7.3.

1 Concept of Insurance

Contract of Insurance

 An agreement whereby one undertakes for a consideration to indemnify (compensate for harm or loss)
another against loss, damage or liability arising from an unknown or contingent event (Secs. 2(1) I.C.)
 A means by which one seeks to be covered against the consequences of an event that may cause loss or
damage. The concept is that the premiums that are paid are accumulated in a pool from which payment of
claims are to be obtained.
 Insurance is a contract, usually represented by a policy, in which an individual or entity receives financial
protection or reimbursement against losses.
 The most common types of insurance policies are auto, health, homeowners, and life.
 A contract of suretyship shall be deemed to be an insurance contract, within the meaning of the Insurance
Code, only if made by a surety who or which, as such, is doing an insurance business
o 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 another party, called the obligee.
 The term ‘doing an insurance business’ or ‘transacting an insurance business’ shall include:
o Making or proposing to make, as insurer, any insurance contract;
o Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;
o Doing any kind of business, including a reinsurance business, specifically recognized as constituting
the doing of an insurance business within the meaning of this Code;
o Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
o The fact that no profit is derived from the making of insurance contracts, agreements or transactions
or that no separate or direct consideration is received therefor, shall not be deemed conclusive to
show that the making thereof does not constitute the doing or transacting of an insurance business.
 What may be insured
o Any contingent or unknown event, whether past or future, which may damnify (cause injury to) a
person having an insurable interest, or create a liability against him, may be insured against, subject
to the provisions of the Insurance Code.
 What may not be insured
o An insurance for or against the drawing of any lottery or for or against any chance or ticket in a
lottery drawing a prize may not be insured, because gambling results in profit and insurance only
seeks to indemnify the insured against loss.
 Parties in an Insurance contract
o INSURER
 Every person, partnership, association or corporation duly authorized to transact insurance
business as provided in the Code may be an insurer.
o INSURED
 Party to be indemnified in case of a loss.
 Anyone except a public enemy (is a nation at war with the Philippines and every citizen or
subject of such nation) may be insured. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent to destroy its resources then pay it
the value of what has been destroyed.
o BENEFICIARY
 The person who receives the benefits of an insurance policy upon its maturity.
 Functions of insurance
o Risk-bearing – it is the principal function of insurance. It distributes the losses of the few over the
many from the fund contributed by all.
o Stimulates business enterprise – it enables the businessmen to maximize their capital in the
development of their business by paying a fixed contribution in form of a premium, instead of
 freezing capital to guard against various contingencies. Insurance also serves as a financial security
against risks.
o Encourages efficiency and enterprise – the elimination of risk is an increase in business efficiency.
o Promotes loss prevention – insurance encourages loss prevention through a system of rating which
allows discounts for good features and imposes special conditions where the risk is unsatisfactory.
o Encourages savings – by protecting the individual against unforeseen events, thus, insurance
provides for a climate where savings are enabled
 Policy
o POLICY – a written instrument in which a contract of insurance is set forth.
o shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign,
symbol, signature, number, or word necessary to complete the contract of insurance
o Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and
which is pasted or attached to said policy is not binding on the insured
o Contents:
 The parties between whom the contract is made;
 The amount to be insured except in the cases of open or running policies;
 The premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis and rates upon
which the final premium is to be determined;
 The property or life insured;
 The interest of the insured in property insured, if he is not the absolute owner thereof;
 The risks insured against; and
 The period during which the insurance is to continue

7.3.2 Elements of an Insurance Contract

An insurance contract exists where the following elements concur:

 Insurable interest
o INSURABLE INTEREST - Legal right to insure any type of property or any
o event that may cause a financial loss or create a legal liability
o 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
o Revocable unless waived
o 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
o Share forfeited shall pass
 Other beneficiaries unless otherwise disqualified
 accordance with the policy contract
 Estate of the insured
 Risk of loss
o Any contingent or unknown event, whether past or future, which may damnify a person having an
insurable interest, or create a liability against him. The insured is subject to a risk of loss through the
destruction or impairment of that interest by the happening of designated peril.
 Assumption of risk
o A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event.
  Distribution of losses
o 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
 Premium
o An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary
o An acknowledgment in a policy of insurance or 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 the premium is actually paid.
 Except in the case of a life or an industrial life policy whenever the grace period provision
applies, or whenever under the broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90) days from date of issuance of the policy.
o A person insured is entitled to a return of premium, as follows:
(a) To the whole premium if no part of his interest in the thing insured be exposed to any of the
perils insured against;
(b) Where the insurance is made for a definite period of time and the insured surrenders his policy,
to such portion of the premium as corresponds with the unexpired time, at a pro rata rate,
unless a short period rate has been agreed upon and appears on the face of the policy, after
deducting from the whole premium any claim for loss or damage under the policy which has
previously accrued: Provided, That no holder of a life insurance policy may avail himself of the
privileges of this paragraph without sufficient cause as otherwise provided by law.

7.3.3 Characteristic and Nature of Insurance Contracts

A contract of insurance has the following nature and characteristics:

 Personal.
o Each party having in view the character, credit and conduct of the other
o The insurer takes into account the character, credit, and conduct of the insured before an agreement
takes place. In case of change of ownership over an insured property, the coverage does not
automatically transfer to the new owner. The insurer has the option not to extend cover to the said
insured property if ever the new owner applies for a continuation of the existing insurance.
 Unilateral
o A unilateral contract is primarily a one-sided, legally binding agreement where one party agrees to
pay for a specified act. Imposes legal duties only on the insurer who promises to indemnify in case of
loss
o Given that unilateral agreements are one-sided, they only require a pre-arranged commitment from
the offeror. The terms and conditions of the insurance did not arise from the meeting of the minds of
the insurer and insured. The wordings are solely prepared by the former. It is the reason why in case
of doubt in the interpretation of the terms and conditions of the insurance contract, it shall be
construed in favor of the latter in case there is ambiguity.
 Contract of Adhesion
o Most of the terms of the contract do not result from mutual negotiations between the parties as
they are prescribed by the insurer in final printed form to which the insured may “adhere” if he
chooses but which he cannot change. (Rizal Surety and Insurance Co.,vs. CA, 336 SCRA 12)
o Little opportunity to bargain/alter the terms and conditions set forth by the insurer
 Contract of indemnity
o Except life and accident insurance, a contract of insurance is a contract of indemnity whereby the
insurer promises to make good only the loss of the insured
o An insurance contract is a contract of indemnity upon the terms and conditions specified therein. It is
settled that the terms of the policy constitute the measure of the insurer's liability
 o Insurers pay no more than the actual loss suffered
 Conditional
o The obligation of the insurer to pay the insured is dependent upon the compliance of the insured
with the terms and conditions of the insurance contract such as payment of premium, timely filing of
a claim, and submission of proof of loss, among others.
 Consensual.
o A contract of insurance is a product of the meeting of the minds of the insured and the insurer. The
mere submission of the application without the corresponding approval of the policy does not result
in the perfection of the contract of insurance. (Great Pacific Life Assurance Corp. vs. Court of
Appeals, 89 SCRA 543)
 Risk Distributing Device
o Insurance serves to distribute the risk of economic loss among as many as possible of those who are
subject to the same kind of loss.
o An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract
where the rights and obligations of the parties correlate and mutually correspond. The insurer
assumes the risk of loss which an insured might suffer in consideration of premium payments under
a risk-distributing device. Such assumption of risk is a component of general scheme to distribute
actual losses among a group of persons, bearing similar risks, who make ratable contributions to a
fund from which the losses incurred due to exposures to the peril insured against are assured and
compensated (UPCB General Insurance Co. Inc. v. Masagana Telemart Inc., G.R. No. 137172, April 4,
2001)
 Aleatory
o In an aleatory contract, 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
o The obligation of the insurer to pay the insured is conditioned upon the happening of the contingent
event such as the perils of fire or flood
 Principle of Utmost Good Faith
o An insurance contract requires utmost good faith (uberrimae fidei) between the parties. The
applicant is enjoined to disclose any material fact, which he knows or ought to know.
o Requires the parties to the contract to disclose conditions affecting the risk of which they ought to
know.
o Reason: An insurance contract is an aleatory contract. The insurer relies on the representation of the
applicant, who is in the best position to know the state of his health
 REPUBLIC ACT NO. 10607 (INSURANCE CODE)

AN ACT STRENGTHENING THE INSURANCE INDUSTRY, FURTHER AMENDING PRESIDENTIAL DECREE NO. 612,
OTHERWISE KNOWN AS "THE INSURANCE CODE", AS AMENDED BY PRESIDENTIAL DECREE NOS. 1141, 1280, 1455,
1460, 1814 AND 1981, AND BATAS PAMBANSA BLG. 874, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

Section 1. Presidential Decree No. 612, as amended, is hereby further amended to read as follows:

GENERAL PROVISIONS

Section 1. This Decree shall be known as ‘The Insurance Code’.

Section 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth
or indicated, unless the context otherwise requires:

(a) A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if
made by a surety who or which, as such, is doing an insurance business as hereinafter provided.
(b) The term doing an insurance business or transacting an insurance business, within the meaning of this Code,
shall include:
(1) Making or proposing to make, as insurer, any insurance contract;
(2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;
(3) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the
doing of an insurance business within the meaning of this Code;
(4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is received
therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or
transacting of an insurance business.
(c) As used in this Code, the term Commissioner means the Insurance Commissioner.

CHAPTER I

THE CONTRACT OF INSURANCE

TITLE 1

WHAT MAY BE INSURED

Section 3. 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 against, subject to the provisions of this chapter.

The consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on
his or her life or that of his or her children.

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of the
person insured shall automatically vest in the latter upon the death of the original owner, unless otherwise provided
for in the policy.

Section 4. The preceding section does not authorize an insurance for or against the drawing of any lottery, or for or
against any chance or ticket in a lottery drawing a prize.

Section 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply.
 TITLE 2

PARTIES TO THE CONTRACT

Section 6. Every corporation, partnership, or association, duly authorized to transact insurance business as elsewhere
provided in this Code, may be an insurer.

Section 7. Anyone except a public enemy may be insured.

Section 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.

Section 9. If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of
his assent, imposes further obligations on the assignee, making a new contract with him, the acts of the mortgagor
cannot affect the rights of said assignee.

TITLE 3

INSURABLE INTEREST

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

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

Section 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he has
expressly waived this 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.

Section 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 contract is silent, the proceeds shall be
paid to the estate of the insured.

Section 13. 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 14. An insurable interest in property may consist in:

(a) An existing interest;

Section 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.

Section 16. A mere contingent or expectant interest in any thing, not founded on an actual right to the thing, nor
upon any valid contract for it, is not insurable.
Section 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by
loss or injury thereof.

Section 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person
having an insurable interest in the property insured.

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.

Section 20. 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.

Section 21. A change of interest in a thing insured, after the occurrence of an injury which results in a loss, does not
affect the right of the insured to indemnity for the loss.

Section 22. A change of interest in one or more of several distinct things, separately insured by one policy, does not
avoid the insurance as to the others.

Section 23. 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.

Section 24. 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 an alienation of the thing insured.

Section 25. 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.