G.R. Nos. L-1669-70. August 31, 1950
PAZ LOPEZ DE CONSTANTINO, PLAINTIFF AND APPELLANT, VS. ASIA LIFE INSURANCE COMPANY, DEFENDANT AND APPELLEE.
BENGZON, J.:
Manila, call for decision of the question whether the beneficiary in a
life insurance policy may recover the amount thereof although the
insured died after repeatedly failing to pay the stipulated premiums,
such failure having been caused by the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium
duly paid to it, the Asia Life Insurance Company (a foreign corporation
incorporated under the laws of Delaware, U.S.A.), issued on September
27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life
of Arcadio Constantino for a term of twenty years. The first premium
covered the period up to September 26, 1942. The plaintiff Paz Lopez de
Constantino was regularly appointed beneficiary. The policy contained
these stipulations, among others:
“This POLICY OF INSURANCE is issued in
consideration of .the-written and printed application herefor, a copy
of which is attached hereto and is hereby made a part hereof, and of
the payment in advance during the lifetime and good health of the
Insured of the annual premium of One Hundred fifty-eight and 4/100
pesos Philippine currency[1]and of the payment of a like amount upon each twenty-seventh day of September hereafter during the term of Twenty years or until the prior death of the Insured. (Italics supplied.)* * * * * * *
“All premium payments are due in advance and any unpunctuality in
making any such payment shall cause this policy to lapse unless and
except as kept in force by the Grade Period condition or under Option 4
below. (Grace of 31 days)”
After that first payment, no further premiums were paid. The assured died on September 22, 1944.
It is admitted that the defendant, being an American corporation,had
to close its branch office in Manila by reason of the Japanese
occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life
Insurance Company issued its Policy No. 78145 (Joint Life 20-Year
Endowment Participating with Accident Indemnity) , covering the lives
of the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3000.
The annual premium: stipulated in the policy was regularly paid from
August 1, 1938, up to and including September 30, 1941. Effective
August 1, 1941, the mode of payment of premiums was changed from annual
to quarterly, so that quarterly premiums were paid, the last having
been delivered on November 18, 1941, said payment covering the period
up to January 31, 1942. No further payments were handed to the insurer.
Upon the Japanese occupation, insured and the insurer became separated
by the lines of war, and it was impossible and illegal for them to deal
with each other. Because the insured had borrowed on the policy an
amount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to
September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff
Agustina Peralta is his beneficiary. Her demand for payment met with
defendant’s refusal, grounded on non-payment of the premiums.
The policy provides in part:
“This POLICY OF INSURANCE is issued in
consideration, of the written.and printed application herefor, a copy
of which is attached hereto and is hereby made a part hereof, and of
the payment in advance during the lifetime and good health of the
Insured of the annual premium of Two Hundred and 43/100 pesos
Philippine currency and of the payment of a like amount, upon each
first day of August hereafter during the term of Twenty years or until
the prior death of either of the Insured. (Italic supplied.)* * * * * * *
“All premium payments are due in advance and any unpunctuality in
making any such payment shall cause this policy to lapse unless and
except as kept in force by the Grace Period condition or under Option 4
below. (Grace of 31 days) * * *”
Plaintiffs maintain that, as beneficiaries, they are entitled to
receive the proceeds of the policies minus all sums due for premiums in
arrears. They allege that non-payment of the premiums was caused by the
closing of defendant’s offices in Manila during the Japanese occupation
and the impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for
non-payment of premiums, in accordance with the contract of the parties
and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this
jurisdiction, fortunately, this Court has had the benefit of extensive
and exhaustive memoranda including those of amici curiae. The matter
has received careful consideration, inasmuch as it affects the interest
of thousands of policy-holders and the obligations of many insurance
companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the Civil Code.[2] Act No. 2427 was largely copied from the Civil Code of California.[3]
And this Court has heretofore announced its intention to supplement the
statutory laws with general principles prevailing on the subject in
the. United States.[4]
In Young vs. Midland Textile Insurance Co. (30 Phil.,
617), we said that “contracts of insurance are contracts of Indemnity
upon the terms and conditions specified in the policy. The parties have
a right to impose such reasonable conditions at the time of the making
of the contract as they may deem wise and necessary. The rate of
premium is measured by the character of the risk assumed. The insurance
company, for a comparatively small consideration, undertakes to
guarantee the insured against loss or damage, upon the terms and
conditions agreed upon, and upon no other, and when called upon to pay,
in case of loss, the insurer, therefore, may justly insist upon a
fulfillment of these terms. If the insured cannot bring himself within
the conditions of the policy, he is not entitled to recover for the
loss. The terms of the policy constitute the measure of the insurer’s
liability, and in order to recover the insured must show himself within
those terms; and if it appears that the contract has been terminated by
a violation, on the part of the insured, of its conditions, then there
can be no right of recovery. The compliance of the insured with the
terms of the contract is a condition precedent to the right of
recovery.”
Recall of the above pronouncements is appropriate because the
policies in question stipulate that “all premium payments are due in
advance and any unpunctuality in making any such payment shall cause
this policy to lapse.” Wherefore, it would seem that pursuant to the
express terms of the policy, non-payment of premium produces its
avoidance.
“The conditions of contracts of insurance, when
plainly expressed in a policy, are binding upon the parties and should
be enforced by the courts, if the evidence brings the case clearly
within their meaning and intent. It tends to bring the law itself into
disrepute when, by astute and subtle distinctions, a plain case is
attempted to be taken without the operation of a clear, reasonable, and
material obligation of the contract. Mack vs. Rochester German Ins. Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Insurance Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co., (49 Phil., 737), this
Court held that a life policy was avoided because the premium had not
been paid within the time fixed, since by its express terms,
non-payment of any premium when due or within the thirty-day period of
grace, ipso facto caused the policy to lapse. This goes to show that although we take the view that insurance policies should be conserved[5] and should not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.
“Forfeitures of insurance policies are not favored,
but courts cannot for that reason alone refuse to enforce an insurance
contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiffs that inasmuch as the
non-payment of premium was the consequence of war, it should be excused
and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says
that in determining the effect of non-payment of premiums occasioned by
war, the American cases may be divided into three groups, according as
they support the so-called Connecticut Rule, the New York Rule, or the
United States Rule.
The first holds the view that “there are two elements in the
consideration for which the annual premium is paid—First, the mere
protection for the year, and, second,the privilege of renewing the
contract for each succeeding year by paying the premium for that year
at the time agreed upon. According to this view of the contract, the
payment of premiums is a condition precedent, the nonperformance of
which, even when performance would be illegal, necessarily defeats the
right to renew the contract.”
The second rule, apparently followed by the greater number of
decisions, holds that “war between states in which the parties reside
merely suspends the contract of life insurance, and that, upon tender
of all premiums due by the insured or his representative after the war
has terminated, the contract revives and becomes fully operative.”
The United States rule declares that the contract is not merely
suspended, but is abrogated by reason of non-payment of premiums, since
the time of the payments is peculiarly of the essence of the contract.
It additionally holds that it would be unjust to allow the insurer to
retain the reserve value of the policy, which is the excess of the
premiums paid over the actual risk carried during the years when the
policy had been in force. This rule was announced in the well-known
Statham[6] case which, in the opinion of Professor Vance, is the correct rule.[7]
The appellants and some amici curiae contend that the New York rule should be applied here. The appellee and other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different
theories. Besides the respect and high regard we have always
entertained for decisions of the Supreme Court of the United States, we
cannot resist the conviction that the reasons expounded in its decision
of the Statham case are logically and juridically sound. Like the
instant case, the policy involved in the Statham decision specifies
that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the Court said:
“* * * it must be conceded that promptness of
payment is essential in the business of life insurance. All the
calculations of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the premiums
when due, but on compounding interest upon them. It is on this basis
that they are enabled to offer assurance at the favorable rates they
do. Forfeiture for non-payment is a necessary means of protecting
themselves from embarrassment. Unless it were enforceable, the business
would be thrown into utter confusion. It is like the forfeiture of
shares in mining enterprises, and all other hazardous undertakings.
There must be power to cut off unprofitable members, or the success of
the whole scheme is endangered. The insured parties are associates in a
great scheme. This associated relation exists whether the company be a
mutual one or not. Each is interested in the engagements of all; for
out of the co-existence of many risks arises the law of average, which
underlies the whole business. An essential feature of this scheme is
the mathematical calculations referred to, on which the premiums and
amounts assured are based. And these calculations, again, are based on
the assumption of average mortality, and of prompt payments and
compound interest thereon. Delinquency cannot be tolerated nor
redeemed, except at the option of the company. This has always been the
understanding and the practice in this department of business. Some
companies, it is true, accord a grace of thirty days, or other fixed
period, within which the premium in arrear may be paid, on certain
conditions of continued good health, etc. But this is a matter of
stipulation, or of discretion, on the part of the particular company.
When no stipulation exists, it is the general understanding that time
is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when
av. insured person is in extreme is to meet a premium coming due,
demonstrates the common view of this matter.“The case,
therefore, is one in which time is material and of the essence of the
contract. Non-payment at the day involves absolute forfeiture if such
be the terms of the contract, as is the case here. Courts cannot with
safety vary the stipulation of the parties by introducing equities for
the relief of the insured against their own negligence.”
In another part of the decision, the United States Supreme Court
considers and rejects what is, in effect, the New York theory in the
following words and phrases:
“The truth is, that the doctrine of the revival of
contracts suspended during the war is one based on considerations of
equity and justice, and cannot be invoked to revive a contract which it
would be unjust or inequitable to revive.“In the case of
life insurance, besides the materiality of time in the performance of
the contract, another strong reason exists why the policy should not be
revived. The parties do not stand on equal ground in reference to such
a revival. It would operate most unjustly against the company. The
business of insurance is founded on the law of averages; that of life
insurance eminently so. The average rate of mortality is the basis on
which it rests. By spreading their risks over a large number of cases,
the companies calculate on this average with reasonable certainty and
safety. Anything that interferes with it deranges the security of the
business. If every policy lapsed by reason of the war should be
revived, and all the back premiums should be paid, the companies would
have the benefit of this average amount of risk. But the good risks are
never heard from; only the bad are sought to be revived, where the
person insured is either dead or dying. Those in health can get new
policies cheaper than to pay arrearages on the old. To enforce a
revival of the bad cases; whilst the company necessarily lose the cases
which are desirable, would be manifestly unjust. An insured person, as
before stated, does not stand isolated and alone. His case is connected
with and co-related to the cases of all others insured by the same
company. The nature of the business, as a whole, must be looked at to
understand the general equities of the parties.”
The above considerations certainly lend themselves to the approval
of fair-minded men. Moreover, if, as alleged, the consequences of war
should not prejudice the insured, neither should they bear down on the
insurer.
Urging adoption of the New York Theory, counsel for plaintiff point
out that the obligation of the insured to pay premiums was excused
during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such
failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of the insurer.
“Under an Oklahoma decision, the annual premium due
is not a debt. It is not an obligation upon which the insurer can
maintain an action against insured; nor is its settlement governed by
the strict rule controlling payment of debts. So, the court in a
Kentucky case declares, in the opinion, that it is not a debt, * * *
The fact that it is payable annually or semi-annually, or at any other
stipulated time, does not of itself constitute a promise to pay, either
express or implied. In case of non-payment, the policy is forfeited,
except so far as the forfeiture may be saved by agreement, by waiver,
estoppel, or by statute. The payment of the premium is entirely
optional, while a debt may be enforced at law, and the fact that the
premium is agreed to be paid is without force, in the absence of an
unqualified and absolute agreement to pay a specified sum at some
certain time. In the ordinary policy there is no promise to pay, but it
is optional with the insured whether he will continue the policy or
forfeit it.” (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996)“It is well settled that a contract of insurance is sui generis.
While the insured by an observance of the conditions, .may hold the
insurer to his contract, the latter has not the power or right to
compel the insured to maintain the contract relation with it longer
than he chooses. Whether the insured will continue it or not is
optional with him. There being no obligation to pay for the premium,
they did not constitute a debt.” Noble vs. Southern States M. D. Ins. Co., 157 Ky. 46, 162 S. W., 528.) (Italics ours.)
It should be noted that the parties contracted not only for
peacetime conditions but also for times of war, because the policies
contained provisions applicable expressly to.wartime days. The logical
inference,therefore, is that the parties contemplated uninterrupted
operation of the contract even if armed conflict should ensue.
For the plaintiffs, it is again argued that in view of the enormous
growth of insurance business since the Statham decision, it could now
be relaxed and even disregarded. It is stated “that the relaxation of
rules relating to insurance is in direct proportion to the growth of
the business. If there were only 100 men, for example, insured by a
Company or a mutual Association, the death of one will distribute the
insurance proceeds among the remaining 99 policy-holders. Because the
loss which each survivor will bear will be relatively great, death from
certain agreed or specified causes may be deemed not a compensable
loss. But if the policy-holders of the Company or Association should be
1,000,000 individuals, it is clear that the death of one of them will
not seriously prejudice each one of the 999,999 surviving insured. The
loss to be borne by each individual will be relatively small.”
The answer to this is that as there are (in the example) one
million policy-holders, the “losses” to be considered will not be the death of one
but the death of ten thousand, since the proportion of 1 to 100 should
be maintained. And certainly such losses for 10,000 deaths will not be
“relatively small.”
After perusing the Insurance Act, we are firmly persuaded that the
non-payment of premiums is such a vital defense of insurance companies
that since the very beginning, said Act 2427 expressly preserved it, by
providing that after the policy shall have been in force for two years,
it shall become incontestable (i.e. the insurer shall have no defense)
except for fraud, non-payment of premiums, and military or naval service in time of war (sec. 184(b), Insurance Act). And when Congress recently amended this section (Rep. Act 171), the defense of fraud was eliminated, while the defense of non-payment of premiums was preserved.
Thus the fundamental character of the undertaking to pay premiums and
the high importance of the defense of non-payment thereof, was
specifically recognized.
In keeping with such legislative policy, we feel no hesitation to
adopt the United States Rule, which is in effect a variation of the
Connecticut rule for the sake of equity. In this connection, it appears
that the first policy had no reserve value, and that the equitable
values of the second had been practically returned to the insured in
the form of loan and advance for premium.
For all the foregoing, the lower court’s decision absolving the
defendant from all liability on the policies in question, is hereby
affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.
[1] Plus P18 for accident benefits.
[2] Enriquez vs. Sun Life, 41 Phil. 269.
[3] Ang Giok Chip vs. Springfield Fire, 56 Phil., 375
[4] Gercio vs. Sun Life, 4& Phil., 53.
[5] Sun Life Ass. Co. vs. Ingersoll, 42 Phil., 331.
[6] New York Life Ins. vs. Statham, 93 U. S. 24, 23 Law. ed. 789.
[7] Op. cit. p. 293. It
is also the rule in West Virginia and Georgia. It adds to the
Connecticut doctrine the duty to return the reserve value of the policy.