Dear PAO,
I have a fire insurance policy that I renew annually, and I pay the premiums through an auto-debit arrangement with my bank. In case I forget to maintain a sufficient balance in my account, resulting in the unsuccessful deduction of the premium, would this be considered non-payment of the premium? May I also know the effects of non-payment of the premium in my insurance policy? Thank you.
Irene
Dear Irene,
Section 2 of Republic Act (R.A.) No. 10607, otherwise known as the Insurance Code of the Philippines, defines a contract of insurance as “an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.”
On the other hand, Section 77 of the Insurance Code provides: “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 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.”
The foregoing provision embodies what is commonly referred to as the “Cash and Carry” Rule in insurance, which is generally expressed by the maxim “No premium, no policy.” In Chartis Philippines Insurance, Inc. vs. Cyber City Teleservices, Ltd., (G.R. No. 234299, March 3, 2021) the Supreme Court, speaking through Honorable Associate Justice Rosmari D. Carandang, clarified the legal consequences attendant to the payment or non-payment of insurance premiums:
“1) [I]f the insured paid the premium, the insurer’s liability attaches correspondingly. There is a valid and binding policy or contract of insurance and the insured may demand indemnification in case of loss. There is no credit on the premium to speak of and, therefore, none which the insurer can demand because he has already been paid;
“2) [I]f the insured did not pay the premium and the parties did not agree that the insurer’s liability has attached, then there is no valid or binding contract of insurance. The insured cannot demand indemnification if loss occurs and neither can the insurer demand payment of the premium;
“3) [I]f the insured did not actually pay the premium but the parties have agreed that the insurer’s liability has attached, then the insured is considered to have extended credit on the premium. When the insured accepts the terms of the credit, there is a valid and binding contract of insurance. The insured must pay the premium before the end of the credit term; otherwise, he cannot demand indemnification in case of loss. The insurer may demand the premium, whether or not loss occurred.”
Accordingly, the general rule is that an insurance policy does not become valid and binding unless the required premium has been paid, except when a valid credit extension exists. The “Cash and Carry Rule” is founded upon the principle that the insurer assumes the risk in consideration of the insured’s payment of the premium.
In your case, the failure of the automatic debit due to insufficient funds constitutes non-payment of the premium. However, this does not necessarily mean that the policy is immediately terminated or rendered ineffective, as the terms of the policy and any applicable grace period or credit arrangement must first be considered. If the premium remains unpaid and no exception applies, the insurer may deny a claim for any loss occurring during the period without valid coverage.
We hope that we were able to answer your queries. This advice is solely based on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.
Thank you for your continued trust and support.
Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to dearpao@manilatimes.net
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