Insurance Law new era in the common law with reference to questions
Presidential Decree No. 1460 involving the law merchant. In the skilful hands of this
(as amended by R.A. No. 10607)
Section 1. This Decree shall be known as “The
Insurance Code of 1978”
Historical Origin of Insurance
(1) Mutual insurance as old as society itself
- Insurance is based upon the principle of aiding another
from a loss caused by an unfortunate event. Some
writers maintained that mutual insurance is as old as
society itself.
- It seems that benevolent societies organized for the
purpose of extending aid to their unfortunate members
from a fund contributed by all, have been in existence
from the earliest times. They existed among the
Egyptians, the Chinese, the Hindus, and the Romans
and are known to have been established among the
Greeks as early as the 3rd century before Christ
(2) Origin of present day insurance attributed to
merchants of Italian Cities
- The practice of insurance as we know it today, as an
important agency in promoting commercial and
industrial transactions, is relatively of modern invention.
- Its origin is to be found in the mutual agreements
among merchants of the Italian cities in the early middle
ages engaged in common shipping ventures for
distributing among the mutual contractors, the loss
falling upon any one by reason of the perils of
navigation.
- It is thus apparent that in its early forms, the law of
insurance was derived from the maritime law and, as
such, was part of the general law merchant, and
international in its character.
(3) Development of insurance in England
- From Italy, the practice of insuring commercial
ventures against disaster rapidly extended to other
maritime States of Europe.
- The Italian merchants coming from the flourishing
commercial centers in Northern Italy, and generally
known as Lombards, founded trading houses in London
in the 12th century and brought with them the custom
of insuring against hazards of trade. All questions of
insurance, however, were determined in accordance
with the customs of merchants, and by merchant courts,
or rather, the custom of submitting all contracting
mercantile rights to courts of merchants established
among themselves.
- In the middle of the 18th century, that the common law
courts of England began to take adequate cognizance of
insurance cases with the passage in 1601 of the First
English Insurance Act by which a special court was
established for the trial of marine insurance
controversies.
- In 1756, with the appointment of Lord Mansfield as
Chief Justice of the Court of King’s Bench, there came a
great judge who is properly called the “Father of
English Commercial Law,” the essential principled of
the law of merchant were incorporated into the
common-law system of England and the common law
courts thereby rendered competent to determine all
questions involving insurance.
(4) Development of Insurance in the U.S.
- In general, the development of the several kinds of
insurance has followed the same lines in the U.S. as in
England. However, the insurance industry of the U.S.
has grown to such an extent that with the exception of
ocean marine insurance, the English practice and the
English decisions have little influence on insurance in
the U.S.
(5) Development of Insurance in the Philippines
- Insurance in the Philippines is rather a young
institution. Prior to the 19th century, insurance, in its
modern sense, did not even exist.
- During the pre-Spanish times, when the political
unit was then the family, if a member of the family died
or suffered any other misfortune, it was borne by the
family. When communities, such as the barangays
developed, the assistance was extended accordingly.
- Eventually, mutual benefit societies and fraternal
associations were organized for the purpose of
rendering assistance, in money or in kind, to their
members.
Reason: It may be that what worked much against the
early development of insurance in the RP, aside from
economic reasons (low per capita income of the people),
was the fatalistic philosophy behind our oft-quoted
expression ‘bahala na.’
- Insurance, in its present concept, was first
introduced in the RP sometime in 1829 when Lloyd’s of
London appointed Stracham, Murray & Co., Inc. as its
representative here.
- Sometime in 1939, the Union Insurance Society of
Canton appointed Russel & Sturgis as its agent in
Manila. The business transacted in the Philippines then
was limited to non-life insurance. It was only in 1898
that life insurance was introduced in this country with
the entry of Sun Life Assurance of Canada in the local
insurance market. It was followed by the following:
a. On June 8, 1906, the Yek Tong Lin Fire and Marine
Insurance Company, the first domestic non-life
insurance company.
b. In 1910, the Insular life Assurance Co., Ltd., the
first domestic life insurance company.
c. Reinsurance was introduced with Reinsurance
Company of the Orient writing treaties for both life
and non-life.
d. The first workmen’s compensation Pool was
organized in 1951 as the Royal Group Incorporated.
- In 1949, a government agency was formed to handle
insurance affairs. The Insular Treasurer was appointed
Commissioner ex-officio.
- Social insurance was established in 1936 with the
enactment of C.A. No. 186 which created the GSIS
which started operations in 1937. The Act covers
government employees. It was followed much later in
1954 by R.A. NO. 1161 which provides for the
organization of SSS covering employees of the private
sector.
Sources of Insurance Law in the Philippines
1. During the Spanish period, all the provisions
concerning insurance in the RP were found in Title
VII of Book Two and Section III of Title III of Book
Three of the Code of Commerce, and in Chapters II
and IV of Title XII of Book Four of the old Civil Code
of 1889.
2. When Act No. 24276 (enacted on December 11,
1914), otherwise known as the Insurance Act, took
effect on July 1, 1915 during the American regime,
the provisions of the Code of Commerce on
insurance were expressly repealed.
3. Thereafter when R.A. No. 386, otherwise known as
the Civil Code of the Philippines, took effect on
August 30, 1950, those provisions of the old Civil
Code on insurance (Arts. 1791-1797 and 1802-
1808) were also expressly repealed.
4. P.D. No. 612, as amended, which ordained and
instituted the Insurance Code of the RP, was
promulgated on December 18, 1974 during the
period of martial law. It repealed Act No. 2427, as
amended. Before PD 612, amendments to the Act
were made by PD No. 63, 123, and 317.
5. P.D. No. 1460 consolidated all insurance laws into
a single code known as the Insurance Code of
1978. Basically, it reenacted PD 612, as amended.
It has been amended by PD No. 1814 and BP Blg.
874.
Laws Governing Insurance
1. Insurance Code of 1978
- The law on insurance is contained now in the Insurance
Code of 1978 and special laws and partly, in the
pertinent provisions of the Civil Code.
- The Insurance Code primarily governs the different
types of insurance contracts and those engaged in
insurance business in the RP. It took effect on June 11,
1978, the date of its promulgation “without prejudice,
however, to the effectivity dates of the various laws,
decrees and executive orders which have so far
amended the provisions of the Insurance Code of the
Philippines. (PD 612)”
2. Civil Code
- The provisions of the Civil Code dealing on insurance
are found in:
a. Articles 739 and 2012, on void donations;
b. Article 2011, on the applicability of the Civil Code;
c. Article 2021-2027, with respect to life annuity
contracts;
d. Article 2186, on compulsory motor vehicle liability
insurance; and
e. Article 2207, on the insurer’s right of subrogation.
- In other words, insurance contracts are governed
primarily by the Insurance Code but if it does not
specifically provide for a particular matter in question,
the provisions of the Civil Code on contracts and other
special laws shall govern.
3. Special laws
- Article 2011 of the Civil Code provides:
“The contract of insurance is governed by
special laws. Matters not expressly provided for in such
special laws shall be regulated by this Code.”
- Among special laws on insurance are:
a. The Insurance Code of 1978 (P.D. 1460);
b. The Revised Government Insurance Act of 1977 (PD
1146, as amended), with respect to insurance of
government employees; and
c. The Social Security Act of 1954 (R.A. No. 1161, as
amended), with respect to insurance of employees
in private employment.
4. Others
- Insofar as the Civil Code is concerned, the Code of
Commerce is considered a special law.
a. R.A. No. 656, as amended by PD No. 245, known
as the “Property Insurance Law,” dealing with
government property.
b. R.A. No. 4898, as amended by RA 5756, providing
life, disability and accident insurance coverage to
barangay officials.
c. Executive Order No. 250, July 25, 1987,
increases, integrates, and rationalizes he insurance
benefits of barangay officials under R.A. No. 4898
and members of Sangguniang Panlalawigan,
Sangguniang Panlungsod, and Sanggunian Bayan
under PD 1147. The insurance benefits are extended
by the GSIS.
d. R.A. No. 3591, as amended, which establishes the
Philippine Deposit Insurance Corporation which
insures the deposits of all banks which are entitled
to the benefits of insurance under the Act.
Right of subrogation of insurer to rights of insured
against wrongdoer
1. Basis of Right – The doctrine of subrogation is
basically a process of legal substitution; the insurer,
after paying the amount of the covered by the
insurance policy, stepping into the shoes of the
insured, as it were, and availing himself of the
latter’s rights that exist against the wrongdoer at
the time of the loss.
It has its roots in equity. It is designed to
promote and to accomplish justice and is the mode
which equity adopts to compel the ultimate payment
of a debt by one who in justice and good conscience
ought to pay. (Phil. American General Insurance
Co., Inc. vs CA, 1997)
2. Purposes of subrogation condition in policy –
Its principal purpose is to make the person who
caused the loss, legally responsible for its and at the
same time prevent the insured from receiving a
double recovery from the wrongdoer and the
insurer.
The insurer is entitled to recover either directly in a
suit against the wrongdoer (3rd party) or as the real
party in interest in a suit brought by the insured and
thereby fully recover or at least lessen the amount
of loss it may have paid the insured.
The rule likewise prevents tortfeasor from being
free from liabilities and is thus founded on
considerations of public policy.
3. Right of subrogation applicable only to
property insurance – The right of subrogation
under Article 2207 applies only to property, and
not to life insurance.
Reason: The value of human life is regarded as
unlimited and, therefore, no recovery from a third
party can be deemed adequate to compensate the
insured’s beneficiary. The pecuniary (monetary)
value of a human life to the beneficiary of a life
insurance policy can seldom be determined with
accuracy, except where the insurance is taken by a
creditor on the life of a debtor to secure a debt. Life
insurance contracts are not ordinarily contracts of
indemnity. (see Ch. II, Title 2)
4. Privity of contract or assignment by insured of
claim not essential – Payment by the insurer to
the insured operates as an equitable assignment
to the former of all the remedies which the latter
may have against the third party whose negligence
or wrongful at caused the loss.
The right of subrogation is not dependent upon, nor
does it grow out of, any privity of contract or upon
written assignment of claim. It accrues simply
upon payment of the insurance claim by the
insurer. (Pan Malayan-Insurance Corp. vs Court of
Appeals, 184 SCRA 54, 1990)
The presentation in evidence of the insurance policy
is not indispensable before the insurer may recover
as the subrogation receipt, by itself, is sufficient
to establish not only the relationship of the insurer
and the insured, but also the amount paid to settle
the insurance. (Delsan vs CA, 2001)
5. Loss or injury for risk must be covered by the
policy – Under Article 2207, the cause of the loss
or injury must be a risk covered by the policy to
entitle the insurer to subrogation. Otherwise,
payment will be considered as “voluntary payment”
in which the insurer has no right of subrogation.
Nevertheless, the insurer may recover from the 3rd
party responsible for the damage to the insured
property under Article 1236 of the NCC which
states:
“Article 1236. The creditor is not bound to accept
payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.
Whoever pays for another may demand from the
debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the payment
has been beneficial to the debtor.” (Sveriges
Anfartygs Assurance vs. Qua Chee Gan, 1967)
6. Right of insured to recover from both insurer
and third party – The right of subrogation given to
the insurer prevents the insured from obtaining
more than the amount of his loss. It is a method of
implementing the principle of indemnity that is at
the heart of all insurance (S18).
The right exists after indemnity has been paid by
the insurer to the insured who can no longer go after
the third party. He can only recover once, except
in case of under-insurance, the insured is
entitled to recover the deficiency from the person
responsible for the loss or injury.
7. Right of insured to recover from insurer
instead of the third party – The insurer cannot
defeat the insured’s claim for indemnity on the
ground that the insured has a right to be
indemnified by a third person. Having been paid a
premium to make good the insured’s loss, the
insurer cannot compel him to seek indemnity
elsewhere.
8. Right of insurer against third party limited to
amount recoverable from latter by the insured
– As the insurer is subrogated merely to the rights
of the insured, it can necessarily recover only the
amount recoverable by the insured from the party
responsible for the loss.
It cannot recover in full the amount it paid to the
insured if it is greater than that to which the insured
could lawfully lay claim against the person causing
the loss. (Rizal surety & Insurance Co. vs Manila
Railroad Co., 1968)
9. Exercise of right of subrogation by insurer
discretionary - Whether the insurer should
exercise the rights of the insured to which it had
been subrogated lies solely within the former’s
sound discretion. Since its identity is not of record,
it has to claim its rights to reimbursement of the
amount paid to the insured. (F.F. Cruz vs CA)
10. Loss of right of subrogation by act of insured
or insurer – Should the insured, after receiving
payment from the insurer, released by his own act
the wrongdoer or 3rd party responsible for the loss
or damage from liability, the insurer loses his rights
against the wrongdoer since the insurer can be
subrogated to only such rights as the insured may
have.
 Remedy of the Insurer: For defeating the
insurer’s right of subrogation, the insured is under
obligation to return to the insurer the amount paid
thereby entitling the latter to recover the same.
Premise of said remedy: Under Article 2207, the
insurer is the real party in interest with regard to
the portion of the indemnity paid for he is deemed
subrogated to the rights of the insured with respect
thereto. (Manila Mahogany Corp. vs CA)
11. Effect of assignment by insured of its rights
against third party to insurer – Where the
insured (shipper/consignee of goods) has assigned
its right against defendant (carrier of goods) for
damages to the insurer which paid the amount
represented by the loss, the case is not between the
insured and the insurer but one between the
shipper/ insured and the carrier of goods
because the insurance company merely stepped
into the shoes of the shipper/insured.
If the shipper/insured has a direct cause of action
against the carrier on account of the damage to
cargo, such action can be asserted or availed of by
the insurer as a subrogee of the shipper/insured and
the carrier cannot set up as a defense any defect in
the insurance policy because it is not a privy to it.
(Compañia Maritima vs Insurance Co. of North
America, 12 SCRA 213, 1964)
Applicability of the Civil Code
- Article 2011 of the Civil Code means that if the
Insurance Code does not specifically provide for a
particular matter in question, the provisions of the Civil
Code regarding contracts shall govern. (Musngi vs West
Coast Life Insurance Co., 1935)
- In other words, insurance contracts are governed
primarily by the Insurance Code and subsidiarily, by the
Civil Code. (see Art. 18, 2011, and Section 422)
- The following jurisprudence affirms above premise:
a. Case of Lucero Vda. de Sindayen vs. Insular Life,
1935, pertaining to insurance company’s consent to
the policy was vitiated by error;
b. Case of Enriquez vs Sun Life, 1920, pertaining to
no-perfection of the contract for a life annuity;
c. Case Musngi supra, where the the insurance
contract was held null and void since the
consideration is false or fraudulent;
d. Case of Filipinas Compania de Seguros vs Nava
pertaining to the amount of recovery in case of
rescission;
e. Case of Insular Life vs Ebrado, 1977, pertaining to
disqualification of a common-law wife from
becoming the beneficiary of the insured in view of
the prohibition in Article 2012 in relation to Article
739 of the Civil Code; and
f. Case of Zenith Insurance vs CA, 1990, where the
award of moral and exemplary damages in case of
unreasonable delay in the payment of insurance
claims was held to be governed by the ruled under
the Civil Code.
Construction of the Insurance Code
- The construction of the Insurance Code means its
interpretation and this is allowed only if its provisions
are not clear.
Note: see Fiscal Tambasacan’s discussion on this matter
Section 2. Definition of Terms
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 or transacting an insurance
business which shall include:
a. making or proposing to make, as insurer, any
insurance contract;
b. 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;
c. doing any kind of business, including reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning
of the Code;
d. doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner
designed to evade the provisions of the Code.
But strictly speaking, a contract of suretyship is
entirely difference from a contract of insurance.
- In the application of the provisions of the Code the fact
that no profit is derived from the making of insurance
contacts, 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.
- The author however proposes a “better definition” of
the contract of insurance which would be:
“A contract of insurance is an agreement by
which one party (insurer) for a consideration (premium)
paid by the other party (insured), promises to pay
money or its equivalent or to do some act valuable to
the latter (or his nominee), upon the happening of a
loss, damage, liability, or disability arising from an
unknown or contingent event.”
Definition of Insurance from other viewpoints
- A definition of insurance may be made from several
viewpoints: EcBuMaS
a. Economic – in this sense, insurance is a method to
which reduces risks by a transfer and combination
(or “pooling”) of uncertainty in regard to financial
loss;
b. Business – insurance is an important part of the
financial world, where insurance serves as a basis
for credit and a mechanism for savings and
investments;
c. Mathematical - insurance is the application of
certain actuarial (insurance mathematics) principles
to calculate the chance of loss. Thus, in life
insurance, the principles of probability are applied
to statistical results of past experience represented
by a mortality table; and
d. Social – insurance is a social device/plan by which
the losses of the few are paid out of the
contributions of all members of a group.
Determination of the existence of the contract
1. Nature of the contract
- The character of insurance is to be determined by the
exact nature of the contract actually entered into
whatever the form it takes or by whatever name it may
be called.
- Thus, it was held that an agreement entered into by a
corporation, even though it was called a surety
company, to indemnify for a valuable consideration
another against loss by reason of uncollectible debts,
was a contract of insurance and not a contract of
guaranty.
2. Elements of the contract
– In determining the existence of a contract of
insurance, it is important to consider the following:
a. Subject matter – it refers to the thing insured. In
fire insurance and in marine insurance, the thing
insured is property; in life, health or accident
insurance, it is the life or health of the person that
is the subject of the contract; in casualty insurance,
it is the insured’s risk of loss or liability; and
b. Consideration – the consideration for an insurance
contract is the premium paid by the insured (S77).
Its amount is principally based on the probability of
loss and extent of liability for which the insurer may
become liable under the contract; and
c. Object and purpose – Basically, a contract of
insurance is a risk-bearing contract. The principal
object and purpose of insurance is the transfer and
distribution of risk of loss, damage or liability
arising from an unknown or contingent event
through the payment of a consideration by the
insured to the insurer under a legally binding
contract to reimburse the insured for losses suffered
on the happening of the stipulated event.
Nature & Characteristics of an Insurance contract
- Basically, insurance contract has the ff. features:
CCCC-VAPEU
a. It is consensual because it is perfected by the
meeting of the minds of the parties;
b. It is conditional because it is subject to conditions
the principal one of which is the happening of the
event insured against.
c. It is a contract of adhesion or Fine Print Rule
considering that most of the terms of the contract
do not result from mutual negotiations between the
parties as they are prescribed by the insurer in
printed form to which the insured may adhere if he
chooses but which he cannot change. Hence, in
case of doubt, the contract shall be interpreted
strictly against the insurer and liberally in favor of
the insured (Rizal surety vs CA).
d. It is a contract of indemnity, which is applicable
only to property insurance, except creditor insuring
the life of his debtor, because the promise of the
insurer is to make good only the loss of the insured.
Hence, no person may secure insurance upon
property in which he has no interest.
e. It is voluntary in the sense that it is not compulsory
and the parties may incorporate such terms and
conditions as they may deem convenient subject to
provisions of law;
Qualification: although the contract of insurance is
generally a voluntary contract, the carrying of
insurance, particularly liability insurance, may be
required by law in certain instances such as for
motor vehicles, or employees, or as a condition to
granting a license to conduct a business or calling
affecting the public safety or welfare.
Also, insurance may arise by operation of law such
as social insurance for members of the GSIS and for
employees of the private sector covered by the SSS
.
f. It is aleatory in the sense that it depends upon
some contingent event. By an aleatory contract, one
of the parties or both reciprocally bind themselves
to give or to do something in consideration of what
the other shall give or do upon the happening of an
event which is uncertain, or which is to occur at an
indeterminate time (Art. 2010, CC).
In a sense, however, the contract of insurance is
commutative because there is still exchange of
equivalents – the amount paid by the insured
(premium) is deemed the equivalent of the
protection given by the insurer based on the
insurance contract.
g. It is a personal contract as the law presumes that
the insurer considered the personal qualifications of
the insured in approving the insurance application.
As a rule, the insured cannot assign, before the
happening of the loss, his rights under a property
policy to others without the consent of the insurer
(S83). Consequently, the obligation of the insurer to
pay does not attach to or run with the property
whether it be real or personal property unless there
is a stipulation to the contrary;
Exception: Life insurance policies, however, are
generally assignable or transferrable (S181) as they
are in the nature of property and do not represent
a personal agreement between insured and insurer.
h. It is executed as to the insured after the payment
of the premium, and executory on the part of the
insurer in the sense that it is not executed until
payment for a loss (which implies that the event
already happened);
i. It is an uberrimae fides contract because it is one
of perfect good faith not for the insured alone, but
equally so for the insurer.
Elements of the Contract of Insurance
- The contract of insurance made between the parties
usually called the insured and the insurer, is
distinguished by the presence of five elements, namely:
PSAPP
a. The insured possesses an interest of some kind
susceptible of pecuniary estimation, known as
“insurable interest”;
b. The insured is subject to a risk of loss through
the destruction or impairment of that interest by the
happening of designated perils;
c. The insurer assumes the risk of loss;
d. Such assumption of risk is part of a general
scheme to distribute actual losses among a large
group or substantial number of persons bearing a
similar risk; and
e. As considerations for the insurer’s promise, the
insured makes a ratable contribution called
“premium,” to a general insurance fund.
- A contract possessing only the first three elements
named above is a risk-shifting device (such as
guaranty), but not a contract of insurance, which is a
risk-distributing device.
- The device of insurance serves to distribute the risk of
economic loss among as many as possible of those who
are subject to the same kind of risk. By paying a pre-
determined amount into a general fund out of which
payment will be made for an economic loss of a defined
type, each member contributes to a small degree
toward compensation for losses suffered by any
member of the group.
Coping with risk
- The inherent uncertainty of events can be described in
terms of chance or probability. In insurance, the
uncertainty is normally described in terms of risk.
People cope with risk in various ways, namely:
a. Limiting the probability of loss (deployment of guards);
b. Limiting effects of loss (such as diversification);
c. Self-insurance (savings);
d. Ignoring risk (buwis buhay performers) ; and
e. Transferring risk to another (such as insurance).
Economic effects of the transfer and distribution
of risk
1. It is beneficial to society as a whole;
2. Undesirable side effects exist such as negligence or
reduced degree of caution on the part of the insured
due to the idea that another will answer for the loss
he is insured of. This is called as moral hazard;
3. There is a problem regarding measurement of
amount of risk transferred since it is not feasible and
allowable to monitor the daily activities and
behavior of a person;
4. Sharing by insured of some responsibility for the
risk through either a deductible or coinsurance. With
a deductible, the insured bears any loss up to
some stated amount with the insurer bearing the
rest. With coinsurance, the insured bears some
stated percentage of the loss regardless of its
amount, with the insurer bearing the rest. Thus, the
insured has an incentive to preserve his property,
since the insured will bear some portion of any loss
to himself;
5. There is a problem regarding computation of
premium to be charged because life is uncertain,
calculating each person’s expected loss with
absolute precision is impossible. Moreover, if such
predictions were possible on an individual basis,
insurance would not be necessary, since each
person would know when loss would occur and then
when would take all necessary preventive
measures, thereby eliminating the value of
transferring risk;
6. Insurers group make a classification of risks; and
7. Existence of adverse selection.
The fields of insurance
- The basic classification emphasizes the difference
between social (government) and voluntary (private)
insurance. With recent trends toward broader insurance
operations and contracts, the following terms have
become important:
Multiple Line Insurance has been accepted to denote
not just several kinds of insurance but the combination
of at least two (2) kinds of insurance, specifically the
traditional fire and casualty lines.
All Lines Insurance refers to the broadening nature of
insurance operations which combine at least most of the
basic types of insurance including the traditional fire,
casualty, life, and health lines.
1. Social (government) insurance – it is a
compulsory form of insurance and is designed to provide
a minimum economic security for large group of
persons, particularly those in the lower income groups.
- The concept here is limited to that insurance which is
required by the government and has for their object the
provision of a minimum standard of living.
Rationale for the compulsion: it is predicated upon
the experience that some persons cannot or will not
voluntarily purchase insurance, and the obligation of the
government to protect the general welfare of its
citizens.
2. Voluntary insurance – it is not based upon
government compulsion and is sought by the insured to
meet a recognized need for protection.
It includes the major category of commercial insurance,
which is divided into personal (life and health) and
property types of protection, and traditionally in
property insurance, the major groupings of fire-marine
and casualty surety insurance are important. It divides
itself into three (3) groups, namely:
a. Commercial insurance – In contrast to cooperative
plans, it receives its motivating force from the profit
idea. Two major classifications are parts of commercial
insurance:
a.1. Personal insurance – this division is based on the
nature of the perils; that is, whether they are more
directly concerned with losses due to loss of earning
power of a person. Life insurance, including annuities,
and health and accident insurance are important parts
of the personal category of commercial insurance; and
a.2. Property insurance – it includes every form that
has for its purpose the protection against loss arising
from the ownership or use of property. It has two
general classifications: (1) indemnifies the insured in
the event of loss growing out of damages to, or
destruction of his own property, and (2) pays damages
for which the insured is legally liable, the consequence
of negligent acts that result in injuries to other persons
or damage to their property.
b. Cooperative insurance – the associations are
organized without regard to the profit motive and
represent, in fact, an effort to accomplish the ends of
social insurance by private enterprise. Here, the non-
profit cooperative objective of the insurance is
emphasized; and
c. Voluntary government insurance – here, there is
no element of compulsion. The various plans offered are
designed to benefit the entire community but are used
only by those persons who wish to use the available
benefits.
Classifications of contracts of insurance
- The different kinds of insurance contracts written at
the present time vary indefinitely in name an form but
for convenience they may be grouped under three great
heads as follows:
1. Insurance against loss or impairment of
property interests, which may be either in
existence or merely expected; that is, present rights
or profits yet to accrue such as marine insurance,
fire insurance, calamity insurance,
1. guaranty insurance, credit insurance, fidelity
insurance, theft insurance, and defective title
insurance.
2. Insurance against loss of earning power
due to death, accidental injury, sickness, ill-
health, old age or other disability, or even
unemployment;
3. Insurance against contingent liability to
make payment to another, that is, the
insured is protected against his loss with regard
to claims for damages. Thus, we have
reinsurance, workmen’s compensation
insurance, and motor vehicle liability insurance,
all of which are designed to reimburse the
insured for any liability he might incur to a 3rd
party.
Classifications under the Code
- Under the I.C., insurance contracts are classified as
follows:
1. Life insurance contracts which may be:
a. Individual life (Secs. 179-183, 227);
b. Group life (Secs. 50, last par., 228); and
c. Industrial life (Secs. 229-231).
2. Non-life insurance contracts which may be:
a. Marine (Secs. 99-166);
b. Fire (Secs. 167-173); and
c. Casualty (Sec. 174); and
3. Contracts of suretyship or bonding (Secs. 175-
178).
- The general definition of insurance in Section 2 can
cover any kind of loss, damage, or liability arising from
an unknown or contingent event. Theoretically, it
would be possible for an insurance company to insure
against any risk whatever associated with any lawful
activity as long as there is no prohibition by a statute or
violation of public policy.
Contracts written by guaranty or surety
companies
- A class of contracts written by guaranty or surety
companies, and generally designated as guaranty
insurance, comprises principally fidelity, title, bond, and
security guaranty.
- Contracts of this kind are now almost regarded as
those of insurance especially since the terms of such
contracts usually closely resemble the essential
elements of an insurance contract. Pertinently, under
the Code, a contract of suretyship shall be deemed to
be an insurance contract only if made by a surety who
or which, as such, is doing an insurance business within
the meaning of the Code. (S2, pars. 1 and 2).
- Like other insurance contracts, they are construed
strictly against the insurer. (Luzon Surety vs City of
Bacolod, 1970).
 TITLE 2
PARTIES TO THE CONTRACT
Sec. 6 Every corporation, partnership, or
association duly authorized to transact
insurance business as elsewhere provided in
this Code, may be an insurer.
PARTIES TO A CONTRACT OF INSURANCE
-There are two parties
1. Insurer- party who assumes or accepts the risk of
loss and undertakes for a consideration to indemnify
the insured or to pay him a certain sum on the
happening of a specified contingency or event.
-Only the corporations, partnerships, and associations
may carry the business of insurance.
2. Insured- the person in whose favor the contract is
operative and who is indemnified against, or is to
receive a certain sum upon the happening of a
specified contingency or event.
-He is the person whose loss is the occasion for the
payment of the insurance proceeds by the insurer.
-He is not however, always the person to whom the
proceeds are paid. This may be a beneficiary
designated in the policy.
-It is also possible that the insured may assign the
proceeds of the insurance to someone else.
-Relationship may be contingent debtor and creditor:
subject to the conditions of the policy and not that of
trustee and cestui que trust.
TERMS USED
4. Insurer- synonymous with “assurer” or
“underwriter”. The insurance company is
sometimes called “underwriter”
5. Insured and assured- are generally used
interchangeably; strictly speaking, the term
“insured” refers to the owner of the property
insured or the person whose life is the subject
of the contract of insurance, while “assured”,
to the person whose benefit the insurance is
granted.
6. Assured- also used sometimes as a synonym
of “beneficiary”.
Beneficiary- He is the person designated by
the terms of policy as the one to receive the
proceeds of the insurance.
-He is the 3rd party in the contract of a life
insurance for whose benefit the policy is issued
and to whom the loss is payable.
-There are occasions when the proceeds are
paid to the estate of the insured.
WHO MAY BE AN INSURER
1. Foreign or domestic insurance company or
corporation- They must first obtain a
certificate of authority for that purpose from
the Insurance Commissioner. He may refuse it,
if in his judgment “such refusal will best
promote the interests of the people in this
country.”
2. Individual, partnership or association-
Although insurance business is ordinarily
carried on by partnerships and corporations,
yet any individual may be an insurer, provided
he holds a certificate of authority from the
Insurance Commissioner.
-Any person, partnership or association of
persons may be given a certificate of
authority if such is possessed of the
capital assets required of an insurance
corporation doing in the same kind of
business in the Philippines and invested in
the same manner (sec 190-192)
a. insurance corporation- one formed or organized
to save any person or persons or other corporations
harmless from loss, damage or liability arising from an
unknown or future or contingent event, or to indemnify
or to compensate any person or persons or other
corporations for any such loss, damage or liability, or
to guarantee the performance of or compliance with
contractual obligations or the payment of debts of
others (Sec 191). The last part of the statement of
purpose refers to suretyship.
b. insurer and insurance company- include all
individuals, partenrships, associations, or corporations,
including GOCC or entities, engaged as principals in
the insurance business, excepting mutual benefit
associations. Unless the context otherwise requires,
the terms shall also include professional reinsurers
defined in Section 288.
BUSINESS OF INSURANCE AFFECTED WITH
PUBLIC INTEREST
-Therefore it is subject to regulation and control by the
state by virtue of the exercise of the police power or in
the interest of public convenience and the general good
of the people.
-An insurance company in effect, is an instrumentality
which gathers funds upon the basis of equality of risk
from a greater number of persons, sufficiently large
enough to arouse the element of chance to step out and
the law of averages to step in as the controlling factor-
and holds numerous amounts so collected as general
fund to be paid out to those who shall suffer losses.
Sec. 7 Anyone except a public enemy may be
insured
Capacity of party insured
1. Natural person- In order that a person may
be a party insured in a contract of insurance,
two (2) essential requisites are necessary:
a. He must be Competent to make a contract
b. He must possess an insurable interest in
the subject of the insurance.
A third requisite applicable also to juridical persons,
may be added (i.e. that the insured must not be a
public enemy)
2. Juridical person- like a partnership or a
corporation, may take out insurance on
property owned by it.
Note: Section 3 authorizes minors, 18 years or more
to take out insurance payable to a limited class of
beneficiaries.
Meaning of public enemy
-designates a nation with whom the Philippines is at
war and it includes every citizen or subject of such
nation.
-may be taken to mean “alien enemy”
-During wartime, a private corporation is deemed an
enemy corporation although organized under Philippine
laws if they are controlled by enemy aliens.
-this is “control test” whereby a corporation is
deemed to have the same citizenship as the controlling
stockholders in time of war.
Effect of war on existing insurance contracts
1. Where parties rendered enemy aliens- by
law of nations, all intercourse between citizens
of belligerent powers which is inconsistent with
state of war is prohibited.
-The purpose of war is to cripple the power and
exhaust the resources of the enemy. It is
inconsistent that the subjects of one country
should lend their assistance to protect by
insurance, the commerce or property of
belligerent alien subjects or to do anything
detrimental to their country’s interests.
-If the parties are not rendered enemy aliens
by the intervention of war, the policy continues
to be enforceable according to its terms and
the laws governing insurance and the general
rules regarding contracts.
-the effect of war between countries of the
insured and the insurer upon insurance
contracts validly entered into during peacetime
is a question upon which there is a decided
conflict of authority.
a. With respect to property insurance-
An insurance policy ceases to be valid
and enforceable as soon as an insured
becomes a public enemy
b. With respect to life insurance- 3
doctrines have arisen
-US Rule: the contract is not merely
suspended but is abrogated by reason
of nonpayment of premiums, since the
time of the payments is peculiarly of
the essence of the contract. However,
the insured is entitled to the cash or
reserve value of the policy (if any),
which is the excess of the premiums
paid over the actual risk carried during
the years when the policy had been in
force.
-This rule has been specifically followed
by our SC
2. Where loss occurs after the end of war-
Since the effect of war is not merely to
suspend but to abrogate the contract of
insurance between the citizens of belligerent
states, the termination of the war does not
revive the contract.
Sec 8. Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his own
name providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the
interest of the mortgagor, who does not cease to be a
party to the original contract, and any act of his, prior
to the loss which would otherwise avoid insurance, will
have the same effect, although the property is in the
hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had been
performed by the mortgagor.
Insurable interest of mortgagee and mortgagor
1. Separate insurable interests- The
mortgagor and mortgagee have each insurable
interest in the property mortgaged (sec 13),
and this interest is separate and distinct from
the other.
-Consequently, insurance taken by one in his
own name only and in his favor alone, does not
inure to the benefit of the other (sec 53)
 -In case both of them take out separate
insurance policies on the same property, or
one policy covering their respective interests,
the same is not open to the objection that
there is a double insurance.
2. Extent of insurable interest of mortgagor-
The mortgagor of property, as owner, has an
insurable interest therein to the extent of its
value, although the mortgage debt equals such
value.
-Reason: loss or destruction of the property
insured will not extinguish his mortgage debt.

3. Extent of insurable interest of mortgagee-

The mortgagee or his assignee as such has an
insurable interest in the mortgaged property to the
extent of the debt secured, since the property is
relied upon as security thereof, and in insuring, he
is not insuring the property itself but his interest or
lien thereon.

-His insurable interest (sec 10) is prima facie the

value mortgaged and extends only to the amount
of the debt, not exceeding the value of the
mortgaged property.

-Such interest continues until the mortgage debt is

extinguished. Thus, separate insurances (sec 93)
covering different insurable interests may be
obtained by the mortgagor and the mortgagee
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Two general classes of life policies

1. Insurance upon one’s life- Sec 10 [a] for the
benefit of himself, or of his estate, in case it
matures only at his death, or for the benefit of
a third person who amy be designates as
beneficiary.
-It does not usually present an insurable interest
question.
2. Insurance upon life of another- When one
applies for insurance on the life of another for the
former’s benefit, he must have an insurable interest
in the life of that person.
Insurable interest in one’s own life.