INSURANCE REVIEW

I. GENERAL CONCEPTS

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. (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. Voluntary the parties may incorporate such terms and conditions as they may deem convenient.
3. Aleatory it depends upon some contingent event.
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.

REQUISITES OF A CONTRACT OF INSURANCE (The Insurance Code of the Philippines Annotated, Hector de Leon, 2002
ed.)
1. A subject matter which the insured has an insurable interest.
2. Event or peril insured against which may be any future contingent or unknown event, past or future and a duration
for the risk thereof.
3. A promise to pay or indemnify in a fixed or ascertainable amount.
4. A consideration known as premium.
5. Meeting of the minds of the parties.

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 latters
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 insureds 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 insurer assumes 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 in the
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. 179183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229231)
2. Non-life insurance
a. Marine (Secs. 99166)
b. Fire (Secs. 167173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship (Secs. 175178)
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 whom 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:
GENERAL RULE: There is no limit in the amount the insured can insure his life.
EXCEPTION: In a creditor-debtor relationship where the creditor insures the life of his debtor, the limit of insurable
interest is equal to the amount of the debt.
Note: If at the time of the death of the debtor the whole debt has already been paid, the creditor can no longer
recover on the policy because the principle of indemnity applies.

C. Property
Every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that the contemplated peril might directly damnify the insured (Sec. 13), which may consist in:
1. an existing interest;
2. any inchoate interest founded on an existing interest; or
3. an expectancy coupled with an existing interest in that out of which the expectancy arises. (Sec. 14)
When it should exist: When the insurance takes effect and when the loss occurs, but need not exist in the
meantime.
Amount: The measure of insurable interest in property is the extent to which the insured might be damnified by loss
or injury thereof. (Sec. 17)

INSURABLE INSURABLE
INTEREST IN LIFE INTEREST IN
PROPERTY
Must exist only at the Must exist at the
time the policy takes time the policy
effect and need not takes effect and
exist at the time of when the loss
loss occurs
Unlimited except in Limited to actual
life insurance value of interest in
effected by creditor property insured.
on life of debtor.
The expectation of An expectation of
benefit to be derived a benefit to be
from the continued derived from the
existence of life continued
need not have any existence of the
legal basis whatever. property insured
A reasonable must have a legal
probability is basis.
sufficient without
more.
The beneficiary need The beneficiary
not have an insurable must have
interest over the life insurable interest
of the insured if the over the thing
insured himself insured.
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.

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)