Introduction
Borrowers sometimes assume that insurance attached to a loan means the outstanding loan will automatically disappear if an insured event occurs. That assumption can lead to serious disputes between borrowers, banks and insurers.
The legal position depends upon the particular insurance arrangement and the event for which coverage was purchased.
Three Parties, Three Relationships
A loan insurance arrangement may involve the borrower, the bank and the insurer. The insurance contract and the loan agreement are separate legal relationships, even though they may be commercially connected.
If the insurer rejects the claim, the bank's contractual rights under the loan agreement do not necessarily disappear.
Why the Policy Matters
The borrower must examine who is insured, who is the beneficiary, what event triggers the policy, and whether the insurer has validly rejected the claim.
Conclusion
Loan insurance provides protection against specified risks; it does not automatically extinguish every loan obligation. Understanding the relationship between the loan contract and insurance contract is essential when a claim is disputed.
