Italian Supreme Court rules on the nature of unit-linked policies

On 12 February 2024 the Italian Supreme Court issued ruling no. 3785 which contains, in its legal arguments, interesting statements on the nature of unit-linked policies. In summary, the principle of law affirmed by the Supreme Court is as follows:

"Having regard to Court of Appeal factual finding, which excluded any social security component in the unit-linked policy at issue, the Court of Appeal’s conclusion on the inapplicability of the protections provided for by Article 1923 of the Italian Civil Code is fully consistent, which are justified, in the light of the judgment of the Court of Cassation no. 8271/2008, only when the financial component is inseparably accompanied by the social security component, but not when the social security component is totally excluded, as in the present case."

This is followed by a systematic analysis of the judgment in question.

The judgement was issued following an appeal against the judgement of the Court of Appeal of Venice, which denied the social security nature of a unit-linked policy submitted to it, holding that it represented a mere financial instrument similar to a mutual fund.

The Supreme Court recognized the importance of the question relating to the nature of unit-liked policies and agreed with the conclusions of the Court of Appeal on the basis of the following.

First of all, the court identified the social security purpose as the dividing line for qualifying a unit-linked policy as a life insurance contract or not. This was previously established by the same court's ruling in United Sections no. 8271 of 2008. It’s the social security purpose, implemented in life insurance policies through the accumulation of capital so as to guarantee the insured an annuity, that justifies the sacrifice of creditors provided for by Article 1923 of the Civil Code a provision that has been held in doctrine to limit the debtor's liability. The provision recognizes in it an express derogation from the principle established by Article 2740 of the Civil Code, with the consequence that the life insurance policy benefits from a favourable discipline not because it is formally an “insurance product” but because it fulfils a particular function of supplementary welfare provision with respect to the compulsory one.

At this point, the court recalled that the doctrine has classified unit-linked policies into several categories according to their different features, most of which relate to the premium refund guarantees granted to the insured. In particular:

• the “guaranteed unit-linked” guarantee the return of capital to the insured, with the possibility of a minimum surcharge;
• the “partial guaranteed unit-linked” provide the policyholder with a guarantee of only partial repayment of the premiums paid; and
• “pure unit-linked policies” in which the sum payable by the insurer depends solely on the value of the “end-to-end” connection to the underlying value of the investment units.

In the case of “guaranteed” and “partial guaranteed” policies, it’s clear how the insurer assumes a demographic risk, in the sense that, when an event occurs pertaining to human life, the insured is always paid the sum of money guaranteed at the time of the contract, even regardless of the underlying value of the mutual fund units, which may have decreased with respect to the premiums paid. In “pure” unit-linked policies, on the other hand, the investment risk is fully borne by the insured, with the consequence that, in the event of the value of the units falling to zero, nothing is owed by the insurer.

In Article 2 of Legislative Decree No. 209/2005 (Private Insurance Code or CAP), the legislator decided to include in the category of class III life insurance policies not all unit-linked policies, but only “guaranteed” or “partial guaranteed” policies, since the demographic risk was deemed to be an unavoidable requirement. It follows that where the investment risk lies entirely with the insured, the demographic risk is non-existent.

The court again affirmed what it had already stated in its previous judgment no. 6061/2012; that a case-by-case assessment by the court of merits is necessary to determine whether a unit-linked policy is characterized by the presence of demographic risk.

The assessment cannot be reviewed in the court of legitimacy, except for a defect of reasoning in the terms of the new strict wording of article 360, paragraph 1, number 5, of the Code of Civil Procedure, as interpreted by the United Sections of this Court in judgment no. 8053/2014.