The Premium

Effect of non-payment of premium

Areola vs CA, 236 SCRA 643

FACTS:

Santos Areola, a lawyer from Dagupan City, availed of a Personal Accident Insurance Policy from Prudential,
but seven months after the issuance of the policy, On June 29, 1985, Prudential unilaterally cancelled the
policy because company records revealed that Areola failed to pay his premiums.

A few days later, however, Prudential found out that Areola actually paid the premiums and that the branch
manager, Teofilo Malapit, failed to remit them. Thus, Prudential offered to reinstate the policy and even
proposed to extend its lifetime to December 17, 1985.

Areola filed a suit for breach of contract and damages against Prudential.

Obtained from Baguio branch of Prudential, for one year (Nov 1984-Nov 1985), premium of 1470 but total
monthly was 1609.5 (doc stamp 110.25, 2% premium tax of 29.4). The policy states that the Statement of
Account is not a receipt and an official receipt will be given after payment but if payment is done through a
representative, payor will be given a provisional receipt. Areola was given provisional receipt but Malapit just
failed to remit and therefore Areola received no official receipt. Areola sent demand letters for immediate
reinstatement, bank apologized but did not immediately reinstate, so he filed the case. The insurance agent
was Carlito Ang.

ISSUE:

Whether or not the erroneous cancellation of Areola's insurance policy due to Malapit's fraudulent act
entitled the former to payment of damages and whether or not the reinstatement of said policy absolves
Prudential from its liability for damages.

HELD:

The Supreme Court held that yes, the erroneous cancellation of Areola's insurance policy entitled him to
payment of damages. Malapit's fraudulent act of misappropriating the premiums collected from Areola is
directly imputable to Prudential. As a corporation it acts solely thru its employees and the latter's acts are
considered its own for which it can be held to account. Under the first paragraph of Article 1910 of the Civil
Code, “The principal must comply with all the obligations which the agent may have contracted within the
scope of his authority.” The fact that Prudential was itself defrauded does not free it of its obligation to Areola.
In the ruling of the Supreme Court in Prudential Bank v. Court of Appeals it held that; A bank is liable for
wrongful acts of its officers done in the interests of the bank or in the course of dealings of the officers in their
representative capacity. A banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his authority even though the
agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other
person, for his own ultimate benefit.
Consequently, no, Prudential's subsequent actions did not absolve it from its liability for damages. Prudential
should be reminded that a contract of insurance creates reciprocal obligations for both insurer and insured.
Reciprocal Obligations are those which arise from the same cause and in which each party is both a debtor and
a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. Under
the second paragraph of Article 1191 of the Civil Code governing reciprocal obligations, “The injured party may
choose between the fulfillment and the rescission of the obligation, with the payment of damages in either
case. Xxx” In the case at hand, Areola is given a choice between fulfillment and rescission due to Prudential's
failure to comply with what is incumbent upon it. However, he is still entitled to payment of damages
regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is Prudential's
claim that its reinstatement of Areola's policy absolves it from liability for damages.