INSURANCE

PREMIUM
Bricia, Jan Karlo Cases on Premium:
John Michael, Domalanta, Marc Denver
Erodias, Dominador III Soriano, Xander
Ragaza, Kenneth Yu, Oliver William
Premium – the agreed price for assuming and carrying
the risk – that is, the consideration paid an insurer for
undertaking to indemnify the insured against a specified
peril.
• Section 77. An insurer is entitled to payment of the
premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding
unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy
whenever the grace period provision applies, or
whenever under the broker and agency agreements
with duly licensed intermediaries, a ninety (90)-day
credit extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90) days
from date of issuance of the policy.
General Rule: No policy or contract of insurance issued
by an insurance company is valid and binding unless and
until the premium thereof has been paid.
Exceptions:
• In case of a life or an industrial life policy whenever the
grace period provision applies.
• Whenever a ninety (90) days credit extension is given
for the premium due.
• When the insurer makes a written acknowledgement in
a policy or contract of insurance of the receipt of
premium even if there is a stipulation therein that it
shall not be binding until the premium is actually paid.
Exceptions:
• When an agreement allowing the insured to pay the
premium in installments and partial payment has been
made at the time of the loss.
• When there is an agreement to grant the insured credit
extension for the payment of the premium and the loss
occurs before the expiration of the credit term.
• When estoppel bars the insurer from invoking section
77 to avoid recovery on a policy providing a credit term
for the payment of the premiums, as against the
insured who relied in good faith on such extension.
Effect of non-payment of premium

• First Premium – non-payment of the first premium,

unless waived, prevents the contract from becoming
binding. This is notwithstanding the acceptance of the
application nor the issuance of the policy. But non-
payment of the balance of the premium does not
produce the cancellation of the contract.
• Subsequent premiums – non-payment of the
subsequent premiums does not affect the validity of the
contract unless, by express stipulation, it is provided
that the policy shall in that event be suspended or shall
lapse.
NO EXCUSE FOR NON-PAYMENT OF PREMIUM –
even in case of fortuitous events, due to war, sickness or
incapacity of the insured.

Exceptions:
• Where the failure to pay was due to the wrongful
conduct of the insurer such as when the insurer induced
the beneficiary under a policy to surrender it for
cancellation by falsely representing that the insurance
was illegal and void, and returning the premiums paid.
• Where the insurer has in any manner waived his right
to demand payment.
Effect of payment by Installments

If the parties have not agreed to have the premiums paid by

installments or payment by installments is not an established
practice by the parties, the obligation to pay premium when
due is considered as an invisible obligation. Thus, a forfeiture
of the policy is not prevented by part payment thereof. This
means that a part payment will not keep the policy in force
for even such a proportionate part of the new period as the
sum paid bears to the whole premium due.

However, in case the parties agreed to have the premiums be

paid by installments or payment by installments is an
established practice by the parties, acceptance of the
payment of premiums by installments would suffice to make
the policy binding.
ILLUSTRATION:
FACTS: Sometime in 1982, American Home Insurance
issued in favor of Makati Tuscany an insurance policy
covering the building of the insured. The premium
amounting to P4, 000.00 was paid on installments. On
February 10, 1983, the insurer renewed the said policy
and again the insured paid the premiums by
installments. On January 20, 1984, the policy was again
renewed and the insured paid two installments in the
amount of P1,000.00 and P50,000.00 which the insurer
accepted. Thereafter, the insured refused to pay the
balance of the premium. Thus, the insurer filed an action
to recover the said balance of the premium. The insured
claimed that the policy was never binding and valid
because no risks attached to the policy for non-payment
of the full premium.
ISSUE: Whether or not the policy was binding and valid
even if the premium was not paid in full so as to make
the insured liable for the balance of the premium.
RULING: The policy was binding and effective
notwithstanding the staggered payment of premiums.
The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those 3 years, the
insurer accepted all the installment payments. Such
acceptance of installments indicates the insurer’s
intention to honor the policies it issued to the insured.
While it may be true that under sec. 77 of the insurance
code, the parties may not agree to make the insurance
contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the
parties may not agree to allow payment of the premium
by installments, or to consider as valid and binding upon
payment of the first premium.
Promissory Notes and Post-Dated checks
• Under the present law a credit extension is sufficient to
make the policy binding. As a consequence, it would
seem that the delivery of a promissory note should be
considered under the present code as sufficient to make
the policy binding.
• Note however, that under art. 1249 of the civil code, “
the delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
they have been impaired.
ILLUSTRATION:
FACTS: Capital insurance issued a policy insuring the
building and goods of Plastic Era on Dec. 17, 2010. The policy
provided that the insurer would be liable for any loss after
the payment of premiums. When the policy was delivered,
Plastic Era failed to pay the premiums but its duly authorized
representative issued a promissory note payable 30 days
thereafter in favor of the insurer for P3,000.00 representing
the full amount of the premiums. On January 8, 2010, Plastic
Era delivered to Capital Insurance a check for P1,000.00 post
dated for January 16 in partial payment of the premiums. On
January 18, the properties insured were burned. At the time,
the post dated check was not yet cashed and it was only on
February 20 when capital Insurance deposited the check but
it was dishonored for lack of funds. The insurer refused to
pay the loss on the ground of non-payment of premiums.
ISSUE: May the insured recover loss from the insurer?

RULING: Since the policy is silent as to the mode of

payment, the insurer is deemed to have accepted the
promissory note as payment of the premiums. This
rendered the policy immediately operative on the date it
was delivered. Thus, when the loss occurred, the
insurance policy was in full force and effect.
The fact that the check issued as partial payment of the
promissory note was later dishonored did not in any way
operate as a forfeiture of its right under the policy, there
being no express stipulation to that effect.
EFFECT OF PAYMENT AFTER LOSS
• The effect of payment of overdue premiums after the
loss will depend on whether the insurer was aware of
the loss or not at the time of the acceptance of
payment.
• The acceptance and retention by the insurer of the
overdue premiums with knowledge of the fact,
evidences a waiver of the right to forfeit the policy and
thus, the insurer is bound under the policy. However,
where the insurer at the time of payment of premiums
did not know of the loss and subsequently returned the
premiums to the insured, the insurer may still raise the
defense of non-payment of premiums.
EFFECT OF REFUSAL TO ACCEPT PAYMENT

The act of the insurer or his agent in refusing the tender

of a premium properly made will necessarily estop the
insurer from claiming a forfeiture of the policy for non-
payment of premium.
ILLUSTRATION:
FACTS: The insured tendered payment of premium for
the succeeding year but the insurer refused to accept it
because the office was closing for the day due to the
threat of bombing.
ISSUE: May the insurer later on claim forfeiture of the
policy for non-payment of premiums?
RULING: No, the insurer may not assert non-payment
of premiums because the refusal to accept payment
stopped the insurer from claiming a forfeiture of the
policy for non-payment.
Section 78. Employees of the Republic of the
Philippines, including its political subdivisions and
instrumentalities, and government-owned or -controlled
corporations, may pay their insurance premiums and
loan obligations through salary deduction: Provided, That
the treasurer, cashier, paymaster or official of the entity
employing the government employee is authorized,
notwithstanding the provisions of any existing law, rules
and regulations to the contrary, to make deductions from
the salary, wage or income of the latter pursuant to the
agreement between the insurer and the government
employee and to remit such deductions to the insurer
concerned, and collect such reasonable fee for its
services.
Section 79. An acknowledgment in a policy or contract
of insurance or the receipt of premium is conclusive
evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid.
• Even if the insured has not yet paid the premium, the
insurer’s obligation will already be enforced if there is
Agreement.
• But it doesn’t mean that the insured is excused from
paying the premium that is due. The insurer can still
demand payment of the premium.
• It is presumed that the insurer has waived the condition
of prepayment
• Receipt is a prima facie evidence of payment. The
insurer may still dispute its acknowledgement but only
for the purpose of recovering the premium due and
unpaid.
Section 80. A person insured is entitled to a return of
premium, as follows:
a) To the whole premium if no part of his interest in the thing
insured be exposed to any of the perils insured against;
b) Where the insurance is made for a definite period of time
and the insured surrenders his policy, to such portion of
the premium as corresponds with the unexpired time, at a
pro rata rate, unless a short period rate has been agreed
upon and appears on the face of the policy, after
deducting from the whole premium any claim for loss or
damage under the policy which has previously
accrued: Provided, That no holder of a life insurance policy
may avail himself of the privileges of this paragraph
without sufficient cause as otherwise provided by law.
Section 80 (a) General Rule: The insured is entitled to
a return of premium if not exposed to peril insured
against. The insured can ask for return of the premium if
the property was not exposed to the risk insured against.

Exception: The insured is not entitled to refund of the

premiums paid
• Where the risk is entire and the contract is indivisible,
• If the property insured was exposed to the risk insured
for any period regardless whether its brief or
momentary.
Section 80 (b): The premium corresponds to a certain
unit or units of time. The idea is that the amount is
actually for the entire period and is spread to the entire
term.

Surrender of the policy means that the insurer will not be

liable for the remaining period and the premium
corresponding to the remaining period is no longer due.

Of course the refund shall be on a pro rata basis except

if a short rate has been agreed upon and appears in the
policy.
Section 80 (b) does not apply:
• Where the insurance is not for a definite period.
• Where a short period rate has been agreed upon. (not
Pro rata)
• Where the policy is a life insurance. (not divisible)

Note: However, the insured will be entitled to receive the

“cash surrender value” of his policy after three annual
premiums shall have been paid.
Section 81. If a peril insured against has existed, and
the insurer has been liable for any period, however
short, the insured is not entitled to return of premiums,
so far as that particular risk is concerned.
Where risk has attached:

Whole premium considered as earned, if the risk

attached by reason of the contract’s becoming binding
upon the insurer, the whole premium must be
considered as earned and, therefore, cannot be
apportioned in case the risk terminates before the end
of the term for which the insurance was granted. (in the
absence of any agreement to the contrary)
Example: X procures insurance upon a
certain vessel against the perils of the sea
for a voyage from Manila to South Korea,
voyage will last for 5 days. If X cancels the
policy 2 days after the voyage has
commenced, no portion of the premium is
returnable because the thing insured has
already been exposed to the perils insured
against.
Where risk has attached:

 Divisible Insurance, if the contract of insurance is

divisible, consisting of several distinct risks for which
different amounts of premiums have been paid, the
premium paid for any particular risk is not earned until
that risk has attached.
Example: The insurance procured by X upon his vessel
contemplates a voyage in three (3) different stages from
Port A to Port B, then to Port C, and finally, to Port D and
X paid different amount of premium as regards each
portion.
The Contract of insurance is divisible. If X cancels the
policy after the vessel reaches Port B, he can recover the
premiums corresponding to the two (2) other stages of
the voyage as to which no risk has been assumed by
insurer.
Section 82. A person insured is entitled to a return of
the premium when the contract is voidable, and
subsequently annulled under the provisions of the Civil
Code; or on account of the fraud or misrepresentation of
the insurer, or of his agent, or on account of facts, or the
existence of which the insured was ignorant of without
his fault; or when by any default of the insured other
than actual fraud, the insurer never incurred any liability
under the policy.
A person insured is not entitled to a return of premium if
the policy is annulled, rescinded or if a claim is denied by
reason of fraud.
Where the contract is voidable:

Fraud of the insurer or his agent. – If the policy is

induced by the fraud or misrepresentation of the
insurer, or his agent, the insured may, by timely action,
rescind the contract and demand the return of the
premiums paid by him. (Section 78)
Examples:
• Where the insured is induced to take out an insurance
upon the representation of the insurer’s agent that the
policy will be issued to him within one month, the
insured may refuse to contract and recover back the
premiums paid by him if the policy is not issued within
said period.
• Where the insurer’s agent represents that in case the
applicant for the life insurance becomes incapacitated
due to an accident, the company will pay him a monthly
pension of P 2000 during the period of incapacity, the
insured is entitled to a return of the premium if the
policy issued states nothing about this point because
the policy is different from that applied for.
Where the contract is voidable:

Other grounds. - “on a account the existence of

which the insured was ignorant of without his fault; or
when by any default of the insured other than actual
fraud, the insurer never incurred any liability under the
policy.”
• Example: Where the insured pays insurance premiums
on his vessel not knowing that it has already been lost,
he can recover back premiums so paid in the absence
of stipulation in the policy that the insurer will remain
liable even if the vessel is already lost.
Where the contract is voidable:

Fraud of the insured. – the insured is not entitiled to a return of the

premium paid if the policy is annulled by reason of fraud or
misrepresentation of the insured.
• Section 83. In case of an over insurance
by several insurers other than life, the
insured is entitled to a ratable return of the
premium, proportioned to the amount by
which the aggregate sum insured in all the
policies exceeds the insurable value of the
thing at risk.
Where there is over-insurance.

In case of over-insurance by double insurance, the

insurer is not liable for the total amount of insurance
taken, his liability being limited to the amount of the
insurable interest on the property insured. Hence he is
not entitled to that portion of the premium corresponding
to the excess of the insurance over the insurable interest
of the insured.
Basis of right to recover premiums. With regard to
return of premium for short, interest, over-insurance,
and double insurance, the basis is this:
• Insurer could have been called to pay the whole sum
insured. – If the insurer could at any time, and under
any conceivable circumstances, have been called on to
pay the whole premium is earned and there shall be no
return;
• Insurer could have been called to pay only part of the
whole sum insured. – If, on the other hand, he could
never in any event have thus been called on to pay the
whole, but only a part of the amount of his
subscription.
Basis of right to recover premiums. With regard to
return of premium for short, interest, over-insurance,
and double insurance, the basis is this:
• Insurer could have been called to pay the whole sum
insured. – If the insurer could at any time, and under
any conceivable circumstances, have been called on to
pay the whole premium is earned and there shall be no
return;
• Insurer could have been called to pay only part of the
whole sum insured. – If, on the other hand, he could
never in any event have thus been called on to pay the
whole, but only a part of the amount of his
subscription.
Recap: When insured entitled to recover premiums.
1. Not exposed to any perils insured against. Sec. 80 (a)
2. Insurance is made for a definite period of time and the
insured surrenders his policy before the termination
thereof. Sec. 80 (b)
3. Voidable insurance contract due to fraud or
misrepresentations (insurer’s default). Sec. 82
4. Voidable insurance contract due to the existence of the
facts of which the insured was ignorant without his fault.
Sec. 82
5. Fraud of the insured. Sec. 82
6. Over-insurance. Sec. 83
7. When rescission is granted due to the insurer’s breach of
contract.
Section 84. An insurer may contract and accept
payments, in addition to regular premium, for the
purpose of paying future premiums on the policy
or to increase the benefits thereof.

• The Insured is duty bound to make prompt

payment of only the insurance premiums due
under the policy.
INSURANCE PREMIUM CASES
 American Home
Assurance Company
vs. Chua
Tibay vs. Court of
Appeals
Alicia Gonzales vs
Asia Life Insurance
Company
 Great Pacific Life
Insurance Corporation
vs. Court of Appeals
and Teodoro Cortez
 Makati Tuscany
Condominium Corporation
vs. Court of Appeals,
American Home Assurance
Co.
 UCPB General
Insurance Co.
Inc., vs. Masagana
Telamart, Inc.
 Jaime T. Gaisano
v. Development
Insurance and Surety
Corporation