David Lewin, Managing Director
In recent years insurance companies have most commonly offered professional civil liability insurance through policies based on a claims-made system, rather than on a loss occurrence one. While the loss occurrence system was used more frequently in the past, claims-made policies now are dominant in the fields of professional indemnity, medical malpractice, directors and officers and, of course, product liability insurance.
The economic reasons provided by insurers justifying such a substantial change are quite understandable: the claims-made system allows insurers to cancel/recalculate/reallocate the reserves every year, whereas with loss occurrence policies, insurers are obliged to keep and manage reserves for quite a long time (five to ten years) after the occurrence of the harmful event.
However, the introduction of claims-made policies in Italy may be problematic because the system does not follow specific features of civil liability insurance as provided in the Italian Civil Code.
Article 1917 of the Italian Civil Code
The first paragraph of Article 1917 of the Italian Civil Code states: “In liability insurance 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. Damages deriving from fraudulent acts are excluded…” The wording of this provision supports the fact that the legal framework for the liability insurance contract is designed on a loss occurrence basis. Therefore, insurance contracts based on a different scheme imply a derogation of the Civil Code’s basic framework.
As a general principle, standard contract clauses that provide a limitation to the range of the statutory liability of the offering party are deemed to be unfair. Therefore, they are not valid unless they are specifically approved by the client with another signature in addition to the signature for general conditions.
This is the reasoning that underlies the Supreme Court ruling n.5264/2005, in which the judges affirmed the following principles:
- Claims-made policies are special contracts of third party liability insurance that do not exactly fall within the scope of Article 1917 of Italian Civil Code (which defines the contract of third party liability insurance). Indeed, claims-made contracts cover the consequences of the claim, whereas Article 1917 c.c. refers to a loss occurrence coverage.
- Although not typical, claims-made policies are deemed to be legitimate, since they fulfill some genuine needs arising from the market.
- Notwithstanding the above, the scope of claims-made coverage is somehow less broad than that described in Article 1917 c.c. (which should be considered a minimum requirement). As a result, the Supreme Court ruled that claims-made clauses are to be considered “unfair” and therefore null and void, unless they are not expressly signed for acceptance pursuant to Articles 1341 and 1342 c.c. (Italian discipline of unfair contract terms), in addition to the normal signing of the contract.
In summary, according to the rulings of the Supreme Court, claims-made clauses are potentially unfair, but they are valid if signed twice for specific acceptance.
This position has not always been shared by the courts of the merit (Tribunale di Roma, 1.8.2006; Tribunale di Roma 5.1.2007). These courts issued some drastic rulings that have not been appealed as far as we know, though the content in these rulings is quite revolutionary.
The opinion of these judges is that claims-made insurance, through which an insurance company undertakes to cover damages that have already occurred prior to the inception of the insurance and before the claim is made, is to be considered null and void because the risk has already happened. The only case where it is allowed to insure a past risk is “putative risk insurance,” which is provided for marine claims only. On the contrary, a recent court ruling (Tribunale di Milano 18.3.2010) states the full validity of the so-called “pure” claims-made policies.
In simple terms, claims-made insurance is considered valid as long as all losses deriving from acts or omissions that took place before the inception of the contract are covered, regardless of how far in the past such events occurred. In this situation the Court of Milan found that there is no harm in the fact that damaging events that happened during the insurance period will not be covered unless the claim is made in the same period, since the insured can benefit from the insurance coverage for the past events that are not yet time-barred.
Such policies could be considered unfair or invalid only in cases where the policy features a short period of retroactivity that does not cover the moment in which the harmful event took place.
This ruling does not take into consideration the fact that, in any case, insurers do not normally cover claims related to events that the insured knew about, or ought to have known about, before the execution of the contract.
In Italy the validity of claims-made clauses is still under scrutiny. Currently, judges have taken the following three positions:
- Claims-made clauses are deemed to be unfair contract terms. Therefore, they are valid only if they are specifically accepted in writing (double signature) pursuant to Articles 1341 and 1342 c.c.
- Claims-made clauses are null and void since they tend to cover putative risks.
- Claims-made clauses are valid if they are “pure claim made.” Clauses where claims refer to harmful acts committed prior to the inception of the policy are covered without any limit of retroactivity.
Some have the view that claims-made clauses are deemed to be valid under Italian law, providing the clause determining the subject matter insured states in clear terms that the policy covers the consequences of the claims-made in a certain period of time and not liabilities arising from the commission of certain acts or omission in a given period of time. The occurrence of this situation is described in Article 1917 c.c.
In the former case, the clause would not be considered unfair, pursuant to Articles 1341 and 1342 c.c., since it is not a question of limiting the range of liability already undertaken by the insurance company, but rather of specifying the exact object of the coverage. Of course, as a consequence the amount of the premium must also be proportioned according to the probability that a claim is actually made in the insured period.
Obviously, the position proposed by the Supreme Court holds the most weight at present, although the principle of ‘stare decisis’ is not formally recognized by Italian law. Nonetheless, given the fluctuation of the solutions provided by the courts of the merit, the Supreme Court could provide insurers and other stakeholders with more certainty on this important issue by focusing on the matter in its plenary session.
Click here to have the rest of this series – and other GC Capital Ideas updates – delivered to your inbox
Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.
Guy Carpenter & Company, LLC provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.
Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a result of new information, research, future events or otherwise.
Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.