March 25 2008
In a decision dated December 20 2007(1) the Supreme Court’s Second Civil Division clarified the conditions under which insurers must give notice to policyholders in the event of non-payment of a premium. The court held that the policyholder must be informed of the precise consequences of non-payment: suspension of coverage 30 days after service of formal notice to pay and of the insurer's intention to terminate the policy 10 days after the expiry of the 30-day period in case of non-payment. It added that it was not for the policyholder to enquire into the insurer’s intention.
Fétis had taken out a home insurance policy with Gan. On May 15 2002 the insurer gave Fétis notice to pay the premium, which was over two months overdue, and informed him that “failing payment, you risk having your coverage suspended 30 days after the date of dispatch of this notice and having the insurance contract terminated 10 days thereafter”.
On July 17 2002 the policyholder paid the outstanding premium. On September 16 2002 Fétis’s house was destroyed by fire. Taking the view that the policy was no longer in effect on the date of the loss, the insurer refused to pay the claim. The policyholder therefore sued the insurer to recover compensation for the loss.
The court of appeal found that the insurance contract had been duly terminated and consequently the insurer was not liable for compensation to the policyholder. The court held that the notice given by the insurer to the policyholder was sufficiently clear to warn the policyholder of the consequences of non-payment of the premium.
The Supreme Court quashed the appeal court judgment on the grounds that the wording of the notice was insufficiently clear to alert the policyholder to the precise consequences of failure to pay the premium in full and to the insurer's intention to terminate the insurance contract if payment was not effected within the statutory 30-day time limit. It added that it was not for the policyholder to enquire into the insurer’s intention.
Article L113-3 of the Insurance Code establishes the conditions under which insurers may suspend and subsequently terminate insurance contracts on which the premiums have not been paid in whole or in part:
“In the event of non-payment of a premium or a part of a premium within 10 days of its due date, and irrespective of the insurer’s right to sue for performance of the contract, the cover may be suspended only 30 days after the insured has been served with formal notice. The insurer shall be entitled to terminate the contract 10 days after expiry of the 30-day period.”
The notice must be given by registered letter with acknowledgment of receipt(2) and the 30-day period begins on the date of the letter’s dispatch.(3)
If a loss occurs during the 30 days preceding the suspension of coverage, the insurer is obligated to compensate the policyholder. If the termination procedure has been completed, the policy is terminated but the premium must still be paid. A policy duly terminated for non-payment of the premium is not reinstated by payment of the premium. The insurer's right to terminate may be waived only by words or deed that unambiguously shows the insurer's intention to waive it.(4) Acceptance of the premium’s payment after the policy has been terminated does not constitute a waiver of the insurer's right to invoke the policy’s termination, even if the insurer has issued a certificate of insurance.
Given the severity of the consequences of termination for non-payment, it is important to ensure not only that the insurance contract was duly terminated at the time of occurrence of a loss, but also to determine who bears the burden of proving that the contract was duly terminated.
This case reiterates that it is the insurer that bears the burden of proving that it gave proper notice and that the notice clearly stated the consequences of non-payment. Therefore, if the notice given by the insurer was ambiguous (eg, if termination of the policy seemed to be merely an option for the insurer), it will not be held to have been sufficiently precise. Furthermore, the insurer must make clear its intention to terminate the contract once the statutory 30-day period for payment has elapsed. It would therefore be prudent for the insurer to notify its intention to terminate the contract by sending the policyholder a letter to that effect 10 days after the expiry of the aforementioned period.
For further information on this topic please contact Carole Sportes at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 70 37 39 00) or by fax (+33 1 70 37 39 01) or by email (firstname.lastname@example.org).
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