Insurance Contracts

7.3.1 Explain the concept of insurance

BASIC CONCEPS OF CONTRACT OF INSURANCE

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 insurance, to be binding from the date of application, must have been a completed contract.

Thus, it must have all the essential elements of a valid contract: (COC)

1. CONSENT

Meeting of minds of whom?

GR : Insurer and Insured

XCP : Insurer, Insured and Beneficiary (when beneficiary is irrevocable)

*Beneficiary

➢ Any person designated by the insured (it could be himself (assured) )

Notes:

➢ The consent of the spouse is not necessary for the validity of an insurance policy taken out by a
married person on his or her life or that of his or her children.
➢ Consent of the Person Insured is NOT Essential to the Validity of the Policy; so long as it could be
proved that the insured has an insurable interest at the inception of the policy, the insurance is valid
even without such consent.

2. OBJECT (Subject Matter in which the insured has an insurable interest.

- This is the risk of loss of subject matter transferred from the insured to insurer

Who may be insured?

Anyone. Except public enemy.

Public enemy is a nation at war with the Ph and every citizen or subject of such nation.

When does a person have insurable Iinterest over the subject matter?

GR: A person is deemed to have an insurable interest in the subject matter insured when a person has a
relation or connection with or concern in the subject matter, such that he will derive pecuniary benefit or
advantage from its preservation and will suffer pecuniary loss from its destruction or injury by the
happening of the event insured against.

XPN: However, in some cases, expectation of benefit from the continued life of that person need not
necessarily be of pecuniary nature to have an insurable interest in the life of a person. (De Leon, 2010)
[See discussion below for more details abt insurable interest)

Games of Chance Cannot be Insured

An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing
a prize is not authorized.

Mere Hope or Expectancy is NOT Insurable

A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any
valid contract for it, is not insurable.

3. CAUSE

Consideration, which is the premium paid by the insured, for the insurer’s promise to indemnify the former
upon the happening of the event or peril insured against.

Event or Peril Insured Against is any contingent or unknown event, whether past or future, which may damnify
a person having an insurable interest, or create a liability against him may be insured

Insurance as an Uberrimae Fides contract

The contract of insurance is one of perfect good faith (uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for the latter, since its dominant bargaining position carries
with it stricter responsibility.

It requires the parties to the contract to communicate that which a party knows and ought to communicate,
that is, the duty to disclose in good faith all facts material to the contract. This doctrine is essential on account
of the fact that the full circumstances of the subject matter of insurance are, as a rule, known to the insured
only and the insurer, in deciding whether or not to accept a risk, must rely primarily upon the information
supplied to him by the applicant.

Insurance as Contracts of Adhesion (Fine Print Rule)

Insurance contracts is an example of a contract of adhesion. An illustration of a contract of adhesion is when

the insurer used “fine print” letters in conditions stated in a contract of insurance.

As a consequence,

Rules in the Construction or Interpretation of Insurance Contracts

GR: If the terms of the contract clearly show the intention of the parties, there shall be no room for
interpretation.

XPN: If there are ambiguities in the terms of an insurance contract, they have to be resolved in favor of the
insured and strictly against the insurer because an insurance contract being a contract of adhesion, most
of its terms is not a product of mutual negotiation between the parties as they are prepared by the insurance
company in final printed forms.
7.3.2 Explain the elements of an insurance contract

Elements of an Insurance Contract (S-P-E-A-R) – kompleto dapat.

1. Scheme to distribute losses

Such assumption of risk is part of a general scheme to distribute actual losses among a large group or
substantial number of persons bearing a similar risk.

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

3. Existence of insurable interest

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

4. Assumption of risk
The insurer assumes that risk of loss for a consideration.

5. Risk of loss
The insured is subject to a risk of loss through the destruction or impairment of that interest by the
happening of the designated peril.

NOTE: The inherent uncertainty of events is normally described in terms of risk. A contract possessing only
the last three elements enumerated above is a risk-shifting device, but NOT a contract of insurance which is
a risk-distributing device.

7.3.3 Discuss the characteristics and nature of insurance contracts

Characteristics and Nature of Insurance Contracts (Con3-Vol-A-Uni-Per)

The following are the characteristics and nature of an insurance contract:

1. Consensual

It is perfected by the meeting of the minds of the parties as to the object, cause and consideration of the
insurance contract. There should be acceptance of the application for insurance.

2. Voluntary

GR: The parties may incorporate such terms and conditions as they may deem convenient: Provided they do
not contravene any provision of law and are not opposed to public policy, law, morals, good customs, or
public order.

XPNs: Insurance contracts that may be required by law such as:

➢ For motor vehicles;

➢ As a condition to granting a license to conduct business or calling affecting the public safety or welfare;
➢ For employees; or
➢ Social insurance for members of the GSIS and for employees of the private sector covered by the SSS.
3. Aleatory

The liability of the insurer depends upon some contingent event, the happening of an uncertain future
event. Thus, it is not a contract of chance. In an insurance contract, each party takes a risk:

For the insurer – risk of having to pay the indemnity if the contingent event happens.

For the insured – risk of paying the premium without receiving anything therefor if the contingent event does
not happen except protection, which in itself is a valuable consideration.

4. Unilateral

It imposes legal duties only on the insurer who promises to indemnify the insured. It is executed as to the
insured after payment of the premium, and executory on the part of the insurer in the sense that it is not
executed until payment for a loss.

5. Conditional

It is subject to conditions the principal one of which is the happening of the event insured against.

6. Contract of Indemnity

Recovery is commensurate with the amount of the loss suffered.

GR: The insurer promises to make good only the loss of the insured.

XPN: The principle is not applicable to life and accident insurance where the result is death because life is not
capable of pecuniary estimation.

The only situation where the principle of indemnity is applicable to life insurance is when the interest of a
person insured is capable of exact pecuniary measurement. (e.g., where a creditor insures the life of his debtor
to the extent of the latter’s debt)

7. Personal

It is personal between the insurer and insured. Each party having in view the character, credit and conduct of
the other.

NOTE: Since insurance is a contract, such is considered a property in legal contemplation. However, unlike
property policies, life insurance policies are generally assignable like any chose in action.

7.3.5 Describe variable contracts

Variable contract insurance : To understand the concept of variable insurance, we must first know the
concept of cash value. In every insurance, hindi lang siya death benefits, pero meron din siyang kasamang
cash value na mag eearn ng interest. Now kung whole insurance, the interest income is fixed, kapag variable
insurance, the cash value will be invested in a mutual funds etc., and the interest income you’ll earn fluctuates
with the performance of the portfolio, hence the word variable. This investment is regulated by IC.
 INSURABLE INTEREST

Without the insurable interest in a subject matter, the contract is void.

7.3.6 Define and apply insurable interest

LIFE

C1 : Insurance upon one’s life

Ang concept nito, u are insuring your own life, for the benefit of:

➢ Himself/Herself (unli insurable interest)

➢ Estate As a general rule, there’s no
➢ Third person who may be designated as beneficiary insurable interest in the life of the
parents and ascendants (Sec 10.a)
C2. Insured the Life of another
unless you are dependent on them
Ito naman u are insuring the life of another person, for yourself. for support on your studies.

a) Spouse (legal wife only) and Children (legitimate or Rationale : Parents precedeceased
illegitimate) their children
b) Supporter of education
c) Debtor
d) Someone where you depends
e) Descendants

*a – relationship suffices to say that pecuniary interest exists.

*b,c,d – it must be established by the insured that pecuniary interest exists.

Insurable Interest on a property

insurable interest as "every interest in property, whether real or personal, or any relation thereto, or liability
in respect thereof, of such nature that a contemplated peril might directly damnify the insured."

Not necessary na ikaw ang legal or beneficial owner ng property. As a general rule if the insured derives
beenefit from the existence or suffer loss from the destruction of the property , then there’s insurable interest
on the property.

Insurable interest in property maybe:

➢ Existing interest – legal or equitable title

o Mortgagor on a property mortgaged
o Lessor on the property leased
Equitable title
- Mortagagee – property mortgage
 Legal title Equitable title
Mortgaged property Mortgagor (value of property) Mortgagee(debt)
Goods no yet delivered Seller Purchaser

➢ Inchoate interest
o Stockholder’s interest in corporate property
➢ Expectance coupled with existing interest
o Example : expectation of profit

Change of interest

As a rule, the insurable interest for a property insurance must exist at the time of perfection and the time of
loss, not necessarily in between. If hindi ito nangyari, let’s say there’s a change of interest at the time of loss,
the insurance will be suspended, hence the transferee is not entitled to the insurance until the interest in the
thing and the interest in the insurance are vested to the transferee.

XCP:

- Life, accident, health insurance

- Change happened after occurrence of injury
- A change of interest of one of the several properties separately insured (covered by one policy)
- A transfer of interest by one of the joint owners
- Policy is framed that it will inure to the benefit of whomsoever.
- Succession

Note : Kung prohibited talaga based on contract ang alienation ng property, then hindi lang suspended ang
insurance pero cancelled din. Why? Because this constitutes a breach of warranty.

BENEFICIARY

• Anyone can be a designated as beneficiary GR: The interest of a beneficiary in a life

• Anytime the beneficiary can be change
XCP:
o Irrevocable beneficiary (right to change waived)
Ano ngayon ang effect ng irrevocable beneficiary?
➢ Need consent niya sa perfection ng contract
➢ Need consent if beneficiary will change.
➢ Need consent niya
➢ Entitled siya kumuha ng loan sa policy, if there is.
➢ Need consent niya if insured will borrow or assign CSV.
Note :
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death
of the insured. In such a case, the share
forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In
the absence of other beneficiaries, the
proceeds shall be paid in accordance with the
policy contract. If the policy contract is silent,
the proceeds shall be paid to the estate of the
insured. (Sec. 12, IC)

If the problem is silent, the insurance designation is REVOCABLE. But note that when the insured does not
change the beneficiary throughout his lifetime, the designation is deemed irrevocable.
PROHIBITED BENEFICIARIES

❖ Anng mga prohibited donees ay prohibited beneficiadies din ng insurance.

Who will then get the proceeds of the insurance? The estate.

PERFECTION OF THE CONTRACT

7.3.7 Illustrate the perfection of the contract of insurance

Jason is the proud owner of a newly-built house worth P5 million. As a protection against any possible loss or damage
to his house, Jason applied for a fire insurance policy thereon with Shure Insurance Corporation (Shure) on Oct. 11,
2016 and paid the premium in cash. It took the company a week to approve Jason's application.

On Oct. 18, 2016, Shure mailed the approved policy to Jason which the latter received five (5) days later. However,
Jason's house had been razed by fire which transpired a day before his receipt of the approved policy. Jason filed a
written claim with Shure under the insurance policy. Shure prays for the denial of the claim on the ground that the
theory of cognition applies to contracts of insurance. Decide Jason's claim with reasons.

Answer:

Jason’s claim shall be denied. What governs insurance contract is the cognition theory, whereby the
insurance contract is perfected only from the time the applicant (Jason) had the knowledge about the the
acceptance of the insurer. In the case at bar, the supposed insured event happened a day before the receipt
of the approved policy. Therefore, following the cognition theory, there is no perfected contract, hence Jason
could not file a claim from Shure.

Who is the offeror and offeree in an insurance contract?

Offerer Offeree
Property or Liability insurance Insured Insurer
Health or Life Insurance: Insured Insurer
premium paid at the time of
application
Health or Life Insurance: Insurer Insured
No premium payment at the time
of application

7.3.8 Apply rescission of insurance contracts

Instance where contract of insurance may be rescinded (cancelled)

1. Nonpayment of premium;

2. Conviction of a crime arising out of acts increasing the hazard insured against;

3. A Determination by the Commissioner that the continuation of the policy would violate or would place the
insurer in violation of the Insurance Code;

4. Physical changes in the property insured which result in the property becoming uninsurable;
5. Discovery of misrepresentation;

6. Discovery of other insurance coverage that makes the total insurance in Excess of the value of the property
insured; or

7. Discovery of Willful or Omissions or Reckless acts increasing the hazard insured against. (Sec. 64, IC)

No policy of insurance other than life shall be canceled by the insurer except upon prior notice thereof to the
insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective
date of the policy, of one or more of the abovementioned instances. (Sec. 64, Ibid)

Other modes of cancelling insurance contract:

1.) Concealment
2.) Misrepresentation
3.) Breach of warranties

CONCEALMENT (Sec 27)

➢ Material facts to be disclosed was not disclosed

When can we consider an information
Requisites as “material” for purposes of
insurance?
➢ Party knows a fact that he neglects to disclose
(intentional or not) Any information that would influence
the decision of the insurer in adjusting
➢ The party concealing is buty bound to disclose the fact
the premiums of the policy, or whether
➢ The fact must be material
he’ll accept the offer or not.
➢ No warranty
➢ No facts of ascertaining the fact concealed
o For instance, nasa form na ifi-fill-out mo na tinatanong ka kung anong mga diseases meron ka,
for instance hypertension—it is better to just tick it off, kahit di ka sure kung meron ka ba
talaga at the time of the constitution of the contract, para kung sakaling namatay ka man due
to hypertension, “concealment” cannot be use as a defense of the insurer not to pay the
insurance claim. Unless u have a proof na talagang wala kang hypertension.

Other important concepts:

➢ The matter concealed need not be the cause of loss, para ma-cancel ang contract.
➢ Concealment should take place at the time the contract is entered into.
➢ Intentional or not (Good faith is not a defense)

Effects:

Within Incontestability clause Beyond incontestability clause

Life or Health insurance Rescissible Cannot be rescinded
Property and Liability insurance Rescissible during and after
incostentability clause.

MISREPRESENTATION/OMISSIONS

- Causal fraud
 - Facts not equal to assertions or stipulations
- Affirmative defense : Must be proven by the insurer by satisfactory or convincing evidence
- Oral or written
- Committed before or during the issuance of the policy

BREACH OF WARRANTY

- Ang concept neto, amy provision sa contract na ganito, for instance mga hindi dapat gawin like
in case of a fire insurance for building : hindi ka dapat mag store ng inflammable materials sa
building, pero still you stored, then that would constutitute a breach of warranty, prohibiting
the insured to collect from the insurer (rescission).
- Dapat material.

7.3.9 Discuss claims settlement and subrogation

CLAIM SETTLEMENT

When must be settled?

Life insurance If there’s maturity: maturity date
If maturity is date of death:
Within 60 days after submitting proof of death
Property insurance 30 days from receipt of proof or ascertainment of loss/damage.
90 days if no ascertainment fr. receipt of proof of loss.

What if hindi ni-settle within the prescribed period? The insured will be entitled to the:

✓ Interest : 12%
✓ Attorney fees
✓ Moral or exemplary damages

Prescription of Settlement:

1) Agreement : In no case na mas mababa sa 1 year

2) Silent : 10 years

SUBROGATION

This concept applies when a plaintiff’s property is insured (note na property or liability lang ang applicable
ang subrogation), and received indemnity from the insurance Co. for the injury or loss arising from a
wrongdoing of a third party.

Now, since the insurance Co. already paid the insured, the former shall be subrogated to the rights of the
latter against the wrongdoer.

Rationale:

- To make the person who caused the loss legally responsble for it
- To prevent the insured from having double recovery : from insurer and wrongdoer
Note:

- If the insurance is insufficient to cover the whole injury or loss, the deficiency may still eb
recovered by the insured from the wrongdoer.

INCONTESTABILITY CLAUSE

➢ Ang concept neto, si insurer binibigyan ng 2 year period from the issuance of the policy or last
reinstatement to prove any misrepresentation, fraud or concealment (grounds for rescission). Now, if
let’s say, it was not proven the same exist, then after the lapse of the 2 year period the insurance is
enforceable, proceeds will be given to the beneficiary, even if it was later on discovered that the
insured committed fraud, misrepresented or concealed a fact in the insurance contract.
➢ This is only applicable sa LIFE INSURANCE POLICY.

SUICIDE CLAUSE

➢ If the insured committed suicide within 2 years from the issuance of the policy, the insurance will not
take effect.
XCP : Insanity

ACTUAL LECPA QUESTIONS FOR INSURANCE(OCTOBER 2023)

Please don’t mass distribute.

1. Which of the following statements in relation to insurable interest is false?

a. Insurable interest is immaterial when the life insurance policy is taken by the insured on his own life.
b. Insurable interest must be pecuniary when a person insures the life of another.
c. An unsecured creditor has an insurable interest in the life of the debtor.
d. An unsecured creditor has an insurable interest in the property of the debtor.

Answer : D

2. Which of the following statements in relation to insurable interest is false? (modified)

a. The employer has an insurable interest in the life of his key employee.
b. A partner has an insurable interest in the life of his co-partner.
c. The principal has an insurable interest in the life of his surety.
d. None of the foregoing. - may nilagay sila dito

Answer : D

3. Which of the following statements in relation to the beneficiaries of life insurance is true?
a. A common-law wife may be designated as the beneficiary of the life insurance taken by common law husband
b. A beneficiary need not have any insurable interest in the life of the insured.
c. As a general rule, the beneficiary designated in the policy cannot be changed by the insured.
d. A common-law wife may be designated as the beneficiary of the life insurance taken by her.

Answer : D