Insurance Loss Payable Clause in leasing agreements

Legal nature, liability, and practical implications

A recent decision of the Milan Court of Appeal (judgment no. 1123/2025) sheds new light on how insurance loss payable clauses ties to financing agreements – specifically leasing agreements.

The Court identifies a distribution of responsibilities between the parties involved (lessor, user, insurance company) that will have significant operational and practical implications.

The Case in brief

The dispute arose after a recreational boat under a leasing agreement was completely destroyed by fire in 2010. When the leasing agreement was signed, the financing company made it a condition that the lessee should stipulate an insurance policy including a loss payee clause requiring the financier’s consent before any indemnity is paid.

The insurance company denied the claim, citing the expiration of the one-year limitation period under Italian navigation law and arguing that no valid action had been taken to interrupt it. The lessee sued the financing company, arguing that the latter, as the party bound by the agreement, was liable for failing to activate the policy rights and, in particular, for the consequent expiry of the indemnity.

The Milan Court held that the claim was statute-barred and, in any case, that the burden of interrupting the statute of limitations through a valid legal act lays with the lessee. The lessee, disagreeing with the decision, appealed the ruling before the Milan Court of Appeal. The Court of Appeal rejected the appeal and confirmed the lower court’s findings. 

The Court’s interpretation

The crucial point of the decision concerns the identification of the insured party. The Court clarifies that the lessee maintains the status of the insured party, being the holder of the risk and the party responsible for the loss of the asset toward the lessor.

The most significant consequence of this construction is the distribution of burdens related to the activation of policy rights. As established by the Court, the lessee, as the insured party, bears the burden of implementing policy rights and must perform, among other things, acts to interrupt the statute of limitations.

The Court’s reasoning aligns with a portion of case law but differs from another part that tend to treat such clauses as agreements in favour of a third party ('contratto a favore di terzi'), thus finding that the lessor is entitled to exercise the rights arising from the insurance policy.

Practical consequences

The ruling could have a significant impact on how clauses of leasing and financing agreements are drafted and managed:

1. Clearer Contractual Obligations for Lessees

Agreements may need to specify in more detail the lessee’s duties in the event of an accident, including timely notification to the insurer and actions to prevent claims from becoming statute-barred—such tasks may be especially burdensome for non-professionals.

2. Stronger Oversight by Financiers

Financing companies may seek the right to approve the terms of the insurance policy, require the inclusion of specific clauses, and oblige lessees to provide full information on the policy during both pre-contractual and execution phases.

3. Enhanced Information Disclosure Requirements

Lessees may face more detailed disclosure obligations toward financiers, designed to mitigate the risk that financiers cannot recover their capital. Such disclosure requirements could be reinforced by provisions defining the lessee's liability in cases of inaction

4. Pricing and risk allocation

Since the financier is not the insured party and has no independent right to claim against the insurer, its exposure increases in the event of an accident that damages the asset. This may result in higher financing costs, more rigorous due diligence processes, and demands for additional guarantees.

Conclusion

Ultimately, the Milan Court of Appeal’s approach could represent a substantial disincentive for the market for financing transactions, due to the increase in financing costs as a natural consequence of the higher risk for the financier of losing the capital invested.