Non-payment of Premiums in Insurance Contracts: A Misguided Interpretative Premise on Suspension as a Condition for Termination

Lucero Celeste Ramírez Izaguirre

Co-leader of the Insurance Department at Rodríguez Angobaldo Abogados, Lima, Peru

Insurance contracts are structured on the basis of a balance between the risk assumed by insurers and the premium that must be paid by policyholders. Premiums are, in fact, the most important element for the proper functioning of insurance, as they enable insurers to meet the risks contracted, which may materialise during the term of the policies. Hence, Peruvian law has established various consequences in the event of non-payment of premiums.

According to the Peruvian Insurance Contract Law, Law Number 29946, in the event of non-payment of premiums, three legal mechanisms may arise: suspension, termination, and extinction of insurance contracts.

Suspension – the first mechanism – takes effect automatically once thirty (30) days have elapsed from the due date of obligations. In this scenario, insurers notify the insureds of the default and demand payment of outstanding premiums, insofar as they remain interested in continuing the policies. Furthermore, during the suspension period insurers will not be liable for any claims arising. Should policyholders fail to pay the premiums due, insurers are entitled to terminate insurance contracts – the second mechanism –, which becomes effective thirty (30) days from the date on which policyholders receive written notice from insurers informing them of this decision.

The extinction of insurance contracts arises in a different context. Unlike suspension, where one of the parties retains an interest in continuing the policies, in the extinction of insurance contracts neither party has any interest in their continuation. This is evident from the inaction of both parties in the face of non-payment of premiums: insurers do not demand payment from the insureds, and policyholders similarly fail to pay. In this scenario, the lapse of ninety (90) days from the due date without payment of premiums results in the automatic extinction of contracts – the third mechanism.

Up to this point, the distinction between suspension, termination, and extinction presents no major difficulties. However, in various administrative rulings an interpretative issue has arisen concerning the termination procedure in cases of non-payment of premiums. Thus, in the administrative sphere it has been argued that extinction of contracts for non-payment of premiums cannot occur unless suspension of the insurance cover has first taken place. Under this approach, suspension is presented as a necessary preliminary step for contracts to be extinguished as a consequence of the policyholders’ failure to pay premiums.

The question that then arises is whether this interpretation truly derives from the regulatory framework of insurance contracts. The answer is negative. The legislation governing insurance contracts does not allow one to assert that suspension constitutes a prerequisite for the extinction of contracts.

Indeed, Article 21 of the Peruvian Insurance Contract Law (PICL) sets out two distinct mechanisms. In its first two paragraphs it regulates the suspension of insurance cover as a consequence of non-payment of premiums. However, in the third paragraph of the same article it provides for the extinction of insurance contracts where insurers do not demand payment of premiums within ninety (90) days following the due date.

An initial reading of Article 21 of the PICL could give rise to misinterpretations if attention is paid solely to its heading, “Suspension of Cover for Non-payment”, since this might lead to claims that the article regulates only that mechanism. Nevertheless, a comprehensive reading of the statutory text shows that legislators have incorporated within the same article not only suspension of cover but also extinction of insurance contracts. This distinction becomes clearer in light of the Superintendency of Banking, Insurance and Pension Fund Administrators of Peru (SBS)’s Resolution No. 3198-2013, which approves the Regulation on Payment of Insurance Policy Premiums.

Similarly, it is incorrect to argue that the ninety (90) day period set out in the final paragraph of Article 21 of the PICL must be calculated from the start of the suspension of cover. A systematic reading of this provision and the Regulation shows that it refers to the expiry of the time allowed for policyholders to pay premiums. Therefore, the period for extinction of contracts is calculated from the due date of premium obligations, not from the moment cover is suspended.

For its part, Article 23 of the PICL regulates the termination of insurance contracts, expressly establishing that this can only occur once cover has first been suspended. In other words, in the case of termination, the statutory text itself does indeed require prior suspension of policies as a condition.

It should also be noted that the time limits laid down for each legal mechanism are different, which shows that legislators have designed distinct consequences for non-payment of premiums. This same logic becomes even clearer when observing SBS Resolution No. 3198-2013, which sets out each of these mechanisms separately:

  • Article 7 of the Regulation governs the suspension of cover for non-payment of premiums, while Article 8 sets out the requirements for communications addressed to policyholders.

  • Article 9 regulates the termination of contracts providing that this may only occur once cover has first been suspended for non-payment of premiums. In addition, Article 10 specifies the requirements for communications through which insurers declare the termination of contracts.

  • Article 11 of the Regulation governs the extinction of insurance contracts. From this provision it is clear that extinction occurs when two conditions are met: non-payment of premiums and the lapse of ninety (90) days from the due date without insurers having demanded payment. In such cases, extinction takes place automatically by the mere lapse of time.

Consequently, it is not correct to argue that suspension constitutes a preliminary stage or forms part of a set of “successive stages” necessarily leading to the extinction of contracts. Suspension means, precisely, the “suspension of insurance cover” in response to non-payment of premiums. If suspension were a mandatory requirement for extinction of contracts, Peruvian legislators would have established a temporal sequence between the two legal mechanisms. However, the fact that the period for extinction is calculated from the due date of premium payments and not from the suspension of cover makes clear that they arise from different factual circumstances.

The issue raised is of particular importance when insurers deny insurance cover. In that context, identifying the status of insurance contracts – whether suspended, terminated, or extinguished – may prove decisive in determining whether cover existed at the time of a claim. If one starts from the mistaken premise that extinction can only occur after prior suspension by insurers, one ends up imposing on “extinction” a requirement that legislators have provided solely for the legal mechanism of “termination of contracts.”

Thus, a false interpretative premise is adopted when it is argued that Article 21 of the PICL presupposes suspension as a preliminary step for the extinction of insurance contracts. In short, a combined reading of the PICL and its Regulation does not support the claim that suspension is a requirement for extinction. Suspension operates where there is still an interest in continuing the policies, and termination expressly requires prior suspension. Extinction, on the other hand, arises in a different context: the lapse of time without insurers demanding payment of premiums and without the policyholders fulfilling that obligation.