Michał Steinhagen

Insurance agreement ends, but protection continues?

Termination of a framework agreement under which individual mortgage insurance policies were issued need not mean the end of the insurance protection.

Mortgage insurance has been functioning for years in Poland and so far has not raised major legal issues. The insurance is typically based on framework agreements between a bank and an insurance company. The framework agreement itself does not provide for any insurance, but allows specific insurance agreements to be concluded with respect to specific loans.

In the case discussed here, the bank offers mortgage loans to individuals. As additional security for repayment of the loans, the bank entered into two framework agreements with an insurance company, for “high LTV” mortgage insurance for loans with a high loan-to-value ratio, and for “bridge” insurance to secure loans until the mortgage is registered. Both framework agreements were entered into for an indefinite period, subject to cancellation upon 3 months’ notice. After some time the insurance company decided that the terms were unfavourable, and cancelled both agreements. The question then arose of what to do about the loans previously covered by the insurance under the two framework agreements. Does termination of the framework agreement automatically terminate the insurance provided under the agreements, or, under the specific terms of the framework agreements, does the insurance protection for earlier loans continue in force?

The bank takes the position that the insurer’s termination of the framework agreement not only does not result in cancellation of the insurance protection for loans previously submitted to the insurer, but the insurance protection may be extended for the period provided in the framework agreements. The insurer, however, would like to free itself of this coverage, particularly because in extreme cases the insurance could continue for up to a couple of decades. The dispute will probably be resolved in court.

“The situation in which an agreement continues to exert effects despite termination is not all that startling,” explained Michał Steinhagen, an adwokat at Wardyński & Partners. “Certain contractual clauses, for example concerning jurisdiction, arbitration or confidentiality, survive the termination of the agreement itself. Other clauses as well may continue to be in force despite termination of the agreement, if that is what the parties expressly provided. However, contractual provisions on this issue are a frequent cause for disputes. This case is one example of that. Thus a court decision on this issue may have a major impact on the practice used for mortgage insurance and other types of insurance.”