There are several types of collateral, including the following mechanisms:
• Assignment of debt;
• Pledging;
• Assignment of rights
Yes, provided that the insurance company with which the policy or contract was entered into accepts this arrangement and that the law under which the policy or contract was entered into provides for it.
- Articles 116 and 117 of the Insurance Contract Act(1) provide for the pledging of contracts.
- Assignment of debt is governed by the Luxembourg Civil Code, in particular article 1275: “Delegation by which a debtor gives to the creditor another debtor who is obligated to the creditor does not operate as a novation unless the creditor has expressly declared that he intends to discharge his debtor who has made the delegation”.
- The assignment of right(s) is set out in articles 118 and 119 of the law on insurance contracts.
(1) Law of 27 July 1997 on insurance contracts, as amended.
The insurer, the subscriber and the creditor must enter into an agreement (an amendment), which follows the rules of the general law of contracts in accordance with the statutory articles referred to above.
The rights resulting from the contract may only be pledged by the policyholder, to the exclusion of his spouse and creditors. In the event of acceptance of the benefit, the pledge is subject to the consent of the beneficiary. Where the policyholder and the insured are two different persons, and the insurance is taken out on the life of a third party, the insured’s consent must also be obtained. Failure to do so will render the pledge null and void.
The assignment of rights is an arrangement by which the policyholder transfers his rights in the policy or contract to a third party.
There are three types of assignment of rights:
• Assignment of all the rights under the contract and transfer of the insurance policy. The banking institution then becomes the policyholder of the contract;
• Assignment of all the rights arising under the contract without transferring it;
• Assignment of part of the rights arising under the contract, without transferring it (e.g. for a sum sufficient to cover a bank loan). The policyholder transfers a part of his rights under the contract.
The mechanism for an assignment of rights is governed by Luxembourg law under Articles 118 and 119 of the Insurance Policies Law.
It should be noted that under French law, the assignment of right(s) of life insurance policy is not permitted.
In cases where the beneficiary (the accepting beneficiary) accepts the benefit of the contract, the
latter must sign the deed of assignment, in addition to the policyholder and the insurer.
Pledging is the assignment, as security for an obligation, of a present or future intangible movable asset or group of intangible movable assets.
The French Insurance Code states that the insurance policy may be pledged either by endorsement or by deed subject to the formalities set out in articles 2355 to 2366 of the Civil Code.
In the latter case, the insurer is not a party to the agreement. It is simply informed of the pledge.
As with all movements relating to the policy, where the beneficiary accepts the policy, the pledge is subject to the agreement of the beneficiary. Moreover, when the insured is different from the policyholder, the insured’s consent is required. The consent of the spouse is also sometimes required. This is the case, for example, in French law, when the policyholder is married under a
community law regime and the funds invested in the life insurance or capitalisation contract are joint funds.
Delegation of a claim is a mechanism whereby the insurer undertakes to reimburse the policyholder’s creditor in the event of non-payment on the part of the policyholder and the triggering of the guarantee, up to the limit of its commitments to the policyholder. It is therefore a payment guarantee that the creditor holds on the policyholder’s/debtor’s life insurance or capitalisation policy.
There are two types of debt delegation: «perfect» or «novatory» debt delegation and «imperfect» debt delegation.
The delegation is imperfect when the delegator is indebted to the delegatee, but the latter has not discharged him of his debt, the delegation giving the delegatee a second debtor. Payment by one of the two debtors discharges the other, to the same extent.
Conversely, the delegation is perfect when the delegator is indebted to the delegatee and the delegatee’s intention to discharge the delegator is expressly stated in the instrument, the delegation effecting novation.
The debt delegation agreement is an amendment to the contract signed at least by the policyholder, the creditor, and the insurer. As a result, the insurer is a party to the contract and undertakes personally to reimburse the debt within the limits of its own commitments, and
in particular the value of the contract on the day the guarantee is executed.
If a beneficiary accepts the benefit of the contract (accepting beneficiary), the delegation of debt will also be subject to the acceptance of the beneficiary who renounces the benefit of the contract.
Moreover, where the insured person is different from the policyholder, his or her consent to the delegation of debt is required. The spouse’s consent is also required where the delegating policyholder is married under a community law regime and the funds invested in the life insurance or capitalisation contract are joint funds.
If the policy is pledged, the policyholder can no longer act freely when carrying out management actions such as arbitrage or surrender. They must seek prior authorisation from the creditor (bank) in accordance with the terms of the pledge.
If the policyholder does not honour his debt, the creditor has the right to request partial or total surrender of the life insurance or capitalisation contract, within the limits of the guaranteed debt and the insurer’s commitment to the policyholder.
The pledge of a life insurance policy or capitalisation contract is terminated when the policyholder has completely repaid his debt to his creditor and the credit institution has informed the insurer by a document known as a “release”.
In the case of an assignment of rights however, a “reverse assignment” is required in order to terminate the guarantee.
Original article published in June 2018 - updated in October 2023.