In the current financial situation there is no doubt that some months are a little more stretched financially than others. Unexpected expenses, vacations, and illnesses can all make it seem like your money is spent before you even got a chance to see it. While we’ve all experienced these moments, it is important to not let certain payments fall to the wayside. Most consumers feel that the insurance payments do not constitute a priority and hence somebody can hold back in the premium payments… However, insurance payments are without a doubt into the category of “must pay” each month.
It’s ok…one says nothing bad will happen… and if something happens I have been a Client of my insurance Company for some many years that they will cover me… After all my insurer is my friend….
Little do we know, that insurance companies as a whole do not approach non-payments lightly and once the risk occurs not paying our insurance premium can constitute not only the termination of a “friendship”, but also lead to unthinkable financial losses.
This is why it is once again so important to stress that one must very carefully read the terms of an insurance contract prior to entering into same.
Indeed, despite the specific nature of insurance contracts, same do not constitute a specific agreement and are thus covered by Contracts Law Cap. 149.
Primarily, we need to stress the nature of the insurance contracts. In particular an insurance contract is a contract of indemnity whereby one party (the insurer) agrees to indemnity the other party (the insured person) on the occurrence of a specified risk or happening. The insured person pays a sum of money (the premium) under the policy to insure him against the particular risk or happening.
Hence the parties’ obligations are the following:
• The insurer is obliged to cover the insured person in case the assured risk occurs
• The insured person is obliged to pay the premium in monthly, semi-yearly, or yearly payments, depending on the type of policy.
In case therefore that the insured person omits to pay the premium, this constitutes a breach of contract and the insurer would ordinarily take some action to respond to the non-payment. The course of action which will be taken is up to the insurer, and will be reflected in the terms of the policy under what is commonly known as a ‘non-forfeiture clause’.
In particular, the insurer will have the following options:
• Lapse of the insurance policy, that is, the insurance policy comes to an end and is no longer in effect – this is a surrender the insured person is deemed to have forfeited the policy and if there is value in the policy it will be replaced by a debt contract under which the insurer owes money to the insured person
• Continue of the insurance policy with increased premiums.
It is indicative to mention in the words of the Federal Supreme Court of Germany, “the non-payment or late payment may, can have “dramatic consequences” for the insured – but only if the insurer meticulously adheres to the pertinent procedure.
Furthermore, the common law concerning life insurance policies is clear: if the insured fails to pay the premium, the policy will lapse by its terms. Although the common law seems strict, there are business reasons for this approach. Indeed, as stated by the United States Supreme Court in the US case of Klein v. New York Life Insurance Company:
“[P]romptness of payment is essential in the business of life insurance. All the calculations of the insurance company are based on the hypothesis of prompt payments. They not only calculate on the receipt of premiums when due, but upon compounding interest upon them. It is on this basis that they are enabled to offer the insurance at the favorable rates they do. Forfeiture for non-payment is a necessary means of protecting themselves from embarrassment. Delinquency cannot be tolerated or redeemed except at the option of the company…
If the assured can neglect payment at maturity and yet suffer no loss or forfeiture, premiums will not be punctually paid. The companies must have some efficient means of enforcing punctuality. Hence their contracts usually provide relevant terms for the forfeiture of the policy upon default of prompt payment of the premiums. If they are not allowed to enforce this forfeiture they are deprived of the means which they have reserved by their contract of compelling the parties insured to meet their engagements. The provision, therefore, for the release of the company from liability on a failure of the insured to pay the premiums when due is of the very essence and substance of the contract of insurance. To hold the company to its promise to pay the insurance, notwithstanding the default of the assured in making punctual payment of premiums, is to destroy the very substance of the contract. This a court of equity cannot do…”
The UK and Cyprus position echoes that as expressed above. Indeed, if the insured person fails to make a scheduled payment, the insurer can choose to cancel the insurance contract entirely on the basis of a relevant clause of forfeiture. Even though, Insurance claim can be for large sums and the beneficiaries of them are often needy, the court cannot be in the position of re-writing a contact out of sympathy.
Apart however from the failure to receive compensation in case a risk occurs, one might find himself liable for criminal or administrative charges. For example in the case of car insurance:
Forgetting to pay the premium will most likely not hinder you may from driving your vehicle. If that is the case, extremely serious problems can come up if an auto accident occurs. Namely:
• You can be held personally liable in an accident
• Hefty fines will be imposed if you’re caught driving without insurance
• Next time you go to purchase insurance, you will be considered high-risk, something that can nearly double the premium payments.
When a policy provides for a lapse in the case of non-payment of a premium, the rights of the insured are determined by the terms of the policy. The usual results of such non-payment are:
(a) forfeiture of all rights,
(b) by extension of insurance for a certain period (usually wit increased premium),
(c) granting paid-up insurance for a certain period (i.e. in case the insured risk occurs, the compensation received will be reduced in accordance with the premium amounts due and relevant interest).
It is worth stating that the insurer will usually inform the insured person in advance prior to the termination of his insurance policy on account of the non-payment of premium. Furthermore, almost all insurance policies will include a “grace period” by virtue of which the insured person will have the opportunity to pay the premium even after the due date, without any of the negative implication advised above.
Once the premium is being repaid the contract can be reinstated or the policy will be voided depending on the terms of the insurance policy.
However it is worth refereeing to the UK decision Dominion Insurance Ltd v Westpac Banking Corporation [1998] FJCA 48; Abu0005u.97s (27 November 1998) where the Court held, that absent a forfeiture clause, the fact that no premiums have been paid does not affect the existence of the contract. The court looked at the Renewal notices and at the history of dealings between the parties.
In order to avoid the above distress, here are some points to remember:
1) Always pay your premium on time
2) If it is impossible to make payment on time ask your insurer to examine if they can extend your period of coverage until you will be able to pay.
3) If your insurance is no longer valid and such insurance s obligatory by the law, omit to do acts that could render your criminally liable.
