Italian court hands down surprising decision on validity of claims-made clauses

“Claims-made” clauses are unfair and therefore invalid to the extent that claims made after the expiry of the policy period for conduct carried out during the policy period are not covered. Claims-made clauses must therefore be converted to “loss occurrence” clauses for these types of cover.

This was the surprise ruling of the Third Division of the Corte di Cassazione, the court of last resort, on 28 April 2017. It all hangs on an interpretation of the principle of fairness.

The Court acknowledges the previous decisions of Italy’s most authoritative court, the Joint Divisions of the Corte di Cassazione. The Joint Divisions stated that claims-made clauses are valid and effective apart from specific instances where a claims-made clause demonstrably breaches the basic principle of fairness (the principio di meritevolezza). Italy’s Consumer Code states that a breach of the fairness principle occurs when the clause in question “causes a significant imbalance in the rights and obligations arising under the contract, to the detriment of the consumer” (art. 33).

The Court criticized the validity of the basic mechanism underlying claims-made clauses which confines liability to claims made during the currency of the policy for the following reasons:

1. Time pressure. It is, in practical terms, highly unlikely that an injured party will make their claim immediately. Damage that occurred during the latter part of the policy period will therefore not be covered. This unfairly reduces the scope of coverage.
2. Imbalance of power. The insured party’s right to indemnity is – unfairly – conditional upon the will of the injured party. Unless and until the injured party makes their claim, no indemnity is due to the insured. The insured party cannot kick start a claim by the injured party: that would be in breach of the insured party’s loss mitigation obligation.
3. Nudge toward poor behavior. The insured party is more likely as a result to adopt behavior in breach of ‘social solidarity’; in particular, the wrongdoer/insured party will have no incentive to offer any spontaneous compensation for the damage (before the injured party makes their request). By doing so, they would forfeit their right to indemnity.

Judgment 10506 formally acknowledges that claims-made clauses are valid as long as they do not breach the fairness principle but it goes on, in its substance, to depart radically from this position. It undermines the validity of claims-made clauses in the Italian jurisprudential framework.

Possibly not a great deal. Bear in mind that Judgment 10506 was handed down by the Third Division, not the more authoritative Joint Divisions. And that there has been a series of court decisions over the course of the last decade which have paved the way to the opinion that claims made clauses are generally valid in Italy. And, finally, the claims made regime was recognized as ‘valid and legitimate’ in the Ministerial Decree of September 2016 relating to mandatory insurance for legal professionals.

Given this scenario, the question remains whether Judgement 10506 will represent a major shift in the jurisprudence regarding the validity of the claims made regime, or whether, instead, it will be seen as a minor deviation in the trend.