INSURANCE CODE (P.D. No. 1460)I.

GENERAL CONCEPTSCONTRACT OF INSURANCE

An agreement whereby one undertakes for a consideration to indemnify another

against loss, damage or liability arising from an unknown or contingent event. (Sec. 2, par.
2, IC)

“DOING AN INSURANCE BUSINESS OR TRANSACTING AN INSURANCE BUSINESS” (Sec. 2,

par. 4)

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, not as a

mere incident to any other legitimate business of a surety;

3. Doing any insurance business, including a reinsurance business;

4. Doing or proposing to do any business in substance equivalent to any of the foregoing

II. CHARACTERISTICS OF AN INSURANCE CONTRACT

(The Insurance Code of the Philippines Annotated Hector de Leon, 2002 ed.)

1. Consensual – it is perfected by the meeting of the minds of the parties.2.

2. Voluntary – the parties may incorporate such terms and conditions as they may deem
convenient.

3. Aleatory – it depends upon some contingent event.4.

4. Unilateral – imposes legal duties only on the insurer who promises to indemnify in case of
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 – Except life and accident insurance, a contract of insurance is a

contract of indemnity whereby the insurer promises to make good only the loss of the
insured.

7. Personal – each party having in view the character, credit and conduct of the other

5 CARDINAL PRINCIPLES IN INSURANCE

1. Insurable Interest
2. Principle of Utmost Good Faith

An insurance contract requires utmost good faith (uberrimae fidei) between the parties. The
applicant is enjoined to disclose any material fact, which he knows or ought to know.

Reason:

An insurance contract is an aleatory contract. The insurer relies on the representation of the
applicant, who is in the best position to know the state of his health.

3. Contract of Indemnity

It is the basis of all property insurance. The insured who has insurable interest over a
property is only entitled to recover the amount of actual loss sustained and the burden is
upon him to establish the amount of such loss

(Reviewer on Commercial Law, Professors Sundiang and Aquino)

Rules:

a. Applies only to property insurance except when the creditor insures the life of his
debtor.
b. Life insurance is not a contract of indemnity.
c. Insurance contracts are not wagering contracts. (Sec. 4)

4. Contract of Adhesion (Fine Print Rule)

Most of the terms of the contract do not result from mutual negotiations between the
parties as they are prescribed by the insurer in final printed form to which the insured may
“adhere” if he chooses but which he cannot change. (Rizal Surety and Insurance Co., vs. CA,
336 SCRA 12)

5. Principle of Subrogation

It is a process of legal substitution where the insurer steps into the shoes of the insured and
he avails of the latter’s rights against the wrongdoer at the time of loss.

The principle of subrogation is a normal incident of indemnity insurance as a legal effect of

payment; it inures to the insurer without any formal assignment or any express stipulation
to that effect in the policy. Said right is not dependent upon nor does it grow out of any
private contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan
Insurance Co., Inc. v. CA, 165 SCRA 536; see also Art. 2207, NCC)

Purposes: (The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)

1. To make the person who caused the loss legally responsible for it.
 2. To prevent the insured from receiving a double recovery from the wrongdoer and
the insurer.

3. To prevent tortfeasors from being free from liabilities and is thus founded on
considerations of public policy.

Rules:

1. Applicable only to property insurance.

2. The insurer can only recover from the third person what the insured could have
recovered.

3. There can be no subrogation in cases:

a. Where the insured by his own act releases the wrongdoer or third party liable
for the loss or damage;

b. Where the insurer pays the insured the value of the loss without notifying the
carrier who has in good faith settled the insured’s claim for loss;

c. Where the insurer pays the insured for a loss or risk not covered by the policy.
(Pan Malayan Insurance Company v. CA, 184 SCRA 54)

d. In life insurance.

e. For recovery of loss in excess of insurance coverage

CONSTRUCTION OF INSURANCE CONTRACT

The ambiguous terms are to be construed strictly against the insurer, and liberally in favor
of the insured. However, if the terms are clear, there is no room for interpretation. (Calanoc
vs. Court of Appeals, 98 Phil. 79)

III. DISTINGUISHING ELEMENTS OF AN INSURANCE CONTRACT

1. The insured possesses an insurable interest susceptible of pecuniary estimation;

2. The insured is subject to a risk of loss through the destruction or impairment of that
interest by the happening of designated perils;

3. The insurerassumes that risk of loss

4. Such assumption is part of a general scheme to distribute actual losses among a large
group or substantial number of persons bearing somewhat similar risks; and

5. The insured makes a ratable contribution (premium) to a general insurance fund.

A contract possessing only the first 3 elements above is a risk-shifting device.

If all the elements, it is a risk-distributing device.

(The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)

IV. PERFECTION OF AN INSURANCE CONTRACT

An insurance contract is a consensual contract and is therefore perfected the

moment there is a meeting of minds with respect to the object and the cause
or consideration.

What is being followed in insurance contracts is what is known as the “cognition theory”.
Thus, “an acceptance made by letter shall not bind the person making the offer except from
the time it came to his knowledge”. (Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil.
269)

Binding Receipt

A mere acknowledgment on behalf of the company that its branch office

had received from the applicant the insurance premium and had accepted the application
subject to processing by the head office.

Cover Note (Ad Interim)

A concise and temporary written contract issued to the insurer through its duly authorized
agent embodying the principal terms of an expected policy of insurance.

Purpose:

It is intended to give temporary insurance protection coverage to the applicant pending the
acceptance or rejection of his application.

Duration:

Not exceeding 60 days unless a longer period is approved by Insurance Commissioner (Sec.
52).

Riders

Printed stipulations usually attached to the policy because they constitute additional
stipulations between the parties. (Ang Giok Chip vs. Springfield, 56 Phil. 275)

In case of conflict 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.
(C. Alvendia, The Law of Insurance inthe Philippines, 1968 ed.)

Clauses
 An agreement between the insurer and the insured on certain matter relating to the
liability of the insurer in case of loss. (Prof. De Leon, p.188)

Endorsements

Any provision added to the contract altering its scope or application. (Prof. De Leon,
p.188)

POLICY OF INSURANCE

The written instrument in which a contract of insurance is set forth. (Sec. 49)

Contents: (Sec. 51)

1. Parties

2. Amount of insurance, except in open or running policies;

3. Rate of premium;

4. Property or life insured;

5. Interest of the insured in the property if he is not the absolute owner;

6. Risk insured against; and

7. Duration of the insurance.

Persons entitled to recover on the policy (sec. 53):

The insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or to whose benefit it is made, unless otherwise specified in the policy.

Kinds:

1. OPEN POLICY – value of thing insured is not agreed upon, but left to be ascertained in
case of loss. (Sec.60)

The actual loss, as determined, will represent the total indemnity due the insured from the
insurer except only that the total indemnity shall not exceed the face value of the policy.
(Development Insurance Corp. vs. IAC, 143 SCRA 62)

2. VALUED POLICY – definite valuation of the property insured is agreed by both parties, and
written on the face of policy. (Sec. 61)
In the absence of fraud or mistake, the agreed valuation will be paid in case of total loss of
the property, unless the insurance is for a lower amount.

3. RUNNING POLICY – contemplates successive insurances and which provides that the
object of the policy may from time to time be defined (Sec. 62)

V. TYPES OF INSURANCE CONTRACTS

1. Life insurance

a. Individual life (Secs. 179–183, 227)

b. Group life (Secs. 50, last par., 228)

c. Industrial life (Secs. 229–231)

2. Non-life insurance

a. Marine (Secs. 99–166)

b. Fire (Secs. 167–173)
c. Casualty (Sec. 174)

3. Contracts of bonding or suretyship (Secs. 175–178)

Note:

1. Health and accident insurance are either covered under life (Sec. 180) or casualty
insurance. (Sec. 174).

2. Marine, fire, and the property aspect of casualty insurance are also referred to
as property insurance.

VI. PARTIES TO INSURANCE CONTRACT

1. Insurer - Person who undertakes to indemnify another.

For a person to be called an insurance agent, it is necessary that he should perform

the function for compensation. (Aisporna vs. CA, 113 SCRA 459)

2. Insured - The party to be indemnified upon the occurrence of the loss. He must have
capacity to contract, must possess an insurable interest in the subject of the insurance and
must not be a public enemy.

A public enemy - a nation with who the Philippines is at war and it includes every
citizen or subject of such nation.

3. Beneficiary - A person designated to receive proceeds of policy when risk attaches.

Rules in the designation of the beneficiary:

a. LIFE

i. A person who insures his own life can designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the life of the insured subject to the
limitations under Art.739 and Art. 2012 of the NCC.

Reason: In essence, a life insurance policy is no different form a civil donation insofar as the
beneficiary is concerned. Both are founded on the same consideration of liberality. (Insular
Life vs. Ebrado, 80 SCRA 181)

ii. A person who insures the life of another person and name himself as the beneficiary must
have an insurable interest in such life. (Sec. 10)

iii. As a general rule, the designation of a beneficiary is revocable unless the insured
expressly waived the right to revoke in the policy. (Sec. 11)

iv. The interest of a beneficiary in a life insurance policy shall be forfeited when the
beneficiary is the principal accomplice or accessory in willfully bringing about the death of
the insured in which event, the nearest relative of the insured shall receive the proceeds of
said insurance if not otherwise disqualified.(Sec. 12)

b. PROPERTY

The beneficiary of property insurance must have an insurable interest in such

property, which must exist not only at the time the policy takes effect but also when the
loss occurs. (Sec. 13 and 18).

Effects of Irrevocable Designation of Beneficiary

Insured cannot:

1. Assign the policy

2. Take the cash surrender value of the policy
3. Allow his creditors to attach or execute on the policy;
4. Add new beneficiary; or
5. Change the irrevocable designation to revocable, even though the change is just and
reasonable

The insured does not even retain the power to destroy the contract by refusing to pay the
premiums for the beneficiary can protect his interest by paying such premiums for he has
an interest in the fulfillment of the obligation. (Vance, p. 665, cited in de Leon, p. 101, 2002
ed.)

VII. INSURABLE INTEREST

A. In General
A person has an insurable interest in the subject matter if he is so connected, so situated, so
circumstanced, so related, that by the preservation of the same he shall derive pecuniary
benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice.

B. Life

Every person has an insurable interest in the life and health:

a. of himself, of his spouse and of his children;

b. of any person on whom he depends wholly or in part for education or support;

c. of any person under a legal obligation to him to pay money or respecting property or
services, of which death or illness might delay or prevent performance; and

d. of any person upon whose life any estate or interest vested in him depends. (Sec. 10)

When it should exist: When the insurance takes effect; not thereafter or when the loss
occurs.

Amount: The measure of insurable interest in property is the extent to which the insured
might be dignified by loss or injury thereof.

INSURABLE INTEREST IN LIFE

1. Must exist only at the time the policy takes effect and need not exist at the time of
loss
2. Unlimited except in life insurance effected by creditor on life of debtor.
3. The expectation of benefit to be derived from the continuedexistence of life need no
t have any legal basis whatever. A reasonable probability is sufficient without more.
4. The beneficiary need not have an insurable interest over the life of the insured if the
insured himself secured the policy. However, if the life insurance was obtained by
the beneficiary, the latter must have insurable interest over the life of the insured.

INSURABLE INTEREST INPROPERTY

1. The beneficiary must have insurable interest over the thing insured
2. Limited to actual value of interest in property insured.
3. An expectation of a benefit to be derived from the continued existence of the
property insured must have a legal basis.
 4. Must exist at the time the policy takes effect and when the loss occurs

SPECIAL CASES

1. In case of a carrier or depositary

A carrier or depository of any kind has an insurable interest in a thing held by him as such,
to the extent of his liability but not to exceed the value thereof (Sec. 15)

2. In case of a mortgaged property

The mortgagor and mortgagee each have an insurable interest in the property mortgaged
and this interest is separate and distinct from the other.

a. Mortgagor – As owner, has an insurable interest therein to the extent of its value, even
though the mortgage debt equals such value. The reason is that the loss or destruction of
the property insured will not extinguish the mortgage debt.

b. Mortgagee – His interest is only up to the extent of the debt. Such interest continues until
the mortgage debt is extinguished.

The lessor cannot be validly a beneficiary of a fire insurance policy taken by a lessee over his
merchandise, and the provision in the lease contract providing for such automatic
assignment is void for being contrary to law and public policy. (Cha vs. Court of Appeals, 227
SCRA 690

STANDARD OR UNION MORTGAGECLAUSE VS.

Subsequent acts of the mortgagor cannot affect the rights of the assignee

OPEN OR LOSS PAYABLE MORTGAGE CLAUSE

Acts of the mortgagor affect the mortgagee. Reason: Mortgagor does not cease to be a
party to the contract. (Secs. 8 and 9)

Effects of Loss Payable Clause

a. The contract is deemed to be upon the interest of the mortgagor; hence, he does not
cease to be a party to the contract.

b. Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance
affects the mortgagee even if the property is in the hands of the mortgagee.
c. Any act, which under the contract of insurance is to be performed by the mortgagor, may
be performed by the mortgagee with the same effect.

d. In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit.

e. Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished.

In case a mortgagee insures his own interest and a loss occurs, he is entitled to the
proceeds of the insurance but he is not allowed to retain his claim against the mortgagor as
the claim is discharged but it passes by subrogation to the insurer to the extent of the
money paid by such insurer. (Palileo vs. Cosio)

VIII. RISK

What may be insured against:

1. Future contingent event resulting in loss or damage – Ex. Possible future fire

2. Past unknown event resulting in loss or damage – Ex. Fact of past sinking of a vessel
unknown to theparties3.Contingent liability – Ex. Reinsurance

IX. PREMIUM PAYMENTS

Consideration paid an insurer for undertaking to indemnify the insured against a specified
peril.

Basis of the right of the insurer to collect premiums: Assumption of risk.

GENERAL RULE:

No policy issued by an insurance company is valid and binding until actual payment of
premium. Any agreement to the contrary is void. (Sec. 77)

EXCEPTIONS:

1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)
2. When the insurer makes a written acknowledgment of the receipt premium; (Sec.
78)
3. Section 77 may not apply if the parties have agreed to the payment of the premium
in installments and partial payment has been made at the time of the loss. (Makati
Tuscany Condominium Corp. v. CA, 215SCRA 462)
4. Where a credit term has been agreed upon. (UCPB vs. Masagana Telemart, 308 SCRA
259)
 5. Where the parties are barred by estoppel. (UCPB vs. Maagana Telemart, 356 SCRA
307)

Section 77 merely precludes the parties from stipulating that the policy is valid even if the
premiums are not paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)

Effect of Acknowledgment of Receipt of Premium in Policy:

Conclusive evidence of its payment, so far as to make the policy binding, notwithstanding
any stipulation therein that it shall not be binding until the premium is actually paid. (Sec.
78)

ENTITLEMENT OF INSURED TO RETURN OF PREMIUMS PAID

A. Whole:

1. If the thing insured was never exposed to the risks insured against; (Sec. 79)

2. If contract is voidable due to the fraud or misrepresentation of insurer or his agents;

(Sec.81)

3. If contract is voidable because of the existence of facts of which the insured was ignorant
without his fault; (Sec. 81)

4. When by any default of the insured other than actual fraud, the insurer never incurred
liability; (Sec. 81)

5. When rescission is granted due to the insurer’s breach of contract. (Sec. 74)

B. Pro rata:

1.When the insurance is for a definite period and the insured surrenders his policy before th
e termination thereof;

Exceptions:

a. policy not made for a definite period of time

b. short period rate is agreed uponc. life insurance policy

2. When there is over-insurance (Sec. 82);

Instances when premiums are not recoverable:

1. When the risk has already attached and the risk is entire and indivisible.

2. In life insurance.

3. When the contract is rescindable or rendered void ab initio by the fraud of the insured.
4. When the contract is illegal and the parties are in pari delicto

PREMIUM VS.

1. Levied and paid to meet anticipated losses.

2. Payment is not enforceable against the insured.
3. Not a debt.

ASSESSMENT

1. Collected to meet actual losses.

2. It becomes a debt once properly levied unless otherwise agreed.
3. Payment is enforceable once levied unless otherwise agreed upon.

X. TRANSFER OF POLICY

1. Life Insurance

It can be transferred even without the consent of the insurer except when there is
a stipulation requiring the consent of the insurer before transfer. (Sec. 181)

Reason: The policy does not represent a personal agreement between the insured and
the insurer.

2. Property insurance

It cannot be transferred without the consent of the insurer.

Reason: The insurer approved the policy based on the personal qualification and the
insurable interest of the insured.

3. Casualty insurance

It cannot be transferred without the consent of the insurer. (Paterson cited in de Leon p. 82)

Reason: The moral hazards are as great as those of property insurance.

CHANGE OF INTEREST IN THE THING INSURED

The mere (absolute) transfer of the thing insured does not transfer the policy, but suspends
it until the same person becomes the owner of both the policy and the thing insured. (Sec.
58)

Reason: Insurance contract is personal.

GENERAL RULE:

A change of interest in any part of a thing insured unaccompanied by a corresponding

change of interest in the insurance suspends the insurance to an equivalent extent, until the
interests in the thing and the interest in the insurance are vested in the same person. (Sec.
20)

EXCEPTIONS:

1. In life, health and accident insurance.(Sec. 20);

2. Change in interest in the thing insured after occurrence of an injury which results in a
loss.(Sec. 21);

3. Change in interest in one or more of several distinct things separately insured by

one policy.(Sec. 22);

4. Change of interest, by will or succession, on the death of the insured. (Sec. 23);

5. Transfer of interest by one of several partners, joint owners, or owners in common, who
are jointly insured, to others. (Sec. 24);

6. When a policy is so framed that it will inure to the benefit of whomsoever, during the
continuance of the risk, may become the owner of the interest insured. (Sec. 57);

7. When there is an express prohibition against alienation in the policy, in case of alienation,
the contract of insurance is not merely suspended but avoided. (Art. 1306, NCC).

XI. ASCERTAINMENT AND CONTROL OF RISK AND LOSSA. Four Primary Concerns of the
Parties:

1. Correct estimation of the risk;

2. Precise delimitation of the risk;