Published 7 February 2020, The Daily Tribune

How important is the timely payment of premium for the enforcement of an insurance contract in case of loss? It determines the validity of the insurance contract, according to the Supreme Court’s decision in the case of Gaisano vs. Development Insurance and Surety Corporation (G.R. No. 190702, February 27, 2017).

The case involved a comprehensive commercial vehicle insurance policy issued by the insurer, Development Insurance and Surety Corporation, on September 27, 1996. As payment for the premium, Gaisano issued a check dated on the same day, September 27, payable to the insurer’s agent, Trans-pacific. The latter did not pick up the check until the next day, September 28.

Incidentally, the vehicle subject of the policy had been stolen on the night of September 27. Unaware of the loss, Trans-pacific picked up the check the following day, September 28, and deposited the same for encashment on October 1. The official receipt for the payment indicated September 28 as the date when premium was paid.

When Gaisano claimed the proceeds under the motor vehicle policy on account of the loss, the insurer denied the claim on the ground that there was no insurance policy in force at the time of the loss.

Upon reaching it on appeal, the Supreme Court ruled that the insurance policy was not yet in force at the time of the  loss because there was no payment yet of premium thereon. The general rule in insurance laws is that unless the premium is paid, the insurance policy is not valid and binding. Section 77 of the Insurance Code, applicable at the time of the issuance of the policy, provides that 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.

There is no dispute that the check was delivered to and was accepted by the insurer’s agent, Trans-Pacific, 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. The notice of the availability of the check, by itself, does not produce the effect of payment of the premium. Thus, at the time of loss, there was no payment of premium yet to make the insurance policy effective.

Despite the ruling, the Supreme Court clarified that there are exceptions to the rule that no insurance contract takes effect unless premium is paid. The exceptions are (1) in case of life or industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77 itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even if premium has not been actually paid, as expressly provided by Section 78 itself; (3) where the parties agreed that premium payment shall be in installments and partial payment has been made at the time of loss (4) where the insurer granted the insured a credit term for the payment of the premium, and loss occurs before the expiration of the term; and (5) where the insurer is in estoppel as when it has consistently granted a 60 to 90-day credit term for the payment of premiums.

Obviously, the first three exceptions are inapplicable. The fourth and fifth exceptions to Section 77 also  do not apply for they contemplate situations where the insurers have consistently granted the insured a credit extension or term for the payment of the premium. Here, however, Gaisano failed to establish the fact of a grant by the insurer of a credit term in his favor, or that the grant has been consistent. Nevertheless, Gaisano is entitled to a return of the premium paid for the vehicle under the principle of unjust enrichment. There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience.

It is perhaps a lesson learned that when it comes to insurance contracts, it is wise to ensure payment of the premium as soon as possible in order to guard against any eventuality of unexpected loss. Like all other contracts, insurance contracts require a consideration for its validity, hence no pay, no gain.

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