On March 10, 2020, the Israeli Supreme Court, in a ruling by Justice Grosskopf, with the concurrence of Justices Amit and Karra, recognized the doctrine of the Innocent Co-Insured in Israeli Insurance law (“the Ruling” and “the Doctrine”) – CA 7058/17 Nathan Melamed v. Tziona Leibowitz Et al.

According to the Doctrine, mala fide misconduct of one of the insured parties does not necessarily void the coverage of the other “innocent” insured parties.

The ruling addressed a case regarding embezzlement of funds by a hedge fund manager, for which he was sentenced to 68 months in prison. The investors sued, inter alia, the hedge fund manager, the hedge fund’s investment broker, a director at the hedge fund and the insurance company which insured the hedge fund in a policy providing professional indemnity for its director and its broker.

The District Court ruled in favor of the investors (claimants) as regards claims against the convicted hedge fund manager – who did not file a defense; as regards the claims against the broker – on a theory of negligence; and as regards the director – for violating his duty of care and good faith. However, the District Court rejected the investors’ claims against the insurance company, inter alia, because the director did not fully disclose pertinent information in the process of obtaining the insurance policy.

The ruling addressed several issues which were appealed, including as to the liability of the broker and director, as to the quantification of damages and others – including the application of the Innocent Co-Insured Doctrine, which is the subject of this update.