The Supreme Court for civil matters, sitting in plenary session, has issued a judgment (Decision 18/2015) on the validity of 'claims-made' policy clauses. Ending a long period of judicial uncertainty, the Supreme Court ruled that, insofar as insurance contracts covering professional risks are concerned, the claims-made principle is fully valid and enforceable. The insurance market has thus breathed a sigh of relief.
The Supreme Court rules in plenum and in nine chambers. One of the plenary session's tasks is to ensure the coherence of jurisprudence generated by the lower civil courts by interpreting the law on important issues where the courts deviate in their approach. In this context, the Supreme Court's Civil Law Chamber A1, first seized by the claimant's request for cassation, referred two of the claimant's reasons for reversal of the Court of Appeal decision to the plenum.(1)
In the framework of bankers' blanket bond cover, the underwriter issued an employee fidelity policy that contained the following language:
"this policy applies to a loss which was discovered by the insured during the policy period. Discovery takes place when the insured acquires knowledge of facts which would cause a reasonable person to assume that some loss covered under this policy has or is about to occur… this policy does not cover any loss which was not discovered during the policy period and any loss which occurred prior to the retro-active date mentioned in the schedule… it is a condition precedent to the insured's right to be indemnified under this policy, that the insured reports in writing to the insurer any loss discovered as soon as practicable and in any case within 14 days from discovery date."
An employee of the insured bank embezzled a considerable amount of money. The insured, as claimant, never disputed the fact that while the actual embezzlement occurred during the policy period, it was discovered and reported to the underwriter long after the policy period had expired.
The claimant put forward two primary arguments in its request for cassation. The claimant first contended that the policy's discovery period clause was invalid under the law governing insurance contracts (Law 2496/1997). Article 7.1 of this law states that "[t]he policyholder shall notify the insurer of the occurrence of the insured event within eight days of the date on which the policyholder acquired knowledge thereof". Moreover, Article 7.2 states that "[t]he wilful violation by the policyholder of the obligations set out in paragraph 1 of this Article shall grant the insurer the right to claim damages". The claimant therefore alleged that any policy language that limits the insured's right to claim against the underwriter by establishing a timeframe for reporting the loss other than that stated in Article 7.1 cannot be validly agreed by the parties. According to the claimant, the policy in question imposed on the insured a duty to report, within the policy period, a loss of which it may become aware much later. This constituted an impermissible compromise of the insured's interests, since Article 33.1 of the law states:
"Any and all acts which have the effect of limiting the rights of the policyholder, the insured or the beneficiary of the indemnity shall be null and void, unless otherwise specifically stipulated in this Law. This shall not apply to insurance for the carriage of goods, credit insurance or guarantee insurance, or marine or air insurance."
On this basis, no agreement which limits the insured's rights can validly be made, with the exception of agreements relating to one of the five commercial risks mentioned in Article 33.1 or cases in which the law specifically allows for such.
The claims-made principle was the main legal topic addressed by the first and second-instance courts when dismissing the claimant's case. The claimant's second argument was that this principle was completely irrelevant to the present case, as it is conceivable only within the framework of liability insurance, where the underwriter may have to maintain reserves for a long time after the policies have expired. In the litigation at hand, a 'first-party' policy or 'own-risk' cover had been provided (ie, employee fidelity) and liability insurance was never invoked. No third party ever claimed any amount from the insured. The sole issue was whether the underwriter could lawfully be released from its obligation to indemnify, as the loss was discovered by the insured after the end of the discovery period granted under the policy.
In response to the claimant's two arguments, the defendant insurer first cited Articles 7.5 and 7.6 of the law:
"7.5) The insurer shall not be obliged to pay the insurance indemnity if the insured event, in case of non-life insurance, occurred due to wilful misconduct or gross negligence of the policyholder or the insured, the beneficiary of insurance, or the persons dwelling with any of them, or their legal or other representatives, or third parties entrusted professionally to safeguard the insured item… 7.6) The terms of the policy may provide for an increased number of cases in which the insurer's liability shall be excluded, if the policyholder or the insured concludes the policy with a view to covering professional risks."
The defendant alleged that Article 7.6 is a special provision (in the sense of Article 33.1) that allows the parties to agree on a limitation of the insured's rights if the latter's professional risks are covered by the policy. According to the defendant, this stipulation is clear and any attempt to construe it differently would be aninterpretation against the letter of the law that would be difficult to uphold. The claimant disputed this contention, holding that Article 7.6 should be read together with Article 7.5 and that the former applies only to the provisions of the latter – that is, the sole aim of Article 7.6 is to allow parties to deviate from the degree of fault described in Article 7.5.
Further, the defendant argued that the insured's compliance with its obligation to notify the insurer within eight days of becoming aware of the loss (pursuant to Article 7.1 of the law) was not the criterion for the insurer's liability, as the claimant contended; this specific obligation was merely a duty of timely notice upon discovery of the loss. According to the defendant, the decisive issue was whether the loss is discovered within the policy period. If it is not – as in this case – the insurer's liability cannot be triggered, as the risk would fall outside the contractual limits agreed by the parties.
The defendant further contended that although the claims-made principle is linked to liability and not to first-party policies, it is not inconceivable that this principle could be applied by analogy to first-party insurance. In certain types of first-party cover, the insured may become aware of a loss suffered long after the event causing the loss has taken place. This is particularly true in crime insurance, where the insured will become aware of (for example) its employees' fraudulent acts long after they occurred, especially when it comes to large credit institutions. For this reason, the international insurance market often offers crime coverage of bankers' blanket bond policies on either:
- a 'loss discovered' basis, which covers losses discovered by the insured during the policy period and is conceptually similar to the claims-made policies of the liability cover; or
- a 'loss sustained' basis, which covers losses that occurred during the policy period (and that are usually also discovered in the same period) and resembles occurrence-type liability policies.
Risk carriers – being aware that, in crime insurance as in liability insurance, their own liability can be triggered well after the end of the policy period – have sought to manage their exposure through the loss discovered/claims made and loss sustained/occurrence wordings, respectively.
The plenum's judge-rapporteur issued his recommendation a few days before the hearing. He recommended that the claimant's position be accepted by the Supreme Court and that the underwriters be found liable to indemnify the insured. However, in a rather unusual move, the plenary session rejected the judge-rapporteur's recommendation (albeit not unanimously) and dismissed the claimant's cassation request with regard to the two reasons for reversal that were submitted to the plenum. It then remanded the case to the chamber for examination of the other two reasons for cassation invoked by the claimant.
The decision did not address the issue of whether the examined policy was rightfully designated a claims-made policy by the lower courts and the referring chamber. The Supreme Court continued to refer to this policy as a claims-made policy, since:
"the occurrence of a harmful event during the policy period does not constitute a sufficient condition for the insurer's liability to be triggered, but the insured must also, during the same period, claim the insurance amount from the insurer, or, in a more lenient variation, report the occurrence to the insurer, thus having to discover the occurrence during the policy period (loss-discovered clause)."
With this language, the Supreme Court essentially placed the loss discovered concept within the framework of the claims-made principle.
A number of other critical issues were addressed in the decision:
- The wording of consumer policies is subject to the protections provided by Article 33.1 of the law. The insured consumer is contractually the weakest party and its rights cannot be limited beyond what is provided in the law (ie, unless the law itself allows for such limitation under specific circumstances).
- In claims-made or loss discovered policies, the insured's obligation to discover and report the loss to the underwriter does not constitute a mere "behavioural duty" of the insured (like the notification under Article 7.1 of the law), non-compliance with which will not affect the insured's right to claim indemnification. According to the court, "[i]t constitutes a condition, the fulfilment of which is necessary for the validity of the insured's claim against the underwriter".
- Art. 7.6 of the law is a standalone provision and does not qualify the content of Article 7.5. This grants the parties to a professional risk insurance contract the freedom to agree on terms exempting the insurer's liability beyond the provisions of the law.
According to the Supreme Court, a first-party policy with a discovery clause (in this case, a crime policy with a 'loss discovered' clause) falls within the broader concept of claims-made policies. Despite the qualitative difference between first-party risks and third-party liability risks, the core reasoning behind the market's invention of these two types of clause is quintessentially the same: the inevitable time lag between the factual element of the loss-generating event and the manifestation of its consequences (ie, the third-party claim or the discovery of monetary loss). The grounds for implementation of discovery periods in both cases are identical to those for liability and first-party policies – they address the 'incurred but not reported' problem, as they contain the claim potential after expiration of the policy period, allowing insurers to release or reallocate reserves much sooner than they would have had the policies been based on the loss occurrence or loss sustained concept. Besides, it is widely accepted that loss discovered polices are similar to claims made liability policies, while loss sustained policies are akin to occurrence-triggered liability policies. Naturally, the decisive parameter for obtaining maximum benefits for both parties to the insurance contract in claims made and loss discovered policies is to intelligently and equitably establish what constitutes a claim and/or discovery.
The decision also reaffirms a basic principle of claims-made (and reported) policies, which also applies to loss discovered policies: the notice to the insurer of an underlying claim and the discovery (and report) of a loss are not simple behavioural duties of the insured (whose breach may have no impact if the insurer's position is not compromised); instead, they are the criteria for whether the underwriter's liability is triggered (ie, they define the scope of cover). If the claim is not made and reported to the insurer in liability risks and if the loss is not discovered and reported in first-party risks, the injury suffered by the insured falls outside of the scope of cover that the underwriter has provided.
Finally, the decision establishes that Article 7.6 of the law allows parties to an insurance contract covering professional risks to limit the insured's rights described in the law, thus ending a period of uncertainty on this critical matter for the insurance industry. Therefore, under Greek law, claims-made and loss discovery clauses can validly be agreed by the parties in professional risk insurance policies.
For further information on this topic please contact Athanassios Lambrou at Zemberis, Markezinis, Lambrou & Associates by telephone (+30 210 363 6016) or email (firstname.lastname@example.org). The Zemberis, Markezinis, Lambrou & Associates website can be accessed at www.zmlaw.gr.
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