CHAPTER 4 PERFECTION OF CONTRACT OF

INSURANCE
A. Offer and acceptance
- perfection is meeting of the minds between
insured and insurer
- the application of the would-be insured is only an
offer subject to acceptance of insurer
Delay in acceptance tort theory
Art 2176 Whoever by act or omission causes
damage or injury to another, there being fault
or negligence, is obliged to pay for the damage
Carale Barks
Tort theory - No contract yet perfected bec
application has not yet been approved due to delay
in insurers part
- Damages are paid to the would-be insured
due to delay in insurers part
- Why? Bec applicant was deprived of
opportunity to seek insurance from other
sources
Tort theory is an exception to the requirement that
a policy has to be issued before the insured can
recover from an insurer. It is applicable to
circumstances where there is fault or negligence on
the part of the insurer in processing the application
of the would be insured. In such a case the would
be insured may recover on the basis of tort.

Perez v CA
- Delay in forward of application bec of
agents fault
Filing of application is offer and the issuance of a
policy is the acceptance. This case also
contemplates the possibility of a claim through tort
theory however because there was no negligence
in the processing of the application, the insurer
could not be held liable.
Vda de Sindayen v Insular
- aunt accepted policy and paid premium but
insured already ded
Although there is a receipt of payment clause, the
insurer is bound by the acts of its agent who is
authorized to deliver the policy. Agent considered
that of insured. The court here used in reverse Par
2 Sec 306 of the code.
Enriquez v Sun Life
- insurer sent letter of acceptance but was
not mailed. Insured died.
Notice of acceptance occurs upon cognition of the
acceptance as provided for in Art 1262 of the civil
code. Acceptance made by letter shall not bind
offeror except from time it came to its knowledge.
B. Premium Payment

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.
Sir: 77 is only for property insurance because of the
use of the word thing and also because a grace
period will only apply after the payment of the first
premium; but may apply to life insurance if no
payment of first premium made.
Sec 78 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.
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) non-payment 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;
or
(f) 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 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 year shall be considered as if written for a term
of one year. Any policy written for a term longer
than one year or any policy with no fixed expiration
date shall be considered as if written for successive
policy periods or terms of one year.

Sec 306 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.
Velasco v Apostol
- premium paid after accident took place
Illustration of the old Insurance Act which expressly
allowed credit extensions.
Valenzuela v CA
- insurer jealous of agent wants to get a
share. Insurer asks agent to pay premiums
of insured.
Under Section 77 of the Insurance Code, the
remedy for the non-payment of premiums is to put
an end to and render the insurance policy not
binding.
Tibay v CA
- out of 3K,only 600 was paid
Policy is not binding. Phoenix and Tuscany are
implied and express waivers respectively. Phoenix
is implied because it sued for payment of premium
and Tuscany is express because there was express
agreement to pay in installments. Sec 77 is based
on the fact that insurance is a risk-distributing
device.
Makati Tuscany v CA
- Makati Tuscany paid only 2 installments out
of 4.
This is actually a case to collect unpaid premiums
by the insurer after the lapse of the coverage
period. Three years of payment by installment
speaks of intent of insurer to answer for risk even if
payment by installment. This is another exception
to Sec 77.
South Sea Surety v CA
- Insured logs lost when ship capsized. Agent
received payment.
Only two exceptions to Sec 77: 1) Life/Industrial
Life where grace period applies and 2) A written
acknowledgement of the receipt of the premium. It
is also an illustration of Sec 306 par 2.

Areola v CA
- Dont mess with a lawyer! Company
cancelled contract bec payment was not
received!
Act of employee to receive premium is binding on
the insurer and the insurer must answer for the
malfeasance of employee in appropriating for
himself the premiums. The reinstatement of the
policy does not preclude the recovery of damages
since the injury has already been inflicted and the
damage done.
UCPB General Insurance v Masagana
Telamart
- Premium not paid before loss occurred in
fire. UCPB has been granting insured 60-90
day credit
Casus omissus of Sec 72 of Insurance Act and Sec
77 of Insurance Code. Exceptions to Sec 77 are:
1) life/industrial life policy when the grace period
applies
2) acknowledgement in policy/contract of the
receipt of premium
3) payment by installment as in Makati Tuscany
4) credit extension granted by insurer
5) estoppel
Sir: Other exceptions are 1) Cover notes as in
Pacific Timber and 2) Oral Contracts
American Home Assurance v Chua
- Check payment was made but was
encashed after the loss
Payment by check if agent issues receipt is binding
on insurer even if not yet encashed. Also admission
of loss adjuster of prior knowledge of other insurers
will render inutile the other insurance clause.
C. Non-default options in life insurance
Sec 227
(f) A provision specifying the options to which the
policyholder is entitled to in the event of default in
a premium payment after three 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 onefifth of the entire reserve or two and one-half per
centum of the amount insured and any dividend
additions thereto;
(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 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;
def. Cash Surrender Value: is the accumulated
reserve on the policy after at least three full
annual premiums and is payable upon surrender
of the policy.
- it is a portion of the reserve in a life policy
which accumulates from premium
overcharges over the years
- premium payment is uniform all throughout
but the risk is lesser when insured was
younger, thus cost of protection was smaller
and there is an excess amount paid
- The cash surrender value is an amount w/c
the insurance company holds in trust for the
insured to be delivered to him upon
demand. It is therefore a liability of the
company to the insured (Manufacturers
Life v Meer)
- To get CSV: surrender policy and contract is
terminated
def. Extended Insurance(shorter period): is a form
of non-default option which uses the CSV as a
SINGLE SINGLE SINGLE premium and extends the
insurance contract until the CSV can afford.
- Face value of insurance remains the same
but only within the term covered by value of
CSV
- During extended period: insured can recover
if he dies or he can reinstate his policy
- After extended period: contract terminates
and cannot even reinstate
def. Paid-up Insurance (smaller face value): is a
form of non-default option where the total CSV is
treated as a SINGLE SINGLE SINGLE premium and
will cover an entire period that the CSV can
purchase except that it only covers the paid up
value.
- obligation to pay premiums is deemed
consummated forever and can reinstate the
policy anytime
- better option if insured is young and then
just reinstate the policy later
def. Automatic Premium Loan: is a form of nondefault option where the CSV is used as payment of
the premium but only as a loan with interest as
illustrated in Manufacturers Life Insurance v Meer.
It is also provided for in Sec 227 (g)

insurer lends/advances to the insured w/o

need of application amount necessary to
pay overdue premium
insurance continues in force for period
covered by CSV

--Manufacturers Life Insurance v Meer

- BIR wants to tax insurance company during
war.
In applying automatic premium loan, insurer in
effect loaned person the amount due and paid his
premium with it.
The cash surrender value is an amount w/c the
insurance company holds in trust for the insured to
be delivered to him upon demand. It is therefore a
liability of the company to the insured. When the
companys credit for advances is paid out of the
CSV, that value and the companys liability is
diminished pro tanto. Net assets of insurer
increased since decrease in liability means
corresponding increase in net assets.
D. Reinstatement
Sec 227 (j) A provision that the policyholder shall
be entitled to have the policy reinstated at any
time within three 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 v Crown Life Insurance
- Was not able to pay all past due premiums
Failure to pay full premium due will result in nonreinstatement of policy unless there is a clear and
positive waiver on the part of the insurer.
E. REFUND
Sec 79 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 80 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 81 A person insured is entitled to return of the
premium when the contract is voidable, on
account of fraud or misrepresentation of the
insurer, or of his agent, or on account of facts, the
existence of which the insured was ignorant
without his fault; or when by any default of the
insured other than actual fraud, the insurer
never incurred any liability under the policy.
Sec 82 In case of an 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 at risk.

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Grepalife v CA
- insurer asks for more payment and another
medical exam even after the premium was
paid. Insured asked for refund

The fact that the policy was inoperative or

ineffectual from the beginning, the company was
never exposed to the risk hence it is not entitled to
the premium.
Cases where refund is possible:
1. if no part of his interest in the thing insured
be exposed to any of the perils insured
against, refund whole premium(79)
- ex: Grepalife v CA
2. 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(79)
3. contract is voidable, on account of fraud or
misrepresentation of the insurer, or of his
agent, or on account of facts, the existence
of which the insured was ignorant without
his fault (81)
- car was already lost at time of insurance
4. any default of the insured other than actual
fraud, the insurer never incurred any liability
under the policy.(81)
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 at risk