Nature of the contract of Insurance

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