K. Rescission of Insurance Contracts

No Policy of Insurance shall be Cancelled Except upon Notice thereof to the Insured

Q: The Peninsula Insurance Company offered to insure Francis' brand-new car against all risks in the sum of P1 million for one year. The policy was issued with the premium fixed at P60,000.00 payable in 6 months. Francis only paid the first two months installments. Despite demands, he failed to pay the subsequent installments.

Five months after the issuance of the policy, the vehicle was carnapped. Francis filed with the insurance company a claim for its value. However, the company denied his claim on the ground that he failed to pay the premium resulting in the cancellation of the policy. Can Francis recover from the Peninsula Insurance Company? (2006 BAR)

A: YES. As a general rule, no policy is binding unless the premiums thereof have been paid. However, one of the exceptions is when there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of loss. In the case at hand, Francis already paid two installments at the time of the loss and as such may recover on the policy (Makati Tuscany Condominium Corporation v. Court of Appeals, G.R. No. 95546, 6 November 1992)¹. Furthermore, the contention of the insurer that the failure to pay premium resulted in the cancellation of the policy is not tenable since no policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured. (Sec. 64, IC)²

Alterations in Use or Condition

An alteration in the use or condition of a thing insured from that to which it is limited by the policy:

• Entitles an insurer to rescind a contract of fire insurance if such alteration:
• Increases the risks, and
• Was made:
• Without the consent of the insurer, and
• By means within the control of the insured.
• Does not affect a contract of fire insurance if the alteration does not increase the risk [Secs. 168-169]³.

Note: A contract of fire insurance is not affected by any act of the insured after the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss [Sec. 170]⁴.

Transferring machinery to another location, despite a provision in the policy stating that the machine cannot be transferred without the consent of the insurer, is considered an alteration in the condition and location of the thing insured [Malayan Insurance Company, Inc. v. Pap Co., Ltd., G.R. No. 200784, 7 August 2013]⁵.