The Italian Supreme Court rules that insurance policy wording must be clear and precise

The European Court of Justice (ECJ) recently issued a judgment in Case C-96/14, Jean-Claude Van Hove v CNP Assurances SA, establishing that the grammatical correctness of a clause relating to the main subject matter of an insurance contract is not sufficient for said clause to be considered clear and intelligible; the ECJ has found that above all, the wording explaining the scope of the insurance coverage must be precise and transparent.

The court has emphasised the principle that an insurance contract must contain precise and intelligible language so as to allow the consumer to assess the economic consequences of an insurance contract. Otherwise, clauses may be held to be unfair.

In their assessment of unfair wording, the courts must first ascertain that the clause in question concerns the main subject matter of the contractual arrangement. The judge then has the task of assessing whether the clause is transparent and comprehensible.

The Italian Supreme Court has recently ruled on the subject of transparency in contractual wordings1. In this case, the Court confirmed that an insurance contract must be drafted using clear and comprehensible language. Where there is scope for more than one meaning, a judge may not apply the literal meaning if that is not consistent with the parties’ intentions or does not make commercial sense. In this case, he will turn to the other tools for interpretation offered by the Italian Civil Code (such as good faith) that is not consistent with the theoretical meaning, before making recourse to the other tools for interpretation offered by the Italian Civil Code.

The legal principle was reiterated by the Supreme Court relating to a complex dispute that arose when an autoclave (a heated container) used for producing cement was destroyed by an explosion at an industrial warehouse, which caused serious consequences including the death of a worker.

The court examined the insurance contract, which described the insured risk as follows: “(…) the insurance policy covers material damage to insured property caused by explosions or outbursts, which are not caused by explosive devices (…)”. The risk of explosion was defined as “a sudden tear in containers due to the excessive pressure of internal fluids not due to an explosion; the effects of freezing or water hammer are not considered to be an explosion.” The contract excludes compensation for any damage to “machinery or equipment subject to explosion, if the incident was caused by wear and tear, corrosion or defective materials (…)”.

However, during the disclosure stage of the proceedings, it was discovered that the “explosion” was not caused by “excessive internal pressure” but by “a defective closure mechanism on the autoclave”.

Overturning the Court of Appeal decision, the Supreme Court found that the damage was covered by the policy even if the co-insurers had decided that the damage was due to a construction defect or structural cave-in (in particular a “defective handle on the door closing the autoclave”), on the grounds that the wording used in the policy was unclear.

The Supreme Court reasoned that in terms of insurance, indisputable clarity depends on the obligation on both parties to act in the utmost good faith: said doctrine was originally provided for by articles 1175 and 1375 of the Italian Civil Code, which were then supplemented with article 166 of the Italian Insurance Code (paragraph no. 1 : “contracts must be drafted in a clear and comprehensive manner” and paragraph no. 2 “Clauses laying down forfeitures, avoidance, limitations to cover or costs to be borne by the policyholder or insured party shall be shown in highlighted characters”).

In the case at hand, the Supreme Court focused on the meaning of the word “excessive”. They sought to clarify that “the word “excess” from a formal logical perspective is a relative rather than absolute, concept. Nothing can be “excessive” per se; it may only be so in relation to something else, acting as a benchmark”. Therefore, according to the Supreme Court judges, “the contract did not establish in any way that the pressure was “excessive” if it was in excess of the maximum tolerated pressure by the machinery under normal use or if it could also mean the pressure that could “tear” (to use the policy wording) a defective machine”.

Therefore, the Supreme Court ordered the insurers to cover the claimed damage.

To conclude, the main principle expressed by the Italian Supreme Court was that if insurance companies unilaterally provide policies which use unclear or ambiguous language, then under no circumstances should the insured suffer the consequences of any flawed drafting.

As a consequence, according to this decision, any ambiguous clause, unilaterally drafted by the insurer, is to be interpreted to the benefit of the insured.

Although that principle is comprehensible, in our opinion, it must not go beyond the grammatical meaning and go against the meaning of the contractual wording. If the scope of risk is clearly identified, and is written using clear and comprehensible language, it should always be valid.

In this particular case, the term “excessive pressure” should have been interpreted as it was by the insurers, namely as “excessive pressure” compared to the “ordinary” pressure deemed acceptable by the autoclave manufacturer. This is without prejudice to being able to pursue action against the manufacturer.

In conclusion, in light of this latest case law, a simple suggestion for insurance companies doing business in Italy is that they pay close attention to their policy language. We recommend that insurers check that the language in their policies is clear and precise, not just from a grammatical standpoint, in order to avoid claims that any limits are unenforceable. The assistance of local experts in insurance law might be necessary. Insurers should avoid all wording that is generic and ambiguous, and should focus on providing all the necessary additional information required by law, which is clear and precise and is required by policy holders to understand the contents of the policy.

1Supreme Court, Civil Section no. III, judgement no. 668 dated 18 January 2016.