Recent developments in claims-made policy debate

Origin of debate
Conflicting court views
Latest Supreme Court decision
Comment

Origin of debate

The debate in Italy on the validity of claims-made clauses stems from the Civil Code provisions which define insurance contracts based on the loss-occurrence scheme. Section 1917 of the Civil Code provides that cover under an insurance contract is triggered on the occurrence of a loss event within the policy period.

The question therefore is whether claims-made insurance policies, which are widely used in Italy to cover civil liability, are valid notwithstanding Section 1917.

The Civil Code dates back to 1942 and is facing challenges in view of the modernisation of contract law that is gradually taking place throughout Europe. This explains the reason behind the different court views on claims-made policies and the existing debate.

Conflicting court views

The Supreme Court and several lower courts have examined the validity of claims-made insurance policies under Italian law and have reached different, sometimes conflicting, conclusions. The Supreme Court has addressed this issue in a few decisions, but the Joint Divisions of the Supreme Court has had to intervene twice in order to provide clarity.

In particular, in its first decisions on this topic (Decisions 5624/2005, 7273/2013 and 2872/2015), the Supreme Court ruled that claims-made clauses are a lawful and valid expression of the parties' contractual freedom. However, it also established that such clauses may be unfair under Section 1341 of the Civil Code (and thus unenforceable unless specifically approved in writing by the insured), leaving the judge to determine the possible unfair nature of claims-made clauses on a case-by-case basis and in light of the specific policy wording.

In 2016 the Joint Divisions of the Supreme Court handed down a long-awaited judgment (9140/2016) which established that claims-made clauses are not unfair under Section 1341 of the Civil Code, as they do not limit the insurer's liability, but rather define the insuring grant. Conversely, the Joint Divisions highlighted that under certain conditions, such clauses may be held null and void in the absence of interests worthy of protection or, in the case of consumers, because they determine a significant imbalance between the rights and obligations under the contract.

The above judgment left open the question of when claims-made clauses should be considered in breach of the basic principle of fairness and not worthy of legal protection.

This question was addressed in a subsequent Supreme Court decision (Decision 10506/2017), which ruled that judges will carry out case-by-case examinations, primarily considering whether a claims-made clause:

• leads to a violation of the insured's contractual freedom;
• gives the insurer an unfair and disproportionate advantage; or
• places the insured in a position of indeterminate subjection with respect to the insurer.

In January 2018 the Third Division of the Supreme Court asked the Joint Divisions of the same court to reconsider their position taken in Decision 9140/2016 and confirm the following principles of law:

• in property, casualty and third-party liability insurance, the coverage trigger can be only the loss and not the claim; and
• in third-party liability insurance, clauses attaching relevance to the date on which the claim is made against the insured rather than the date on which the insured caused the damage to the third party must be held invalid.

The Third Division of the Supreme Court raised a number of debatable and formalistic arguments in order to maintain – despite the specific request to confirm said principles – that contracts departing from the loss-occurrence scheme are not insurance contracts and therefore cannot be deemed generally valid.

Latest Supreme Court decision

On 24 September 2018 the Joint Divisions of the Supreme Court handed down Decision 22437 and partially changed their previous position.

In particular, the Supreme Court upheld the following principles:

• The claims-made model falls within the broader contractual scope of non-life insurance and claims-made clauses are valid. In this context, the court highlighted that the claims-made model recently found express legislative recognition in the Italian legal system under:
  • Section 10 of Law 24/2017 with regard to medical liability insurance; and
  • Section 3 of Legislative Decree 148/2011 regarding professional liability insurance.
• Claims-made clauses are not unfair under Section 1341 of the Civil Code, as they do not limit insurers' liability, but rather define the scope of coverage.

Nonetheless, dissenting from Decision 9140/2016, the Supreme Court stated that testing a claims-made clause's worthiness on a case-by-case basis is not required, as claims-made policies are typical contracts regulated by the Civil Code.(1)

However, in this respect the Supreme Court stated that when evaluating the validity of their clauses, the courts should examine the actual and overall contractual relationship (ie, from the pre-contract phase to the time of its implementation).

Such investigation should focus on:

• the insurer's compliance with the duties of good faith, protection and information in the pre-contractual phase;
• the adequacy of the contract to meet the insured's concrete interests or needs. In other words, the evaluation must concern the 'concrete cause' of the contract (ie, the actual interests that the contract aims to achieve);
• the consideration (ie, the relationship between the risk and the premium paid). Therefore, in the case of a violation of the above, the policyholder can apply for the appropriate remedies set out in civil law (eg, pre-contractual liability for damages and nullity of the contract, including partially, for its inadequacy to meet the practical purpose pursued by the policyholder).

Comment

The fact that the Supreme Court has abandoned the fairness or worthiness test is undoubtedly favourable to insurers, since this should limit the uncertainties surrounding the concepts of fairness and worthiness.

On the other hand, insurers and intermediaries will need to carefully:

• manage claims-made policies, focusing on appropriate information in the pre-contractual phase; and
• evaluate whether such contracts meet the insured's interests and needs in the given circumstances.

For further information on this topic please contact Marco Dimola at DLA Piper Italy by telephone (+39 02 80 61 81) or email (marco.dimola@dlapiper.com). The DLA Piper website can be accessed at www.dlapiper.com.

Endnotes

(1) Pursuant to Section 1322 of the Civil Code, parties are free to enter into contracts that are not specifically regulated by the Civil Code (so called 'typical contracts') provided that they aim to realise interests worthy of protection by law. When the parties enter into a typical contract, the worthiness test is unnecessary, as it has already been carried out by the legislature.