Section 77 of the Insurance Code of the Philippines lays down the general rule that no

insurance contract issued by an insurance company is valid and binding unless and until the
premium has been paid. However, there are established statutory and jurisprudential
exceptions to this rule, as follows:

Grace Period. This exception may be invoked in case the insurance coverage relates to
life or industrial life (health) insurance and when grace period applies (Sec. 77, ICP).
Policyholders of life or endowment insurance is entitled to a grace period of either thirty (30)
days or one (1) month within which the payment of any premium after the first may be made
(Sec. 233, ICP). In industrial life insurance, the insured is entitled to a grace period of four (4)
weeks, or one (1) month if payable monthly, within which to pay premiums following the first
payment (Sec. 236, ICP). Note that this exception presupposes that the insurance policy had
already been in force for a certain period, and is therefore inapplicable when the insurance
policy is first taken (AQUINO, p. 116).

Failure of the insurer to collect premium on industrial life insurance. In case of

industrial life insurance, the policy shall not lapse for non-payment of premium if such non-
payment was due to the failure of the insurer to send its representative or agent to the insured
at the latter’s residence or some place indicated by him for the purpose of collecting such
premium. However, this does not apply when the premium on the policy remains unpaid for a
period of three months or twelve weeks after the grace period has expired (Sec. 235, par. 2, ICP).

Credit Extension. The Insurance Code now allows a ninety (90)-day credit extension to
make the policy binding even if the premium has not been paid (Sec. 77, ICP, as amended by RA
10607). It reverted to the former rule embodied in Section 72 of the Insurance Act (Act No. 2427)
which allowed a credit extension for the premium due except that such credit extension is now
limited to ninety days. Hence, under the present law, the policy is valid and binding if there is a
ninety-day credit extension given (Sec. 77, ICP as amended).

However, even before this amendment to the Insurance Code of 1978, the Supreme
Court noted that there is nothing in Section 77 which prohibits the parties in an insurance
contract to provide a credit term within which to pay the premiums. This agreement is not
against the law, morals, good customs or public policy. The agreement binds the parties (UCPB
General Insurance Co., Inc. v. Masagana Telemart, Inc., G.R. No. 137172, April 14, 2001).

In effect, if the insurer has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of said term, recovery on the policy should be
allowed even though the premium is paid after the loss but within the credit term (AQUINO, p.
119). However, the policy must expressly and clearly provide for a credit extension (Gaisano v.
Development Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017).

While a credit extension granted by an insurer has the effect of upholding the validity of
the policy, notwithstanding the fact that the premium has not yet been paid, there is an
exception to this exception. In a case decided by the Supreme Court under the old Insurance
Law, it was held that a policy is deemed automatically cancelled if the insured signed a
promissory note stating that the insured will pay the premium on or before a fixed date and the
insured failed to pay on the stipulated date (Acme Shoe Rubber & Plastic Corporation v. The Court
of Appeals, G.R. No. L-56718, January 17, 1985; AQUINO, p. 121).
 Estoppel. This is a correlative exception to credit extension carved out in the case of
UCPB v. Masagana. In this case, the Supreme Court declared that it would be unjust and
inequitable not to allow recovery on the policy on the ground of non-payment of premiums if
the insurer had consistently granted 60 to 90-day credit term for the payment of renewal
premiums despite its full awareness of Section 77. Estoppel bars the insurer from taking refuge
under said Section, since the insured relied in good faith on such practice (UCPB General
Insurance Co., Inc. v. Masagana Telemart, Inc., G.R. No. 137172, April 14, 2001).

Acknowledgment of Receipt of Premium. When the insurer makes a written

acknowledgment of the receipt of premium, this acknowledgment being a conclusive evidence
of payment of premium, it would operate to make the policy binding (Sec. 79, ICP). But, this
does not mean that the insured is excused from paying the premium that is due. The insurer can
still demand payment of the premium (AQUINO, p. 117).

Acceptance of surety bond. Bonds and suretyship contracts are deemed to be insurance
contracts when issued by a surety doing an insurance business as defined by law (Sec. 2, par. 3,
ICP). Thus, as a general rule, payment of premium is likewise required to make the contract of
suretyship or bond valid and binding. But, when a bond or suretyship contract is issued and
accepted by the obligee or creditor, said bond or suretyship contract shall be valid and
enforceable notwithstanding the non-payment of premium (Sec. 179, ICP; Philippine Pryce
Assurance Corp. v. Court of Appeals, G.R. No. 107062 February 21, 1994).

Premiums paid on installments. In case the parties agreed to have the premiums paid by
installments or payment by installments is an established practice by the parties, acceptance of
the payment of premiums by installments would suffice to make the policy binding because it
reveals an intention on the part of the insurer to honor the policy. Basic principles of equity and
fairness would not allow the insurer to continue collecting and accepting the premiums paid on
installments, and later deny liability on the ground that the premiums were not paid in full
(Makati Tuscany Condominium Corporation v. The Court of Appeals, G.R. No. 95546, November 6,
1992; GSIS v. Prudential Guarantee and Assurance, Inc., G.R. No. 165585, November 20, 2013).
Hence, the general rule in Section 77 may not apply if the parties agreed to the payment of
premium in installment, and partial payment has already been made at the time of loss (Philam
Insurance Co., Inc. v. Parc Chateau Condominium Unit Owners Association, Inc., G.R. No. 201116,
March 4, 2019).

This exception cannot be invoked if the insurance policy clearly provides for payment of
premium in full. Accordingly, where the premium has only been partially paid and the balance
was paid only after the peril insured against has occurred, the insurance contract did not take
effect and the insured cannot collect at all on the policy (Sps. Antonio A. Tibay and Violeta R.
Tibay v. Court of Appeals, G.R. No. 119655 May 24, 1996).

The case of Spouses Tibay should be distinguished from the 1967 case of Philippine
Phoenix and Insurance Co., Inc. v. Woodworks, Inc (G.R. No. L-22684, August 31, 1967). In Phoenix,
after the insurance company accepted a partial payment, it sued for the balance of the premium,
thereby admitting the existence of an insurance contract with the insured. In Spouses Tibay, a
specific stipulation that the policy is not in force until the premium has been fully paid and duly
receipted by the Company. Resultantly, it is correct to say that in Phoenix, a contract was
perfected upon partial payment of the premium since the parties had not otherwise stipulated
that prepayment of the premium in full was a condition precedent to the existence of a contract
(Sps. Antonio A. Tibay and Violeta R. Tibay v. Court of Appeals, G.R. No. 119655 May 24, 1996).

Another instance that would prevent the application of this exception is when there is a
stipulation expressly providing for the automatic cancellation of the policy in case of failure to
pay any of the scheduled installment on or before the due date. Such non-payment
automatically voids the insurance policy (Philam Insurance Co., Inc. v. Parc Chateau Condominium
Unit Owners Association, Inc., G.R. No. 201116, March 4, 2019).

Insurance premiums of government employees. The insurance policiy of a government

employee paid through salary deductions is already binding although the premium is, in effect,
paid through installment (Sec. 78, ICP as amended by RA 10607). It should be emphasized,
however, that the provision requires that there is an agreement between the insurer and the
government employee authorizing salary deduction of the premium, consistent with the rule
that no deductions can be made from the salary without the consent of the employee (AQUINO,
p. 123).

Binding cover notes. A cover note is binding if it was issued by the insurer at the time
when no premium could be fixed on it until all the particulars of the insurance are known. As a
logical consequence, no separate premium is required to be paid on the cover note.
Furthermore, if regular policies were subsequently issued and premiums were paid thereon, the
cover note should not be treated as a separate policy requiring a separate premium. Cover notes
should be integrated to the regular policies so that the premiums on the regular policies include
the consideration for the cover notes. Therefore, liability on the cover note should arise even
before payment of premium. Otherwise, the purpose and function of the cover note would be
rendered meaningless. (Pacific Timber Export Coropration v. Court of Appeals, G.R. No. L-38613
February 25, 1982).