Published 18 June 2018, The Daily Tribune

Does the notice of availability of check, by itself, produce the effect of premium payment thereby entitling the insured to receive the insurance proceeds when the risk insured against occurs?The Supreme Court answered the issue in the negative in the fairly recent case of Gaisano vs. Development Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017.

Let us assume that on September 27, 1996, DIS Insurance Company issued a comprehensive commercial vehicle policy to Johnny over a motor vehicle for a period of one year. Johnny’s company XYZ immediately processed the payments and issued a check on the same day payable to TRS, DIS insurance agent. The check represented payment for the premium and other charges over the vehicle. However, nobody from TRS picked up the check that day because its president and general manager was celebrating his birthday. TRS informed XYZ that its messenger would get the check the next day, September 28.  In the evening of September 27, 1996 while under the official custody of Peter, XYZ’s marketing manager, the vehicle was stolen. Oblivious of the incident, TRS picked up the check the next day, September 28. It issued an official receipt dated September 28, 1996, acknowledging the receipt of premium payment and other charges over the vehicle.  On October 1, 1996, Johnny informed DIS of the vehicle’s loss and asked for the insurance proceeds. In its answer, DIS asserted that the non-payment of the premium rendered the policy ineffective. The premium was received by the insurance agent only on October 2, 1996, and there was no known loss covered by the policy to which the payment could be applied.  The question is whether or not there was a binding insurance contract between DIS and Johnny.

As pointed out, the Supreme Court ruled in the negative. Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. Just like any other contract, it requires a cause or consideration. The consideration is the premium, which must be paid at the time and in the way and manner specified in the policy.  There is no dispute that the check was delivered to and was accepted by TRS, only on September 28, 1996. No payment of premium had thus been made at the time of the loss of the vehicle on September 27, 1996. While Johnny claims that TRS was informed that the check was ready for pick-up on September 27, 1996, the notice of the availability of the check, by itself, does not produce the effect of payment of the premium. TRS could not be considered in delay in accepting the check because when it informed Johnny that it would only be able to pick-up the check the next day, Johnny did not protest to this, but instead allowed TRS to do so. Thus, at the time of loss, there was no payment of premium yet to make the insurance policy effective. The Court also added that Johnny also failed to establish the fact of a grant by ABC Insurance of a credit term in his favor, or that the grant has been consistent. The Court then concluded that Johnny is not entitled to the insurance proceeds because no insurance policy became effective for lack of premium payment. He is, however, is entitled to a return of the premium paid for the vehicle to prevent unjust enrichment.

The Supreme Court decision basically reiterated the “cash and carry rule “in a contract of insurance. Under this rule, there is no valid and binding insurance contract unless premium is paid. The payment of premium is imperative for the validity of the policy. It is a condition precedent to, and essential for, the efficaciousness of the contract. Jurisprudence and law, however, admit of exceptions such as a) in case of  life or industrial policy accident whenever the grace period provision  applies; b) when the insurer acknowledges receipt of premium in the policy event if there is a stipulation that it shall not be binding until the premium is actually paid, thus creating a legal fiction of payment; c) when the premium is payable on installment basis and the loss occurs after partial payment has been made, in which case, the insured is entitled to recover the full amount of insurance without prejudice to his obligation to pay the balance of the premium; d) in case of suretyship, when the obligee has accepted the bond despite non-payment of premium; e ) when the insurer grants the insured a credit period ( generally not to exceed 90 days ) to pay the premium and the loss occurs prior to the expiration of the credit period; f) when the parties are barred by estoppel, that is by practice or arrangement, the insurer has been accustomed to receiving premium payments even after policy issuance; and, g ) when the insurer issued a cover note ( which means temporary coverage pending issuance of the policy not to exceed, however, 60 days ) and the loss occurs during that period.

Practical lesson then for the “insured “who wants certainty of insurance coverage. He must ask for a credit period to pay his premium, otherwise, he must ensure that the cash payment or the check issued to cover the premium is actually received by the insurer or its agent. Otherwise, he can not recover, and the peace of mind that insurance aims to provide will simply be a piece of error and the notion of certainty supposedly associated with it a mere fiction.

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