Title 6: The Policy

(1) [72] What is policy insurance? [p178]

Sec. 49. The written instrument in which a contract of insurance is set forth, is called a
policy of insurance. It is the written document embodying the terms and stipulations of the
contract of insurance between the insured and the insurer.

(2) [79] Explain the principle that an insurance contract is a contract of adhesion [p179]
The term "adhesion contract" is essentially a description of the manner by which the
contract is formed: one party having superior bargaining power imposes its choice of terms
on the other party. Ordinarily, contracts are freely negotiated by parties with roughly
equivalent bargaining power. Although the insured can choose from a variety of available
coverages, he cannot negotiate the substance of the contract with the insurer. Since in
this type of contracts, the parties do not bargain on equal footing, the weaker party's
participation is reduced to the alternative "to take it or leave it." Thus, those contracts are
viewed as traps for the weaker party whom the courts of justice must protect Consequently,
where the language used in an insurance contract or application is such as to create
ambiguity, the same should be resolved liberally in favor of the insured and strictly against
the party responsible therefor.

(3) [72] Policy insurance vs Contract Insurance [p181]

A policy of insurance is different from the contract of insurance:

(1) The policy is the formal written instrument evidencing the contract of insurance entered
into between the insured and the insurer. It is the law between them.

(2) Form thereof previously approved by Insurance Commissioner. Insurance policies

generally are required in standard forms. Under Section 226, no policy of insurance shall
be issued or delivered within the Philippines unless in the form previously approved by the
Insurance Commissioner.

(4) [75] what is the required form of an insurance policy? [p182]

Sec. 50. The policy shall be in printed form which may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces provided therein.
Group insurance and group annuity policies, however, may be typewritten and need not be in
printed form.

In case of conflict between the written and printed portions of a policy, the written portion
prevails. (Jargue vs. Union Fire Insurance Co., 56 Phil. 758 [1932].)

(5) [73] when is an insurance perfected? [p182]

A contract of insurance, like other contracts, must be assented to by the parties either in
person or by their agents. Under the law, assent or consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to constitute the contract. (Art. 1319,
Civil Code.)
(1) Acceptance of application. If an application for insurance has not been either
accepted or rejected, there is no contract yet as it is merely an offer or proposal.
The contract, to be binding from the date of the application, must have been a
completed contract, one that leaves nothing to be done, nothing to be completed, nothing to
be passed upon, or determined, before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in agreement. (De Lim vs. Sun Life
Assurance Co.)
 (2) Compliance with conditions precedent. The parties may impose additional
conditions precedent to the validity of the policy as a contract as they see fit. The usual conditions
found in the application for insurance or in the policy are that the contract shall not become binding
until the policy is delivered and the first premium paid. These conditions are valid and enforceable.
Until the conditions are fulfilled, the policy is of no binding effect.
There is no valid and binding insurance contract where no premium is paid unless credit is
given or there is a waiver or some agreement obviating the necessity for prepayment of the
premium.
(3) Cover Notes- Cover notes (also called a binder) may be issued to afford immediate
provisional protection to the insured until the insurer can inspect or evaluate the risk in question and
issue the proper policy (Sec. 52, par. 1.), or until the risk is declined and notice thereof given.

(6) [74] When is there an offer and acceptance of an insurance contract? [p185]
(1) In property and liability insurance. It is the insured who technically makes an offer to
the insurer, who accepts the offer, rejects it, or makes a counter-offer. The offer is usually accepted
by an insurance agent on behalf of the insurer.
(2) In life and health insurance. The situation depends upon whether the insured pays the
premium at the time he applies for insurance.
(a) If he does not pay the premium, his application is considered an invitation to the
insurer to make an offer, which he must then accept before the contract goes into effect. If he pays
the premium with his application, his application will be considered an offer. Binding receipt is, a
conditional acceptance by the insurer.
(b) Where the application for insurance constitutes an offer by the insured, a policy
issued strictly in accordance with the offer is an acceptance of the offer that perfects the contract. If
the policy issued does not conform to the insured's application, it is an offer to the insured which he
may accept or reject.

(7) [76] What is the significance of a delivery in an insurance policy? [p186]

Delivery is the act of putting the insurance policy into the possession of the insured.
The delivery of the policy is important because it serves as:
(a) as evidence of the making of a contract and of its terms;
(b) as communication of the insurer's acceptance of the insured's offer.
(c) it affects the term of the coverage;
(d) the "decisive act that ordinarily marks the end of the insurer's opportunity to
decline coverage."

(8) [78] What are the modes of delivery in an insurance policy? [p187]
1. Actual Delivery- actual manual transfer of the policy.
2. Constructive delivery- the intention of the parties which may be shown by their acts or
words.

(9) [77] What is the effect of delivery in an insurance policy? [p189]

(1) Where delivery conditional Non-performance of the condition precedent prevents the
contract from taking effect.
(2) Where delivery unconditional. Ordinarily consummates the contract, and the policy as
delivered becomes the final contract between the parties.
(3) Where premium still unpaid after unconditional delivery. In the absence of any clear
agreement granting credit extension, the policy will lapse if the premium is not paid, at
the time and in the manner specified in the policy.

(10) [77] What if the delivery was made to the insurers agent? [p188]
There has been much conflict of view on the question.
 (1) Beneficiary cannot recover. One view holds that the beneficiary cannot recover
for the simple reason that the insurance agent is not his agent, (see Bradley vs. New York
Life Ins., 275 F. 657 [1921].)
(2) Beneficiary can recover. The insured having complied with every condition
required of him, actual delivery to him is not essential to give the policy binding effect, (see New
York Life Ins. Co. vs. Babcock,30 S.E. 273 [1898].)

(11) [81] What is a rider? In case of conflict between policy and the rider, which will prevail? In case
of conflict between the policy and other attached papers, which will prevail? [p190]
A rider is a small printed or typed stipulation contained on a slip of paper attached to
the policy and forming an integral part of the policy.

When there is an inconsistency between a rider and the printed stipulations in the
policy, the rider prevails, as being a more deliberate expression of the agreement of the contracting
parties.

(12) [82] What will happen if the insured fails to read the insurance policy? [p193]
Majority rule. The insured's acceptance and retention of the policy unread is not such laches
as will defeat his right to reformation. The basis for the decisions is that insurance contracts are
contracts of "adhesion" and not of bargaining, that is, the insured purchases the contract prepared
solely by the insurer.
Minority rule- One who accepts a contractual instrument is conclusively presumed, in the
absence of fraud or mutual mistake, to know and assent to its contents. The insured has the duty to
read his policy and is bound by his contract as written whether he reads it or not.

(13) [82] Who has the duty to explain? [p195]

(1) Where terms of policy are clear. The insurer has no affirmative duty to explain the
policy or its exclusions to the insured.
(2) Important caveats. The insurer or his agent(s) has the duty to explain:
(a) Reasonable expectations of insured. The doctrine of "reasonable
expectations" can operate to impose de facto a duty on the insurer to explain
the policy's coverage to the insured.
(b) Options available to insured. In the area of motor vehicle insurance where
legislations have made certain kinds of coverage optional, usually uninsured
or underinsured motorist insurance, courts have sometimes imposed a duty on
the insurer to explain the options to the insured.
(c) Information expected by insured from insurer's agent. Agents owe their
customers a duty to exercise the skill and care that a reasonable agent would
exercise in the circumstances. This duty encompasses in many situations an
obligation to explain to the customer the kinds of coverage available and to
help the insured in choosing an appropriate coverage. To the extent agents
and the insurers who retain them are held liable for the negligence of agents
in performing their professional duties, a duty to explain coverage is effectively
imposed upon the insurer.
(d) Contractual rights of insured after denial of coverage. When the insured
disputes a denial of coverage, the duty of good faith and fair dealing may
impose an obligation on the insurer to alert the insured to his rights.