A very recent ruling by the Italian Court of Cassation (No. 3173 of 18 February 2016) has established that the stipulation of a limit does not constitute an essential element of a civil liability insurance contract.
The ruling provides an interesting opportunity for further considerations on the importance of setting out clear provisions on the limits and sub-limits in civil liability policies and, particularly, the burden of proof concerning their application.
According to the Court’s ruling, the limit in a third party liability insurance represents the maximum liability of the insurer and, in this respect, performs the same function as the value of the insured item in the first party insurance.
However, whereas the value of the insured item in the first party insurance does constitute an essential element of such kind of insurance, the same cannot be said with regard to third party liability insurance.
In fact, overinsurance is not permitted in first party insurance (art. 1908 of the Italian Civil Code), a fact that in itself reflects the principle of indemnity, essential in this type of insurance. A lack of agreement on the value would distort the purpose of the contract to the extent that it would enable the insured to be compensated for an amount greater than the value of the insured item.
According to the Court, the notion of over or underinsurance in civil liability insurance is inconceivable, and it is left to the parties themselves to agree the amount of the guaranteed limit of liability. "A third party liability insurance contract could, therefore, be drawn up for any limit whatsoever, without this affecting its nature or purpose. Likewise, a third party liability contract could be drawn up for an unlimited maximum amount, something which is not unheard of in commercial practice. Consequently, the limit of liability in civil liability insurance does not constitute an essential element of a contract, since a contract might effectively be drawn up without establishing any limit of liability at all”.
The existence of the limit of liability and its extent – the Court stated – do not constitute the elements on which the right to indemnification of the insured is based, but instead the elements limiting the insurer's exposure.
As such, they must be stated and demonstrated by the insurer, in accordance with art. 2697 of the Italian Civil Code.