Insurance contracts and the Code

Contributed by Ian Macdonald and current to 1 September 2005

WHAT DOCUMENTS HAVE TO BE GIVEN TO THE DEBTOR?

If a premium under a credit-related insurance contract is financed under the credit contract, the insurer must ensure that a copy of the policy of insurance is given to the debtor within 14 days after acceptance of the insurance proposal by the insurer.

This also applies in the case of a contract of insurance entered into by the credit provider in which the debtor has a beneficial interest (s.136).

CAN THE BORROWER BE REQUIRED TO TAKE OUT INSURANCE WITH THEIR LOAN?

A credit provider or a supplier must not require a debtor or guarantor to take out insurance, or pay the cost of insurance arranged by the supplier unless that insurance is:

• compulsory insurance (such as compulsory third party injury insurance);
• mortgage indemnity insurance;
• insurance over mortgaged property; (often described as ‘comprehensive insurance’); or
• insurance of a nature and extent approved by the regulations.

The credit provider or a supplier must not represent to the debtor or guarantor that the debtor or guarantor is required to pay the cost of any other type of insurance (s.133).

A common type of insurance that is taken out in relation to loans is consumer credit insurance. The borrower does not have to take this insurance out.

DOES THE BORROWER HAVE TO INSURE WITH A PARTICULAR INSURER?

A credit provider or supplier of goods or services cannot require a debtor or guarantor to insure with a particular insurer (s.133). If this section is contravened, the insured is entitled to recover the whole of the premium paid under the contract from the credit provider or supplier. The only exceptions to this rule are where the insurer is the only insurer providing insurance of the relevant kind, or where the regulations provide an exemption.

Further, the credit provider or supplier cannot make any unreasonable requirement as to the terms on which the debtor or guarantor is to take out insurance (s.133(2)).

CAN THE INSURANCE CONTRACT BE TERMINATED IF THE CREDIT CONTRACT IS TERMINATED?

The Code provides for termination of consumer credit insurance and mortgage property insurance where the credit contract is terminated (ss.138,139).