DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies

Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
INSURANCE LAW

I. LAWS GOVERNING CONTRACTS OF INSURANCE IN THE PHILIPPINES

(1) Insurance Code (R.A. 10607, amending P.D. 612)

(2) New Civil Code
(3) Special laws

II. BASIC CONCEPTS

Contract of Insurance – It is an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage, or liability arising from
an unknown or contingent event

Essential elements of a valid contract (Art. 1318)

(1) Subject matter in which the insured has an insurable interest

(2) Consideration, which is the premium paid by the insured, for the insurer’s
promise to indemnify the former upon the happening of the event or peril
insured against
(3) Meeting of the minds of the parties

Event or peril insured against – it is any contingent or unknown event, whether

past or future, which may damnify a person having an insurable interest, or create
a liability against him may be insured

Doing an Insurance Business and Transacting an Insurance Business, means:

(a) Making or proposing to make, as an Insurer, any insurance contract

(b) Making or proposing to make, as a Surety, any contract of suretyship as a
vocation and not merely incidental to any other legitimate business or activity
of the surety
(c) Doing any kind of business, including a Reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of the Insurance Code
(d) Doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of the IC.

In the application of the provisions of the IC, 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, does not constitute the
doing or transacting of an insurance business.

III. INSURANCE CONTRACT

(1) Insurance as an Uberrimae Fides contract – the contract of insurance is one

of perfect good faith (Uberrimae fidei) not for the insured alone, but equally so
for the insurer; in fact it is more so for the latter, since its dominant bargaining
position carries with it stricter responsibility.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
It requires the parties to the contract to communicate that which a party
knows and ought to communicate, that is, the duty to disclose in good faith all
facts material to the contract.

(2) Insurance as contracts of adhesion (Fine Print Rule) – While generally

stipulations in a contract come about after deliberate drafting by the parties
thereto, there are certain contracts in which almost all the provisions of which
have been drafted only by one party, usually a corporation. Such contracts are
called contracts of adhesion because the only participation of the other party
is the signing of his signature, or his “adhesion” thereto.

Rules in the construction or the interpretation of contracts:

GR: If the terms of the contract clearly show the intention of the parties, there
shall be no room for interpretation

XPN: If there are ambiguities in the terms of an insurance contract, they have to
be resolved in favor of the insured and strictly against the insurer because an
insurance contract being a contract of adhesion, most of its terms is not a
product of mutual negotiation between the parties as they are prepared by the
insurance company in final printed forms.

Elements of an Insurance Contract

(a) Scheme to distribute losses – such assumption of risk is part of a general

scheme to distribute actual losses among a large group or substantial
number of persons bearing a similar risk

(b) Payment of premium – As consideration for the insurer’s promise, the insured
makes a ratable contribution called “premium” to a general insurance fund

(c) Existence of insurable interest – The insured possesses an interest of some

kind, susceptible of pecuniary estimation known as “insurable interest”

(d) Assumption of risk – The insurer assumes the risk of loss for a consideration

(e) Risk of loss – The insured is subject to the risk of loss through the destruction
or impairment of that interest by the happening of the designated peril

IV. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACT

(a) Consensual – It is perfected by the meeting of the minds of the parties as to

object, cause, and consideration of the insurance contract. There should be
acceptance of the application for insurance.

(b) Voluntary

GR: The parties may incorporate such terms and conditions as they may deem
convenient: Provided, they do not contravene any provision of law and are not
opposed to public policy, law, morals, good customs, or public order.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
EXPNS:

i. For motor vehicles

ii. As a condition to granting a license to conduct business or calling
affecting the public safety or welfare
iii. For employees
iv. Social insurance for members of the GSIS and for employees of the
private sector covered by the SSS

(c) Aleatory – The liability of the insurer depends upon some contingent event, the
happening of an uncertain future event. Thus, it is not a contract of chance. In
an insurance contract, each party takes risk:

For the insurer – risk of having to pay the indemnity if the contingent event
happens

For the insured – risk of paying the premium without receiving anything
therefor if the contingent event does not happen

(d) Unilateral - It imposes legal duties on the insurer who promises to indemnify
the insured. It is executed as to the insured after payment of the premium, and
executory on the part of the insurer in the sense that it is not executed until
payment for a loss.

(e) Conditional – It is subject to conditions the principal one of which is the

happening of the event insured against

(f) Contract of Indemnity – Recovery is commensurate with the amount of the

loss suffered

GR: The insurer promises to make good only the loss of the insured

XPN: The principle is not applicable to life and accident insurance where the
result is death because life is not capable of pecuniary estimation.

The only situation where the principle of indemnity is applicable to life

insurance is when the interest of a person insured is capable of exact
pecuniary measurement (e.g., where the creditor insures the life of his debtor
to the extent of the latter’s debt)

(g) Personal - it personal between the insurer and the insured. Each party having
in view the character, credit, and conduct of another

V. PARTIES TO THE INSURANCE CONTRACT

INSURER – party who assumes or accepts the risk of loss and undertakes for a
consideration to indemnify the insured on the happening of a specified
contingency or event

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
INSURED – person in whose favor the contract is operative and who is indemnified
against or is to receive a certain sum upon the happening of a specified
contingency or event

NOTE: The insured is not always the person to whom the proceeds are paid

ASSURED/BENEFICIARY – a person designated by the terms of the policy to

receive the proceeds of the insurance. He may be the insured or a third party in
the contract for whose benefit the policy is issued and to whom the loss is
payable.

VI. PERFECTION OF THE INSURANCE CONTRACT

Policy of Insurance – the written instrument in which the contract of insurance

contract is set forth; it is the written document embodying the terms and
stipulations of the contract of insurance between the insured and the insurer

Note: The policy is not necessary for the perfection of the contract

Types of Policy Insurance

1. Open – one in which the value of the thing insured is not agreed upon, and the
amount of the insurance merely represents the insurer’s maximum liability.
The value of the thing insured shall be ascertained at the time of the loss.

2. Valued – one which expresses on its face an agreement that the thing insured
shall be valued at a specific sum

3. Running – one which contemplates successive insurances, and which

provides that the object of the policy may be from time to time defined

Basic contents of a policy

a. Parties
b. Period during which the insurance is to continue
c. Property or life insured
d. Amount of insurance, except in open or running policies
e. Interest of the insured in the property if he is not the absolute owner
f. Risk insured against
g. Rate of premium

Rider – an attachment to an insurance policy that modifies the conditions of the

policy by expanding or restricting its benefits or excluding certain conditions from
the coverage

Cover Notes – persons who wish to be insured may get protection before the
perfection of the insurance contract by securing a cover note.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Perfection of the insurance contract – the contract of insurance is perfected when
the assent or consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract

Cognition Theory – mere submission of the application without the

corresponding approval of the policy does not result in the perfection of the
contract of insurance

VII. PREMIUM PAYMENT

Insurance Premium – the amount of money a person pays for an insurance policy,
in consideration for the assumption by the insurance of the risk of loss as a result
of the happening of a designated peril

Payment of Premiums – the burden is on an insured to keep a policy in force by the

payment of premiums, rather than on the insurer to exert every effort to prevent
the insured from allowing a policy to lapse through the failure to make premium
payments.

General Rule: No policy or contract of insurance issued by an insurance company

is valid and binding unless and until the premium thereof has been paid. Any
agreement to the contrary is void.

EXPNS:

A policy is valid and binding even when there is non-payment of premium:

1. When there is an agreement allowing the insured to pay the premium in

installments and partial payment has been made at the time of loss
2. When there is an agreement to grant the insured credit extension for the
payment of the premium and loss occurs before the expiration of the credit
term
3. When estoppel bars the insurer to invoke non-recovery on the policy
4. In case of life or industrial life policy whenever the grace period provision
applies, or whenever under the broker and agency agreements with duly
licensed intermediaries, a ninety-day credit extension is given. No credit
extension to a duly licensed intermediary should exceed 90 days from the date
of issuance of the policy
5. When there is acknowledgment in a policy of a receipt of premium, which
the law declares to be conclusive evidence of payment
6. When the public interest so requires, as determined by the Insurance
Commissioner

VIII. WHAT MAY BE INSURED

Persons who may be insured – Any one except a public enemy may be insured

Public enemy – a nation at war with the Philippines and every citizen or subject of
such nation.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Subject of an insurance contract – anything having an appreciable pecuniary
value, which is subject to loss or deterioration, or of which one may be deprived
so that his pecuniary interest is or may be prejudiced

Consent of the person insured is NOT essential to the validity of the policy – so
long as it could be proved that the insured has an insurable interest at the
inception of the policy, the insurance is valid even without such consent

IX. INSURABLE INTEREST – that interest which a person is deemed to have in the
subject matter insured, where he has a relation or connection with or concern in
it, such that the person will derive pecuniary benefit or advantage from the
preservation of the subject matter insured and will suffer pecuniary loss or
damage from its destruction, termination, or injury by the happening of the event
insured against

Mere hope or expectancy is not insurable – A mere contingent or expectant

interest in anything, not founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable.

When does a person have insurable interest?

Insurable interest in Life Insurance v. Insurable interest in Property Insurance

LIFE PROPERTY
As to extent
GR: Every person has an unlimited Limited to the actual value of the
insurable interest in his own life property

EXPN: Where life insurance is taken

out by a creditor on the life of a debtor,
insurable interest is limited to the
amount of debt
As to when insurable interest must exist
Must exist at the time the policy takes GR: Must exist twice, both at the time
effect and need not exist thereafter the policy takes effect and at the time
of loss, but need not exist in the period
in between.

XPNS:

1. A change in the interest in a

thing insured, after the
occurrence of the of an injury
which results in a loss, does not
affect the right of the insured to
indemnity for the loss

2. A change of interest in one or

more several distinct things,
separately insured by one
policy, does not avoid insurance
as to the others

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
3. A change of interest, by will or
succession, on the death of the
insured, does not avoid an
insurance, and his interest in
the insurance passes to the
person taking his interest in the
thing insured

4. A transfer of interest by one of

several partners, joint owners,
or owners in common, who are
jointly insured, to the others,
does not avoid an insurance
even though it has been agreed
that the insurance shall cease
upon alienation of the thing
insured

5. Every stipulation in a policy of

insurance for the payment of
loss whether the person insured
has or has not any interest in the
property insured, or that the
policy shall be received as proof
of such interest, and every
policy executed by way of
gaming or wagering is void

As to the beneficiary’s interest

GR: The beneficiary need not have The beneficiary must have insurable
insurable interest over the life of the interest over the thing insured
insured if the insured secured the
policy himself

XPN: However, if the life insurance

policy was obtained by the
beneficiary, the latter must have
insurable interest over the life of the
insured

X. CHANGE OF BENEFICIARY

GR: The insured shall have the right to change the beneficiary he designated in the
policy

EXPN: If the insured expressly waived this right in the said policy

Effects of Irrevocable Designation of a Beneficiary

1. The insured cannot assign the policy without the written consent of the
beneficiary if the designation of the beneficiary is irrevocable
2. A new beneficiary cannot be added to the irrevocably designated beneficiary
without the latter’s written consent for this would in effect reduce the latter’s
vested rights

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
3. The insured cannot take the cash surrender value or even assign or borrow on
said policy without the consent of the beneficiary.

Effects of Revocable Designation of Beneficiary – The insured may change the

beneficiary during his lifetime, add a beneficiary, or exclude a beneficiary in case
of joint designation of beneficiaries.

The same rule applies in case the policy is silent on the nature of designation for
in such case, designation is deemed to be revocable.

XI. INSURABLE INTEREST IN LIFE/HEALTH

Two General Classes of Life Policies

(1) Insurance upon one’s life – are those taken out by the insured upon his own
life for the benefit of:

a. Himself
b. His Estate, in case it matures only at his death; or
c. Third person who may designated as beneficiary

(2) Insurance upon life of another – are those taken out by the insured upon the
life another. Where a person names himself beneficiary in a policy he takes in
the life of another, he must have insurable interest in the life of the latter. This
includes the following:

a. His spouse and children

b. Any person on whom he depends wholly or in part for education or support,
or in whom he has 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
d. Of any person whose life any estate or interest invested in him depends

Persons prohibited from being designated as beneficiaries

Under Art. 739 in relation to Art. 2012 of the New Civil Code, the following are
prohibited designation of beneficiaries:

a. Those made between persons who were guilty of adultery or concubinage

at the time of donation
b. Those made between persons found guilty of the same criminal offense,
in consideration thereof
c. Those made to a public officer or his wife, descendants, or ascendants by
reason of his office

Rationale for the prohibition: A beneficiary in a life insurance policy is no

different from a donee. Both are recipients of pure beneficence.