AIME T. GAISANO, Petitioner, v.

DEVELOPMENT INSURANCE AND SURETY

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11,
2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the
September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC
granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial vehicle
policy issued by Development Insurance and Surety Corporation (respondent), viz.: ChanRoblesVir tualawlibrary

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant
ordered to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from the
date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5 chanroblesv irtuallawlibrary

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate
number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance
business.6 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.8 Respondent also issued two other commercial vehicle
policies to petitioner covering two other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific Underwriters
Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's Ark Merchandising
(Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far East Bank check dated
September 27, 1996 payable to Trans-Pacific on the same day.11 The check bearing the amount of
P140,893.50 represents payment for the three insurance policies, with P55,620.60 for the premium and
other charges over the vehicle.12 However, nobody from Trans-Pacific picked up the check that day
(September 27) because its president and general manager, Rolando Herradura, was celebrating his
birthday. Trans-Pacific informed Noah's Ark that its messenger would get the check the next day,
September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing manager
Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the vicinity of SM
Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine National Police
Traffic Management Command at Camp Crame in Quezon City.14 Despite search and retrieval efforts, the
vehicle was not recovered.15

Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an
official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for
the premium and other charges over the vehicle.16 The check issued to Trans-Pacific for P140,893.50 was
deposited with Metrobank for encashment on October 1, 1996.17
On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported the
loss and filed a claim with respondent for the insurance proceeds of P1,500,000.00.18 After investigation,
respondent denied petitioner's claim on the ground that there was no insurance contract.19 Petitioner,
through counsel, sent a final demand on July 7, 1997.20 Respondent, however, refused to pay the
insurance proceeds or return the premium paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21 with the
RTC where it sought to collect the insurance proceeds from respondent. In its Answer,22 respondent
asserted that the non-payment of the premium rendered the policy ineffective. The premium was received
by the respondent only on October 2, 1996, and there was no known loss covered by the policy to which
the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the
premium paid as of September 27, even if the check was received only on September 28 because (1)
respondent's agent, Trans-Pacific, acknowledged payment of the premium on that date, September 27,
and (2) the check that petitioner issued was honored by respondent in acknowledgment of the authority of
the agent to receive it.25 Instead of returning the premium, respondent sent a checklist of requirements to
petitioner and assigned an underwriter to investigate the claim.26 The RTC ruled that it would be unjust
and inequitable not to allow a recovery on the policy while allowing respondent to retain the premium
paid.27 Thus, petitioner was awarded an indemnity of P1,500,000.00 and attorney's fees of P50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records were
forwarded to the CA.31

CA HELD: The CA granted respondent's appeal.32 The CA upheld respondent's position that an
insurance contract becomes valid and binding only after the premium is paid pursuant to Section 77 of the
Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found that the
premium was not yet paid at the time of the loss on September 27, but only a day after or on September
28, 1996, when the check was picked up by Trans-Pacific.34 It also found that none of the exceptions to
Section 77 obtains in this case.35 Nevertheless, the CA ordered respondent to return the premium it
received in the amount of P55,620.60, with interest at the rate of 6% per annum from the date of the
denial of the claim on October 9, 1996 until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract
between him and respondent.37 He submits that it comes within the exceptions to the rule in Section 77 of
the Insurance Code that no contract of insurance becomes binding unless and until the premium thereof
has been paid. The prohibitive tenor of Section 77 does not apply because the parties stipulated for the
payment of premiums.38 The parties intended the contract of insurance to be immediately effective upon
issuance, despite non-payment of the premium, because respondent trusted petitioner.39 He adds that
respondent waived its right to a pre-payment in full of the terms of the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the return
of the premiums paid, then he should be able to recover the full amount of P140,893.50, and not merely
P55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was merely to
disregard the contract for only the lost vehicle.42 According to petitioner, the principle of mutuality of
contracts is violated, at his expense, if respondent is allowed to be excused from performance on the
insurance contract only for one vehicle, but not as to the two others, just because no loss is suffered as to
the two. To allow this "would be to place exclusively in the hands of one of the contracting parties the
right to decide whether the contract should stand or not x x x."43

For failure of respondent to tile its comment to the petition, we declared respondent to have waived its
right to file a comment in our June 15, 2011 Resolution.44

The lone issue here is whether there is a binding insurance contract between petitioner and respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.45 Just like any other contract, it requires
a cause or consideration. The consideration is the premium, which must be paid at the time and in the way
and manner specified in the policy.46 If not so paid, the policy will lapse and be forfeited by its own
terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the insurance
policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time of the issuance
of the policy, provides:ChanRoblesVir tualawlibrary

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the grace period provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an
insurance contract, both the insured and insurer undertake risks. On one hand, there is the insured, a
member of a group exposed to a particular peril, who contributes premiums under the risk of receiving
nothing in return in case the contingency does not happen; on the other, there is the insurer, who
undertakes to pay the entire sum agreed upon in case the contingency happens. This risk-distributing
mechanism operates under a system where, by prompt payment of the premiums, the insurer is able to
meet its legal obligation to maintain a legal reserve fund needed to meet its contingent obligations to the
public. The premium, therefore, is the elixir vitae or source of life of the insurance business:ChanRoblesVirtualawlibrary

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance
is primarily a risk-distributing device, a mechanism by which all members of a group exposed to a
particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of
being compelled upon the happening of the contingency to pay the entire sum agreed upon, and the
insured, that of parting with the amount required as premium. without receiving anything therefor in case
the contingency does not happen. To ensure payment tor these losses, the law mandates all insurance
companies to maintain a legal reserve fund in favor of those claiming under their policies. It should be
understood that the integrity of this fund cannot be secured and maintained if by judicial fiat partial
offerings of premiums were to be construed as a legal nexus between the applicant and the insurer despite
an express agreement to the contrary. For what could prevent the insurance applicant from deliberately or
willfully holding back full premium payment and wait for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment and full satisfaction. It must be emphasized
here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance
firms are enabled to other the assurance of security to the public at favorable rates. x x x 50 (Citations
omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-
Pacific, only on September 28, 1996. No payment of premium had thus been made at the time of the loss
of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was informed that the
check was ready for pick-up on September 27, 1996, the notice of the availability of the check, by itself,
does not produce the effect of payment of the premium. Trans-Pacific could not be considered in delay in
accepting the check because when it informed petitioner that it will only be able to pick-up the check the
next day, petitioner did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of
loss, there was no payment of premium yet to make the insurance policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is paid.
In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said: ChanRoblesVirtualawlibrary

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an
agreement to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides: ChanRoblesVirtualawlibrary

SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals,
wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments
of the premium and partial payment has been made at the time of loss. We said therein, thus: ChanRoblesVirtualawlibrary

We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that the petitioners and private respondent intended subject insurance policies to be binding
and effective notwithstanding the staggered payment of the premiums. The initial insurance contract
entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the
insurer to continue collecting and accepting the premiums, although paid on installments, and later deny
liability on the lame excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its decision: ChanRoblesVirtualawlibrary

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer would prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in
effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy
binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but docs not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good customs,
public order or public policy (De Leon,' The Insurance Code, p. 175). So is an understanding to allow
insured to pay premiums in installments not so prescribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment
of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to
Section 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or
industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77
itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of
premium, even if premium has not been actually paid, as expressly provided by Section 78 itself; (3)
where the parties agreed that premium payment shall be in installments and partial payment has been
made at the time of loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals;53 (4) where
the insurer granted the insured a credit term for the payment of the premium, and loss occurs before the
expiration of the term, as held in Makati Tuscany Condominium Corp.; and (5) where the insurer is in
estoppel as when it has consistently granted a 60 to 90-day credit term for the payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in UCPB General
Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not contain an
acknowledgment of the receipt of premium but merely a statement of account on its face;54 and (3) no
payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended the
contract of insurance to be immediately effective upon issuance, despite non-payment of the premium.
This waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the
insurers have consistently granted the insured a credit extension or term for the payment of the premium.
Here, however, petitioner failed to establish the fact of a grant by respondent of a credit term in his favor,
or that the grant has been consistent. While there was mention of a credit agreement between Trans-
Pacific and respondent, such arrangement was not proven and was internal between agent and principal.55
Under the principle of relativity of contracts, contracts bind the parties who entered into it. It cannot favor
or prejudice a third person, even if he is aware of the contract and has acted with knowledge.56

We cannot sustain petitioner's claim that the parties agreed that the insurance contract is immediately
effective upon issuance despite non payment of the premiums. Even if there is a waiver of pre-payment of
premiums, that in itself does not become an exception to Section 77, unless the insured clearly gave a
credit term or extension. This is the clear import of the fourth exception in the UCPB General Insurance
Co., Inc. To rule otherwise would render nugatory the requirement in Section 77 that "[n]otwithstanding
any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, x x x." Moreover, the policy itself
states:
ChanRoblesVirtualaw library

WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis
of this Contract and deemed incorporated herein, has applied to the company for the insurance hereinafter
contained, subject to the payment of the Premium as consideration for such insurance.57 (Emphasis
supplied.)
The policy states that the insured's application for the insurance is subject to the payment of the premium.
There is no waiver of pre-payment, in full or in installment, of the premiums under the policy.
Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy became
effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium paid for the
vehicle in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust enrichment
when a person unjustly retains a benefit to the loss of another, or when a person retains money or property
of another against the fundamental principles of justice, equity and good conscience.58 Petitioner cannot
claim the full amount of P140,893.50, which includes the payment of premiums for the two other
vehicles. These two policies are not affected by our ruling on the policy subject of this case because they
were issued as separate and independent contracts of insurance.59 We, however, find that the award shall
earn legal interest of 6% from the time of extrajudicial demand on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009
and the Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that
respondent should return the amount of P55,620.60 with the legal interest computed at the rate of 6% per
annum reckoned from July 7, 1997 until finality of this judgment. Thereafter, the total amount shall earn
interest at the rate of 6% per annum from the finality of this judgment until its full satisfaction.

SO ORDERED. chanroblesvirtuallawlibrary

Bersamin, (Acting Chairperson), Del Castillo,* and Caguioa,***JJ., concur.