Paz Lopez de Constantino vs Asia Life Insurance Company
G.R. No. L-1669 August 31, 1950
Facts: 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 a provision that whenever the insured lapse any payment of the premium, the policy will be avoided. After that first payment, no further premiums were paid. The insured died on September 22, 1944. Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No. 78145 (Joint Life 20Year Endowment Participating with Accident Indemnity), covering the lives of the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. 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, the 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 mount 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.
Issue: 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.
Held: No. 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 non-performance would be illegal necessarily defeats the right to renew the contract.”
The second rule, apparently followed by the greater number of decisions, hold that “war between states in which the parties reside merely suspends the contracts of the life insurance, and that, upon tender of all premiums due by the insured or his representatives 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-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 Statham6 case which, in the opinion of Professor Vance, is the correct rule.
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 no. 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 No. 171), the defense of fraud was eliminated, while the defense of nonpayment 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.