I.

INSURANCE (PD 612, as amended by RA 10607)

1. Basic concepts
1. What may be insured

2. Insurable interest
3. Double insurance and overinsurance
4. Reinsurance
5. No fault, suicide, and incontestability clauses

2. Perfection of the insurance contract

3. Rights and obligations of parties

1. Insurer
2. Insured
3. Beneficiary

4. Rescission of insurance contracts

1. Concealment
2. Misrepresentation or omissions
3. Breach of warranties
5. Loss

REVIEWER IN INSURANCE LAW

As lectured by Dean Jose R. Sundiang
1
MATTERS TO STUDY:
For purposes of the bar, study very well the following:
1. Insurable interest (most important)
2. The principle of indemnity, specially in property insurance
3. The principle of subrogation (Art. 2207, NCC)
4. The principle of utmost good faith
5. The principle of insurance as a contract of adhesion
CASE: ENRIQUEZ VS. SUN LIFE ASSURANCE CO.
FACTS: An application for life insurance was mailed. An acceptance was
also
mailed by the insurer. Before the receipt of the acceptance letter, the
insured died.
HELD: Follow the Theory of Cognition. A contract is perfected upon
knowledge
of the acceptance. There was no perfected contract since it was not
shown
that the acceptance of the application ever came to the knowledge of
the
applicant.

HISTORY:
1. Insurance Act (2427)
2. PD 612
3. PD 1460 - merely codified all the insurance laws of the Philippines;
date of effectivity - 11 June 1978
4. PD 1814 - amending certain provisions of the Insurance Code
5. BP 874

CONTRACT OF INSURANCE

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. It is an agreement, a contract.
Hence, it must have all the essential elements of a contract: consent,
object, and cause or consideration.

What are the essential elements of a contract of insurance?

There must be a subject matter in which case there must be an insurable

interest, especially in property insurance.

There must be the risk or the peril insured against. Under the Code, the risk
is any contingent and unknown event, whether past or future, which may
damnify a person having an insurable interest can be insured against.

Insurable interest is a very important concept in insurance. There must be

a risk or peril insured against.
There must also be the consent of the contracting parties.

As a rule, it is a voluntary contract. The only exception is found in Chapter

VI, the Compulsory Motor Vehicle Liability Insurance. Those who have cars
know this. You cannot register your vehicle unless it is covered by this type
of insurance.
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REVIEWER IN INSURANCE LAW
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But as a rule, insurance is a voluntary contract. So the parties must give
their consent freely; no vice of consent, like force, intimidation, undue
influence, mistake, violence, etc. Then, like any other contract, there must
be a meeting of the minds. It is a consensual contract; it is perfected by
mere consent. There is also an offer and an acceptance between the
insurer
and the insured. These elements must concur before you have a contract
of
insurance.

Elements of an Insurance Contract

Like any other contract, an insurance contract must have consent of the parties, object
and cause or consideration. The parties who give their consent in this contract are the
insurer and insured. The object of the contract is the transferring or distributing of the
risk of loss, damage, liability or disability from the insured to the insurer. The cause or
consideration of the contract is the premium which the insured pays the insurer.

Additional Element of an Insurance Contract

Insurable Interest. This means that the insured possesses an interest of some kind
susceptible of pecuniary estimation.

The essential elements of an insurance contract are:

(a) Insurable interest;
(b) Existence of risk;
(c) Assumption of such risk by the insurer;
(d) Said assumption being part of a general scheme to distribute actual losses among those bearing
similar risks;
(e) Payment of premium.

Who are the parties? The insured and the insurer. Who is the insurer? He
is the party who undertakes to indemnify the insured against loss, damage
or
liability arising from an unknown or contingent event. The insured on the
other hand, is the party to be indemnified upon the occurrence of the
loss.
Aside from being capacitated to enter into a contract, what other
qualifications must the insured posses? The law says under Sec. 7, he must
not be a public enemy. The law says anyone except a public enemy can
be
insured against.
What does public enemy mean? To what does it refer? It refers to a
country
with which the Philippines is at war and the citizens thereof. What is the
reason why, under the law, a public enemy cannot be insured against?
The
reason is obvious. The purpose of war is to cripple the power & exhaust the
resources of the enemy. If the Code did not contain the aforementioned
prohibition, it could be insured to compensate by way of insurance after
having destroyed or crippled the resources of the enemy.
May a minor validly enter into a contract of insurance? Under the present
Code, the law by way of exception provides that a minor may enter into
a
contract of life, health and accident insurance, provided the beneficiary
is
among those mentioned under the law: the minor's estate, the parents,
spouse,
children, siblings (Sec. 3[3]).
Consider, however, RA 6809, which reduced the minority age to eighteen.
So
when the law speaks of a minor at least eighteen years of age,
considering RA
said provision of the Insurance Code has been
correspondingly modified by said piece of legislation.
In other words, one who is eighteen (18) years of age is no longer a minor
under RA 6809. Therefore, a person who is eighteen years of age may
enter not
only into a contract of life and accident insurance, but even property
6809, I believe that
insurance.
Suppose the insured is minor, below eighteen years of age, say seventeen
and he enters into a contract of property insurance. The insurance
company
issues a policy. There is a loss by fire. Can the insurance deny the claim on
the ground that the insured is a minor? May the insurer raise as a defense
the minority of the insured, and therefore consider the contract void? NO.
Recall the law on contracts under the Civil Code. Under the law, a
contract
entered into by a minor is not void, it is only voidable, therefore valid
until annulled (Art. 1390 [1], NCC)
Furthermore, we have that law on contracts, that when one of the parties
is incapacitated, the capacitated party cannot invoke as a defense the
incapacity of the other party. In other words, in the absence of
misrepresentation on the part of the minor, the insurer will be liable
despite the fact that the insured is a minor. We can even apply the
principle
of estoppel. The insurer is estopped from denying the claim.
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REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
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How about a married woman? Can she enter into a contract of insurance
without the consent of her husband? YES provided that the insurance is on
her
life or that of her children (Sec. 3, par. 2, ICP)
The law does not mention property insurance. Under the Civil Code and
under the present Family Code, with respect to the question of whether a
wife
may engage in any trade, occupation or profession without the consent
of the
husband, the rule is YES, the wife can do so. All that the wife can do is to
object on serious moral grounds and provided that his income is sufficient
to
support the family in accordance with its social standing.
There are many important concepts referring to a contract of insurance.
The most important ones are:
1. it is a personal contract
2. it is a contract of adhesion
CHARACTERISTICS OF A CONTRACT OF INSURANCE
1. It is an aleatory contract
Art. 2010, NCC - 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.
Event which may or may not happen - fire
Even that will happen although we do not know when - death (in so far
as the insurer is concerned, the even is conditional, it may or may not
happen)
2. It is a personal contract
that the insurer considered
See Sec. 20
The law
presumes
the
personal
qualifications of the insured.
3. It is a contract of indemnity (except life & accident insurance where
the result is death)
In so far as property insurance is concerned. The purpose of the
insurance contract is to indemnify. Therefore, the amount to be
recovered should never be more than the loss. Otherwise, the contract
becomes an instrument for unjust enrichment (solutio indebiti).
4. It is a contract of adhesion
A contract which does not result from the negotiation of the parties.
In insurance, there is a policy, normally in printed form. Normally,
the applicant of the insured has no participation in the preparation of
the contract. He may either accept or reject the contract.
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Characteristics of an Insurance Contract

A contract of insurance has the following characteristics:
1. Consensual – perfected by the meeting of the minds of the parties
2. Voluntary – it is not compulsory and the parties may incorporate such terms and conditions as they
may deem convenient which will be binding provided they are not against the law or public policy
3. Aleatory – depends upon some contingent event
4. Executed – as to the insured after the payment of the premium
5. Executory – as to the insurer as it is not executed until payment for a loss
6. Conditional – subject to conditions the principal one of which is the happening of the event insured
against
7. Personal – each party in the contract have in view the character, credit and conduct of the other
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As lectured by Dean Jose R. Sundiang
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In transportation law, there is a case involving a plane ticket which
the Supreme Court held as a contract of adhesion. Will it bind the
passenger although he has not read it? Yes, because while it is a
contract of adhesion, it is not a void contract. It follows that he is
bound by the provisions thereof. That is also the case of a contract of
insurance.
The situation is different in a contract of sale where the parties
normally would have a say on the terms thereof, the manner of payment,
the manner of delivery, who should shoulder the expenses, etc. This
does not apply in a contract of insurance.
In a contract of insurance, the policy is in written form presented to
the applicant. He either adheres (that is why it is called a contract
of adhesion) or rejects the contract. Therefore, as a result, being a
contract of adhesion, the rule is: should there be any doubt, ambiguity
or obscurity, in any of the terms and stipulations of the contract, the
same shall be interpreted strictly against the insurer and liberally in
favor of the insured.
There is a similar provision of the Civil Code, under Art. 1377.
Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
Applying the aforesaid provision to a contract of insurance, who is
that party? The insurer. The party who prepared the contract. Therefore,
should there be any doubt, any ambiguity or obscurity, in any of the
terms and conditions of the contract, the rule to follow is: the same
shall be interpreted strictly against the insurer and liberally in
favor of the insured.
To illustrate: regarding the so-called authorized driver clause of the
policy, who is deemed to be an authorized driver under the policy? In a
contract of insurance, should there be an accident, and the driver at
the time of the accident is not an authorized driver within the meaning
of the policy, there can e no recovery.
Under the policy, who is an authorized driver?
1. the insured
2. any person driving upon the insured's order with his permission
provided the person driving is authorized to drive the motor vehicle
in accordance with the licensing laws, rules, or regulations and is
not disqualified from driving the same by order of a court law, or
any rule or regulation on that behalf.
Simply that means: if the one driving is other than the insured:
1. he must be authorized or permitted by the insured.
2. he must be qualified to drive in accordance with, say, the Land
Transportation Code, and other rules and regulations, must not have
been disqualified by any court of law, rule or regulation in that
behalf.
According to the Code, however, the requirement that the person
driving,
must be duly authorized to drive in accordance with the licensing law,
rules and regulations, and is not disqualified from driving the said
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As lectured by Dean Jose R. Sundiang
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motor vehicles by any order of a court of law, etc., applies only if
the person driving is other than the insured.
So, in the case of Palermo, and some other cases, at the time of the
accident, the one driving his car was the insured himself. He had an
expired driver's license. The insurance company denied the claim
involving the authorized driver clause. According to the insurance
company, the under the policy, the insured as driver was not authorized,
hence, the insurer was not liable.
The Supreme Court said NO. Because at the time of the accident, the one
driving the car was the insured himself. The foregoing requirement does
not apply.
In the case of Perla Compania de Segurus vs. CA, 208 scra 478, the
insured car was parked somewhere in Makati. It was car napped. It was
being driven by someone who had an expired license before it was
stolen.
The insurance company denied the claim invoking the authorized driver
clause.
The Supreme Court disagreed. In the first place, what should apply is
the theft clause, not the authorized driver clause. The fact that the
person driving the car before it was stolen did not have a license or
had an expired driver's license is of no moment. The clause that should
apply is the theft clause.
In the case of Villacorta vs. Insurance Commission, 100 SCRA 467, the
insured car was involved in an accident and was brought to the repair
shop. Necessarily the owner would have to entrust the keys of the car
to the owner of the shop or the authorized representative, so the car
after the repair had been completed could be road-tested. But some of
the employees of the motor shop used the car in a joy-ride around
Manila. Unfortunately, it was involved in an accident, again the
insurance company denied the claim invoking the authorized driver
clause.
The Supreme Court disagreed. When the insured entrusted the keys to the
owner of the repair shop, there was an implied authority given by the
insured either to the owner of the shop or the latter's employees to
drive the car. Secondly, in that case, what should apply is not the
authorized driver clause but the theft clause of the policy.
EXCEPTION TO THE RULE: tourists, however, who have an expired xxx of 90
days is not under the law, an authorized driver unless he secures a
Philippine Driver's License.
REMEMBER -
You apply the rule that should there be any doubt, ambiguity or
obscurity, in any of the terms and stipulations of the contract, the
same shall be interpreted strictly against the insurer and liberally in
favor of the insured, only when there is doubt, ambiguity or obscurity,
in any of the terms and stipulations of the contract.
But if the terms, conditions, and stipulations are clear, there is no
room for interpretation.
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When the law or contract is clear, no matter how harsh it may be, then
the courts will have to enforce the law or contract. Courts are not
supposed to make contracts for the parties. That is also true with the
contract of insurance.
Why don't we refer or apply to the provisions of the Civil Code when we
talk about the contract of insurance? What laws govern the contract of
insurance?
Art. 2011, CC: The contract of insurance is governed by special
laws. Matters not expressly provided for in such special laws shall
be regulated by this Code.
Primarily, a contract of insurance is governed by special laws (PD 1460,
as amended). In the absence of any applicable provision of the special
law, the provisions of the Civil Code, particularly the provisions on
Obligations and Contracts shall be applied.
In the absence of any applicable provisions in both, then decisions and
doctrines prevailing in the United States may be applied. Why? Because
primarily, our law on insurance is of American origin, patterned from
the insurance laws of California and New York.
REMEMBER, in resolving insurance problems, apply the following in the
order they are mentioned:
1. Special Laws
2. Civil Code (Art. 2011)
3. American decisions and doctrines
5. It is based on the principle of subrogation (applicable only to
property insurance)
Art. 2027, CC: If the plaintiff's property has been insured, and he
has received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss
or injury.
Subrogation is
essentially
a
process
of
substitution,
where
the
subrogee, in this case, the insurer, steps into the shoes of the
insured. Actions or rights pertaining to the insured will be
transferred to the insurer.
For example, you have a car insured under a comprehensive policy. It
was involved in an accident. It was the fault of the other party.
Damage: P30,000.00. What are your remedies? Either you recover from
the
insurer or from the party at fault. You cannot recover from both. Why
not? Because a contract of insurance is a contract of indemnity. It is
not to be used as an instrument for profit or gain.
Suppose you decide to recover from the insurer, but the insurer pays
you only P25,000.00. With respect to that amount, there will be
subrogation. It is now the insurer who can recover this amount from the
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party at fault. In the case of Malayan Insurance Company, the court
held that subrogation is a normal incident of indemnity insurance. It
inures to the insurer without the need of formal assignment or an
express stipulation in the policy to that effect. The moment the
insurer pays the insured, the insurer becomes a subrogee in equity.
May the insured recover from the party at fault? Art. 2207 of the Civil
Code says YES, because the law says, "if the amount paid by the
insurance company does not fully recover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury."
Can the insurer's right of subrogation be destroyed? Yes. The insurer's
right of subrogation can be destroyed when the insured releases the
other party at fault from liability. Why? Because by releasing the
other party, the insured destroys or defeats the insurer's right of
subrogation. Hence, the insurer will deny the claim of the insured.
In other words, it is the obligation of the insured to preserve at all
times that right of recovery which belongs to him, but which will
eventually be transferred to the insurer by way of subrogation. That is
a condition in the insurance policy.
How else can the right of subrogation be destroyed or defeated? When
the insurer pays the insured even if the cause of the loss was not the
risk or peril insured against.
What factors must concur before there can be recover in property
insurance?
1. the insured must have an insurable interest in the subject matter;
2. that the interest must be properly covered by the policy;
3. there must be a loss; and
4. as a rule, the loss must be proximately caused by the peril insured
against.
ILLUSTRATIONS:
1. A owns a house worth P1M. He has an insurable interest in the house.
But B insured the house in his name. Should there be a loss, can B
recover? No. Because he has no insurable interest in the house. Can
A recover? No. Because while A has an insurable interest in that
house, such interest was not covered by the policy, as it was B who
insured the house.
2. In the same example, A insured the house against fire for one year.
During the year, there was no fire, there was no loss. Can there be
a refund of the premiums paid? No. there can be no recovery. What
does the insured get? What is the consideration?
The consideration on the part of the insurer is the premium paid by
the insured. How about the insured, what is its consideration? The
protection, the promise, the undertaking on the part of the insurer
to indemnify the insured in case of loss. That is the consideration
on the part of the insured.
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REVIEWER IN INSURANCE LAW
As lectured by Dean Jose R. Sundiang
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So it is not correct to say that should there be no loss within the
term of the policy, there is no cause or consideration. There was a
consideration. If there is no cause or consideration, even under
the law on contracts, the contract is void. Or where the cause or
consideration is illicit or unlawful, the contract is also void.
Art. 1411, CC: When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. xxx
INSURABLE INTEREST
When is a person said to have an insurable interest in a subject matter?
Why does the law require the insured to have an insurable interest?
If the insured has no insurable interest in the subject matter, the
contract becomes a wagering contract, on the theory that he has
nothing to
lose and everything to gain.
While it is true that the insurance is a conditional contract based on
chance, it is not the same as a wagering contract. The law does not
authorize
it under Sec. 4, 16 and 25.
When is the insured deemed to have an insurable interest? 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 property he
shall suffer pecuniary loss, damage or prejudice.
How do we determine whether a person has an insurable interest in the
life
of another person, without considering the enumeration under Sec. 10?
There
is insurable interest when that person has an interest in the preservation of
life of another despite the insurance, rather than in its destruction because
of the insurance.
In other words, could the beneficiary be more interested in terminating
that life so that he could recover from the insurer, or could he be more
interested in preserving that life, despite the insurance, then he has
insurable interest in that life.
In whose life or health does a person has an insurable interest?
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; and
d) of any person upon whose life any estate or interest vested in him
depends.
The explanations for (a) and (b) above are self-explanatory.
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As lectured by Dean Jose R. Sundiang
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For (c) above, this refers to a case where the person in question is under
obligation either for payment of money or to render services. The movie
companies for instance, have insurable interest in the life/lives and health
of the actors and actresses who are under contract with them. Why?
Because
these actors and actresses are under obligation to render services to said
movie companies. Without these actors and actresses, these movie
companies
are liable to close down.
With respect to the obligation for the payment of money, there is the
creditor-debtor relationship. A creditor has insurable interest in the life
of the debtor, but only to the event of the obligation. For instance, the
debtor owes the creditor of P1M in the form of a loan. Can the creditor
insure the life of the debtor? Yes. Because the debtor is under obligation
to
pay money to the creditor. The death of the debtor will either delay or
prevent the payment of the loan. But although the creditor can insure the
life of the debtor, the insurance is limited to the amount of the loan which
is P1M.
QUERY:
In the example above, suppose C (creditor) insures the life of D (debtor)
for P1M. Before the death of D, the loan had been fully paid by him. Can
D
recover? No, because he was not a party to the contract (Art. 1311, CC).
An
insurance procured by the creditor over the life of the debtor for the
benefit of the creditor will not inure to the benefit of the debtors. The
creditor is not acting as an agent. Can C recover? No, because he no
longer
had insurable interest on the life of D at the time of D's death. Who can
recover? Nobody.
Suppose it was D who insured his own life and made C as the beneficiary,
but before D's death, the loan had been paid in full, this time who can
recover? The heirs or legal representative of D.
Try to consider the difference between those two different situations. An
insurance procured by the creditor on the life of the debtor in the name
or
for the benefit of the creditor will not inure to the benefit of the debtor.
The nature of the life insurance partakes of the nature of a contract of
indemnity because, unlike in property insurance, in life insurance, as a
rule,
there is no limit. That is one of the distinctions between life insurance and
property insurance. You can insure your own life for as much as you wish,
with as many insurance companies as you like, provided you pay the
premiums.
In property insurance, on the other hand, there is a limit. And that is the
extent of the insurable interest. Under Sec. 14, for a person to have
insurable interest in property, he need not be the owner thereof.
Sec. 14. An insurable interest in property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in that out of
which the expectancy arises.
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As lectured by Dean Jose R. Sundiang
Aside from an owner of a property, who else can have an insurable
interest
in such property? A lessee, among others. In order to ascertain whether or
not a person has an insurable interest in property subject matter, the test
to be applied is Sec. 17.
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.
In the event of loss or injury to the property, will he be damnified? Will
he suffer any loss, damage or prejudice? If the answer is YES, then he has
insurable interest.
In the sale of property, the vendor, prior to actual delivery, has an
insurable interest in the property. In sale with a right to repurchase (pacto
de retro), within the period of redemption, the vendor a retro has an
insurable interest in the property because he still has the right of
redemption.
Although you should recall how is ownership of the thing sold transfers to
the vendee or buyer. That is important for determining for instance, the
issue of who should bear the loss, because of the principle or res perit
domino.
In transfer by delivery, tradition, actually or constructively, it is not
the perfection of the contract, nor the payment of the price, but the
delivery, which will transfer ownership to the buyer. So pending delivery,
despite perfection or even payment of the price, as a rule, then vendor is
still the owner. The vendee, of course, under Arts. 1163-1165, CC, can
demand
delivery. He has a right. So in effect, both the vendor and the vendee
have
insurable interest in property subject matter.
With respect to a stockholder of a corporation, does he have insurable
interest in the corporate assets and property? The rule in corporation law is
that a corporation has a personality distinct and separate from those of its
stockholders. Hence, any property of the corporation is not property of its
stockholders. Such property belongs to the corporation as a distinct and
separate entity. But a stockholder has an inchoate interest to the extent of
his shares or subscription in corporate assets. To that extent, a stockholder
has insurable interest in the property of a corporation.
Going back to life insurance, do you have an insurable interest in the
life of your girlfriend? No. Mere relationship is not enough to grant
insurable interest in a person party to such relationship. Unless she
depends
on you for support.
What about a corporation, does it have an insurable interest in the life
of its janitor? No. Even if the janitor is under obligation to render
services to the corporation, death of the janitor cannot bring loss or
prejudice to the corporation. But does a corporation have an insurable
interest in the life of its president? Yes. Death of the president will mean
loss or prejudice to the corporation itself.
Do you have an insurable interest in the life of your lecturer? Is he not
under obligation to render service to you (deliver lectures)? Or is it the
school which has an insurable interest in the life of the lecturer? No.