STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5722

June 18, 1980

CREDIT INSURANCE ACT:

'Line of credit' loans

The Credit Insurance Act does not prohibit the issuance of insurance on line of credit loans.

In such cases, the total loan indebtedness which results from new loan advances may be treated as the original indebtedness where there is a renewal or refinancing of the loan.

To the extent that a refinancing or a renewal occurs subsequent to a loan addition, a new indebtedness is created which requires delivery of a new policy.

William McLaughlin

Director

Michigan Department of Commerce

4th Floor

Law Building

Lansing, Michigan

You have requested my opinion on the following questions regarding the Credit Insurance Act, 1958 PA 173, MCLA 550.601 et seq; MSA 24.568 et seq, and its applicability to 'open-ended' or 'line of credit' loans:

The terms 'line of credit loan' or 'open-ended loan' are synonymous. The term 'line of credit' is utilized in a number of contexts and is defined in Modoc Meat & Cattle Co v First State Bank of Oregon, 271 Or 276; 532 P2d 21, 25, as follows:

Essentially, the definition of an 'open-ended loan' is the same as the definition of 'line of credit'. Shneider-Davis Co v Hart, 23 Tex Civ App 529; 57 SW 903, 904 (1900). A line of credit loan or open-ended loan allows one to continue borrowing so long as the account is kept from going over a predetermined limit.

The Credit Insurance Act, in section 4, refers to writing insurance on all loans 'on a term plan'. The designation 'term plan' refers to term insurance, defined as 'insurance covering only losses occurring before the expiration of a stated term', Black's Law Dictionary (4th Ed, 1951). Section 7 of the act states that the term for insurance issued on all loans shall commence '. . . on the effective date of the policy.' Section 7 also prescribes that the term for credit insurance shall not '. . . extend more than 15 days beyond the scheduled maturity date of the indebtedness except when extended without additional cost to the debtor.'

Generally, what section 7 of the Credit Insurance Act provides is that insurance issued on all loans shall run approximately co-extensive with the duration of the loan indebtedness. Hence, insurance which is written on 'open-ended loans' must run approximately co-extensive with the duration of the loan. Therefore, in my opinion, section 4 does not prohibit insurance on 'open-ended loans' provided this requirement is met.

In answer to your second question, section 6 of the Credit Insurance Act, supra, does not explicitly prohibit insurance on open-ended loans, but it does limit the amount of periodic indemnity payable by such insurance to an amount which:

The effect of section 6 on insurance issued on 'open-ended loans' would be to limit the amount payable by the insurer to an amount not more than the original indebtedness. Thus, additional loans, issued subsequent to the initial or 'original' indebtedness, would not be covered by the insurance. This, however, would not be the case where there was a refinancing or renewal of the original indebtedness as a result of subsequent loans garnered pursuant to a line of credit or open-ended loan account.

The word 'refinance' means 'to finance again or renew; to reorganize the finances', Bankers Life Co v International Tel & Tel Co, 239 F2d 621, 623, (CA 7, 1956). The word 'renew' means to replace, U.S. v Mallery, 53 F Supp 564, 569 (DC Wash, 1944). Therefore, to renew or refinance a loan means to replace or extinguish the prior original indebtedness with a new indebtedness. Hence, any new loan advance which results in a renewal or refinancing of an existing indebtedness would, in effect, create a new original indebtedness. In this way, insurance issued on open-ended loans could cover the total indebtedness.

Therefore, in my opinion, section 6 does not prohibit the writing of openended loans. Moreover, the total loan indebtedness which results from new loan advances may be treated as the 'original indebtedness' where there is a renewal or refinancing of the loan.

In response to your third question, where a loan account is renewed subsequent to advances and charges, the account has been refinanced. When the refinancing or renewal results in discharging the former indebtedness prior to the scheduled maturity date of the loan, section 7 of the act provides:

Termination of insurance on the prior loan and commencement of insurance on the subsequent resulting loan would require a new policy which would set forth any fundamental changes, i.e. amount of coverage, etc.

In answer to the second part of your third question, according to section 7, as previously discussed in this opinion, the term of credit insurance on all loans runs approximately co-extensive with the term of the loan. From this it clearly follows that changes in the scheduled maturity date of a loan also changes the scheduled maturity date of the insurance on the loan. Thus, in other words, new advances on a line of credit loan account which result in refinancing will change the maturity date of the insurance because the maturity date of the loan itself is changed.

To answer your final question, section 7 of the act provides:

In addition to section 7 of the act, section 10 prescribes that a policy or certificate be delivered to the insured 'at the time indebtedness is incurred . . .' Section 11 prescribes that in the absence of compliance with section 10, a copy of the insurance policy shall be delivered 'at the time indebtedness is incurred.'

Therefore, in my opinion, to the extent that a refinancing or renewal occurs subsequent to a loan addition, a new indebtedness is created, thereby resulting in the need for new insurance coverage. In such a case, a new policy or certificate must be delivered. See Gardner v League Life Insurance Company, 48 Mich App 574; 210 NW2d 897 (1973).

In summation, it is my opinion that credit insurance on 'open-end' loans is legal when operated within the purview of the Credit Insurance Act. New charges on an existing account may result in the refinancing of the account and discharge of the prior original indebtedness; thereby meeting the requirements of the act, for full insurance coverage over the entire indebtedness.

Frank J. Kelley