Dear PAO,
I bought a second-hand car and decided to get an insurance to insure it from any accidents. Last week, the insurance agent and I agreed to proceed with the insurance contract, however, I was not able to pay the premium yet because I was waiting for my salary. Unfortunately, the car was stolen last night. Can I still pay the premium for the insurance so that I can collect the proceeds from the insurance contract?
Waren
Dear Waren,
Please be informed of the ruling of the Supreme Court in the case of Jaime T. Gaisano vs. Development Insurance and Surety Corporation (GR 190702, 27 Feb. 27, 2017, Associate Justice Francis Jardeleza) which states that:
“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. If not so paid, the policy will lapse and be forfeited by its own terms.
“The law, however, limits the parties’ autonomy as to when payment of premium may be made for the contract to take effect. 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:
“Sec. 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.
“In Tibay v. Court of Appeals, we emphasized the importance of this rule. We explained that in an insurance contract, both the insured and insurer undertake risks. On one hand, there is the insured, a member of a group exposed to a particular peril, who contributes premiums under the risk of receiving nothing in return in case the contingency does not happen; on the other, there is the insurer, who undertakes to pay the entire sum agreed upon in case the contingency happens. This risk-distributing mechanism operates under a system where, by prompt payment of the premiums, the insurer is able to meet its legal obligation to maintain a legal reserve fund needed to meet its contingent obligations to the public. The premium, therefore, is the elixir vitae or source of life of the insurance business.” (Emphasis supplied)
Based on the above-quoted case, it is clear that, just like any other contract, an insurance contract requires a cause or consideration for it to be valid and binding. The consideration in an insurance contract is the premium, which must be paid at the time and in the way and manner specified in the policy. If not so paid, the policy will lapse and be forfeited on its own terms. Thus, the general rule in insurance laws is that unless the premium is paid, the insurance policy is not valid and binding.
Based on your query, your car was lost before you paid the premium on the insurance contract. Thus, there was no valid and binding contract of insurance between you and the insurance company. In other words, you may not belatedly pay the premium and subsequently claim for the insurance contract, which, in the first place, was never perfected and became valid.
We hope that we were able to answer your queries. Please be reminded that this advice is based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated on.
Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]
