GREAT PACIFIC LIFE INSURANCE CORPORATION, PETITIONER, VS. THE HON. COURT OF APPEALS AND TEODORO CORTEZ, RESPONDENTS.

Great Pacific Life Insurance versus Cortez

The Case

This is a petition for review brought by Great Pacific Life Insurance Corporation against Teodoro Cortez, an insured who asked for the return of the first annual premium he had paid on a twenty-year endowment policy on his life. The insurer had issued the policy, delivered it, and accepted his premium in installments, only to inform him months later that the policy had never taken effect and that he must pay a balance and undergo another medical examination. The case matters because it fixes the consequences of an insurer's bad faith in accepting premiums without giving the corresponding protection, and it gathers the Insurance Code rules on when an insured is entitled to a return of premium.

Procedural History

Cortez filed a complaint for damages in the Court of First Instance of Negros Oriental, praying for the refund of his premium of 1,416 pesos and 60 centavos, plus moral damages and attorney's fees. After trial, the trial court rendered judgment in his favor, ordering the insurer to refund the premium without interest, to pay 30,000 pesos as moral damages, 500 pesos as litigation expenses, 2,000 pesos as attorney's fees, and the costs of suit. The insurer appealed to the Court of Appeals, which affirmed the judgment but reduced the moral damages to 10,000 pesos, with costs against the appellant. The insurer moved for reconsideration, and the appellate court denied the motion. The insurer then came to the Supreme Court by petition for review.

Facts

Upon the solicitation of Margarita Siega, an underwriter for Great Pacific Life Insurance Corporation, Teodoro Cortez applied for a twenty-year endowment policy for 30,000 pesos. His application, together with the requisite medical examination, was accepted and approved by the company, and Endowment Policy Number 221944 was issued in his name. The policy was released for delivery on January 24, 1973, and was actually delivered to him by the underwriter on January 25, 1973. The effective date shown on the face of the policy was December 25, 1972, and the annual premium was 1,416 pesos and 60 centavos. The underwriter assured him that the first premium could be paid within a grace period of thirty days from the date of delivery.

Cortez paid the first premium in three installments: 400 pesos on February 5, 1973, 350 pesos on February 17, 1973, and 666 pesos and 60 centavos on February 21, 1973. Each installment was covered by a temporary receipt issued by the underwriter, and each was later confirmed by an official receipt issued by the company's home office in Makati. All three payments thus fell within the thirty-day grace period.

In a letter dated June 1, 1973, the company advised Cortez that the policy was not in force. To make it enforceable and operative, he was asked to remit the balance of 1,015 pesos and 60 centavos to complete his initial annual premium due December 15, 1972, and to see a company physician for another full medical examination at his own expense. Cortez immediately informed the company that he was cancelling the policy and demanded the return of his premium plus damages. When the company ignored the demand, he sued.

Issues

• Whether or not Cortez is entitled to a refund of the premium he paid on the policy.
• Whether or not the award of moral damages to Cortez was proper.

Applicable Provisions

Section 79 of the Insurance Code of 1978 provides:

SECTION 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.

This paragraph governs the refund, because the Court found that the company was never at risk under the policy.

Section 81 of the Insurance Code of 1978 provides:

SECTION 81. A person insured is entitled to a return of the premium when the contract is voidable on account of the 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.

This section supplies the second ground for the refund, since the insurer never incurred any liability under the policy.

Section 82 of the Insurance Code of 1978 provides:

SECTION 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.

The Court cited this section among the return-of-premium provisions, although the case itself does not involve over-insurance.

Ruling

On the first issue, the Court held that Cortez is entitled to the refund. The Court found that when the company advised him, four months after he had paid the first premium, that his policy had never been in force and that he must pay another premium and undergo another medical examination, the company committed a serious breach of the contract of insurance. The company should have informed him of the deadline for paying the first premium before or at least upon delivery of the policy, so that he could have complied and would not have been misled into believing that his life and his family were protected when they were not. And if the premium was unacceptable for being late, it was the company's duty to return it. By accepting his premiums without giving the corresponding protection, the company acted in bad faith. Since the policy was in fact inoperative from the beginning, the company was never at risk, and it is not entitled to keep the premium.

On the second issue, the Court held that the award of moral damages was proper. There could hardly be any doubt that Cortez suffered moral shock, serious anxiety, and wounded feelings upon being informed six months after the policy was issued, and four months after the full premium was received, that his policy was worthless because it never took effect, so that he and his family never received the protection he paid for.

Doctrine

An insurer that accepts premiums without giving the corresponding protection acts in bad faith and commits a serious breach of the contract of insurance. It must inform the insured of the deadline for paying the first premium before or at least upon delivery of the policy; if the premium is unacceptable for being late, it must return the premium. Under Section 79 of the Insurance Code, the insured is entitled to the whole premium if no part of his interest in the thing insured was ever exposed to any of the perils insured against, and under Section 81, he is entitled to a return when, by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. Where the policy was inoperative from the beginning, the insurer was never at risk and cannot keep the premium. Moral damages lie for the moral shock, serious anxiety, and wounded feelings caused by learning that a paid-up policy is worthless.

Disposition

The Supreme Court denied the petition for lack of merit and affirmed the decision of the Court of Appeals as modified, ordering the insurer to pay interest at six percent per annum on the refundable premium of 1,416 pesos and 60 centavos from the filing of the complaint until the judgment is fully paid, with costs against the petitioner, and declaring the decision immediately executory.

Remember This

Memorize the line that an insurer which accepts premiums without giving the corresponding protection acts in bad faith, and that where the policy was inoperative from the beginning the insurer was never at risk and cannot keep the premium. Examiners use this case on the return of premiums under Sections 79 and 81 of the Insurance Code, and on moral damages for an insured who is told too late that his policy never took effect.