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INSURANCE LAW by: Judge Jovencio Gascon

INSURANCE CODE OF 1978


(Presidential decree 1460, as amended)
1. P.D. 1460 Insurance Code of 1978
2. Civil Code
i.

Art. 739 & 2012 = void contracts

ii.

Art. 2011 applicability of the Civil Code

iii.

Arts. 2021-2027 life annuity contracts

iv.

Art. 2186 compulsory motor vehicle liability insurance

v.

Art. 2207 insurers right of subrogation.


If the plaintiffs property has been insured and he has received indemnity
from the Insurance Company for the injury or loss arising out of the wrong
or breach of contract complained of, the Insurance Company shall be
subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the
Insurance Company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Applicable Special Laws:


1. Article 2011 of the Civil Code states that the contract of insurance is governed by
special laws and that matters not expressly provided for in the special laws shall
be regulated by the Civil Code. Therefore, the laws applicable to insurance shall
be in the following order:
a) Insurance Code of 1978
b) Civil Code, Article 2011 and other articles such as:
P.D. 1146 Revised Government Service Insurance Act of 1977
insurance of government employees.
R.A. 1161 Social Security Act insurance of employees in private
employment.
c) Family Code (E.O. 209)
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d) CODE of Commerce:
i.

R.A. 656 amended by P.D. 245 Property Insurance Law dealing with
government property.

ii.

R.A. 4898 (R.A. 5756) Life, disability and accident insurance


coverage to barangay officials.

iii.

E.O. 250 (July 25, 1987) increases, integrates and rationalizes the
insurance benefits of barangay officials, SP, SP, SB

iv.

R.A. 3591 PDIC which insures the deposits of all banks.

Section 5 of the Insurance Code provides that it shall cover all kinds of insurance
issued. There are basically two types of insurance covered by the Insurance
Code:
a) Life Insurance; and
b) Non-life insurance.
The Code also covers the contract of surety.
If the Insurance Code or a special law does not specifically provide for a particular
matter in question, the provisions of the Civil Code on contracts shall govern
suppletorily.
Definitions and Concepts:
1. Insurance = a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent
event. (Sec. 2)
2. Events covered by Insurance:
General Rule: Only a future event can be governed by an insurance contract
(Sec. 3)
Exception: A past event may be covered by marine insurance if the loss of the
vessel in the past could not have been known by ordinary means of
communication, then it could be the subject of marine insurance (Section 109).
3. Parties in Insurance Contract:
An insurance is a contract, so the general rule is that only those having capacity
to contract may enter into such contract. Under Sec. 3, a minor above 18
years of age may enter into insurance contract, but his right to choose his
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beneficiary is limited to his estate, his parents, spouse, child, brother or sister.
This particular provision has become obsolete with the promulgation of R.A. 6809
providing for the age of minority to commerce at the age of 18 years.
4. Characteristics of Insurance Contract:
a) Aleatory = there is an element of risk. An aleatory contract is one where the
obligation depends upon the occurrence of an uncertain event or one certain
to happen but at an indeterminate time. The former takes place in a fire
insurance, and the latter in life insurance.
b) Contract of Indemnity = there is an exchange of value for value (quid pro
quo), particularly in property insurance.
c) Onerous = There is valuable consideration (premium).
d) Bilateral = Both parties are bound to do something.
e) Formal = As to form, an insurance contract is not consensual in nature
because a policy is required to be issued, and the premium must be paid.
NOTE: as far as fire insurance is concerned, the Insurance Commission uses
the term cash and carry: payment of premium as a fourth requisite of the
insurance contract. (Sec. 77).
EXCEPTION: Under Sec. 78 (it covers only life insurance): if in a policy, it is
provided that a certain amount is to be paid as premium and it is expressly
acknowledged therein that payment of premium has been received, then the
insurance company is still bound to pay the beneficiary, even though the
premium has not been actually paid. (Reason: Estoppel).
5. Interpretation of Insurance Contract = Being contracts of adhesion, the
general rule is that insurance contracts are to be construed liberally in favor of
the insured and strictly against the insurer resolving all ambiguities against the
latter.
Yet contracts of insurance are to be construed according to the sense and
meaning of the terms which the parties themselves have used.

Insurance Policy
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1. Three Types if Insurance Contracts:


a) Policy =
b) Binding Receipt = is merely an acknowledgment on behalf of the
company that their branch office had received from applicant the
insurance premium and had accepted
the application subject to
processing by the head office.
c) Cover Note = It is a receipt whereby the company agrees to insure you
but good only for 60 days pending the issuance of a regular policy. It
should always be in writing. (Sec. 49).
= No separate premium is to be paid on a cover note. It is not a
separate policy but integrated to the regular policy subsequently
issued.
2. Specific Code provisions Relating to Policies:
a) Riders are permitted in a policy provided specific reference is made to
them in the policy. (Sec. 50).
b) Section 51 provides for the contents of policy parties, amount, premium,
property or life insured and insurable interest.
c) Cover notes permitted not exceeding 60 days unless they have approval
of Insurance Commissioner (Sec. 52)
d) Insurance by agents or trustee the principal and real party in interest
must be indicated (Sec. 54).
e) Insurance by partner or co-owner - for partnership or co-ownership, must
be so indicated (Sec. 55).
f) Mandatory provision in the Insurance Policy: (Sec. 277))
= Grace period of 30 days is mandatory in life insurance. If insured dies
within 30-day grace period, his heirs can recover but must pay premiums
due.
= Reinstatement = within 3 years from date of default.
= Policy loan = once the policy has cash surrender value.
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3. Unilateral Cancellation of Policy (Sec. 64, 65 and 79)


a) By the Insurer:
= Upon written notice;
= stating the grounds for cancellation;
= stating that it can prove the ground should the insured require it.
b) Only Grounds for cancellation:

Non-payment of premium;
Conviction of crime increasing hazard;
Fraud or misrepresentation discovered;
Willful or reckless acts increasing the hazard;
Physical changes in property making it uninsurable or increasing
hazard;
If Insurance Commission decides continuation of policy would violate
Code.

c) Prescriptive Period (Sec. 63)


Insurer may provide in its policies that unless insured brings action
within one year from time cause of action accrues, action will be
barred. The one (1) year period is reckoned from the date the
cause of action accrues, i.e.: upon denial of the claim and not upon
the happening of the loss.
Under Section 384 of the Insurance Code, the injured must file with
the insurance company a written notice of claim within six (6)
months from the date of the accident, and suit for recovery must be
brought within one year. The one-year prescriptive period to bring
suit in court against the insurer should be counted from the time
that the insurer rejects the written claim filed therewith by the
insured, the beneficiary or the third person interested under the
insurance policy.
A valid cancellation of policy requires the concurrence of the
following conditions:
1. Prior notice of cancellation to the insured;
2. Notice based on occurrence after effective date of policy of one
or more of the grounds mentioned by law;
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3. Notice must be in writing mailed or delivered to the insured at


the address shown in the policy; and
4. The notice must state the grounds relied upon provided in Sec.
64 of the Insurance Code and upon request of insured, to
furnish facts on which cancellation is based.

d) Cancellation by the Insured (sec. 79) Short Period Rate Scale


The insured may unilaterally cancel the policy without need of
consent of the insurer, and may ask for the return of the unused part of the
premium paid corresponding to the months not yet elapsed in accordance
with the short period scale printed in the policy.
e) Non-renewal of Property Insurance (Sec. 66).
In property insurance, if the insurer does not desire to have the
policy renewed, written notice to this effect must be given insured
within 45 days before the period for termination of the policy
expires.
4. Lack of Documentary Stamp on Insurance Policy
Life and non-life insurance policies are subject to documentary stamp
taxes by their mere issuance, and the fact that the policies have not
become effective for non-payment of the corresponding premium cannot
affect the insurance companys liability for payment of the documentary
stamp taxes.
Insurance Premiums:
Under Section 77 of the Insurance Code, for life insurance, it is stipulated that the
payment of premium is necessary for validity of the policy (also known as cash and
carry provision). However, Sec. 78 provides that the acknowledgment in the policy that
premium has been paid is binding on the insurer.
1. RATIONALE for Full Payment of Premium; Nature of Insurance:
to safeguard the interest of the assured, it must not be ignored that the
contract of insurance is primarily a risk-distributing device, a mechanism
by which all members of a group exposed to a particular risk contribute
premiums to an insurer.
From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against.
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Each party therefore takes a risk:


= the insurer, that of being compelled upon the happening of the
contingency to pay the entire sum agreed, and
= the insured, that of a parting with the amount required as premium,
without receiving anything therefore in case the contingency does not
happen.
2. Effects of Non-payment of Premium:
The payment of premium is a condition precedent to, and essential for, the
efficaciousness of the contract of insurance. The only two statutorily
provided exceptions are:
a) In case the insurance coverage relates to life or industrial (health)
insurance when a grace period applies; and
b) When the insurer makes a written acknowledgment of the receipt of
premium, this acknowledgment being declared by law to be then
conclusive evidence of the premium payment (Sections 77-78).
3. Effect of Partial Payment of Premium:
Partial payment of premium would not make the insurance coverage
effective. To ensure payment of these losses, the law mandates all
insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. It should be understood that the integrity of
this fund cannot be secured and maintained if by judicial fiat, partial
offerings of premiums were to be construed as a legal nexus between the
applicant and the insurer despite an express agreement to the contrary.
4. Payment of Premium by Check:
5. Payment of Premium by Installments
6. Effects of Payments of Premium through Agent

PARTIES TO THE INSURANCE CONTRACT:


1. INSURER (Sec. 6) =
2. INSURED (Sec. 6) =
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3. BENEFICIARY (Arts. 739 and 2012 of the Civil Code)


A public enemy may not be insured. Public enemy is a citizen of a country with which
the Philippines is at war (Sec. 7)

Beneficiary Designation:
General Rule

: Insured may designate anyone he wishes as his beneficiary.

Exception

: Husband may not designate his concubine, nor


may the wife designate her paramour.

The designation of common law wife as beneficiary is void. This need only be
proved by preponderance of evidence, no previous conviction is required (Insular
Life vs. Ebrada, 80 SCRA 181 (1977)
Nature of Beneficiary Designation:
The right to designate beneficiary means the right to change the beneficiary at
any time. This is the general rule: That designation of beneficiary is revocable (Sec.
11.)
It would be irrevocable only if there is an express stipulation in the policy to that
effect.
a) In taxation: under the NIRC, if there is an irrevocable designation of beneficiary,
when the insured dies the proceeds of life insurance will not be subject to estate
tax. If the designation is revocable, the proceeds will be subject to estate tax.
b) Section 12 = When an irrevocable beneficiary is designated, and he commits
acts of ingratitude that would disqualify him from inheriting, but the insured
cannot remove him as beneficiary.
But under Sec. 12, if the beneficiary is designated, whether revocable or
irrevocable, and subsequently he is found guilty of causing the death of
insured, that designation is void and proceeds will be paid to the heirs of
the insured.
c) Section 180: Cash Surrender Value = is only applicable in life insurance. Part
of the premium paid is set aside in a fund which is mandatory upon life insurance
companies.

The purpose of the reserve fund is in the event of many deaths and claims, the
insurer will be able to pay all the claims because it has the cash surrender
values.
The insured can also borrow on the cash surrender value, but if the designation
of the beneficiary is irrevocable, the consent of the beneficiary is required.
All these three (3) rights can be availed of by the insured and not by the beneficiary.
RIGHT OF SUBROGATION process of legal substitution
Purpose: to make the person who caused the loss, legally responsible for it and at the
same time prevent the insured from receiving a double recovery from the wrongdoer
and the insurer.
Applicable only to property insurance.
Classes of Insurance research
Parties to insurance
Insurable interest in general
What are to be insured
Concealment
Representation in relation to concealment
Elements of insurance contract