Facts
Decision
On January 10 2012 the Court of Milan (XII Division) ruled on various legal issues affecting professional indemnity (PI) insurance policies, including claims-made rules and prior knowledge/non-disclosure issues.
A former statutory auditor of a company which had been declared bankrupt was found jointly and severally liable, together with the other former statutory auditors and directors, for failure to exercise control over the management of the company in respect of a multimillion-euro claim brought by the receiver.
The statutory auditor concerned had timely notified its insurer of the above claim and sought the relevant indemnification under its PI policy. However, the insurer denied coverage based on the following main arguments:
- In the absence of a retroactive period provided for by the policy, the latter (governed by the claims-made rule) cannot cover claims relating to wrongful actions committed before the inception date. In the case at hand, the wrongful actions contested to the insured had been committed before such date.
- The insured failed to notify the insurer at the time of the inception of the policy about the previous bankruptcy event, and such failure amounted to a material non-disclosure under Section 1892 of the Civil Code, which provides that the insured's rights under the policy are forfeited in the event of material non-disclosure, either intentionally or with gross negligence.
The court ruled in favour of the insured, stating that:
- pursuant to a Supreme Court decision (3527/2010), the claims-made clause is, in general terms, valid and does not conflict with mandatory provisions of law (for further details please see "Court of Milan clarifies validity of claims-made clauses");
- considering the nature of the claims-made clause, even in the absence of a stated retroactive date (as in the case at hand), any claims-made policy must be interpreted as covering claims notified during the policy period, even if they arose from wrongful actions committed before the policy period; and
- in contrast to previous decisions of the Court of Milan (VIII Division), an insured's failure to notify that it had been a member of the board of statutory auditors of a bankrupt company before the inception date does not necessarily amount to a material non-disclosure, since claims by receivers against former statutory auditors and directors further to the declaration of bankruptcy are not an automatic consequence of the latter. In any event, the burden of proving that the insured failed to notify the above through fraud or gross negligence lies with the insurer, which had failed to discharge it in the case at hand.
However, the court rejected the claim for damages brought by the insured against the insurer. This claim was based on the argument that the insurer had mismanaged the claim by preventing the insured, due to the above denial of coverage, from entering into a favourable settlement agreement with the receiver before the final decision - an agreement which would have enabled him to avoid the subsequent attachment proceedings against his properties.
According to the court, the insured failed to provide evidence of the actual availability of the receiver to enter into such a settlement agreement, and therefore rejected the claim for damages.
For further information on this topic please contact David Marino or Marco Dimola at DLA Piper Italy by telephone (+39 02 80 61 81), fax (+39 02 80 61 82 01) or email ([email protected] or [email protected]).