The claims made clause as interpreted by the Italian Supreme Court
The Joint Division of the Italian Supreme Court with decision n. 9140 filed on 6 May 2016 ruled on the validity of the “claims made” clause in insurance contracts. The ruling sets out the following basic principles in relation to these clauses: “in insurance contracts covering civil liability towards third parties, the clause granting coverage subject to both the wrongful act and the request for damages occuring during the policy period or within specified time periods set by the contract (i.e. so called “mixed” or “non-pure” claims made clause) is not vexatious; such clause, under certain conditions, might however be declared void because the underlying interests does not deserve protection under the applicable law (“difetto di meritevolezza”), or ….[in case of consumers]…. because the clause causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer; the relevant evaluation must be carried out by the Court awarding on the merit [i.e. Tribunals and Courts of Appeal] and such evaluation is not subject to appeal before the Court of Cassation, provided that the judgement’s reasoning is adequate”.
The decision will be a milestone in the Insurance industry for the following reasons.
The Court has split the “claims made” clauses in two major categories: one related to the so called “pure” clauses and one related to the so called “impure” or “mixed” clauses. The “pure” clauses cover requests for damages received by the Insured for the first time during the policy period irrespective of the date the unlawful act was committed. Instead, the “impure” clauses cover requests for damages received by the Insured for the first time during the policy period provided that the related unlawful acts committed by the Insured also occurred during the policy period or in a limited period of time preceding the date of commencement of the policy (retroactivity period).
The Court in line with its previous case-law (see judgements of the Court of Cassation n. 7273/2013 and 3622/2014), recognised the possibility to derogate from article 1917, I paragraph of the Italian Civil Code (that provides that “the insurer is bound to indemnify the insured for the damages which the latter must pay to a third party as a result of the events occurred during the period of insurance and depending on the liability provided by the contract”) and affirmed the validity of the claims made clause, overcoming a case-law tendency of the Courts of first instance that deemed the clause invalid for being in violation of article 1917, of article 2965, as well as of articles 2965, 2932 and 2935 of the Italian Civil Code (see judgement of the Court of Genoa of 8 April 2008; judgement of the Court of Rome, section XIII of 1 March 2006; judgement of the Court of Bologna of 1.10.2002).
In addition to the aspect related to the validity of the claims made clause, the Court also addressed the problem of its “vexatious nature”, stating – contrary to much of recent case-law – that the claims made clause (included the mixed clause) cannot be deemed vexatious.
However, according to the Court, the “mixed” claims made clause must be examined by the Judge to evaluate whether the underlying interests deserve protection under the applicable law and it can be declared null and void in case the result of such evaluation is negative. On this point, the Court clarified that “the assumption that the underlying interests might not deserve protection under the applicable law appears in principle unfounded in relation to the “pure” claims made clauses that, by not providing for any time limitations in relation to their retroactivity, completely devaluate the relevance of the date the unlawful act was committed, whereas the result of the evaluation is more problematic in relation to the so called “impure” clauses”. The Court did not provide any guidelines to establish when the interests underlying the clause deserve protection under the applicable law, instead the Court only stated that “any evaluation as to whether the interests underlying the clause deserve protection under the applicable law must be carried out in practice, and, more specifically, in relation to the aspects of each specific case at stake”.
Moreover, the Supreme Court, by further exploring the effects of declaring the clause null and void, states that, in case the interests underlying the “impure” clause are found to deserve no protection under the applicable law, the statutory framework of civil liability insurance contracts provided for in the Italian Civil Code (i.e. the loss occurrence scheme) will have to be applied. The Court found that the application of such framework is permitted by article 1419, II paragraph of the Italian Civil Code and by article 2 of the Constitution that “allows the Judge to amend and supplement the contract, when this is necessary to guarantee a fair balance of the parties’ interests and prevent or combat the abuse of rights”. Therefore, the declaration of the “mixed” clause being null and void does not render the contract void (as previously argued by the Court of Appeal of Rome with judgement n. 312 of 18 January 2012), instead it only transform the insurance scheme to a loss occurrence.
Finally, also the view put forward by the Court as regards the impact of the claims made clause on mandatory statutory professional liability insurance deserves attention. In this regard, the Court clarifies that article 3, paragraph V of Legislative Decree n. 138 of 2011 requires professionals to underwrite “an adequate insurance policy for the risks related to their professional activity”. According to the Court, the assessment of the suitability of the policy will very hardly have a positive outcome in presence of a claims made clause, that, regardless of how it is structured, exposes the Insured to coverage gaps”.
It is too early to clearly determine the impact of the judgment in the Insurance Industry in Italy and on policies issued before that decision. However, it seems clear that the decision raises a number of questions among the professionals involved in the industry within and outside Italy. The debate is already starting inter alia among the foreign Insurers, brokers and intermediaries currently placing their insurance policies in the Italian market and mainly those EU underwriters carrying out their business in Italy under the right of establishment or the freedom of services principles. It is not a mystery that claims made policies have been introduced in Italy by foreign insurers and achieved significant penetration into contracts due to their capacity to grant coverage for risk which would have been unlikely insured under the common loss occurrence schemes (the only scheme regulated under the current provision of the Italian civil code).
In Italy, claims made policies have never been specifically regulated and their interpretation has always been left to the Courts on a case by case basis.
The decision has the great advantage that for the first time the Supreme Court confirmed that “pure” claims’ made policy are valid and providing coverage for unlimited retroactivity periods, claim made clauses are not considered oppressive (so that under the Italian law they do not need any express approval and acceptance).
However, the judgment will also raise doubts and comments with regards to the so called “mixed” claims made policies (those providing coverage with regards to events occurred in a limited retroactivity period). With regards to that case, it seems that the Court overruled the previous interpretation of those atypical but so common (and successful) coverage schemes.
In particular the new Court’s construction could lead to the risk that a claims’ made clause could be considered null and void ex officio by the Judge under an overall evaluation of the deservedness of the policy. Such a principle (and in particular the risks related to the interpretation case by case by the Judge) could open an area of uncertainty on the validity of the policies already issued in Italy in the “mixed claims made scheme” and would have an impact on the policies to be underwritten in the future.
In this perspective, it is not completely clear whether the latter could be an obstacle in the market and, in particular, in the attraction of foreign insurers in our country. Historically the Italian insurance market has always been one of the most active and relevant within the EU (not only for our tradition because it is told that the first insurance policy was issued in Venice) and, de iure condendo, we strongly suggest the Italian Government to set forth a clear peace of law in order to definitely regulate claims’ made policies also in Italy, avoid any area of uncertainty and grant our Country to continue to keep up with the European Union Insurance Industry.