Insurance Contract

Governing Laws

PD 612, as amended by RA No. 10607. The Civil Code will supplant cases which are not squarely covered
by the RA No. 10607.

What is an Insurance Contract?

A contract of insurance is one where one undertakes for a consideration to indemnify another against
loss, liability, or damage arising from an unknown, or uncertain event.

Parties

1. Insurer
2. Insured
3. Beneficiary

Characteristics of Insurance

1. Risk Distributing Device – Insurance serves as to distribute the risk of economic loss among
those who are subject to the same risk.
2. Contract of Adhesion – A contract of adhesion is one wherein a party, usually a corporation,
prepares the stipulations in the contract, while the other party merely affixes his signature, or
his “adhesion” thereto.

As a rule, the contract shall be interpreted according to the terms therein. In case of ambiguity,
it shall be resolved against the insured.

3. Aleatory – An aleatory contract is one where one, or both parties are reciprocally bound to give,
of do something for consideration upon the happening of an event whch is uncertain, or which
is to occur at an indeterminate time.

In insurance, the obligation of the insurer to pay the proceeds of the insurance arises only upon
the happening of an event, or which is to occur at an indeterminate time. The insurer becomes
liable upon the happening of the peril against the insured.

{insert case}

4. Contract of Indemnity – Contracts of insurance are generally for indemnity. The insured who has
insurable interest over the thing is only entitled to recover the amount of actual loss sustained
and the burden is upon him to establish the amount of such loss.

5. Contract of Utmost Good Faith – The contract of insurance requires utmost good faith 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.
The contract of insurance is one of perfect good faith (uberrima fides meaning
good faith; absolute and perfect candor or openness and honesty; the absence of
any concealment or deception, however slight [Black’s Law Dictionary, 2nd
Edition], not for the insured alone but equally so for the insurer (Field man’s
Insurance Co., Inc. v. Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a party knows and ought to communicate (Section 25,
Act No. 2427). Whether intentional or unintentional the concealment entitles the
insurer to rescind the contract of insurance (Section 26, id.: Yu Pang Cheng v.
Court of Appeals, Et Al., 105 Phil. 930; Saturnino v. Philippine American Life
Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof. [Link] : virtual law li

Thus, any concealment, whether intentional or not, entitles the insurer to rescind the contract.

Essential elements

1. Consent
2. Object
3. Cause

Cognition theory cases

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.
Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Facts: The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in Manila for a
life annuity. Two days later he paid the sum of P6,000 to the manager of the company's
Manila office and was given a receipt.

The application was immediately forwarded to the head office of the company at Montreal,
Canada. On November 26, 1917, the head office gave notice of acceptance by cable to
Manila. (Whether on the same day the cable was received notice was sent by the Manila
office of Herrer that the application had been accepted, is a disputed point, which will be
discussed later.) On December 4, 1917, the policy was issued at Montreal. On December 18,
1917, attorney Aurelio A. Torres wrote to the Manila office of the company stating that Herrer
desired to withdraw his application. The following day the local office replied to Mr. Torres,
stating that the policy had been issued, and called attention to the notification of November
26, 1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr.
Herrer died on December 20, 1917.

Issue: Is there a perfected contract in insurance

Held: Yes, there is a perfected contract of insurance.

An acceptance made by letter shall not bind the person making the offer except from
the time it came to his knowledge.
The pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to be a
medical examination of the applicant; (2) there had to be approval of the application by the
head office of the company; and (3) this approval had in some way to be communicated by
the company to the applicant. The further admitted facts are that the head office in Montreal
did accept the application, did cable the Manila office to that effect, did actually issue the
policy and did, through its agent in Manila, actually write the letter of notification and place it
in the usual channels for transmission to the addressee. The fact as to the letter of
notification thus fails to concur with the essential elements of the general rule pertaining to
the mailing and delivery of mail matter as announced by the American courts, namely, when
a letter or other mail matter is addressed and mailed with postage prepaid there is a
rebuttable presumption of fact that it was received by the addressee as soon as it could have
been transmitted to him in the ordinary course of the mails. But if any one of these elemental
facts fails to appear, it is fatal to the presumption. For instance, a letter will not be presumed
to have been received by the addressee unless it is shown that it was deposited in the post-
office, properly addressed and stamped.

LAPULAPU D. MONDRAGON

v. COURT OF APPEALS and NGO HING, Respondents

Ngo Hing filed an application with the Great Pacific Life Assurance Company
(hereinafter referred to as Pacific Life) for a twenty-year endowment policy in the
amount of P50,000.00 on the life of his one-year old daughter Helen Go. Said
respondent supplied the essential data which petitioner Lapulapu D. Mondragon,
Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form
in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the data on
the application form which was signed by private respondent Ngo Hing. The
latter paid the annual premium, the sum of P1,077.75 going over to the
Company. Upon the payment of the insurance premium, the binding
deposit receipt was issued to private respondent Ngo Hing.. Then on April
30, 1957, Mondragon received a letter from Pacific Life disapproving the
insurance application. The letter stated that the said life insurance application for
20-year endowment plan is not available for minors below seven years old.

The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead,
Mondragon wrote back Pacific Life again strongly recommending the approval of
the 20-year endowment life insurance.

It was when things were in such state that Helen Go died of influenza with
complication of broncho-pneumonia. Thereupon, Ngo Hing sought the payment
of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu,
which rendered the adverse decision as earlier referred to against both
petitioners.

Issue: (1) whether the binding deposit receipt (Exhibit E) constituted a

temporary contract of the life insurance in question; and
(2) whether private respondent Ngo Hing concealed the state of health and
physical condition of Helen Go

Issue No. 1: Implied from the aforesaid conditions is that the binding deposit
receipt in question is merely an acknowledgment, on behalf of the company, that
the latter’s branch office had received from the applicant the insurance premium
and had accepted the application subject for processing by the insurance
company; and that the latter will either approve or reject the same on the basis
of whether or not the applicant is "insurable on standard rates." Since petitioner
Pacific Life disapproved the insurance application of respondent Ngo Hing, the
binding deposit receipt in question had never become in force at any time.

Issue No. 2: Relative to the second issue of alleged concealment, this Court is of
the firm belief that private respondent had deliberately concealed the state of
health and physical condition of his daughter Helen Go. When private respondent
supplied the required essential data for the insurance application form, he was
fully aware that his one-year old daughter is typically a mongoloid child. Such a
congenital physical defect could never be ensconced nor disguised. Nonetheless,
private respondent, in apparent bad faith, withheld the fact material to the risk
to be assumed by the insurance company. As an insurance agent of Pacific Life,
he ought to know, as he surely must have known, his duty and responsibility to
supply such a material fact. Had he divulged said significant fact in the insurance
application form, Pacific Life would have verified the same and would have had
no choice but to disapprove the application outright.

Elements:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of a designated peril;
3. The insurer assumes the risk;
4. 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
5. In consideration of the insurer’s promise, the insurer pays a premium. (Philamcare Health
Systems vs. CA, 379 SCRA 356)

Kinds

1. Life Insurance – Life insurance is insurance on human lives and insurance appertaining
thereto or connected therewith. Every contract or undertaking for the payment of annuities
including contracts for the payment of lump sums under a retirement program where a life
insurance company manages or acts as a trustee for such retirement program shall be
considered a life insurance contract for purposes of this Code. (Sec. 181, IC)

2. Fire Insurance – As used in this Code, the term fire insurance shall include insurance against
loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such
risks are covered by extension to fire insurance policies or under separate policies - Sec. 169,
IC
3. Casualty Insurance – Casualty insurance is insurance covering loss or liability arising from
accident or mishap, excluding certain types of loss which by law or custom are considered as
falling exclusively within the scope of other types of insurance such as fire or marine. It
includes, but is not limited to, employer’s liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and theft insurance, personal accident and health
insurance as written by non-life insurance companies, and other substantially similar kinds
of insurance. Sec. 176, IC.

4. Suretyship – A contract of suretyship is an agreement whereby a party called the surety

guarantees the performance by another party called the principal or obligor of an obligation
or undertaking in favor of a third party called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any company by virtue of and under the
provisions of Act No. 536, as amended by Act No. 2206. Sec. 177, IC
5. Compulsory Motor Vehicle Insurance - refers to a contract of insurance against passenger
and thirdparty liability for death or bodily injuries and damage to property arising from
motor vehicle accidents. Sec. 386, IC

It shall be unlawful for any land transportation operator or owner of a motor vehicle to
operate the same in the public highways unless there is in force in relation thereto a policy
of insurance or guaranty in cash or surety bond issued in accordance with the provisions of
this chapter to indemnify the death, bodily injury, and/or damage to property of a third-
party or passenger, as the case may be, arising from the use thereof. Sec. 387, IC

6. Marine Insurance – pertains to insurance for losses incurred in connection with property,
such as a ship, goods, or other moveables, involved in maritime transport.

7. Microinsurance – Microinsurance is a financial product or service that meets the risk

protection needs of the poor where:

(a) The amount of contributions, premiums, fees or charges, computed on a daily basis,
does not exceed seven and a half percent (7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro Manila; and

(b) 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.
Sec. 187, IC

8. Compulsory insurance coverage for agency hired workers – is an insurance mechanism

made available by the law to provide insurance protection for OFWs.

Variable Insurance Contract

The term variable contract shall mean any policy 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 so 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. It shall not be deemed to be a
security or securities as defined in The Securities Act, as amended, or in the Investment
Company Act, as amended, nor subject to regulations under said Acts.

Insurable Interest

Every interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the insured,
is an insurable interest. (Section 13, IC)
A person is deemed to have an insurable interest in the subject matter of insurance where he has a
relation, or connection with, or concern in it that he will derive pecuniary benefit, or advantage from its
preservation and will suffer pecuniary loss, or damage from its destruction, termination, or injury by the
happening of the event insured against.

Insurable interest may involve life, health, or property even safety/security of things, loss of which will
expose the insured to liability. Insurable interest is indispensable to every contract of insurance. Else,
the insured is just gambling.

Basis of insurable interest in life, and health insurance

Section 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.

Section 14.

An insurable interest in property may consist in:

(a) An existing interest;

(b) An inchoate interest founded on an existing interest; or

(c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be covered by one policy, or each may take out a separate policy
covering his interest, either at the same, or at separate times.

Mortgagor – full value of the debt.

The mortgagee’s insurable interest is relied upon as security, and in insuring he is not insuring the
property but his interest or lien.

His interest is prima facie the value mortgaged and extends only to the amount of the debt, not
exceeding the value of the mortgaged property.

Section 19. An interest in property insured must exist when the insurance takes effect, and
when the loss occurs, but need not exist in the meantime; and interest in the life or health of
a person insured must exist when the insurance takes effect, but need not exist thereafter
or when the loss occurs.
Rationale:

To prevent a person from taking out an insurane policy on property upon which he has no insurable
interest, and collecting the proceeds of the said policy in case of loss.

Gaisano Cagayan vs. Insurance Company of North America

Facts: Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss &
Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts in connection with ready-
made clothing materials which have been sold or delivered to various customers and dealers of the
Insured anywhere in the Philippines."2 The policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for
a period in excess of six (6) months from the date of the covering invoice or actual delivery of
the merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the
close of every calendar month all amount shown in their books of accounts as unpaid and
thus become receivable item from their customers and dealers. x x x4

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.
Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that
IMC and LSPI filed with respondent their claims under their respective fire insurance policies with
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held
liable because the property covered by the insurance policies were destroyed due to fortuities event
or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no
breach of contract committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.

Issue: 1. Whether there is an insurable interest.

2. Whether Gaisano is liable of the unpaid accounts.

Ruling:

1. An insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a
beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be liable to loss should it
be injured or destroyed by the peril against which it is insured. 29 Anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its
destruction.30 Indeed, a vendor or seller retains an insurable interest in the property
sold so long as he has any interest therein, in other words, so long as he would suffer
by its destruction, as where he has a vendor's lien. 31 In this case, the insurable interest of
IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days
after the time of the loss covered by the policies.

2. As correctly stated by the CA, where the obligation consists in the payment of money,
the failure of the debtor to make the payment even by reason of a fortuitous event
shall not relieve him of his liability. 33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only holds
true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the
obligation is pecuniary in nature.34

Change of Insurable Interest

Except in the cases specified in the next four sections, and in the cases of life, accident,
and health insurance, a change of interest in any part of a thing insured unaccompanied by
a corresponding change of interest in the insurance, suspends the insurance to an
equivalent extent, until the interest in the thing and the interest in the insurance are vested
in the same person.(Sec. 20, IC)

The mere transfer of a 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. (Sec. 58,
IC)
Premium

See. Sec. 77, IC

The law states that the insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Usually, the insured cannot be sued for nonpayment of the
premium, the only effect of non-payment being that the policy will not go into force. After the insurance
comes into force after their payment of premium, it is only the insurer that makes a legally enforceable
promise.

The obligation of the insurer will not become valid and binding if the first premium has not been paid. If
the subsequent premiums have not been paid, the policies issued will be deemed to have lapsed.

There are five exceptions to the rule that the policy is not valid and binding unless the premiums have
been paid. These exceptions are as follows:

(1) When the grace period applies in case of life and industrial life policy;

(2) When there is an acknowledgement in the policy or receipt that the

premium has been paid;

(3) When there is an agreement that the premium shall be payable on installment;

(4) When there is a credit extension; and

(5) When the equitable doctrine of estoppel applies.

Grace Period.

A grace period is the period after the date of the premium is due during which the premium can be paid
with no interest charged and the policy remaining in force.13 This exception presupposes that the
insurance policy had already been in force for a certain period. It cannot apply when the insurance
policy is first taken.

The applicable provisions are Sections 233, 234, and 236

Acknowledgement

The second exception is provided for in Section 79 of the Insurance Code. Even if, in fact, the insured has
not yet paid the premium, the insurer’s obligation will already be in force if there is agreement.
However, this does not mean that the insured is excused from paying the premium that is due. The
insurer can still demand payment of the premium.

Installment

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer, would prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in
effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy
binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good customs,
public order or public policy.

Credit Extension

Credit extension is allowed under our present law and jurisprudence. However, the policy must
expressly and clearly provide for a credit extension. Under Section 77 as amended by R.A. No. 10607, a
90-day credit extension may be given under the broker and agency agreements with duly licensed
intermediaries.

The requisites are as follows:

(1) The credit extension must be provided for under the broker and agency agreements; and

(2) The credit extension to a duly licensed intermediary should exceed 90 days from date of issuance of
the policy. The agreement between the duly licensed intermediary and the insurer will benefit the
insured who can also pay through the intermediary within the credit extension

Devices on Estimation/Control of Risk or Loss

Concealment, representations, warranties, conditions, and exceptions have been developed by insurers
in order to have correct estimation of the risk, control of such risk, and determination of value of loss.

Concealment and representations will enable the parties to secure accurate information or data with
regard to the subject matter of insurance, and risk to which it is exposed.

Concealment.

In a contract of insurance, each party has a duty to communicate to the other, in good faith, all facts
within his knowledge which are material to the contract, and as to which he makes no warranty, and
which the other has not the means of ascertaining.

Concealment is the neglect that which a party knows, and ought to communicate.

What is the effect of concealment?

Whether intentional or not, concealing material information would result in the recission of contract.

Neither party to a contract of insurance is bound to communicate information of the

matters following, except in answer to the inquiries of the other:

(a) Those which the other knows;

(b) Those which, in the exercise of ordinary care, the other ought to know, and of which
the former has no reason to suppose him ignorant;

(c) Those of which the other waives communication;

(d) Those which prove or tend to prove the existence of a risk excluded by a warranty,
and which are not otherwise material; and

(e) Those which relate to a risk excepted from the policy and which are not otherwise
material. (Sec. 30, IC)