Let’s take a recent ruling of the Italian Supreme Court10 as a starting point for a brief overview on the consequences of failure to pay an insurance premium following the first one.
The question we are going to try and answer here - and to which the Italian Supreme Court answered very clearly - is whether the failure to pay an insurance premium following the first one and the consequent termination of the contract, render the insured uncovered with respect to a claim occurring within the so-called «grace period» or «forgiveness period» (i.e. fifteen days of the agreed deadline for paying the premium)?
The case on which the Italian Supreme Court ruled concerned a liability insurance policy of a construction company; nevertheless, the principles laid down by the Court apply to any kind of liability insurance policy11, which is why they are worth being dealt with here.
The case at issue relates to the death of an employee of the insured company in an accident at work at a construction site. The company owner was found guilty of manslaughter and convicted under criminal law to pay to the plaintiffs an interim compensation precept of Euro 150,000.00 and Euro 170,000.00 to INPS.
The company then enforced its liability insurance policy in order to be held harmless from the above payments, while the insurance company alleged the unenforceability of the policy for having expired.
More specifically, the insured argued that the insurance policy was valid and effective, as the claim occurred within fifteen days of the agreed deadline for payment of the insurance premium («grace period» or «forgiveness period», see above); the insurer in turn replied that the insurance premium was paid after the fifteen-day deadline, that is, when the insurance coverage was no longer in force.
The court upheld the insurance company’s claim in both first and second instance, because, on the one hand, (i) the circumstance that the premium was not for the first, but for the following, year, involved the suspension of the contract effectiveness under Article 1901 of the Italian Civil Code and (ii) the claim occurred in the period of the contract’s «extended validity» (the aforesaid fifteen-day period) and, on the other hand, because (iii) the payment of the premium occurred six months after the contract’s expiry date, with consequent automatic termination of the contract by operation of law.
The applicable statutory provision in this regard is Article 1901 of the Italian Civil Code, which reads as follows:
«If a policyholder fails to pay the premium or the first instalment thereof as stated in the contract, the insurance shall be suspended until midnight on the day when the payment is made. If a policyholder fails to pay any of the subsequent premiums within the deadlines agreed upon, the insurance shall be suspended from midnight on the fifteenth day following the expiry date.
In the cases mentioned in the two preceding paragraphs, the contract shall be terminated by operation of law if the insurer does not bring an action for collection within six months of the deadline for payment of the premium or any instalment thereof; the insurer shall only be entitled to the payment of the premium covering the current period of insurance and reimbursement for expenses. This provision shall not apply to life insurance».
Trial courts interpreted the above rule to say that the termination effect involved in the failure to pay an insurance premium within six months after the relevant deadline can even overwhelm the operation of the insurance policy during the grace period. In other words, according to trial courts, non-payment of an insurance premium within six months after the expiry thereof may trigger termination of the contract with effect from the insurance premium due date.
The Supreme Court found such interpretation incorrect.
Indeed, according to the Italian Supreme Court, the non-payment of an insurance premium following the first one shall trigger - pursuant to Article 1901, second paragraph, of the Italian Civil Code - the suspension of the insurance cover only after the expiry of the grace period and not right away. As emphasised by the Italian Supreme Court, said principle «applies irrespective of whether the insurance premium due is paid within the specified period, and even if the infringement of the insured persists or the contract is subsequently terminated pursuant to Article 1901, third paragraph of the Italian Civil Code, which means the retrospective effect of such termination will be effective from the expiry of the grace period, and not from the premium due date».
The above therefore leads to the conclusion that that the fifteen-day period of extended validity of an insurance cover is basically a simple extension – to all intents of law – of the cover concerned. As clarified by the Supreme Court, such extension is irrespective of whether the following instalment of the insurance premium be paid or not.
This is clearly good news to all insured.