main causes of this are falls from a height (45%) or injuries from a moving object as a result of a fall from a height or an impact on a flat surface.
The many levels of responsibility
Since work accidents in the construction industry are frequently caused by negligence, they often constitute fertile ground for filing a workers' compensation claim.
In other words, the National Insurance Institute recognizes the accident as a work accident, compensates the injured party or their survivors, and files a lawsuit against those it deems responsible for the incident. The Occupational Safety Regulations (#) provide it with the legal basis for this, with a very broad definition of the levels of responsibility for those involved:
· "Construction operator" – is a main contractor or client who performs all or part of the work through his employees or through contractors working for him. The construction operator and the work manager on his behalf currently bear the main responsibility for safety.
· "The work commissioner" – is the developer who commissioned the work. The commissioner may be defined as the "construction operator."
· "Main contractor " - someone who enters into a contractual agreement with a client to perform construction or engineering construction work.
"Subcontractor" – a subcontractor whose employees are employed at the construction site.
· Additional parties involved in possible claims - safety instructors, supervisors, project managers, third parties of any kind, such as: suppliers and professionals who roam the site, etc.
Workplace accidents establish grounds against these parties, together or separately. It is also possible that liability will be placed on some of them in relative terms. For example, a determination that the subcontractor is responsible for 30% of the damage due to the failure to provide protective equipment and a 70% liability imposed on the main contractor, the construction operator, due to the failure to supervise and control the conduct of the subcontractor's employees on site.
*For the sake of order, I will note that the Ministry of Economy recently initiated the cancellation of Regulation 6 of the Safety Regulations, which defines the circle of responsibility and imposes full responsibility on the main contractor (if one is appointed) and the work manager on his behalf, with the aim of drafting a new regulation that will expand the circle of responsibility and allow for the imposition of more significant responsibility on additional parties, especially the developer.
The construction industry is unfortunately characterized by a very large volume of work accidents. According to the Safety Administration's 2021 report, approximately 57% of fatalities in work accidents in Israel come from the construction industry, approximately 28% of which occur on sites that were not reported to the Administration. The main causes of this are falls from a height (45%) or injuries from a moving object as a result of a fall from a height or an impact on a flat surface.
The many levels of responsibility
Since work accidents in the construction industry are frequently caused by negligence, they often constitute fertile ground for filing a workers' compensation claim.
In other words, the National Insurance Institute recognizes the accident as a work accident, compensates the injured party or their survivors, and files a lawsuit against those it deems responsible for the incident. The Occupational Safety Regulations (#) provide it with the legal basis for this, with a very broad definition of the levels of responsibility for those involved:
The construction operator – is a main contractor or client who performs all or part of the work through his employees or through contractors working for him.
The construction operator and the work manager on his behalf currently bear the main responsibility for safety.
"Client" – is the entrepreneur who commissioned the work. The client may be defined as the "construction operator". ·
"Main contractor" – someone who enters into a contractual agreement with a client to perform construction or engineering work.
"Subcontractor" – a subcontractor whose employees are employed at the construction site.
Others involved in possible claims – safety supervisors, inspectors, project managers, third parties of any kind, such as: suppliers and professionals who roam the site, etc.
Workplace accidents establish grounds against these parties, together or separately. It is also possible that liability will be placed on some of them in relative terms. For example, a determination that the subcontractor is responsible for 30% of the damage due to the failure to provide protective equipment and a 70% liability imposed on the main contractor, the construction operator, due to the failure to supervise and control the conduct of the subcontractor's employees on site.
*For the sake of order, I will note that the Ministry of Economy recently initiated the cancellation of Regulation 6 of the Safety Regulations, which defines the circle of responsibility and imposes full responsibility on the main contractor (if one is appointed) and the work manager on his behalf, with the aim of drafting a new regulation that will expand the circle of responsibility and allow for the imposition of more significant responsibility on additional parties, especially the developer.
In 2017, the State Comptroller issued a serious report on "The National Insurance Institute's Handling of Claims Against Third Parties (Recovery)". The report extensively reviewed the legal infrastructure on which the National Insurance Institute relies in its claims against those responsible for accidents. According to its findings, "Since for years the National Insurance Institute did not exercise the full potential of its right to recover from insurance companies, it lost a lot of money, and the concern is that it is hundreds of millions of shekels."
In light of the serious report, the National Security Council began a steady wave of subpoenas.
The proliferation of accidents fueled the fire and created a dramatic increase in the number of claims filed by him against defendants identified as responsible for accidents and against their insurance companies.
Dramatic increase in the number of restitution claims following the State Comptroller's report
The NSC's subrogation claims are one of the main reasons why global reinsurers have begun to tighten the terms of engagement, coverage, and premiums for issuing contractor work insurance policies in Israel, and some have even decided to exit Israel altogether.
The significant insurance amounts paid by insurance companies to the National Insurance Institute in reinsurance claims are considered a cooling factor for reinsurers abroad, who are already experiencing large losses since 2018 (mainly due to the effects of global climate change and catastrophic natural damage) and are trying to reduce damages.
Subrogation claims - a major factor in reinsurers leaving the Israeli construction insurance market
The rescission claims of the National Insurance Company in Israel have created quite a few challenges for reinsurers abroad for several reasons. First, many claims are filed many years after the date of the event. The statute of limitations is 7 years and often the claim is filed right near the end of this period. The insurance company often has difficulty dealing with claims that concern past events and sometimes prefers to compromise even when it can "win" in a legal proceeding.
Furthermore, the National Insurance Institute's substitution claims place Israeli insurance companies and reinsurers in a position where they have no certainty regarding the scope of claims and losses they will incur in the Israeli market.
I would like to point out that some of the claims are filed against groups far removed from those responsible for the accident, thereby forcing the insured and their insurers to be dragged into proceedings that last a long time and involve significant costs (experts, hearings, etc.).
Dispel the uncertainty
In addition, it should be mentioned that third-party and employer liability clauses involve high compensation amounts in Israel in tort claims. Mainly due to heads of damage such as loss of future earnings or the passing of years of service. Even claims filed by junior and young workers with low wages and no special training can result in compensation totaling millions of shekels, when the medical damage significantly harms the injured party's ability to earn a living in the future.
High costs in compensation for the injured themselves and/or their survivors
The tightening of conditions by reinsurers has clearly led to a drastic and consistent increase in contractor insurance rates in Israel. Premiums have jumped by tens and sometimes hundreds of percent; conditions for entry into insurance coverage have been tightened, deductibles have increased beyond recognition, and in types of projects considered to be particularly risky, there is often real difficulty in issuing insurance.
This is especially true for projects that are pre-defined as "high-risk" such as complex urban renewal projects, groundwater infiltration, building preservation projects, and infrastructure projects. Although construction insurance accounts for no more than a few tenths of a percent on average (and up to one and a half percent in very complex projects!) of the direct construction costs of the project, it has become a real barrier.
The drama in the construction insurance market - a major increase in premiums and excesses and a worsening of insurance conditions
The construction industry is a vital economic engine for the economy, and it is important to find a suitable solution that will allow a way out of the complex situation in which the construction insurance sector finds itself. The arrangement defined between insurance companies and the National Insurance Institute in the field of PLTAD may be the key, or at least a call to action, for a similar mechanism in the field of construction insurance.
It is certainly possible to analyze the scope of the expense required from insurance companies in compensation claims after work accidents in the construction industry and build a mix of fixed payments instead of individual legal litigation on a case-by-case basis.
This type of arrangement could significantly reduce the burden placed on the court system (which is already overburdened) and free up the need for the National Insurance Institute and insurance companies to maintain and finance a large bureaucratic database for the benefit of the matter.
The solution – regulating the settlement mechanism between the National Insurance Institute and the insurance companies
Hope for the return of reinsurers to the construction insurance market in Israel
But most of all, it seems that only this type of arrangement is likely to bring global reinsurers back to the market. It will define a global accounting mechanism, constitute a WIN-WIN for all involved, and allow insurance companies a certain certainty in measuring risk - a risk whose costs have contributed greatly to the flight of most global reinsurers from the construction insurance sector in Israel in the past year.
In conclusion: Our office has held a series of consultations on this matter with professionals and key stakeholders, including the management of the Contractors Association. It seems that joint action is needed here by the insurance companies, the Israel Builders Contractors Association, and members of Knesset to draft a private bill on the matter. We intend to push decision-makers and the Israeli government to take action and make an important decision to regulate the aforementioned accounting mechanism, a decision that will greatly assist in getting the construction insurance sector in Israel back on track.
But most of all, it seems that only this type of arrangement is likely to bring global reinsurers back to the market. It will define a global accounting mechanism, constitute a WIN-WIN for all involved, and allow insurance companies a certain certainty in measuring risk - a risk whose costs have contributed greatly to the flight of most global reinsurers from the construction insurance sector in Israel in the past year.
In conclusion: Our office has held a series of consultations on this matter with professionals and key stakeholders, including the management of the Contractors Association. It seems that joint action is needed here by the insurance companies, the Israel Builders Contractors Association, and members of Knesset to draft a private bill on the matter. We intend to push decision-makers and the Israeli government to take action and make an important decision to regulate the aforementioned accounting mechanism, a decision that will greatly assist in getting the construction insurance sector in Israel back on track.
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