Latest ruling of the Italian Supreme Court on claims made clauses
February 2019 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
The inclusion of claims made clauses in professional liability insurance contracts has become common in Italy in recent times, having been the subject of several rulings by the Italian Supreme Court, in which the latter has adopted contradicting positions over the years.
The Italian Supreme Court has distinguished two main types of claims made clauses: so-called “mixed” or “impure” clauses and “pure” clauses. While “impure” claims made clauses provide insurance coverage only if the wrongful act and the request for compensation occurred during the coverage period (starting with the beginning of the retroactivity period), “pure” clauses cover all requests for compensation brought by the damaged against the insured for the first time during the policy period irrespective of when the wrongful act occurred.
Hence, “impure” claims made clauses add a further temporal requirement for coverage, i.e., the moment when the wrongful act occurred.
Previous case law
The special mechanism of claims made clauses in civil liability insurance contracts differs from the insurance mechanism established by Article 1917 paragraph 1 of the Italian Civil Code and has been the subject of various contrasting valuations by the Italian Supreme Court over the last 20 years. According to a first opinion, claims made clauses are null and void, because they are in conflict with the provision under Article 1917 of the Italian Civil Code. Even though it confirms the validity of claims made clauses in general, opinion considered them “vexatious” clauses pursuant to and with the effects of Article 1341 of the Italian Civil Code.
With decision n. 9140/2016, the Joint Division of the Italian Supreme Court ruled that claims made clauses are not null and void because Article 1932 does not list Art. 1917 paragraph 1 as mandatory and the clauses do not alter the bilateral nature of the contract. With regard to “impure” claims made clauses, the Supreme Court further established that the courts of merits must assess – in view of the clauses’ atypical nature – whether the respective clause is protection worthy (evaluation of worthiness).
With its ruling, the Supreme Court has removed all doubt regarding the potential nullity of claims made clauses and shifted the focus to the evaluation of worthiness.
The Supreme Court also established in a further ruling that an insurance contract is not protection worthy if it grants an unfair or disproportionate advantage to one of the parties without compensation to the other party, or if one of the parties obligates the other party to maintain conduct that is in contrast with mandatory constitutional solidarity duties.
These criteria on protection worthiness have been integrated with further criteria that have often caused legitimate doubts for insurance companies operating in Italy. In a later ruling, the Supreme Court, for example, established that non-protection worthiness is due to a lack of posthumous coverage. This sudden change of opinion created several practical issues.
Therefore, and to avoid further doubts concerning the practical application of the rulings, a definite ruling of the Joint Division has become necessary.
The Supreme Court ruling no. 22437/2018
With ruling n. 22437/2018, the Joint Division has acknowledged that the Italian legislator, as legislators of other countries with similar judicial culture (France, Spain and Belgium), has transposed the model of claims made clauses into Italian law. The ruling confirmed that the model is part of the legal types described by Italian law, as it is a form of insurance against damages and consequently the evaluation of protection worthiness is not necessary.
Even though the Joint Division confirmed that no evaluation of protection worthiness has to be carried out, it underlined that the obligation to verify whether the specific clause and the model of claims made respects the limits set by Italian law for each phase of the contractual relationship.
During the negotiation phase, an insurance company and its brokers have to fulfil their information obligations in a transparent manner that aims to protect the contractual partner, to guarantee that the insured obtains insurance coverage corresponding to his needs. In the event of a breach of these obligations, the insured has the right to obtain the benefit he would have obtained if the insurance company or its brokers had fulfilled its obligation correctly.
Secondly, the so-called ‘concrete cause’ of the contract has to be assessed, meaning its suitability to achieve the goals for which it has been executed. To carry out this assessment, the bilateral obligations of the insurance contract have to be evaluated, because an evident imbalance of bilateral obligations has to be interpreted as a lack of concrete cause. The policy premium is an important element to assess the balance between the mutual obligations of the parties.
It is important to underline that it is not the court’s intention to impose an evaluation of the economic balance of the performances due by the parties. Instead, it intends to investigate – in the light of the contractual good faith principle – if the provision ‘on claims made basis’ is the result of an arbitrary imbalance. Precisely, in liability insurance contracts the premium has to be related to the insured risk through the application of actuarial calculation principles.
If a lack of reciprocity of the obligations should emerge from the assessment, the consequence could be to nullify the contract pursuant to Article 1418 of the Italian Civil Code. To avoid nullity, the courts may amend the contractual provisions by adding what is necessary from legal provision to restore balance. This part of the ruling is a novelty, since it clarifies that in case of imbalance a claims made contract is no longer transformed into a loss occurrence model but can be remodelled to guarantee the ‘concrete cause’ of the insurance contract. A court might, for example, modify the retroactivity period provided under the insurance contract or add a posthumous coverage period, and hence adapt the insurance contract to the purpose for which it has been executed.
Lastly, according to the ruling in the phase of execution, a clause permitting the insurer’s withdrawal if a claim included in the insured risk occurs, has to be considered critical.
The last ruling of the Joint Division of the Supreme Court regarding claims made clauses is a big step ahead, but also a step in a new direction.
On the one hand, the clarity with which the Supreme Court has acknowledged that claims made clauses are typical clauses, and outlined what requirements the parties have to implement (with regard to the information obligations, the contractual purpose and execution phase) is welcome. The ruling has a special impact because lower courts are held to respect and apply the legal principles established by the ruling of the Joint Division of the Supreme Court.
On the other hand, the impact on existing insurance contracts is rather uncertain. Courts must carry out a comprehensive assessment of all contractual phases, including the reciprocity of contractual obligations, which adds a strong element of discretion.
In addition to the above rulings, the recent regulations issued by the Italian legislator (with regard to policies) have provided further elements and criteria to be observed and respected by insurance contracts yet to be issued.
Giovanna Aucone is a partner at PG Legal. She can be contacted on +39 06 884 1535 or by email: email@example.com.
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