Contracts of Insurance
What may be insured against
Sec. 3, Insurance Code
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 husband is not necessary for the validity of an
insurance policy taken out by a married woman on her life or that of her
children.
Any minor of the age of eighteen years or more, may, notwithstanding
such minority, contract for life, health and accident insurance, with any
insurance company duly authorized to do business in the Philippines,
provided the insurance is taken on his own life and the beneficiary
appointed is the minor's estate or the minor's father, mother, husband,
wife, child, brother or sister.
The married woman or the minor herein allowed to take out an insurance
policy may exercise all the rights and privileges of an owner under a
policy.
All rights, title and interest in the policy of insurance taken out by an
original owner on the life or health of a minor shall automatically vest in
the minor upon the death of the original owner, unless otherwise
provided for in the policy.
Requisites of a contract of insurance
Since policies are contracts, many of the rules and general principles of
contracts apply also to insurance. In order that there will be a valid and
enforceable contract of insurance, it is necessary that the following be present:
(1) A subject matter in which the insured has an insurable interest (see Sees.
12-14.)
(2) Event or peril insured against which may be any (future) contingent or
unknown event, past or future (Sec. 3.), and a duration for the risk thereof (see
Sec. 51[g].)
(3) A promise to pay or indemnify in a fixed or ascertainable amount (see
Sec. 2.)
(4) A consideration for the promise, known as the premium (see Sec. 77.); and
(5) A meeting of minds of the parties upon all the foregoing essentials, (see
Arts. 1318,1319, Civil Code.)
Of course, the parties must be competent to enter into the contract, (see Arts.
1327-1329, Civil Code; Secs. 6-7.
Under Section 226, it is provided that "no policy of insurance shall be issued
or delivered within the Philippines unless in the form previously approved by
the Insurance Commissioner. Of course, the contract must not be for a
purpose contrary to law or public policy.
Subject matter of contract of insurance
In general
Anything that has 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, may properly constitute the subject matter of insurance.
Property insurance
Both persons and property may be the subjects of insurance, but the term
"subject matter" is ordinarily used in reference to the insurance of property.
The property covered by a policy is regarded the subject matter of the
insurance, but it is apparent that in the last analysis, it is the risk of loss of
such property that is primarily involved, (see Sees. 13-14.)
Life, health, and accident insurance
While it is true that in life, health, or accident insurance the person becomes
the subject of insurance, the matter is generally viewed as one in reference to
the insured as a party to the contract. (29 Am. Jur. 216; see Secs.
10, 179-183.)
Casualty insurance
In insurance (not falling within the scope of the other types of insurance)
against perils which may affect the person and/or property of the insured and
give rise to liability on his part to pay damages to others, the subject matter is
the risks involved in its use, or the insured's risk of loss or liability, that he may
suffer loss or be compelled to indemnify for the loss suffered by a third person.
Casualty insurance includes personal accident and health insurance as
written by non-life insurance companies and all insurance against loss or
liability which is not within the scope of the other types of insurance, namely,
fire, marine, suretyship and life, (see Sec. 174.)
Event or peril insured against
Under Section 3 (par. 1.), the contingency or unknown event must be such
that its happening will (1) damnify or cause loss to a person having an
insurable interest or (2) create a liability against him. The unknown event may
be past or future, (see Sec. 51[f].) In a contract of insurance, the insurer is
liable for a fortuitous event if it is the event or peril insured against and is the
proximate cause of the loss, (see Sec. 84; also Art. 1174, Civil Code.)
Insurance by a married woman
A married woman may take out an insurance on her life or that of her children
without the consent of her husband (Sec. 3, par. 2.), or that of her husband,
she having an insurable interest in the latter, (see Sec. 10.) She may also take
out insurance on her paraphernal or separate property, or on property given
to her by her husband. (Harding vs. Comm. Union Assurance Co., 38 Phil.
464 [1918]; see Art. 39, Civil Code; Arts. 110, 111, Family Code [Exec. Order
No. 209].)
Insurance by a minor
Life, health, or accident insurance
Under Section 3 (par. 3.), a minor may enter into a valid contract of insurance
provided that:
part, and may be maintained by suit, if necessary, for the protection of those
in whose favor it is made. (Heffelfinger vs. Comm., 302 US 690; 43 Am. Jur.
2d 310.)
Interest of beneficiary
In general, the nature of the interest of the beneficiary depends on the terms
of the insurance contract, including the existing statutes by which the insurer
and its policyholders are bound. Under our Code, the married woman or the
minor allowed to take out an insurance policy may exercise all the rights and
privileges of an owner, as insured and/or beneficiary. (Sec. 3, par. 4; see Sec.
180, par. 3.)

(a) He is 18 years of age or over; (b) The contract is for life, health, or Transfer of rights to minor insured upon death of original owner of policy
Upon the death of the original owner of a policy of insurance taken out by him
accident insurance;
on the life or health of a minor, all rights, title and interest in the policy shall
(c) The insurance is taken on his life; and
automatically vest in the minor unless otherwise provided for in the policy.
(d) The beneficiary (the person designated to receive the proceeds of the
(Sec. 3, par. 5.) This contemplates a case where X took a life insurance on
insurance upon the happening of the event insured against) is any of those
the life or health of his son Y, a minor, appointing himself (X) as beneficiary,
enumerated by law.
and later X died.
Other insurance
Sec. 4, Insurance Code
A contract of insurance other than life, health, or accident insurance, such as
The preceding section does not authorize an insurance for or against
fire or marine insurance, entered into by a minor is not entirely void. It is one
the drawing of any lottery, or for or against any chance or ticket in a
which is merely voidable, that is, it is valid until annulled in a proper action in
lottery drawing a prize.
court by the minor or his legal representative. (Art. 1390, Civil Code.)
Concept of lottery
If the contract is not disaffirmed by the minor, the insurer cannot escape
The term "lottery" extends to all schemes for the distribution of prizes by
liability by pleading minority as a defense because "persons who are capable
chance, such as policy playing, gift exhibition, prize concerts, raffles at fairs,
cannot allege the incapacity of those with whom they contracted." (Art. 1397,
etc., and various forms of gambling. The three essential elements of lottery
ibid.) But if the contract is fair and no fraud or undue influence was practiced
are: (1) consideration; (2) prizes; and (3) chance. (Uy vs. Palomar, 27 SCRA
by the insurer, the minor cannot recover the premiums paid, if he cannot return
287 [1969].)
the benefits received, (see Arts. 1385, 1241, par. 1, 1427, ibid.; Johnson vs.
Northwestern Mut. L. Ins. Co., 59 N.W. 992.)
There is consideration of price paid if it appears that the prizes offered by
whatever name they may be called came out of the fund raised by the sale of
The result is that an insurance company contracting with a minor is bound by
chances among the participants in order to win the prizes. Conversely, if the
the contract; the minor ordinarily is not.
prizes do not come out of the fund or contributions by the participants, no
consideration has been paid and consequently, there is no lottery, (ibid.) Thus,
Ownership of life insurance policy
there is no lottery where a company, to promote the sale of certain products,
Interest of person who insured his own life
resorts to a scheme which envisions the giving away for free of certain prizes
Ownership of a modem life insurance policy is divided between the insured
for the purchase of said products, for the participants are not required to pay
and the beneficiary (infra.), the insured being the owner of its various
more than the usual price of the products. Under the scheme, prizes can be
marketing and sales features, such as the loan and cash surrender values,
obtained without any additional consideration. (Phil. Refining Co. vs. Palomar,
and the beneficiary being the owner of a promise to pay the proceeds at the
148 SCRA 313 [1987]; Palomar vs. CFI of Manila, 165 SCRA 162 [1988].)
death of the insured subject to the insured's right of revocation. (Gordon vs.
Portland Trust Bank, 53 ALR 2d 1106; 43 Am. Jur. 2d. 310-311.)
It can be clearly seen from the language of Section 4 that a sweepstake holder
cannot insure himself against the failure of his ticket to win a prize because
One who takes a policy of insurance on his own life becomes, in so doing, a
even if he were not to win, it cannot be said that he suffered a "loss" of the
party to the contract, even though the benefits of the insurance are to accrue
prize. In other words, the failure to win a prize would not damnify or create a
to someone else known as beneficiary. Such contract remains his, at least, in
liability against him.
Contract of insurance not a wagering contract
A contract of insurance is a contract of indemnity and is not a wagering or
gambling contract, (see Sec. 25.) While it is based on a contingency, it is not
a contract of chance and is not used for profit. The very purpose of insurance
is the reimbursement of the holder of insurance for actual loss suffered from
specified risks. The distinctions are the following:
(1) In a gambling contract, the parties contemplate gain through mere
chance {i.e., occurrence of the contingent event), while in a contract
of insurance, the parties seek to distribute possible loss by reason of
mischance;
(2) The gambler courts fortune, while the insured seeks to avoid
misfortune;
(3) The contract of gambling tends to increase the inequality of fortune,
while the contract of insurance tends to equalize fortune (see Vance,
op. ext., p. 93.)
(4) The essence of gambling is this: whatever one person wins from a
wager is lost by the other wagering party. In a contract of insurance,
what one insured gains is not at the expense of another insured.
Basically, it can be said that the entire group of insureds provides
through the premiums paid, the funds which make possible the
payment of all claims; and
(5) As soon as a party makes a wager, he creates a risk of loss to himself
where no such risk existed previously. On the other hand, the
purchase of insurance does not create a new and, therefore, non-
existing risk of loss to the purchaser. Instead, the only intelligent
reason for purchasing insurance is that the purchaser faces an
already existing risk of economic loss. (Protection Functions of Life
and Health Insurance, by William T. Beadles, in Life and Health
Insurance Handbook, edited by Gregg & Lucas [3rd ed.], p. 29,
hereinafter cited as LHIH.) One can insure only if he has an insurable
interest in the subject of insurance, (see Sees. 3[par. 1], 10,13.)
Similarity between insurance and gambling
Insurance and gambling are similar in only one respect. In both cases, one
party promises to pay a given sum to the other upon the occurrence of a given
future event, the promise being conditioned upon the payment of, or
agreement to pay, a stipulated amount by the other party to the contract.
This means that in either case, one party may receive more, much more, than
he paid or agreed to pay. At this point, similarity ceases between gambling
and insurance. (W.T. Beadles, in LHIH, op. ext., p. 30.)
Sec. 5, Insurance Code
All kinds of insurance are subject to the provisions of this chapter so far
as the provisions can apply.
Applicability of provisions of Chapter 1
By virtue of Section 5, the provisions of Chapter 1 on "The Contract of
Insurance" (Sees. 1-98.) are also applicable to Marine Insurance (Sees. 99-
166.), Fire Insurance (Sees. 167-173.), Casualty Insurance (Sec. 174.),
Suretyship (Sees. 175-178.), Life Insurance (Sees. 179-183.), and to any
other kind of insurance (see Sec. 2.) so far as said provisions can apply.
Matters not expressly provided for in the Insurance Code and special laws on
insurance are regulated by the Civil Code. (Art. 2011, Civil Code.)
So, an insurance contract under Republic Act No. 1161 (Social Security Act
of 1954.), as amended, shall be governed primarily by the said law and
subsidiarily, by Chapter 1 of the Insurance Code, and in the absence of
applicable provisions in both laws, the pertinent provisions of the Civil Code
shall be applied.
Parties to insurance contracts
Sec. 6, Insurance Code
Every person, partnership, association, or corporation duly authorized to
transact insurance business as elsewhere provided in this code, may be an
insurer.
Who may be an insurer
Foreign or domestic insurance company or corporation
Before a foreign or domestic insurance company or corporation may transact
insurance business in the Philippines, it must first obtain a certificate of
authority for that purpose from the Insurance Commissioner who may refuse
to issue such certificate of authority if, in his judgment "such refusal will best
promote the interests of the people of this country" (Sec. 187.)
Individual partnership, or association
Although insurance business is ordinarily carried on by partnerships and
corporations, yet any individual may be an insurer, the only requisite being
that "he holds a certificate of authority from the Insurance Commissioner."
(Sec. 6.) Any person, partnership, or association of persons may be given a
certificate of authority if such person, partnership, or association is "possessed
of the capital assets required of an insurance corporation doing the same kind
of business in the Philippines and invested in the same manner." (see Sees.
184-186.)
An "insurance corporation" is defined by the Code as one "formed or
organized to save any person or persons or other corporations harmless from
loss, damage, or liability arising from any unknown or future or contingent
event, or to indemnify or to compensate any person or persons or other
corporations for any such loss, damage, or liability, or to guarantee the
performance of or compliance with contractual obligations or the payment of
debts of others." (Sec. 185.) The last part of the statement of purpose refers
to suretyship, (see Sec. 175.)
For purposes of the Code, the terms, "insurer" and
"insurance company" "include all individuals, partnerships, associations, or
corporations, including government-owned or controlled corporations or
entities, engaged as principals in the insurance business, excepting mutual
benefit associations. Unless the context otherwise requires, the terms shall
also include professional reinsurers defined in Section 280." (Sec. 184.)
Business of insurance affected with public interest
It is recognized that the business of insurance is one that is affected with a
public interest and, therefore, it is subject to regulation and control by the state
by virtue of the exercise of its police power or in the interest of public
convenience and the general good of the people. (29 Am. Jur. 60-61.)
An insurance company, in effect, is an instrumentality which gathers funds
upon the basis of equality of risk from a greater number of persons, sufficiently
large in number to arouse the element of chance to step out and the law of
averages to step in as the controlling factor and holds the numerous
amounts so collected as general fund to be paid out to those who shall suffer
losses. In this fund, which thus constitutes a guaranty against individual loss,
all are interested not in some vague way but in a very real sense. (Tyson vs.
Banton, 273 U.S. 418.)
Thus, a law requiring insurance companies to file schedule of rates and
prohibiting discriminatory rates, was held valid on the ground that the business
of insurance affects the public welfare as to invoke and require governmental
regulation. "Accidental fires are inevitable and extent of the loss is very great.
The object of the regulation is to distribute the loss over as wide an area as
possible. In other words, the loss is spread over the country, the disaster to
an individual is shared by many, the disaster to a community shared by other
communities; great catastrophies are, therefore, lessened." (German Alliance
Ins. Co. vs. Lewis, 223 U.S. 889.)
Who may be insured
Sec. 7, Insurance Code
Anyone except a public enemy may be insured.
Capacity of party insured
(1) Natural person. In order that a person may be the party insured in a
contract of insurance, two essential requisites are necessary, to wit:
(a) He must be competent to make a contract (see Arts. 1327-1329, Civil
Code.); and
(b) He must possess an insurable interest in the subject of the insurance.
(Vance, op. cit.f p. 143.)
A third requisite, applicable also to juridical persons, may be added, i.e., that
the insured must not be a public enemy. (Sec. 7.)
(2) Juridical person. A juridical person, like a partnership or a corporation,
may take out insurance on property owned by it. (see Arts. 44, 45, Civil Code.)
Note that Section 3 specifically authorizes minors, 18 years or more to take
out insurance payable to a limited class of beneficiaries.
Meaning of public enemy
A public enemy designates a nation with whom the Philippines is at war and it
includes every citizen or subject of such nation. The term may be taken to
mean "alien enemy." A mob, however numerous they may be, or robbers or
thieves whoever they may be, are never considered public enemies for
purposes of the above provision, (see Bouvier's Law Dictionary; Russel vs.
Fagan, 4 Atl. 258.)
During wartime, a private corporation is deemed an enemy corporation
although organized under Philippine laws if they are controlled by enemy
aliens. This is the so-called "control test" whereby a corporation is deemed to
have the same citizenship as the controlling stockholders in time of war.
(Filipinas Cia de Seguros vs. Christern Huenefeld & Co., 89 Phil. 54 [1951];
S.
Winshop vs. Phil. Trust Co., 90 Phil 744 [1952].)
Effect of war on existing insurance contracts
Where parties rendered enemy aliens.
By the law of nations, all intercourse between citizens of belligerent powers
which is inconsistent with a state of war is prohibited. The purpose of war is to
cripple the power and exhaust the resources of the enemy. It is inconsistent
that the subjects of one country should lend their assistance to protect by
insurance, the commerce or property of belligerent alien subjects or to do
anything detrimental to their country's interests, (see 6 Couch, Cyclopedia of
Insurance Law, pp. 5352-5353.)
Of course, if the parties are not rendered enemy aliens by the intervention of
war, the policy continues to be enforceable according to its terms and the laws
governing insurance and the general rules regarding contracts. The effect of
war between countries of the insured and the insurer upon insurance contracts
validly entered into during peacetime is a question upon which there is a
decided conflict of authority.

With respect to life insurance

Three rules or doctrines have arisen. One of these rules is the United States
Rule which declares that the contract is not merely suspended but is
abrogated by reason of nonpayment of premiums, since the time of the
payments is peculiarly of the essence of the contract. However, the insured is
entitled to the cash or reserve value of the policy (if any), which is the excess
of the premiums paid over the actual risk carried during the years when the
policy had been in force. (New York Life Ins. vs. Statham, 93 U.S. 24.)

This rule has been specifically followed by our Supreme Court, (see
Constantino vs. Asia Life Ins. Co., 87 Phil. 248 [1950]; also McGuire vs. The
Manufacturer's Life Ins. Co., 87 Phil. 370 [1950]; Nat. Leather Co., Ins. vs.
U.S. Life Ins. Co., 87 Phil. 410 [1950]; Vda. de Carrero vs. Manufacturer's Life
Ins. Co., 87 Phil.
460 [1950]; Gonzaga vs. Crown Life Ins. Co., 91 Phil. 10 [1952].)

Where loss occurs after end of war

Since the effect of war is not merely to suspend but to abrogate the contract
of insurance between citizens of belligerent states, the termination of the war
does not revive the contract. Consequently, the insurer is not liable even if the
loss is suffered by the insured after the end of the war.