Insurance (I)

The Business of Insurance

The Contract of Insurance

Governing Law: Insurance Code of 1978 – PD 1460 as amended and Special Laws

Insurance code: primarily governs the different types of insurance contracts and those engaged in
insurance business
in the Philippines.

Civil Code

Articles 739 and 2012 – on void donations

Article 2011 – Applicability of the Civil Code / Special Laws

Article 2021-2027 – Life annuity contracts

Article 2186 – Compulsory motor vehicle liability insurance

Article 2207 – Insurer’s right of subgroation

Special laws

1. Insurance Code of 1978 – PD 1460

2. Revised Government Service Insurance Act of 1977 – PD 1143 as amended
3. Social Security Act of 1954 – RA 1161 as amended
a. With respect to insurance of employees in private employment
4. Others
a. Code of Commerce – Considered a special law
b. RA 656 as mended by PD 245 – Property Insurance Law
c. RA 4898 as amended by RA 5756 – Providing life, disability and accident insurance
coverage to barangay officials
d. EO 250 – increases integrates and rationalizes the insurance benefits of barangay officials
under RA 4898 and members of the Sangguniang Panlalawigan, Suangguniang
Panlungsod and Sangguniang Bayan under PD 1147
e. RA 3591 – Establishes the PDIC insuring the deposits of all banks which are entitled to
the benefits of insurance under the Act.

The Insurance Commissioner (Sections 437-439, PD 612 as amended by RA No. 1067)

 Chapter VIII
THE INSURANCE COMMISSIONER

Title 1
ADMINISTRATIVE AND ADJUDICATORY POWERS

ADMINISTRATIVE Section 414. The Insurance Commissioner shall have the duty to see that all
laws relating to insurance, insurance companies and other insurance matters, mutual benefit
associations, and trusts for charitable uses are faithfully executed and to perform the duties imposed
upon him by this Code, and shall, notwithstanding any existing laws to the contrary, have sole and
exclusive authority to regulate the issuance and sale of variable contracts as defined in section two
hundred thirty-two and to provide for the licensing of persons selling such contracts, and to issue
such reasonable rules and regulations governing the same.

The Commissioner may issue such ruling, instructions, circulars, orders and decision as he may
deem necessary to secure the enforcement of the provisions of this Code, subject to the approval of
the Secretary of Finance. Except as otherwise specified, decisions made by the Commissioner shall
be appealable to the Secretary of Finance.

ADMINISTRATIVE Section 415. In addition to the administrative sanctions provided elsewhere in

this Code, the Insurance Commissioner is hereby authorized, at his discretion, to impose upon the
insurance companies, their directors and/or officers and/or agents, for any willful failure or refusal to
comply with, or violation of any provision of this Code, or any order, instruction, regulation, or ruling
of the Insurance Commissioner, or any commission or irregularities, and/or conducting business in
an unsafe or unsound manner as may be determined by the Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a day; and

(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.

ADJUDICATORY Section 416. The Commissioner shall have the power to adjudicate claims and
complaints involving any loss, damage or liability for which in insurer may be answerable under any
kind of policy or contract of insurance, or for which such insurer may be liable under a contract of
suretyship, or for which a reinsurer may be sued under any contract of reinsurance it may have
entered into; or for which a mutual benefit association may be held liable under the membership
certificates it has issued to its members, where the amount of any such loss, damage or liability,
excluding interest, cost and attorney's fees, being claimed or sued upon any kind of insurance, bond,
reinsurance contract, or membership certificate does not exceed in any single claim one hundred
thousand pesos.

The insurer or surety may, in the same action file a counterclaim against the insured or the obligee.

The insurer or surety may also file a cross-claim against a party for any claim arising out of the
transaction or occurrence that is the subject matter of the original action or of a counterclaim therein.

With leave of the Commissioner, an insurer or surety may file a third-party complaint against its
reinsurers for indemnification, contribution, subrogation or any other relief, in respect of the
transaction that is the subject matter of the original action filed with the Commissioner.
The party filing an action pursuant to the provisions of this section thereby submits his person to the
jurisdiction of the Commissioner. The Commissioner shall acquire jurisdiction over the person of the
impleaded party or parties in accordance with and pursuant to the provisions of the Rules of Court.

The authority to adjudicate granted to the Commissioner under this section shall be concurrent with
that of the civil courts, but the filing of a complaint with the Commissioner shall preclude the civil
courts from taking cognizance of a suit involving the same subject matter.

Any decision, order or ruling rendered by the Commissioner after a hearing shall have the force and
effect of a judgment. Any party may appeal from a final order, ruling or decision of the Commissioner
by filing with the Commissioner within thirty days from receipt of copy of such order, ruling or
decision a notice of appeal and with the Supreme Court twelve printed or mimeographed copies of a
petition for certiorari or review of such order, ruling or decision, as the case may be. A copy of the
petition shall be served upon the Commissioner and upon the adverse party, and proof of service
thereof attached to the original of the petition.

As soon as a decision, order or ruling has become final and executory, the Commissioner shall motu
propio or on motion of the interested party, issue a writ of execution required the sheriff or the proper
officer to whom it is directed to execute said decision, order or award, pursuant to Rule thirty-nine of
the Rules of Court.

For the purpose of any proceeding under this section, the Commissioner, or any officer thereof
designated by him, empowered to administer oaths and affirmation, subpoena witnesses, compel
their attendance, take evidence, and require the production of any books, papers, documents, or
contracts or other records which are relevant or material to the inquiry. In case of contumacy by, or
refusal to obey a subpoena issued to any person, the Commissioner may invoke the aid of any court
of first instance within the jurisdiction of which such proceeding is carried on, where such person
resides or carries on his own business, in requiring the attendance and testimony of witnesses and
the production of books, papers, documents, contracts or other records. And such court may issue
an order requiring such person to appear before the Commissioner, or officer designated by the
Commissioner, there to produce records, if so ordered or to give testimony touching the matter in
question. Any failure to obey such order of the court may be published by such court as a contempt
thereof.

A full and complete record shall be kept of all proceedings had before the commissioner, or the
officers thereof designated by him, and all testimony shall be taken down and transcribed by a
stenographer appointed by the Commissioner.

A transcribed copy of the evidence and proceeding, or any specific part thereof, of any hearing taken
by a stenographer appointed by the Commissioner, being certified by such stenographer to be a true
and correct transcript of the testimony on this hearing of a particular witness, or of a specific proof
thereof, carefully compared by him from his original notes, and to be a correct statement of evidence
and proceeding had in such hearing so purporting to be taken and subscribed, may be received as
evidence by the Commissioner and by any court with the same effect as if such stenographer were
present and testified to the facts so certified. (As amended by Presidential Decree No. 1455)
-Quasi-legislative functions

-Quasi-adjudicatory functions

Power of state to regulate insurance business (Sections 190-199, Insurance Code)

• Concepts defined

• Contract of Insurance- Section 2 of the Insurance Code(memorize definition)

Sec. 2. Wherever used in this Code, the following terms shall have the respective meanings
hereinafter set forth or indicated, unless the context otherwise requires:

(1) A   “contract  of   insurance”  is  an   agreement  whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.

A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this
Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter
provided

(2)The   term   “doing   an   insurance   business”   or   “transacting   an   insurance   business,”  

within   the meaning of this Code, shall include:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in
a manner designed to evade the provisions of this Code.

In the application of the provisions of this 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.

(3) As   used   in   this   Code,   the   term   “Commissioner” means the “Insurance Commissioner.”

NOTES
  "assurance" instead of "insurance" to describe the life insurance business, the former referring to
an event like death, which must happen, and the latter, to a contingent event which may or may
not occur. As used in the Code, the term "insurance" covers "assurance."
 A better definition would be that, a contract of insurance is an agreement by which one party
(insurer) for a consideration (premium) paid by the other party (insured), promises to pay
money or its equivalent or to do some act valuable to the latter (or his nominee), upon the
happening of a loss, damage, liability, or disability arising from an unknown or contingent
event.
 An insurance contract is a promise by one person to pay another, money or any other thing of
value upon the happening of a fortuitous event beyond the effective control of either party in
which the promisee has an interest apart from the contract.

Definition of Insurance from other viewpoints:

Economic – insurance is a method which reduces risk by a transfer and combination (or
"pooling") of uncertainty in regard to financial loss

Business – it has been defined as a plan by which large numbers of people associate
themselves and transfer to the shoulders of all, risks that attach to individuals. Insurance
may also be looked upon as an important part of the financial world, where insurance serves as a
basis for credit and a mechanism for savings and investments.

Mathematical - insurance is the application of certain actuarial (insurance mathematics)

principles.

in life insurance, the principles of probability are applied to statistical results of past
experience represented by a mortality table.

Ex. Out of 10,000 lives, on the average, 10 people die per year – Probability of death is
1/1000 or 0.001

Social – insurance has been defined as a social device whereby the uncertain risks of individuals
may be combined in a group and thus made more certain, with small periodic contributions by the
individuals providing a fund out of which those who suffer losses may be reimbursed.

A plan by which the losses of the few are paid out of the contributions of all members
of a group

How to determine the existence of the contract?

Nature of the contract

Determined by the exact nature of the contract actually entered into whatever the form it takes or by
whatever name it may be called.

Elements of the contract

Subject matter - refers to the thing insured, In fire insurance and in marine insurance, the thing insured
is property; in life, health or accident insurance, it is the life or health of the person that is the subject of
the contract; in casualty insurance, it is the insured's risk of loss or liability; and

Consideration - consideration for an insurance contract is the premium paid by the insured. Its amount
is principally based on the probability of loss and extent of liability for which the insurer may become
liable under the contract.

Object and purpose - principal object and purpose of insurance is the transfer and distribution of risk of
loss, damage, or liability arising from an unknown or contingent event through die payment of a
consideration by the insured to the insurer under a legally binding contract to reimburse the insured for
losses suffered on the happening of the stipulated event.

Nature and Characteristics of an insurance contract

1. Consensual - perfected by the meeting of the minds of the parties, (see Art. 1319, Civil Code.)
2. Voluntary - not compulsory and the parties may incorporate such terms and conditions as they
may deem convenient (Art 1306, Civil Code). In conformity with the law and not opposed to
public policy.
a. the carrying of insurance, particularly liability insurance, may be required by law in
certain instances such as for motor vehicles
b. Required for employees (Labor Code 168-184)
c. Required for granting a license to conduct a business or calling affecting the public safety
or welfare.

3. Aleatory - it depends upon some contingent event. But it is not a contract of chance (see Sec. 4.)
although the event against the occurrence of which it is intended to provide may never occur.
a. Aleatory Contract – One of the parties or both reciprocally bind themselves to give or to
do something in consideration of what the other shall give or do upon the happening
of an event which is uncertain, or which is to occur at an indeterminate time. (Art
2010 Civil Code) – Gambling, Wagering, Betting
b. In insurance, each party must take a risk; the insurer, that of being compelled upon the
happening of the contingency, to pay the entire sum agreed upon and the insured, that of
parting with the amount required as premium without receiving anything therefor in case
the contingency does not happen except what is ordinarily termed "protection" which is
itself is a valuable consideration.
c. aleatory in nature which means that they may involve the exchange of widely varying
values for it is of the essence of insurance that no one knows how the risk insured against
will happen.
d. Thus, an insurer may be liable to pay the full amount insured under life policies of which
only very few premiums have been paid.

4. Executed as to the insured after the payment of the premium and Executory on the part of the
insurer in the sense that it is not executed until payment for a loss.
 a. In other words, it is a unilateral contract imposing the legal duties only on the insurer
who promises to indemnify in case of loss.
b. Synallagmatic contract is a contract in which each party to the contract is bound to
provide something to the other party
c. Contract contemplates payment of the premium as condition precedent to the inception of
the contract but the insured usually assumes no duty to pay subsequent premiums
enforceable at the suit of the insurer unless the latter has continued the insurance after
maturity of the premium, in consideration of the insured’s express or implied promise to
pay.
5. Conditional – Because it is subject to conditions the principal one of which is the happening of
the event insured against.
a. In addition to this main condition, the contract usually includes many other conditions
(such as payment of premium or performance of some other act) which must be complied
with as precedent to the right of the insured to claim benefit under it.
6. Contract of indemnity
a. (except life and accident insurance where the result is death)
b. because the promise of the insurer is to make good only the loss of the insured
c. Insurable Interest – Sec. 13. Every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured, is an insurable interest.

If the insured has no insurable interest, the contract is void and unenforceable (see Secs.
18-19.) as being contrary to public policy because it affords a temptation to the insured to
wish or bring about the happening of the loss.
i. Section 18. No contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest in the property
insured.

ii. Section 19. An interest in property insured must exist when the insurance
takes effect, and when the loss occurs, but need not exist in the meantime; and
interest in the life or health of a person insured must exist when the
insurance takes effect, but need not exist thereafter or when the loss occurs.

7. A personal contract – each party having in view the character, credit and conduct of the other.
a. GENERAL RULE: Insured cannot assign, before the happening of a loss, his rights
under a property policy to others without the consent of the insurer (Sec 83)
b. Obligation of the insurer to pay DOES NOT attach to or run with the property whether it
be real property or personal.
c. If a person whose property is insured sells it to another, buyer cannot be his successor in
the contract of insurance unless there is consent of the insurer.
d. Exception: “On account of the owner”, “for whom it may concern”, “the loss is payable
to bearer” – the subsequent transferees or owners become by the terms of the contract, the
real parties to the contract of insurance.
e. Successive Novation - Insurance is made to pass from owner to owner.
 f. All insurance contracts share a common trait of “personalness”:
i. The category of personal insurance, which includes life, health, accident, and
disability insurance – purely personal as it applies only to a particular individual,
and it is not possible for the insured unilaterally declaring that his health
insurance policy shall now be deemed to cover the health of someone else.
ii. Liability insurance is also personal in the same sense: each person purchases
coverage for his own potential liability to others. The insurer prices the coverage
depending on the characteristics and traits of the particular insured.
iii. Property insurance also personal in this limited sense. Insurance is on the
insured’s interest in the property, not on the property itself.
1. It is the damage to the personal interest not the property that is being
reimbursed under a policy of property insurance
g. Life insurance policies, however, are generally assignable or transferable as they are in
the nature of property and do not represent a personal agreement between insured and
insurer. (Sec 181)
8. Insurance is a contract, as such, it is property in legal contemplation.

Distinguishing elements of the contract of insurance

(1) The insured possesses an interest of some kind susceptible of pecuniary estimation, known as
"insurable interest”
(2) The insured is subject to a risk of loss through the destruction or impairment of that interest by
the happening of designated perils
(3) The insurer assumes that risk of loss
(4) Such assumption of risk is part of a general scheme to distribute actual losses among a large
group or substantial number of persons bearing a similar risk
(5) As consideration for the insurer's promise, the insured makes a ratable contribution called
"premium," to a general insurance fund