(2° were DAW Sere ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) TIMOTEO B. AQUINO Professor of Law and Pre-Bar Reviewer Author, Torts and Damages Reviewer on Civil Law Philippine Corporate Law Compendium Notes and Cases on Banking Law and Negotiable Instruments Law (Vols. I and II) Casebook on Corporate Law Co-Author, Reviewer on Commercial Law Essentials of Transportation and Public Utilities Law Handbook on Summary and Smalls Claims Procedure and Bouncing Checks Law (With Notes on Ejectment and Katarungang Pambarangay Law) Revised Rules on Summary Procedure: Revisited Fundamentals of Negotiable Instruments Law Fundamentals of Obligations and Contracts Second Edition 2014 Pbishe REX Book Store901 Ld 494 col imedlis Apne Mt |OTEO B. AQUINO ISBN 978-971-23-6743-4 No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied indifferent electronic devices or in any other form, for distribution or sale, without the written permission of the authorized representative of the publisher except inbooks, articles, reviews; legal papers, al or other official proceedings with proper Any copy of this book without the corresponding number and the authorized signature of the author on this page either proceeds from an illegitimate source or isin possession of one who has no authority to dispose of the same. * ALL RIGHTS RESERVED BY THE AUTHOR No, 6862 (05-CM-00057 Printed by poe {84 Perrin St, Quezon Cty aL No.8S7-h ney gx lt PREFACE We are still in what is fittingly called by Mr. Allan Greenspan as the “Age of Turbuience.” Mr. Greenspan observed that the financial ‘upted much of the world’s financial system and had cast “a pall over many nations’ prospects for economic growth.” ‘The insurance industry is one of those hit by the upheaval. Even insurance companies that appeared to be monolithic a years ago are now stuck in financial quagmire. Significantl Greenspan is also of the view that “the best strategy is to ensure ‘unencumbered by protectionism or rigid regulation, to absorb and mitigate the shock of crises.” Nevertheless, he aiso believes that there is a greater need for enforcement of regulati activities that hinder voluntary exchange markets. For him, there is a greater need for law-enforcement professionals, Lawyers are part of the pillars of law-enforeoment. But pillars cannot endure in the terra firma of law without solid basie foundation, This includes knowledge of the fundamental statutory ries and legal principles that govern financial intermediation conduits like insurers. The present work is the author's modest contribution to such indispensable underpinnings. As tho title ofthis book suggests, what is woven are the essentials of insurance laws, rules, and jurisprudence. The materials prepare law students and legal practitioners for a more intensive training othe intricacies of the insurance industry. ‘The book departs from the mode of presentation that can be found in available law books on insurance because of its topical presentation. The statutory provisions and administrative rules are integrated in the discussion. The arrangement of the topics reflects and puts into writing how the author collates, arranges, and correlates the voluminous materials wher teaching the subject in Jaw school. Sample bar examination questions and thei sted answers are included. To further illustrate the oper gal norms, eases decided hy the Supreme Court and other tribunals are presented in a “problem-answer” form.‘The previows edition of this work was based on the Insurance Code of 1978. With the enactment of Republic Act No. 10607, the author was constrained to update the work to make it cousistent with the new law. In addition, the author alse included two chapters, particularly Chapter 17 on the Insurance Commissioner, and Chapter 18 on Pre-Need Plans. The author included a chapter on Pre-Need Plans because the regulation thereof was already transferred to the Insurance Commissioner under Republic Act No. 9829. As usual, this work would not have been finished without the inspiration of the author’s wife, Bernadette, and their children Leona Isobelle, Lean Carlo, and Lauren Margaret. The author likewise owes gratitude to his family and friends who are also always there to lend support. He also owes special thanks to the law professors who generously support the author by using his other works. Finally, the author is grateful to his students during his almost twenty years of teaching law not only for their encouraging comments, but also for giving him the privilege of being part of their legal training, Truly, the author's students are the reasons why his works came ta be. ‘TIMOTEO B. AQUINO February 2014 ‘Teresa, Rizal Beene 1.04. 2.01 Applicable Laws 3 3 CONTENTS Chapter 1. General Concepts Pre-Need Plans... Variable Contracts 2. Doing an Insurance Business... ‘Mutual Insurance Companies... New Civil Cod Corporation Code Elements, 4.01. 4.02. 4.08, 4.04. Assumption of Risk. 5.01. 5.02. Requisites of a Valid Contract Distribution of Losses... Risk... . Nature and Purpoce.... How People Deal with Risks How Insurance Deal with Risk.. Characteristics, Social Value. Perfection Kinds of Insurance. Principle of Indemnity Chapter 2. The Parties Hngured... 101. Assured and Ow: 1.02. Capacity.poe .. Insurer. . Beneficiary... 7. Insurance Agent and Insurance Broker. . Ingurable Interest in Life Insurance Insurance |. Insurable Interest in Property Insurance... 3.01. Tes 1.03. Effect of Death of Owner .. 1.04. Public Enemy..... 2.01. _ Definition... 2.02, Certificate of Authority. 2.68. Grounds for Dapproval of Application 2.04, Prohibited Acts... 3.01. Generally Revocabl 3.02, Forfeiture of Right} of Beneficiary 3.03. Disqualification of Beneficia ‘Trustee or Agent. 6.01. Assignee of Property Insurance... 7.01, Insurance Agent. 7.02, Insurance Broker 7.03. Effect of Receipt of 7.04. No Jurisdiction Over Insurer- Relation Chapter 8. Insurable Interest Concept 2.01. Classes of Insurable Interest 3.02. Kinds of Insurable Interest... 3.03. Distinctions between Insurable Interest in Property Insurance and Life Insurance . 3.04, Insurable Interest of Bailee .. 3.05. _Insurable Interest of Mortgagor and Mortgage .... 8.06. Insurable Interest of Mortaagee . When Must Insurable Interest Bxist... 4.01. Property Insurance .. . Assignee in Life Insurance.. ._ How to Prevent Lapse of Life Insurance Policy .. . Return of Premium... . Contract of Adhesior |. Interpretation and Proof. ). Cover Notee . Kinds of Property Insurance Policy . . Cancellation. |. Renewal of Poli 4.02, Life Insuranee Insurable Interest of Benen in n ropes Insurance .. 5.01. Insurable Interest of Beneficiary Insurance... 6.01. Assignee in Property Insuranci Chapter 4, Premium . Premium Required for Policy to be Binding... 1.01. Effect of Non-Payment.... 1.02. When Binding Even if Premium is Unpaid 2.01. Automatic Policy Loan and Cash Surrender Value... 202, Dividends.... 2.03. Reinstatement Clause. 3.01, Grounds... Advance Payment .. Rebate of Premium Chapter 5. The Policy Consensual. Designation of Beneficiary Identification of the Insured... Policy Form .. . Riders: 9.01. Proof. 78 9 79 80 80 122. Reformation of the Poli . Representation . Incontestable Clause. Chapter 6. Ascertaining and Controlling Risks 1.05. 1.06, Judgment or Opinion. 1.07. Knowledge of the Insurer 1.08, Intentional and Unintentional Coneealment 1.09. Knowledge of the Fact Concealed. 1.10. Waiver of Insurer LIL. Remedy, 2.01. Time of Representation. 2.02. 2.08. 2.04. 2.05. Formalties of Express Warranty Examples of Express Warrant} 5.01. Mandatory Incontestable Clauses. 5.02. Rationale. ; 7.08. Waiver... * 7.04. Estoppel . Claims Settlement... |. Prescriptive Period. }: Subrogation... 5.03. When Inapplicable War Limitation Rider or War Clause .... Defenses of Insured Against Revocation. 7.01. Guaranteed Insurability Clause 7.02, ‘Timeliness of Rescission Chapter 7. Loss and Notice of Loss Proximate Cause Defined .. Rules under the In Concurrent Causes. ‘Negligent and Inter or Omissions. . Notice of Loss. Effects of Delay... Chapter 8. Claims Settlement and Subrogation 1.01, Unfair Claims Sottlement Practices 1,02. Life Insurance Policy 1,03. Non-Life Inswrance Pol 1.04. Unreasonable Denial or Withholding of Claim, . Fraudulent Claim 3.01. Stipulation 3.02. Accrus 3.03. Rul 4.01. Requicites of Subrogation. 4.02. When thero is no Subrogation 4.03. Limitations ... 4.04, Discretion of Insurer to Exercise Right. 170 im 172 172 176|. No General Pro} |. Other Insurance ;. Over-Insurance by Double Insuran |. Definition .. .. Parties. . Inisurable Interest. . Obligation . Cancellati Kinds of Marine Insurande.. Chapter 9. Double Insurance 2.01. Double Insurance in Life Insurance. 5.01. Rules in Case of Over-Insurance by Double Insurence. Chapter 10. Reinsurance 1.01. 1.02. Distinguished from Double-Insurance and 6.01. Facultative Reinsurance. 5.02. Treat 7.01. Measure of Liabil 7.02. Good Faith Chapter 11. Marine Insurance 2.01. Ocean Marine Insurance 2.02. Inland Marine Insurance. 2.03. Aviation Insurance. ition Against Double Insuranee.... 227 228 228 228, 229 229 231 233, 234 235 239 240 13. |. The Voyage and Deviation ; 9.01. Route... |. Abandonment ... . Measure of Indemnity... Period Covered . Risks Insured Agai 4.01, All-Risk Pol 4.02, Named Perils: Policy 4.03. Inland Marine Insurance Insurable Interest . 5.01. Insurable Interest over the Shi 6.02, Insurance over Cargo... 5.03. Insurance over Freightage and Income ... Concealment Representation .. Implied Warranties 9.02, Deviation... L085 nein 10.01. Kinds of Loss 11.01. Requisites. 11.02. Effeets of Abandonment. 11.03. Acceptance of Abandonm |. Revocation... 11.05. Bifect of Failure to 12.01. Co-Insurance Clause 1202, Freightaye or Cargo. 12.08. Profits... 12.04. Partial Lose of Cargo. 12.05. Sue and Labor Clause. 12.06. Application of Old Materi Average: es 13.01. FPA Clause. 13.02. Simple or Particular a Avra 18.03, General Average.... 279 282, 285 287 287 29018.04. Who will Pay General Average... 18.08. Subrogation... Chapter 12. Fire Insurance se toe ‘Transfer of Policy.. Exempt from Execution Chapter 14, Casualty Insurance and CTPL Insurance 292 294 295 297 297 299 299 299 300 301 301 303 |. General Concepts 7104. Authorized D: Theft Clause Distinguished. 8.01. 8.02. 8.03. 8.04, 8.05. 8,06. Change of Ownership. 8.07. Claims Settlement. 8,08. Penalty Clauses... Chapter 15. Suretyship 4.01. Distinguished frm Inaurance Contracta 1.02, Sean 1.03. Distinguished from Guaranty 1.04. Civil Code applicable 1.05. 1.06. Extent of Liability ‘The Parties Continuing Surety. Reimbursement Extinguishment.... Chapter 16. Regulation of Insurance Business Sources of Regulation o 1.01. Authority of LGU Restricted , ‘Reasons and Bases of Regulatio Areas of Regulation... Formation and Licensing of Insurers... 343 343 343 382, 3834.01. 4.02. 4.03. 4.04. 4.05. 4.06. Other Aspects of 5. Directors and Officers 5.01. Corporate Governance 6. Financial Regulations... 6.01. Paid-up Capital and Net Worth srporate Organization. 608. Limit of Single Risk. Security Deposit... Regulation of Persons Tnvol 801. Reinsurance Busines 8.02. Foreign Companies 8.03, Holding Compani 8.04. Self-regulatory Orgat 8.05. Other Persona Subject to Regulation .. 9. Corporations in Distress. Capitali Conservatorship 10. Rate Regulati 10.01. Purposes of Rate Re 1 2 12.01. Prohibitions 13. Anti-Money Laundering. 18.01. Layering. 383 383 384 384 385, 385 Chapter 17, Insurance Commissioner . Insurance Commi ‘Term of the Com Security for the Commi Administrative Sanctions Quasi-Judicial Functions. Chapter 18. Pre-Need Plans . Governing Law and State Policy Pre-Need Plan Defined 3. Parties... 7 3.01. Other Persons Regulated by the Commissioner .. 3.02. Suspension or Revocation of Authority 4, Kinds of Pre-Need Plans... 5. Pre-Need Contract 5.01, Interpretation 6. Disclosure of Information 7. Consideration ... 8. Termination of 8.01. Termination by Planholder 8.02. Termination by Pre-Need C: |. Claims Settlement. 12. Regulation of Pre-Need Compani APPENDICES ‘Appendix “A” —The Insurance Code (RA 10607)... Appendix “B” — Rules of Procedure of Insurance ‘Commission... [Appendix “C” — CMVLI Coverage (.M ‘Appendix ‘D” — Capitalization Requirements (D.0. No. 27-06). Appendix “E” — The Insurance Act (Act 2427) . Appendix “F” — Pre-Need Code (RA 9829). 1c, No, 4-2008) 413 413 414 416 417 418 420 421 422 423 423 424 425 425 426 426 426 429 430 430 ~ 430 431CHAPTER ONE GENERAL CONCEPTS Modern insurance contracts originated from the practice of merchants in the fourteenth century. Nevertheless, it has been acknowledged that different strains of security arrangements have already been used for centuries and they are akin to insurance contracts in embryonic forms. Tustice Laurel commented on the growth of insurance business in this “The phenomenal grow th of insurance from almost nothing hundred years ago toits present gigantic proportion isnot ofthe outstanding marvels of present-day business life, The demand for economic security, the growing need for soc the clamor for protection agai fone of the felt necessities of modern life. Insurance is no longer 9's monopoly. Upon it are heaped the assured hopes of lies 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 definition of the “contract of insurance” appears in the first paragraph of Section 2 of the Insurance Code that states:* (a) A “contract of insurancs whereby one undertakes fora consi an agreement jon to indemnify2 [ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) another against loss, damage or liability arising from an unknown or contingent event. a, Ineurance may also be defined as a contract whereby surer undertakes for a consideration to pay another party called the insured, or his beneficiary, upon the happening of the peril insured against, whereby the part or his beneficiary suffers loss or damage or is exposed to lial $1.01. TEST. Whether or not a contract is one of insurance is to be determined by its purpose, effect, contents, and import and by the terminology used.” The test to determine if act or not, depends on the nature ‘to be performed, and the exact nature of the agreement in the light of the occurrence, cantingericy or circumstances under which the performance becomes requisite. It, contract even if it is referred to as a health plan, In Philameare Health Systems v. Court of Appeals,' 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. 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, b, ‘The Supreme Court reached different. conclus Philippine Health Care Provider, Inc. v. CIR‘ where it conel ‘that the elements of insurance contract are absent. The Court r that there was no indemnity precisely because the member merely avails of medical services to pe paid or already paid in advance fat a pre-agreed price under! the agreements. Indemnity of the ‘member was not the focal point of the agreement but the extension of medical services to the member at an affordable cost; it did not “National Auto Service Corporation v. State, Texas Civ. App, 58 SW. (24) 209. "FG. No. 125678, March 18, 2002, See also Blue Crocs Health Care, In. v. ‘Noom! and Danilo Olivares, G-R. No. 169737, February 12, 2008, SG. No. 167820, September 18, 2008, CHAPTER ONE a GENERAL CONCEPTS partake of the nature of a contract of insurance. Although risk is 1 primasy element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost. anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, an entity undertakes a isk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But itis not the risk of the type peculiar only to insurance companies. ¢. _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 Rules and Regulations.’ Under the Implementing Rules and Regulations, a pre-need company may be all of the following types of pension plan, and (3) life or memorial $1.02, SURETYSHIP. For regulatory purposes, a contract of suretyship shall be deemed to be an insurance contract within the meaning of the Insurance Code when made by a surety who or whieh, as such, is doing an insurance business.* a. The contract of suretyship under the New Civil Code is simply defined as an agreement whereby one binds himself solidarily with the principal debtor. $1.03. PRE-NEED PLANS, Insurance contracts should like- wise be distinguished from pre-need plans that are now under the regulatory powers of the Insurance Commission (LC.) under the Pre-Need Code (RA No, 9829). Pre-need plans are contracts, ‘agreements, deeds or plans for the benefit of the planholders which provide for the performance of future services, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds as may be determined by I.C. The4 ESSENTIALS OF INSURANCE LAW (Republic det No, 10607 with Notes on Pre-Noed Act) basic laws and rules on Pre-Need Plans are discussed in Chapter 18 of this work." $1.04, VARIABLE CONTRACTS. The Insurance Code likewise governs “variable contracts.” *Variable contract” means any icy or contract on either a group or on an individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary s0 as to reflect investment results of any segregated portfolio of investments or of a designated separate account in which amounts received in connection with such contracts shall have been placed and accounted for separately and apart from other investments and accounts. This contract may also provide benefits or values incidental thereto payable in fixed or variable amounts, or both." PROBLEMS: 1. ET, deceased husband of respondent JT, applied for a health care coverage with petitioner Philameare Health Systems, Ine. 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. PO10194. Under the agreement, respondent’s husband italization benefits, whether isted therein. He was also ‘out-patient services, Was the agreement an insurance contract? alth care agreement was in the nature of non- ance, which is primarily a contract of indemnity. In 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. (Philameare Health Systems, Ine. v. Court of Appeals and 125678, March 18, 2002. But see ‘September 18, 2009 below) “See Chapter 18, page 422 of this book. ‘Section 288,1.C. as amended. CHAPTER ONE GENERAL CONCEPTS Under tho agreement with the PHOP, Ine. the member pays the PHCP a predetermined consideration in exchange for the hospital, medical andprofescional services rendcrod by the petitioner's physician or affiliated physician to him, In case of availment hy a member of the benefits under the agreement, PHCP does not reimburse or indemnify the member as the latter does not pay any third party Instead, itis the petitioner who pays the participating physicians and other health care providers forthe services rendered at pre-agreed rates. The member doos not make any such payment. According to the agreement, a member can take advantage of the bulk of the benefits anytime, 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 ofthe list of sarvices available. The assumption of the expense by petitioner is not confined to the happening of 1 contingency but includes incidents even in the absence of illness or injury. Can the contract between the member and the PHCP be considered an insurance contract? No. The contract is not an insurance contract. Not all the necessary elements of a contract of insurance are present in petitioner's agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by PHCP. In other words, there is nothing in the agreement that gives rise to a monetary 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” presuppose that a liability or claim because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreoments. Indemnity of the member was rot the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. While PHOP undertakes business risk whe offers to provide health services: the risk th to eam a reasonable return on its investment, But the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk6 BSSENTIALS QF INSURANCE LAW (Rep Ae No, 060 with Nota on ProNon A) ‘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. Homaver, asuming thatthe PHCPs commitment provide medical services an insurer. (Philippine Health Care Providers, Inc. v. CIR, GR. No. 167380, September 18, 2009) $2, DOING AN INSURANCE BUSINESS. The term “doing an insurance business” or “transacting an insurance business,” within the meaning of the Insurance Code, shall include: (1) Making or proposing to make, as insurer, any. insurance contract; (2) Making or proposing to make, as surety, any retyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; ) Doing any kind of business, including a \ce business, specifically recognized as cons- ing the doing of an insurance business within the ing of this Code; (4) Doing or proposing to do any business in substance equivalent o any of the foregoing it designed to evade the provisions of this Code. a. Profit not material. In the application of the provisions 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." "Sedtion LC. pb. (CHAPTER ONE 1 GENERAL CONCEPTS. D. _Insome 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. ©. Bancassurance. The recent amendments to the Insur- ance Code introduce the concept of the the business of bancassur- ance. The term bancassurance means “the presentation and sale to bank customers by an insurance company of its insurance products within the premises of the head office of such bank duly licensed by the Bangko Sentral ng Pilipinas or any of its branches under such rules and regulations which the Commissioner and the Bangko Sen- tral ng Pilipinas may promulgate.”* The Insurance Commissioner and the Bangko Sentral ng Pilipinas shall promulgate rules and regulations to effectively supervise the business of bancassurance.* $2.01. MUTUAL INSURANCE COMPANIES. Mutual Insurance Companies are entities that are “doing an insurance business” within the contemplation of the Insurance Code. A Mutual Insurance Company is a company owned by policyholders. Itis 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 only sources of funds to meet losses and expenses." PROBLEMS: 1, Inorder to save on premium payments, owners organized a company (Company issued by the Company “A” but the source of ind shall be exclusively from the annual contributions of tho momber shipownors. No profit is derived from tho ‘operation of the company. No other person or entity other than a member can obtain a policy from the Company “A? No separate premiums are paid by the members in securing policies from Company. Is the Company “A” doing an insurance business? "Soction 975, LC. es amended hy RA No, 10607 tba. "Republic v. SulifeIngurance Company of Canada, GR. No. 158085, October 14, 2006; White Gold Marine Services, Ine. Pionacr Insurance Surety Corporation, tal, supra. See 2006 Bar.8 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pro-Nood Act) contracts and that no separate or direct consi received therefor. These facts do not preclude the ‘No, 154514, July 28, 2005) % Mr. A borrowed money from Mr. B. As a security for the loan, Mr. C, a doctor, agreed to act as a surety in favor of Mr. B. Ie Mr. C “doing an insurance busines: ‘contract as part of his vocation. §3. APPLICABLE LAWS. The primary law that governs insurance contracts is the Insurance Code of the Philippines that was originally enacted as Presidential Decree No. 602 was previously amended by PD Nos. 1141 1460, 1814 and 1981, and BP Blg. 874. The previous edition of this, work was based on PD No, 1460 as amended, otherwise known as Insurance Code of 1978. a. The most recent amendment is RA No. 10607 dated August 16, 2013." RA No. 10607 was published in a newspaper of general circulation on September 5, 2013. This law re-enacted PD No, 602 as amended and introduced new concepts and pr For example, the law now includes a provision on microi bancassurance, trust operations of insurance companies self-regulatory organizations. The new law strengthen regulatory provisions of the Code. These include but are not limited to: (1) inerease of the paid-up capital and net worth requirements CHAPTER ONE, 8 GENERAL CONCEPTS framework (4) adoption of corporate governance rules, changes in the provisions on margin of solvency," (6) change the provisions on investments," (7) fixing the term of the Insurance Commissioner to six (6) yes 8) changes in the jurisdiction of the Insurance Commission over insurance claims the law now expressly allows in Secti payment of premium. Another example is the del of the provision regarding minors, $3.01. NEW CIVIL CODE. In addition, the New Civil Code Insurance Code. Article 2011 of the New Civil Code provides that the contract of insurance is governed by special laws and matters not expressly provided for in such special laws shall be regulated by the said Code. The New Civil Code likewise provides for grounds for disqualification of beneficiaries under Article 2012 thereof. a. Right of Subrogation” The New Civil Code specifically to subrogation. Article 2207 of the New Civil Code provides that “if the plaintiffs property has been inured, and he has received indemnity from the insurance company not fully cover the injury or loss, the aggrieved party shall be ‘to recover the deficiency from the person causing the loss or $3.02. CORPORATION CODE. By express provisions of ‘Section 191 of the Insurance Code, the provisions of the Corporation10 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act) Code of the Philippines® shall apply to all insurance corporations engaged in business in the Philippines insofar as they do not conflict with the provisions of the Insurance Code. Thus, ifthere is a specific 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 such corporation, §4. ELEMENTS. Insurance contracts have the following features or elements: The insured has an insurable interest; ‘The insured is subject to risk ofloss by the happening of the designated peril; ‘The insurer assumes the risk; ‘Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; and (6) In consideration of the insurer’s promise, the insured pays a premium." §4.01, REQUISITES OF A VALID CONTRACT. It should be noted however that insurance must have of a valid contract enumerated in the New Object certain which is the subject matter of the contract; and| Cause of the obligation which is established. $4.02, DISTRIBUTION OF LOSSES. It is required that the assumption of risk by the insurer is part of a general scheme to dis- Josses among a large group of persons bearing & si spreading” device. However, for purposes of applying the provisions of the Insurance Code, a single transaction may be deemed an insur- ance contract. Consequently, those who may enter into insurance contracts without authority from the Insurance Commission may Gulf Resorte, Inc, v. Philippine Charter Insurance Corporation, GR. No, 166167, May 16, 2008. be sanctioned precisely for offering and enteri tracts without a general scheme to distribute actual to vietimize the unknowing public. Nevertheless, th also be compelled to comply with its obligation under the insurance contract. The “insurer” is still considered engaged in insurance busi- ness because it is doing or proposing to do business which in sub- stance is equivalent to those expressly enumerated in Section 2 of the Insurance Code in a manner designed to evade the provisions of the!Insurance Code." $4.03. RISK, It is an element of an insurance contract that the insiured is subject to a risk of loss by the happening of the designated peril. The first paragraph of Section 3 of the Insurance Code provides: ‘Sec. 3. Any contingent or unknown event, whether be insured against, . a. Uncertainty is a feature of insurance because it requires the presence of an unknown and contingent event. The loss may or may not happen. In the case of life insurance, the uncertainty is ‘with respect to the time death will occur. b, Requirements of Insurable Risk. From the viewpoint of the insurer, it is ideal that six (6) requirements of insurable risk are present: (1) There must be a large number of homogenous exposure units, (2) The loss must be accidental and unintentional, (8) The loss must be determinable and measurable, (4) The loss should not be catastrophic, (5) The chance of loss must be calculable, and (6) The premium must be economically feasible. Nevertheless, while catastrophic losses are not , the losses should also be not too miniscule. Trivial sse8 are not insurable in accordance with the prineiple of De ‘minimis non curat lex. c. Pure Risk distinguished from Speculative Risk. Broadly speaking, risk is the uncertainty of loss. The risk that may Section 2, LC. Robert I Mehr and Emerson Cammack, Principle of Insurance, 7th Ed. p 82, herein ater refered to as “Mebr and Cammac “The law does not concer itself with tis12 ESSENTIALS OP INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) be assumed ure” type of risk which is defined as a situation where the pi either the person involved will suffer a loss or he will not suffer a loss. This involves the possibility that one's property may be destroyed or the possibility that one may suffer economic loss because of premature death or injur should be distinguished from “speculative” risk which may either result in gain For 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. (@) Incidentally, in addition to being a pure risk, the ‘Supreme Court that what is involved in insurance contracts is called an “Insurance Risk,” also known as “Actuarial Risk. It 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. 4. Distinguished froni Peril. The designated peril in insurance is the specific cause of loss that is insured against while risk is the uncertainty that the property or person insured will be lost or damaged by reason of the designated or some other peril. However, these terms (risk and peril) are oftentimes used interchangeably in legal literature. ec. Past Event. A past event that may be insured against is peculiar to Marine Insurance. For example, a marine insurance policy for a ship “lost or-not lost” insures the ship even for the event that may have already transpired. At the time the policy was taken, the parties are not aware if the ship is already lost. The insurer will pay even if the ship turns out to be already lost at the time the policy was taken. £ Distinguished from Fortuitous Event and Condi- tion. Risk is not synonymous to fortuitous event in Civil Law. The term risk is likewise not the equivalent of “condition” under the New Civil Code. In life insurance, the only uncertainty is the time when the risk insured against (death) will happen. g. Distinguished from Hazard. Risks should be dis- tinguished from hazards which are circumstances or conditions that create or increase the risk of loss. Hazards may either be (1) ee i Philippine Health Care Provider, Ie. v. CIR, supra, Not 6. CHAPTER ONE ro CENERAL CONCEPTS physical hazard, (2) moral hazard, or (8) morale hazard. Physical hazard refers to the 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 loss. Moral hazard likewi ies carelessness or indifference to alloss because of the existence of the insurance although this type of moral hazard is also sometimes called “morale hazard.” h. Distinguished from Loss. Loss is the end result of the risk insured against. Loss involves diminution of value or dis- appearance of value resulting from a ris} $4.04, ASSUMPTION OF RISK. The insurer assumes the risk of loss, meaning, the insurer promises to pay the insured if the risk insured against occurs. While the promise of the insurer is generally to pay the money value of the loss, the assumption of risk may include the promise to deliver the equivalent of the property that en a view to the effect that insurance contracts, indemnify by the performance of services.” One is a fire insurance policy where the beneficiary is entitled to cash but there is an “option to rebuild ich the parties stipulate “the repairing, rel or replacing of buildings or structures wholly or partially or destroyed." An option to rebuild clause is allowed under Section 174 of the Insurance Code. The Supreme Court ruled in one case that the insurer must notify the insured of his election stating which of the two prestations he is disposed to fulfill in accordance with the provisions of the Civil Code on alternative obligations. §5. NATURE AND PURPOSE. Insurance is a plan for dealing with the risk of economic loss resulting from the happening of a future or contingent event or a past event unknown to the parties. The insured sacrifices a present monetary loss in the form of premium payment in order to avoid a greater loss in the future. Reda p6 id, "See Chapter 7 ‘Physicians’ Defense Co. v. Cooper, (C.C.A. 9th} 199 F. $76, 47 LRA. NS.) ‘See Section 174, LC, as amended by RA No. 10607, Section 172 before RA No. 10807; Ong Guan Cuan and Bank of“ ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Noed Act) $5.01, HOW PEOPLE DEAL WITH RISKS. In general, the ways people deal with risk include: (a) risk avoidance, (b) risk retention, (c) risk transfer, (d) loss control, and (e) insurance. a. Examples. An example of risk avoidance is when people avoid a particular activity to escape the risk of loss. Risk retention 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 ofloss may either be loss avoidance or lose 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 over-weening 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, ifppossible 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-valued, 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.”* $5.02, HOW INSURANCE DEALS WITH RISK. From the viewpoint of most insured individuals, they are transferring their risk of loss to the insurance company. As stated earlier, they trade present loss by way of premium payments with future recompense for greater loss. a. Risk Distributing Device. However, in rea ance is a risk distributing device:because the risk of ally transferred to the insurer but a number of people constituting the clients of the insurer contribute to a common fund by paying premiums. In theory, the insurer will get the amount to be paid to each insured in case of loss from this pool or common fund. Ths why it is one of the features of insurance that the assumption of risk of the insurer is part of a gerieral scheme to distribute actual losses among a large group of persons bearing a similar risk. Adam Smith “George E. Redja, Principles of Insurance, rd Ba.,p. 18, hereinafter referred, twas Reda” “Ibid. p14. “Adam Seuth, The Wealth of Nations, Bantam Classic Edition, 2008, p. 149, CHAPTER ONE 6 GENERAL CONCEPTS observed in The Wealth of Nations that “the trade of insurance gives security to the fortunes of private people, and by dividing among that great many that loss which would ruin an individual, makes it fall light and easy upon the whole society.”# b, Law of Large Numbers. Pooling of loss experience of large number of homogenous exposure units will also allow the insurer to predict future losses with some accuracy. Thisis consistent with what is known as the “Law of Large Numbers” according to which the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.” surance contracts are: (1) ) Consensual; (5) Uberrimae .. a. Aleatory, Article 2010 of the New Civil Code provides that a contract is aleatory when 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. Insurance is one of the contracts enumerated in the New Civil Coue as falling under this classification of special contracts. It is not a contract of chance but a contract where some of the rights of the parties of the contract are contingent upon chance events.* 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. joney values exchanged in that, sense are not equivalents, In another sense, however, the contract is commutative because what the insured paid far is the equivalent of what he got, that is, the promise of the insurer to indemnify the insured in case of loss. b. Unilateral. This is a characteristic of insurance contract because the payment of the premium is not traditionally imposed as an obligation but an event that gives the contract obligatory force. However, upon payment of the premium there is only one party ‘who has the obligation, that is, the insurer's obligation to pay the procweds of the insurance in case of loss.16 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) ¢. Personal. The contract is personal because the contract is entered into with due consideration to the circumstances of the parties. Thus, the insurer may have accepted the risk because of the insurability of the insured. Each party enters into the contract in view of the character, credit and conduct 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 éf 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 38 to the insured and not the loss of specified property." d, Consensual. The contract of insurance is perfected by mere consent without the need of delivery or any formality. . -Uberrimae Fidae. The contract of insurance is one of perfect: good faith. Thus, both parties must not only perform their obligations in good faith but they must alfo avoid material concealment or misrepresentations. The caveat emptor rule is there- fore generally inapplicable. (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 secks to take advantage of some condition of forfeiture in order to eseape payment under the poliey."" £ Executory and Conditional. The contract is execulory to the insurer and subject to conditions, the principal one of which is the happening of the event insured against. In addition to the main condition, it usvally includes many other conditions which must be ‘complied with as precedent to the right of the insured to claim the proceeds." §7. SOCIAL VALUE, It has been said that insurance contributes to society by favorably affecting the allocation of resources, engaging in loss-prevention, indemnifying losses, serving ‘ervance,p. 68 Burton T. Beam, Jr, Devil L. Bickelhaupt, Robert Mr. Crowe, Barbara S, indamentals of Insurance for Financiol Pionning, 3rd (2002) Ed, p. 150, ‘vance, p. 67. CHAPTER ONE 1” (GENERAL CONCEPTS 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 of labor and capital. Fraudulent losses likewise occurs and in some cases result in carelessness. However, the social value of insurance far outweighs its social costs.” a. General Benefits of Insurance. It hes been observed that the benefits of insurance for the general public include the ) It gives peace of mind; (2) It kee businesses together; (3) It increases marginal utility of assets because it serves as intermediary between those who have small need for a minor amount of capital and those who have great needs for immediate use of large sums to meet losses they have suffered; (4) It facilitates eredit transactions; (6) It stimulates savings; (6) It provides investment capital; (7) It provides incentive to business or individuals because they are relieved of fortuitous losses; and (8) It helps in loss prevention. §8. PERFECTION. An insurance contract is consensual.» Henée, it is perfected by the meeting of minds with respect to the object and consideration of the contract. Article 1319 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) Mohr and Cammack, pp. 10-14 (General Insurance, 1974 Bd, pp. 75-77, hereinafter18 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Nead Act) a. 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. b. Insured makes the Offer. In insurance contract, the insured makes the offer by submitting the application to the insurer or its authorized agent. The insurer accepts the offer by approving the application and the contract is perfected upon receipt of notice by the insured of such approval.” (2) In this connection, it is well to note that the usual procedure for the perfection of an insurance contract (insured makes the offer by fling 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.” . Unaceepted application. In a case decided by the Supreme Court, the insuraiice contract was considered binding ‘upon proof that the insurands application was duly received by the insurer" The Court ruled that insurer assumed the risk of loss without approving the application. However, itis believed that the ruling in the said case cannot be considered an exception to the rrule on perfection of insurance contracts. Courts cannot impose a contract int 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. "7s del be ding frm te Malton Thay contented nde rc bt the Coy of Cans uder ihe ones prec ee ie inet acre ew malice fee eae a eee Isher coping er prta teen fice hare ce even Bank te Pi Corot Apenl No. 0957, March 4,108 atc Berge Sa Lf arrunee Coo Ganda GE Ne Nvener ta wren 1, lal Cerone Menoal Park Cryin v Php Amica Lio Inert Crporton, I No oO Moa Se. CHAPTER ONE 19 GENERAL CONCEPTS ‘The policy was to be effective for a period of one year, renewable on a yearly basis. The policy provides that: “The insurance of any eligible Lot'Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.” The Supreme Couirt 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 seomingly conflicting provisions rust be harmonized to mean that upon a party's purchase ‘of a memorial Jot on installment from Eternal, an insurance 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 fas a termination of the insurance contract. cof the insurance contract by the insurer must unambiguous." explicit and (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 -eptance 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 Witernal Gardens Memorial Park Corporation v. Philippine American Lite i, See Luz Pineda, e al. v. Hon. Court of Appeals, etal, G:R. No. 105562, September 27, 1993, See ala>§8(a] of Chapter 13 ofthis work.» ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Neet Act) 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 alot 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 its acceptance happens at the same time as the acceptance of the offer to sell the lot is made. (2) In Eternal Gardens Memorial Park ». Phitippine American Life Insurance Corporation,® the petitioner can be 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 decmed to have accepted the insurance thereby perfecting the same. (3) The situation in Eternal Gardens Memorial Parie ». Philippine Americal 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@ 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. a. Effect of Non-acceptance. 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 ifjhere is no meeting of minds between the parties as to the object and! consideration. Courts cannot make a contract if nothing was agreed upon. Itis true that acceptance of an offer can be implied. However, implied acceptance of an offer ean be *Vance, p. 188. CHAPTER ONE a GENERAL CONCEPTS, established only if there are other circumstances that will indicate such aeceptance 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). (1) However, even if there is no perfected contract, the insurer may be subject to tort liability under Articles 19 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. PROBLEMS: 1. “P filed an application with an insurance company for = in the amount of P50,000.00 ar old daughter, supplying all “pplication form, bat without disclosing that hi ongoloid child. Upon “Pst payment of the annual premium, a binding deposit receipt was issued to "P” by the insurance agent sUject plan applied for was not available for minors below seven years old and offered another plan. The insurance agent {id 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. payment of the proceeds of the ineurance but the company’ refused on the grounds that there was concealment of ‘material fact in the inst rejected the application. that the binding deposit receipt cons contract of life insurance. How would you resolve this ‘A: The denial by the insurance company of the claim is valid. ‘There is no perfected insurance e fearns abou the approval ofthe a Hence, not insurance contract approval came after the death of the insured. The binding deposit receipt is merely conditional and does not insure outright. The binding deposit the approval or rejection of application by the insuranceESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) company. (Great Pacific Life Ass. Co. v. Court of Appeals, GR. No, L-31845, April 30, 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-@ 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? No, Mr. A cannot recover from XYZ, Thers is no perfected insurance contract between A and XYZ at the time of th loss. An insurance contract is perfected only from the time the ingured 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 loss, the ingured learned about the acceptance of the offer only after the loss or on January 28, 2007, ‘Anapplication for 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 thet the ‘company would include KD as an insured family member. JH Insurance Company approved the application but notation “Delete KD as insured" Therealter, a surance poliry was sent to DHD insuring the lives 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 ofthe proposed insured and that no coverage should bbe provided to her. Not being able to contact the insured ‘who was not at home when he called, the soliciting agent left the poliey and attached documents with AD. ‘The amendment had not beea signed by the insured when KD died, The insurance company denied the claim for KD’s death, Is the denial proper? ‘Yes, the denial of the claim. was proper because there was no perfected contract of insurance. The application of the CHAPTER ONE, 2 GENERAL CONCEPTS insured was in the nature ofan 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 insurance which deletes the policy of one of the lives included in the application. The amendment constituted a counter-offer which must be accepted by the ‘ingured-applicant. In this case, the counter-offer was not ‘accepted because the signature was not obtained. (John Hancock Mutual Life Insurance Company v. Donald H. Dietlin, et al., 199 A. 2d 311, Apri 6, 1964) 49. KINDS OF INSURANCE. Insurance m insurance or (2) government insurance. Governm ineludes the insurance coverage provided by the So System to employees of the private sector and the insurance coverage under the Government Service Insurance System whic. extends to the employees in the government service. 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 persons, particularly in the lower income classes. ‘They are designed to protect the large group of persons against the perils of accidental injury, sickness, old age, unemployment and the premature death of the family wage earner.” 4. Classification According to Object. Based on the object that is sought to be protected, private insurance can either be: (1) Life or Health Insurance, (2) Property Insurance, or (3) Liability Insurance. b. Special Types. Special types of insurance contracts with specific provisions in the Insurance Code are: (1) Marine Insurance, (2) Casualty Insurance, (3) Fire Insurance, (4) Life Insurance, (5) Compulsory Third Party Liability Insurance, and (6) Microinsurance, c. Life Insurance. The classification of life insurance may'be made: (1) according to the period when it is in force, or (2) according to its object, or (3) according to its special characteristics Life Insurance may be classified in (1) Term Insurance — The life of a person is insured on a temporary basis or for a limited period. “Bikelbaupl,p. 86, “Bikethaupt, iid4 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) (2) Whole Life Infurance — A person is insured during his entire lifetime. | (8) Endowment Policy — In this type of insurance, the get the proceeds if the insured does not survive. (4) Industrial Life — It is that form of life insurance ‘tinder which the premiums are payable either monthl oftener, ifthe face amount of insurance provided in any policy is not more than five hundted times that ofthe curren: atutary wum daily wage in the City of Manila, and if the words “Industral polley” are printed upon the pelley ae part of the descriptive matter. 4. Property Insurance. The Insurance Code recognizes insurance policies that are wholly or partly considered property insurance. These include: (1) fire insurance and allied insurance, (2) marine insurance, and (3) casualty insurance. ©. _ Microinsuranee. RA No. 10607 now includes a provision on Microinsurance.* Section 187 of the Insurance Code provide that ‘Microinsurance is a financial product or service that meets the risk protection needs of the poor where: “{a) The amount of contributions, premiums, feos. ‘or charges, computed on a daily basis, does not exceed and a half percent (7.5%) of the current daily minimum wage rate for nonagricultural workers in Metro Manila; ana (6) The maximum sum of guaranteed benefits is not more than one thousand (1,000) times of the current daily minimum wage rate for nonagricultural workers in Metro Manila.” §10. PRINCIPLE OF INDEMNITY. One of the fundamental principles of insurance is what is known as the principle of indemnity. ‘This means that the insured should not collect more than the actual “Section 236, LC., a8 amended by RA No, 10007 ‘Sections 187 & 188, LC., as amended by RA No. 10807. i CHAPTER ONE 6 GENERAL CONCEPTS cash value of the loss. The principle is meant to prevent the insured from profiting from insurance and to reduce moral hazard.” a. Exceptions, Accepted exceptions to the principle of indemnity include: (1) Life insurance because the amount to be paid by the insurer can never be equal to the value of the life that is being insured, and (2) Valued policies under which the insurer will pay the value fixed in the policy regardless of the actual cash value in case of total loss." b. Manifestations. The fact that insurance contract is & contract of indemnity is manifested in the following: (1) Insurable interest is indispensable, (2) The value of the interest destroyed or damage is generally the measure of indemnity (except in the cases cited above), (3) Co-insurance clause in marine insurance, and (4) Subrogation in property insurance." Rede, p. 6. "bid, p. 62 **Vance, pp. 75-6.CHAPTER TWO THE PARTIES ‘The insurer and the insured are the parties to an insurance is the party who promises to pay in case loss. insured against occurred. The insured is, the owner of the poli property or life is insured or who took ‘out the insurance over the life of persons in whom he has insurable interest. There is a third person involved in an insurance contract known as the beneficiary. The ber favor the insurance was taken by th ‘the proceeds of the insurance in case of loss. However, in strict legal sense, the beneficiary is not a party to the contract unless he is the insured himself. The importance of studying the parties involved in insurance contracts was explained in this wise: “Insurance ideas and practices define central privileges ‘and responsibilities within a society. In that sense, our insurance arrangements form a material constitution, one that operates that reason, studying who is eligible to receive what insurance ‘penefita, and who pays for them, is as good a guide to the social ‘compact as any combination of Supreme Court opinions.”* $1. INSURED. Under the Insurance Code, the insured is the person who applied for and to whom an insurance policy is issued to is life, property or the life of or property of other person/s in ‘property he has insurable interest or liability to other persons. The insured is the one who enters into a contract with the “Tom Baker, On the Genealogy of Moral Hazard, 15 Texas Law Review 237 . 6 CHAPTER TWO a7 ‘THE PARTIES. §1.01. ASSURED AND OWNER. In life insurance, if person insures the life of another, the person whose life is insured is called the “insured” while the person who took out an insurance on the former's life is called the “assured.” There are those who refer to the person who obtained the policy as the “owner” and the person whose life was insured as the “insured.” $1.02. CAPACITY. Under the New Civil Code, a contract is voidable if one of the parties is incapacitated. Accordingly, an insurance contract is voidable if the insured is a minor, an insane person or is otherwise incapacitated to enter into an insurance contract. However, a capacitated person can validly enter into an insurance contract insuring the life of an incapacitated person like a minor. ‘a. Spouses. Married women can enter into insurance con- tracts without the consent of their husbands in the same manner that the latter can enter into an insurance contract without the icy taken out of his or her life or that of his or her children. Section 3 of the Insurance Code provides that: consent of the spot jot necessary for lity of an insurance policy taken out by a married Person on his or her life or that of his or her children.” (1) ‘The above-quoted provision is co Executive Order No. 209 otherwise known as th of the Philippines and Republic Act No, 7192. Re 7192 expressly provides that married women can insurance contracts without the consent of their husbands. ‘Women’s capacity to act is not impaired by marriage because the mandate of the law is on equality. These statutory provisions are consistent with Section 14 of the Article II of the 1987 Constitution which provides for “equality before the law of women and men.” (2) The wording of the law — “his or her children” — does not limit the provision to an insurance taken on the common children of the spouses. This means that the insurance taken “Aisle 1990, New Civil Code. ‘article ‘erecy ESSENTIALS OP INSURANCE LAW (public Act No. 10607 with Notes on Pre-Need Act) on the life ofa child who is not also the child of the other spouse may be covered by the provision. jon of Section 3 is that the consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on the life of other persons other than life of the spouses themselves or his ot her children. It is believed, however, that we have to apply the provisions of the Family Code with respect to this situation. Thus, if ‘the property regime of the spouses lute community property, the insurance is taken on the life of a third person (ho is a debtor of the spouses), the taking of insurance can be considered an act of administration. Hence, the taking of the {insurance policy should be jointly made by the spouses because ‘Section 96 of the Family Code provides that the administration of the community property shall belong to both spouses jointly. Jn case of disagreement, it is the husband that will prevail. ‘However, if a spouse takes an insurance policy on his own life and a third person who is totally unrelated to them, financially or otherwise, is made a beneficiary, then itis believed that the taking of the insurance and payment of the premium is in the nature of a donation that should be approved by both spouses under an absolute community property regime. Section 98 of the Family Code provides that “neither spouse may donate any community property without the consent of the other.” b. Minors. Minors cannot enter into insurance contracts. ‘The rule under the New Civil Code is that a contract entered into between a minor and capacitated person is considered voidable. Hence, an insurance contract! entered into between the minor and an insurance company is voidable. (1) RA No. 10607 removed the provision on minors in Section 3 making it consistent with other laws. It should be noted in this connection that previously Section 8 of the Insur- ance Code provides that “any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and accident insurance, with any insurance company inor's father, mother, husband, ild, brother or sister.” However, this pro Wise deemed superseded hy the Family Code which fixed the CHAPTER TWO 29 ‘THE PARTIES age of majority at eighteen (18) years.* At eighteen (18), a per- son is capacitated to act for all purposes. Hence, a person who is eighteen (18) can enter into an insurance contract without any limitation except the limitations imposed on other persons who are of legal age. $1.08, EFFECT OF DEATH OF OWNER. The last para- graph of Section 3 as amended by RA No. 10607 now provides: rights, title and it insurance taken out by an health of the person insured shi the latter upon the death of the f @ minor ean be insured. The ‘minor child. Ifthe parents, who iginal owners of the the poliey shall be a Before RA No. 10607, the last paragraph of Section 3 applies only to insurance taken on the life of minors. Section 3 previously provides that “all rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.” With the replacement of the word minor with the generic “person insured,” the last paragraph of Section 3 is no longer limited to insurance taken on the life or health of minors. $1.04, PUBLIC ENEMY. Section 7 of the Insurance Code provides that “Anyone except a public enemy may be insured.” A public enemy is a State (and the citizens thereof) which is at war with the Philippines. a. Effect of War. If there is no war yet at the time of the taking of the policy but war ensues between the Philippines and the country of the insured, the insurance policy is deemed abrogated. ‘The Supreme Court has adopted the so called “United States Rule” which declares that the contract is not merely suspended, but is “Article 234, Family Code, as amended by RA No. 6809,2» ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Nood Act) abrogated by reason of nonpayment of premiums, since the time of the payments is peculiarly of the essence of the contract.” (1) The Supreme Court rejected the New York rule which holds that war between states in which the parties reside suspends the contract of ‘ance and that, upon tender of all premiums due by the insured or his representative after the ‘war was terminated, the contract is revived and becomes fully operatives b. | In another case, the Supreme Court ruled that based on Section 7 of the Insurance Code, it stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy, The High Court cited these author “Byfect of war, generally. — wtercourse between citi- inconsistent with a state nations. Such prohibition permitted to lend their-assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do of war is to cripple the power and exhaust the enemy, and it is inconsistent that one country should destroy ts enemy's property and repay in insurance the value of intercourse with the eneray, which prior thereto may have been lawful. All individuals therefore, who compose the belligersnt powers, exist, as to each other, in a state of utter exclusion, and are public enemies." ‘Pilipinas Compania de Sepurvs y. Christer, Humenfld & Co, GR. No. 11-2294, May 28, 1961 “hbid.,eting 6 Couch, Cye. of Ins. Law, pp. 6352-5858, i CHAPTER TWO 3 ‘THE PARTIES Inthe case ofan ordinary fire policy, which $2, INSURER, Section 6 of the Insurance Code provides that every person, partnership, association, or corporation duly authorized to transact insurance business may be an insurer. However, individuals are no longer. an insurer under the present ance company” 288 defines the term “professional reinsurer” as any person, part- nership, association or corporation that transacts solely and exclu- sively reinsurance business in the Phil >. Domestic and Foreign Company. An insurer may be a domestic company or a foreign company. “Domestic compan, mmpanies formed, organized or existing under pines. “Foreign company” when used without jude companies formed, organized, or existing xr than those of the Philippines. —1 22 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) ¢. Mutual Benefit Association. Although excluded from the term “insurer” under Section 184 of the Insurance Code, like- ‘wise within the regulatory powers of the Insurance Commission are “mutual benefit associations.” They must first secure a license from the Insurance Commission before they can transact business." (2) Mutual benefit associations include ‘any society, association or corporation, without capital stock, formed or organized not for profit but mainly for the purpose of paying sick benefits to members, or of furnishing financial deceased members of fixed or any sum of money, irre whether such aim or purpose is carried out by means of fixed dues or assessments collected regularly from the members, , by the issuance of certificates of insurance, members of accident or life insurance benefits d and regular dues or assessments, but in no case shall include any society, association, or corporation with such mutual benefit features and which shall be carried purely from voluntary contributions collected not regul andor no fixed amount from whomsvever may eontribute. 4. Mutual Insurance Companies. Mutual Insurance Companies are recognized under the Insurance Code. Section 268 provides that any domestic stock life insurance company doing business in the Philippines may convert itself into an incorporated ‘mutual life insurer. To that end, it may provide and carry out a plan for the acquisition of the outstanding shares of its capital stock for the benefit of its policyholders, or any class or classes ofits policyholders, by complying with the requirements of Chapter III, ‘Title 17 of the Insurance Code.* (Q) Procedure for Mutualization. The plan for mu- tualization shall include appropriate proceedings for amend- ing the insurer's articles of incorporation to give effect to the surer, for the benefit of its policyholders or any class or classes thereof, of the outstanding sh: capital stock and the conversion of the insurer from corporation into a non-stock corporation for the benet members. The members of such non-stock corporation shall be — sn meeereurnen CHAPTER TWO 33 ‘THE PARTIES the policyholders from time to time of the class or classes for whose benefit the stock of the insurer was acquired, and the policyholders of such other class or classes as may be specified {in such corporation’s articles of incorporation as they may be amended from time to time. (2) The terms “policyholder” or “policyholders” for purposes of mutualization under Chapter III, Title 17 shall be deemed to mean the person or persons insured under an individual policy of life insurance, or of health and accident insurance, or of any combit ife, health and accident insurance. They shall also include the person or persons to whom any annuity or pure endowment is presently or prospectively payable by the terms of an individual annuity or pure endowment contract, except where the policy or eontract declares some other person to be the owner or holder thereof, in which case such other person shail be deemed policyholder. The terms “policyholder” and “policyholders” include the employer to whom, or a president, secretary or other executive officer of any corporation or association to which a master group policy has been issued, but exclude the holders of certificates or policies issued under or in connection with a master group policy. Beneficiaries under unmatured contracts shall not as such be deemed to be policyholder (8) Demutualization. In some countries, the trend is towards “demutualization,” More and more mutual insurance companies are converting to stock corporations. One of the primary reasons for this development is the need of compar for more funds. Itis easier to raise funds if the corporate vel stock corporation. Another reason for demutualization is to le the insurance company to diversify ite activities and to facilitate payment of cortain types of non-cash compensation tots directors and officers. Demutualization is now expressly ssurance Code which ‘a domestic mutual life insurance company doing business in the Philippines may convert itself into an "Boston 259, LC., ac amended by RA No, 10607 "Pid. "Burton 7. Beam, Jr, David L. Bickelhaupt, Robert M, Crowe, and Barbara Pose, Pundomertl of Isuranes for Financ! Planing Sed a, 2002p 8 “Beam, etal”4 ESSENTIALS OP INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) incorporated stock life insurance company by mutualization.”= The same provision states that “the conversion of a domestic ‘mutual life insurance company shall be carried out pursuant to a conversion plan duly approved by the Commissioner.”* The Corporation Code applies suppletory to this demutualization process. ¢. Cooperatives. The new Section 190 expressly includes cooperatives in the entities included in the terms “insurer” or “insurance company.” In this connection, Articles 105 to 108 of RA No, 9520 otherwise known as the Philippine Cooperative Code of 2008 provides that: ART. 105. Cooperative the cooperative formed by the the cooperative insurance s¢ ndowment, motor vehicle coverage, bonding, ‘crop and livestock protection and equipment insurance. ART. 107. Applicability of Insurance Laws. The provisions of th ‘and regulation ‘operation of an Insurance company shall apf cooperative insurance entitles organized under this Code. The requirements on capitalization, investments and reserves of insurance firms may be liberally modified upon consultation with the Authority and the cooperative sector, but inno case may be requirement to be reduced to less than half of those under the Insurance Code and other related laws. he proviaon was inserted by RA No, 10607 Section 280, LC, aa amendod by RA No. 10607. pe, CHAPTER TWO 35 ‘THE PARTIES ssion and the Authority, cooperative sector $2.02, CERTIFICATE OF AUTHORITY, Section 193 of the Insurance Code provides that, “No insurance company shall transact any insurance business in the Philippines until after it shall have obtained a certificate of authority for that purpose from the (Insurance) Commissioner upon application therefor and payment by the company concerned of the fees.” A certificate of authority is required because contracts of insurance involve public interest and regulation thereof by the State is necess: a. Basic Qualifications. Similarly, Section 192 provides that no person, partnership, or association of persons shall transact any insurance business in the Philippines except as agent of a person poration authorized to do the business of insurance in the ) possessed of the capital and assets required oration doing the same kind of business in the ited in the same manner; (2) nor unless the ave granted to him or them a certificate to the effect that he or they have complied with all the provisions of law which an insurance corporation doing business in the Philippines is required to observe, b. Term of the Certificate. Section 193 provides that “the certificate of authority issued by the Commissioner shall expire ‘on the last day of December, three (3) years following its date of issuance, and shall be renewable every three (3) years thereafter, subject to the company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or decisions of the Comaztission.” §2.03. GROUNDS FOR DISAPPROVAL OF APPLICA- TION. Section 193 provides for some of the grounds for rejection of the application for certificate of authority by the Insurance Commis- sioner: 8. Ifsuch refusal will best promote the interest of the people Marine Services. Ine. v. Ploncer Insurance and Surety IR.No, 154514, July 28, 2005.ESSENTIALS OF INSURANCE LAW (Repablic Act No, 10607 with Notas on Pre-Need Act) b. If there is evidence that the applicant. company is not qualified by the laws of the Philippines to transact business therein; If the grant of such authority appears to be unjustified in the light of: (1) economic requirements, (2) the direction, administration, integrity and responsibility of the organizers and administrators, (8) the financial organization and the amount of capital, and (4) reasonable assurance of the safety ofthe interests of the policyholders and the public; and 4. The name if the applicant belongs to any other known company transacting a similar business in the Philippines or its name is s0 similar as to be calculated to mislead the public; $2.04. PROHIBITED ACTS. An insurer is prohibited from doing, among other acts, the following: a, To transact in the Philippines both the business of life ‘and non-life insurance concurrently unless specifically authorized to do 80; b, To have equity in ap adjustment company (neither shall an adjustment company have an equity in an insurance company); © To negotiate any contract of insurance other than is plainly expressed in the policy or other written contract issued to or to be issued as evidence thereof," 4d. Todirectly or indireetly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of such insured, either as an inducement to the making of such insurance orafter such insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefits to accrue thereon;* "Section 195, 1C., as amended by RA No. 10607. “*Toid. Note that the terms “fe” and “non-life” insurance shall be deemed to include health, accident and disability insurance, Section 370, LC, as amended by RA No, 10607. "Ibid. CHAPTER TWO 37 THE PARTIES To give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract of insurance; To make any discrimination against any sense that he is or other policy conditions or privileges than are accorded to other nationals beeauso of his race;* ‘To isque or circulate or cause or permit to be issued or circulated any literature, illustration, circular or state- ment of any sort misrepresenting the terms of any policy issued by any insurance company of the benefits or advantages promised thereby, or any misleading ‘estimate of the dividends or share of surplus tobe received thereon; ‘To use any name or title of any policy or class of policies misrepresenting the true nature thereof* and ‘To make any misleading representation or incomplete comparison of policies to any person insured in such com- pany for the purpose of inducing or tending to induce such person to lapse, forfeit, ot surrender his said insurance. PROBLEM: 1 Sometime in Jenuary 1975, Ms. NLwas able to convince Mr, ET to take out a life insurance policy with MBL Insurance Corporation. As a result of a medical examination conducted on ET showing that he was a diabetic, the insurance premium with a face value of 0,000. In order to persuade ‘the policy at tho computed premium, NL offered to return to him the amount corresponding to her commission premium payment, which is equivalent to (50%) thereof. Upon such inducement, E” the poliey thus, on April $0, 1975, he issued two checks im bia "bia ‘"Section 371, [Cas amended by RA No, 10607, Poi “Bid,38 BSSBNTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) favor of the MBL for P46,590 each or a total of P93,180. Both checks were postdated May 30, 1975 ao as to enable NL to make arrangements for the return to ET of one ‘check corresponding to the amount of her commission. On June 4, 1975, NL received the sum of P51,249 as her commission out of the first annual premium paid by ET. Yet, NL failed to comply with her commitment to pay BT 46,590. Soon afer, RT's attorney sent a demand letter dated July 7, 1975. Can Mr. ET recover from MBL? A: No, ETeannotrecover from MBL. Under Section 961 of the Insurance Code insurance companies, brokers and agents are prohibited to induce another to take out an insurance policy with the promise to return part of the premium ‘out of the commissions of the agent or broker. The law isallows practices involving rebates or preferential treatment with respect to the cost of the poli benefits allowed for the premium, Accordi contracts or agreements directly prohibiter ‘would be against the very public policy whieh the law was designed and intended to uphold. (Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio Trinidad, GR. No, L-64677, September 13, 1990) $3. BENEFICIARY. The beneficiary may be a third person, Unless he is the insured himself, the beneficiary is not one of the contracting parties. However, a third party beneficiary named in the policy has the right to file an action against the insurer in case of loss. No other party can recover the proceeds other than the beneficiary. Section 58 provides: SEC. 53, The insurance proceeds exclusively to the proper interest of th name or for whose benefit it is mat ‘specified in the policy. a, When a beneficiary is designated. In life insurance, if there is a named beneficiary and the designation is not invalid, it is the designated beneficiary ivho is entitled to receive the proceeds and not the heirs of the instired. If another person is named the beneficiary, the proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, In other words, the proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person whose EET CHAPTER TWO 2 "THE PARTIES. tife was insured At any rate, the heir may also be the beneficiary and the proceeds of the life-insurance policy payable to said heit belongs to him exclusively and does not form part of the deceased's estate b. Third Parties. The insurer has no obligation to turn over the proceeds of the insurance to third persons even if the third persons are immediate relatives if there is a designated beneficiary. ‘The Supreme Court cited Section 53 and explained of Loreto . Maramag v. Eva Verna De Guzman Maramag, et “Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, ifetill alive; or the beneficiary, if the insured is already deceased, upon the maturation of the policy. The exception to this rule is a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.” é. When there is no beneficiary. It is only when there is no designated beneficiary or when the designation is void, that the laws of succession are applicable." In other words, if there is no designated beneficiary, the proceeds shall form part of the estate of the déceased insured, 4. Effect of use of conjugal funds. If the funds of the conjugal partnership of gains are used to pay for the premium, the proceeds of the policy constitute community property if the policy ‘was made payable to the deceased's estate, One-half of said proceeds belongs to the estate and the other half to the surviving spouse. ance Systom, G.R, No. 1-25808, ‘Sango Alabat,e al. v. Toribia De Supreme Cour of California found that the premiums Were pid using the salary of4 ESSENTIALS OF INSURANCE LAW (Republi Act No, 10607 with Notes on Pre-Neod Act) (1) Inacase decided when the New Civil Code provisions on the property regime of the spouses was still in force, the ‘Supreme Court adopted the following comments of Manresa in bis Commentaries on the Civil Code:* “The amount of the policy represents the premium to bbe paid, and the right to it arises the moment the contract is perfected, for at that moment the power of disposing of it may be exercised, and if death occurs payment, may be demanded. tis therefore something acquired for a valuable consideration ‘the exclusive property of husband or wife, the poliey belongs to ‘the owner; if with conjugal property, or if the money eannot be proved as coming from one or the other ofthe spouses, the policy is community property.” (2) However, if there is a designated beneficiary, the beneficiary is entitled to the proceeds of the policy. The source of the premium is immaterial. e. Vested Interest of beneficiary. The vested interest or right of the beneficiaries in a life insurance policy should be ‘measured on its full face value and not on its cash surrender value, for in case of death of the insured, said beneficiaries are paid on the basis of its face value and in case the insured should discontioue paying premiums, the beneficiaries may continue paying it and are entitled to automatic extended term or paid-up insurance options and that said vested right under the poliey eannot be divisible at any given time. “Vol. 9, page 589 clted in The Bank of Philippine lalands v, Juan Posada, J, “Dein Nario et al. v. The Philippine American Life Ingurance Company, G.R, No, 1-29796, June 26, 1967, 20 SCRA 434, CHAPTER TWO THE PARTIES PROBLEM: L Enrique Mora, owner of an bearing plate no. QC — a HLS. Reyes, Inc, with the ‘1. The Company (refer State Bonding & Insurance Cé Irom of damage 4. The Insured may authorize the repair of the Motor damage for which the under this Policy provided ‘estimated cost of such rey tag mortgaged in favor ofthe soid HLS. Reyes, Ine, and that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as Mortgagee;ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) During the effectivity of an insurance contract, the car met an accident. Enrique Mora, without the knowledge and consen} of the HS. Reyes, Inc., authorized the Bonifacio Bros, Ind. to furnish the labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the HH. Bayne Adjustment Co. The insurance company, after claiming a franchise in the amount of P100, drew a check in the amount of 2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the ‘meantime, the car was delivered to Enrique Mora without. the consent of the H.S. Reyes, Inc., and without payment, to the Bonifacio Bros., Ine. and Ayala Auto Parts Co, of ‘the cost of repairs and materials. Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros., Ine. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding & Insurance Co,, Ine. for the collection of the sum of 2,002.78, Will the action prosper? ‘The action will not prosper because Bonifacio Bros., Ine. and Ayala Auto Parts Co. have no cause action against the ingurer. The facts show that the appellants’ alleged cause of action rests contract. They seok to recover the insurance proceeds, and for this purpose, they rely upon paragraph 4 of the ingurance contract document executed by and between the & Insurance Company, Inc. and Enrique “io Bros. and Ayala Auto Parte are not ‘mentioned in the contract as parties thereto; not is there any clause or provision thereof from which we can infer that there is an obligation on the part of the insurance company to pay the cost of repairs directly to them. It is fundamental that contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person. Such stipulation is known as stipulation pour auérui or a provision in favor of a third person not a party to the contract. However, there is no such stipalation in the subject insurance contract in favor of Bonifacio Bros. and Ayala Auto Parts, The parties to the insurance contract omitted such stipulation. What | | | CHAPTER TWO. 6 ‘THE PARTIES ‘was stipulated upon was a “loss payable” clause of the insurance policy thet provides that the “Loss, if any, is payable to HLS, Reyes, Ine.” indicating that it was ealy the HS. Reyes, Inc. which they intended to benefit, (Bonifacio Brothers v. Mora, G.R, No. 20853, May 29, 1967) §8.01. GENERALLY REVOCABLE. Asa rule, the designation ofthe beneficiary is revocable. Ifthe insured wants the designation to be irrevocable, the irrevocable nature should be expressly provided for in the policy: change the ber unless he has expressly waived for a a. Effectif Irrevocable. As the term implies, an irrevocable beneficiary cannotbe replaced. The irrevocable beneficiary has vested affected by the subsequent assignment of the insurance policy. In case there is cash surrender value, it is the irrevocable beneficiary who can take a policy loan thereon. (1) Surrender of the policy and policy loan is not merely ‘an act of administration, hence, the irrevocable beneficiary icy constitutes an act of disposition or alienation of property rights and not merely of management or administration because it involves the ‘incurring or termination of contractual oblig b. Exception. By way of exception, the Family Code pro- vides for revocation of an irrevocable designation of beneficiary. Article 64 of the Family Code provides that after the finality of the decree of legal separation, the innocent spouse may revoke the designation as a beneficiary in any insurance policy, even if such designation is stipulated to be irrevocable. The revocation of or change in the designation of the insurance beneficiary shall take effect upon written notification thereof to the insured. ption in Article 64, Family Code favo, ee. ¥. The Philippine American Life Insurence Company, ibid“ ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Nood Act) c. Revocation during the Lifetime. The additional provision that was inserted by RA No. 10607 in Section 11 states that notwithstanding the revocable nature of the designation of the beneficiary, “in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.” However, the provision is a surplusage with respect to life insurance because the insured who is the owner of the can no longer change the beneficiary beyond his lifetime. The insurance proceeds should already be paid after the death of the insured because the risk insured against already transpired. This is true even if the ‘one who took the insurance is not the person whose life is insu ‘The additional provision in Section 11 may find application only in property insurance. PROBLEM: 1. On October 18, 1980, P took outa life insurance policy and ‘named his only son Qhs beneficiary. P learned that Q was hooked on druge and immediately notified the insurance company in writing thet he is substituting his sister R fan the beneficiary in place of Q. P later died of advanced tuberculosis. Upon P's death, Q claimed the proceeds of the ineurance policy contending that as designated beneficiary he acquired a vested right to the policy. Is Q's contention correct? ‘A: No, the contention of Q is not correct. The designation of the beneficiary is revocable unless the right to revoke in waived. In the present case, the designation of Q as beneficiary was revoked with his replacement with R. $3.02, FORFEITURE OF RIGHTS OF BENEFICIARY. Section 12 of the Insurance Code provides: with the policy contract. If (hip oon ed ty CHAPTER TWO 6 "THE PARTIES. a. Section 12 of the Insurance Code talks about a disqualification that arises after the perfection of the contract of insurance, The beneficiary does not suffer any disqualification at the inception of the contract but he becomes disqualified after the contract's perfection. The underlying principle is thatthe beneficiary should not profit from his misdeed. This is consistent with the rise advantage de son tort desmene and Nemo Hloram. suam conditionem facere potest. Note that the disqualification under Section 12 of the Insurance Code arises due to a willful act of the beneficiary. b. RA No. 10607 changed the default rules on beneficiary under Section 12.* In Life Insurance, if a beneficiary is disqualified under Section 12, the proceeds of the insurance shall be paid in accordance with the following rules: (2) The forfeited share of the disqualified beneficiary shall pass on to the other beneficiaries; (2) _Ifthere are no other beneficiaries, the proceeds shall be paid in accordance with the poliey contract; (3) If there are no other beneficiaries and there is no provision in the policy contract, the proceeds shall be paid to the estate of the insured. $3.08, DISQUALIFICATION OF BENEFICIARY. ‘The grounds for disqualification of a beneficiary in insurance contracts can be found in the New Civil Code. Article 2012 of the New Civil Code provides: Article 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy and by the person who cannot make any donation to him, according to sald article. “One ought not to take advantage of his own wrong. No one ota improve his condition through his own misdeed ‘*Before the amendatory provisions of RA No, 10607, if there are no other ben- the insured shall recive the proceeds af said insur6 ‘ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) a. Rationale. The Supreme Court explained in The Insular Life Assurance Co., Ltd. v. Carponia T. Ebrado:* “In essence, a life insurance policy is no different frem a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, beeause from the premiums of the policy which ‘the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequencs b. Grounds for disqualification. Thus in the following cases, although the insurance contract itself is valid, the designation of beneficiary is void because they are disqualified as beneficiaries: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to apublic officer or his wife, descendants and ascendants, by reason of his office. ¢. Hence, in one case, the Supreme Court ruled that a husband cannot name as beneficiary a woman with whom he had illicit relations. The common law wife who is aware that the man with whom she has relations is already married may not be validly designated as a blneficiary." However, this argument would certainly not apply to the children borne out of wedlock. The illegitimate children are not covered by the prohibition. As a matter of fact, the New Civil Code (and now the Family Code) recognizes certain successional rights of illegitimate children. Supra. “artide 728, New Civil Code, ‘Insular Life Assurance v. Bbrado, GR. No. L-A4059, October 28, 197, £0 SCRAI&1. "Southern Luzon Employees! Association v. Juanita Golpeo, G-R. No. L6114, Octaber 30, 1964. CHAPTER TWO a "THE PARTIES 4. Conviction is not necessary in order for one to be dis- qualified due to adultery or concubinage. This is the rule in donation which should equally apply to insurance contracts. The Supreme Court explained: nn for adultery or ‘mentioned in “4. We do not think that a convi concubinage is exacted before the disabi Article 739 may effectuate. More specifica disability on “persons who were guilty of ad at the time of the donation,” Article 739 itself provides: In the ease referred to in No. 1, the action for declaration 1g be brought by the spouse of the donor or donee; It of the donee may be proved by preponderance of leanod from the afore-quoted provision ‘that a criminal prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be-proved ‘in the same action” for declaration of nullity of donation. And, it Would be sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded, €. _ Thespouse can designate the other as a beneficiary. While a spouse is prohibited from making a donation to the other spouse il Code and the Family Code, this prohibition does not apply to insurance contracts. The proceeds of the insurance policy cannot be considered a donation or gift. “The contract of life insurance is a special contract and the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code (and the Family Code) has no provision lcit relationships her shares in the lv. Del Vab, 29 Phi of Canada, ta, GR.No. 237 134 [1916]; Hlario Gercio v. Sun Life Aasurance September 8, 1925e ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) insurance proceeds must be awarded to the illegitimate children ‘who are also designated as beneficiaries. PROBLEMS: 1, Eduardo Fernandez applied for and was issued policy no. 0777 by Atlas Life Insurance Corporation on a whole life plan for P200,000. Although he was married to Clara, with whom he had five (5) legitimate children, he designated his jana Cruz, as his revocable beneficiary ‘on the policy, and referred to Diana, in his application and policy as his wife. Five years thereafter, he died. ‘immediately fled her claim for the proceeds of the policy ‘as designated beneficiary. Clara also filed her claim as a legal wife. The insurance company filed a petition for interpleader before the Regional Trial Court of Rizal to determine who should be entitled to the proceeds of the policy. If you were the judge, how would you decide the said interpleader action? fe pce or teense Gan Vy uasatas Vance ‘The designation of his common-law wife, Diana as his revocable beneficiary is void because the designation was made at the time they were guilty of concubinage. Hence, the proceeds shall be part of the estate, Note: The guilt of Diana and Eduardo for concubi- nage may be established by mere preponderance of evi- dence in the same action and there is no need fora erimi- nal conviction for concubinage. (Insular Life Assurance o,, Lid. v. Bbrado, October 28, 1997, 80 SCRA 181) 4. TRUSTEE OR AGENT, The insurance policy may be obtained by a person through his agent or trustee, When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general words in the policy. "Hicrs of Loreto C. Maramag v. Bva De Guzman Maramag, GR. No. 181122, Sune 5, 2008, ‘Section 54, LC. CHAPTER TWO 9 ‘THE PARTIES §5. PARTNER, To reader an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest." a, If the policy is secured for the benefit of a partnership, change in the name of the partnership does not avoid the pol For example, the Supreme Court ruled in one case that when the partners of a general partnership doing business under the firm name of “Sharruf & Co.” obtained insurance policies and the latter afterwards changed its name to “Sharruf & Eskenazi” (which are the names of the same and only partners of said firm “Sharruf & Co”), but continuing the same business, the new firm acquires the rights of the former under the same poticies.* §6. ASSIGNEEE OF LIFE INSURANCE. Justice Holmes the ordinary characteris! jurisdiction, a life or healt ‘without the consent of the insurer. Section 184 of the Insurance Code provides: ‘SEC. 184. A policy of insurance upon life or health may pass by transfer, whether he has an insurs le interest or not, and such ‘person may recover upon it whatever the insured might have recovered. a. How to tr assignment of life or he of the New Civil Code on assignment o For example, the New Civil Code provides as one of the modes of transferring ownership the delivery of the proof or evidence of the right, Accordingly, delivery of the policy may transfer ownership of the policy of insurance, Section 55, LC. ‘“Sharuff & Co, ¥. Baloise Insurance Company, eta, G.R.No. 44139, March 20,3987, ‘Grigeyv, Rusell, 22 U.S, 149, 2 8. Ct. 68 (292150 ESSENTIAL{ OF INSURANCE LAW (Republic Aet No. 10}07 with Notes on Pre-Need Act) b. Notice not necessary. Since the right to transfer is conferred by law, notice to the insurer is not even necessary to validate the transfer. The assignee acquires right thereon even without the knowledge of the insurer. Nevertheless, while notice to the insurer is not required, it is more advantageous to the assignee to give notice to the insurer of such transfer. ¢. Double Assignment. There are two views in determining who has a better right in case the insured assigns the life or health insurance policy to two or more persons. One is the “English Rule” according to which the assignee who first gives notice is the one entitled to the proceeds if he has no notice of any prior assignment.” ‘The other view is known as the “American Rule” which provides that the assignee under the first assignment has the preferable claim." The “American Rule” applies in t ‘the absence of any specific provision on double sale or assignment of Tights, the applicable principle is prius tempore portior jure — first in time, stronger in right. $6.01. ASSIGNEE OF PROPERTY INSURANCE. With respect to property insurance, Section 58 provides that the mere transfer ofa thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured. Implicit from this provision is the rule that the policy can be transferred so long as the transferee has insurable interest in the thing insured. Nevertheless, the insurer's assent is necessary for the transfer.” jurisdiction because in a. Exceptions. There are exceptional cases when the insurer's consent is not necessary even if suecessors-in-interest of the insured substitute the latter. These include eases involving ‘transfer through will or succession and other instances of transfer by operation of law and in cases where there is transfer among partners. §7. INSURANCE AGENT AND INSURANCE BROKER. Section 307 of the Insurance Code provides that “no insurance company doing business in the Philippines, nor any agent thereof, shall pay any commission or other compensation to any person for “WGiriber and Bendles,p, 992 bid. ‘San Miguel Brewery v.!.aw Union & Rock Ineurance Co, G.Rt, No. -14300, January 19, 1920, 40 Phil 674 Sections 29 & 24,1. CHAPTER TWO a ‘THE PARTIES services in obtaining insurance, unless such person shall have first procured from the Commissioner a license to act as an insurance agent of such company or as an insurance broker as hereinafter provided.” The law likewise provides that “no person an ingurance agent or as an insurance broker in the solicitation or Procurement of applications for insurance, or receive for services in dbtaining insurance, any commission or other compensation from any insurance company doing business in the Phi any agent thereof, without first procuring a license so the Commissioner, which must be renewed every three (3) years thereafter.” fa. Section 318 of the Insurance Code provides that “Except 1s otherwise provided by law or treaty, it shall be unlawful for any person, partnership, association or corporation in the Philippines, for himself or itself, or for some other person, partnershi or corporation, either to procure, receive or forward insurance in, or to issue or to deliver or accept policies of insurance of or for, any insurance company or companies not authorized to transact business in the Philippines, covering risks, life or non-life, situated in the Philippines and any such person, partnership, association or corporation violating the provisions of this section shall be deemed guilty of a penal offense, and upon convietion thereof, shall for each such offense be punished by a fine of two hundred fifty thousand pesos (250,000), or imprisonment of six (6) months, or both at the discretion of the court." §7.01. INSURANCE AGENT. An insarance agent is any person who for compensation solicits or obtains insurance on behalf of any insurance company or transmits for a person other than himself an application for a policy or contract of insurance to or from such company or offers or assumes to act in the negotiating of such insurance.* Insurance agent includes an agency leader, agency ‘manager or their equivalent, a. Independent Contractor. RA No. 10607 clarified the relationship between the insurer and the insurance agent by expressly providing in Section 309 that “an insurance agent is fan independent contractor and not an employee of the company act as ~~ “Section 318, a amended by RA No. 10607 which increased the penalty from a fine of P10,000, "Section 209, LC.52 ESSENTIALS OF INSURANCE LAW (epublie Act No. 10607 with Notos on Pre-Neod Act) represented.” Nevertheless, Section 309 likewise provides that “since the insurance industry is imbued with public interest, the insurance companies upon approval of the Commissioner may exercise wide latitude in supervising the activities of their insurance agents to ensure the protection of the insuring public."™ (1) _ It should be noted in this connection that the new provisions of Section 309 of the Insurance Code was enacted after the legal controversy brought about by the conflicting de- cisions in Tongko v. The Manufacturers Life Insurance Compa- ny." In its original decision in the said case, the Supreme Court ruled that the insurer kad control over the insurance agent that would make the latjer the former's Later, the Supreme Court reversed its own ru ruled that that its previous decision evidence adduced and was not in accordance with prevailing jurisprudence."* The Supreme Court further ruled in its Reso- Tution on the Motion for Reconsideration that the absence of any showing the insurer's eontrol over the insurance agent's contractual duties points to the absence of employer-employee relationship." b. General agent. It shall be unlawful for any person, company or corporation in the Philippines to act as general agent of any insurance company unless he is empowered by a written power of attorney duly executed by such insurance company, and registered with the Insurance Commissioner to receive notices, summons and legal processes for and in behalf of the insurance company concerned in connection with actions or other legal proceedings against said insurance company." (1) Court processes. Notices, summons, or processes of any kind sent by registered mail to the last registered address of such general agent of the company concerned or to “This provision was inserted in Section 309 ofthe IC, a amended by RA No, 10607. “GR, No. 167622, November 7, 2008 (original decision penned by Justice Yel) and June 29, 2040 (esltion of the Motion for Reconsideration penned by Satios Brion). ‘Tongkov. The Manufacturers Life Insurance Company, (.R. No, 167622, No- ‘vember 7, 2008, ‘Tongho v. The Manufacturers Life Inourance Company, GR, No, 167622, ‘June 29, 2010. CHAPTER TWO 63 ‘THE PARTIES ‘the Commissioner shall be sufficient service and deemed as if served on the insurance company itself €. Classes of agents. It is believer that despite the reversal of its original Decision in Tongko v. The Manufacturers Life Insurance Comp surance company may still have two classes of agents: (1) salaried employees who keep definite hours aud work under the control and supervision of the company; and (2) an independent contractor who work on commission basis. Under tthe first category, the relationship between the insurance company and its agents is governed by the Contract of Employment and the provisions of the Labor Code, while under the second category, the same is governed by the Contract of Agency and the provisions of the New Civil Code on Agency. Disputes involving the agent are cognizable by the regular courts. If a person is an insurance agent within the contemplation of the Insurance Code, then by express provisions of Section 309, the insurance agent is as independent contractor. However, the name used to designate person is not controlling, if all the elements of employer-employee relationship are present — especially the element of eontrol - then the “insurance agent” should be considered an employee. This is a factual issue that requires presentation of evidence on the different indicia of employer-employee relationship. 4. Governing law. Insurance agents are governed by the New Civil Code provisions on Agency. Their acts within the limits of their authority are considered binding on their principal. They also bind their principal if apparent authority is given to them. The ‘Supreme Court observed in one case:* “By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another ‘The general rule ofits agent done petitioner thatthe act ofits agent isnot binding because is an insurance company ‘nd isnot involved in investment.5 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10807 with Notes on Pre-Need Act) bear the damage caused to third persons. When the agent exceeds his authority, the agent becomes personally liable for the damage, But even when the agent exceeds his authority, the principal is still solidarily iable together with the agent if the principal allowed the agent to act as though the agent hed full powers, In other words, the acts of an agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them, expressly or impliodly. Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without authority.” (2) Inthis connection, tis well to quote the comments of Justice Laurel on the role of insurance agents: “Iti of cominon, ‘enowledge that the selling of insurance today is subjected to the whirlwind preasure of modern salesmanship. Insurance companies send detailed instructions to their agents to solicit, and procure applications. These agents are to be found all over the length and breadth of the land. They are stimulated to ‘more active efforts by contests and by the keen competition offered by the other rival insurance companies. They supply all the information, prepare and answer the applications, submit the applications to their companies, conclude the transactions, and otherwise smooth out all difficulties, The agents in short do what the company set them out to do.”* Consequently, the ingurer is ordinarily bound by the negligent or willful aets or omissions of insurance agents. e. Collusion betwee the insured and the agent. However, the insurer is entitled to deny a claim if a material fact regarding the health of the insured was concealed by the agent with the participation of the insured.” Although the insurance agent represents the insurer, the insured cannot escape the effect of the falsity that the agent committed with his complicity. £, Limit of authority of agent. The provisions in the pol that specifies and limits the powers and duties of an agent is bi on the insured.” If the authority of the agent is limited in the pol itself, the insured cannot claim otherwise by saying that he did not ——“Tajnwular Life v, Feliciano, e 201, 208. “insular Life v. Feliciano, et al, GR. No, 47598, December 28, 1948. 1 GR. No, 47698, September 18, 1841, 73 Phil ‘Susana Glaraga v. Sun Life Assurance Co, Gi. No, 1-25968, December 14, 1926. CHAPTER TWO 5 "THE PARTIES, read the policy. By accepting the policy, the insured becomes charged with knowledge of its contents, whether he actually read it or not. He could not ostrich-like hide his head from it in order to avoid his part of the bargain and at the same time claim the benefit thereof. He is deemed chargeable with knowledge, from the very terms of the policy he seeks to enforce.” $7.02, INSURANCE BROKER. An insurance broker is any person who for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance contract or in placing risk or taking out insurance, on behalf of an insured other than himself.” Thus, while the insurer agent normally represents the insurer, the insurance broker acts for and in behalf of the insured. $7.03, EFFECT OF RECEIPT OF PREMIUM. The premium, or any portion thereof, which an insurance agent or insurance broker collects from an insured and which is to be paid to an insurance company because of the assumption of liability through the issuance of policies or contracts of insurance, shall be held by the agent or broker in a fiduciary capacity and not be misappropriated or converted to his own use or illegally withheld by the agent or broker." a. Authority to Receive Premium. Any insurance com- pany which delivers to an insurance agent or insurance broker a policy or contract of insurance shall be deemed to have authorized such agent or broker to receive on its behalf payment of any premium. which is due on such policy or contract of insurance at the time ofits issuance or delivery or which becomes due thereon." §7.04, NO JURISDICTION OVER INSURER-AGENT RELATIONSHIP, Section 439 of the Insurance Code expressly provides that “the power of the of the Commissioner does not cover iship between the insurance company and its agents! The Supreme Court explained in Philippine American Life Insurance Company and Rodrigo De Los Reyes v. Hon. Armando Ansaldo, et al,* that while the subject of Insurance Agents and (Cas amended by RA No, 10607, (Cas amended by RA No. 10807 ‘As amended by RA No, 10607. GR. No. 76452, July 26, 1994,