Surety Insurance Contracts

The legal position of so-called "surety insurance contracts" has been further clarified by the Court of Cassation.

The contracts, or policies, known as "surety insurance contracts" are commonly used in Italy as a means of guaranteeing obligations. There has been much debate over the nature of such contracts and in particular as to whether they are to be classified as a type of "insurance" contract or as guarantees. The question is of some importance as a number of relatively onerous regulations apply to insurance contracts.

The question was recently considered by the Court of Cassation (11/10/94 no. 8295). One of the problems at issue was the effect on the contract of inaccurate statements (or statements not making full disclosure) by the debtor whose obligations under the principal contract are to be guaranteed by the surety insurance. The court, in confirming earlier decisions, stressed the atypical nature of the contract. Although such contracts are in effect a "mixture" of both insurance policy and guarantee, the prevalent aspect is that of guarantee and therefore the rules applicable would be those in relation to guarantees and not those relating to insurance.

Had the contract been classified as an insurance contract then the provisions of article 1892 of the civil code would have been applicable with the result that insurer would possibly have been entitled to have the contract nullified by reason of negligent or fraudulent misrepresentation or lack of disclosure by the insured party.

However, as the contract was held to be a form of guarantee, the rules relating to this kind of contract would be applicable. The validity of the contract was consequently to be evaluated in the light of the general rules governing voidability for mistake or fraud.

Practical pointer: Surety Insurance Contracts have the same nature as guarantees, and can be used by companies, as easily as bank guarantees, to secure their indebtedness.