Consumer loan and payment protection insurance "connected contracts"

Consumers who take out a loan to finance the purchase of goods or services will very often be offered an accompanying policy of payment protection insurance, designed to meet their repayment liabilities in the event of death and (for example) sickness, disability or their becoming unemployed. Under German law, however, an important question has, until now, remained unresolved, namely the precise legal relationship between the purchase and loan contracts (on the one hand) and the insurance contract (on the other).

Under German law, as elsewhere in the EU, consumers have a statutory right to withdraw from certain contracts within a specified period (often referred to as a "cooling off period" in English). Under section 358 (2) of the German Civil Code, where a consumer exercises his or her right to withdraw from a consumer loan agreement, he/she will also thereby be permitted at the same time to withdraw from the underlying contract for goods or services with which the loan was "connected".

As to whether there exists the necessary connection, the relevant provisions appear at section 358(3) of the Civil Code, thus:

"A contract for the supply of goods or for the provision of some other performance and a consumer loan contract are connected, if the loan fully or partially serves to finance the other contract and both contracts constitute an economic unit."

So the link between the underlying purchase contract and the loan agreement is obvious enough. But what of the payment protection insurance policy? Could that also be said to be a contract "connected" to the loan agreement under the above definition? That was an issue on which the German High Court ("BGH") recently handed down judgment (judgment XI ZR 45/09), holding that (at least on the facts of that case) consumer loan agreements and payment protection insurance contracts were indeed "connected contracts" under section 358.

The BGH noted that in the case before the court, the loan had "partially served to finance" the payment protection insurance, because part of the loan amount was actually used to pay the premium.

Furthermore, the BGH stated that the loan agreement and the insurance were to be seen as an "economic unit", because they were connected in such a way that one contract would not have been concluded without the other. In summary, they noted in particular the following aspects:


The loan agreement served the financing of the payment protection insurance contract;


The lender and the insurer used contractual forms with a similar layout and design, and in both contracts reference was made to the respective other contract;


The lender and the insurer used the same distribution organisation;


The payment protection insurance was only available in connection with the loan agreement, not on a stand-alone basis;


It was held irrelevant that the consumers may have been presented with a choice, when taking out the loan, whether also to purchase payment protection insurance; the fact remained that those consumers who did purchase the insurance would not have taken out the loan amount relating to the insurance premium without it.

The decision has the following legal consequences:

  • A consumer exercising his right to withdraw from the consumer loan agreement will also no longer be bound by the connected payment protection insurance contract, and vice versa. At the point of entering into the relevant contracts, the consumer's attention must be directed to his right to withdraw within a specified statutory period, and the said period will only begin to run once this notification has been given. Hence, in the absence of proper notice, the consumer may have the right to withdraw from both the loan and insurance agreement at any stage, including at the end of the contract term;
  • A consumer may refuse to make payments under the loan agreement to the extent that objections under the connected contract, e.g. the payment protection insurance, entitle him to refuse performance under the connected contract (Sec. 359 BGB), and vice versa.

While it may be said that this case is limited to its facts (ie. cases where the loan partially finances the insurance premium) there are nevertheless important messages for insurers and their distribution partners participating in the payment protection market in Germany. Most consumer loan agreements currently do not contain instructions on the customer's withdrawal right with regard to connected contracts, with potentially adverse consequences for the providers of both the loans and the insurance.

Finally, it is to be noted that the BGH does not directly concern group insurance payment protection, a popular concept in Germany. Under this arrangement, the lending bank maintains a group policy, to which the borrower customers have the opportunity to accede as insured persons without becoming policyholders. It remains to be seen whether (and, if so, to what extent) the German courts will apply the recent BGH decision to these group insurance structures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.