Credit insurance vs bond insurance: understanding the differences

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These two insurance mechanisms protect commercial transactions, but they operate differently. Their confusion leads to costly strategic errors for companies.

Credit insurance: main features

Credit insurance protects the creditor-seller against the risk of non-payment. Creditors take out this insurance to protect themselves against the insolvency of their customers.

According to V. Nicolas, professor at the Faculty of Toulon: "Credit insurance can be defined as an insurance system that enables creditors, in return for the payment of a premium, to cover themselves against the non-payment of debts owed by pre-identified individuals who are in default of payment.

In a ruling dated 17 January 1950, the Court of Cassation confirmed the legal classification of this contract as insurance.

Credit insurance has two distinct components:

• Internal credit insurance (domestic market)
• Export credit insurance (international trade)

The French Insurance Code classifies credit insurance in class 14 of article R.321-1.

Bond insurance: special features

Surety insurance is fundamentally different from credit insurance. It is taken out by the debtor-buyer and replaces other forms of surety that the creditor may require.

Ch. Gavalda, in a study published in 1974, highlights this essential characteristic: "Credit insurance is not taken out by the selling creditor, but this time by the debtor, the buyer. It replaces any other guarantee, in particular a real guarantee, that the creditor may have requested.

The French Insurance Code classifies surety insurance in class 15 of article R.321-1, which is distinct from credit insurance.

The two contracts also differ in their scope. Bond insurance is frequently used for guarantees required by public authorities.

Fundamental differences

There are three main distinctions between these contracts:

1. Legal nature
   • Credit insurance: main contract
   • Bond insurance: accessory contract linked to the principal obligation
2. Contractual structure
   • Credit insurance: a synallagmatic and onerous contract
   • Bond insurance: unilateral contract, traditionally free of charge
3. Purpose of the commitment
   • Credit insurance: the insurer pays its own debt
   • Surety insurance: the insurer pays someone else's debt

Case law has clearly established this distinction. In two rulings of 15 May and 30 October 1936, the Riom Court of Appeal stated that : "In credit insurance, the insurer does not pay someone else's debt, as in a surety bond, but pays its own debt.

This position was confirmed by the Paris Court of Appeal on 23 January 1937.

Historical development of the distinction

The dividing line between credit insurance and bond insurance has changed. For a long time, the question of whether banks or insurance companies could offer these products was divisive.

The Renaudin arbitration of 6 October 1952 was a turning point. It classified certain transactions as banking and others as insurance.

European directives subsequently changed the legal landscape. Directive 87/343 of 22 June 1987 and Directive 88/357/EEC of 22 June 1988 authorised insurers to offer all forms of credit insurance.

Article L.511-6 of the French Monetary and Financial Code now allows insurance companies to carry out banking transactions, blurring the historical distinction between the two sectors.

A contract must be correctly classified in order to determine the applicable legal regime. An error in qualification can lead to the application of inappropriate rules in the event of a dispute.

Our firm advises companies on the choice between credit insurance and bonding insurance. We analyse your specific needs to identify the right solution for your business. Contact us to secure your commercial transactions.

Sources

• J.-Cl. Droit bancaire et financier, Fasc. 800: Internal and export credit insurance, V. Nicolas
• Insurance Code, articles R.321-1, L.111-6, L.112-2, L.112-4
• Monetary and Financial Code, article L.511-6
• Cass. com. 17 Jan. 1950: JCP 1951, II, 5998
• CA Riom, 15 May and 30 Oct. 1936: DP 1936, 2, 113
• CA Paris, 23 Jan. 1937: RGAT 1937, p. 319
• Renaudin arbitration, 6 October 1952
• Directive 87/343/EEC of 22 June 1987
• Directive 88/357/EEC of 22 June 1988

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