G.R. No. L-2668. September 30, 1950
NATIONAL LEATHER CO., INC., PLAINTIFF AND APPELLANT, VS. THE UNITED STATES LIFE INSURANCE CO., DEFENDANT AND APPELLEE.
REYES, J.:
Manila dismissing plaintiff’s action for the recovery of the proceeds
of a life insurance policy. Though the amount sought to be recovered is
only P10,000, the case has been elevated to this Court by agreement of
the parties upon representation that only questions of law are involved.
It appears from the stipulation of facts that plaintiff is a
Philippine corporation with offices in the city of Manila, while
defendant is a foreign life insurance company incorporated under the
laws of New York, U.S.A., and licensed to do business in the
Philippines (except during the period of the Japanese occupation) with
main office in New York but with a branch office in Manila. On April
14, 1939, plaintiff insured with the defendant the life of Pedro
Alejandrino for $5,000 under a 10-year term non-participating policy in
consideration of the payment to the defendant, in advance, of the sum
of $23.11 as quarterly premium beginning April 14, 19391 and the
payment of a like sum every quarter thereafter, also in advance, for a
period of 10 years or until the prior death of said Pedro Alejandrino.
The stipulated quarterly premiums on the policy were regularly paid up
to October 14, 1941, when the last quarterly premium payment was made,
covering the period from that date to January 14, 1942. Thereafter no
more premiums were paid, it appearing that, because defendant was an
American corporation, its branch office in Manila was closed when that
city was occupied by the Japanese forces on January 2, 1942, and it had
remained closed during the entire period of enemy occupation. It was
not reopened until March, 1945. Pedro Alejandrino died on September 23,
1943, that is, beyond the period covered by the premiums paid by the
insured. But just the same, after the liberation of Manila in 1945,
plaintiff, as the beneficiary named in the policy^made a claim for the
proceeds thereof and tendered a check for P323.54, the total unpaid
premiums from January 14, 1942, to October 14, 1943.
Defendant however, rejected the claim and returned the check on the
ground that the policy had ceased to be in force as of January 14,
1942, for non-payment of the stipulated premiums. It was to secure the
judicial enforcement of this claim that plaintiff brought the present
action and took this appeal when its complaint was dismissed by the
court below.
Among the provisions of the policy issued by the defendant to plaintiff are the following:
“This Policy is issued in consideration of the
application therefor, copy of which application is attached hereto and
made a part hereof, and of the payment, on or before delivery hereof,
of the quarterly premium of TWENTY-THREE DOLLARS AND ELEVEN CENTS ($23.11) and of the payment of a like amount
upon each 14th day of April, July, October and January hereafter during
the term of Ten years or until the prior death of the Insured.”* * * * * * *
“Payment of Premiums.—Except as herein provided the payment of a
premium or installment shall not maintain this Policy in force beyond
the date when the next premium or installment thereof is payable.“All
premiums are payable in advance at the Shanghai or New York City Office
or to any agent of the Company upon delivery, on or before date due,
of a receipt signed by an executive officer, viz: the Chairman of the
Board of Directors, President, Vice-President, Secretary, Assistant
Secretary, Actuary, Assistant Actuary or Cashier of the Company and
countersigned by said agent.“A grace of one month or thirty
days (whichever period is the longer) shall be granted for the payment of every premium after the first, during which time the insurance
shall continue in force. If death occur within the days of grace the
unpaid portion of the premium for the then current policy year shall be
deducted from the amount payable hereunder.“Upon written
request therefor, approved by the Company at its Shanghai or New York
City Office, premium payments may be changed at any anniversary of this
Policy so as to be payable annually, semi-annually, or quarterly in
accordance with the published rates in force at the date of issue of
this Policy. If this Policy become a claim by death any unpaid portion
of the annual premium for the policy year in which death occurs shall
be an indebtedness to be deducted from the amount payable hereunder.* * * * * * *
“Reinstatement.—If
this Policy shall lapse in consequence of default in payment of any
premium, it may be reinstated at any time upon evidence of insurability
satisfactory to the Company and the payment of all overdue premiums
with interest at six per centum per annum to the date of reinstatement.”
As correctly stated by the appellee, the sole question at issue in
this case is whether or not a life insurance policy lapses pursuant to
its terms because of non-payment of the stipulated premium when such
nonpayment occurred at a time when the insurer and the assured were
separated by the lines of war. This question, though new in this
jurisdiction, has already been determined in the recent decision of
this Court in the case of Paz Lopez de Constantino vs. Asia Life
Insurance Company, G. R. No. L-1669[*], and that of Agustina Peralta vs. Asia Life Insurance Company, G. R. No. L-1670 (August 31, 1950)[*].
It would, therefore, be idle to discuss the question again, it being
sufficient for the purposes of the present action that we quote the
following from that decision:
“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 policies 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 extra-ordinary
and even desperate efforts sometimes made, when an 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 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 arrearage 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 consideration 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 Hew 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 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. Inc. Co., 157 Ky. 46, 162 S. M, 528.) (Italic supplied.)“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 ofie 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.”
We see nothing in the present case which would justify a departure
from the ruling laid down in the above decision, according to which the
nonpayment of premiums does not merely suspend put puts an end to an
insurance contract, “since the time of the payment is peculiarly of the
essence of the contract.” The rule is not affected by the fact that the
nonpayment is due to war or that the insured has not been negligent.
There is, therefore, nothing to the argument that in this case
plaintiff’s failure to make premium payments after January 14, 1942,
should be excused as being due, not to its own negligence, but to
defendant’s omission to make arrangements for the receipt of premiums
that were to fall due during the period of enemy occupation. And,
besides, as the trial court says in its decision,” * * * It
is unreasonable to expect the defendant to send notice of its closing to
the thousands of its insured in the Philippines immediately before and
after the fall of Manila, because then such a step would be
impracticable owing to the confusion and disorder occasioned by the
war. Besides, even if such a notice were actually sent, defendant could
not have received payments of insurance premiums because its offices
were closed and its American officials interned upon orders of the
Japanese authorities.”
In view of the foregoing, the decision below is affirmed, with costs.
Moran, C.J., Ozaeta, Paras, Pablo, Bengzon, Tuason, and Reyes, JJ., concur.
[*] Supra, p. 248.
[6] New York Life Ins. vs. Statham, 93 U. S. 24, 23 L. 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.