|Allocation between Different Insurers |
Whenever the same risk is insured by more than one insurer the principle of double insurance applies. The Israeli Supreme Court has ruled that this legal doctrine should be implemented even where more than one insured is involved.
The Supreme Court precedent did not address an important issue namely: - the appropriate allocation between the insurers. The Israeli Insurance Contract Law - 1981 ("the Law") allocates the respective contributions of the insurers in accordance with the ratio between the "insured amounts" under the policies.
The practical implementation of this provision is sometimes far from clear. For example:
- Should the same method of allocation be made in all types of insurance?
- What is the "insured amount" where one of the policies contains a sub-limit of liability relevant to the insured event? Is it the sub-limit or the aggregate policy limit?
- How should the apportionment be made where one of the policies is a liability policy with an unlimited insured amount?
The various methods for determining respective contribution between double insurers
(a) "The maximum insured amounts method" – pursuant to which the allocation is made in accordance with the proportion between the maximum limit of liability under each policy and the total limits of liability under all policies combined.
(b) "The independent actual liabilities method" – this method calculates the independent amount which each insurer would have been liable to pay, regardless of the existence of another insurer. The ratio between such independent amounts determines the allocation between the insurers.
(c) "The equal shares method" – where the loss is fully covered by both policies, each insurer will bear an equal share of the loss, regardless of the policies` limits.
(d) "The premium method" – the allocation is made in accordance with the ratio between the premiums paid for each policy.
Supreme Court Precedent Applies the Maximum Insured Amounts Method
In a binding precedent (C.A. 5464/00 Perez G.G. Engineering Ltd. et al v. Keinan et al ("the Keinan case")), the Israeli Supreme Court held that:
In property insurance: - the relevant method is the maximum insured amounts method, namely – the full potential policy limit of each policy is taken into account. This was based on strict interpretation of the Law.
In liability insurance: - the maximum insured amounts method applies mutatis mutandis. The Supreme Court acknowledged that there is a material distinction between property insurance and liability insurance, however determined that in order to justify deviation from the above mentioned method, proof must be shown that economic differences exist between the two types of insurance, which necessitate applying a different method in liability insurance. In the case before it, such proof was not adduced, and therefore the court applied the maximum insured amounts method.
We hold the view that implementation of the maximum insured amounts method in liability insurance, where the maximum limit of liability might be substantially higher than the actual loss, may lead to unfair and illogical results. As mentioned, the Supreme Court has left the door open in such cases, to present the courts with convincing evidence that supports a more appropriate system. We therefore expect in the future to observe interesting case law developments on this issue.
Unlimited Liability Policies
When there is no limit of liability in one or more liability policies, it is impossible to apply the maximum insured amounts method. This is therefore one of the unique cases which will require application of a different approach. Although the Supreme Court in the Keinan Case did not determine which method should apply in such case, we believe that the appropriate and fair approach should be the independent actual liabilities method.
Contribution between liability insurers in case one of the policies is wider in scope:
In C.C. Anolik v. Kibbutz Malkia et al, the District Court of Haifa presided over a case involving bodily injury in a horse riding accident. Two liability policies were relevant. The first policy insured only the professional liability of the riding school. This policy`s limit was more than 300 times lower than the maximum limit under the second policy, which covered an entire range of commercial and other activities of its insured, only one of which was the riding school. The court decided that in such circumstances, the independent actual liabilities method should prevail.
Contribution in case of property entrusted with third parties:
In C.C. 127152/00 Hadar Insurance Co. Ltd. v. Ellen Or Jewellery Import and Export Ltd. et al, jewellery entrusted by its owner with a third party was insured both by the owner and the trustee with different insurers. The court determined that both policies are property insurance, and rejected the contention that in fact the trustee insured his liability to safeguard the property. Following the Keinan Case, the contribution between the insurers was calculated pursuant to the maximum insured amounts method. For the purpose of applying this method, the court considered the maximum limit of liability under each policy and rejected the argument that only the insured amount of the entrusted jewellery should be taken into consideration.
Application of the maximum insured amounts method might be problematic and unjustified in many situations. In liability insurance, the Supreme Court left the door open in future cases to prove the justification of applying a different method. In property insurance, the only way to overcome unjustified results, is by reaching a different agreement between the relevant insurers.