Supreme Court 6 December 2019: Insurance portfolios, and portfolios in general, cannot be transferred/pledged

On Friday, in a long-awaited judgment, the Supreme Court determined that, since an insurance portfolio is not a property right, it cannot be transferred or pledged. Whilst in the first instance this has implications for the insurance sector, the judgment has a bearing on all sectors in which portfolios are transferred.

What was the case about?

This case involved a loan by ING Bank of EUR 20,000.00 to an insurance broker. As security for the loan, the bank had required various pledges, including ‘client portfolios’ and ‘goodwill’. After the broker went bankrupt, the receiver sold the insurance portfolio and the associated goodwill to a third party, for EUR 80,000.00. In its case against the receiver, ING Bank argued that this sum should have been used to repay the loan, because it had a pledge on the insurance portfolio.

Is a portfolio a property right?

This case revolved around the question of whether, in a legal sense, a portfolio constitutes ‘property’ that can be transferred or pledged. According the law, there are three categories of property, namely immovable and movable property, animals, and property rights. ING Bank argued that a portfolio is a property right.

The bank contended that an insurance portfolio is a collection of agreements, the value of which is in the expectation that clients will continue paying commission in future. In practice, this collection of agreements with a future value can be, and is, traded. The bank pointed out that the receiver did indeed sell the insurance portfolio. According to the bank, it is therefore clear that insurance portfolios have an economic value and, in the bank’s view, this means that insurance portfolios are property rights. The bank believed it is supported by the literature, in which the assumption is sometimes made that an insurance portfolio must be classed as a property right (meaning it can be transferred/pledged). A key argument for this stance is found in § 4.3.8.3 of the Wet op het financieel toezicht (Dutch financial supervision act), which deals with the relationship between insurers and insurance brokers. This clause reads as follows:

‘The insurer shall, at the written request of a broker, lend its cooperation to the full or partial transfer of that broker’s portfolio to another broker, unless the insurer has well-founded objections against that broker.’ [underlining by MK]

However, the literature is (quite rightly) divided over the question of whether an insurance portfolio must be classed as a property right. An insurance portfolio is indeed a collection of agreements (both between the broker and the insurers and between the broker and the policyholders) and the rights and claims arising from those agreements, as well as the associated goodwill. This ‘totality of assets’ cannot be deemed an independent property right. Whilst the Dutch financial supervision act does state that a portfolio can be transferred, this does not mean a transfer from the point of view of civil law. What it means is simply this: that the insurer respects the broker’s position by cooperating with the transfer of an insurance portfolio.

Supreme Court’s ruling

The Supreme Court ruled that an insurance portfolio cannot be deemed a property right. Consequently, it cannot be transferred or pledged. According to the Supreme court, the fact that portfolios are, in practice, more or less regarded as transferable is immaterial. Furthermore, the Court rejected the bank’s argument that it is harder to provide finance to brokers if portfolios cannot be pledged.

What now?

Our office is involved in lots of insurance-related transactions, including financing. The question of whether an insurance portfolio per se can be transferred or pledged is often raised. We have always advised that the portfolio per se cannot be transferred or pledged, a view that has now been corroborated by the Supreme Court.

Will this present problems? Not necessarily: the transfer of the portfolio itself is still easy to arrange. The key is to clearly stipulate that all agreements with insurers and clients are to be transferred, and to get the vendor to sign a proper competition clause. Things get trickier when financing is involved. The fact is that the portfolio per se cannot be pledged and cannot be sold by the lender as collateral. However, the cash flow can be diverted to the lender by pledging the commissions, although they have a lower value than a broker’s going concern goodwill.