In this article, our Exclusive member in Spain, Belzuz abogados will study whether the insurance company can terminate the insurance contract due to non-payment of the successive premium. The consequences of non-payment of the premium in the insurance contract are different, depending on whether the non-payment occurs in the first premium (article 15.1 Law 50/1980) or in the successive premium (article 15.2 Law 50/1980).
To do so, we will analyse the criterion maintained by the judgment of the First Chamber of the Supreme Court of 10 May 2023 in the cassation appeal, 3373/2019. Speaker: Pedro José Vela Torres.
Basis of the claim:
The plaintiff and her husband entered into a mortgage loan contract with XXX. On the same date, they took out insurance policies with XXX (one in the name of each spouse), which guaranteed payment of the loan capital in the amount of €75,000 in the event of death or disability and €150,000 in the event of an accident.
With regard to the husband’s insurance, the premium receipt for the corresponding annuity was sent to the bank account to which the payment was domiciled, and was returned due to insufficient funds.
Subsequently, it was presented again for collection and was also returned for non-existence of balance. Finally, it was presented once again and was initially paid, but finally, the insured ordered its return, so that the premium remained unpaid.
The parties agreed to amend the policy in order to reduce the death cover and the premium amount accordingly, without issuing a new premium receipt, but a refund in favour of the policyholder in the amount of € 312.50. However, as the premium receipt was not paid, the refund was not paid and the policy was terminated by the insurer on 30 January 2014.
On 1 July 2014, the plaintiff’s husband died and she filed a lawsuit before the First Instance Courts (civil jurisdiction), which was heard by Madrid First Instance Court no. 13, requesting a judgment against the insurance company XXX for the amount of €59,782.58, plus the interest accrued on the aforementioned amount calculated from 1 July 2014 in accordance with the provisions of article 20 of the Insurance Contract Law.
The claim was upheld in full, condemning the insurer to pay the amount claimed, plus the interest of Art. 20 LCS and imposed the costs on the defendant insurer, considering “that there was no intention of non-payment of the premium by the policy holder, because on dates close to the return of the receipt a novation of the contract was agreed, without the insurer collecting the new receipt or informing the policy holder that he had to pay the previous one, from which the refund would be compensated or reduced, and therefore the policy cannot be correctly understood as annulled…”.
The judgement was appealed by the insurer before the 8th section of the Provincial Court of Madrid, which upheld the appeal, considering, “that, after the novation of the contract, the insurer could not be required to send the new receipt with the resulting premium, when the receipt had been consciously returned by the insured, who would have had to pay it again and wait for the return of the amount resulting from the reduction. It therefore concluded that at the time of the loss the contract was terminated,” Consequently, it reversed the first instance judgement and dismissed the claim”.
The judgment of appeal was appealed in cassation, based on the following grounds:
“First.- The legal infringement committed is the incorrect application of articles 1203, 1208, 1255,1258, 1310, 1311 and 1313 of the Civil Code and the doctrine of the Supreme Court which develops them.
“Second. – The legal infringement committed is the incorrect application of articles 14 and 15.2 of the Insurance Contract Act, 1258 CC. and the doctrine of the Supreme Court that develops them.”
– Decision of the Chamber.
The insurance contract is a contract of the utmost good faith, which must prevail with regard to the argument of the desire for novation, which translates, in accordance with articles 1258 of the Civil Code and 57 of the Commerce Code, into the parties acting with total diligence before the conclusion of the contract, during its validity and after the occurrence of the loss.
1. Regarding the non-payment of successive premiums: The case law on the consequences of non-payment of successive premiums (art. 15.2 LCS), is summarised in the judgement of the Plenary of the 1st Chamber 357/2015, of 30 June, ratified by other subsequent judgements (judgements 374/2016, of 3 June; 58/2017, of 30 January; and 294/2022, of 6 April).
According to this case law, from the non-payment of the successive premium, during the first month the contract continues in force and with it the insurance cover, so that, if the loss occurs in this period of time, the company is obliged to compensate the insured in the terms agreed in the contract and is liable to the third party who exercises the direct action of art. 76 LCS.
From the month following the non-payment of the premium, and during the following five months, as long as the policy holder continues without paying the premium and the insurer has not cancelled the contract, the insurance coverage is suspended.
This means that, once the claim has occurred during this time, the insurer does not cover it against its insured. However, the suspension of the insurance cover does not operate against the third party who exercises the direct action of Art. 76 LCS, in so far as this same precept foresees that “The direct action is immune to the exceptions that may correspond to the insurer against the insured person”.
Once six months have elapsed since the non-payment of the premium, without the insurer having claimed its payment, the insurance contract will be automatically extinguished by the effect of the legal provision itself, without it being necessary to request the cancellation by any of the parties.
Logically, the claim occurring after the termination of the contract is not covered by the insurance, and for this reason the insurer will not only not be liable for the compensation against the insured person, but neither will he be liable against the third party who intends to exercise the direct action. In contrast to what happens with Art. 15.1 LCS, Art. 15.2 does not foresee the possibility that the aforementioned legal regime can be substituted by an agreement to the contrary.
2. It is not disputed that the agreement between the parties in September 2013 constituted a modifying novation and not an extinctive novation, as is clearly shown by the fact that the same policy number continued to be kept and that the modification affected, not the cover for death and disability, but the insured amounts and the correlative reduction in the premium.
On this basis, if the parties were aware that the last premium of the original contract had not been paid due to the economic difficulties of the policyholder, who nevertheless had an interest in the continuation of the insurance relationship, to the extent that he went to the company to renegotiate its conditions, and perhaps it would have been appropriate for them to expressly agree to issue a new receipt adjusted to the new premium. However, the truth is that, according to what was declared proven by the Provincial Court, they did not do so, but agreed that the insured would pay the last receipt returned and once the payment had been made, the insurer would return the part that exceeded the resulting new premium (extorno).
Therefore, it cannot be said that there was an omission of the creditor to collect the receipt of the insurance premium, but what happened was the non-payment by the debtor of the insurance premium, in the terms in which he agreed with the insurer.
Therefore, even in the most favourable case for the policyholder/insured, in which the six-month period of art. 15.2 LCS is calculated from 11 September 2013, the policy would have been extinguished “ope legis”, due to non-payment of a successive premium, on 11 March 2014, several months before the incident. As a consequence, the appeal must be dismissed.
Conclusion. –
The consequence of the non-payment of the successive premium during the first month is that the contract continues in force and, with it, the insurance coverage. Therefore, if the claim occurs during this period of time, the company is obliged to compensate the insured person in the terms agreed in the contract and is liable to the third party who exercises the direct action of art. 76 LCS.
From the month following the non-payment of the premium, and during the following five months, as long as the policy holder continues without paying the premium and the insurer has not cancelled the contract, the insurance coverage is suspended.
Once the six months have elapsed since the non-payment of the premium, without the insurer having claimed its payment, the insurance contract will be automatically terminated by the effect of the legal provision itself, without it being necessary to request the cancellation by any of the parties.
Logically, the claim occurring after the termination of the contract is not covered by the insurance, and for this reason the insurer will not only not be liable for the compensation against the insured person, but neither will he be liable against the third party who intends to exercise the direct action.
In view of the above, we recommend that you do not hesitate to consult a specialised Law Firm such as Belzuz Abogados, in these cases in which, as a consequence of a negotiation or even in cases of misunderstandings, unforeseen situations can occur and which can have disastrous consequences for one of the parties to the contract.
