INSURANCE LAW

I. GENERAL CONCEPTS

A. Definition

Test- The test is whether the assumption of risk and the indemnification of loss is the principal
object and the purpose of the contract. If the principal object and purpose of the contract is
assumption of risk and the indemnification of loss, then the contract is insurance.

Suretyship- For regulatory purposes, a contract of suretyship shall be deemed an insurance

contract within the meaning of the Insurance Code when made by surety who or which, as such,
is doing an insurance business.

The contract of suretyship under the New Civil Code is simply defined as "An Agreement
whereby one binds himself solidarily with the principal debtor."

Pre-Need Plans- Pre-need plans are contracts, agreements, deeds or plans for the benefit of
the plan-holders 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.

Variable Contracts- menas any policy or contract on either a group or on an individual basis
issued by an insurance company providing for benefits or other contractual paymenrs or values
thereunder to vary so as to reflect investment results of any segregated portfolio of investments
or of designated seperate account.

B. Elements of Contract of Insurance

Insurance contracts have the following feature elements:

1. the insured has an insurable interest;

2. the insured is subject to a risk of loss by the happening of the designated peril;
3. the insurer assumes the risk;
4. such assumption of risk is part of a general scheme to distribute actual osses among a
large group of persons bearing a similar risk and
5. in consideration of the insurers promise, the insured pays a premuim.

C. Nature and Purpose

Insurance is 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.

How people deal with risk:

a. risk avoidance
b. risk retention
 c. risk transfer
d. loss contril
e. insurance

How insurance deals with risk:

They are transferring their risk of loss to the insurance company. As stated earlier, they trade
present loss by the way of premium payments with future recompense for greater loss.

D. Characteristics

Aleatory- 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.

It is also aleatory in the sense that what he insured will pay in pesos is not equal to what he will
receive in case of loss.

Unilateral- The payment of premium is not traditionally imposed as an obligation but an event
that gives the contract obligatory force.

Personal- It is personal because the contract entered into with due consideration to the
circumstances of the partes, 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.

Consensual- The contract of insurance is perfected by mere consent without the need of
delivery of 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 also void material concealment or
misinterpretations.

Executory and Conditional- It is executory and subject to conditions, the principal one of which
is the happening of the event insured against. In addition to the main condition, the insurance
contract usually includes many other conditions which must be complied with as precedent to
the right of the insured to claim the proceeds.

E. Perfection. An insurance contract is consensual which is perfected by meeting of minds

with respect to the object and consideration of the contract.

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)

F. 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 cash value of the loss. The
principle is meant to prevent the insured from profiting from insurance and to reduce moral
hazard. The "real purpose of the contract is, in case of loss, to place the insured in the same
situation in which he was before the loss, subject to the terms and conditions of the policy."

[Link]. 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. 147

b. Manifestations. The fact that insurance contract is a contract of indemnity is manifested in the
following: (1) Insurable interest is indispensable, (2) The value of the interest destroyed or
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.

II. Parties

A. Insured, Assured, Owner

INSURED. Under the Insurance Code, the insured is the person who applied for and to whom
an insurance policy is issued to cover his life, or property, or the life or property of another
person/s in whose life or property he has insurable interest. The insured is the one who
enters into a contract with the insurer; he is the owner of the policy. The insured is also
defined as "the person, group, organization whose property, health, life is covered by an
insurance policy

ASSURED AND OWNER. In life insurance, if a 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."

B. Insurer-Insurance Code provides that every corporation, partnership, or association, duly

authorized to transact insurance business, may be an insurer. An insurer is "every person or
corporation engaged in the business of making insurance contracts of insurance."16

Insurers shall only insure persons and/or risks situated within the Philippines. However, the
Insurance Commission clarified that "persons within the Philippines" include permanent
residents of the Philippines even if they are gainfully employed outside the Philippines."

Definition-

"Insurer" or "insurance company" shall include all partnerships, associations, cooperatives,

or corporations, including government-owned or -controlled corporations or entities, engaged as
principals in the insurance business, excepting mutual benefit associations.

Prohibited acts-An insurer is prohibited from doing, among other acts, the following:

and non-life insurance concurrently unless specifically authorized to do so;

 A. To transact in the Philippines both the business of life
B. To have equity in an adjustment company (neither shall an adjustment company have an
equity in an insurance company);
C. To negotiate any contract of insurance other than what is plainly expressed in the policy
or other written contract issued to or to be issued as evidence thereof;"
D. To directly or indirectly, 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 or after 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;
E. 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;
F. To make any discrimination against any Filipino in the sense that he is given less
advantageous rates, dividends, or other policy conditions or privileges than are accorded
to other nationals because of his race;
G. To issue or circulate or cause or permit to be issued or circulated any literature,
illustration, circular, or statement 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 to be received thereon;
H. To use any name or title of any policy or class of policies misrepresenting the true nature
thereof;"
I. To make any misleading representation or incomplete comparison of policies to any
person insured in such company for the purpose of inducing or tending to induce such
person to lapse, forfeit, or surrender his said insurance; and/or
J. To commit unsafe business practices or acts

Grounds for disapproval-Section 193 provides for some of the grounds for rejection of the
application for certificate of authority by the Insurance Commissioner:

[Link] such refusal will best promote the interest of the people of this country;

b. If there is evidence that the applicant company is not qualified by the laws of the Philippines
to transact business therein;

c. 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, the financial organization and the amount of capital; do not give
reasonable assurance of the safety of the interests of the policyholders and the public; and

d. The name of the applicant belongs to any other known company transacting a similar
business in the Philippines or its name is so similar as to be calculated to mislead the public.
C. Beneficiary - The beneficiary may be a party to the contract of insurance or a third person
(a person who is not a party to the contract). For instance, a person who has insurable
interest over the life of another may obtain an insurance policy and designate himself as the
beneficiary. On the other hand, a person may insure his own life or property and designate
somebody else or a third person as the beneficiary. The designation of the third party as a
beneficiary may be required by a separate agreement as in the case of a mortgagee who is
designated as beneficiary by virtue of a stipulation in a mortgage contract.

a. Revocability- As a rule. the designation of the beneficiary is REVOCABLE. If the insured

wants the designation to be irrevocable, the irrevocable nature should be expressly provided
for in the policy:

Sec 11. The insured shall have the right to change the beneficiary he designated in the policy,
unless he has expressly waived this right right in said policy. Notwithstanding the foregoing,
in the event the insured does not change the beneficiary during his lifetime, the designation
shall be deemed irrevocable.

b. Forfeiture of rights-SEC. 12. The interest of a beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing
about the death of the insured. In such a case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy contract. If the policy iis silent, the
proceeds shall be paid to the estate of the insured

c. Disqualification-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:

ART. 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 said article.

Grounds for Disqualification. Thus, in the following cases, although the insurance contract
itself is valid, the designation of beneficiaries is void because of the disqualification of the
persons so designated:"

(1) Those made between persons who are 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; or

(3) Those made to a public officer or his wife, descendants and ascendants, by reason of his
office.
D. Trustee- 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 property in interest may be indicated by describing the
insured's agent or trustee or by other general words in the policy.

Partner- To render an insurance affected 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 common interest.

Assignee-Justice Holmes said that "life insurance has become in our day one of the best
recognized forms of investment and self-compelled saving. So far as reasonable safety permits,
it is desirable to give to life policies the ordinary characteristics of property." Consistently, in this
jurisdiction, a life or health insurance policy can be transferred even 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, will, or succession to
any person, whether he has an insurable interest or not, and such person may recover upon it
whatever the insured might have recovered.

E. Insurance Agent and Broker

INSURANCE BROKER. The standard contract of brokers states that the insurance broker is
authorized to solicit, transact, and service (life or non-life, as applicable) insurance and/ or
reinsurance business that the insurer is authorized to write.

The broker has no authority to represent the insurer in any and all matters affecting the
insurance business. The broker shall be an independent business partner of the insurer. There
is no employer-employee or principal-agent relationship between the parties, except in respect
of Section 315 of the Insurance Code.® Section 315 provides:

SEC. 315. 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 shall not be misappropriated or
converted to his own use or illegally withheld by the agent or broker.

Any insurance company 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
of its issuance or delivery or which becomes due thereon.

In order to ensure faithful performance by the insurance agent or insurance broker of these
fiduciary responsibilities, the Insurance Commissioner shall prescribe the minimum terms and
conditions on such matters in the standard agency or brokers agreement between the agents
and/or the broker with the insurance companies.

INSURANCE AGENT. An insurance 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.« The term "insurance agent" includes an
agency leader, agency, manager, or their equivalent.
a. Effect of receipt of Premium- The premium or any portion thereof, which an insurance
agent or insurance broken 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 fiduciary capacity and shall not be
misappropriated or converted to his own use or illegally withheld by the agent or broker.

III. Insurable Interest

A. Concept-One of the earliest definitions of insurable interest in life insurance in the United
States can be found in the case of Warnock v. Davis: "It is not easy to define with precision
what will in all cases constitute an insurable interest, so as to take the contract out of the
class of a wager policies. It may be stated generally, however, to be such an interest, arising
from the relation of the party obtaining the insurance, either as creditor of or surety for the
assured, or from ties of blood or marriage to him, as will justify a reasonable expectation of
advantage or benefit from the continuance of his life. It is not necessary that the expectation
of advantage or benefit should always be capable of pecuniary estimation; for a parent has
an insurable interest in the life of his child, and a child in the life of his parent, a husband in
the life of his wife, and a wife in the life of her husband. The natural affection in cases of this
kind is considered as powerful — as operating more efficiently — to protect the life of the
insured than any other consideration. But in all cases, there must be a reasonable ground,
founded upon the relations of the parties to each other, either pecuniary or of blood or
affinity, to expect some benefit or advantage from the continuance of the life of the assured.
Otherwise, the contract is a mere wager, by which the party taking the policy is directly
interested in the early death of the insured.

Such policies have the tendency to create a desire for the event. They are, therefore,
independently of any statute on the subject, condemned, as being against public policy."

B. Insurable Interest in Life Insurance

The persons in whose life one may have insurable interest are enumerated in Section 10 of the
Insurance Code, which provides:

SEC. 10. Every person has an insurable interest in the life and health:

(a) Of himself, of his spouse and of his children;

(b) Of any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest;

(c) Of any person under a legal obligation to him for the payment of money, or respecting
property or services, of which death or illness might delay or prevent the performance; and

(d) Of any person upon whose life any estate or interest vested in him depends.

C. Insurable Interest in Property Insurance

a. Test- Based on Section 13 of the Insurance Code, the presence of insurable interest in
property can be determined by asking if the insured has interest in property, whether real or
personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the said insured.

b. Kinds-Insurable interest in property may be an: (1) existing interest; (2) inchoate interest
founded on an existing interest; or (3) expectancy, coupled with an existing interest out of which
the expectancy arises. All of these interests must directly damnify the insured.39

a. Existing Interest. Existing interest includes the interest of an owner. However, title or
ownership is not essential. Thus, the following persons have insurable interest over the
property even if they are not the owners thereof: (1) lessee, (2) depositary, (3)
usufructuary, and (4) borrower in commodatum.
b. Consistently, a possessor who is holding the property without consideration with the
consent of the owner has insurable interest in the property that he is occupying. One has
insurable interest if he is so situated with respect to the property that he will suffer loss
as the proximate result of its damage or destruction.
c. In sale of goods, an unpaid seller retains insurable interest over the goods even if
ownership had already been transferred to the vendee upon delivery. An unpaid seller
has a vendor's lien and therefore he will be damnified by the loss of the goods even after
delivery.
d. On the other hand, the vendee or buyer has insurable interest over the goods even while
the goods are still in transit. In one case, the Supreme Court ruled that the consignee of
the goods in transit under an invoice containing the terms under "C & F Manila," has
insurable interest in said goods. As vendee/consignee of the goods, he has such
existing interest therein as may be thesubject of a valid insurance contract. His interest
over the goods is based on the perfected contract of sale. The perfected contract of sale
between him and the seller/shipper of the goods operates to vest in him an equitable title
even before delivery or before he performed the conditions of the sale. The contract of
shipment, whether under ""C.I.E," or "C & F" is immaterial in the determination of
whether the vendee has insurable interest or not in the goods in transit. The perfected
contract of sale even without delivery vests the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance.
e. Insurable interest in property exists in any of the following cases because the person is
so situated that he will suffer because of the loss due to a peril insured against:*(1)
When the insured possesses a legal title to the property insured, whether vested or
contingent, defeasible or indefeasible;(2) When he has equitable title of whatever
character and in whatever manner acquired;(3) When he possesses a qualified property
or possessory right in the subject of the insurance; (4) When he has mere possession or
right of possession;and (5) When he has neither possession of the property nor any
other legal interest in it but stands in such relation with respect to it that he may suffer
from its destruction, loss of a legal right dependent upon its continued existence.
f. An example of the last situation of a person who stands in such relation with respect to it
that he may suffer from its destruction is a building contractor who insured the building
that he constructed."
g. Ownership is not the only interest on the property that will vest insurable interest.
h. Inchoate Interest- It must be founded on an existing interest, otherwise the loss of the
property will not directly damnify the insured.
i. Expectancy- It must likewise be coupled with an existing interest for instance, the
interest of an heir over the properties of his or her relative who is still alive is a mere
 expectancy that is not coupled with an existing interest even if he or she is a cumpolsory
heir of such a relative.

c. Distinctions

d. Insurable interest of bailee, mortgagor, mortgagee

Insurable Interest of Bailee- In a contract of carriage, the carrier may be damnified by the loss
of the goods because he may be obligated to pay the shipper any damage to the property.
Similarly, a depository is obligated to take care of the thing deposited and he can be made liable
if the thing deposited is damaged. Thus, both the carrier and the depository have insurable
interest over the property subject to the provisions of Section 15 of the Insurance Code which
provides:

SEC. 15. A carrier or depository of any kind has an insurable interest in a thing held by him as
such, to the extent of his liability but not to exceed the value thereof.

Insurable Interest of Mortgagor and Mortgagee- Both the mortgagor and the mortgagee have
insurable interest over the mortgaged property. The mortgagor is the owner of the mortgaged
property; hence, he has an existing interest that may be the subject of an insurance. Section 8
governs situations when the mortgagor takes an insurance on the basis of his own insurable
interest:

SEC. 8. Unless the policy otherwise provides, where a mortgagor of property effects insurance
in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of
insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor,
who does not cease to be a party to the original contract, and any act of his, prior to the loss,
which would otherwise avoid the insurance, will have the same effect, although the property is in
the hands of the mortgagee, but any act which, under the contract of insurance, is to be
performed by the mortgagor, may be performed by the mortgagee therein named, with the same
effect as if it had been performed by the mortgagor.

D. When must Insurable Interest Exist (Property and Life Insurance)

[Link] Interest of Beneficiary in Property Insurance- The beneficiary must have

insurable interest in the property that is the object of the insurance. The contract will be
considered a wagering contract if the beneficiary will be allowed to recover even if he has no
insurable interest in the subject property.

F. INSURABLE INTEREST OF BENEFICIARY IN LIFE INSURANCE. If the insured takes out

an insurance on his own life, he can designate anybody whether or not the beneficiary has
insurable interest over his (insured) life. However, if the insured takes out an insurance on
the life of another designating himself or herself as beneficiary, insurable interest on the part
of the insured is necessary. Insurable interest on the part of the beneficiary is likewise
necessary if one takes out an insurance on the life of another and designates a third person
as the beneficiary.

G. Assignee in Life Insurance- A life insurance policy can be transferred even without the
consent of or notice to the insurer. By express provision of Section 184 of the Insurance
Code, it is not necessary that the transferee has insurable interest.
CASE DIGESTS