Philippine Phoenix Surety & Insurance Company vs. Woodworks, Inc.

Non-payment of the stipulated fire insurance premium, absent a clear and accepted agreement extending credit, causes the policy to lapse and bars the insurer from recovering premium as an enforceable debt.

Philippine Phoenix Surety & Insurance Company is an insurer issuing fire coverage, while Woodworks, Inc. is an applicant for insurance over its building, machinery and equipment. Fire insurance in force at the time was governed by Act No. 2427, under which insurance is a contract of indemnity for a consideration known as premium. The policy in dispute expressly conditioned indemnity upon payment of premium and allowed termination at the request of the insured or at the option of the company.

On July 21, 1960, upon the application of Woodworks, Inc., Philippine Phoenix Surety & Insurance Company issued in its favor Fire Insurance Policy No. 9749 for P500,000.00, insuring defendant's building, machinery and equipment for one year from July 21, 1960 to July 21, 1961 against loss by fire. The premium and other charges, including margin fee surcharge of P590.76 and documentary stamps of P156.60 affixed on the policy, amounted to P10,593.36. It is undisputed that defendant did not pay the stipulated premium upon issuance nor at any time thereafter.

On April 19, 1961, before expiration of the one-year term, plaintiff notified defendant through Indorsement No. F-6963/61 of cancellation of the policy, allegedly upon defendant's request, which defendant denied having made. In the indorsement plaintiff credited defendant with P3,110.25 for the unexpired period of 94 days and claimed the balance of P7,483.11 as earned premium from July 21, 1960 to April 18, 1961, or 271 days. On July 6, 1961, plaintiff demanded payment in writing.

Defendant, through counsel, disclaimed liability in a reply-letter of August 15, 1961, contending in essence that premium need not be paid because the insurer did not stand liable for indemnity during the period premiums were unpaid. On January 30, 1962, plaintiff sued to recover the P7,483.11 as earned premium, while defendant controverted on the theory that failure to pay premium after issuance ended the insurance contract and rendered the policy unenforceable. The trial court found the policy binding and awarded the claimed premium with interest, attorney's fees and costs, prompting defendant's appeal on questions of law.

• Binding Effect Without Payment: Petitioner argued that the lower court erred in sustaining Fire Insurance Policy, Exhibit A, as a binding contract even though the premium stated therein had not been paid.
• Demandability After Expiry: Petitioner maintained that the lower court erred in sustaining that the premium in the insurance policy became an obligation demandable even after the period in the policy had expired.
• Unpaid Premium as Debt: Petitioner argued that the lower court erred in not deciding that a premium not paid is not a debt enforceable by action of the insurer.

• Validity of Policy Despite Non-Payment: Whether Fire Insurance Policy No. 9749 was a binding contract although the stipulated premium was never paid.
• Enforceability of Unpaid Premium: Whether an unpaid premium constitutes a debt enforceable by the insurer even after expiration of the policy period.

• Validity of Policy Despite Non-Payment: No. The policy lapsed for non-payment, prepayment having been required and no credit extension having been clearly agreed to and accepted.
• Enforceability of Unpaid Premium: No. Non-payment did not merely suspend but ended the insurance contract, so no premium could be collected as earned for a period without insurer liability.

• Validity of Policy Despite Non-Payment: The policy expressly conditioned indemnity upon payment, providing coverage for loss by fire only after payment of premium and requiring a printed receipt signed by an official or agent as proof of payment. When a policy is tendered, the insured must pay the premium unless credit is given, waived, or otherwise obviated by agreement, and a credit extension requires a clear and express agreement. No such agreement appeared in the policy provisions, and even if credit were presumed from unconditional delivery without prepayment, defendant never accepted any offer of credit by a promise to pay made known in some manner, acceptance being essential to convert conditional delivery into unconditional delivery. Distinguished was Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 20 SCRA 1270, where recovery was allowed because there was a perfected and partially performed contract as to premium payment, unlike here where no partial payment whatsoever was made.
• Enforceability of Unpaid Premium: Non-payment of premium does not merely suspend but puts an end to the insurance contract, time of payment being peculiarly of the essence, particularly under provisions making the policy void or the insurer's obligation cease upon failure to pay. Had the insured peril occurred, the insurer would have had a valid defense since compliance with contract terms is a condition precedent to recovery, the burden being on the insured to keep the policy in force rather than on the insurer to prevent lapse. An insurer cannot treat a contract as valid for collecting premiums yet invalid for indemnity. The conclusion was buttressed by Section 77 of the Insurance Code, Presidential Decree No. 612, providing that no insurance contract is valid and binding unless and until premium has been paid, notwithstanding agreement to the contrary.

• Premium as consideration and condition precedent — Insurance is a contract to indemnify against loss from an unknown or contingent event for a consideration called premium, and compliance with its payment terms is a condition precedent to recovery. Applied here, the fire policy's after payment of premium language meant no indemnity obligation arose without payment.
• Prepayment and lapse upon non-payment — Premium must be paid at the time and in the manner specified in the policy, and if not so paid the policy lapses and is forfeited by its own terms; non-payment ends rather than merely suspends the contract where time of payment is of the essence. Applied here, total non-payment caused Policy No. 9749 to lapse, defeating suit for earned premium.
• Credit extension requires clear express agreement and acceptance — To obviate prepayment there must be a clear and express agreement for credit, and acceptance through a promise to pay made known in some manner is essential to make such agreement valid and to change conditional delivery into unconditional delivery. Applied here, neither a policy provision granting credit nor defendant's acceptance was shown, despite unconditional delivery of the policy.
• Mutuality of validity for indemnity and premium — An insurer cannot treat a contract as valid for collecting premiums and invalid for indemnity. Applied here, since plaintiff would not have been liable for fire loss without premium payment, it could not collect premium for the same period.
• Statutory prepayment rule — Under Section 77 of the Insurance Code, no contract of insurance issued by an insurance company is valid and binding unless and until premium has been paid, notwithstanding agreement to the contrary. Cited here as buttressing the lapse resulting from non-payment.

• "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.'" — States the statutory definition establishing premium as the consideration for the insurer's indemnity undertaking.
• "The premium must be paid at the time and in the way and manner specified in the policy and, if not so paid, the policy will lapse and be forfeited by its own terms." — Articulates the controlling prepayment-and-lapse rule applied to defeat recovery of earned premium.
• "an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the purpose of indemnity." — States the mutuality principle barring collection where the insurer bore no risk of loss.
• "Compliance by the insured with the terms of the contract is a condition precedent to the right of recovery." — Defines the insured's burden to keep the policy in force by premium payment before indemnity can attach.

• Glaraga vs. Sun Life Assurance Co., 49 Phil. 737 (1926) — Cited for the rule that premium must be paid as specified or the policy lapses and is forfeited by its own terms.
• Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 20 SCRA 1270 (1967) — Distinguished as allowing recovery of unpaid premium balance because there was a perfected and partially performed contract as to premium payment, unlike the total non-payment here.
• National Leather Co., Inc. vs. U.S. Life Insurance Co., 87 Phil. 410 (1950) — Cited for the rule that non-payment of premiums puts an end to, and does not merely suspend, the insurance contract.
• Mutual Fire Co. vs. Maple, 60 Or 359, 119 p. 484; 43 Am. Jur. 2d, pp. 630-631 — Cited for the rule that failure to pay premium at the stipulated time voids or forfeits the policy or ends the insurer's obligation, including fire policies.

• Section 2, Act No. 2427 (The Insurance Law) — Defines insurance as an indemnity contract for a consideration, applied to identify premium as the consideration whose non-payment prevented liability.
• Section 77, Insurance Code, Presidential Decree No. 612 — Provides that no insurance contract is valid and binding unless and until premium has been paid notwithstanding contrary agreement, applied to buttress the finding of lapse.
• Paragraphs 2 and 10, Fire Insurance Policy No. 9749 — Require a signed printed receipt as proof of premium payment and govern termination at the insured's request or the company's option with retention or return of premium, applied to show prepayment was stipulated and no credit was granted.

Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ., concur. Makasiar, J., is on leave.