Mortgage borrowers are very familiar with creditor insurance, which is often seen as a simple formality when taking out a loan. But this is a simplistic view. This complex contract deserves special attention, both during its execution and when it is terminated.
Special features of loan insurance
Loan insurance is a unique legal arrangement. It is based on a tangle of contractual relationships between three parties: the insurer, the credit institution (policyholder) and the borrower (subscriber).
This contractual triangle explains the complexity of the applicable legal regime. The Court of Cassation has confirmed the existence of a direct contractual link between the insurer and the member, despite the intervention of the policyholder (Cass. 1re civ., 7 June 1989, no. 87-14.648).
The originality of this structure does not stop there: the credit institution plays a dual role. Initially the underwriter of the group contract, it generally becomes the beneficiary designated by the policyholder in the event of a claim. This makes for a tricky legal analysis.
The obligations of the parties during the performance of the contract
Policyholder information obligations
The obligation to provide information does not end with the signing of the contract. Case law has considerably extended the scope of the policyholder's obligations during the performance of the contract.
In a ruling handed down on 2 March 2007, the Cour de cassation (French Supreme Court) imposed a real obligation on banks to warn customers: ". where a banker 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, the banker must inform the customer whether the risks covered are appropriate to his personal situation as a borrower. "(Cass. ass. plén. 2 March 2007, no. 06-15.267).
More recently, the Commercial Chamber has even held that the banker must inform the insured of the abusive nature of a refusal of cover by the insurer (Cass. com., 5 Sept. 2018, no. 17-15.866).
However, there are limits to these obligations:
- The policyholder is not obliged to inform the member of matters not directly related to the contract.
- It is not liable if it did not have the necessary information.
- The member may not invoke the policyholder's liability if he or she has been disloyal.
Members' obligations
Policyholders must comply with their obligation to declare the risk truthfully. Lying or concealing medical information may invalidate the contract (article L.113-8 of the Insurance Code).
You must also pay the premiums, which are generally deducted from your loan instalments.
Claims management
The occurrence of a claim is a critical time in the life of a loan insurance contract.
Making a claim
Although the form of the declaration is free, case law ensures that the formalities are not excessive. The Court of Cassation has shown itself hostile to standard declaration forms imposed by insurers (Cass. 1re civ., 12 Jan. 1999).
Here again, the policyholder must play an active role. Case law requires them to inform the policyholder of the steps to be taken. The Court of Cassation has ruled against a credit institution that failed to ask its customer for a medical certificate, despite the fact that it was essential for the policy to be taken out (Cass. 1re civ., 2 Feb. 1994).
Payment of compensation
In accordance with article L.113-5 of the Insurance Code, the insurer - and not the policyholder - is responsible for settling the claim.
In practice, the beneficiary is generally the credit institution. The insurer therefore takes the place of the borrower to repay the balance of the loan, which constitutes payment of the debt and releases the borrower (Cass. 1re civ., 14 Nov. 1995).
Contractual amendments and their limits
There are strict rules governing changes to loan insurance policies.
Article L.141-4 of the Insurance Code requires policyholders to be informed in writing of any framework contract concluded between the insurer and the policyholder. This obligation is incumbent on the policyholder, who must prove that he has complied with it.
Please note, however, that for home loans, article L.312-9 of the French Consumer Code states that a change in the risks covered or in the terms and conditions of the insurance cannot be enforced against a borrower who has not agreed to it.
The evolution of the right of cancellation
For a long time, the courts held that borrower's insurance could not be cancelled before the end of the loan term. This situation, which was disadvantageous for borrowers, has gradually changed.
The law of 1 July 2010
This law established the principle that the lender cannot refuse an insurance contract other than the one it offers, if that contract provides an equivalent level of cover.
This advance remained limited, as it only applied when the loan was taken out. Once the contract had been signed, the borrower remained bound by it.
The Hamon Act of 17 March 2014
The Hamon law introduced a right of cancellation during the 12 months following signature of the contract (article L.113-12-2 of the Insurance Code). A small step, but still not enough.
The Court of Cassation has also been reluctant to extend this option, as demonstrated by a ruling of 24 May 2017 in which it refused to see it as a general principle of annual termination.
The law of 21 February 2017 (Bourquin amendment)
This law represented a major step forward by allowing annual cancellation of loan insurance policies. This provision, codified in article L.313-30 of the Consumer Code, applies to all contracts in force from 1 January 2018.
Current conditions for cancellation by the borrower
Today, there are three ways for borrowers to cancel their insurance policies:
- Within 12 months of signing (Hamon law)
- On each policy anniversary date (Bourquin amendment)
- At any time during the first year for policies taken out after 1 June 2022 (Loi Lemoine)
The procedure to be followed is strict:
- Find a new contract with equivalent cover
- Send a letter of cancellation to your current insurer
- Give 15 days' notice if cancellation is within the first year, or two months' notice if cancellation is within the second year.
The lender has 10 working days to accept or refuse the substitution. Reasons must be given for any refusal.
Changing your insurance often represents a considerable financial challenge. A recent study by the broker Magnolia.fr suggests average savings of €15,000 over the lifetime of a mortgage.
Our firm regularly assists customers to secure their change of loan insurance. Don't hesitate to contact us to assess your situation and guide you through this delicate process. An appointment beforehand can avoid many pitfalls and guarantee the success of your approach.
Sources
- Insurance Code, articles L.113-5, L.113-8, L.141-1 to L.141-4
- Consumer Code, articles L.312-9, L.313-30
- Cass. 1st civ. 7 June 1989, no. 87-14.648
- Cass. ass. pl. 2 March 2007, no. 06-15.267
- Cass. com., 5 Sept. 2018, no. 17-15.866
- Law no. 2010-737 of 1 July 2010 reforming consumer credit
- Law no. 2014-344 of 17 March 2014 on consumer affairs (Hamon law)
- Law no. 2017-203 of 21 February 2017 (Bourquin amendment)
- Law no. 2022-270 of 28 February 2022 (Lemoine Law)
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