Filipinas Life Assurance Co. vs. Nava

An insurer's unjustified refusal to honor a policy loan clause constitutes a violation of a material provision of the policy under Section 69 of the Insurance Act, entitling the insured to rescind the contract and to recover all premiums paid with interest pursuant to Article 1295 of the old Civil Code.

Respondent Gonzalo P. Nava held 18 life insurance policies: one issued by Insular Life Assurance Co., Ltd. on January 1, 1936 with a face value of P5,000.00, and 17 issued by Filipinas Life Assurance Co. on February 28, 1939 with an aggregate face value of P90,000.00. Each policy contained an identical loan clause permitting the insured, after three full years' premiums had been paid and no premium was in default, to obtain a loan from the insurer on the sole security of the policy up to the cash value specified in the Schedule of Policy Values, subject to six per centum per annum interest paid in advance. Nava had paid total premiums of P34,646.60 across the 18 policies, including payments made in Japanese fiat currency during the occupation. The dispute arose from the insurers' refusal to grant a policy loan, premised on Insurance Commissioner regulations issued May 20, 1946 requiring the withholding of fiat currency premium payments pending the establishment of a debtor-creditor relationship.

On January 1, 1936, Gonzalo P. Nava entered into a contract of life insurance with Insular Life Assurance Co., Ltd., with a face value of P5,000.00, for which Policy No. 58999 was issued. On February 28, 1939, Nava entered into 17 separate contracts of life insurance with Filipinas Life Assurance Co., one policy having a face value of P10,000.00 and the rest P5,000.00 each, for an aggregate of P90,000.00. Each of the 18 policies contained an identical loan clause providing that after three full years' premiums had been paid and no premium was in default, the insurer would advance on proper assignment and delivery of the policy a sum equal to or less than the cash value specified in the Schedule of Policy Values, less any existing indebtedness, subject to interest at six per centum per annum paid in advance. The clause further provided that failure to repay any loan or interest would not avoid the policy unless the total indebtedness equaled or exceeded the full loan value available.

Nava paid premiums on these policies both before and during the Japanese occupation. To Insular Life, he paid P1,544.40 from 1936 to December 1941 and P1,029.60 from January 1942 to January 1945, totaling P2,574.00. To Filipinas Life, he paid P13,976.40 from February 1939 to December 1941 and P18,096.20 from January 1942 to January 1945, totaling P32,072.60. The aggregate amount paid across all 18 policies before and during the war was P34,646.60.

On April 28, 1948, Nava applied to the insurers for a loan of P5,000.00 pursuant to the loan clause in the policies. The insurers refused, citing regulations issued by the Insurance Commissioner on May 20, 1946 requiring insurance companies to withhold payments on premiums made during the Japanese occupation, subject to future adjustment "as soon as debtor-creditor relationship is established." Because of this withholding process, the insurers maintained that Nava was not entitled to borrow any amount until the adjustment had been made. On September 30, 1948, Nava called the insurers' attention to the Supreme Court's decision in Haw Pia vs. China Banking Corporation, which had established and recognized the debtor-creditor relationship with respect to payments in fiat currency made during the occupation on pre-war obligations. The insurers nonetheless refused, asserting that the Haw Pia ruling was not applicable to life insurance premium payments. On February 4, 1949, Nava reiterated his request, and as it was again refused — notwithstanding that the aggregate cash surrender values of the 18 policies reached P9,468.29 — he commenced the present action on February 10, 1949 before the Court of First Instance of Manila, praying for rescission of the 18 policies and refund of all premiums paid, plus 6% interest as damages and costs.

On November 28, 1951, the insurers passed a resolution, approved by the Insurance Commissioner, giving full credit to all premium payments made by policyholders in fiat currency during the occupation on pre-war policies. They filed an amended answer offering to pay Nava P9,468.29, representing the aggregate cash surrender values of all the policies as of February 10, 1949, but this offer was refused. After trial, the court a quo rendered judgment rescinding the insurance contracts and ordering Filipinas Life to pay P32,072.60 and Insular Life to pay P2,574.00, representing the total premiums paid. The Court of Appeals affirmed this decision on November 14, 1962, and the insurers elevated the case by petition for review to the Supreme Court.

• Justification for Loan Refusal: Petitioners contended that their refusal to grant the loan was justified by Insurance Commissioner regulations issued May 20, 1946, which required the withholding of fiat currency premium payments on pre-war policies subject to adjustment "as soon as debtor-creditor relationship is established," and that since this relationship had not yet been established, they could not be held liable for non-compliance with the loan clause.
• Inapplicability of Haw Pia to Life Insurance: Petitioners maintained that the Haw Pia ruling did not settle the question of valuation of premium payments in Japanese military notes on life insurance policies because the insured is not a debtor of the insurer, nor is the insurer his creditor, considering that there is no obligation on the insured's part to pay premiums.
• Recovery Limited to Cash Surrender Value: Petitioners argued that even if respondent were entitled to rescind, he should recover only the cash surrender value of the policies at the time the complaint was filed, not all premiums paid, because the insurer had assumed the risk of the insured's death and the insured had enjoyed the benefit of protection during the policy period — recovery of the full premium under such circumstances being, according to Vance on Insurance, unjust and contrary to the better authorities.
• Inability to Restore Benefit of Protection: Petitioners insisted that because respondent could not restore the "value of the benefit of protection" he had received under the policies, he was not entitled to rescind under Article 1295 of the old Civil Code, which requires mutual restitution upon rescission.

• Validity of Loan Refusal: Whether petitioners' refusal to grant respondent the policy loan of P5,000.00 was justified by the Insurance Commissioner's regulations requiring the withholding of fiat currency premium payments pending the establishment of a debtor-creditor relationship.
• Measure of Recovery Upon Rescission: Whether respondent, upon rescission of the insurance policies under Section 69 of the Insurance Act, is entitled to a refund of all premiums paid or merely to the cash surrender value of the policies.
• Restoration of Intangible Benefits: Whether respondent's inability to restore the "value of the benefit of protection" he received under the policies precludes him from rescinding the contracts under Article 1295 of the old Civil Code.

• Validity of Loan Refusal: No. The refusal was not justified, the Haw Pia ruling having already validated fiat currency payments on pre-war contractual obligations, and the Insurance Commissioner's regulations being of doubtful validity if they impaired the loan clause in violation of the constitutional prohibition on impairment of contracts.
• Measure of Recovery Upon Rescission: All premiums paid. Article 1295 of the old Civil Code, supplementing the Insurance Act pursuant to Article 16 of the same Code, requires the return of the price paid upon rescission, and the majority rule in U.S. jurisprudence supports full recovery of premiums in cases of wrongful rescission of life insurance contracts.
• Restoration of Intangible Benefits: No, the inability to restore intangible benefits does not bar rescission. Article 1295 contemplates material things subject to restoration, not intangible benefits, and the insurers had already derived material benefits from the use of the premiums paid.

• Validity of Loan Refusal: The Court reasoned that the Haw Pia decision, rendered April 9, 1948, declared all payments made in Japanese military notes during the occupation on pre-war contractual obligations valid for all legal intents and purposes, and this ruling was reiterated in subsequent cases. A life insurance policy is a contractual obligation in which the insured is duty-bound to pay the premiums agreed upon, lest the policy lapse. The fact that an insured who has paid three full years' premiums may not be considered delinquent under an automatic premium payment clause does not divest the policy of its contractual nature, because the premium must still be paid later with interest. The insured is therefore a debtor of the insurer within the meaning of the Insurance Commissioner's regulations, and the fiat currency premium payments were valid payments satisfying the regulatory condition for establishing a debtor-creditor relationship. The insurers could not rely on the regulations as an excuse for refusing the loan. Moreover, the regulations themselves were of doubtful validity, as an administrative official has no power to issue a regulation that would impair a contractual obligation in violation of Section 1(10), Article III of the Constitution. The refusal thus violated the loan clause, a material provision of the policies under Section 69 of the Insurance Act, which provides that "the violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind." The citation from Vance on Insurance — that a breach of the agreement to make a loan does not entitle the insured to rescind — was rejected as not controlling, since it was not shown that the relevant U.S. jurisdictions had a provision identical to Section 69, and the rule cited represented a divergence of opinion rather than a uniform doctrine.

• Measure of Recovery Upon Rescission: Because the Insurance Act contains no express provision on what a court should do upon rescission under Section 69, Article 16 of the old Civil Code directs that the Civil Code supplements the deficiency. Article 1295 provides that "rescission makes necessary the return of the things which were the subject-matter of the contract, with their fruits, and of the price paid, with interest thereon." The Court therefore found correct the Court of Appeals' ruling ordering a refund of all premiums paid up to the filing of the action, amounting to P34,644.60. Petitioners' reliance on the proposition that full premium recovery is "obviously unjust" after the insurer has sustained the risk was rejected as representing the minority rule in the United States; the majority rule, as reported in American Law Reports Annotated, allows the insured to recover all premiums paid, with interest, in cases of wrongful cancellation, repudiation, termination, or rescission of life insurance contracts.

• Restoration of Intangible Benefits: The Court held that Article 1295 of the old Civil Code contemplates transactions involving material things and does not refer to intangible benefits that cannot be subject of restoration. To interpret it otherwise would defeat the law itself, with the result that rescission could never be had under Section 69 of the Insurance Act. Furthermore, the insurers had already derived material benefits from the use of the premiums paid by respondent before, during, and after the war, from which they must have realized substantial profits. In this light alone, the insurers could not claim prejudice or unfairness if ordered to refund the premiums.

• Section 69 of the Insurance Act — Rescission for Violation of Material Provision — The violation of a material warranty or other material provision of a policy on the part of either party entitles the other to rescind. The loan clause in a life insurance policy constitutes a material provision; the insurer's unjustified refusal to honor it gives the insured the right to rescind the contract. This statutory remedy is available notwithstanding contrary authority from U.S. treatises, which do not reflect a uniform rule and which were issued under jurisdictions lacking a provision identical to Section 69.

• Article 1295 of the old Civil Code — Restitution Upon Rescission — Rescission necessitates the return of the things which were the subject matter of the contract, with their fruits, and of the price paid, with interest. This provision supplements the Insurance Act on matters not expressly covered by special law, pursuant to Article 16 of the old Civil Code. The article contemplates material things capable of restoration and does not require the insured to restore intangible benefits such as the "value of protection," since to do so would render rescission impossible under Section 69 of the Insurance Act. The majority rule, supported by American Law Reports Annotated, permits recovery of all premiums paid with interest in cases of wrongful rescission of life insurance contracts.

• Validity of Fiat Currency Payments — Haw Pia Doctrine — Payments made in Japanese military notes during the occupation on pre-war contractual obligations are valid for all legal intents and purposes. This doctrine extends to premium payments on life insurance policies, which constitute a contractual obligation in which the insured is duty-bound to pay premiums. The insured is thus a debtor of the insurer within the meaning of the Insurance Commissioner's regulations requiring the establishment of a debtor-creditor relationship.

• Non-Impairment of Contracts — Limit on Administrative Regulations — Administrative regulations that would suspend the effectivity of a provision embodied in a valid insurance policy are of doubtful validity, as they would impair contractual obligations in violation of Section 1(10), Article III of the Constitution. An administrative official has no power to issue a circular or regulation the effect of which would be violative of the Constitution.

• "The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind." — The Court's quotation of Section 69 of the Insurance Act, the statutory basis for the insured's right to rescind upon the insurer's breach of the loan clause.

• "Rescission makes necessary the return of the things which were the subject-matter of the contract, with their fruits, and of the price paid, with interest thereon." — The Court's quotation of Article 1295 of the old Civil Code, the basis for ordering full restitution of premiums upon rescission, supplementing the Insurance Act under Article 16.

• "The fact, however, is that the oft-repeated regulations of the Insurance Commissioner are of doubtful validity if their effect is to suspend the effectivity of a provision or clause embodied in a valid insurance policy for that would partake of the nature of a regulation the effect of which would be to infringe or impair a contractual obligation in violation of Section 1(10), Article III, of our Constitution." — This passage articulates the constitutional limitation on administrative regulations affecting insurance contracts, grounding the Court's refusal to accept the insurers' justification for withholding the loan.

• Haw Pia vs. China Banking Corporation, 80 Phil. 604 — Controlling precedent. Established that payments made in Japanese military notes during the occupation on pre-war contractual obligations are valid for all legal purposes. Applied to hold that Nava's fiat currency premium payments were valid, defeating the insurers' justification for refusing the policy loan.
• Hongkong and Shanghai Banking Corporation vs. Luis Perez Samanillo, Inc., 82 Phil. 851 — Followed. Reiterated the Haw Pia ruling on the validity of fiat currency payments on pre-war obligations.
• Philippippine Trust Company vs. Araneta, 83 Phil. 132 — Followed. Similarly reiterated the Haw Pia ruling.
• Lim, et al. vs. Register of Deeds of Rizal, 46 O.G. 3665 — Cited for the proposition that an administrative official has no power to issue a regulation violative of the Constitution, supporting the Court's doubt as to the validity of the Insurance Commissioner's regulations.
• Bank Savings Life Insurance Co. vs. Steiner, 81 S.W. 2d 225 — Cited as a U.S. case from Texas where the insured was held entitled to rescind and recover all premiums paid, demonstrating that the rule against rescission for breach of a loan agreement is not uniformly followed in the United States.

• Section 69, Insurance Act — Provides that the violation of a material warranty or other material provision of a policy entitles the other party to rescind. Applied to hold that the insurer's refusal to honor the loan clause violated a material provision, giving the insured the right to rescind all 18 policies.
• Article 1295, old Civil Code — Provides that rescission necessitates the return of the subject matter of the contract with fruits, and the price paid with interest. Applied to order the refund of all premiums paid by the insured upon rescission, as the Insurance Act contains no express provision on the consequences of rescission under Section 69.
• Article 16, old Civil Code — Provides that on matters not governed by special laws, the Civil Code shall supplement deficiencies. Applied to make Article 1295 supplementary to the Insurance Act in determining the restitutionary consequences of rescission.
• Section 1(10), Article III, Constitution — The non-impairment of contracts clause. Cited to cast doubt on the validity of Insurance Commissioner regulations that would suspend the effectivity of a provision in a valid insurance policy.

Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, and Sanchez, JJ., concurred. Bengzon, J.P. and Zaldivar, JJ., took no part.