THE original provision of Section 72 of the Insurance Act (Act 2427) did not require the full and prompt payment of the premium for an insurance contract to be effective. Thus, even if the premium had not been paid, an insurer was obligated to pay indemnity in case of loss and, correlatively, he had also the right to sue for payment of the premium. This, however, changed on June 20, 1963, when Republic Act (RA) 3540 introduced an amendment to Section 72 by adding the sentence: “No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid.” This radically changed the legal regime in that unless the premium is paid there is no insurance.
Today, Section 77 of the Amended Insurance Code provides that no contract of insurance is valid and binding unless the premium has been paid. After all, premium has been described as the “elixir vitae” or the elixir of life of the insurance business.
The payment contemplated means full and prompt payment. Hence, the nonpayment of premiums would result to the lapse and forfeiture of the policies (Valenzuela v. Court of Appeals). Nonpayment of the premiums does not merely suspend but puts an end to an insurance contract. In Constantino v. Asia Life Insurance Company, it was ruled that even if the nonpayment of premiums was due to the second world war, specifically by reason of the closure of the insurer’s Manila branch office because of the Japanese occupation, the insurance contract should be deemed abrogated by reason of nonpayments, as argued by the so-called United States Rule. In other words, war was no excuse for the nonpayment of premiums. This general rule in Section 77 is what is known as the Cash and Carry rule.
The payment may be made to the insurer or to its agent pursuant to Section 315 (paragraph 2) of the Insurance Code.
The Insurance Code and jurisprudence have, however, stated five exceptions to this general rule: a) in case of a life and or an industrial life policy whenever the grace period applies (Section 77); b) when a 90-day credit extension is given (Section 77); c) acknowledgement of payment in the policy even if no actual payment has been received (Section 79); d) if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss (Makati Tuscany Condominium v. CA); and e) when estoppel applies (UCPB General Insurance Co. v. Masagana Telamart Inc. 2001).
Section 77 provides: “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 90-day credit extension is given. No credit extension to a duly licensed intermediary should exceed 90 days from date of issuance of the policy.”
Our concern is how far can the exceptions to the general rule go? A source of confusion in the interpretation of Section 77 is the phrase “notwithstanding any agreement to the contrary”. The initial contention is that premiums must be paid in full before any insurance policy becomes valid, and no agreement whatsoever (“notwithstanding any agreement to the contrary”) allowing a less than full payment shall be acceptable before an insurance policy comes to effect. The Supreme Court en banc has ruled in the 2001 UCPB Gen v. Masagana Telamart that “Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy. So is an understanding to allow insured to pay premiums in installments not so proscribed.” Therefore the application of the phrase “notwithstanding any agreement to the contrary” has been severely narrowed or limited to refer only to any agreement “stipulating that the policy is valid even if premiums are not paid”. Thus, parties can agree as long as it is not contrary to morals, good customs, public order or public policy.
When a 90-day credit extension is given
The Amended Insurance Code amended Section 77 by expressly allowing an additional exception to the general rule by adding the 90-day credit extension given to licensed intermediaries under a broker or agency agreement. Without this express provision, however, the Supreme Court has already added this exception in the case of UCPB v. Masagana (2001). The Court ruled that UCPB Gen had, in fact, granted credit extensions to Masagana; that the grant thereof was a prevalent industry practice, and that it was not against morals, good customs, public order or public policy. Thus, when the fire occurred, the fire policies were renewed by operation of law and were effective and valid, and the premiums were paid within the 90-day credit term. The import of a credit extension was stated in UCPB (2001): “This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term.”
For historical appreciation, the original provision recognized credit extension. Section 72 of Act 2427, as amended by RA 3540 on June 21, 1963, read: “An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid.”
This provision on credit extension, granted in 1963, was removed by Presidential Decree 612 (Insurance Code) on December 18, 1974, following abuses committed by insurance agents in withholding premiums collected. The Finance Journal of the Department of Finance cited the rationale: “No policy or contract of insurance issued by an insurance company should be valid unless the premium therefore has been paid. In other words, there shall no longer be any extension of credit with respect to insurance premiums. It seems that most of the cases of misappropriation of premium collections committed by insurance agents arise from the fact that the agent is usually given the opportunity to hold the premium collections during the period covered by the credit extension.” Notwithstanding this express deletion, the Court in UCPB (2001) ruled that it is a valid agreement. Under the 2013 amendment, this has been expressly reinstated. The concern over agents’ misappropriation of premiums will have to be addressed through other means.
Where the parties agreed to installment payment and partial payment was made
Where the policy requires the payment of premium in full, and where the premium has only been partially paid and the balance paid only after the peril insured against has occurred, the insurance contract did not take effect and the insured cannot collect at all on the policy. Where the full payment of the premium was not a condition precedent to the existence of the contract, the partial payment of the premium made the policy effective and the insurer may commence action against the insured for the unpaid balance on the policy.
Dennis B. Funa is currently the deputy insurance commissioner for Legal Services of the Insurance Commission. E-mail: dennisfuna@yahoo.com.