WHAT LAWS GOVERN INSURANCE

The laws governing insurance in the order of priority are:

(1) The Insurance Code [PD 1460-whose effectivity date is June 11, 1978]
(2) In the absence of applicable provisions, the Civil Code
(3) In the absence of applicable provisions in the Insurance Code and Civil Code, the
general principles on the subject in the United States (Constantino vs. Asia Life
Insurance, 87 Phil 248)

NOTE: On August 15, 2013, RA 10607 was signed into law. It is a restatement of the Insurance
Code [PD 612], with amendments. While RA 10607 restated the whole law, most of the
amendments touch only the administrative portion of the Code, and very little on the substantive
portion.

Example: H applied for insurance with S Company with offices in Montreal, Canada. The
application was mailed to S and on November 26, the insurer gave notice of acceptance by cable.
H never received the cable and he died on December 20. The Insurance Code is silent as to
acceptance by cable.

Held: The Civil Code shall apply and under Article 1319, an acceptance made by letter
shall not bind the person making the offer except from the time it came to his knowledge.
There was no valid contract as H died without knowing the acceptance of his application.
(Enriquez vs. Sun Life Assurance of Canada, 41 Phil 269)

Q: Does the common law spouse who was named by a married man as his beneficiary
entitled to the proceeds of a life insurance policy?

A: No. The Insurance Code does not contain a specific provision applicable to the cause, so
Art. 2012 of the Civil Code applies, “any person forbidden from receiving any donation under
Art. 739 cannot be named as a beneficiary of a life insurance policy by a person who cannot
make a donation to him.” The common law spouse has no right to receive the proceeds.

Case: B, a married man obtained a life insurance policy designating his common law wife, C as
beneficiary. Upon B’s death, his widow contested the right of C to receive the proceeds.

Ruling: Since the Insurance Code did not contain a specific provision applicable
to the case, the provisions of Article 2012 of the Civil Code provides, “any person
forbidden from receiving any donation under Article 739 cannot be named as a
beneficiary of a life insurance policy by a person who cannot make a donation to
him.” Article 739 declares as void, those donations “made between persons guilty
of adultery or concubinage at the time of the donation.”

Q: Is a contract of insurance revoked or abrogated by reason of non-payment of the

premiums? May non-payment of premiums be excused by reason of war?

A: No. The US Rule applies which declares that the contract is not merely suspended but is
ABROGATED (revoked) by reasons of non-payment of the premium, since the payment of
premiums is peculiarly the essence of the contract.

Case: Asia Life Insurance Co., an American corporation insured the life of Constantino. The first
premium covered the period up to September 26, 1942. After which no premium payments were
made. By reason of the Japanese occupation, the insurer had to close offices until 1945. Upon a

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subsequent claim, the insurer refused to pay due to non-payment of the premium. The beneficiary
maintains that the non-payment should be excused by reason of war.

Ruling: Since the law then did not provide for the situation and the fact that the law on
insurance and the civil code was largely copied from the civil code of California, the
court applied the United States Rule that declares that the contract is not merely
suspended as held by the New York Rule, but instead is abrogated (revoked) by reason of
non-payment of the premium, since payment of the same is peculiar of the essence of the
contract.

WHAT IS A CONTRACT OF INSURANCE

A Contract of Insurance is an agreement whereby one undertakes for a consideration to indemnify

another against loss, damage or liability arising from an unknown or contingent event.

Q: Is the promise of an employer to pay the heirs of the employee if the latter dies in an
accident by fire an insurance contract?

A: No, such is not an insurance contract because it is actually a conditional donation in the
employee’s favor.

A Contract of Suretyship shall also be deemed an insurance contract if made by a surety who or
which is doing an insurance business. [Sec. 2(a)]

Doing an insurance business or transacting an insurance business is:

(a) Making or proposing to make as insurer, any insurance contract;
(b) Making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
(c) Doing any business including a reinsurance business, specifically recognized as doing an
insurance business within the meaning of the Code;
(d) Doing or proposing to do any business in substance equivalent to any of the foregoing in
a manner designed to evade the provisions of the Code. (Section 2)

The fact that no profit is derived from making of insurance contracts, agreements or transactions
or that no separate or direct consideration is received shall not be deemed CONCLUSIVE to
show that the making thereof does not constitute the doing or transacting of an insurance
business.

Case: Philippine Health Care Providers Inc. v CIR (2009) has stated that:

(1) Contracts of law firm with clients whereby in consideration of periodical

payments, the law firm promises to represent such clients in all suits for or
against them are NOT INSURANCE contracts.

(2) A contract by which a corporation, in consideration of a stipulated amount,

agrees at its own expense to defend a physical against all suits for damages for
malpractice is one of insurance, and the corporation will be deemed as engaged
in the business of insurance.

WHAT IS THE CONCEPT OF INSURANCE

Insurance is a means by which one seeks to be covered against the consequences of an event that
may cause loss or damage.

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The concept is that the premiums that are paid are accumulated in a pool from which payment of
claims are to be obtained. As a basis, it is assumed that the people contributing premiums are in
excess of those making claims resulting in a larger pool of money than the amounts being
claimed.

WHAT ARE PURE AND SPECULATIVE RISKS

Risk – It the possibility that something bad/unpleasant may happen

(1) Pure Risk - it is whether a person will suffer or will not suffer a loss from the occurrence
of an event. The ONLY RISK that may be insured against.
(2) Speculative Risk – it is whether a person will profit or suffer a loss from the occurrence
of an event.

INSURANCE IS RISK DISTRIBUTING

Insurance is a risk distributing device because when the insurer assumes the risk, it is distributing
potential liability, in part, among others.

It is not risk shifting because the entirety of risk of lass is not shifted to another.

NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE

(1) It is an Aleatory Contract

(2) It is a Contract of Indemnity for Non-life Only
(3) It is a Personal Contract
(4) It is Executory and Conditional on the part of the Insurer
(5) It is One Perfect Good Faith
(6) It is a Contract of Adhesion

 It is an ALEATORY CONTRACT

(a) As the liability of the Insurer depends upon the happening of a contingent event.
It is not a wagering contract;
(b) Monetary value of reciprocal obligations are unequal or are different; you do not
get what you are going to receive

 It is a CONTRACT OF INDEMNITY FOR NON-LIFE ONLY – as recovery is

commensurate to the loss.

Example: losses from a building, you do not get the full amount of the value of the
building, but only the actual damages

It is an Investment in Life Insurance – secured by the insured as a measure of economic

security for him during his lifetime and for his beneficiary upon his death (so it is not a
contract of indemnity, generally)

Exn: One secured by the creditor on the life of the debtor.

Limitation on Exn: The creditor only gets the amount of the outstanding debt

Q: Why it is not generally a contract of indemnity?

A:There is no fixed value on life

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 Q: What is the nature of a health care agreement?

A: The nature of a health care agreement was held by jurisprudence to be in the nature of non-
life insurance, primarily a contract of indemnity.

An ambiguity in favor of the insured allowing him to recover for medical expenses incurred
while abroad was interpreted in favor of the insured.

Q: May the employer offer to pay the amount that the deceased employee would have earned
had he not died AND REFUSE to pay the full amount of a life insurance?

A: No, the refusal of the insurer to pay is not valid because life insurance is not a contract of
indemnity.

Case: Fortune Medicare, Inc. v Amorin, GR No. 195872, March 12 2014

It was held to be in the nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expenses arising from sickness, injury or
other stipulated contingency, the health care provided must pay for the same to the extent
provided under the contact.

Ruling:The court also interpreted an ambiguity in favor of the insured allowing him to
recover for his medical expenses incurred while abroad.

Case: An employee earns P20, 000 a month. Over a 10 year period, he will receive P2, 400, 000.
He obtains a 10 year life insurance policy for P5, 000, 000. When the employee dies, his
beneficiary makes a claim on the policy but the insurer refused to pay the full amount, instead it
offers to pay the amount that the employee would have earned had he not died.

Ruling:The refusal of the insurer to pay is not valid because life insurance is not a
contract of indemnity.

 It is a PERSONAL CONTRACT – as an insurer contracts with reference to the character of

the insured and vice versa.

It might be willing to make good loss of a person by the destruction of his property, while
it would altogether be unwilling to insure the same property if owned by another. On the
other hand, the insurance taken by one person will not apply to the interest of another
person in the same property.

Parties deal with each other based on their personal contract; on the part of the insurance
corporations, they do not grant the same type or amount of insurance

 It is EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER – because

upon happening of the event or peril insured against, the conditions having been met, it has
the obligation to execute the contract by paying the insured. It is executed on the part of the
insured after the payment of the premium.

 It is ONE OF PERFECT GOOD FAITH for both Insurer and Insured, but more so for the
INSURER, since its dominant bargaining position imposes a stricter liability/responsibility.

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 Parties usually do not know each other when the relationship begins, so they have to
disclose what needs to be disclosed (concealment) or disclose that which is accurate
(misrepresentation)

An insurer may also be guilty of concealment or misrepresentation because the law

specifies that the “injured party” may ask for the rescission of the contract.

 It is a CONTRACT OF ADHESION – Insurance companies manage to impose upon the

insured prepared contracts which the insured cannot change.

Consequently, they are construed as follows:

(a) Verba Legis – In case there is no doubt as to the terms of the insurance contract,
it is to be construed in its PLAIN, ORDINARY, and POPULAR SENSE.

Case: P Bank obtained insurance against robbery which excluded loss by any criminal
act of the insured or any authorized representative. While transferring funds from one
branch to another, the insured’s armored truck was robbed. The driver was assigned by a
labor contractor with the insured, while the security guard was assigned by an agency
contracted by the insured. Both driver and guard were found to be involved. Can the loss
be excluded?

Ruling:The loss is excluded as while the driver and guard are assigned by labor
contractors, they are still within the term “authorized representative.”

Case: Personal Accident policies providing payment for “loss of hand.” The insurance
policy defines it as amputation. Insured has an accident resulting in a temporary total
disability but hand is not amputated.

Ruling: Insurer is not liable. Note though in a casre where the policy provided
for loss of both legs by amputation, a clam against the policy was allowed for a
total paralysis to be excluded is contrary to public policy, public good and sound
morality, as it would force the insured to have his legs amputated to be able to
claim on the policy.

(b) Contra Preferentum – If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be

construed strictly against the insurer and liberally in favor of the insured because
the latter has no voice in the selection of the words used, and the language used is
selected by the lawyers of the Insurer. (QUA CHEE GAN v. LAW UNION ROCK
INS. CO. LTD 98 Phil. 85)

Q: In resolving ambiguities in the provision of the insurance contract, how are these
construed.

A: They are construed liberally in favor of the insured and strictly against the insurer who
drafted the insurance policy.

Example: gasoline not expressed as lubricants; unclear provision for indemnity (range given)

Case: Warranty in a fire insurance policy prohibited storage of oils having a flash point
of below 300 Fahrenheit. Gasoline is stored. Is there a policy violation?

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 Ruling: The clause is ambiguous. In ordinary parlance oil means lubricants – not
gasoline. There is no reason why gasoline could not be expressed clearly in the
language the public can readily understand. (QUA CHEE GAN 98 Phil. 85)

Case: An action to recover the amount of PHP 2,000.00 due to death by drowning where
the policy provided for indemnity in the amount of PHP 1,000.00 to PHP 3,000.00.
Ruling: the interpretation of the obscure stipulation in contract must not favor
the one who caused the obscurity. Hence, judgment for an additional PHP
2,000.00 was affirmed (Del Rosario vs. Equitable Insurance and Casualty
Company, 8 SCRA 343).

Case: Denial of a claim on the ground that the insured vehicle was a private “owner”
type vehicle on the ground that the policy issued to the insured was a Common Carrier’s
Liability Insurance Policy which covers a public vehicle for hire.

Ruling: Insurer is liable as it was aware all along that the vehicle of the insured
was a private vehicle. (Fieldmans Insurance v. Mercedes Vargas vda De
Songco, 25 SCRA 70)

Case: Denial of claim for benefit due to the death of Flaviano Landicho in a plane crash
under a GSIS Policy on the ground of non payment of the premium.

Ruling: The policy contained a provision that the application for insurance is
authority for GSIS to cause the deduction of premium from the insured’s salary
(Landicho v. GSIS, 44 SCRA 7)

Q: How should a contract of insurance be CONSTRUED?

A: A contract of insurance is a contract of adhesion. It is a “take it or leave it” proposition so

the contract is strictly construed against the person who created it.

Rule #1: Construe it in its plain and ordinary meaning

Exn: When ambiguity arises
Example: covering permanent loss of hands with amputation

Rule #2: Construe contract of insurance in its ENTIRETY. Do so together with any
attachments to the contract because these form a part of the contract

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

(1) Existence of Insurable Interest

(2) Risk of loss
(3) Assumption of risk
(4) Scheme to distribute losses
(5) Payment of premiums

 EXISTENCE OF INSURABLE INTEREST

The insured should possess an interest of some kind, susceptible of pecuniary estimation –
known as “insurable interest”.

Generally a person has insurable interest in the subject matter insured when:

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 INSURABLE INTEREST – He has such a relation or connection with, or concern in, such
subject matter that he will derive pecuniary benefit or advantage from its preservation or will
suffer pecuniary loss or damage from its destruction, termination, or injury by the happening
of the event insured against.

Case: BD has a bank deposit of half a million pesos. Since the limit of the insurance
coverage of the PDIC is only 1/10 of BD’s deposit, he would like some protection for the
excess by taking out an insurance against all risk or contingencies of loss arising from
any unsound or unsafe banking practices including unforeseen adverse effect of the
continuing crisis involving the banking and financial sector in the Asian region. Does BD
have an insurable interest within the meaning of the Insurance Code of the Philippines?

Ruling:Yes, BD has insurable interest in his bank deposit. In case of loss of said
deposit, more particularly to the extent of the amount in excess of the limit
covered by the PDIC Act, BD will be damnified. He will suffer pecuniary loss of
P400, 000, that is, his bank deposit of half a million pesos minus P100, 000
which is the maximum amount recoverable from the PDIC.

Exception: The expectation of benefit from the continued life of a person insured need not be
of a pecuniary nature.

The insured has insurable interest when there is either an event which damnifies him or
creates a liability

Q: Does a person have insurable interest for the excess of the insurance coverage of the
PDIC of his bank deposit?

A: Yes, a person has insurable interest in his bank deposit. In case of loss, the person will be
damnified

A person has insurable interest in life, health and property.

It is necessary because its absence renders the contract VOID. This is based on the principle
that insurance is a contract of indemnity. If the insured has no interest, he will not stand to
suffer loss or injury by the happening of the event insured against.

 RISK OF LOSS

The insured is subject to risk of loss through the destruction or impairment of that interest by
the happening of the designated risks.

 ASSUMPTION OF RISK

The Insurer assumes the risk of loss

 SCHEME TO DISTRIBUTE LOSSES

Such assertion is part of a general scheme to distributed actual loss among a large group of
persons bearing somewhat similar risks

It is a scheme that relies on the presumption that claims will be less than the total premiums
paid

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 Basis:
(a) Our instinct of self-preservation. We will not intentionally cause ourselves loss,
damage or injury. We have the natural tendency to preserve life;
(b) the insurance company has already figured out the necessary amount of
premiums in so far as the amount that they receive

Insurance is RISK-DISTRIBUTING and NOT risk-shifting: because the insurer relies on

the scheme of allocation; and the persons actually paying are the other insured

When the insurer assumes the risk, it is distributing potential liability, in part,
among others.

It is not risk-shifting because the entirety of risk of loss is not shifted to another.

 PAYMENT OF PREMIUMS

As a consideration for the insurer’s promise, the insured makes a ratable contribution called a
premium to the general insurance fund.

WHAT ARE THE REQUISITES FOR A VALID INSURANCE CONTRACT?

(1) Subject matter in which the insured has an insurable interest;

(2) Consideration, which refers to the premium payments, based on probability of
loss and extent of liability;
(3) Object and purpose which is the transfer and distribution of risk of loss, damage,
or liability;
(4) Cause, which refers to an event or peril, insured against;
(5) A meeting of minds of the parties upon all the foregoing essentials

PERFECTION OF INSURANCE CONTRACT

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