Group 1: Insurance (Delgado/Nebres Report)

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)
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.
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the
time it came to his knowledge. The contract, in such a case, is presumed to have
been entered into in the place where the offer was made.
What is being followed in insurance contracts is what is known as the “cognition
theory” an insurance contract is perfected the moment the offeror learns of the
acceptance of his offer by the other party.
Insured usually makes the offer by submitting the application to the insurer or its
authorized agent. The insurer accepts the offer by approving the application and the
contract is perfected upon receipt of notice by the insured of such approval.
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:

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a. Applies only to property insurance except when the creditor insures the life of his
debtor.
b. Life insurance is not a contract of indemnity.
c. Insurance contracts are not wagering contracts. (Sec. 4)
4. Contract of Adhesion (Fine Print Rule)
☞ Most of the terms of the contract do not result from mutual negotiations between the
parties as they are prescribed by the insurer in final printed form to which the insured
may “adhere” if he chooses but which he cannot change. (Rizal Surety and Insurance
Co., vs. CA, 336 SCRA 12)
5. Principle of Subrogation
☞ It is a process of legal substitution where the insurer steps into the shoes of the
insured and he avails of the latter’s rights against the wrongdoer at the time of loss.

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

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

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.
Insurance contract was considered binding upon proof that the insurance
application was duly received by the insurer
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).

Clauses

☞ An agreement between the insurer and the insured on certain matter relating to the
liability of the insurer in case of loss.

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Endorsements

☞ Any provision added to the contract altering its scope or application.

POLICY OF INSURANCE

☞ The written instrument in which a contract of insurance is set forth.

POLICY OF INSURANCE
Contents: (Sec. 51) PARPIRD
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 of Policy:
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)

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Kinds of Insurance
A. Compulsory Insurance- coverage is secured from private insurers and not from a
particular government agency
 Compulsory Third Party Liability Insurance for motor vehicles
 Compulsory coverage of passengers and cargoes of vessels
 Compulsory coverage Migrant worker deployed by a recruitment/manning
agency at cost to the said worker
B. General Classification
Different kinds of assurance may be grouped into three great heads namely:
1. Insurance against loss or impairment of property, interests, which may be either
be in existence or merely expected; that is present rights or profits yet to accrue
2. Insurance against loss of earning, power by accidental injury, sickness, old age,
or disability, by death, or even by unemployment,
3. Insurance against contingent liability to make payment to another for any cause.
C. Classification According to Object
- Private insurance can either be:
a. Life or Health Insurance
b. Property Insurance, or
c. Liability insurance
D. Special Types
- With specific provisions in the Insurance Code
a. Marine Insurance
b. Casualty insurance
c. Fire insurance
d. Life insurance
e. Compulsory Third Party Liability Insurance, and
f. Microinsurance (RA. No. 10607)
E. As to the persons Covered

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a. Individual Insurance- usually owned by the person or entity who is insured or

who owns the property
b. Group insurance- provides coverage to more than one person under a single
contract issued to someone other than the person insured
F. Insurance may be either Personal Insurance or Business Insurance
a. Personal Insurance- natural persons and their families like life insurance,
disability and motor vehicle insurance
b. Business insurance- used by business organizations like employee life
insurance or property insurance for the factory and the inventories
Life Insurance may be classified into:
1. Term Insurance – The life of a person is insured on a temporary basis or for a
limited period
2. Whole Life Insurance
3. Endowment Policy
4. Industrial Life
5. Ordinary Life

Principle of Indemnity
The principle is meant to prevent the insured from profiting from insurance and to
reduce moral hazard. The real purpose of the contract is, in case of loss, to place the
insured in the same situation in which he was before the loss, subject to the terms and
conditions of the policy.

Principle of Indemnity
a. Exceptions:
1. Life Insurance
2. Valued policies under which the insurer will pay the value fixed in the policy
regardless of the actual cash value in case of total loss
b. Manifestations:
1. Insurable interest is indispensable,

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2. The value of the interest destroyed or damage s generally the measure of

indemnity
3. Co-insurance clause in marine insurance,
4. subrogation in property insurance

TYPES OF INSURANCE CONTRACTS (R.A No. 10607)

1. Life insurance
a. Individual life (Secs. 179–183, 227)
b. Group life (Secs. 50, last par., 228)
c. Industrial life (Secs. 229–231)
2. Non-life insurance
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)
c. Casualty (Sec. 174)
3. Contracts of bonding or suretyship (Secs. 175–178
Note:
1. Health and accident insurance are either covered under life (Sec. 180) or
casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect of casualty insurance are also referred to
as property insurance

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The Parties

Parties to a Contract of Insurance

1. Insurer
2. Insured
3. Beneficiary

Capacity

Under the New Civil Code, a contract is voidable if one of the parties is incapacitated.
Accordingly, an insurance contract is voidable if the insured is a minor, an 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 like a minor.

Rule on Married Women

Equality in Capacity to Act. – Women of legal age, regardless of civil status, shall have the
capacity to act and enter into contracts which shall in every respect be equal to that of men
under similar circumstances.

Section 3 of the Insurance Code provides that:

“The consent of the spouse is not necessary for the validity of an insurance policy taken out by
a married person on his or her life or that of his or her children.”

General Rule
Women’s capacity to act is not impaired by marriage;
Provision on insurance is not limited to common children of the spouses;

Exceptions
If the beneficiary is a debtor of the spouses, taking of insurance can be considered as an act of
administration where it should be jointly undertaken under absolute community of property
regime. In case of disagreement, it is the husband that will prevail.

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If the beneficiary is a stranger to any of the spouses, taking of insurance can be in the nature
of donation that should be approved by both of them under absolute community of property
regime.
Rule on Minors

Minors cannot enter into insurance contracts. The rule under the New Civil Code is that a
contract entered into between a minor and capacitated person is considered voidable. Hence,
an insurance contract entered into between the minor and an insurance company is voidable.

Effect of Death of Owner

The last paragraph of Section 3 as amended by R.A. No. 10607 now provides

“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 if the
original owner, unless otherwise provided for in the policy.”

For example, the life of a minor can be insured. The parents can insure the life of their minor
child. If the parents, who are the original owners of the policy, will die, all the rights, title and
interest in the policy shall be automatically vested in the minor.

Public Enemy

Section 7 of the Insurance Code provides that “Anyone except a public enemy may be insured.”

Public enemy - a State (and citizens thereof) which is at war with the Philippines.

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

Rights of Policy Holders

Policy Holder – named owner of the insurance policy who may be the insured or assured in life
or non-life insurance policy or a beneficiary may be applicable.

As part of its effort to protect the public, the Insurance Commission promulgated the Bill of
Rights of Policyholders under which the following are recognized:

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1. Right to a financially sound and viable insurance company

2. Right to access insurance companies’ official financial information
3. Right to be informed of the license status of insurance companies, intermediaries and
soliciting agents
4. Right to be offered a duly approved insurance product
5. Right to be informed of the benefits, exclusions and other provisions under the policy
6. Right to receive the policy
7. Right to confidentiality of information
8. Right to efficient service from insurance companies,
intermediaries and soliciting agents
9. Right to prompt and fair settlement of claims
10. Right to seek assistance from the Insurance Commission

Beneficiary

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).

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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.

Exception:

The Family Code provides for revocation of an irrevocable designation of beneficiary. Article 64
of the Family Code provides that after the finality of the decree of legal separation, the innocent
spouse may revoke the designation as beneficiary in any insurance policy even such designation
is stipulated to be revocable.

Insurance not wagering a contract

The law does not authorize insurance for or against the drawing of any lottery, or for or against
any chance or ticket in a lottery drawing a prize.

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