With the progressive worsening of living conditions, we have witnessed an increase in the number of declarations of insolvency of individuals,
whether filed by them in court or requested by a creditor.
The question posed ("What happens to the insurance contract in the event of insolvency of the policyholder or insured?") addresses an increasingly recurrent theme in people's daily lives, the answer to which may differ depending on each specific case. In fact, the first step to be followed is to check the terms that were contracted by the parties, namely in the general conditions of the insurance policy. This means that the parties may freely agree on the effects that a declaration of insolvency of the policyholder or insured may have on the insurance contract, with regard, for example, to its subsistence or otherwise. If nothing is stipulated, it is understood that the insurance contract will remain in force after the declaration of insolvency of the policyholder or insured.
In our experience as insurance lawyers, most insurers in the market do not provide in their policies for the termination of the insurance contract simply because the policyholder or insured have been declared insolvent, so in principle insurance contracts will remain in force despite this circumstance.
However, it should be noted that, despite the declaration of insolvency and the possibility of extinguishing debts by the exoneration of remaining liabilities, the policyholder should continue to pay the insurance premium, which is essential for all contracted covers to remain in force. If this does not happen, the insurance contract will cease its effects, not because the policyholder or insured has been declared insolvent, but because of the non-payment of the premium.
Notwithstanding the above, it is important to mention that even if the insurance contract continues to exist after the declaration of insolvency, this does not mean that there can be no changes to the contractual content. In fact, as you will easily understand, in certain types of insurance, insolvency of the policyholder or insured may be a factor that increases the risk to be insured by insurance companies. The Insurance Contract Act established a presumption that insolvency constitutes an aggravation of the risk, a presumption that may be rebutted by evidence to the contrary.
Therefore, in the case of an increase of the risk, the policyholder or insured must, within 14 days from the date of notification of the declaration of insolvency, communicate this fact to the insurance company. The notification shall be in writing or in another medium which provides a durable record. Within 30 days of this communication, the insurance undertaking will review the risk and may do one of three things:
- If it understands that the declaration of insolvency has no influence on the risk to be insured, maintain the validity of the insurance contract in the precise terms that were initially contracted;
- If it understands that the said insolvency alters the risk to be insured, it may present the policyholder with a proposal to modify the contract, which must be accepted or refused within 30 days, at the end of which the proposed modification is deemed approved;
- If it demonstrates that under no circumstances would he conclude contracts covering risks with the characteristics resulting from this aggravation of risk, it may terminate the contract, without prejudice to the duty to return the premiums relating to the contract period not covered.
It is therefore important to carefully analyse the general conditions of each of the insurance products contracted in order to assess the possible consequences that a declaration of insolvency may have in terms of the relationship with the insurance company, as well as possible obligations arising for each party.
The team of lawyers in the Insurance Law department of Belzuz Abogados S.L.P. has extensive experience in providing legal advice to national and international companies, as well as to individuals, and may be of significant assistance in clarifying all types of questions that may arise in relation to insurance matters.
Departamento Direito dos Seguros | Portugal
Belzuz Advogados SLP
A presente Nota Informativa destina-se a ser distribuída entre Clientes e Colegas e a informaçăo nela contida é prestada de forma geral e abstracta, năo devendo servir de base para qualquer tomada de decisăo sem assistęncia profissional qualificada e dirigida ao caso concreto. O conteúdo desta Nota Informativa năo pode ser utilizada, ainda que parcialmente, para outros fins, nem difundida a terceiros sem a autorizaçăo prévia desta Sociedade. O objectivo desta advertęncia é evitar a incorrecta ou desleal utilizaçăo deste documento e da informaçăo, questőes e conclusőes nele contidas.
