MIDTERM REPORT

Ramirez, Gerald S.
Insurance

CANCELLATION OF INSURANCE POLICY

SUMMARY

Cancellation, as the term is generally used with regard to insurance, is broadly regarded as the
right to rescind, abandon, or cancel a contract of insurance. (State Pacific Mut. L. Ins. Co. vs.
Larson, 152 Fla. 729. ) It is the termination by either the insurer or the insured of a policy of
insurance before its expiration. Verily, the right of the insurer to cancellation of a policy of
insurance other than life is covered by Sections 64 and 65 while the right of the insured to cancel
a policy is provided under Sections 79 to 82.

The unilateral cancellation of insurance by either the insurer or the insured produces different
consequences. For example, if a policy on which premiums have been paid for a year is
cancelled by the insurer before the expiration of the year, it retains only a proportion of the
annual premium that the expired time bears to the entire time. While, if the policy is cancelled by
the insured, the prorate return of premium will not be followed if the policy stipulates a short
period rate, in which case, the insured is entitled to return of the premium in the proportion
stipulated.

ILLUSTRATIVE EXAMPLE

1.) Suppose X entered into a contract of insurance with Y insurer. X insured his house for
P1,000,000 for 5 years. However, Y before the lapse of 5 years unilaterally cancelled the
insurance contract without notice to X invoking the ground of insolvency. Is the cancellation
proper? Suppose the cancellation is proper, how much will X get from the proceeds?

ANS: No. The cancellation was not proper.

Section. 64. No policy of insurance other than life shall be cancelled by the insurer
except upon prior notice thereof to the insured, and no notice of cancellation shall be
effective unless it is based on the occurrence, after the effective date of the policy, of one or
more of the following: (a) Non-payment of premium; (b) Conviction of a crime arising out
of acts increasing the hazard insured against; (c) Discovery of fraud or material
misrepresentation; (d) Discovery of willful or reckless acts or omissions increasing the
hazard insured against; (e) Physical changes in the property insured which result in the
property becoming uninsurable; (f) Discovery of other insurance coverage that makes the
total insurance in excess of the value of the property insured; or (g) A determination by the
Commissioner that the continuation of the policy would violate or would place the insurer in
violation of this Code.

SECTION. 65. All notices of cancellation mentioned in the preceding section shall be in
writing, mailed or delivered to the named insured at the address shown in the policy, or to his
broker provided the broker is authorized in writing by the policy owner to receive the notice of
cancellation on his behalf, and shall state: (a) Which of the grounds set forth in Section 64 is
relied upon; and (b) That, upon written request of the named insured, the insurer will furnish the
facts on which the cancellation is based.

In the case at bar, not only was there no written notice given to the insured, the grounds relied
upon by the insurer (insolvency) was not among those included under Article 64 of the Insurance
Code. The list is exclusive and the notice mandatory.

ANS: Y retains a proportion of the annual premium that the expired time bears to the entire time.
Hence, X will get only the remainder of the premium.

2.) Based on the facts given in Example No.1, suppose it is the insured who unilaterally
cancelled the insurance without notice to the insurer and without stating any valid ground. Is the
cancellation proper? Assuming that the cancellation is proper, how much will X get?

ANS: It depends. Unlike in the cancellation by the insurer, the withdrawal of the insured from
the insurance contract is not that strict compared to the insurer. The insured may withdraw the
insurance if the policy allows as such and as agreed by the parties subject only to some
restrictions. Nevertheless Section. 80 of the Insurance Code provides. A person insured is
entitled to a return of premium, as follows: (a) To the whole premium if no part of his
interest in the thing insured be exposed to any of the perils insured against.
3.) Explain the “customary short rate basis” and its rules

ANS: Customary Short-rate Basis. Where the insurance is made for a definite period of time and
the insured surrenders his policy, to such portion of the premium as corresponds with the
unexpired time, at a pro rata rate, unless a short period rate has been agreed upon and appears
on the face of the policy, after deducting from the whole premium any claim for loss or
damage under the policy which has previously accrued: Provided, That no holder of a life
insurance policy may avail himself of the privileges of this paragraph without sufficient
cause as otherwise provided by law. (Sec.80 (b) Prev. 79)

JURISPRUDENCE

Malayan Insurance Co., Inc vs Gregoria Cruz Arnaldo

G. R. No. L-67835, October 12, 1987

Facts: Petitioner (hereinafter called (MICO) issued to the private respondent, Coronacion Pinca,
a fire insurance policy on her property for the amount of P14,000.00 effective July 22, 1981,
until July 22, 1982.

On October 15,1981, MICO allegedly cancelled the policy for non-payment, of the premium and
sent the corresponding notice to Pinca. On December 24, 1981, payment of the premium for
Pinca was received by Domingo Adora, agent of MICO. On January 15, 1982, Adora remitted
this payment to MICO, together with other payments. On January 18, 1982, Pinca's property was
completely burned. On February 5, 1982, Pinca's payment was returned by MICO to Adora on
the ground that her policy had been cancelled earlier. But Adora refused to accept it.

In due time, Pinca made the requisite demands for payment, which MICO rejected. She then
went to the Insurance Commission. It is because she was ultimately sustained by the public
respondent that the petitioner has come to us for relief.

Issue: Was there a valid cancellation of policy by the insurer-defendants?

Ruling: NO. MICO's arguments that there was no payment of premium and that the policy had
been cancelled before the occurence of the loss are not acceptable. We do not share MICO's view
that there was no existing insurance at the time of the loss sustained by Pinca because her policy
never became effective for non-payment of premium. Payment was in fact made, rendering the
policy operative as of June 22, 1981, and removing it from the provisions of Article 77,
Thereafter, the policy could be cancelled on any of the supervening grounds enumerated in
Article 64 (except "non-payment of premium") provided the cancellation was made in
accordance therewith and with Article 65.

On the other hand, there is the flat denial of Pinca, who says she never received the claimed
cancellation and who, of course, did not have to prove such denial Considering the strict
language of Section 64 that no insurance policy shall be cancelled except upon prior notice, it
behooved MICO's to make sure that the cancellation was actually sent to and received by the
insured. The presumption cited is unavailing against the positive duty enjoined by Section 64
upon MICO and the flat denial made by the private respondent that she had received notice of
the claimed cancellation.

Charles Abolafia vs Liverpool and London and Globe Insurance Company

Ltd, G. R. No. L-21991, October 31, 1924
Facts: On the 31st of March, 1922, the plaintiff was the holder of policy No. 13356106 O/No.
240 of the fire insurance issued by the defendant Liverpool and London and Globe Insurance
Company, Ltd., upon a store of the plaintiff No. 335, Calle Echague, City of Manila. The term of
this policy was one year, to expire March 31, 1923, and the amount insured P20,000.

On the 8th of July, 1922, the same plaintiff obtained from the defendant Liverpool and London
and Globe Insurance Company, Ltd., another policy of fire insurance No. 13628459 O/No. 1715
upon the same store for the sum of P7,500 and for the period of one year, to expire July 8, 1923.

On the 1st of June, 1922, he had the same store insured against fire by the defendant North China
Insurance Company, which issued policy No. 23214 O/No. 1664 in favor of the plaintiff for the
sum of P10,000 and for the term of one year, expiring June 1, 1923.

The plaintiff paid the premiums upon the aforesaid three policies of fire insurance.

On the night of the 23d or morning of the 24th of September, 1922, a fire occurred on Calle
Echague, and the store of the plaintiff was damaged by the fire in the sum of P29,245.59, which
he seeks to recover from the defendants through their agent Wise & Company in proportion to
the value of the policies issued by them.

The defendants refused to pay the amounts claimed by the plaintiff, alleging as a defense that the
policies issued by them contain the following clause:

The Insurance may be terminated at any time at the request of the Insured, in which case the
Company will retain the customary short period rate for the time the Policy has been in force.
The Insurance may also at any time be terminated at the option of the Company, on notice to that
effect being given to the Insured, in which case the Company shall be liable to repay on demand
a ratable proportion of the premium for the unexpired term from the date of the cancelment.

And that making use of the right granted them by said clause, the defendants allege that on
September 22, 1922, and prior to the fire, as stated in the plaintiff's complaint, the defendant
companies have taken advantage of the right of election contained in said insurance policies and
terminated and cancelled said insurance policies, giving notice to the plaintiff of the termination
and cancellation thereof; that afterwards and on said date, the defendants sent the plaintiff by
registered mail, postage prepaid, and duly addressed to him, their check for all the premiums to
be refunded and to which the plaintiff was entitled under the terms of the policy or for any other
account; that later, that is, on the morning of September 23, 1922, and prior to the alleged fire,
said insurance policies and the termination of the insurance, and said policies became then and
forever null, void, and no effect and specially at the time the alleged fire occurred, when the
plaintiff was no longer insured by the defendants against any loss and had no insurance contract
valid and subsisting with the defendants.

Issue: whether or not the insurance policies alleged by the plaintiff were in force on the night of
September 23, 1922, when the fire occurred that caused the damages sought to be recovered

Ruling: No special form is prescribed for giving the notice of the termination of the insurance by
the insurance companies, and we believe that when the policy does not expressly provide the
manner in which the cancellation of a fire insurance policy should be effected, it must be
understood that it may be done in any way admissible in law. Thus in the case of Davidson vs.
German Insurance Company of Freeport it was held that:
“Notice, to effect cancellation, need not be in writing. It may be verbal or oral. No particular
form of notice is prescribed. It is only necessary that the company positively, distinctly, and
unequivocally indicate to the insured that it is its intention that the policy shall cease to be
binding as such upon the expiration of five days from the time when its intention is made known
to the insured”.

In our opinion the record contains conclusive evidence that the plaintiff was actually and
positively notified of the cancellation of his policies by the defendants before the fire occurred
on the night of September 23, 1922. But it is argued that the notice given was not valid, because
no payment was tendered of the proportionate part of the premiums for the unexpired term at the
same time of giving the notice. We believe that the return of the ratable proportion of premiums
for the unexpired period is not a condition precedent to the cancellation of the policies. In this
case of cancellation of insurance, the obligation of the insurance companies is to return the
proportionate part of the premiums upon demand of the insured.

Under the equivocal terms of the policies in question we are of the opinion, and so hold, that the
return of the premiums is not an essential requisite for the validity of the cancellation.