Lack of retroactive coverage in professional liability insurance for planners due to violations of the duty of disclosure when switching between insurance companies
Sep 22, 2019
By: Miri Levhar, VP, Itzick Simon - the leading construction insurance agency
An entrepreneurial construction company entered into a tender with the Ministry of Housing to build 106 housing units. As the project progressed, it became clear that due to the negligent architectural planning on which the tender was based, only some of the units could be built (due to proximity to a main road).
The construction company filed a lawsuit against the Ministry of Housing and the State of Israel, and they in turn filed a third-party notice against the architect who was involved in planning the plans for the tender at various levels. The lawsuit was accepted, as was the notice against the negligent architect. However, when the latter sought insurance coverage for the legal process and its results from the insurance company that insured him with a professional liability policy, the court rejected the matter due to the acceptance of a claim regarding "violation of the duty of disclosure."
What were the reasons for the court's decision to accept the insurance company's version, and what do we learn from this about professional liability policies in general, and about changing insurers in the field of professional liability throughout a career in particular? See a real-life case, which contains an important message regarding professional liability for architects and planners.
The parties to the proceeding – the architect who is insured in a third-party notice against the insurance company that insured him with a professional liability policy.
Who will pay and how much will he pay? The architect was insured for about 15 years with professional liability insurance with Insurance Company A, and then renewed the policy with Insurance Company B. Both policies were "Claims Made," meaning the day the claim was filed. The second policy purchased included retroactive coverage for about 9 years, including the date of the design failure.
The new insurance company claimed that when the architect transferred from the previous insurance company, he did not know about the incident that occurred about three years earlier. The architect, for his part, claimed that he should not have informed the new insurance company because he believed he had no responsibility in the matter.
In other words, the architect claimed that at the time of the policy renewal, he was certain that there was no mistake or negligence on his part, and he was certain that the fault lay with the Ministry of Construction and Housing and the project manager.
By: Miri Levhar, VP, Itzick Simon - the leading construction insurance agency
An entrepreneurial construction company entered into a tender with the Ministry of Housing to build 106 housing units. As the project progressed, it became clear that due to the negligent architectural planning on which the tender was based, only some of the units could be built (due to proximity to a main road).
The construction company filed a lawsuit against the Ministry of Housing and the State of Israel, and they in turn filed a third-party notice against the architect who was involved in planning the plans for the tender at various levels. The lawsuit was accepted, as was the notice against the negligent architect. However, when the latter sought insurance coverage for the legal process and its results from the insurance company that insured him with a professional liability policy, the court rejected the matter due to the acceptance of a claim regarding "violation of the duty of disclosure."
What were the reasons for the court's decision to accept the insurance company's version, and what do we learn from this about professional liability policies in general, and about changing insurers in the field of professional liability throughout a career in particular? See a real-life case, which contains an important message regarding professional liability for architects and planners.
The parties to the proceeding – the architect who is insured in a third-party notice against the insurance company that insured him with a professional liability policy.
Who will pay and how much will he pay? The architect was insured for about 15 years with professional liability insurance with Insurance Company A, and then renewed the policy with Insurance Company B. Both policies were "Claims Made," meaning the day the claim was filed. The second policy purchased included retroactive coverage for about 9 years, including the date of the design failure.
The new insurance company claimed that when the architect transferred from the previous insurance company, he did not know about the incident that occurred about three years earlier. The architect, for his part, claimed that he should not have informed the new insurance company because he believed he had no responsibility in the matter.
In other words, the architect claimed that at the time of the policy renewal, he was certain that there was no mistake or negligence on his part, and he was certain that the fault lay with the Ministry of Construction and Housing and the project manager.
Reject the message
The insurance company sought to dismiss the notice filed against it for " failure to disclose the allegations " raised against the architect. "This is a breach of the duty of disclosure regarding a detail that could have affected our willingness, as a reasonable insurer, to enter into the insurance contract," the defense argued. "The architect did not indicate the subject of the incorrect tender when he filled out our insurance proposal. If he had informed us, it is reasonable to assume that the event would have been excluded from the retroactive period or that we would not have entered into the contract at all."
The court accepted the insurance company's version and ruled that the insured would not be granted coverage by virtue of Professional liability policy. It was determined that the architect did not fulfill his obligation under Section 6(a) of the Insurance Contract Law, and did not provide a full and honest answer regarding his knowledge of a matter that could affect the insurer's desire to contract with him as a reasonable insurer.
"The inscription was written on the wall, and L. (the architect) should have noted this in the insurance proposal," the ruling states. "If he did not do so, the insurance company had the right to cancel the policy."
The court also noted that "although the Insurance Contract Law is a consumer law whose main purpose is to protect policyholders from insurance companies... at the same time, the duty of disclosure is a primary obligation, and constitutes the basis for the contract between the policyholder and the insurer."
Tender publication date – November 1994.
Date of filing the lawsuit – October 1999.
The date of the verdict – May 2006.
The insurance company requested to dismiss the claim filed against it due to the failure to disclose claims made against the architect. “This constitutes a breach of the duty of disclosure regarding a matter that could have influenced our willingness, as a reasonable insurer, to enter into the insurance contract,” it was argued in the defense statement. “The architect did not disclose the issue of the erroneous tender when completing our insurance proposal. Had he informed us, it is likely that the event would have been excluded from the retroactive period or that we would not have entered into the contract at all.”
The court accepted the insurance company’s version and ruled that the insured would not receive coverage under the professional liability policy. It was determined that the architect did not fulfill his obligations under Section 6(a) of the Insurance Contract Law and did not provide a full and honest response regarding his knowledge of a matter that could affect the insurer’s willingness, as a reasonable insurer, to enter into the contract.
“The writing was on the wall, and ‘L’ (the architect) should have disclosed this in the insurance proposal,” the ruling stated. “Since he did not do so, the insurance company had the right to cancel the policy.”
The court also noted: “Although the Insurance Contract Law is a consumer law whose primary purpose is to protect insured parties against insurance companies… the duty of disclosure is a primary duty and constitutes the foundation of the contract between the insured and the insurer.”
Tender publication date: November 1994
Date of filing the claim: October 1999
Date of judgment: May 2006
The insurance aspect
Professional liability policies are extremely important for planners, architects and engineers. Since this is a "Claims Made" policy, insurance coverage depends on the fulfillment of two cumulative conditions:
- The insured was insured under a professional liability policy on the day of the failure, and in the case of architects, this is sometimes the planning date, which was several years before the bulldozers entered the area.
- The insured was insured under a professional liability policy at the time the claim was filed.
Many times throughout their careers, thanks to healthy competition in the insurance industry, insureds move between policies and insurers. In each such move, the insurance continuity must be verified. That is, to ensure the existence of effective retroactive coverage to the past. The above case teaches us what may happen when the transition is not "smooth". The architect renewed the policy, but did not specify procedures and inquiries related to the negligent tender. On the day of the order, the insurer seized on this as finding a great spoil (which it did find).
What was the insured supposed to do? The insured was required to inform the insurance company about the tender, and that he might be forced to be involved in legal proceedings. The concealment of the matter, whether done in good faith or fraudulently, is what invalidated the policy.
If the insured had informed the insurance company, and it had entered into a contract with him that included retroactive coverage without excluding the specific case, the policy would have stood firm. It allows the architect to benefit from both insurance coverage for the compensation amounts awarded against him, and also coverage for the numerous legal expenses he was required to incur as part of the procedure (which lasted for many years).
Another point – at the time of the incident, the insured was insured under a professional liability policy that he had purchased years earlier. He changed insurance companies in February 1999, and the claim was filed in October of that year. If the claim had been filed before February 1999 (the date of the transfer between the policies), or alternatively, the architect had postponed the transfer after filing it, he would have had insurance protection under the policy purchased by the previous insurance company.
Professional liability policies are extremely important for planners, architects and engineers. Since this is a "Claims Made" policy, insurance coverage depends on the fulfillment of two cumulative conditions:
The insured was insured under a professional liability policy on the day of the failure, and in the case of architects, this is sometimes the planning date, which was several years before the bulldozers entered the area.
The insured was insured under a professional liability policy at the time the claim was filed.
Many times throughout their careers, thanks to healthy competition in the insurance industry, insureds move between policies and insurers. In each such move, the insurance continuity must be verified. That is, to ensure the existence of effective retroactive coverage to the past. The above case teaches us what may happen when the transition is not "smooth". The architect renewed the policy, but did not specify procedures and inquiries related to the negligent tender. On the day of the order, the insurer seized on this as finding a great spoil (which it did find). What was the insured supposed to do? The insured was required to inform the insurance company about the tender, and that he might be forced to be involved in legal proceedings. The concealment of the matter, whether done in good faith or fraudulently, is what invalidated the policy. If the insured had informed the insurance company, and it had entered into a contract with him that included retroactive coverage without excluding the specific case, the policy would have stood firm. It allows the architect to benefit from both insurance coverage for the compensation amounts awarded against him, and also coverage for the numerous legal expenses he was required to incur as part of the procedure (which lasted for many years).
Another point – at the time of the incident, the insured was insured under a professional liability policy that he had purchased years earlier. He changed insurance companies in February 1999, and the claim was filed in October of that year. If the claim had been filed before February 1999 (the date of the transfer between the policies), or alternatively, the architect had postponed the transfer after filing it, he would have had insurance protection under the policy purchased by the previous insurance company.
