Insurers are being warned by the European Court of Justice (ECJ) that they must ensure consumers are able to understand the economic consequences of the policy being taken out.
The court decreed that even if the contractual terms given are in plain language, the policyholder must be able to understand using "precise intelligible criteria" the economic consequences of the whole contract.
Failing to do so could leave insurers open to legal action in national courts under unfair terms legislation.
The ECJ's decision came in the case of Jean-Claude Van Hove v CNP Assurances SA, which originated in France.
Mr Van Hove took two out mortgages totalling around €68,000 and protected 75% of the value with a disability insurance contract should he be unable to work.
Following an accident at work, Mr Van Hove was found to have a permanent partial incapacity rate of 72% within the meaning of French social security law.
However, the doctor appointed by the insurance company concluded that Mr Van Hove's state of health, although no longer compatible with him returning to his former post, allowed him to carry on appropriate employment on a part-time basis. The insurer therefore refused to continue to cover the loan repayments.
Van Hove brought legal action claiming the terms relating to total incapacity for work were unfair and the French court referred the matter to the ECJ.
The ECJ agreed that case considering whether the terms were unfair could proceed and returned it back to the French court.
However, it emphasised that because the contracts were co-joined as part of one framework that the "consumer cannot be required to have the same vigilance regarding the extent of the risks covered by that insurance contract as he would if he had concluded the insurance contract and the loan contracts separately".
It added: "The court therefore declares that terms that relate to the main subject-matter of an insurance contract may be regarded as being drafted in plain, intelligible language if they are not only grammatically intelligible to the consumer, but also set out transparently the specific functioning of the insurance arrangements, taking into account the contractual framework of which they form part, so that that consumer is in a position to evaluate, on the basis of precise, intelligible criteria, the economic consequences for him which derive from it.
"If not, the national court may assess the possible unfairness of the term at issue."
