INSURANCE LAW

CHAPTER I. GENERAL CONCEPTS

SEC. 1. This Decree shall be known as the Insurance Code.
Definition.
SEC 2. Whenever used in this Code, the following terms shall have the respective meanings
hereinafter set forth or indicated, unless the context otherwise requires:
(a) 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 insurance 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.
(b) 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 business or activity of the surety;
3. Doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
4. Doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.
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
insurance business.
Contract 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.
-

A contract whereby a party, called the insurer, undertakes for a consideration to pay
another party called the insured, or his beneficiary, upon the happening of the peril
insured against, whereby the party insured or his beneficiary, suffers loss or damage or is
exposed to liability.
A contract of surety, for purposes of regulation, shall be deemed a contract of insurance
within the meaning of the Insurance Code when made by a surety who or which, as such,
is doing an insurance business

Pre-need plans contracts, agreements, deeds, or plans for the benefit of the planholders which
provide for the performance of future service/s, payment of monetary considerations or delivery
of other benefits at the actual need or agreed maturity date, as specified therein, in exchange for
cash or installment amounts with or without interest or insurance coverage.
Variable contracts any contract or policy on either a group or an individual basis issued by an
insurance company providing for benefits or other contractual payments or values thereunder to
vary so as to reflect investment results of any segregated portfolio of investments or of a
designated separate account in which amounts received in connection with such contracts shall
have been placed and accounted for separately and apart from other investments and accounts.

Bancassurance means the presentation and sale to bank customers by an insurance company
of its insurance products within the premises of the head office of such bank duly licensed by the
BSP or any of its branches under such rules and regulations which the Commissioner and the BSP
shall promulgate.
Mutual Insurance Companies entities that are doing an insurance business within the
contemplation of the Insurance Code. It is owned by the policy holders and is designed to
promote the welfare of its members and the money collected from among them is solely for their
own protection. In a sense, the member is both the insurer and the insured.
Elements of Insurance Contract:
1.
2.
3.
4.

The insured has an insurable interest;

The insured is subject to a risk of loss by the happening of the designed peril;
The insurer assumes the risk;
Such assumption of risk is part of a general scheme to distribute actual losses, among a
large group of persons bearing a similar risk;
5. In consideration of the insurers promise, the insured pays a premium.
- In addition to the foregoing elements, the insurance contract must have all the essential
elements of a valid contract.
- it is required that the assumption of risk by the insurer is part of a general scheme to distribute
actual losses among a large group of persons bearing similar risk.
Risk an element of an insurance contract that the insured is subject to a risk of loss by the
happening of a designated peril.
SEC. 3. 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 against, subject to
the provisions of this chapter.
The consent of the spouse is not necessary for the validity of an insurance policy taken out by a
married person on his/her life or that of his/her children.
All rights, title and interest in the policy of insurance taken out by an original owner on the life or
health of the person insured shall automatically vest in the latter upon the death of the original
owner, unless otherwise provided for in the policy.
-

Uncertainty is a feature of insurance because it requires the presence of an unknow and

contingent event.

Requirements of Insurable Interest on the point of view of the Insurer:

1.
2.
3.
4.
5.
6.

There must be a large number of homogenous exposure units;

The loss must be accidental and unintentional;
The loss must be determinable and measurable;
The loss should not be catastrophic;
The chance of loss must be calculable;
The premium must be economically feasible.

- While loss should not be catastrophic, the loss must not be too miniscule as to be trivial, which
are not insurable.
- What is insurable is pure risk, not speculative risk. Pure risk is also referred to as insurance risk
or actuarial risk.
Pure Risk v. Speculative Risk

Pure risk is that which is defined as a situation where the possibility is either the person
involved will suffer a loss or he will not suffer a loss; on the other hand, speculative risk is
that which may result in gain or loss.

Risk v. Peril
-

Designated peril in insurance is the specific cause of the loss that is insured against, while
risk is the uncertainty that the property or person insured will be lost or damaged by
reason of the designated or some other peril.

Risk v. Hazard
-

Hazards are circumstances which increase the risk.

3 kinds of Hazard:
1. Physical refers to the physical condition of the thing or the person that increases the
chance of loss;
2. Moral involves dishonesty of character or character defects in the individual that
increases the chance of loss;
3. Morale includes carelessness or indifference to a loss because of the existence of the
insurance.
Risk v. Loss
-

Loss is the end result of the risk insured against; it involves diminution of value or
disappearance of value resulting from a risk.

Nature and purpose:

-

A plan of dealing with risk of economic loss resulting from the happening of a future or
contingent event, or a past event unknown to the parties. The insured sacrifices a present
monetary loss in the form of premium payment in order to avoid a greater loss in the
future.

How people deal with Risks:

1. Risk avoidance people avoid a particular activity to escape the risk of loss;
2. Risk retention the person involved will shoulder all the damages that may be incurred;
3. Risk transfer one who is normally responsible will make the other party shoulder the loss
through contract;
4. Loss control may either be loss avoidance or loss retention;
5. Insurance
How Insurance deals with Risk:
-

Insurance is a risk distributing device as the risk is not actually transferred to the insurer
but a number of people constituting the client of the insurer contribute to a common fund
by paying premiums.

Law of Large Numbers the greater the number of exposures, the more closely will the actual
results approach the probably results that are expected from an infinite number of exposures.
Characteristics of an Insurance Contract:
1. Aleatory one of the parties, or both, reciprocally bind themselves to give or to do
something in consideration of what the other shall give upon the happening of an event
which is uncertain, or which is to occur at an indeterminate time. Insurance contract is

2.

3.

4.
5.

6.

aleatory in the sense that what the insured will pay in pesos is not equal to what he will
receive in case of loss.
Unilateral only the insurer has the obligation to indemnify the insured upon payment of
the premium. The payment of the premium is not an obligation per se but an event that
gives the contract obligatory force.
Personal the contract is entered into with due consideration to the circumstances of the
parties. Each party enter into a contract in view of the character, credit, and conduct of
the other.
Consensual insurance contract is perfected by mere consent without the need of delivery
or any formality;
Uberrimae Fidae insurance contract is one of perfect good faith. Both parties must not
only perform their obligations in good faith but must also avoid material concealment or
misrepresentations.
Executory & Conditional it is executory to the insurer and subject to conditions, the
principal of which is the happening of the event insured against.

General Benefits of Insurance:

1. Gives peace of mind;
2. Keeps families and business together;
3. Increases marginal utility of assets because it serves as intermediary between those who
have small need for a minor amount of capital and those who have great needs for
immediate use of large sums to meet losses they have suffered;
4. Facilitates credit transactions;
5. Stimulates savings;
6. Provides investment capital;
7. Provides incentive to business or individuals because they are relieved of fortuitous losses;
8. Helps in loss prevention.
When is insurance contract perfected?
-

An insurance contract is consensual, hence, it is perfected by the meeting of the minds

with respect to the object and consideration of the contract.

Cognition theory the contract is perfected the moment the offeror learns of the acceptance
of his offer by the other party.
Kinds of Insurance:
1. Social Insurance compulsory in nature and are designed to provide a minimum of
economic security for large groups of persons, particularly in the lower income classes.
Ex. SSS, GSIS
Classification According to Object:
a. Life or Health Insurance
b. Property Insurance
c. Liability Insurance

Special Types of Insurance those with specific provisions in the Insurance Code, such as the
following:
a.
b.
c.
d.

Marine Insurance;
Casualty Insurance;
Fire Insurance;
Life Insurance;

e. Compulsory Third Party Liability Insurance;

f. Microinsurance

1. Classification of Life Insurance:

a. Term Insurance life of a person is insure on a temporary basis or for a limited period;
b. Whole life Insurance a person is insured during his entire lifetime.
c. Endowment Policy the insured is paid a certain amount or the face value of the policy if
the insured survives a certain period and the beneficiary will get the proceeds if the insure
does not survive;
d. Industrial life form of life insurance under which the premiums are payable either
monthly or oftener, if the face amount of insurance provided in any policy is not more than
five hundred times that of the current statutory minimum daily wage in Manila City, and if
the words industrial life are printed upon the policy as part of the descriptive matter.
2. Classification of Property Insurance:
a. Fire Insurance and Allied Insurance;
b. Marine Insurance;
c. Casualty Insurance
Microinsurance a financial product or service that meets the risk protection needs of the poor
where:
a. The amount of contributions computed on a daily basis does not exceed 7.5% of the
current daily minimum wage rate for nonagricultural workers in Metro Manila;
b. The maximum sum of guaranteed benefits is not more than 1000 times of the current
daily minimum wage rate for nonagricultural workers in Metro Manila.
Principle of Indemnity the insured should no collect more than the actual cash value of the loss.
Exceptions:
a. Life insurance because the amount to be paid can never equal to the value of the life that
is being insured;
b. Valued policy the value is fixed regardless of the actual cash value in case of total loss.
Manifestations:
a.
b.
c.
d.

Insurable interest is indispensable;

The value of the interest destroyed or damage is generally the measure of indemnity;
Co-insurance clause in marine insurance;
Subrogation in property insurance.

CHAPTER II. THE PARTIES

a. Insurer the party who promises to pay in case loss results because the peril insured
against occurred;
b. Insured the owner of the policy whose property or life is insured or who took out the
insurance over the life of persons in whom he has insurable interest
c. Beneficiary the person in whose favor the insurance is taken by the insured and who will
receive the proceeds of the insurance in case of loss.
Capacity an insurance contract is voidable if the insured is a minor, insane person or is
otherwise incapacitated to enter into an insurance contract. However, a capacitated person

can validly enter into an insurance contract insuring the life of an incapacitated person life a
minor.
SEC. 3. 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 against, subject to
the provisions of this chapter.
The consent of the spouse is not necessary for the validity of an insurance policy taken out by a
married person on his/her life or that of his/her children.
All rights, title and interest in the policy of insurance taken out by an original owner on the life or
health of the person insured shall automatically vest in the latter upon the death of the original
owner, unless otherwise provided for in the policy.
-

Married women can enter into insurance contract without consent of the husband and vice
versa. She/he may take out an insurance on the life of his children, even those with
another woman/man.
Minors cannot enter into insurance contract. If he/she does, it is voidable for absence of
capacity.

Effect of Death of Owner:

-

Upon death of the original owner, all rights, title and interest in the policy taken out on the
life of a person shall automatically vest on the latter unless otherwise provided in the
policy.

SEC. 4. The preceding section does not authorize an insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a lottery drawing a prize.
SEC. 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions
can apply.
Who may be an insurer?
SEC. 6. Every corporation, partnership, or association, duly authorized to transact insurance
business as elsewhere provided in this Code, may be an insurer.
-

The term insurer or insurance company includes all partnership, associations, cooperatives
or corporations or entities, engaged as principals in the insurance business, professional
reinsurers, whether domestic or foreign.

Exception:
-

Mutual benefit association- any society , association or corporation, without capital stock,
formed not for profit but mainly for the purpose of paying sick benefits to members, or of
furnishing financial support to members while out of employment, or etc.

Certificate of Authority no insurance company shall transact any business in the Philippines
until after it shall have obtained a certificate of authority for that purpose from the Insurance
Commissioner upon application therefor and payment of fees.
Requirements for Companies to be Insurer:
a. Possessed of the capital and assets required of an insurance corporation doing the same
kind of business in the Philippines and invested in the same manner;
b. Issued with a Certificate of Authority
Term of Certificate of Authority 3 years, renewable every 3 years thereafter, subject to the
companys continuing compliance with the provisions of the Insurance Code.

Grounds for Disapproval of Application:

a. If refusal will best promote the interest of the people of this country;
b. If there is evidence that the applicant company is not qualified by the laws of the Phils to
transact business herein;
c. If grant of such authority appears to be unjustified in light of the following:
--- economic requirements;
--- the direction, administration, integrity and responsibility of the organizers and
administrators;
--- financial organization and the amount of capital;
--- reasonable assurance of the safety of the interest of the policyholders and the public.
d. The name of the company applicant belongs to any other known company transacting a
similar business in the Philippines or its name is so similar as to be calculated to mislead
the public.
Prohibited Acts of Insurance Companies:
a. Transact in the Phils both business of life and non-life insurance concurrently unless
specifically authorized to do so;
b. To have equity with an adjustment company (neither shall an adjustment company have
an equity in an insurance company);
c. Negotiate any contract of insurance other than is plainly expressed in the policy or other
written contract issued to or to be issued as evidence thereof;
d. Directly or indirectly offer any rebate from the premiums which is specified in the policy or
any special favor or advantage in the dividends of other benefits to accrue thereon;
e. Give or offer to give any valuable consideration or inducement of any kind, directly or
indirectly, which is not specified in such policy or contract of insurance;
f. Make any discrimination against any Filipino in the sense that he given less advantageous
rates, dividends or other policy conditions or privileges than are accorded to other
nationals because of his race;
g. Issue or circulate or cause or permit to be issued or circulated any literature, etc,
misrepresenting the terms of any policy issued by an insurance company of the benefits or
advantages promised thereby, or any misleading estimate of the dividends or share of
surplus to be received thereon;
h. Use any name or title of any policy or class of policies misrepresenting the true nature
thereof;
i. Make any misleading representation or incomplete comparison of policies to any person
insured in such company for the purpose of inducing or tending to induce such person to
lapse, forfeit, or surrender his said insurance.
Who may be insured:
SEC 7. Anyone except a public enemy may be insured.
Who is a public enemy:
-

A state, a the citizens thereof, which is at war with the Phils.

Effect of war:
-

If there is no war yet at the time of the taking of the policy, but war ensues between Phils
and the country of the insured, the insurance policy is deemed abrogated.

Beneficiary:

May be a third person. Unless he is the insured himself, the beneficiary is not one of the
contracting parties. No other party can recover the proceeds of an insurance contract
other than the beneficiary.

When a beneficiary is designated:

-

In life insurance, if there is a named beneficiary and the designation is not invalid, it is the
designated beneficiary who is entitled to recover the proceeds and not the heirs of the
insured.
The insurer has no obligation to turn over the proceeds of the insurance to third persons
even if the third persons are immediate relatives if there is a designated beneficiary.

When there is no beneficiary designated:

-

When there is no designated beneficiary, or the designation is void, that the laws of
succession are applicable.
If there is no designated beneficiary, the proceeds shall form part of the estate of the
deceased insured.

Effect of use of conjugal funds:

-

If conjugal funds were used to pay for the premium, the proceeds will constitute
community property if the policy was made payable to the deceaseds estate. One half
belongs to the estate, and the other half to the surviving spouse.
However, if there is a designated beneficiary, the proceeds shall be paid to him/her
regardless of the source of the premium.

Nature of Designated of Beneficiary:

General Rule: Revocable
Exception: when irrevocable nature is expressly provided in the policy.
Effect of irrevocability of designated beneficiary:
-

Beneficiary cannot be replaced. The right of the designated beneficiary cannot be affected
by the subsequent assignment of the insurance policy.

Exception: in case of legal separation, the innocent spouse may, despite the stipulation that the
designated beneficiary is irrevocable, revoke the designation upon written notification thereof to
the insured.
Revocation during the Lifetime:
-

In the event the insured does not change the beneficiary during his lifetime, the
designation shall be deemed irrevocable

Forfeiture of right of beneficiary:

a. If the beneficiary is a principal, accessory or accomplice in willfully bringing about the
death of the insured;
To whom will proceeds go upon forfeiture:
a. Pass to other beneficiaries;
b. If there are no other beneficiaries, the proceeds shall be paid in accordance with the policy
contract;
c. If there are no other beneficiaries and there is no provision in the policy contract, the
proceeds shall be paid to the estate of the insured.

Grounds for disqualification of beneficiary:

Considering that insurance contracts partake of the nature of donation inter vivos, the
prohibitions for donation apply to contract of insurance as well:
a. Those made between persons who are guilty of adultery or concubinage at the time of
donation;
b. Those made between persons found guilty of the same criminal offense, in consideration
thereof;
c. Those made to a public officer of his wife, descendants and ascendants, by reason of his
office.

Conviction is not necessary in order for one to be disqualified. Guilt for

concubinage/adultery may be proved by mere preponderance of evidence in the same
action for recovery and there is no need for a criminal conviction.
While spouses are prohibited to donate to each other, this prohibition does not apply to
insurance contracts, hence, one spouse can designate the other as beneficiary.
While the concubine is disqualified, the illegitimate child is not, hence, upon
disqualification of the concubine, her share should go to the illegitimate child who is also a
beneficiary.

Transfer of Life Insurance:

-

Life insurance policy can be transferred even without the consent of the insurer.

How to transfer:
-

No formalities are required. Mere delivery of proof or evidence of right, such as the policy,
may transfer ownership.
Notice to the insurer is not necessary to validate the transfer, nevertheless, it is
advantageous to the assignee to give notice to the insurer of such transfer.

Effect of Double Assignment: Who has a better claims?

Two views on the matter:
a. English Rule assignee who first gives notice is the one entitled to the proceeds if he has
no notice of ay prior assignment;
b. American rule the assignee under the first assignment has the preferable claim.
* The American rule is applicable here in the Phils as it is in consonance with the principle of
prius tempore portior jure first in time, stronger in right.
Assignment of Property Insurance:
-

Property insurance may be transferred/assigned so long as the transferee has insurable

interest in the thing insured, nevertheless, the insurers assent is necessary for the
transfer.

Exception to the rule that consent of the insurer is necessary:

-

Transfer through will or succession and other instances of transfer by operation of law

Insurance Broker and Insurance Agent:

-

Before any person may act as agent or broker for an insurance company, he/she must first
secure a license from the Insurance Commissioner which must be renewed every 3 years
thereafter.

Insurance agent defined:

-

Any person who, for compensation, solicits or obtains insurance on behalf of any insurance
company or transmits for a person other than himself an application for a policy or
insurance contract to or from such company or offers or assumes to act in the negotiating
od such insurance.
An insurance agent is an independent contractor and not an employee of the company
represented. However, in view of the nature of business insurance as one imbued with
public interest, the insurance company, upon approval of the Commissioner, may exercise
wide latitude supervising the activities of their agents.

General Agent an agent of an insurance company who is empowered by a written power of

attorney duly executed by such insurance company, and registered with the Insurance
Commissioner, who received notices summons and legal processes for and in behalf of the
insurance company concerned in connection with actions or other legal proceedings against said
insurance company.
Classes of Agents:
a. Salaried employees who keep definite hours and work under the control and supervision of
the company;
b. An independent contractor who work on commission basis.
Governing law:
-

The provisions on agency of the New Civil Code shall govern the insurance agents.

NOTE: Collusion between the insured and the agent entitled the insurer to deny the claim if a
material fact regarding the health of the insured was concealed by the agent with the
participation of the insured.
Insurance Broker defined:
-

Any person who, for any compensation, commission or other thing of value acts or aids in
any manner in soliciting, negotiating or procuring the making of any insurance contract or
in placing risk or taking out insurance, on behalf of an insured other than himself.
While an insurance agent normally represents the insurer, the insurance broker acts for
and in behalf of the insured.

Receipt of Premium
-

An agent or broker who receives premium, does so in a fiduciary capacity. Receipt of

premium by the agent or the broker who delivered the policy to the insured is deemed
receipt by the principal and is binding.

NOTE: the Insurance Commissioner has no jurisdiction over the relationship between the
insurance company and the agent/broker.
CHAPTER III. INSURABLE INTEREST
Definition an interest, arising from the relation of the party obtaining the insurance, either as
creditor of or surety for the assured, or from ties of blood or marriage to him, as will justify a
reasonable expectation of advantage or benefit from the continuance of his life.
SEC. 10. 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, or in whom
he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of money, or respecting
property or services, of which death or illness might delay or prevent the performance;
(d) Of any person upon whose life any estate or interest vested in him depends;
Classes of Insurable Interest in Life Insurance:
1. Insurable interest in insureds own life;
2. Insurable interest in the life of another person
--- relationship by blood;
--- business relationship
--- other pecuniary interest
Blood relationship limited to insurable interest over the life of a spouse, or of ones children.
Education or support the law does not require that the one giving the support is legally
obligated. Anybody may support anothers educational endeavor
Pecuniary Interest a partner on the life of his business partner has an insurable interest;
employer to employees.
Creditor creditor has an insurable interest on the life of the debtor but the latter has none as he
does not stand to be damnified by the death of the former.
Sec. 11. The insured has the right to change the beneficiary, unless he has waived such right in
said policy. However, failure to revoke the designation during lifetime, the designation shall be
deemed irrevocable.
SEC 12. Forfeiture of the rights of the beneficiary.
Insurable Interest on Property Insurance:
SEC. 13. 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, is
an insurable interest.
Kinds of Insurable Interest on Property Insurance:
Sec. 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest;
(c) An expectancy, coupled with an existing interest in that out of which the expectancy
arises.
Insurable interest in property exists in any of the following:
1. When the insured possesses a legal title to the property insured, whether vested or
contingent, defeasible or undefeasible;
2. When he has equitable title of whatever character and in whatever manner acquired;
3. When he possesses a qualified property or possessory right in the subject of the
insurance;
4. When he has a mere possession or right of possession;
5. When he has neither possession of the property nor respect to it that he may suffer from
its destruction, loss of a legal right dependent upon its continued existence.
Existing interest includes interest of an owner. Title or ownership is not essential.

Inchoate interest shareholder has an inchoate interest founded on existing interest over the
properties of the corporation;
Expectancy the same must also be founded on existing interest.
Insurable Interest in Life Insurance v. Insurable Interest in Property Insurance:
a. Unlimited unless secured by a debtor; limited to the value of the property;
b. Must exist at the time of the perfection of the contract; must exist at the time of the
perfection of the contract and at the time of the loss;
c. Expectation of benefit need not have legal basis or need not be based on legally
enforceable obligation; expectation of benefit must have legal basis;
d. Insurable interest is not necessary if the insured took out the policy on his own life and
designated another. If one took out an insurance on the life of another, the beneficiary
must have an insurable interest on such life; beneficiary must have insurable interest.
Insurable Interest of Bailee:
SEC. 15. A carrier or depositary 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.
Insurable Interest of Mortgagor and Mortgagee:
-

Each has an independent insurable interest and both interests may be covered by one
policy, or each may take out a separate policy covering his interest, either at the same or
at separate times.
The mortgagors insurable interest covers the full value of the property
The mortgagees insurable interest is limited to the value of the mortgage or the extent of
the value of the debt.

What may not be insured:

Sec. 16. A mere contingent or expectant interest in any thing, not founded on an actual right to
the thing, nor upon any valid contract to it, is not insurable.
Measure on insurable interest in property:
SEC. 17. The measure of an insurable interest in property is the extent to which the insured
might be damnified by loss or injury thereof.
SEC 18. No contract or policy of insurance shall be enforceable except for the benefit of some
person having an insurable interest in the property insured.
When must insurable interest exist:
Sec. 19. An interest in property insured must exist when the insurance takes effect, and when the
loss occurs, but need not exist in the meantime; and interest in the life or health of a person
insured must exist when the insurance takes effect, but need not exist thereafter or when the
loss occurs.
Effect of change of interest in any part of the thing insured unaccompanied by the corresponding
change in interest in the insurance:
SEC. 20. Except in the cases specified in the next four sections, and in cases of life, accident, and
health insurance, a change in interest in any part of a thing insured unaccompanied by a
corresponding change in interest in the insurance, suspends the insurance to an equivalent

extent, until the interest in the thing and the interest in the insurance are vested in the same
person
-

Mere transfer of a 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.
However, transfer or change of interest in the property with the consent of the insurer
will not suspend the policy. In fact, the policy may be written in such a way that consent is
given in advance.

Exceptions to suspension:
Sec. 21. A change in interest in a thing insured after the occurrence of an injury which results in a
loss, does not affect the right of the insured to indemnity for the loss;
SEC. 22. A change in interest in one or more several distinct things, separately insured by one
policy, does not avoid the insurance as to the others;
SEC. 23. A change on interest, by will or succession, on the death of the insured, does not avoid
an insurance; and his interest in the insurance passes to the person taking his interest in the
thing insured.
SEC. 24. A transfer of interest by one of several partners, joint owners, or owners in common,
who are jointly insured, to the others, does not avoid an insurance even though it has been
agreed that the insurance shall cease upon alienation of the thing insured.
Insurable interest of beneficiary in property insurance:
-

The beneficiary has to have an insurable interest on the property insured, otherwise, it will
be considered a wagering contract, which is void.

Insurable interest of Beneficiary in Life Insurance:

-

When a person takes out a life insurance on his own life, the beneficiary need not have an
insurable interest, while if a person takes out an insurance policy on the life of someone
else, he has to have an insurable interest thereof. This rule applies as well if a third person
is designated as beneficiary.

SEC 25. Every stipulation in a policy of insurance for the payment of the loss whether the person
insured has or has not any interest in the property insured, or that the policy shall be received as
proof of such interest, and every policy executed by way of gaming or wagering, is void.
CHAPTER IV. PREMIUM
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid, except in the case of a life or industrial life policy whenever the
grace period provision applies, or whenever under the broker and agency agreements with duly
licensed intermediaries, a 90-day credit extension is given. No credit extension to a duly-licensed
intermediary should exceed 90 days from date of issuance of the policy.
-

No insurance contract shall be binding without payment of premium.

When payment accrues:

-

Payment may be made to the insurer himself or its agent.

Payment to an agent having authority to receive or collect payment is equivalent to
payment to the principal himself.

Effect of Non-payment.
-

The obligation of the insurer will not become valid and binding if the first premium has not
been paid. If the subsequent premiums have not been paid, the policies issued will be
deemed to have lapsed.
The insurer cannot demand payment of unpaid premiums as the only effect is the lapsing
of the insurance policy.

General Rule:
-

Non-payment of premium does not bind the contract of policy.

Exceptions:
1. When the grace period applies in case of life and industrial life policy;
2. When there is an acknowledgment in the policy or receipt that the premium has been
paid;
3. When there is an agreement the premium shall be payable on installment;
4. When there is a credit extension;
5. When there is estoppel.

A. Grace Period
- Period after the date of the premium is due during which the premium can be paid with no
interest charged and the policy remaining in force.
- This exception presupposes that the insurance policy had already been in force for a
certain period. It cannot apply when the insurance policy is first taken
Grace period for Individual or endowment insurance:
-

30days (subject to the option of the insurer to an interest charge of not more than 6%)

B. Acknowledgement
Sec 79. An acknowledgement in a policy or contract of insurance or the receipt of premium is
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.
C. Installments
D. Credit extensions
Requisites:
a. The credit extension must be provided for under the broker and agency agreements;
b. Must not exceed 90 days
E. Estoppel
- When the insured has relied in good faith on a practice that they have been following with
the insurer, the latter is already barred from taking refuge under Sec. 77.
DEVICES PREVENT LAPSE OF LIFE INSURANCE:
a. Grace period;
b. Automatic policy load an cash surrender value
- Cash surrender value is the amount of money the company agrees to pay to the holder of
the policy if he surrenders it and releases his claims upon it.
c. Application of Dividends in case of participating insurance policy, the insured in entitled
to the dividends that may be available and such dividends may be applied to the payment
of premiums;

d. Reinstatement Clause a policyholder shall be entitled to have the policy reinstated at any
time within 3 years from the date of default of premium payment unless the cash
surrender value has been duly paid, or the extension has expired.
- Reinstatement shall be made upon production any indebtedness to the company upon
said policy, with interest rate not exceeding that which would have been applicable to said
premiums and indebtedness in the policy years prior to reinstatement.
Return of Premium: Grounds
a. When the thing was not exposed to the peril insured against;
b. Time policy, when the policy is surrendered before the expiration of the stipulated time
(the refund is pro rata);
c. When the contract is voidable and subsequently annulled under the provisions of the Civil
Code;
d. When the contract is annulled on account of the fraud or misrepresentation of the insurer
or of his agent or on accounts of facts, or the existence of which the insured was ignorant
of without his fault;
e. When by any default of the insured other than the actual fraud, the insurer never incurred
liability under the policy;
f. When there is over-insurance by several insurers.
Advance payment premium may be paid in advance by the insured.
REBATE OF PREMIUM
-

No rebate of premiums are allowed. Violation constitutes a ground for the immediate
revocation of the license issued to the erring insurance company.

CHAPTER VII. LOSS AND NOTICE OF LOSS

SEC. 85. An agreement not to transfer the claim of the insured against the insurer after the loss
has happened, is void if made before the loss except as otherwise provided in the case of life
insurance.
Loss mean the injury or damage sustained by the insured in consequence of the happening of
one or more of the accidents or misfortunes against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured.
-

It is the pecuniary detriment consisting of the total cash value of the property in case of
total loss or the reduction of the value thereof in case of partial loss;
In case of life insurance, it refers to the death of the insured.

Proximate cause the cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which, the result would not have
occurred.
Remote Cause that cause which some independent force merely took advantage of to
accomplish something which is not the natural effect thereof.
Efficient cause the proximate cause of the loss, is that which is proximate to the loss not
necessarily in time but in efficiency.
Initially, the policy should be examined to determine what are the perils insured against and the
perils that are excluded. After establishing that the peril is included in the perils insured against
and is not an excluded peril, it must then be determined if such peril is the proximate cause.
Immediate Cause suggests proximity in time to the loss. Contemplates a situation where at
least 2 causes are involved; one occurs after the other.

Ex. Explosion which caused the fire.

When insurer is liable for the loss:
SEC. 86. Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril
insured against was the proximate cause, although a peril not contemplated by the contract may
have been a remote cause of the loss; but he is not liable for the loss of which the peril insured
against was only a remote cause.
SEC. 87. An insurer is liable where the thing insured is rescued from a peril insured against that
would otherwise have caused the loss, if, in the course of such rescue, the thing is exposed to a
peril not insured against, which permanently deprives the insured of its possession, in whole or in
part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against.

When Insurer is not liable:

SEC 88. Where a peril is especially excepted in a contract of insurance, a loss, which would not
have occurred but for such peril, is thereby excepted although the immediate cause of the loss
was a peril which was not excepted.
SEC. 89. An insurer is not liable for a loss caused by the willful act or through the connivance of
the insured; but he is not exonerated by the negligence of the insured, or of the insurance agents
or others.
Rules on loss under the Insurance Code:
1. If the peril insured against is the proximate cause, the insurer is liable; the liability is still
present even if the proximate cause is accompanied by a remote cause or immediate
cause which is not insured against;
2. If the peril insured against is the remote cause, the insurer is not liable;
3. If the thing was damaged because it was being rescued from the peril insured against, the
insurer is liable;
4. If the thing was damaged by peril not insured against while it was being rescued from a
peril insured against, the insurer is liable;
5. If the peril insured against is the immediate cause of the loss, the insurer is liable,
provided the proximate cause is not an excepted peril;
6. If the peril insured against is the immediate cause of the loss, and the proximate cause is
an excepted peril, the insurer is not liable.

When an insurance policy provides coverage for losses produced by some causes, and
excludes coverage for losses from other causes, courts frequently hold that coverage
extends to the loss even though an excluded element is a contributory cause;
An incidental peril outside of the policy, contributing to the risk insured against, will not
defeat recovery nor may the insurer defend by showing that an earlier cause brought the
loss not within a peril insured against, where the insured peril was the last step prior to the
loss.

NOTICE OF LOSS
-

The parties may agree on a stipulation in the policy that notice should be given within a
certain period from the time of the loss. The parties may agree that the absence of notice
of loss within the period agreed upon, will extinguish the loss.
This notice is separate from the claim itself although a claim within the period of giving
notice is already deemed compliance with the notice of loss requirement.

Requirement of Notice of Loss in Fire Insurance:

SEC 90. In case of loss upon an insurance against fire, an insurer is exonerate, if written notice
thereof, be not given to him by an insured, or some person entitled to the benefit of the
insurance, without unnecessary delay. For other non-life insurance, the Commissioner may
specify the period for the submission of the notice of loss.
-

Notice of loss is mandatory in fire insurance, failure of which exonerates the insurer from
liability.
The use of the word immediate means as soon as the circumstances permit.
Only substantial compliance of the requirement of notice of loss is necessary;
There is waiver of the requirement of notice of loss if the claim is denied on the ground
that the policy is null and void.

Proof of Loss:
SEC. 91. When a preliminary proof of loss is required by a policy, the insured is not bound to give
such proof as would be necessary in a court of justice; but it is sufficient for him to give the best
evidence which he has in his power at the time.
-

It is not required for the insured to submit preliminary proof of loss. However, if there is a
stipulation in the contract to submit preliminary proof, preponderance of evidence in not
required, merely the best evidence that he has in his power at the time is enough.
However, if a case is filed in court, the burden of proof is on the insured to prove his loss
which he must do by preponderance of evidence.

Defects in Notice and Proof:

SEC. 92. All defects in a notice of loss, or in preliminary proof thereof, which the insured might
remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of
objection, are waived.
-

There is no defect of proof even if an adjusters report is not submitted.

Effect of delay:
SEC. 93. Delay in the presentation to an insurer of notice or proof of loss is waived if caused
by any act of him, or if he omits to take objection promptly and specifically upon that ground.
Instances where delay is excused:
-

When the delay is attributable to the insurer;

When there was no prompt objection;
When there is an objection but not specifically on the ground that there was delay of
notice or proof of loss.

SEC. 94. If the policy requires, by way of preliminary proof, the certificate or testimony of a
person other than the insured, it is sufficient for the insured to use reasonable diligence to
procure it, and in case of the refusal of such person to give it, then to furnish reasonable
evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the
facts necessary to be certified or testified.
CHAPTER VIII. CLAIMS SETTLEMENT AND SUBROGATION
SEC. 247. (a) No insurance company doing business in the Philippines shall refuse, without just
cause, to pay or settle claims arising under the coverages provided by its policies, nor shall any
such company engage in unfair claim settlement practices. Any of the following acts by the

insurance company, it committed without just cause and performed with such frequency as to
indicate a general business practice, shall constitute unfair claim settlement practices:
1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to
coverage at issue;
2. Failing to acknowledge with reasonable promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable standards for the prompt investigation of
claims arising under its policies;
4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear; or
5. Compelling policyholders to institute suits to recover amounts due under it policies by
offering without justifiable reason substantially less than the amounts ultimately recovered
in suits brought by them.
(b) Evidence as to numbers and types of valid and justifiable complaints to the Commissioner
against an insurance company, and the Commissioners complaint experience with other
insurance companies writing similar lines of insurance shall be admissible in evidence in an
administrative or judicial proceeding brought under this section.
(c) if it is found, after notice and an opportunity to be heard, that an insurance company has
violated this section, each instance of noncompliance with paragraph (a) may be treated as a
separate violation of this section and shall be considered sufficient cause for the suspension or
revocation of the companys certificate of authority.
- the liability of the insurer attaches the moment the risk insured against causes loss to the
insured.
Adjuster defined:
-

A person employed by the insurer in property and casualty insurance to settle in behalf of
the insurer the claim of the insured. He evaluates the insurance claim and makes proper
recommendation to the insurer.

2 kinds of adjuster:
a. Independent Adjuster any person, partnership, association, corporation, which for
money, commission or any other thing of value, acts for or on behalf of an insurer, in the
adjusting of claims arising under insurance contracts or policies issued by such insurer.
b. Public adjuster - any person, partnership, association, corporation, which for money,
commission or any other thing of value, acts for or on behalf of an insured in negotiating
for, or effecting, the settlement of a claim or claims of the said insured arising under
insurance contracts or policies, or which advertises for or solicits employment as an
adjuster of such claims.
NOTE: the adjuster does not assume personal liability.
LIFE INSURANCE POLICY:
SEC. 248. The proceeds of a life insurance policy shall be paid immediately upon maturity of the
policy, unless such proceeds are made payable on installments or as an annuity, in which case,
the installments, or annuities shall be paid as they become due. Provided however, that in the
case of a policy maturing by the death of the insured, the proceeds thereof shall be paid within
60 days after presentation of the claim and the filing of the proof of death of the insured. Refusal
or failure to pay the claim within the time prescribed herein will entitle the beneficiary to collect
interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling

prescribed by the Monetary Board, unless such failure or refusal is based on the ground that the
claim fraudulent.
The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall
include the discounted value of all premiums paid in advance of their due dates, but are not due
and payable upon maturity.
-

Proceeds must be paid upon maturity. If policy matures upon death of the insured,
proceeds must be paid within 60days of the presentation of the claim and submission of
proof of death.
Failure or refusal to pay within the specified period entitles the beneficiary to claim for
interest on the proceeds which shall be set twice the ceiling provided by the Monetary
Board.
Delay or refusal to pay proceeds is warranted if it is based on the ground that the claim is
fraudulent;

NON-LIFE INSURANCE POLICY

SEC. 249. The amount of any loss or damage for which an insurer may be liable, under any
policy other than life insurance policy, shall be paid within 30 days after proof of loss is
received by the insurer and ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by arbitration. But if such ascertainment is
not had or made within 60 days after such receipt by the insurer of the proof of loss, then the
loss or damage shall be paid within 90 days after such receipt. Refusal or failure to pay the
loss or damage within the time prescribed herein will entitle the assured to collect interest on
the proceeds of the policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground
that the claim is fraudulent.
-

Proceeds of non-life insurance policies must be paid within 30days from receipt of proof of
loss and the loss or damage is ascertained by agreement of the parties or by arbitration.
If within 60 days from receipt of proof of loss, the amount of loss has not been ascertained,
proceeds shall be paid within 90 days from receipt of proof of loss.
Refusal or failure to pay proceeds entitles the beneficiary to collect interest thereon at the
rate twice the ceiling provided by the Monetary Board.
No interest if such refusal is based on the ground that the claim is fraudulent.

Duty of the Commissioner or the Court in case of litigation to enforce insurance policies:
SEC. 250. In case of any litigation for the enforcement of any policy or contract of insurance, it
shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or withheld; and
in the affirmative case, the insurance company shall be adjudged to pay damages which shall
consist of attorneys fees and other expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by
the Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in Sec. 248 or Sec. 249, as the case may be, until the claim is fully satisfied. Provided,
that failure to pay any such claim within the time prescribed in said sections shall be considered
prima facie evidence of unreasonable delay in payment.
-

For an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive or malevolent.
Consequently, an insurer should not be held liable for unreasonably delaying the release of
the payment of the claim if such delay is caused by the ascertainment of the real and
actual beneficiary.

FRAUDULENT CLAIM
SEC. 251. It is unlawful to:
(a) Present or cause to be presented any fraudulent claim for the payment of a loss under a
contract of insurance; and
(b) Fraudulently prepare, make or subscribe any writing with intent to present or use the
same, or to allow it to be presented in support of any such claim. Any person who violates
this Section shall be punished by a fine not exceeding twice the amount claimed or
imprisonment of 2 years, or both, at the discretion of the court.

The insurer may justifiably reject a claim that is fraudulent.

Denial may also be justified if the loss is grossly overvalued;
Mere preparation of a claim form, with intent to present or use the same but the form was
not submitted because the person who prepared it changed his mind, attaches no liability.

Who are liable in case a fraudulent claim is filed?

a. The person who submitted the fraudulent claim;
b. The person who caused the filing of the fraudulent claim;
c. The person who prepared or made the fraudulent claim with intent to present or use the
same, or to allow it to be presented in support of any such claim;
d. The person who subscribed any writing with intent to present or use the same, or to allow
it to be presented in support of any such claim.
Prescriptive period:
-

The Insurance Code does not provide for a prescriptive period for the filing of a complaint
for the recovery of the proceeds of the insurance.

Exception:
-

The one year period provided for in the case of compulsory third party liability.

. However, the parties may stipulate a prescriptive period in the policy subject to the limitation
under Sec. 63, to wit:
Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than 1 year from the time when the cause
of action accrues, is void.
Accrual:
-

The right of the insured to the payment of his loss accrues from the happening of the loss.
However, the cause of action in an insurance contract, does not accrue until the insureds
claim is finally rejected by the insurer.
The rejection referred to is the rejection of the first instance
The prescriptive period provided in the contract of insurance is not tolled when the insured
writes a letter of clarification as to the grounds for the cancellation of the policy.

Rule if there is no stipulation:

-

If no prescriptive period is provided for in the policy, the prescriptive period is 10 years
from the rejection of the claim by the insurer. Civil Code provides for a 10-year prescriptive
period of written contracts.

Subrogation
-

Payment of the insurer to the insured operates as an equitable assignment to the former
of all remedies which the latter may have against the third party whose negligence or
wrongful act caused the loss.

Requisites of Subrogation:
a.
b.
c.
d.

The insurance involved is property insurance;

There is a loss arising from the risk insured against;
The insured received indemnity from the insurer for the loss;
The indemnity is covered by the face value of the policy.

Exceptions to the equitable principle of Subrogation:

a. If the assured by his own acts. Releases the wrongdoer or 3 rd party liable for the loss or
damage, from liability, the insurers right of subrogation is defeated;
b. Where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settle the assureds claim for loss, the settlement is binding
on both the assured and he insurer, and the latter cannot bring an action on his right of
subrogation;
c. When the insurer pays the assured for a loss which is not a risk covered by the policy,
thereby affecting voluntary payment, the former has no right of subrogation against the 3 rd
party liable for the loss.
d. When life insurance is involved.
Limitation of the Right to Subrogation:
-

The insurer can only recover as much as the assured can from a third party liable for the
loss.
If the claim of the insured is limited, so is that of the insurer in his right to subrogation.
Whether or not the insurer exercises his right to subrogation, the insured may not recover
from the 3rd party who is liable for the loss after payment by the insurer.

CHAPTER IX. DOUBLE INSURANCE

Definition:
SEC. 95. A double insurance exists where the same person is insured by several insurers
separately in respect to the same subject and interest.
Requisite for Double Insurance:
a.
b.
c.
d.
e.

The same person is insured;

There are 2 or more insurers, that insured the person, separately;
The insurance is over the same subject;
The same interest is involved;
The same peril is insured against.

Double Insurance in Life Insurance.

-

There can be double insurance in life insurance but there can never be over-insurance.

There is no general prohibition against double insurance. However, other insurance clauses may
prohibited by stipulation double insurance.

Ex:
a. condition that states that the procurement of additional insurance without the consent of
the insurer render the policy ipso facto void;
b. provision that requires the insured to disclose the existence of any other insurance on the
property, otherwise, the contract may be avoided for material concealment;
c. warranty that there is no other existing insurance over the same property.
These stipulations have long been held as valid and serve as limitations on double insurance.
Over-insurance by Double Insurance:
-

there is over insurance if the insured takes out an insurance over the property insured in
the amount which is in excess of the value of his insurable interest

RULES IN CASE OF OVER-INSURANCE:

SEC. 96. Where the insured in a policy other than life is over insured by double insurance:
(a) the insured, unless the policy otherwise provides, may claim payment from the insurers in
such order as he may select, up to the amount for which the insurers are severally liable
under their respective contracts;
(b) where the policy under which the insured claims is a valued policy, any sum received by
him under any other policy shall be deducted from the value of the policy without regard
to the actual value of the subject matter insured;
(c) where the policy under which the insured claims is an unvalued policy, any sum received
by him under any policy shall be deducted against the full insurable value, for any sum
received by him under any policy;
(d) where the insured receives any sum in excess of the valuation in the case of valued
policies, or of the insurable value in the case of unvalued policies, he must hold such sum
in trust for the insurers, according to their right of contribution among themselves;
(e) each insurer is bound, as between himself and the other insurers, to contribute ratably to
the loss in proportion to the amount for which he is liable under his contract.
CHAPTER X. REINSURANCE
Definition:
SEC. 97. A contract of reinsurance is one by which an insurer procures a third person to insure
him against loss or liability by reason of such original insurance.
-

An agreement between two parties, called the reinsured and reinsurer, whereby the
reinsurer agrees to accept a certain fixed share of the reinsureds risk upon terms set out
in the agreement.

Reinsurance v. Double Insurance:

-

Insurer becomes the reinsured; the insurer remains in such capacity;

There are two separate insured; there is only one insure;
The subject matter is the liability of the insurer; the subject matter is the property insured;
Involves separate interest; same interest is insured;
Different perils are insured against in separate policies; same peril in insured against in
separate policies

Reinsurance v. Co-insurance clause:

Two separate contracts are involved; there is only one contract;

The liability is fixed in a separate contract between the parties; the obligation on the part
of the insured is fixed by law or in a clause stipulated upon;
The insured will not shoulder part of the loss contemplated by the reinsurance contract;
the insured will share in the loss contemplated by the original contract;
Not mandated by law in marine insurance; co-insurance in provided by law in marine
insurance.

Parties to Reinsurance:
a. Reinsured also known as the ceding company or the direct-writing company;
b. Reinsurer the one who accepts a certain fixed portion of the reinsureds risk.
Duty of the Reinsured upon obtaining reinsurance:
SEC. 98. When an insurer obtains reinsurance, except under automatic reinsurance treaties, he
must communicate all the representations of the original insured, and also all the knowledge and
information he possesses, whether previously or subsequently acquired, which are material to
the risk.
NOTE: this duty is only applicable in Facultative Reinsurance where the reinsurer still has the
right to accept or not. In Automatic Treaty, the duty to communicate may be dispensed with.
However, the duty of good faith still apllies.
BORDEAU a policy form which shows loss history and premium history with respect to a
specific risk.
Nature of Reinsurance:
SEC. 99. A reinsurance contract is presumed to be a contract of indemnity against liability, and
not merely against damage.
SEC. 100. The original insured has no interest in a contract of reinsurance.
-

There is no privity between the original insured and the reinsurer. Although, the original
insured may be allowed to directly sue the reinsurer if the reinsurance contract contains a
stipulation pour autrui in favor of the original insured.
Likewise, a reinsurer is not a party in an action against the insurer.

Functions of Reinsurance Contract:

a. Gives insurers the benefit of greater stability resulting from a widespread business;
b. Enables insurers to have a single risk capacity to accommodate policies of large amounts,
with knowledge that they can protect themselves against staggering losses by adjusting
risk in such a manner as to reduce the probability of serious inroad into their capital and
surplus.
Kinds of Reinsurance:
a. Facultative Reinsurance an optional, case-by-case method used when the ceding
company receives an application for insurance. The insurer is under no obligation to
accept the insurance. its advantage is flexibility since the reinsurance contract can be
made to fit a particular case. Once the share is accepted, the obligation is absolute. The
term facultative is used merely to define the right of the reinsurer to accept or not to
accept participation in the risk.
b. Automatic Treaty involves a prior agreement between the insurer and the reinsurer that
the reinsurer is compelled to accept what is being ceded by the insurer.
Kinds:

Quota-share treaty the parties agree to share the losses and premiums based on
some proportion;
Surplus-share treaty the reinsurer accepts in excess of the ceding companys
retention limit up to a maximum amount;
Excess-of-loss treaty losses in excess of the retention limit are paid by the
reinsurer up to some maximum limit.;
Reinsurance pool an organization of insurers that underwrites reinsurance on a
joint basis.

Insurable Interest the requirement of insurable interest is complied with by the fact that the
reinsured has issued the original policy and accepted liability to its original insured.
Obligation:
-

The reinsurer is obligated to pay the insurer or the ceding company the moment the
latter is exposed to liability

Extent of Liability
-

The reinsurance cannot exceed the amount of the liability of the insurer under the
original policy.

Cancellation:
-

Reinsurance contracts may be cancelled on the same grounds as ordinary insurance

policies;
Cancellation of reinsurance treaty does not automatically result in the cancellation
of reinsurance contracts entered into pursuant thereto.