Enrique obtained from Seguro Insurance Company a comprehensive motor vehicle insurance to cover his top of the line Aston Martin. The policy was issued on March 31, 2010 and, on even date, Enrique paid the premium with a personal check postdated April 6, 2010.
On April 5, 2010, the car was involved in an accident that resulted in its total loss.
On April 10, 2010, the drawee bank returned Enrique’s check with the notation “Insufficient Funds.” Upon notification, Enrique immediately deposited additional funds with the bank and asked the insurer to redeposit the check.
Enrique thereupon claimed indemnity from the insurer. Is the insurer liable under the insurance coverage? Why or why not? (3%)
Suggested answer only. Not an official answer and not legal advice.
No, Seguro Insurance Company is not liable under the insurance coverage. Under Article 1249 of the Civil Code and Section 77 of R.A. 10607, an insurance policy is not valid and
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Quick check
Under Section 77 of the Insurance Code, when does an insurance policy become valid and binding upon the insurer?
Section 77 mandates that an insurance policy is generally not binding until the premium is actually paid.
Under Article 1249 of the Civil Code, when does the delivery of a check produce the legal effect of payment?
Article 1249 explicitly provides that check delivery produces payment only when encashed or impaired through creditor fault.
What is the legal consequence if a check issued for insurance premium payment is dishonored for insufficient funds?
Dishonor of a premium check renders the conditional payment void and relieves the insurer of liability for prior losses.
Does a postdated check constitute valid premium payment binding the insurer prior to its maturity date?
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Can an insured retroactively validate an insurance policy by depositing funds after a check bounces and a loss occurs?
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Learn more about these topics
1. Cash Premium Requirement
Under Section 77 of the Insurance Code (Republic Act Number 10607), an insurance policy is not valid and binding until the premium has been paid. Unless one of the recognized statutory exceptions applies—such as an express credit agreement, estoppel, or installment agreement—the insurer is not bound by the policy and cannot be held liable for any loss occurring prior to the actual receipt and clearance of full premium payment.
2. Payment by Check
Under Article 1249 of the Civil Code of the Philippines, the delivery of promissory notes payable to order, or bills of exchange or checks, produces the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. Payment of an insurance premium by check is conditional and does not bind the insurer unless the check is cleared and encashed upon presentment.
3. Dishonored Check Effect
When a check given for insurance premium payment is dishonored upon presentment due to insufficient funds, the conditional payment is rendered ineffective. Subsequent deposit of funds or request to redeposit after the occurrence of an insured loss cannot retroactively validate the policy or bind the insurer for a loss sustained while the policy was uncollected and inactive.