Espinoza, Patricia Rachelle C.
| Insurance
IV. PREMIUM
Concept
Premium is the elixir vitae of the insurance
business because by law the insurer must maintain a legal
reserve fund to meet its contingent obligations to the public,
hence, the imperative need for its prompt payment and full
satisfaction. All actuarial calculations and various
tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt
payment of premiums. Upon this bedrock insurance firms
are enabled to offer the assurance of security to the public
at favorable rates
It represents the consideration of the contract; it is
what the insured pays the insurer to assume the risk of or
the value loss.
The rates of premium are based on the nature and
character of the property or other interest insured.
The burden is on an insured to keep a policy in
force by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured from
allowing a policy to elapse through a failure to make
premium payments. The continuance of the insurer's
obligation is conditional upon the payment of premiums, so
that no recovery can be had upon a lapsed policy, the
contractual relation between the parties having ceased
(Philippine Phoenix Surety & Insurance Company vs.
Woodworks, Inc. G.R. No. L-25317 August 6, 1979).
Q: What is net premium?
A: It is the portion of the premium that is chargeable
directly to the risk assumed by the insurer.
Q: What is gross premium?
A: It is the total amount charged to the insured, which
necessarily includes the net premium plus charges for
administrative expenses and profits.
Assessment defined
A sum specifically levied by mutual insurance companies or
associations, upon a fixed and definite plan. to pay losses
and expenses. A policy issued on the assessment plan has
been defined as one where the payment of the benefits is in
any manner or degree dependent upon the collection of an
assessment upon persons holding similar policies.
PREMIUM ASSESSMENT
Levied and paid to meet Collected to meet actual
anticipated losses losses
Payment, after the first, Unless otherwise agreed.
is not enforceable are legally enforceable
against the insured once levied
Not a debt If properly levied, unless
otherwise expressly
agreed, is a debt
Payment of premium ordinarily not a debt
1. In fire, casualty, and marine insurance—the
premium payable becomes a debt as soon as the
risk attaches, and in suretyship, as soon as the
contract or bond is perfected and delivered to the
obligor.
2. In life insurance—the premium becomes a debt or
when in case of the first premium, the contract has
become binding, and in the case of subsequent
premiums, when the insurer has continued the
insurance after maturity of the premium, in
consideration of the insured's express or implied
promise to pay.
When Payment Accrues
The law states that the insurer is entitled to
payment of premium as soon as the thing insured is exposed
to the peril exposed against. It should be noted, however,
that the contract of insurance is generally unilateral. This
means that the insurer does not have a reciprocal obligation
to pay the premium although the same payment will give
rise to the unilateral obligation of the insurer. Usually, the
insured cannot be sued for the non-payment of the
premium, the only effect of non-payment being that the
policy will not go into force. After the insurance comes into
force after their payment of premium, it is only the insurer
that makes a legally enforceable promise
SEC. 315. The premium, or any portion thereof, which an
insurance agent or insurance broker collects from an
insured and which is to be paid to an insurance company
because of the assumption of liability through the issuance
of policies or contracts of insurance, shall be held by the
agent or broker in a fiduciary capacity and shall not be
misappropriated or converted to his own use or illegally
withheld by the agent or broker.
Any insurance company which delivers to an
insurance agent or insurance broker a policy or contract of
insurance shall be deemed to have authorized such agent or
broker to receive on its behalf payment of any premium
which is due on such policy or contract of insurance at the
time of its issuance or delivery or which becomes due
thereon.
In order to ensure faithful performance by the
insurance agent or insurance broker of these fiduciary
responsibilities, the Insurance Commissioner shall
prescribe the minimum terms and conditions on such
matters in the standard agency or brokers agreement

between the agents and/or the broker with the insurance
companies.
Payment to an agent having the authority to collect
or receive such payment is equivalent to payment to
principal himself, and such payment is complete if the
money is delivered to the agent’s hands and is a discharge
of the indebtedness owing to the principal.
Industrial Life Policy
SEC. 235. The term industrial life insurance as used in this
Code shall mean that form of life insurance under which the
premiums are payable either monthly or oftener, if the face
amount of insurance provided in any policy is not more than
five hundred times that of the current statutory minimum
daily wage in the City of Manila, and if the words industrial
policy are printed upon the policy as part of the descriptive
matter.
An industrial life policy shall not lapse for
nonpayment of premium if such nonpayment was due to the
failure of the company to send its representative or agent to
the insured at the residence of the insured or at some other
place indicated by him for the purpose of collecting such
premium: Provided, That the provisions of this paragraph
shall not apply when the premium on the policy remains
unpaid for a period of three (3) months or twelve (12)
weeks after the grace period has expired.
Q: What does the phrase “the thing insured is exposed
to the peril insured against” assume?
A: It assumes that the contract is perfected which takes
place when the applicant’s offer is accepted by the insurer.
Q: What is the effect if as between the insurer and the
insured, there was not only a perfected contract of
insurance but a partially performed one?
A: The non-payment of the balance of the premium due
does not produce the cancellation of the contract of
insurance in the sense that it can no longer be enforced. A
contrary rule would place exclusively in the hands of the
insured the right to decide whether the contract should
stand or not.
Acceptance of premium
Acceptance of premium within the stipulated period for
payment thereof, including the agreed grace period, merely
assures continued effectivity of the insurance policy in
accordance with its terms (Stoke v. Malayan Insurance Co.,
Inc., G.R. No. L-34768, February 28, 1984).
Payment of the premium to agent of the insurance company
is binding on it (Malayan Insurance v. Arnaldo G.R. No. L-
67835, October 12, 1987 and Areola v. CA G.R. No. 95641,
September 22, 1994).
Espinoza, Patricia Rachelle C.| Insurance
NOTE: An insurance company which delivers a policy to an
insurance broker, is deemed to have authorized the latter to
receive the payment of the premium (IC, Sec. 306).
SEC. 306. In addition to any other penalty provided by law,
the Commissioner may, upon the willful failure of any
person within a holding company system to comply with
this title or any regulation or order promulgated hereunder:
(a) Proceed under Title 14 or Title 15, Chapter III
of this Code with respect to insurer within the
holding company system; or
(b) Revoke or refuse to renew the authority to do
business in this country of an insurer within the
holding company system or refuse to issue such
authority to any other insurer in the system; or
(c) Direct that, in addition to any other penalty
provided by law, such person forfeit to the people
of this country a sum not less than Five thousand
pesos (P5,000.00) for a first violation and Twenty-
five thousand pesos (P25,000.00) for any
subsequent violation. An additional sum not less
than Twenty-five thousand pesos (P25,000.00)
shall be imposed for each month during which any
such violation shall continue.
“Cash and carry” rule (2003 Bar)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and until the
premium thereof has been paid. Any agreement to the
contrary is void.
XPN: A policy is valid and binding even when there is non-
payment of premium:
1. In case of life or 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 (IC, Sec. 77).
2. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding until
the premium is actually paid. This is without
prejudice however to right of insurer to collect
corresponding premium (IC, Sec. 77).
3. When there is an agreement allowing the insured
to pay the premium in installments and partial
payment has been made at the time of loss (Makati
Tuscany Condominium Corp. v. CA, G.R. No. 95546,
Nov. 6, 1992).
4. When there is an agreement to grant the insured
credit extension for the payment of the premium

and loss occurs before the expiration of the credit
term (2007 Bar; NCC, Art. 1306; UCPB General
Insurance v. Masagana Telemart, G.R. No. 137172,
Apr. 4, 2001).
5. When estoppel bars the insurer to invoke non-
recovery on the policy.
6. When the public interest so requires, as
determined by the Insurance Commissioner
Example: In compulsory motor vehicle insurance, if the
policy was issued without payment of premium by the
vehicle owner, the insurer will still be held liable. To rule
otherwise would prejudice the 3rd party victim.
1. Grace Period
SEC. 233. In the case of individual life or endowment
insurance, the policy shall contain in substance the
following conditions:
"(a) A provision that the policyholder is entitled to
a grace period either of thirty (30) days or of one
(1) month within which the payment of any
premium after the first may be made, subject at the
option of the insurer to an interest charge not in
excess of six percent (6%) per annum for the
number of days of grace elapsing before the
payment of the premium, during which period of
grace the policy shall continue in full force, but in
case the policy becomes a claim during the said
period of grace before the overdue premium is
paid, the amount of such premium with interest
may be deducted from the amount payable under
the policy in settlement;
SEC. 234. No policy of group life insurance shall be issued
and delivered in the Philippines unless it contains in
substance the following provisions, or provisions which in
the opinion of the Commissioner are more favorable to the
persons insured, or at least as favorable to the persons
insured and more favorable to the policyholders:
"(a) A provision that the policyholder is entitled to
a grace period of either thirty (30) days or of one
(1) month for the payment of any premium due
after the first, during which grace period the death
benefit coverage shall continue in force, unless the
policyholder shall have given the insurer written
notice of discontinuance in advance of the date of
discontinuance and in accordance with the terms of
the policy. The policy may provide that the
policyholder shall be liable for the payment of a pro
rata premium for the time the policy is in force
during such grace period;
Section 236. In the case of industrial life insurance, the
policy shall contain in substance the following provisions:
Espinoza, Patricia Rachelle C.| Insurance
"(a) A provision that the insured is entitled to a
grace period of four (4) weeks within which the
payment of any premium after the first may be
made, except that where premiums are payable
monthly, the period of grace shall be either one (1)
month or thirty (30) days; and that during the
period of grace, the policy shall continue in full
force, but if during such grace period the policy
becomes a claim, then any overdue and unpaid
premiums may be deducted from any amount
payable under the policy in settlement;
In case of individual life or endowment insurance and group
life insurance, the policyholder is entitled to a grace period
of either 30 days or 1 month within which the payment of
any premium after the first may be made [IC, Secs. 233 (a)
and 234 (a)].
In case of industrial life insurance, the grace period is 4
weeks, where premiums are payable monthly, either 30
days or 1 month [IC, Secs. 236 (a)].
2. Acknowledgment of receipt of premium
SEC. 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.
Acknowledgment of receipt of premium is conclusive
evidence of its payment, in so far as to make the policy
binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid (IC,
Sec. 79).
When the policy contains such written acknowledgment, it
is presumed that the insurer has waived the condition of
prepayment. It hereby creates a legal fiction of payment.
The presumption is however, extended only to the question
of the binding effect of the policy.
As far as the payment of the premium itself is concerned,
the acknowledgment is only a prima facie evidence of the
fact of such payment. The insurer may still dispute its
acknowledgment but only for the purpose of recovering the
premium due and unpaid. Whether payment was indeed
made is a question of fact.
3. Payment in installments
Q: American Home Assurance Co. (AHAC) , issued in
favor of Makati Tuscany Condominium Corporation
insurance policies for 2 years. The premiums were paid
by Tuscany on installments. The policy was again
renewed, however, Tuscany thereafter refused to pay
the balance of the premium. AHAC filed an action to
recover the unpaid balance. Tuscany contended that
payment by installment of the premiums due on an

insurance policy invalidates the contract of insurance
and no risk attached to the policy. The policy was never
binding and valid, and no risk attached to the policy. Is
the contention of Tuscany valid?
A: NO. The subject policies are valid even if the premiums
were paid on installments. The records clearly show that
Tuscany and AHAC intended the subject insurance policies
to be binding and effective notwithstanding the staggered
payment of the premiums. For 3 years, the insurer accepted
all the installment payments. Such acceptance of payments
speaks loudly of the insurer’s intention to honor the policies
it issued to Tuscany.
While the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the validity
of the contract, Section 78 of the Insurance Code in effect
allows waiver by the insurer of the condition prepayment
by making an acknowledgment in the insurance policy of
receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that
premium is actually unpaid (Makati Tuscany Condominium
Corp. vs. CA G.R. No. 95546, November 6, 1992).
Q:The Peninsula Insurance Company offered to insure
Francis' brand new car against all risks in the sum of PI
Million for 1 year. The policy was issued with the
premium fixed at 160,000.00 payable in 6 months.
Francis only paid the first two months installments.
Despite demands, he failed to pay the subsequent
installments. Five months after the issuance of the
policy, the vehicle was carnapped. Francis filed with the
insurance company a claim for its value. However, the
company denied his claim on the ground that he failed
to pay the premium resulting in the cancellation of the
policy. Can Francis recover from the Peninsula
Insurance Company? (2006 Bar)
A: YES, when insured and insurer have agreed to the
payment of premium by installments and partial payment
has been made at the time of loss, then the insurer becomes
liable. When the car loss happened on the 5th month, the six
months agreed period of payment had not yet elapsed. The
owner may recover from Peninsula Insurance Company,
but the latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
4. Credit Extension
Under Sec. 77 as amended by RA 10607, a ninety (90)-day
credit extension may be given whenever credit extension is
given under the broker and agency agreements with duly
licensed intermediaries. The requisites are as follows:
1. The credit extension must be provided for under
the broker and agency agreements; and
2. The credit extension to a duly licensed
intermediary should not exceed ninety (90) days
Espinoza, Patricia Rachelle C.| Insurance
from date of issuance of the policy (Sundiang Sr. &
Aquino, 2014).
a. CREDIT EXTENSION under RA 10607 is
extended to the duly licensed
intermediary which in turn can benefit the
insured. However, the Supreme Court
observed in UCPB General Insurance co., vs
Masagana Telemart, Inc. has provided a
fourth exception to section 77, namely,
that the insurer may grant credit
extension for the payment of the premium.
This simply means that 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. The SC
observed that there is nothing in Sec. 77
which prohibits the parties in an insurance
contract to provide a credit term within
which to pay the premiums. That
agreement is not against the law, morals,
good customs, public order or public
policy.
b. OLD RULE- in Act No. 2427, it is provided
that “An insurer is entitled to the payment
of the 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.” Thus, under the old law, the
insurance policy would be valid and
binding notwithstanding the non-payment
of the premium if there was a clear
agreement to grant to the insured credit
extension. Such agreement may be
expressed or implied. Sec. 77 deleted the
clause “unless there is clear agreement to
grant the insured credit extension of the
premium due.” The implication of the
ruling is that credit extensions are no
longer allowed because the law-making
body deliberately made the deletion
precisely to remove the exception
c. Well-reasoned opinion of Justice Vitug to
the effect that credit extensions are not
allowed under the present law. He believes
that there should at least be partial
payment to premium to establish the
vinculum juris between the insurer and
the insured.

d. In the old law, the policy is deemed
cancelled if the insured issued a promissory
note stating a fixed date on payment of
premiums and fails to do so, even though
there is express agreement on credit
extensions
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-standing
insurance relationship with each other; SPMC secures
the comprehensive fire insurance on its plant and
facilities from SIC. The standing business practice
between them has been to allow SPMC a credit period
of 90 days from the renewal of the policy within which
to pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day after
the fire, SPMC issued a manager's check to SIC for the
fire insurance premium, for which it was issued a
receipt; a week later SPMC issued its notice of loss. SIC
responded by issuing its own manager's check for the
amount of the premiums SPMC had paid, and denied
SPMC's claim on the ground that under the "cash and
carry" principle governing fire insurance, no coverage
existed at the time the fire occurred because the
insurance premium had not been paid. Is SPMC entitled
to recover for the loss from SIC? (2003, 2013 Bar)
A: YES. St. Peter Manufacturing Company is entitled to
recover for the loss from Stable Insurance Company. Stable
Insurance Company granted a credit term to pay the
premiums. This is not against the law, because the standing
business practice of allowing St. Peter Manufacturing
Company to pay the premiums after 60 or 90 days, was
relied upon in good faith by SPMC. Stable Insurance
Company is in estoppel (UCPB General Insurance Company,
Inc. v. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001).
5. Estoppel
Estoppel may bar an insurer from taking refuge
under Section 77 if the insured relied in good faith on a
practice that they have been following with the insurer.
Hence, estoppel becomes the 5th exception to sec. 77. The Sc
ruled that it would be unjust and inequitable if recovery on
the policy would not be permitted against insurer, which
had consistently granted a 60-day to 90-day credit term for
the payment of premiums despite its full awareness of
section 77.
Q: Maxilite and Marques entered into a trust receipt
transaction with FEBTC for the shipment of various
high-technology equipment. FEBIBI, upon the advice of
FEBTC, facilitated the procurement and processing
from Makati Insurance Company of four separate and
Espinoza, Patricia Rachelle C.| Insurance
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would debit
Maxilite’s account for the premium payments.
However, said premiums were not paid. A fire gutted
Maxilite’s office and warehouse. As a result, Maxilite
suffered losses amounting to at least P2.1 million,
which Maxilite claimed against the fire insurance policy
with Makati Insurance Company. Makati Insurance
Company denied the fire loss claim on the ground of
non-payment of premium. FEBTC and FEBIBI
disclaimed any responsibility for the denial of the
claim. Will the claim of Maxilite prosper?
A: YES. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium has
been unpaid. That FEBTC induced Maxilite to believe that
the insurance premium has in fact been debited from
Maxilite’s account is grounded on the following facts: (1)
FEBTC represented and committed to handle Maxilite’s
financing and capital requirements, including the insurance
of the trust receipted merchandise; (2)the premiums of
prior insurance policies had been paid through automatic
debit arrangement; (3) FEBIBI sent FEBTC, not Maxilite, to
debit Maxilite’s account; (4) there was no written demand
from FEBTC or Makati Insurance Company for Maxilite to
pay the insurance premium; (5) the subject insurance
policy remained uncancelled despite the alleged non-
payment of the premium, making it appear that the
insurance policy remained in force and binding. Thus,
Maxilite can still claim from FEBTC (Jose Marques and
Maxilite Technologies, Inc. vs FEBTC, GR No. 171379, January
10, 2011).
Payment through salary deduction
SEC. 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.
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 (IC, Sec. 78).
*there should be consent with the government
employee for the salary deduction (reason for sec. 78)
Surety
SEC. 179. The surety is entitled to payment of the premium
as soon as the contract of suretyship or bond is perfected
and delivered to the obligor. No contract of suretyship or
bonding shall be valid and binding unless and until the
premium therefor has been paid, except where the obligee
has accepted the bond, in which case the bond becomes
valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the
surety: Provided, That if the contract of suretyship or bond
is not accepted by, or filed with the obligee, the surety shall
collect only a reasonable amount, not exceeding fifty
percent (50%) of the premium due thereon as service fee
plus the cost of stamps or other taxes imposed for the
issuance of the contract or bond: Provided, however, That if
the nonacceptance of the bond be due to the fault or
negligence of the surety, no such service fee, stamps or taxes
shall be collected.
In the case of a continuing bond, the obligor shall pay the
subsequent annual premium as it falls due until the contract
of suretyship is cancelled by the obligee or by the
Commissioner or by a court of competent jurisdiction, as
the case may be.
Another exception can be cited but only with
respect with suretyship under Section 179 of the IC., which
provides that the surety is already liable even if there is
non-payment of premium if the oblige has already accepted
the bond. Also, it provides that the surety is entitled to
payment of the premium as soon as the contract of
suretyship or bond is perfected and delivered to the obligor
and no contract of suretyship or bonding shall be valid and
binding unless and until the premium thereof has been paid.
However, the exception s when the oblige has accepted the
bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has
been paid by the obligor to the surety.
Valid Tender of Payment
The insurance contract will continue to be binding
if the non-payment was due to the fault of the insurer. The
act of the insurer or his agent in refusing the tender of
payment of a premium properly made, will necessarily stop
the insurer from claiming a forfeiture for non-payment
Payment of premium by post-dated check
Espinoza, Patricia Rachelle C.| Insurance
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said note or
check has been converted into cash. This is consistent with
Article 1249 of the New Civil Code.
NOTE: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even if
it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor
(2007 Bar).
Q: If the applicant failed to pay premium and instead
executed a promissory note in favor of the insurer
payable within 30 days which was accepted by the
latter, is the insurer liable in case of loss?
A: YES, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted the
promise of the applicant to pay the insurance premium
within thirty 30 days from the effective date of policy. By so
doing, it has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any provision therein
that it would only pay for the loss or damage in case the
same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the
mode of payment, insurer is deemed to have accepted the
promissory note in payment of the premium. This rendered
the policy immediately operative on the date it was
delivered (Capital Insurance & Surety Co. Inc. v. Plastic Era
Co., Inc. G.R. No. L-22375, July 18, 1975).
Q: On September 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face value of P5
million from RN Insurance Company (RN), with his wife
Tina Marcial (Tina) as sole beneficiary. On the same
day, Danny issued an undated check to RN for the full
amount of the premium. On October 1, 2013, RN issued
the policy covering Danny’s life insurance. On October
5, 2013, Danny met a tragic accident and died. Tina
claimed the insurance benefit, but RN was quick to deny
the claim because at the time of Danny’s death, the
check was not yet encashed and therefore the premium
remained unpaid.
a. Is RN correct?
b. Will your answer be the same if the check is dated
October 15, 2013? (2014 Bar)
A:
a. NO. RN Insurance is not correct. The facts of the case
show that Danny procured insurance on his life on
September 25, 2013, with his wife Tina as beneficiary, and
on that same day, he issued an undated check to RN for the
full amount of the premium. Since the undated check was

issued to RN on September 25, 2013, it will be considered
dated as of the same day.
RN Insurance denied the claim of Tina because at
the time of Danny’s death, the check was not yet encashed,
therefore, the premium remained unpaid. The payment by
means of a check or note, accepted by the insurer, bearing a
date prior to the loss, assuming the availability of the funds
thereof, would be sufficient even if it remains unencashed
at the time of the loss. The subsequent effects of
encashment would retroact to the date of the mercantile
instrument.
b. The answer would not be the same if the check were
dated October 15, 2013. The payment of a promissory note
or postdated check at a stated maturity subsequent to the
loss, is insufficient to put the insurance into effect (Vitug,
Commercial Laws and Jurisprudence, 2006, Vol. I, p. 250).
If it were RN Insurance who dated the check
October 15, 2013, then my answer would be the same as my
answer to the first question.
Q: Alfredo took out a policy to insure his commercial
building from fire. The broker for the insurance
company agreed to give a 15-day credit within which to
pay the insurance premium. Upon delivery of the policy
on May 15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a fire broke
out and destroyed the building owned by Alfredo. May
Alfredo recover on the insurance policy? (2007 Bar)
A: YES. Alfredo may recover on the policy. It is valid to
stipulate that the insured will be granted credit term for
payment of premium. Payment by means of a check which
was accepted by the insurer, bearing a date prior to the loss,
would be sufficient. The subsequent effects of encashment
retroact to the date of the check (UCPB General Insurance
Co., Inc. v. Masagana Telamart, Inc., 356 SCRA 307 [2001]).
Non-payment of premiums
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer. The
continuance of the insurer’s obligation is conditioned upon
the payment of the premium, so that no recovery can be had
upon a lapsed policy, the contractual relation between the
parties having ceased. If the peril insured against had
occurred, the insurer would have had a valid defense
against recovery under the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding the
acceptance of the application or the issuance of the policy,
unless waived. But nonpayment of the balance of the
premium due does not produce the cancellation of the
contract.
Espinoza, Patricia Rachelle C.| Insurance
With respect to subsequent premiums, non-
payment does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy shall in
that event be suspended or shall lapse (De Leon, 2010).
Non-payment of premiums by reason of the
circumstances or conduct of the insurer
GR: Non-payment of premiums does not merely suspend
but put an end to an insurance contract since the time of the
payment is peculiarly of the essence of the contract (De
Leon, 2010).
XPN:
1. The insurer has become insolvent and has
suspended business or has refused without
justification a valid tender of premiums (Gonzales
v. Asia Life Ins. Co., G.R. No. L-5188, Oct. 29, 1952).
2. Failure to pay was due to the wrongful conduct of
the insurer.
3. The insurer has waived his right to demand
payment
Instances when payment of premium becomes a debt or
obligation
1. In fire, casualty and marine insurance, the premium
payable becomes a debt as soon as the risk
attaches.
2. In life insurance, the premium becomes a debt only
when, in the case of the first premium, the contract
has become binding, and in the case of subsequent
premiums, when the insurer has continued the
insurance after maturity of the premium, in
consideration of the insured’s express or implied
promise to pay (De Leon, 2010).
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Devices used to prevent the forfeiture of a life
insurance after the payment of the first premium
(CPAGER)
1. Grace period – After the payment of the first
premium, the insured is entitled to a grace period
of 30 days within which to pay the succeeding
premiums [IC, Sec. 233 (a)].
2. Cash surrender value – The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it
(Cyclopedia Law Dictionary, 3rd ed.).
3. Extended insurance – It is where the insured is
given a right, upon default, after payment of at least

three full annual premiums [IC, Sec. 233 (f)] to have
the policy continued in force from the date of
default for a time either stated or equal to the
amount as the net value of the policy taken as a
single premium, will purchase (De Leon, 2010).
SEC. 233 e) If the policy is participating, a provision
that the company shall periodically ascertain and
apportion any divisible surplus accruing on the policy
under conditions specified therein
(f) A provision specifying the options to which the
policyholder is entitled to in the event of default in a
premium payment after three (3) full annual premiums
shall have been paid. Such option shall consist of:
(1) A cash surrender value payable upon surrender
of the policy which shall not be less than the
reserve on the policy, the basis of which shall be
indicated, for the then current policy year and any
dividend additions thereto, reduced by a surrender
charge which shall not be more than one-fifth (1/5)
of the entire reserve or two and one-half percent
(2½%) of the amount insured and any dividend
additions thereto; and
(2) One or more paid-up benefits on a plan or plans
specified in the policy of such value as may be
purchased by the cash surrender value.
(g) A provision that at any time after a cash surrender
value is available under the policy and while the policy
is in force, the company will advance, on proper
assignment or pledge of the policy and on sole security
thereof, a sum equal to, or at the option of the owner of
the policy, less than the cash surrender value on the
policy, at a specified rate of interest, not more than the
maximum allowed by law, to be determined by the
company from time to time, but not more often than
once a year, subject to the approval of the
Commissioner; and that the company will deduct from
such loan value any existing indebtedness on the policy
and any unpaid balance of the premium for the current
policy year, and may collect interest in advance on the
loan to the end of the current policy year, which
provision may further provide that such loan may be
deferred for not exceeding six (6) months after the
application therefor is made
4. Paid up Insurance – The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued in
force from the date of default for the whole period
of the insurance without further payment of
premiums. It results to a reduction of the original
amount of insurance, but for the same period
originally stipulated (6 Couch 2d., 355; 37 C.J.S. 364).
Espinoza, Patricia Rachelle C.| Insurance
5. Automatic Loan Clause – A stipulation in the policy
providing that upon default in payment of
premium, the same shall be paid from the loan
value of the policy until that value is consumed. In
such a case, the policy is continued in force as fully
and effectively as though the premiums had been
paid by the insured from funds derived from other
sources (6 Couch 2d., 383).
6. Reinstatement – Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at any time within 3 years from the date of
default in the payment of premium, unless the cash
surrender value has been paid, or the extension
period expired, upon production of evidence of
insurability satisfactory to the company and the
payment of all overdue premiums and any
indebtedness to the company upon said policy [IC,
Sec. 233 (j)].
SEC. 233 (j). A provision that the policyholder shall be
entitled to have the policy reinstated at any time within
three (3) years from the date of default of premium
payment unless the cash surrender value has been duly
paid, or the extension period has expired, upon production
of evidence of insurability satisfactory to the company and
upon payment of all overdue premiums and any
indebtedness to the company upon said policy, with interest
rate not exceeding that which would have been applicable
to said premiums and indebtedness in the policy years prior
to reinstatement.
AQUINO BOOK- prevent lapse of Life Insurance
1. Grace Period
2. Automatic policy loan
3. Application of dividend-life insurance policy may
be participating or non-participating. In the case of
participating insurance policy, the insured is
entitled to the dividends that may be available. It is
mandated in the IC that if the policy is participating,
it must contain a provision that the company shall
periodically ascertain and apportion any divisible
surplus accruing on the policy under the conditions
specified therein. It may be provided that the
dividend shall be applied to the premiums that are
due or payable. [IC, Sec. 233 (e)]
4. Restatement clause
REINSTATEMENT OF A LAPSED POLICY OF LIFE
INSURANCE
Purpose of the reinstatement provision

The purpose of the provision is to clarify the
requirements for restoring a policy to premium-paying
status after it has been permitted to lapse.
The law requires that the policy owner be
permitted to reinstate the policy, subject to the violations
specified, any time within three (3) years from the date of
default of premium payment. A longer period, being more
favorable to the insured, may be used.
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the insurer, which
has the right to deny reinstatement if it were not satisfied
as to the insurability of the insured, and if the latter did not
pay all overdue premiums and other indebtedness to the
insurer (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-
3581, September 21, 1950).
Q: A life insurance policy lapsed. The insured applied
for reinstatement of the policy and paid only a part of
the overdue premiums. Subsequently, the insured died.
Was the insurer liable?
A: The insurer is not liable as the policy was not reinstated.
The failure to pay the balance of the overdue premiums
prevented reinstatement and recovery of the face value of
the policy (Andres vs. Crown Life Ins. Co., 55 O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for reinstatement
any time within three years after it lapsed. Eulogio paid
the premiums due on the first two months. However, he
failed to pay subsequent premiums. One month after
the policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the overdue
premiums and signed a reinstatement policy stating
that the payment deposit only and shall not bind the
Company until this application is finally approved.
Hours later, Eulogio died of electrocution. The
insurance company denied the claim of his
beneficiaries stating that the policy was never
approved. Is the contention of the insurance company
valid?
A: YES. The stipulation in a life insurance policy giving the
insured the privilege to reinstate it upon written
application does not give the insured absolute right to such
reinstatement by the mere filing of an application. The
insurer has the right to deny the reinstatement if it is not
satisfied as to the insurability of the insured and if the latter
does not pay all overdue premium and all other
indebtedness to the insurer. After the death of the insured,
the Insurance Company cannot be compelled to entertain
an application for reinstatement of the policy because the
conditions precedent to reinstatement can no longer be
determined and satisfied (Violeta R. Lalican vs. The Insular
Life Assurance Company Limited, supra).
Espinoza, Patricia Rachelle C.| Insurance
RETURN OF PREMIUMS
SEC. 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.
SEC. 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.
SEC. 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.
SEC. 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.
Instances when the insured entitled to recover
premiums already paid or a portion thereof (2000 Bar)
1. Whole
a. When no part of the thing insured has been
exposed to any of the perils insured against (IC, Sec.
80).
b. When the contract is voidable because of the fraud
or misrepresentations of the insurer of his agent
(IC, Sec. 82).

c. When the insurance is voidable because of the
existence of facts of which the insured was ignorant
without his fault (IC, Sec. 82).
d. When the insurer never incurred any liability
under the policy because of the default of the
insured other than actual fraud (IC, Sec. 82).
e. When rescission is granted due to insurer’s breach
of contract (IC, Sec. 74).
NOTE: When the contract is voidable, a person insured is
entitled to a return of the premium when such contract is
subsequently annulled under the provisions of the New
Civil Code.
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 (IC, Sec. 82).
2. Pro rata:
a. When the insurance is for a definite period and the
insured surrenders his policy before the
termination thereof; except:
i. Policy not made for a definite period of
time;
ii. Short period rate is agreed upon; or
iii. In life insurance policy.
b. When there is over-insurance. The premiums to
be returned shall be proportioned to the amount by
which the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk (IC,
Sec. 83).
i. In case of over-insurance by double
insurance, the insurer is not liable for the
total amount of the insurance taken, his
liability being limited to the property
insured. Hence, the insurer is not entitled
to that portion of the premium
corresponding to the excess of the
insurance over the insurable interest of
the insured. (1990 Bar)
ii. In case of over-insurance by several
insurers, 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 insured (IC,
Sec. 83).
SEC. 95. A double insurance exists where the same person
is insured by several insurers separately in respect to the
same subject and interest.
SEC. 96. Where the insured in a policy other than life is over
insured by double insurance:
(a) The insured, unless the policy otherwise
provides, may claim payment from the insurers in
Espinoza, Patricia Rachelle C.| Insurance
such order as he may select, up to the amount for
which the insurers are severally liable under their
respective contracts;
(b) Where the policy under which the insured
claims is a valued policy, any sum received by him
under any other policy shall be deducted from the
value of the policy without regard to the actual
value of the subject matter insured;
(c) Where the policy under which the insured
claims is an unvalued policy, any sum received by
him under any policy shall be deducted against the
full insurable value, for any sum received by him
under any policy;
(d) Where the insured receives any sum in excess
of the valuation in the case of valued policies, or of
the insurable value in the case of unvalued policies,
he must hold such sum in trust for the insurers,
according to their right of contribution among
themselves;
(e) Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the loss
in proportion to the amount for which he is liable
under his contract.
Illustration:
Where there is a total over insurance of P500,000.00 in an
aggregate P2,000,000.00 policy (P1,500,000.00 is only the
insurable value), 25% (proportion of P500k to P2M) of the
premiums paid to the several insurers should be returned.
Where there is over-insurance by double insurance (See
Section 93)
The insurer is not liable for the total amount of the
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.
The premium to be returned where there is over-
insurance by several insurers shall be proportioned to the
amount by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at risk.
Where insurance is illegal
GR: Premiums cannot be recovered.
XPN: If, in fact, the parties are not in pari delicto, the law will
allow an innocent insured to take again his premiums as
when—
1. The insured was ignorant of the facts which
rendered the insurance illegal; or

2. One, having no insurable interest in the life insured,
paid premiums in the bona fide belief induced by
the fraudulent statement of the insurer, that such
insurance was valid.
When the insured is not entitled to return of premiums
paid (LI2F)
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81)
2. In life insurance policies (IC, Sec. 80 [b])
3. If the policy is annulled, rescinded or if a claim is
denied by reason of fraud (IC, Sec. 82)
4. If contract is illegal and the parties are in pari
delicto.
Grounds where return of premium is warranted (Book-
Aquino)
1. When the thing was not exposed to the peril
insured against
2. “Time Policy” when the policy is surrendered
before the expiration of the stipulated time (refund
is pro rata)
3. When the contract is voidable and subsequently
annulled under the provisions of the Civil Code
4. When the contract was annulled on the account of
fraud or misrepresentation if the insurer or of his
agent or on account of facts, or the existence of
which the insured was ignorant of without his fault
5. When by any default of the insured other than the
actual fraud, the insurer never incurred liability
under the policy
6. When there is over-insurance by several insurers
Q: Teodoro Cortez, applied for a 20-year endowment
policy with Great Pacific Insurance Corporation (Great
Pacific). His application, with the requisite medical
examination, was accepted and approved by the Great
Pacific and in due course, an endowment policy was
issued in his name. Thereafter, Great Pacific advised
Cortez that the policy was not in force. To make it
enforceable and operative, Cortez was asked to remit
the balance to complete his initial annual premium and
to see Dr. Felipe V. Remollo for another full medical
examination at his own expense. Because of this, Cortez
informed that it that he was cancelling the policy and he
demanded the return of his premium plus damages.
Great Pacific ignored his demand. Is Cortez entitled to a
refund of his premium?
A: YES. Great Pacific should have informed Cortez of the
deadline for paying the first premium before or at least
upon delivery of the policy to him, so he could have
complied with what was needful and would not have been
misled into believing that his life and his family were
protected by the policy, when actually they were not. And,
Espinoza, Patricia Rachelle C.| Insurance
if the premium paid by Cortez was unacceptable for being
late, it was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the beginning,
the company was never at risk, hence, it is not entitled to
keep the premium (Great Pacific Life Insurance Corp. v. CA,
et al., G.R. No. L-57308, April 23, 1990).
Payments in addition to regular premium
ADVANCE PAYMENT
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 (IC, Sec. 84).
SEC. 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.
REBATE OF PREMIUM
SEC. 370. No insurance company doing business in the
Philippines or any agent thereof, no insurance broker, and
no employee or other representative of any such insurance
company, agent, or broker, shall make, procure or negotiate
any contract of insurance or agreement as to policy
contract, other than is plainly expressed in the policy or
other written contract issued or to be issued as evidence
thereof, or shall directly or indirectly, by giving or sharing a
commission or in any manner whatsoever, pay or allow or
offer to pay or allow to the insured or to any employee of
such insured, either as an inducement to the making of such
insurance or after such insurance has been effected, any
rebate from the premium which is specified in the policy, or
any special favor or advantage in the dividends or other
benefits to accrue thereon, or shall give or offer to give any
valuable consideration or inducement of any kind, directly
or indirectly, which is not specified in such policy or
contract of insurance; nor shall any such company, or any
agent thereof, as to any policy or contract of insurance
issued, make any discrimination against any Filipino in the
sense that he is given less advantageous rates, dividends or
other policy conditions or privileges than are accorded to
other nationals because of his race.
SEC. 372. If the Commissioner, after notice and hearing,
finds that any insurance company, rating organization,
agent, broker or other person has violated any of the
provisions of this title, it shall order the payment of a fine
not to exceed Twenty-five thousand pesos (P25,000.00) for
each such offense, and shall immediately suspend or revoke
the license issued to such insurance company, rating
organization, agent, or broker. The issuance, procurement
or negotiation of a single policy or contract of insurance
shall be deemed a separate offense.
 Espinoza, Patricia Rachelle C.| Insurance
Violation of Sec. 370

Constitutes a ground for immediate revocation of license

issued to the erring insurance company, agent or broker
and the imposition of fine not exceeding P25,000.00

Purpose

Prevention of unfair discriminatory practice by insurance

companies, agents or brokers, in order to ensure that equal
terms are fixed for policy holders of the same insurable
class and equal protection of life. The statutes prohibit such
practices involving rebates or preferential treatment with
respect to the cost of the policy or the benefits allowed for
the premium. It follows that to enforce contacts or
agreements directly forbidden under these statutes,
thereby allowing recovery thereunder, would be subversive
of the very public policy which the law was designed and
intended to uphold. While the statutes are addressed to the
insurance companies, agents or brokers, and are enacted
for the protection of policyholders, the provisions are for
the general body of policyholders who would suffer the
enforcement of the prohibited agreements, and not for
those who have entered into such agreements and are
seeking to profit by its terms.

Basis of right to recover premiums

1. 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 sum on which he has received
premium, in such case the whole premium is
earned and there shall be no return;
2. 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 he ought not retain a larger than one-
half or one fourth of the premium and must return
the residue.