Insurance Firm Ordered to Cover Faulty Investing

Investment manager’s license revoked by Israel Securities Authority after he squanders couple’s money on unauthorized investments, but insurance company must foot part of the bill.

An investment company and one of its two insurers will have to pay damages to a couple that lost NIS 2.2 million through a mismanaged investment portfolio, a Tel Aviv District Court judge recently ruled. This ruling will now serve to clarify the extent to which insurers are responsible for significant losses incurred by investors due to decisions made by investment managers.

In her ruling, Judge Ruth Ronnen ruled that financial services company Momentum Capital Markets would to pay the plaintiffs NIS 2.2 million for the professional negligence of investment manager Liron Shlomo Asa. Because Momentum held a business insurance policy, originally with Menorah Mivtachim Insurance and then the Phoenix Insurance Company, the plaintiffs also sued the insurance companies to recover their losses.

The insurance companies claimed that they should not have to pay because Asa knowingly provided misleading reports to the couple and thus was guilty of more than negligence. However, the judge found that because Asa appeared to not have been fully aware that his investors would lose their money, the insurance coverage applied. She stated that in cases of doubt, insurance policies should be interpreted in favor of the beneficiary and not the policy writer. “A broad interpretation should be given to the terms of mistake, negligence and omission,” she wrote in her ruling. “This kind of interpretation would include behavior like Asa's, who was aware that he was acting in contravention of the agreement [with investors] and wrongly assessed the outcomes of his actions.”

Nevertheless, the judge ruled that Phoenix, which took over Momentum's insurance policy from Menorah in 2009, was not responsible for covering its share of the losses because Momentum had willfully mislead it by not providing information that it knew could lead to a large number of lawsuits. According to testimony by Asa, he already knew that close to one third of his clients has suffered significant losses when the company signed its policy with Phoenix. Thus, only Menorah Mivtachim will have to pay for the policy covering losses due to negligence in 2008, amounting to NIS 500,000. Phoenix, which would have been responsible for the remaining NIS 1.7 million, will not have to pay.

In 2008, the plaintiffs placed NIS 2.9 million in an investment portfolio at Momentum Capital Markets managed by Asa. They agreed with the portfolio management company that they would seek a mix of investments that would provide an expected return of 21% and accept losses up to 7% of the investment. In 2010, the couple decided to end their agreement with Asa and Momentum and sold off the higher risk portfolio to concentrate on more stable investments. However, because of the investment decisions made by Asa, their portfolio had shrunk to NIS 1.57 million, leading the couple to sue Asa, Momentum, Menorah Mivtachim and Phoenix for negligence. The judge decided to award the couple NIS 2.2 million, based on the calculated value of their investment portfolio had it been invested properly.

The defendants in the lawsuit admitted that Asa had made improper investments starting at the end of 2008 and then tried to make up the losses with other investments, and did not report this to his clients. However, the court found that because the couple's contract was with Momentum and not Asa personally, it was the company that violated the agreement and was responsible for covering the losses. Because Momentum was insured, this meant that the insurance companies would have to bear the cost.

Reuters