The Supreme Court ruling again on the legitimacy of claims-made clauses

On 28 April 2017, the Supreme Court issued a new ruling on the “worthiness” of claims-made clauses included in professional liability policies.

In 2016 the Court acknowledged the legitimacy of claims-made policies, provided that the provisions set for by the policy itself, do not unreasonably limit the insured’s rights.

In the case at issue, the policy provided for coverage only for claims submitted and notified during the policy period. Such clause has been deemed “unworthy” by the Supreme Court and, therefore, shall not be admitted in the Italian insurance market.

The grounds for the Supreme Court decision provide as follows:

• The clause substantially creates an unjustified advantage for the insurer. In fact, the clause allows a hidden reduction of the policy period. Arguably, all damages caused by the insured in proximity of the expiration of the policy, would not be covered because it is unlikely that the damaged party would immediately present a claim and therefore, one of the two necessary conditions for coverage, would not be met.

• The insured would be in a position of undetermined subjugation with respect to the insurer. Firstly, the unworthiness lies in the fact that, should the clause have been admitted, the insured would have been interested in a prompt request for damage compensation: this anomaly, would be in open contrast with the basis of insurance law that necessitates for the covered risk to be an uncertain, future and unwanted event. Secondly, the insured – knowing that a damage was caused by her/his misconduct – would be in the position of either:

• remaining silent and wait for the claimant to present a request for damage compensation. This behavior would cost her/him the indemnity (if presented after the expiration of the policy), or
• soliciting the damaged person to immediately claim damages – this behavior would nonetheless, cause him/her to lose the indemnity for the violation of the obligation to minimize damages as per art. 1915 of the Italian Civil Code.

• Finally, the effect of a claims-made clause as defined above, could force the insured to violate the highest principle of solidarity provided for in the Italian Constitution. If the insured decides to act in good faith, as required by the principles of the Italian Constitution, and therefore, spontaneously pays the damage, the damaged party will never formally request compensation. This would result in a lack of coverage for the insured, because of the absence of the formal request, one of the necessary conditions to receive an indemnity.

It seems that after the first judgement in 2016, which made insurers sigh in relief, this new decision will instead be a challenge for the market: only policies that provide for an adequate coverage will be able to pass the severe test of the Courts.