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25 January 2011
In 2010 two Italian courts issued significant decisions on index-linked policies. Insurers should be aware of their conclusions and ensure that their practices are consistent with them.
On August 10 2010 the Court of Parma ruled on the right of attachment over index-linked policies.(1) Section 1923 of the Civil Code provides that in the case of life insurance, "execution cannot be levied on sums due by the insurer to the contracting party or the beneficiary, nor can such sums be subject to provisional remedies". In keeping with this principle, the Joint Section of the Court of Cassation has confirmed that in view of the social security function of life insurance contracts, sums due by an insurer cannot be attached or seized.
However, the Court of Parma considered that index-linked policies, rather than being true insurance policies, are financial products in all material respects. Unlike true insurance policies, they allow the sum invested to be redeemed at any time, with no guarantee being required from the insured. Therefore, the court considered that such policies are not mainly intended as instruments with a social security function, but are entered into primarily as speculative investments.
The court noted that index-linked insurance products have a profit-making component that is exclusively linked to financial factors. It held that
"such a profit may not arise if the financial benchmarks are negative (ie, an event that would result in a loss for the contracting party), in view of the fact that although the insurance policies guarantee reimbursement of the nominal capital… such capital is net of management costs. Therefore, it is lower than the amount initially paid and is further reduced by the effects of inflation, which is clearly incompatible with [the definition of a] life insurance instrument (ie, the type of private insurance which is the most similar to that offered by social security institutions). It is in light of this social security function that Section 1923 of the Civil Code sets out a provision to safeguard it."
On the basis of these principles, the court held that index-linked policies can be attached.
On July 23 2010 the Court of Milan confirmed that:
"applications for cancelling and terminating index-linked policies that are issued by insurance companies through banks must be submitted to the issuing company. Recourse to the bank may be had only for applications to assess the bank's extra-contractual and pre-contractual liability arising from a breach of its duties of disclosure and good faith in its relationship with the client."
In the case of index-linked policies, the principle of good faith(2) and the applicable legislation(3) require that pre-contractual information on the greater complexity of the product and the associated risks be provided in a manner which gives clients sufficient time to form an accurate idea of the main elements of the proposed action, thereby enabling them to seek additional information and make informed choices.
In this case the court held that the declaration signed by the client on execution of the contract - which stated that the client had been "provided with the terms and conditions governing the insurance relationship, which he or she acknowledges and accepts in full" - did not meet the requirements, and that the bank had not shown that it had adequately informed the client of the particular features of the proposed policy and its relevant conditions.
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