The Contract of Insurance

A. Form and Function 1.Perfection -Written form-Section 232SEC. 232. No policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner, and no application form shall be used with, and no rider, clause, warranty or endorsement shall be attached to, printed or stamped upon such policy, certificate or contract unless the form of such application, rider, clause, warranty or endorsement has been approved by the Commissioner.

Grace Period Sec. 233 aSEC. 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;

Non-default Option Sec. 233 f and h“(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.

“(h) A table showing in figures cash surrender values and paid-up options available under the policy each year upon default in premium payments, during at least twenty (20) years of the policy beginning with the year in which the values and options first become available, together with a provision that in the event of the failure of the policyholder to elect one of the said options within the time specified in the policy, one of said options shall automatically take effect and no policyholder shall ever forfeit his right to same by reason of his failure to so elect;

Reinstatement of lapsed policy-Section 233(j)“(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.

Andres vs. Crown Life Insurance, G.R. No. L-10874 – Petition for Review on Certiorari

Facts: 1. Andres and his wife applied for a policy for Php 5,000. Premiums were paid semi-annually, and the amount of P165.15 was paid for two semesters. The third wasn’t paid. Crown Life advised Andres that the policy lapsed and reinstatement is in 60 days. The policy was allowed to lapse.

2. Andres and his wife applied for reinstatement. He mailed 100. There was a balance of 65 pesos. The company assented on the condition that he pay the 65 pesos. Then he paid.

3. Andres’wife passed away. The insurance company, however, didn’t pay indemnity. They enclosed a Death Claim Discharge but the Andres refused to sign. The company returned Php 165.

4. Andres filed a complaint in the CFI against Crown Life Insurance Company for the recovery of the amount of P5,000, as the face value of a joint 20-year endowment insurance policy.

5. Andres presented his death claim as survivor-beneficiary but denied of payment.

6. The court rendered decision absolving the defendant from any liability on the ground that the policy having lapsed, it was not reinstated at the time the plaintiff’s wife died.

7. Not satisfied with the decision, plaintiff appealed to the Court of Appeals, but the appeal was later certified to this Court.

Issue: Whether or not the lapsed policy has been validly and completely reinstated

Held: No. The conditions set forth in the policy for reinstatement are the following:(a) application shall be made within three years from the date of lapse;(b) there should be a production of evidence of the good health of the insured:(c) if the rate of premium depends upon the age of the Beneficiary, there should likewise be a production of evidence of his or her good health;(d) there should be presented such other evidence of insurability at the date of application for reinstatement;(e) there should be no change which has taken place in such good health and insurability subsequent to the date of such application and before the policy is reinstated; and(f) all overdue premiums and other indebtedness in respect of the policy, together with interest at six per cent, compounded annually, should first be paid.

Andres did not comply with the last condition; for he only paid P100 before his wife’s death; and, despite the Company’s reminders, he only remitted the balance 2 days after his wife died. The company had the right to treat the contract as lapsed and refuse payment of the policy.

2.Formal Acceptance-Stipulations

Perez vs. CA, G.R. No. 112329(2000) – Petition for review on certiorari

Facts: 1. Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation for P20,000.00. An agent of the insurance corporation, visited Perez in Quezon and convinced him to apply for additional insurance coverage of P50,000.00.

2. Virginia A. Perez, Primitivo’s wife, paid P2,075.00 to the agent. The receipt issued indicated the amount received was a "deposit." Unfortunately, the agent lost the application form accomplished by Perez and he asked the latter to fill up another application form. The agent sent the application for additional insurance of Perez to the Quezon office. Such was supposed to forwarded to the Manila office.

3. Perez drowned. His application papers for the additional insurance of P50,000.00 were still with the Quezon. It was only after some time that the papers were brought to Manila.

4. Without knowing that Perez died, BF Lifeman Insurance Corporation approved the application and issued the corresponding policy for the P50,000.00. Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased.

5. She was paid P40,000.00 under the first insurance policy for P20,000.00 but the insurance company refused to pay the claim under the additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00.

6. The insurance company maintained that the insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez. Consequently, the insurance company refunded the amount paid.

7. BF Lifeman Insurance Corporation filed a complaint against Virginia Perez seeking the rescission and declaration of nullity of the insurance contract in question.

8. Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under the contract and all the elements of a valid contract are present.

9. Trial court rendered a decision in favor of petitioner ordering respondent to pay 150,000 pesos.The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for P50,000.00 could not have been perfected since at the time that the policy was issued, Primitivo was already dead.

10. Petitioner’s motion for reconsideration having been denied by respondent court, the instant petition for certiorari was filed on the ground that there was a consummated contract of insurance between the deceased and BF Lifeman Insurance Corporation.

Issue: WON the widow can receive the proceeds of the 2nd insurance policy

Held: No.

Perez’s application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased and respondent corporation was further conditioned with the following requisites stated in the application form:

"there shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good health."

BF Lifeman didn’t give its assent when it merely received the application form and all the requisite supporting papers of the applicant. This happens only when it gives a policy.

As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must have been a completed contract.

3.Premium payments(Sections 77-78,64,66,306)

“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, 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.

“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.“SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following:

“(a) Nonpayment of premium;“(b) Conviction of a crime arising out of acts increasing the hazard insured against;“(c) Discovery of fraud or material misrepresentation;“(d) Discovery of willful or reckless acts or omissions increasing the hazard insured against;“(e) Physical changes in the property insured which result in the property becoming uninsurable;“(f) Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or“(g) A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.

“SEC. 66. In case of insurance other than life, unless the insurer at least forty-five (45) days in advance of the end of the policy period mails or delivers to the named insured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the named insured shall be entitled to renew the policy upon payment of the premium due on the effective date of the renewal. Any policy written for a term of less than one (1) year shall be considered as if written for a term of one (1) year. Any policy written for a term longer than one (1) year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of one (1) year.

“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.

Tibay et al., vs. CA, G.R. No. 119655

Facts: 1. Violeta Tibay (and Nicolas Roralso) obtained a fire insurance policy for their 2-storey from Fortune Life Insurance Co. The said policy covers the period from January 23, 1987 until January 23, 1988 or one year for P600,000 and at the agreed premium of P2,983.50. On January 23,1987 petitioner made a partial payment of the premium with P600.

2 March 1987, the said building was burned to the ground. It was only two days after the fire insurance that Violeta advanced the full payment of the policy premium which was accepted by the insurer. On this same day, petitioner likewise filed the claim that was then referred to the insurer's adjuster. Investigation of the cause of fire commenced and the petitioner submitted the required proof of loss.

3. Despite that, the Fortune Insurance refused to pay the insurance claim saying it as not liable due to the non-payment by petitioner of the full amount of the premium as stated in the policy.

4. The petitioner then brought the matter to the Insurance Commission but nothing good came out. Hence this case filed.

5. Trial court rule in favor of the petitioner. CA reversed the lower court's decision and held that Fortune is not liable but ordered it to return the premium paid with interest to the petitioner. Hence, this petition for review.

Issue: W/N the partial payment of the premium rendered the insurance policy ineffective?

Held: YES.1. 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. The consideration is the premium, which must be paid at the time, way and manner as stated in the policy, and if not so paid as in this case, the policy is therefore forfeited by its own terms. In this case, the policy taken out by the petitioner provides for payment of premium in full. Since the petitioner only made partial payment with the remaining balance paid only after the fire or peril insured against has occurred, the insurance contract therefore did not take effect barring the insured from claiming or collecting from the loss of her building.

2. Under Section 77 of the Insurance Code (Philippine), it provides therein 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." Herein case, the controversy is on the payment of the premium. It cannot be disputed that premium is the elixir vitae of the insurance business because the insurer is required by law to maintain a reserve fund to meet its contingent obligations to the public. Due to this, it is imperative that the premium is paid fully and promptly. To allow the possibility of paying the premium even after the peril has ensued will surely undermine the foundation of the insurance business.

American Home Assurance vs. Chua, G.R. No. 130421

Facts: 1. Chua obtained from American Home a fire insurance covering the stock-in-trade of his business. The insurance was due to expire on March 25, 1990.

2. On April 5, 1990, Chua issued a check for P2,983.50 to American Home’s agent, James Uy, as payment for the renewal of the policy. The official receipt was issued on April 10. In turn, the latter a renewal certificate. A new insurance policy was issued where petitioner undertook to indemnify respondent for any damage or loss arising from fire up to P200,000 March 20, 1990 to March 25, 1991.

3. On April 6, 1990, the business was completely razed by fire. Total loss was estimated between P4,000,000 and P5,000,000.

4. Respondent filed an insurance claim with petitioner and four other co-insurers, namely, Pioneer Insurance, Prudential Guarantee, Filipino Merchants and Domestic Insurance.

5. Petitioner refused to honor the claim hence, the respondent filed an action in the trial court.

6. American Home claimed there was no existing contract because respondent did not pay the premium. Even with a contract, they contended that he was ineligible because of his fraudulent tax returns, his failure to establish the actual loss and his failure to notify to petitioner of any insurance already effected.

7. The trial court ruled in favor of respondent because the respondent paid by way of check a day before the fire occurred and that the other insurance companies promptly paid the claims. American homes was made to pay 750,000 in damages.

8. CA found that respondent’s claim was substantially proved and petitioner’s unjustified refusal to pay the claim entitled respondent to the award of damages.9. American Home filed the petition reiterating its stand that there was no existing insurance contract between the parties. It invoked Section 77 of the Insurance Code, which provides that no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid and the case of Arce v. Capital Insurance that until the premium is paid there is no insurance.

Issues:Whether there was a valid payment of premium, considering that respondent’s check was cashed after the occurrence of the fireHeld: Yes. No. Yes, but not all damages valid. Petition granted. Damages modified.

Ratio:Yes. The renewal certificate issued to respondent contained the acknowledgment that premium had been paid. In the instant case, the best evidence of such authority is the fact that petitioner accepted the check and issued the official receipt for the payment. It is, as well, bound by its agent’s acknowledgment of receipt of payment.Section 78 of the Insurance Code explicitly provides:

An acknowledgment in a policy or contract of insurance of 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.

Makati Tuscany Condominium Corp. vs. CA, 215 SCRA 462(1992)

Facts: 1. American Home Assurance Co. (AHAC), represented by American International Underwriters (Phils.), Inc., issued in favor of Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy on the latter's building and premises, for a period beginning March 1 1982 and ending March 1 1983, with a total premium of P466,103.05. The premium was paid on four installments, all of which were accepted by private respondent.

2. Successive renewals of the policies were made in the same manner. On 1984, the policy was again renewed and petitioner made two installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium.

3.AHAC filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy. Makati Tuscany explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor.

4. Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85.

5. Trial Court: dismissed the complaint and counterclaim. CA: ordering herein petitioner to pay the balance of the premiums due

ISSUE: Whether payment by installment of the premiums due on an insurance policy invalidates the contract of insurance.

Held: No, the contract remains valid even if the premiums were paid on installments. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepared in full.

At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted.

Moreover, as correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary. The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the entire premium.

4.Effect of Non-Payment

Philippine Phoenix Surety vs. Woodworks, Inc., G.R. No. L-22684(1967)

Facts: 1. Woodworks, Inc. was issued a fire policy for its building machinery and equipment by Philippine Phoenix Surety & Insurance Co. for P500K covering July 21, 1960 to July 21, 1961. Woodworks did not pay the premium totaling to P10,593.36.

2. Woodworks notified Philippine Phoenix the cancellation of the Policy so Philippine Phoenix credited P3,110.25 for the unexpired period of 94 days and demanded in writing the payment of P7,483

3. Woodworks refused stating that it need not pay premium "because the Insurer did not stand liable for any indemnity during the period the premiums were not paid."

4. Philippine Phoenix filed with the CFI to recover its earned premium of P7,483. Woodworks contends that to pay the premium after the issuance of the policy put an end to the insurance contract and rendered the policy unenforceable

5. CFI: favored Philippine Phoenix

ISSUE: W/N there was a valid insurance contract despite no premium payment was paid

HELD: NO. Reversed. Policy provides for pre-payment of premium. To constitute an extension of credit there must be a clear and express agreement therefor and there must be acceptance of the extension.

Since the premium had not been paid, the policy must be deemed to have lapsed. Failure to make a payment of a premium or assessment at the time provided for, the policy shall become void or forfeited, or the obligation of the insurer shall cease, or words to like effect, because the contract so prescribes and because such a stipulation is a material and essential part of the contract. This is true, for instance, in the case of life, health and accident, fire and hail insurance policies

Explicit in the Policy itself is plaintiff's agreement to indemnify defendant for loss by fire only "after payment of premium" Compliance by the insured with the terms of the contract is a condition precedent to the right of recovery.

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.

5.Effect of Partial Effect Payment

UCPB General Insurance, Inc., vs. Masagana Telemart, Inc., G.R. No. 137172(1999)

Facts: 1. Masagana Telemart obtained from UCPB General Insurance a fire insurance policies on its property effective from May 1991 - 1992. On June 1992, Masagana’s properties were raged by fire.

2. On the same date Masagana tendered, and UCPB accepted five checks as renewal premium payments for which a receipt was issued. Masagana made a claim which was denied. The checks were then returned to Masagana.

3. According to UCPB, the claim cannot be entertained for properties were burned before the tender of premium.

Issue: Whether or not section 77 of the insurance code must be strictly applied to UCPB’s advantage despite its practice of granting 60 to 70 day credit term for the payment of its premium

Held: No. The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SECTION 78. Any acknowledgment in a policy or contract of insurance of 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 premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss.

Tuscany case 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 if 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.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against UCPB, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77.

6.Effect of Payment by check/Acknowledgment of receipt of premium in policy

Capital Insurance and Surety Co.,vs. Plastic Era co. Inc., 65 SCRA 134(1975)

Facts: 1. Capital Insurance delivered to Plastic Era Manufacturing Co., Inc., its open Fire Policy wherein the Capital Insurance undertook to insure the latter's building, equipments, raw materials, products and accessories located at Rizal.

2. The policy expressly provides that if the property insured would be destroyed or damaged by fire after the payment of the premiums, at any time between the 15th day of December 1960 and one o'clock in the afternoon of the 15th day of December 1961, the insurance company shall make good all such loss or damage in an amount not exceeding P100,000.00.

3. When the policy was delivered, Plastic Era failed to pay the corresponding insurance premium. On January 8, 1961, Plastic Era delivered to Capital Insurance, a check for the amount of P1,000.00 postdated January 16, 1961 as partial payment of the premium.

4. However, Capital Insurance tried to deposit the check only on February 20, 1961 and the same was dishonored by the bank for lack of funds.

5. Two days after the insurance premium became due, the property insured by Plastic Era was destroyed by fire. Plastic Era demanded from Capital Insurance the payment of the sum of P100,000.00 as indemnity for the loss of the insured property but the latter refused for the reason that, among others, Plastic Era failed to pay the insurance premium.

ISSUES1. WON a contract of insurance has been duly perfected between petitioner and respondent2. WON the dishonored check constituted payment

HELD: 1. YES. Tender of draft or check in order to effect payment that would extinguish the debtor's liability should be actually cashed. If the delivery of the check of Plastic Era to Capital Insurance were to be viewed in the light of the foregoing, no payment of the premium had been effected. Significantly, Capital Insurance accepted the promise of Plastic Era to pay the insurance premium within 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 the 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, Capital Insurance 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.

2. YES. Although the check was due for payment on January 16, 1961 and Plastic Era had sufficient funds to cover it as of January 19, 1961, Capital Insurance decided to hold the same for thirty-five (35) days before presenting it for payment. Having held the check for such an unreasonable period of time, Capital Insurance was estopped from claiming a forfeiture of its policy for non-payment even if the check had been dishonored later. Where the check is held for an unreasonable time before presenting it for payment, the insurer may be held estopped from claiming a forfeiture if the check is dishonored.

7.Effect of Payment thru Agent

South Sea Surety vs. CA, G.R. No. 102253(1995)

Facts: 1. Valenzuela Hardwood entered into an agreement with the Seven Brothers whereby the latter undertook to load the Valenzuela’s logs for shipment to Manila.

2. South Sea insured the logs for P2,000,000.00 in its marine policy. Valenzuela then gave the check in payment of the premium on the insurance policy to Mr. Victorio Chua (authorized representative of South Sea). Seven Brothers’ ship sank resulting in the loss of the logs.

3. A check for P5,625.00 to cover payment of the premium tendered to the insurer but was not accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance policy it issued as of the date of inception for non-payment of the premium due in accordance with Section 77 of the Insurance Code.

4. Valenzuela demanded from South Sea the payment of the proceeds of the policy but the latter denied liability under the policy. Valenzuela likewise filed a formal claim with defendant Seven Brothers Shipping Corporation for the value of the lost logs but the latter denied the claim.

5. Valenzuela filed a complaint for the recovery of the value of lost logs and freight charges from Seven Brothers Shipping Corporation or from South Sea Surety and Insurance Company, the insurer.

6. The trial court rendered judgment in favor of plaintiff Valenzuela. The Court of Appeals affirmed the judgment only against the insurance corporation and absolved the shipping entity from liability. The court held that there was a stipulation in the charter party exempted the ship owner from liability in case of loss.

In the SC petition, petitioner argues that it should have been freed from any liability to Hardwood. It faults the appellate court (a) for having disregarded Section 77 of the insurance Code and (b) for holding Victorio Chua to have been an authorized representative of the insurer.

Issue: WON Mr. Chua acted as an agent of the surety company or of the insured when he received the check for insurance premiums.

Held: Yes. Agent of the surety.

To determine if there was a valid contract of insurance, it must be determine if the premium was validly paid to the company or its agents at the time of the loss.

Sec. 306 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 of contract of insurance at the time of its issuance or delivery or which becomes due thereon.

When South Sea delivered to Mr. Chua the marine cargo insurance policy for Valenzuela’s logs, he is deemed to have been authorized by former to receive the premium which is due on its behalf.

When the logs were lost, the insured had already paid the premium to an agent of the South Sea Surety and Insurance Co., Inc., which is consequently liable to pay the insurance proceeds under the policy it issued to the insured.

Malayan Insurance vs. Arnaldo, G.R. No. L-67835(1987)

Facts: 1. Malayan Insurance Co. (MICO), issued fire insurance for the amount of P14,000 on the property of Coronacion Pinca, effective July 1981-1982. MICO later allegedly cancelled the policy for non-payment of the premium and sent a notice to Pinca.

2. On Dec. 24 Adora, an agent of MICO, received Pinca’s payment, which was remitted to MICO. On Jan. 18, 1982, Pinca’s property was completely burned. On Feb. 5, MICO returned Pinca’s payment to Adora on the ground that her policy had been cancelled; Pinca refused to accept it.

3. Pinca went to the Insurance Commission. Gregoria Arnaldo, the Insurance Commissioner, sustained the claim for compensation for Pinca’s burned property.

ISSUES:1. With regard to the effect of payment thru agent, the issue is WON Adora was authorized to receive such payment?2. WON there was a valid insurance contract at the time of the lossHELD:

1. Yes. Sec. 306 of the Insurance Code provides that any insurance company that delivers a policy to its agent is deemed to have authorized such agent to receive payment of premium on its behalf. It is a well-known principle under the law of agency that payment to an authorized agent is equivalent to payment to the principal himself. MICO’s acknowledgement of Adora as its agent thus defeats its contention that he was not authorized to receive payments on its behalf.

2. Yes. Sec 77 of the Insurance Code is not applicable in the instant case as payment was eventually made. It is to be noted that the premium invoice was stamped “Payment Received”, indicating an understanding between the parties that payment could be made later. This is furthered by the fact that Adora had earlier told her to call him anytime she was ready with her payment.

Payment was legally made on the original transaction and validly received by Adora, who was not informed of the alleged cancellation and thus saw no reason to reject the payment.

8.Return of Premiums (Sections 80-83)

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.

9. Insurer never incurred liability due to default of insured

American Home Assurance vs. Chua, G.R. No. 130421(1999)(refer to above case)

10.Recission

Areola vs. CA, G.R. No. 95641(1994)

Facts: 1. 7 months after the issuance of Santos Areola's Personal Accident Insurance Policy (covering a period of one year), Prudential Guarantee unilaterally cancelled the same since company records revealed that Areola failed to pay his premiums.

2. Under the terms of the statement of account issued by Prudential, Areola was supposed to pay the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25 and 2% premium tax of P29.40.

3. The statement of account stated that it must not be considered a receipt as an official receipt will be issued upon payment of the account. And if payment was made to a representative, the client must demand for a Provisional Receipt and if Official Receipts aren’t received within 7 days, Prudential should be notified. If payment is made to their office, clients should demand for an OR.

4. Prudential offered to reinstate same policy it had previously cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the cancellation was erroneous and that the premiums were paid in full by Areola but were not remitted by Teofilo M. Malapit, Prudential's branch manager.

5. Areola claims that the fraudulent act of misappropriating his premium payments is the proximate cause of the cancellation of the insurance policy. Areola theorized that Malapit's act of signing and even sending the notice of cancellation himself, notwithstanding his personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation of bad faith. Such fraudulent act committed by Malapit is attributable to Prudential.

6. Malapit's acts are therefore not separate and distinct from that of Prudential’s. They must bear the consequences of the erroneous cancellation of subject insurance policy caused by the non-remittance by its own employee of the premiums paid. The subsequent reinstatement could not possibly absolve respondent insurance company from liability, there being an obvious breach of contract.

8. Prudential argues that where reinstatement, the equitable relief sought by Areola was granted at the right moment, and Areola is left without a cause of action on which to predicate his claim for damages. Reinstatement effectively restored Areola to all his rights under the policy.

ISSUES1. WON the erroneous act of canceling the insurance policy would entitle Areola to payment of damages2. WON the subsequent act of reinstating the wrongfully cancelled insurance policy obliterate whatever liability for damages Prudential has

HELD1. YES. Malapit's fraudulent act of misappropriating the premiums paid by petitioner-insured is beyond doubt directly imputable to Prudential. A corporation, such as respondent insurance company, acts solely thru its employees. The latter’s acts are considered as its own for which it can be held to account.

Thus, his receipt of said premiums is receipt by private respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by the acts of its agent.

Article 1910 thus reads:Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance company; no exoneration from liability could result therefrom.

2. NO. Prudential’s act of reinstating the insurance policy cannot obliterate the injury inflicted on Areola.

Under the law governing reciprocal obligations, particularly the second paragraph of Article 1191, the injured party, Areola in this case, is given a choice between fulfillment or rescission of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with what is incumbent upon him.

However, said article entitles the injured party to payment of damages, regardless of whether he demands fulfillment or rescission of the obligation.

It is untenable that reinstatement is equivalent to fulfillment of its obligation, which divests the petitioner-insured of a rightful claim for payment of damages.