JAIME T.

GAISANO vs. DEVELOPMENT INSURANCE AND SURETY

CORPORATION
G.R. No. 190702, February 27, 2017
JARDELEZA, J

Topic or Provision: Cash and Carry Rule (Section 77); Exceptions

This is a petition for review on certiorari seeking to nullify the Court of Appeals' Decision and
Resolution reversing the Decision of the Regional Trial Court (RTC) granting petitioner’s claim
on the proceeds of the comprehensive commercial vehicle policy issued by respondent.

DOCTRINE:

The general rule in insurance laws is that unless the premium is paid, the insurance policy is
not valid and binding. 

There are five (5) exceptions to this rule. In UCPB General Insurance Co., Inc. v. Masagana
Telamart, Inc., the Court summarized the exceptions as follows:

(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, as held in Makati Tuscany Condominium
Corp. v. Court of Appeals;
(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, as held in Makati Tuscany
Condominium Corp.; 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

FACTS:

Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate number GTJ-
777, while respondent is a domestic corporation engaged in the insurance business. On
September 27, 1996, respondent issued a comprehensive commercial vehicle policy to
petitioner over the vehicle for a period of one year commencing on September 27, 1996 up
to September 27, 1997.

To collect the premiums and other charges on the policies, respondent's agent,
Trans-Pacific Underwriters Agency issued a statement of account to petitioner's company,
Noah's Ark Merchandising. Noah's Ark immediately processed the payments and issued a
Far East Bank check dated September 27, 1996 payable to Trans-Pacific on the same day.
However, nobody from Trans-Pacific picked up the check that day (September 27) because
its president and general manager, Rolando Herradura, was celebrating his birthday. Trans-
Pacific informed Noah's Ark 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 Noah's Ark
marketing manager Achilles Pacquing as a service company vehicle, the vehicle was stolen
in the vicinity of SM Megamall. Despite search and retrieval efforts, the vehicle was not
recovered. HTE

Oblivious of the incident, Trans-Pacific picked up the check the next day, September
28 and an official receipt was issued

Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported the
loss and filed a claim with respondent for the insurance proceeds. After investigation,
respondent denied petitioner's claim on the ground that there was no insurance contract. 

Petitioner filed a complaint for collection of sum of money and damages with the
RTC where it sought to collect the insurance proceeds from respondent. In its Answer,
respondent asserted that the non-payment of the premium rendered the policy ineffective.

The RTC ruled in favor of petitioner. It considered the premium paid as of September
27, even if the check was received only on September 28 because (1) respondent's agent,
Trans-Pacific, acknowledged payment of the premium on that date, September 27, and (2)
the check that petitioner issued was honored by respondent in acknowledgment of the
authority of the agent to receive it. 

The CA upheld respondent's position that an insurance contract becomes valid and
binding only after the premium is paid pursuant to Section 77 of the Insurance Code. It
found that the premium was not yet paid at the time of the loss on September 27, but only a
day after or on September 28, 1996, when the check was picked up by Trans-Pacific. It also
found that none of the exceptions to Section 77 obtains in this case. 

Petitioner’s Contention:

He argues that there was a valid and binding insurance contract between him and
respondent. He submits that it comes within the exceptions to the rule in Section 77 of
the Insurance Code that no contract of insurance becomes binding unless and until the
premium thereof has been paid. The prohibitive tenor of Section 77 does not apply because
the parties stipulated for the payment of premiums. The parties intended the contract of
insurance to be immediately effective upon issuance, despite non-payment of the premium,
because respondent trusted petitioner.

Issue:

Whether the insurance contract had been perfected at the time of loss on September 27 in the
evening when the check was acquired only on September 28.

Ruling:

No. The general rule in insurance laws is that unless the premium is paid, the insurance policy
is not valid and binding. 

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.

Here, there is no dispute that the check was delivered to and was accepted by respondent'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, 1996. While petitioner claims that
Trans-Pacific 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. Trans-Pacific could not be considered in delay in accepting the check because
when it informed petitioner that it will only be able to pick-up the check the next day, petitioner
did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss,
there was no payment of premium yet to make the insurance policy effective. 

Petitioner cites the 5 exceptions to the rule that no insurance contract takes effect unless
premium is paid and argues that the policy falls under the 4th and 5th exceptions. In UCPB
General Insurance Co., Inc. v. Masagana Telamart, Inc., the Court summarized the
exceptions as follows:

(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, as held in Makati Tuscany Condominium
Corp. v. Court of Appeals;
(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, as held in Makati Tuscany
Condominium Corp.; 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.

The policy here does not fall under the 1st to 3rd. The 4th and 5th exceptions to Section 77
operate under the facts obtaining in Makati Tuscany and UCPB General Insurance. Both
contemplate situations where the insurers have consistently granted the insured a credit
extension or term for the payment of the premium. Here, however, petitioner failed to establish
the fact of a grant by respondent of a credit term in his favor, or that the grant has been
consistent. While there was mention of a credit agreement between Trans-Pacific and
respondent, such arrangement was not proven and was internal between agent and principal.

We cannot sustain petitioner’s claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite non-payment of premiums. Even if there is
waiver of pre-payment of premiums, that in itself does not become an exception to Section 77,
unless the insured clearly gave a credit term or extension. More, the policy states “subject to
the payment of the premium as consideration for such insurance.” Thus, there is no waiver of
pre-payment. Respondent cannot be placed in estoppel. Thus, respondent was ordered to
return the premium with legal interest from July 7, 1997 (date of petitioner’s sending of final
demand to respondent for payment of proceeds before filing the action in RTC).
 ERLINDA V. ALVAREZ vs. SUN LIFE OF CANADA [PHILIPPINES], INC.

[G.R. No. 206674. September 29, 2014.]

Topic/Provision: Concealment (Section 27)

Petition for Review denying the CA's finding of concealment and reiterating the findings of the
RTC that the affirmative answers of the insured in her application should have prompted
respondent to further examine the health of the insured.

DOCTRINE:

Section 27 of the Insurance Code provides that a concealment, whether intentional or

unintentional, entitles the injured party to rescind a contract of insurance. Concealment,
according to the same Code, is a neglect to communicate that which a party knows and
ought to communicate. A party to an insurance contract, therefore, is obliged to
communicate all facts within his knowledge which are material to the same, to be
determined by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in malting his inquiries. 

FACTS:

Respondent Sun Life of Canada (Philippines), Inc. issued Participating Life Insurance Policy No.
031376350 to petitioner Erlinda V. Alvarez II covering the life of her mother Erlinda V. Alvarez,
the insured, with a face value of P500,000.00 payable upon the death of said insured. Since the
insured was found to have been suffering from high blood pressure, she was classified as high-
risk, which required petitioner to pay a higher premium. 

On April 27, 2005, the insured passed away. Thereafter, respondent sent petitioner a letter
requiring the submission of documents to facilitate her claim under the policy, one of which was
an authorization of any physician, medical practitioner, hospital, other medical or medically-
related facility who has attended to the insured to give the respondent details on the prior
medical history thereof.

Discovering several medical conditions which pre-dated the application for the policy,
respondent sent petitioner another letter declaring the policy void and denying petitioner's claim
therefrom. Specifically, it discovered that in 2003, the insured sought consultations with the
following: (1) University of Santo Tomas (UST) Hospital, which found her to be suffering from
stable angina, atherosclerosis, and lateral wall ischemia; and (2) AIM Imaging Medical Services,
which likewise found her to be suffering from lateral wall ischemia. Respondent explained that
had it been informed of the foregoing medical history in the insured's application for insurance at
the time of the application for the policy, it would leave issued the same with a higher rating. It
stated, however, that the premiums paid by petitioner will be refunded.

Petitioner, through its counsel, nevertheless sent a letter to respondent demanding the payment
of the insurance claim on the policy, which respondent further denied. Disgruntled, petitioner
filed a complaint, on December 18, 2006, for breach of contract and damages against
respondent before the Regional Trial Court (RTC) of Makati City.
The RTC found no concealment or misrepresentation on the part of the insured and ruled in
favor of petitioner. It held that the insured was able to disclose to respondent her general
condition when she gave affirmative answers to the following questions: (1) have you ever had,
been told to have, or sought advice for: a.) high blood pressure, chest pain/discomfort, heart
murmur, stroke, circulatory or heart disorder?; (2) other than previously stated, have you, within
the past 5 years: a.) consulted any doctor or other health practitioner?; b.) submitted to ECG, X-
rays, blood tests or other test?; and (3) have any of your parents, brothers, or sisters had high
blood pressure or diabetes prior to age 60 or any hereditary disorder? The insured also
provided specifications thereto in stating that she was discovered to have high blood pressure in
1995; her last check up in Makati Medical Center in 2003 showed normal results, except a slight
increase in cholesterol, and that both her parents were discovered to have high blood pressure
before the age of 60 and died of a stroke. These negated concealment.

The CA reversed the lower court's Decision. It ruled that the insured's concealment of her chest
pain, lateral wall ischemia, and stable angina entitled respondent to rescind the contract of
insurance, especially because the information that the insured failed to disclose were material
and relevant to the approval and issuance of the insurance policy. Respondent's acceptance of
the premiums paid by petitioner cannot be deemed as a waiver of its right to rescind the
contract. Furthermore, it took into consideration the two-year incontestability clause in the
contract of insurance and held that since the insured died on April 27, 2005, the incontestability
period of two years from the issuance of the policy on December 1, 2003 had not yet set in.
Thus, respondent was not barred from rescinding the contract on the ground of concealment or
misrepresentation. 

ISSUE:

Whether there is concealment due to the non-disclosure of the check-ups in the UST Hospital
and AIM.

RULING:

NO. The petition lacks merit.

Section 27 of the Insurance Code provides that a concealment, whether intentional or

unintentional, entitles the injured party to rescind a contract of insurance. Concealment,
according to the same Code, is a neglect to communicate that which a party knows and ought to
communicate. A party to an insurance contract, therefore, is obliged to communicate all facts
within his knowledge which are material to the same, to be determined by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in forming
his estimate of the disadvantages of the proposed contract, or in malting his inquiries. 

In the case at hand, it is undisputed that prior to the approval of the insured's insurance
policy and during the stage of her application, she did not disclose the fact that she consulted
with the UST Hospital and the AIM Imaging Medical Services which diagnosed her to be
suffering from stable angina, atherosclerosis, and lateral wall ischemia. Such fact, as the CA
aptly noted, is material to the contract in view of its effect on the respondent in forming its
estimate of whether to deny or approve the application as well as in prescribing the amount of
premium thereon.

Given this materiality of the UST Hospital's and AIM's findings, the insured was
necessarily obliged to disclose the same to respondent. She, however, failed to do so. The fact
that the insured gave affirmative answers in the application form does not relieve her from the
obligation to disclose the diagnoses of the UST Hospital and AIM. It must be noted that while
she admitted in her application form that she had consulted with a doctor within the past 5
years, she only disclosed her general check-up in Makati Medical Center in 2003 which showed
normal results except for a slight increase in her cholesterol and nothing more. If she was able
to provide information thereon, we do not see why she was unable to disclose her consultations
with the UST Hospital and the AIM, which were all made in the same year of 2003. No
explanation was given to clarify the same. This concealment, therefore, by insured effectively
entitled respondent to rescind the contract of insurance.

Furthermore, We agree with the CA in holding that respondent was not barred from
rescinding the contract on the ground of concealment in light of the two-year incontestability
clause in the contract of insurance, which is in accordance with Section 48 of the Insurance
Code. The insured herein died on April 27, 2005 while the insurance policy was issued on
December 1, 2003. Hence, since the incontestability period of two years had not yet set in,
respondent was not barred from rescinding the contract on the ground of concealment or
misrepresentation, receipt of premium payments from petitioner, notwithstanding.