Insurer's subrogation and security deposit

Insurer's subrogation and security deposit: why the subrogated creditor cannot claim more than the subrogating party held

Introduction

Where an insurer compensates a landlord for tenant damage and then turns against the tenants by way of subrogation, can it claim the full amount paid without taking into account the security deposit still held by the landlord?

The question is far from theoretical. It arises whenever an insurer covering tenancy obligations pays compensation to its policyholder without first deducting the security deposit. For tenants, the stakes are direct: they risk paying twice – once through the security deposit tied up since they moved in, and a second time when the subrogated party calls on them. For the insurer, the difficulty is the mirror image: if it has overpaid, against whom can it turn?

In a judgment of 29 January 2026 (Cour de cassation, 3rd Civil Chamber, 29 January 2026, No. 24-17.255), the Cour de cassation gives a clear answer, based on the mechanism of defences that can be raised against the subrogated creditor: the security deposit is a connected debt, the set-off of which can be asserted against the subrogated party, who cannot be vested with rights that the subrogating party did not itself hold.

The legal framework of subrogation and of the defences that can be raised

Personal subrogation (subrogation personnelle) allows a person who has paid another's debt to step into the shoes of the original creditor as regards its rights against the debtor. This mechanism, codified in Articles 1346 et seq. of the French Civil Code, rests on a fundamental principle: the subrogated party acquires only the rights that the subrogating party actually held at the time of payment.

Article 1346-5 of the French Civil Code governs the defences that can be raised against the subrogated creditor. It expressly provides that the debtor may raise against it the defences inherent in the debt, such as set-off of connected debts, as well as the defences arising from its dealings with the subrogating party before the subrogation became enforceable against the debtor. The interplay between set-off and limitation periods in disputes over unfair terms in home loans is the subject of our commentary on the consumer's ability to combine limitation and set-off.

Recent case law shows an effort to clarify this mechanism. Two judgments handed down in autumn 2025 clarified the burden of proof: the party relying on the subrogation must establish the existence of a legitimate interest, while the debtor must show a gratuitous intention or the voluntary performance of a natural obligation in order to exclude it (Cour de cassation, 1st Civil Chamber, 13 November 2025, No. 23-16.988; Cour de cassation, 2nd Civil Chamber, 27 November 2025, No. 23-13.753).

The facts and the proceedings

In this case, tenants had paid a security deposit of €780 to the landlady's managing agent when they moved in. After the dwelling was handed back, the landlady obtained from her insurer, which guaranteed tenancy obligations, payment of compensation covering the damage recorded.

Subrogated in the landlady's rights, the insurer obtained an order for payment (injonction de payer) requiring the tenants to pay €1,005. The tenants lodged an objection before the judicial court (tribunal judiciaire) of Mont-de-Marsan, which dismissed their claims and ordered them to pay the full amount claimed.

As the judgment was given at first and last instance under Articles R. 211-3-24 and R. 211-3-25 of the French Code of Judicial Organisation (claims below €5,000), only an appeal on points of law to the Cour de cassation remained open to the tenants.

The contribution of the judgment of 29 January 2026

The Third Civil Chamber quashes the judgment on the basis of Article 1346-5 of the French Civil Code. It restates three essential rules of the subrogation regime:

The debtor may rely on the subrogation as soon as it becomes aware of it, but the subrogation can be enforced against the debtor only if it has been notified to the debtor or if the debtor has acknowledged it.

The subrogation is enforceable against third parties from the time of payment.

The debtor may raise against the subrogated creditor the defences inherent in the debt, including set-off of connected debts, as well as the defences arising from its dealings with the subrogating party before the subrogation became enforceable against the debtor.

The Court holds that the tenants, who argued that the landlady's claim was extinguished in whole or in part even before the subrogation by deduction of the security deposit, were raising against the subrogated creditor a defence inherent in the debt; the ground that they were not seeking the return of the security deposit was ineffective. The very purpose of the security deposit is to cover tenancy defaults. On the amounts at issue (€1,005 claimed, security deposit of €780), the subrogated insurer could claim only the balance of the debt after deduction of the deposit, namely €225, subject to the assessment of the court to which the case is remitted. The deduction from the security deposit of the occupation indemnity owed by a tenant remaining in the premises is analysed in our article on the security deposit and holding over.

The remedies open to the subrogated insurer

The action for recovery of undue payment against the subrogating party

The judgment does not rule on the insurer's recourse against the landlady. Where the insurer has compensated the landlady without deducting the security deposit that she held, it may bring an action against her for recovery of undue payment (répétition de l'indu), governed by Articles 1302 to 1302-3 of the French Civil Code: what has been received without being due is subject to restitution, and a person who receives it by mistake or knowingly must return it to the person from whom it was unduly received.

Indeed, the landlady had the security deposit at her disposal while having obtained from her insurer compensation for the entire tenancy debt. The surplus received – corresponding to the amount of the security deposit, namely €780 – is an undue payment whose return the insurer may request.

Determining against whom the restitution action is brought

A distinction must be drawn according to the capacity of the person against whom the action is brought. Where the insurer sues its own policyholder (here the landlady), the appropriate basis is recovery of undue payment: the excess payment was made under the insurance contract, and the policyholder is its direct beneficiary.

The position is different where the insurer has paid a third-party victim the compensation to which that victim was entitled: the victim has not received an undue payment, the true beneficiary of the payment being the person whose debt was discharged by a third party who was not liable for it. The restitution action is then brought against that debtor and not against the victim (Cour de cassation, 1st Civil Chamber, 9 March 2004, No. 01-16.269; Cour de cassation, 1st Civil Chamber, 22 September 2011, No. 10-14.871).

Practical consequences

For insurers. Before any compensation is paid, systematically check the existence and amount of the security deposit held by the landlord. Deducting that amount from the compensation paid avoids an excess payment and the need for an action for recovery. Failing that, the subrogated insurer will be able to claim from the tenant only the net balance.

For landlords. Inform the insurer fairly of the existence and amount of the security deposit. A landlord who received the full compensation without disclosing the deposit is exposed to an action for recovery of undue payment and, where applicable, to a challenge to its contractual good faith.

For tenants. Systematically raise set-off against the security deposit when a subrogated insurer makes a claim. Article 1346-5 of the French Civil Code is a solid basis for limiting the amount actually due to the balance alone after deduction.

Identified litigation risks

The main risk lies in the security deposit not being taken into account at the compensation stage, generating cascading litigation: an action by the subrogated party against the tenants, an objection by the tenants on the basis of set-off, then an action by the insurer against the landlord for recovery of undue payment.

A second risk concerns proof that the debts are connected. If the security deposit is not contractually allocated to covering damage, the characterisation of the debts as connected could be challenged, even though the solution adopted by the Cour de cassation appears difficult to reverse in tenancy matters.

Recommendations

On the insurer's side, build a systematic check of the security deposit into compensation procedures and provide contractually for an obligation on the policyholder to declare its amount. On the landlord's side, document precisely the allocation of the security deposit in the exit statement before any claim is declared. On the tenant's side, keep proof of payment of the security deposit and produce it from the stage of the order for payment or the objection.

Conclusion

The judgment of 29 January 2026 reaffirms a structuring principle of the law of obligations: the subrogated party cannot have more rights than the subrogating party. In tenancy matters, this rule requires the security deposit to be deducted from any claim made by the subrogated insurer. For each party, securing its position depends on rigorous management of information and documentation from the compensation stage, well before any litigation phase.

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