CHAPTER 1 GENERAL CONCEPTS Modern insurance contracts originated from the practice of merchants in the 14th ceritury. Nevertheless, it has been acknowl- edged that different strains of security arrangements have already been used for centuries and they are akin to insurance contract in embryonic form, dustice Laurel commented on the growth of insurance business in this wise: “The phenomenal growth of insurance from almost nothing a hundred years ago to its present gigantic proportion is not of the outstanding marvels of present-day business life. The demand for economic security, the growing need for social stability, and the clamor for protection against the hazards of cruel-crippling calamities and sudden economic shocks, have made insurance one of the felt necessities of modern life. Insurance is no longer a rich man’s monopoly. Upon it are heaped the assured hopes of many families of modest means. It is woven, as it were, into the very warp and woof of national economy. It-touches the holiest and most sacred ties in the life of man-love of parents, love of wives and love of children.” §1. DEFINITION. The statutory definitio f the “contract of insurance” appears in the first paragraph of Section 2 af the! that states:? SEC. 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: pan * (a) A contract’ of insurance is. an agreement: ‘The Insular Life Assurance Co., Ltd. v. Serafin D. Feliciano, et al., G.R. No. 47593, September 13, 1941, 73 Phil. 201. ‘Section 2, Insurance Code, Republic Act (RA) No, 10607 dated August 15, 2018, hereinafter referred to as LC. { Scanned with CamScannerESSENTIALS OF INSURANCE LAW : (Republic Act No. 10607 with Notes on Pre-Need Act) ! LoL I be deemed to'bean. ct;;within the meaning of this Code, . : In the application of the provisions of this Code, the fact thas ns profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, (nobbe deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. . (c) As used in this Code, the term Commissioner means the Insurance Commissioner. Scanned with CamScannerCHAPTER 1 3 GENERAL CONCEPTS §1.01. TEST) Whether or not a contract is one of insurance is not necessarily by the terminology used. The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact or circumstances under which the performance becomes requisite.‘ The test is whenever the assumption of risk and the mdemnification _of loss is the principal object and purpose of the contract.’ a. For instance, a contract may be considered an insurance contract_even if it is referred to as a health plan. In P 3 the Supreme Court ruled that the contract involved was an insurance contract rather than a pre- need plan. In the said case, the insurable interest of respondent's husband in obtaining the health care agreement was his own health. Qnce the member incurs hospital, medical, or any other expense arising from sickness, injury or other stipulated contingent, the hgalth care provider must pay for the same to the extent agreed upon under the contract. This ruling was reiterated in ‘ne. v. Amorin? where the Supreme Court emphasized"“that for purposes of determining the liability of a health care provider to its members, jurisprudence holds that a health care agreement is in the nature of non-life insurance, which is primarily a contract of adomnity?” The arrangement is "he same when th 6 arrangement is “the same when the member eure hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.” b. urt reached a different conclusion in here it concluded that the elements of insurance contract are absent. The Court ruled that there was no indemnity precisely because the member merely ®National Auto Service Corporation v. State, Texas Civ. App., 55 S.W. (24) 209. ‘White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al,, G.R. No. 164514, July 28, 2005. gg, Philippine Health Care Providers v. CIR, G.R. No. 167330, September 18, ®GR. No. 125678, March 18, 2002. See also Blue Cross Health Care, Inc Noemi and Danilo Olivares, G.R. No. 169737, February 12, 2008. sat 7G.R. No. 195872, March 12, 2014 citing Philamcare Health Systems, Inc v. CA, 429 Phil. 82, 90 (2002); see also Philippine Health Care Providers, Inc. v., Commissioner of Internal Revenue, supra. _ __ *Supra (The Supreme Court reversed its previous ruling in 2008 as reported, in 554 SCRA 511 [2008)). Scanned with CamScanner: ESSENTIALS OF INSURANCE LAW ; (Republic Act No. 10607 with Notes on Pre-Need Act) / avails of medical services to be paid or already paid in advance | member was not the focal point of the agreement but the exten, n of medical services to the member at an affordable cost; it inal partake of the nature of a contract of insurance. Although ris\y/ a primary element of an insurance contract, it is not necessarily, true that risk alone is sufficient to establish it. Almost anyone why uridertakes a contractual obligation always bears a certain degree gt financial risk. Consequently, there is a need to distinguish prepaiq service contracts (like those of petitioner) from the usual insurance «contracts. Indeed, an entity undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. c. It should be noted in this connection that a Health Plan is not one of the Pre-Need Plans expressly recognized under the Pre. Need Code and its Implementing Rufes and Regulations.” Under ie i d. Even a provision in a Collective Bargaining Agreement can be considered an insurance contract under certain circumstanc- és Tn Miteubishi sia Unit a 5 ilippii f° the Collective Bargaining Agreement entered into between the petitioner union and respondent corporation, MMPC, contained a provision that states that the company “shall obtain group hospitalization insur- ance coverage or assume under a self-insurance basis hospitalization for the dependents of regular employees up to a maximum amount of forty thousand pesos (P40,000.00) per confinement subject to” cer tain limitations and conditions specified therein. The Court ruled that “MMPC is a no-fault insurer. Hence, it cannot be obliged 0 pay the hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance providers of said dependents.” Moreover, since the subject CBA provision is insurance contract, the rights and obligations of the parties must determined in accordance with the general principles of jnsurance law. Being in the nature of a non-life Insurance contract and esse™ a zt *Section 4(b), R.A. No. 9829, Section 10, IRR of the Pre-Need Code. 10D At. anennn Scanned with CamScannerCHAPTER 1 5 GENERAL CONCEPTS tially a contract of indemnity, the CBA provision obligates MMPC to indemnify the covered employees’ medical expenses incurred by their dependents le but only up to the extent of the expenses actually incurred. i i i ‘inci i i i proscribes the insured from recovering greater than'the los: e In ‘e Supreme Court considered the Protection and Indemnity Agreement issued by a P&I Club as an insurance contract. In the Protection and Indemnity Agreement, the P&I Club is the insurer, the shipowner is the insured, and the heir of acrew on board the insured vessel is a beneficiary. yc ieacg v Wikeaipiny to compensate the expenses that will be incurred by the owner of the product or building to replace, repair or rework the property may also be in the form of insurance.” g. Contracts of law firm with clients whereby in consider- ation of periodical payments, the law firm promise dical he Jaw firm promises to represent such clients in all suits for or against them are(not/insurance con- SS, INSURE » For regulatory purposes, “a” éontract a. The contract of suretyship under the New Civil Code is sXnply defined as an agreement whereby one binds himself solidaril wilh the principal debtor,” %* $1.03. PRESNEED" PANS? Insurance contracts should likewise be distinguished from pre-need plans that are now under the regulatory powers of the Insurance Commission (.C.) under "G.R, No, 143313, June 21, 2005. “Williams, Jr. and Heins, Risk Management and Insurance, 1989 Ed., p. $22. “Ibid, , : “Philippine Health Care Providers, Inc. v. CIR, supra, "Section 2, I.C.; See §2 of this Chapter. t "*Section 2047, New Civil Code. Scanned with CamScannermc, 4 Wo ESSENTIALS OF INSURANCE LA\ (Republic Act No. 10607 with Notes on Pre-Need Act) rovide for the performance of ‘ Considerations or delivery of ot jer benefits atthe time of actual need oragreed maturity date, as specified therein, im exchange for cash or -jnstallment amounts with or without interest or nsurané® cover and includes life, pension, education, interment an ier plans,» n eds as may be determined by I.C""The instruments, contracts or dee a d basic laws and rules on Pre-Need Plans are discussed in Chapter 18 this work.!® Ones ‘VARIABLE™CONTRACTS? The Insurance Code likewise governs “variable contracts. ‘policy or contract on:either-a group oF on an individual basis issued” by an insurance company providing for benefits or.other contractual» payments or values thereunder to vary.so.as to reflect investment of ' investments or of a designated» gregated portfolio nt in which amounts recei have bee d ted for separately” and apart from other investments and accounts. This contract may also provide benefits or values incidental thereto payable in fixed or Ben Mec vl “ In return for the 20 years of faithful service of X as a househelper.to ~ _ Y, the latter promised to pay P100,000.00 to X's heirs if he (X) dies in nt an accident by fire. X agreed. Is this an insurance contract? (2011 Bar) Agi? 4: No, the agreement is not insurance but a conditional donation. ws There is no insurance because there is no contract to indemnify the heirs or X for any loss, damage or liability. Y actually promised to transfer P100,000.00 to the heirs of X gratuitously on the condition that X dies in an accident by fire. The promise to transfer is subject to a suspensive condition. i @© ET, deceased husband of respondent JT, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. The application was approved for a period of one year from March 1, | 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent's husband was entitled to avail of hospitalization benefits, whether ordinary of "Section 4(b), R.A. No, 9829, '8See Chapter 18, of this book, p. 491. "Section 238, 1.C. as amended. Scanned with CamScannerCHAPTER 1 7 GENERAL CONCEPTS emergency, listed therein. He was also entitled to avail of “outpatient benefits” such as annual physical examinations, preventive health care and other outpatient services. Was the agreement an insurance contract? a: (es. Yhe health care agreement was in the nature of non-life insu ance, which 1s primarily a contract of indemnity. Tn This, the insurable interest of respondent's husband in obtaining the health care agreement was on his own health. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. (Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos, G.R. No. 125678, March 18, 2002. But ‘see contrary view in’ Phil. Health Care Providers, Inc. v. CIR, September 18, 2009 below) Under the agreement with the PHCP, Inc., the member pays the PHCP a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioner's physician or affiliated physician to him. In case of availment by a member of the betiefits under the agreement, PHCP does not reimburse or indemnify the member as the latter does not pay any thirdiparty. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. According to the agreement, a member can take advantage of the bulk of the benefits anytime, seg, laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his, or her part. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list af services available, The assumption of the expense by petitioner is Qo confined to the happening of a contingency but includes incidents even in the absence of illness or injury. Can the contract between the member and the PI be considered an insurance contract? AG ‘The contract is not an insurance contract. Not all the éessary elements of a contract of insurance are present in 's agreements. To begin with, there is no loss, damage on the part of the member that should be indemnifi by PHCP. In other words, there is nothing that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms “indemnify” or “indemnity” presupposes that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be Scanned with CamScannerLAW SSENTIALS OF INSURANCE (Republi “Act No. 10607 with Notes on Pre-Need Act) i the focal point ments. Indemnity of the member was( f fi ofthe agreement but the extension of medital services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. ile PHCP undertakes a business risk when it offers to jrodins health services: the risk that it might fail to earn reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, alsg known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured. paid or already paid in advance at a roar price under the However, assuming that the PHCP’s commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioner's objective is to provide medical services at reduced cost, not to distribute risk like an insurer. (Philippine Health Care Providers, Inc. v. CIR, G.R. No. 167330, September 18, 2009) Respondent. Rosita.Singhid’s deceased husband. Benito Singhid (Benito).was hired by Fullwin Maritime Limited (Fullwin), through its local agent, respondent Marine Manning and Management Corporation (MMMC), as chief cook on board the vessel MV Sun Richie Five for a term of 12 months. MV Sun Richie Five Bulkers S.A., owner of the vessel Sun Richie Five, was a member of a P&I Club, which is “an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties. The vessel and its crew were covered by a “Class 1— Protection and Indemnity” agreement beginning noon of February 20, 1997 up to February 20, 1998 as embodied in the Certificate of Entry issued by OMMIAL. OMMIAL transacted business in the Philippines through its local correspondent, herein petitioner Pandiman Philippines, Inc. (PPI). While the vessel was on its way to Shanghai, China from Ho Chih Minh City, Vietnam, Benito suffered a heart attack, and subsequently died on June 24, 1997, His remains were flown back to the Philippines, After Benito’ remains Ware interred, his widow Rosita filed a claim for death benefits with MMMG, which, however, referred her to herein petitioner PPI. Upon Rosita’s submission of all the required documents, PPI approved the claim and recommended payment thereof in the amount of 'US$79,000. claims that itis not an insurance agent but a mere local correspondent Scanned with CamScannerCHAPTER 1 9 GENERAL CONCEPTS of the P&I Club. Thus, petitioner maintains that even if OMMIAL (the P&I Club), as insurer of Sun Richie Five, is held principally liable to Rosita for her husband’s death benefits, petitioner cannot be held solidarily liable together with said insurer. Should petitioner PPI be held liable as insurance agent for Rosita’s claim for death benefits under the “Class 1 - Protection and Indemnity” agreement? ‘A: No, PPI is not liable under the “Class 1 - Protection and In- demnity” agreement. The protection and indemnity agreement ig actually an insurance contract, the provisions of the Insu ance Code (P.D. No. 1460, as amended) is the governing law. In the subject insurance contract, the P&I Club (OMMIAL) is the insurer, the shipowner (Sun Richie Five Bulkers S.A.) is the insured, and herein respondent Rosita Singhid as widow and heir of a crew on board the insured vessel like Benito, is a ben- eficiary. Initially, the Court observed that there is nothing therein to show that an insurance contract inthis case was in fact negotiated between the insured Sun Richie Five and the insurer OMMIAL, through petitioner as insurance agent which will make petitioner an insurance agent under Section 300 of the Insurance Code. The fact that petitioner referred to OMMIAL ‘as its “principal” instead of its “client” is of no moment. Such “reference,” however, will not and.cannot-vary. the definition _of what an insurance agent actually. is. under. the. aforecited Jaw, nor can it automatically turn petitioner into one, thereby becoming correspondingly liable to all the duties, requirements, liabilities and penalties to which an insurance agent is subject to. Hence, petitioner PPI is not an insurance agent under the obtaining circumstances. _ In any event, payment for claims arising from the peril insured against, to which the insurer is liable, is definitely not one of the liabilities of an insurance agent. Thus, there is no legal basis, whatsoever for holding petitioner solidarily liable __ with insurer OMMIAL for Rosita’s claim for death benefits on account of her husband’s demise while under the employ. of MMMC’s principal, Fullwin. “a Besides, even under the principle of “relativity of contracts,” petitioner PPI cannot be held liable for the same death benefits claims. The insurance contract between the insurer and the insured, under Article 1811 of the Civil Codé, is binding only upon the parties (and their assigns and heirs) who execute the same. With the reality, as borne by the records, that petitioner PPI is not a party to the insurance contract in question, no liability or obligation arising therefrom, may be imposed upon it. (Padiman Philippines, Inc. v. Marine Manning Management Corp., G.R. No. 143318, June 21, 2005) Scanned with CamScannerESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) §2. DOINGAN INSURANCE BUSINESS. The term “doing an insurance business” or “transacting an insurance business” within the meaning of the Insurance Code, shall include: @) Ma insurance contract; 2) Making or proposing to make, as surety, anycontract a 5 said opananstaesaaantel ae i other legitimate business or-activity of the surety; (3) ‘Doing any kind of business, including a reinsurance 4 oe fically recognized as constituting the doing of an» ‘insurance business within the meaning of this Codey and of the Insurance Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.” b. In some cases, a single transaction is sufficient to consider that the party who extends the protection under the contract is engaged in insurance business because the law considers making “any” insurance contract as engaging in the business of insurance. c. Bancassurance. The recent amendments to the Insur- ance Code introduce the concept of the business of bancassurance. The term Insurance Commissioner and the Bangho Sentral ng Pilipinas shall promulgate rules and regulations to effectively supervise the business of bancassurance.® Section 2, 1.C. “Ibid. Section 376, I.C., as amended by R.A. No. 10607. *Ibid.; See Circular Letter No. 2015-20 dated April 27, 2016 entitled “Rules Implementing Title 9, Chapter IV of the Amended Insurance Code on Bancassuranco” Scanned with CamScannerCHAPTER 1 nn GENERAL CONCEPTS i “ Sho Cemfanres §2.01. MUTUAL INSURANCE COMPANIES. ti e A Mutual Insurance Company is a company owned by policyholders. It is designed to promote the welfare of its members and the money collected from among them is solely for their own protection. In a sense, the member is both the insurer and insured. It has no capital stock and the premiums or contributions of the members are the gnly sources of funds to meet losses and expenses.* a. Mutual Insurance Companies may take the form of the P&I Club which is “an association composed of shipowners in gener- al who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties.”* ¥ §2.02. HMO: PRINCIPAL OBJECT AND PURPOSE TEST. It was explained earlier that there are conflicting decisions on the issue that health plans entered into with a Health Maintenance Organization (HMO) partake the nature of insurance contracts. rr the Supreme Court ruled that the HMO involved in the case was not engaged in insurance business. The Court cited the followin; “Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, have determined that’ HMOs are not in the insurance business. i assumption of risk and:indemnification of loss (which are-elements of an_ ce Republic v, Sunlife Insurance Company of Canada, G.R. No. 158085, October 14, 2005; White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, etal., G.R. No, 154514, July 28, 2005. See 2006 Bar. ‘i 25Pandiman Philippines, Inc. v. Marine Manning Management Corporatio G.R. No. 143313, June 21, 2005; See also Steamship Mutual Underwriting Association: Bermuda) Ltd. v, Sulpicio Lines, Inc., G.R. No. 196072, September 20, 2017. DOH Administrative Order No. 34 Series of 1994; E.O. No. 192 dated November 12, 2015. GR, No. 167390, September 18, 2009; see also Medicard Philippines, Inc, v. Commissioner of Internal Revenue, G.R. No. 222743, April 6, 2017. Scanned with CamScannerLAW .SSENTIALS OF INSURANCE. = Republi "Act No. 10607 with Notes on Pre-Need Act) ; ‘hat of insurance: But if they are merely, or patoal objectives, the business is yarem Brnsipal objectives ne the principal purpose, then the business i not insurance. . CRE ‘Applying the principal object an “American case law supporting the argument poration ve for profit), whgse main object is to provide HMO, whether or not organi: main oben urpose test, there is significant t that a corporation (such as an the members of a group with health services, business. xe tal element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only en that feature, the line between insufance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct, This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.” ‘That an inciden' ROBLEMS: In order to save on premium payments, a number of ship-owners organized a company (Company “A”) which will answer for all the damages or losses to each of their vessels. Each of the vessels shall be covered by individual policies issued by the Company “A” but the source of indemnity shall be exclusively from the annual contributions of the member aypownersNo prot is derived from the operation of the company.(Np other persett or entity other than a member can oe a polioy ete the Company “A.” No separate premiums are paid se “htaggan rns eg em Comoe he Ces At coespany, “A ie engaged in insurance business in the 8 under tion 2[2] of the Insurance Code and the G Policies that it issues are insurance policies. Company “A” is in = e nature of a Mutual Insurance Company. It is immaterial that = Profit is derived from making insurance contracts and mma _Eebarate or direét consideration is received therefor. wali Ae es preclude the existence of an insurance business, (White Gold Marine Services, Inc v. Pioneer Insurance rety Corporation, et al., G.R. No. 154514, July 28, 2005) Scanned with CamScanner |CHAPTER 1 a8 GENERAL CONCEPTS ® Mr. A borrowed money from Mr. B, As a security for the loan, Mr. C,a doctor, agreed to act as a surety in fe “ insurance business”? ebetealatee pene certain A: No. Mr, Cis not doing an insurance business. It appears that the contract of suretyship entered into by Mr. C is just an isolated transaction. Mr. C did not enter into the contract as part of his vocation. th t ‘was originally enacted as P.D. No. 602.” A series of amendments followed the enactment of the law until the most recent amendment, R.A. No. 10607 dated August 15, 2013,” a. _ RUAQINo=10607/was published in a newspaper of general circulation on September 62019, Thislawre-enacted P:D:No. 602 28° gthened the regulatory provisions tare not limited to:"(1)"increase of the paid-up capital and net worth requirements for insurers;* ew, juirements for unimpaired capital or assets and reserved;® ew provisions on financial reporting framework;™ (4)’adoption nc gion oneal pre eer corporate governance rules; anges in thé provisions of aaah of selvoney (6) changes in the provisions on investments" ig the term of the Insurance Commissioner to six years;* ain ranges in the jurisdiction of the Insurance Commission dver insurance claims.” Other changes merely expressly adopte 7. The previous edition of this work was based on P.D. No. 1460 as amended, otherwise known as Insurance Code of 1978. . See Appendix 1 of this work. Section 429, 1.C., as added by R.A. No. 10607. *tgections 430 to 436, 1.C., as added by R.A. No. 10607. uy | Section 194 1.C., as amended by R.A. No. 10607; One Billion Pesos i is now equired for new domestic life or non-life stock: corporation, ** S9Seetion 197, I.C., as amended by, R.A. No. 10607. » Chapter ILA, Section 189, 1.C., as added by R.A. No. 10607. ection 193, I.C., as added by R.A. No. 10607. agit , **Section 200, 1.C., as added by R.A. No. 10607. “ *1Gection 204, 1.C., as added by R.A. No. 10607.» inst **First paragraph, Section 437, I.C., as added by R.A/No. 10607. ‘ Section 439, L.C., as modified by R.A. No. 10607.” o ui Scanned with CamScanner4 ESSENTIALS OF INSURANCE LAW Republic Act No. 10607 with Notes on Pre-Need Act) prevailing jurisprudence. For instance, the in Secti edit extension for the pa al ion 77.a.c Another example is the deletion in Secti regarding minors. » b. Previously, the Code of Commerce, which took effect in 1888, governed eg ae Tee insurance. Justice Malcolm traced the history of insurance Jaws in “Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book TIT and Section III of Title III of Book III, which dealt with insurance contracts, In the Civil Code there formerly existed and presumably still exist, Chapters TT and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On and after July 1, 1915, there was, however, in ferce the Insurance Act No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly repealed I of Book If and S of Title IIT of Book III of the code of Commeres. The law of insurance is consequently now found in the Insurance Act and the Civil Code.” . 4. Interpretation. There are rovisions of The Insurance Act (Act No. 2427) which were taken verbatim from the la alitornia. In turn, provisions of the Insurance Act are retained even under present laws." Hence, “in accordance with welll-] settled canons of statutory construction, the court should follow in fundamental points, at least, the construction placed by California courts on a California law.” 83.01. NEW. CIVIL CODE. IA addition, the New Civil Code Provisions govern suppletorily, ivi "hy ile ott 7 Te Bol , inG-R- No, 116895, Noveniber 29, 1900, Arfide Zot flac ‘cai 4, rhe new provisions that were not Part of or adopted from the Insurance Act jnclude the provisions on Surety, Compulsory Motes Vehicle Liability Insurance, and Mutual Benefit Associations (See Appendix of the; work). Ang Giok Chip v. Springfield Fire & Mari GR.No. 1.99607, Deena? Sine Marine Insurance Company, G: Scanned with CamScannerCHAPTER 1 GENERAL CONCEPTS Article 2011 of the New Civil ae further provides that matters in the special laws on insurance shall be renee by the New Civil Code. For instance, the rules on rfection of contracts under the Title IV of the New Stee obligations and contracts can be applied in the absence of provisions of the Insurance Code. More specifically, the New Cn ‘ode ikewise provides for grounds for disqualification of beneficiari nder Article 2012 thereof. a. Rightiof Subrogatio’.“ The New Civil Code specifically deals with the right of the insurer to subrogation, AFticle22070f the” le provides that “if the plaintiff's: property has been” insured, an for the injury or loss arising out of ng or breach of contract’ CaN ere a | be subrogated to the ights 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.” The right of subrogation ig discussed in Chapter 8 ofthis book. le 2267 By express pi provision of the. Insurance Code, the same Code prevails over the Corporation Code. This also means that insurance corporations are still subject to the regulatory powers of the Securities and Exchange Commission as corporations. ar py anv h in (prevails) §4. (ELEMENTS.” Insurance contracts have the followin features or elements: . (1) Theinsured/hasaninsurableinterest; @) ae aiaiaa het ingof the designated peril; ” (8). The insurer assumes the tisk; ae *8See for instance Musngi v. West Coast Life Insurance, G.R. No. L-41794, ‘August 30, 1935 (citing ‘the elements of contracts and rules on void contracts under the old Civil Code), | “See Chapter 8, Claims Settlement and Subrogation. “BLP. Big. 68. Scanned with CamScanner(OC ties: @ 16 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) (4) Such-assumption of risk-is part’of a°general scheme'ty distribute actual losses among’ a bearing a similar risk;/and { (5) In consideration of the insurer's. promise, the is pays a premium: §4.01. . It should be noted however that insurance must have all the essential ele. ments of a valid contract enumerated in the New Civil Code. ‘Article 318 of the vil. C : provides that there:ismo contract unles (1) Consent of the contracting par» 8 , Object certain which is the subject matter of the contract; and (3) Cause of the obligation which is established: For the insurer, “(he consideration in insurance contracts is the premium, the rate of which is measured by the character of the risk assumed.”*’ On the other hand, the object of insurance is the obligation to indemnify : i liability arising from an unknown another against loss, damage, or ox contingent even.* It is th not) amount.to be paid by the insuref that is the object of the contract. Although the property insured ;or, the life insured are the subject matters that are insured, the property and life of a person are not objects of the contract as the term is understood in civil law. §4.02, . It is required ‘that the assumption of risk. by the insurer is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk. This is an affirmation of the fact that insurance is a “risk-spreading” device. However, for purposes of applying the provisions of the Insurance, Code, a single. transaction. may. be deemed an insurance contract, Jn fact, as noted earlier, a provision in a Collective Bargaining Agreement may be considered an insurance contract in proper cases,*? fs 7 : ‘Gulf Resorts, Ine. v. Philippine Charter Insurance Corporation, G.R. No. 166167, May 16, 2005. “ted g, sulpisio Guevara, The Insurance Law Annotated, 1939 Ed., p. 8, hereinafter cited as “Guevara, p. 3; Gaisano v. Development Insurance and Surety Corp., GR. No. 190702, February 27, 2017.” i “Guevara, ibid. Mitsubishi Motors Philippines Salaried Employees Union’ (MMPSEU) v. Mitsubishi Motors Philippines Corp., G.R. No. 175773, June 17, 2013. : Scanned with CamScannerCHAPTER 1 7 GENERAL CONCEPTS wo en ut a general scheme to:distribute actual losses but ino ibe*camnpellzn lic, Nevertheless, the “insurer” mus| trace Tea % comply with its obligation under the insurance contract. The “insurer” is still considered engaged in ee bustness because it is doing or proposing to do business which in substance is equivalent to th i yee 2 of the [neues jose expressly enumerated in ion 2 of e Code in a manner designed to evade the provisions of the Insurance Code, — $4.08. (RISE is an element of an insurance contract that the insured is sul ect to a risk of loss by the happening of the desig- nated peril. The first paragraph of Section 3 of the Insurance Code provides: , Sec. 3. Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against. ‘ dawn fy — to cause log, wv Janore tv a*contingent or” it must damnify” kc “must be real fe company may Under Section 3, tl or ¢! and such that neither the hasten or prevent it." ou, Sis. ba the presence of an unknown and contingent event, The loss may or naj not happen. Tn the case of if insurance, the u fappen. In the case of life insurance, the uncertainty is with respect to the time death will occur. “Fortuity:is:to:-bedetermined” of the risk.” Thus, “losses ‘occasioned 'to the subject'matter in the ‘all'risks’'is not’enough.”* These types of losses are.not fortuitous. However, the unce: y may refer to the time of occurrence as in the case of life insurance. In the latter case, the occurrence of the event — death — is a period rather than a condition. "vent — death — is a period rather than a condition Se Section 2, 1.C. * Vicente Francisco, Commentaries on the Insurance Act, 1933 Ed., p. 4, hereinafter cited as “Francisco, p. 4” citing 1 Joyce Ins., Sec. 6. | t "Chitty on Contracts, Vol. Il, 29th Ed., 2004, p. 1162, hereinafter called “Chitty of Contracts.” {°° } "Chitty on Contracts, p. 1162. Scanned with CamScanner18 ESSENTIALS OF INSURANCE LAW | (Republic Act No. 10607 with Notes on Pre-Need Act) | ©, Willful cee Similarly, as will be discussed in Chap; provides that nner) Cea oesemeredyttrenillfl of the insured:” The element of uncertainty or contingency is absent, in these cases. However, it is possible for another assured, with | his own insurable interest, to recover if he did Sol\participate or contribute to the willful act. a. ‘rom the viewpoint of the insurer, it is ideal that (1)_Nevertheless, while catastrophic losses are not in- surable, the losses should also be not too miniscule. Trivial losses are not insurable in accordance with the principle of. minimis non curat lex, (2) There are ‘risks of loss that cannot be insured by -yeas0n of public policy. For example, liability for exemplary f th re of the proceedings where the ei. Pure. Risk-distinguished from Speculative Risk. Broadly speaking, risk is the uncertainty of loss. The risk that may be assumed is the “pure!itypelofriskewhich is defined as a situation» _ where the possibility iseither the person involved will suffer a loss : injury. This should be distinguished from “speculative?tisk whi i in gai or lossFor example, gambling involves speculative risk because the player may lose or he may win. Pure risk results in either loss or “no loss” while speculative risk results in either loss or gain. (1) Incidentally, in addition to being a pure risk, the Supreme Court explained that what is involved in insurance contracts is called an “! , x “Robert I. Mehr and Emerson Cammack, Principles of Insurance, 7th Ed 32, herein afte Pp. rein after referred to as “Mehr anc SS) Sanding. of (tte ae The law does not concern itself wi "*1.C. Circular Letter No. 2017-49, Octdbe¥ 30, 2017. alee Fae fan Scanned with CamScannerCHAPTER 1 19 GENERAL CONCEPTS (Rigke” Itis:the risk that the cost of insurance elai ce claims: might be bi . The amount of prei mium is calculated on the basis of assumptions made relative to the a insure! Penn vane f. ‘Distinguished :from=Perili»The SSE in jnsurance is the spec a UmiReTS ile gllvis the Rincertaintycthet-tierpropertysompersencinenred will be lost or damaged by reason of the desi i]. However, these terms (risk and peril) are oftentimes used interchangeably in legal fitsrature: 5. Pasbvent.A is peculiar to Me . For example, a marine insurance policy for a ship “lost or not lost” insures the ship even for the event that may have alzeady transpired. the policy was taken, the parties are aware if the ship is already lost. The insurer will pay oven ifthe ship turns out to be already lost at the time the policy was taken. Als ve TotTtvars een ee : New Civil Code. While w condition is Seal afuture and uncer- tain event, a risk insured against may even be considered a period" in civil, In life insurance, the only uncertainty is the time when the risk insured against (dea! oe a eo ‘isks should be distin- pe . Hazards may either ba Pon AY ey (irae ors tthe physical condition of the thing or the person that increases the chance. of loss. Moral hazard involves dishonesty-or character defects in the individual that increase the chance of logs. Moral hazard likewise includes carelessness or indifference to a loss of mors ecause of the existence of the insurance although this t dis also sometimes called ‘ : Bae oe a "Philippine Health Care Provider, Inc. v. CIR, GR. No, 167330, September 2009, “George E. Redja, Principles of Insurance, 3rd Ed. “Redja, p. 13." "Ibid. , p. 18, hereinafter cited as Scanned with CamScannerLAW oF ay SURAN' Fyn Notes on Pre-Need Act) 20 i es that arise from the ve k. Inherent Vice. a are generally covered ye | condition of the prop’ ; jn the policy, inate unless xe ents that “a i thai t ingurance 201 ee Te gencrally arises from extemal ease tf vest emveption, Jife insurance may cover dea ease oa age.® $4.04, ASSUMPTION OF RISK: Theinsurer assumes the, obloaanmnsaninealbieinee ise of the insurer is genent insured against occurs: While the promise o v genera to ay the pane value of the loss, the assumption of risk me Tay include the promise to deliver the equivalent, of the ‘property th, was lost. There is even a view to the e! fect tl t Insurance contragy “it 4 inchide contiraéts to inideminity by the performance of Services Oy, vat J example of this is'a fire instante policy where the benefician (ot automatically entitled to cash but there is an “option to rebuild sedan clause” under which the parties stipulate ‘the repairing, rebuilding at oor rey lacing of buildings or structures wholly or partially dam ‘he Supreme Court riiléd in one tae gn that the insurer must notify the insured of his election stating which of of the two prestations aa disposed to fulfill im accordance with the Ere tn Corte.on alternative obligations Parties: The insured Sacrifices a present monetary loss in the fom (~Premium payment in order to avoid a greater loss in the future. —__. ...See Chapter 7, “Chitty on Contr; “Filipino Merc chants Ih monn beer ne Seng, eu No. 85141, Noveaiber mango" IME: ¥- Court of Appeals and Cho id. 1989, acts, p. 1162, Physicians’ D. 290, vis Defense Co. v. Cooper, (0.C.A, oth) 199 F, 576, 47 LRA See Section 174, 1.0, ag amended “Previously Section V2 bef by R.A. No. 10607, Co. Ltd., G.R. No, 1.22738, December ia: 10607; Ong v. The Century 1n5¥”* Ong v. The Century Tnsu eee rance On Scanned with CamScannerNv tant ke AGE use B Sy ie Laps wt? 1 are GENERAL CoNCEDs a a. Examples. An example of risk avoidance i avoid a particular activity to escape the risk of Toes, a Sid means that the person involved will shoulder all the damages that may be incurred. Risk transfer may be accomplished for example when the one who is normally responsible will make the other party shoulder the loss through contract. Control of loss may either be loss avoidance or loss retention.” « _b._ While it is true that more and more individuals have taken notice of the importance of risk management in their everyday lives, there are others who are indifferent to risks. Adam Smith wrote: “The overweening conceit which the greater part of men have of their own abilities, is an ancient evil remarked by the philosophers |): and moralist of all_ages. Their absurd presumption in their own good fortune, has been less taken notice of. It is, however, if possible still more universal. ‘There is no man living who, when in tolerable health and spirits, has not some:share of.it.‘The chance of gain is by every man more or-less over-valuéd, and the chance of loss is by most men under-valued, by Scarce any man, who is in tolerable health and spirits, valued more than it is worth.”"" present loss by way of premium payments with future recompense for greater loss. ae : Xa. RiskDistributing Device: However premiums, In theory, the insurer will get the amount to be paic each insured in case of loss from this pool or common. fund. That why it is one of the features of insurance that the assumption of: of the insurer is part of a general scheme to distribute actual losses among a large group of persons bearing a similar, risk. Adam: Smith observed in The Wealth of Nations that “the trade of insurance gives 13. Redja, p. 14. i "Adam Smith, The Wealth of Nations, Bantam Classic Edition, 2003, p. 149, Scanned with CamScannerflegtey uilgteal Personal Corstnstal ene E LA SURANCI Wo ESSENTIALS OF 1S Pre-Need Act) “ (Republic Act No. 10607 with Notes on e, and by dividing among i ople tunes of private Tq ruin an individual, makes it es which would ruin the whole society. ooling of loss experience of : its will also allow the of homogenous exposure unit also alloy ie aie future losses with some accuracy. This is consistent ith what is known as the “Law of Large Numbers” according to security to the for that great many that lo: fall light and easy upon provides a, Aleatorys w k that a contract is aleatory when one of the parties or both reciprocally ind 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. Insurance is one of the contracts enumerated in the New Civil Code as falling under this classification of special contracts. It-is not ‘a contract-of ¢ It is also aleatory in the sense that what the insured will pay in pesos is not equal to what he will receive in case of loss. The money values exchanged in that sense-are-not equivalents. In another sense, however, the contract is-commutative because what the.insured paid for is the equivalent of what he got, that is, the promise of the insurer to indemnify.the -insured in case of loss. ‘ t aw b, However, upon payment of the premium there is only one party who has the obligation, that is, the insurer’s obligation to pay the proceeds of the insurance in case of loss. - “bid., p. 961. "Robert I. Mehr and Sandra C. Gi i . d . Gustavson, Life Insurance: The ind Practice, 4th Kd., p. 31, hereinafter referred to as “Mehr and Gustavson.” "William R. Vance, He hereinafter referred to ne *V, pay of the Law of Insurance, 2nd Ed. (1930), p. 66, Scanned with CamScannerCHAPTER 1 GENERAL CONCEPTS c. (Personal? The'contrac — ‘hi the eration to the circumstances of the . Thus, the insurer m: 7 the insurablity ofthe insured. Beek joe ace ntraet in view of the character, credif’ and conduct of the othe ‘uct of the other.” Even property insurance contract is personal in nature. In reality, it is a person rather than the property that is protected. Hence, the character, credit and conduct of the person who insures a property are still important considerations. Property insurance still aims to indemnify a person who incurred the loss; the measure of insurance payment is loss to the insured and not the loss of specified property.” concealmentor=misrepresentations»»The caveat emptor rule is therefore generally inapplicable. 1 (1) The obligation to maintain perfect good faith is imposed not only on the insured but on the insurer as well. This “accounts for the readiness which the courts apply the doctrine of estoppel as against the insurer when he seeks to take advantage of some condition of forfeiture in order to me x escape payment under the policy. i addition to the main y other conditions which ‘must be right of the insured to claim the condition, it usually includes man: complied with as precedent to the *Vance, p. 69. TBurton'T. Beam, Jr», Davil L. Bickelhaupt, Robert Mr. Crowe, Barbara Poole, Fendonentals of Insurance for Financial Planning, 3rd (2002) Ed. p. 160, hereinafter referred to as “Beam, Jr., et al p- 160.” Vance, p. 75. Vance, p. 67. Scanned with CamScannerESSENTIALS OF INSURANCE LAW “ (Ropublie Act No. 10607 with Notes on Pre-Need Act) “the chief objection is that it leads to an unearnéd gain —‘unearney’ in the sense that wagering is not socially productive.” It was further explained: ‘*Jaguely, a sense of antagonism is aroused in a community of workers ee seca who obtain a means of livelihood without participating in the machinery of social or economic production and distribution — in short, against ‘social slackers.’ More specifically, unearned gains lead to idleness, and the wagerer becomes a social parasite. Useful business and industry are thereby discouraged. On the moral side, idleness leads to vice; and the impoverishment of the loser entails misery, and, in consequence, crime.” a. Under the same principle, Section 4 prevents insurance on a lottery or any game of chance: i b. It should be noted that as early as the case of El’Debaté, thi si 1 iderati chance. The term “lottery” extends to all schemes for the distribution of prizes by chance, such as policy playing, gift exhibitions, prize concerts, raffles at fairs, and various forms of gambling. However, this definition involves thé’ definition of “lottery” under the Postal Law under the old Administrative Code. The law does not'condemn the gratuitous distribution of property by chance, if no consideration is derived directly or indirectly from the party receiving the chance, but does condemn as criminal, schemes in which ’a’ valuable consideration of some kind is paid directly or indirectly for the chance to draw aprize. Gai) c. However, Section 4 of the Insurance Code is more expan- sive. The prohibition is not limited to the insurance on lottery. It prohibits insurance “for or against any chance.” Hence, an insurance "Edwin W. Patterson, Insurable Interest In Life, Columbia Law Review, Vol. 18, No. 5 (May, 1918), p. 886, hereinafter referred to as “Patterson, p. 386.” "Ibid. ___ 44 Phil. 278, citing Sotto v. Ruiz, 21 Phil. 468, Note, however, that this involves the definition of “lottery” under the Postal Law and the old Administrative le. Scanned with CamScannerCHAPTER 1 25 GENERAL CONCEPTS against a “chance” to win a prize is sti - . : consideration for the “lottery.” s still prohibited even if there is no ; d. | In addition, it does not follow that an insurance contract is authorized even if the transaction does not involve an jllegal wagering contract. For instance, in "| and Philippine Refining Company resorted to two schemes to promote the sale of its products both of which envisioned the giving away for free of certain prizes (without additional consideration) for the purchase of its soap and cooking oil products. In other words, the participants would get the exact value of the prize for the goods plus the chance of winning in the scheme. No one would be required to pay more than the usual price of the products. The Court concluded that no lottery was involved in the two cases because of the settled rule that “a plan whereby prizes can be obtained without any additional consideration (when a product is purchased) is not a lottery.” However, it is believed that even if there was no lottery, no insurance can be taken on the chance to win the prize-It is believed that the scheme — although not a prohibited lottery — involves a “chance” that is contemplated in Section 4 of the Insurance Code. Moreover, there can be no insurable interest in the chance to win a prize, whether or not there is consideration, because the “insured” will not be damnified by the loss. e. It has been said that “the gambler courts fortune, the u Afticle"2013/0f the New Civil” insured seeks to avoid misfortune.”® the explanation of Professor contracts is helpful: Patterson on the nature of wagering “At the outset it is necessary to determine the sense in which the term “wager” is used. It may have an equivocal or a sinister meaning, depending upon whether regard is had to the form of the agreement, or to its object, eas set forth by Hawkins, J, in Carlill v. Carbolic The essentials of a'wager? Smoke Ball Co.1 are:((1)®A mutual agreement of two that according to the "1G.R No, L-29881, August 31, 1988. "GR. No. L-29062, 148 SCRA 313 (1987). “Francisco, p. 7 citing Vance on Ins., Section 24. “Patterson, p. 389. Scanned with CamScanner26 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) issue of a future uncertain event, one shalll receive from the other a stake; "@)'the necessity that each party shall either win or lose; (@)sthat neithe; party shall have any interest other than the stake he is to win or Tose;i(4),, mutuality of intent as to hazar< in the other hand, Anson defines as “a promise to give mon ascertainment of an uncertain event.” The latter definition ignores the essential of the former, namely, the absence of any interest in the event other than the stake to be won. Anson was looking solely to the form of the agreement, while Hawkins, J., was attempting to frame a definition which would cover the object of the agreement as well as its form. Thus, a marine insurance policy and a bet upon a horse race are alike in the sense that each is a promise to pay money upon the happening of an event which may or may not occur. A consideration of the objects or purposes of the two agreements, however, shows that the resemblance is only superficial. The purpose of the promisee in making the bet is to gain by the transaction; the purpose of the promisee in procuring the marine policy is to lessen the hardship from his misfortune in losing his ship. Since the promise is to pay the amount of loss. sustained, this is the only purpose (barring fraud) which the insured can have in taking out such a policy. Such a purpose — to lessen hardship from pecuniary misfortune — may be called an “indemnity purpose.” Here the “insurable interest” of the insured is his maximum possible pecuniary loss from the happening of the event.”* f, It should also be noted that AFticle'2014:of:the New Civil Coderprovides that “no-action.can-be.maintained by:the winner for the collection of what he has won in a game of chance. Bi $7. it has been said that insurance contributes to society by favorably affecting the allocation of resources, engaging in loss-prevention, indemnifying losses, serving as a basis of the credit structure, eliminating worry, facilitating trade and commerce, and providing channel for investible funds. There are costs because of the large amount of money needed as premium and the insurance business employs substantial amounts labor and capital. Fraudulent losses likewise occur and in ome ses result-in carelessness: However; *5Patterson, p. 385. Mehr and Cammack, pp. 10-14. Scanned with CamScannerCHAPTER 1 GENERAL CONCEPTS a7 ” It has been observed si for the general public include the for immediate use of large sums to meet losses they have suff [(@F facilitates credit transactions; |(5) It stimulates savings; ‘on provides investment capital; (7)'Tt provides incentive to business or individuals because they are relieved of fortuitous losses; andi(8) It -helps in loss prevention.*” §8. PERFECTION? An insurance contract is consensual. Hence, it is perfected by the meeting of minds with respect to the object and consideration of the contract. Article 1819 of the New Civil Code provides: 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. (1262a) ; * . Cognition"Theory. Particularly, consistent with ‘the Cognition Theory® that is being applied under the New Civil Code, an insurance contract is perfected the moment the offeror learns of the acceptance of his offer by the other party. David L, Bickelhaupt, General Insurance, 1974 Ed., pp. 75-77, hereinafter teferred to as “Bickelhaupt.” ‘| — A distinguished from real contracts which are perfected by delivery and formal contracts which require certain: formalities-like a public instrument ' perfected, ‘oe ies *This should be distinguished from the Manifestation Theory contemplat under Article 54 of the Code of Commerce under which the contract is perfected from the time the acceptance of the offer is manifested. For example, the sending of the letter accepting the offer perfects the contract even if the offeror has not yet received the notice. ‘a Scanned with CamScannerURANCE LAW ESSENTIALS OF INSI ‘Need Act) * (Republic Act No. 10607 with Notes on Pre+ In insurance the offer by sul the aplication ii ii .. The insurer accepts the offe to the insurer or its authorized agent. : on i approving the application and the contract is perfected upon roceipt of notice by the insured of such approval.” (1) On the other hand, the insurer will then go through the process of underwriting. “Uni is the selection and pricing of insurance applications that are offered to the Po b. ue contract, the insured makes ithori: insurer. (2) In this connection, it is well to note that the usual the perfection of an insurance contract (insured snakes the offer by filing an application form) may be departed from. “It may be that the insurer offers a contract which is accepted by the insured with or without writing; or the agent to whom the application for insurance is made may have authority to accept the offer without reference, and this acceptance may be written or oral.”” procedure for In a case decided by the «. U Supreme Court, upon proof that the insurance application was duly received by the insurer. The Court ruled that insurer assumed the risk of loss without approving the application. However, it is believed that the ruling in the said case cannot be considered an exception to the rule on perfection of insurance contracts. Courts cannot impose a contract in the absence of a perfected contract. Closer examination of the facts shows that what was involved was Creditor Group Life Insurance Policy. Under the policy, the clients of petitioner Eternal Gardens who purchased burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage depended ‘upon the existing balance of the purchased burial lots. The policy was to be effective for a period of one year, renewable ona yearly basis. The policy provides that: “The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with Development Bank of the Phils, v. Court of Appeals, G.R. No. 109937, March 21, 1994; Rafael Enriquez v, Sun Life Assurance Co. of Canada, G.R. No. 15895, November 29, 1920. _ “Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 2009 Ed. Section 4,2, hereinafter referred to as “Beam, Jr. and Wiening.” Vance, p. 175. Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Corporation, G.R. No. 166245, April 9, 2008. Scanned with CamScanner |CHAPTER 1 29 GENERAL CONCEPTS the LI pomerety there shall be no insurance if the application of the Lot Kurrhaser is not approved by the Company.” The Supreme Court applied the rule that there must be strict interpretation of the provision of the insurance policy against the insurer in arriving at the conclusion that the insurance shall be deemed effective the moment the lot buyer contracts a loan with Eternal Gardens. In other words, there was already a prior agreement regarding the effectivity of the contract of insurance. The Supreme Court observed: “On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a party's purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser js created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance contract, Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination of the insurance contract by the insurer must be explicit and unambiguous.” (1) The‘decision in Eternal Gardens ‘Memorial Park v. Philippine American Life Insurance Corporation® may also be harmonized with the general rule that an insurance contract is perfected from the time the applicant learns about the acceptance or approval of his application by considering that the petitioner Eternal Gardens should be deemed the agent of the insurer with respect to the subject group life insurance." The petitioner should have been considered an agent of the insurer “by virtue of the master agreement or policy and the perfection of the contract for the purchase of a lot on installment likewise perfects the insurance contract with respect to the specific lot buyer. In other words, the petitioner can be deemed the agent of the insurer for purposes of making the offer of insurance and ‘Memorial Park Corporation v. Philippine American Life ra. It is believed however that the observation of the ‘the insurer cannot be interpreted as the termination .stion is whether or not an insurance contract the risk of loss through its inaction. “Eternal Gardens Insurance Corporation, sup) Supreme Court that inaction of of the contract is not in point. The que ‘was entered into or whether the insurer assumed There is nothing to terminate if not risk is assumed, “Ibid. "See Luz Pineda, et al. v. Hoi September 27, 1993. See also §9{a] of Chapter yn. Court of Appeals, et al., G.R. No. '105562, 13 of this work. Scanned with CamScanner80 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) its acceptance happens at the same time as the acceptance op the offer to sell the lot is made. (2) In Eternal Gardens Memorial Park v. Philipping American Life Insurance Corporation,” the petitioner can he deemed to be the agent of insurer who offers an insurance contract at the same time as it offers to sell its lots, When, the buyer accepts the offer, the buyer is also deemed to have accepted the insurance thereby perfecting the same. — (8) The situation in Eternal Gardens Memorial Park y, Philippine American Life Insurance Corporation® is similar to the practice of business entities in tying up with insurance companies in the sale of their goods. For example, some business entities sell goods like luggage or offer tour package, if a person will buy the goods or avail of the service, the buyer «will be entitled to automatic insurance coverage. In some cases, insurance companies sell greeting cards like Christmas cards which entitle the buyer to insurance coverage. It is believed that in those cases, the sellers are constituted as the agents of the insurance companies. These agents make the offer of insurance which the buyers accept. d. In any event, an insurance contract cannot be deemed perfected if there is only an offer to enter into an insurance contract in the form of an insurance application. As observed by Prof. Vance, “mere delay by the insurer, although unreasonable, in acting upon the application raises no implication of acceptance nor does it estop the insurer to deny the existence of the contract.”” Consent is an indispensable element of the contract and there can be no contract if there is no meeting of minds between the parties as to the object and consideration. Courts cannot make a contract if nothing was agreed upon. It is true that acceptance of an offer can be implied. However, implied acceptance of an offer can be established only if there are other circumstances that will indicate such acceptance other than inaction or delay. In other case, estoppel can be relied upon only if there are other circumstances that led the applicant to believe and rely on the belief that his application is already approved (other mere than inaction or delay). The Supreme *'Supra. Scanned with CamScannerCHAPTER 1 GENERAL CONCEPTS a {tis of course a primary rule that a contract of insurance, ik th contract ut be assented to by both parties either in person or by thay agents. an application for i weected, itis merely an ts ation for insurance has not been accepted or be binding from the applica that leaves nothing to be ‘There can be no contract of met in agreement.” e. Court likewise relied on Prof, Joyce in De Lim v. Sun Life Assurance Company of Canada in explaining the three general rules concerning the agent’s receipt pending approval or issuance of policy in this wise: [f the: act: of k by n he Supreme a “binding slip” or “binding receipt” does not insure of itself’and the acceptance by the agent is within the scope of his authority a receipt containii i e for a specific’ time which is not ab: conditional, uy sceptanct e specified period unless the - . The Court likewise cited two cases Stating that: “In the case of Steinle vs. New York Life Insurance Co. ({1897], 81 Fed., 489) the facts were that the amount of the first premium had been paid to an insurance agent and a receipt given therefor. The receipt, however, expressly declared that if the application was accepted by the company, the insurance shall take effect from the date of the application but that if e application was not accepted, the money shall be returned, The trite lecision of the circuit court of appeal was, “On the conceded facts of this 1G.R. No, L-16774, November 29, 1920, 41 Phil. 263. “'bid...citina Jovee. Volume I, p. 253. Scanned with CamScannerESSENTIALS OF INSURANCE LAW ” (Republic Act No. 10607 with Notes on Pre-Need Act) case, there was no contract to life insurance perfected and the judgment of the circuit court must be affirmed.” In the ease of Cooksey v. Mutual Life Insurance Co. ((1904}, 73 Ark, 117 the person applying for the life insurance paid and amount equaj to the first premium, but the application and the receipt for the money paid, stipulated that the insurance was to become effective only when the application was approved and the policy issued. The court held that the transaction did not amount to an agreement for preliminary or temporary insurance. It was sait It is not an unfamiliar custom among life insurance companies in the operation of the business, upon receipt of an application for insurance, to enter into a contract with the applicant in the shape of a so-called “binding receipt” for temporary insurance pending the consideration of the application, to last until the policy be issued or the application rejected, and such contracts are upheld and enforced when the applicant dies before the issuance of a policy or final rejection of the application. It is held, too, that such contracts may rest in parole. Counsel for appellant insists that such a preliminary contract for temporary insurance was entered into in this instance, but we do not think so. On the contrary, the clause in the application and the receipt given by the solicitor, which are to be read together, stipulate expressly that the insurance shall become effective only when the “application shall be approved and the policy duly signed by the secretary at the head office of the company and issued.” It constituted no agreement at all for preliminary or temporary insurance . . .” f. Where an agreement is made between the applicant and the agent, no liability shall attach until the principal approves the risk. The acceptance and issuance of a binding receipt is merely conditional and is subordinated to the act of the company in approving or rejecting the application. g. It is also believed that situation where an agent is authorized to enter into an insurance contract obtains in Bank of Philippine Islands v. Laingo' involving an offer to bank customers to open a two-in-one deposit account in partnership with its affiliate insurer, Any customer interested to open a deposit account under this two-in-one product, after submitting all the required documents to the bank and obtaining the bank’s approval, will automatically be given insurance coverage. Thus, the bank acted as agent of the insurer with respect to the insurance feature of its own marketed product. The acceptance by the agent binds the insurer. —___. ™2Great Pacific Lil Ama she Life Assurance Co. v. Hon. Court of Appeals, G.R. No. L-31845; 'G.R. No, 205206, March 16, 2016, Scanned with CamScannerCHAPTER 1 33 GENERAL CONCEPTS enh vhs anne Liability, Even if there is no perfected contract, the insurer may be subject to tort liability under Articles 2176, 19, 20, and 21 of the New Civil Code for abuse of right or acting in a manner that is contrary to morals and good customs based on the peculiar circumstances of each case. __,_() Mere delay in acceptance of the insurance application will not result in a binding contract. Court cannot impose upon the parties a contract if they did not consent. However, in proper cases, the insurer may be liable for tort. Liability may also be based on Articles 2176, 19, 20, and 21 of the New Civil Code. For instance, Professor Vance cited one case where the Court observed that: “Having solicited applications for insurance, and having so obtained them and having received payment of fees or premiums exacted, they are bound to furnish the indemnity the state has authorized them to furnish, or decline to do so within such reasonable time as will enable them to act intelligently and advisedly thereon, or suffer the consequence: from their neglect to do so.” §8.01. DELIVERY OF THE POLICY. Since the contract of insurance is consensual, the delivery of the policy is not necessary for the perfection of the contract. Prof. Agbayani opined that delivery of the policy is necessary to make the policy binding. However, he also said that this requirement of delivery is satisfied if the parties’ intention is to be bound by the insurance. In effect, even under this view, mere consent is enough to bind the parties. The view does not diverge from the rule established by jurisprudence that insurance is consensual. a. While delivery of the policy is not indispensable for the perfection of the contract of insurance, it is still important that the Policy is delivered to the insured so that the insured can read and ‘understand all the terms and conditions thereof. The policy is proof of the terms and conditions of the contract and the fact that the insured accepted the same. As explained in one case, it is and was incumbent upon the insured to read the insurance contracts. For instance, this can be reasonably expected of an insured who has been @ businessman for a long period of time and the contract concerns ae ‘Vance, p. 192. .._. *Aguedo Agbayani, Commercial Law, Volume 2, 1986 Ed., p. 111, hereinafter Cited as “2 Agbayani.” Scanned with CamScannera4 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) indemnity in case of loss in his money-making trade which may be precisely the reason for his procuring the same." b. The parties may also expressly agree that the delivery and acceptance of the policy is a condition for the effectivity thereof It can be provided that the insurance policy is not valid and binding until the policy is accepted by the insured upon its delivery, Necessarily, however, there is already vinculum juris that binds the parties in these cases. The condition is imposed as part of a binding agreement. c. The delivery of the policy may also be the reckoning point for compliance with certain conditions. For instance, it may be expressly agreed upon that the insured property should not be used for business purposes at the time of the delivery of the policy, It may also be provided that the insured is of good health at the time of delivery of the policy. PROBLEMS: (2, filed ‘an application with an insurance company for a 20-year endowment policy in the amount of P50,000.00 on the life of his one- year old daughter, supplying all the essential data in the application form, but without disclosing that his daughter was a Mongoloid child. Upon “P's” payment of the annual premium, a binding deposit receipt was issued to “P” by the insurance agent subject to the processing by the company. The insurance company disapproved the insurance application stating that the plan applied for was not available for minors below seven years old and offered another plan. The insurance agent did not inform “P" of the disapproval nor of the alternative plan offered and instead, strongly recommended that the company reconsider and approve the insurance application, As faith would have it, “P's” daughter died. “P” sought payment of the proceeds of the insurance but the company refused on the grounds that there was concealment of material fact in the insurance application and that it has rejected the application. “P” contended, on the other hand, that the binding deposit receipt constituted 2 temporary contract of life insurance. How would you resolve this issue? ‘A: The denial by the insurance company of the claim is valid. There is no perfected insurance contract until the insured learns about the approval of the application by the insurer. Hence, 106New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992. Scanned with CamScannerCHAPTER 1 35 GENERAL CONCEPTS not insurance contract can be perfected if the approval came after the death of the insured. The binding deposit receipt is merely conditional and does not insure outright. The binding deposit receipt is subordinated to the approval or rejection of application by the insurance company. (Great Pacific Life Ass'n Co, v. Court of Appeals, G.R. No. L-31845, April 80, 1979) Mr. A filed an application for a fire insurance policy to cover his house. He signed the application on January 15, 2007 and delivered it to his insurance broker, Mr. B, on January 16, 2007 together with the required premium. Mr. B submitted the application to the office of XYZ Insurance Corporation on January 20, 2007 and the application was processed and approved on January 25, 2007. On January 26, 2007, XYZ sent a notice to Mr. A by mail. Mr. A received the notice on January 28, 2007. In the meantime, on January 26, 2007, the house of Mr. A was totally destroyed by fire. Can Mr. A recover from XYZ? A (Sor. A cannot recover from XYZ. There is no perfected fnisurance contract between A and XYZ at the time of the loss. An insurance contract is perfected only from the time the insured had notice of the acceptance of his offer. The application of Mr. A constitutes the offer to enter into an insurance contract. While the offer had already been accepted on January 25, 2007 or before the Joss, the insured learned about the acceptance of the offer only @ftén the loss or on January 28, 2007. ‘An application for a life insurance policy with JH Insurance Company was made by Mr. DHD and listed therein for inclusion as insured lives are Mr. DHD, his wife AD and his children KD and BD. The application discloses that “KD’s heart is impaired.” Mr. DHD was informed by the soliciting agent that he could not assure him that the company would include KD as an insured family member. JH Insurance Company approved the application but with the notation “Delete KD as insured.” Thereafter, a life insurance policy was sent to DHD insuring the lives of all the persons named in the application but attached thereto are the application and a document entitled “Amendment to Application” which required the signature of the insured and provides that KD be deleted from the list of the proposed insured and that no coverage should be provided to her. Not being able to contact the insured who was not at home when he called, the soliciting agent left the policy and attached documents with AD. The amendment had not been signed by the insured when KD died. The insurance company denied the claim for KD’s death. Is the denial proper? A: Yes, the denial of the claim was proper because there was no perfected contract of insurance. The application of the insured was in the nature of an offer that must be accepted by the insurance company. The insurance company did not accept the offer and instead attached the amendment to the contract of, Scanned with CamScanner$5 605 ett 2 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) insurance which deletes the policy of one of the lives includeg in the application. The amendment constituted a counter-offer which must be accepted by the insured-applicant. In this case the counter-offer was not accepted because the signature wag not obtained. (John Hancock Mutual Life Insurance Company », Donald H. Dietlin, et al., 199A. 2d 811, April 6, 1964) 4 §9. ‘insurance or (2) government insu) includes the insura cove pl System to employees of the privat G ervice ance 9. tothe employees in the government service." This coverage was even extended to the punong barangay, the members of the sangguniang barangay, the barangay secretary, the barangay treasurer, and the members of the barangay tanod.® These insurance contracts are called “social insurance” contracts. They are compulsory in nature and are designed to provide a minimum of economic security for large groups of person: particularly in the lower income classes." oe 2 the 1 There is also mandatory coverage under the National Health Insurance Act of 2018 which provides for mandatory coverage"? {Siti a,» Compulsory Insurance. There are also other compulsory insurance like the C y Motor Vehicles and the cargoes 6f Vessels The insurance coverage is secured from private insurers and (20) from a particular government agency.-There is also a special-law- that provides. for-compulsory-insurance-for each migrant worker deployed by a recruitment/manning agency at no cost to the said worker. JOTR.A. No. 8282. 108R.A, No. 8291. f 3 1Section 522, Local Government Code. 3 1 NOBikelhaupt, p. 66. MBikelhaupt, ibid. R.A. No. 10606. SSections 386 to 402, I.C.; See Chapter 14 of this work. WUSection 14, R.A. No. 9295; See Chapter 11 of this work. USSection 37-A, R.A. No. 8042 or Migrant Workers and Overseas Filipinos Act of 1995, as added by R.A. No. 10022. i Scanned with CamScannerCHAPTER 1 37 GENERAL CONCEPTS b, General "CIaSGificatiOn,” Professor Vance declared that there are attempts to extend the principles of insurance to numerous kinds of losses." This attempt resulted in extension to insurance to many kinds of risk and different kinds of insurance: ts yet to accrue; layhGRuencten ne peerennprsmelniae elsesenyonT cor retical eee gm TT and My i that i Insurance. ) d. (Special Types? Special peso oft insurance contracts with C 2 e. eee ree Insuranée or'(@) Group Insurance: i is.usually quned by the person’ or entity who is insured or who owns the property. Sor snl ott elt someone ober tats person under a single contract issued to someone other than the persons. insured.” An-example itter is ‘a group mortgage redemption insurance and policies iid to employers.!""— . t i Business Insurance. Personal/insurancé are those used by natural persons and their families like life insurance, disability and motor ti ’ * N6William R. Vance, Handbook of the Law of Insurance, 2nd: Ed., p. 34, hereinafter referred to as “Vance, p. 34.” Wid, uaa, ued, Beam, Jr. and Wiening, Fundamentals of Insurance Planning, | ard (2009), Section 1.32, hereinafter referred to as “Beam, Jr. and Wiening.” 121S¢e for example Serrano v. Court of Appeals, G.R. No. eee a 16, Ao 1984, Scanned with CamScanner- ESSENTIALS OF INSURANCE LAW 1 (Republic Act No. 10607 with Notes on Pre-Need Act) ! vehicle insurance. wre those that are used Business organizations like employee ife Insurance” oF propost insurance for the factory and the inventories therein, ‘ g. (LifesTvisurance!”The classification of life insurance may be made: (1) according to the period when it is in force, or ( according to its object, or (3) according to its special characteristic, Life Insurance may be classified into: ’ J (2) MermiInsiranee — The li a temporary basis or for a limited period. Q) Whole Life Insurane’ — Avperson is insured during. his entire lifetime. =) (3) End6wmient’Policy— Inthis type of i i. -insured is paid a certain amount or'tl io if the insured survives a certain period and the beneficiary will” get the proceeds if the insured does not survive. 4 (4) diidustrialsbife — It is thateform’of life-insurance under: which the premiums are “payabl . ofteneryif thé face amount of insurance provided in any policy is not more than five hundred times that of the current statu- tory minimum daily wage in the City of Manila, and if the words “industrial policy” are printed upon the policy as part of the descriptive matter. ? r h. The Insurance Code. recognizes insurance policies that are wholly or partly considered property “insurance. These include: i ; nd (8)/easualty insurance? 'j, (Mieroinisurancep R.A. No. 10607 now includes a provi- sion on Microinsurance.™ Section 187 of the Insurance Code provide Section 235, L.C., as amended by R.A. No. 10607. 1Vance, p. 46. | Ibid. "428gections 187 and 188, I.C., as amended by R.A. No. 10607. Scanned with CamScannerCHAPTER 1 39 GENERAL CONCEPTS that risk protection needs of emai tions, premiums, fees or charges, cor — doe? not _ exceed 7.5% of the current da Laren a agricultural workers in Metro } of guaranteed benefits is 3 not more thai ODO meee Z El wage rate TOE Hon agrretionraleworieranineMean, | Manila. $10. PRINCIPLE OF INDEMNITY/One of the fundamental principles of insurance is what is knownas the principle ofindemnity. it the insu: houl jore { value of b.. Manifestations. The fact that insurance contract is a contract of indemnity is manifested in the following: (1) Insurable interest is indispensable, (2) The value of the interest destroyed or image is generally the measure of indemnity (except in the cases cited above), (3) Co-insurance clause in marine inguraiice, and (4) Subrogation i in property insurance.” "Redja, p. 61. 3 "Francisco, p. 5. “*[bid., p. 62. "Vance, pp. 75-76. Scanned with CamScanner