Unlimited right of cancellation for bank loans with legal debt insurance

BGH: Bank. And insurance customers are due billions in reversals


Because of high commissions banks like to sell to loans equal to a residual debt insurance. Until recently, banks believed that loans and insurance were each separate contracts with separate cancellation rights – which was the only way they supposedly properly instructed customers.

However, to everyone’s surprise, the Federal Court of Justice (BGH) has now ruled on 15.12.2009 (Ref.: XI ZR 45/09) that loans and residual debt insurance policies are often linked transactions, the revocation of which also eliminates the other contract in each case.


Defective revocation instruction with loans connected with remainder debt insurance opens unlimited right of revocation for everything

as a rule, the consumer has not been properly informed about the effect of the right of withdrawal in the case of linked contracts. This is because there is regularly no specific indication that the loan and the insurance are linked transactions, since the insurance costs have been co-financed.

Consequence according to § 355 para. 3 BGB. Is that the right of revocation never expired – the customer can even today up to the limitation limit even from already repaid loans and associated residual debt insurance by revocation and demand the reversal. At least the premiums for the test debt insurance – or the portion of the loan attributable to it – will be refunded, and possibly even a more favourable interest rate retroactively.


Money back when revoking loans with residual debt insurance

When revoking loans, the consumer only owes compensation for the value (§§ 357 para. 1 sentence 1, 346 para. 2 sentence 1 no. 1 BGB) for the period of a capital transfer – this regularly means an interest advantage, because the profit margin is omitted for the bank. If the consumer has not been properly informed of his right of withdrawal, he shall have that right for an unlimited period.

However, in the case of a revocation of a current loan, the entire amount of the loan – but not the part of the loan that is covered by the residual debt insurance, which can be considerable – becomes due immediately. In return, the consumer may be able to reschedule for the future at more favorable interest rates now, and an early repayment penalty may not be required either. The consumer can reclaim any parts of the residual debt insurance that have already been repaid.

However, if the consumer also wants a more favourable interest rate for the past, he bears the burden of proving that the compensation to which the bank is entitled for the capital transfer is lower than the interest initially agreed, at the level of the market interest rate. Potentially it is 1 – 2 % or more, namely the “profit mark-up” of the bank, which is not owed in the case of pure value replacement by the bank.

With interest rates currently low, this is an opportunity to restructure debt quickly and cheaply. In the case of loans that have already been repaid, at least the premiums or the loan portion and interest payments for the financed residual debt insurance are returned, possibly after deduction of appropriate risk costs for the insurance cover used, which are usually much lower.


No time limit on the possibility of revocation, even for old contracts

In the case of doorstep selling and also in the case of consumer credit, there is no time limit on the consumer’s right of withdrawal. In principle, this also applies to contracts already executed or fully settled by both parties many years ago. The Introductory Act to the German Civil Code (EGBGB) states that the unlimited right of cancellation introduced into the German Civil Code in 2002 also applies to older continuing obligations and thus apparently also to insurance and credit contracts that have already been settled.


Insurance contracts still affected under new law

In addition to this right of cancellation for linked contracts, the insurance industry is also threatened with billions in repayments for a completely different reason. Namely because, contrary to the more recent opinion of the BGH, they had not regarded the frequently occurring instalment payments of annual premiums during the year as consumer loans – and had therefore also not properly instructed about the special right of revocation for consumer loans.

Many a bank or insurance company board member still hoped that insurance contracts would be excluded from the scope of consumer credit as part of the implementation of EU Directive 2008/48/EC of 23 April 2008. However, as expected, this did not happen.

It is true that financial institutions, especially insurance companies, could also instruct customers about the right of withdrawal at a later date (subsequent instruction), so that they would then only have one month to withdraw. Apparently, however, neither financial houses nor regulators want to advise consumers of “their right.”

After all, millions of life insurance policies are terminated at a loss every year anyway. Likewise, investors whose unit-linked insurance policies went into the basement during the financial crisis would probably be only too happy to simply get their premiums back with interest – the revocation makes this possible.

This is then regularly far more than the surrender value, even if this has already been increased to the so-called minimum surrender value according to BGH case law. Cancellation has legal priority over termination: This means that the policyholder can often more than double the payout claim against the insurer compared to cancellation with a minimum surrender value.


Mostly no statute of limitations yet

In the case of an unclear and unclear factual or legal situation – such as existed prior to the relevant BGH ruling – no claim can become time-barred before ten years have elapsed under the new law of obligations (calculated from 01.01.2002). For older claims, even up to 30 years can apply as a limitation period.

Together with repayments for contracts already terminated in the past, which can still be revoked today, there is a threat of additional claims in the double-digit billion range. Even those who have already obtained a supplement for the minimum surrender value according to the BGH as of 2005 can therefore now often demand a second, usually much higher supplement.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

courtesy of

from www.cb-verlag.de (published in Verbandsnachrichten issue 01/2010, page 24-25)


Finanz Colloquium Heidelberg GmbH and the editorial staff of ForderungsPraktiker (published in ForderungsPraktiker issue 02/2010, page 55-56)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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