Chapter 1 GENERAL PROVISIONS Brief History of Insurance The origin of insurance is quite obscure. In the ancient times, it has been the practice to take hostages from tribes who were under obligation to make good of their promises. That practice is actually suretyship, which falls under the definition of doing an insurance business. But the concept of modern insurance, as we know now, has marine insur- ance as its forerunner.’ It is but a necessary incident of navigation, by merchants who intend to sell their wares to the world. Insurance Laws Adopted by the Philippines ___ The concept of insurance was introduced to the Phil- 'ppines by the Spaniards. The regulating laws then were the Spanish Code of Commerce as well as the Spanish Civil Code. Later on, Act 2427 or the Insurance Act, which took 1 Joyce, 2.— + 2 HANDBOOK IN INSURANCE Law (RA 10607) effect in July 1, 1915, repealed the provisions of the Span- ish Code of Commerce on insurance. The Insurance Act is however, copied almost verbatim from the California Insurance Act, with the exception of Chapter V thereof, which was taken largely from the insurance law of New York.’ Thus, when a statute has been adopted from some other state or country and said statute has previously been construed by the courts of such state or country, the statute is deemed to have been adopted with the construction given? On December 18, 1974, P.D. No. 612 promulgated the Insurance Code of the Philippines thereby repealing Act 2427. The said law was further amended by P.D. Nos. 63, 123 and 317. Finally, on June 11, 1976, P.D. No. 1460 took effect and consolidated all insurance laws into a single code — the Insurance Code of 1978. The code was further amended, resulting to R.A. No. 10607 which was signed by the President on August 15, 2013. The revisions embodied in the Amended Insurance Code are intended to reinforce the provisions of the previous code so as to further strengthen the insurance industry and ensure the economic viability and financial stability of companies operating in the country, to the end that each and every Filipino is amply protected and secured.* Prudential Guarantee & Assurance Inc. vs. Trans-Asia Shipping Lines, Inc., 491 SCRA 411, June 20, 2006. 3Constantino vs. Asia Life Inc. Co., 87 Phil. 248, August 31, 1950; Gercio vs. Sun Life Assurance Co. of Canada, 48 Phil. 53, September 28, 1925; Cerezo vs. Atlantic, Gulf & Pacific Co., 33 Phil. 425, February 4, 1916. “Insurance.gov.ph.GENERAL PROVISIONS 3 The Insurance Commission The Insurance Commission is headed by the Insurance Commissioner. He is a presidential appointee who, pursu- ant to Sec. 437, is primarily tasked in seeing to it that all laws relating to insurance, insurance companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully executed. The current organizational structure of the Insurance Commission is as follows: * Insurance Commissioner Deputy Deputy Deputy Deputy Ins. Ins. Com. Ins. Com. Ins. Com. Com. Mgt. Financial Legal Technical Support Examina- Services Services tion _| Non- Regulation, ‘Actua- |_| [ Admin life Enforcement rial Exami- & Prose- nation cution Life Public Invest- Budget & Exami- Assistance & ment Manage- nation Mediation Services ment Pre- Licensing Rating ‘Account- need ing Exami- SInsurance.gov.ph.HANDBOOK IN INSURANCE Law (RA 10607) The duty to see that all 1 ance are faithfully executed; Sole and exclusive auth: iable contracts ‘aws relatin, 4 nation aa Informa- Brokers Conservator- Reinsur- |_| tion | | Exami- ship, i. hnolo; nation Receivership [feennoroey \& Liquidation} Claims Statistics Planning Adjudica- & tion Research Cebu District Davao District |_| Baguio District The Insurance Commissioner is exercising two kinds of powers: administrative/regulatory and adiudi i a ry djudicatory/quasi- The administrative power i i i sO iis ae Pp utlined in Secs, 437 and 1. i to insur- Ority to regulate the issu- and to pGENERAL PROVISIONS 5 To issue such rulings, instructions, circulars, or- ders and decisions as may be deemed necessary fo secure the enforcement of the provisions of this Code, to ensure the efficient regulation of the insurance industry in accordance with global best practices and to protect the insuring public; 4.1. 4.2. 4.3. 44. 4.5. 4.6. 4.7. To formulate policies and recommenda- tions on issues concerning the insurance industry, advise Congress and other gov- ernment agencies on all aspects of the in- surance industry and propose legislation and amendments thereto; To approve, reject, suspend or revoke li- censes or certificates of registration; To impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; To prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and su- pervise compliance with such rules, regula- tions and orders; To enlist the aid and support of, and/or deputize any and all enforcement agencies of the government in the implementation of its powers and functions under this Code; To issue cease and desist orders to prevent fraud or injury to the insuring public; To punish for direct and indirect contempt;HANDBOOK IN INSURANCE LAW (RA 10607) 4.8. 4.9. 4.10. 411; 4.12. 4.13. To compel the officers of any registered insurance corporation or association to call meetings of stockholders or members thereof; To issue subpoena duces tecum and sum- mon witnesses to appear in any proceed- ing of the Commission and order the ex- amination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any en- tity or person under investigation for the Proper disposition of the cases before it; To suspend or revoke, after Proper notice and hearing, the license or certificate of authority of any entity or person under its regulation, upon any of the grounds pro- vided by law; To conduct an examination to determine compliance with laws and regulations if the circumstances so warrant; To investigate not oftener than once a year from the last date of examination to determine whether an institution is con- ducting its business on a safe and sound basis: Provided, That, the deficiencies irregularities found by or discovered by an audit shall be immediately addressed; To inquire into the solvency and liquidity of the institutions under its supervision and enforce Prompt corrective action;GENERAL PROVISIONS it 4.14. To retain and utilize, in addition to its annual budget, all fees, charges and other income derived from the regulation of in- surance companies; 4.15. To fix and assess fees, charges and penal- ties; and 4.16. To exercise such other powers as may be provided by law as well as those which may be implied from, or which are neces- sary or incidental to the express powers granted the Commission to achieve the objectives and purposes of this Code. 5. To impose upon insurance companies, their di- rectors and/or officers and/or agents, for any willful failure or refusal to comply with, or viola- tion of any provision of this Code, or any order, instruction, regulation, or ruling of the Insurance Commissioner, or any commission or irregulari- ties, and/or conducting business in an unsafe or unsound manner, the following: 5.1. Fines not less than P5,000 and not more than P200,000; and 5.2. Suspension, or after due hearing, removal of directors and/or officers and/or agents. Should the Insurance Commissioner then allow gar- nishments of security deposits in its custody? No.HANDBOOK IN INSURANCE Law (RA 10607) Case: Republic vs. Del Monte Motors, 504 SCRA 53, October 9, 2006; also Capital Insurance and Surety Co. vs. Del Monte Motorworks, G.R. No. 159979, December 9, 2015 RTC rendered a Decision in finding Vilf- ran Liner, Inc., Hilaria Villegas and Maura Villegas jointly and severally liable to pay Del Monte Motors, Inc., for the balance of Vilfran Liner’s service contracts with respondent. The trial court further ordered the execution of the Decision against the counterbond posted by Vilfran Liner and issued by Capital Insur- ance and Surety Co., Inc. (CISCO). The sheriff proceeded to levy on the Properties of CISCO. He also issued a Notice of Garnishment on several depository banks of the insurance company. Moreover, he served a similar notice on the Insurance Commission, So as to enforce the Writ on the security deposit filed by CISCO with the Commission. This is not valid. The law expressly and clear} st the security deposit shall be (anon for all the obligations of the depositing in- surer under its insurance Contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from levy by any claimant, ” CISCO has valid outstanding policies. Its policy holders have a right under the law to be equally protected by its security deposit.GENERAL PROVISIONS 9 To allow the garnishment of that deposit would impair the fund by decreasing it to less than the percentage of paid-up capital that the law requires to be maintained. Further, this move would create, in favor of respon- dent, a preference of credit over the other policy holders and beneficiaries. The securities required by the Insurance Code to be deposited with the Insurance Commissioner are intended to answer for the claims of all policy holders in the event that the depositing insurance company becomes insolvent or otherwise unable to satisfy their claims. The security deposit must be ratably distributed among all the insured who are entitled to their respective shares; it cannot be garnished or levied upon by a single claimant, to the detriment of the others. On the other hand, the adjudicatory power is found in Sec, 439. The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for which such insurer may be liable under a contract of suretyship, or for which a reinsurer may be sued under any contract of reinsurance it may have entered into; or for which a mutual benefit association may be held liable under the membership certificates it has issued to its members, where the amount of any such loss, damage or liability, excluding interest, cost and attorney’s fees, being claimed or sued upon any kind of insurance, bond, rein-10 [HANDBOOK IN INSURANCE LAW (RA 10607) surance contract, or membership certificate does not exceed in any single claim P5,000,000. However, the authority to adjudicate granted to the Commissioner shall be concurrent with that of the civi] courts, but the filing of a complaint with the Commissioner shall preclude the civil courts from taking cognizance of a suit involving the same subject matter. So, would the Insurance Commissioner have jurisdic- tion if what is in issue is the relationship between the insurance company and its agents/brokers? Again, no. Case: Philamlife vs. Ansaldo, 234 SCRA 509 Paterno wrote to the Insurance Commis- sioner alleging certain problems encountered by agents, supervisors, managers and Public consumers of Philamlife. Should the Insur- ance Commissioner take cognizance of the case? No. The contract of agency entered into between Philamlife and its agents is not in- cluded within the Meaning of an insurance business to give jurisdiction over the same to the Insurance Commissioner. Neither is it in- cluded in the quasi-judicial power of the In- surance Commissioner which is limited to ad- judicating claims and complaints filed by the insured against the insurance company. Note: A new para: graph is now added in Sec. 439, which provides that “th © power of the Commissioner does Under the old Insurance Code, the amount is only P100,000.GENERAL PROVISIONS 11 not cover the relationship between the insurance company and its agents/brokers but is limited to adjudicating claims and complaints filed by the insured against the insurance company.” D. Definition 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. A contract of suretyship shall be deemed to be an in- surance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter provided.” The term doing an insurance business or transacting an insurance business, within the meaning of this Code, shall include: (1) Making or proposing to make, as insurer, any insurance contract; (2) | Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate busi- ness or activity of the surety; (3) Doing any kind of business, including a reinsur- ance business, specifically recognized as consti- tuting the doing of an insurance business within the meaning of this Code; 7Section 2. =HANDBOOK IN INSURANCE LAW (RA 10607) Doing or proposing to do any business in sub- stance equivalent to any of the foregoing ina manner designed to evade the provisions of this Code. (4) The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insur- ance business. An insurance contract exists where the following ele- ments concur:® The insured has an insurable interest; 2. The insured is subject to a tisk of loss by the happening of the designed peril; The insurer assumes the tisk; 4. Such assumption of tisk is part of a general scheme to distribute actual losses amon group of persons bearing a similar risk (princi of risk-distribution) and @nindple 5. In consideration of the insurer’s Promis in- sured pays a premium. ©, the in Illustrations: 1. Even if a contract contains a! ll the elem insurance contract, if its pri Sats of an mary purpose is the ‘Philippine Health Care Providers, Inc. vs. Commise;, nal Revenue, 600 SCRA 413, September 18, 2009. ®\Mer of Inter.GENERAL PROVISIONS 13 rendering of service, it is not a contract of insur- ance.? ; The primary purpose of the parties in mak- ing the contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it prom- ises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in con- sideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insur- ance, and the corporation will be deemed as en- gaged in the business of insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a contract is not to render personal ser- vices, but to indemnify against loss and damage resulting from the defense of actions for mal- practice.”® 2. An insurance company which granted mortgage and other kinds of loans is not converted into a lending institution. The granting of certain loans is one of several means of investment allowed to insurance companies. °Philippine Health Care Providers, Inc. vs. Commissioner of Inter- nal Revenue, 600 SCRA 413, September 18, 2009. 1M, C. L. Campos, Insurance, pp. 17-18 (1983), citing Physicians’ Defense Co. vs. O’Brien, 100 Minn. 490, 111 N.W. 397 (1907).14 HANDBOOK IN INSURANCE Law (RA 10607) Insurance companies are required by law to possess and maintain substantial legal reserves to meet their obligations to policyholders. This obviously cannot be accomplished through the collection of premiums alone, as the legal re- serves and capital and surplus insurance compa- nies are obligated to maintain run into millions of pesos.” The test to determine if a contract is an insur- ance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circum- stances under which the performance becomes requisite. It is not by what it is called. A mutual insurance company is a coopera- tive enterprise where the members are both the insurer and insured. In it, the members all con- tribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and where the Profits are divided among themselves, in Proportion to their interest. (2006 Bar) where the third Party is anyo; P &I Club and the members. roe i Sees Here, White Gold ‘ . a protecti Marine Services procured ion and indemnity coverage for its ves- NCIR vs. Phil. American Accident 1 March 18, 2005. nsurance, 453 SCRA 668,GENERAL PROVISIONS 15 sels from Steamship Mutual through Pioneer In- surance. By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business. In return for the 20 years of faithful service of X as a househelper to Y, the latter promised to pay P100,000 to X’s heirs if he (X) dies in an acci- dent by fire. X agreed. Is this an insurance con- tract? (2011 Bar) a. Yes, since all the elements of an insurance contract are present. b. Yes, since X’s services may be regarded as the consideration. c. No, since Y actually made a condi- tional donation in X’s favor. d. No, since it is in fact an innominate con- tract between X and Y. Nature and Characteristics of Insurance hs Aleatory Insurance is an aleatory contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.’ It is not a commutative contract under the terms of which each of the parties is supposed to give an exact equivalent, either in obligation or performance, to the other. art, 2010, Civil Code.16 HANDBOOK IN INSURANCE Law (RA 10607) Now, under the Civil Code, aleatory con- tracts are divided into three — insurance, life an- nuity’® and gambling. Thus, is insurance synonymous to a gam- bling contract? Section 4 of the Insurance Code expressly prohibits the same.’* The reason be- hind is simple. A renowned writer, William Rey- nolds Vance, sums it up - “The gambler courts fortune, the insured seeks to avoid misfortune.” 2012 Bar: An insurance contract is an aleatory contract, which means that: a. the insurer will pay the insured equivalent to the amount of the premium paid b. the obligation of the insurer is to pay de- pending upon the happening of an uncer- tain future event ec. the insured pays a fixed premium for the duration of the policy period and the amount of the premiums paid to the insurer is not necessar- ily the same amount as what the in- sured will get upon the happening of an uncertain future event d. the obligation of the insurer is to pay de- pending upon the happening of an event that is certain to happen. 13]t is an engagement to pay an income yearly during the life of a person (Black’s Law Dictionary, S* edition). Section 4. The preceding section does not authorize an insur- ance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize.GENERAL PROVISIONS 17 Note: The answer is not (a) since the pro- ceeds are usually more than the premiums paid. The answer is not (d) since payment may be predicated likewise on the happening of an un- certain event. Although (b) is correct, the better answer is (c) as it is more complete. 2. Contract of indemnity for property insurance An insurer indemnifies the insured based on the loss or injury the latter actually suffered from. If there is no loss or injury, then there is no obligation on the part of the insurer to indemnify the insured.'* This is consistent with the principle of indemnity which proscribes the insured from recovering greater than the loss.'® 3. Contract of investment for life insurance For life insurance however, the insurance is more of an investment, a form of security for the insured or his beneficiaries. There is no amount pegged for the value of human life, as opposed to property. 4. Personal The insurer takes into consideration the per- sonal circumstances of the insured, including his state of health, when it approves the policy. 'SLoadstar Shipping Co., Inc. vs. Malayan Insurance Co., Inc., G.R. No. 185565, November 26, 2014. ‘The principle of indemnity in property insurance is based on Section 18 of the Insurance Code which provides that no contract or Policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. | |18 HANDBOOK IN INSURANCE Law (RA 10607) Hence, the contract is generally not transferable in nature. 5. Executory and conditional on the part of the in- surer but executed on the part of the insured The insured, upon payment of the premium, has no more responsibility but to await for the happening of the insured peril. The insurer, on the other hand, would have to await for the happening of the insured peril before liability could arise. 6. Contract of good faith The contract of insurance is one of perfect good faith (uberrima fides meaning good faith; absolute and perfect candor or openness and honestly; the absence of any concealment or de- ception, however slight), not for the insured alone but equally so for the insurer.’ In fact, it is more so for the latter, since its dominant bar- gaining, position carries with it stricter responsi- bility.® 7. Contract of adhesion Insurance contract is by nature a contract of adhesion — one wherein a party, usually a cor- poration, prepares the stipulations in the con- tract, while the other party merely affixes his signature or his “adhesion” thereto. Through the "Great Pacific Life Insurance Co. vs. CA, 89 SCRA 543, April 30, 9. "Qua Chee Gan vs. Law Union and Rock Insurance Co. Ltd., 98 Phil. 95, December 17, 1955.GENERAL PROVISIONS 19 years, the courts have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party’s participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the courts of justice must protect. Consequently, any ambiguity therein is | resolved against the insurer, or construed liber- | ally in favor of the insured.” 2012 Bar: An insurance contract is a contract of adhesion, which means that in resolv- ing ambiguities in the provision of the insurance contract — a. _ the general rule is that, the insurance con- tract is to be interpreted strictly in accor- dance with what is written in the contract b. are to be construed liberally in fa- vor of the insured and strictly against the insurer who drafted the insurance policy c. are to be construed strictly against the in- sured and liberally in favor of the insurer d. if there is an ambiguity in the insurance contract, this will invalidate the contract 8. Synallagmatic or reciprocal or bilateral An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal con- tract where the rights and obligations of the par- Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporatio , Inc. vs. mn, 458 SCRA 550, May 16, 2005. a20 HANDBOOK IN INSURANCE LAW (RA 10607) ties correlate and mutually correspond. The in- surer assumes the risk of loss which an insured might suffer in consideration of premium pay- ments under a risk-distributing device.”° This is also called as principle of risk distribution. This is different from tisk-shifting, which is exemplified by warranty on sale of goods. In in- surance, the premiums paid by all of the insured are pooled into a common fund, and the losses to be paid out are taken from that fund. In short, the risk then is distributed among all of the in- sured. But in a sale of goods with warranty, the amount paid is not pooled into a common fund, like in insurance. Thus, in case of loss, it will be borne by the seller alone. 9. Generally voluntary or optional, though manda- tory for some forms Insurance premiums and GSIS contributions, the mandatory deductio; Payroll. Payment for Cl are mandatory in Sss as these forms part of ms from an employee’s MVLI or compulsory mo- tor vehicle liability insurance is also required whenever a vehicle i is being registered with the Land Transportation Office annually, 2014 Bar: Asa tule, an insurance con- tract is consensual and voluntary. The exception is in the case of: a. inland marine insurance *See separate opinion of J. Vitug in UCPB General Insurance, Inc. vs. Masagana Telamart, Inc., 356 SCRA 307, April 4, 2001,GENERAL PROvisioNS 21 b. industrial life insurance ¢. motor vehicle liability insurance d. life insurance The other forms of insurance are voluntary; you have the option to procure one or not. But for motor vehicle liability insurance, the Land Transportation Office does not allow the regis- tration or renewal of registration of any motor vehicle unless the same is insured.?! Types of Insurance 1. Life Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.” Such includes also health and acci- dent insurance, being connected to life. However, health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contin- gent, the health care provider must pay for the same to the extent agreed upon under the con- tract.” Sec. 389. Sec, 181. Fortune Medicare, Inc. vs. Amorin, G.R. No. 195872, March 12, 2014, citing Philippine Health Care Providers, Inc. vs. Commissioner of Internal Revenue, 600 SCRA 413, September 18, 2009; Philamcare Health Systems v. CA, 379 SCRA 356.HANDBOOK IN INSURANCE LAW (RA 10607) 22 2. Non-life or property insurance All other insurances then would fall under this category. Examples are marine, fire and casualty insurance, which will be discussed much later. Doctrine of Estoppel Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party in order to prevent fraud and falsehood. Illustrations: 1. 2009 Bar: Dans, who was already 76 years old, was advised by DBP to take a mortgage re- demption insurance (MRI) after taking a loan from it. Dans acquiesced. The DBP MRI Pool however rejected the application as he was over the acceptance age limit of 60 years at the time of application and informed DBP about it. Unfor- tunately, Dans had already died. As an insurance agent, DBP made Dans go through the motion of applying for said insur- ance, thereby leading him and his family to be- lieve that they had already fulfilled all the re- quirements for the MRI and that the issuance of their policy was forthcoming. Apparently, DBPGENERAL PROVISIONS 23 had full knowledge that Dan’s application was never going to be approved.” 2. | Masagana Telamart procured insurance coverage from UCPB for a number of years and had been granted a 60 to 90-day credit term for the re- newal of the policies. Time came that the proper- ties insured were burnt by fire and the insurance premiums for the renewal of the policy were be- latedly paid, following the practice. The insured may recover as the insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term. Note: Sec. 77 now allows a 90 day credit extension under broker and agency agreements with duly licensed intermediaries. 3. 2013 Bar: Stable Insurance Co. (SIC) and St. Peter Mfg. Co. (SPMC) have had a long-standing insurance relationship with each other; SPMC secures the comprehensive fire insurance on its plant and facilities from SIC. The standing busi- ness practice between them has been to allow ?4DBP vs. CA, 231 SCRA 370, March 21, 1994. >UCPB vs. Masagana Telamart, 356 SCRA 307, April 4, 2001. In the original ruling of the Supreme Court in June 15, 1999, it denied the claim of the insured. However, upon motion for reconsideration where 5 justices dissented, the Supreme Court reconsidered its ruling. Besioce24 HANDBOOK IN INSURANCE Law (RA 10607) SPMC a credit period of 90 days from the re- newal of the policy within which to pay the pre- mium, Soon after the new policy was issued and before premium payments could be made, a fire gutted the covered plant and facilities to the ground. The day after the fire, SPMC issued a manager’s check to SIC for the fire insurance premium, for which it was issued a receipt; a week later, SPMC issued its notice of loss. SIC responded by issuing its own manager’s check for the amount of the premiums SPMC had paid and denied SPMC’s claim on the ground that under the “cash and carry” principle governing fire insurance, no coverage existed at the time the fire occurred because the insurance premium had not been paid. Is SPMC entitled to recover for the loss from SIC? Obviously yes, following the dictum in Ma- sagana. Songco, who just finished Grade 1, owned a pri- vate jeepney. The agent of Fieldmen’s Insurance Company made him however believe that he could take a common carrier liability insurance for his private jeep. During the effectivity of the policy, Songco, who was on board his jeep, fig- ured in an accident and died. Fieldmen could not, thereafter, in any litiga- tion arising out of such representation, be per- mitted to change its stand to the detriment of the heirs of the insured. As estoppel is primarilyGENERAL PROVISIONS 25 based on the doctrine of good faith and the avoidance of harm that will befall the innocent party due to its injurious reliance, the failure to apply it in this case would result in a gross trav- esty of justice.® Doctrine of Ambiguity Article 1377 of the Civil Code provides - “The inter- pretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.” Corollary to that is Section 17, Rule 130 Rules of Court which provides — “Of two constructions, which preferred. — When the terms of an agreement have been intended in a different sense by the different parties to it, that sense is to prevail against either party in which he supposed the other understood it, and when different constructions of a provision are otherwise equally proper, that is to be taken which is the most favorable to the party in whose favor the provision was made.” A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from non-compliance with its obligations.” %6Fjeldmen’s vs. Songco, 25 SCRA 70, September 23, 1968. 2 Malayan vs. CA, 270 SCRA 242, March 20, 1997.26 HANDBOOK IN INSURANCE LAW (RA 10607) Illustrations: 1. Ambiguity as to the amount to be paid Under the provisions of the contract, Equi- table Insurance bound itself to pay itself to pay P1,000 to P3,000 as indemnity for the death of the insured. Considering there is an ambiguity with respect to the the indemnity to be paid, the same will be resolved against the one responsi- ble thereof. The insured, has little, if any, par- ticipation in the preparation of the policy, to- gether with the drafting of its terms and condi- tions. The interpretation of obscure stipulations in a contract should not favor the party who caused the obscurity, which, in the case at bar, is the insurance company.”* Ambiguity as to the effectivity of the policy a. Landicho’s life insurance policy with the GSIS provided two clauses: fist, “that this appli- cation serves as a letter of authority to the Collect- ing Officer of our Office — the Bureau of Public Works — thru the GSIS to deduct from my salary the monthly premium”, and second, “the policy shall be effective on the first day of the month next following the month the first premium is paid.” Despite the authorization given, GSIS failed to inform the payroll to make the deductions hence the premium was not paid. Landicho then should not be faulted on relying on the first clause and believing that there existed already a valid in- Del Rosario vs. Equitable Insurance and Casualty Company, Inc., 8 SCRA 343, June 29, 1963.*Landicho vs. GSIS, 44 SCRA 7, GENERAL PROVISIONS 27 surance contract. When the terms in an insur- ance policy, which are ambiguous, equivocal, or uncertain are to be construed strictly and most strongly against the insurer, and liberally in fa- vor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved, and the reason for this rule is that the insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and de- liberation by experts and legal advisers em- ployed by, and acting exclusively in the interest of, the insurance company.” b. Under the policy, the clients of Eternal Gardens who purchased burial lots from it on in- stallment basis would be insured by Philamlife. The policy provided that “The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.” The said provision would show ambiguity as the first sentence appears to state that the insurance coverage of the clients of Eternal already became effective upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve the insurance contract be- fore the same can become effective. An insur- ance contract is a contract of adhesion which must be construed liberally in favor of the in- March 17, 1972.28 HANDBOOK IN INSURANCE LAW (RA 10607) sured and strictly against the insurer in order to safeguard the latter’s interest.” c. On March 6, 1997, Felipe N. Khu, Sr. applied for a life insurance policy with Insular Life. It was approved on June 22, 1997. On June 23, 1999, Felipe's policy lapsed due to non- payment of the premium but on September 7, 1999, Felipe applied for the reinstatement of his policy and paid premium. On October 12, 1999, Insular Life advised Felipe that his application for reinstatement may only be considered if he agreed to certain conditions such as payment of additional premium and the cancellation of the riders pertaining to premium waiver and acci- dental death benefits. Felipe agreed to these conditions and on December 27, 1999 paid the agreed additional premium thus on January 7, 2000, Insular Life issued Endorsement No. PN- 000015683. He later died of renal failure. The claim of the beneficiaries was denied on the ground of Felipe’s misrepresentation as he did not disclose his prior ailments. The two-year period be reckoned to ascer- tain whether the policy could still be contested is to be reckoned from the date when the applica- tion was processed and approved by the insurer. Thus, it is settled that the reinstatement of an in- surance policy should be reckoned from the date when the same was approved by the insurer. The parties differ as to when the reinstate- ment was actually approved. Insular Life claims Eternal Gardens vs. Philamlife, G.R. No. 166245, April 8, 2008.GENERAL PROVISIONS 29 that it approved the reinstatement only on De- cember 27, 1999. On the other hand, the benefi- ciaries contend that it was on June 22, 1999 that the reinstatement took effect. The resolution of this issue hinges on the following documents: 1) Letter of Acceptance; and 2) the Endorse- ment. In the Letter of Acceptance, Khu declared that he was accepting “the imposition of an extra/additional . . . premium of P5.00 a year per thousand of insur- ance; effective June 22, 1999.” The reinstatement was conditioned upon the payment of additional premium not only prospectively, that is, to cover the remainder of the annual period of coverage, but also retroac- tively. In the Endorsement, the obscurity is patent. In the first sentence of the Endorsement, it is not entirely clear whether the phrase “effective June 22, 1999” re- fers to the subject of the sentence, namely “the rein- statement of this policy,” or to the subsequent phrase “changes are made on the policy.” Given the obscurity of the language, the construc- tion favorable to the insured will be adopted by the courts. An insurance contract is a contract of adhesion which must be construed liberally in favor of the in- sured and strictly against the insurer in order to safe- guard the latter's interest.” 21tnsular Life Assurance Co., Ltd. vs. Khu, G.R. No. 195176, April 18, 2016. be ee30 HANDBOOK IN INSURANCE LAW (RA 10607) Ambiguity as to the peril insured against a. Soya bean meal on board a ship was subjected to insurance. However, the vessel, while on dock at South Africa, was detained by civil authorities because of a lawsuit on a ques- tion of ownership and possession. As a result, the soya bean meal were not delivered. The peril clause provided coverage for the following: “Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Surprisals, Takings of the Sea, Arrests, Re- straints and Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality so- ever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof”. The insurance company would seek to interpret the term “arrests” to cover those arising from politi- cal or executive acts and the arrest of the vessel by judicial authorities is an excluded risk. If a marine insurance company desires to limit or restrict the operation of the general pro- visions of its contract by special proviso, excep- tion, or exemption, it should express such limita- tion in clear and unmistakable language. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation of the subject clauses. An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contractGENERAL PROVISIONS 31 which is, to insure against risks of loss or dam- age to the goods. Such interpretation should re- sult from the natural and reasonable meaning of language in the policy. Where restrictive provi- sions are open to two interpretations, that which is most favorable to the insured is adopted.” b. Castor instructed her driver to bring her Toyota Revo to the shop for tune-up. The driver however, absconded, together with the vehicle. Castor filed an insurance claim but was denied on the ground that the driver is under her em- ploy/service, hence an exempted risk. Section III of the policy however allows indemnification for theft, but another provision exempts malicious damage caused by the Insured, any member of his family or by a person in the Insured’s service. It was ruled that there is a difference be- tween loss, in theft, and damage. “Loss” refers to the act or fact of losing, or failure to keep pos- session, while the word “damage” means dete- rioration or injury to property. Theft perpetrated by a driver of the insured is not an exception to the coverage from the in- surance policy. The provision on theft does not qualify as to who would commit the theft. Thus, even if the same is committed by the driver of the insured, there being no categorical declara- tion of exception, the same must be covered. An insurance contract should be interpreted as to carry out the purpose for which the parties en- tered into the contract which is to insure against ®Malayan vs. CA, 270 SCRA 242, March 20, 1997.HANDBOOK IN INSURANCE LAW (RA 10607) risks of loss or damage to the goods. Such inter- pretation should result from the natural and rea- sonable meaning of language in the policy. Where restrictive provisions are open to two in- terpretations, that which is most favorable to the insured is adopted.** (2014 Bar) Ambiguity as to the area insured a. Fire broke out in the compound of Transworld razing the middle portion of its four- span building and partly gutting the left and right sections thereof. A two-storey building (be- hind the four-span building) where fun and amusement machines and spare parts were stored, was also destroyed by the fire. The claim for insurance was denied, arguing that the annex building is not included in the coverage. Exami- nation of the policy however showed that the coverage included those “contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate within own Compound.” It was ruled that the so-called annex was not an annex building but an integral and in- separable part of the four-span building. The in- surance adjusters even described the two-storey building as a permanent structure which adjoins and intercommunicates with the first right span of the lofty storey building, hence formed part thereof. As the two-storey building was already in existence at the time the contract was taken, alpha Insurance vs. Castor, September 2, 2013. ieGENERAL PROVISIONS 33 the insurer should have specifically excluded the said two-storey building from the coverage of the fire insurance if it wanted to. Doubt should be resolved against Rizal Surety Insurance Com- pany, whose lawyer or managers drafted the fire insurance policy contract under scrutiny.* b. The resort’s swimming pools were in- sured against earthquake with American Home ‘Assurance. The insurance was renewed but this time with Phil. Charter where the latter was re- quired to copy verbatim the provisions in the previous policy with American Home. The policy however included in the coverage other resort properties, but the premiums paid corresponded to the pools only. Moreover, there was a rider where no qualifications were placed on the scope of the earthquake shock coverage. As a result, the policy extended earthquake shock coverage to all of the insured properties. The Supreme Court ruled that the resort cannot focus on the earthquake shock endorse- ment to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock coverage to the two swimming pools only. There is no ambi- guity in the terms of the contract and its riders. There is no mention of any premium payable for the other resort properties with regard to earth- quake shock. This is consistent with the history el Rizal Surety vs. CA, 336 SCRA 12, July 18, 2000.34 HANDBOOK IN INSURANCE LAW (RA 10607) of Gulf Resort’s previous insurance policies American Home.** © A law student’s “bakettt” list: 1. Sa 20 cases assigned, isa lang ang di mo nabasa at dun ka pa tinawag. Bakettt? 2. Yung klasmet mo na pasaway, isa lang ang case na nabasa at dun pa siya na- tawag. Pangisi-ngisi pa si ungas. Bakettt? 3. Gusto mong bumawi kaya nagpuyat ka sa pag-aaral. Naka order ka pa ng cara- mel macchiato habang nakaupo sa Star- bucks ng 5 oras. Only to find out na ab- sent si Prof. Bakettt? 4. You met a guy in class. Yummy at pa- pable. Kaso pareho pala kayong lalaki din ang hanap. Bakettt? © *SGulf Resorts vs, Phil. Charter Insurance, 458 SCRA 550, May 16, 2005.