Credit-related insurance
What is credit-related insurance?
The Act defines credit-related insurance as:
- insurance over goods used as security
- “gap insurance”, ie, cover for the gap between the amount an
insurance policy pays out if secured goods are destroyed, and the
amount outstanding under the credit contract
- consumer credit insurance, ie, cover for the outstanding
obligations of a debtor under a credit contract in the event of
their injury, sickness or death.
Credit-related insurance is insurance taken out by the debtor.
Insurance that protects you, eg, lender’s mortgage insurance, is not
consumer credit insurance.
Repayment waiver and extended
warranties?
“Repayment waivers” and “extended warranties” are forms of
creditor “self-insurance”.
A repayment waiver is an agreement between the debtor and you in
which you, for an additional payment from the debtor, agree to waive
any amount due in the event of their sickness, injury or
unemployment.
An extended warranty is an agreement between the debtor and you
in which you agree to repair or replace defective goods outside the
normal warranty period.
These agreements are treated like other forms of credit-related
insurance. The rules below apply to repayment waivers and extended
warranties as well as to credit-related insurance.
Creditor obligations for credit-related
insurance, extended warranties and repayment waivers
The Act specifies three obligations for credit-related insurance:
- under Section 69 a creditor or lessor must not make any
unreasonable requirement in relation to the terms on which a
debtor or lessee takes out credit-related insurance
- under Section 70 the creditor or lessor must disclose the
terms of the credit-related insurance contract if they arranged
the insurance. See the sections on initial disclosure for
consumer credit contracts
and consumer leases
- under Sections 51 and 52, if the debtor makes full prepayment,
the creditor must provide a proportionate rebate of any consumer
credit insurance premium financed under a consumer credit
contract.
“Unreasonable credit related
insurance requirements”?
A requirement is unreasonable if it is not reasonably necessary
for protecting the lessor’s or creditor’s legitimate interests, or
is not necessary in light of the risks undertaken by the parties to
the arrangement.
Example
- Requiring a debtor to take out insurance for a risk that
does not exist, such as requiring a beneficiary to cover loss of
employment.
If a requirement is found to be unreasonable, the Court may order
that the insurance policy be annulled and the cost of the policy
refunded to the debtor or lessee by the creditor.
Calculating a proportionate rebate of
an insurance premium in the event of full prepayment
If you have arranged a consumer credit insurance policy for a
credit contract and the debtor makes full prepayment, you must
provide a proportionate rebate of the policy premiums.
This rebate must be calculated at the time the full prepayment
is made.
The procedure for calculating the rebate will be provided in
regulations.
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