PREMIUM payments are essential for an insurance system to work.
To effectively work as a risk-distributing mechanism, these payments are pooled together by the insurance company to fund the losses of clients who unfortunately experienced the perils stated in their policy.
But when clients consistently fail to pay the premium, the insurance business may run out of funds once legal claims add up.
This is the reason why the law mandates that an insurance policy is valid only if premium has been promptly paid, subject to some exemptions such as when the policy allows for a grace period, credit extensions, and installment as mode of payment.
As there is a law that requires payment of the premium for an insurance policy to be binding, there are also cases, when the premium, which has already been paid, could be returned to the client, as a matter of right.
For instance, if the interest of the insured has not been exposed to the dangers or perils stated in the contract, he can demand for the return of the premium he paid for the policy, since his interest was never at risk anyway.
Let’s say an insurance for shipping an equipment purchased abroad was obtained, but the voyage did not actually happen, or the equipment was on the shipping list but was not included in the shipment (short-shipped). If the risk is entire and contract is indivisible, and the interest of the insured was exposed to the risk stated in the policy, even for a brief period or moment, premiums may not be returned.
Premium may also be refunded when a policy has been cancelled or surrendered before its expiration.
As an example, suppose the policyholder paid a premium in full for fire insurance coverage for a year on Jan. 1, 2019, but later cancelled the policy on Feb. 1, 2019. Assuming there are no conditions in the policy regarding the allowed cancellation period (or cooling-off period), he may get the premium corresponding to the months that were not covered by the fire insurance policy.
A policyholder is also entitled to refund the premium paid if the policy contract may be deemed unenforceable (voidable) on the ground of misrepresentation or fraud on the part of the insurance company or its agent, or on account of some important details or facts which are unknown to the insured through no fault of his.
It is important to note that when the fraudulent act was made by the insured, he does not have the right to refund the premium paid.
When a voidable policy contract is later annulled, it basically loses its validity. Thus, any premium paid should be returned.
When there is no fraud on the part of the policyholder, but because of his default, such as neglecting to pay the premium in a timely manner, then the insurance policy lapses. The insurer in effect has no obligation to him. In this case, the later premium paid past its deadline, may be returned. There is no insurance policy in force because the non-payment of premium on time may invalidate the policy, unless it contains one of the exemptions mentioned earlier.
In case of over-insurance, or when the client purchased several insurance policies for the same thing resulting in the total coverage eventually exceeding the value of the thing insured, the client is entitled to refund a premium calculated on a pro rata or proportionate basis.
Aside from being refundable, as in the different cases provided above, premiums may also be paid in advance. The law allows for payments of future premium.
However, rebating of premium is strictly prohibited by insurance laws. Although this is a popular marketing strategy for other types of businesses, in insurance, it is illegal and is a ground for the immediate revocation of the license issued to the insurance company, broker, or agents. An example would be a policyholder receiving a rebate in the form of a discounted premium.
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 rb.escolango@yahoo.com.