Mortgage Insurance: Coverage Remains in Effect Despite Early Termination of the Loan Term

When a bank declares a loan to be due and payable, does the borrower’s insurance policy remain in effect in the event of a subsequent claim? A recent case serves as a reminder that, in the absence of an express clause in the contract, the insurer must maintain its coverage.

Sick Leave Claim Denied After Loan Acceleration
In July 2008, a couple took out a mortgage accompanied by borrower’s insurance covering disability. But in September 2017, the bank acceleratedthe loan: the couple was required to immediately repay the entire outstanding principal balance.
 

Two years later, in March 2019, the husband went on sick leave and asked the insurer to cover his monthly payments. The insurer refused, arguing that the default on the loan had resulted in the automatic termination of the insurance policies.
 

This stance was all the more baffling to policyholders given that premiums had continued to be collected beyond that date. In response to their challenge, the insurer refunded the premiums but maintained its refusal to provide coverage.

Early Termination and Insurance: Two Distinct Mechanisms
Legally,early termination means that the lender terminates the loan agreement and demands immediate repayment of the amounts owed. In principle, this situation does not automatically affect insurance coverage, which remains valid until the end of the contract or until the principal is repaid in full to the lender (Cass. 1st Civ., January 18, 2000, No. 97-17.847).
 

However, nothing prevents an insurer from including a contrary provision in the policy, stipulating that the insurance coverage expires at the same time as the policy term ends (Court of Cassation, 1st Civil Chamber, April 26, 2000, No. 97-19.846; Cass. 2nd Civ., Nov. 4, 2010, No. 09-16.972).
 

In the case under review, the insurer invoked a clause stipulating that coverage would cease in the event of early repayment of the loan. However, this clause could not apply: the borrowers had not paid off their debt, as it had been incorporated into a debt restructuring plan imposed by the Banque de France in November 2016. The lender’s claim therefore clearly remained in effect.

The Ombudsman’s Decision: Guarantees to Remain in Effect
Noting the absence of early repayment, the Ombudsman urged the insurer to reexamine the case and honor its guarantee. Indeed, in the absence of an express provision stipulating the termination of guarantees in the event of acceleration of the loan, the insurer cannot unilaterally terminate the contract.
 

The recommendation is clear: as long as the loan has not been fully repaid and the insurance contract does not explicitly provide for the termination of coverage upon acceleration, the loan insurance must continue to cover the risks.

This case highlights an important nuance: acceleration does not automatically result in the termination of insurance coverage. For borrowers, this provides additional protection; for insurers, it serves as an incentive to clarify their contract terms.