AVOIDING risks is one of the reasons why people purchase life or property insurance. The buyer of insurance pays a “premium” to be protected against financial losses if the perils and dangers contained in the policy contract happen.
The premium paid for an insurance policy is determined partly based on the risk level of the buyer but the degree varies. A corporate employee in a secured building has a lower risk of being harmed or killed than an electricity lineman checking powerlines from one city to another. Similarly, risk levels for a certain property may also differ. A house which is built closer to a gas station faces a greater risk than the one within a guarded subdivision.
Insurance companies can statistically estimate how much premium to charge given the information disclosed by the buyer when applying. This is one of the reasons why insurance companies ask a lot of questions. For instance, a buyer of life insurance will be asked questions related to his medical history, vices, profession, age, etc.
Insurance is a financial tool that allows spreading of risks, which vary depending on the person or property being insured. The insurance company combines all the premium payments collected from its clients to fund the claims of each insured.
Without the premium payments, an insurance company will have little or no money to provide for the claimants when they declare a loss and may result in the collapse of the insurance industry.
Thus, insurance laws require that premium should be secured first for a policy to be binding. In other words, an insurance policy is only valid when a premium has already been paid, either directly to the insurance company or to its agent. The insurance company is entitled to payment of the premium as soon as the person or property being insured is exposed to the dreadful situations contained in the policy.
Meanwhile, the insurance company cannot sue its client for non-payment of premium because it means there is no insurance contract to speak of. However, when the premium has been paid and the insurance becomes enforceable, the insurer or the company is legally committed to fulfill its promise.
There are cases, however, when the insurance policy maintains its validity despite an unpaid premium, which excludes the first payment.
After the premium due date, a “grace period,” usually 30 days or a month, is commonly given by the insurance company. This allows for payment of the premium with no interest charged. During this period, the insurance policy is still valid despite the overdue premium. But if the policy becomes a claim within the grace period but the overdue premium has not been paid yet, the insurance company may deduct the amount of such premium, plus interest, from the amount payable by the insurance company.
When there is an “acknowledgment” or receipt of the premium by the insurance company, the policy is considered in force although actual payment has not been rendered. As such, the insurance company may demand payment of the premium.
An insurance policy is also considered valid despite the unpaid premium if the insurance company and the insured agreed to pay in “installment,” but the first installment must have been already been paid by the insured.
If a “credit extension” for the payment of the premium is expressly and clearly provided in the policy, it is also deemed valid. However, credit extension may be granted up to a maximum of 90 days only as duly provided under the broker or agency agreements. If the loss happens before the expiration of the credit term, the insured may recover or claim from the policy even if the premium is paid after the loss but within the credit term.
Let’s suppose an insurance company had been consistently granting credit extensions for a valued client to pay the premium and the client suffers a loss, say a fire destroyed the property he insured after the renewal of the insurance policy. If the client paid later by issuing a check to the insurance company, which the latter acknowledged and issued a receipt, the client is allowed to recover the loss because the insurer is “estopped” from using the defense that the premium had not been paid. It cannot invoke the non-payment of premium to invalidate the claim, since the insured relied in good faith on a practice that they have been undertaking.
Lastly, if the non-payment is due to the insurance company’s or agent’s fault—for instance, they refused a payment which was tendered properly—the insurance company cannot claim that the policy is invalid due to non-payment.
In case of “suretyship,” the surety is already liable despite the non-payment of premium by the obligor (the one who is obligated to perform a task) when the obligee (the one who will benefit from the fulfillment of the obligor’s promise) had already accepted the surety bond. A surety bond is a financial guarantee to the obligee that the obligor will fulfill his obligations as stated in the contract.
In life insurance, there are devices employed to avoid the lapsing of life insurance policy due to late or non-payment of premium, such as a grace period, automatic policy loan, application of dividend, and restatement clause which are employed by insurance companies.
The article is originally posted in Atty. Randy Escolango’s website. ATTY. RANDY B. ESCOLANGO, Ph.D. is currently the Deputy Insurance Commissioner for Legal Services of the Insurance Commission, Department of Finance. He may be contacted at email@example.com.