The seemingly straightforward topic of deductibles raises a number of interesting issues, one being the circumstances in which an insurer is justified in applying more than one deductible.

Much, of course, depends on the specific wording of the deductible clause in the policy, but it is helpful to review the case law to see how the courts have dealt with this issue.

In Park & Derochie Decorating Co. Ltd. v. Employers' Liability Assurance Corp. Ltd.¹, a 1963 decision of the Alberta Supreme Court, the plaintiff contracted to paint some gas storage tanks belonging to Canadian Bechtel Limited. During painting operations, 72 automobiles belonging to employees of other contractors working for Canadian Bechtel were damaged by paint. Canadian Bechtel paid for cleaning and repairs, and the plaintiff reimbursed Canadian Bechtel. The plaintiff then brought this action against its insurer for indemnity.

The liability policy provided that the plaintiff would be liable for the first $25.00 of "each and every claim submitted with respect to the cover provided." The only issue at trial was whether there was one claim, as contended by the plaintiff, or 72, as contended by the defendant insurer.

The court agreed with the insurer, finding that whereas the plaintiff may have made only one payment to Canadian Bechtel, there were 72 claimants, each of whom had a clear right of action against the plaintiff. In the court's opinion, the fact that the plaintiff chose to make one payment to Canadian Bechtel, and allowed Canadian Bechtel to deal with the individual claimants, could not affect the legal position of the defendant insurer.

A very similar fact situation, with the identical result, occurred in R. A. Kerschbaumer Painting Contractors Ltd. v. The Canadian Indemnity Company,² a 1977 decision of the B.C. Supreme Court. In that case, the plaintiff’s employees were carrying out spray-painting operations and caused damage to 25 parked cars. Each car owner made a claim against the plaintiff. The plaintiff sought indemnity under the liability policy issued by the defendant. The deductible clause read as follows:

"The Insured shall pay the first $250.00 of each and every claim arising out of damage to the property of others... and the Insurer shall be liable only for the difference between such deductible amount and the limit of the Insurer's liability for each accident or occurrence as stated in the Policy."

The plaintiff argued that this deductible clause was ambiguous because it stipulated a $250.00 deductible for "each and every claim," but then referred to the liability of the insurer to pay the difference between the deductible amount and the policy limit "for each accident or occurrence." The court disagreed, and held that the policy limit applied to any one "accident or occurrence," but that many claims could arise from one "accident or occurrence." The insured was required to pay the first $250.00 of each claim.

In Canadian Imperial Bank of Commerce v. Madill³, a 1981 decision of the Ontario High Court of Justice, the CIBC and the Bank of Nova Scotia sued their insurer, Lloyds, for the losses sustained as a result of the issuance and presentation of a large number of fraudulent letters of credit in various parts of the world. Between June 30 and July 8, 1975, 25 operators cashed 93 fraudulent CIBC letters of credit in 25 cities in Europe, Asia and Australia, fraudulently obtaining in excess of $900,000.00. The Bank of Nova Scotia sustained losses in excess of $800,000.00 between August 29 and September 3, 1975 as a result of the presentment of forged letters of credit at 77 different banks in 30 cities in the world, by at least 25 different people using forged documents.

Both the CIBC and the Bank of Nova Scotia reimbursed the various banks which had dispersed funds to the thieves, and then submitted claims to Lloyds under their respective policies of insurance.

The policy issued to the CIBC provided coverage of $1,000,000.00 with a deductible of $250,000.00. The deductible clause in that policy read as follows:

"The Underwriters shall not be liable under any of the Insuring Agreements of this policy on account of loss as specified...unless the amount of such loss, after deducting the net amount of all reimbursement and/or recovery ...shall exceed the sum of TWO HUNDRED & FIFTY THOUSAND CANADIAN DOLLARS (Can. $250, 000.00) (herein

called Deductible Amount) and then for such excess only .... "

The policy issued to the Bank of Nova Scotia provided coverage of $10,000,000.00 subject to a deductible of $150,000.00 for "each and every loss."

After finding that both claims fell within the coverage provided by the respective policies, the court turned its attention to the issue of whether each bank's claim was subject to a single deductible (as argued by the banks), or whether the deductible applied to each individual encashment of a fraudulent letter of credit (as argued by Lloyds). If the latter argument prevailed, the banks could make no recovery under their insurance policies, because each encashment was within the deductible amount.

After examining the evidence, the court concluded that each bank's loss was "the sum total of scores of encashments," but that each bank's loss resulted from "one casualty or event," and that consequently each bank was required to pay only one deductible. The court found that "The evidence of a single operation against each bank is overwhelming", and mentioned a few of the indicators:

a. the principal attack on each bank occurred on a Canadian bank holiday;

b. the operation involved a large number of separately numbered letters of credit and letters of introduction;

c. the operation involved a large number of people, each with forged documents;

d. the forged letters of credit had been carefully stamped on the reverse side,     indicating prior encashments by other banks, and giving the forged documents an aura of authenticity. (Prior encashments had never actually taken place.)

The court stated at p.536:

"In a military operation there may be many battalions involved in an attack, but it is nevertheless one attack directed at one objective. There may be a hundred people in a symphony orchestra, but it is one orchestra, with one conductor and hopefully, a common purpose."

The court noted that loss through forged letters of credit was one of the risks specifically set out in the insuring agreements of the policies, and the court pointed out that if it were to accept the insurer's argument that each encashment was a separate loss, banks would rarely be able to make recovery under the insurance policies, because forged letters of credit were usually within the deductible amount. The court commented that both the banks and the insurer must have known that such losses in excess of the deductible amounts could occur only "by the skilfully planned and swiftly carried out operations that were launched against the plaintiffs." In this respect the Court found the following testimony, given by a banking expert called on behalf of Lloyds, to be significant:

"One knows that bank paper is in circulation and can be forged. Insurers are sophisticated too. The Banker's Blanket Bond has been developed over a very long time and insurers would have a good idea of bankers risks." ⁴

Lloyds appealed to the Ontario Court of Appeal, but the appeal was dismissed.⁵

The Alberta Court of Queen's Bench had occasion to consider the issue of multiple deductibles in January 1988, in Armenco v. Continental Insurance Co.⁶ In that case the plaintiff owned a grocery store and gas bar which was leased to, and operated by, two individuals who were paid a commission on gasoline sales. These individuals collected and banked the proceeds from the gasoline sales, and were supposed to provide the plaintiff with regular reports of the amount of gasoline held in the storage tanks. However, they did not provide the regular reports as required. Investigations subsequently revealed a large volume of gasoline was unaccounted for.

The plaintiff put forward a claim of $50,000.00 under an all-risk policy issued by the Continental Insurance Co., which provided coverage for "direct physical loss or damage." When the Continental declined the claim, the plaintiff brought this action against Continental and the broker. The trial proceeded on two principal issues: firstly, whether the loss constituted "direct physical loss or damage," and secondly, whether the $250.00 deductible should be applied to every occasion on which the operators improperly adjusted the sales figures.

The court concluded that the plaintiff had indeed sustained "direct physical loss or damage" and that only one deductible should be applied. The court's reasoning on the deductible issue was brief and straightforward: the policy stipulated that the $250.00 applied to each "claim" and only one claim had been put forward.

The Continental Insurance Co. appealed to the Alberta Court of Appeal in 1989.⁷ The appeal was allowed. The Court of Appeal agreed with the trial judge's finding that "the loss was caused by fraudulent or negligent bookkeeping practices," but held that this did not constitute a "direct physical loss" of gasoline. Consequently there was no coverage.

In view of this finding, the Court of Appeal did not find it necessary to address the issue of the deductible.

In November 1988, the Alberta Court of Queen's Bench again considered the issue of multiple deductibles in V.K. Mason Construction Management Inc. v. Hanover Insurance Co.⁸ The plaintiff Mason was the general contractor for the construction of an office building, and held a builder's risk policy issued by Hanover Insurance Company. Mason hired another contractor to supply and install granite on the exterior of the building. This work involved some welding. During the welding process, 180 windows were damaged. This damage occurred over a period of time, because the welding was performed as each individual granite panel was installed.

Mason put forward a claim to Hanover in the amount of $120,000.00 for damage to the 180 windows. Hanover refused to pay, arguing that the damage to the windows had not occurred within its policy period, that the policy was void as a result of misrepresentation and that in any event a separate $5,000.00 deductible would apply for each day during which window damage occurred.

The deductible clause in the policy read as follows:

The court referred to the Armenco decision discussed above, and noted that, as in Armenco, the policy wording required that the deductible be applied to "each claim" and not to each "loss". The court was of the view that, as only one claim had been submitted, only one deductible applied.

The Court stated at p.67:

Canada Trust Co. Mortgage Co. v. Kansa General Insurance Co.⁹ is an unreported 1994 decision of the Manitoba Court of Queen's Bench. The plaintiff in that case held an errors and omissions policy issued by Kansa. In 1963 the Plaintiff received a transfer of some oil and mineral interests which it was to administer as trustee. A trust agreement (the "Northern Oils Trust") was drawn up. In 1977 the plaintiff leased the interests to an oil exploration company, Troy Oils Ltd., but neglected to obtain the consent of some of the interest holders. In January 1983, these interest holders brought an action against the plaintiff, and they obtained judgment against the plaintiff in 1986. The plaintiff then sought coverage pursuant to the errors and omissions policy issued by Kansa. Kansa denied coverage on the ground that the error in question was a prior error which had not been made known to Kansa at the time the policy was issued.

However, the court allowed the plaintiffs action and considered the issue of deductibles. Kansa argued that two deductibles should be applied, as the plaintiff had made two errors: firstly, the Plaintiff should not have placed the mineral and oil interests in the Northern Oils Trust, and secondly, the plaintiff should not have entered into an oil lease with Troy. The Court disagreed, pointing out that there was just one fundamental error which brought about the loss, that being the lease of the oil and mineral interests to Troy. Consequently, only one deductible was applicable.

Yang v. Canadian Lawyers' Insurance Association¹⁰ is a 1996 decision of the Alberta Court of Queen's Bench. In that case, a lawyer acted as an agent for the purposes of the Immigrant Investors Program. He established a company which received $250,000.00 from each of the seven plaintiffs (who did not know each other), and he undertook to invest these funds in shopping centre projects and to obtain clear title to those projects for the plaintiffs.

However, one of the shopping centres in which the lawyer invested the plaintiffs' money had prior encumbrances registered on title. When those prior encumbrancers foreclosed, all the plaintiffs' money was lost. The plaintiffs' money had been invested by the lawyer in three separate instalments.

The seven plaintiffs obtained judgment against the lawyer and then brought this action against the lawyer's insurer. The insurer acknowledged that the policy provided coverage, but argued that the aggregate claim of the seven plaintiffs was subject to a policy limit of $1,000,000.00 per "occurrence," that the professional service provided by the lawyer was the acquisition of the shopping centre which constituted one "occurrence," and that consequently the insurer was liable under the policy subject to the $1,000,000.00 coverage limit.

The plaintiffs, on the other hand, argued that the lawyer performed a "professional service," which was a distinct and independent "occurrence" each time he advanced an investor's funds. If this position was accepted, the policy limit would never be reached.

The court accepted the plaintiffs' argument, pointing out that the lawyer had a separate and distinct duty to each plaintiff and that each time he invested any money belonging to any of the plaintiffs, that constituted an act of negligence.

The Court noted at p.319-320:

"The first professional service performed by the lawyer was the investment of each applicant’s money, once that was done negligently and the money was hopelessly lost then the fact that the lawyer continued to make errors with a common fund of applicants' money makes no difference. The `occurrence' that resulted in the loss of the money was its very investment. This was accomplished separately and distinctly for each of the applicants. The lawyer had a separate and distinct duty to each applicant. By the wording of the policy what he did for each applicant was a separate and distinct professional service."

The most recent case we have found is City of Edmonton v. Protection Mutual Insurance Co.,¹¹ a February 1997 decision of the Alberta Court of Queen's Bench. In this case, which is unreported, the defendant issued a boiler and machinery policy to the City of Edmonton. The deductible was $1,000,000.00. The deductible clause in the policy read as follows:

"In each case of loss or damage covered by this Policy, this company shall not be liable unless the Insured sustains a loss in a single occurrence in excess of any applicable deductible provided elsewhere in this policy and then only for its share of such excess."

The City of Edmonton owned two steam turbine generators, each of which sustained cracking damage in its rotor wheel. The plaintiff brought this action against the insurer for the costs incurred in replacing the rotors. Several issues were before the court: whether the damage was caused by an "accident" as defined in the policy; whether the action was time barred; and the number of deductibles to be applied. On the deductible issue, the court noted that the machines had been purchased at different times (one in 1970, one in 1973), began operations at different times, were operated at different times, developed cracks at different times and places, and had been repaired at different times.

Consequently, the court held that two separate deductibles were applicable. However, as the court found the action was time barred, no amounts were payable to the insurer.

In summary, it can be seen that the courts are inclined to lean in favour of a single deductible when to do otherwise would result in there being no coverage. Again, however, much depends on the wording of the deductible clause, and each case turns on its own facts.