A deceased borrower’s heirs may bring a claim against the insurer

The heirs of a deceased debtor under a loan agreement have a right of action against the insurer

While the former Insurance Code was in force, the Supreme Court of Cassation (SCC) reached important conclusions in Judgment No. 138 of 5 January 2016 in commercial case No. 1727/2014, Commercial Chamber, Second Division, delivered under Article 290 of the Code of Civil Procedure. The Court admitted the cassation appeal under Article 280(1), point 2, of the Code of Civil Procedure on the following questions:

1. Where a borrower has insured their life against specified risks, does the borrower, or do their heirs, have substantive entitlement, procedural standing and a legal interest in obtaining an order requiring the insurer, on occurrence of the insured event, to pay the sum due to the beneficiary under the policy?

2. Do the heirs of a person insured under a group life policy have a legal interest and standing to sue the insurer to protect the bank’s rights if the bank takes no action?

The Court noted that the former Insurance Code gave neither the insured borrower nor their heirs a direct action under the life policy against the insurer before the debt to the bank had been paid (former Article 242(1)). Nevertheless, a borrower insured under a life or accident policy, or their heirs, had a legal interest and standing to sue for payment of the insurance benefit to the bank. The Court held that, to establish a legal interest in an indirect action under Article 134(1) of the Obligations and Contracts Act, a claimant who is the borrower’s heir must allege two things: (1) that the claimant is a creditor of the bank as regards the bank’s right and obligation to seek judicial recovery of the insurance benefit; and (2) that the bank has failed to pursue in court the sum due from the insurer under a life policy naming the borrower as insured and the bank as beneficiary. Accordingly, under Article 134(1) read with former Article 199a(1) of the Insurance Code, the borrower could bring a derivative action against the insurer under a policy taken out by the bank covering the life, health or bodily integrity of the debtor under the bank loan. The relief sought was a binding judgment enforceable against the insurer for the alleged monetary obligation to pay the benefit to the beneficiary bank. As the holder of the disputed right, the bank had to be joined by the court as a co-claimant: this was compulsory joinder based on joint standing under Article 134(2) of the Obligations and Contracts Act read with Article 26(4) of the Code of Civil Procedure.

The last sentence of Article 382(1) of the current Insurance Code, in force from 1 January 2016, expressly gives a bank borrower a right to demand payment directly from the insurer, even where the bank, rather than the borrower, took out the policy to secure the borrower’s monetary obligations. The law recognises the debtor as an insured party to the insurance relationship. The debtor thus has an independent legal right to demand the benefit upon occurrence of a covered risk to their life, health or bodily integrity, in an amount corresponding to the outstanding loan obligations. As regards payment of the insurance benefit, the debtor has all the rights of an insured person except the right to receive the benefit personally up to the amount of the unpaid debt. This protects the interests of the insured borrower’s heirs and co-debtors when an insured event occurs, expressly allowing them to sue for payment of a benefit due to a third party, the creditor.

It follows that if, after an insured event, the creditor fails to bring a claim against the insurer for the benefit, the deceased borrower’s heirs and any other person liable under the loan agreement may sue the insurer. They may seek an order requiring it to pay the creditor the benefit due, up to the outstanding loan balance. By virtue of Article 26(4) of the Code of Civil Procedure, the court must join as a co-claimant the creditor for whose benefit the policy was taken out.

This article is not a legal opinion or advice concerning a particular situation or person. For legal assistance in a specific case, consult a lawyer.