I.

Introduction

A. Laws governing insurance

1) PD 1460 as Primary Law in Insurance PD 1460 or the Insurance Code of 1978 is the
principal law on insurance. It consolidated PD 612 also known as the Insurance Code of 1974
with other amendatory decrees and executive orders.

2) Insurance Code

Supplementary Laws

(1) Civil Code – Articles 789, 2011, and 2012.

(2) Act 2573 – Mutual Insurance on Work Animals

(3) RA 8291 – GSIS of 1997

(4) RA 656 – Property Insurance Law

(5) RA 8282 – SSS of 1997

(6) RA 3124 – Industrial Life Insurance

(7) PD 317 – Insurance Cooperatives

(8) PD 1467 – Crop Insurance, as amended by RA 8175

B. General concept of insurance

I. GENERAL CONCEPTS

CONTRACT OF INSURANCE

 An agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. (Sec. 2, par. 2, IC)

“DOING AN INSURANCE BUSINESS OR TRANSACTING AN INSURANCE BUSINESS” (Sec.

2, par. 4)
1. Making or proposing to make, as insurer, any insurance contract;

2. Making or proposing to make, as surety, any contract of suretyship as a vocation, not as

a mere incident to any other legitimate business of a surety;

3. Doing any insurance business, including a reinsurance business;

4. Doing or proposing to do any business in substance equivalent to any of the foregoing

C. Characteristics

Characteristics of an insurance contract

The following are its characteristics:

1. consensual – perfected by meeting ofthe minds of the parties.

2. voluntary – the parties may incorporate such terms and conditions as they may deem
convenient.

3. aleatory – depends upon some contingent event.

4. unilateral – imposes legal duties only on the insurer who promises to indemnify in case of
loss.

5. conditional – it is subject to conditions the principal one of which is the happening of the
event insured against.

6. contract of indemnity – except life and accident insurance, a contract of insurance is a

contract of indemnity whereby the insurer promises to make good only the loss of the insured.

7. personal – each party having in view the character, credit and conduct of the other.

8.Property in legal contemplation- since it is a contract it is a property in legal contemplation.

But unlike property policies, life insurance policies are generally assignable and transferrable
like “any choice in action”

1. Risk distributing device

-Risk Distributing Device

Insurance serves to distribute the risk of economic loss among as many as possible of those
who are subject to the same kind of loss.
An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract
where the rights and obligations of the parties correlate and mutually correspond. The insurer
assumes the risk of loss which an insured might suffer in consideration of premium payments
under a risk-distributing device. Such assumption of risk is a component of general scheme to
distribute actual losses among a groupof persons, bearing similar risks, who make ratable
contributions to a fund from which the losses incurred due to exposures to the peril insured
against are assured and compensated. (UPCB General Insurance Co. Inc. v. Masagana
Telemart Inc., G.R. No. 137172, April 4, 2001)

2. Contract of adhesion

-. Contract of Adhesion (Fine Print Rule)

 Most of the terms of the contract do not result from mutual negotiations between the parties
as they are prescribed by the insurer in final printed form to which the insured may “adhere” if
he chooses but which he cannot change. (Rizal Surety and Insurance Co., vs. CA, 336 SCRA
12)

3. Aleatory-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.

4. Contract of indemnity-An insurance contract is a contract of indemnity upon the terms and
conditions specified therein. It is settled that the terms of the policy constitute the measure of
the insurer's liability. In the absence of statutory prohibition to the contrary, insurance
companies have the same rights as individuals to limit their liability and to impose whatever
conditions they deem best upon their obligations not inconsistent with public policy. (Fortune
Insurance and Surety Co. v. Court of Appeals)

Exceptions:

• Life insurance (because the amount paid by the insurer can never be equal to the value of life
insured)

• Valued Policies (under which the insurer will pay the value fixed in the policy regardless of
actual cash value in case of total loss)

D. Elements of insurance (IRAPS)

1) Insurable interest- In general, a person is deemed to have insurable interest in the subject
matter insured where he has a relation or connection with or concerning it that he will derive
pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage
from its destruction, termination or injury by the happening of the event insured against.
2) Risk of Loss or Damage/ Designated Peril as Cause- The happening of the designated
events, either by unknown or contingent past or future, will subject such interest to some loss
whether in the form of injury, damage or liability.

3) Assumption of Risk- The insurer assumes the risk to indemnify the insured in case of loss

4) Payment of Premium- The insurer undertakes to assume the risk of such a loss for
consideration called the premium to be paid by the insured.

5) Risk- Distributing Scheme- This assumption of risk is part of a general scheme to distribute
the loss among a large number of persons exposed to similar risks.

E. Right of subrogation

-RIGHT OF SUBROGATION

 Process of legal substitution

 The insurer, after paying the amount covered by the policy, steps into the shoes of the
insured

 Insurer avails of the rights of the insured against the wrongdoer

 Insured CANNOT recover from offender what was paid by insurer but can recover any
deficiency.

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

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

 Applicable only in non-life insurance (Philamgen v. CA)

 In insurance law, an insurer, after paying the claim of an insured, by process of legal
substitution, steps into the shoes of the insured and can proceed against an erring party or the
one who caused the loss.

INSTANCES WHEN SUBROGATION IS NOT APPLICABLE

1. When the insurer pay the insured for a loss not covered by the policy.

2. The insurer by his own act releases the wrongdoer.

3. In case of life insurance.

4. Recovery of loss in excess of the limits provided by the policy.

Interpretation of Insurance Contracts

The ambiguous terms are to be construed strictly against the insurer and liberally in favour of
the insured. However, if the terms are clear, there is no room for interpretation.

Malayan Insurance case: Exceptions to the general coverage are construed most strongly
against the company. Even an express exception in a policy is to e construed against the
underwriters by whom the policy is framed, and for whose benefit the exception is introduced.

▪ REASON ▪ A policy of insurance is a contract of adhesion considering that most of the terms
of the contract do not result from mutual negotiations between the parties as they are prescribed
by the insurer in final printed form to which the insured may “adhere” if he chooses but which he
cannot change.\

Parties to an Insurance Contract

1. Insurer - Person who undertakes to indemnify another. Every person, partnership,

association, or corporation duly authorized to transact insurance business, may be an insurer.

2. Insured – The party to be indemnified upon the occurrence of the loss. He must have the
following qualifications:

a. capacity to contract;

b. must possess an insurable interest in the subject of the insurance; and

c. must not be a public enemy

d. must not be disqualified by law

3. Beneficiary – a person designated to receive proceeds of policy when risk attaches.