Italy’s highest court, the Corte di Cassazione (Cassazione) has published a decision concerning claims-made clauses. In this summary, we report on this recent decision and its impact on future rulings by Italian courts dealing with claims-made clauses in insurance contracts.
Prior leading judgement
In Judgment No 9140 dated May 6, 2016 the Cassazione ruled substantially that
- claims-made clauses in insurance contracts depart from the third party liability (TPL) regime, provided for by the Italian Civil Code (which considers only loss occurring policies).
- claims-made clauses with no retroactive date will be valid and effective
- claims-made clauses coupled with a retroactive date are generally valid and effective, but may be challenged under principles of fairness in circumstances where the claims-made regime causes a significant imbalance in the rights and obligations arising under the contract. If this is proven, claims-made policies may be held void under the fairness principle (principio di meritevolezza, principle which is breached when the arrangement of the parties’ interests in the deal is not aligned with the fundamental principles of the Italian legal system).
However, with Judgment No 22437 dated September 24, 2018, the Cassazione changed its position, deciding that
- claims-made policies fall within the Italian Civil Code’s definition of TPL coverage, which is broad enough to include both the loss occurring and the claims-made regime. As such, the claims-made regime has been adopted by the Legislator as a regime to be mandatorily applied in case of professional indemnity medical malpractice insurance (See, art. 10 Law 24/2017) and professional indemnity of professionals such as lawyers (See, art. 3 D.L. 138/2011 and L. 148/2011).
- since the claims made regime is expressly contemplated by art. 1917 of the Italian Civil Code, its validity may not be tested against a principle of fairness; rather, the judge must consider whether or not, in the specific case, the following requirements are met
(i) The parties negotiated the deal in good faith (i.e., the distributor duly informed the client of the specific features of the claims-made regime – including, for example, possible discontinuity in coverage issues, i.e., a gap in coverage in case of subsequent policies underwritten by different insurers). In the event that the judge finds that this requirement is not met, the remedy will be damage compensation.
(ii) The agreement meets the insured’s needs. In the event that the agreement is not aligned with the insured’s needs, then the judge may be asked to amend the terms and conditions of coverage, making use of a “partial invalidity of clause” in order to align the agreement with the insured’s legitimate expectations, which may emerge from a demands and needs test, or by the statutory provisions of law (e.g., in case of professional liability coverage). For example, the judge may consider partially void the policy providing for the retroactive date, and so delete the retroactive clause.
(iii) The agreement does not include any abusive terms, such as a clause that would allow the insurer to terminate the policy in case of loss. In the event that the agreement contains an abusive clause, the judge must declare the clause in question void.
In practical terms, the abandonment of the “fairness test” in favour of a “fair dealing in negotiation test” and “alignment with insured needs test” creates a more predictable and narrower ground of scrutiny for the court.
We therefore consider that this ruling as a step forward for the positive evaluation of the claims-made regime in the Italian legal system. However, this judgment will obligate the insurer to carefully assess the application of claims-made clauses in the context of a demands and needs analysis, which is required under the Insurance Distribution Directive (that entered into force on October 1, 2018). Insurers will have to supervise carefully the use of such clauses to avoid any detrimental impact on the applicable terms of the policy.
We remain at your disposal for any clarification.