Financial Services Newsletter : Litigation
Published on 26th Feb 2020
Supreme Court rules that it is impossible to create a right of pledge on assurance portfolios
For years, it has been uncertain whether it is possible to create a right of pledge on an assurance portfolio (assurantie-portefeuille). On 6 December 2019, the Dutch Supreme Court settled this debate with a ruling that it is impossible to create a right of pledge on assurance portfolios as a whole.
The Supreme Court substantiated its ruling as follows:
In order to create a pledge on assurance portfolios, it is necessary that an insurance portfolio itself can be regarded as an asset within the meaning of article 3:1 of the Dutch Civil Code (DCC).
The term "insurance portfolio" is not defined by law and has no fixed content. For the purpose of its ruling, the Supreme Court provides that an insurance portfolio includes (i) the cooperation agreements which an insurance intermediary has concluded with insurers, (ii) the service agreements which an insurance intermediary has concluded with its clients, and (iii) goodwill.
Assets within the meaning of article 3:1 DCC are (i) all items that are corporeal objects which can be subject to human control (zaken) and property rights and interests (vorderingsrechten). Property rights and interests are rights that are transferable, either individually or together with another right, or that are intended to provide the beneficiary with a material benefit, or that have been obtained in exchange for a material benefit (to be) provided within the meaning of article 3:6 DCC.
The Supreme Court decides that insurance portfolios are merely a combination of contracts and goodwill, which are not (individual) assets within the meaning of article 3:1 DCC. Therefore, even though assurance portfolios have (monetary) value within the course of trade, it is impossible to create a right of pledge on an assurance portfolio as such.
The fact that the article 4:103 sub 4 of the Dutch Financial Supervision Act stipulates that insurers in principle have to cooperate with a transfer of insurance portfolios between brokers does not change this outcome.
Despite the ruling, it is still possible to create a right of pledge on the account receivables arising from the contracts within the assurance portfolios. It is therefore recommended to stipulate a pledge on the assets of insurance intermediaries, including on all account receivables.
The decision (in Dutch) can be found here.
The Supreme Court has emphasised that the degree of expertise and relevant experience of a private investor is relevant in respect of the special duty of care of a bank in investment advisory relationships.
According to established case law, a bank, as a professional and expert service provider, has a special duty of care within investment advisory relationships with private investors.
This duty of care includes, among other things, (i) that the bank must carry out a proper investigation into the client's financial capabilities, expertise and objectives, and (ii) to warn the client of any risks associated with an investment, as well as if and when an investment strategy is not (or no longer) in line with the client's financial capabilities or objectives, his willingness to take risks or his expertise.
In light of the above, in 2018, the Court of Appeal of Amsterdam had ruled that a bank was in breach of its special duty of care, because the bank had not warned a private investor properly of the risk associated with trading in options. This, according to the Court of Appeal, regardless of the fact that said private investor had extensive international knowledge of and experience with financial instruments and was exceptionally wealthy.
The Supreme Court has set the ruling of the Court of Appeal aside and has referred the case back to the Court of Appeal for a new ruling. The Supreme Court has emphasised that the content of the special duty of care of a bank in investment advisory relationships with private investors depends on the circumstances of the case. Among other things, the degree of expertise and relevant experience of the client, his income and capital position and the complexity of the product and the associated risks are relevant in this respect. The Court of Appeal had not taken these circumstances into account.
The decision (in Dutch) can be found here.