The Dutch Supreme Court assures us: an insurance portfolio cannot be used as collateral
The Dutch Supreme Court has ruled that an insurance portfolio as such cannot be pledged. With this ruling clarity is provided on an issue that was the subject of debat for a long time.
The long-awaited answer to a frequently asked question
The insurance portfolio is perhaps the most valuable asset item of an insurance broker. In the literature and the case law there has been fierce debate as to whether a pledge can be created over this type of portfolio as such. According to Article 3:228 of the Dutch Civil Code (DCC) a pledge can be created over (i) assets that are (ii) transferable. To what extent does an insurance portfolio meet these two requirements? The Dutch Supreme Court provided clarity in its judgment of 6 December 2019: a complete insurance portfolio cannot be pledged.
In 2007, an insurance broker entered into a credit agreement with ING Bank. As security for all that the insurance broker owed and in the future would owe to the bank, the broker pledged all its business assets to the bank. Following the bankruptcy of the broker, a dispute arose between the receiver and the bank as to whether a pledge had been created on the broker’s insurance portfolio.
The Dutch Civil Code does not provide a definition of the term ‘insurance portfolio’. In its judgment, the Dutch Supreme Court used the same determination of the size and composition of an insurance portfolio as the District Court Gelderland had done in first instance, because this definition was not contested before the Supreme Court. In doing so, the Supreme Court assumes that an insurance portfolio consists of a combination of agreements and the claims arising from these. The existing goodwill is also part of the portfolio, in the expectation that clients will conclude insurance contracts in the future with the broker.
Qualification as asset
In Dutch law, assets are understood to be both things and all proprietary rights and interests (Article 3:1 DCC). An insurance portfolio is not a corporeal object that can be subjected to human control and therefore it does not meet the definition of a thing (Article 3:2 DCC). For this reason the Dutch Supreme Court had examined whether an insurance portfolio as a whole can be classified as a property right (Article 3:6 DCC).
In Dutch literature it was assumed that an insurance portfolio as a whole can be expressed in terms of money and can be exercised as a subjective right against others. Therefore an insurance portfolio would qualify as a property right. Support for this assumption was found in the broad interpretation of (subjective) property rights, the legislative history and former case law of the Dutch Supreme Court. But the same assumption was also based on other arguments, namely that from Article 4:103(4) Financial Supervision Act it follows that an insurance portfolio is transferable under property law. Although it is not required for the classification as a property right that a right is transferable, it has been argued that demonstrating the transferability of an insurance portfolio is sufficient to establish that it is a property right.
However, following the Advocate-General’s opinion, the Dutch Supreme Court chooses a different path. According to the Supreme Court only individual things or individual property rights can qualify as an asset. With this consideration the Supreme Court appears to indicate that an insurance portfolio is not an individual property right. It should be seen as a mixture of assets that can be pledged (e.g. claims) and assets that cannot be pledged (e.g. goodwill). Although an insurance portfolio as a unit has significance under the law pertaining to obligations, the portfolio as a whole cannot be regarded as an object of property law.
Transferability under property law
Now that the Supreme Court has ruled that an insurance portfolio as a whole cannot be regarded as a thing or a property right, this should be the end of the discussion. After all, this means that the cumulative conditions for pledging – cf. Article 3:228 DCC: (i) an asset that (ii) is transferable - are not met. However, the Supreme Court continues its ruling and considers an insurance portfolio as such not transferable under property law, because by its very nature the insurance portfolio does not qualify as an individual property right. After all, only individual things and property rights can be the subject of a legal act under property law.
Consequences in legal practice?
The Dutch Supreme Court has taken a decision with regard to a divisive question. As a result of this judgment, receivers will no longer be confronted with insurance portfolios which do not offer redress due to a pledge that is established on that portfolio as such. However, the ruling is less rosy for lenders and insurance brokers. Lenders who thought that for their benefit a pledge was created over insurance portfolios as such, will in fact have received fewer certainties than previously thought. Banks may require additional securities from insurance brokers to whom credit had already been provided. There is also a risk that it will become more difficult for insurance brokers to obtain credit in the future. After all, under Dutch law their most valuable asset item – the insurance portfolio – cannot be pledged as a fund of assets.