Law no. 2014-344 on consumer rights (Loi Hamon) dated March 17, 20141 is intended to reinforce consumer protection by offering “new levers to rebalance power between consumers and professionals”.
As a result of this ambitious goal, the Loi Hamon encompasses several areas of consumer contracts, including insurance.
The Loi Hamon introduces new provisions into the French Insurance Code (FIC), which have been qualified as “innovations in insurance contract law”: while some of them may seem desirable, the relevance and purpose of others appear to be more questionable. These new measures have given rise to long parliamentary debates and criticisms or fears expressed by the industry’s stakeholders have been levelled at some of them.
This update describes two of the new measures introduced by the Loi Hamon: the infra-annual cancellation right and the new cooling-off right in respect to affinity insurance2.
Based on the observation that most insurance contracts designed for individuals are one-year contracts renewable by tacit agreement, the cancellation of which is only possible upon their anniversary date (except for certain specific cases provided by law) and considering that the difficulty to easily and quickly disengage from such contracts prevents the consumer from taking advantage of competition to subscribe insurance policies with lower levels of premiums3, the Loi Hamon establishes an “infra-annual” cancellation right for insurance contracts, in a new article L. 113-15-2 of the FIC.
In essence, the new provision enables an insured to cancel an insurance contract at any time on one month’s notice, following the first complete year of insurance.
Scope and exercise of the “infra-annual” cancellation right
Article L. 113-15-2 of the FIC provides that:
“For insurance contracts covering individuals outside of their professional activity and relating to classes of insurance defined by decree of the Council of State4, the insured may, upon the expiration of a period of one year as from the first subscription, cancel the tacitly renewable contracts and adhesions without any charge or penalty. Such cancellation shall take effect one month after the insurer has received the insured’s notification, by letter or any other durable medium.”
This new provision outlines the key principles of this right, a number of aspects or consequences of which remain to be defined.
The cancellation right is only granted to the insured and may be exercised after the first year of insurance, i.e. notice of cancellation may be given immediately after expiration of the first year, as from commencement of the thirteenth month following the date of conclusion of the insurance contract or the date of enrolment. This cancellation right is discretionary and may not give rise to the application of charges or penalties to be borne by the insured.
The cancellation right may be exercised by any traceable means, either a letter (which does not need to be sent by registered mail) or any other durable medium (which should include electronic correspondences and faxes). However, the stated intent to implement the least burdensome procedure for the insured may prove, over time, to be the source of uncertainty, due to the absence of requirement of registered correspondence, which would have had the benefit of establishing a fixed date for the insured’s infra-annual cancellation request and its receipt by the insurer.
The insurance contracts targeted by this measure are contracts entered into by individuals for their personal requirements, such list currently remaining to be specifically defined by government decree which will establish the concerned classes of insurance. It is assumed that MTPL5 and household insurance should be subject to this provision, while insurance covering legal expenses should theoretically, be excluded.
Infra-annual cancellation takes effect “one month after the insurer has received the insured’s notification” and gives rise to an obligation on the part of the insurer to refund premiums paid in advance and relating to the insurance period prior to the effective date of the cancellation. The refund on a prorata temporis basis of the premiums paid in advance shall be made by the insurer “within thirty days of the cancellation date”, i.e. logically 30 days after the effective date of the cancellation; in the event of failure of the insurer to pay within such period, amounts not refunded automatically bear interest at the legal rate.
The insured must remain vigilant in order to effect the infra-annual cancellation of his insurance contract in a manner that does not result in his losing coverage due to an inadvertent lapse between the time that the infra-annual cancellation becomes effective and the time that replacement insurance takes effect.
In this respect, a specific procedure organising the succession of insurance contracts has been implemented for mandatory insurances (namely, the MTPL insurance and the tenant’s liability insurance), under which the “new insurer” is entrusted with the responsibility of ensuring the “permanent coverage of the insured” in the event of change of insurance contract. In this respect, it would have been advisable for slightly more complete formalities in respect to the cancellation letter to be provided by the Loi Hamon, in order to regulate the new insurer’s obligations more clearly and reduce potential litigation for lack of coverage (even if the lapse is only temporary) in the case of a succession of insurance contracts.
All of these provisions will be applicable to insurance contracts (as well as enrolments) entered into or renewed as from the promulgation of the relevant government decree, which is currently planned to occur in October 2014.
Impact on contractual documentation
This measure will apply to contracts entered into or renewed as from the publication of the government decree and will result:
- with respect to existing insurance contracts or enrolments, an addendum to the terms and conditions or a revised version thereof with respect to the infra-annual cancellation right (and other provisions of the Loi Hamon where relevant);
- for new insurance contracts or enrolments, terms and conditions setting out the infra-annual cancellation right (and other provisions of the Loi Hamon where relevant);
- for all contracts and enrolments, the amendment of the premium notices in order to restate the exercise of the infra-annual cancellation right.
It should be recalled that insureds are already supplied, in application of the FIC (article L. 113-15-1), with information in respect to the annual renewal date of their insurance contract and the right granted to them at the same time to cancel such insurance contract at the anniversary date.
Since the Loi Hamon is an addition to the existing provisions of the FIC, one effect of the Loi Hamon should be that the annual notice for premiums of an insurance contract should include both information relating to the annual cancellation of the contract and information relating to the infra-annual cancellation (resulting from the Loi Hamon).
Therefore, a question may arise as to whether the objective of protecting the consumer and reinforcing his rights does not risk “drowning” the insured in a complex system, the comprehension and consistency of which may escape him.
In any event, the introduction of infra-annual cancellation will result in the amendment by the insurers of the subscription procedure for new business, in those cases where they are in the position of the “new insurer” in the case of mandatory insurances (where the insurer has the obligation to proceed to the cancellation of the previous contract, in addition to the responsibility of its combination with the effective date of the new insurance contract). In the case of distance sales, such obligations may give rise to practical difficulties for their integration in the distribution process.
Cooling-off in case of multi-insurance
According to the impact study prepared for the Loi Hamon, insurances are viewed by consumers as a forced expenditure, which may represent a significant portion of their budget, and multi-insurance situations have risen with the development of affinity insurance products (i.e. ‘add-on’ insurance sold through well-known brands).
Therefore, Loi Hamon aims at improving the scope of pre-contractual information delivered to the policyholder, in order to avoid duplication of insurances. This new right is set out in article L. 112-10 in the FIC.
Scope and exercise of the cooling-off period in the event of multiple insurances
In the event the insured detects, after having entered into an affinity insurance contract, that they have duplicate cover, the Loi Hamon offers a remedy by providing a cooling-off period of 14 calendar days for the last concluded contract, under the following conditions:
- in the case of a non-professional affinity insurance contract (i.e. an insurance cover which is complementary to the product or service supplied and covers either (a) malfunction, loss, and theft or damage to the goods provided or (b) damage or loss, including theft, to luggage and other risks related to a trip);
- if the insured can show the existence of an “existing cover” for one of the risks covered by such new affinity insurance contract.
If these conditions are complied with, the insured may cancel his new contract, without any charge or penalty, as long as the new contract has not been entirely performed or the insured has not notified a loss within the fourteen calendar days from the conclusion of the new contract.
In order to cancel duplicate cover, the insured is required to inform the insurer by letter (of which neither the form nor the terms have been specified to date) and, as the case may be, provide it with the evidence of the “prior coverage” (although the drafting of article L. 112-10 of the FIC is not clear enough in this respect) within the 14 day cooling-off period.
Once the insured has exercised their right to cancel within the cooling-off period, the insurer must refund any premium paid within a timeframe of thirty days as from the date of the exercise of the right.
Article L. 112-10 specifies however that the insurer is entitled to retain the entire premium if the policyholder exercises the cooling-off right after notification of a claim during the cooling-off period.
Pre-contractual information on the cooling-off of the new contract
Pre-contractual information must be provided by the insurer (or, in practice, the intermediary) to the insured where there is potential for duplicate cover under the new contract with respect to the cover that the prospective policyholder already owns.
This obligation is fulfilled by providing the insured “before the conclusion of [the insurance contract] (…) [with] a document inviting him to verify that he does not already benefit from the coverage of one of the risks covered in the new contract” and by informing him of the cooling-off right in such case. The content and form of the pre-contractual information to be provided will be specified in a ministerial order (the promulgation of which is planned for October 2014).
Such information will be required to be included in the distribution process for affinity insurances and raises questions regarding its implementation, in particular with regard to internet or telephone sales. It is hoped that the ministerial order’s provisions will be sufficiently clear as to how firms can comply with this requirement in a variety of distribution chains.
Essentially, it will be up to the insured to ascertain the existence of potential duplication among their different policies. It would be advisable for the ministerial order not to transfer responsibility in this respect to the “new” insurer or the intermediary under the new affinity insurance contract, as these entitles are highly unlikely to have the necessary awareness of the policyholder’s existing coverage.