Loan insurance: issues and developments

Got your mortgage? Congratulations. But don't forget loan insurance, which is often relegated to second place during negotiations, but is nonetheless essential. It can account for a substantial proportion of the total cost of your loan, sometimes up to 30% or even more depending on your profile and cover. It plays a fundamental role in securing the repayment of your loan over the long term.

A central element of the mortgage

Borrower's insurance guarantees repayment of the loan in the event of certain unforeseen events, such as the borrower's death, disability or loss of employment. Although the bank cannot legally impose it as the sole condition for granting credit, in practice it almost systematically requires insurance cover to protect against payment default.

Given its importance and cost, the legislator has gradually tightened the rules governing this type of contract in order to provide better protection for borrowers. Understanding mortgage reform and your rights has therefore become essential for navigating this complex landscape. The economic stakes are also considerable. The French loan insurance market is worth several billion euros a year, and the banks, via their insurance subsidiaries or partnerships, derive significant income from it in the form of commissions. This situation has led to a number of reforms aimed at opening up this market to competition, to the benefit of consumers.

The standardised information sheet: your comparison tool

Even before making a definitive loan offer, the bank is obliged to provide you with a Standardised Information Sheet (SIS) on the insurance it is offering. This obligation derives from article L. 313-8 of the Consumer Code and applies from the very first loan simulations. The FSI is an essential document that should enable you to clearly understand the cover offered and to compare offers.

In accordance with article R. 313-9 of the French Consumer Code, this sheet must specify in particular:

• Definition and description of the types of cover offered (death, disability, incapacity, etc.).
• Where applicable, the characteristics of the minimum guarantees required by the lender to grant the finance.
• The types of cover you plan to choose and the percentage of the capital to be covered.
• A personalised, detailed estimate of the cost of the proposed insurance, including :
  • The cost in euros per period (monthly, quarterly, etc.).
  • The total cost of the insurance in euros over the proposed term of the loan.
  • The Annual Percentage Rate of Insurance (APR), which compares the cost of insurance with the Annual Percentage Rate (APR) of the loan.
• A clear statement of your right to take out insurance with the insurer of your choice (delegated insurance) and the conditions for exercising this right.

Unfortunately, some banks may be less diligent in providing or explaining this information sheet. Without a complete and clear ISP, it is difficult for you to effectively compare the offers on the market and take advantage of the competition. Failure to comply with this obligation to provide pre-contractual information is not without consequences: article L. 341-26 of the French Consumer Code states that a lender who grants credit without providing the FSI may forfeit the right to interest, in full or in the proportion determined by the court.

Freedom of choice of insurance: an established principle

The Lagarde Act of 2010 marked an important step forward by enshrining the principle of unbundling loan and insurance contracts. Article L. 313-30 of the French Consumer Code is very clear on this point: you are free to choose your insurer. This is known as delegating insurance.

In theory, the bank cannot refuse an external insurance contract that you present if it offers an equivalent level of cover to that offered under its group contract.

In practice, however, there can be obstacles to exercising this freedom. Some institutions may be tempted to reject alternative contracts for unclear or questionable reasons, or to impose delegation fees (which are prohibited) or to complicate the process to discourage borrowers. In response to these practices, the Lemoine Act of 2022 strengthened the penalties. Article L. 313-32 of the Consumer Code now states that an unjustified refusal or delaying tactics by a bank may result in an administrative fine of up to €15,000. Checks by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) have also been stepped up to ensure that this fundamental right is respected.

The right of cancellation and substitution: freedom extended over time

Legislators have gradually extended the scope for borrowers to change their insurance during the term of their loan, recognising that needs and offers are evolving. The legal framework has undergone several key stages:

• La Hamon law (2014) first opened up a right of cancellation and substitution during the 12 months following the signature of the loan offer.
• The amendment Bourquin (incorporated into the Sapin II Act in 2017, applicable in 2018) then extended this right, allowing annual cancellation on each anniversary date of the loan contract.
• Finally, the Lemoine law (2022) marked a decisive step forward by introducing a infra-annual right of cancellation. In concrete terms, from 1 September 2022 for all policies (and from 1 June 2022 for new policies), you can cancel your loan insurance by at any timewithout waiting for the anniversary date.

Article L. 113-12-2 of the Insurance Code (and its equivalents in the Mutual Code) governs the terms and conditions of this cancellation. Notification may be made by simple letter or any other durable medium (email, secure customer area, etc.). The bank then has 10 working days to examine the proposed new contract and notify you of its decision (acceptance or reasoned refusal). If it accepts, the amendment to the loan contract must be issued free of charge.

This major legislative change has a clear objective: to stimulate competition and enable borrowers to make substantial savings. According to estimates by the ACPR and consumer associations, changing insurance during the course of a loan can represent savings of several thousand or even tens of thousands of euros over the total term of the loan, depending on the borrower's profile and the outstanding capital.

The equivalent level of cover: the sticking point

The key concept that determines the possibility of substituting insurance is the "equivalent level of cover". It is often on this point that discussions, or even disputes, with the bank can arise. The law, in particular article L. 313-30 of the Consumer Code, simply states that the lender cannot refuse a contract offering this equivalent level of cover, without defining it precisely.

To provide clarification, in 2015 the Comité Consultatif du Secteur Financier (CCSF) drew up a list of objective criteria for comparing cover. This list includes 18 general criteria, to which can be added 4 specific criteria for Total and Irreversible Loss of Autonomy (PTIA) cover and 8 criteria for Temporary Total Disability (ITT) and Permanent Total Disability (IPT). These criteria include the percentage insured, the type of cover (lump-sum or compensation), excess periods, cover for back or psychological conditions, cover for high-risk sports, age limits, etc. The bank must choose a maximum of 11 criteria from the 18 general criteria, plus possibly 4 criteria for loss of employment cover if this is required, to define its minimum requirements communicated in the ISP.

Case law tends to impose an assessment based on these objective criteria. An alternative policy does not have to be identical in every respect to the bank's group policy; it must provide equivalent cover for the risks defined by the bank using the selected criteria. A policy may even offer superior cover on certain points, without this justifying a refusal.

If the bank refuses to replace the policy, it must give detailed and explicit reasons for its decision in writing, indicating precisely which equivalence criteria have not been met and which guarantees are deemed insufficient. The refusal must be made within 10 working days of receipt of the complete application.

The lender's obligation to provide information and advice

In addition to simply providing documents, the bank (or intermediary) has a genuine obligation to inform and advise the borrower. This responsibility is particularly important when it comes to insurance, given the complexity of cover and possible exclusions.

A landmark ruling by the Assemblée plénière of the Cour de cassation on 2 March 2007 (no. 06-15.267) established a clear principle: a bank offering group insurance must advise customers on whether the risks covered are appropriate to their personal situation. Simply handing over the information leaflet is not enough to fulfil this obligation.

This means that the bank advisor must enquire about the borrower's personal and professional situation in order to alert him or her to any limits or exclusions of cover that may apply. For example:

• If you work in a profession considered to be high-risk.
• If you regularly take part in dangerous sports.
• If you have a specific medical history (outside the scope of the right to be forgotten).

Failure to comply with this obligation to provide personalised advice gives rise to civil liability on the part of the lender. If you are refused cover even though the bank should have warned you of the risk in the light of your known situation, you may be able to sue the bank for compensation for the loss suffered (generally the loss of the chance to be properly insured). The First Civil Chamber of the Court of Cassation has reaffirmed the importance of the lender's duty to inform, particularly in the case of loans involving specific risks (Civ. 1re, 25 May 2022, no. 21-10.635).

Recent legislative developments: the Lemoine Law

The Lemoine Act of 28 February 2022 was a further significant step in the liberalisation and transparency of the loan insurance market. Its main advances are :

• Intra-annual cancellation : As mentioned above, you can change your insurance at any time, as soon as you sign the loan.
• The right to be forgotten : The deadline for no longer having to declare a former cancer or chronic hepatitis C has been reduced to 5 years after the end of the therapeutic protocol (and regardless of age at diagnosis in the case of cancer), in accordance with article L. 1141-5 of the French Public Health Code.
• The abolition of the medical questionnaire subject to conditions : For home loans where the insured share per person is less than 200,000 euros (i.e. 400,000 euros for a couple each insuring 100% of a joint loan) AND where the repayment due date falls before the borrower's 60th birthday, no health questionnaire may be required by the insurer.
• The annual information obligation : Insurers must inform their policyholders each year of their right to cancel. Banks must also inform their policyholders of this right at the time of any loan simulation.
• Tougher penalties : Increased administrative fines for banks that obstruct the right to cancel or delegate insurance.

The aim of these reforms is to make the market more fluid and accessible, particularly for people with health problems. They upset the previous economic balance, in which bancassurers held a very large share of the market. The potential savings for borrowers are substantial, so it's worth taking the time to compare offers and exercise your rights. A young borrower in good health can often halve or even more his or her monthly premium by opting for delegated insurance. Over the entire term of the loan, this represents thousands of euros.

Despite these legal advances, getting your insurance delegated or replaced can still sometimes be a tricky business. Banks can use lengthy processing times, question the equivalence of cover in a questionable way or make repeated requests for documents to discourage borrowers. So it's essential to know your rights and to persevere.

To navigate these complexities and ensure that your rights are respected, the assistance of a lawyer can prove invaluable. Our lawyers can advise you on mortgages and can analyse the conformity of the documents provided by the bank (FSI, loan offer), assess the validity of a refusal to delegate or substitute, and assist you in amicable or contentious proceedings if necessary.

Sources

• Consumer Code: articles L. 313-8, L. 313-29, L. 313-30, L. 313-31, L. 313-32, L. 341-26
• Insurance Code: Article L. 113-12-2
• Public Health Code: article L. 1141-5
• Law no. 2010-737 of 1 July 2010 (Lagarde Law)
• Law no. 2014-344 of 17 March 2014 (Hamon Law)
• Law 2017-203 of 21 February 2017 ratifying the ordinance on mortgage credit (incorporating the Bourquin amendment)
• Law no. 2022-270 of 28 February 2022 (Lemoine Law)
• Court of Cassation, Plenary Session, 2 March 2007, no. 06-15.267
• Constitutional Council, 12 January 2018, no. 2017-685 QPC
• Court of Cassation, 1st Civil Division, 25 May 2022, No. 21-10.635
• Opinion of the Comité Consultatif du Secteur Financier (CCSF) on the equivalence of the level of cover in loan insurance