Loan insurance is an essential part of taking out a property loan, but it raises a number of legal questions. Between protection for the lender, guarantees for the borrower and contractual entanglement, this insurance deserves an in-depth examination.
Legal basis and anatomy of an atypical contract
L'credit insurance belongs to the category of group insurance, defined in article L.141-1 of the French Insurance Code. This text describes it as "a contract taken out by a legal entity with a view to membership by a group of persons meeting the conditions defined in the contract".
This seemingly simple definition masks a complex contractual architecture that has long confused borrowers and lawyers alike. The Court of Cassation has had to intervene regularly to clarify the relationships between the various players.
Three protagonists are involved in this montage:
- The insurer offering the risk cover
- The credit institution, as underwriter
- The borrower, who takes out the contract
For the uninitiated borrower, this legal set-up is confusing. As V. Nicolas (Essai d'une nouvelle analyse du contrat d'assurance, LGDJ, 1996), "it is difficult for a borrower who is not a lawyer to understand that he is signing a framework contract negotiated by his lender, who is then the subscriber and who is also the beneficiary of the contract".
Multiple contractual links as a source of confusion
Case law has gradually defined the contours of these contractual relationships. In a judgment of 7 June 1989 (Cass. 1re civ., 7 June 1989, no. 87-14.648), the Cour de cassation confirmed the existence of a direct contractual relationship between the insurer and the policyholder.
But the legal construction does not stop there. The credit institution is considered to be a third party beneficiary of a stipulation pour autrui (Cass. 1re civ., 25 nov. 1997, no. 95-20.780). This arrangement allows the insurer to take the place of the borrower to repay the balance of the loan in the event of a claim.
This legal classification has major consequences:
- The credit institution collects the sums paid by the insurer directly
- The member is released from his debt
- The insurer can take direct action against the member
- The exceptions applicable to the policyholder also apply to the member
This analysis was confirmed in a judgment of 22 May 2008 (Cass. 1re civ., no. 05-21.822).
The ambivalent role of the credit institution
The credit institution occupies a special position in this arrangement. It combines several legal qualities:
- Group insurance policyholder
- Lender
- Beneficiary of the stipulation for third parties
This hybrid position explains the gradual strengthening of the obligations imposed by case law.
The policyholder is therefore required to provide pre-contractual information. In a ruling by the full Court of Cassation on 2 March 2007 (Cass. ass. plén., no. 06-15.267), the Court of Cassation stated that "a banker who offers a loan to a customer who has taken out a group insurance policy to cover all or part of his commitments in the event of the occurrence of various risks is obliged to inform the customer that the risks covered are appropriate to his personal situation as a borrower".
Simply providing a notice is not enough to satisfy this obligation. The underwriter must analyse the borrower's personal situation and guide them towards suitable cover.
Practical issues for borrowers
Legal analysis of creditor insurance is not just a theoretical exercise. It has practical consequences for the borrower.
Firstly, in terms of information. L'obligation of the policyholder is a lever for borrowers who are poorly advised. Case law punishes an underwriter who fails to draw the policyholder's attention to the consequences of a false declaration (Cass. 1re civ., 14 Oct. 1997, RGDA 1997, p. 1069).
Secondly, concerning changes to the contract. Article L.141-4 of the Insurance Code requires the policyholder to inform members in writing of any planned changes, with the option of cancelling their membership.
Finally, for termination of the contract. Since Law no. 2017-203 of 21 February 2017, policyholders have been able to cancel their loan insurance contract annually and choose another insurer, subject to equivalence of cover.
These changes in legislation and case law reflect a gradual rebalancing of contractual relations in favour of the borrower. Nevertheless, knowledge of the legal mechanisms is still essential if you are to protect your rights effectively.
Are you considering buying a property or experiencing difficulties with your loan insurance contract? Our lawyers specialising in insurance law will help you analyse your contracts and defend your interests. Contact us for an initial appointment.
Sources
- Insurance Code, Article L.141-1 et seq.
- Cass. 1st civ. 7 June 1989, no. 87-14.648
- Cass. 1st civ., 25 Nov. 1997, no. 95-20.780
- Cass. 1st civ., 22 May 2008, no. 05-21.822
- Cass. ass. pl., 2 March 2007, no. 06-15.267
- Law no. 2017-203 of 21 February 2017
- V. Nicolas, Essai d'une nouvelle analyse du contrat d'assurance, LGDJ, 1996
- J. Kullmann, note under Cass. 1re civ. 14 Oct. 1997, RGDA 1997, p. 1069
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