Report on Law on Insurance: The Business of Insurance; Titles 9-12

By Ralph Anthony H. Reyes

Febuary 29, 2016 Room 5A
Manuel L. Quezon University
School of Law
Policy of insurance is different from the contract of insurance. The policy is the formal written instrument evidencing the contract
of insurance entered into between the insured and the insurer.
FORM OF INSURANCE POLICY
No policy, certificate or contract of insurance shall be issuedor delivered within the Philippines unless in the form previously
approved by the Commissioner. No application form shall be used with, and no rider, clause, warranty or endorsement shall be
attached to, printed or stamped upon such policy, certificate or contract unless the form of such application, rider, clause,
warranty or endorsement has been approved by the Commissioner.
OFFER AND ACCEPTANCE/CONSENUAL
An insurance contract is consensual. It is therefore perfected by mere consent. Consent is manifested by the
meeting of the offer and the acceptance upon the object or the cause which are to constitute the contract. A contract of insurance
must be assented to by both parties, either in person or through their agents and so long as an application for insurance has not
been either accepted or rejected, it is merely a proposal or an offer to make a contract. (Perez vs. CA, 2000)
(1) Submission of application, even with premium payment is a mere offer on the part of the applicant, and does not
bind the insurer.
(2) An insurance contract is also not perfected where the applicant dies before the approval of his application or it
does not appear that the acceptance of the application ever came to the knowledge of the applicant.
(3) 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., 1920) The parties may impose additional conditions precedent to
the validity of the policy as a contract as they see fit. Usually, it is stipulated in the application that contract shall
not become binding until the policy is delivered and the first premium is paid. (De Leon)
DELAY IN ACCEPTANCE

Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with
his application. (Perez v. Court of Appeals,
2000)
When there is delay in acceptance due to the negligence of the insurance company which takes unreasonably long time before the
application is processed and the applicant dies, the contract is not perfected. In this case, the insurer can be liable for DAMAGES
in accordance with the TORT THEORY. The insurance business is imbued with public interest, thus it is the duty of the insurer
to act with reasonable promptness in acting on applications submitted to it.
The measure of damage is the face value of the policy. In life insurance, the proceeds will inure to the insureds estate and not to
the beneficiary. Insurer is liable under the policy because its delay in formally accepting/denying the application and payment
ofpremium is taken as an implied acceptance.
Offer when the insured submits an application to the insurer
Acceptance when the insurer approves the application
Effectivity upon payment of first premium, provided there has been an approval of the application.
DELIVERY OF POLICY

Delivery is the act of putting the insurance policy (the physical document) into the possession of the insured.
(1) The delivery can be a proof of the acceptance of the insurer of the offer of the insured. It is not, however, a pre-requisite
of a valid contract of insurance.
(2) Actual manual delivery is not necessary for the validity of the contract. Constructive delivery may be sufficient.

(3) The contract may be completed without delivery depending on the intention of the parties.
Note: There are conflicting views as to whether delivery to the agent of the insurance company can be considered delivery to the
insured. In Bradley vs. New York Life Insurance (1921), it was held that the agent of the insurance company is not the agent of the
insured thus delivery to the agent cannot be considered delivery to the insured. In New York Life Insurance Co. vs. Babcock
(1898), however, it was held that actual delivery to the insured is not essential to give the policy binding effect as long as the
insured has complied with every condition required of him.
PREMIUM PAYMENT
DEFINITION

An insurance premium is the agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for
undertaking to indemnify the insured against the specified peril.
Where only one premium is paid for several things not separately insured, making for only one cause or consideration, the
insurance contract is entire or indivisible, not severable or divisible, as to the items insured. (Oriental Assurance Corp. vs. CA,
1991)
General rule: No insurance policy issued or renewal is valid and binding until actual payment of the premium. Any agreement to
the contrary is void. (Sec. 77)
Exceptions:
(1) In case of life and industrial life whenever the grace period provision applies (Sec. 77)
(2) Where there is an acknowledgment in the contract or policy of insurance that the premium has already been
paid (Sec. 78)
(3) Where there is an agreement to grant the insured credit extension for the payment of the premium despite full
awareness of Sec. 77 (UCPB v. Masagana Telemart,
2001)
(4) Where there is an agreement allowing the insured to pay premium in installment and partial payment has
been made at the time of the loss (Makati Tuscany vs. CA, 1992)
(5) Where the parties are barred by estoppel (UCPB v.Masagana, 2001)
AUTHORITY OF AGENT TO RECEIVE PREMIUM

Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said
agent to receive the premium in its behalf. The insurer is also bound by its agents acknowledgment of receipt of payment of
premium (American Home Assurance Co. vs. Chua, 1999).
EFFECT OF PAYMENT BY POSTDATED CHECK

The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the
insurance into effect. But payment by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient
even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the
instrument and its acceptance by the creditor (Vitug)
EFFECT OF NON-PAYMENT OF PREMIUM

(1) Non-payment of first premium Nonpayment of the first premium unless waived (Sec. 78) prevents the contract from
becoming binding notwithstanding the acceptance of the application nor the issuance of the policy.
(2) Non-payment of subsequent premiums Nonpayment of subsequent premiums does not affect the validity of the contracts
unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse.
(a) In case of individual life insurance, the policy holder is entitled a grace period of either 30 days or 1 month within which
payment of any premium after the first may be made (Secs. 277(a), 228(a)).
(b) In cases of industrial life insurance, the grace period is 4 weeks, and where premiums are paid monthly, either 30 days or 1
month (Sec 230(a)).
EXCUSES FOR NON-PAYMENT OF PREMIUM

(1) Fortuitous events - Fortuitous events which render payment by the insured wholly impossible will NOT prevent forfeiture of
the policy when the premium remains unpaid. In other words, it is NOT an excuse.
(2) War - Non-payment of premiums occasioned by war causes an insurance to be not merely suspended, but is completely
abrogated. It would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums
paid over the actual risk carried during the years when the policy had been in force in time of war (Constantino vs. Asia Life
Insurance Co., 1950).
NON-DEFAULT OPTIONS IN LIFE INSURANCE
The law requires that in case of life or endowment insurance, the policy shall contain a provision specifying the
options to which the policy holder is entitled in the event of default in a premium payment after 3 full annual premiums shall
have been paid (Sec 227(f)).
CASH SURRENDER VALUE (CSV)

The cash value or cash surrender value is an amount which the insurance company holds in trust for the insured to be delivered to
him upon demand. When the companys credit for advances is paid out of the cash value or cash surrender value, that value and
the companys liability is diminished (Manufacturers Life Insurance v. Meer, 1951)
It is the amount that the insured is entitled to receive if he surrenders the policy and releases his claims upon it.
The right to CSV accrues only after 3 premium payments.The Insured is given the right to claim the amount less than the reserve,
reduced by surrender charge.
Rationale: Premium is uniform throughout your lifetime, but the risk is varied (higher risk when youre older, low when youre
young) thus the cost of protection is more expensive during the early years of the policy
ALTERNATIVES TO OBTAINING CASH SURRENDER VALUE

(1) Extended insurance/term insurance The insured, after having paid 3 full annual premiums, is given the right to have
the policy continued in force from date of default for a time either stated or equal to the amount of the CSV, taken as a
single premium.
(a) Face value of the policy remains the same but only within the term.
(b) It is also called term insurance where CSV is taken as a single premium (no further payments) to extend the
policy for a fixed period of time.
(c) Reinstatement allowed if made within the term purchased; no reinstatement after the lapse of the term purchased
(2) Paid-up insurance Where insurance is paid-up, the insured who has paid 3 full annual premiums is given the right, upon
default, to have the policy continued from the date of default for the whole period of insurance without further payment of
premiums. It is also called reduced paidup because in effect the policy, terms and conditions are the same but the face value is
reduced to the paid-up value.
(3) Automatic Premium Loan (APL) 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.
(a) It only applies if requested in writing by the insured either in the application or at any time before expiration of the
grace period. In effect, the insurance policy continues in force for a period covered by the payment.
(b) After the period, if insured still does not resume paying his premiums, policy lapses, unless CSV still remains. If
there is still CSV, APL continues until CSV is exhausted.
(c) This is beneficial for the insured because it continues the contract and all its features with full force and effect.
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Reinstatement of a lapsed life insurance policy is not a nondefault option. It does not create a new contract, but merely revives
the original policy so insurer cannot require a higher premium than the amount stipulated in the contract. It does not apply to
group/industrial life insurance.

Requisites:
(1) Must be exercised within 3 years from date of default
(2) Insured must present evidence of insurability satisfactory to the insurer
(3) Pay all back premiums and all indebtedness to the insurer
(4) CSV must not have been duly paid to insured nor the extension period expired
(5) Application must be filed during the insureds lifetime (Andres vs. Crown Life Insurance, 1958)
REFUND OF PREMIUMS
WHEN RETURN OF PREMIUMS CAN BE MADE

(1) If the thing insured was never exposed to the risks insured against (Sec. 79(a)) whole premium should be refunded
(2) When the contract is voidable due to the fraud or misrepresentation of insurer or his agent (Sec. 81) whole premium should
be refunded
(3) When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy (Sec. 81)
whole premium should be refunded
(4) Contract is voidable because of the existence of facts of which the insured was ignorant without his fault (Sec.
81) whole premium should be refunded
(5) Where the insurance is for a definite period and the insured surrenders his policy (Sec. 79(b)) the portion of the premium
that corresponds to 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 should be return
(6) Ratable return of the premium when there is over insurance by several insurers (Sec. 82) the return premiums should be
proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk
(7) When rescission is granted
UNFAIR CLAIMS SETTLEMENT; SANCTIONS

No insurance company doing business shall refuse, without just cause, to pay or settle claims arising under coverages provided
by its policies, nor shall any such company engage in unfair claim settlement practices (Sec. 241).
Instances of unfair claims settlement done by an insurance company (Sec. 241 (1)):
(1) KNOWINGLY misrepresenting to claimants pertinent facts or policy provisions regarding coverage;
(2) FAILING to acknowledge with reasonable promptness pertinent communications regarding claims arising under its policies;
(3) FAILING to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies;
(4) NOT attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has
become reasonably clear;
(5) COMPELLING policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason
substantially less than the amounts eventually recovered in suits brought by them
Revocation of certificate of authority
The Certificate of Authority issued to the domestic or foreign company by the Commission may be revoked or suspended by the
Insurance Commissioner for any of the following grounds (Sec. 247):
(1) The company is in an unsound condition;
(2) That it has failed to comply with the provisions of law or regulations obligatory upon it;
(3) That its condition or method of business is such as to render its proceedings hazardous to the public or its policyholders;
(4) That its paid-up capital stock, in the case of a domestic stock corporation, or its available cash assets, in the case of a domestic
mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient;

(5) That the margin of solvency required of such company is deficient.

Note: The Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its
officers and agents, and no new business shall thereafter be done by such company or for such company by its agents in the
Philippines while such suspension, revocation, or disability continues or until its authority to do business is restored by the
Commissioner.
Before restoring such authority, the Commissioner shall require the company concerned to submit to him a business plan showing
the companys estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years.
Liquidation of insurance company
If the company is determined by the Commissioner to be insolvent or cannot resume business, he shall, if public
interest requires, order its liquidation (Sec. 249).
Note: This should be distinguished from a situation where a conservator is appointed when the Commissioner finds that a
company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity adequate to protect
the policyholders and creditors. Theconservator will take charge of the management of the
insurance company (Sec. 248).