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Several Deductibles or a Single Deductible – The Relevant Yardsticks.
In a situation where there are repeated acts of negligence, the question often arises: how many insured events occurred, and how many deductibles should apply?
In C.C. (Jerusalem Magistrates Court) 23435/98 Avny Mizrachi Construction & Construction Materials Co. Ltd. v. Migdal Insurance Co. Ltd. a decorative cladding element on the outer walls of an apartment building, which comprised a repeating pattern of glass and concrete, was found faulty due to lack of insulation. The insured contended that the fault in the design was a single fault, and since the outside decoration pattern is a repeating pattern, affixed by the contractor over the entire exterior wall – it is a single occurrence. Furthermore, one negligent act caused all the damage, and therefore only one deductible applies.
The insurance company alleged that since the damage was caused to several apartments, each apartment constitutes a single occurrence and a deductible should apply for each occurrence.
The Court ruled that the decorative pattern on the exterior wall is a single design, planned to create an impressive decorative element. The design constitutes a single element, of which each apartment wall is a part and not a separate design.
The damage, although affecting many apartments, is a single occurrence, and the negligent act – the faulty design of the materials which constitute the pattern, is a single negligent act. Thus, only one deductible should apply.
Furthermore, it is unreasonable to allow the number of occurrences to be determined by the technical format of the claim filed to Court. It is unreasonable that the insured will have to bear a single deductible where all the apartment owners sued the contractor in a single united claim, and several deductibles in an event where each apartment owner files a separate claim. The Court ruled that while checking negligence the cause of all the damages should be ascertained, and if the cause is a single event – one negligent act from which all the damage arose, it should be considered as a single occurrence.
Where the damage falls below the deductible: Is the insurer's liability to pay the damage to the 3rd party joint and several with the insured?
The Israeli lower courts recently issued several contradicting decisions regarding this question.
In C.C. (Nazareth) 5449/01, Salach Hasan Salach v. Kadmany Corporation Ltd. (August 2005) the Magistrates court ruled that an insurer may be obliged to pay the full amount of damages regardless of the deductible. Salach, an employee of the defendant (Kadmany) was injured in a motor vehicle accident while traveling in the course of his work. He filed a claim against his employer and against the employer's liability insurer. The employer entered into liquidation and did not file a defence. The insurance company reached a settlement with plaintiff for payment of damages in an amount less than the policy deductible. The insurer contended that it was the duty of the insured to pay the deductible, and his refusal to do so amounts to breach of the insurance contract which enabled the Insurer to cancel the policy.
The Court ruled that the fact that an insured does not fulfill the policy conditions and does not cooperate with the insurer, does not lead to cancellation of the policy, nor does it enable the insurer to decline coverage. The existence and the amount of the deductible set out in the insurance contract derives from a commercial agreement between the parties.
The insurer determines the amount of the deductible and the insured agrees to it, however the insurer may reduce the deductible or chose not to include it in the insurance contract. The fact that an insurance contract sets a deductible does not automatically mean that the coverage is afforded only in respect of amounts which are over and above the deductible.
The Court ruled that the liability towards a third party should be borne jointly and severally by the insurer and the insured – both are liable to pay the full amount of damages regardless of the deductible set in the contract. Should the insured not pay the deductible, the insurer is liable to pay and may file a claim against the insured to try and collect the amount (in this case it was worthless since the insured had entered into liquidation).
A similar decision was given in the Nazareth Magistrates Court (CC. 5816/02 Haja Said v. Haja Salach et al (hereinafter: the Haja claim) here the employer had also entered into liquidation proceedings, and as the damages were below the deductible, the court ruled that it should be borne jointly and severally, and be paid by the insurer to the beneficiary when it cannot be collected from the employer. However an appeal was filed in January 2006 and it is still pending in Court.
Contrary to the opinion of the Nazareth Court, the Tel Aviv District Court ruled that the insurer should not pay any amounts which are within the deductible. In a recent decision (C.A. 1291/02, 1460/02 Ayalon Insurance Co. Ltd. v. Moshe Arzi (3rd January 2006)), the court ruled that “As it can not be demanded of an Insurer to pay amounts higher than the insured amount, so it can not be demanded that an insurer bear the first layer (i.e. the deductible), as for the first layer the insured is considered to be its own insurer”. It should be noted that this claim was of an insured against an insurer – and not a claim between a third party and insurer.
Where the damage falls below the deductible - the insurer must inform the insured prior to reaching an agreement, otherwise the insurer will be obligated to pay the full amount of the damages regardless of the deductible. In C.C. (Tel Aviv) 112457/01, Israel Phoenix Assurance Co. Ltd. v. Rami Pery (August 2005), the Court ruled that the insurer must pay the whole amount of the damages, even if they fall below the deductible. A third party filed a claim against the insured – a travel agent – for injuries he sustained during a tour organized by the insured. The insurance company reached an agreement with the third party for payment of damages in an amount which was less than the deductible, and sued the insured for the amount paid.According to section 68 of the Insurance Contract Law - 1981, a third party may file a claim directly against the liability insurer. The insurer may settle the claim by reaching a settlement agreement with the plaintiff, provided that the insurer gives 30 days notice to the insured, who may object to the settlement.
In the said case, the insurer reached a settlement with the plaintiff, and signed the agreement without giving prior notice to the insured and without waiting 30 days. According to the settlement, the damages were less than the deductible, and therefore the insurer contended that the insured alone must pay the damages. The Court ruled that the insurer breached its obligations by reaching the agreement for an amount less than the deductible without giving the insured an opportunity to object to the settlement.
The Court based its decision on C.C. 745772/03, Shena Consultants v. Harel Insurance Co., in which the Court had ruled that an insured may indeed object to an agreement between an insurer and a third party, for reasonable reasons. Furthermore, the Shena decision states that an insured must act in good faith, and show a legitimate reason for objecting to a proposed settlement.
Section 68 cannot be stipulated against, therefore, the fact that the insurance contract provides that the insurer has sole discretion in reaching a settlement with a plaintiff does not mean that the insurer may ignore the provisions of Section 68, and not give the insured a chance to object to the agreement. It is the Court's opinion that the legislator has decided to give the insured the power to veto an agreement and force the insurer to continue with the Court proceedings - whilst taking a risk that he would have to pay the entire deductible, if he cannot provide valid reasons for his objection.
The Court also gave an example of such a reason: if the insured is sure of his lack of liability and wishes to protect his reputation. A liability claim may have implications beyond the monetary aspects of the dispute – and may cause severe damage to the name and reputation of the insured. Therefore, if an insurer does not inform the insured of a settlement agreement and give the insured a chance to veto it, the insurer, though bound by the agreement reached, may not be entitled to the deductible amount to be paid by the insured.
Comment:
The decisions of the lower courts – the Magistrates and District courts – have no binding authority for future litigation, but rather are of a persuasive nature. Hence one can find contradicting judgments on this issue – until a judgment is handed down by the Supreme Court – which has a binding authority for all instances.
As can be seen from the decisions reviewed in this newsletter, bad cases bring about bad judgements. Sometimes a harsh outcome for an injured third party is avoided by the court applying wrong analysis of the respective obligations of the insured – insurer – third party.
The decision of the Tel Aviv District Court in the Ayalon v. Arzi case, according to which the liability of the insurer is limited to the amounts stated in the policy, and deductible is viewed as self insurance – should in our opinion apply regardless of whether the litigation is of an insured vs insurer or a third party against an insurer.
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