PERFECTION OF THE CONTRACT OF INSURANCE

An insurance contract is a consensual contract and is therefore perfected the moment

there is a meeting of minds with respect to the object and the cause or consideration.

What is being followed in insurance contracts is what is known as the “cognition

theory”. Thus, “an acceptance made by letter shall not bind the person making
the offer except from the time it came to his knowledge”. (Enriquez vs. Sun Life
Assurance Co. of Canada, 41 Phil. 269)

A. Definitions

1. Policy of insurance - the written instrument in which a contract of insurance is set

forth.

2. Binding Receipt - a mere acknowledgment on behalf of the company that its branch
office had received from the applicant the insurance premium and had accepted the
application subject to processing by the head office.

3. Cover Note (Ad Interim) - a concise and temporary written contract issued to the
insurer through its duly authorized agent embodying the principal terms of an expected
policy of insurance. • Purpose: It is intended to give temporary insurance protection
coverage to the applicant pending the acceptance or rejection of his application. •
Duration: Not exceeding 60 days unless a longer period is approved by Insurance
Commissioner (Sec. 52).

4. Riders - printed stipulations usually attached to the policy because they constitute
additional stipulations between the parties. (Ang Giok Chip vs. Springfield, 56 Phil. 275)
In case of conflict between a rider and the printed stipulations in the policy, the
rider prevails, as being a more deliberate expression of the agreement of the
contracting parties. (C. Alvendia, The Law of Insurance in the Philippines, 1968 ed.)
• For the rider to be binding:
o Must be attached/pasted to the policy
o Descriptive title or name of the rider, clause, warranty, or endorsement is mentioned
and written on the blank spaces provided in the policy
o Countersigned by insured

• General Rule: Not necessary if rider attached to the policy when issued.

Exception: Necessary when added AFTER policy is issued.

REASON: To prevent an insurer from adding or inserting provisions w/o the consent of
the insured.
5. Warranty – inserted or attached to a policy to eliminate specific potential increases of
hazard during the policy term owing to: 1) actions of the insured or 2) condition of the
property.
6. Clauses - an agreement between the insurer and the insured on certain matter
relating to the liability of the insurer in case of loss. (Prof. De Leon, p.188)

7. Endorsements - Any provision added to the contract altering its scope or application.
Ex. Endorsements extending the perils covered. Most times, they are merely typewritten
additions to the contract, changing its amount, rate, or term.

B. Offer and Acceptance; consensuality

• Submission of application, even w/ payment is a mere offer on the part of the
applicant, it does not bind the insurer.
• Approval of the application by the insurer is necessary to perfect contract.
If made:
o w/ payment of premium – policy becomes effective
o w/o payment – effective upon payment of premium
• Delay in Acceptance; Tort Theory Situation where applicant submits application for
insurance, but due to negligence of company, w/c takes an unreasonably long time
before processing the application, the applicant dies before the application is
processed, thus, the contract is not perfected.

• Remedy : Insurer liable for damages (Tort Theory) in the amount of the face
value of the policy, w/c is given to the estate of the deceased applicant. (not to
beneficiary because contract not perfected. Also, no contractual liability also
because there is no contact)

C. Basic contents of a policy

1. Parties
2. Amount of insurance, except in open or running policies;
3. Amount of premium;
4. Property or the life insured;
5. Interest of the insured in the property if he is not the absolute owner;
6. Risk insured against; and
7. The period during which the insurance is to continue

D. Delivery of the Policy - the act of putting the insurance policy – the physical
document – into the possession of the insured.
• Constructive delivery is sufficient.
• WoN policy was delivered after its issuance depends not upon manual possession by
the insured but rather upon the intention of the parties as manifested in their acts or
agreements.
• Effect of Delivery:
1) Where delivery is conditional – Non-performance of Condition precedent prevents
contract from taking effect
2) Where delivery is unconditional – Delivery corresponding terms of application
consummates the contract and policy delivered becomes final contract bet. the parties
3) Where premium still unpaid after unconditional delivery – Policy will lapse if premium
unpaid at time and manner specified in the policy, in the absence of any clear
agreement that insurer will extend credit.
Perez v CA
Facts: Perez, already previously insured with BF Lifeman Insurance Co. applied
for additional coverage. He paid premium and was issued a receipt by the agent
of BF Lifeman. However, he died before his application papers were transmitted
to the head office of BF Lifeman. Was the insurance policy was perfected?

Held: No. There was no acceptance of the offer. The perfection of the contract was
conditioned upon compliance with the provision in the application form w/c stated that
perfection only lies when the applicant pays and the premium and receives and accepts
the policy while still in good health. Thus, the assent of BF Life was not given when it
merely received the application form of Perez in its provincial office. Also, delivery to
Perez would be impossible as he is already dead. So long as an application for
insurance has not been accepted or rejected by the insurer, it is merely an offer
or proposal to make a contract. The contract to be binding from date of application
must have been a completed contract that leaves nothing to be done, passed upon or
determined, before it shall take effect.

Vda. De Sindayen v Insular Life Assurance Co.

Facts: Sindayen partially paid his agent the first premium for a life insurance
policy. Agent and Sindayen agreed that policy, when and if issued, should be
delivered to Sindayen’s aunt who will complete the payment of the first annual
premium. Jan. 16, 1933 – agent received approved policy and delivered it to
Sindayen’s aunt on Jan. 18. However, before the policy was given to Sindayen
himself, he died on Jan. 19. Should Insular Life assume the risk covered by
Sindayen’s policy

Held: YES. Delivery to the insured in person is not necessary, and may be made by
mail or duly constituted agent (in this case, Sindayen’s aunt). Insurance company is
bound by the acts of its agent. In this case, the agent is not a mere automaton and is
vested w/ some discretion in deciding WON the condition as to the health of the
applicant has been complied with. Once he decides that it has and delivers the policy,
then, in the absence of fraud, the insurance company is estopped from claiming the
policy has no effect.

Enriquez v Sun Life Assurance Co.

Facts: Herrer applied for insurance and paid the premium, however, he died
before he received the notice of acceptance (of his application) sent by Sun Life
from its Montreal head office. Was the insurance contract perfected w/o the
notice of acceptance coming to the knowledge of the applicant.

Held: NO. Under the Civil Code, consent is shown by the concurrence of offer and
acceptance. An acceptance shall not bind the person making the offer except from the
time it came to his knowledge.
E. Contents of policy
1. Parties
2. Amount of insurance, except in open or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property if he is not the absolute owner;
6. Risk insured against; and
7. Duration of the insurance.

F. Form of policy • The policy is different from the contract itself. The policy is not
essential to the validity of the contract as long as all the essential elements for the
existence of contract are present.

• The Insurance Code does not require a particular form for the validity of the contract,
but requires form for policy: o Shall be in printed form but group insurance and group
annuity policies, however, may be typewritten and need not be in printed form

G. Kinds of Insurance Policy

1. Open or Unvalued Policy - one in which a certain agree sum is written on the face
of the policy not as the value of the property insured, but as the maximum limit of the
insurer’s liability (i.e. face value) in case of destruction by the peril insured against.
2. Valued Policy – one in which the parties expressly agree on the value of the subject
matter of the insurance.
3. Running Policy - intended to provide indemnity for property w/c cannot well be
covered by a valued policy because of its frequent change of location and quantity, or
for property of such a nature as not to admit of a gross valuation. Also denotes
insurance over a class of property rather than any particular thing. Ex. Insurance over
constantly changing stock of goods.

RISK

A. What may be insured against:

1. Future contingent event resulting in loss or damage – Ex. Possible future fire
2. Past unknown event resulting in loss or damage – Ex. Fact of past sinking of a vessel
unknown to the parties
3. Contingent liability – Ex. Reinsurance

B. Liability of insurer in certain causes of death of insured

1. Suicide
Insurer is liable in the following cases:
1. If committed after two years from the date of the policy’s issue or its last
reinstatement;
2. If committed in a state of insanity regardless of the date of the commission unless
suicide is an excepted peril. (Sec. 180-A)
3. If committed after a shorter period provided in the policy, any stipulation extending
the 2-year period is null and void.
2. At the hands of the law (E.g. by legal execution) It is one of the risks assumed by
the insurer under a life insurance policy in the absence of a valid policy exception.
(Vance,p.572 cited in de Leon, p. 107)
3. Killing by the beneficiary
GENERAL RULE: 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 which event, the nearest relative of the
insured shall receive the proceeds of said insurance if not otherwise disqualified. (Sec.
12)
Exceptions: 1. Accidental killing
2. Self-defense
3. Insanity of the beneficiary at the time he killed the insured

PREMIUM PAYMENTS
• Premium - consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.

• General rule: No policy issued by an insurance company is valid and binding until
actual payment of premium. Any agreement to the contrary is void. (Sec. 77)

Except:
1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)
2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)
3. Section 77 may not apply if the parties have agreed to the payment of the premium in
installments and partial payment has been made at the time of the loss. (Makati
Tuscany Condominium Corp. v. CA, 215 SCRA 462)
4. Where a credit term has been agreed upon. (UCPB vs. Masagana Telemart, 308
SCRA 259)
5. Where the parties are barred by estoppel. (UCPB vs. Maagana Telemart, 356 SCRA
307)

• Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence

of its payment, so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is actually paid. (Sec. 78)

Tibay v CA
Held: Since acceptance of partial payment is not mentioned among the exceptions
provided in Sec 77 and 78 of the Insurance Code, no policy of insurance can ever
pretend to be efficacious until premium has been fully paid. The policy contained a
condition w/c said that “The policy including any renewal thereof is not in force until the
premium has been fully paid x x x” Clearly, the Policy provides for payment of premium
in full.
Makati Tuscany v CA
Held: The policies are valid even if the premiums paid in installments because the
records clearly show that the two parties intended the policies to be binding and
effective notwithstanding the staggered payment of the premiums. The acceptance of
the installment payments over the period of 3 years speak loudly of intention of insurer
to honor the policies it issued to Makati Tuscany.
NOTE: Difference with Tibay case: In Tibay, there was an express stipulation w/c said
that payment shall be made in full. In this case, the policy was binding because of the
prior agreement to allow installment payments, hence full payment under Sec.77
deemed waived.

UCPB Gen. Ins. v Masagana Telemart

Held There are exceptions to Sec 77: a) The first is provided by Sec. 77 itself and
that is, in case of a life or industrial life policy whenever the grace period applies b) Sec
78: An acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid. c) Sec. 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made at the time of the loss.
d) The insurer may grant credit extension for the payment of the premium e) It would be
unjust and inequitable if recovery on the policy would not be permitted against UCPB,
w/c consistently granted the 60-90 day credit term for the payment of the premiums
despite its full awareness of Sec. 77. Estoppel bars it from taking refuge under the
action, since Masagana relied on good faith on such a practice

C. Premium default in insurance; lapsed policy

1) Non-life
• Where contract covers a period of 1 year, there would normally be only one premium
payment for the period.
• If parties agreed to pay in installments, and there is a failure to pay any installment
when it falls due insurer may:
- cancel policy after due notice
- compel the payment of installments

2) Life
• Contract not binding until first periodical premium payment. After first payment, insured
under no legal obligation to pay subsequent premium.
• Insurance Code grants grace period within which to pay subsequent premiums. If
policy becomes a claim during the grace period but before overdue premium is paid,
overdue may be deducted from proceeds of policy
• Failure to pay w/in grace period = automatic lapse

• Exception: Insured has paid three full annual premiums.

Entitled to the following options upon default: (Non-Default Options)

1) Cash Surrender Value • The amount the insured is entitled to receive if he

surrenders the policy and releases his claims upon it. It is the portion of reserve on a
life policy

2) Extended Insurance
• EFFECT: Policy continues in force from date of default, for a period either stated or
equal to the amount of the cash surrender value, taken as a single premium, will
purchase. Also called “term insurance.”
• Depends on availability of CSV.
• During extended period : If insured dies, beneficiary can recover face amount of policy.
Insured can also reinstate the policy w/in this period.
• Beyond extended period : If he survives No benefits. He cannot even reinstate the
policy by paying past premiums; has to purchase new policy

3) Paid-up Insurance
• Amount of Insurance that the CSV, applied as a single premium, can purchase. •
EFFECT: Policy continues in force from date of default for the whole period and under
the same conditions of the original contract w/o further payment of premiums. However,
in case of death of insured, he may recover only the “paidup” value of the policy w/c is
much less than the original amount agreed upon. (In other words, na-reduce yung
original insurance contract to one with a lower value)

4) Automatic Premium Loan • Upon default, insurer lends/ advances to the insured
without any need of application on his part, amount necessary to pay overdue premium,
but not to exceed the CSV of the policy.
• Only applies if requested in writing by the insured either in the application or at any
time before the expiration of the grace period.
• EFFECT: Insurance continues in force for period covered by the payment. After
period, if insured still does not resume paying his premiums, policy lapses, unless there
remains CSV.

5) Reinstatement
• Requisites:
1. exercised w/in 3 years from default
2. insured must present evidence of insurability satisfactory to the company
3. pay all back premiums and all his indebtedness to the insurance company
4. CSV has not been duly paid nor the extension period expired
• Effect: Does not create a new contract, merely REVIVES the old policy. Thus,
insurer cannot require higher premium than amount stipulated in the contract.
• Required by Insurance Code for every individual and industrial life policy
• Not required that 3 annual premiums have been paid

6) Forfeiture – Absolute forfeiture of all insured rights. Generally not favored. Due to
liberal spirit in the conduct of life insurance, insurers instead, give the insurer the benefit
of the reserve value of the policy.
 • ENTITLEMENT OF INSURED TO RETURN OF PREMIUMS PAID

When is the insured entitled to return of premiums? When can he ask for a
refund, totally or partially? He can demand for the return of the entire premium if the
thing insured was never exposed to the peril insured against.
Why? Because there is no assumption of risk.

1. Whole:
a. If the thing insured was never exposed to the risks insured against; (Sec. 79)
b. If contract is voidable due to the fraud or misrepresentation of insurer or his agents;
(Sec. 81)
c. If contract is voidable because of the existence of facts of which the insured was
ignorant without his fault; (Sec. 81)
d. When by any default of the insured other than actual fraud, the insurer never incurred
liability; (Sec. 81)
e. When rescission is granted due to the insurer’s breach of contract. (Sec. 74)

2. Pro rata:
a. When the insurance is for a definite period and the insured surrenders his policy
before the termination thereof, except:
o policy not made for a definite period of time
o short period rate is agreed upon
o life insurance policy
b. When there is over-insurance (Sec. 82);

3. Not recoverable:
a. When the risk has already attached and the risk is entire and indivisible.
b. In life insurance.
c. When the contract is rescindable or rendered void ab initio by the fraud of the
insured.
d. When the contract is illegal and the parties are in pari delicto.

Let's say you insured your car for 12 months. You paid your premiums of P1,200
per month. After six months of effectivity, no loss. You decide to surrender the policy,
have it cancelled, probably because you already sold
the car. In this case, you can ask for a return of premium for the unexpired
period of six months.

In the absence of any short-period rate, the basis of the computation is

pro rata.

Likewise, partial return of premium is applicable to cases of over insurance

resulting from double insurance.
 In over insurance, the total amount of the coverage exceeds the value
of the property. There can be double insurance without over insurance,
and over insurance without double insurance.

OVER INSURANCE WITHOUT DOUBLE INSURANCE

You have a building worth P10M and you insured it with one company for P15M.

DOUBLE INSURANCE WITHOUT OVER INSURANCE

You have a building worth P10M and you insured it with five companies
for P2M each for a total of P10M.

Where, however, there is double insurance resulting in over insurance, the

premiums paid corresponding to the excess will be refunded. Insofar as the excess
is concerned, there is no assumption of risk on the part of the insurer. In case of
total loss, the insured cannot recover more than the value of the property,
because insurance is a contract of indemnity, not for profit. It is not intended to
enrich the insured. Otherwise, it becomes a wagering contract.

What's wrong with a wagering contract? If this is allowed, the insured would be
tempted to bring about the loss or destruction of the thing insured.

In property insurance, the result is arson.

EXAMPLE:

You have a building worth P10M and you insured it with five companies for
P3M each, for a total of P15M. In case of loss, even a total loss, the insured cannot
recover more than P10M, which is the value of the property.
The premium corresponding to the excess of P5M must be refunded to the
insured, because insofar as such excess is concerned, the insurer never
assumed any risk.

DOUBLE INSURANCE

You have a building worth P10M. You insured it with 5 companies worth
P20M. Hence, you have double insurance resulting in over insurance.

Q: Should there be a loss, from whom and how much can the insured recover?

A: Sec. 94. Where the insured is over insured by double insurance:

 (a) The insured, unless the policy otherwise provides, may claim payment from
the insurers in such order as he may select, up to the amount for which the
insurers are severally liable under their respective contracts;

(b) Where the policy under which the insured claims is a valued policy,
the insured must give credit as against the valuation for any sum received by
him under any other policy without regard to the actual value of the subject
matter insured;

(c) Where the policy under which the insured claims is an unvalued
policy he must give credit, as against the full insurable value, for any sum
received by him under any policy;

(d) Where the insured receives any sum in excess of the valuation in the case
of valued policies, or of the insurable value in the case of unvalued policies, he
must hold such sum in trust for the insurers, according to their right of
contribution among themselves;

(e) Each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which he is liable
under his contract.

EXAMPLES:

SITUATION (a)

This means that the insured can recover from the insurers in any order
he wants provided that the insurers liability shall not exceed the face value of the
policy in the case of a valued policy.

Suppose there are 5 insurers, the insurer can recover the whole P10M
from insurer 1 or from insurer 1, P3M, from insurer 2, P2M and from
insurer 3, P5M.

While it is true that under Sec. 94 (e) the insurers are proportionately liable,
this is only true as among them. Insofar as the insured is concerned, he can hold
any of the insurers liable up to the amount for which they are severally liable
under their respective contracts.

SITUATION (b) and (c)

There are 4 insurers and the total loss is P10M. Let's say he recovers from insurer
1, P2M. He has to deduct that from the amount of the total loss. Then recover from
 insurer 2, P3M and insurer 3, P3M. Again, he has to deduct the amount from the
total loss. How much can he recover from insurer 4? Only P2M.

Why? Insurance is a contract of indemnity. The insured should not be allowed

to recover more than the value of the property otherwise it will result in unjust
enrichment on the part of the insured and thus becomes a wagering contract.

SITUATION (d)

Suppose for one reason or another, he was able to recover more than
P10M say, P15M. Under the law, the excess of P5M does not belong to
him and he shall hold it in trust for the insurer according to their right of
contributions among themselves. He becomes a trustee similar to the
principle of solutio indebiti.

When there is something delivered and there is no right or

obligation to demand it, the obligation to return the thing delivered
arises.

SITUATION (e)

The insurers among themselves are only proportionately liable. So how

much is each of them liable?

(Amount of policy) x (Loss)

Total Insurance taken

Ultimately, each insurer will only shoulder a proportionate amount of the loss,
although an insurer may be made to pay more than his actual contribution. But
eventually those who paid less than what they are supposed to pay will have to
reimburse the insurer, which may have paid more than their proportionate
contribution.

REINSURANCE
This is what we call, in property insurance, limit of single risk. This means an
insurance company is allowed to retain only 20% of its net worth. This is retention
capacity. That applies only to a single risk.
Sec. 215. No insurance company other than life, whether foreign or
domestic, shall retain any risk on any one subject of insurance in an amount
exceeding
twenty per centum of its net worth. For purposes of this section, the term "subject of
insurance" shall include all properties or risks insured by the same insurer that
customarily are considered by non -life company underwriters
to be subject to loss or damage from the same occurrence of any hazard insured
against.

Reinsurance ceded as authorized under the succeeding title shall be

deducted in determining the risk retained. As to surety risk, deduction shall
also be made of the amount assumed by any other company authorized to
transact surety business and the value of any security mortgage, pledged, or
held subject to the surety's control and for the surety's protection.

This means that the occurrence of the peril insured against might result
in a total loss. Insurance companies operate on the basis of the law of the
averages. They have a way of limiting their exposure in a given area.

For instance in fire insurance, no insurance company will insure all the
houses located along the same block. Why? Should fire break out in that
area, there is a probability that all the causes will get burned. And it will result
in what they call xxx

So if you apply with an insurance company, the insurer will ask: "How
much is my exposure in that area?" If the insurer has reached the maximum
exposure, it will no longer issue any policy.

In life insurance, the insurer considers the assumption that not all policy
holders will die at the same time.

Let's say X is the insured. He owns a building worth P100M. He insures it

with one insurer Y against fire. 20% of the net worth is its retention capacity.

Let's assume that the retention capacity of Y is P20M. While it can insure
the property for P100M, Y will have to reinsure the excess of P20M.

So the original contracts between X and Y is the contract of insurance. Y

will have to reinsure with A say, P10M, with B, P30M, with C, P30M and D, P10M for a
total of P80M.

These contracts between Y and A, B, C and D are contracts of reinsurance.

In the original contract (contract of insurance), the subject matter of the contract
is the building in the subsequent contract (contract of reinsurance), the subject
matter is the liability that Y may suffer by reason of the original contract.

So what happens? Let's say there was a total loss. The entire building worth
P100M was damaged. Can the insured recover directly from the reinsurer?

No. Because the insured is not a party to the contract of insurance.

 From whom can the insured recover the amount of P100M? Only from Y, the
insurer. But later on, Y can recover from the reinsurers a total of P80M. The
original insurer for P100M can recover from the reinsurers a total of P80M. Net loss,
P20M.

Without the device of reinsurance, Y will have to shoulder the entire amount of
P100M. This is one way of preventing insurance companies from becoming
bankrupt or insolvent. It is to the interest of the insuring public that insurance
companies remain solvent. That is a purpose of reinsurance. Insurance is a risk
distributing device. Loss of one is shouldered by many.

In reinsurance, the rules on concealment and representation, how may

this be done? There may be either a reinsurance treaty or a proper
payment basis.

If there is a reinsurance treaty between Y and A, that in itself is a contract signed

before hand. There is an agreement under that treaty that for every risk assumed by
Y, a certain percentage shall be ceded to Y automatically. No need of making an
offer. Of course, in the treaty, there is a provision on the type of risk that shall be
covered.

So let's say there is a treaty between Y and A and this is one of the risks covered by
the treaty. And under the treaty, 10% of the risk assumed by Y is automatically ceded to
A, then the moment Y assumes this risk, 10% Of P100M is automatically ceded to A by
way of reinsurance.

The advantage in a treaty is that there is no need to make an offer, there

is no need to make an acceptance. The cession is automatic.

In that case, the reinsurer under the treaty follows the fortune or
misfortune of the insurer. The reinsurer relies on the underwriting
judgment of the insurer.

But if there is no treaty, the transaction is on a case by case basis. Let's say there
is a treaty between Y and A, then Y has to make an offer to A just like any other
contract. So Y will send a letter to A, and A may or may not accept the offer because
there is no treaty arrangement. If A says no, there is no contract of reinsurance.