We study to what extent voluntary health insurance decisions in microcredit groups are subject to free-riding and whether a binding contract is a way out of this social dilemma. In jointly liable credit groups, group members serve as social collateral for each other’s loan repayment and contribute for peers with catastrophic health expenditures. We model the individual insurance decision under such joint liability and show that the decision resembles a prisoner’s dilemma. We therefore predict higher demand for group insurance, in which the entire group enrolls only if all group members agree. Results from a framed field experiment among 355 microcredit clients in Tanzania confirm that group insurance is indeed a way to overcome free-riding in the individual insurance decision. These findings are particularly relevant for the design of micro-insurance schemes that are increasingly piloted in developing countries.