Insurance Law Aquino 2018.docx

ESSENTIALS OF

INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) TIMOTEO B. AQUINO Professor of Law, Pre-Bar Review and MCLE Lecturer A u t h o r , Torts and Damages Reviewer on Civil Law Philippine Corporate Law Compendium Essentials of Credit Transactions and Banking Law Notes and Cases on Negotiable Instruments Law and Banking Law Notes and Cases on Banking Law and Negotiable Instruments Law (Vol. II, General Banking Law and Related Laws) C o - A u t h o r , Reviewer on Commercial Law Essentials of Transportation and Public Utilities Law Handbook on Summary and Smalls Claims Procedure and Bouncing Checks Law (With Notes on Ejectment and Katarungang Pambarangay Law) Revised Rules on Summary Procedure: Revisited Fundamentals of Negotiable Instruments Law Fundamentals of Obligations and Contracts

Third Edition

2018

856 Nicanor Reyes, Sr. St. Tel. Nos. 736-05-67 • 735-13-64 1977 C.M. Recto Avenue Tel. Nos. 735-55-27 • 735-55-34 Manila, Philippines www.rexpublishing.com.ph

e>

p «?;» p <»> p

UNIVERSITY OF THE CORDILLERAS' LIBRARIES_______________

PREFACE TO THE THIRD EDITION This latest edition includes a discussion of new cases promulgated by the Supreme Court, rules and regulations issued by the Insurance Commission as well as additional discussion of important subjects that comprise what the author believes to be the essentials of Insurance Law. The plan is for this work to provide entry-level information and discussion on Insurance Law. It is hoped that the students and practitioners will continue to give this edition the same reception that was given to the previous edition. The author is grateful to all of them.

TIMOTEO B. AQUINO Teresa,, Rizal

in

r: A

PREFACE We are still in what is fittingly called by Mr. Allan Greenspan as the “ A g e o f T u r b u l e n c e . ” Mr. Greenspan observed that the financial crisis disrupted much of the world’s financial system and had cast “a pall over many nations’ prospects for economic growth.” The insurance industry is one of those hit by the upheaval. Even insurance companies that appeared to be monolithic a couple of years ago are now stuck in financial quagmire. Significantly, Mr. Greenspan is also of the view that “the best strategy is to ensure that our markets at all times have enough flexibility and resilience, unencumbered by protectionism or rigid regulation, to absorb and mitigate the shock of crises.” Nevertheless, he also believes that there is a greater need for enforcement of regulations that stops activities that hinder voluntary exchange markets. For him, there is a greater need for law-enforcement professionals. Lawyers are part of the pillars of law-enforcement. But pillars cannot endure in the t e r r a f i r m a of law without solid basic foundation. This includes knowledge of the fundamental statutory rules and legal principles that govern financial intermediation conduits like insurers. The present work is the author’s modest contribution to such indispensable underpinnings. As the title of this book suggests, what is woven are the essentials of insurance laws, rules, and jurisprudence. The materials prepare law students and legal practitioners for a more intensive training on the intricacies of the insurance industry. The book departs from the mode of presentation that can be found in available law books on insurance because of its topical presentation. The statutory provisions and administrative rules are integrated in the discussion. The arrangement of the topics reflects and puts into writing how the author collates, arranges, and correlates the voluminous materials when teaching the subject in law school. Sample bar examination questions and their suggested answers are included. To further illustrate the operation of legal norms, cases decided by the Supreme Court and other tribunals are presented in a “problem-answer” form.

The previous edition of this work was based on the Insurance Code of 1978. With the enactment of Republic Act No. 10607, the author was constrained to update the work to make it consistent with the new law. In addition, the author also included two chapters, particularly Chapter 17 on the Insurance Commissioner, and Chapter 18 on Pre-Need Plans. The author included a chapter on Pre-Need Plans because the regulation thereof was already transferred to the Insurance Commissioner under Republic Act No. 9829. As usual, this work would not have been finished without the inspiration of the author’s wife, Bernadette, and their children Leona Isabelle, Lean Carlo, and Lauren Margaret. The author likewise owes gratitude to his family and friends who are also always there to lend support. He also owes special thanks to the law professors who generously support the author by using his other works. Finally, the author is grateful to his students during his almost twenty years of teaching law not only for their encouraging comments, but also for giving him the privilege of being part of their legal training. Truly, the author’s students are the reasons why his works came to be.

TIMOTEO B. AQUINO February 2014 Teresa, Rizal

CONTENTS

CHAPTER 1. GENERAL CONCEPTS Definition........................................................................ 1.1. Test.......................................................................... 1.2. Suretyship.......................................................... 1.3. Pre-Need Plans........................................................ 1.4. Variable Contracts.................................................. 2. Doing an Insurance Business......................................... 1.

2.1. 2.2. 3.

4.

Mutual Insurance Companies..................................... HMO: Principal Object and Purpose Test

Applicable Laws............................................................. 3.1. New Civil Code.......................................................... 3.2. Corporation Code....................................................... Elements................................................................................... 4.1. Requisites of a Valid Contract.................................... 4.2. Distribution of Losses................................................. 4.3. Risk............................................................................ 4.4. Assumption of Risk....................................................

1 3 5 5

6 10 11 11 13 14 15 15 16 16 17

20 20 21 21

5.

Nature and Purpose.................................•................................ 5.1. How People Deal with Risks........................................ 5.2. How Insurance Deals with Risk..................................

6.

Characteristics........................................................................... 6.1. Not a Wagering Contract............................................

7.

Social Value..............................................................................

23

8.

Perfection................................................................................ 8.1. Delivery of the Policy.................................................

26

9. Kinds of Insurance.................................................................... 10. Principle of Indemnity ................................................................

vii

22

27 33 36 39

CHAPTER 2. THE PARTIES 1.

Insured................................................................................................. 40 1.1. Assured and Owner............................................................. 41 1.2. Capacity.............................................................................. 41 1.3. Effect of Death of Owner ........................................................... 43 1.4. Public Enemy............................................................................... 43 1.5. Rights of Policyholders................................................................ 45

2.

Insurer.......................................................................................................... 46 2.1. Definition..................................................................................... 46 2.2. Certificate of Authority................................................................ 50 2.3. Grounds for Disapproval of Application..................................... 51 2.4. Prohibited Acts............................................................................ 51 Beneficiary................................................................................................... 53 3.1. Generally Revocable.................................................................... 61 3.2. Forfeiture of Rights of Beneficiary.............................................. 62 3.3. Disqualification of Beneficiary ................................................... 63 Trustee or Agent.......................................................................................... 66 Partner.......................................................................................................... 66

3.

4. 5. 6.

Assignee of Life Insurance.......................................................................... 67 6.1. Assignee of Property Insurance................................................... 68

7.

Insurance Agent and Insurance Broker........................................................ 68 7.1. Insurance Agent........................................................................... 69 7.2. Insurance Broker.......................................................................... 75 7.3. Effect of Receipt of Premium...................................................... 75 7.4. No Jurisdiction Over Insurer-Agent Relationship................................................................................. 75

1.

Concept......................................................................................................... 77

2.

Insurable Interest in Life Insurance............................................................. 79 2.1. Insurable Interest Under the Code............................................... 79 2.2. Classes of Insurable Interest in Life Insurance ..................................................................................... 80 2.3. Consent of the Insured................................................................. 85 Insurable Interest in Property Insurance...................................................... 89 3.1. Test.............................................................................................. 90 3.2. Kinds of Insurable Interest........................................................... 90 3.3. Distinctions Between Insurable Interest in Property Insurance and Life Insurance........................................ 93 3.4. Insurable Interest of Bailee.......................................................... 97

CHAPTER 3. INSURABLE INTEREST

3.

viii

3.5.

Insurable Interest of the Mortgagor and Mortgagee.......................................................................... 98 3.6. Insurable Interest of Mortgagee.............................................. 101 3.7. Subrogation ............................................................................ 102 3.8. Financial Lease ...................................................................... 102 4. Time When Insurable Interest Must Exist........................................ 105 4.1. Property Insurance.................................................................. 105 4.2. Life Insurance......................................................................... 108 5. Insurable Interest of Beneficiary in Property Insurance ........................................................................................ 109 5.1. Insurable Interest of Beneficiary in Life Insurance................................................................................. 110 6................................................................................................................ Assigne e in Life Insurance.................................................................................... 110 6.1. Assignee in Property Insurance................................................. Ill CHAPTER 4. PREMIUM 1.

2.

3. 4. 5.

Premium Required for Policy to be Binding.............................. 112 1.1. Effect of Non-Payment........................................................... 113 1.2. When Binding Even if Premium is Unpaid...................... 115 How to Prevent Lapse of Life Insurance Policy..................................... 123 2.1. Automatic Policy Loan and Cash Surrender Value...................................................................... 123 2.2. Dividends................................................................................ 126 2.3. Reinstatement Clause.............................................................. 126 Return of Premium................................................................................. 127 3.1. Grounds................................................................................... 128 Advance Payment ........................................................................... 132 Rebate of Premium.......................................................................... 132 CHAPTER 5. THE POLICY

1. 2.

Consensual............................................................................................ 134 Statute of Frauds Inapplicable................................................................ 135

3.

Policy...................................................................................................... 135 3.1. Other Documents ................................................................. 137 3.2. Policy Form............................................................................ 137 Basic Provisions ..................................................................................... 138 4.1. Parties .................................................................................... 140 4.2. Designation of Beneficiary .....................................-...... 141 4.3. Amount Insured ................................................................. 142

4.

ix

5. 6. 7.

8. 9. 10.

4.4. Premium ................................................................................... 4.5. Identification of the Insured....................................................... 4.6. Identification of Property Insured ............................................. 4.7. Risk Insured Against ................................................................ Riders...................................................................................................... Contract of Adhesion............................................................................... 6.1. Reading of Policy...................................................................... Interpretation and Proof........................................................................... 7.1. Interpretation in Case of Doubt.................................................. 7.2. Forfeiture Clauses...................................................................... 7.3. Other Rules of Interpretation..................................................... 7.4. Indivisibility.............................................................................. 7.5. Proof.......................................................................................... 7.6. Signatory................................................................................... Cover Notes............................................................................................ Kinds of Property Insurance Policy.......................................................... Cancellation............................................................................................. 10.1.

143 144 145 159 152 154 154 155 156 159 159 162 163 164 165 166 169

Rescission................................................................................ 172

11.

Renewal of Policy.................................................................................... 173

12.

Reformation of the Policy........................................................................ 174 12.1. Mistake.................................................................................... 175 CHAPTER 6. ASCERTAINING AND CONTROLLING RISKS 1 2

1.

Concealment............................................................................................ 1.1. Materiality................................................................................. 1.2. Examples of Material Facts....................................................... 1.3. Causation Not Necessary .......................................................... 1.4. Requisites.................................................................................. 1.5. Knowledge of Agent of Insured................................................ 1.6. When There Is No Concealment................................................ 1.7. Judgment or Opinion................................................................. 1.8. Knowledge of the Insurer.......................................................... 1.9. Intentional and Unintentional Concealment............................................................................. 1.10. Knowledge of the Fact Concealed............................................. 1.11. Waiver of Insurer...................................................................... 1.12. Remedy.......................................................................................

2.

Representation.................................................................................... 2.1. Time of Representation............................................................... x

3.

4.

5.

6. 7.

2.2. Distinctions and Similarities............................................ 207 2.3. Kinds................................................................................ 208 2.4. Interpretation.................................................................... 208 2.5. Test of Materiality............................................................ 209 2.6. Remedy............................................................................ 212 Warranties......................................................................................... 214 3.1. Kinds................................................................................ 214 3.2. Rules on Promissory Warranties...................................... 215 3.3. Formalities of Express Warranty..................................... 215 3.4. Examples of Express Warranty........................................ 216 3.5. Breach of Warranty by the Insured.................................. 217 3.6. Remedy............................................................................ 218 3.7. Breach Without Fraud...................................................... 219 3.8. Distinctions...................................................................... 219 Other Devices................................................................................... 219 4.1. Conditions........................................................................ 219 4.2. Exception, Exclusion, or Exemption................................ 221 Incontestable Clause......................................................................... 222 5.1. Mandatory Incontestable Clauses.................................... 223 5.2. Rationale.......................................................................... 224 5.3. Allegation of Connivance with Agent ............................. 226 5.4. Effect of Death Within Two Years.................................. 226 5.5. When Inapplicable .......................................................... 228 War Limitation Rider or War Clause.................................... 231 Defenses of Insured Against Revocation.......................................... 231 7.1. Guaranteed Insurability Clause........................................ 232 7.2. Timeliness of Rescission.................................................. 233 7.3. Waiver.............................................................................. 234 7.4. Estoppel............................................................................ 236 CHAPTER 7. LOSS AND NOTICE OF LOSS

1.

Loss .................................................................................................. 23^ 1.1. Proximate Cause Defined................................................. 238 1.2. Rules under the Insurance Code....................................... 239 1.3. Concurrent Causes........................................................... 241 1.4. Negligent and Intentional Acts or Omissions..................................................................... 243

2. 3. 4. 5.

Notice of Loss .................................................................................. Proof of Loss..................................................................................... Defects in Notice and Proof.............................................................. Effect of Delay..................................................................................

xi

244

CHAPTER 8. CLAIMS SETTLEMENT AND SUBROGATION Claims Settlement............................................................................ 1.1. Unfair Claims Settlement Practices.................................. 1.2. Life Insurance Policy........................................................ 1.3. Non-Life Insurance Policy................................................ 1.4. Unreasonable Denial or Withholding of Claim..

252 253 254 254 255

Fraudulent Claim ............................................................................ Prescriptive Period........................................................................... 3.1. Stipulation......................................................................... 3.2. Accrual.............................................*............................... 3.3. Rule If There Is No Stipulation.........................................

258 261 261 262 263

Subrogation...................................................................................... 4.1. Requisites of Subrogation................................................. 4.2. When There Is No Subrogation........................................ 4.3. Limitations........................................................................ 4.4. Limitations as to the Amount Recoverable....................... 4.5. Effect of Prescription........................................................ 4.6. Discretion of Insurer to Exercise Right............................ 4.7. Presentation of the Policy.................................................

264 266 266 267 267 269 271 271

CHAPTER 9. DOUBLE INSURANCE Definition......................................................................................... Requisites ....................................................................................... 2.1. Double Insurance in Life Insurance.................................. No General Prohibition Against Double Insurance......................... Other Insurance Clause.................................................................... 4.1. Alternative Forms............................................................. 4.2. Rationale........................................................................... 4.3. Validity............................................................................. 4.4. Additional Insurance......................................................... Over-Insurance by Double Insurance.............................................. 5.1. Rules in Case of Over-Insurance By Double Insurance.............................................................. Collateral Source Rule.....................................................................

276 276 277 278 278 278 279 279 281 283 283 285

CHAPTER 10. REINSURANCE 287 288 288

Definition..................... 1.1. Nature............ 1.2. Distinctions xu

2. 3. 4. 5. 6. 7. 8.

Parties......................................................................... 288 Distinguished from Double-Insurance and Co-Insurance............................................................................................ 291 Functions................................................................................................... 292 Kinds......................................................................................................... 292 5.1. Facultative Reinsurance........................................................... 292 5.2. Treaty....................................................................................... 293 Insurable Interest....................................................................................... 293 Premium.................................................................................................... 294

9.

Obligation.................................................................................................. 294 8.1. Measure of Liability................................................................. 294 8.2. Good Faith.............................................................................. 294 Cancellation............................................................................................... 296

1.

Definition................................................................................................... 298

2.

Kinds of Marine Insurance....................................................................... 299 2.1. Ocean Marine Insurance........................................................... 300 2.2. Inland Marine Insurance........................................................... 304 2.3. Aviation Insurance................................................................... 305 Period Covered.......................................................................................... 306

CHAPTER 11. MARINE INSURANCE

3. 4.

5.

6. 7. 8.

9.

Risks Insured Against............................................................................... 306 4.1. All Risk Policy......................................................................... 306 4.2. Named Perils Policy................................................................. 308 4.3. Inland Marine Insurance Perils............................:............. 315 Insurable Interest....................................................................................... 316 5.1. Insurable Interest Over the Ship.............................................. 317 5.2. Insurance Over Cargo............................................................... 318 5.3. Insurance Over Freightage and Income................................... 320 Concealment............................................................................................. 322 Representation......................................................................................... 324 Implied Warranties................................................................................... 326 8.1. Seaworthiness....................................................................... 326 8.2. Documents of Nationality or Neutrality............................. 331 8.3. Legality..................................................................................... 331 The Voyage and Deviation........................................................................ 331 9.1. Route...................................................................................... 331 9.2. Deviation.................................................................................. 332

xiii

10.

Loss ........................................................................................................... 334 10.1. Kinds of Loss.......................................................................... 334

11.

Abandonment............................................................................................. 342 11.1. Requisites.................................................................................. 343 11.2. Effects of Abandonment........................................................... 345 11.3. Acceptance of Abandonment.................................................... 346 11.4. Revocation................................................................................ 346 11.5. Effect of Failure to Abandon.................................................... 347

12.

Measure of Indemnity................................................................................ 348 12.1. Co-Insurance Clause................................................................. 349 12.2. Freightage or Cargo.................................................................. 350 12.3. Profits........................................................................................ 350 12.4. Partial Loss of Cargo................................................................ 351 12.5. Sue and Labor Clause............................................................... 351 12.6. Application of Old Materials.................................................... 351

13.

Averages.................................................................................................... 352 13.1. FPA Clause............................................................................... 352 13.2. Simple or Particular Average.................................................... 353 13.3. General Average....................................................................... 354 13.4. Who Will Pay General Average............................................... 356 13.5. Subrogation............................................................................... 359

1. 2. 3. 4.

Concept........................................................................................................ 360 Property Insured........................................................................................... 362 Alteration..................................................................................................... 362 Subsequent Acts of the Insured................................................................... 364

5.

Measure of Indemnity.................................................................................. 364 5.1. Valued Policy............................................................................. 364 5.2. Open Policy................................................................................ 365 5.3. Indirect Losses........................................................................... 365

CHAPTER 12. FIRE INSURANCE

6. 7. 8.

Prohibitions.................................................................................................. 366 Co-Insurance................................................................................................ 367 Sound Value Distinguished from Replacement Cost Value........................................................................... 367 9. Exceptions.................................................................................................... 368 10. Warranty.................................................................................................... 369 CHAPTER 13. LIFE INSURANCE 1. 2.

General Concepts......................................................................................... 370 Kinds............................................................................................................ 373

xiv

3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Annuity.............................................................................................. 377 Life Annuity Under the Civil Code .................................................. 378 Minor as Insured................................................................................ 379 Suicide Clause................................................................................... 381 Accidental Death Benefit Clause............................................................... 382 Transfer of Policy....................................................................................... 385 Exempt from Execution.............................................................................. 385 Insolvency................................................................................................ 386 Contents of Policy.................................................................................... 387 Life Insurance Equation........................................................................... 401 CHAPTER 14. CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

1.

Definition.................................................................................................... 402 1.1. Distinguished from Accident Insurance................................... 403

2. 3. 4.

Governing Rules......................................................................................... 403 Theft and Robbery Insurance..................................................................... 403 Personal Accident and Health Insurance.................................................... 406 4.1. Accident.................................................................................. 406 4.2. Willful Exposure to Needless Perils....................................... 407 4.3. Voluntary Acts........................................................................ 407

5. 6.

Glass Insurance.......................................................................................... 411 Employer’s Liability Insurance.................................................................. 411

7.

Motor Vehicle Liability Insurance............................................................. 411 7.1. Direct Liability........................................................................ 411 7.2. Authorized Driver Clause..................................................... 414 7.3. Theft Clause ........................................................................... 416 7.4. Authorized Driver Clause and Theft Clause Distinguished..................................................... 417

8.

Compulsory Motor Vehicle Liability Insurance (CMVLI)................................................................................ 418 8.1. Definitions.............................................................................. 420 8.2. Alternative Compliance........................................................ 421 8.3. Coverage................................................................................. 422 8.4. No Fault Indemnity Clause..................................................... 425 8.5. Cancellation of CMVLI.......................................................... 427 8.6. Change of Ownership............................................................. 428 8.7. Claims Settlement................................................................... 428 8.8. Penalty Clauses....................................................................... 430

XV

CHAPTER 15. SURETYSHIP 1.

General Concepts................................................................ 1.1. Distinguished from Insurance Contracts ... 1.2. Three “Cs”............................................................. 1.3. Distinguished from Guaranty................................ 1.4. Civil Code Applicable........................................... 1.5. Nature of Liability ................................................ 1.6. Extent of Liability..................................................

2. 3. 4. 5. 6. 7. 8.

The Parties........................................................................... Premium.............................................................................. Interpretation....................................................................... Kinds of Bonds................................................................... Continuing Surety............................................................... Reimbursement................................................................... Extinguishment...................................................................

436 437 437 438 439 439 441 441 442 442 444 445 446 446

CHAPTER 16. REGULATION OF INSURANCE BUSINESS 1. 2. 3. 4.

5. 6.

Sources of Regulation......................................................... 1.1. Authority of LGU Restricted................................. Reasons and Bases of Regulation....................................... Areas of Regulation............................................................ Formation and Licensing of Insurers.................................. 4.1. Applicable Law..................................................... 4.2. Basic Requirements............................................... 4.3. Certificate of Authority......................................... 4.4. When Issuance of Certificate Can Be Refused............................................................. 4.5. Suspension and Cancellation of Authority. 4.6. Other Aspects of Corporate Organization., Directors and Officers......................................................... 5.1. Corporate Governance........................................... Financial Regulations.......................................................... 6.1. Paid-up Capital and Net Worth............................. 6.2. Margin of Solvency............................................... 6.3. Admitted Assets.................................................... 6.4. Dividend Policy..................................................... 6.5. Investments............................................................ 6.6. Reserves................................................................. 6.7. Examinations and Reports..................................... 6.8. Limit of Single Risk..............................................

xvi

449 450 450 450 451 451 451 451 452 452 453 454 454 455 455 459 459 459 460 460 461 461

7.

Security Deposit........................................................................................ 462

8.

Regulation of Persons Involved in the Business............................... 465 8.1. Reinsurance Business............................................................. 465 8.2. Foreign Companies................................................................. 466 8.3. Holding Companies............................................................... 466 8.4. Self-Regulatory Organizations............................................... 467 8.5. Other Persons Subject to Regulation...................................... 468 9. Corporations in Distress............................................................................ 470 9.1. Conservatorship...................................................................... 470 9.2. Receivership............................................................................ 472 9.3. Capitalization While Under Conservatorship.... 475 10. Rate Regulation ...................................................................................... 475 10.1. Purposes of Rate Regulation.................................................. 476 10.2. Power of the Commissioner Over Rates................................ 477 11. Policy Forms........................................................................................... 477 12.

Sales Practices and Consumer Protection............................................... 477 12.1. Prohibitions............................................................................ 478

13.

Anti-Money Laundering......................................................................... 480 13.1. Layering................................................................................. 480

1. 2. 3. 4. 5. 6. 7. 8.

Insurance Commissioner........................................................................... 481 Term of the Commissioner........................................................................ 481 Authority of the Commissioner................................................................. 482 Security for the Commissioner and Other Officers.......................... 484 Administrative Sanctions.......................................................................... 485 Quasi-Judicial Functions........................................................................... 486 Procedure................................................................................................... 488 Pre-Need.................................................................................................... 489

1. 2.

Governing Law and State Policy............................................................... 491 Pre-Need Plan Defined.............................................................................. 492

3.

Parties........................................................................................................ 492 3.1. Other Persons Regulated by the Commissioner ........................................................................ 493 3.2. Suspension or Revocation of Authority ................................ 494 Kinds of Pre-Need Plans........................................................................... 494

CHAPTER 17. THE INSURANCE COMMISSIONER

CHAPTER 18. PRE-NEED PLANS

4.

xvii

5.

Pre-Need Contract .................................................................................... 495 5.1. Interpretation ............................................................................ 495

6. 7.

Registration and Disclosure of Information.............................................. 499 Consideration ........................................................................................... 502

8.

Termination of the Plan............................................................................. 503 8.1. Termination by Planholder ...................................................... 503 8.2. Termination by Pre-Need Company.................................. 503 Claims Settlement.............................................................................. 503 Unfair Claims Settlement.................................................................. 504 Trust Fund............................................................................................... 505 Regulation of Pre-Need Companies........................................................ 507 Pre-Need Companies in Distress............................................................. 508

9. 10. 11. 12. 13.

APPENDICES Appendix “A” — The Insurance Code (RA 10607).......................................... 513 Appendix “B” — Pre-Need Code (RA 9829).................................................... 638 Appendix “C” — The Insurance Act (Act 2427).............................................. 666 Appendix “D” — Insurance Memorandum Circular No. 4-2006........................................................ 699

xviii

CHAPTER 1 GENERAL CONCEPTS Modern insurance contracts originated from the practice of merchants in the 14th century. Nevertheless, it has been acknowledged that different strains of security arrangements have already been used for centuries and they are akin to insurance contract in embryonic form. Justice Laurel commented on the growth of insurance business in this wise: ‘The phenomenal growth of insurance from almost nothing a hundred years ago to its present gigantic proportion is not of the outstanding marvels of present-day business life. The demand for economic security, the growing need for social stability, and the clamor for protection against the hazards of cruel-crippling calamities and sudden economic shocks, have made insurance one of the felt necessities of modern life. Insurance is no longer a rich man’s monopoly. Upon it are heaped the assured hopes of many families of modest means. It is woven, as it were, into the very warp and woof of national economy. It touches the holiest and most sacred ties in the life of man—love of parents, love of wives and love of children.”1 §1. DEFINITION. The statutory definition of the “ c o n t r a c t o f i n s u r a n c e ” appears in the first paragraph of Section 2 of the Insurance Code that states:2

SEC. 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

The Insular Life Assurance Co., Ltd. v. Serafin D. Feliciano, et al., G.R. No. 47593, September 13, 1941, 73 Phil. 201. 2 Section 2, Insurance Code, Republic Act (RA) No. 10607 dated August 15, 2013, hereinafter referred to as I.C.

1

2

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

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 insurer, any insurance contract;

make,

as

(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. a. Insurance may also be defined as a contract whereby one party called the insurer undertakes for a consideration to pay another party called the insured, or his beneficiary, upon the happening of the peril insured against, whereby the party insured or his beneficiary suffers loss or damage or is exposed to liability.

CHAPTER 1 GENERAL CONCEPTS

3

§1.01. TEST. Whether or not a contract is one of insurance is to be determined by its purpose, effect, contents, and import and not necessarily by the terminology used.3 The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency or circumstances under which the performance becomes requisite.4 The test is whenever the assumption of risk and the indemnification of loss is the principal object and purpose of the contract.5 6 7 8 a. For instance, a contract may be considered an insurance contract even if it is referred to as a health plan. In P h i l a m c a r e H e a l t h S y s t e m s v . C o u r t o f A p p e a l s , * the Supreme Court ruled that the contract involved was an insurance contract rather than a preneed plan. In the said case, the insurable interest of respondent’s husband in obtaining the health care agreement was his own health. Once the member incurs hospital, medical, or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. This ruling was reiterated in F o r t u n e M e d i c a r e , I n c . v . A m o r i n 1 where the Supreme Court emphasized “that for purposes of determining the liability of a health care provider to its members, jurisprudence holds that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.” The arrangement is “the same when the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.” b. The Supreme Court reached a different conclusion in P h i l i p p i n e H e a l t h C a r e P r o v i d e r , I n c . v . C I R 8 where it concluded that the elements of insurance contract are absent. The Court ruled that there was no indemnity precisely because the member merely

3

National Auto Service Corporation v. State, Texas Civ. App., 55 S.W. (2d) 209.

4 White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al., G.R. No. 154514, July 28, 2005. Philippine Health Care Providers v. CIR, G.R. No. 167330, September 18, 2009. 6 G.R. No. 125678, March 18, 2002. See also Blue Cross Health Care, Inc. v. Noemi and Danilo Olivares, G.R. No. 169737, February 12, 2008. 7 G.R. No. 195872, March 12, 2014 citing Philamcare Health Systems, Inc. v. CA, 429 Phil. 82, 90 (2002); see also Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, supra. 8 Supra (The Supreme Court reversed its previous ruling in 2008 as reported in 554 SCRA 511 [2008]).

4

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements. Indemnity of the member was not the focal point of the agreement but the extension of medical services to the member at an affordable cost; it did not partake of the nature of a contract of insurance. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, an entity undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. c. It should be noted in this connection that a Health Plan is not one of the Pre-Need Plans expressly recognized under the Pre- Need Code and its Implementing Rules and Regulations.9 Under the Implementing Rules and Regulations, a pre-need company may be authorized to issue plans if it is any or all of the following types of plans: (1) educational plan, (2) pension plan, and (3) life or memorial plan. d. Even a provision in a Collective Bargaining Agreement can be considered an insurance contract under certain circumstances. In M i t s u b i s h i M o t o r s P h i l i p p i n e s S a l a r i e d E m p l o y e e s U n i o n ( M M P S E U ) v . M i t s u b i s h i M o t o r s P h i l i p p i n e s C o r p .,10 the Collective Bargaining Agreement entered into between the petitioner union and respondent corporation, MMPC, contained a provision that states that the company “shall obtain group hospitalization insurance coverage or assume under a self-insurance basis hospitalization for the dependents of regular employees up to a maximum amount of forty thousand pesos (P40,000.00) per confinement subject to” certain limitations and conditions specified therein. The Court ruled that “MMPC is a no-fault insurer. Hence, it cannot be obliged to pay the hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance providers of said dependents.” Moreover, since the subject CBA provision is an insurance contract, the rights and obligations of the parties must be determined in accordance with the general principles of insurance law. Being in the nature of a non-life insurance contract and essen

9

Section 4(b), R.A. No. 9829. Section 10, IRR of the Pre-Need Code. 10 G.R. No. 175773, June 17, 2013.

CHAPTER 1 GENERAL CONCEPTS

5

tially a contract of indemnity, the CBA provision obligates MMPC to indemnify the covered employees’ medical expenses incurred by their dependents but only up to the extent of the expenses actually incurred. This is consistent with the principle of indemnity which proscribes the insured from recovering greater than the loss.” e. In P a n d i m a n P h i l i p p i n e s , I n c . v . M a r i n e M a n n i n g M a n a g e m e n t C o r p . , n the Supreme Court considered the Protection and Indemnity Agreement issued by a P&I Club as an insurance contract. In the Protection and Indemnity Agreement, the P&I Club is the insurer, the shipowner is the insured, and the heir of a crew on board the insured vessel is a beneficiary. f. A promise of manufacturers, contractors or distributors to replace a product or redo a work if the product or work is defective is not considered an insurance but a warranty.* 12 However, the promise by a third person — not the manufacturer, contractor or distributor - to compensate the expenses that will be incurred by the owner of the product or building to replace, repair or rework the property may also be in the form of insurance.13 g. Contracts of law firm with clients whereby in consideration of periodical payments, the law firm promises to represent such clients in all suits for or against them are not insurance contracts.14 §1.02. SURETYSHIP. For regulatory purposes, a contract of suretyship shall be deemed to be an insurance contract within the meaning of the Insurance Code when made by a surety who or which, as such, is doing an insurance business.15 a. The contract of suretyship under the New Civil Code is simply defined as an agreement whereby one binds himself solidarily with the principal debtor.16 §1.03. PRE-NEED PLANS. Insurance contracts should likewise be distinguished from pre-need plans that are now under the regulatory powers of the Insurance Commission (I.C.) under

n G.R. No. 143313, June 21, 2005. Williams, Jr. and Heins, Risk Management and Insurance, 1989 Ed., p. 322. ™Ibid. 14 Philippine Health Care Providers, Inc. v. CIR, supra. 15 Section 2,1.C.; See §2 of this Chapter. 16 Section 2047, New Civil Code.

12

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

6

the Pre-Need Code ( R . A . N o . 9 8 2 9 ) . Pre-need plans are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds as may be determined by I.C. 17 The basic laws and rules on Pre-Need Plans are discussed in Chapter 18 of this work.18 §1.04. VARIABLE CONTRACTS. The Insurance Code likewise governs “variable contracts.” “ V a r i a b l e c o n t r a c t ”means 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.19 PROBLEMS: 1. In return for the 20 years of faithful service of X as a househelper to Y, the latter promised to pay P100,000.00 to X’s heirs if he (X) dies in an accident by fire. X agreed. Is this an insurance contract? ( 2 0 1 1 B a r ) A:

2.

No, the agreement is not insurance but a conditional donation. There is no insurance because there is no contract to indemnify the heirs or X for any loss, damage or Lability. Y actually promised to transfer P100,000.00 to the heirs of X gratuitously on the condition that X dies in an accident by fire. The promise to transfer is subject to a suspensive condition.

ET, deceased husband of respondent JT, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or

17

Section 4(b), R.A. No. 9829.

18

See Chapter 18, of this book, p. Section 238, I.C. as amended.

19

CHAPTER 1 GENERAL CONCEPTS

7

emergency, listed therein. He was also entitled to avail of “o u t p a t i e n t b e n e f i t s ” such as annual physical examinations, preventive health care and other outpatient services. Was the agreement an insurance contract? A:

Yes. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. In this, the insurable interest of respondent’s husband in obtaining the health care agreement was on his own health. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. ( P h i l a m c a r e H e a l t h S y s t e m s , I n c . v . C o u r t o f A p p e a l s a n d J u l i t a T r i n o s , G . R . N o . 1 2 5 6 7 8 , M a r c h 1 8 , 2 0 0 2 . But see c o n t r a r y v i e w i n P h i l . H e a l t h C a r e P r o v i d e r s , I n c . v . C I R , S e p t e m b e r 1 8 , 2 0 0 9 b e l o w )

Under the agreement with the PHCP, Inc., the member pays the PHCP a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, PHCP does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e . g . , laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury. Can the contract between the member and the PHCP be considered an insurance contract? A:

No. The contract is not an insurance contract. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by PHCP. In other words, there is nothing in the agreement that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms “indemnify* or “indemnity* presupposes that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be

8

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

paid or already paid in advance at a pre-agreed price under the agreements. Indemnity of the member was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. While PHCP undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured. However, assuming that the PHCP’s commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioner’s objective is to provide medical services at reduced cost, not to distribute risk like an insurer. ( P h i l i p p i n e H e a l t h C a r e P r o v i d e r s , I n c . v . C I R , G . R . N o . 1 6 7 3 3 0 , S e p t e m b e r 1 8 , 4 2 0 0 9 )

4. Respondent Rosita Singhid’s deceased husband Benito Singhid (Benito) was hired by Fullwin Maritime Limited (Fullwin), through its local agent, respondent Marine Manning and Management Corporation (MMMC), as chief cook on board the vessel MV Sun Richie Five for a term of 12 months. MV Shn Richie Five Bulkers S.A., owner of the vessel Sun Richie Five, was a member of a P&I Club, which is “an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties. The vessel and its crew were covered by a “Class 1-Protection and Indemnity”agreement beginning noon of February 20, 1997 up to February 20, 1998 as embodied in the Certificate of Entry issued by OMMIAL. OMMIAL transacted business in the Philippines through its local correspondent, herein petitioner Pandiman Philippines, Inc. (PPI). While the vessel was on its way to Shanghai, China from Ho Chih Minh City, Vietnam, Benito suffered a heart attack, and subsequently died on June 24, 1997. His remains were flown back to the Philippines. After Benito’s remains were interred, his widow Rosita filed a claim for death benefits with MMMC, which, however, referred her to herein petitioner PPI. Upon Rosita’s submission of all the required documents, PPI approved the claim and recommended payment thereof in the amount of US$79,000. But, despite said recommendation, Rosita’s death claims remained unpaid. PPI is being made liable as an insurance agent. However, PPI claims that it is not an insurance agent but a mere local correspondent

CHAPTER 1 GENERAL CONCEPTS

9

of the P&I Club. Thus, petitioner maintains that even if OMMIAL (the P&I Club), as insurer of S u n R i c h i e F i v e , is held principally liable to Rosita for her husband’s death benefits, petitioner cannot be held solidarity liable together with said insurer. Should petitioner PPI be held liable as insurance agent for Rosita’s claim for death benefits under the “ C l a s s 1 P r o t e c t i o n a n d I n d e m n i t y ” a g r e e m e n t ? A: No, PPI is not liable under the "C l a s s 1 P r o t e c t i o n a n d I n d e m n i t y ” agreement. The protection and indemnity agreement is actually an insurance contract, the provisions of the Insurance Code (P.D. No. 1460, as amended) is the governing law. In the subject insurance contract, the P&I Club (OMMIAL) is the insurer, the shipowner (Sun Richie Five Bulkers S.A.) is the insured, and herein respondent Rosita Singhid as widow and heir of a crew on board the insured vessel like Benito, is a beneficiary. Initially, the Court observed that there is nothing therein to show that an insurance contract in this case was in fact negotiated between the insured S u n R i c h i e F i v e and the insurer OMMIAL, through petitioner as insurance agent which will make petitioner an insurance agent under Section 300 of the Insurance Code. The fact that petitioner referred to OMMIAL as its “principal” instead of its “client” is of no moment. Such “reference,” however, will not and cannot vary the definition of what an insurance agent actually is under the aforecited law, nor can it automatically turn petitioner into one, thereby becoming correspondingly liable to all the duties, requirements, liabilities and penalties to which an insurance agent is subject to. Hence, petitioner PPI is not an insurance agent under the obtaining circumstances. In any event, payment for claims arising from the peril insured against, to which the insurer is liable, is definitely not one of the liabilities of an insurance agent. Thus, there is no legal basis whatsoever for holding petitioner solidarily liable with insurer OMMIAL for Rosita’s claim for death benefits on account of her husband’s demise while under the employ of MMMC’s principal, Fullwin. Besides, even under the principle of “relativity of contracts,” petitioner PPI cannot be held liable for the same death benefits claims. The insurance contract between the insurer and the insured, under Article 1311 of the Civil Code, is binding only upon the parties (and their assigns and heirs) who execute the same. With the reality, as borne by the records, that petitioner PPI is not a party to the insurance contract in question, no liability or obligation arising therefrom, may be imposed upon it. ( P a d i m a n P h i l i p p i n e s , I n c . v . M a r i n e M a n n i n g M a n a g e m e n t C o r p . , G . R . N o . 1 4 3 3 1 3 , J u n e 2 1 , 2 0 0 5 )

10

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§2. DOING AN INSURANCE BUSINESS. The term "doing an insurance business” or “transacting an insurance business,” within the meaning of the Insurance 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; and (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.20 a. Profit Not Material. In the application of the provisions of the Insurance 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.21 b. In some cases, a single transaction is sufficient to consider that the party who extends the protection under the contract is engaged in insurance business because the law considers making “any” insurance contract as engaging in the business of insurance. c. Bancassurance. The recent amendments to the Insurance Code introduce the concept of the business of b a n c a s s u r a n c e . The term b a n c a s s u r a n c e means “the presentation and sale to bank customers by an insurance company of its insurance products within the premises of the head office of such bank duly licensed by the B a n g k o S e n t r a l n g P i l i p i n a s or any of its branches under such rules and regulations which the Commissioner and the B a n g k o S e n t r a l n g P i l i p i n a s may promulgate.”22 The Insurance Commissioner and the B a n g k o S e n t r a l n g P i l i p i n a s shall promulgate rules and regulations to effectively supervise the business of b a n c a s s u r a n c e . 2 3

“Section 2,1.C. n Ibid. ^Section 375,1.C., as amended by R.A. No. 10607. 23 IbidSee Circular Letter No. 2015-20 dated April 27, 2015 entitled “Rules Implementing Title 9, Chapter IV of the Amended Insurance Code on Bancassurance.”

CHAPTER 1 GENERAL CONCEPTS

11

§2.01. MUTUAL INSURANCE COMPANIES. Mutual Insurance Companies are entities that are “doing an insurance business” within the contemplation of the Insurance Code. A Mutual Insurance Company is a company owned by policyholders. It is designed to promote the welfare of its members and the money collected from among them is solely for their own protection. In a sense, the member is both the insurer and insured. It has no capital stock and the premiums or contributions of the members are the only sources of funds to meet losses and expenses.24 a. Mutual Insurance Companies may take the form of the P&I Club which is “an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties.”25 §2.02. HMO: PRINCIPAL OBJECT AND PURPOSE TEST. It was explained earlier that there are conflicting decisions on the issue that health plans entered into with a Health Maintenance Organization (HMO) partake the nature of insurance contracts. It should be recalled that HMO refers to a juridical entity legally organized to provide or arrange for the provision of pre-agreed or designated health care services to its enrolled members for a fixed pre-paid fee for a specified period of time. 26 27 a. I n Philippine Health Care Providers, Inc. v. Commissioner o f I n t e r n a l R e v e n u e , 2 1 the Supreme Court ruled that the HMO involved in the case was not engaged in insurance business. The Court cited the following: “Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization

24 Republic v. Sunlife Insurance Company of Canada, G.R. No. 158085, October 14, 2005; White Gold Marine Services, Inc. v. Pioneer Insurance Surety Corporation, et al, G.R. No. 154514, July 28, 2005. See 2006 Bar. 25 Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No. 143313, June 21, 2005; See also Steamship Mutual Underwriting Association (Bermuda) Ltd. v. Sulpicio Lines, Inc., G.R. No. 196072, September 20, 2017. 26 DOH Administrative Order No. 34 Series of 1994; E.O. No. 192 dated November 12, 2015. 27 G.R. No. 167330, September 18, 2009; see also Medicard Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 222743, April 5, 2017.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

12

or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance. Applying the principal object and purpose test, there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business.

XXX

That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.”

PROBLEMS: 1. In order to save on premium payments, a number of ship-owners organized a company (Company “A”) which will answer for all the damages or losses to each of their vessels. Each of the vessels shall be covered by individual policies issued by the Company “A” but the source of indemnity shall be exclusively from the annual contributions of the member shipowners. No profit is derived from the operation of the company. No other person or entity other than a member can obtain a policy from the Company “A.” No separate premiums are paid by the members in securing policies from Company. Is the Company “A” doing an insurance business? A:

Yes, Company “A” is engaged in insurance business in the Philippines under Section 2 [2] of the Insurance Code and the policies that it issues are insurance policies. Company “A” is in the nature of a Mutual Insurance Company. It is immaterial that no profit is derived from making insurance contracts and that no separate or direct consideration is received therefor. These facts do not preclude the existence of an insurance business. ( W h i t e G o l d M a r i n e S e r v i c e s , I n c . v . P i o n e e r I n s u r a n c e S u r e t y C o r p o r a t i o n , e t a l . , G . R . N o . 1 5 4 5 1 4 , J u l y 2 8 , 2 0 0 5 )

CHAPTER 1 GENERAL CONCEPTS

2.

13

Mr. A borrowed money from Mr. B. As a security for the loan, Mr. C, a doctor, agreed to act as a surety in favor of Mr. B. Is Mr. C “doing an insurance business”? A:

No. Mr. C is not doing an insurance business. It appears that the contract of suretyship entered into by Mr. C is just an isolated transaction. Mr. C did not enter into the contract as part of his vocation.

§3. APPLICABLE LAWS. The primary law that governs insurance contracts is the Insurance Code of the Philippines that was originally enacted as P.D. No. 602. 28 A series of amendments followed the enactment of the law until the most recent amendment, R.A. No. 10607 dated August 15, 2013.29 a. R.A. No. 10607 was published in a newspaper of general circulation on September 5,2013. This law re-enacted P.D. No. 602 as amended and introduced new concepts and provisions. For example, the law now includes a provision on microinsurance, bancassurance, trust operations of insurance companies, 30 and selfregulatory organizations.31 The new law strengthened the regulatory provisions of the Code. These include but are not limited to: (1) increase of the paid-up capital and net worth requirements for insurers;32 (2) new requirements for unimpaired capital or assets and reserved;33 (3) new provisions on financial reporting framework; 34 (4) adoption of corporate governance rules;35 (5) changes in the provisions on margin of solvency;36 (6) changes in the provisions on investments;37 (7) fixing the term of the Insurance Commissioner to six years;38 and (8) changes in the jurisdiction of the Insurance Commission over insurance claims. 39 Other changes merely expressly adopted

28 The previous edition of this work was based on P.D. No. 1460 as amended, otherwise known as Insurance Code of 1978.

^See Appendix 1 of this work. ^Section 429,1.C., as added by R.A. No. 10607. 31 Sections 430 to 436,1.C., as added by R.A. No. 10607. 32 Section 194 I.C., as amended by R.A. No. 10607; One Billion Pesos is now required for new domestic life or non-life stock corporation. 33 Section 197,1.C., as amended by, R.A. No. 10607. ^Chapter II-A, Section 189,1.C., as added by R.A. No. 10607. 35 Section 193,1.C., as added by R.A. No. 10607. 36 Section 200,1.C., as added by R.A. No. 10607. 87 Section 204,1.C., as added by R.A. No. 10607. 38 First paragraph, Section 437,1.C., as added by R.A. No. 10607. 39 Section 439,1.C., as modified by R.A. No. 10607.

14

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

prevailing jurisprudence. For instance, the law now expressly allows in Section 77 a credit extension for the payment of premium. , Another example is the deletion in Section 3 of the provision- regarding minors. b. Previously, the Code of Commerce, which took effect in 1888, governed insurance contracts. The Code of Commerce contained provisions on fire insurance, life insurance and transportation insurance. Justice Malcolm traced the history of insurance laws in Enriquez v. Sun Life Assurance Company of Canada:40 “Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil Code there formerly existed and presumably still exist, Chapters II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On and after July 1, 1915, there was, however, in force the Insurance Act No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of insurance is consequently now found in the Insurance Act and the Civil Code.” c. The Insurance Act was later repealed by P.D. No. 612 which took effect on December 18, 1974. As noted earlier, P.D. No. 602 was amended by subsequent laws including P.D. Nos. 1141, 1280, 1455, 1460, 1814, and 1981, and B.P. Big. 874. d. Interpretation. There are provisions of The Insurance Act (Act No. 2427) which were taken verbatim from the law of California. In turn, provisions of the Insurance Act are retained even under present laws. 41 Hence, “in accordance with well[-] settled canons of statutory construction, the court should follow in fundamental points, at least, the construction placed by California courts on a California law.” 42 §3.01. NEW CIVIL CODE. In addition, the New Civil Code provisions govern suppletorily. Article 2011 of the New Civil Code provides that the contract of insurance is governed by special laws.

40

G.R. No. L-15895, November 29, 1920. The new provisions that were not part of or adopted from the Insurance Act include the provisions on Surety, Compulsory Motor Vehicle Liability Insurance, and Mutual Benefit Associations (See Appendix of this work). 42 Ang Giok Chip v. Springfield Fire & Marine Insurance Company, G.R. No. L-33637, December 31, 1931. 41

CHAPTER 1 GENERAL CONCEPTS

15

Article 2011 of the New Civil Code further provides that matters not expressly provided for in the special laws on insurance shall be regulated by the New Civil Code. For instance, the rules on perfection of contracts under the Title IV of the New Civil Code on obligations and contracts can be applied in the absence of provisions of the Insurance Code.43 More specifically, the New Civil Code likewise provides for grounds for disqualification of beneficiaries under Article 2012 thereof. a. Right of Subrogation.44 The New Civil Code specifically deals with the right of the insurer to subrogation. Article 2207 of the New Civil Code provides that “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.” The right of subrogation is discussed in Chapter 8 of this book.

§3.02. CORPORATION CODE. By express provisions of Section 191 of the Insurance Code, the provisions of the Corporation Code of the Philippines 45 shall apply to all insurance corporations engaged in business in the Philippines insofar as they do not conflict with the provisions of the Insurance Code. Thus, if there is a specific provision of the Insurance Code, the same Code prevails over the Corporation Code. This also means that insurance corporations are still subject to the regulatory powers of the Securities and Exchange Commission as corporations. §4. ELEMENTS. Insurance contracts have the following features or elements: (1) (2)

The insured has an insurable interest; The insured is subject to a risk of loss by the happening of the designated peril;

(3)

The insurer assumes the risk;

43 See for instance Musngi v. West Coast Life Insurance, G.R. No. L-41794, August 30, 1935 (citing the elements of contracts and rules on void contracts under the old Civil Code). 44 See Chapter 8, Claims Settlement and Subrogation. 45 B.P. Big. 68.

16

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(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 insured pays a premium. 46

§4.01. REQUISITES OF A VALID CONTRACT. It should be noted however that insurance must have all the essential elements of a valid contract enumerated in the New Civil Code. Article 1318 of the New Civil Code provides that there is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; and (3) Cause of the obligation which is established. For the insurer, “(t)he consideration in insurance contracts is the premium, the rate of which is measured by the character of the risk assumed.”47 On the other hand, the object of insurance is the obligation to indemnify another against loss, damage, or liability arising from an unknown or contingent even.48 It is the not proceeds of the insurance or the amount to be paid by the insurer that is the object of the contract. Although the property insured or the life insured are the subject matters that are insured, the property and life of a person are not objects of the contract as the term is understood in civil law. §4.02. DISTRIBUTION OF LOSSES. It is required that the assumption of risk by the insurer is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk. This is an affirmation of the fact that insurance is a “risk-spreading?’ device. However, for purposes of applying the provisions of the Insurance Code, a single transaction may be deemed an insurance contract. In fact, as noted earlier, a provision in a Collective Bargaining Agreement may be considered an insurance contract in proper cases.49 a. Consequently, those who may enter into insurance contracts without authority from the Insurance Commission may be sanctioned precisely for offering and entering into insurance

46 Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No. 156167, May 16, 2005. 47 Sulpicio Guevara, The Insurance Law Annotated, 1939 Ed., p. 3, hereinafter cited as “Guevara, p. 3; Gaisano v. Development Insurance and Surety Corp., G.R- No. 190702, February 27, 2017.” ^Guevara, ibid. 49 Mitsubishi Motors Philippines Salaried Employees Union (MMPSEU) v. Mitsubishi Motors Philippines Corp., G.R. No. 175773, June 17, 2013.

CHAPTER 1 GENERAL CONCEPTS

17

contracts without a general scheme to distribute actual losses but only to victimize the unknowing public. Nevertheless, the “insurer” must also be compelled to comply with its obligation under the insurance contract. The “insurer” is still considered engaged in insurance business because it is doing or proposing to do business which in substance is equivalent to those expressly enumerated in Section 2 of the Insurance Code in a manner designed to evade the provisions of the Insurance Code.50 §4.03. RISK. It is an element of an insurance contract that the insured is subject to a risk of loss by the happening of the designated peril. The first paragraph of Section 3 of the Insurance Code provides:

Sec. 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. a. Under Section 3, the risk must be (1) a contingent or unknown event, whether past or future; and (2) it must damnify the insured or create liability against him. The risk “must be real and such that neither the insured nor the insurance company may hasten or prevent it.”51 b. Uncertainty is a feature of insurance because it requires the presence of an unknown and contingent event. The loss may or may not happen. In the case of life insurance, the uncertainty is with respect to the time death will occur. “Fortuity is to be determined at the time of the making of the contract or possibly, the inception of the risk.”52 Thus, “losses occasioned to the subject matter in the ordinary course of affairs, such as ordinary depreciation and wear- and-tear, do not therefore entitle the assured to recover unless an express stipulation enables him to do so, and simply insure against ‘all risks’ is not enough.” 53 These types of losses are not fortuitous. However, the uncertainty may refer to the time of occurrence as in the case of life insurance. In the latter case, the occurrence of the event - death - is a period rather than a condition.

“Section 2,1.C. 51 Vicente Francisco, Commentaries on the Insurance Act, 1933 Ed., p. 4, hereinafter cited as “Francisco, p. 4” citing 1 Joyce Ins., Sec. 6. 52 Chitty on Contracts, Vol. II, 29th Ed., 2004, p. 1162, hereinafter called “Chitty on Contracts.” “Chitty on Contracts, p. 1162.

18

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

c. Willful Acts. Similarly, as will be discussed in Chapter 7, Section 89 of the Insurance Code provides that “an insurer is not liable for a loss caused by the willful act or through the connivance of the insured.” The element of uncertainty or contingency is absent in these cases. However, it is possible for another assured, with his own insurable interest, to recover if he did not participate or contribute to the willful act. d. Requirements of Insurable Risk. From the viewpoint of the insurer, it is ideal that six requirements of insurable risk are present: (1) There must be a large number of homogenous exposure units; (2) The loss must be accidental and unintentional; (3) The loss must be determinable and measurable; (4) The loss should not be catastrophic; (5) The chance of loss must be calculable; and (6) The premium must be economically feasible.54 (1) Nevertheless, while catastrophic losses are not insurable, the losses should also be not too miniscule. Trivial losses are not insurable in accordance with the principle of D e m i n i m i s n o n c u r a t l e x . 5 5 (2) There are risks of loss that cannot be insured by reason of public policy. For example, liability for exemplary damages regardless of the nature of the proceedings where the same is awarded are not insurable.56 e. Pure Risk distinguished from Speculative Risk. Broadly speaking, risk is the uncertainty of loss. The risk that may be assumed is the “pure” type of risk which is defined as a situation where the possibility is either the person involved will suffer a loss or he will not suffer a loss. This involves the possibility that one’s property may be destroyed or the possibility that one may suffer economic loss because of premature death or injury. This should be distinguished from “speculative” risk which may either result in gain or loss. For example, gambling involves speculative risk because the player may lose or he may win. Pure risk results in either loss or “no loss” while speculative risk results in either loss or gain. (1) Incidentally, in addition to being a pure risk, the Supreme Court explained that what is involved in insurance contracts is called an “Insurance Risk,” also known as “Actuarial

o4 Robert I. Mehr and Emerson Cammack, Principles of Insurance, 7th Ed., p. 32, herein after referred to as “Mehr and Cammack.” 55 The law does not concern itself with trifles. 56 I.C. Circular Letter No. 2017-49, October 30, 2017.

CHAPTER 1 GENERAL CONCEPTS

19

Risk.” It is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.67 f. Distinguished from Peril. The designated peril in insurance is the specific cause of loss that is insured against while risk is the uncertainty that the property or person insured will be lost or damaged by reason of the designated or some other peril. However, these terms (risk and peril) are oftentimes used interchangeably in legal literature. g. Past Event. A past event that may be insured against is peculiar to Marine Insurance. For example, a marine insurance policy for a ship ‘lost or not lost” insures the ship even for the event that may have already transpired. At the time the policy was taken, the parties are not aware if the ship is already lost. The insurer will pay even if the ship turns out to be already lost at the time the policy was taken. h. Distinguished from Fortuitous Event and Condition. Risk is not synonymous to fortuitous event in Civil Law. The term risk is likewise not the equivalent of “condition” under the New Civil Code. While a condition is generally a future and uncertain event, a risk insured against may even be considered a period in civil. In life insurance, the only uncertainty is the time when the risk insured against (death) will happen. i. Distinguished from Hazard. Risks should be distinguished from hazards which are circumstances or conditions that create or increase the risk of loss. Hazards may either be (1) physical hazard, (2) moral hazard, or (3) morale hazard.57 58 Physical hazard refers to the physical condition of the thing or the person that increases the chance of loss. Moral hazard involves dishonesty or character defects in the individual that increase the chance of loss. Moral hazard likewise includes carelessness or indifference to a loss because of the existence of the insurance although this type of moral hazard is also sometimes called “morale hazard.”59

57

2009.

Philippine Health Care Provider, Inc. v. CIR, G.R. No. 167330, September 18,

58

George E. Redja, Principles of Insurance, 3rd Ed., p. 13, hereinafter cited as “Redja, p. 13.” ™Ibid.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

20

j. Distinguished from Loss. Loss is the end result of the risk insured against. Loss involves diminution of value or disappearance of value resulting from a risk.60 k. Inherent Vice. Losses that arise from the very nature and condition of the property are not generally covered by the insurance unless expressly provided for in the policy. Generally, insurance cover losses that arises from events that “impinge upon the subject matter.” 61 It generally arises from external causes. 62 By way of exception, life insurance may cover death from disease or old age.63 §4.04. ASSUMPTION OF RISK. The insurer assumes the risk of loss, meaning, the insurer promises to pay the insured if the risk insured against occurs. While the promise of the insurer is generally to pay the money value of the loss, the assumption of risk may include the promise to deliver the equivalent of the property 7 that was lost. There is even a view to the effect that insurance contracts include contracts to indemnify by the performance of services. 64 One example of this is a fire insurance policy where the beneficiary is not automatically entitled to cash but there is an “option to rebuild clause” under which the parties stipulate “the repairing, rebuilding or replacing of buildings or structures wholly or partially damaged or destroyed.”65 An option to rebuild clause is allowed under Section 174 of the Insurance Code.66 The Supreme Court ruled in one case that the insurer must notify the insured of his election stating which of the two prestations he is disposed to fulfill in accordance with the provisions of the Civil Code on alternative obligations.67 §5. NATURE AND PURPOSE. Insurance is a plan for dealing with the risk of economic loss resulting from the happening of a future or contingent event or a past event unknown to the parties. The insured sacrifices a present monetary loss in the form of premium payment in order to avoid a greater loss in the future.

60

See Chapter 7.

61

Chitty on Contracts, p. 1162. Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R. No. 85141, November 28, 1989. 63 Ibid. 64 Physicians’ Defense Co. v. Cooper, (C.C.A. 9th) 199 F. 576, 47 L.R.A. (N.S.) 290. 65 See Section 174,1.C., as amended by R.A. No. 10607. ^Previously Section 172 before R.A. No. 10607; Ong v. The Century Insurance Co., Ltd., G.R. No. L-22738, December 2, 1924. 67 0ng v. The Century Insurance Co., Ltd., ibid. 62

CHAPTER 1 GENERAL CONCEPTS

21

§5.01. HOW PEOPLE DEAL WITH RISKS. In general, the ways people deal with risk include: (a) risk avoidance, (b) risk retention, (c) risk transfer, (d) loss control, and (e) insurance.68 a. Examples. An example of risk avoidance is when people avoid a particular activity to escape the risk of loss. Risk retention means that the person involved will shoulder all the damages that may be incurred. Risk transfer may be accomplished for example when the one who is normally responsible will make the other party shoulder the loss through contract. Control of loss may either be loss avoidance or loss retention.69 b. While it is true that more and more individuals have taken notice of the importance of risk management in their everyday lives, there are others who are indifferent to risks. Adam Smith wrote: “The overweening conceit which the greater part of men have of their own abilities, is an ancient evil remarked by the philosophers and moralist of all ages. Their absurd presumption in their own good fortune, has been less taken notice of. It is, however, if possible still more universal. There is no man living who, when in tolerable health and spirits, has not some share of it. The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued, by scarce any man, who is in tolerable health and spirits, valued more than it is worth.”70 §5.02. HOW INSURANCE DEALS WITH RISK. From the viewpoint of most insured individuals, they are transferring their risk of loss to the insurance company. As stated earlier, they trade present loss by way of premium payments with future recompense for greater loss. a. Risk-Distributing Device. However, in reality, insurance is a riskdistributing device because the risk of loss is not actually transferred to the insurer but a number of people constituting the clients of the insurer contribute to a common fund by paying premiums. In theory, the insurer will get the amount to be paid to each insured in case of loss from this pool or common fund. That is why it is one of the features of insurance that the assumption of risk of the insurer is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk. Adam Smith observed in The Wealth of Nations that “the trade of insurance gives

^Redja,” p. 13. 69 Redja, p. 14. 70 Adam Smith, The Wealth of Nations, Bantam Classic Edition, 2003, p. 149.

22

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

security to the fortunes of private people, and by dividing among that great many that loss which would ruin an individual, makes it fall light and easy upon the whole society.”71 b. Law of Large Numbers. Pooling of loss experience of large number of homogenous exposure units will also allow the insurer to predict future losses with some accuracy. This is consistent with what is known as the “Law of Large Numbers” according to which the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures.72 §6. CHARACTERISTICS. Insurance contracts are: (1) Aleatory, (2) Unilateral, (3) Personal, (4) Consensual, (5) U b e r r i m a e F i d a e .

a. Aleatory. Article 2010 of the New Civil Code provides that a contract is aleatory when 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. Insurance is one of the contracts enumerated in the New Civil Code as falling under this classification of special contracts. It is not a contract of chance but a contract where some of the rights of the parties of the contract are contingent upon chance events.73 It is also aleatory in the sense that what the insured will pay in pesos is not equal to what he will receive in case of loss. The money values exchanged in that sense are not equivalents. In another sense, however, the contract is commutative because what the insured paid for is the equivalent of what he got, that is, the promise of the insurer to indemnify the insured in case of loss. b. Unilateral. This is a characteristic of insurance contract because the payment of the premium is not traditionally imposed as an obligation but an event that gives the contract obligatory force. However, upon payment of the premium there is only one party who has the obligation, that is, the insurer’s obligation to pay the proceeds of the insurance in case of loss.

71

Ibid., p. 961.

72

Robert I. Mehr and Sandra C. Gustavson, Life Insurance: Theory and Practice, 4th Ed., p. 31, hereinafter referred to as “Mehr and Gustavson.” 73 William R. Vance, Handbook of the Law of Insurance, 2nd Ed. (1930), p. 66, hereinafter referred to as “Vance.”

CHAPTER 1 GENERAL CONCEPTS

23

c. Personal. The contract is personal because the contract is entered into with due consideration to the circumstances of the parties. Thus, the insurer may have accepted the risk because of the insurability of the insured. Each party enters into the contract in view of the character, credit and conduct of the other. 74 Even property insurance contract is personal in nature. In reality, it is a person rather than the property that is protected. Hence, the character, credit and conduct of the person who insures a property are still important considerations. Property insurance still aims to indemnify a person who incurred the loss; the measure of insurance payment is loss to the insured and not the loss of specified property. 75 d. Consensual. The contract of insurance is perfected by mere consent without the need of delivery or any formality. e. U b e r r i m a e F i d a e . The contract of insurance is one of perfect good faith. Thus, both parties must not only perform their obligations in good faith but they must also avoid material concealment or misrepresentations. The c a v e a t e m p t o r rule is therefore generally inapplicable. (1) The obligation to maintain perfect good faith is imposed not only on the insured but on the insurer as well. This “accounts for the readiness which the courts apply the doctrine of estoppel as against the insurer when he seeks to take advantage of some condition of forfeiture in order to escape payment under the policy.”76 f. Executory and Conditional. The contract is executory to the insurer and subject to conditions, the principal one of which is the happening of the event insured against. In addition to the main condition, it usually includes many other conditions which must be complied with as precedent to the right of the insured to claim the proceeds.77 §6.01. NOT A WAGERING CONTRACT. In a wagering contract, one person is interested in the loss of another; he benefits if the other party losses. If one is wagering on the life of another, he may profit from the loss of the life of the other. It was explained that

74

Vance, p. 69. Burton T. Beam, Jr., Davil L. Bickelhaupt, Robert Mr. Crowe, Barbara S. Poole, Fundamentals of Insurance for Financial Planning, 3rd (2002) Ed., p. 150, hereinafter referred to as “Beam, Jr., et al., p. 150.” 7e Vance, p. 75. 77 Vance, p. 67. 75

24

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

“the chief objection is that it leads to an unearned gain — ‘unearned’ in the sense that wagering is not socially productive.”78 It was further explained: “Vaguely, a sense of antagonism is aroused in a community of workers against persons who obtain a means of livelihood without participating in the machinery of social or economic production and distribution — in short, against ‘social slackers.’ More specifically, unearned gains lead to idleness, and the wagerer becomes a social parasite. Useful business and industry are thereby discouraged. On the moral side, idleness leads to vice; and the impoverishment of the loser entails misery, and, in consequence, crime.”79

a. Under the same principle, Section 4 prevents insurance on a lottery or any game of chance: SEC. 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.

b. It should be noted that as early as the case of E l D e b a t e , I n c . v . T o p a c i o ,®° the Supreme Court ruled that for lottery to exist, three elements must concur, namely: consideration, prize, and chance. The term “lottery” extends to all schemes for the distribution of prizes by chance, such as policy playing, gift exhibitions, prize concerts, raffles at fairs, and various forms of gambling. However, this definition involves the definition of “lottery” under the Postal Law under the old Administrative Code. The law does not condemn the gratuitous distribution of property by chance, if no consideration is derived directly or indirectly from the party receiving the chance, but does condemn as criminal, schemes in which a valuable consideration of some kind is paid directly or indirectly for the chance to draw a prize. c. However, Section 4 of the Insurance Code is more expansive. The prohibition is not limited to the insurance on lottery. It prohibits insurance “for or against any chance.” Hence, an insurance * 19

78 Edwin W. Patterson, Insurable Interest In Life, Columbia Law Review, Vol. 18, No. 5 (May, 1918), p. 386, hereinafter referred to as “Patterson, p. 386.” 19 Ibid. ®°44 Phil. 278, citing Sotto v. Ruiz, 21 Phil. 468. Note, however, that this involves the definition of “lottery” under the Postal Law and the old Administrative Code.

CHAPTER 1 GENERAL CONCEPTS

25

against a “chance” to win a prize is still prohibited even if there is no consideration for the “lottery.”

d. In addition, it does not follow that an insurance contract is authorized even if the transaction does not involve an illegal wagering contract. For instance, in P a l o m a r v . C o u r t o f F i r s t I n s t a n c e 81 and P h i l i p p i n e R e f i n i n g C o m p a n y v . P a l o m a r * 2 Philippine Refining Company resorted to two schemes to promote the sale of its products both of which envisioned the giving away for free of certain prizes (without additional consideration) for the purchase of its soap and cooking oil products. In other words, the participants would get the exact value of the prize for the goods plus the chance of winning in the scheme. No one would be required to pay more than the usual price of the products. The Court concluded that no lottery was involved in the two cases because of the settled rule that “a plan whereby prizes can be obtained without any additional consideration (when a product is purchased) is not a lottery.” However, it is believed that even if there was no lottery, no insurance can be taken on the chance to win the prize. It is believed that the scheme — although not a prohibited lottery — involves a “chance” that is contemplated in Section 4 of the Insurance Code. Moreover, there can be no insurable interest in the chance to win a prize, whether or not there is consideration, because the “insured” will not be damnified by the loss. e. It has been said that “the gambler courts fortune, the insured seeks to avoid misfortune.”83 Article 2013 of the New Civil Code provides that “a game of chance is that which depends more on chance or hazard than or skill or ability.” An insurance contract will be a wager whenever both these conditions exist: (a) The beneficiary may freely take the initiative in procuring the contract; and (b) the beneficiary has no interest in the life insured.*1 In this connection, the explanation of Professor Patterson on the nature of wagering contracts is helpful: “At the outset it is necessary to determine the sense in which the term “wager” is used. It may have an equivocal or a sinister meaning, depending upon whether regard is had to the form of the agreement, or to its object. The essentials of a wager, as set forth by Hawkins, J., in Carlill v. Carbolic Smoke Ball Co.l are: (1) A mutual agreement of two that according to the

81

G.R No. L-29881, August 31, 1988.

82

G.R. No. L-29062, 148 SCRA 313 (1987). Francisco, p. 7 citing Vance on 83

26

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

issue of a future uncertain event, one shall receive from the other a stake; (2) the necessity that each party shall either win or lose; (3) that neither party shall have any interest other than the stake he is to win or lose; (4) mutuality of intent as to hazard. On the other hand, Anson defines a wager as “a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event.” The latter definition ignores the third essential of the former, namely, the absence of any interest in the event other than the stake to be won. Anson was looking solely to the form of the agreement, while Hawkins, J . , was attempting to frame a definition which would cover the object of the agreement as well as its form. Thus, a marine insurance policy and a bet upon a horse race are alike in the sense that each is a promise to pay money upon the happening of an event which may or may not occur. A consideration of the objects or purposes of the two agreements, however, shows that the resemblance is only superficial. The purpose of the promisee in making the bet is to gain by the transaction; the purpose of the promisee in procuring the marine policy is to lessen the hardship from his misfortune in losing his ship. Since the promise is to pay the amount of loss sustained, this is the only purpose (barring fraud) which the insured can have in taking out such a policy. Such a purpose - to lessen hardship from pecuniary misfortune - may be called an “indemnity purpose.” Here the “insurable interest” of the insured is his maximum possible pecuniary loss from the happening of the event.”86

f. It should also be noted that Article 2014 of the New Civil Code provides that “no action can be maintained by the winner for the collection of what he has won in a game of chance. But any loser in a game of chance may recover his loss from the winner, with legal interest from the time he paid the amount lost, and subsidiarily from the operator or manager of the gambling house.” Hence, a loser is not damnified by the loss because he can recover his loss from the winner. §7. SOCIAL VALUE. It has been said that insurance contributes to society by favorably affecting the allocation of resources, engaging in loss-prevention, indemnifying losses, serving as a basis of the credit structure, eliminating worry, facilitating trade and commerce, and providing channel for investible funds. There are costs because of the large amount of money needed as premium and the insurance business employs substantial amounts of labor and capital. Fraudulent losses likewise occur and in some cases result in carelessness. However, the social value of insurance far outweighs its social costs. 86

^Patterson, p. 385. ^Mehr and Cammack, pp. 10-14.

i 1 t

CHAPTER 1 GENERAL CONCEPTS

27

a. General Benefits of Insurance. It has been observed that the benefits of insurance for the general public include the following: (1) It gives peace of mind; (2) It keeps families and businesses together; (3) It increases marginal utility of assets because it serves as intermediary between those who have small need for a minor amount of capital and those who have great needs for immediate use of large sums to meet losses they have suffered; (4) It facilitates credit transactions; (5) It stimulates savings; (6) It provides investment capital; (7) It provides incentive to business or individuals because they are relieved of fortuitous losses; and (8) It helps in loss prevention.87 §8. PERFECTION. An insurance contract is consensual. 88 Hence, it is perfected by the meeting of minds with respect to the object and consideration of the contract. Article 1319 of the New Civil Code provides:

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) a. Cognition Theory. Particularly, consistent with the C o g n i t i o n T h e o r y 89 that is being applied under the New Civil Code, an insurance contract is perfected the moment the offeror learns of the acceptance of his offer by the other party.

87 David L. Bickelhaupt, General Insurance, 1974 Ed., pp. 75-77, hereinafter referred to as “Bickelhaupt.” 88 As distinguished from real contracts which are perfected by delivery and formal contracts which require certain formalities like a public instrument to be perfected. 89 This should be distinguished from the Manifestation Theory contemplated under Article 54 of the Code of Commerce under which the contract is perfected from the time the acceptance of the offer is manifested. For example, the sending of the letter accepting the offer perfects the contract even if the offeror has not yet received the notice.

28

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. Insured Usually Makes the Offer. In insurance contract, the insured makes the offer by submitting the application to the insurer or its authorized agent. The insurer accepts the offer by approving the application and the contract is perfected upon receipt of notice by the insured of such approval.90 (1) On the other hand, the insurer will then go through the process of underwriting. “Underwriting is the selection and pricing of insurance applications that are offered to the insurer.”91 (2) In this connection, it is well to note that the usual procedure for the perfection of an insurance contract (insured makes the offer by filing an application form) may be departed from. “It may be that the insurer offers a contract which is accepted by the insured with or without writing; or the agent to whom the application for insurance is made may have authority to accept the offer without reference, and this acceptance may be written or oral.”92 c. Unaccepted Application. In a case decided by the Supreme Court, the insurance contract was considered binding upon proof that the insurance application was duly received by the insurer.93 The Court ruled that insurer assumed the risk of loss without approving the application. However, it is believed that the ruling in the said case cannot be considered an exception to the rule on perfection of insurance contracts. Courts cannot impose a contract in the absence of a perfected contract. Closer examination of the facts shows that what was involved was Creditor Group Life Insurance Policy. Under the policy, the clients of petitioner Eternal Gardens who purchased burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage depended upon the existing balance of the purchased burial lots. The policy was to be effective for a period of one year, renewable on a yearly basis. The policy provides that: “The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with

^Development Bank of the Phils, v. Court of Appeals, G.R. No. 109937, March 21, 1994; Rafael Enriquez v. Sun Life Assurance Co. of Canada, G.R. No. 15895, November 29, 1920. 91 Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 2009 Ed., Section 4.2, hereinafter referred to as “Beam, Jr. and Wiening.” 92 Vance, p. 175. 93 Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Corporation, G.R. No. 166245, April 9, 2008.

CHAPTER 1 GENERAL CONCEPTS

29

the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.” The Supreme Court applied the rule that there must be strict interpretation of the provision of the insurance policy against the insurer in arriving at the conclusion that the insurance shall be deemed effective the moment the lot buyer contracts a loan with Eternal Gardens. In other words, there was already a prior agreement regarding the effectivity of the contract of insurance. The Supreme Court observed: “On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a party’s purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination of the insurance contract by the insurer must be explicit and unambiguous.”94

>

(1) The decision in Eternal Gardens Memorial Park v. Philippine American Life Insurance Corporation 95 may also be cr

harmonized with the general rule that an insurance contract is perfected from the time the applicant learns about the acceptance or approval of his application by considering that the petitioner Eternal Gardens should be deemed the agent of the insurer with respect to the subject group life insurance. 96 The petitioner should have been considered an agent of the insurer by virtue of the master agreement or policy and the perfection of the contract for the purchase of a lot on installment likewise perfects the insurance contract with respect to the specific lot buyer. In other words, the petitioner can be deemed the agent of the insurer for purposes of making the offer of insurance and

^Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Corporation, supra. It is believed however that the observation of the Supreme Court that inaction of the insurer cannot be interpreted as the termination of the contract is not in point. The question is whether or not an insurance contract was entered into or whether the insurer assumed the risk of loss through its inaction. There is nothing to terminate if not risk is assumed. 95 Ibid. 96 See Luz Pineda, et al. v. Hon. Court of Appeals, et al., G.R. No. 105562, September 27, 1993. See also §9[a] of Chapter 13 of this work.

! UNIVERSITY OF THE CORDILLERAS LIBRARIES

______

1

j. jj 1 f

30

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

its acceptance happens at the same time as the acceptance of the offer to sell the lot is made. (2) In E t e r n a l G a r d e n s M e m o r i a l P a r k v . P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o r p o r a t i o n 9 7 the petitioner can be deemed to be the agent of insurer who offers an insurance contract at the same time as it offers to sell its lots. When the buyer accepts the offer, the buyer is also deemed to have accepted the insurance thereby perfecting the same. (3) The situation in E t e r n a l G a r d e n s M e m o r i a l P a r k v . P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o r p o r a t i o n 9 8 is similar to the practice of business entities in tying up with insurance companies in the sale of their goods. For example, some business entities sell goods like luggage or offer tour package; if a person will buy the goods or avail of the service, the buyer will be entitled to automatic insurance coverage. In some cases, insurance companies sell greeting cards like Christmas cards which entitle the buyer to insurance coverage. It is believed that in those cases, the sellers are constituted as the agents of the insurance companies. These agents make the offer of insurance which the buyers accept. d. Effect of Non-acceptance. In any event, an insurance contract cannot be deemed perfected if there is only an offer to enter into an insurance contract in the form of an insurance application. As observed by Prof. Vance, “mere delay by the insurer, although unreasonable, in acting upon the application raises no implication of acceptance nor does it estop the insurer to deny the existence of the contract.”99 Consent is an indispensable element of the contract and there can be no contract if there is no meeting of minds between the parties as to the object and consideration. Courts cannot make a contract if nothing was agreed upon. It is true that acceptance of an offer can be implied. However, implied acceptance of an offer can be established only if there are other circumstances that will indicate such acceptance other than inaction or delay. In other case, estoppel can be relied upon only if there are other circumstances that led the applicant to believe and rely on the belief that his application is already approved (other mere than inaction or delay). The Supreme

91

Supra.

9 8

Ibid.

"Vance, p. 188.

CHAPTER 1 GENERAL CONCEPTS

31

Court explained in De Lira u. Sun Life Assurance Company of Canada:100 * “It is of course a primary rule that a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been accepted or rejected, it is merely an offer or proposal to make contract. The contract, to be binding from the application, must have been a completed contract, one that leaves nothing to be done, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement.”

e. Rules on Acceptance by an Agent. The Supreme Court likewise relied on Prof. Joyce in De him v. Sun Life Assurance Company of Canada 101 in explaining the three general rules concerning the agent’s receipt pending approval or issuance of policy in this wise: (1) If the act of acceptance of the risk by the agent and the giving by him of a receipt is within the scope of the agent’s authority, and nothing remains but to issue a policy, then the receipt will bind the company; (2) Where an agreement is made between the applicant and the agent whether by signing an application containing such condition, or otherwise, that no liability shall attach until the principal approves the risk and a receipt is given buy the agent, such acceptance is merely conditional, and it subordinated to the act of the company in approving or rejecting; so in life insurance a “binding slip” or “binding receipt” does not insure of itself; and (3) Where the acceptance by the agent is within the scope of his authority a receipt containing a contract for insurance for a specific time which is not absolute but conditional, upon acceptance or rejection by the principal, covers the specified period unless the risk is declined within that period. The Court likewise cited two cases stating that: “In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489) the facts were that the amount of the first premium had been paid to an insurance agent and a receipt given therefor. The receipt, however, expressly declared that if the application was accepted by the company, the insurance shall take effect from the date of the application but that if the application was not accepted, the money shall be returned. The trite decision of the circuit court of appeal was, “On the conceded facts of this

100

G.R. No. L-15774, November 29, 1920, Phil. Joyce, 263. Volume I, p. 253. Ibid.,41citing lQ1

32

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

case, there was no contract to life insurance perfected and the judgment of the circuit court must be affirmed.” In the case of Cooksey v. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the person applying for the life insurance paid and amount equal to the first premium, but the application and the receipt for the money paid, stipulated that the insurance was to become effective only when the application was approved and the policy issued. The court held that the transaction did not amount to an agreement for preliminary or temporary insurance. It was said: It is not an unfamiliar custom among life insurance companies in the operation of the business, upon receipt of an application for insurance, to enter into a contract with the applicant in the shape of a so-called “binding receipt” for temporary insurance pending the consideration of the application, to last until the policy be issued or the application rejected, and such contracts are upheld and enforced when the applicant dies before the issuance of a policy or final rejection of the application. It is held, too, that such contracts may rest in parole. Counsel for appellant insists that such a preliminary contract for temporary insurance was entered into in this instance, but we do not think so. On the contrary, the clause in the application and the receipt given by the solicitor, which are to be read together, stipulate expressly that the insurance shall become effective only when the “application shall be approved and the policy duly signed by the secretary at the head office of the company and issued.” It constituted no agreement at all for preliminary or temporary insurance . . f. Where an agreement is made between the applicant and the agent, no liability shall attach until the principal approves the risk. The acceptance and issuance of a binding receipt is merely conditional and is subordinated to the act of the company in approving or rejecting the application. 102 g. It is also believed that situation where an agent is authorized to enter into an insurance contract obtains in Bank of Philippine Islands v. Laingo103 involving an offer to bank customers to open a two-in-one deposit account in partnership with its affiliate insurer. Any customer interested to open a deposit account under this two-in-one product, after submitting all the required documents to the bank and obtaining the bank’s approval, will automatically be given insurance coverage. Thus, the bank acted as agent of the insurer with respect to the insurance feature of its own marketed product. The acceptance by the agent binds the insurer.

102 Great Pacific Life Assurance Co. v. Hon. Court of Appeals, G.R. No. L-31845, April 30, 1979. 103 G.R. No. 205206, March 16, 2016.

CHAPTER 1 GENERAL CONCEPTS

33

h. Tort Liability. Even if there is no perfected contract, the insurer may be subject to tort liability under Articles 2176, 19, 20, and 21 of the New Civil Code for abuse of right or acting in a manner that is contrary to morals and good customs based on the peculiar circumstances of each case. (1) Mere delay in acceptance of the insurance application will not result in a binding contract. Court cannot impose upon the parties a contract if they did not consent. However, in proper cases, the insurer may be liable for tort. Liability may also be based on Articles 2176, 19, 20, and 21 of the New Civil Code. For instance, Professor Vance cited one case where the Court observed that: “Having solicited applications for insurance, and having so obtained them and having received payment of fees or premiums exacted, they are bound to furnish the indemnity the state has authorized them to furnish, or decline to do so within such reasonable time as will enable them to act intelligently and advisedly thereon, or suffer the consequences from their neglect to do so.”104 §8.01. DELIVERY OF THE POLICY. Since the contract of insurance is consensual, the delivery of the policy is not necessary for the perfection of the contract. Prof. Agbayani opined that delivery of the policy is necessary to make the policy binding.105 However, he also said that this requirement of delivery is satisfied if the parties’ intention is to be bound by the insurance. In effect, even under this view, mere consent is enough to bind the parties. The view does not diverge from the rule established by jurisprudence that insurance is consensual.

a. While delivery of the policy is not indispensable for the perfection of the contract of insurance, it is still important that the policy is delivered to the insured so that the insured can read and understand all the terms and conditions thereof. The policy is proof of the terms and conditions of the contract and the fact that the insured accepted the same. As explained in one case, it is and was incumbent upon the insured to read the insurance contracts. For instance, this can be reasonably expected of an insured who has been a businessman for a long period of time and the contract concerns

104

Vance, p. 192.

105

Aguedo Agbayani, Commercial Law, Volume 2, 1986 Ed., p. Ill, hereinafter cited as “2 Agbayani.”

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

34

indemnity in case of loss in his money-making trade which may be precisely the reason for his procuring the same.106 b. The parties may also expressly agree that the delivery and acceptance of the policy is a condition for the effectivity thereof. It can be provided that the insurance policy is not valid and binding until the policy is accepted by the insured upon its delivery. Necessarily, however, there is already vinculum juris that binds the parties in these cases. The condition is imposed as part of a binding agreement. c. The delivery of the policy may also be the reckoning point for compliance with certain conditions. For instance, it may be expressly agreed upon that the insured property should not be used for business purposes at the time of the delivery of the policy. It may also be provided that the insured is of good health at the time of delivery of the policy.

PROBLEMS: 1.

“P” filed an application with an insurance company for a 20-year endowment policy in the amount of P50,000.00 on the life of his one- year old daughter, supplying all the essential data in the application form, but without disclosing that his daughter was a Mongoloid child. Upon “P’s” payment of the annual premium, a binding deposit receipt was issued to “P” by the insurance agent subject to the processing by the company. The insurance company disapproved the insurance application stating that the plan applied for was not available for minors below seven years old and offered another plan. The insurance agent did not inform “P” of the disapproval nor of the alternative plan offered and instead, strongly recommended that the company reconsider and approve the insurance application. As faith would have it, “P’s” daughter died. “P” sought payment of the proceeds of the insurance but the company refused on the grounds that there was concealment of material fact in the insurance application and that it has rejected the application. “P” contended, on the other hand, that the binding deposit receipt constituted a temporary contract of life insurance. How would you resolve this issue? A:

The denial by the insurance company of the claim is valid. There is no perfected insurance contract until the insured learns about the approval of the application by the insurer. Hence,

106 New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992.

CHAPTER 1 GENERAL CONCEPTS

35

not insurance contract can be perfected if the approval came after the death of the insured. The binding deposit receipt is merely conditional and does not insure outright. The binding deposit receipt is subordinated to the approval or rejection of application by the insurance company. ( G r e a t P a c i f i c L i f e A s s n C o . v . C o u r t o f A p p e a l s , G . R . N o . L - 3 1 8 4 5 , A p r i l 3 0 , 1 9 7 9 ) Mr. A filed an application for a fire insurance policy to cover his house. He signed the application on January 15, 2007 and delivered it to his insurance broker, Mr. B, on January 16, 2007 together with the required premium. Mr. B submitted the application to the office of XYZ Insurance Corporation on January 20, 2007 and the application was processed and approved on January 25, 2007. On January 26, 2007, XYZ sent a notice to Mr. A by mail. Mr. A received the notice on January 28, 2007. In the meantime, on January 26, 2007, the house of Mr. A was totally destroyed by fire. Can Mr. A recover from XYZ? A:

No, Mr. A cannot recover from XYZ. There is no perfected insurance contract between A and XYZ at the time of the loss. An insurance contract is perfected only from the time the insured had notice of the acceptance of his offer. The application of Mr. A constitutes the offer to enter into an insurance contract. While the offer had already been accepted on January 25, 2007 or before the loss, the insured learned about the acceptance of the offer only after the loss or on January 28, 2007.

An application for a life insurance policy with JH Insurance Company was made by Mr. DHD and listed therein for inclusion as insured lives are Mr. DHD, his wife AD and his children KD and BD. The application discloses that “KD’s heart is impaired.” Mr. DHD was informed by the soliciting agent that he could not assure him that the company would include KD as an insured family member. JH Insurance Company approved the application but with the notation “Delete KD as insured.” Thereafter, a life insurance policy was sent to DHD insuring the lives of all the persons named in the application but attached thereto are the application and a document entitled “Amendment to Application” which required the signature of the insured and provides that KD be deleted from the list of the proposed insured and that no coverage should be provided to her. Not being able to contact the insured who was not at home when he called, the soliciting agent left the policy and attached documents with AD. The amendment had not been signed by the insured when KD died. The insurance company denied the claim for KD’s death. Is the denial proper? A:

Yes, the denial of the claim was proper because there was no perfected contract of insurance. The application of the insured was in the nature of an offer that must be accepted by the insurance company. The insurance company did not accept the offer and instead attached the amendment to the contract of

36

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

insurance which deletes the policy of one of the lives included in the application. The amendment constituted a counter-offer which must be accepted by the insured-applicant. In this case, the counter-offer was not accepted because the signature was not obtained. ( J o h n H a n c o c k M u t u a l L i f e I n s u r a n c e C o m p a n y v . D o n a l d H . D i e t l i n , e t a l . , 1 9 9 A 2 d 3 1 1 , A p r i l 6 , 1 9 6 4 ) §9. KINDS OF INSURANCE. Insurance may be: (1) private insurance or (2) government insurance. Government insurance includes the insurance coverage provided by the Social Security System to employees of the private sector 107 and the insurance coverage under the Government Service Insurance System which extends to the employees in the government service. 108 This coverage was even extended to the p u n o n g h a r a n g a y , the members of the s a n g g u n i a n g b a r a n g a y , the h a r a n g a y secretary, the h a r a n g a y treasurer, and the members of the h a r a n g a y t a n o d . 1 0 9 These insurance contracts are called “social insurance” contracts. They are compulsory in nature and are designed to provide a minimum of economic security for large groups of persons, particularly in the lower income classes.110 They are designed to protect the large group of persons against the perils of accidental injury, sickness, old age, unemployment and the premature death of the family wage earner. 111 There is also mandatory coverage under the National Health Insurance Act of 2013 which provides for mandatory coverage.112 a. Compulsory Insurance. There are also other compulsory insurance like the Compulsory Third Party Liability Insurance for Motor Vehicles113 and the compulsory coverage of passengers and cargoes of vessels. 114 The insurance coverage is secured from private insurers and not from a particular government agency. There is also a special law that provides for compulsory insurance for each migrant worker deployed by a recruitment/manning agency at no cost to the said worker.115 107

R.A. No. 8282.

108

R.A. No. 8291. Section 522, Local Government Code. 110 Bikelhaupt, p. 66. m Bikelhaupt, ibid. U2 R.A. No. 10606. 113 Sections 386 to 402,1.C.; See Chapter 14 of this work. 114 Section 14, R.A. No. 9295; See Chapter 11 of this 115 Section 37-A, R.A. No. 8042 or Migrant Workers and Overseas Filipinos Act of 1995, as added by R.A. No. 10022. 109

CHAPTER 1 GENERAL CONCEPTS

37

b. General Classification. Professor Vance declared that there are attempts to extend the principles of insurance to numerous kinds of losses.116 This attempt resulted in extension to insurance to many kinds of risk and different kinds of insurance. However, Professor Vance said that different kinds of insurance may be grouped into three great heads namely: (1) “Insurance against loss or impairment of property interests, which may either be in existence or merely expected; that is present rights or profits yet to accrue;” 117 (2) “Insurance against loss of earning power, by accidental injury, sickness, old age, or disability, by death, or even by unemployment;”118 and (3) “Insurance against contingent liability to make payment to another for any cause.”119 c. Classification According to Object. Based on the object that is sought to be protected, private insurance can either be: (1) Life or Health Insurance, (2) Property Insurance, or (3) Liability Insurance. d. Special Types. Special types of insurance contracts with specific provisions in the Insurance Code are: (1) Marine Insurance, (2) Casualty Insurance, (3) Fire Insurance, (4) Life Insurance, (5) Compulsory Third Party Liability Insurance, and (6) Microinsurance. e. As to the Persons Covered. Insurance be (1) Individual Insurance or (2) Group Insurance. Individual insurance is usually owned by the person or entity who is insured or who owns the property. Group insurance provides coverage to more than one person under a single contract issued to someone other than the persons insured.120 An example of the latter is a group mortgage redemption insurance and policies issued to employers.121 f. Insurance may also be either Personal Insurance or Business Insurance. Personal insurance are those used by natural persons and their families like life insurance, disability and motor

1984.

116 William R. Vance, Handbook of the Law of Insurance, 2nd Ed., p. 34, hereinafter referred to as “Vance,117p.Ibid. 34.” ll8 Ibid. n9 Ibid. 120 Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., (2009), Section 1.32, 121 hereinafterSee referred to as “Beam, Wiening.” for example SerranoJr.v.and Court of Appeals, G.R. No. L-35529, July 16,

38

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

vehicle insurance. Business insurance are those that are used by business organizations like employee life insurance or property insurance for the factory and the inventories therein. g. Life Insurance. The classification of life insurance may be made: (1) according to the period when it is in force, or (2) according to its object, or (3) according to its special characteristics. Life Insurance may be classified into: (1) Term Insurance — The life of a person is insured on a temporary basis or for a limited period. (2) lifetime.

Whole Life Insurance — A person is insured during his entire

(3) Endowment Policy — In this type of insurance, the insured is paid a certain amount or the face value of the policy if the insured survives a certain period and the beneficiary will get the proceeds if the insured does not survive. (4) Industrial Life — It is that form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila, and if the words “industrial policy” are printed upon the policy as part of the descriptive matter.122 (5) Ordinary Life — the insured is required to pay a certain fixed premium annually throughout life and the beneficiary is entitled to receive payment under the policy only upon the death of the insured. 123 When the payment is paid for a limited period of years, the insurance is called “Limited Payment Life.”124 h. Property Insurance. The Insurance Code recognizes insurance policies that are wholly or partly considered property insurance. These include: (1) fire insurance and allied insurance, (2) marine insurance, and (3) casualty insurance. i. Microinsurance. R.A. No. 10607 now includes a provision on Microinsurance.125 Section 187 of the Insurance Code provide

122

Section 235,1.C., as amended byVance, RA. No. 10607. p. 46. l2i Ibid. 125 Sections 187 and 188,1.C., as amended by R.A. No. 10607. 123

CHAPTER 1 GENERAL CONCEPTS

39

that 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 7.5% of the current daily minimum wage rate for non- agricultural workers in Metro Manila; and (b) The maximum sum of guaranteed benefits is not more than 1,000 times of the current daily minimum wage rate for non-agricultural workers in Metro Manila. §10. PRINCIPLE OF INDEMNITY. One of the fundamental principles of insurance is what is known as the principle of indemnity. This means that the insured should not collect more than the actual cash value of the loss. The principle is meant to prevent the insured from profiting from insurance and to reduce moral hazard.126 The “real purpose of the contract is, in case of loss, to place the insured in the same situation in which he was before the loss, subject to the terms and conditions of the policy.”127 a. Exceptions. Accepted exceptions to the principle of indemnity include: (1) Life insurance because the amount to be paid by the insurer can never be equal to the value of the life that is being insured; and (2) Valued policies under which the insurer will pay the value fixed in the policy regardless of the actual cash value in case of total loss.128 b. Manifestations. The fact that insurance contract is a contract of indemnity is manifested in the following: (1) Insurable interest is indispensable, (2) The value of the interest destroyed or damage is generally the measure of indemnity (except in the cases cited above), (3) Co-insurance clause in marine insurance, and (4) Subrogation in property insurance.129

1 12 1 1 2

CHAPTER 2 THE PARTIES The insurer and the insured are the parties to an insurance contract. The insurer is the party who promises to pay in case loss results because the peril insured against occurred. The insured is the owner of the policy whose property or life is insured or who took out the insurance over the life of persons in whom he has insurable interest. There is a third person involved in an insurance contract known as the beneficiary. The beneficiary is the person in whose favor the insurance was taken by the insured and who will receive the proceeds of the insurance in case of loss. However, in strict legal sense, the beneficiary is not a party to the contract unless he is the insured himself. The importance of studying the parties involved in insurance contracts was explained in this wise: “Insurance ideas and practices define central privileges and responsibilities within a society. In that sense, our insurance arrangements form a material constitution, one that operates through routine, mundane transactions that nevertheless define the contours of individual and social responsibility. For that reason, studying who is eligible to receive what insurance benefits, and who pays for them, is as good a guide to the social compact as any combination of Supreme Court opinions.”1

§1. INSURED. Under the Insurance Code, the insured is the person who applied for and to whom an insurance policy is issued to cover his life, property or the life of or property of other person/s in whose life or property he has insurable interest or liability to other persons. The insured is the one who enters into a contract with the insurer; he is the owner of the policy. The insured is also defined as “the person, group, or organization whose property, health, life is covered by an insurance policy.”2

lr

Tom Baker, On the Genealogy of Moral Hazard, 75 Texas Law Review 237 (1996). Par. 5.1 (i), I.C. Circular Letter 2015-58-A dated December 21, 2015.

2

40

OHAFTRK?

■11

fHF FART1F8

$1.0 U ASSURED AND OWNER. In life insuwiw, if a person tusurtNS th<' Life of awthw, The person whoso life is insured is called th«' Yusu^esT* whik the person who took out an insurance on the former's life is called the '‘‘assured.’* There are those who refer t o t he person who obtained the policy as the Ywvnor” and the person whose Lite w as insured as the ’‘'insured.'* $1.02. CAPACITY. Under the New Civil Code, a contract is voidable if one of the parties is incapacitated.* Accordingly, an insurance contract is voidable if the insured is a minor, an insane person or is otherwise incapacitated to enter into an insurance contracts Howowr. a capacitated person can validly enter into an insurance contract insuring the life of an incapacit ated person like a minor.

a. Spouses. Married women can enter into insurance contracts without the consent of their husbands in the same manner that the latter can enter into an insurance contract without the consent of his wife tor a policy taken out of his or her life or that of his or her children. Section 3 of the Insurance Code provides that: •"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.” (1) The above-quoted provision is consistent with E.O. No. 209 otherwise known as the Family Code of the Philippines 8 and RA. No. 7192. R.A. No. 7192 expressly provides that married women can enter into insurance contracts without the consent of their husbands. Women’s capacity to act is not impaired by marriage because the mandate of the law is on equality.* These statutory provisions are consistent with Section 14 of the Article II of the 1987 Constitution which provides for “equality before the law of women and men.” (2) The wording of the law - "his or her children” - does not limit the provision to an insurance taken on the common children of the spouses. This means that the insurance taken 3 4 * 6

3 4

Ardcle 1390, New Civil Code.

Article 38, New Civil Code. hereinafter referred to as the “Family Code." 6 See Article 73, Family Code.

42

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

on the life of a child who is not also the child of the other spouse may be covered by the provision. (3) The implication of Section 3 is that the consent of the spouse is necessary for the validity of an insurance policy taken out by a married person on the life of other persons other than life of the spouses themselves or his or her children. It is believed, however, that we have to apply the provisions of the Family Code with respect to this situation. Thus, if the property regime of the spouses is absolute community property, the insurance is taken on the life of a third person (who is a debtor of the spouses), the taking of insurance can be considered an act of administration. Hence, the taking of the insurance policy should be jointly made by the spouses because Section 96 of the Family Code provides that the administration of the community property shall belong to both spouses jointly. In case of disagreement, it is the husband that will prevail. However, if a spouse takes an insurance policy on his own life and a third person who is totally unrelated to them, financially or otherwise, is made a beneficiary, then it is believed that the taking of the insurance and payment of the premium is in the nature of a donation that should be approved by both spouses under an absolute community property regime. Section 98 of the Family Code provides that “neither spouse may donate any community property without the consent of the other.” b. Minors. Minors cannot enter into insurance contracts. The rule under the New Civil Code is that a contract entered into between a minor and capacitated person is considered voidable. Hence, an insurance contract entered into between the minor and an insurance company is voidable. (1) R.A. No. 10607 removed the provision on minors in Section 3 making it consistent with other laws. It should be noted in this connection that previously Section 3 of the Insurance Code provides that “any minor of the age of 18 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.” However, this provision was likewise deemed superseded by the Family Code which fixed the

CHAPTER 2 THE PARTIES

43

age of majority at 18 years. 7 At 18, a person is capacitated to act for all purposes. Hence, a person who is 18 years old can enter into an insurance contract without any limitation except the limitations imposed on other persons who are of legal age. §1.03. EFFECT OF DEATH OF OWNER. The last paragraph of Section 3 as amended by R.A. No. 10607 now provides:

“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.” (1) For example, the life of a minor can be insured. The parents can insure the life of their minor child. If the parents, who are the original owners of the policy, will die, all the rights, title and interest in the policy shall be automatically vested in the minor. (2) Before R.A. No. 10607, the last paragraph of Section 3 applies only to insurance taken on the life of minors. Section 3 previously provides that “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.” With the replacement of the word minor with the generic “person insured,” the last paragraph of Section 3 is no longer limited to insurance taken on the life or health of minors. §1.04. PUBLIC ENEMY. Section 7 of the Insurance Code provides that “Anyone except a public enemy may be insured.” A public enemy is a State (and the citizens thereof) which is at war with the Philippines.

a. Effect of War. If there is no war yet at the time of the taking of the policy but war ensued between the Philippines and the country of the insured, the insurance policy is deemed abrogated. The Supreme Court has adopted the so called “United States Rule” which declares that the contract is not merely suspended, but is

’Article 234, Family Code, as amended by R.A. No. 6809.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

44

abrogated by reason of nonpayment of premiums, since the time of the payments is peculiarly of the essence of the contract. 3 (1) The Supreme Court rejected the New York rule which holds that war between states in which the parties reside suspends the contract of life insurance and that, upon tender of all premiums due by the insured or his representative after the war was terminated, the contract is revived and becomes fully operative.8 9

b. In another case, the Supreme Court ruled that based on Section 7 of the Insurance Code, it stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy.10 The High Court cited these authorities: “Effect of war, generally. — All intercourse between citizens of belligerent powers which is inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to increase, its income or resources; all acts of voluntary submission to it; or receiving its protection; also all acts concerning the transmission of money or goods; and all contracts relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason that the subjects of one country cannot be permitted to lend their assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do anything detrimental to their country’s interest. The purpose of war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent that one country should destroy its enemy’s property and repay in insurance the value of what has been so destroyed, or that it should in such manner increase the resources of the enemy, or render it aid, and the commencement of war determines, for like reasons, all trading intercourse with the enemy, which prior thereto may have been lawful. All individuals therefore, who compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and are public enemies.11

In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified term it is plain that when the parties

8

James McGuire v. Manufacturers Life Insurance Company, G.R. No. L-3581,

September 21,1950; Lopez de Constantino Asia Life Insurance Company, and Peralta Asia Life Insurance Company, G.R. Nos. L-1669 and L-1670, August 31, 1950. 9 Ibid. 10 Filipinas Compania de Seguros v. Christern, Huenenfeld & Co., G.R. No. L-2294, May 25, 1951. n Ibid., citing 6 Couch, Cyc. of Ins. Law, pp. 5352-5353.

CHAPTER 2 THE PARTIES

45

become alien enemies, the contractual tie is broken and the contractual rights of the parties, s o f a r a s n o t v e s t e d , lost/’12

§1.05. RIGHTS OF POLICYHOLDERS. An insured may be considered a policyholder under the Insurance Code. The Insurance Commission defines a “policyholder as the named owner of the insurance policy who may be the insured or assured in life or nonlife insurance policy or a beneficiary as may be applicable/’13 As part of its effort to protect the public, the Insurance Commission promulgated the Bill of Rights of Policyholders under which the following right are recognized: “1) Right to a financially sound and viable insurance company. Policyholders shall have the right to an insurance company that is financially stable and solvent to ensure its ability to honor its contractual obligations to its policyholders. 2) Right to access insurance companies’ official financial information. Policyholders shall have the right to access insurance companies’ audited financial statements and annual reports. 3) Right to be informed of the license status of insurance companies, intermediaries and soliciting agents. Policyholders shall have the right to be informed if a particular insurance company, intermediary or soliciting agent is duly licensed to engage in doing insurance business in the Philippines. 4) Right to be offered a duly approved insurance product. Only duly approved insurance products in accordance with the Insurance Code and pertinent regulations shall be offered. 5) Right to be informed of the benefits, exclusions and other provisions under the policy. Policyholders shall have the right to be informed of the benefits, exclusions and all other provisions of the policy. 6) Right to receive the policy. Policyholders shall have the right to receive the policy within a reasonable period of time after payment of premium. 7) Right to confidentiality of information. Policyholders shall be protected from unauthorized disclosure of personal, financial and other confidential information by insurance companies,

12 Filipinas Compania de Seguros v. Christern, Huenefeld & Co., supra, citing Vance, the Law on Insurance, Section 44, p. 112. ^Insurance Commission Circular Letter No. 2016-30, dated May 26, 2016.

46

ESSENTIALS OF INSURANCE IAW (Republic Act No. 10607 with Notes on Pre-Need Act)

intermediaries and soliciting agents, except as otherwise allowed by law, regulations or valid court or government order. 8) Right to efficient service from insurance companies, intermediaries and soliciting agents. Policyholders shall have the right to timely and prompt delivery of service from insurance companies, intermediaries and soliciting agents. 9) Right to prompt and fair settlement of claims. Insurance companies shall process and settle policyholders’ claims with utmost good faith and within a reasonable period. Policyholders shall have the right to: (i) receive a written acknowledgement of the claim; (ii) prompt payment of valid claims within the period prescribed under the Insurance Code or pertinent regulations; or, (iii) receive a written denial of claim with the stated ground and/or basis thereof. 10) Right to seek assistance from the Insurance Commission. Policyholders shall have the right to seek assistance in settling any controversy between an insurance company, intermediary or soliciting agent and policyholder. Policyholders shall have the right to: (i) report any wrongful act or omission of an insurance company, intermediary or soliciting agent; (ii) file a complaint against any insurance company for unreasonable denial of a valid insurance claim; and (iii) institute action against any erring insurance company, intermediary and soliciting agent for any of the grounds provided under the Insurance Code and other pertinent regulations.”14

§2. INSURER. Section 6 of the Insurance Code provides that every person, partnership, association, or corporation duly authorized to transact insurance business may be an insurer. An insurer is “every person or corporation engaged in the business of making insurance contracts of insurance.”15 §2.01. DEFINITION. “Insurer” or “insurance company” shall include all partnerships, associations, cooperatives or corporations, including governmentowned or controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. 16 The old governing provision of Insurance Code

u

Supra.

15 Par. 5.1 (j), I.C. Circular Letter 2015-58-A dated December 21, 2015. Section 190, I.C., as amended by R.A. No. 10607. Note that R.A. No. 10607 deleted the following definition of insurance corporations in the previous Section 185 of the I.C., which is now Section 191, as corporations 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 debt of others corporations. 16

CHAPTER 2 THE PARTIES

47

included individuals in the term “insurer” or ‘insurance company.” However, individuals are no longer identified as persons who can be an insurer under the present law.17

a. Professional Reinsurer. The terms “insurer” or “insurance company” likewise include professional reinsurers.18 Section 288 defines the term “professional reinsurer” as any person, partnership, association or corporation that transacts solely and exclusively reinsurance business in the Philippines. b. Domestic and Foreign Company. An insurer may be a domestic company or a foreign company. “Domestic company” shall include companies formed, organized or existing under the laws of the Philippines. “Foreign company” when used without limitation shall include companies formed, organized, or existing under any laws other than those of the Philippines.19 c. Mutual Benefit Association. Although excluded from the term “insurer” under Section 190 of the Insurance Code, likewise within the regulatory powers of the Insurance Commission are “mutual benefit associations.” They must first secure a license from the Insurance Commission before they can transact business.20 (1) Mutual benefit associations include “any society, association or corporation, without capital stock, formed or organized not for profit but mainly for the purpose of paying sick benefits to members, or of furnishing financial support to members while out of employment, or of paying to relatives of deceased members of fixed or any sum of money, irrespective of whether such aim or purpose is carried out by means of fixed dues or assessments collected regularly from the members, or of providing, by the issuance of certificates of insurance, payment of its members of accident or life insurance benefits out of such fixed and regular dues or assessments, but in no case shall include any society, association, or corporation with such mutual benefit features and which shall be carried out purely from voluntary contributions collected not regularly and/or no fixed amount from whomsoever may contribute.”21

17

The provision was Section 184 of the I.C. before R.A. No. 10607. ™Ibid. 19 Section 190,1.C., as amended by R.A. No. 10607. “Section 404,1.C., as amended by R.A, No. 10607. 21 Section 403,1.C., as amended by R.A. No. 10607.

d. Mutual ImKiramce C'tttpajzzas. Murru&l Immram** Compames mm z^czziz&i fibe kmmnzim Code. Serru- 2A5 provides zcjtt <my icmesmc izr.rlr fife ttstrttitsE m mpazy bring business in tbe Philipgmes zusy r^h’ m:.: =r. in?rrpc-rs:ed mutual life insurer. To oksu eu.fi. r: ZLEJ rrruoe and cany on: a plan for the ecrmisfiinu ot the omruau fi:ur enure? of its capital stock for the benefit of :os pcikyioiiera. or any t_ass or classes of its policyholders, by complying wfifi one rertzreztrttts of Chapter HL Title 17 of the Iran ranee Otoe.Oj Procedure for MumaHzanon. The plan for mutualization shah zrehrie appropriate proceedings for amending the insurer's arnitlas tf incnrpcraticn i-o give effect to the aecuisition. by said insurer, for the benefit of its policyholders or any class or classes thereof, of the outstanding shares of its capital stock and the conversion of the insurer from a stock corporation into a non-stock corporation for the benefit of its members. The members of such non-srock corporation shall be the poEcyholders from time to rime of the class or classes for whose benefit the stock of the insurer was acquired, and the policyholders of such other class or classes as may be specified in such corporations Articles of Incorporation as they may be amended from time to time.23 (2) The terms "policyholder" or “policyholders" for purposes of mutualization under Chapter Title 17 shall be deemed to mean the person or persons insured under an individual policy of life insurance, or of health and accident insurance, or of any combination of life, health, and accident insurance. They shall also include the person or persons to whom any annuity or pure endowment is presently or prospectively payable by the terms of an individual annuity or pure endowment contract, except where the policy or contract declares some other person to be the owner or holder thereof, in which case such other person shall be deemed policyholder. The terms “policyholder” and “policyholders” include the employer to whom, or a president, secretary or other executive officer of any corporation or association to which a master group policy has been issued, but exclude the holders of certificates or policies issued under or in connection with a master group

in.

“Sections 268 to 280, I.C., as amended by R.A. No. 10607. “Section 269,1.C., aB amended by R.A. No. 10607.

CHAPTER 2 THE PARTIES

49

policy. Beneficiaries under unmatured contracts shall not as such be deemed to be policyholders.24 (3) Demutualization. In some countries, the trend is towards “demutualization.” More and more mutual insurance companies are converting to stock corporations. One of the primary reasons for this development is the need of companies for more funds. It is easier to raise funds if the corporate vehicle is a stock corporation. Another reason for demutualization is to enable the insurance company to diversify its activities and to facilitate payment of certain types of non-cash compensation to its directors and officers.25 Demutualization is now expressly recognized under Section 280 of the Insurance Code which provides that “a domestic mutual life insurance company doing business in the Philippines may convert itself into an incorporated stock life insurance company by de-mutualization.” 26 The same provision states that “the conversion of a domestic mutual life insurance company shall be carried out pursuant to a conversion plan duly approved by the Commissioner.”27 The Corporation Code applies suppletory to this demutualization process.28 e. Cooperatives. The new Section 190 expressly includes cooperatives in the entities included in the terms “insurer” or “insurance company.” In this connection, Articles 105 to 108 of R.A. No. 9520 otherwise known as the Philippine Cooperative Code of 2008 provides that:

ART. 105. Cooperative Insurance Societies. — Existing cooperatives may organize themselves into a cooperative insurance entity'for the purpose of engaging in the business of insuring life and property of cooperatives and their members. ART. 106. Types of Insurance Provided. — Under the cooperative insurance program established and

24

Section 269, ibid. ^Burton T. Beam, Jr., David L. Bickelhaupt, Robert M. Crowe, and Barbara S. Poole, Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 74, “Beam, et al” 26 See I.C. Circular Letter No. 2017-06, dated January 23, 2017 providing for rules on demutualization. 27 Section 280,1.C., as amended by R.A. No. 10607. ^Ibid.

50

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

formed by the virtue of the provisions of this Code, the cooperative insurance societies shall provide its constituting members different types of insurance coverage consisting of, but not limited to, life insurance with special group coverage, loan protection, retirement plans, endowment, motor vehicle coverage, bonding, crop and livestock protection and equipment insurance. ART. 107. Applicability of Insurance Laws. — The provisions of the Insurance Code and all other laws and regulations relative to the organization and operation of an insurance company shall apply to cooperative insurance entities organized under this Code. The requirements on capitalization, investments and reserves of insurance firms may be liberally modified upon consultation with the Authority and the cooperative sector, but in no case may be requirement to be reduced to less than half of those provided for under the Insurance Code and other related laws. ART. 108. Implementing Rules. — The Insurance Commission and the Authority, in consultation with the concerned cooperative sector, shall issue the appropriate rules and regulations implementing the provisions of this Chapter. §2.02. CERTIFICATE OF AUTHORITY. Section 193 of the Insurance Code provides that, “no insurance company shall transact any insurance business in the Philippines until after it shall have obtained a certificate of authority for that purpose from the (Insurance) Commissioner upon application therefor and payment by the company concerned of the fees.” A certificate of authority is required because contracts of insurance involve public interest and regulation thereof by the State is necessary.29 a. Basic Qualifications. Similarly, Section 192 provides that no person, partnership, or association of persons shall transact any insurance business in the Philippines except as agent of a person or corporation authorized to do the business of insurance in the Philippines, unless: (1) possessed of the capital and assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner; (2) nor unless the

29 White Gold Marine Services, Inc. v. Pioneer Insurance and Surety Corporation, et al., G.R. No. 154514, July 28, 2005.

CHAPTER 2 THE PARTIES

51

Commissioner shall have granted to him or them a certificate to the effect that he or they have complied with all the provisions of law which an insurance corporation doing business in the Philippines is required to observe. b. Term of the Certificate. Section 193 provides that ‘The certificate of authority issued by the Commissioner shall expire on the last day of December, three (3) years following its date of issuance, and shall be renewable every three (3) years thereafter, subject to the company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or decisions of the Commission.” §2.03. GROUNDS FOR DISAPPROVAL OF APPLICATION. Section 193 provides for some of the grounds for rejection of the application for certificate of authority by the Insurance Com mis - sioner: a.

If such refusal will best promote the interest of the people of this country;

b.

If there is evidence that the applicant company is not qualified by the laws of the Philippines to transact business therein;

c.

If the grant of such authority appears to be unjustified in the light of: (1) economic requirements; ( 2 ) the direction, administration, integrity and responsibility of the organizers and administrators; (3) the financial organization and the amount of capital; and (4) reasonable assurance of the safety of the interests of the policyholders and the public; and

d.

The name of the applicant belongs to any other known company transacting a similar business in the Philippines or its name is so similar as to be calculated to mislead the public.

SO c

§2.04. PROHIBITED ACTS. An insurer is prohibited from doing, among other acts, the following:30 a.

To transact in the Philippines both the business of life and non-life insurance concurrently unless specifically authorized to do so;31

^Section 193, I.C., us amended by R.A. No. 10607. 91 Ibid. Note that the terms “life” and “non-life” insurance shall be deemed to include health, accident, and disability insurance. UNIVERSITY OF THE CORDILLERAS ____________________ LIBRARIES

52

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b.

To have equity in an adjustment company (neither shall an adjustment company have an equity in an insurance company);

c.

To negotiate any contract of insurance other than is plainly expressed in the policy or other written contract issued to or to be issued as evidence thereof;32

d.

To directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of such insured, either as an inducement to the making of such insurance or after such insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefits to accrue thereon;33

e.

To give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract of insurance;34

f.

To make any discrimination against any Filipino in the sense that he is given less advantageous rates, dividends or other policy conditions or privileges than are accorded to other nationals because of his race;35

g.

To issue or circulate or cause or permit to be issued or circulated any literature, illustration, circular or statement of any sort misrepresenting the terms of any policy issued by any insurance company of the benefits or advantages promised thereby, or any misleading estimate of the dividends or share of surplus to be received thereon;36

h.

To use any name or title of any policy or class of policies misrepresenting the true nature thereof;37 and

i.

To make any misleading representation or incomplete comparison of policies to any person insured in such company for the purpose of inducing or tending to

32

Section 370,1.C., as amended by R.A. No. 10607. ™Ibid. 34 Ibid. ™Ibid. ^Section 371,1.C., as amended by R.A. No. 31 10607. Ibid.

CIlArJ’KK 2 Tin-; PARTIES

U

induct; Much person to lapse, forfeit, or Htjrrender h m ftaid insurance. j. To commit unsafe business practices or acts/*'-' PROBLEM: 1.

Sometime in January 1975, MH, NL was able to convince Mr, ET to take out a life insurance policy with MBL Insurance Corporation. A x a result of a medical examination conducted on ET showing that he was a diabetic, the insurance company fixed the annual insurance premium at P93,180.00 for a life insurance policy with a face value of Pi,000,000.00. In order to persuade ET to take out the policy at the computed premium, NL offered to return to him the amount corresponding to her commission out of the first premium payment, which is equivalent to 50% thereof. Upon such inducement, ET agreed to take the policy thus, on April 30, 1975, he issued two checks in favor of the MBL for P46,590.00 each or a total of P93,180.00. Both checks were postdated May 30, 1975 so as to enable NL to make arrangements for the return to ET of one check corresponding to the amount of her commission. On June 4, 1975, NL received the sum of P51,249.00 as her commission out of the first annual premium paid by ET. Yet, NL failed to comply with her commitment to pay ET P46,590.00. Soon after, ET’s attorney sent a demand letter dated July 7, 1975. Can Mr. ET recover from MBL? A:

No, ET cannot recover from MBL. Under Section 361 of the In surance Code insurance companies, brokers and agents are prohibited to induce another to take out an insurance policy with the promise to return part of the premium out of the commissions of the agent or broker. The law disallows practices involving rebates or preferential treatment with respect to the cost of the policy or the benefits allowed for the premium. Accordingly, to enforce contracts or agreements directly prohibited under the law would be against the very public policy which the law was designed and intended to uphold. ( N o r a L u m i b a o v . T h e H o n . I n t e r m e d i a t e A p p e l l a t e C o u r t a n d E u g e n i o T r i n i d a d , G . R . N o . L 6 4 6 7 7 , S e p t e m b e r 1 3 , 1 9 9 0 )

§3. BENEFICIARY. The beneficiary may be a party to the contract of insurance or a third person (a person who is not a party to the contract). For instance, person having insurable interest over the life of another may obtain an insurance policy and designate 38 *

38

Section 371, l.C. "See l.C. Circular Letter No. 2017-59, December 29, 2017.

54

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

himself as the beneficiary. On the other hand, a person may insure his own life or property and designate somebody else or a third person as the beneficiary. The designation of the third party as a beneficiary may be required by a separate agreement as in the case of a mortgagee who is designated by virtue of a stipulation in a mortgage contract. However, the designation of the beneficiary may be based on the sole will of the insured. a. Beneficiary Not A Party. Unless he is the insured himself, the beneficiary is not one of the contracting parties. However, a third party beneficiary named in the policy has the right to file an action against the insurer in case of loss. No other party can recover the proceeds other than the beneficiary. Section 53 provides:

SEC. 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy. b. When a Beneficiary is Designated. In life insurance, if there is a named beneficiary and the designation is not invalid, it is the designated beneficiary who is entitled to receive the proceeds and not the heirs of the insured. If another person is named the beneficiary, the proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured. In other words, the proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person whose life was insured. 40 At any rate, the heir may also be the beneficiary and the proceeds of the life-insurance policy payable to said heir belongs to him exclusively and does not form part of the deceased’s estate. 41 The view has been expressed that it is immaterial if it is the beneficiary or it is the insured that will pay the premium: “If the law required that every contract should have, manifestly, a useful object, it is doubtful if the insurance contract of the sort here discussed could justify itself. However, the law enforces all agreements except those which are clearly harmful; and the harmful tendencies of such an agreement are reduced to a negligible minimum by the requirement that

40 Luz Picar, et al. v. Government Service Insurance System, G.R. No. L-25803, May 29, 1970; Del Val v. Del Val, 29 Phil. 534, 540 (1915); Sergio Alabat, et al. v. Toribia De Alabat, G.R. No. L-22169, December 29, 1967. 41 The Bank of Philippine Islands v. Juan Posadas, Sr., G.R. No. 34583, October 22, 1931, citing 37 Corpus Juris 565-566.

CHAPTER 2 THE PARTIES

55

the cestui, and not the beneficiary, shall take the initiative in procuring the policy. It may be noted, too, that the beneficiary’s gain is less in this case than where the cestui pays the premiums. It is submitted, therefore, that the mere fact that the beneficiary pays the premiums should not make the transaction void. If all of the proceeds of the policy are to go to some third person, neither the cestui nor the person who pays the premiums, the transaction is a gift by the person paying the premiums, and is unobjectionable. Where by the terms of the policy or by a separate agreement, the person who pays the premium is to receive a substantial part of the proceeds, the balance going to some third person who pays nothing, the transaction may be a gift by the beneficiary paying the premiums or possibly a pledge to secure the repayment of the premiums. The situation is practically the same as if two policies were issued, e . g . , one payable to Y, who pays nothing, the other payable to B, who agrees to pay the premiums on both. Since the latter is open to the same objections as the policies discussed in the last paragraph, this case does not rest upon a very different basis from that one. Yet one circumstance should be noted: the fact that B is to divide the proceeds with the c e s t u i s widow or other dependent furnishes a possible motive for the c e s t u i to procure the policy upon his own initiative; and yet it gives B a greater incentive to desire the c e s t u i s premature death than is the case where B is to receive the entire proceeds. It is believed that the weight of authority supports the view that the mere payment of premiums by the beneficiary who has no interest, upon a policy procured by the c e s t u i , does not ipso facto render the policy void. In a number of cases where A procured a policy upon his life and at once made it payable in whole or in part to B, who had no interest in A’s life and who agreed to pay all the premiums, the courts have held the transaction to be a pure wager and have denied B the right to the proceeds of the policy. In most of the cases cited in the last note it is not clear whether the payment of premiums by the beneficiary was regarded per se wager and have denied B the right to the proceeds of the policy. In most of the cases cited in the last note it is not clear whether the payment of premiums by the beneficiary was regarded per se as making the contract void, or whether it was regarded as strong evidence that the beneficiary was the active and moving party in the transaction. The distinction is substantial. The real issue is whether or not the beneficiary took the initiative in procuring the policy. The fact that the policy was procured by the c e s t u i under an agreement whereby the intended beneficiary was to pay the premiums, is an evidential fact upon that issue. It is not conclusive, but taken with the surrounding circumstances it may produce an irresistible inference that the c e s t u i was but a tool in the hands of the beneficiary.”42

42

401.

Edwin W. Patterson, Columbia Law Review, Vol. 18, No. 5 (May 1918), pp. 400-

56

ESSENTIALS OF ZXSUEAN’CZ L-.-* (Republic Act No. 1C6C7 Noces :u. Prs-Ssec. Art

c. The principle is the same in prozeTtj mtrme. 15. the insuredbeneficiary, having insurable in:eretTL is entitled t.: :h= proceeds of the premium although he is net the owner there*:! The Supreme Court explained in Larr.pcsr.rj 1. Jose*1 that h: is ^eh settled that a policy of insurance is a distinct independent contrast her*-een the insured and insurers, and third person have no right either in a court of equity, or in a court of law. to the proceeds of ru unless there be some contract or trust, expressed or implied, between the insured and third persons.” The Court further explained: “The policy was in the name of Barrette alone- It was. ihereftre. = personal contract between him and the company and not a con trait which ran with the property. According to this personal contract the insurance policy was payable to the insured without regard to the nature and extent of his interest in the property, provided that he had as we have sain, an insurable interest at the time of the making of the contract, and also at the time of the fire. Where different persons have different interests in the same property, the insurance taken by one in his own right and in his own interest does not in any way insure to the benefit of another. This is the general rule prevailing in the United States and we find nothing different in this jurisdiction. ( 1 9 C y c 8 8 3 . ) In the case of S h a d g e t t v . P h i l l i p s a n d C r e w C o .. reported in 56 L. R.A., 461, Mrs. Shadgett received a piano as a gift from her husband and insured it. She knew that it was the obligation of her husband to insure the piano for the benefit of the vendor. The court held, however, that the vendor (mortgagee) was not entitled to the proceeds of the insurance as “there was no undertaking on the part of Mrs. Shadgett to either insure for complainant’s benefit, or to assume her husband’s obligation to so insure, and mere knowledge of that obligation did not impose it upon her." The court further said: “The contract of insurance was wholly between the defendant and the insurance company, and was personal in the sense that the money agreed to be paid in case of loss was not to stand in the place of the piano itself, but was a mere indemnity against the loss of defendant s interest therein. I f h e r i n t e r e s t w a s s m a l l , o n a c c o u n t o f [ e j n c u m b r a n c e s e x i s t i n g i n f a v o r o f t h e c o m p l a i n a n t , that fact was for the consideration only of the insurer and defendant, for complaint has no concern with the adjustment of the loss between them. We know of no principle, either of law or equity, which would bind defendant to carry out her donor’s contract to insure, in the absence of any agreement on her part to do so, even though the property in her hands was subject to complainant’s rights therein as a conditional vendor.” The court further says: “A contract of insurance made for the insurer’s (insured) indemnity only, a s w h e r e t h e r e i s n o a g r e e m e n t , express or implied, 43

43

G.R. No. L-9401, March 30, 1915.

CHAPTER 2 THE PARTIES

that it shall be for the benefit of a third person, DOES HOC ASIACH

OR RM WMI the title to the insured property on a transfer thereof personal as the insurer and the insuredIn such case strangers to the contract require in their own right any interest in the insurance mcc*~y. SKsepi through an assignment or some contract with which they are connected-"

d. Third Parties, The insurer has no obligation to Kim over the proceeds of the insurance to third persons even if the third persons are immediate relatives if there is a designated beneficiary. The Supreme Court cited Section 53 and explained in H e i r s o f L o r e t o C . M a r a m a g v . E v a V e r n a D e G u z m a n M a r a m a g , e i “Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, if sriH alr^e: or the beneficiary, if the insured is already deceased, upon the maturation of the policy. The exception to this rule is a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.”

e. When There is No Beneficiary. It is only when there is no designated beneficiary or when the designation Is void, that the laws of succession are applicable. 44 45 In other words, if there is no designated beneficiary, the proceeds shall form part of the estate of the deceased insured.46 f. Effect of Death of Owner-Beneficiary. Section 3 of the Insurance Code provides that “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.” The problem, however, arises if a person insured his own life and designated another person as beneficiary but both the insured and the beneficiary died in the same incident. It has been opined that in these cases, the rules on survivorship applies. 47 It should be recalled that Rule 131, Section 3(jj) of the Rules of Court

44

G.R. No. 181132, June 5, 2009.

46

Social Security System v. Candelaria D. Davac, ei al, G.R. No. L-21642, July 30, 1966. 46 Heirs of Loreto C. Maramag v. Eva Verna De Guzman Maramag, et al~, G.R. No. 181132, June 5, 2009; Re: Claims for the Benefits of the Late Mario v. Chanliongco, A.M. No. 190, October 18, 1977. 47 Sulpicio Guevara, The Insurance Law, 1939 Ed., p. 6, hereinafter referred to as “Guevara, p. 6.”

58

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

applies if the persons involved are not heirs of each other. The rules on survivorship of heirs, on the other hand, are provided for in Article 43 of the New Civil Code. g. Effect of Use of Conjugal Funds. If the funds of the conjugal partnership of gains are used to pay for the premium, the proceeds of the policy constitute community property if the policy was made payable to the deceased’s estate. One-half of said proceeds belongs to the estate and the other half to the surviving spouse.48 (1) In a case decided when the New Civil Code provisions on the property regime of the spouses was still in force, the Supreme Court adopted the following comments of Manresa in his Commentaries on the Civil Code: 49 “The amount of the policy represents the premium to be paid, and the right to it arises the moment the contract is perfected, for at that moment the power of disposing of it may be exercised, and if death occurs payment may be demanded. It is therefore something acquired for a valuable consideration during the marriage, though the period of its fulfillment, depend upon the death of one of the spouses, which terminates the partnership. So considered, the question may be said to be decided by Articles 1396 and 1401: if the premiums are paid with the exclusive property of husband or wife, the policy belongs to the owner, if with conjugal property, or if the money cannot be proved as coming from one or the other of the spouses, the policy is community property.”

(2) However, if there is a designated beneficiary, the beneficiary is entitled to the proceeds of the policy. The source of the premium is immaterial. h. Vested Interest of Beneficiary. The vested interest or right of the beneficiaries in a life insurance policy should be measured on its full face-value and not on its cash surrender value,

48 The Bank of Philippine Islands v. Juan Posadas, Sr., G.R. No. L25803, May 29, 1970, citing Martin Moran, 11 Tex. Civ. A., 509; In re Stan’s Estate, Myr. Prob. (Cal) 5 (where the Supreme Court of California found that the premiums were paid using the salary of the deceased, which salary was considered community property); In re: Webb’s Estate, Myr. Prob (Cal), 93 (where the Supreme Court of California found that the decedent paid the first third of the amount of the premiums on his life-insurance policy out of his earning before the marriage and the remainder from his earnings received after the marriage and where the court held that one-third of the policy belonged to his separate estate, and the remainder to the community property). 49 Vol. 9, page 589 cited in The Bank of Philippine Islands v. Juan Posadas, Jr., ibid.

CHAPTER 2 THE PARTIES

5&

for in case of death of the insured, said beneficiaries are paid on the basis of its facevalue and in case the insured should discontinue paying premiums, the beneficiaries may continue paying it and are entitled to automatic extended term or paid-up insurance options and that said vested right under the policy cannot be divisible at any given time.50

PROBLEM: 1. Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate no. QC-8088, mortgaged the same to the H.S. Reyes, Inc., with the condition that the former would insure the automobile, with the latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the State Bonding & Insurance Co. Inc., and motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent provisions of which read:

“1- The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the Limits of Liability, indemnify the Insured against loss of or damages to the Motor Vehicle and its accessories and spare parts whilst thereon; (a) by accidental collision or overturning or collision or overturning consequently upon mechanical breakdown or consequent upon wear and tear. XXX XXX XXX

2.

At its own option the Company may pay in cash the amount of the loss or damage or may repair, reinstate, or replace the Motor Vehicle or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed to value of the parts whichever is the less. The Insured's estimate of value stated in the schedule will be the maximum amount payable by the Company in respect of any claim for loss or damage. XXX XXX XXX

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable under this Policy provided that: — (a) The estimated cost of such repair does not exceed the Authorized Repair Limit, (b)A detailed estimate of the cost is forwarded to the Company without delay, subject to the condition that Loss, if any, is payable to H.S. Reyes, Inc., ’ by virtue of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as Mortgagee;

50 Delfin Nario, et al. v. The Philippine American Life Insurance Company, G.R. No. L-22796, June 26, 1967, 20 SCRA 434.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

60

XXX XXX XXX

During the effectivity of an insurance contract, the car met an accident. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company, after claiming a franchise in the amount of P100.00, drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the meantime, the car was delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros., Inc. and Ayala Auto Parts Co. of the cost of repairs and materials. Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros., Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73. Will the action prosper? A:

The action will not prosper because Bonifacio Bros., Inc. and Ayala Auto Parts Co. have no cause action against the insurer. The facts show that the appellants’ alleged cause of action rests exclusively upon the terms of the insurance contract. They seek to recover the insurance proceeds, and for this purpose, they rely upon paragraph 4 of the insurance contract document executed by and between the State Bonding & Insurance Company, Inc. and Enrique Mora. Bonifacio Bros, and Ayala Auto Parts are not mentioned in the contract as parties thereto; nor is there any clause or provision thereof from which we can infer that there is an obligation on the part of the insurance company to pay the cost of repairs directly to them. It is fundamental that contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person. Such stipulation is known as stipulation p o u r a u t r u i or a provision in favor of a third person not a party to the contract. However, there is no such stipulation in the subject insurance contract in favor of Bonifacio Bros, and Ayala Auto Parts. The parties to the insurance contract omitted such stipulation. What was stipulated upon was a “loss payable” clause of the insurance policy that provides that the “Loss, if any, is payable to H.S. Reyes, Inc.” indicating that it was only the H.S. Reyes, Inc. which they intended to benefit. ( B o n i f a c i o B r o t h e r s v . M o r a , G . R . N o . 2 0 8 5 3 , M a y 2 9 , 1 9 6 7 )

CHAPTER 2 THE PARTIES

61

§3.01. GENERALLY REVOCABLE. As a rule, the designation of the beneficiary is revocable. If the insured wants the designation to be irrevocable, the irrevocable nature should be expressly provided for in the policy:

SEC. 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. a. Effect if Irrevocable. As the term implies, an irrevocable beneficiary cannot be replaced. The irrevocable beneficiary has vested rights over the policy. 51 For example, the rights of the irrevocable beneficiary cannot be affected by the subsequent assignment of the insurance policy. In case there is cash surrender value, it is the irrevocable beneficiary who can take a policy loan thereon.52 (1) Surrender of the policy and policy loan is not merely an act of administration, hence, the irrevocable beneficiary has interest therein. Surrender of the policy constitutes an act of disposition or alienation of property rights and not merely of management or administration because it involves the incurring or termination of contractual obligations.53 b. Exception. By way of exception, the Family Code provides for revocation of an irrevocable designation of beneficiary. Article 64 of the Family Code provides that after the finality of the decree of legal separation, the innocent spouse may revoke the designation as a beneficiary in any insurance policy, even if such designation is stipulated to be irrevocable. The revocation of or change in the designation of the insurance beneficiary shall take effect upon written notification thereof to the insured. The same rule can be found in Article 43 of the Family Code and is likewise adopted in Article 50 of the same Code. In other words, revocation of the designation as a beneficiary of the spouse who is in bad faith applies in cases covered by Articles 40, 42, 43, 45, 50, and 64 of the Family Code.

51

See exception in Article 64, Family Code. Delfin Nario, et al. v. The Philippine American Life Insurance Company,

52

supra.

™Ibid.

62

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

c. Revocation during the Lifetime. The additional provision that was inserted by R.A. No. 10607 in Section 11 states that notwithstanding the revocable nature of the designation of the beneficiary, “in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.” However, the provision is a surplusage with respect to life insurance because the insured who is the owner of the policy can no longer change the beneficiary beyond his lifetime. The insurance proceeds should already be paid after the death of the insured because the risk insured against already transpired. This is true even if the one who took the insurance is not the person whose life is insured. The additional provision in Section 11 may find application only in property insurance. PROBLEM: 1. On October 18, 1980, P took out a life insurance policy and named his only son Q as beneficiary. P learned that Q was hooked on drugs and immediately notified the insurance company in writing that he is substituting his sister R as the beneficiary in place of Q. P later died of advanced tuberculosis. Upon P’s death, Q claimed the proceeds of the insurance policy contending that as designated beneficiary he acquired a vested right to the policy. Is Q’s contention correct? A:

No, the contention of Q is not correct. The designation of the beneficiary is revocable unless the right to revoke is waived. In the present case, the designation of Q as beneficiary was revoked with his replacement with R.

§3.02. FORFEITURE OF RIGHTS OF BENEFICIARY. Section 12 of the Insurance Code provides:

SEC. 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 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 is silent, the proceeds shall be paid to the estate of the insured. a. Section 12 of the Insurance Code talks about a disqualification that arises after the perfection of the contract of insurance. The beneficiary does not suffer any disqualification at

CHAPTER 2 THE PARTIES

(i:i

the inception of the contract but he becomes disqualified after the contract’s perfection. The underlying principle is that the beneficiary should not profit from his misdeed. This is consistent with the maxim U n n e d o l t p r i s e a d v a n t a g e d e s o n t o r t d e s m e n e 54 and N e m o e x s u o d e l i c t o m e l l o r a m s u a m c o n d i t i o n e m f a c e r e p o t e s t Note that the disqualification under Section 12 of the Insurance Code arises due to a willful act of the beneficiary. b. R.A. No. 10607 changed the default rules on beneficiary under Section 12.66 In Life Insurance, if a beneficiary is disqualified under Section 12, the proceeds of the insurance shall be paid in accordance with the following rules: (1) The forfeited share of the disqualified beneficiary shall pass on to the other beneficiaries; (2) If there are no other beneficiaries, the proceeds shall be paid in accordance with the policy contract; (3) If there are no other beneficiaries and there is no provision in the policy contract, the proceeds shall be paid to the estate of the insured. §3.03. DISQUALIFICATION OF BENEFICIARY. The grounds for disqualification of a beneficiary in insurance contracts can be found in the New Civil Code. Article 2012 of the New Civil Code provides:

ART. 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy and by the person who cannot make any donation to him, according to said article. a. Rationale. The Supreme Court explained in The Insular Life Assurance Co., Ltd. v. Carponia T. Ehrado:57 “In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon 54 55 56 * * *

54

0ne ought not to take advantage of his own wrong. No one can improve his condition through his own misdeed. 56 Before the amendatory provisions of R.A. No. 10607, if there are no other beneficiaries, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. b7 Supra. 55

64

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pro-Need Act)

the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As « consequence, the proscription in Article 739 of the new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation. Under American law, a policy of life insurance is considered as a testament and in construing it, the courts will, so far as possible treat it as a will and determine the effect of a clause designating the beneficiary by rules under which wills are interpreted.”

b. Grounds for Disqualification. Thus in the following cases, although the insurance contract itself is valid, the designation of beneficiary is void because they are disqualified as beneficiaries:50 (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

c. Hence, in one case, the Supreme Court ruled that a husband cannot name as beneficiary a woman with whom he had illicit relations. The common law wife who is aware that the man with whom she has relations is already married may not be validly designated as a beneficiary.59 However, this argument would certainly not apply to the children borne out of wedlock. The illegitimate children are not covered by the prohibition. As a matter of fact, the New Civil Code (and now the Family Code) recognizes certain successional rights of illegitimate children.60 * d. Conviction is not necessary in order for one to be disqualified due to adultery or concubinage. This is the rule in donation which should equally apply to insurance contracts. The Supreme Court explained:01

“Article 739, New Civil Code. “Insular Life Assurance v. Ebrado, G.R. No. L-44059, October 28, 1977, 80 SCRA 181. “Southern Luzon Employees’ Association v. Juunita Golpeo, G.R. No. L-6114, October 30, 1954. ailbid.

CHAI'I'EH 2 THE PARTIES

"4. Wo do not think that a con victior) for adultery or concubinage in exacted before the disabilities mentioned in Article 730 tony effectuate. More specifically, with regard to the diaahility on “persons who were guilty of adultery or concubinage at the time of the donation,” Article 730 itself provides: In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donee may be proved by preponderance of evidence in the same action," The underscored clause neatly conveys that no criminal conviction for the disqualifying offense is a condition precedent. In fact, it cannot even be gleaned from the afore-quoted provision that a criminal prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be proved “in the same action” for declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.

e. The spouse can designate the other as a beneficiary. While a spouse is prohibited from making a donation to the other spouse under the New Civil Code and the Family Code, this prohibition does not apply to insurance contracts. The proceeds of the insurance policy cannot be considered a donation or gift. ‘The contract of life insurance is a special contract and the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code (and the Family Code) has no provision which relate directly and specifically to life-insurance contracts or to the destination of life insurance proceeds.”62 f. While a concubine is disqualified, the illegitimate children of the insured are not disqualified. No legal proscription exists in naming as beneficiaries the children of illicit relationships by the insured. If the concubine was disqualified, her shares in the insurance proceeds must be awarded to the illegitimate children who are also designated as beneficiaries.63 PROBLEM: 1. Eduardo Fernandez applied for and was issued policy no. 0777 by

Atlas Life Insurance Corporation on a whole life plan for P200,000.00. Although he was married to Clara, with whom he had five (5)

62 Del Val v. Del Val, 29 Phil. 534 (1915); Hilario Gercio v. Sun Life Assurance of Canada, et al., G.R. No. 23703, September 28, 1925. “Heirs of Loreto C. Maramag v. Eva Do Guzman Maramag, G.R. No. 181132, June 5, 2009.

66

ESSENTIALS OF INSURANCE ’LAW (Republic Act No. 10607 with Notes on Pre-Need Act.)

legitimate children, he designated his common-law wife, Diana Cruz, as his revocable beneficiary on the policy, and referred to Diana, in his application and policy as his wife. Five (5) years thereafter, he died. Diana immediately filed her claim for the proceeds of the policy as designated beneficiary. Clara also filed her claim as a legal wife. The insurance company filed a petition for interpleader before the Regional Trial Court of Rizal to determine who should be entitled to the proceeds of the policy. If you were the judge, how would you decide the said interpleader action? A:

If I were the judge, I would rule in favor of Clara. As the legal wife, Clara (together with the children) is entitled to the proceeds of insurance taken by Eduardo Fernandez. The designation of his common-law wife, Diana as his revocable beneficiary is void because the designation was made at the time they were guilty of concubinage. Hence, the proceeds shall be part of the estate. Note: The guilt of Diana and Eduardo for concubinage may be established by mere preponderance of evidence in the same action and there is no need for a criminal conviction for concubinage. (Insular Life Assurance Co., Ltd. v. Ebrado, October 28, 1997, 80 SCRA 181)

§4. TRUSTEE OR AGENT. The insurance policy may be obtained by a person through his agent or trustee. When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general words in the policy.64 §5. PARTNER. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. 65 a. If the policy is secured for the benefit of a partnership, a change in the name of the partnership does not avoid the policy. For example, the Supreme Court ruled in one case that when the partners of a general partnership doing business under the firm name of “Sharruf & Co.” obtained insurance policies and the latter afterwards changed its name to “Sharruf & Eskenazi” (which are the names of the same and only partners of said firm “Sharruf &

“Section 54,1.C. “Section 55,1.C.

CHAPTER 2 THE PARTIES

67

Co.”), but continuing the same business, the new firm acquires the rights of the former under the same policies.66 §6. ASSIGNEE OF LIFE INSURANCE. Justice Holmes said that “life insurance has become in our day one of the best recognized form of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property.”67 Consistently, in this jurisdiction, a life or health insurance policy can be transferred even without the consent of the insurer. Section 184 of the Insurance Code provides:

SEC. 184. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. a. How to Transfer. No formalities are required for the assignment of life or health insurance policies. Hence, the provisions of the New Civil Code on assignment of rights should be applied. For example, the New Civil Code provides as one of the modes of transferring ownership the delivery of the proof or evidence of the right. Accordingly, delivery of the policy may transfer ownership of the policy of insurance. b. Notice Not Necessary. Since the right to transfer is conferred by law, notice to the insurer is not even necessary to validate the transfer. The assignee acquires right thereon even without the knowledge of the insurer. Nevertheless, while notice to the insurer is not required, it is more advantageous to the assignee to give notice to the insurer of such transfer. c. Double Assignment. There are two views in determining who has a better right in case the insured assigns the life or health insurance policy to two or more persons. One is the “English Rule” according to which the assignee who first gives notice is the one entitled to the proceeds if he has no notice of any prior assign-

oe Sharuff & Co. v. Baloise Insurance Company, et al., G.R. No. 44119, March 30. 1937. 67 Janine R. Greiber and William T. Beadles, Law and the Insurance Life Insurance Contract, 1968 Ed., p. 372 hereinafter cited as “Greiber and Beadles, p. 332.”

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

menu* The other view is known as the “ A m e r i c a n R u l e n which provides that the assignee under the first assignment has the preferable claim.® The “American Rule” applies in this jurisdiction because in the absence of any specific provision on double sale or assignment of rights, the apphcable principle is p r i u s t e m p o r e p o r t i o r j u r e — first in time, stronger in right. §6.01. ASSIGNEE OF PROPERTY INSURANCE. With respect to property insurance, Section 58 provides that 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. Implicit from this provision is the rule that the policy can be transferred so long as the transferee has insurable interest in the thing insured. Nevertheless, the insurer’s assent is necessary for the transfer.70 a. Exceptions. There are exceptional cases when the insurer’s consent is not necessary even if successors-in-interest of the insured substitute the latter. These include cases involving transfer through will or succession and other instances of transfer by operation of law and in cases where there is transfer among partners.71 §7. INSURANCE AGENT AND INSURANCE BROKER. Section 307 of the Insurance Code provides that “no insurance company doing business in the Philippines, nor any agent thereof, shall pay any commission or other compensation to any person for services in obtaining insurance, unless such person shall have first procured from the Commissioner a license to act as an insurance agent of such company or as an insurance broker as hereinafter provided.” The law likewise provides that “no person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance company doing business in the Philippines, or any agent thereof, without first procuring a license so to act from the Commissioner, which must be renewed every three years thereafter.”

“Greiber and Beadles, p. 332. "Ibid. 70 San Miguel Brewery v. Law Union & Rock Insurance Co., G.R. No. L-14300, January 19, 1920, 40 Phil. 674. 71 Sections 23 and 24,1.C.

CHAPTER 2 THE PARTIES

69

a. Section 318 of the Insurance Code provides that “except as otherwise provided by law or treaty, it shall be unlawful for any person, partnership, association or corporation in the Philippines, for himself or itself, or for some other person, partnership, association or corporation, either to procure, receive or forward applications of insurance in, or to issue or to deliver or accept policies or contracts of insurance of or for, any insurance company or companies not authorized to transact business in the Philippines, covering risks, life or non-life, situated in the Philippines and any such person, partnership, association or corporation violating the provisions of this section shall be deemed guilty of a penal offense, and upon conviction thereof, shall for each such offense be punished by a fine of two hundred fifty thousand pesos (P250,000), or imprisonment of six (6) months, or both at the discretion of the court.”72 §7.01. INSURANCE AGENT. An insurance agent is any person who for compensation solicits or obtains insurance on behalf of any insurance company or transmits for a person other than himself an application for a policy or contract of insurance to or from such company or offers or assumes to act in the negotiating of such insurance.73 Insurance agent includes an agency leader, agency, manager or their equivalent. a. One who claims that a person is an insurance agent must prove that the latter falls under Article 309 of the Insurance Code. The mere fact that there reference by the alleged agent to the insurer as a “principal” instead of its “client” is not conclusive evidence that the former is in fact an insurance agent. Such “reference” however, will not and cannot vary the definition of what an insurance agent actually is under the Insurance Code, “nor can it automatically turn petitioner into one, thereby becoming correspondingly liable to all the duties, requirements, liabilities and penalties to which an insurance agent is subject to.”74 b. Independent Contractor. R.A. No. 10607 clarified the relationship between the insurer and the insurance agent by expressly providing in Section 309 that “an insurance agent is

72 Section 318, as amended by R.A. No. 10607 which increased the penalty of a fine of P10,000.00. 73 Section 317,1.C. 74 Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No. 143313, June 21, 2005.

ESSENTIALS OF INSURANCE LAW Zsctibcc An Ncv 10607 «nt.h Note's on Pro-Nood Act)

70

an mderenden: contractor and not an employee of the company represented/ Nevertheless. Section 309 likewise provides that “since the Lnsnrance industry is imbued with public interest, the insurance companies up*an approval of the Commissioner may exercise wide latitude in supervising the activities of their insurance agents to ensure the protection of the insuring public.”75 (1> I; should be noted in this connection that the new provisions of Section 309 of the Insurance Code was enacted after the legal controversy brought about by the conflicting decisions in Tongko v. The Manufacturers Life Insurance Company.™ In its original decision in the said case, the Supreme Court ruled that the insurer had control over the insurance agent that would make the latter the former’s employee.77 Later, the Supreme Court reversed its own ruling in the same case and ruled that that its previous decision “was not supported by the evidence adduced and was not in accordance with prevailing jurisprudence.”78 The Supreme Court further ruled in its Resolution on the Motion for Reconsideration that the absence of any showing the insurer’s control over the insurance agent’s contractual duties points to the absence of employer-employee relationship.79 c. General Agent. It shall be unlawful for any person, company or corporation in the Philippines to act as general agent of any insurance company unless he is empowered by a written power of attorney duly executed by such insurance company, and registered with the Insurance Commissioner to receive notices, summons and legal processes for and in behalf of the insurance company concerned in connection with actions or other legal proceedings against said insurance company.*

(1) Court Processes. Notices, summons, or processes of any kind sent by registered mail to the last registered

75

This

provision was inserted in Section 309 of the I.C., as amended by R.A. No.

10607. 76 G.R. No. 167622, November 7, 2008 (original decision penned by Justice Velasco) and June 29, 2010 (Resolution of the Motion for Reconsideration penned by Justice Brion). 77 Tongko v. The Manufacturers Life Insurance Company, G.R. No. 167622, November 7, 2008. 78 Tongko v. The Manufacturers Life Insurance Company, i b i d . , June 29, 2010. 79 /bid. “Section 308,1.C.

CHAPTER 2 THE PARTIES

71

address of such general agent of the company concerned or to the Commissioner shall be sufficient service and deemed as if served on the insurance company itself.81 d. Classes of Agents. It is believed that despite the reversal of its original Decision in T o n g k o v . T h e M a n u f a c t u r e r s L i f e I n s u r a n c e C o m p a n y , an insurance company may still have two classes of agents: (1) salaried employees who keep definite hours and work under the control and supervision of the company; and (2) an independent contractor who work on commission basis. Under the first category, the relationship between the insurance company and its agents is governed by the Contract of Employment and the provisions of the Labor Code, while under the second category, the same is governed by the Contract of Agency and the provisions of the New Civil Code on Agency. Disputes involving the agent are cognizable by the regular courts.82 If a person is an insurance agent within the contemplation of the Insurance Code, then by express provisions of Section 309, the insurance agent is as independent contractor. However, the name used to designate a person is not controlling, if all the elements of employer-employee relationship are present - especially the element of control - then the “insurance agent” should be considered an employee. This is a factual issue that requires presentation of evidence on the different i n d i c i a of employer-employee relationship. e. Governing Law. Insurance agents are governed by the New Civil Code provisions on Agency. Their acts within the limits of their authority are considered binding on their principal. They also bind their principal if apparent authority is given to them. The Supreme Court observed in one case:83 “By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. The general rule is that the principal is responsible for the acts of its agent done within the scope of

81

Section 308,1.C. Philippine American Life Insurance Company and Rodrigo De Los Reyes v. Hon. Armando Ansaldo, et al., G.R. No. 76452, July 26, 1994; Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989); Investment Planning Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962). ^Filipinas Life Assurance Company v. Clemente N. Pedroso, et al., G.R. No. 159489, February 4, 2008. Note: The Supreme Court rejected the argument of the petitioner that the act of its agent is not binding because it is an insurance company and is not involved in investment. 82

ESSENTIALS OF INSURANCE LAW (Republic Ac; No. 10607 with Notes on Pro-Need Act)

its authority, and should bear the damage caused to third persons. When the agent exceeds his authority, the agent becomes personally liable for the damage. But even when the agent exceeds his authority, the principal is still solidarily liable together with the agent if the principal allowed the agent to act as though the agent had full powers. In other words, the acts of an agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them, expressly or impliedly. Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without authority.''

(1) In this connection, it is well to quote the comments of Justice Laurel on the role of insurance agents: “It is of common knowledge that the selling of insurance today is subjected to the whirlwind p r e s s u r e of modern salesmanship. Insurance companies send detailed instructions to their agents to solicit and procure applications. These agents are to be found all over the length and breadth of the land. They are stimulated to more active efforts by contests and by the keen competition offered by the other rival insurance companies. T h e y s u p p l y a l l t h e i n f o r m a t i o n , p r e p a r e a n d a n s w e r t h e a p p l i c a t i o n s , s u b m i t t h e a p p l i c a t i o n s t o t h e i r c o m p a n i e s , c o n c l u d e t h e t r a n s a c t i o n s , a n d o t h e r w i s e s m o o t h o u t a l l d i f f i c u l t i e s . The agents in short do what the company set them out to do.” 84 Consequently, the insurer is ordinarily bound by the negligent or willful acts or omissions of insurance agents. f. Collusion Between the Insured and the Agent. However, the insurer is entitled to deny a claim if a material fact regarding the health of the insured was concealed by the agent with the participation of the insured. 85 Although the insurance agent represents the insurer, the insured cannot escape the effect of the falsity that the agent committed with his complicity. g. Limit of Authority of Agent. The provisions in the policy that specifies and limits the powers and duties of an agent is binding on the insured.86 If the authority of the agent is limited in the policy itself, the insured cannot claim otherwise by saying that he did not read the policy. By accepting the policy, the insured becomes

205.

1926.

“Insular Life v. Feliciano, et al, G.R. No. 47593, September 13, 1941, 73 Phil. 201, “Insular Life v. Feliciano, et al, G.R. No. 47593, December 29, 1943. “Susana Glaraga v. Sun Life Assurance Co., G.R. No. L-25963, December 14,

CHAPTER 2 THE PARTIES

73

charged with knowledge of its contents, whether he actually read it or not. He could not ostrich-like hide his head from it in order to avoid his part of the bargain and at the same time claim the benefit thereof. He is deemed chargeable with knowledge, from the very terms of the policy he seeks to enforce.87 (1) It should also be noted in this connection that whenever limitations on the authority of agents are conspicuously noted in the insurance application, the insured is precluded from establishing that the agent had apparent authority. 88 h. Not Solidarily Liable with Insurer for the Claim. “In any event, payment for claims arising from the peril insured against, to which the insurer is liable, is definitely not one of the liabilities of an insurance agent.” 89 Thus, the insurance agent cannot be made solidarily liable with the insurer for the insurance claim. There is no legal basis whatsoever for holding petitioner solidarily liable with insurer.

CASE: On July 20, 1999, Rheozel Laingo (Rheozel), the son of respondent Yolanda Laingo (Laingo), opened a “Platinum 2-in-l Savings and Insurance” account with petitioner Bank of the Philippine Islands (BPI) in its Claveria, Davao City branch. The Platinum 2-in-l Savings and Insurance account is a savings account where depositors are automatically covered by an insurance policy against disability or death issued by petitioner FGU Insurance Corporation (FGU Insurance). BPI issued a passbook and an Insurance Coverage Certificate to Rheozel with Laingo as his named beneficiary. On September 25, 2000, Rheozel died due to a vehicular accident as evidenced by a Certificate of Death issued by the Office of the Civil Registrar General of Tagum City, Davao del Norte. Since Rheozel came from a reputable and affluent family, the Daily Mirror headlined the story in its newspaper on September 26, 2000. BPI was informed of the death of Rheozel on September 27, 2000 and the family of the deceased was allowed to withdraw P995,000.00 from the account of Rheozel to be used for the funeral and burial expenses. An employee of BPI even went to the wake to verify some information. More than two (2) years later or on January

87

Supra.

88

John, K. DiMugno and Paul E.B. Glad, California Insurance Law Handbook, 2010 Ed., p. 28 hereinafter cited as “DiMugno and Glad, p. 28”, citing Linnastruth v. Mutual Ben. Health & Acc. Ass’s, 22 Cal. 2d 216, 137 P.2d 833 (1943). 89 Pandiman Philippines, Inc. v. Marine Manning Management Corporation, G.R. No. 143313, June 21, 2005.

/•I

KSNKNTIAI.N OK INMI H
21, 2008, Klmo/ds HiHlor, Ivlmiilvn l.imigo < tonri'pcion, winJ** iimingmg Kluw.tTs personal things in IHM room al llmir roMiilonri* m Kroland, i)/ivno (''ity. found the Personal Arralenl liiminino' ('nvi'iitgo 1 !erl lliriilo ihsna d by FGU Insurance. Ivhealvn immodinloly conveyed I lie mformiil ioM to Laingo Laingo sent two f2) lot-tors dnlod Septemlier II, 2008 nod November 7, 2008 to HIM and FGU lusunmoo roqiioHl.ing lliem to proceMii her claim a a beneticiary of Kbeo/td's insurance policy. The claim wan denied. In a cane tiled by Hainan against the insurer, (be trial court ruled that the prescriptive period ot 00 days shall commence from flu* time of death of the insured and not from the knowledge of the beneficiary. Since the insurance claim wan tiled more than 90 days from the death of the insured, the case must he dismissed. Is Laingo, as named beneficiary who had no knowledge of the existence of the insurance contract, barred on the ground of failure to file a written notice of claim within 90 days upon the death of the insured? A:

No, Laingo is not barred. Notice was in fact given to the agent of the insurer which notice is binding on the latter. In this case, BPI acted as agent of FGU Insurance with respect to the insurance feature of its own marketed product. BPI not only facilitated the processing of the deposit account and the collection of necessary documents but also the necessary endorsement for the prompt approval of the insurance coverage without any other action on Rheozel’s part. Rheozel did not interact with FGU Insurance directly and every transaction was coursed through BPI. BPI, as agent of FGU Insurance, had the primary responsibility to ensure that the 2-in-l account be reasonably carried out with full disclosure to the parties concerned, particularly the beneficiaries. Thus, it was incumbent upon BPI to give proper notice of the existence of the insurance coverage and the stipulation in the insurance contract for filing a claim to Laingo, as Rheozel’s beneficiary, upon the latter’s death. In this case, BPI had the obligation to carry out the agency by informing the beneficiary, who appeared before BPI to withdraw funds of the insured who was BPI’s depositor, not only of the existence of the insurance contract but also the accompanying terms and conditions of the insurance policy in order for the beneficiary to be able to properly and timely claim the benefit. Upon Rheozel’s death, which was properly communicated to BPI by his mother Laingo, BPI, in turn, should have fulfilled its duty, as agent of FGU Insurance, of advising Laingo that there was an added benefit of insurance coverage in Rheozel’s savings account. An insurance company has the duty to communicate with the beneficiary upon receipt of notice of the death of the insured. This notification is how a good father of a family should have acted within the scope of its business dealings with its clients. BPI is expected not only to provide utmost customer satisfaction in terms of its own products and services but also to give assurance that its business concerns with its partner entities are implemented accordingly.

CHAPTER 2 THE PARTIES

75

BPI had been informed of Rheozel's death by the latter’s family. Since BPI is the agent of FGU Insurance, then such notice of death to BPI is considered as notice to FGU Insurance as well. FGU Insurance cannot now justify* the denial of a beneficiary's insurance claim for being filed out of time when notice of death had been communicated to its agent within a few days after the death of the depositor-insured. In short, there was timely notice of Rheozel’s death given to FGU Insurance within three (3) months from Rheozel’s death as required by the insurance company. Consequently*. BPI and FGU Insurance shall bear the loss pay* the insurance proceeds of Rheozel’s personal accident coverage to Laingo. as Rheozel’s named beneficiary. ( B a n P h i l i p p i n e I s l a n d s v . L a i G . R . N o . 2 0 5 2 0 6 , M a r c h 2 0 1 6 )

and must insurance k o f n g o , 1 6 ,

§7.02. INSURANCE BROKER. An insurance broker is any person who for any* compensation, commission or other thing of value acts or aids in any* manner in soliciting, negotiating or procuring the making of any* insurance contract or in placing risk or taking out insurance, on behalf of an insured other than himself. 90 Thus, while the insurer agent normally represents the insurer, the insurance broker acts for and in behalf of the insured. §7.03. EFFECT OF RECEIPT OF PREMIUM. The premium, or any portion thereof, which an insurance agent or insurance broker collects from an insured and which is to be paid to an insurance company because of the assumption of liability through the issuance of policies or contracts of insurance, shall be held by the agent or broker in a fiduciary capacity and shall not be misappropriated or converted to his own use or illegally withheld by the agent or broker.91 a. Authority to Receive Premium, Any insurance company which delivers to an insurance agent or insurance broker a policy or contract of insurance shall be deemed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its issuance or delivery or which becomes due thereon.92 §7.04. NO JURISDICTION OVER INSURER-AGENT RELATIONSHIP. Section 439 of the Insurance Code expressly

^Section 310,1.C. as amended by R.A. No. 91 10607. Section 315,1.C. as amended by RJL No. 952 Ibid. 10607.

76

ESSENTIALS OF INSURANCE LAW (Republic Act. No. 10607 with Noto« on Pro-Neod Act)

provides that “the power of the of the Commissioner does not cover the relationship between the insurance company and its agents/ brokers.” 93 The Supreme Court explained in P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o m p a n y a n d R o d r i g o D e L o s R e y e s v . H o n . A r m a n d o A n s a l d o , e t a l . , 9 * * that while the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code, the provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance agents and brokers. The Insurance Code does not have provisions governing the relations between insurance companies and their agents. It follows that the Insurance Commissioner cannot, in the exercise of its quasijudicial powers, assume jurisdiction over controversies between the insurance companies and their agents.95 a. It should be clarified, however, that insurance agents and brokers are under the regulatory powers of the Insurance Commissioner. Hence, the Insurance Commissioner can revoke their license in proper cases. In addition, administrative sanctions can be imposed by the Insurance Commissioner on erring insurance agents and brokers.96

93As amended by R.A. No. 10607. 9*G.R. No. 76452, July 26,1994.

*Ibid.

^Section 437(i), I.C., as amended by R.A. No. 10607.

CHAPTER 3 INSURABLE INTEREST In early 18th century England, life insurance policies can be issued to persons who were unrelated and even unknown to the insured. 1 The insured himself often did not know who took the policy on his own life. At one time it was almost a sport to wager that public figures would or would not live for even such a short period of time as a few days. Persons in public life were thus made the subjects of life insurance contracts by people who were not even acquainted with them. It so shocked the public that in 1774, the English Parliament took action and enacted a law that provided that “no insurance shall be made by any person or persons, or any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering.”2 3 §1. CONCEPT. One of the earliest definitions of insurable interest in life insurance in the United States can be found in the case of W a r n o c k v . D a v i s : ' 4 “It is not easy to define with precision what will in all cases constitute an insurable interest, so as to take the contract out of the class of a wager policies. It may be stated generally, however, to be such an interest, arising from the relation of the party obtaining the insurance, either as creditor of or surety for the assured, or from ties of blood or marriage to him, as will justify a reasonable expectation of advantage or benefit from the continuance of his life. It is not necessary that the expectation of advantage or benefit should always be capable of pecuniary estimation; for a parent has an insurable interest in the life of his child, and a child in the life of his parent, a husband in the life of his wife, and a wife in the life of her husband. The natural affection in cases of this kind is considered as powerful — as operating

’Janice E. Greiber and William T. Bead lea, Law and the Life Insurance Contract, 1968 Ed., p. 121, hereinafter referred to as “Greiber and Beadles.” 2 Greiber and Beadles, p. 121. 3 104 U.S. 775 (1882). 77

7H

KSSKNTIAI-H OF INSURANCE LAW (Republic Act. No. 10607 with Notes on Pre-Need Act)

more efficaciously to protect, the life of the insured than any other consideration. Hut in all cases there must be a reasonable ground, founded upon the relations of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the continuance of the life of the assured. Otherwise, the contract is a mere wager, by which the party taking the policy directly interested in the early death of the assured. Such policies have the tendency to create a desire for the event. They are, therefore, independently of any statute on the subject, condemned, as being against public policy.”

a. Verily, in all cases where the law provides for insurable interest in life, there is reasonable ground to expect that one who takes out insurance over the life of another stands to benefit from its continuation and is not interested in his early death. However, it is important to point out that the Insurance Code now provides for an exclusive list in Section 10 of persons who may have insurable interest in the life of another. b. With respect to property insurance, the basic concept of insurable interest is provided for in Section 13 of the Insurance Code which states that “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.” Otherwise stated, an insurable interest in property is a pecuniary reason for desiring the continued existence of property, arising out of right or a liability, connected with property, which the law can perceive.4 c. Public policy requires an insurable interest to prevent wagering under the guise of insurance, and to reduce to a safe level the temptation to destroy the insured property. Lack of insurable interest is a defense created for the benefit of society, not for the benefit of any insurance company.5 d. The Supreme Court explained in L a l i c a n v . T h e I n s u l a r L i f e A s s u r a n c e C o m p a n y L t d . 6 that “an insurable interest is one of the most basic and essential requirements in an insurance contract. In general, an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the preservation of

4

Hugh J. Fegan, Insurance from Ballantine's Problems inIbid., Law,p.p.569. 569. 6 G.R. No. 183526, August 25, 2009. 6

OHAPTKK 3 IN8U K A B L K I N T B K K 8 T

n

the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance.” e. Independent of the foregoing, the presence of insurable interest likewise has the following purposes: (1) The presence of insurable interest reduces moral hazard — dishonesty or character defects in the individual that increase the chance of loss; and (2) Insurable interest likewise helps in measuring the loss of the insured. f. If the insured has no insurable interest over the life or property he insures, the insurance contract is considered unenforceable. 7 If it can be established that the contract is really a wager, the same can be considered void for being against public policy. Thus, Section 25 of the Insurance Code provides: SEC. 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.

§2. INSURABLE INTEREST IN LIFE INSURANCE. It was explained that “[i]t was first thought that human life was so sacred that it could not be the object of a contract, but this belief soon disappeared to give place to the rule that human life may be insured under conditions sufficient to neutralize the temptation of the beneficiary to destroy the life of the insured. This safeguard can be found in the rule which requires that a person who insures the life of another must be interested in the continuance of the life of the insured, at least at the time the insurance is effected for the purpose of frustrating any evil intent of hastening the fatal event by which he would derive an economic benefit.”8 §2.01. INSURABLE INTEREST UNDER THE CODE. The persons in whose life one may have insurable interest are enumerated in Section 10 of the Insurance Code which provides:

1

See Section 18,1.C. Francisco, p. 14.

8

ESSENTIALS OE INSI EtANv '.v ,A\^

80

(Republic Act No. LOtfOT wtth N rel="nofollow">««“/*? or*

Act)

SEC. 10. Every person tias an msurable 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. §2.02. CLASSES OF INSURABLE INTEREST IN LIFE INSURANCE. Insurable interest may be (1) insurable interest in the insured’s own life, or (2) insurable interest in the life of another person. Where the insurance is on the life of another, the owner of the insurance policy is different from the "subject” of the insurance — meaning the person whose life is insured. The owner may, in turn, be the beneficiary or the beneficiary may he another person. With respect to insurable interest in the life of another person, the same may be based on (1) relationship by blood; (2) business relationship; or (3) other pecuniary interest. a. Blood Relationship. Blood relationship is limited to insurable interest over the life of a spouse or of one’s children. In these cases, mere blood relationship is sufficient; as explained in one case, “close ties of blood or affinity,... with the natural affection and moral forces which generally prompt one such to serve and protect the other, rendering it highly improbable that one for money would take the life of the other, afford a surer guaranty to society against the dangers of betting on the duration of human life, than any mere pecuniary interest in the life insured, often more imaginary than real.”9

b. When Mere Blood Relationship is Not Sufficient. Blood relationship alone would not suffice in other cases. Thus, one has no insurable interest over the life of his parents or his brothers and sisters by the mere fact that they are related to him by blood 9

Croswell v. Connecticut Indemnity, Ass’n. (1897)1 S. C. 103, 114,2 8 S. E. 200.

CHAPTER 3 INSURABLE INTEREST

81

alone. If the person whose life is sought to be insured is not a spouse or a child, one can have insurable interest only on the life of a relative if he or she falls under any other paragraph of Section 10 of the Insurance Code. For example, a person has insurable interest over the life of his parents because his parents are legally obligated under the Family Code to give support to their children. The basis of insurable interest is not blood relationship but pecuniary interest. c. Education or Support. One has insurable interest on the life of any person on whom he depends wholly or in part for education or support. The law does not require that the person on whom one depends wholly or in part for education or support is legally obligated to do so. For example, if Mr. A, a mere family friend, without being obligated to do so, pays for the education or is supporting Mr. B, the latter may take out a life insurance on the life of Mr. A. It should be recalled that Article 195 of the Family Code (E.O. No. 209):

ART. 105. Subject to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article: (1) The spouses; (2) Legitimate ascendants and descendants; (3) Parents and their legitimate children and the legitimate and illegitimate children of the latter; (4) Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and (5) Legitimate brothers and sisters, whether of full or half-blood. (291a) (1) The above-enumerated persons are entitled to support can insure the life of the persons who are legally obligated to support them. As noted earlier, although the persons enumerated are blood relatives, blood relationship is not the basis of the insurable interest but the fact that the persons are legally obligated to support the other. Insurable interest is therefore present if support is received as a mere fact or as a matter of right. There is insurable interest in the life of one who, in fact, gives support even without any legal obligation or in cases when one is legally obligated to support

ISSENTIALS OF INSURANCE UVW

'2

Ja^: N,\ '. AfO~ wni Xo;<^ on Pro-Neod Act)

another although ore ^ame is not being given in the meantime. In me miter case, even ii there is no present reliance for support on me person whose life is being insured, there is at least pecuniary interest in the life of the persons identified in Article iOo o: me Family Code. d. Pecuniary Interest, Even* person has insurable interest in the life or health of any person in whom he has a pecuniary interest. It is enough if there is a reasonable certainty that the continuation of the life will be of direct, material advantage to the insured, but if such benefit would only be indirect or uncertain the requirement as to insurable interest is not satisfied. 10 It was further observed that “the modern tendency of the courts is to broaden the conception of an insurable interest, and it is now generally accepted that a reasonable expectancy" of pecuniary" benefit arising from the continuance of life of an individual with whom one has business dealings, or a reasonable expectancy of pecuniary harm because of the death of such an individual, furnishes an insurable interest.” 11 In other words, the insurable interest is based “on a reasonable expectation of financial benefit from the continuation of the life of the insured or a reasonable expectation of expenses upon the death of the insured.”12 (1) Accordingly, a company has an insurable interest in the life of its officers.13 One has insurable interest over the life of his partner or his employee. In both cases, pecuniary benefit is derived by the person who will take out an insurance policy with the continued preservation of the life of the partner or employee. In the case of a partner, it is reasonable to conclude that the continuance of partnership and the life of a partner furnished a reasonable expectation of advantage to the other partners. Similarly, the loss of the life of the employee, officer or director will result in economic loss on the part of the employer or the corporation because he will be deprived of the service of the employee. There reasonable expectancy of financial loss from the death of an officer or director or employee or partner.

,0

Harvard Law Review, Vol. 23, No. 1 (1909), pp. 57-59. "Columbia Law Review, Vol. 22, No. 2 (Feb. 1922), p. 170. ,2 Robert I. Mehr and Emerson Cammack, Principle of Insurance, 1980 Ed., p. 97, hereinafter cited as “Mehr and Cammack, p. 97.” 13 U.S. v. Supplee-Biddle Hardware Co., 265 U.S. 189, 44 S.Ct. 546 (1924).

CHAPTER 3 INSURABLE INTEREST

83

(2) Under the same principle, a surety has insurable in the life of the principal and a close corporation has insurable interest in the lives of its stockholders (who may directly manage the close corporation).14 e. Debtor’s Life. One can insure the life 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. In other words, a creditor shall have insurable interest over the life of the debtor who may be obligated to deliver money or property or to provide some service. However, the debtor cannot insure the life of the creditor because he will not be damnified by the loss of the creditor’s life. (1) The view has been previously expressed that if the creditor insures the life of the debtor and the creditor pays the premium, it is only the creditor who is allowed to recover under the policy. The debtor has no right to recover from the insurer as there is no privity between them. “To allow the representatives of the debtor to claim from the creditor the fund minus the expenses (and the debt, if that is yet unpaid) is to put all the chances of loss upon the creditor. If his debtor dies soon, the creditor reaps no benefit if the premiums and their accumulated interest consume the fund, as they must more often than not, his security for the debt is gone.”15 (2) It was opined however that a distinction is drawn in cases of creditors’ policies between those effected by the creditor absolutely for his own protection and benefit, and those under an agreement of the parties for collateral security, the debtor paying the premiums. Where the relation of debtor and creditor subsists, and the true construction of the instruments and the evidence of the real nature of the transaction shows that the policy of insurance was effected by the creditor as a security or indemnity, if the debtor directly or indirectly provides money to defray the expenses of that security, he is on a principle of natural equity, entitled to have the security delivered up to him when he pays his debt, which it was directly or indirectly

14

Mehr and Cammack, p. 97. Erskine Hazard Dickson, Insurable Interest in Life, The American Law and Register Review, Vol. 44, No. 3, (March 1896) p. 163, herein after cited as ‘'Dickson, p. 163 ” 15

84

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

at his expense effected to secure.16 This is especially true it* the creditor is constituted as an agent of the debtor for the purpose of securing the policy. (3) It should be noted, however, that Section 3 of the Insurance Code now provides that “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.” This contemplates a situation where the person who took out the policy predeceased the insured. (4) If the creditor insures the life of a debtor and the debt has been paid when the debtor died, the creditor can no longer recover. It was opined that this type of insurance is not like an ordinary life insurance but one that is a contract of indemnity. Hence, the rule that applies to property insurance applies, that is, the insurable interest must exist at the time of the loss. The creditor cannot recover because his interest does not exist at the time of the loss.17 f. One Whose Life Any Estate Depends. There is insurable interest on the life of any person upon whose life any estate or interest vested in him depends. Dean Francisco gave the following examples: (1) “A person who will become the owner of a property as soon as another attains a certain age, may, (by) means of insurance, assure an indemnity for loss to be suffered by him in case that person dies before attaining such age; (2) A may insure the life of B in order to compensate himself for the loss which he will suffer through the latter’s death if A receives as a legacy the usufruct of a property that ownership of which is vested in B, on the condition that at the death of the latter, the legacy is extinguished, the ownership and usufruct of the property passing to C.”18 g. Mortgage Redemption Insurance. Debtors may be insured into a group life insurance known as “mortgage redemption insurance.” A “mortgage redemption insurance” is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that

Hi

Dickson, p. 162. Guevarra, p. 12. 18 Francisco, p. 16. 17

CHAPTER 3 INSURABLE INTEREST

85

in the event of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given to the mortgagor under such a concept so that in the event of death, the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage indebtedness. Consequently, where the mortgagor pays the insurance premium under the group insurance policy, making the loss payable to the mortgagee, the insurance is on the mortgagor’s interest, and the mortgagor continues to be a party to the contract. In this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-payable clause does not make the mortgagee a party to the contract.19 h. If the insurer that issued the mortgage redemption insurance files a case against the beneficiaries to declare null and void on the ground of fraud or material concealment, a third party complaint can be filed by the beneficiaries (defendants) against the mortgagee.20 §2.03. CONSENT OF THE INSURED. One of the issues raised regarding insurable interest in life insurance is with respect to the consent of the insured. The question is whether or not the consent of the person whose life is insured is necessary for the purpose of securing a life insurance. a. The first view is supported by American legal writers to the effect that consent must be secured, otherwise, the insurance is void for being against public policy. Under this view, “even though one person has insurable interest in the life of another, as a precautionary measure against foul play, the prospective buyer (of the policy) is not allowed to insure that person’s life without the subject’s consent.” 21 Thus, Dean Perez, citing Couch, is of the view that consent of the insured is indispensable. 22 He explained that the person who will apply for an insurance policy must not only have

19 Great Pacific Life Assurance Corp. v. Court of Appeals, G.R. No. 113899, October 13, 1999; Paramount Life & General Insurance Corporation v. Castro, G.R. No. 195728, April 19, 2016. 20

Paramount Life & General Insurance Corporation v. Castro, ibid. “Mehr and Cammack, p. 97.” 22 Perez, Insurance Code and Insolvency Law, 1999 Ed., p. 36. 21

86

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

insurable interest in the life of the subject but he must also get the consent of the subject - the person whose life is insured “otherwise the contract is not valid unless subsequently ratified by the insured.” 23 Prof. Vance is of the same view stating that the consent of the subject is a strong evidence of good faith on the part of the person who is procuring the insurance policy that affords a needed guaranty to society; 24 * the view of Prof. Vance is cited and supported by Professor Agbayani. 26 On the other hand, the view that consent is not indispensable is supported by Prof. De Leon who explained that the insurance contract is valid so long as it could be established that the assured has a legal insurable interest. He observed that “the presence of insurable interest takes the contract out of the class of forbidden wagers.”26 b. This author agrees with the view that consent is not necessary. In the first place, Prof. Vance observed that “it seems not to be yet clearly settled whether the consent of the insured is necessary to the validity of the policy procured by another, especially in view of the undoubtedly extensive practice of insurer now to grant insurance in large amounts on the lives of persons who have no knowledge of the contract and have given no consent to it.”27 Secondly, the concern of Prof. Vance relates to large amounts of insurance taken by tradesmen even on the King and Queen and prominent financiers. These are the types of insurance policies that according to him are contrary to public policy and void on clear principle and by weight of authority;28 these are the insurance that are not limited to the amount of pecuniary interest or there is excess insurance. 29 Third, there is a set of persons identified in Section 10 who may not be capable of giving consent. Thus, under Section 10(a), a parent has insurable interest in the life of a child even if the child is a minor. The minor child cannot give his or her consent except through the parents who are his or her parents, as guardian. In fact, it has been acknowledged that policies on infants are an exception. 30 Fourth, the insurance secured by one spouse on the life

23

Perez, ibid.

24

Vance, pp. 172-173. 2 Agbayani 34. 26 Hector S. De Leon, The Insurance Code of the Philippines, Annotated, 1998 Ed., p. 97. 27 Vance, p. 171. 28 Ibid. 29 Vance, p. 172. 30 Perez, p. 36; Vance, p. 171. 26

CHAPTER 3 INSURABLE INTEREST

87

of another is also a known exception. 31 Thus, outside of these last two cases children and spouses - the insurable interest is already pecuniary and excess insurance can already be determined. In other words, the invitation to mischief is minimal if the insurable interest is limited to the pecuniary interest. Lastly, as it was observed by one legal writer, “the law is seeking merely to restrict the eligible beneficiaries to a roughly selected class of persons who, by their general relations to the insured (cestui que vie), will render the harmful tendencies of such contracts negligible. ,,32 The presence of real insurable interest in the persons named in Section 10 is an assurance that these persons are interested in the preservation of the life of the person whose life is insured. It was further observed that consent is not the only way to prevent the danger that is sought to be avoided: “It cannot be doubted that the law would be tolerating a very substantial evil if “the whole world of the unscrupulous” (to use Mr. Justice Holmes’ phrase)” were free to bet upon what life they choose. Some safeguard is necessary in order to reduce this evil to a negligible minimum. The transactions above-mentioned (sale of an expectancy, and promise to devise property in consideration of support during the promisor’s life) afford one instance of a sufficient safeguard, the consent of the c e s t u i q u e v i e . So also, A’s consent that B may become the beneficiary in a policy upon A’s life reduces to a negligible minimum the tendency of such a contract to bring about murder. The instinct of self-preservation is one of the most powerful of psychological forces. If, then, the c e s t u i q u e v i e is s u i j u r i s and is intelligently cognizant of the nature of the transaction and of the possibility that the beneficiary may profit by his death, the consent of the c e s t u i q u e v i e affords sufficient assurance that the beneficiary will be a person who may safely be entrusted to resist the temptation to murder. The law cannot make a better choice of beneficiary than can the c e s t u i q u e v i e . Moreover, such a d e l e c t u s p e r s o n a e makes “a roughly selected class of persons who by their general relations with the person whose life is insured, are less likely than criminals at large to attempt to compass his death.” It is obvious, however, that this reasoning (from the instinct of self-preservation) will be inapplicable where through infancy, insanity, duress, deception or pure ignorance, the consent of the c e s t u i q u e v i e is not an intelligent consent or is not a real consent; and hence these abnormal cases must be dealt with on a different footing. The consent of the c e s t u i q u e v i e is not the only means by which the temptation to murder may be counteracted. Where the beneficiary’s gain

3 1

M

88

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

from the policy is substantially equalled by a corresponding loss produced by the death of the c e s t u i q u e v i e , the actual tendency to produce homicide is reduced to a negligible minimum. So, too, where from any other cause the beneficiary has an unusually strong motive for desiring the preservation of the life insured. Thus, the second objection to life insurance contracts is met when either (a) the c e s t u i q u e v i e gives his intelligent juristic consent to the naming of the beneficiary; or (b) the beneficiary has a sufficiently powerful motive, pecuniary or otherwise, for desiring that the death of the c e s t u i should not occur.”33 c. In the case of insurable interest on any person under a legal obligation for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance, the insurable interest is limited up to the extent of the liability. It is in effect a security for the payment of obligation and the obligee who took the policy cannot recover more that what is owed to him. With such limitations, it is believed that it is unreasonable to require the creditor to secure the consent of the debtor before securing the policy for his own protection, with the creditor paying the premium. Of course, in practice, consent is usually present because the creditor who intends to secure a policy will make it a condition in the loan or any pertinent agreement that the debtor gives his or her consent. In the alternative, the creditor will require the debtor to secure an insurance policy and either assign the same to the creditor or to make the creditor the beneficiary thereof. PROBLEM: 1. On January 4, 1983, Mr. P joined Alpha Corporation (AT .PHA) as president of the company. ALPHA took out a life insurance policy on the life of Mr. P with Mutual Insurance Company, designating ALPHA as the beneficiary. ALPHA also carried a fire insurance with Beta Insurance Company on a house owned by it but temporarily occupied by Mr. P, again with ALPHA as the beneficiary. On September 1, 1983, Mr. P resigned from ALPHA and purchased the company house he had been occupying. A few days later, fire occurred resulting in the death of Mr. P and the destruction of the house. a.

What are the rights of ALPHA against Mutual Life Insurance Company on the life insurance policy?

b.

What are the rights of ALPHA against Beta Insurance Company on the fire insurance?

^Patterson, p. 409.

CHAPTER 3 INSURABLE INTEREST

A:

89

(a) ALPHA can recover from Mutual Life Insurance Company in the life insurance policy. ALPHA had insurable interest of ALPHA in the life of the person insured, Mr. P, at the time the insurance took effect. Mr. P was an employee of ALPHA at the time the insurance policy was taken. The fact that he was no longer an employee at the time of his death will not defeat the claim because in life insurance, insurable interest need not exist thereafter or when the loss occurred. ( S e c t i o n 1 9 , 1 . C . ) (b) ALPHA cannot recover from Beta Insurance Company. In property insurance, insurable interest in the property insured must exist not only when the insurance takes effect but also when the loss occurs. In the given problem, the fire that destroyed the insured house took place after ALPHA had sold the house to Mr. P. Hence, the insurable interest of ALPHA in the property insured no longer existed when the loss occurred. ( S e c t i o n 1 9 , 1 . C . )

2.

On July 14, 2005, X, took an insurance policy on the life of his friend, Y. In the insurance application, X misrepresented that Y was in perfect health although he knew all the time that Y was afflicted with AIDS. On October 18, 2007, Y died in a motor accident. Shortly thereafter, X filed his insurance claim. Should the insurer pay? Reasons. A:

No. The insurer need not pay the claim of X. The insurer does not have any legal obligation to make such payment because X does not have insurable interest over the life of Y. The friendship of X alone is not the insurable interest contemplated in the life insurance. Insurable interest in the life of others (other than one’s spouses or children) is merely to the extent of the pecuniary interest in that life which interest is not shown in the facts presented.

§3. INSURABLE INTEREST IN PROPERTY INSURANCE. The basic rule in property insurance is provided for in Section 18 of the Insurance Code which provides that “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.” Related provisions are Sections 13, 14, 16, and 17 of the Insurance Code which provides:

SEC. 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.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

90

SEC. 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. SEC. 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable. SEC. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. §3.01. TEST. Based on Section 13 of the Insurance Code, the presence of insurable interest in property can be determined by asking if the insured has 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 said insured. a. Any title to, or interest in property, legal or equitable, will support a contract of property insurance. Even where the insured has no title, the contract will be upheld if his interest in or his relation to, the property is such that he will, or may be benefited by its continued existence or suffer a direct pecuniary loss from its destruction or injury.34 b. The test in determining insurable interest in property is whether one will derive pecuniary benefit or advantage from its preservation, or will suffer pecuniary loss or damage from its destruction, termination, injury by the happening of the event insured against.35 §3.02. KINDS OF INSURABLE INTEREST. Insurable interest in property may be an (1) existing interest; (2) inchoate interest founded on an existing interest; or (3) expectancy, coupled

34 Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance Corporation, CA GR CV No. 03771, January 6, 1986, 1 CARA 1, 5. 35 Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance Corporation, ibid., citing Harrison v. Fortlege, 161 U.S. 57.

CHAPTER 3 INSURABLE INTEREST

91

with an existing interest out of which the expectancy arises. All of these interests must directly damnify the insured.36 a. Existing Interest. Existing interest includes the interest of an owner. However, title or ownership is not essential. Thus, the following persons have insurable interest over the property even if they are not the owners thereof: (1) lessee, (2) depositary, (3) usufructuary, and (4) borrower i n c o m m o d a t u m . b. Consistently, a possessor who is holding the property without consideration with the consent of the owner has insurable interest in the property that he is occupying. One has insurable interest if he is so situated with respect to the property that he will suffer loss as the proximate result of its damage or destruction.37 c. In sale of goods, an unpaid seller retains insurable interest over the goods even if ownership had already been transferred to the vendee upon delivery. An unpaid seller has a vendor’s lien and therefore he will be damnified by the loss of the goods even after delivery.38 d. On the other hand, the vendee or buyer has insurable interest over the goods even while the goods are still in transit. In one case, the Supreme Court ruled that the consignee of the goods in transit under an invoice containing the terms under “C & F Manila,” has insurable interest in said goods. As vendee/consignee of the goods, he has such existing interest therein as may be the subject of a valid insurance contract. His interest over the goods is based on the perfected contract of sale. The perfected contract of sale between him and the seller/shipper of the goods operates to vest in him an equitable title even before delivery or before he performed the conditions of the sale. The contract of shipment, whether under “F.O.B.,” “C.I.F,” or “C & F” is immaterial in the determination of whether the vendee has insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance.39

36

Section 13,1.C.

37

Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance Corporation, supra. 38 Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8, 2006; Carlos De Lizardi v. F.M. Yaptico, G.R. No. L-9954, March 22, 1915. 39

Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November

28, 1989.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

92

e. Insurable interest in property exists in any of the following cases because the person is so situated that he will suffer because of the loss due to a peril insured against:40

(1) When the insured possesses a legal title to the property insured, whether vested or contingent, defeasible or indefeasible; (2) When he has equitable title of whatever character and in whatever manner acquired; (3) When he possesses a qualified property or possessory right in the subject of the insurance; and

(4)

When he has mere possession or right of possession;

(5) When he has neither possession of the property nor any other legal interest in it but stands in such relation with respect to it that he may suffer from its destruction, loss of a legal right dependent upon its continued existence. f. An example of the last situation of a person who stands in such relation with respect to it that he may suffer from its destruction is a building contractor who insured the building that he constructed. 41 The Supreme Court explained in Lampano v. Jose:42 “If Barretto (the building contractor) had an insurable interest in the house, he could insure this interest for his sole protection. The policy was in the name of Barretto alone. It was, therefore, a personal contract between him and the company and not a contract which ran with the property. According to this personal contract the insurance policy was payable to the insured without regard to the nature and extent of his interest in the property, provided that he had, as we have said, an insurable interest at the time of the making of the contract, and also at the time of the fire. Where different persons have different interests in the same property, the insurance taken by one in his own right and in his own interest does not in any way insure to the benefit of another. This is the general rule prevailing in the United States and we find nothing different in this jurisdiction. (19 Cyc., 883.)”

40 Harvardian Colleges of San Fernando, Pampanga, Inc. v. Country Bankers Insurance Corporation, supra. 41 Lampano v. Jose, G.R. No. L-9401, March 30, 1915.

42

Ibid.

INSURABLE INTEREST IN PROPERTY

INSURABLE INTEREST IN LIFE

1. As to extent: Limited up to the value of 1. Unlimited except if secured by the creditor. the property.

43

Guevara, p. 13 citing Aetna Ins. Co. v. Miers, 5 Sneed (Tenn.) 139. 44Vance, p. 19. 45 2 Agbayani 42-43.

2. At the time of the perfection of the insurance contract. . Time when it must exist: At the time of perfection of the contract and at the time of the loss. . Need for legal basis: Expectation of benefit must have legal basis. 3. Expectation of benefit need not have legal basis or need not be based on legally enforceable obligation. . Beneficiary’s interest: Beneficiary must have insurable interest. 4. Insurable interest is not necessary if the insured took out the policy on his own life and designated another. Beneficiary must have insurable interest if one took out an insurance on the life of another.

PROBLEMS: 1.

A piece of machinery was shipped to Mr. Pablo and on the basis of C & F, Manila. Mr. Pablo insured said machinery with the Talaga Merchandise Insurance Corp. (TAMIC) for loss or damage during the voyage. The vessel tank en route to Manila. Mr. Pablo then filed a claim with TAMIC which was denied for the reason that prior to delivery, Mr. Pablo had no insurable interest. Decide the case. A:

2.

TAMIC invalidly denied the claim. Mr. Pablo already had an insurable interest on the piece of the machinery he bought even before delivery. As a purchaser, he already had equitable interest on the property delivery. ( F i l i p i n o M e r c h a n t s I n s u r a n c e C o . v . C A , 1 7 9 S C R A 6 3 8 )

A owns a house valued at P50,000.00 which he had insured against fire for P100,000.00. He obtained a loan from B in the amount of P100,000.00 and to secure payment thereof, he executed a deed of mortgage to the house but without assigning the insurance policy to the latter. For A’s failure to pay the loan upon maturity, B initiated foreclosure proceedings and in the ensuing public sale, the house was sold to B as the highest bidder. Immediately, upon issuance of the highest bidder’s certificate of sale in his favor, B insured the house against fire for P120,000.00 with another insurance company. In order to redeem the house, A borrowed P100,000.00 from C, and as a security device, he assigned the insurance policy of P100,000.00 to C. However, before A could pay B his obligation of P100,000.00 the

CHAPTER 3 INSURABLE INTEREST

}>5

house was accidentally and totally burned. Who can recover from the insurer? A:

Only B can recover under the policy. As the mortgagor and highest bidder in the foreclosure sale, B has insurable interest on A’s house. However, his interest is limited to P50,000.00, the value of A’s house. An insurance contract is a contract of indemnity, hence, B cannot recover more that the value of the house. A cannot recover. Although A has insurable interest over the house, he lost his interest over the insurance policy when he assigned it to C. A had no more interest in his insurance policy at the time of the loss. C cannot recover because he has no insurable interest over A’s house. As an unsecured creditor, C has no interest over the house. Besides, the assignment to him of A’s insurance policy was not approved by the insurer.

3.

A owns a house worth P500,000.00. He insured it against fire for P250,000.00 for the period from January 1, 1977 to January 1, 1978. At the instance of B who is a judgment creditor of A, the said house was levied upon by the sheriff and sold at public auction on March 15, 1977. It was adjudicated to B for P150,000.00 at the auction sale. B insured the house against fire for P150,000.00 for the period from March 16, 1977 to March 16, 1978. The house was accidentally burned on April 1, 1977. May A recover under his policy? Give reasons. A; A can recover under his policy. A had insurable interest over the house at the time the policy was taken and at the time of the loss. A did not lose his insurable interest when the house was sold at public auction. A, as judgment debtor, had 12 months time after the sale to redeem the property. A’s insurable interest in the house remained during such redemption period. Hence, A had insurable interest at the time of loss.

4.

The defendant, Mariano R. Barretto, constructed a house for the other defendant, Placida A. Jose, on land described as No. 72, plot F. Estate of Nagtahan, district of Sampaloc, city of Manila, for the agreed price of P6,000.00. Subsequent thereto and on November 12, 1912, Placida A. Jose sold the house to the plaintiff, Antonina Lampano, for the sum of P6,000.00. On March 22, 1913, the house was destroyed by fire. At the time of the fire, Antonina Lampano still owed Placida A. Jose the sum of P2,000.00, evidenced by a promissory note, and Placida A. Jose still owed Mariano R. Barretto on the cost of the construction the sum of P2,000.00. After the completion of the house and sometime before it was destroyed, Mariano R. Barretto took out an insurance policy upon it in his own name, with the consent of Placida A. Jose, for the sum of P4,000.00. After its destruction, he collected P3,600.00

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

96

from the insurance company, having paid in premiums the sum of P301.50. Has Antonina Lampano any right to recover from Barretto any portion of the insurance money? A:

No. That Barretto had an insurable interest in the house, we think there can be no question. He constructed the building, furnishing all the materials and supplies, and insured it after it had been completed. Having insurable, he could insure this interest for his sole protection. The policy was in the name of Barretto alone. It was, therefore, a personal contract between him and the company and not a contract which ran with the property. According to this personal contract the insurance policy was payable to the insured without regard to the nature and extent of his interest in the property, provided that he had, as we have said, an insurable interest at the time of the making of the contract, and also at the time of the fire. Where different persons have different interests in the same property, the insurance taken by one in his own right and in his own interest does not in any way insure to the benefit of another. In the case at bar, Barretto assumed the responsibility for the insurance. The premiums, as we have indicated, were paid by him without any agreement or right to recoup the amount paid therefor should no loss result to the property. It would not, therefore, be in accordance with the law and his contractual obligations to compel him to account for the insurance money, or any par thereof, to the plaintiff, who assumed no risk whatever.

(Antonina Lampano v. PlacidaA. Jose, et al., No. L-9401, March 30, 1915; pars. 3 and 5, Art. 1923, Civil Code; Manresa, Vol. 12, pp. 692695; citing decision of the Supreme Court of Spain of December 30, 1896; 19 Cyc., 883) 5.

Mr. AKY is an owner of a business establishment engaged in dyeing and bleaching clothing materials. Mr. AKY insured his building which serves as his place of business including the machineries and all its contents with X Insurance Corporation such as textiles found therein. While the insurance policy was in force, fire destroyed the building and all its contents. Included in the properties that were destroyed are textiles which were delivered by the customers of Mr. AKY that were meant for dyeing. X Insurance Corporation argues that Mr. AKY cannot recover with respect to the textiles because he allegedly does not have insurable interest thereon. Is the position of X Insurance Corporation tenable? A:

No, the position of X Insurance Corporation is not tenable. AKY has insurable interest over the textiles. The destruction of the textiles meant pecuniary loss to AKY because he was deprived of the compensation he would certainly be entitled to for dyeing the same not to mention their pecuniary liability for the labor and other expenses. They are also liable to the owners

CHAPTER 3 INSURABLE INTEREST

97

of the textiles for their loss. Whenever there is a real interest to protect and a person is so situated with respect to the subject of insurance that its destruction would or might reasonably be expected to impair the value of that interest, an insurance on such interest would not be a wager within the statute, whether the interest was an ownership in or a right to the possession of the property or simply an advantage of a pecuniary character having a legal basis. ( A n g K a Y u , e t a l . v . P h o e n i x A s s u r a n c e C o . , L t d . , e t a l . , C A , G . R . N o . 2 7 8 8 1 - R , S e p t e m b e r 2 8 , 1 9 6 1 , 1 C A R 7 0 4 , 7 0 9 )

§3.04. INSURABLE INTEREST OF BAILEE. In a contract of carriage, the carrier may be damnified by the loss of the goods because he may be obligated to pay the shipper any damage to the property. Similarly, a depositary is obligated to take care of the thing deposited and he can be made liable if the thing deposited is damaged. Thus, both the carrier and the depositary have insurable interest over the property subject to the provisions of Section 15 of the Insurance Code which provides: SEC. 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.

a. Included in insurance policies taken by depositaries are the socalled bailee policies that are involved in transportation of goods. It was observed that “any bailee or person in custody of property and responsible for it may take insurance in his own name, and may recover not only a sum equal to his own interest in the property by reason of any lien for advances or charges, but the full amount named in the policy up to the value of the property.”46 However, under Section 15, the amount that can be recovered is limited to amount that is equivalent to the extent of liability of the carrier or depositary; the value of the property is fixed as the upper limit of the amount that can be recovered by the bailee or carrier and not necessarily the amount that can be recovered. b. In Lopez v. Del Rosario,47 the Supreme Court observed that “a policy effected by bailee and covering by its terms his own

46

Guevara, p. 14 citing 26 C.J. 26, 27.

47

G.R. No. L-19189, November 27,1922 citing Snow v. Carr (1878), 61 Ala., 363; 32 Am. Rep., 3; Broussard vs. South Texas Rice Co., (1910), 103 Tex., 535; Ann. Cas., 1913-A, 142, and note; Home Insurance Co. of New York v. Baltimore Warehouse Co. (1876), 93 U.S., 527.

ESSENTIALS OP INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

98

property and property held in trust; inures, in the event of a loss, equally and proportionately to the benefit of all the owners of the property insured. Even if one secured insurance covering his own goods and goods stored with him, and even if the owner of the stored goods did not request or know of the insurance, and did not ratify it before the payment of the loss, yet it has been held by a reputable court that the warehouseman is liable to the owner of such stored goods for his share.” It should be noted however that the Supreme Court observed in this case that by giving a natural expression to the terms of the warehouse receipts, it could be concluded that the warehouseman acted as the agent of the owners-depositor. The agency can be deduced from the warehouse receipts, the insurance policies, and the circumstances surrounding the transaction. Thus, the situation in L o p e z v . D e l R o s a r i o ™ is not one of those contemplated under Section 15 of the Insurance Code because insurance under this provision is an insured to be taken by the carrier or the depositary in their own behalf. §3.05. INSURABLE INTEREST OF THE MORTGAGOR AND MORTGAGEE. Both the mortgagor and the mortgagee have insurable interest over the mortgaged property. The mortgagor is the owner of the mortgaged property, hence, he has an existing interest that may be the subject of an insurance. Section 8 governs situations when the mortgagor takes an insurance on the basis of his own insurable interest:

SEC. 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.

™Supra.

CHAPTER 3 INSURABLE INTEREST

99

a. 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. The mortgagor’s insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property. The mortgagee’s insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring, he is not insuring the property but his interest or lien thereon. His insurable interest is p r i m a f a c i e the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property. Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee.49 b. The usual practice and contractual stipulation is for mortgagor to take out insurance for the benefit of the mortgagee. The mortgagee may be made the beneficial payee in several ways including the following: 50 (1) He may become the assignee of the policy with the consent of the insurer; or (2) A mere pledgee without such consent, or the original policy may contain a mortgage clause; or (3) A rider making the policy payable to the mortgagee “as his interest may appear” may be attached; or (4) A “standard mortgage clause,” containing a collateral independent contract between the mortgagee and insurer, may be attached; or (5) The policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which case the mortgagee acquires an equitable lien upon the proceeds; or (6) The policy may provide for a loss payable clause in favor of the mortgagee.

49 Armando Geagonia v. Court of Appeals and Country Bankers Insurance Corporation, No. 114427, February 6, 1995; Rizal Commercial Banking Corporation, et al. v. Court of Appeals, et al., G.R. No. 128833, April 20, 1998. ^Armando Geagonia v. Court of Appeals, ibid.

100

ESSENTIALS OF INSURANCE 1 AW (Republic Act No. 10607 with Notes on Pro-Need Act)

c. In the policy obtained by the mortgagor with “loss payable clause” in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself." 1 Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. This kind of policy covers only such interest as the mortgagee has at the issuance of the policy. 51 52 The typical “loss payable clause” is also known as the “open mortgage clause.” d. A “loss payable clause” should be distinguished from a “union mortgage clause” where there is a transfer of an insurance from the mortgagor to the mortgagee with the assent of insurer. The applicable statute is Section 9 of the Insurance Code which provides: SEC. 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 obligation on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.

e. The different variations of “loss payable clauses” were explained by Prof. Vance in this wise: “In the first class are those that merely designate the mortgagee as payee, to the extent of his interest, of such sum as may become payable under the provisions and conditions of the policy. Under such clause, the mortgagee is made merely a beneficiary under the contract, recognized as such by the insurer, but not made a party to the contract itself. Any default on the part of the mortgagor, which by the terms of the policy defeat his rights, will also defeat all rights of the mortgagee under the contract, even though the latter may not have been in any fault. In the second class are those clauses, known in their more usual forms, as “standard” or “union” mortgage clauses, which create collateral independent contracts between the insurer and mortgagee, and provide that the rights of the mortgagee shall not be defeated by the acts or defaults of the mortgagor. Under clauses of this class, we have the general rule that the mortgagee’s rights remain unaffected by any default or breach of condition by the mortgagor to which the mortgagee is not a party.”53

51 Great Pacific Life Assurance Corp. v. Court of Appeals and Medarda V. Leuterio, G.R. No. 113899, October 13, 1999.

62 53

Ibid.

Vance, pp. 654-655.

CHAPTER 3 INSURABLE INTEREST

101

§3.06. INSURABLE INTEREST OF MORTGAGEE. The rule is that a mortgagee may, independently of the mortgagor, insure the mortgaged property in his own name and for his own interest. In such case, the mortgagee is entitled to the insurance proceeds in case of loss, but he is not allowed to retain his claim against the mortgagor. The claim is passed by subrogation to the insurer to the extent of the money paid. Or stated in another way, the mortgagee may insure his interest in the property independently of the mortgagor and in that event, upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid.54 a. It is true that there are authorities which hold that if a mortgagee procures insurance on his separate interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage debt, and that, furthermore, the mortgagee “has still a right to recover his whole debt of the mortgagor.” But these authorities merely represent the minority view. The general rule and the weight of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage. In this respect, the insurer is akin to a surety.55 b. Thus, in one case, an insurance contract was taken out by the mortgagee upon his own interest and it was stipulated that the proceeds would be paid to him only. The Supreme Court held that the mortgagee, in case of loss, may only recover upon the policy to the extent of his credit at the time of the loss. It was declared that the mortgagor had no right of action against the mortgagee on the policy.56

^Cherie Palileo v. Beatriz Cosio, G.R. No. L-7667, November 28, 1955, citing Vance, pp. 654, 772-773. 55 Cherie Palileo v. Beatriz Cosio, ibid., citing 19 R.C.L. p. 405; Jones on Mortgages, Vol. I, pp. 671-672; King v. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. v. Boyden 9 Allen, 123. See also Loomis v. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. v. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster v. Equitable Mut. F. Ins. Co., 2 Gray 216. See case note, 3 Lawyers’ Report Annotated, new series, p. 79. ^San Miguel Brewery v. Law Union and Rock Insurance Co., Ltd., G.R. No. L-14300, January 19, 1920, 40 Phil. 674.

102

ESSENTIALS OF INSURANCE LAW

(Republic Act No. 10607 with Notes on Pre-Need Act)

c. On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by which the mortgagor is to pay the premiums upon such insurance. 57 d. The mortgagee may likewise procure an insurance policy for his own benefit and make himself the beneficiary. The mortgagee will not be required to account for the proceeds or to share the same to the mortgagor. The contract between the mortgagee as insured and the mortgagor is an independent contract.58 e. It has been noted, however, that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and obtains a policy on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause.59 §3.07. SUBROGATION. “Where a mortgagee insures the mortgaged property at his own expense and for his own benefit and a loss occurs, the insurer on paying the loss to the mortgagee is subrogated, to the extent of the amount thus paid, to the means of enforcing payment of the original obligation by the debtor, the claim not being extinguished until payment to him.”60 a. However, where the mortgagor obtains an insurance on the mortgaged property or the insurance was obtained at his request and expense, the insurer is not entitle to subrogation to the rights of the mortgagee on a payment of the loss in the absence of a specific provision therefor in the policy.61 §3.08. FINANCIAL LEASE. Both the financial lessor and the lessee in a financial lease have insurable interest over the property that is the object of the lease.62 The financial lessor likewise has insurable interest over the property that is the object of the financial lease. A financial lease is a “a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or

57

San Miguel Brewery v. Law Union and Rock Insurance, supra. ^Antonina Lampano v. Placida A. Jose, et al., G.R. No. L-9401, March 30, 1915, citing Shadgett v. Phillips and Crew Co, 56 L. R. A., 461. ^Armando Geagonia v. Court of Appeals and Country Bankers Insurance Corporation, supra. ^Francisco, p. 11; See also Chapter 8 for extensive discussion of subrogation. 61 Francisco, p. 12, citing Carpenter v. Providence Washington Ins., Co., 16 Pet. 495 and F. Ins. Co. v. Royal Ins. Co., 55 N.Y. 343, 14 AM. Rep. 271. 62 Vicente Ong T.im Sing, Jr. v. FEB Leasing, G.R. No. 168115, June 8, 2007.

CHAPTER 3 INSURABLE INTEREST

103

acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.” 63 The financial lessor has insurable interest because the legal title to the leased equipment is lodged in the financial lessor. The financial lessee likewise has insurable interest because is entitled to the possession and use of the leased equipment.

PROBLEMS: 1. On December 18 [2006], plaintiff obtained from defendant a loan in the sum of P12,000.00 subject to the following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250.00 a month; (b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550.00, plus the sum of P250.00 as interest for the first month; and (c) that after making the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.00. Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00 corresponding to nine (9) months from December 18 [2006], on the basis of P250.00 a month, which is more than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign a document known as “Conditional Sale of Residential Building,” purporting to convey to defendant, with right to repurchase, a two (2)-storey building of strong materials belonging to plaintiff. This document did not express the true intention of the parties which was merely to place said property as security for the payment of the loan. After the execution of the aforesaid document, defendant insured the building against fire with the Associated Insurance & Surety Co., Inc. for the sum of P15,000.00, the insurance policy having been issued in the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that she be credited with the necessary amount to pay her obligation out

“R-A. No. 5980 as amended by R.A. No. 8556, Section 3(d).

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

104

of the insurance proceeds but defendant refused to do so. When a case was filed with the trial court, the “Conditioned Sale of Residential Building” was declared an equitable mortgage and the obligation of the plaintiff was considered fully compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of Pi, 107.00 representing the difference of the loan of P12,000.00 and the sum of P13,107.00 collected by said defendant from the insurance company. Did the court correctly rule that there was compensation? A:

No. The court erred in declaring that the proceeds of the insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the amount of insurance received by the defendant, for the correct solution should be that the proceeds of the insurance should be delivered to the defendant but that her claim against the plaintiff should be considered assigned to the insurance company who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity. Hence, the proceeds of the insurance amounting to P13,107.00 was properly collected by defendant who is not required to account for it to the plaintiff. The collection of said insurance proceeds shall not be deemed to have compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment from the former. (Cherie Palileo v. Beatriz Cosio, G.R. No. L-7667, November 28, 1955) 2

2.

L borrows P50,000.00 from M payable 360 days after date at 12% per annum. To secure the loan, L mortgages his house and lot in favor of M. To protect himself from certain contingencies, M insures the house for the full amount of the loan with Rock Insurance Co. A fire breaks out and burns the house and M collects from the insurance company the full value of the insurance. Upon maturity of loan, the insurance company demands payment from L. The latter refuses on the ground that the loan had been extinguished by the insurance payment which M received from the insurance company. He further contends that it is bad enough to lose a house but it is worse if one has to pay off a paid obligation to somebody who has not extended any loan to him. Besides, he states, that the insurance payment should inure to his benefit because he owns the house. Pass upon the merit of L's contention. A:

The contentions of L are untenable. The obligation to pay the loan was not extinguished when M received the proceeds of the insurance company. The insurable interest of M as mortgagee is separate and distinct from the interest of L. Thus, recovery under an insurance policy separately taken by the mortgagee, M, will not affect the obligation of L.

CHAPTER 3 INSURABLE INTEREST

105

L’s argument that he has not entered into any loan or contract of whatever nature with the insurance company will not excuse him from liability. Upon payment of the insurer, the latter is subrogated to the rights of the mortgagee. The right of subrogation is imposed by law. It is not dependent upon nor does it grow out of any privity of contract, or upon the insurer an assignee in equity. L’s consent to said subrogation is not necessary. ( A r t i c l e 2 2 0 7 N C C ; F i r e m a n ’ s F u n d I n s u r a n c e C o . v . J a m i l l a & C o . , 7 0 S C R A 3 2 3 ) §4. TIME WHEN INSURABLE INTEREST MUST EXIST. The time during which insurable interest must exist is different if the insurance is property insurance and if the insurance is life or health insurance. The governing rule is expressed in Section 19 of the Insurance Code:

SEC. 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. §4.01. PROPERTY INSURANCE. In property insurance, insurable interest in the subject property must exist when the insurance takes effect and when the loss occurs. It need not exist continuously from the time the insurance takes effect until the time of the loss; the law provides that it need not exist in the meantime. In other words, the insured can recover even if he lost his insurable interest after the perfection of the insurance contract so long as he recovers the same before the loss occurs. For example, Mr. A is the owner of a car which he insured with X Company. After the issuance of the policy, Mr. A sold and delivered the car to Mr. B. Later, Mr. A reacquired the car from Mr. B. It was after the re-acquisition that the car was destroyed. In this case, Mr. A can recover even if there is a period between the time of the taking of the insurance and the time of the loss that Mr. A had no insurable interest over the car. The insurance is deemed suspended during the intervening period in accordance with Section 20 of the Insurance Code which provides:

SEC. 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

106

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

change in 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.

a. Thus, in the given example, the insurance is suspended when Mr. B became the owner and possessor of the car. The insurance is automatically reinstated when Mr. A re-acquires the property. SEC. 58. 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.

b. The policy may contain a provision that renders the policy void upon the transfer of the property without the consent of the insurer. “If the policy contains no provision against alienation, the transfer of the entire interest in the property covered will not render the contract void, but simply inoperative during the period of suspension, and subject to a revival upon the interest again vested in the person named in the policy as insured. The fact that a transfer or sale of the property insured is merely voidable will not aid the insured where it has not been set aside prior to the loss.”64 c. Transfer or change of interest in the property with the consent of the insurer will not suspend the policy. In fact, the policy itself may be written in such a way that consent is given in advance by the insurer and the policy will inure to the benefit of anyone to whom the property is transferred. Section 57 of the Insurance Code provides:

SEC. 57. A policy may be so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured.

d. The change of interest will not suspend the insurance in the cases contemplated in Sections 21 to 24 of the Insurance Code which provide:

64

Joyce, The Law of Insurance, 2nd Ed., Vol. 4, p. 3960.

CHAPTER 3 INSURABLE INTEREST

107

SEC. 21. A change in 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. SEC. 22. A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others. SEC. 23. A change on 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. SEC. 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.

e. Under Section 22, two or more properties are insured but they are insured separately. Thus, if two buildings are insured in one policy but they are insured separately, the change of interest in one building does not suspend the insurance as to the other building. f. In summary, a change in the interest in property insurance will not suspend the insurance in the following cases: (1) If there is a change in interest in the thing insured after the occurrence of the loss;65 (2) If there is a change in interest in one or more of several things that are separately insured (as to the things not transferred);66 (3)

Change of interest through succession;67

(4) Transfer of interest from one partner to another partner of interest over a property jointly insured;68 and

65

Section 66 21,1.C. Section 67 Section ^Section 24,1.C.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

108

(5) Transfer of interest from one joint or co-owner to another of the jointly or co-owned property insured.69 g. It should also be noted that the policy is avoided, and not merely suspended, if there is an express prohibition to alienate but the insured breached the contractual prohibition.70 §4.02. LIFE INSURANCE. In life insurance, all that is required is that the insured has insurable interest over the life that is insured at the time the insurance takes effect. This rule is rooted in the fact that life insurance is not a contract of indemnity. For example, a spouse can insure the life of the other spouse. The spouse who took out the insurance can still recover if at the time of the death of the spouse whose life was insured, their marriage was already annulled. a. Moreover, the rule that incipient interest is sufficient takes into consideration the hardship upon the insured that will result if the contrary rule will be implemented. “The premiums are fixed, and are calculated upon the face of the policy at the time it is taken. If the cessation or diminution of the beneficiary’s insurable interest prevents or reduces the recovery, the insured will have paid for something which he does not get.” 71 It was also observed that an incipient interest is a sufficient safeguard against promiscuous wagering on lives. The rule is aimed at the making of such contracts; the purpose of the contract is to be looked at as of the time when it was entered into.72 PROBLEMS: 1. The agent in Davao of the insured “A” was employed to ship “A’s” copra to Manila and to communicate the shipment to the buyer “A” in Manila. The same agent wrote the owner of the copra announcing the sailing of the ship, but failed to state that the ship had run a ground, which fact he already knew before announcing the sailing. “A,” the buyer of the copra, in all good faith, took a marine insurance on the copra. The copra was badly damaged and was a total loss. Can the insured recover on the policy?

A:

No, the insured cannot recover on the policy. The subject matter of the Marine Insurance was already lost at the time of the

69

Section 24,1.C.

70

2 Agbayani 49. Patterson, p. 414 citing Dalby v. India and London Life Assurance Co. (1854) 15 C.

71

B. 365 72

Patterson, p. 414.

CHAPTER 3 INSURABLE INTEREST

109

perfection of the insurance contract. It is basic that an interest in the property insured must exist when the insurance takes effect and when the loss occurs. 2.

In a civil suit, the court ordered Benjie to pay Nat P500,000.00. To execute the judgment, the sheriff levied upon Benjie’s registered property (a parcel of land and the building thereon), and sold the same at a public auction to Nat, the highest bidder. The latter, on March 18, 1992, registered with the register of deeds the certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured with Garapal Insurance for Pi Million the same building that was sold at public auction to Nat. Benjie failed to redeem the property by March 18, 1993. On March 19, 1993, a fire razed the building to the ground. Garapal insurance refused to make good its obligation to Benjie under the insurance contract. Is Garapal Insurance legally justified in refusing payment to Benjie? A:

3.

Yes, Garapal Insurance is legally justified in refusing payment of the insurance proceeds to Benjie. The basic rule in insurance is that the insured must have insurable interest in the property insured not only at the time of the perfection of the contract but also at the time of the loss. In this case, Benjie no longer had insurable interest on the property at the time of the loss because Benjie was no longer the owner of the property insured as he failed to redeem the property within the redemption period of one year.

On February 3,1987, while Jose Palacio was in the hospital preparatory to a heart surgery, he called his only son, Boy Palacio, and showed the latter a will naming his son as sole heir to all the father’s estate including the family mansion in Forbes Park. The following day, Boy Palacio took out a fire insurance policy on the Forbes Park mansion. One week later, the father died. After his father’s death, Boy Palacio moved his wife and children to the family mansion which he inherited. On March 30, 1987, a fire occurred razing the mansion to the ground. Boy Palacio then proceeded to collect on the fire insurance he took earlier on the house. Should the insurance company pay? Reasons. A:

No, the insurance company can legally refuse to pay. The rule in property insurance is that insurable interest must exist both at the time of the risk insured against occurs. In the present case, Boy did not have insurable interest on the house at the time he took the insurance. The fact that Boy Palacio was the expected sole heir of his father’s estate does not give the prospective heir any existing interest prior to the decedent.

§5. INSURABLE INTEREST OF BENEFICIARY IN PROPERTY INSURANCE. The beneficiary must have insurable interest in the property that is the object of the insurance. The

110

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

contract will be considered a wagering contract if the beneficiary will be allowed to recover even if he has no insurable interest on the subject property. §5.01. INSURABLE INTEREST OF BENEFICIARY IN LIFE INSURANCE. If the insured takes out an insurance on his own life, he can designate anybody whether or not the beneficiary has insurable interest over his (insured) life. However, if the insured takes out an insurance on the life of another designating himself or herself as beneficiary, insurable interest of the part of the insured is necessary. Insurable interest on the part of the beneficiary is likewise necessary if one takes out an insurance on the life of another and designates a third person as the beneficiary. PROBLEM: 1. Blanco took out a Pi Million life insurance policy naming his friend and creditor, Montenegro as his beneficiary. When Blanco died, his outstanding loan to Montenegro was only P50,000.00. Blanco’s executor contended that only P50,000.00 out of the insurance proceeds should be paid to Montenegro and the balance of P950,000.00 should be paid to Blanco’s estate. Is the executor’s contention correct? Reason out your answer. A:

No, the contention of the executor is not correct. A person can insure his own life and he does, he can designate any person as beneficiary even if the same person does not have insurable interest in his life. In other words, the beneficiary in a life insurance policy in the life of the insured need not have insurable interest if he was designated by the insured himself. The beneficiary who is so designated is therefore entitled to the entire proceeds of the insurance.

§6. ASSIGNEE IN LIFE INSURANCE. A life insurance policy can be transferred even without the consent of or notice to the insurer. By express provision of Section 184 of the Insurance Code, it is not necessary that the transferee has insurable interest. a. Since a policy of insurance upon life or health may pass by transfer, will or succession to any person whether he has insurance interest or not, the transferee may recover whatever the insured may have recovered under the policy.73

73 Great Pacific Life Assurance Corp. v. Court of Appeals and Medarda V. Leuterio, G.R. No. 113899, October 17, 1999.

CHAPTER 3 INSURABLE INTEREST

111

§6.01. ASSIGNEE IN PROPERTY INSURANCE. With respect to property insurance, it is necessary that the transferee has insurable interest over the thing insured. This is consistent with Section 18 of the Insurance Code which provides that “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.” The requirement of insurable interest can likewise be inferred from Section 58 which provides that 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.

a. Accordingly, a clause in an agreement, providing for an automatic assignment of the policy is void, if the assignee does not have any insurable interest over the insured property. For example, a provision in a contract of lease that provides that any fire insurance policy obtained by the lessee over the merchandise inside the leased premises is deemed assigned or transferred to the lessor is void for being contrary to law and public policy.74 b. If the transfer of the property insurance policy is made after the loss, insurable interest on the part of the beneficiary is no longer necessary. In fact, the policy cannot prohibit the transfer of the policy after the loss has occurred. The Insurance Code provides:

SEC. 85. An agreement not to transfer the claim of the insured against the insurer after the loss has happened, is void if made before the loss except as otherwise provided in the case of life insurance. PROBLEM: 1. “NT owns a condominium unit presently insured with Holy Insurance Company for Pi Million. “N” later sells the condominium unit to “0.” Somehow, “O” fails to obtain the transfer of the insurance policy to his name from “N.” Subsequently, a fire of unknown origin destroys completely the condominium unit. Who may collect the insurance? A Nobody can collect the insurance proceeds. While N had insurable interest at the time the insurance policy was taken, he no longer had insurable interest at time of the loss. On the other hand, “O” is not a party to the insurance contract and there was no valid assignment of the policy to “O.” * 18

74 Spouses Nilo Cha, et al. v. Court of Appeals, et al., G.R. No. 124520, August 18, 1997.

CHAPTER 4 PREMIUM Insurance is a risk-spreading device. The insurer pools the premiums paid by all its client. In theory, the pool of premiums answers for the losses of each insured. Indeed, it is no exaggeration to say that premium is the e l i x i r v i t a e of insurance business.1 §1. PREMIUM REQUIRED FOR POLICY TO BE BINDING. At the heart of the statutory rules on premium is Section 77 of the Insurance Code which provides:

SEC. 77. 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, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been 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. a. When Payment Accrues. 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. It should be noted however, that the contract of insurance is generally unilateral. This means that the insurer does not have a reciprocal obligation to pay the premium although the same payment will give rise to the unilateral obligation of the insurer. Usually, the insured cannot be sued for nonpayment of the premium, the only effect of non-payment being

lr

Tibay v. Court of Appeals, G.R. No. 119655, May 24, 1996, 257 SCRA 126. 112

CHAPTER 4 PREMIUM

113

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. (1) Payment may be made to the insurer himself or its agent. Section 315 of the Insurance Code provides “any insurance company which delivers to an insurance agent or insurance broker a policy or contract of insurance shall be deemed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its issuance or delivery or which becomes due thereon.” Payment to an agent having authority to receive or collect payment is equivalent to payment to the principal himself; such payment is complete when the money delivered is in the agent’s hands and is a discharge of the indebtedness owing to the principal.2 (2) Industrial Life Policy.3 In the case of industrial life policy, Section 235 of the Insurance Code provides that the same “shall not lapse for non-payment of premium if such non-payment was due to the failure of the company to send its representative or agent to the insured at the residence of the insured or at some other place indicated by him for the purpose of collecting such premium.” This rule shall not apply however when the premium on the policy remains unpaid for a period of three (3) months or twelve (12) weeks after the grace period has expired.4 §1.01. EFFECT OF NON-PAYMENT. 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. Mere delivery of a promissory note or a post-dated check is not sufficient unless the case is covered by any of the exceptions. The importance of payment of premium was explained in this wise: “An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract where the rights and obligations of the parties

2 Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, et al., G.R. No. 67835, October 12, 1987; Santos B. Areola, et al. v. Court of Appeals, et al., G.R. No. 95641, September 22, 1994. :1 Section 235, I.C. 4 2nd par.. Section 235, I.C.

114

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

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 a 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.

xxx A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate legal reserve in favor of those claiming under their policies. The law generally mandates that insurance companies should retain an amount sufficient to guarantee the security of its policyholders in the remote future, as well as the present, and to cover any contingencies that may arise or may be fairly anticipated. The integrity of this legal reserve is threatened and undermined if a credit arrangement on the payment of premium were to be sanctioned. Calculations and estimations of liabilities under the risk insured against are predicated on the basis of the payment of premiums, the vital element that establishes the juridical relation between the insured and the insurer. By legislative fiat, any agreement to the contrary notwithstanding, the payment of premium is a condition precedent to, and essential for, the efficaciousness of the insurance contract, except (a) in case of life or industrial life insurance where a grace period applies; or (b) in case of a written acknowledgment by the insurer of the receipt of premium, such as by a deposit receipt, the written acknowledgment being conclusive evidence of the premium payment so far as to make the policy binding.”5

(b) It was observed that the payment of the premium creates the v i n c u l u m j u r i s between the parties. It was observed that “so essential is the premium payment to the creation of the v i n c u l u m j u r i s between the insured and the insurer that it would be doubtful to have that payment validly excused even for a fortuitous event.” 6 It is believed however, that there is already a v i n c u l u m j u r i s between the parties even if the premium has not yet been paid. Considering that insurance contract is consensual, a juridical bond already exists between the parties the moment the contract is perfected by mere consent. However, it is the obligation of the insurer that is subject to the condition that the premium is paid. (c) If the insurer has no liability under the lapsed and inexistent policies, the insurer has no right to demand, much less

6 Separate Opinion of Justice Vitug in UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc., G.R. No. 137172, April 4, 2001. 6 Ibid., citing Constantino v. Asia Life Insurance Co., 87 Phil. 248.

CHAPTER 4 PREMIUM

115

sue the insured for the unpaid premiums. To give the insurer the right to sue the insured would be the height of injustice and unfair dealing. With the lapsing of the policies through the nonpayment of premiums by the insured there is no more insurance contract to speak of. The nonpayment of the premiums does not merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract.7 a. Payment by Check. Delivery of a check after the loss is not effective. 8 Similarly, delivery of a post-dated check before the loss will not result in making the policy binding if there is no credit agreement. In G a i s a n o v . D e v e l o p m e n t I n s u r a n c e a n d S u r e t y C o r p ,,9 the Supreme Court observed that the policy states that the insured’s application for the insurance is subject to the payment of the premium. Hence, there is no waiver of pre-payment, in full or in installment, of the premiums under the policy. b. However, there is an opinion to the effect that if the check is not postdated and covered by sufficient funds, delivery thereof will make the insurance policy valid and binding even if the same is encashed after the loss. 10 The effect of the subsequent encashment retroacts to the date of delivery to and acceptance by the insurer.11 §1.02. WHEN BINDING EVEN IF PREMIUM IS UNPAID. Based on the ruling in U C P B G e n e r a l I n s u r a n c e C o . , I n c . v . M a s a g a n a T e l a m a r t , I n c . , 1 2 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;

7 Arturo P. Valenzuela, et al. v. The Hon. Court of Appeals, et al.t G.R. No. 83122, October 19, 1990. 8 Gaisano v. Development Insurance and Surety Corp., G.R. No. 190702, February 27, 2017. 9 Ibid. 10 Justice Jose C. Vitug, Pandect of Commercial Law and Jurisprudence, 1st Ed., p. 68. n Ibid. 12 G.R. No. 137172, April 4, 2001. Note that the Supreme Court reversed its earlier Decision in the same case which sustained the insurer’s position.

116

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(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.

a. 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, the pertinent provisions of which state:

SEC. 233. In the case of individual life or endowment insurance, the policy shall contain in substance the following conditions: (a) A provision that the policyholder is entitled to a grace period either of thirty (30) days or of one (1) month within which the payment of any premium after the first may be made, subject at the option of the insurer to an interest charge not in excess of six percent (6%) per annum for the number of days of grace elapsing before the payment of the premium, during which period of grace the policy shall continue in full force, but in case the policy becomes a claim during the said period of grace before the overdue premium is paid, the amount of such premium with interest may de deducted from the amount payable under the policy in settlement;

xxx SEC. 234. No policy of group life insurance shall be issued and delivered in the Philippines unless it contains in substance the following provisions, or provisions which in the opinion of the Commissioner are more favorable to the persons insured, or at least as favorable to the persons insured and more favorable to the policy-holders:

13 Harvey W. Rubin, Dictionary of Insurance Terms, 4th Ed., p. 207, hereinafter referred to as “Rubin.”

CHAPTER 4 PREMIUM

117

(a) A provision that the policyholder is entitled to a grace period of either thirty (30) days or of one (1) month for the payment of any premium due after the first, during which grace period the death benefit coverage shall continue in force, unless the policyholder shall have given the insurer written notice of discontinuance in advance of the date of discontinuance and in accordance with the terms of the policy. The policy may provide that the policyholder shall be liable for the payment of a pro rata premium for the time the policy is in force during such grace period; xxx SEC. 236. In the case of industrial life insurance, the policy shall contain in substance the following provisions: (a) A provision that the insured is entitled to a grace period of four (4) weeks within which the payment of any premium after the first may be made, except that where premiums are payable monthly, the period of grace shall be either one (1) month or thirty (30) days; and that during the period of grace, the policy shall continue in full force, but if during such grace period the policy becomes a claim, then any overdue and unpaid premiums may be deducted from any amount payable under the policy in settlement; xxx b. Acknowledgment. The second exception is provided for in Section 79 of the Insurance Code which states:

SEC. 79. An acknowledgment in a policy or contract 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. 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.

118

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

c. Installment. In M a k a t i T u s c a n y C o n d o m i n i u m C o r p o r a t i o n v . T h e C o u r t o f A p p e a l s , e t a l . , u the Supreme Court allowed the insured to pay the premiums on installment basis and adopted the following ratiocination of the Court of Appeals in making such ruling: “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. ( D e L e o n , t h e I n s u r a n c e C o d e , a t p . 1 7 5 ) So is an understanding to allow insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted. The reliance by petitioner on A r c e v . C a p i t a l S u r e t y a n d I n s u r a n c e Co.14 15 is unavailing because the facts therein are substantially different from those in the case at bar. In A r c e , no payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the balance.” d. Credit Extension. Credit extension is allowed under our present law and jurisprudence. However, the policy must expressly and clearly provide for a credit extension.16 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

14 G.R. No. 95546, November 6, 1992; Government Service Insurance System v. Prudential Guarantee and Assurance, Inc., G.R. Nos. 165585 and 176982, November 20, 2013 (the rule was applied to reinsurance premiums in this case). 15

G.R. No. L-28501, September 30, 1982. Gasiano v. Development Insurance and Surety Corporation, G.R. No. 190702, February

16

27, 2017.

CHAPTER 4 PREMIUM

119

(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. (1) It should be noted that the credit extension, under R.A. No. 10607, is extended to the duly licensed intermediary which in turn can benefit the insured. However, the Supreme Court observed in U C P B G e n e r a l I n s u r a n c e C o . , I n c . v . M a s a g a n a T e l a m a r t , I n c . 1 7 that by the approval of the afore- quoted findings and conclusion of the Court of Appeals, M a k a t i T u s c a n y C o n d o m i n i u m C o r p o r a t i o n v . T h e C o u r t o f A p p e a l s , e t a l . 1 8 has provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term. The Supreme Court observed 19 that there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term within which to pay the premiums. That agreement is not against the law, morals, good customs, public order, or public policy. The agreement binds the parties. Article 1306 of the Civil Code provides that the contracting parties may establish such stipulations clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (2) Old Rule. The old insurance law, Act No. 2427, as amended provided that: “An insurer is entitled to the payment of premium as soon as the thing insured is exposed to the peril insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid.” Thus, under the old law, the insurance policy would be valid and binding

17 G.R. No. 137172, April 4, 2001. Note that the Supreme Court reversed its earlier Decision in the same case which sustained the insurer’s position. 18 G.R. No. 95546, November 6, 1992. 19 UCPB General Insurance Company, Inc. v. Masagana Telamart, Inc., supra.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

120

notwithstanding the non-payment of the premium if there was a clear agreement to grant to the insured credit extension. Such agreement may be express or implied.20 The present law, Section 77 of the Insurance Code of 1978 has deleted the clause “unless there is clear agreement to grant the insured credit extension of the premium due.” The implication of the ruling in V e l a s c o v . A p o s t o l 21 is that credit extensions are no longer allowed because the law-making body deliberately made the deletion precisely to remove the exception. (3) It is also important to note the well-reasoned opinion of Justice Vitug to the effect that credit terms are not allowed under the present law. He believes that there should at least be partial payment of premium to establish the v i n c u l u m j u r i s between the insurer and the insured. He explained in his Separate Opinion in U C P B v . M a s a g a n a T e l a m a r t : 2 2 “This provision23 amended Section 72 of the then Insurance Act by deleting the phrase, “unless there is a clear agreement to grant the insured credit extension of the premium due,” and adding at the beginning of the second sentence the phrase, “[notwithstanding any agreement to the contrary.” Commenting on the new provision, Dean Hernando B. Perez states:

“Under the former rule, whenever the insured was granted credit extension of the premium due or given a period of time to pay the premium on the policy issued, such policy was binding although premiums had not been paid (Section 72, Insurance Act; 6 Couch 2d. 67). This rule was changed when the present provision eliminated the portion concerning credit agreement, and added the phrase ‘notwithstanding any agreement to the contrary’ which precludes the parties from stipulating that the policy is valid even if premiums are not paid. Hence, under the present law, the policy is not valid and binding unless and until the premium is paid (Arce v. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer wants to favor the insured by making the policy binding notwithstanding the nonpayment of premium, a mere credit agreement would not be sufficient. The remedy would be for the insurer to acknowledge in the policy that premiums were paid although they were not, in which case the policy becomes binding because such acknowledgment is a

20

Laura Velasco, et al. v. Hon. Sergio A.F. Apostol, et al., G.R. No. L-44588, May 9,

1989. 21

Ibid. G.R. No. 13712, April 4, 2001. 23 Section 77,1.C. 22

CHAPTER 4 PREMIUM

121

conclusive evidence of payment of premium ( S e c t i o n 7 8 ) . Thus, the Supreme Court took note that under the present law, Section 77 of the Insurance Code of 1978 has deleted the clause ‘unless there is a clear agreement to grant the insured credit extension of the premium due” ( V e l a s c o v . A p o s t o l , 1 7 3 S C R A 2 2 8 ) By weight of authority, estoppel cannot create a contract of insurance, neither can it be successfully invoked to create a primary liability, nor can it give validity to what the law so proscribes as a matter of public policy. So essential is the premium payment to the creation of the v i n c u l u m j u r i s between the insured and the insurer that it would be doubtful to have that payment validly excused even for a fortuitous event. The law, however, neither requires for the establishment of the juridical tie, nor measures the strength of such tie by, any specific amount of premium payment. A part payment of the premium, if accepted by the insurer, can thus perfect the contract and bring the parties into an obligatory relation. Such a payment puts the contract into full binding force, not merely p r o t a n t o , thereby entitling and obligating the parties by their agreement. Hence, in case of loss, full recovery less the unpaid portion of the premium (by the operative act of legal compensation), can be had by the insured and, correlatively, if no loss occurs the insurer can demand the payment of the unpaid balance of the premium. In the instant case, no juridical tie appears to have been established under any of the situations hereinabove discussed.” (4) It should likewise be noted that in a case decided under the old Insurance Law when credit extensions were expressly allowed, the policy is deemed automatically cancelled if the insured signed a promissory note stating that the insured will pay the premium on or before a fixed date and the insured failed to pay on the stipulated date.24

PROBLEM: Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a long-standing insurance relationship with each other; SPMC secures the comprehensive fire insurance on its plant and facilities from SIC. The standing business practice between them has been to allow SPMC a credit period of 90 days from the renewal of the policy within which to pay the premium. Soon after the new policy was issued and before premium payments could be made, a fire gutted the covered plant and facilities to the ground. The day after the fire, SPMC issued a manager’s check to SIC for

24 Acme Shoe Rubber & Plastic Corporation v. The Court of Appeals, et al., G.R. No. L56718, January 17, 1985.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

122

the fire insurance premium, for which it was issued a receipt; a week later SPMC issued its notice of loss. SIC responded by issuing its own manager’s check for the amount of the premiums SPMC had paid, and denied SPMC’s claim on the ground that under the “cash and carry” principle governing fire insurance, no coverage existed at the time the fire occurred because the insurance premium had not been paid. Is SPMC entitled to recover for the loss from SIC? ( 2 0 1 3 B a r ) A:

SPMC is entitled to recover the loss. The granting of a credit term to pay the premiums is not prohibited by the Insurance Code. The problem likewise indicates that the standing business practice of the insurer is to allow SPMC to pay the premiums after 60 or 90 days. Hence, SPMC relied in good faith that the insurer, Stable Insurance Company, will continue with such credit extension. Hence, based on the facts, Stable Insurance is likewise estopped from raising the defense that premium had not been paid.

e. Estoppel. Estoppel may bar an insurer from taking refuge under Section 77 if the insured relied in good faith on a practice that they have been following with the insurer. Hence, estoppel then is the fifth exception to Section 77. For example, the Supreme Court ruled that it would be unjust and inequitable if recovery on the policy would not be permitted against insurer, which had consistently granted a 60-day to 90day credit term for the payment of premiums despite its full awareness of Section 1 1 . 2 5 f.

Salary Deductions for Government Employees. Section 7826 provides that:

SEC. 78. Employees of the Republic of the Philippines, including its political subdivisions and instrumentalities, and government-owned or -controlled corporations, may pay their insurance premiums and loan obligations through salary deduction: Provided, That the treasurer, cashier, paymaster or official of the entity employing the government employee is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from the salary, wage or income of the latter pursuant to the agreement between the insurer and the government

25 Ibid., Gasiano v. Development Insurance and Surety 190702, Corporation, G.R. No. February 27, 2017. 26 This is a new provision inserted by R.A. No. 10607.

CHAPTER 4 PREMIUM

123

employee and to remit such deductions to the insurer concerned, and collect such reasonable fee for its services. Thus, under the above-quoted provision, the insurance policy is already binding although the premium is, in effect, paid through installment by the government employee. It should be emphasized, however, that the provision requires that there is an agreement between the insurer and the government employee authorizing salary deduction of the premium. This is consistent with the general rule that no deductions can be made from the salary without the consent of the employee. g. Surety. Another exception can be cited but only with respect to a suretyship under Section 179 of the Insurance Code which provides that the surety is already liable even if there is nonpayment of premium if the obligee has already accepted the bond.27 Section 179 of the Insurance Code provides that the surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor and no contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid. However, the exception is when the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. h. Valid Tender of Payment. The insurance contract will continue to be binding if the non-payment was due to the fault of the insurer. The act of the insurer or his agent in refusing the tender of payment of a premium properly made, will necessarily stop the insurer from claiming a forfeiture from non-payment.28 §2. HOW TO PREVENT LAPSE OF LIFE INSURANCE POLICY. Several devices have been used to prevent the lapse of life insurance policy. These include: (1) grace period; (2) automatic policy loan; (3) application of dividend; and (4) restatement clause. §2.01. AUTOMATIC POLICY LOAN AND CASH SURRENDER VALUE. Cash surrender value “as applied to a life insurance policy, is the amount of money the company agrees to pay

27

AFP General Ins. Corp. v. Molina, G.R. No. 151133, June 30, 2008. Alicia S. Gonzales v. Asia Life Insurance Company, G.R. No. L-5188, October 29, 1952, citing Vance on Insurance, 2nd Ed., p. 294. 28

124

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

to the holder of the policy if he surrenders it and releases his claims upon it. The more premiums the insured has paid the greater will be the surrender value; but the surrender value is always a lesser sum than the total amount of premiums paid.” 29 The cash value or cash surrender value is therefore an amount which the insurance company holds in trust for the insured to be delivered to him upon demand. It is therefore a liability of the company to the insured. When the company’s credit for advances is paid out of the cash value or cash surrender value, that value and the company’s liability is thereby diminished p r o t a n t o . Consequently, the net assets of the insurance company increased correspondingly; for it is plain mathematics that the decrease of a person’s liabilities means a corresponding increase in his net assets.30 a. Section 233(f) of the Insurance Code provides that life or health insurance policy must state the options to which the policy holder is entitled in the event of default in a premium payment after three full annual premiums have been paid. Such options shall consist of:

b. A cash surrender value payable upon surrender of the policy which shall not be less than the reserve on the policy, the basis of which shall be indicated, for the then current policy year and any dividend additions thereto, reduced by a surrender charge which shall not be more than one-fifth (1/5) of the entire reserve or two and one-half percent (21/2%) of the amount insured and any dividend additions thereto; and c. One or more paid-up benefits on a plan or plans specified in the policy of such value as may be purchased by the cash surrender value.31 d. Under paragraph (g) of the same provision, Section 233, the life insurance policy must likewise contain a “provision that at anytime after a cash surrender value is available under the policy and while the policy is in force, the company will advance, on proper assignment or pledge of the policy and on sole security thereof, a 29 The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-2910, June 29, 1951, citing Cyclopedia Law Dictionary, 3rd Ed., 1077. 30 The Manufacturers Life Insurance Co. v. Bibiano L. Meer, ibid. 31 Par. (f), Section 233,1.C.

CHAPTER 4 PREMIUM

125

sum equal to, or at the option of the owner of the policy, less than the cash surrender value on the policy, at a specified rate of interest, not more than the maximum allowed by law, to be determined by the company from time to time, but not more often than once a year, subject to the approval of the Commissioner; and that the company will deduct from such loan value any existing indebtedness on the policy and any unpaid balance of the premium for the current policy year, and may collect interest in advance on the loan to the end of the current policy year, which provision may further provide that such loan may be deferred for not exceeding six months after the application therefor is made.” e. Under an Automatic Premium Loan Clause, “if at the end of the grace period the premium due has not been paid, a policy loan will automatically be made from the policy’s cash value to pay the premium. The primary purpose is to prevent unintentional lapse of the policy.”32 If the policy loan and accrued interest is not paid in cash, the life insurer recovers the outstanding balance of the loan and accrued interest either from the death benefit if the insured dies or the cash surrender value. The insurer cannot file a case for the payment of the loan because in reality, then the policy loan is an advance. As explained by Justice Holmes: “The so-called liability of the policyholder never exists as a personal liability, it never is a debt, but is merely a deduction in account from the sum that the plaintiffs (insurer) ultimately must pay.”33 f. Sample stipulations referred to as non-forfeiture clauses contained in life insurance policies was quoted by the Supreme Court34 as follows: ‘“8. Automatic Premium Loan. — This Policy shall not lapse for non-payment of any premium after it has been three full years in force, if, at the due date of such premium, the Cash Value of this Policy and of any bonus additions and dividends left on accumulation (after deducting any indebtedness to the Company and the interest accrued thereon) shall exceed the amount of said premium. In which event the company will, without further request, treat the premium then due as paid, and the amount of such premium, with interest from its actual due date at six per

32

Rubin, p. 44. Board of Assessors v. New York Life Insurance Co., 216 U.S. 517, 30 S.Ct. 385

33

(1910).

34 The Manufacturers Life Insurance Co. v. Bibiano L. Meer, G.R. No. L-2910, June 29, 1951.

126

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

cent p e r a n n u m , compounded yearly, and one per cent, compounded yearly, for expenses, shall be a first lien on this Policy in the Company’s favour in priority to the claim of any assignee or any other person. The accumulated lien may at any time, while the Policy is in force, be paid in whole or in part. ‘When the premium falls due and is not paid in cash within the month’s grace, if the Cash Value of this policy and of any bonus additions and dividends left on accumulation (after deducting any accumulated indebtedness) be less than the premium then due, the Company will, without further requests, continue this insurance in force for a period ... ‘10. Cash and Paid-Up Insurance Values. — At the end of the third policy year or thereafter, upon the legal surrender of this Policy to the Company while there is no default in premium payments or within two months after the due date of the premium in default, the Company will (1) grant a cash value as specified in Column (A) increased by the cash value of any bonus additions and dividends left on accumulation, which have been allotted to this Policy, less all indebtedness to the Company on this Policy on the date of such surrender, or (2) endorse this Policy as a Non-Participating Paid-up Policy for the amount as specified in Column (B) of the Table of Guaranteed Values ...” §2.02. DIVIDENDS. The life insurance policy may be participating or nonparticipating. In the case of participating insurance policy, the insured is entitled to the dividends that may be available. It is mandated in the Insurance Code that if the policy is participating, it must contain a provision that the company shall periodically ascertain and apportion any divisible surplus accruing on the policy under conditions specified therein.35 It may be provided that the dividend shall be applied to the premiums that are due or payable. §2.03. REINSTATEMENT CLAUSE. Section 233(j) of the Insurance Code states among others that a life insurance policy must contain a provision that the policyholder shall be entitled to have the policy reinstated at any time within three years from the date of default of premium payment unless the cash surrender value has been duly paid, or the extension period has expired. a. The reinstatement will be made upon production of evidence of insurability satisfactory to the company and upon payment of all overdue premiums and any indebtedness to the company upon said policy, with interest rate not exceeding that which would have been applicable to said premiums and indebtedness in the policy

35

Section 233(e), I.C; see also Section 218,1.C.

CHAPTER 4 PREMIUM

127

years prior to reinstatement.36 It is a long standing rule that right of the insured to reinstatement does not give him an absolute right to such reinstatement by the mere filing of an application. The insurer may deny the application for reinstatement if it is not satisfied as to the insurability of the insured and if the insured does not pay the overdue premium.37 * * §3. RETURN OF PREMIUM. Section 80 of the Insurance Code enumerates the cases when return of premium is a matter of right:

SEC. 80. 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 penis 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. SEC. 81. If a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not entitled to return of premiums, so far as that particular risk is concerned. SEC. 82. A person insured is entitled to a return of the premium when the contract is voidable, and subsequently annulled under the provisions of the Civil Code; or on account of the fraud or misrepresentation of the insurer, or of his agent, or on account of facts,

36

Section 2330), I.C.

37 Rufino D. Andres v. The Crown Life Insurance Company, G.R. No. L-10874, January 28, 1958; Lalican v. Insular Life Assurance Co., G.R. No. 183526, August 25, 2009.

ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act)

128

or the existence of which the insured was ignorant of without his fault; or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud. SEC. 83. In case of an over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. §3.01. GROUNDS. Based on the foregoing provisions, the return of premium is warranted in the following cases: (1)

When the thing was not exposed to the peril insured against;38

(2)

“Time policy” when the policy is surrendered before the expiration of the stipulated time (the refund is p r o r a t a ) ; 3 9

(3) When the contract is voidable and subsequently annulled under the provisions of the Civil Code;40 (4) When the contract is annulled on account of the fraud or misrepresentation of the insurer or of his agent or on account of facts, or the existence of which the insured was ignorant of without his fault;41 (5) When by any default of the insured other than actual fraud, the insurer never incurred liability under the policy;42 and (6)

When there is over-insurance by several insurers.43

"Section 80, a, I.C. "Section 80, b, I.C. "Section 82,1.C., as 42 amended Ibid. "Section 83, I.C.

CHAPTER 4 PREMIUM

129

a. Not exposed to peril insured against. The insured can ask for the return of the premium if the property was not exposed to the risk insured against. However, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the property insured was exposed to the risk insured for any period, however brief or momentary.44 b. Time policy. With respect to time policy, the idea is that the amount paid is actually for the entire period and is spread to the entire term. In other words, the premium corresponds to a certain unit or units of time. That is why surrender of the policy means that the insurer will not be liable for the remaining period and the premium corresponding to the remaining period is no longer due. The refund shall be on a p r o r a t a basis except if a short rate has been agreed upon and appears in the policy. c. Voidable policy. Refund of the premium is also warranted if the contract is voidable. However, the ground that the contract is voidable should not be due to the insured or his agent. The law provides that the voidable nature of the contract should be on account of fraud or misrepresentation of the insurer, or of his agent, or on account of facts, the existence of which the insured was ignorant without his fault. Thus, under the provisions of Section 82 as amended by R.A. No. 10607, the insured is not entitled to return of the premium if the insured acted fraudulently, thus:

“A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud.” (1) Similarly, the insurer cannot keep the premium that was paid by the insured if the insurer was never at risk because the policy was inoperative and ineffectual from the beginning.45

PROBLEMS: 1. MTI obtained from UG Insurance Co., Inc. five insurance policies on its properties in Pasay City and Manila. For years, MTI had been issuing fire policies to UG, and these policies were annually renewed.

44 Makati Tuscany Condominium Corporation v. The Court of Appeals, et al, G.R. No. 95546, November 6, 1992. 45 Great Pacific Life Insurance Corporation v. Hon. Court of Appeals and Teodoro Cortez, G.R. No. L-57308, April 23, 1990.

ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notow on fVo Need Actj

130

UG had boon granting Respondent, a 60-to 90-day credit term within which to pay the premiums on the renewed policies. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the notice sent by ordinary mail was received by MTI, and the copy thereof allegedly sent to the broker was ever transmitted to MTI. The premiums for the policies in the aggregate amount of P225,753.95 were paid by MTI within the 60- to 90-day credit term and were duly accepted and received by UG’s cashier. However, the payment was made after the loss. Can UG deny the claim on the ground that the policies were not renewed by the payment of premium? A:

2.

A insured his house against loss by fire for P100,000.00. The policy provides that the insurer shall be liable “if the property insured shall be damaged or destroyed by fire after the payment of premium, at anytime, from June 15, 1976 to June 15, 1977.” The policy was delivered to A on June 14, 1976. Instead of paying the premium in cash, A issued a promissory note dated June 15, 1976, for the amount of the premium, payable within 30 days. The note was accepted. On June 29, 1976, the property insured was burned. The insurer refused to pay on the ground that the premium had not been paid, and the note did not have the effect of payment, as its value had not been realized at the time the house was burned. Decide with reasons. A:

3.

No, UG cannot deny the claim. The policies were already deemed renewed because the premiums were paid within the credit extension given by the insurer. In addition, it would be unjust and inequitable if recovery on the policy would not be permitted against UG, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on such practice. Hence, the present case falls under two exceptions to Section 77, namely, when a credit extension was granted and when the equitable principle of estoppel applies. ( U C P B G e n e r a l I n s u r a n c e C o m p a n y , I n c . v . M a s a g a n a T e l a m a r t , I n c . , G . R . N o . 1 3 7 1 7 2 , A p r i l 4 , 2 0 0 1 )

A may recover. The acceptance of the insurer of the promissory note has the effect of waiving the provision that it would be liable only after payment of optimum premium. The insurer may likewise be deemed to have been estopped in claiming that the insurance contract is not yet in force.

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter’s building and premises, for a

CHAPTER 4 PREMIUM

131

period beginning March 1, 1982 and ending March 1, 1983, with a total premium of P466,103.05. The premium was paid on installments on March 12, 1982, May 20, 1982, June 21, 1982 and November 16, 1982, all of which were accepted by private respondent. The policy was renewed twice thereafter with the same arrangement on payment of the premium on installment. The last renewal was on January 20, 1984, and the insurer issued to petitioner Insurance Policy No. AHCPP-9210651 for the period March 1, 1984 to March 1, 1985. On this renewed policy, petitioner made two installment payments, both accepted by private respondent, the first on February 6, 1984 for P52,000.00 and the second, on June 6, 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium. Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651. In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AHCPP-9210651. It explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor and the receipts for the installment payments covering the policy for 1984-85, as well as the two previous policies. Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. Decide with reason. A:

The claim of the insurer must be sustained. The subject policies are valid even if the premiums were paid on installments. The records clearly show that petitioner and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full. It appearing from the peculiar circumstances that the parties actually intended to make the three insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP9210651) in March 1985. Moreover, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary. ( M a k a t i T u s c a n y C o n d o m i n i u m C o r p o r a t i o n v . T h e C o u r t o f A p p e a l s , e t a l . , G . R . N o . 9 5 5 4 6 , N o v e m b e r 6 , 1 9 9 2 )

132

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§4. ADVANCE PAYMENT. Premium may be paid in advance by the insured. Thus, an additional provision was added as Section 84 by R.A. No, 10607 which authorizes insurers to accept payments for the purpose of paying future premiums:

SEC. 84. An insurer may contract and accept payments, in addition to regular premium, for the purpose of paying future premiums on the policy or to increase the benefits thereof. §5. REBATE OF PREMIUM. Section 370 of P.D. No. 612 states:

SEC. 370. No insurance company doing business in the Philippines or any agent thereof, no insurance broker, and no employee or other representative of any such insurance company, agent, or broker, shall make, procure or negotiate any contract of insurance or agreement as to policy contract, other than is plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or shall indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of such insured, either as an inducement to the making of such insurance or after such insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefits to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract of insurance; nor shall any such company, or any agent thereof, as to any policy or contract of insurance issued, make any discrimination against any Filipino in the sense that he is given less advantageous rates, dividends or other policy conditions or privileges than are accorded to other nationals a. Furthermore, Section 372 of the Insurance Code provides that violation of Section 370 constitutes a ground for the immediate revocation of the license issued to the erring insurance company, agent or broker and the imposition of a fine not exceeding P25,000.00

CHAPTER 4 PREMIUM

133

b. The purpose of these statutes is the prevention of unfair discriminatory practices by insurance companies, agents and brokers in order to ensure that equal terms are fixed for policyholders of the same insurable class and equal expectation of life. In aid and furtherance of this desirable policy, the statutes prohibit such practices involving rebates or preferential treatment with respect to the cost of the policy or the benefits allowed for the premium. 46 It follows that to enforce contracts or agreements directly forbidden under these statutes, thereby allowing recovery thereunder, would be subversive of the very public policy which the law was designed and intended to uphold. While the statutes are addressed to the insurance companies, agents and brokers, and are enacted for the protection of policyholders, the provisions are for the general body of policyholders who would suffer by the enforcement of the prohibited agreements, and not for those who have entered into such agreements and are seeking to profit by its terms.47

46 Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio Trinidad, G.R. No. L-64677, September 13, 1990, citing Laun v. Pacific Mutual Life Inn. Co. of California, 111 NW 660 (1907); Bernblum v. Travelers Ins. Co. of Hartford, Connecticut, 105 SW 2d 941 (1937); Chatz v. Bloom, 54 NE 2d 889 (1944); Mahone v. Hartford Life and Accident Insurance Company, 561 P 2d 142 (1976). 47 Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio Trinidad, ibid!., citing Smathers v. Bankers’ Life Ins. Co., 65 SE 746 (1909); Richmond v. Conservative Life Ins. Co., 165 NW 286 (1917); Sovereign Camp v. Waggoner, 173 So. 424 (1937).

CHAPTER 5 THE POLICY

A clearly readable and understandable insurance policy is important for the protection of the general public. In the early days of fire insurance business, certain insurance companies were notorious for cluttering their policies with restrictive provisions that resulted in voluminous contracts that were largely unreadable. A decision in one case contains this Dickensian description of such nefarious practice: “Forms of applications and policies x x x of a most complicated and elaborate structure were prepared, and filled with covenants, exceptions stipulations, provisions, rules, regulations and conditions rendering the policy void in a great number of contingencies. These provisions were of such bulk and character that they would not be understood by men in general, even if subjected to a careful and laborious study; by men in general, they were sure not to be studied at all. The study of them was rendered particularly unattractive by a profuse intermixture of discourses on subjects in which a premium payer would have no interest. This compound, if read by him, would, unless he were an extraordinary man, be an inexplicable riddle, a mere flood of darkness and confusion, some of the most material stipulations were concealed in a mass of rubbish on the back side of the policy and the following page, where few would expect to find anything more than a dull appendix and where scarcely any one would think of looking for information x x x. As if it were feared that, notwithstanding these discouraging circumstances, some extremely eccentric person might attempt to examine and understand the meaning of the involved and intricate net in which he was to be entangled, it was printed in such small type and in lines so long and so crowded that the perusal of it was made physically difficult, painful and injurious.”1

§1. CONSENSUAL. An insurance contract is a consensual contract. It is perfected by mere consent of the parties and no

Delaney v. Rockingham Farmers Mutual Insurance Company, 52 N.H. 581, 587 (1873), cited in Huebner, Black & Webb, p. 17. 134

CHAPTER 5 THE POLICY

135

formality is required for its perfection. Hence, the absence of a policy does not bar the contract from coming into existence. §2. STATUTE OF FRAUDS INAPPLICABLE. A contract is unenforceable if the same does not comply with the Statute of Frauds. Article 1403 of the New Civil Code requires a contract to be in a note or memorandum if it is one of the cases covered by the Statute of Frauds. 2 These include contracts that cannot be performed within one year after the contract is made. One argument is that insurance contracts (with a term of more than one year) cannot be performed within one year because the loss may occur after one year. However, insurance contracts can be performed within one year although it is contingent upon the happening of an event. For instance, while life insurance contracts may remain in force for decades, the obligation of the insurance company to pay the proceeds may likewise be performed within one year because the future event (death of the insured) may occur within one year. Hence, insurance contracts are not covered by the Statute of Frauds. §3. POLICY. Although formalities are not required for the perfection of the contract, it is still mandated by law that written policies should be issued by the insurer. A policy of insurance is defined in Section 49 of the Insurance Code as “the written instrument in which a contract of insurance is set forth.” a. Printed Form. Section 50 of the Insurance Code provides that the policy 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 shall be written on the blank spaces provided therein. (1) Before R.A. No. 10607, Group Insurance and Group Annuity Policies which may be typewritten and need not be in printed form. However, R.A. No. 10607 removed this exception in Section 50. b. Electronic Document. Section 50 now provides that “the policy may be in electronic form subject to the pertinent provisions of R.A. No. 8792, otherwise known as the ‘Electronic Commerce Act’ and to such rules and regulations as may be prescribed by the Commissioner.” 3 The applicable rules and regulations is the Insurance Commission Circular Letter No. 2014-47 dated November

2

See Article 1403, New Civil Code. Section 50,1.C., as amended by R.A. No. 10607. 3

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

136

21, 2014 entitled “Guidelines on Electronic Commerce of Insurance Products. In the Guidelines, the Insurance Commissioner expressed the view that: (1) the words “writing,” “certificate” or any reference documents found in the Insurance Code permit electronic documents; (2) the requirement that the document be “signed” permits electronic signature; and (3) the provisions for “delivery,” “notice” or that the document be “mailed” or is “issued” or similar acts, permit electronic communications. 4 (1) It is also provided that “considering that consumers themselves complete the insurance application form on the Internet, the process may be subject to error. To prevent the consequences of such errors, the information from the application form shall be recapitulated in a summary and presented to consumers before the contract is concluded, giving them the opportunity to validate their answers once more. In lieu of an actual specimen signature from the consumer to validate the information indicated in the online application form, the consumer may signify his consent by clicking the confirmation button to finalize the processing of the application. The use of the confirmation button does not prevent the insurance provider from using other modes of capturing consent (i . e ., digital electronics signature pads, software application).5 c. Approval of Insurance Commission. All policies issued by insurance companies are approved by the Insurance Commission in accordance with the first paragraph of Section 232 which provides:

SEC. 232. No policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner, and 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.

4

Section 13,1.C., Circular Letter No. 14-47. Circular Letter No. 2014-47 dated November 21, 2014 as amended by Circular Letter No. 2016-60 dated November 16, 2016 and Circular Letter No. 2016-15 dated March 15, 2016.

CHAPTER 5 THE POLICY

137

d. Amendments. The rule requiring submission to the Insurance Commission and approval thereof by the latter includes amendments or revisions to the standard policy wordings that would require approval as determined by said body. The specimen copy of the submitted forms shall be stamped “Approved” by the Commission. 6 §3.01. OTHER DOCUMENTS. It should also be noted that in addition to the policy, the other important documents for the creation of insurance contract or the creation or limitation of liability include the Application, cover notes or binders, Riders and Endorsements. a. Application. The Application is the offer of the person who seeks to procure an insurance policy. The application contains information and declaration that may constitute representations of the applicant. “Declarations are statements providing information about the risk to be insured and usually for the basis for a decision regarding the issuance and rating of the insurance.”7 b. Binding Receipts. Insurers may likewise issue binding receipts. However, it was explained that in life insurance, a “binding slip” or “binding receipt” does not insure by itself. 8 Thus, in one case, the binding deposit receipt was clearly intended to be merely a “provisional or temporary insurance contract and only upon compliance of the following conditions: (1) that the company shall be satisfied that the applicant was insurable on standard rates; (2) that if the company does not accept the application and offers to issue a policy for a different plan, the insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the deposit shall be refunded; and (3) that if the applicant is not able according to the standard rates, and the company disapproves the application, the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the applicant.” 9 The binding deposit receipt is merely conditional and does not insure outright. §3.02. POLICY FORM. The insurer is generally free to provide for the terms and conditions of the policies that it will issue so long

Circular Letter No. 2015-15 dated March 26, 2015. 7 Mehr and Cammack, p. 118. “Great Pacific Life Assurance Co. v. Hon. Court of Appeals, G.R. No. L31845 April 30,1979 citing De Lim v. Sun Life Assurance Company of 9 Ibid.

138

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

as the same provisions are not contrary to law, moral, customs, and public policy. In addition, the forms are subject to the approval of the Insurance Commission. Pursuant to Section 232 of the Insurance Code, the Insurance Commission likewise imposed the minimum requirements for the approval of insurance plans/forms for policy, certificate or contract of insurance, application, rider, clause, warranty or indorsements for all life insurance companies.10 a. In some cases, the Insurance Commission approved standard policies that should be used by insurers. For example, the Insurance Commission approved a Standard Fire Policy in September 1980 and the same was made effective in January 1981. Similarly, the Insurance Commission likewise approved a Standard Life Insurance Policy dated June 25, 1993.11 b. Mandatory Provisions under the Code. However, in certain cases, the law itself provides for mandatory provisions. Thus, the law prescribes minimum mandatory provisions for the following policies: (1) Individual life, 12 (2) Endowment Insurance,13 (3) Group Life,14 * and (4) Industrial Life.16 c. Insurance Guidelines. The Insurance Commission consolidated the relevant rules on the approval of Non-Life Insurance Policy Forms. Hence, the Commission promulgated the “Guidelines on the Approval of Non-Life Insurance Policy Forms The administrative issuance recognizes the flexibility of the insurers “to design insurance products to support the needs of the clients in a manner that shall promote greater insurance protection.” 17 Moreover, the guidelines provide that the “policy forms must not be inequitable, unfairly discriminatory, misleading, deceptive, obscure or that encourage misrepresentation.”18 §4. BASIC PROVISIONS. It is a basic rule that the terms of the contract constitute the measure of the insurer’s liability and

10

Circular Letter No. 11-90, July 10, 1990. Circular Letter No. 14-93; See also Circular Letter No. 2015-12-C dated March 24, 2015 for the Changes in the Approved Non-Life Insurance 12 Section 233,1.C. 13 Ibid. 14 Section 234,1.C. 16 Section 235,1.C. 16 Circular Letter No. 2015-58-A dated December 21, 2015. 17 Ibid. 18 Par. 3.3, Circular Letter No. 2015-58-A dated December 21, 2015. u

CIIAI’TKK 5 THF POLICY

compliance therewith is a condition precedent to the insured'n right of recovery from the insurer.'0 Section 51 provides the contents of the policy. However, Section 51 does not prohibit additional stipulations. 19 20 Stipulations that are not contrary to law, morals, good customs, public order or public policy must be upheld as effective, valid and binding as between the parties.21 a. The provisions of an insurance contract can be classified as follows: (1) declarations, (2) insuring agreements, (3) exclusions, and (4) conditions. The policy of insurance must contain the provisions enumerated in Section 51 which provides:

SEC. 51. A policy of insurance must specify: (a) The parties between whom the contract is made; (b) The amount to be insured except in the cases of open or running policies; (c) 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; (d) The property or life insured; (e) The interest of the insured in property insured, if he is not the absolute owner thereof; (f) The risks insured against; and (g) The period during which the insurance is to continue. a. Declarations. Most of the provisions of Section 51 are part of the declaration. “Declarations identify the insured; describe the property, activity or life insured; state the types of coverage purchased, the applicable policy limits and the term of the coverage;

1990.

19 Stokes v. Malayan Insurance Co., Inc., C.K. No. L-34768, February 28, 1984, 127 SCRA 766, 769; Young v. Midland Toxtilo liiHuruncu, Co., 30 Phil. 617. 20 Steamship Mutual Underwriting Association (Bermuda) Limited v. Sulpicio Lines, Inc., G.R. Nos. 196072 and 208603, September 20, 2017. 21 Perla Compania De Seguros v. Court of Appeals, G.R. No. 78860, May 28,

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

140

and indicate the premium paid for each separate coverage purchases. The purpose of the declarations made by the insured is to give the insurer sufficient information to enable it, with information from other sources, to issue the desired contract at a proper price.”22 b. Insuring Agreements. These provisions specify what the insurer promises to do. “The insuring agreements describe the characteristics of the events covered under the contract.”23 c. Exclusions. These provisions limit the coverage provided under the insuring agreements. These provisions exclude specified perils, property, sources of liability, persons, losses, locations and time periods.24 d. Conditions. These provisions define terms used in the other parts of the contract, prescribe conditions that must be complied before the insurer can be made liable and may describe the basis for computing the premium.25 e. Distinguished from Notes. In marine insurance, the policy should be distinguished from “Marine Risk Notes.” A Marine Risk Note is an acknowledgment or declaration confirming the specific shipment covered by its Marine Open Policy, the evaluation of the cargo, and the chargeable premium. 26 Such note is not the policy itself. d. Non-Waiver Clause. The Insurance Commission allows an insurer to insert in a non-life insurance policy a Non-Waiver Clause which is a provision that “no change in the policy is valid unless approved by an executive officer of the insurer, or unless the approval is endorsed on the policy or attached it, or both, and that no agent has authority to change the policy or waive any of its provisions.” 27 §4.01. PARTIES. The policy must identify the insurer and the insured. Parties are indispensable elements of insurance contracts.

22

C. Arthur Williams, Jr. and Richard M. Heins, Risk Management and Insurance, 1989 6th Ed., p. 339 hereinafter referred to as “Williams, Jr. and Heins.” 23

Williams, Jr. and Heins, ibid. ^Williams, Jr. and Heins, p. 340. “Williams, Jr. and Heins, p. 341. 26 Aboitiz Shipping Company v. Philippine American General Insurance Company, G.R. No. 77530, October 5, 1989, 178 SCRA 357; Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No. 172156, November 23, 2007. 27 Par. 7.21,1.C. Circular Letter 2015-58-A dated December 21, 2015.

CHAPTER 5 THE POLICY

141

The parties who consent to perfect the contract should necessarily be specified. a. It should be noted however that the person whose life is insured need not be a party to the insurance contract. §4.02. DESIGNATION OF BENEFICIARY. The designation of the beneficiary should be made in unequivocal terms. The Insurance Code provides for rules on designation of beneficiaries as follows:

SEC. 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy. a. Rules on Designation. Ideally, the name of the beneficiary is expressly stated in the policy to avoid confusion. The designation is not however invalid despite the absence of the specific name. For instance, it is enough that the identity of the beneficiary is sufficiently determinable from the details provided in the policy. Some of the rules on the designation of the beneficiary are as follows: (1) If the designated beneficiary is the “wife” without the specific name, the second wife is the beneficiary in case the first wife dies;28 (2) If the policy designates the “children” as beneficiary, these include adopted children and children by the wife designated as beneficiary and children of the previous marriage;29 (3) Adopted children are included in the policy that designates the “children” as beneficiary.30 (4) Only the children by the wife designated as beneficiary is included if the designation uses the terms “our children” or “children of this marriage.”31 (5) There is a conflict of opinion regarding the issue regarding the inclusion of illegitimate in the designation of “children” as beneficiary. However, with the policy to protect children, it is submitted that illegitimate children are included. * 1

2 8

B S1 i lbid.

142

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(6) The estate may be designated by expressly providing that the estate is the beneficiary or as follows: “To the executors, administrators, assigns of the insured.”32 (7) The words “wife of the insured” or the use of the term “Mrs ” is merely descriptive and the person whose specific name appears as beneficiary (example Mrs. Juana De la Cruz) is considered the beneficiary even if in fact, the person so named is not married to the insured.33 34 (8) The person designated by specified name but with an additional description “fiance” remains the beneficiary even if the person so named is no longer the fiance of the insured.31 (9) The designation may be class designation which include the members of the class who are living at the death of the insured (example, “children”).35 (10) The designation may be P e r S t i r p e s which means that proceeds shall be divided among the members of a class, such as children of the insured, with the share of the member of the class, like a child, who pre-deceased the insured going to that person’s surviving children.36 §4.03. AMOUNT INSURED. The amount insured fixes the limit of the liability of the insurer. In property insurance, the liability may be for total loss or for less than total loss. The policy may also provide for different amounts of compensation depending on the type or cause of loss. For example, in health insurance, the liability may vary depending on the cause of the injury. 37 On the other hand, a life insurance policy may provide for a bigger amount of insurance coverage for certain causes of death as in the case where double compensation is provided for accidental death. a. In addition, the amount may vary depending on whether or not certain conditions are complied with. Thus, in one case, the car insurance policy drew out not only the limits of the insurer’s liability but also the mechanics that the insured had to follow to be entitled

32

Greider and Beadles, p. 146. Ibid. 34 IbidSimmons v. Simmons, 272 S.W. 2d 913. 35 Greider and Beadles, p. 167. ™Ibid. 37 Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963. 33

CHAPTER 5 THE POLICY

143

to full indemnity of repairs. The option to undertake the repairs is accorded to the insurance company in one of the paragraphs of the policy otherwise the insurer’s liability is fixed as at smaller amount. Where the insurer is deprived of the option because the insured took it upon itself to have the repairs made, and only notified the insurer when the repairs were done, the insurer is liable for such a smaller amount. Under this provision, it is not even necessary to require the insurer to prove that the cost of repair that was made at the instance of the insured was unreasonable.38 b. In this connection, it was also explained that “limitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts with ‘extreme jealousy’ and ‘care’ and with a ‘jaundiced eye.”’39 c. The policy may also stipulate an automatic increase in coverage under certain circumstances. For instance, in one variation of what is known as the “Automatic Increase Clause” in life insurance, the coverage is automatically increased to a higher amount if the insured reaches a certain age.40 §4.04. PREMIUM. It is a basic statutory rule that “no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid.” 41 While the presence of consideration is an indispensable element of an insurance contract, the Insurance Code requires payment of the premium in order to make the responsibility of the insurer to pay obtain obligatory force. a. Ordinarily, the exact amount of the payable premium should be specified in the policy. However, there are cases when the insurance is of a character where the exact premium is only determinable upon the termination of the contract. In which case the law requires that a statement of the basis and rates upon which

38 Misamis Lumber Corporation v. Capital Insurance and Surety Company, G.R. No. L21380, May 20, 1966.

^hilamcare Health Systems, Inc. v. Court of Appeals, 429 Phil. 82 (2002); Blue Cross Health Care, Inc. v. Spouses Olivares, 568 Phil. 526 (2008); Fortune Medicare, Inc. v. Amorin, G.R. No. 195872, March 12, 2014 (involving the interpretation of the term “approved standard charges” for which the insurer was liable up to 80%). ^Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company, G.R. No. 1190176, March 19, 2002. 41 Section 77,1.C.

144

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the final premium is to be determined is specified in the policy. In other words, the rate of the premium should either be determined or determinable. The amount of the premium cannot be left to the sole will of one of the parties. §4.05. IDENTIFICATION OF THE INSURED. Generally, the policy expressly specifies the insured - the person whose life is insured. Specifying the insured leaves no room to doubt the identity of the owner of the policy or the person whose life is insured. In property insurance, the person insured is the person, having insurable interest of the property insured, took out the insurance policy; the subject matter of the insurance in this case is the property insured. As noted in Chapter 2, in life insurance, if a person insures the life of another, the person whose life is insured is called the “insured” while the person who took out an insurance on the former’s life is called the “assured.” a. Insured Identified in General Terms. Section 56 of the Insurance Code applies when the insured is not specifically identified. When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy. Hence, it is a question of proof if the person claims that he is one of those described as insured in general terms.

SEC. 56. When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy. Thus, an insurance over a car may designate the “registered owner” as the insured. In such case, there it can easily be established by presenting the Certificate of Registration of the car. b. Additional Insured. There are cases, however, when the insured are necessarily identified in general terms. Thus, in the Compulsory Third Party Liability Insurance, the Insurance Code mandates an insurance coverage in favor of the “passengers” of the vehicle. Necessarily, not all future passengers can be identified in the policy and their identities may also be determined as of the time of the accident. Similarly, a Group Insurance Plan may provide that any person eligible for coverage shall be automatically insured. A

CHAPTERS THE POLICY

145

person is insured so long as he qualifies under the coverage clause provided for in the policy.42 c. Agents, Trustees, Co-Owners and Partners. Sections 54 and 55 provides for rules on the determination of the real owner of the policy in policies involving agents, trustees, co-owners and partners.

SEC. 54. When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general words in the policy. SEC. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his copartners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. (1) Agent or Trustee. The principal may be damnified by the loss of the property that he owns that is under the care of a trustee or agent. On the other hand, the agent or trustee that takes care of the property may also be damnified by the property’s loss. Hence, both the principal and his agent or trustee can insure the property under the latter’s care. There may be instances, however, that the principal takes an insurance on the property through the agent or trustee. The policy may not expressly provide that it was the principal who really took the policy but the policy may contain words that will indicate that the principal is the real party-in-interest. This is an example of the situations that are covered by Section 54 of the Insurance Code. (2) Partner or Co-owners. Partners and co-owners may have insurable interest on the property owned by the partnership or owned in common. The insurance can be taken by the managing partner or co-owner on the property for the partnership or the co-ownership. In such case, the terms of the policy should expressly provide that the insurance is applicable to the joint or common interest. An express provision is

42

Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

146

necessary because a co-owner and partner also have insurable interest on the property and they may take an insurance for their own benefit. §4.06. IDENTIFICATION OF PROPERTY INSURED. Section 51 provides that the property insured and the interest of the party insured must be specified. Ideally, the description of the property insured should so specific as to leave no room to doubt its identity. This will avoid unnecessary dispute with the insurer in case of loss. However, an erroneous description of the property insured will not necessarily avoid the policy if the true intention of the parties can be determined. a. Thus, in G a r c i a v . H o n g k o n g F i r e & M a r i n e I n s u r a n c e C o . , L t d .,43 the insured wanted insurance upon a stock of goods, which he owned, and he received and paid for a policy on a building, which he did not own, and while the policy was in force and effect, both the building, which he did not own, and the stock of merchandise, which he did own, were completely destroyed by fire. Hence, there can be recovery in case of loss of the merchandise. b. It is well to point out in this connection that insurance can also be on the liability of a person. Hence, the subject matter of the insurance is not limited to property; it can also insure the performance of the obligation of a person. For instance, the potential liability of the carrier to its passengers in case the passengers are injured may be insured against. c. In one case involving insurance against the risk of loss through earthquakes, the insured claimed that the policies covered not only two swimming pools but also all the properties in the resort that it owns. The insured rejected the claim for loss over the other properties claiming that the policies covered only the swimming pools. The Supreme Court ruled in favor of the insurer stating that all the provisions of the policies and riders, taken and interpreted together indubitably show the intention of the parties to extend the earthquake shock coverage to the two swimming pools only.44 PROBLEMS: 1. Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns two oil mills. Both are located in a factory compound at Iyam, Lucena City. It appears that respondent

43

G.R. No. 20341,

September 1, 1923. “Ibid.

CHAPTER 5 THE POLICY

147

commenced its business operations with only one (1) oil mill. In 1988, it started operating its second oil mill. The latter came to be commonly referred to as the new oil mill. The two oil mills were separately covered by fire insurance policies issued by petitioner American Home Assurance Co., Philippine Branch. The policy for the new oil mill states: This is obvious from the categorical statement embodied in the policy, extending its protection: “On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra, copra cake and copra mills whilst contained in the n e w o i l m i l l building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.” A fire that broke out in the early morning of September 30,1991 gutted and consumed the new oil mill. Respondent immediately notified the petitioner of the incident. The latter then sent its appraisers who inspected the burned premises and the properties destroyed. Thereafter, in a letter dated October 15, 1991, petitioner rejected respondent’s claim for the insurance proceeds on the ground that no policy was issued by it covering the burned oil mill. It stated that the description of the insured establishment referred to another building. It was noted that despite the fact that the policy in question was issued way back in 1988, or about three years before the fire, and the insured did not call petitioner’s attention with respect to the misdescription. Did the insurer validly reject the claim? A:

No. The rejection of the claim was invalid. In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be. Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties manifestly intended to insure was the new oil mill. This is obvious from the categorical statement embodied in the policy referring to the “new oil mill.” If the parties really intended to protect the first oil mill, t h e n t h e r e i s n o n e e d t o s p e c i f y i t a s n e w . Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave uncovered its second one. As mentioned earlier, the first oil mill is already covered under another policy issued by the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter ought to know that a second agreement over that same realty results in its over insurance.

148

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

The imperfection in the description of the insured oil mill’s boundaries can be attributed to a misunderstanding between the petitioner’s general agent, and its policy issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the policy to be issued for the new one. It is thus clear that the source of the discrepancy happened during the preparation of the written contract. These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto. 15 Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus, while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on the policy concededly pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting evidence a l i u n d e , which will explain the imperfection and clarify the intent of the parties. Anent petitioner’s argument that the respondent is barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, we find that the same proceeds from a wrong assumption. Evidence on record reveals that respondent’s operating manager notified the petitioner’s agent with whom respondent negotiated for the contract about the inaccurate description in the policy. However, the agent assured the manager that the use of the adjective n e w will distinguish the insured property. The assurance convinced respondent, despite the impreciseness in the specification of the boundaries, the insurance will cover the new oil mill. Hence, respondent is not barred by estoppel. ( A m e r i c a n H o m e A s s u r a n c e C o m p a n y v . T a n t u c o E n t e r p r i s e s , I n c . , G . R . N o . 2 1 3 8 9 4 , O c t o b e r 8 , 2 0 0 1 )

2. On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insur ance) issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for PI,000,000.00 and eventually increased to Pi,500,000.00, covering the period from August 14, 1980 to March 13, 1981. Pertinent portions of subject policy on the buildings insured, and location thereof, read: ‘“On stocks of finished and/or unfinished products, raw materials and supplies of every kind and description, the properties of the Insureds and/or held by them in trust, on commission or on joint account with others and/or for which they (sic) responsible in case of loss whilst contained and/or stored during the currency of this Policy in the premises occupied by

CHAPTER 5 THE POLICY

149

them forming part of the buildings situate (sic) within own Compound at MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.’ X X X

X X X

X X X

‘Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, warehouse and caretaker’s quarters. 1 Bounds in front partly by one-storey concrete building under galvanized iron roof occupied as canteen and guardhouse, partly by building of two and partly one storey constructed of concrete below, timber above under-galvanized iron roof occupied as garage and quarters and partly by open space and/or tracking/packing, beyond which is the aforementioned Magdalo Street; on its right and left by driveway, thence open spaces, and at the rear by open spaces. w

The same pieces of property insured with the petitioner were also insured with New India Assurance Company, Ltd., (New India). On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of its four-span building and partly gutting the left and right sections thereof. A two-storey building (behind said four-span building) where fun and amusement machines and spare parts were stored, was also destroyed by the fire. Petitioner Rizal Insurance denied the insurance claim stating that its fire insurance policy sued upon covered only the contents of the four- span building, which was partly burned, and not the damage caused by the fire on the two-storey annex building. Is the denial of the claim justified? A:

No, the denial was not justified. Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire insurance policy regarding its coverage, which reads: “x x x contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate (sic) within own Compound x x x.” Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage to what were stored in the four-span building. As opined by the trial court of origin, two requirements must concur in order that the said fun and amusement machines and spare parts would be deemed protected by the fire insurance policy under scrutiny, t o w i t : “First, said properties must be contained and/or stored in the areas occupied by Transworld and second, said areas must form part of the building described in the policy x x x.”

150

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

‘Said building of four-span lofty one-storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, warehouse and caretaker’s quarter Verily, the two (2)-storey building involved, a permanent structure which adjoins and intercommunicates with the “first right span of the lofty storey building,” formed part thereof, and meets the requisites for compensability under the fire insurance policy sued upon. So also, considering that the two (2)-storey building aforementioned was already existing when subject fire insurance policy contract was entered into on January 12, 1981, having been constructed sometime in 1978, petitioner should have specifically excluded the said two (2)-storey building from the coverage of the fire insurance if minded to exclude the same but if did not, and instead, went on to provide that such fire insurance policy covers the products, raw materials and supplies stored within the premises of respondent Transworld which was an integral part of the four (4)-span building occupied by Transworld, knowing fully well the existence of such building adjoining and intercommunicating with the right section of the four (4)-span building. Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny. Hence, petitioner insurer is liable for the amount of P470,328.67, it being the total loss and damage suffered by Transworld for which petitioner Rizal Insurance is liable. ( R i z a l S u r e t y & I n s u r a n c e C o m p a n y v . C o u r t o f A p p e a l s , G . R . N o . 1 1 2 3 6 0 , J u l y 1 8 , 2 0 0 0 ) §4.07. RISK INSURED AGAINST. The concept of risk was discussed in Chapter l.46 Section 3 of the Insurance Code provides that “(a)ny 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.” Hence, it is indispensable that the following elements are present: (1) the event that constitutes the risk must be contingent or unknown; and (2) the happening of the event will damnify the insured or will create a liability against the insured. 45

45

See discussion in Note 4.03.

CHAPTER 5 THE POLICY

151

a. It was explained that the following must be within the scope of the contractual definition: (1) nature of the event, (2) the time of its occurrence, (3) place of its occurrence, and (4) the nature of the loss suffered (in indemnity insurance).” 46 Thus, the policy may provide for a period of cover under which the insurer may be liable only if the risk insured against occurs within the period agreed upon. The loss resulting from the risk insured against must occur during the period agreed upon although the full extent of the loss may be determined or is made manifest after the period of cover.47 b. Named Perils and All Risk Policies. If the policy specifies the risk or risks insured against, the policy is called a “named-peril” policy. An all risk policy as the term implies all risks of accidental nature. c. All Risk Policies. An “all risk policy” should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind. The terms “accident” and “accidental,” as used in insurance contracts, have not acquired any technical meaning. The very nature of the term “all risks” must be given a broad and comprehensive meaning as covering any loss other than a willful and fraudulent act of the insured. This is pursuant to the very purpose of an “all risks” insurance to give protection to the insured in those cases where difficulties of logical explanation or some mystery surround the loss or damage to property. An “all risks” policy has been evolved to grant greater protection than that afforded by the “perils clause,” in order to assure that no loss can happen through the incidence of a cause neither insured against nor creating liability in the insured; it is written against all losses, that is, attributable to external causes. Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an “all risks” policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured under an “all risks insurance policy” has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage.48

“^Chitty on Contracts, Vol. II, 29th Ed., 2004, p. 1161. 47 Chitty on Contracts, ibid., p. 1166. 48 Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R. No. 85141, November 28, 1989.

152

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§5. RIDERS. The second and third paragraphs of Section 50 of the Insurance Code provide for the rules regarding riders, clauses, warranties or endorsements also known as “Ancilliary Forms” that are not part of the original printed form but are merely attached to the policies, v i z . :

“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, unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy. Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.” a. Requisites. Based on Section 50 of the Insurance Code, a rider, clause warranty or endorsement that are not part of the original printed form are binding provided that: (1) policy;

The rider, clause, warranty or endorsement is attached to the

(2) The descriptive title or name of the rider, clause, warranty or endorsement is mentioned and written on the blank spaces provided in the original printed policy form; and (3) If not applied for by the insured or owner, the rider, clause, warranty or endorsement shall be countersigned by the insured. b. Riders and endorsements modify the provisions in the standard policies by adding special provisions thereto. Strictly speaking, Riders are modifications in life insurance while Endorsements are modifications in property and liability insurance.49 However, they are used interchangeably in many cases. A rider or endorsement that is attached to a policy is a part of the contract, to the same extent and with like effect as it actually embodied therein.50

49

Mehr and Cammack, p. 141. “Ang Giok Chip v. Springfield Fire and Marin Insurance Co., G.R. No. L-33637, December 31, 1931 citing I Couch, Cyclopedia of Insurance Law, Sec.

CHAPTER 5 THE POLICY

153

c. An E n d o r s e m e n t is a written agreement attached to a property insurance policy to add or subtract insurance coverages. 51 The Insurance Commission defines an E n d o r s e m e n t as “a written document attached to an insurance policy that modifies the policy by changing the coverage afforded under the policy. An E n d o r s e m e n t can add or reduce coverage for acts or things that are not covered as part of the original policy and can be added at the inception of the policy or later during the term of the policy.”52 d. A rider is an endorsement to a life insurance policy that modifies clauses and provisions of the policy, including or excluding coverage. 53 If the requirements of Section 50 of the Insurance Code are complied with, they take precedence over the original policy provisions. They are deemed integral parts of the original policy. 54 The importance of riders and endorsements was further explained in this wise: “Endorsements and riders are used to complete a contract, alter coverages to satisfy particular needs, and to change policies in effect. The standard fire policy is not complete until an endorsement describing the property covered is attached. To satisfy particular needs, endorsements and riders may alter the coverage to include additional perils, property, losses, places, hazards, and people, or may be used to eliminate coverages in the standard form. Subsequent to the issuance of the policy, endorsements or riders may be added to revise the amount of insurance, correct errors in the contract, adjust a rate, or include coverage of newly acquired property. Endorsements and riders supersede the standard policy provisions and may be altered by later endorsements or riders.”55

e. It is a well-settled rule that in case repugnance exists between written and printed portions of a policy, the written portion prevails. There can be no question that as far as any inconsistency exists, a “rider” prevails over the printed clause it covers. When an

51

Rubin, p. 153. 52

Paragraph 5.1 (f), I.C., Circular Letter No. 2015-58-A dated December 21,

2015. 53

Rubin, p. 440. ^Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Co., Inc., G.R. No. 119176, March 19, 2002. This case involves an “Automatic Increase Clause” where the date when the automatic increase of the value of the policy is provided for in the attachment. The Supreme Court ruled that there was no need to enter into a separate agreement. 55

Mehr and Cammack, p. 141.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

154

instrument consists partly of written words and partly of a printed form and the two are inconsistent, the former controls the latter.56 §6. CONTRACT OF ADHESION. Insurance policies are contracts of adhesion because only one (1) party (insurer) prepares the written contract while the other party (insured) merely adheres to the contract. Usually, the insured cannot change the written policy imposed by the insurer. It is likewise called contract by adherence. a. Nevertheless, it does not follow that the insured has not given his consent to the terms and conditions of the insurance contract simply because it is a contract of adhesion. A contract of adhesion is as equally binding as any other contract. Every insured should be aware of the fact that a party is not relieved of the duty to exercise the ordinary care and prudence that would be exacted just because what is involved is a contract by adherence. The conformity of the insured to the terms of the policy is implied from his failure to express any disagreement with what is provided for therein. §6.01. READING OF POLICY. The majority rule is that injured persons may accept policies without reading them, and that this is not negligence p e r s e . However, the rule is not without any exception. Thus, it is incumbent upon the insured to read the insurance contract if this can be reasonably expected of him considering that he has been a businessman for a long period of time and the contract concerns indemnity in case of loss in his moneymaking trade of which important consideration he could not have been unaware as it was precisely the reason for his procuring the same.57 As Mr. Justice Regalado explained: “Petitioners (insured) should be aware of the fact that a party is not relieved of the duty to exercise the ordinary care and prudence that would be exacted in relation to other contracts. The conformity of the insured to the terms of the policy is implied from his failure to express any disagreement with what is provided for. It may be true that the majority rule, as cited by petitioners, is that injured persons may accept policies without reading them, and that this is not negligence per se. But, this is not without any

^Francisco Jarque v. Smith Bell & Co., Ltd., et al., G.R. No. L-32986, November 11, 1930, citing Joyce on Insurance, 2d Ed., Sec. 224, p. 600; Arnould on Marine Insurance, 9th Ed., Sec. 73; Marine Equipment Corporation v. Automobile Insurance Co., 24 Fed. (2d), 600; and Marine Insurance Company v. McLahanan, 290 Fed., 685, 688. 57

New Life Enterprises v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31,

1992.

CHAPTER 5 THE POLICY

155

exception. It is and was incumbent upon (the insured) to read the insurance contracts, and this can be reasonably expected of him considering that he has been a businessman since 1965 and the contract concerns indemnity in case of loss in his money-making trade of which important consideration he could not have been unaware as it was pre-in case of loss in his moneymaking trade of which important consideration he could not have been unaware as it was precisely the reason for his procuring the same.”58 59

a. In this connection, it was further explained that the receipt of this policy by the insured without objection binds both the acceptor and the insured to the terms thereof. The insured may not thereafter be heard to say that he did not read the policy or know its terms, since it is his duty to read his policy and it will be assumed that he did so.69 It was further ruled that “where the holder of a policy discovers a mistake made by himself and the local agent in attaching the wrong rider to his application, elects to retain the policy issued to him, and neither requests the issuance of a different one nor offers to pay the premium requisite to insure against the risk which he believe the rider to cover, he thereby accepts the policy.”60 §7. INTERPRETATION AND PROOF. One of the cardinal rules in the interpretation of contracts is “when the words and language of documents are clear and plain or readily understandable by an ordinary reader thereof, there is absolutely no room for interpretation or construction anymore. Courts are not allowed to make contracts for the parties; rather, they will intervene only when the terms of the policy are ambiguous, equivocal, or uncertain. The parties must abide by the terms of the contract because such terms constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right of recovery from the insurer.”61

58 New Life Enterprises v. Hon. Court of Appeals, et al, G.R. No. 94071, March 31, 1992; See also Ejercito v. Oriental Assurance Corporation, G.R. No. 192099, July 8, 2015.

59 Ang Giok Chip v. Springfield Fire & Marine Insurance Co., G.R. No. L-33637, December 31, 1931. ^Ang Giok Chip v. Springfield Fire & Marine Insurance Co., ibid., citing California Jurisprudence, vol. 14, p. 427. 61 New Life Enterprises v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992 citing Marina Port Services, Inc. v. Iniego, et al., 181 SCRA 304 (1990); Pan Malayan Insurance Corporation v. Court of Appeals, et al., 184 SCRA 54 (1990); and Perla Compania de Seguros, Inc. v. Court of Appeals, et al., 185 SCRA 741 (1990).

156

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

a. In Phil. American General Insurance Co., Inc. v. Mutuc, 62 the Supreme Court ruled that insurance contracts are the private laws of the contracting parties and should therefore be fulfilled according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter what form they may be, whenever the essential requisites for their validity are present. In Pacific Oxygen & Acetylene Co. v. Central Bank ,63 the Supreme Court ruled that the first and fundamental duty of the courts is the application of the law according to its express terms, interpretation being called for only when such literal application is impossible. b. “While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company, yet contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. Moreover, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.”64 §7.01. INTERPRETATION IN CASE OF DOUBT. If, however, there is doubt, any doubt should be resolved against the insurer since an insurance contract is a contract of adhesion. Conformably, it stands to reason that the doubt should be resolved against the insurer whose lawyer or managers drafted the insurance policy contract.65 This is consistent with Article 1377 of the New Civil Code which provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

62 G.R. No L-19632, November 13, 1974. 61 SCRA 22; Castro v. Court of Appeals, G.R. No. L-44727, September 11, 1980, 99 SCRA 197. 63 G.R. No. L-21881, March 1, 1969, 22 SCRA 917. M New Life Enterprises v. Hon. Court of Appeals, et al., supra citing Sun Insurance Office, Ltd. v. Court of Appeals, et al., 195 SCRA 193 (1991) and Article 1157, New Civil Code. 65 Rizal Surety and Insurance Company v. Court of Appeals and Transworld Knitting Mills, Inc., G.R. No. 112360, July 18, 2000.

CHAPTER 5 THE POLICY

157

a. Reasonable Expectation Doctrine. One of the doctrines that is being used regarding the interpretation of policies is the Reasonable Expectation Doctrine under which the language of the insurance policy is interpreted to give effect to the reasonable expectation of the insured. This is the result of the view the interpretation should favor the insured because of the disparate bargaining status between the parties; that the insurer is the more powerful bargainer to meet its own needs.66 b. It has been generally held that the terms in an insurance policy, which are ambiguous, equivocal, or uncertain are to be construed strictly against, the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved, and the reason for this rule is that the “insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by expert and legal advisers employed by, and acting exclusively in the interest of, the insurance company. 67 It was likewise explained the “rigid application of the rule on ambiguities has become necessary in view of current business practices. The Courts cannot ignore that nowadays monopolies, cartels, and concentration of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared ‘agreements’ that the weaker party may not change one whit, his participation in the ‘agreement’ being reduced to the alternative to ‘take it or leave it’ labeled since contracts by adherence ( c o n t r a t s d ’ a d h e s i o n ), in contrast to those entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary.68 Justice J.B.L. Reyes explained in Q u a C h e e G a n u . L a w U n i o n a n d R o c k I n s u r a n c e C o . , L t d . , 6 9 that

^Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104, 419 P.2d 168 (1966). 67 Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963 citing 29 Am. Jur. 181; 44 C.J.S. 1174; Calanoc v. Court of Appeals, et al., G.R. No. L-8151, December 16, 1955. ^Fieldmen’s Insurance Company, Inc. v. Vda. de Songco, G.R. No. L-24833, September 23, 1968, citing New Civil Code, Article 24; Sent, of Supreme Court of Spain, December 13, 1934, February 27, 1942. 69 98 Phil. 85 (1955).

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

158

the contract of insurance is one of perfect good faith ( u b e r i m a f i d e s ) 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. This is merely to stress that while the morality of the business world is not the morality of institutions of rectitude like the pulpit and the academe, it cannot descend so low as to be another name for guile or deception. Moreover, should it happen thus, no court of justice should allow itself to lend its approval and support. c. The Supreme Court ruled in L a n d i c h o v . G o v e r n m e n t S e r v i c e I n s u r a n c e S y s t e m “This is particularly true as regards insurance policies, in respect of which it is settled that the ‘terms in an insurance policy, which are ambiguous, equivocal, or uncertain xxx are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved/ and the reason for this is that the ‘insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance company/” d. For example, if the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt regarding the portions of the building insured thereby, the doubt should be resolved in favor of the insured and against the insurance company.70 71 An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of the language in the policy. 72 The rule is that the provisions defining the coverage of the policy shall be construed to provide the widest possible coverage while exclusions are construed narrowly against the insured.73

70

G.R. No. L-28866, March 17, 1972, citing 29 Am. Jur. 181 & 44 CJS 1174. Rizal Surety and Insurance Company v. Court of Appeals and Transworld Knitting Mills, Inc., G.R. No. 112360, July 18, 2000. 72 Malayan Insurance Corporation v. The Honorable Court of Appeals and TKC Marketing Corporation, G.R. No. 119599, March 20, 1997. 73 DiMugno and Glad, p. 1706 citing Crane v. State Farm Fire & Cas. Co., 48 A.L.R. 3d 1089 (1971). 71

CHAPTER 5 THE POLICY

159

e. While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense.74 §7.02. FORFEITURE CLAUSES. Provisions, conditions or exceptions tending to work a forfeiture of insurance policies should be construed most strongly against those for whose benefit they are inserted, and most favorably toward those against whom they are intended to operate. 75 Hence, coverage provisions are construed broadly to provide the broadest possible coverage while exclusions are construed narrowly. 76 Exclusions are strictly construed against the insurer and liberally interpreted in favor of the insured.77 §7.03. OTHER RULES OF INTERPRETATION. Other rules of interpretation of contracts that apply to insurance contracts include the rules discussed hereunder. a. E x p r e s s o u n i u s e x c l u s i o a l t e r i u s — the mention of one thing implies the exclusion of another thing. An enumeration of exclusions or excluded perils wherein no liability attaches to petitioner insurance company leads to the conclusion that the other causes are not excluded. Thus, if murder and assault are not expressly included in the enumeration of the circumstances that would negate liability in said insurance policy leads to conclusion that the insurer is liable in those cases.78 b. When an instrument consists partly of written words and partly of a printed form and the two are inconsistent, the written words control the latter.79

74

Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No. 89741, March 13, 1991; Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 (1988). 75

Trinidad v. Orient Protective Ass’n., 67 Phil. 181. State Farm Mutual Auto Insurance Co. v. Partridge, 10 Cal. 3df 94, 109 Cal. Rptr. 811

76

(1973). 77 Delgado v. Heritage Life Insurance Co., 157 Cal. App. 3d 262, 271, 203 Cal. Rptr. 672, 677 (2nd Dist. 1984). 78 Finman General Assurance Corp. v. The Hon. Court of Appeals, G.R. No. 100970, September 2, 1992. 79 Jarque v. Smith Bell & Co., Ltd., G.R. No. L-32986, November 11,1930 citing Joyce on Insurance, 2d ed., sec. 224, page 600; Arnould on Marine Insurance, 9th Ed., Sec. 73; Marine Equipment Corporation v. Automobile Insurance Co., 24 Fed. (2d), 600; and Marine Insurance Company v. McLahanan, 290 Fed., 685, 688.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

160

c. Another basic rule is that all provisions should be examined and a particular provision should not be construed in isolation. “All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control; neither do particular words or phrases necessarily determine its character.” 80 All the provisions and riders should be taken and interpreted together to show the intention of the parties.81 d. The words used in the policy do not have different meanings depending on whether they appear in the coverage clause or an exclusion clause.82 e. Where categories are used in a policy to defined covered items, an exception to the insurance coverage contained in one of the categories does not apply to the other categories.83 f. The policy should be read as a layman would have read it and not as it may be analyzed by an expert. However, the plain meaning rule does not apply if the parties used particular words in a technical sense.84

CASE: 1. On February 7,1957, the defendant Equitable Insurance and Casualty Co., Inc., issued Personal Accident Policy No. 7136 on the life of Francisco del Rosario, alias Paquito Bolero, son of herein plaintiff- appellee, binding itself to pay the sum of Pi,000.00 to P3,000.00, as indemnity for the death of the insured. Part I the Policy provides that if the insured sustains any bodily injury which is effected solely through violent, external, visible and accidental means, and which shall result, independently of all other causes and within 60 days from the occurrence thereof, in the Death of the Insured, the Company agreed to pay the following amounts: Section 1. Injury sustained other than those specified below unless excepted hereinafter PI,000.00; Section 2. Injury sustained by the wrecking or disablement

^Gulf Resorts Inc. v. Philippine Charter Insurance Corp., G.R. No. 156167, May 16, 2005. 81

Ibid. Mori v. Southern General Ins. Co., 196 Cal. Rptr. 627, 629 (3rd District, 1987) cited in DiMugno and Glad, p. 1702. ^American Star Insurance Co. v. Ins. Co. of the West, 232 Cal. App. 3d 1320 (4th District 1991) cited in DiMugno and Glad, p. 1703. ^DiMugno and Glad, p. 1704 citing Crane v. State Farm Fire & Cas. Co., 48 A.L.R. 3d 1089 (1971) and Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4th 645. 82

CHAPTER 5 THE POLICY

161

of a railroad passenger car or street railway car in or on which the Insured is travelling as a farepaying passenger - Pi,500.00; Section 3. Injury sustained by the burning of a church, theatre, public library or municipal administration building while the Insured is therein at the commencement of the fire - P2,000.00; Section 4. Injury sustained by the wrecking or disablement of a regular passenger elevator car in which the Insured is being conveyed as a passenger (Elevator in mines excluded) - P2,500.00; and Section 5. Injury sustained by a stroke of lightning or by a cyclone - P3,000.00. Part VI that the policy shall not cover disappearance of the Insured nor shall it cover Death, Disability, Hospital fees, or Loss of Time, caused to the insured: (h) By drowning except as a consequence of the wrecking or disablement in the Philippine waters of a passenger steam or motor vessel in which the Insured is travelling as a farepaying passenger. However, a rider to the Policy contained the following: IV. DROWNING It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the policy is hereby waived by the company, and to form a part of the provision covered by the policy. On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board the motor launch “ISLAMA” together with 33 others, including his beneficiary in the Policy, Remedios Jayme, were forced to jump off said launch on account of fire which broke out on said vessel, resulting in the death of drowning, of the insured and beneficiary in the waters of Jolo. A claim is made for P3,000.00. The insurer admits that it is liable under the insurance policy but the defendant claims that the liability is not P3,000.00 but only PI,000.00. Is the insurer liable for only PI,000.00? A:

No, the insurer is liable up to P3,000.00. Besides, on the face of the policy itself, death by drowning is a ground for recovery apart from the bodily injury because death by bodily injury is covered by Part I of the policy while death by drowning is covered by Part VT thereof. But while the policy mentions specific amounts that may be recovered for death for bodily injury, yet, there is not specific amount mentioned in the policy for death through drowning although the latter is, under Part VI of the policy, a ground for recovery thereunder. Since the defendant has bound itself to pay Pi,000.00 to P3,000.00 as indemnity for the death of the insured but the policy does not positively state any definite amount that may be recovered in case of death by drowning, there is an ambiguity in this respect in the policy, which ambiguity must be interpreted in favor of the insured and strictly against the insurer so as to allow greater indemnity. We believe that under the proven facts and circumstances, the findings and conclusions of the trial court, are well taken, for they are supported by the generally accepted principles or rulings on insurance, which enunciate

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

162

that where there is an ambiguity with respect to the terms and conditions of the policy, the same will be resolved against the one responsible thereof. It should be recalled in this connection, that generally, the insured, has little, if any, participation in the preparation of the policy, together with the drafting of its terms and Conditions. The interpretation of obscure stipulations in a contract should not favor the party who cause the obscurity (Art. 1377, N.C.C.), which, in the case at bar, is the insurance company. Where two interpretations, equally fair, of languages used in an insurance policy may be made, that which allows the greater indemnity will prevail. At any event, the policy under consideration, covers death or disability by accidental means, and the appellant insurance company agreed to pay PI,000.00 to P3,000.00. is indemnity for death of the insured. ( D e l R o s a r i o o . The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963) §7.04. INDIVISIBILITY. An insurance policy may be considered indivisible even if it covers two or more properties. The general rule is that “the peculiar character of the insurance contract raises a strong presumption in all the cases that its terms are to be construed as parts of an indivisible whole.” 85 It would depend on the intent of the parties. The Court ruled: “The terms of the contract constitute the measure of the insurer liability and compliance therewith is a condition precedent to the insured’s right to recovery from the insurer. ( P e r l a C o m p a n i a d e S e g u r o s , I n c . v . C o u r t o f A p p e a l s , G . R . N o . 7 8 8 6 0 , M a y 2 8 , 1 9 9 0 , 1 8 5 S C R A 7 4 1 ) Whether a contract is entire or severable is a question of intention to be determined by the language employed by the parties. The policy in question shows that the subject matter insured was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not make the contract several and divisible as to the items insured. The logs on the two barges were not separately valued or separately insured. Only one premium was paid for the entire shipment, making for only one cause or consideration. The insurance contract must, therefore, be considered indivisible.” 86

a. When the insurance contract covers several separate subjects in consideration of separate premiums, the contract is divisible and invalidity of one does not affect the other. In addition, the con-

85

Vance, p. 86.

1991.

^Oriental Assurance Corp. v. Court of Appeals, G.R. No. 94052, August 9,

CHAPTER 5 THE POLICY

163

tract is indivisible when breach or misrepresentation regarding one (1) subject affects the other subjects.87 §7.05. PROOF. If the terms and conditions of the policy are in question in a case, the party who seeks to prove such terms and conditions must present the policy during trial and formally offer it as evidence. Any person who relies on the policy as the basis of his cause of action must also attach the same to the complaint as an actionable document.88 The Court observed: “... If a legal claim is irrefragably sourced from an actionable document, the defendants cannot be deprived of the right to examine or utilize such document in order to intelligently raise a defense. The inability or refusal of the plaintiff to submit such document into evidence constitutes an effective denial of that right of the defendant which is ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the plaintiffs substantiation of its own cause of action.”

a. The obligation to attach the policy to the Complaint as an actionable document and to present and offer the same applies even if the plaintiff is an insurance company that is trying to recover based on its right of subrogation.89 b. Note that the Insurance Commission issued I.C. Circular No. 11-2000 which prevents insurers and insurance agents from divulging information in insurance policies. However, the Supreme Court ruled that the Circular is not intended to prevent compliance with lawful orders of the Court. Hence, there is no legal impediment to the production of the insurance application and the insurance policy pursuant to subpoena issued by the trial court.90 c. It should be noted, however, that if the policy is attached to the complaint, the insurer cannot escape liability by claiming that the policy (or bond of a surety) was unaccounted for or missing from its custody. 91 The insurer cannot let the beneficiary suffer through its own fault.

87

Vance, p. 86. ^Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No. 172156, November 23, 2007. "Ibid. ^Philip S. Yu v. Court of Appeals, G.R. No. 154115, November 29, 2005, 476 SCRA 443. 91 Capital Insurance and Surety Co. v. Del Monte Motors, Inc., G.R. No. 159979, December 15, 2015.

164

ESSENTIALS OF INSURANCE LAW

(Republic Act No. 10607 with Notes on Pre-Need Act)

§7.06. SIGNATORY. The officer who should sign the policy for the insurer must be duly authorized to sign the policy. However, violation of the internal rules of the insurer regarding contract signatories cannot be used against an innocent insured. For example, if the Vice President signed the insurance policy, the insurer cannot escape liability by citing the internal rules that states that the corporate signatory is the President. As between the insured and the insurer, the insurer who employed and gave character to the Vice President as its agent should be the one to bear the loss.92

PROBLEMS: 1.

GRI is the owner of a resort and had its properties in said resort insured originally with the AHAC. In the first four insurance policies issued by AHAC the risk of loss from earthquake shock was extended only to plaintiffs two swimming pools. Subsequently, petitioner agreed to insure with respondent the properties covered by the policy issued by AHAC-AIU, provided that the policy wording and rates in said policy be copied in the policy to be issued by respondent. An earthquake struck central Luzon and northern Luzon and petitioner’s properties, including the two swimming pools, were damaged. GRI then filed a claim with the respondent for the said damage including other properties destroyed by the earthquake. Respondent denied claim and said that they are only liable to the two swimming pools covered by the policy and not the other properties. Whether or not AHAC is also liable for the damages caused by the earthquake on the other properties of petitioner? A:

92

No. AHAC is only liable for the two swimming pools. It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with each other. All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal. GRI cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend the earthquake shock coverage to the swimming pools only. An insurance premium is the consideration paid by the insured to the insurer for undertaking to indemnify the former against a specified peril. In the subject policy, no premium payments were paid with regard to earthquake shock coverage except on the two pools. There is no mention of any premium payable for the other resort properties. ( G u l f R e s o r t s , I n c . v . P h i l i p p i n e C h a r t e r I n s u r a n c e C o r p o r a t i o n , G . R . N o . 1 5 6 1 6 7 , M a y 1 6 , 2 0 0 5 )

Capital Insurance and Surety Co. v. Del Monte Motors, Inc., supra.

CHAPTER 5 THE POLICY

165

§8. COVER NOTES. Cover notes are interim or preparatory contracts of insurance. An interim coverage may be necessary because the insurer may need more time to process the insurance application. The applicable provision states: SEC. 52. Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within sixty (60) days after the issue of the cover note, a policy shall be issued in lieu thereof, including within its terms the identical insurance bound under the cover note and the premium therefor. Cover notes may be extended or renewed beyond such sixty (60) days with the written approval of the Commissioner if he determines that such extension is not contrary to and is not for the purpose of violating any provisions of this Code. The Commissioner may promulgate rules and regulations governing such extensions for the purpose of preventing such violations and may by such rules and regulations dispense with the requirement of written approval by him in the case of extension in compliance with such rules and regulations. a. Requisites. The issuance of Cover Notes under Section 52 is subject to the following rules: (1) The Cover Note shall be issued or renewed only upon prior approval of the Insurance Commission; (2) The Cover Note shall be valid and binding not more than 60 days from the date of its issuance; (3) The cover note may be cancelled by either party upon prior notice to the other of at least seven days; (4) The policy should be issued within 60 days after the issuance of the cover note; and (5) The 60-day period may be extended upon written approval of the Insurance Commission. b. When approval is dispensed with. The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice president or general manager of the insurer that the risk involved, the values of such risks and premium therefor have not as yet been determined or established

166

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

and the extension or renewal is not contrary to or is not for the purpose of violating the Insurance Code or any rule.93 c. Premium. No separate premium (separate from the policy or main contract) is required for the cover note.94 §9. KINDS OF PROPERTY INSURANCE POLICY. A property insurance policy is either open, valued, or running.95 These types of policies are defined in Sections 60 to 62, v i z . :

SEC. 60. An open policy is one in which the value of the thing insured is not agreed upon, and the amount of the insurance merely represents the insurer’s maximum liability. The value of such thing shall be ascertained in case of loss.96 SEC. 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum. SEC. 62. A running policy is one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements. a. Valued Policy. A valued policy expresses the agreed valuation of the thing insured on the face of the policy. This valuation is binding on the parties; no party can establish a different valuation in case of loss. The amount to be paid by the insurer as indemnity may not necessarily be related to the actual loss. The measure of indemnity is the agreed valuation and not the actual loss. That is precisely the reason why a valued policy is considered an exception to the principle of indemnity. (1) The rule that the valuation in a valued policy is binding on the insurer may be justified if the situation of the insurer is considered v i s a - v i s that of the insured. Unlike its most prospective customers, the insurer has the necessary resources to determine the correct valuation of the property.

93 Ins. Memo. Circ. No. 3-75. Pacific Timber Export Corp. v. Court of Appeals, 112 SCRA 199. 95 Section 59,1.C. ^As amended by R.A. No. 10607.

94

CHAPTER 5 THE POLICY

167

After profiting from premium payment at the rate that was computed on the basis of the agreed valuation (and which rate will then be high if there is over-insurance), the insurer should not be allowed to question the valuation on which it profited. (2) A life insurance policy is always a valued policy because the amount fixed in the policy is always not related to the actual loss. The parties will always agree on a valuation which is always not equivalent to the value of the life that will be lost. b. Open Policy. No valuation of the property is stipulated in an open policy. Consistent with the rule that contract of insurance is a contract of indemnity, the insurer is only entitled to recover the amount of the actual loss sustained by him as he may be able to establish (there being no express valuation in the policy). Judgment may be properly entered against the insurer for lack of satisfactory proof of the amount of his loss. 97 An open policy is sometimes called an “unvalued policy” because it is “one in which the value is not fixed, but is left to be definitely determined in case of loss.” 98 The actual loss as determined will represent the total indemnity due the insured from the insurer except only that the total indemnity shall not exceed the face value of the policy.99 (1) There is still a face value appearing in an Open Policy. However, the amount fixed merely represents the insurers liability.100 c. Running Policy. A fire insurance policy may be entered into that covers “stock of rice and p a l a y (loose and/or in sacks), the property of the assured or held by him in trust, on commission or on joint account with others and/or for which he is responsible in case of loss, while contained during the currency of the policies in the building of the assured in Binalonan, Pangasinan ”101 This policy is a

97 Tan Chuco v. Yorkshire Fire and Life Insurance Company, G.R. No. L5069, October 15,1909, citing Franklin F. Ins. Co. v. Hamil, 6 Gill (Md.) 87; Marchesseau v. Merchants Ins., Co., 1 Rob. (La.), 438; Eagle Ins. Co. v. Lafayette Ins. Co., 9 Ind.,on 443. "Couch Insurance, 2nd Ed., Vol. 1, pp. 90-91, hereinafter called “1 Couch 90, 91.” "Development Insurance Corporation v. Intermediate Appellate Court, et al., G.R. No. L-71360, July 16, 1986. 100 Section 60,1.C., as amended by R.A. No. 10607. 101 Lee Bog & Company v. Hanover Fire Insurance Company of the City of New York, et al., G.R. No. L-10305, February 28, 1961.

168

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

typical running policy where the extent of the property insured shall be defined from time to time because of the nature of the business that is being insured. PROBLEMS: 1.

Suppose that Fortune owns a house valued at P600,000.00 and insured the same against fire with three insurance companies as follows: X — P400,000.00 Y — P200,000.00 Z — P600,000.00 In the absence of any stipulation in the policies, from which insurance company or companies may Fortune recover in case of fire should destroy his house completely? A:

2.

If each of the policies obtained by Fortune in problem (1) is an open policy and it was immediately determined after the fire that the value of the house was P2.4 Million, how much may he collect from X, Y, and Z? A:

3.

Fortune may recover from any, any two (2) or all of the insurers provided that the total amount that he will recover does not exceed his loss. ( S e c . 9 4 , I C P ) Fortune may demand indemnity from Z alone for P600,000.00. In the alternative, Fortune may recover from all insurers P200,000.00 each. Fortune may also opt to recover P400,000.00 from X and recover the balance from any or both Y or Z.

Fortune may recover the full amount of the coverage from each insurer if all policies are open policies. The value of the property to be considered is the actual value of P2.4 Million. Since the total amount of the insurance coverage is less than the actual loss, Fortune may recover P400,000.00 from X, P200,000.00 from Y and P600,000.00 from Z or a total amount of Pl.2 Million. 3

If each of the fire insurance policies obtained by Fortune in problem (2) is a valued policy and the value of his house was fixed in each policies at Pi Million, how much would Fortune recover from X if he has already obtained full payment from the insurance policies issued by Y and Z? A:

Fortune can only recover P200,000.00 from X. The valuation of the property (in this case PI Million) is binding on the parties and it is no longer necessary to determine the actual value thereof. The valuation in the policy is deemed the actual value of the property. (Par. [b], Section 94, ICP)

CHAPTER 5 THE POLICY 4.

Supposing in problem (1), Fortune was able to collect from both Y and Z, may he keep the entire amount he was able to collect from the said two (2) insurance companies? Explain your answers. A:

5.

169

No. Fortune may not keep the amount that he collected from Y and Z. In problem (1), the total value of the property was P600,000.00, hence, if he collected P200,000.00 from Y and P600,000.00 from Z, there is an excess of P200,000.00. Fortune can only be indemnified for his loss. Fortune must hold the excess amount of his insurable interest in the house, P200,000.00, in trust for the insurers Y and Z. (Par. [d], Section 94, ICP)

In problem (1) what is the extent of the liability of the insurance companies among themselves? A:

Each insurer is bound to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Par. fej, Section 94, ICP) The ratable contribution of each insurer will be determined based on the following formula: Amount of policy Total insurance taken Using the foregoing formula, the extent of liability of each insurer out of the total loss of P600,000.00 are as follows: X = P200,000 (400,000/1,200,000 x 600,000), Y = P100,000 (200,000/1,200,000 x 600,000) and Z = P300,000 (600,000/1,200,000 x 600,000).

§10. CANCELLATION. Cancellation of property insurance policies should be made in accordance with Sections 64 and 65 of the Insurance Code which provide:

SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following: (a) Non-payment of premium; (b) Conviction of a crime arising out of acts increasing the hazard insured against; (c) Discovery of fraud or material misrepresentation; (d) Discovery of willful or reckless acts or omissions increasing the hazard insured against;

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

170

(e) Physical changes in the property insured which result in the property becoming uninsurable; or (f) Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or102 (g) A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code. SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, or to his broker provided the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf, and shall state: (a) Which of the grounds set forth in Section 64 is relied upon; and (b) That, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based. a. Requisites of Cancellation. Cancellation of insurance policies requires the concurrence of the following conditions: (1)

Prior notice of cancellation to insured;

(2) The notice of cancellation must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned in Section 64; (3) The notice must be in writing, mailed or delivered to the named insured at the address shown in the policy or to his broker is authorized in writing in the policy owner to receive the notice of cancellation on his behalf; (4) The notice must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.103

102

Section 64(f) was added by R.A. No. 10607. Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos, G.R. No. 125678, March 18, 2002; Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835, October 12, 1987; Section 65 as amended by R.A. No. 10607. 103

CHAPTER 5 THE POLICY

171

b. Property Insurance. The law provides that Section 64 applies to insurance “other than life insurance.” In other words, Section 64 applies only to property insurance. (1) Nevertheless, it is believed that some of the grounds in Section 64 may apply to life insurance. For example, a life insurance policy may also be cancelled for non-payment of premium, fraud or material misrepresentation. c. Reason for Notice Requirement. The purpose of provisions or stipulations for notice to the insured is to prevent the cancellation of the policy without allowing the insured ample opportunity to negotiate for other insurance in its stead. The form and sufficiency of a notice of cancellation is determined by policy provisions and Sections 64 and 65 of the Insurance Code.104 d. Contents of Notice. Section 65 requires a statement of the grounds relied upon. Nevertheless, so long as the ground is stated, written notice to the insured need not be in any particular form in order to form the basis for the cancellation of a policy. In the absence of a statute or policy provision prescribing such form, the notice is sufficient so long as it positively and unequivocally indicates to the insured, that it is the intention of the company that the policy shall cease to be binding. Where the policy contains no provision that a certain number of days notice shall be given, a reasonable notice and opportunity to obtain other insurance must be given.105 e. Actual Receipt Necessary. Actual personal notice to the insured is essential to a cancellation under a provision for cancellation by notice. The actual receipt by the insured of a notice of cancellation is universally recognized as a condition precedent to a cancellation of the policy by the insurer. Consequently, a letter containing notice of cancellation which is mailed by the insurer but not received by the insured, is ineffective as cancellation.106 f. Receipt of Notice by Broker. Generally, the receipt of notice of cancellation by the broker is not binding on the insured. Ordinarily, “the authority of the broker to represent the insured

104 Saura Import and Export, Co., Inc. v. Philippine International Surety Co., Inc. and Philippine National Bank, G.R. No. 15184, May 31, 1963, citing 29 Am. Jur. pp. 732-741. ™Ibid. ™Ibid.

172

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

ends with the completion of the contract, and any notice thereafter given to the broker will not affect the rights of the insured.” 107 By way of exception, Section 65 as amended by R.A. No. 10607 now provides that notice of cancellation can be given to the broker provided that the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf. g. Cancellation by the Insured. While Section 64 deals only with the right of the insurer to cancel the policy, it does not follow that the insured cannot cancel the policy. This right to surrender the policy is implicit in Section 80 of the Insurance Code which provides that the insured is entitled to the return of the premium “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 p r o r a t a 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.” Section 80 is subject to the caveat 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.” (1) It should likewise be noted in this connection that in a case decided under the old Insurance Law, the Supreme Court ruled that “neither the return of the policy, nor a demand for the return of a proportion of the premium corresponding to the unexpired term, nor the actual return of said portion of the premium is essential to the effectivity of the request of the insured for the cancellation of the insurance policy. Upon receipt thereof by the insurer, the contract becomes i p s o f a c t o terminated, without any further act of any party.”108 §10.01. RESCISSION. Cancellation like rescission is one of the ways to terminate the policy. Termination means any practice or act by an insurer which has the effect of discontinuing an insurance policy. 109 The said term also includes nonrenewal. If the termination based on grounds other than those provided for in Section 64 of the Insurance Code, “the violation of the provision of

107

Vance, pp. 444-445. Leona Paulino v. The Capital Insurance & Surety Co., Inc., G.R. No. L11728, May 15, 1959. 109 Par. 5.1,1.C. Circular Letter 2015-58-A dated December 21, 2015. 108

CHAPTER 5 THE POLICY

173

the policy or any breach must be consistent with grounds allowed by law on concealment, representation and warranty.” 110 Thus, the grounds for rescission by the insurer of a non-life insurance policy are enumerated as follows: 111 1)

When representation is false on material point whether affirmative or promissory;112

2)

Violation of material warranty on the part of either party or other material provisions of the policy;113

3) 4)

Intentional or unintentional concealment;114 Violation of a special provision of the policy where the policy declares that violation thereof shall avoid the policy;115 and

5)

Intentional or fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty;116 and

6)

With respect to fire insurance, alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks.117

§11. RENEWAL OF POLICY. The insured has the right to renew a non-life insurance policy. In some cases, he can do so by simply paying the premium due on the effective date of the renewal. a. Renewal of the policy means that “the issuance and delivery insurer of a policy for the same or similar coverage superseding at the end policy period a policy previously issued and delivered by the same insurer issuance and delivery of a certificate or notice extending the terms of a beyond its period

U0

Par. 7.5,1.C. Circular Letter 2015-58-A dated December 21,

nl 2015.

Ibid.

112

Section 45,1.C. Section 74,1.C. 114 Section 27,1.C. 115 Section 75,1.C. u6 Section 29,1.C. “’Section 171,1.C. 113

by an of the or the policy

174

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

or term.118 Non-renewal is simply the termination of the policy by the insurer at the expiration of the date of the policy.119 b. However, the insured will not have any right to renew if notice of the intention not to renew is given by the insurer at least 45 days prior expiration of the policy.

SEC. 66. In case of insurance other than life, unless the insurer at least forty-five (45) days in advance of the end of the policy period mails or delivers to the named insured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the named insured shall be entitled to renew the policy upon payment of the premium due on the effective date of the renewal. Any policy written for a term of less than one (1) year shall be considered as if written for a term of one (1) year. Any policy written for a term longer than one (1) year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of one (1) year. §12. REFORMATION OF THE POLICY. It may happen that what was agreed upon is different from what is written in the policy. For example, during the negotiations which resulted in the writing of an insurance policy, the parties agreed to certain terms and conditions but the resulting policy does not reflect their true agreement because of inadvertence, ignorance, or mistake. In such case, the Court would have the power to reform the contracts and give effect to them in the sense in which the parties intended to be bound. But in order to justify this, it must be made clearly to appear that the minds of the contracting parties did actually meet in agreement and that they labored under some mutual error or mistake in respect to the expression of their purpose.120

n8

Par. 5.1 (q), I.C. Circular Letter 2015-58-A dated December 21, 2015.

U9

Par. 5.1 (m), I.C. Circular Letter 2015-58-A dated December 21, 2015. San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.), et al., G.R. No. L-14300, January 19, 1920. See also Fink v. Queens Insurance Co., 24 Fed., 318; Esch v. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co. v. Charter Oak Insurance Co., 31 Conn., 517; Balen v. Hanover Fire Insurance Co., 67 Mich., 179. 120

CHAPTER 5 THE POLICY

175

a. Thus, in one case,121 it appeared that a mortgagee desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be insured. The insurance company agreed to accept the risk, but the policy was issued in the name of the mortgagor-owner, because of the mistaken belief of the company’s agent that the law required it to be so drawn. It was held that a court of equity had the power, at the suit of the mortgagee, to reform the instrument and give judgment in his favor for the loss thereunder, although it had been exactly as it was. Said the court: “If the applicant correctly states his interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by mistake of law adopts the wrong form, a court of equity will reform the instrument so as to make it insurance upon the interest named.” 122 b. In another case the Court said: “[The Court] ha[s] before us a contract from which by mistake, material stipulations have been omitted, whereby the true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement, there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written agreement did not effect that which the parties intended. That a court of equity can afford relief in such a case, is, We think, well[-]settled by the authorities.”123 c. But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties. §12.01. MISTAKE. It should be noted that it is also possible for the insured to recover even if there was a mistake. It is not necessary that there be reformation of the policy. In an early case,

121

San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.), et al., ibid., citing in Bailey v. American Central Insurance Co. (13 Fed., 250). 122 San Miguel Brewery, et al. v. Law Union and Rock Insurance Company (Ltd.), ibid. 123

Ibid., citing Smell v. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.

176

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

it was apparent that a mistake was made in the issuance of the policy. The insured wanted insurance upon a stock of goods, which he owned, and he received and paid for a policy on a building, which he did not own, and while the policy was in force and effect, both the building, which he did not own, and the stock of merchandise, which he did own, were completely destroyed by fire. The insured was a well-known merchant, and his merchandise was in the building described in the policy. The insured was allowed to recover for the loss of his merchandise under the circumstances.124

l24 Domingo Garcia and Philippine National Bank v. The Hong Kong Fire and Insurance Co., Ltd., G.R. No. 20341, September 1, 1923.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS Professor Vance said that “in making a contract so highly aleatory as that of insurance the parties have four primary concerns: (1) the correct estimation of the risk which enables the insurer to decide whether he is willing to assume it, and if so at what rate of premium; (2) the precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer; (3) such control of the risk after it is assumed as will enable the underwriter to guard against the increase of the risk because of change in conditions; and (4) determining whether the loss has occurred, and if so, the amount of the loss.” 1 It is precisely because of such concerns that different devices were developed to ascertain and control risks. These devices include concealment, representation, warranty, condition and exceptions. Thus, the correct estimation of the risk may be made if all material information are disclosed and if the parties are certain that disclosed information can be relied upon. On the other hand, delimitation of the risk may be made by specific description of the risk consisting of the designation of the specific person or property interest to be covered and the specification of the perils. Delimitation is further accomplished by using exceptions that are inserted in the policy or stated in the rider. Control of the risk can be done by resorting to promissory warranties and conditions that will prevent the occurrence of risks or hazards that may happen after the policy has been issued. §1. CONCEALMENT. Concealment is defined in Sections 26 and 28 of the Insurance Code as follows:

1 William R. Vance, Handbook of the Law of Insurance, 2nd Ed., pp. 334-335, hereinafter referred to as “Vance.”

177

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

178

SEC. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment. SEC. 28. Each party to a contract of insurance must 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. a. The obligation of each party not to conceal material facts is expressed in Section 28 of the Insurance Code which states that each party to a contract of insurance must 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. The obligation to communicate is the obligation of each party, both the insurer and the insured. Even the insurer is bound to observe utmost good faith in dealing with the insured. b. The duty to disclose is required because insurance contracts are described as contracts u b e r r i m a e f i d a e , that is, of utmost good faith. Lord Mansfield explained in a leading case2 in England: “Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriters trust his representation, and proceeds upon the confidence that he does not keep back circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque as if it did not exist.” c. In A r g e n t e v . W e s t C o a s t L i f e I n s u r a n c e C o m p a n y ,3 the Supreme Court explained that the rule on concealment is a requirement of honesty, good faith, and fair dealing. “The assured undertakes to state all the circumstances affecting the risk, a full and fair statement of all is required.” §1.01. MATERIALITY. Only material facts are required to be disclosed. It would be too much to put on an insured the duty to disclose

2

Carter v. Boehm, 3 Burr. 1905 (1766). G.R. No. L-24899, March 19, 1928 citing Joyce, The Law of Insurance, 2nd edition, volume 3, Chapter LV. 3

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

179

everything that might influence the mind of the insurer. “Business could hardly be carried on if this were required.” 4 In relation to the insured, the matters he concealed are considered material if such matters will affect the insurer’s action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same or in fixing the terms and conditions of the policy. In relation to the insurer, the matters concealed are considered material if they will affect the decision of the insured to enter into the insurance contract. Section 31 provides:

SEC. 31. Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries. a. Generally, the matter concealed by the insured is considered material if it relates to physical hazard or moral hazard. Hazards affect the estimate of the disadvantages of the proposed contract. If the insurer knows about the circumstances relating to physical or moral hazard, it will give a chance to the insurer to make further inquiries and to decide on the basis of such inquiry. b. Thus, according to Professor Vance, “the test of materiality is the effect which the knowledge of the fact in question would have on the making of the contract. To be material, a fact need not increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the parties in making the contract.”5 c. If there is nothing in the policy that makes it an obligation of the party to make disclosure during the life of the contract, then there is no duty to make such disclosure for facts occurring after the insurance takes effect. Such information could not affect the making of the contract. d. The Supreme Court explained in one case:6 “The basis of the rule vitiating the contract in case of concealment is that it

4 Victor Dover, A Handbook to Marine Insurance, 1975 Ed., p. 346, citing Ionides v. Pender, 1874, hereinafter referred to as “Dover.” 6 Vance, p. 347. 6 Argente v. West Coast Life Insurance, Inc., G.R. No. L-24899, March 19,1928.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

180

misleads or deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist. The principal question, therefore, must be: Was the assurer misled or deceived into entering a contract obligation or in fixing the premium of insurance by a withholding of material information of facts within the assured’s knowledge or presumed knowledge?” e. However, material information obtained after the filing of the application but before the insurance takes effect should also be disclosed. Hence, the applicant for a life insurance policy is under a duty to disclose to the insurer changes in his health occurring or coming to his knowledge between the date of submission of the policy and the time it takes effect.7 §1.02. EXAMPLES OF MATERIAL FACTS. Using the test of materiality set forth above, the facts that are material — and should therefore be disclosed relate to the physical hazard or to the moral hazard. 8 Material facts in property insurance includes, for example, “the nature, construction or use of an insured building, or whether it is particularly exposed to risk; in life insurance, they would include health or a high risk occupation or hobby or the results of any health tests known to the insured; in liability insurance, they would include a bad accident record.”9 a. In M a l a y a n I n s u r a n c e v . P A P C o . L t d . , 1 0 the transfer of the location of the insured machineries was considered material fact that should have been disclosed when the fire insurance policy was renewed. The unconsented removal of the machineries to another location made the said machineries at the insured company’s own risk. The Court ruled that there was concealment that entitled the insurer to rescind under Sections 26 and 27 of the Insurance Code.

7

Vance, p. 351; Miller v. Republic Nat. Life Ins. Co., 789 F.2d 1336 (9th Cir.

1986). 8

Birds, p. 111. Birds, pp. Ill to 112. G.R. No. 200784, August 7, 2013: Note that the Supreme Court considered the non-disclosure as concealment, misrepresentation and a breach of material warranty. 9

10

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

181

b. In F l o r e n d o u . P h i l a m P l a n s , I n c . , n the insured signed the insurance application without filling in the details regarding his continuing treatments for heart condition and diabetes. The Supreme Court ruled that there was concealment of a material fact. In this same case, the beneficiary also argued that the application required the disclosure of treatment for heart condition in the last five years. The beneficiary pointed out that the pacemaker implant was made about 20 years before he signed the application. The Supreme Court rejected the argument explaining that: “Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he had a pacemaker implant in the early 70s since this did not fall within the five-year timeframe that the disclosure contemplated. But a pacemaker is an electronic device implanted into the body and connected to the wall of the heart, designed to provide regular, mild, electric shock that stimulates the contraction of the heart muscles and restores normalcy to the heartbeat. That Manuel still had his pacemaker when he applied for a pension plan in October 1997 is an admission that he remained under treatment for irregular heartbeat within five years preceding that application. Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes when he submitted his pension plan application. These clearly fell within the five-year period. More, even if Perla’s knowledge of Manuel’s pacemaker may be applied to Philam Plans under the theory of imputed knowledge, it is not claimed that Perla was aware of his two other afflictions that needed medical treatments. Pursuant to Section 27 of the Insurance Code, Manuel’s concealment entitles Philam Plans to rescind its contract of insurance with him.” c.

The following are other examples of material concealment:

(1) Concealment of the insured in life insurance of fainting spells and/or drug overdose illness is a material concealment;* 12 (2) The insured’s failure to disclose in an application for an automobile insurance that he does not have a driver’s license or that his license was revoked or suspended;13

n

G.R. No. 186983, February 22, 2012.

12

Wilson v. Western National Life Ins. Co., 235 Cal. App. 3d 981, 1 Cal. Rpt. 2d 157 (5th Dis. 1991) cited in DiMugno and Glad, p. 1634. ,a Civil Service Emp. Ins. Co. v. Blake, 245 Cal. App. 2d 196, 53 Cal. Rptr. 701 (2d Diet. 1966) cited in DiMugno and Glad, p. 1946.

182

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§1.03. CAUSATION NOT NECESSARY. The matter concealed need not be the cause of the loss. For example, in life insurance, the facts concealed need not have a bearing on the cause of death of the insured. It is well-settled that the insured need not die of the disease if he had failed to disclose to the insurer the existence of such disease. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries.14 a. In F l o r e n d o v . P h i l a m P l a n s , I n c . , 1 5 the matter concealed was the continuing treatment of the insured for heart condition and diabetes. The claim was denied on the ground of material concealment although the insured died of blood poisoning. §1.04. REQUISITES. The requisites that can be derived from the provisions of the Insurance Code that justify one party to rescind the policy on the ground of concealment are as follows: (1)

The party involved must know the fact concealed or at least he ought to know the same;16

(2) (3)

The fact concealed must be material;17 No warranty is extended by the party regarding the fact concealed;18 and

(4) The other party does not have the means of ascertaining.19 §1.05. KNOWLEDGE OF AGENT OF INSURED. Professor Vance believes that knowledge on the part of the agent of the insured can be imputed to the insured himself only if the following circumstances are present: (1) It was the duty of the agent to acquire and communicate information of the facts in question, and (2) It was possible for the agent, in the exercise of reasonable diligence, to have made such communication before the making of the insurance contract. 20 It is believed that the requirements suggested by Prof.

14

Sun Assurance Company of Canada v. The Hon. Court of Appeals and Spouses Rolando and Bernarda Bacani, G.R. No. 105135, June 22, 1995; Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 (1960). 16 Supra. 16 Sections 26 and 27,1.C. 17 Section 28,1.C. 18 Ibid. 19 Section 28,1.C.; Florendo v. Philam Plans, Inc., supra. 20 Vance, p. 354.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

183

Vance are consistent with Section 43 of the Insurance Code which provides that the principal-insured is bound with the knowledge of his agent “whose duty it is to give information.” a. In F l o r e n d o v . P h i l a m P l a n s , I n c . , 2 1 the beneficiary insisted that there was no concealment because the soliciting agent knew that the insured had a pacemaker implanted 20 years before he signed the application. In addition, the beneficiary contended that the mere fact that the insured signed the application in blank and let the soliciting agent fill in the required details did not make her his agent and bind him for her concealment. The Supreme Court rejected the arguments stating that the responsibility of preparing the application belonged to the insured and the insured cannot sign the application and disown the responsibility for having it filled up. If the insured furnished the soliciting agent the needed information and delegated to her the filling up of the application, then she acted on his instruction, not on the insurer’s instructions. The Supreme Court likewise observed that even assuming that it was the soliciting agent who filled up the application, the insured is still bound by what it contains because he expressly certified that he authorized the actions of the agent. The Supreme Court also noted that the insured was a civil engineer and manager of a construction company and he could be expected to know that one must read every document, especially if it creates rights and obligations affecting him before signing the same. “It could reasonably be expected that he would not trifle with something that would provide additional financial security to him and his wife in his twilight years.”22 b. However, it should be noted that the insurer cannot rely on the alleged connivance between the agent and the insured all the time. This is especially true where the incontestability clause applies.23 24 c. In addition, it is also well to note the authorities cited in the dissenting opinion in T h e I n s u l a r L i f e A s s u r a n c e C o . L t d . v . F e l i c i a n o l A that are also persuasive:

21

Supra. Florendo v. Philam Plans, Inc., supra; Insular Life Assurance Co. Ltd. v. See also Feliciano, G.R. No. L-47593 December 29, 1943; Soliman v. U.S. Life Insurance Co, G.R. L-11975, June 27, 1958. 23 Manila Bankers Life Insurance Corp. v. Aban, G.R. No. 175666, July 29, 22

2013.

24

G.R. No. L-47593, December 29, 1943.

184

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

“Besides, the principles that the insured is not bound to know the contents of the application, and may rely on the agent’s assurances that his answers have been correctly written will, of course, apply with special force where the insured is illiterate and unable to read, or is ignorant of the language. (Vol. 5, Cooley’s Briefs on Insurance, 2nd Ed., p. 4188, cases cited.) And also where the photostatic copies of the application embodied in the policy are practically illegible, the insured is not bound to know the contents of the application. (New York Ins. Co. v s . Holpem D.C. 57 Fed. 2nd, 200). According to the great weight of authority, if an agent of the insurer, after obtaining from an applicant for insurance a correct and truthful answer to interrogations contained in the application for insurance, without knowledge of the applicant fills in false answers, either fraudulently or otherwise, the insurer cannot assert the falsity of such answers as a defense to the liability on the policy and this is generally without regard to the subject matter of the answers or the nature of the agent’s duties or limitations on his authority, at least if not brought to the attention of the applicant. It is equally well-settled that if a correct representation is made in a written application, or the insurance agent issuing the policy is appraised of the true facts concerning the matter in question, as for instance the title to the insured premises, but the agent inserts an incorrect statement in the policy, the insurer cannot rely upon the error in avoidance of its liability.” H o m e I n s . C o . v s . M e n d e n h a l l , 154 111., 452, 45 NE., 1078, 36 LRA., 374; P h o e n i x I n s . C o . v s . T u c k e r , 92 111., 64, 34 Am Rep., 106; C o m m e r c i a l I n s . C o . v s . S p a n k n o b l e , 52 111., 53, 4 Am. Report, 582; Y o u n g v s . H a r t f o r d F . I n s . C o . 45 Iowa, 377, 24 Am. Rep., 754; W e l s h v s . L o n d o n A s s u r . 151 Pa., 607, 25 A, 142, 21 Am St. Rep., 726 — (Taken from Am Juris, on Insurance Vol. 29, par. 843). An insured may be justified in signing an application in blank at the request of the insurer’s agent, who agrees to fill it in from data furnished by the insured or from an old application. In fact, an insurer cannot urge the falsity of representations contained in the policy issued, or in the application, where such representations were inserted therein, either by the company or its agent, after the application was signed, without the knowledge or consent of the insured, who has made no such representations. (Couch on Insurance, Vol. 4, par. 842 b.)”

§1.06. WHEN THERE IS NO CONCEALMENT. SEC. 30. 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;

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

(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. 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade. SEC. 33. The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated. SEC. 34. Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by section fifty-one. SEC. 35. Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. a. When there is no material concealment. From the above-quoted provisions, there is no material concealment that justifies the insurer to rescind the policy in the following cases: (1)

When matters are known to the other party;

(2) When, in the exercise of ordinary care, one party ought to know, and of which the other party has no reason to suppose him ignorant; 3

(3)

When there is waiver of communication;

185

186

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(4) When matters are those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; (5) When matters are those which relate to a risk excepted from the policy and which are not otherwise material; (6) When the matter involves general causes that are open to inquiry of each party and which may affect the political or material perils contemplated; (7)

When the matter is included in general usages of trade;

(8) Information of the nature or amount of the insured property, is not disclosed unless in answer to an inquiry; and (9) When what is involved is information of the party’s own judgment upon the matters in question. b. Facts that need not be disclosed. Indeed, not all facts are to be disclosed to the other party. As explained by Lord Mansfield:25 “The underwriter need not be told what lessens the risk agreed and understood to be run by the express terms of the policy. He need not be told general topics of speculation; as for instance: The underwriter is bound to know every cause which may occasion natural perils; as the difficulty of the voyage, the kind of seasons, the probability of lightning, hurricanes, earthquakes, e t c . He is bound to know every cause which may occasion political perils; from the rupture of States from war, and the various operations of it. He is bound to know the probability of safety from the continuance or return of peace; from the imbecility of the enemy, through the weakness of their counsels or their want of strength, e t c . The reason of the rule which obliges parties to disclose is to prevent fraud and to encourage good faith. It is adapted to such facts as vary the nature of the contract which one privately knows and the other is ignorant and has reason to suspect. The question, therefore, must always be whether there was under all the circumstances at the time the policy was underwritten, a fair representation; or a concealment x x x varying materially the object of the policy and changing the risks understood to be run.”

25

Carter v. Boehm, supra.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

187

§1.07. JUDGMENT OR OPINION. Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. Thus, opinions of the insured need not be disclosed. In other words, the duty of disclosure — and the duty not to misrepresent - requires that the statement to be made by one party relates to facts and not to opinion. 26 However, there must be good faith and there must be no intent to deceive. 27 Thus, the Supreme Court relied on the following disquisition in one case:28 “Although false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.” a. In the above-cited P h i l a m c a r e H e a l t h S y s t e m s , I n c . u . C o u r t o f A p p e a l s , 2 9 the Supreme Court explained that the answers of an applicant (who is not a doctor) regarding the medical history of his wife largely depends on opinion rather than fact. The Supreme Court ruled that there would be no concealment so long as the answers are made in good faith and without intent to deceive even if the answers which are in the nature of opinions are untrue. In the said case, Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. It appears that in the application for health coverage, petitioner required respondent’s husband to sign an express authorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all

26

John Birds, Modern Insurance Law, 4th Ed. (1997), p. 102, hereinafter referred to as

“Birds.” 27 Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos, G.R. No. 125678, March 18, 2002. 2& Ibid., citing Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of America.

2

*Ibid.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

188

information relative to any hospitalization, consultation, treatment or any other medical advice or examination. In the standard application form, he gave the answer “NO” to the following question: “Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?” The petitioner insurer denied the claim saying that there was a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. The petitioner was not sustained by the Supreme Court explaining that the statement was a matter of opinion. b. The same conclusion was reached when the insured answered that there was “no recurrence” of his kidney ailment. The Supreme Court accepted the explanation that the answer may be construed as an honest opinion of the insured who was not a medical doctor. The Court also sustained the view that answers to question that are matters of opinion made in good faith without intent to deceive will not avoid the policy even though they are untrue.30 c. The conclusion would be different, however, if the insured knows relevant facts that indicate the nature or gravity of his illness. Thus, if the insured had consulted a doctor for something other than common colds and he had full knowledge of the nature of the illness, the non-disclosure thereof cannot be considered just a matter of opinion. It is one involving non-disclosure of material fact. For example, in S u n L i f e I n s u r a n c e C o m p a n y o f C a n a d a v . C o u r t o f A p p e a l s a n d R o l a n d a a n d B e r n a r d a B a c a n i ,31 the deceased insured was asked whether he consulted a doctor or submitted to ECG, X-rays, blood test, and other test, or have been attended or admitted to a hospital or have sought advice for urine, kidney or bladder disorder. The deceased answered questions in the affirmative with respect to the first (whether he consulted a doctor) but limited his answer to a consultation with a certain doctor of the Chinese General Hospital on February 1986, for cough and flu complications. The other questions were answered in the negative. However, the insurer later discovered that two weeks prior to his application for insurance, the insured was examined and confined

30

Sun Life of Canada (Philippines), Inc. v. Sibya, G.R. No. 211212, June 8,

2016. 31

G.R. No. 105135, June 22, 1995. See case digest below.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

189

at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests. The Supreme Court ruled that the information which the insured failed to disclose were material and relevant to the approval and the issuance of the insurance policy. The matters concealed would have definitely affected petitioner’s action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application. The Supreme Court ruled that there could not have been good faith on the part of the insured because he was surely aware of the previous confinement. §1.08. KNOWLEDGE OF THE INSURER. It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the facts, and the insurer is estopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration.32 a. Reason for the Rule. The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one’s money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to the abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at

32 Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., G.R. No. L-4611, December 17, 1955, 98 Phil. 85, 90-91, citing 29 Am. Jur., Insurance, Section 807, at pp. 611-612.

190

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which [the Court] cannot believe it to be guilty of.33 b. The Supreme Court explained in one case the effect of knowledge on the part of the insurer of facts that are enough to invalidate the policy:34 “It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the known facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration.” ( 2 9 A m . J u r . , I n s u r a n c e , S e c t i o n 8 0 7 , a t p p . 6 1 1 - 6 1 2 ) The reason for the rule is not difficult to find. “The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one’s money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorrent to fair-minded men. It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent poses and designs which we cannot believe it to be guilty of.” ( W i l s o n v . C o m m e r c i a l U n i o n A s s u r a n c e C o . , 9 6 A t l . 5 4 0 , 5 4 3 - 5 4 4 ) A s i m i l a r v i e w w a s u p h e l d i n t h e c a s e o f Capital Insurance & Surety Co., Inc. v. Plastic Era Co., Inc., 65 SCRA 134, w h i c h i n v o l v e d a violation

33 Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., ibid., citing Wilson v. Commercial Union Assurance Co., 96 Atl. 540, 543-544. 34 Edillon v. Manila Bankers Life Insurance Corp., G.R. No. L-34200, September 30, 1982.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

191

of the provision of the policy requiring the payment of premiums before the insurance shall become effective. The company issued the policy upon the execution of a promissory note for the payment of the premium. A check given subsequent by the insured as partial payment of the premium was dishonored for lack of funds. Despite such deviation from the terms of the policy, the insurer was held liable. §1.09. INTENTIONAL AND UNINTENTIONAL CONCEALMENT. Section 27 of the Insurance Code is unequivocal that intent of the party is irrelevant in concealment:

SEC. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. a. In this jurisdiction, concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of insurance. This rule is consistent with the definition of concealment as “negligence to communicate that which a party knows and ought to communicate.”35 36 In the case of A r g e n t e v . W e s t C o a s t L i f e I n s u r a n c e Co.,36 the Supreme Court quoted Joyce as follows: 37 “The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist.” Prof. Dover38 explained that concealment, or s u p p r e s s i o v e r i , is nearly allied to a l l e g a t i o f a l s i , and avoids a contract upon principles of natural justice. Every concealment, whether arising from accident, negligence, inadvertence, or mistake, if material, will be equally fatal to the contract as if it were intentional or fraudulent. b. The Supreme Court held that materiality of the information withheld does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which ensue. Thus, “ g o o d f a i t h ” i s no defense in concealment.

35 Ignacio Saturnino v. The Philippine American Life Insurance Company, G.R. No. L16163, February 28, 1963.

^G.R. No. L-24899, March 19, 1928, 51 Phil. 725. 37 Joyce, Law of Insurance, 2nd Ed., Vol. 3. 38 Dover, p. 344.

192

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

c. In one case, the insured’s failure to disclose the fact that he was hospitalized for two weeks prior to filing his application for insurance, raises grave doubts about his b o n a f i d e s . It can be inferred that such concealment was deliberate on his part.39 d. Section 27 of the Insurance Code adopts the rule under the old Insurance Law. However, the original Section 27 does not contain the phrase “intentional or unintentional.” This phrase was however returned by B.P. Big. 874. Nevertheless, the absence of the phrase “intentional or unintentional” in the original Insurance Code of 1978 (prior to its amendment by B.P. Big. 874) did not change the rule. As a simple matter of grammar, it may be noted that “intentional” and “unintentional” cancel each other out. The net result therefore of the phrase “whether intentional or unintentional” is precisely to leave unqualified the term “concealment.” Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to “any concealment” without regard to whether such concealment is intentional or unintentional. The phrase “whether intentional or unintentional” was in fact superfluous. The deletion of the phrase “whether intentional or unintentional” could not have had the effect of imposing an affirmative requirement that a concealment must be intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Big. 874 of the phrase “whether intentional or unintentional” merely underscored the fact that all throughout (from 1914 to 1985), the statute did not require proof that concealment must be “intentional” in order to authorize rescission by the injured party.40 e. An exception to the rule that concealment may be intentional or unintentional is provided for in Section 29 of the Insurance Code because the requirement therein is that the omission is intentional or fraudulent. Section 29 states:

SEC. 29. An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind.

™Vda. de Canilang v. Court of Appeals, G.R. No. 92492, June 17, 1993, 223 SCRA 443. 40 Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, G.R. No. L30685, May 30, 1983.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

193

f. There would still be material concealment even if the insured has no knowledge of the existence of a duty to disclose. Similarly, concealment is present if the insured has no knowledge of the materiality of the fact which he already knows. A man may act in perfect good faith within the meaning of the ordinary term of the phrase, yet still be held not to have acted in the utmost good faith in the legal sense.41 §1.10. KNOWLEDGE OF THE FACT CONCEALED. With respect to knowledge of the material fact concealed, the Supreme Court observed in S a t u r n i n o v . T h e P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o m p a n y 42 that actual knowledge of the insured is not necessary to give the insurance company the right to avoid the policy on the ground of concealment. If it were the law that an insurance company could not depend a policy on the ground of concealment or misrepresentation, “unless it could show actual knowledge on the part of the applicant that the statements were false, then it would be impossible for it to protect itself and its honest policyholders against fraudulent and improper claims.” 43 It would be wholly at the mercy of anyone who wishes to apply for insurance, as it would be impossible to show actual fraud except in extreme cases. It could not rely on an application as containing information on which it could act. There would be no incentive to an applicant to tell the truth. 44 In other words, under the majority view, absence of knowledge of the fact concealed will not deprive the insurer of the right to invoke concealment because unintentional concealment is still concealment that is contemplated under Section 26 of the Insurance Code. a. The majority view is to the effect that the insured need not know the fact concealed is consistent with what Prof. Vance referred to as the English Doctrine.45 Prof. Vance cited the celebrated case of C a r t e r v . B o e h m 46 where Justice Mansfield observed that although the suppression should happen through mistake, without any fraudulent intention, yet the underwriter is deceived because the risk run is really different from the risk understood and intended to be run at the time of the agreement.

41

Birds, p. 103.

42 Supra, citing Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214. Saturnino v. The Philippine American Life Insurance Co., supra. 44 Ibid. 45 Vance, p. 339. This is in contrast to the American Doctrine where the presence of fraud is necessary before the concealment can be invoked. 46 3 Borrows, 1905, 1909. 43

194

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(1) One example that is often cited is a situation where the insured was already sick at the time he took the policy but he was not aware of such fact. It is often suggested that there is concealment of material fact because concealment need not be intentional.47 (2) Similarly, there is still concealment even if the party does not know but he ought to know the matter concealed. The law makes this an exception. Although objectively speaking, the party is not actually aware of the matter concealed, the law ascribes to him presumed knowledge of the matter or fact concealed because he ought to know the same matter or fact in view of the surrounding circumstances. Thus, if a party was not aware of the nature of his illness by reason of negligence or indifference, then this may amount to bad faith in some cases and therefore material concealment results. For example, if the insured was hospitalized for several months, he cannot claim that there was no material concealment because he ought to know the nature of his illness. b. Minority View. The minority view is to the effect that the contract cannot be rescinded on the ground of concealment if the non-disclosing party does not know the fact involved. This view is supported by the definition in Section 26 of the Insurance Code which states that concealment is neglect to communicate that which a party “knows and ought to communicate.” Thus, it is required under Section 26 that the fact allegedly concealed is known to the party or at the very least, the fact is something that the party who allegedly concealed ought to know. According to this view, when the law states that the concealment is intentional or unintentional, the intent refers to the intent to deceive or “corrupt intent.”48 The view is that Section 26 of the Insurance Code which refers to matters that “a party knows” can be reconciled with Section 27 which refers to intentional and unintentional concealment. The view is that one can conceal only if he knows what to conceal. It is true that concealment can still avoid the policy even if the concealment is unintentional. But this only means that there is still concealment whether or not there was fraudulent intent. Thus, mistake, good faith and

47 Suggested answers to the Bar Examinations in Commercial Law of the UP Law Center. 48 This was in fact the issue that was resolved by the alternative rules cited in the treatise of Prof. Vance when he referred to the English Rule and the American Rule. The English doctrine is to the effect that the presence or absence of corrupt intent is immaterial (Vance, p. 339).

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

195

negligence will not excuse the insured from material concealment because unintentional non-disclosure still avoids the policy. c. Exceptions. Nevertheless, even under the majority view where knowledge on the part of the insured/applicant is immaterial, there were cases when the Supreme Court did not sustain the insurer’s position that the insurance policies in question can be avoided on the ground of concealment or misrepresentation. These include cases when (1) the matter allegedly concealed is a matter of opinion, and (2) when the insurer waived his right to the information as in the case where the insured gave an imperfect answer.49 * For example, the insurer cannot avoid the policy on the ground of concealment if the matter concealed involves an opinion on the medical condition of the insured. In the above-cited P h i l a m c a r e H e a l t h S y s t e m , I n c . v . C o u r t o f A p p e a l s , 50 the insurer was not informed of the medical condition of the insured. However, the Court ruled that the medical condition of the insured is a matter of opinion which cannot be invoked so long as there was no intent to deceive. Hence, if the insured stated that he is in good health, such statement is a matter of opinion and should not be construed as material concealment. §1.11. WAIVER OF INSURER. It has been held that where, upon the face of the application, a question appears to be not answered at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the omission to answer more fully immaterial. 51 For example, in life insurance, even if from the viewpoint of a medical expert, the information communicated about the ailment of the insured was imperfect, there would be no ground to avoid the policy on the ground of concealment if the imperfect answer or information is nevertheless sufficient to have induced insurer to make further inquiries about the ailment and operation of the insured. a. I n Ng Gan Zee v. Asian Crusader Life Assurance Corporation ,52 t h e alleged false statements given by Kwong Nam

49

See §1.10 below.

“G.R. No. 125678, March 18, 2002. 51 Ng Gan Zee v. Asian Crusader Life Assurance Corporation, G.R. No. L-30685, May 30, 1983. b2 Ibid. It should be noted that the Supreme Court observed in Ng Gan Zee v. Asian Crusader Life Assurance Corporation that the concealment must be intentionally made. This observation is apparently inconsistent with the provisions of the old Insurance Law (the law then in force) which expressly provides that the

196

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

are as follows: “Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been associated with ulcer of stomach. Tumor taken out was hard and of a hen’s egg size. Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now, claims he is completely recovered.” (1) The insurer claims that there was material misrepresentation because the doctor who treated the insured reported that about two (2) years before he (the insured) applied for a life insurance policy, the insured was diagnosed as having “peptic ulcer” for which, an operation, known as a subtotal gastric resection was performed on the insured and that the Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from the patient’s body was a portion of the stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension. The Supreme Court considered this as an imperfect answer that does not avoid the policy. The Supreme Court adopted the observation of the trial court that “if the ailment and operation of [the insured] had such an important bearing on the question of whether the [insurer] would undertake the insurance or not, the court cannot understand why the [insured] or its medical examiner did not make any further inquiries on such matters from the x x x [h]ospital or require copies of the hospital records from the appellant before acting on the application for insurance. The fact of the matter is that the [insurer] was too eager to accept the application and receive the insured’s premium. It would be inequitable now to allow the [insurer] to avoid liability under the circumstances.53 b. It was explained however that “where an answer of the applicant to a direct question of the insurers purports to be a complete answer to the question, any substantial misstatement or omission avoids a policy issued on the faith of the application.”54 c. In S u n L i f e o f C a n a d a ( P h i l i p p i n e s ) , I n c . v . S i b y a ,55 the Court ruled that there was no concealment because the insured

concealment may be intentional or unintentional. Hence, such observation must be considered as a mere obiter. 53 Supra. ^Vance, p. 348, citing Phoenix Mut. Life Ins. Co. v. Raddin, 120 U.S. 183, 7 S.Ct 500, 30 L. Ed. 644 (1887). “G.R. No. 211212, June 8, 2016.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

197

disclosed the fact that he had sought advice for kidney problems and had undergone a procedure due to kidney stone at the National Kidney Institute in 1987. The insurer claimed that there was concealment because the insured allegedly did not disclose his previous medical treatment in May and August of 1994 which undisclosed fact allegedly suggested that the insured was in “renal failure” and at a high risk medical condition. The Court ruled against the insurer and allowed recovery by the beneficiaries. The Court ruled that concealment as a defense for the insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. The insurer failed to clearly and satisfactorily established its allegations. The Court pointed out the admission of the insured of his medical treatment for kidney ailment and that he authorized the insurer to inquire further into his medical history for verification purposes. §1.12. REMEDY. Section 27 provides that the presence of concealment entitles the insurer to rescind the insurance contract. However, it is important to note that the right to rescind should be exercised previous to the commencement of an action on the contract. 66 It is also subject to the incontestable clause discussed hereunder. PROBLEMS: 1. In a non-medical insurance contract (one where the company waives medical examination) the insured failed to disclose that she had once been operated on, although the information on this matter was supposed to have been supplied the company. Within the proper period, may the insurance company have the contract rescinded? A:

2.

Yes, the insurance company can have the contract rescinded. The fact that the insured was operated on is a material fact that should have been disclosed to the insurer. The fact concealed may have affected the decision of the insurer to approve the application or to fix the premium rate. Section 27 of the Insurance Code provides that “a concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.”

X applied for Life Insurance with Metropolitan Life Insurance Company. The application contained this question: “Have you ever had any ailment or disease of x x x (b) the stomach or intestines, liver, kidney or genitourinary organ?” X, a laundry woman, who has

“Section 48,1.C.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

198

no medical knowledge answered “No.” The application was approved, premium was paid and six (6) months later, X died from cancer of the stomach. The post medical examination of X shows that she had the cancer at the time she applied for a policy. Can the beneficiary of X collect on the policy? A:

3.

Juan procured a “non-medical” life insurance from Good Life Insurance. He designated his wife, Petra, as the beneficiary. Earlier in his application in response to the question as to whether or not he had ever been hospitalized, he answered in the negative. He forgot to mention his confinement at the Kidney Hospital. After Juan died in a plane crash, Petra filed a claim with Good Life. Discovering Juan’s previous hospitalization, Good Life rejected Petra’s claim on the ground of concealment and misrepresentation. Petra sued Good Life, invoking faith on the part of Juan. Will Petra’s suit prosper? Explain. A:

4.

No, the beneficiary of X cannot collect on the policy. The matter concealed was material hence the insurer has a valid defense against the beneficiary. The defense is available even if X was not aware of her fatal illness because Section 27 of the Insurance Code gives the right to the insurer to avoid the policy whether the concealment is intentional or unintentional.

No, Petra’s suit will not prosper. There was material concealment in the present case because the illness of Juan could certainly affect the decision of the insurer to enter into the insurance contract. The fact that the insured died of a cause that is alien to the illness that was concealed will prevent the insurer from invoking the concealment as a defense. In addition, the fact that the insured merely forgot to disclose his confinement at the Kidney Hospital does not excuse him from the non-disclosure because Section 27 of the Insurance Code makes concealment available as a defense whether the same is intentional or unintentional.

A, an agent of life insurance company X, induced B who has been suffering from advanced tuberculosis to apply for P10,000.00 life insurance which B did and he (B) requested to fill the application form. Through the connivance of the physician, it was made to appear in the application that B is in good health and the P10,000.00 life insurance policy was issued by X to B. If B dies of tuberculosis, may his beneficiaries recover? Why? A:

No, the beneficiaries may not recover. There was collusion on the part of the insured, the insurance agent and the physician which vitiates the policy. This is not a simple case of concealment but a deliberate attempt to defraud the insurer. There was a deliberate attempt to hide the fact that the insured was suffering from tuberculosis.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

199

On October 18, 1980, P took out a life insurance policy and named his only son Q as beneficiary. P thereafter learned that Q was hooked on drugs and immediately notified the insurance company in writing that he is substituting his sister R as the beneficiary in place of Q. P later died of advanced tuberculosis. In the application filled up by the agent of the insurance company, the agent, without the knowledge of P, filled in a false answer and made it appear that P was in good health. Upon P’s death, Q claimed the proceeds of the insurance policy contending that as designated beneficiary, he having acquired a vested right to the policy. Can the insurance company refuse liability on the policy? A:

No. The false statement was made by the insurer’s agent hence it should be the insurer who should bear the effects of its agents misconduct. It would have been different if there was collusion between the agent and the insured. However, there is no such collusion in the present case because the problem states that the false answer was made without the knowledge of the insured. ( S e e M a l a y a n I n s u r a n c e C o r p . v . P i n c a , G . R . N o . 6 7 8 3 5 , O c t o b e r 1 2 , 1 9 8 7 a n d G r e a t P a c i f i c L i f e u . C A , 8 9 S C R A 5 4 3 )

The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy dispenses with the medical examination of the applicant usually required in ordinary life policies. However, detailed information is called for in the application concerning the applicant’s health and medical history. The written application in this case was submitted by Saturnino to appellee on November 16, 1957, witnessed by appellee’s agent Edward A. Santos. The policy was issued on the same day, upon payment of the first year’s premium of P339.25. On September 19, 1958 Saturnino died of pneumonia, secondary to influenza. Appellants here, who are her surviving husband and minor child, respectively, demanded payment of the face value of the policy. The claim was rejected and this suit was subsequently instituted. It appears that two (2) months prior to the issuance of the policy or on September 9, 1957, Saturnino was operated on for cancer, involving complete removal of the right breast, including the pectoral muscles and the glands found in the right armpit. She stayed in the hospital for a period of eight (8) days, after which she was discharged, although according to the surgeon who operated on her she could not be considered definitely cured, her ailment being of the malignant type. Notwithstanding the fact of her operation, Estefania A. Saturnino did not make a disclosure thereof in her application for insurance. On the contrary, she stated therein that she did not have, nor had she ever had, among other ailments listed in the application, cancer or other tumors; that she had not consulted any physician, undergone any operation or suffered any injury within the preceding five (5) years; and that she had never been treated for nor did she ever have any illness or disease peculiar to her sex, particularly of the breast, ovaries,

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

200

uterus, and menstrual disorders. The application also recites that the foregoing declarations constituted “a further basis for the issuance of the policy.” Did the insured make such false representations of material facts as to avoid the policy? What is the effect of waiver of the medical examination? A:

There can be no dispute that the information given by her in her application for insurance was false, namely, that she had never had cancer or tumors, or consulted any physician or undergone any operation within the preceding period of five (5) years. Are the facts then falsely represented material? The Insurance Law ( S e c t i o n 3 0 ) provides that “materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the proposed contract, or in making his inquiries.” It seems to be the contention of appellants that the facts subject of the representation were not material in view of the “nonmedical” nature of the insurance applied for, which does away with the usual requirement of medical examination before the policy is issued. The contention is without merit. If anything, the waiver of medical examination renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. It is logical to assume that if appellee had been properly apprised of the insured’s medical history she would at least have been made to undergo medical examination in order to determine her insurability. Appellants argue that due information concerning the insured’s previous illness and operation had been given to appellees agent Edward A. Santos, who filled the application form after it was signed in blank by Estefania A. Saturnino. This was denied by Santos in his testimony, and the trial court found such testimony to be true. This is a finding of fact which is binding upon [the Court], this appeal having been taken upon questions of law alone. [The Court] do[es] not deem it necessary, therefore, to consider appellee’s additional argument, which was upheld by the trial court, that in signing the application form in blank and leaving it to Edward A. Santos to fill (assuming that to be the truth) the insured in effect made Santos her agent for that purpose and consequently was responsible for the errors in the entries made by him in that capacity. In the application for insurance signed by the insured in this case, she agreed to submit to a medical examination by a duly appointed examiner of appellee if in the latter’s opinion such examination was necessary as further evidence of insur-

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

201

ability. In not asking her to submit to a medical examination, appellants maintain, appellee was guilty of negligence, which precluded it from finding about her actual state of health. No such negligence can be imputed to appellee. It was precisely because the insured had given herself a clean bill of health that appellee no longer considered an actual medical check-up necessary.

Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself did not know, since her doctor never told her, that the disease for which she had been operated on was cancer. In the first place the concealment of the fact of the operation itself was fraudulent, as there could not have been any mistake about it, no matter what the ailment. Secondly, in order to avoid a policy it is not necessary to show actual fraud on the part of the insured. ( I g n a c i o S a t u r n i n o v . T h e P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o m p a n y , G . R . N o . L 1 6 1 6 3 , F e b r u a r y 2 8 , 1 9 6 3 ) On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was issued Policy No. 3-903- 766-X valued P100,000.00, with double indemnity in case of accidental death. The designated beneficiary was his mother, respondent Bernarda Bacani. On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings prompted it to reject the claim. In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclosed material facts relevant to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total premiums paid in the amount of P10,172.00 was attached to said letter. Petitioner claimed that the insured gave false statements in his application when he answered the following questions: “5. Within the past 5 years have you: a) consulted any doctor or other health practitioner? b)

submitted to: ECG? X-rays? blood tests?

c)

6.

other tests? attended or been admitted to any hospital or other medical facility? 6

Have you ever had or sought advice for:

202

ESSENTIALS OK INSURANCE LAW (Republic Act No. 1 (><>07 with Notes on Pro-Need Act)

XXX XXX XXX

b)

urine, kidney or bladder disorder?” (Rollo, p. 53) The deceased answered questions No. 5(a) in the affirmative but limited his answer to a consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The other questions were answered in the negative. { R o l l o , p. 53) Petitioner discovered that two (2) weeks prior to his application for insurance, the insured was examined and confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests, (a) Was rescission of the contract justified on the ground of concealment? (b) Will the waiver of medical examination be deemed a waiver of concealment as a ground for rescission? (c) Assuming that there was concealment, can the same be invoked even if it was not the cause of the loss?

A:

a. Yes. The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health. The information which the insured failed to disclose were material and relevant to the approval and the issuance of the insurance policy. The matters concealed would have definitely affected petitioner’s action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application. It should be noted that materiality of the information withheld does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which ensue. Thus, “good faith” is no defense in concealment. The insured’s failure to disclose the fact that he was hospitalized for two (2) weeks prior to filing his application for insurance, raises grave doubts about his b o n a f i d e s . It appears that such concealment was deliberate on his part. b.

No. The argument that the insurer’s waiver of the medical examination of the insured debunks the materiality of the facts concealed is untenable. The waiver of a medical examination [in a non-medical insurance contract] renders even more material the information required

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

203

of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. Such argument of private respondents would make Section 27 of the Insurance Code, which allows the injured party to rescind a contract of insurance where there is concealment, ineffective. c.

Yes, concealment can still be invoked. The fact that the facts concealed had no bearing to the cause of death of the insured, it is well-settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries. ( S u n A s s u r a n c e C o m p a n y o f C a n a d a v . T h e H o n . C o u r t o f A p p e a l s and S p o u s e s R o l a n d o a n d B e r n a r d a B a c a n i , G . R . N o . 1 0 5 1 3 5 , J u n e 2 2 , 1 9 9 5 ; H e n s o n v . T h e P h i l i p p i n e A m e r i c a n L i f e I n s u r a n c e C o . , 5 6 O . G . N o . 4 8 [ I 9 6 0 ] ) NOTE: The rescission in this case was exercised within the two (2)-year contestability period as recognized in Section 48 of The Insurance Code.

On June 18, 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from “sinus tachycardia.” The doctor prescribed the following for him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the same doctor again on August 3, 1982 and this time was found to have “acute bronchitis.” On the next day, August 4, 1982, Jaime Canilang applied for a “non-medical” insurance policy with respondent Great Pacific Life Assurance Company (“Great Pacific”) naming his wife, petitioner Thelma Canilang, as his beneficiary. Jaime Canilang was issued ordinary life insurance Policy No. 345163, with the face value of P19,700.00, effective as of August 9, 1982. On August 5, 1983, Jaime Canilang died of “congestive heart failure,” “anemia,” and “chronic anemia.” Petitioner, widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on December 5, 1983 upon the ground that the insured had concealed material information from it. The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as follows: '‘MEDICAL DECLARATION 'I hereby declare that: (1) I have not been confined in any hospital, sanitarium or infirmary, nor received any medical or surgical advice/attention within the last five (5) years.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

204

(2)

I have never been treated nor consulted a physician for a heart condition, high blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical impairment.

(3)

I am, to the best of my knowledge, in good health. EXCEPTIONS:

GENERAL DECLARATION I hereby declare that all the foregoing answers and statements are complete, true and correct. I hereby agree that if there be any fraud or misrepresentation in the above statements material to the risk, the INSURANCE COMPANY upon discovery within two (2) years from the effective date of insurance shall have the right to declare such insurance null and void. That the liabilities of the Company under the said Policy /TA/Certificate shall accrue and begin only from the date of commencement of risk stated in the Policy/TA/Certificate, provided that the first premium is paid and the Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual good health. Signed at Manila this 4th day of August, 1992. Elegible

Signature of Applicant” [The Court] note[s] that in addition to the negative statements made by Mr. Canilang in paragraphs 1 and 2 of the medical declaration, he failed to disclose in the appropriate space, under the caption “Exceptions,” that he had twice consulted Dr. Wilfredo B. Claudio who had found him to be suffering from “sinus tachycardia” and “acute bronchitis.” Was there material concealment? A:

Yes, there was material concealment. The information which Jaime Canilang failed to discloses was material to the ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang disclosed his visits to his doctor, the diagnosis made and the medicines prescribed by such doctor, in the insurance application, it may be reasonably assumed that Great Pacific would have made further inquiries and would have probably refused to issue a nonmedical insurance policy or, at the very least, required a higher premium for the same coverage. The materiality of the information withheld by Great Pacific did not depend upon

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

205

the state of mind of Jaime Canilang. A man’s state of mind or subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably drawn. Neither does materiality depend upon the actual or physical events which ensue. Materiality relates rather to the “probable and reasonable influence of the facts” upon the party to whom the communication should have been made, in assessing the risk involved in making or omitting to make further inquiries and in accepting the application for insurance; that “probable and reasonable influence of the facts” concealed must, of course, be determined objectively, by the judge ultimately. In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to communicate must have been intentional rather than merely inadvertent. For Jaime Canilang could not have been unaware that this heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice in the two (2) months before applying for non-medical insurance. Indeed, the last medical consultation took place just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor precisely because of the discomfort and concern brought about by his experiencing “sinus tachycardia.” ( T h e l m a V d a . d e C a n i l a n g v . H o n . C o u r t o f A p p e a l s , e t a l . , G . R . N o . 9 2 4 9 2 , J u n e 1 7 , 1 9 9 3 ) The insured, in his application for insurance, particularly in his declarations to the examining physician, stated the following in answering the questions propounded to him: 14. Have you ever had any of the following diseases or symptoms? Each question must be read and answered “Yes” or “No.”

XXX XXX XXX

Gastritis, Ulcer of the Stomach or any disease of that organ? No. Vertigo, Dizziness, Fainting-spells or Unconscious? No. Cancer, Tumors or Ulcers of any kind? No. 15. Have you ever consulted any physician not included in any of the above answers? Give names and address or physicians list ailments or accidents and date. No. It appears that the insured entered the Chinese General Hospital for medical treatment on January 29, 1950 having stayed there up to February 11, 1950. Upon entering the

206

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

hospital, he complained of dizziness, anemia, abdominal pains and tarry stools, and in the evening of his admission he had / several abdominal pains and his discharges were with black' tarry stools and felt dizzy and weak. The history of his illness shows that the same “started a year ago as frequent dizziness.” An X-ray picture of his stomach was taken and the diagnosis made of him by his doctors showed that his illness was “peptic ulcer, bleeding.” Was there material concealment? A:

Yes, there was material concealment. It should be noted that the insured’s confinement in the Chinese General Hospital took place from January 29, 1950 to February 11, 1950, whereas his 57 application for insurance wherein he stated his answer to the questions propounded to him by the examining physician of defendant was submitted to defendant on September 5, 1950. It is apparent that when the insured gave his answers regarding his previous ailment, particularly with regard to “Gastritis, Ulcer of the Stomach or any disease of that organ” and “Vertigo, Dizziness, Fainting-spells or Unconsciousness,” he concealed the ailment of which he was treated in the Chinese General, Hospital which precisely has direct connection with the subject of the questions propounded. The negative answers given by the insured regarding his previous ailment, or his concealment of the fact that he was hospitalized and treated for sometime of peptic ulcer and had suffered from “dizziness, anemia, abdominal pains and tarry stools,” deprived defendant of the opportunity to make the necessary inquiry as to the nature of his past illness so that as it may form its estimate relative to the approval of his application. Had defendant been given such opportunity, considering the previous illness of the insured as disclosed by the record of the Chinese General Hospital, defendant would probably had never consented to the issuance of the policy in question. In fact, according to the death certificate, the insured died of “infiltrating medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature, stomach metastases spleen,” which may have direct connection with his previous illness. ( Y u P a n g C h e n g u . T h e C o u r t o f A p p e a l s , e t a l , G . R . N o . L - 1 2 4 6 5 , M a y 2 9 , 1 9 5 9 )

§2. REPRESENTATION. Representations are statements made to give information to the insurer to induce him to enter into the insurance contract. 58 A representation is a collateral communication made to the other party in writing or by word of mouth.59

57

Va 58 nce, Va 59 Do nce, ver,

CONCEALMENT 1. It involves an omission - n o n d i s c l o s u r e .

REPRESENTATION 1. It involves a positive assertion or affirmation.

60 168 SCRA 1 (1988) citing Tolentino, Commercial Laws of the Philippines, p. 991, Vol. II, 8th Ed.; New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992.

2. Concealment cannot refer to future acts. 2. Representation can pertain to the future because it can be promissory. 3. Same test applies. 3. Same test of materiality applies. 4. A party can rescind.

4. A party can rescind. |

§2.03. KINDS. As to form, a representation may be oral or written. 61 As to the nature of the statements, representation may be either affirmative or promissory. a. Affirmative representations involve statements dealing with facts existing at the time the contract is made while promissory representations pertain to statements made by the insured concerning what is to happen at the time the insurance is already effective. Section 39 provides that: SEC. 39. A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation. §2.04. INTERPRETATION. The basic rule is that representations are construed liberally in favor of the insured and are required to be only substantially true.62 a. Rules. Section 38 of the Insurance Code provides that the language of a representation is to be interpreted by the same rules as the language of contracts in general. In this connection, Articles 1370 to 1379 of the New Civil Code may be applied. For instance, the rule in the New Civil Code is that if the terms are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control.63 b. Time to Which it Refers. Section 42 of the Insurance Code provides that a representation must be presumed to refer to the date on which the contract goes into effect. For example, the representation that the house is not occupied relates to the time the

61

Section 36,1.C. Vance, p. 373. ^Article 1370, New Civil 62

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

209

contract takes effect. It may be possible that the house had been occupied before but there is no misrepresentation so long as the same is not occupied when the contract takes effect. Obviously, this applies only to affirmative representations and not to promissory representations. c. Can Qualify an Implied Warrant. Section 40 provides that a representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty. For instance, the implied warrant of seaworthiness may be qualified by a representation which was made earlier by the insured that the ship does not have a particular equipment on board. §2.05. TEST OF MATERIALITY. Section 46 of the Insurance Code provides that the materiality of a representation is determined by the same rules as the materiality of a concealment. Thus, there is deemed to be material misrepresentation if the knowledge of one party thereof will affect the insurer’s action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same or in fixing the terms and conditions of the policy. a. Examples. Thus, the representation is material if it relates to health, freedom from disease, habits and medical attendance. There are instances when family relationship and family history may also be important.64 (1) There is material representation for instance when the insured in a life insurance policy falsely represented that she had not smoked for one year;65 (2) There is also material misrepresentation if the applicant in a life insurance policy stated that she weighed 180 pounds when she in fact weighed 300 pounds;66 b. Representation as to Age in Life Insurance. Section 233(d) provides that the following provision must be stated in an Individual Life or Endowment Policy:

^S.S. Huebner and Kenneth Black, Jr., Life Insurance, 10th Ed., pp. 173-174, hereinafter called “Huebner and Black.” ^Old Line Life Ins. Co. v. Superior Court, 229 Cal. App. 3d 1600, 281 Cal. Rptr. 15 (1st Dist. 1991) cited in DiMugno and Glad, p. 1634. 66 Taylor v. Sentry Life Ins. Co., 729 F.2d 652, (9th Cir. 1984) cited in DiMugno and Glad, p. 1634.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

210

(d) A provision that if the age of the person insured, or the age of any person, considered in determining the premium, or the benefits accruing under the policy, has been misstated, any amount payable or benefit accruing under the policy shall be such as the premium paid would have purchased at the correct age; (1) With the above-quoted provision, a misstatement of the age of the insured does not avoid the policy. The only result is that any amount payable or benefit accruing under the policy shall be such as the premium paid would have purchased at the correct age. In other words, the benefits that will be paid will be equal to what the premium paid by the insured would have purchased if the age had been correctly stated. This rule takes into consideration the view that no person can testify on his own age except from hearsay. (2) In this connection, the Standard Life Insurance Policy Provisions issued by the Insurance Commission under Circular Letter No. 14-93, dated June 25, 1993 include the following: “If the age of the Insured has been misstated, the amount of insurance will be adjusted to the amount which the premium would have purchased at the correct age, applicable risk class and applicable premium rates as of the policy date. If at the correct age, the Insured is not eligible for any coverage under this Policy or its riders, the Company will refund the corresponding premiums actually received by the Company less any indebtedness under this Policy.” 3

(3) No doubt, persons do not have accurate information as to their correct ages. Yet the correct age of the insured is the chief corner-stone of the life insurance structure. 67 The prudent thing for the insurer to do then is to require the submission of the Certificate of Live Birth of the insured. If the Certificate of Live Birth will not be required and the insurer merely relied on the representation of the insured, then the insurer’s only recourse is to make the adjustment regarding premium if there was misstatement.

67

Langan v. United States Life Insurance Co., 344 Mo. 989, 130 So. W. (2d)

479 (1939).

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

211

(4) Nevertheless, it is believed that the misstatement as to the age of the insured must be done in good faith. There is a ground to rescind for misrepresentation if there is fraud or intent to deceive consistent with the feature of insurance as contracts u b b e r i m a e f i d a e . (5) In E d i l l o n v . M a n i l a B a n k e r ’ s L i f e I n s u r a n c e C o r p . , 6 8 the life insurance policy provides that the insurer shall not be liable to pay claims when the insured is under 16 or over 60 years. However, although the insured was already above 60 years when she applied for an insurance policy, she actually disclosed such fact in the application. Hence, the Court ruled that the insurer is estopped from using the age of the insured. The insurer should be construed as having waived the disqualification willfully or through the negligence of its employees. Despite the information given by the insured as to her age, “which could hardly be overlooked in the application form, considering its prominence thereon and its materiality to the coverage applied for, the respondent insurance corporation received her payment of premium and issued the corresponding certificate of insurance without question.” c. Erroneous Description of Building in Fire Insurance. Misdescription of the building without the fault of the insured cannot be considered material representation.69 The mistake of the employees or agents of the insurance company cannot prejudice the insured.70 (1) With respect to statements regarding the value of the property, it has been observed that all statements of value are, of necessity, to a large extent matters of opinion and it would be outrageous to hold the that the validity of all valued policies must depend upon the absolute correctness of the estimated amount. The ordinary test of value of property is the price it will commend in the market if offered for sale. However, men may honestly differ about the value of the market or as to what it will bring in the market.71

68

G.R. No. L-34200 September 30, 1982. Domingo Garcia v. Hong Kong Fire & Marine Insurance, Co., Ltd., G.R. No. 20341, September 1, 1923, 45 Phil. 122. 70 1 Couch 215. 71 Mrs. Henry E. Harding v. Commercial Union Assurance Co., G.R. No. L-12707, August 10, 1918. 69

212

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§2.06. REMEDY. There is misrepresentation or false representation under Section 44 of the Insurance Code if the facts fail to correspond with assertions or stipulations. Misrepresentation entitles the aggrieved party to the right to rescind the contract. Section 45 provides:

SEC. 45. If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. a. When Rescission is Unavailable. Based on Section 48 and the second sentence of Section 45, the injured party cannot rescind the policy on the ground of false representation in the following cases: (1)

When there is waiver;

(2)

When an action has already been commenced on the contract; 72

(3)

When the incontestable clause applies.73

and b. Estoppel No Longer Applicable. Before R.A. No. 10607, the insurer can no longer rescind the policy “when there is estoppel as in the case where the insurer accepted premium payments despite knowledge of the ground for rescission.”74 However, R.A. No. 10607 deleted this provision thereby indicating that acceptance of the premium will not estop the insurer from rescinding the policy on the ground of misrepresentation. In other words, the insurer can still rescind the policy even if it accepted the premium despite knowledge of the ground for rescission provided that other defenses are not available like the incontestability clause discussed hereunder. PROBLEM: 1. On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On the same date, appellant, upon receipt

72

Section 48,1.C. Ibid. 74 Before R.A. No. 10607, there is a second sentence in Section 45, I.C. that states that “the right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Batas Pambansa Big. 874J' 73

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

213

of the required premium from the insured, approved the application and issued the corresponding policy. On December 6, 1963, Kwong Nam died of cancer of the liver with metastasis. All premiums had been religiously paid at the time of his death. On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment of the face value of the policy. On the same date, she submitted the required proof of death of the insured. Appellant denied the claim on the ground that the answers given by the insured to the questions appealing in his application for life insurance were untrue. The insured allegedly made the following misrepresentation: “Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been associated with ulcer of stomach. Tumor taken out was hard and of a hen’s egg size. Operation was two (2) years ago in Chinese General Hospital by Dr. Yap. Now, claims he is completely recovered.” The insurer relied on the following to prove the alleged misrepresentation: [1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General Hospital on May 22, 1960, i . e . , about two (2) years before he applied for an insurance policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan had diagnosed the patient’s ailment as ‘peptic ulcer’ for which, an operation, known as a sub-total gastric resection was performed on the patient by Dr. Pacifico Yap; and [2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from the patient’s body was a portion of the stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension. On the bases of the above undisputed medical data showing that the insured was operated on for “peptic ulcer,” involving the excision of a portion of the stomach, appellant argues that the insured’s statement in his application that a tumor, “hard and of a hen’s egg size,” was removed during said operation, constituted material concealment. Was there material representation that avoids the policy? A:

No. It bears emphasis that Kwong Nam had informed the appellant’s medical examiner that the tumor for which he was operated on was “associated with ulcer of the stomach.” In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between “peptic ulcer” and “a tumor,” his statement that said tumor was “associated with ulcer of the stomach,” should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Indeed, such statement must be presumed to have been made by him without knowledge of its incorrectness and without any deliberate intent on his part to mislead the appellant. While it may be conceded that, from the viewpoint of a medical expert, the information communicated was imperfect, the same was nevertheless sufficient to have induced appellant to make further inquiries about the ailment and operation of

214

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the insured. It has been held that where, upon the face of the application, a question appears to be not answered at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the omission to answer more fully immaterial. As aptly noted by the lower court, “if the ailment and operation of Kwong Nam had such an important bearing on the question of whether the defendant would undertake the insurance or not, the court cannot understand why the defendant or its medical examiner did not make any further inquiries on such matters from the Chinese General Hospital or require copies of the hospital records from the appellant before acting on the application for insurance.” The fact of the matter is that the defendant was too eager to accept the application and receive the insured’s premium. It would be inequitable now to allow the defendant to avoid liability under the circumstances. ( N g G a n Z e e v . A s i a n C r u z a d e r L i f e A s s u r a n c e C o r p o r a t i o n , G . R . N o . L 3 0 6 8 5 , M a y 3 0 , 1 9 8 3 )

§3. WARRANTIES. A warranty is an affirmation of fact or a promise that forms part of the terms and conditions of the policy. Otherwise stated, a warranty is a statement or promise set forth in the policy, or by reference incorporated therein, the untruth or nonfulfillment, renders the policy voidable by the insurer.75 SEC. 68. A warranty may relate to the past, the present, the future, or to any or all of these.

a. A warranty provides a safety valve by which underwriters can ensure that an insurance is actually of the character attributed to it. 76 §3.01. KINDS. A warranty is either express or implied. 77 A warranty may also be an affirmative warranty or promissory warranty. a. An express warranty is one that is stated in the policy or any of its attachments. An implied warranty is a natural element of the contract imposed by law and is a part of the policy without

75 Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, G.R. No. 151890, June 20, 2006, 491 SCRA 411, 435. 76 Dover, p. 369. 77 Section 67,1.C.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

215

the need that it be stated in the policy. For example, there may be implied warranty of seaworthiness in marine insurance. b. An affirmative warranty is an affirmation of fact that exists at the time they are made. It is an undertaking that some positive allegation of fact is true. For example, the insured may warrant that the insured building is not being for commercial purposes. Promissory warranty stipulates that certain things shall be done or a specified condition shall exist during the currency of life of the insurance contract. In promissory warranty, one party is bound by an executory stipulation. §3.02. RULES ON PROMISSORY WARRANTIES. Promissory warranties are subject to Sections 72 and 73 of the Insurance Code which provide:

SEC. 72. A statement in a policy which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place. SEC. 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy. a. Promissory warranty may either be a positive act or an omission. Thus, the insured in a fire insurance may warrant that the firewall of the building will be modified to the height and specifications stated in the policy. On the other hand, there may also be a promissory warranty that is in the form of omission as in the case where the insured warrants that he will not store gasoline or kerosene in the insured building. §3.03. FORMALITIES OF EXPRESS WARRANTY. Section 69 of the Insurance Code provides that no particular form of words is necessary to create a warranty. However, Section 70 imposes the following requirements:

SEC. 70. Without prejudice to Section 51, every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.

216

ESSENTIALS OF INSURANCE LAW

(Republic Act No. 10607 with Notes on Pre-Need Act)

a. Thus, there are only two ways of making an express warranty part of the insurance contract:

(1)

It must be contained in the policy itself; or

(2) It may be expressed in another instrument provided that the separate instrument is signed by the insured and referred to in the policy. b. The Supreme Court explained that “any express warranty or condition is always a part of the policy, but, like any other part of an express contract, may be written in the margin, or contained in proposals or documents expressly referred to in the policy, and so made a part of it” 7* The Supreme Court further explained: “The law says that every express warranty must be “contained in the policy itself.” The word “contained,” according to the dictionaries, means “included,” “inclosed,” “embraced,” “comprehended,” etc. When, therefore, the courts speak of a rider attached to the policy, and thus “embodied” therein, or of a warranty “incorporated” in the policy, it is believed that the phrase “contained in the policy itself” must necessarily include such rider and warranty. As to the alternative relating to “another instrument,” “instrument” as here used could not mean a mere slip of paper like a rider, but something akin to the policy itself, which in section 48 of the Insurance Act is defined as “The written instrument, in which a contract of insurance is set forth.” In California, every paper writing is not necessarily an “instrument” within the statutory meaning of the term. The word “instrument has a welldefined definition in California, and as used in the Codes invariably means some written paper or instrument signed and delivered by one person to another, transferring the title to, or giving a lien, on property, or giving a right to debt or duty. (Hoag v s . Howard [1880], 55 Cal., 564; People v s . Fraser [1913], 137 Pac., 276.) In other words, the rider, warranty F, is contained in the policy itself, because by the contract of insurance agreed to by the parties it is made to form a part of the same, but is not another instrument signed by the insured and referred to in the policy as forming a part of it ”7& §3.04. EXAMPLES OF EXPRESS WARRANTY. Section 71 of the Insurance Code provides that a statement in a policy of a matter relating to the person or thing insured, or to the risk, as a 78 *

78 Ang Giok Chip v. Springfield Fire & Marine Insurance Co., G.R. No. L-33637, December 31, 1931 citing Parsons on Maritime Law, 106, and Phillips on Insurance, Section 756 and 4 Couch, Cyclopedia of Insurance Law, Section 862. ™Ibid.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

217

fact, is an express warranty thereof. For example, a statement in the life insurance policy that the insured has not been involved in any vehicular accident for the past 10 years or has never been charged with any crime involving moral turpitude is an express warranty. Similarly, a statement that there is no gasoline in the insured building is a warranty because it relates to the risk insured against. a. A warranty may likewise be in the form of an “other insurance” clause whereby the insured warrants that there is no existing insurance over the same property when the insurance policy takes effect. 80

§3.05. BREACH OF WARRANTY BY THE INSURED. Breach of warranty by the insured renders the contract defeasible. However, in order to avoid the policy, the insurer must prove such breach consistent with the rule that any violation must be established by the person who is making such allegation. 81 a. The insurer may elect to waive his right to avoid the policy in case of breach by the insured. This waiver by the insurer may be express or implied. For example, there is implied waiver when the insurer renewed the policy knowing that there was breach of warranty.82

PROBLEM: 1. Julie and Alma formed a business partnership. Under the business name Pino Shop, the partnership is engaged in the sale of construction materials. Julie insured the stocks in trade of Pino shop with WGC Insurance Company for P350,000.00. Subsequently, she again got an insurance contract with RSI for Pi million and then from EIC for P200,000.00. A fire of unknown origin gutted the store of the partnership. Julie filed her claim with the three insurance companies. However, her claim was denied separately for breach of policy condition which required the insured to give notice of any insurance effected covering the stocks in trade. Julie went to court and contended that she should not be blamed for the omission, alleging that the insurance agents for WGC, RSI and EIC knew of the existence of the additional insurance coverages and that she was not informed about

m

See Chapter 9, Section 3 discussing the “Other Insurance Clause.”

81

Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines, Inc., G.R. No. 151890, June 20, 2006. 82 Ibid.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

218

the requirement that such other or additional insurance should be stated in the policy. May she recover on her fire insurance policy? A:

No, she can no longer recover from said insurance policy because she is guilty of violation of a warranty condition.

§3.06. REMEDY. A party may rescind the policy if there is breach of warranty on the part of the other party.

SEC. 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind. SEC. 75. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy. a. It should be noted that Sections 74 and 75 allow the party to rescind or to avoid the policy only in case of a material breach. Breach of an immaterial provision does not avoid the policy. Sections 74 to 75 of the Insurance Code indicate that it is no longer the rule that all warranties are considered material the moment that they are expressed to be so in the policy. It should be recalled that the rule in the United States is that materiality of warranties are already removed from the consideration of the court or jury. This is not the rule under the Insurance Code. b. However, if the policy itself provides that breach of a warranty or a provision avoids the policy, the warranty is deemed to be material. The policy may make what would normally be considered an immaterial warranty into one that is material. This may be done if the parties agree that the statements are absolutely true and if untrue in any respect, the policy is avoided. c. There is authority for the view, however, that non- compliance with a warranty is excused when by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law. Breach may likewise be waived by the other party.83

“Dover, p. 370.

WARRANTY

1. It is part of the contract.

RKI’RESKNTATION 1 1. It is not part of the contract hut a collateral inducement. 2. It can he oral or in writing.

2. It is written on a policy or its rider. 3. It is presumed to be material. 4. There must be strict compliance. |

.J 3. It must be established to be material. 4. It must be substantially true. j

§4. OTHER DEVICES. Risks can also be limited or controlled using “exceptions/’ “exclusions,” and “conditions.” §4.01. CONDITIONS. Conditions are in the nature of collateral terms. They do not relate to the risk covered or statement of facts but are in the nature of collateral promises or stipulations.84 These include the following: (1) Promises or obligations regarding claims procedure that are not fundamental to the validity of the contract; and (2) Conditions conferring more rights to the insurer enlarging or repeating the minimum rights provided by law.85 a. An insurance contract with stipulated conditions is the law between the parties. Its terms and conditions constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right to recovery from the insurer.86

“Birds, p. 150. “Birds, p. 151. “Rafael (Rex) Verandia v. Court of Appeals, et al., G.R. No. 75605, January 22, 1993; Pacific Banking Corporation v. Court of Appeals 168 SCRA 1 (1988); Oriental Assurance Corporation v. Court of Appeals, 200 SCRA 459 (1991), citing Perla Compania de Seguros, Inc. v. Court of Appeals, 185 SCRA 741 (1991).

220

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. Conditions may also be either conditions precedent like payment of premium or conditions subsequent like giving of notice of loss. c. For example, a policy may provide that all benefits under the policy shall be forfeited “if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the policy.”87 Thus, if for example an insured presented a false declaration to support his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of the same stipulation of the policy in the absence of proof that the insurer waived such provision. Worse yet, by presenting a false lease contract, the insured, reprehensibly disregarded the principle that insurance contracts are u b e r r i m a e f i d a e and demand the most abundant good faith.88 89 d. The burden is on the insurer to prove that the insured breached the condition that is imposed. Since breach of condition is a defense that will relieve him of his liability under the policy the onus of proof is on the insurer who will invoke such defense. e. In P e r l a C o m p a n i a D e S e g u r o s , I n c . v . C o u r t o f A p p e a l s , ™ the Supreme Court considered as valid the provision in an insurance against liability to third persons, a provision that imposes the condition that any settlement of claim by third persons shall be subject to the approval of the insurer. No compliance with the condition will bar the insured from claim from the insurer. The stipulation states: “No admission, offer, promise or payment shall be made by or on behalf of the insured without the written consent of the Company which shall be entitled, if it so desires, to take over and conduct in his (sic) name the defense or settlement of any claim, or to prosecute in his (sic) name for its own benefit any claim for indemnity or damages or otherwise, and shall have full discretion in the conduct of any proceedings in the settlement of any claim, and the insured shall give all such information and assistance as the Company may require. If the Company shall make any payment in settlement of any claim, and such payment includes any amount

87 Rafael (Rex) Verandia v. Court of Appeals, et al., G.R. No. 75605, January 22, 1993. ™Ibid. 89 G.R. No. 78860, May 28, 1990, 185 SCRA 741.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

221

not covered by this Policy, the Insured shall repay the Company the amount not so covered.” f. In another variation of what is known as the “Other Insurance Clause,” it may be expressly provided for as a condition that the insured must give notice of the existence of another insurance coverage on the same property. Otherwise, the policy is null and void.90 An extended discussion of the “Other Insurance Clause” is in Chapter 9 of this work. §4.02. EXCEPTION, EXCLUSION, OR EXEMPTION. The insurer may provide for exemptions or exceptions in the policy. However, the rule is that if the insurer desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception, or exemption, the policy should express such limitation in clear and unmistakable language. For example, if the insurer wants to include the risk of arrest occasioned by ordinary judicial process as an exception in the marine insurance policy, it must expressly so provide in the policy without ambiguity.91 a. It is to be desired that the terms and phraseology of the exception clause be clearly expressed so as to be within the easy grasp and understanding of the insured, for if the terms are doubtful or obscure the same must be of necessity be interpreted or resolved against the insured who caused the ambiguity. 92 b. Exceptions to the general coverage are construed most strongly against the company. Even an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception is introduced. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted.93 c. The obligation to prove that the loss is covered by the exception rests with the insurer.94 For example, a fire insurance policy in one case excludes from the coverage of the policy damages

M New Life Enterprises v. Court of Appeals, G.R. No. 94071, March 31, 1992; see Note 3 of Chapter 9 of this book. 91 Malayan Insurance Corporation v. The Honorable Court of Appeals and TKC Marketing Corporation, G.R. No. 119599, March 20, 1997. 92 Virginia Calanoc v. Court of Appeals, G.R. No. L-8151, December 16, 1955. 93 Ibid. 94 See New World International Development (Phils.), Inc. v. NYK-FilJapan Shipping Corp., G.R. No. 171468, August 24, 2011.

222

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

resulting from explosion. The Supreme Court still sustained the claim because the insurer failed to prove that the cause of the loss was explosion. 95 d. In another case,96 97 the personal accident insurance policy involved specifically enumerated only 10 circumstances wherein no liability attaches to the insurance company for any injury, disability* or loss suffered by the insured as a result of any of the stipulated causes. The High Court observed that the principle of “ e x p r e s s i o u n i u s e s t e x c l u s i o a l t e r i u s ”— the mention of one thing implies the exclusion of another thing — is applicable. Since murder and assault was not expressly included in the enumeration of the circumstances that would negate liability in said insurance policy, murder and assault cannot be considered by implication to discharge the insurance company from liability for any injury, disability or loss suffered by the insured. Thus, the failure of the insurance company to include death resulting from murder or assault among the prohibited risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death. The Court likewise cited Article 1377 of the Civil Code of the Philippines which provides that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Moreover, it is well-settled that contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer. Ambiguity in the words of an insurance contract should be interpreted in favor of its beneficiary. e. Another example of an exclusion is the stipulation in a Theft and Robbery Insurance involved in F o r t u n e I n s u r a n c e & S u r e t y C o . u . C o u r t o f A p p e a l s . 9 1 The policy in the said case states that the excluded risks include “any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee, partner, director, trustee or authorized representative of the Insured whether acting alone or in conjunction with others.” §5. INCONTESTABLE CLAUSE. Section 48 of the Insurance Code provides that:

95 Paris-Manila Perfume Co. v. Phoenix Assurance Company, Ltd., G.R. No. L-25845, December 17, 1926. “Finman General Assurance Corporation v. Hon. Court of Appeals and Julia Surposa, G.R. No. 100970, September 2, 1992. See Chapter 14 for the digest of this case. 97 G.R. No. 115278, May 23, 1995; See the digest of this case in Chapter 14.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

223

SEC. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. §5.01. MANDATORY INCONTESTABLE CLAUSES. Section 233 requires the following incontestable clause in an Individual Life or Endowment Policy:

(b) A provision that the policy shall be incontestable after it shall have been in force during the lifetime of the insured for a period of two (2) years from its date of issue as shown in the policy, or date of approval of last reinstatement, except for non-payment of premium and except for violation of the conditions of the policy relating to military or naval service in time of war; a. For group life insurance policies, the mandatory incontestable clause required under Section 234 is as follows:

(b) A provision that the validity of the policy shall not be contested, except for non-payment of premiums after it has been in force for two (2) years from its date of issue; and that no statement made by any insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two (2) years during such person’s lifetime nor unless contained in written instrument signed by him; b. The mandated incontestable clause for industrial life insurance policies under Section 236 of the Insurance Code states:

(b) A provision that the policy shall be incontestable after it has been in force during the lifetime of the

224

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

insured for a specified period, not more than two (2) years from its date of issue, except for non-payment of premiums and except for violation of the conditions of the policy relating to naval or military service, or services auxiliary thereto, and except as to provisions relating to benefits in the event of disability as defined in the policy, and those granting additional insurance specifically against death by accident or by accidental means, or to additional insurance against loss of, or loss of use of, specific members of the body; c. The incontestability period is one year only for a Term Insurance coverage under a Group Life Insurance Policy that is required to cover planholders of Pre-Need Plans. The one-year contestability period is part of the Standard Contract Provisions for Health, Pension and Memorial pre-need plans that are required by the Insurance Commission.98 §5.02. RATIONALE. The incontestable clause is upheld in law not for the purpose of upholding fraud but for the purpose of shutting off harassing defenses. 99 The clause is designed to induce the insurer to investigate and act with reasonable promptness if it wishes to avoid the policy. The facts can be best ascertained and established if investigated within the soonest possible time. Investigation becomes harder through the passage of time. It is unfair for the insurer to wait for the death of the insured who obviously can no longer defend his claim. 100 The rationale was explained as follows: “ E a r l y U s e o f t h e C l a u s e . The incontestable clause was first introduced by life insurance companies on a voluntary basis in the latter half of the 1800’s in an effort to counteract a growing attitude toward the life insurance business. This feeling was due largely to the practices of some insurers of taking full advantage of their right to disaffirm a contract if any statement, even a relatively unimportant one, in the application were not literally true. Often premiums had been paid for a long period of time, and the misstatements concerned were relatively trivial, yet the company would disaffirm the contract at the death of the insured, leaving the beneficiary in the difficult position of either having no insurance or explaining and

"Insurance Commission Circular Letter No. 2016-11 dated March 8, 2016. "Mutual Life Insurance Company v. Whitehead, 123 Ky. 21, 26 (1906). 100Amex Life Assurance Co. v. Slome Capital Corp., 60 Cal. Rptr. 2nd 898 (1977).

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

225

alleged misstatement made many years earlier in the application and about which she knew little or nothing. As a matter of fact, the early life insurers had a considerable amount of success in disaffirming their policies in circumstances of this kind, but this success, as one commentator has put it, rapidly gained for them a reputation as the ‘great repudiators.’ In an effort to counteract this growing reputation and to assure the insureds and beneficiaries that such purely technical grounds would not be used to disaffirm their contracts, the incontestable clause was introduced in the latter half of the 19th century by the companies themselves.”101 a. In Manila Bankers Life Insurance Corp. v. Aban ,102 the Supreme Court explained that “the ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from or provide insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly investigate those they insure within two years from effectivity of the policy and while the insured is still alive. If they do not, they will be obligated to honor claims on the policies they issue, regardless of fraud, concealment or misrepresentation. The law assumes that they will do just that and not sit on their laurels, indiscriminately soliciting and accepting insurance business from any Tom, Dick and Harry.” b. The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the policy, whether or not, the insured still lives within such period. After two years, the defenses of concealment or misrepresentation, no matter how patent or well founded, no longer he. Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability.103 04 c. The incontestable clause was not applied in Florendo v. Philam Plans104 because the two-year period has not yet lapsed. In the above-cited Manila Bankers Life Insurance Corp. v. Aban ,105 the policy was issued on August 30, 1993, the insured died on April 10,

101

Greider and Beadles, p. 181. G.R. No. 175666, July 29, 2013 citing Tongko v. The Manufacturers Life Insurance Company (Phils.), Inc., G.R. No. 167622, June 29, 2010, 622 SCRA 58, 75; Republic v. Del Monte Motors, Inc., 535 Phil. 53, 60 (2006); White Gold Marine Services, Inc. v. Pioneer Insurance & Surety Corporation, 502 Phil. 692, 700 (2005); and Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Company, G.R. No. 166245, April 9, 2008, 551 SCRA 1, 13. 103 Emilio Tan, et al. v. The Court of Appeals and Philippine American Life Insurance Company, G.R. No. 48049, June 29, 1989. i04 Supra. 105 G.R. No. 175666, July 29, 2013. 102

226

ESSENTIALS OF INSURANCE U-WV (Republic Act No. 10607 with Notes on Pre-Need Act)

1996. and the claim was denied on April 16, 1997. The insurance policy was thus in force for a period of three years, seven months, and 24 days. Considering that the insured died after the two-year period, the plaintiff-appellant is, therefore, barred from proving that the policy is void ab initio by reason of the insured’s fraudulent concealment or misrepresentation or want of insurable interest on the part of the beneficiary, herein defendant-appellee. §5.03. ALLEGATION OF CONNIVANCE WITH AGENT The insurer cannot likewise escape the operation of the incontestability clause by claiming that the insured connived with the insurance agent. Even if the same allegation is true, the insurer should have discovered this alleged fraud if proper investigation was made during the two-year period. It was further observed Manila Bankers Life Insurance Corp. v. Aban,10e that: “Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen and the insurance policies they issue, then they should cease doing business. If they could not properly screen their agents or salesmen before taking them in to market their products, or if they do not thoroughly investigate the insurance contracts they enter into with their clients, then they have only themselves to blame. Otherwise said, insurers cannot be allowed to collect premiums on insurance policies, use these amounts collected and invest the same through the years, generating profits and returns therefrom for their own benefit, and thereafter conveniently deny insurance claims by questioning the authority or integrity of their own agents or the insurance policies they issued to their premium-paying clients. This is exactly one of the schemes which Section 48 aims to prevent. Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that the inevitable may be put off for years - or even decades - by the pendency of these unnecessary court cases. In the meantime, they benefit from collecting the interest and/or returns on both the premiums previously paid by the insured and the insurance proceeds which should otherwise go to their beneficiaries. The business of insurance is a highly regulated commercial activity in the country, and is imbued with public interest. “An insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the former’s interest.” §5.04. EFFECT OF DEATH WITHIN TWO YEARS. The rule that was promulgated in E m i l i o T a n , e t a l . v . T h e C o u r t o f A p p e a l s 106 107 is to the effect that the policy can still be rescinded or

106

G.R. No. 175666, July 29, 2013. G.R. No. 48049, June 29, 1989. 107

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

227

the claim can still be denied if the insured dies within the two-year period provided for under Section 48 of the Insurance Code. In the same case, the insured died before the expiration of the two-year period and the beneficiaries contended that the insurance company no longer had the right to rescind the contract of insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of action. The Supreme Court rejected this contention because the petitioners’ interpretation would give rise to the incongruous situation where the beneficiaries of an insured who dies right after taking out and paying for a life insurance policy, would be allowed to collect on the policy even if the insured fraudulently concealed material facts.108

a. Unfortunately, a contrary rule was expressed in Sun Life of Canada (Philippines), Inc. v. Sibya,109 * where the Supreme Court ruled that “the death of the insured within the two-year period will render the right of the insurer to rescind the policy nugatory. In the said case, the insurer issued the policy on February 5, 2001 and the insured died on May 11, 2001 or a mere three months from the issuance of the policy. However, the Court ruled that the incontestability period will now set in. The Court cited the observation in Manila Bankers Life Insurance Corporation v. Aban 110 where it was stated that “after the two-year period lapses, or when the insured dies within the period, the insurer must make good on the policy, even though the policy was obtained by fraud, concealment, or misrepresentation.”

b. It is believed that the ruling in Emilio Tan, et al. v. The Court of Appeals111 is the correct rule. It is believed that the insurer can deny the claim on the ground of concealment if the insured dies before the expiration of the two-year period. It should be noted that the portion of the observation in Manila Bankers Life Insurance Corporation v. Aban112 * that was quoted by the Supreme Court in the Sun Life of Canada (Philippines), Inc. v. Sibya113 is a mere obiter because the policy involved in Manila Bankers Life Insurance Corporation v. Aban 114 had already been in force for more than three

108 Emilio Tan, et al. v. The Court of Appeals and Philippine American Life Insurance Company, ibid. 109

G.R. No. 211212, June 8, 2016. Supra, 715 Phil. 404 (2013). in G.R. No. 48049, June 29, 1989. ll2 Supra. 11S Supra. 114 Supra. u0

228

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(3) years. In addition, it is believed that the policy under Section 48 will not be served if the insurer’s right to rescind or deny the claim will be denied if the insured dies within the two-year period. The Court explained in Manila Bankers Life Insurance Corporation v . Aban:115

“The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or misrepresentation within a period of two years. It is not fair for the insurer to collect the premiums as long as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation when the insured dies in order to defeat the right of the beneficiary to recover under the policy. At least two years from the issuance of the policy or its last reinstatement, the beneficiary is given the stability to recover under the policy when the insured dies. The provision also makes clear when the two-year period should commence in case the policy should lapse and is reinstated, that is, from the date of the last reinstatement. After two years, the defenses of concealment or misrepresentation, no matter how patent or well-founded, will no longer he.

Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability. The so-called ‘incontestability clause’ precludes the insurer from raising the defenses of false representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least two years during the insured’s lifetime. The phrase ‘during the lifetime’ found in Section 48 simply means that the policy is no longer considered in force after the insured has died. The key phrase in the second paragraph of Section 48 is ‘for a period of two years.”’

It is submitted that if the policy is in force for less than two years, especially for a very short period like a few days of even a month or two after the issuance or last reinstatement of the policy, then the period would not be sufficient to conduct sufficient investigation to discover the fraudulent concealment or misrepresentation. §5.05. WHEN INAPPLICABLE. The incontestable clause cannot be invoked in the following cases: (1)

Non-payment of premium;116

115

Supra 116 Sect ion

CHAPTER 6 .ASCERTAINING AND CONTROLLING RISKS

229

(2) Violation of the conditions of the policy relating to military or naval service in times of war;1,7 (3)

Property Insurance;us

(4)

Absence of Insurable Interest;

(5) When vicious fraud was employed in obtaining the policy as in the case of fraudulent impersonation and the case where the policy was taken as part of the scheme to murder the insured;117 118 119

(6)

Where the cause of the loss is an excepted risk;120

(7)

Where the beneficiary feloniously kills the insured;121

(8) The beneficiary failed to comply with conditions subsequent like failure to submit notice of loss; and (9)

If the claim is barred by extinctive prescription.

(10) The incontestability clause does not apply if the insured applied vicious fraud.122 Thus, it was also explained that the incontestable clause does not apply if there was fraudulent impersonation. For instance, it is contrary to public policy for any person to obtain life insurance by substituting an individual other than the named insured for medical examination. The contract is void in this situation, hence, the incontestable clause does not apply. 123 Thus, the incontestable clause was not applied when if the beneficiary of an insured who is an HIV-positive caused an impostor to take the medical examination.124 (11) The clause does not apply if the assured does not have insurable interest on the life of the insured. There cannot be any insurance contract in the absence of insurable interest. The incon-

117

Section 227,1.C. Section 48,1.C. 119 2 Agbayani 100. 120 Ibid. l2l Ibid. l2z See for example Eguaras v. Great Eastern Assurance Co., Ltd., G.R. No. L-10436, January 24, 1916, 33 Phil. 263 . 123 Obartuch v. Security Mutual Life Insurance Company, 114 F. (2d) 873 (C.CA. 111. 1940) cited in Greider and Beadles, p. 250. 124 Amex Life Assurance Co. v. Superior Court, 14 Cal. 4th 1231, 60 Cal. Rptr. 2d 898, 930 P. 2d 1264 (1997) cited in DiMugno v. Glad, p. 1640. 118

230

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

testable clause does not apply because the clause by itself does not create a contract.125 Hence, incontestable clause does not apply if any of the other essential elements of the contract is absent.

PROBLEMS: 1.

In June 1981, Juan applied for a life insurance policy with a double indemnity provision in case of death by accident. Describe an express injury in the application form of insurance, he did not mention the fact that he had suffered from viral hepatitis the previous year. As Juan had fully recovered from the disease, the medical examination performed by the insurance company’s physician did not reveal such previous illness, and showed that Juan was healthy and was an insurable risk. The policy was issued forthwith. In March 1983, Juan died in an automobile accident. Subsequent investigation revealed that Juan is negligent in not having his breaks checked. The insurance company refused to pay Juan’s wife, the designated beneficiary on two grounds: that Juan is guilty of fraudulent concealment of his ailment, and that Juan’s death was caused by his own negligence. The policy is silent as to the effect of the insured’s negligence on the right to recover therein. Juan’s wife insists that she has the right to recover because Juan’s death was caused by an accident, which has nothing to do whatsoever with his liver ailment. She therefore insists on double indemnity. a.

Is she entitled to any indemnity? Explain.

b. If Juan’s accident occurred in July 1983, would your answer be the same? Explain. A:

a. No. Juan’s wife is not entitled to any indemnity. Juan concealed a material fact; and the fact that the cause of his death is not the liver ailment does not relieve him and his heirs of the effect of such concealment. b.

No, my answer would not be the same if Juan’s accident occurred in July 1983. The incontestable or incontestability clause is already applicable. The policy has become incontestable considering that the policy was issued in June 1981 and two years had lapsed from the date of the issuance of the policy. Section 48 of the Insurance Code provides that “after a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement,

125

Greider and Beadles, p. 252.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

231

the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent/’ 2. On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on November 6, 1990. He died on April 26, 1992 of Hepatoma. The insurance company denied the beneficiaries’ claim and rescinded the policy by reason of alleged misrepresentation and concealment of material facts made by Tan in his application. It returned the premiums paid. The beneficiaries contended that the company had no right to rescind the contract as rescission must be done “during the lifetime” of the insured within two years and prior to the commencement of the action. Is the contention of the beneficiaries tenable? A:

No, the contention of the beneficiaries is untenable. Mr. Tan died on April 26, 1992 or less than two years from the insurance of the policy on September 23, 1990. There is no requirement under Section 227 that the rescission is done during the lifetime of the insured.

§6. WAR LIMITATION RIDER OR WAR CLAUSE. Section 227 requires a provision in the policy that the incontestable clause does not apply if there is a violation of the conditions of the policy relating to military or naval service in times of war. The war clause itself is not required by the Insurance Code. However, the moment the parties include a war clause in the policy, the beneficiaries can no longer invoke the incontestable clause if the war clause is violated. The war limitation clause or rider limits the liability of the insurer in the event the insured looses his life as a result of war. It was explained that the purpose of this clause is not so negative as it might seem. Insurers might not be willing to issue life insurance policies in times of war. Hence, a war clause does not represent so much a limitation on the coverage in the broad sense as a practical way of issuing coverage that would not otherwise be made available to a large number of young men in times of war or when war is imminent. It permits the issuance of life insurance policies that would not otherwise be issued.126 §7. DEFENSES OF INSURED AGAINST REVOCATION. Aside from the incontestable clause, other grounds may be invoked by the insured or his beneficiaries to prevent the insurer from invoking the devices for limiting or controlling the risk. These

126

Greider and Beadles, p. 219.

232

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

include: (1) Guaranteed Insurability Clause, (2) Failure to invoke before commencement of the action, (3) Waiver, and (4) Estoppel. §7.01. GUARANTEED INSURABILITY CLAUSE. For group life insurance policies, Section 234(b) provides that no statement made by any insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two years during such person’s lifetime nor unless contained in written instrument signed by him. Thus, under this provision, statements that tend to show that the insured is uninsurable cannot be used against him in the following cases: (1) If the insurance has been in force prior to the contest for a period of two years during the person’s lifetime; or (2) insured.

If the statement is not in writing and/or not signed by the

a. The term “insurability” includes all matters which would have been considered by the company on the application except the age of the insured. It includes such elements as habits, occupation, finances and good health.127 It is often confused with good health but it has long been settled that good health is not the same as insurability. The classic example of the distinction between the two is the statement in one case that a criminal that is condemned to death may be in perfect health but hardly insurable.128 b. For instance, insurance company may consider a person uninsurable because of the insured’s pecuniary circumstances coupled with heavy overinsurance that is entirely out of line with his financial condition. 129 In another case, the insurability was determined by considering that the insured is known to be financially insolvent and the circumstances show probability of suicide.130 c. The insurability clause may likewise be stipulated upon by the parties for individual life and endowment policies. This clause becomes more important when the insured is entitled

127 Ibid., p. 401; Kallman v. Equitable Life Assurance Society, 248 A.D. 146,288 N.Y.S. 1032 (1936). 128 Kallman v. Equitable Life Assurance Society, ibid. ™Ibid. 130 Ibid., citing Ginsberg v. Eastern Life Insurance Co. of New York, 118 N.J. Esq. 223, 178 A. 378.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

233

to reinstatement or renewal of the policy. Proof of insurability at the time of the application for reinstatement is a proper risk for insurance upon the basis of the original contract.131 §7.02. TIMELINESS OF RESCISSION. The first paragraph of Section 48 of the Insurance Code provides that “whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract.” The chapter referred to is Chapter I which includes provisions on concealment, representations, and warranties. Thus, in one case where the insurer alleged that there was concealment, the Supreme Court explained that while under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a contract of insurance,” the right to rescind should be exercised previous to the commencement of an action on the contract.132 a. The provision requiring the right to rescind to be exercised previous to the commencement of an action is a copy of Section 47 of the old law. In a decision of the Supreme Court under the old law, it was explained that: “As stated, an action to rescind a contract is founded upon and presupposes the existence of the contract which is sought to be rescinded. If all of the material matters set forth and alleged in the defendant’s special plea are true, there was no valid contract of insurance, for the simple reason that the minds of the parties never met and never agreed upon the terms and conditions of the contract. [The Court] [is] clearly of the opinion that, if such matters are known to exist by a preponderance of the evidence, they would constitute a valid defense to plaintiff s cause of action.” 133 b. If an insurer cannot rescind the contract because of the commencement of an action, the insurer can still set up the ground for rescission as a defense. In another case,134 the Supreme Court explained the origin and the interpretation of the rule in the first paragraph of Section 48 in the State where the same rule originated:

131

Banas v. Oriental Life Insurance Co., (CA) 52 O.G. 5898 (No. 13).

132

Philamcare Health Systems, Inc. v. Court of Appeals, G.R. No. 125678, March 18, 2002. .

133

Tan Chay Heng v. The West Coast Life Insurance Company, G.R. No. L-27541, November

21, 1927. 134

Bemardo Argente v. West Coast Life Insurance Company, G.R. No. 24899, March 19,

1928.

234

ESSENTIALS OF INSURANCE lJ\W (Republic Act No. 10607 with Notes on Pre-Need Act)

“Lastly, appellant contends that even if the insurance company had a right to rescind the contract, such right cannot now be enforced in view of the provisions of Section 47 of the Insurance Act providing “Whenever a right to rescind a contract of insurance is given to their insurer by provision of this chapter, such right must be exercised previous to the commencement of an action on the contract” This section was derived from Section 2583 of the California Civil Code, but in contrast thereto, makes use of the imperative “must” instead of the permissive “may.” Nevertheless, there are two answers to the problem as propounded. The first is that the California law as construed by the code examiners, at whose recommendation it was adopted, conceded that “A failure to exercise the right (of rescission), cannot, of course, prejudice any defense to the action which the concealment may furnish.” ( C o d e s o f C a l i f o r n i a a n n o t a t e d ; T a n C h a y H e n g v . W e s t C o a s t L i f e I n s u r a n c e C o m p a n y [ 1 9 2 7 ] , p . 8 0 , a n t e . ) The second answer is that the insurance company more than one month previous to the commencement of the present action wrote the plaintiff and informed him that the insurance contract was void because it had been procured through fraudulent representations, and offered to refund to the plaintiff the premium which the latter had paid upon the return of the policy for cancellation. As held in California as to a fire insurance policy, where any of the material representations are false, the insurer’s tender of the premium and notice that the policy is canceled, before the commencement of suit thereon, operate to rescind the contract of insurance. ( R a n k i n v . A m a z o n I n s u r a n c e C o . [ 1 8 9 1 ] , 8 9 C a l , 2 0 3 . ) " c. The abovequoted Decision states that the interpretation under the California Civil Code as to a fire insurance policy is that where any of the material representations is false, the insurer’s tender of the premium and notice that the policy is cancelled, before the commencement of suit thereon, operate to rescind the contract of insurance.135 Thus, the exercise of the right to rescind does not require the filing of a case in court. §7.03. WAIVER. Waiver is the intentional relinquishment of a known right. It may also be narrowly defined as the intended giving up of a known privilege or power. It always involves consent but it does not rise to the level of contract. 136 Waiver may be express or implied. a. The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated. For example, if the insured

135

Bemardo Argente v. West Coast Life Insurance Company, supra. 13e

Vance, p. 451.

CHAPTER 6 ASCERTAINING AND CONTROLLING RISKS

235

already disclosed that he had undergone surgery without stating all the details, the insurer can no longer rescind the contract on the ground that the specific illness involved in the surgery was not disclosed. The insurer is deemed to have made a waiver for its failure to make further inquiries.

b.

Similarly, even if there is an exclusionary condition of overage (where there is

exclusion if insured is above a certain age), the insurer can no longer deny the claim on such ground if the insured disclosed his or her age in the application. 137

c. It has been held that where, upon the face of the applica tion, a question appears to be not answered at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, the insurers thereby waive the imperfection of the answer and render the omission to answer more fully immaterial. 138 d. Waiver is also illustrated in Section 33 of the Insurance Code which provides that the right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated. e. Q u e C h e e G a n v . L a w U n i o n I n s u r a n c e C o . , L t d . 1 3 9 involved a claim on an insurance policy which contained a provision as to the installation of fire hydrants the number of which depended on the height of the external wan perimeter of the bodega that was insured. When it was determined that the bodega should have 11 fire hydrants in the compound as required by the terms of the policy, instead of only two that it had, the claim under the policy was resisted on that ground. The Court ruled that the said deviation from the terms of the policy did not prevent the claim because the insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed, contrary to the requirements of the warranty in question. f. It should be noted that in non-life insurance policies, an insurer may insert in any insurance policy a provision that no change in the policy is valid unless approved by an executive officer

137 Edillon v. Manila Banker’s Life Insurance Corporation, G.R. No. L-34200, September 30, 1982; see also Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., G.R. No. L-4611, December 17, 1955. 138 Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, supra. 139 Supra.

236

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

of the insurer, or unless the approval is endorsed on the policy or attached to it, or both, and that no agent has authority to change the policy or waive any of its provisions.140

§7.04. ESTOPPEL. Article 1431 of the New Civil Code provides that through estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Estoppel may be i n p a i s or by deed. Unlike a waiver, there is no element of consent in estoppel. As already discussed earlier, Section 45 of the Insurance Code (before it was amended by R.A. No. 10607) used to provide for an example of estoppel. However, R.A. No. 10607 already removed this previous exception in Section 45 of the Insurance Code. a. For example, an insurance firm was not allowed to escape liability under a common carrier insurance policy on the pretext that what was insured, not once but twice, was a private vehicle and not a common carrier. The policy was issued upon the insistence of the insurer’s agent who discounted fears of the insured that his privately owned vehicle might not fall within the terms of the policy. Moreover, the insured was “a man of scant education,” finishing only the first grade. The Supreme Court observed that it is now beyond question that where inequitable conduct is shown by an insurance firm, it is “estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured.” 141 The doctrine of estoppel undeniably calls for application. Since the insurer had led the insured to believe that he could qualify under the common carrier liability insurance policy, and to enter into contract of insurance paying the premiums due, it could not, thereafter, in any litigation arising out of such representation, be permitted to change its stand to the detriment of the heirs of the insured. As estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall the innocent party due to its injurious reliance, the failure to apply it in this case would result in a gross travesty of justice.142

140 Par. 7.21, Guidelines on the Approval of Non-Life Policy Forms, I.C. Circular Letter dated 2015-58-A dated December 21, 2015. 141 Fieldmen’s Insurance Company v. Mercedes Vargas Vda. de Songco, G.R. No. L-24833, September 23, 1968; Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., supra. 142 Fieldmen’s Insurance Company v. Mercedes Vargas Vda. de Songco, ibid.

CHAPTER 7 LOSS AND NOTICE OF LOSS The question of causation is a focal question in insurance cases because the liabilities of insurers rest on proof of causation. The determination of whether or not the risk insured against or an excepted peril or a risk not insured against is the proximate cause of the loss is crucial in fixing the insurer’s liability. In many cases, insurance claims involve simple cause and effect analysis. In some cases, the task is complicated because of the number of candidate causes that may have preceded the loss. As John Stuart Mill explained in his A S y s t e m o f L o g i c : “It is not true that one effect must be connected with only one cause or assemblage of conditions; that each phenomenon can be produced only in one way. There are often several independent modes in which the same phenomenon could have originated. One fact may be the consequent in several invariable sequences; it may follow, with equal uniformity, any one of several antecedents, or collection of antecedents. Many causes may produce mechanical motion: many causes may produce some kinds of sensation: many causes may produce death. A given effect may really be produced by a certain cause, and yet be perfectly capable of being produced without it.”1

§1. LOSS. Loss in insurance means the injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify the insured.2 a. In property insurance, loss means the pecuniary detriment consisting of the total cash value of the property in case of total loss or the reduction of the value thereof in case of partial loss.

1

Book III, Chapter 10, Section 1. 2

Bonifacio Bros., Inc., et al v. Enrique Mora, et al, G.R. No. L-20853, May 29,

1967. 237

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

238

With respect to life insurance, loss occurs when the person insured dies while in health insurance, loss occurs in case of injury to or disability of the insured. In both cases, the loss must have been caused by the peril insured against or is otherwise covered by the insurance policy. §1.01. PROXIMATE CAUSE DEFINED. Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.3 a. Distinguished from Remote Cause. Proximate cause should be distinguished from remote cause which is defined as that cause which some independent force merely took advantage of to accomplish something which is not the natural effect thereof.4 The insurer will not be liable if the peril insured against is a mere remote cause — c a u s a p r o x i m a n o n r e m o t a s p e c t a t o r .5 Francis Bacon explained this by saying that: “It were infinite for the law to judge the causes of causes, and their impulsion one of another; therefore it contenteth itself with the immediate cause.”6 b. Efficient Cause. In Insurance Law, “the proximate cause of the loss is that cause proximate to the loss, not necessarily in time, but in efficiency. Remote causes may be disregarded in determining the cause of the loss, but the doctrine may be interpreted with good sense, so as to uphold and not defeat the intention of the parties to the contract. There must be a direct and uninterrupted sequence between the proximate cause and ultimate loss; if any new intervening cause arises between primary cause and ultimate loss, such new intervening cause will rule out consideration of preceding causes, subject to its possessing the qualities of reality, predominance, efficiency.”7 c. Peril Insured Against. The intention of the parties comes into play because of the element of designation of the perils insured against. Thus, unlike tort cases, there is a threshold question in insurance if the peril is covered by the insurance. Initially, the policy should be examined to determine what are the perils insured

3

Bataclan v. Medina, 102 Phil. 181 (1957). 'U’imoteo B. Aquino, Torts and Damages, 2016 Ed., p. 302, citing 57 Am. Jur. 2d 484. 5 Regard the proximate cause and not the remote cause. 6 Cited in Victor Dover, A Handbook to Marine Insurance, 1975 Ed. (Revised by Robert H. Brown), p. 398, hereinafter cited as “Dover.” 7 Dover, pp. 401-402.

CHAPTER 7

LOSS AND NOTICE OF LOSS

239

against and the perils that are excluded. After establishing that the peril is included in the perils insured against and/or not an excluded peril, another question is whether or not the event that transpired falls within the contemplation of what is expressly provided for. For instance, if the insurance is against fire, an underlying question is whether or not fire occurred. It may start with a conceptual problem on the meaning of fire. This issue is separate from the issue that resolves whether the particular “fire” involved is the proximate cause of the loss. d. Immediate Cause. There is likewise the concept of immediate cause that is injected in the Insurance Code.8 The term “immediate cause” suggests proximity in time to the loss. What is usually contemplated is a situation where at least two causes are involved; one cause occurs after the other. For example, an explosion occurred in a building which was followed by fire which destroyed the building. In this case, the immediate cause is fire. §1.02. RULES UNDER THE INSURANCE CODE. Although the concept of proximate cause in torts is adopted for purposes of insurance, the rules are not exactly the same as the rules in torts. The rule in q u a s i - d e l i c t is that the tortfeasor is liable only if his negligent act or omission is the proximate cause of the loss. In other words, the defendant is not liable if his negligent act is not the proximate cause of the loss even if it such negligence immediately preceded the loss. In insurance cases, it would be possible for the insured to recover even if the peril insured against is not the proximate cause of the loss. The insurer may be liable even if the peril insured against is just an immediate cause and another cause is the proximate cause. a. The rules are embodied in Sections 86 to 88 of the Insurance Code which state:

SEC. 86. Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss which the peril insured against was only a remote cause. SEC. 87. An insurer is liable where the thing insured is rescued from a peril insured against that

8

See Section 88,1.C.

240

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against. SEC. 88. Where a peril is especially excepted in a contract of insurance, a loss, which would not have occurred but for such peril, is thereby excepted although the immediate cause of the loss was a peril which was not excepted. b.

Based on the above-quoted provisions, the rules may be summarized

thus: (1) The insurer is liable if the peril insured against is the proximate cause of the loss;9 the liability is present even if it is accompanied by a remote cause or an immediate cause and whether or not such causes (remote or immediate) are excepted perils; (2) The insurer is not liable if the peril insured against is the remote cause;10 (3) The insurer is liable if the thing insured is damaged because it was being rescued from the peril insured against;11 (4) The insurer is liable for damages caused by a peril not insured against to which the thing was exposed while the same was being rescued from a peril insured against;12 (5) The insurer is liable if the peril insured against is the immediate cause of the loss if the proximate cause is not an excepted peril;13 (6) The insurer is not liable if the peril insured against is the immediate cause but the proximate cause is an excepted peril.14

9

Section 10 86,1.C. Ibid. “Section 12

Ibid.

13

Section

14

Ibid.

CHAFTSE ~ LOSS AND NOTICE G? LOSS

241

c. For example, the proximate cause is ire an d the immediate cause is explosion. The insurer will be liable if ire is a peril insured against even if explosion is an excepted peril. If fire is an excepted peril and explosion is the one insured against- the insurer will not be liable. §1.03, CONCURRENT CAUSES. In tort law, where the negligent acts of two or more persons concur in bringing about an injury to another, the joint tortfeasors shall be solidarity liable.15 16 Joint tortfeasors are solidarity liable if their concurrent or successive negligent acts or omissions are. in combination, the direct and proximate causes of a single injury to a third ter son.15 Solidary liability is likewise present if the causes are evernfetermined. that is, the acts or omissions concur but can separately cause the same injury even if only one occurs. Although two or more causal sets concur, one causal set is enough to bring about the result.17 18 a. In insurance cases, the issue is whether the insurer is liable if the peril insured against is only one o: the concurrent causes. “The problem of determining the effect of insurance provisions relating to causation has repeatedly arisen in instances in which the loss can reasonably be viewed attributable to more than one cause. In such instances, courts typically consider whether at least one of the contributing factors that cause the loss is a risk covered by the insurance policy.’713 When an insurance policy provides coverage for losses produced by some causes, and excludes coverage for losses from other causes, courts frequently hold that coverage extends to the loss even though an excluded element is a contributory cause.19 b. An incidental peril outside the policy, contributing to the risk insured against, will not defeat recovery nor may the insurer defend by showing that an earlier cause brought the loss not within a peril insured against, where the insured peril was the last step prior to loss. It has been held that recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set

15

Article 2194, New Civil Code.

See Aquino, Torts and Damages, 2016 Ed., p. 599. 11 Ibid., p. 272, 18 Robert E. Keeton and Allan Widiss, Insurance Lcuc, A Guide to Fundamental Principles, Legal Doctrines and Commercial Practices, p. 553. 19 Keeton and Widiss, ibid. 16

242

ESSENTIALS OF INSURANCE LAW

(Republic Act No. 10607 with Notes on Pre-Need Act)

into operation a chain of causation in which the last step may have been excepted risk.20 c. Where only one concurring cause of loss is insured against and damage by each cause cannot be distinguished, the party responsible for the dominating efficient cause has been held liable for the loss. But where there are several concurring causes of loss, and the damages by the respective perils can be distinguished, each party must bear his proportion.21 d. It has also been observed that California courts have applied a rule that where two proximate causes join in causing an injury one of which is insured against, the insurer is liable under the policy irrespective of the eventuality that there is another concurrent proximate cause which constitutes an uncovered risk.22 (1) For example, the insured while driving a car was injured by his negligent discharge of a pistol. He was allowed recovery under a policy which excluded injuries arising out of use of a vehicle.23 (2) Another example is a case where a homeowner’s policy excluded flood but the insured was allowed to recover although the damage incurred was due to the flooding of the insured’s property where the concurrent proximate cause was the negligence of third parties in maintaining flood control facilities.24 (3) In the same vein is a case where an owner of a home which slid down the hill along with the hillside itself recovered under an all risk policy expressly excluding earth movement because a concurrent cause could be found in a sub-drain that had been negligently damaged so that the ground become saturated and moved.25

20 See Sections 86-88, I.C. See also: In Re: Insurance Claims of Guaranteed Hotels, Inc., Zambales Doctors Hospital, Inc., Rocio P. Baltao & E.S. Baltao & Co. v. Philippine Pryce Assurance Corporation, Arbitration Proceedings No. 1, January 10, 1992, citing Appleman, 2083, pp. 309-312. 2x Ibid. 22 Kenneth York and John Whelan, Insurance Law General Practices, p. 228. 23 Ibid., citing State Farm Mutual Auto Ins. Co. v. Partridge, 10 Cal. 3d 94 Cal. Rprt. 811 (1973). 24 Ibid., citing Safeco Ins. Co v. Guyton, 692 F. 2d 551 (9th Cir. 1982). 2S Ibid., citing Premier Ins. Co. v. Welch, 140 Cal. App. 3r 720, 189 Cl. Rprt. 657 (1983).

CHAPTER 7 LOSS AND NOTICE OF LOSS

243

(4) In the given examples, however, it appears that the cases can be decided on the basis of Sections 84 to 86 of the Insurance Code because the perils insured against were the proximate causes of the respective loss although the immediate causes were excluded in the policy. §1.04. NEGLIGENT AND INTENTIONAL ACTS OR OMISSIONS. The rule expressed in Section 89 of the Insurance Code is to the effect that (1) the insurer is not liable for losses caused by intentional acts of the insured, and (2) the insurer is liable if the loss was caused through negligence. The provision states:

SEC. 89. An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but he is not exonerated by the negligence of the insured, or of the insurance agents or others. a. Rationale. The reason for the rule that the insurer is liable for negligence is because one of the purposes for taking out insurance is to protect the insured against the consequences of his own negligence and that of his agents. Thus, it is a basic rule in insurance that the carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer.26 b. Effect of Gross Negligence. Distinction should, however, be made between ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the insured’s right to recover under the insurance contract. While mistake and negligence of the insured or his agent constitute part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract.27 c. For example, the insured was not allowed to recover in a marine insurance policy covering a barge which ran aground because of the strong waves brought about by bad weather. The court found that there was b l a t a n t n e g l i g e n c e on the part of the employees of the insured when the patron (operator) of the tugboat immediately left the barge at the wharf despite the looming bad weather. Negligence

26 FGU Insurance Corporation v. The Court of Appeals, et al., G.R. No. 137775, March 31, 2005. 27 Jbid.

244

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

was likewise exhibited by the representative of the insured who did not heed the request that the barge be moved to a more secure place. The court found that the prudent thing to do, as was done by the other sea vessels at the wharf during the time in question, was to transfer the vessel to a safer wharf. Only the subject vessel was left at the wharf.28 §2. NOTICE OF LOSS. The parties may agree on a stipulation in the policy that notice should be given within a certain period from the time of the loss. The parties may agree that the absence of notice of loss within the period agreed upon will extinguish the loss. This notice is separate from the claim itself although a claim within the period of giving notice is already deemed compliance with the requirement. a. However, with respect to fire insurance, notice of loss is mandatory under Section 90. Notice may be given either by (1) the insured, or (2) the person entitled to the benefit of the insurance. For example, the mortgagee who is the beneficiary may also give notice of loss under this provision. Section 90 provides:

SEC. 90. In case of loss upon an insurance against fire, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay. For other non-life insurance, the Commissioner may specify the period for the submission of the notice of loss. b. The notice under Section 90 should be given without unnecessary delay. It would depend on the circumstances if there was unnecessary delay in giving the notice of loss. For example, there could be no undue delay if the absence of immediate notice was because the insured was injured and hospitalized for a long period of time. c. Even if the policy requires “immediate” notice, the use of the term “immediate” does not mean that the parties intended to impose upon the insured any impossible requirements. Therefore, notice will be considered immediate if it has been given as soon as circumstances permitted the insured, in the exercise of reasonable

28

FGU Insurance Corporation v. The Court of Appeals, supra.

CHAPTER 7 LOSS AND NOTICE OF LOSS

245

diligence, to communicate it.29 In another case, the Supreme Court ruled that the words “immediate notice” can be construed to mean only within a reasonable time. 30 d. Whether or not there is undue delay, which is proscribed under Section 90 or a stipulation in the policy, should be decided liberally in favor of the insured. Prof. Vance 31 explained that these conditions, while in the form of conditions precedent, are in reality in the nature of conditions subsequent, the breach of which affects a right that has already accrued. Until a loss occurs through a peril covered by the policy, the insurer’s liability under this contract is altogether contingent, but with the happening of the capital fact of loss his liability arises and becomes properly fixed. Hence, “when they contain provisions of forfeiture they must be regarded as penalties defeating a right that has already accrued. Such being the nature of these conditions, it is manifest that the general rules of construction require that they shall be construed with much less strictness than those conditions that operate prior to the loss.”32 e. It is sufficient that there is substantial compliance with the provision in the policy requiring notice of loss. 33 The policy may also contain a provision stipulating the period within which notice should be given. f. There is waiver of the requirement of notice of loss if the claim is denied on the ground that the policy is null and void. It is well-settled by a preponderance of authorities that such a denial is a waiver of notice of loss because if the policy is null and void, the furnishing of such notice would be useless.34 g. Notice to the agent of the insurer binds the insurer. Under the doctrine of representation, notice to the agent is notice to the principal.35

29

Vance, p. 781.

^E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715, December 20, 1910. 31

Vance, pp. 780-781. Ibid. ^Finman General Assurance Corporation v. Court of Appeals and USIPHIL Incorporated, G.R. No. 138737, July 12, 2001. ^E.M. Bachrach v. British American Assurance Co., supra. ^Bank of Philippine Islands v. Laingo, G.R. No. 205206, March 16, 2016. 32

2Ae

KSSKNTIALS OP INSURANCE LAW (Republic Act No. 1()(>07 with Notes on Pro-Need Act)

§3. PROOF OF LOSS. It is not required for the insured to submit a preliminary proof of loss unless there is a stipulation in the policy requiring submission of proof of loss. If there is a contractual stipulation, requiring the submission of a preliminary proof of loss, compliance should be in accordance with Sections 89 and 92 of the Insurance Code:

SEC. 91. When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time. SEC. 94. If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified. a. The law does not require preponderance of evidence because the insured is not bound to submit preliminary proof that is required by regular courts. Substantial evidence is also not required because such evidence is required only in quasi-judicial cases including cases before the Insurance Commission. All that the law requires is for the insured to give the best evidence which he has in his power to submit at that time. b. If the policy is valued, the valuation fixed in fire insurance policy is conclusive in case of total loss. If the policy is an open policy, the valuation is not conclusive, and the loss and its amount may be determined on the basis of such proof as may be offered by the insured, which need not be of such persuasiveness as is required in judicial proceedings.36 c. However, if the claim is denied and the insured is constrained to file a case in court, the burden of proof is on the insured to prove his loss because the same is part of his cause of

36

Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-

67835, October 12, 1987.

CHAPTER 7

LOSS AND NOTICE OF LOSS

247

action- If a case is filed in court, the insured must prove his cause of action by preponderance of evidence. (1) In an accident insurance, the insured's beneficiary has the burden of proof in demonstrating that the cause of death is due to the covered peril. Once the fact is established, the burden then shifts to the insurer to show any excepted peril that may have been stipulated by the parties. An "accident insurance" is not thus to be likened to an ordinary life insurance where the insured’s death, regardless of the cause thereof, would normally be compensable. The latter is akin to property insurance with an "all risk” coverage where the insured, on the aspect of burden of proof, has merely to show the condition of the property insured when the policy attaches and the fact of loss or damage during the period of the policy and where, thereafter, the burden would be on the insurer to show any "excluded peril.” When, however, the insured risk is specified, it lies with the claimant of the insurance proceeds to initially prove that the loss is caused by the covered peril.37 §4. DEFECTS IN NOTICE AND PROOF. Section 92 of the Insurance Code provides that "all defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived.” a. In one case, it was ruled that the certification issued by the Integrated National Police of Lao-ang, Samar, as to the extent of the insured’s loss should be considered sufficient. The insurer submitted no evidence to the contrary nor did it even question the extent of the loss. Even if the same certification is not what was provided for, there is deemed to be compliance because of the rule that if the insured files notice and preliminary proof of loss and the insurer fails to specify to the former all the defects thereof and without unnecessary delay, all objections to notice and proof of loss are deemed waived under Section 92 of the Insurance Code.38 b. one case:39

For example, the Supreme Court sustained the validity of this provision in

37 Jacqueline Jimenez Vda. de Gabriel v. Hon. Court of Appeals, et al., G.R. No. 103883, November 14, 1996. ^Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835, October 12, 1987. 39 Finman General Assurance Corporation v. Court of Appeals and USIPHIL Incorporated, G.R. No. 138737, July 12, 2001.

248

ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act)

“13. The insured shall give immediate written notice to the Company of any loss, protect the property from further damage, forthwith separate the damaged and undamaged personal property, put it in the best possible order, furnish a complete inventory of the destroyed, damaged, and undamaged property, showing in detail quantities, costs, actual cash value and the amount of loss claimed; AND WITHIN SIXTY DAYS AFTER THE LOSS, UNLESS SUCH TIME IS EXTENDED IN WRITING BY THE COMPANY, THE INSURED SHALL RENDER TO THE COMPANY A PROOF OF LOSS, signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: the time and origin of the loss, the interest of the insured and of all others in the property, the actual cash value of each item thereof and the amount of loss thereto, all encumbrances thereon, all other contracts of insurance, whether valid or not, covering any of said property, any changes in the title, use, occupation, location, possession or exposures of said property since the issuing of this policy by whom and for what purpose any buildings herein described and the several parts thereof were occupied at the time of loss and whether or not it then stood on leased ground, and shall furnish a copy of all the descriptions and schedules in all policies, and if required verified plans and specifications of any building, fixtures, or machinery destroyed or damaged. The insured, as often as may be reasonably required, shall exhibit to any person designated by the company all that remains of any property herein described, and submit to examination under oath by any person named by the Company, and subscribe the same; and, as often as may be reasonably required, shall produce for examination all books of account, bills, invoices, and other vouchers or certified copies thereof if originals be lost, at such reasonable time and place as may be designated by the Company or its representative and shall permit extracts and copies thereof to be made. No claim under this policy shall be payable unless the terms of this condition have been complied with.” c. The Supreme Court noted that immediately after the occurrence of the fire, the insured notified the insurer thereof. Thereafter, the insured submitted the following documents: (1) Sworn Statement of Loss and Formal Claim; and (2) Proof of Loss. The submission of these documents, to the Court’s mind, constitutes substantial compliance with the provision in the policy. Indeed, as regards the submission of documents to prove loss, substantial, not strict, compliance with the requirements will always be deemed sufficient.40 d. There is no defect of proof however even if an adjuster’s report is not submitted. There is nothing in the Insurance Code that makes the participation of an adjuster in the assessment of the

40 Finman General Assurance Corporation v. Court of Appeals and USIPHIL Incorporated, supra.

CHAPTER 7 LOSS AND NOTICE OF LOSS

249

loss imperative or indispensable. Section 334 of the Insurance Code cannot be relied upon because it simply speaks of the licensing and duties of adjusters. 41 §5. EFFECT OF DELAY. Section 93 of the Insurance Code provides that delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of the insurer or if he omits to take objection promptly and specifically upon that ground. Thus, there are three cases when delay is excused: (1)

When delay is attributable to the insurer;

(2)

When there was no prompt objection; and

(3) There was an objection but not specifically on the ground that there was delay of notice or proof of loss. PROBLEMS: 1. In 1977, petitioner Norman R. Noda obtained from respondent Zenith Insurance Corporation, two fire insurance policies: [1] No. F-03724 with a face value of P30,000.00 covering the goods and stocks in trade in his business establishment at the market site in Mangagoy, Bislig, Surigao del Sur for the period from March 3, 1977 to March 3, 1978 and [2] No. F-03734 with a face value in the aggregate amount of P100,000.00 for the period from May 10, 1977 to May 10, 1978 and consisting of Item 1 for P40,000.00 on household furniture, fixtures, fittings and other personal effects, and Item 2 for P60,000.00 on stocks in trade usual to petitioner’s retail business situated in a two (2)-storey building at 039 Barreda St., also in Mangagoy, Bislig, Surigao del Sur, the ground floor of which the petitioner used as store and the second floor as family quarters. While both policies were in force, fire destroyed petitioner’s insured properties at the market site on September 5, 1977 and at Barreda St. on November 9, 1977. Petitioner failed to obtain indemnity on his claims from respondent Zenith. When a case was filed with the Insurance Commission, the Commissioner ordered the insurer to pay only on one (1) policy and denied the claim on Policy No. F-03734 with respect to stocks in trade. A:

To prove the existence of the stocks in trade covered by Policy No. F-03734, petitioner offered his testimony and that of his wife as well as documentary exhibits. The foregoing evidence for petitioner preponderantly showed the presence of some P590,000.00 worth of goods in his retail store during the fire of November 9, 1977. While the insurer, and the Insurance

Incorporated, supra.

Finman General Assurance Corporation v. Court of Appeals and USIPHIL

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

250

Commissioner for that matter, have the right to reject proofs of loss if they are unsatisfactory, they may not set up for themselves an arbitrary standard of satisfaction. Substantial compliance with the requirements will always be deemed sufficient. A scrutiny of the above-mentioned adjuster’s report reveals that together with the formal demand for full indemnity, petitioner submitted his income tax return for 1978, purchase invoices, certification from his suppliers as to his purchases, and other supporting papers. The report even took into account the appraisals of the other adjusters and concluded that the total loss sustained by petitioner in his household effects a n d stocks in trade reached P379,302.12. But after apportioning said amount among petitioner’s six different insurers (the co- insurance being known to Zenith), the liability of Zenith was placed at P60,592.10. It therefore recommended that Zenith pay the petitioner the amount of P60,592.10. Indeed, petitioner had every reason to expect that respondent Commissioner would give equal weight and credence to the adjuster’s report (on Policy No. F-03734) as she had done with the other. After all, said document was offered as evidence by Zenith itself and could very well be considered as an admission of its liability up to the amount recommended. It would have been pointless for Zenith to have introduced said report as its evidence if it did not agree with its findings and ultimate proposals. Being in the nature of an admission against interest, it is the best evidence which affords the greatest certainty of the facts in dispute. Respondent Commissioner should not have perfunctorily dismissed that particular evidence as a worthless piece of paper. ( N o r m a n N o d a v . H o n . G r e g o r i a C r u z A r n a l d o a n d Z e n i t h I n s u r a n c e C o r p o r a t i o n , G . R . N o . 5 7 3 2 2 , J u n e 2 2 , 1 9 8 7 ) 2.

Clause 13 of the contract of insurance between the parties provides that “If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, ... all benefit under this Policy shall be forfeited.” Plaintiff insured’s verified claim totaled P31,860.85, of which, in accordance with the terms of the policy, three-fourths was asked, or P23,895.64. The insurer’s inventory of the goods found after the fire came to P13,113.00. The difference between insured’s claim and insurer’s estimate of the loss, which was confirmed in the trial court, was P18,747.85. Can the insurer deny the claim under Clause 13 of the policy? A:

Yes, the claim can be denied. A false and material statement made with an intent to decide or defraud a v o i d s a n i n s u r a n c e p o l i c y . (Yu Cua v. South British Insurance Co. [1920], 41 Phil. 134; Go Lu v. Yorkshire Insurance Co. [1922], 43 Phil. 633; Tuason v. North China Insurance Co. and Liverpool & London & Globe Insurance Co. [1924], 47 Phil. 14; Insurance Act No. 2427, Sec. 44.) T h a t h a s b e c o m e t h e s e t t l e d d o c t r i n e in the

CHAPTER 7 LOSS AND NOTICE OF LOSS Philippines. It should not now be departed from out of a spirit of sympathy in one particular case. It is well for those who are unfortunate enough to have losses by fire to know that they can only hope to recoup themselves by fair dealing. No court could, for a moment, subscribe to a confirmation of a fire insurance claim dishonestly made. While the contrast between the claim and the loss in the three (3) cited cases may be more startling than in the case at bar, the same principle governs. In the Y u C u a case, the claim was 14 times bigger than the real loss; in the Go L u case, eight (8) times; and in the T u a s o n case, six (6) times. In the T a n I t case before us, the difference under one (1) hypothesis is about 50%, and under another hypothesis, about 25%. Still that constitutes a serious discrepancy between the true value of the property and that sworn to in the proofs of loss, and is an outstanding fact to be considered as bearing upon the presence of fraud. It is more than an honest misstatement, more than inadvertence or mistake, more than a mere error in opinion, more than a slight exaggeration, and in connection with all the surrounding circumstances, discloses a material overvaluation made intentionally and willfully. [The Court] might condone one who overvalues his loss to offset counter-undervaluation by an insurance company, but [the Court] cannot forgive one who asks for reimbursement for good alleged to have been consumed by fire when no such good were in the place to be consumed. ( T a n I t v . S u n I n s u r a n c e O f f i c e , G . R . N o . L 2 7 8 4 7 , D e c e m b e r 1 2 , 1 9 4 7 )

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION The expectation of payment for his loss is the primary reason why the insured entered into the insurance contract. For the insured, it is imperative that the insurer effect a fair and prompt payment for his loss. A writer keenly observed: “The repayment for the values which have been lost is often the point at which the policyholder has the strongest possible realization of why he purchased the insurance contract. Up to that time he may have had a feeling that there were a number of vague reasons why he purchased the protection. When he actually receives a loss check which makes it possible for him to rebuild his home or replace his automobile, he has specific and tangible knowledge as to why he needed the insurance. He often may wonder what he possibly would have done if he had not had the proper insurance coverage. The insured who has honestly suffered loss or damage need not approach the insurance company in no apologetic frame of mind. The claim settlement which he asks for is his by right of purchase. It should be the objective of both to arrive at a fair and equitable measure of the loss.”1

§1. CLAIMS SETTLEMENT. The liability of the insurer attaches the moment the risk insured against causes loss to the insured. Section 247 of the Insurance Code provides that “no insurance company doing business in the Philippines 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.” a. Insurance adjusting is the term that is being used to denote the function of loss payment. An adjuster is the person employed by the insurer in property and casualty insurance to settle in behalf of the insurer the claim of the insured. The adjuster evaluates

^ickelhaupt, p. 176. 252

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

253

the insurance claim and makes the proper recommendation to the insurer. Under the Insurance Code, the adjuster may be an Independent Adjuster or a Public Adjuster:2 (1) An “independent adjuster” is any person, partnership, association or corporation which, for money, commission or any other thing of value, acts for or on behalf of an insurer in the adjusting of claims arising under insurance contracts or policies issued by such insurer.3 (2) A “public adjuster” is any person, partnership, association or corporation which, for money, commission or any other thing of value, acts on behalf of an insured in negotiating for, or effecting, the settlement of a claim or claims of the said insured arising under insurance contracts or policies, or which advertises for or solicits employment as an adjuster of such claims. 4 b. Note however, that the functions of an adjuster is merely to settle and adjust claims in behalf of his principal. The adjuster does not assume personal liability. 5 §1.01. UNFAIR CLAIMS SETTLEMENT PRACTICES. Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices which may result in the suspension or revocation of the certificate of authority of the insurer by the Insurance Commission: 6 (1) Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; (2) Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies;

2

Section 333,1.C; See Chapter 16 for further discussion on the law on adjusters. Ibid. A Ibid. 5 Smith Bell & Co., Inc. v. Court of Appeals and Joseph Bengson Chua, G.R. No. 110668, February 6, 1997. 3

Section 247,1.C.

254

ESSENTIALS OP INSURANCE LAW (Republic Act No. 10607 with Notes to Pre-Neec Act,

(4) Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (5) Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. §1.02. LIFE INSURANCE POLICY. The proceeds of a life insurance policy shall be paid immediately upon maturity of the policy. 7 * However, the policy may provide that the proceeds are made payable in installments or as an annuity, in which case the installments, or annuities shall be paid as they become due.* a. In the case of a policy maturing by the death of the insured, the proceeds thereof shall be paid within 60 days after presentation of the claim and filing of the proof of the death of the insured. The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall include the discounted value of all premiums paid in advance of their due dates, but are not due and payable at maturity.9 b. Refusal or failure to pay the claim within the time prescribed herein will entitle the beneficiary to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.10 §1.03. NON-LIFE INSURANCE POLICY. The amount of any loss or damage for which an insurer may be liable under any policy other than life insurance policy, shall be paid within 30 days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration.11 The period may be shorter if an agreement is reached.12

7

Se ctio Ibi 9 Ibi 10 I “Section 249,1.C. bid 12 Par. 7.12,1.C. Circular Letter 2015-58-A dated December 21, 2015. 6

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

255

a. However, if ascertainment of loss is not had or made within 60 days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within 90 days after receipt of the proof of loss.11 b. Unreasonable refusal or failure to pay the loss or damage within the time prescribed under Section 249 of the Insurance Code will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.13 14 The “double interest” referred to in Section 249 can only be interpreted to mean double the legal rate of interest of 6 % prescribed by the Monetary Board or 12%.15 When the law in Section 249 speaks of the ceiling prescribed by the Monetary Board, it can only refer to the rate applicable to obligations that are in the nature of loans or forbearance of money.16 Under BSP Circular No. 799, Series of 2013 dated July 1, 2013, the legal rate of interest was reduced from 12% to 6% for every loan or forbearance of money, goods, or credits and the rate allowed for judgments in the absence of contractual stipulation as to the rate of interest. c. The insurer must settle the claim even without the participation of an adjuster. There is nothing in the Insurance Code that makes the participation of an adjuster in the assessment of the loss imperative or indispensable. Section 334 of the Insurance Code speaks of the licensing and duties of adjusters but it does not require as a pre-requisite the assessment of adjusters in the settlement of the insurance claim. 17 §1.04. UNREASONABLE DENIAL OR WITHHOLDING OF CLAIM. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld.18 It should be noted that failure to pay any such claim

13

Section 249, I.C. (previously Section 243).

14

Ibid.

15

Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines, Inc., G.R. No. 151890, June 20, 2006. 16 Stronghold Insurance Co., Inc. v. Pamana Island Resort Hotel and Marina Club, Inc., G.R. No. 174838, June 1, 2016. 17 Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, G.R. No. L-67835, October 12, 1987. 18

Section 250, I.C.

256

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

within the time prescribed in Sections 248 and 249 of the Insurance Code shall be considered p r i m a f a c i e evidence of unreasonable delay in payment.19 a. Interest and Damages. If the claim of the insured has been unreasonably denied or withheld, the insurance company shall be adjudged to pay the following: 1) attorneys fees; 2) other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment; 3) interest of 12% at twice the ceiling prescribed by the Monetary Board of the amount of the claim due the injured; 20 and 4) the amount of the claim.21 The interest that is payable for unlawful withholding of the insurance proceeds or unlawful denial of the claim is what is known as “compensatory interest” which is in the nature of penalty.22 b. For an insurance company to be held liable for unreasonably delaying and withholding payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent. It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man. For instance, the insurer cannot be deemed to be guilty of acting wantonly and in bad faith in delaying the release of the proceeds if there is a problem in the determination of who is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds. 23 c. If there is no unreasonable or unjustified delay or refusal in settling the claim of the insured, the interest is 6% p e r a n n u m from the time of demand. As already stated earlier, under BSP

19

See discussion in Section 1.02 and 1.03 above, Notes 6 and 10.

20

Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., et al.,

supra. 21 Ibid., see also Zenith Insurance Corporation v. Court of Appeals and Lawrence Fernandez, G.R. No. 85296, May 14, 1990. 22 Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit, G.R. No. 183272, October 15, 2014. 23 The rule in Rizal Commercial Banking Corporation, et al. v. Court of Appeals and Go Yu & Sons, Inc., G.R. No. 128833, April 20, 1988 and Zenith Insurance Corporation v. Court of Appeals, 185 SCRA 403 (1990) was already overtaken by BSP Circular 799, Series of 2013.

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

257

Circular No. 799, Series of 2013, the legal rate of interest is now 6% whether or not the claim is based on loan or forbearance of money. (1) Based on the ruling in Stronghold Insurance Co., Inc. v. Pamana Island Resort Inc.,24 if the Bangko Sentral ng Pilipinas (BSP) will eventually increase the rate of interest to a rate that is higher than the present rate of 6% for loan or forbearance of money, then the higher rate would still be inapplicable if there is an unreasonable denial of an insurance claim under Article 249 of the Insurance Code. (2) However, the ruling in other cases is to the effect that if the case is a simple insurance claim, the interest rate that applies is the one that applies for claims that are not in the nature of loan or forbearance of money. The High Court ruled that if there is no unreasonable delay, the insurance claims for damage or loss incurred by the insured is not in the nature of loan or forbearance of money.25 However, if the rate for loans and forbearance of money is increased back to 12%, such 12% should already be applied from the time the judgment of court becomes final and executory even if the claim is originally not for loan or forbearance of money.26 d. No compensatory or penalty interest was due in case the insurer is refunding the premium as a consequence of the rescission of the policy because of material concealment committed by the insured. Compensatory interest is due only if the obligor is proven to have failed to comply with his obligation. In the said case, the insurer did not incur delay or unjustifiably deny the claim.27 e. Mere denial of the claim does not warrant of the award of moral and exemplary damages and attorney’s fees. For instance, the imposition of damages is not justified if it is evident that the insurer is acting in good faith in resisting the beneficiary’s claim on the ground that the death of the insured is covered by the exception.

24 G.R. No. 174838, June 1, 2016; New World International Development (Phils.), Inc. v. NYK-PhilJapan Shipping Corp., et al., G.R. No. 171468, August 24, 2011; Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., G.R. No. 174838, June 1, 2016. 25 Tio Kho Cho v. Hon. Court of Appeals, G.R. Nos. 76101-02, September 30, 1991. 26 Ibid.; Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, July 12, 1994. 27 Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit, G.R. No. 183272, October 15, 2014.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

258

This is true where the issue is debatable and is clearly not raised only for the purpose of evading a legitimate obligation. In order that a person may be made liable to the payment of moral damages, the law requires that his act be wrongful. The adverse result of an action does not p e r s e make the act wrongful and subject the act to the payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such right is so precious that moral damages may not be charged on those who may exercise it erroneously. For these, the law taxes costs.28 §2. FRAUDULENT CLAIM. The insurer may justifiably reject a claim that is fraudulent.29 For instance, the insured can deny the claim if the insurer presented a false claim based on a fictitious document. 30 Similarly, the denial of the claim may also be justified if the loss is grossly overvalued.31 R.A. No. 10607 now expressly provides for criminal liability for fraudulent claims. Section 251 of the Insurance Code as amended by R.A. No. 10607 provides that:

SEC. 251. It is unlawful to: (a) Present or cause to be presented any fraudulent claim for the payment of a loss under a contract of insurance; and (b) Fraudulently prepare, make or subscribe any writing with intent to present or use the same, or to allow it to be presented in support of any such claim. Any person who violates this section shall be punished by a fine not exceeding twice the amount claimed or imprisonment of two (2) years, or both, at the discretion of the court.

a. Since presentation of a fraudulent claim is considered illegal, the insurer is not obligated to pay the insured or beneficiary who submitted such fraudulent claim. (1) However, there is a need to interpret paragraph (b) of Section 251 of the Insurance Code. The first paragraph

28 Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim, G.R. No. 92383, July 17, 1992. 29

Tan It v. Sun Insurance Office, G.R. No. L-27847, December 12, 1927. Moises Ariche, et al. v. The Law Union and Rock Insurance Co., Ltd., et al., G.R. Nos. L-24454-24456, January 12, 1996. 31 The East Furniture, Inc. v. The Globe & Rutgers Fire Insurance Co. of New York, G.R. No. L-35848, November 22, 1932. 30

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

259

is clear enough - the person who presented or caused to be presented any fraudulent claims is criminally liable. However, with respect to the second paragraph, it is believed that the same cannot be interpreted to mean that mere preparation of a claim form is enough to make one liable. If the form was prepared with the intent to present or use the same but the form was not submitted because the person who prepared it changed his mind and kept it in his drawer, then there should be no liability. Even if violation of Section 251 is m a l a p r o h i b i t a , it is absurd to make one liable just by preparing the claim. (2) The word “fraudulently'’ in paragraph 5 indicates that the insurer was already aware of the claim; fraud presupposes the presence of another person against whom the fraud is committed or is being misled. Hence, it is believed that paragraph (b) of Section 251 presupposes that a claim was already presented. (3) Thus, if a fraudulent claim was filed, the persons who may be made criminally liable under Section 251 are as follows:

(4)

The person who presented the fraudulent claim;

(5)

The person who caused the filing of the fraudulent claim;

(6) The person who prepared or made the fraudulent claims with intent to present or use the same, or to allow it to be presented in support of any such claim; and (7) The person who subscribed any writing with intent to present or use the same, or to allow it to be presented in support of any such claim. (8) The insured is not even entitled to a return of premium in accordance with Section 82 of the Insurance Code as amended by R.A. No. 10607 which provides, in part: “A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud.” It follows, that the insurer is also not liable to pay interest for its refusal to pay the claim based on the ground that the claim is fraudulent.32

32

Section 250,1.C.

260

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. In United Merchants Corporation v. Country Bankers Insurance Corp.,M the Supreme Court ruled that the insured in a fire insurance was guilty of fraud when it padded its claim. Hence, it forfeited its right to the proceeds pursuant to an express stipulation in the Policy. The “claim is twenty five times the actual claim proved.” The Supreme Court summarized its previous rulings on fraudulent claim in support of its Decision:

“In U y H u & C o . v . T h e P r u d e n t i a l A s s u r a n c e C o . , L t d . , the Court held that where a fire insurance policy provides that ‘if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under this Policy,’ and the evidence is conclusive that the proof of claim which the insured submitted was false and fraudulent both as to the kind, quality and amount of the goods and their value destroyed by the fire, such a proof of claim is a bar against the insured from recovering on the policy even for the amount of his actual loss. XXX In Y u B a n C h u a n v . F i e l d m e n ’ s I n s u r a n c e , C o . , I n c . , the Court ruled that the submission of false invoices to the adjusters establishes a clear case of fraud and misrepresentation which voids the insurer’s liability as per condition of the policy. Their falsity is the best evidence of the fraudulent character of plaintiffs claim. In V e r e n d i a v . C o u r t o f A p p e a l s , where the insured presented a fraudulent lease contract to support his claim for insurance benefits, the Court held that by its false declaration, the insured forfeited all benefits under the policy provision similar to Condition No. 15 of the Insurance Policy in this case. XXX

It has long been settled that a false and material statement made with an intent to deceive or defraud voids an insurance policy. In Y u C u a v . S o u t h B r i t i s h I n s u r a n c e C o . , the claim was fourteen times bigger than the real loss; in G o L u v . Y o r k s h i r e I n s u r a n c e C o . , eight times; and in T u a s o n v . N o r t h C h i n a I n s u r a n c e C o . , six times. In the present case, the claim is t w e n t y - f i v e t i m e s the actual claim proved. The most liberal human judgment cannot attribute such difference to mere innocent error in estimating or counting but to a deliberate intent to demand from insurance companies payment for indemnity of goods not existing at the time of the fire. This constitutes the so-called “fraudulent

^G.R. No. 198588, July 11, 2012.

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

261

claim'’ which, by express agreement between the insurers and the insured, is a ground for the exemption of insurers from civil liability.”34 §3. PRESCRIPTIVE PERIOD. The Insurance Code does not provide for a prescriptive period for the filing of a complaint for the recovery of the proceeds of the insurance. One exception is the one year period provided for in the case of Compulsory Third Party Liability Insurance under Section 397 of the Insurance Code. §3.01. STIPULATION. However, the parties may stipulate a prescriptive period in the policy subject to the limitation under Section 63 of the Insurance Code, which states that:

SEC. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one (1) year from the time when the cause of action accrues, is void. a. The stipulated period prevails. For example, the policy involved in one case35 includes Condition 27 which reads: “27. Action or suit clause — If a claim be made and rejected and an action or suit be not commenced either in the Insurance Commission or in any court of competent jurisdiction within twelve (12) months from receipt of notice of such rejection, or in case of arbitration taking place as provided herein, within twelve (12) months after due notice of the award made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.” The Supreme Court ruled that Condition 27 in the policy is consistent with Section 63 of the Insurance Code. b. The condition contained in an insurance policy that claims must be presented within one year after rejection is not merely a procedural requirement but an important matter essential to a prompt settlement of claims against insurance companies. It demands that insurance suits be brought by the insured while * 41

34 United Merchants Corporation v. Country Bankers Insurance Corp., Note 33, citing Uy Hu & Co. v. The Prudential Assurance Co., Ltd., 51 Phil. 231 (1927); Yu Ban Chuan v. Fieldmen’s Insurance Co., 121 Phil. 1275 (1965); Tan It v. Sun Insurance Office, 51 Phil. 212 (1927), citing Yu Cua v. South British Insurance Co., 41 Phil. 134 (1920); Go Lu v. Yorkshire Insurance Co., 43 Phil. 633 (1922); Tuason v. North China Insurance Co., 47 Phil. 14 (1924). 35 Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No. 89741, March 13, 1991.

262

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the evidence as to the origin and cause of destruction have not yet disappeared.36 §3.02. ACCRUAL. The right of the insured to the payment of his loss accrues from the happening of the loss. However, the cause of action in an insurance contract does not accrue until the insured’s claim is finally rejected by the insurer. 37 There is no real necessity for bringing suit before such final rejection.38 Since “cause of action” requires as essential elements not only a legal right of the plaintiff and a correlative obligation of the defendant in violation of the said legal right, the cause of action does not accrue until the party obligated (surety or insurer) refuses, expressly or impliedly, to comply with its duty to pay the amount of the bond or insurance proceeds. 39 Indisputably, the insured’s cause of action or his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction commences from the time of the denial of his claim by the Insurer, either expressly or impliedly. 40 a. The rejection referred to should be construed as the rejection in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for reconsideration, such should have been expressly stipulated. The prescriptive period starts to run from final rejection of the claim and not from the resolution by the insurer of the request or petition for reconsideration by the insured. The Court explained that the contention runs counter to the declared purpose for requiring that an action or suit be filed in the Insurance Commission or in a court of competent jurisdiction from the denial of the claim. To uphold such contention would contradict and defeat the very principle which the High Court had laid down. Moreover, it can easily be used by insured persons as a scheme or device to waste time until

^Ang v. Fulton Fire Insurance Co., 2 SCRA 945 (1961); E. Macia & Co. v. The China Fire Insurance & Co., Ltd., et al., G.R. No. L-21881, October 3, 1924. 37 Travellers Insurance & Surety Corporation v. Hon. Court of Appeals and Vicente Mendoza, G.R. No. 82036, May 22, 1997; Agricultural Credit & Cooperative Financing Administration v. Alpha Insurance & Surety Co., Inc., G.R. No. L-24566, July 29, 1968. 38 Star Insurance Co. v. Chia Yu, 96 Phil. 696 (1955). ACCFA v. Alpha Insurance & Surety Co., Inc., 24 SCRA 151 (1968); See also H.H. Hollero Construction, Inc. v. Government Service Insurance System, G.R. No. 152334, September 24, 2014. 40 Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, G.R. No. 89741, March 13, 1991. 39

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

263

any evidence which may be considered against them is destroyed. 41 While the Supreme Court used the phrase “final rejection” in one case, 42 the same cannot be taken to mean the rejection of a petition for reconsideration. Such was clearly not the meaning contemplated by the Court. The insurance policy in the case provides that the insured should file his claim, first, with the carrier and then with the insurer. The “final rejection” being referred to in said case is the initial rejection by the insurance company. b. The prescriptive period stipulated in the contract is not tolled if the insured sends a letter to the insurer asking for clarification of the grounds for cancellation of the policy.43 In one case, the Supreme Court explained that there was no peculiar circumstance that justifies the view of the insured that the rule should be relaxed because it turned out that the insured filed the case eight months after the receipt of a clarificatory letter from the insurer.44 c. A stipulation in a policy of insurance that no action shall be sustainable unless commenced within 12 months after the loss, is binding, and bars a suit commenced after that time, even though a prior suit was commenced within 12 months, and failed without fault on the part of the plaintiff.45 §3.03. RULE IF THERE IS NO STIPULATION. If no prescriptive period is provided for in the policy, the prescriptive period is 10 years from the rejection of the claim by the insurer. This is consistent with the provisions of Article 1144 of the New Civil Code which provides that prescriptive period for written contracts is 10 years. 46 PROBLEM: Q. Robin secured his building against fire with EFG Insurance. The insurance policy contained the usual stipulation that any action or suit must be filed within one year after the rejection of the claim. After

41

Sun Insurance Office, Ltd. v. Court of Appeals and Emilio Tan, supra. Eagle Star Ins., Co., Ltd., et al. v. Chia Yu, 96 Phil. 701 (1955); Summit Guaranty and Insurance Co., Inc. v. Judge de Guzman, 235 Phil. 389, 399 (1987). 43 New Life Enterprises and Julian Sy v. Hon. Court of Appeals, et al., G.R. No. 94071, March 31, 1992. 44 Ibid. 45 E. Macias & Co. v. The China Fire & Insurance Co., Ltd., et al., G.R. No. L-21881, October 3, 1924. 46 Mayer Steel Pipe Corporation, et al. v. Court of Appeals, et al., G.R. No. 124050, June 19, 1997. 42

264

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

his building burned down, Robin filed his claim for fire loss with EFG. On February 28, 1994, EFG denied Robin’s claim. On April 3, 1994, Robin sought reconsideration of the denial, but EFG reiterated its position. On March 20,1995, Robin commenced judicial action against EFG. Should Robin’s action be given due course? Explain. A. No, Robin’s action should not be given due course. The filing of a request for reconsideration by Robin did suspend the running prescriptive period of one (1) year stipulated in the insurance policy. The one (1) year prescriptive period commenced to run from the denial of the claim on February 28, 1994. Hence, the filing of the case on March 20, 1995 was already time-barred. §4. SUBROGATION. Legal subrogation is an equitable doctrine and arises by operation of the law, without any agreement to that effect executed between the parties.47 Subrogation is an arm of equity that may guide or even force one to pay a debt for which an obligation was incurred but which was in whole or in part paid by another.48 “Subrogation is founded on principles of justice and equity, and its operation is governed by principles of equity. It rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form”49 The legal principle is that “once the insurer pays the insured, equity demands reimbursement as no one should benefit at the expense of another.”50 a. The right of subrogation of insurers is governed by Article 2207 of the New Civil Code which provides:

Art. 2207. If the plaintiff’s 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

47 Republic Flour Mills Corp. v. Forbes Factors, Inc., G.R. No. 152313, October 19, 2011. 48 Ibid., citing Fireman’s Fund Insurance Company v. Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323, 327-328; 83 C.J.S. 576, 678, note 16, citing Fireman’s Fund Indemnity Co. v. State Compensation Insurance Fund, 209 Pac. 2d 55. 49 Fireman’s Fund Insurance Company v. Jamila & Company, Inc., ibid., citing 83 C.J.S. 579-80. “Asian Terminals, Inc. v. Malayan Insurance Co., Inc., G.R. No. 171406, April 4, 2011.

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

265

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. b. Under Article 2207 of the New Civil Code, payment by the assurer to the assured operates as an equitable assignment to the assurer of all the remedies which the assured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract or upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the insurance claim. 51 c. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay.52 d. Article 2207 of the Civil Code is founded on the well- settled principle of subrogation. If the insured property is destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter may have against the third party whose negligence or wrongful act caused the loss.53

51 Loadstar Shipping Company, Incorporated v. Malayan Insurance Company, Incorporated, G.R. No. 185565, November 26, 2014; Asian Terminals, Inc. v. Philam Insurance Company, Inc., G.R. Nos. 181163, 181262, and 181319, July 24, 2013; RCJ Bus Lines Incorporated v. Standard Insurance Company, G.R. No. 193629, August 17, 2011; Aboitiz Shipping Corp. v. Insurance Co. of North America, No. 168402, August 6, 2008; The Philippine American General Insurance Company v. The Hon. Court of Appeals and Felman Shipping Lines, G.R. No. 116940, June 11, 1997; Coastwise Lighterage Corporation v. Court of Appeals, et al.y G.R. No. 114167, July 12, 1995; Pan Malayan Insurance Corporation v. Court of Appeals, G.R. No. 81026, April 3, 1990, 184 SCRA 54; Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund Insurance Company v. Jamila and Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323.

o2 The Philippine American General Insurance Company v. The Hon. Court of Appeals and Felman Shipping Lines, G.R. No. 116940, June 11, 1997. 53 Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al., G.R. No. 81026, April 3, 1990; Compania Maritima v. Insurance Company of

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

266

§4.01. REQUISITES OF SUBROGATION. The following requisites must concur for subrogation to take place: (1) (2) (3)

The insurance involved is property insurance; There is a loss arising from the risk insured against; The insured received indemnity from the insurer for the loss;

(4) The indemnity is covered by the face value of the policy. §4.02. WHEN THERE IS NO SUBROGATION. There are a few recognized exceptions to the rule on subrogation. Thus, there is no subrogation in the following instances: (1)

If the assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated;54

(2) Where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation;55 (3) Where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting “voluntary payment,” the former has no right of subrogation against the third party liable for the loss;56 (4) Where the insurer paid in excess of the amount of the loss; and (5) When life insurance is involved.57

North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323. 54 Danzas Corporation, et al v. Court of Appeals, G.R. No. 141462, December 15, 2005, 478 SCRA 80; Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al, G.R. No. 81026, April 3, 1990, citing Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956). 55 Pan Malayan Insurance Corporation v. Court of Appeals, Erlinda Fabie, et al, G.R. No. 81026, April 3, 1990; McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923). 56 Jbid., citing Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G.R. No. L22146, September 5, 1967, 21 SCRA 12. 57 See Article 2207, New Civil Code.

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

267

§4.03. LIMITATIONS. If the claim of the insured against a third party is limited, the right of subrogation of the insurer is likewise limited. “As subrogee, the insurer steps into the shoes of the assured and may exercise only those rights that the assured may have against the wrongdoer who caused the damage.” 58 a. Consistently, if the insured is bound by contractual stipulations, the insurer-subrogee is also bound by the same contractual stipulation. 59 “Second, the insurer can be subrogated only to the rights as the insured may have against the wrongdoer.”60 Thus, if a notice of claim is imposed on the insured as a condition precedent, the right of the insured-subrogee to recover is subject to the condition precedent as well.61 §4.04. LIMITATIONS AS TO THE AMOUNT RECOVERABLE. For example, in one case the person responsible for the damage is a common carrier and there was a valid limitation in the bill of lading as to the amount recoverable from the carrier. The Supreme Court ruled that the insurer, after paying the claim of the insured for damages under the insurance, is subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is recoverable by the latter. Since the right of the assured in case of loss or damage to the goods, is limited or restricted by the provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to like limitations and restrictions. 62 63 a. In Atlantic Mutual Insurance Company v. Manila Port Service,™ the Supreme Court explained that having been subrogated merely to the rights of the insure, the insurer’s recovery necessarily should be limited to what was recoverable by the insured. The insurer cannot recover from the offending party an amount greater than that to which the insured could lawfully lay claim. 64

58

Aboitiz Shipping Corp. v. Insurance Company of North America, G.R. No. 168402, August 6, 2008. 59 Federal Express Corporation v. American Home Assurance Company, G.R. No. 150094, August 18, 2004, 437 SCRA 50, 56. "Ibid. 61 Aboitiz Shipping Corp. v. Insurance Company of North America, supra. 62 St. Paul’s Fire & Marine Insurance Co. v. Macondary Co., Inc., et al.y G.R. No. L27796, March 25, 1976. 63 G.R. No. L-16271, October 31, 1961; see also Insurance Service Co. of North America v. Manila Port Service, L-17331, November 29, 1961; Insurance Company of North America v. U.S. Lines, Co., G.R. No. L-17032, March 31, 1964. 64 Rizal Surety and Insurance Company v. Manila Railroad Company, G.R. No. L24043, April 25, 1968.

268

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. Similarly, in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporationthe Supreme Court sustained the contractual stipulation

limiting the liability of the ship repairer to P50,000,000.00. The Supreme Court ruled that the insurer, as subrogee of the ship owner who has the right to claim from the ship repairer, may only claim P50,000,000.00 even if it paid more than such amount to the ship owner. The Supreme Court reiterated the well-settled rule that the insurer can be subrogated only to the rights as the insured may have against the wrongdoer. c. However, the stipulation limiting the liability to a certain amount is not binding on the insurer and the insured if the stipulation is contrary to public policy, morals and public customs. Thus, Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc.,66 the vessel was insured with the insurer for P45,000,000.00. The vessel was totally lost because of the negligence of the defendant that was engaged in the business of dry-docking and repairing of marine vessels. The said claim of shipowner was then found to be valid and compensable such that Prudential paid the latter the total value of its insurance claim. Furthermore, it was ascertained that the replacement cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to P50,000,000.00. When the insurer exercised its right of subrogation, the party responsible invoked the stipulation with the insured limiting its liability to the insured to Pi,000,000.00. It was explained that the aforestated circumstances, let alone the fact that negligence on the part of party responsible has been sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner to Pi,000,000.00; the limit was found to be “unconscionable if not overstrained.” To allow the defendant to limit its liability to PI,000,000.00 notwithstanding the fact that the total loss suffered by the assured and paid for by insurer amounted to P45,000,000.00 would sanction the exercise of a degree of diligence short of what is ordinarily required because, then, it would not be difficult for the defendant to escape Lability by the simple expedient of paying an amount very much lower than the actual damage or loss suffered by the shipowner. d. On the other hand, if the amount recoverable by the insured from the person who caused the loss is more than the face 65 * *

65 G.R. Nos. 180880-81 and 180896-97, September 18, 2012. In this case, the respondent insurer paid its insured, the ship owner, the amount of US$8,472,581.78. ^G.R. No. 132607, May 5, 1999.

CHAPTER S CLAIMS SETTLEMENT AND SUBROGATION

269

value of the policy, the insurer can only recover from the person who caused the loss the amount that it actually paid to the insured. If the total face value is paid, the insurer can recover the same amount subject to the right of the insured to recover the balance or that part of the loss that is not covered by the insurance. §4.05. EFFECT OF PRESCRIPTION. As noted earlier, uas subrogee, the insurer steps into the shoes of the assured and may exercise only those rights that the assured may have against the wrongdoer who caused the damage.” 67 Consistently, if the claim of the insured is subject to a prescriptive period, the claim of the insurer by virtue of its right of subrogation is also subject to the same prescriptive period. 66 For example, if the insured is the shipper of goods in a common carrier, to all intents and purposes, the insurer (after payment to the insured) stands in the place and in substitution of the consignee. * 69 A fortiori, both the insurer and the consignee are bound by the contractual stipulations in the bill of lading and statutory regulations. 70 (1) For example, in international carriage by sea, Section 3(6) of the Carriage of Goods by Sea Act would also apply to the insurer. This means that the insurer, like the shipper, may no longer file a claim against the carrier beyond the one (l) -year period provided in the law. But it does not mean that the shipper may no longer file a claim against the insurer because the basis of the insurer’s liability is the insurance contract. Such obligation prescribes in 10 years, in accordance with Article 1144 of the New Civil Code.71 (2) Similarly, the insurer is bound by a stipulation in the airway bill requiring the filing of a claim with the carrier must be within a certain period from the time the goods are placed at the disposal of the consignee. The filing of a claim is a condition precedent that must be complied with even by the insurer. The shipper or consignee must allege and prove the fulfillment of this condition. Consequently, in the exercise of

^Aboitiz Shipping Corp. v. Insurance Company of North America, G.R. No. 168402, August 6, 2008. ^Oriental Assurance Corporation v. Ong, G.R. No. 189524, October 11, 2017. 69 Federal Express Corporation v. American Home Assurance Company, et al., G.R. No. 150094, August 18, 2004, 437 SCRA 50, 56-57. 70 Ibid. 71 Mayer Steel Pipe Corporation, et al. v. Court of Appeals, et al., G.R. No. 124050, June 19, 1997; Filipino Merchants Co., Inc. v. Alejandro, 145 SCRA 42.

270

ESSENTIALS OF INSURANCI LAW (Republic AT: NO. 10537 wrb No:a? oa Pre-Need Art

its subrogatory rights. the insurer is likewise required to aLere and prove the fulfillment of the condition requiring the filing cf a claim within the period fixed in the airway bill'1 a. Rightfully, the insurer who is exercising its right cf subrogation is also bound by the prescriptive period that applies to the insured. 7- This is understandable because the insurer, in the exercise of the right of subrogation, is pursuing the cause of action belonging to the shipper/insured. Hence, any defense available against the shipper is available against the insurer. It should be noted however that the Supreme Court ruled in V e c t o r S h i p p i n g C o r p o r a t i o n v . A m e r i c a n H o m e A s s u r a n c e C o . / * that the action cf the insurer is not upon a written contract, but upon an obligation created by law. Hence, it comes under Article 1144(2) of the Civil Code. For purposes of the law on the prescription of actions, the period of limitation is 10 years. This is because the subrogation of insurer to the rights of the insured was by virtue of the express provision of law embodied in Article 2207 of the Civil Code, right of subrogation pursuant to Article 2207, s u p r a , was “not dependent upon, nor did it grow out of, any privity of contract or upon written assignment of claim but accrued simply upon payment of the insurance claim by the insurer." According to the Supreme Court, the insurer’s cause of action accrued as of the time respondent actually indemnified. b. It is submitted that the ruling in V e c t o r S h i p p i n g C o r p o r a t i o n v . A m e r i c a n H o m e 7 3 7 4 7 5 A s s u r a n c e C o . 7 2 is not correct and the rulings in D o m i n g o A n g u . C o m p a n i a M a r i t i m a , e t a l and A n g v . A m e r i c a n S t e a m s h i p A g e n c i e s , I n c . express the correct rule. There seems to be confusion regarding the right of subrogation and the cause of action. The cause of action is not the right of subrogation: it is not an act or omission in violation of the right of another. What accrues at the time of payment of the insurer is the right of subrogation and not the cause of action being pursued against the defendant. The wrongful act or omission that constitutes the cause of action is the breach of the contract between the carrier and not shipper which resulted in the damage to the shipper (loss of cargo). What the Insurance company enforced was the same cause of action

72 Federal Express Corporation v. American Home Assurance Company, et al., supra. 73 Fil Merchants v. Alejandro, 145 SCRA 42 (1986). 74 G.R. No. 159213, July 3, 2013. ™Ibid.

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

271

that pertained to the shipper-insured who was paid by the insurance company. After all, subrogation gives the insurer the right to exercise the right of the insurer. Hence, the case is for the enforcement of the right of the insured that was violated and the insurer merely stepped into the shoes of the insured. Hence, prescriptive period should not be based on the day the right of subrogation accrued but on the time the cause of action accrued. §4.06. DISCRETION OF INSURER TO EXERCISE RIGHT. Under Article 2207, the real party-in-interest with regard to the indemnity received by the insured is the insurer. The insured can no longer recover his damages against the offending party or the party who is liable. Whether or not the insurer should exercise the rights of the insured to which it had been subrogated lies solely within the former’s sound discretion. The insurer may opt not to exercise its right of subrogation.76 §4.07. PRESENTATION OF THE POLICY. It was noted in Chapter 5 that any person who relies on the policy as the basis of his cause of action must also attach the same to the complaint as an actionable document. 77 The obligation to attach the policy to the Complaint as an actionable document and to present and offer the same applies even if the plaintiff is an insurance company that is trying to recover based on its right of subrogation.78 * * * a. In Home Insurance Corporation v. Court of Appeals, 19 the insurance contract, which was not presented in evidence in that case would have indicated the scope of the insurer’s liability, if any. Hence, the non-presentation of the policy was declared fatal to the claim. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., m the Supreme Court ruled that the presentation of the marine insurance policy was necessary because the issues raised therein arose from the very existence of an insurance contract. In Wallem Philippines Shipping, Inc. v. Prudential Guarantee and Assurance, Inc., sl the Court ruled that the insurance contract must be presented in

76 FF Cruz & Co., Inc. v. The Court of Appeals, et al., G.R. No. L-52732, August 29, 1988; Phil. Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031 (1957). 77

Malayan Insurance Company, Inc. v. Regis Brokerage Corporation, G.R. No. 172156, November

23, 2007. 1H

Ibid. G.R. No. 109293, August 18, 1993, 225 SCRA 411. "°G.R. No. 172156, November 23, 2007. H, G.R. No. 152158, February 7, 2003. 7tt

272

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

evidence in order to determine the extent of the coverage. Thus, if the insurer paid more than what is provided for in the policy, the insurer cannot recover that it paid beyond such amount. b. However, there are cases that hold that “non-presentation of the insurance contract or policy is not necessarily fatal.82 * * The admitted exceptions are cases when there is no dispute regarding the existence and validity of the policy and the terms and conditions thereof. In D e l s a n T r a n s p o r t L i n e s , I n c . v . C o u r t o f A p p e a l s the Court ruled that the presentation in evidence of the marine insurance policy is not indispensable in the case before the insurer may recover from the common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of herein private respondent as insurer and the assured shipper of the lost property but also the amount paid to settle the insurance claim. There was no issue as regards the provisions of Marine Open Policy and its existence was already admitted by petitioner in open court. The Supreme Court explained that even though it was not offered in evidence, it can still be considered by the court as long as they have been properly identified by testimony duly recorded and they have themselves been incorporated in the records of the case. c. In I n t e r n a t i o n a l C o n t a i n e r T e r m i n a l S e r v i c e s , I n c . v . F G U I n s u r a n c e C o r p o r a t i o n , 84 the Supreme Court used the same line of reasoning in sustaining the finding the arrastre contractor liable for the lost shipment despite the failure of the insurance company to offer in evidence the insurance contract or policy. d. Similarly, the presentation of the insurance contract or policy was not necessary in A s i a n T e r m i n a l s , I n c . v . M a l a y a n I n s u r a n c e C o . , I n c . 8 5 Although petitioner objected to the admission of the Subrogation Receipt in its Comment to respondent’s formal offer of evidence on the ground that respondent failed to present the insurance contract or policy, the Answer and Pre-Trial Brief showed that “petitioner never questioned respondent’s right to subrogation, nor did it dispute the coverage of the insurance contract or policy. Since there was no issue regarding the validity of the insurance

82 Eastem Shipping Lines, Inc. v. Prudential Guarantee and Assurance, Inc., G.R. No. 174116, September 11, 2009, 599 SCRA 565, 581.

“G.R. No. 127897, November 15, 2001, 420 Phil. 824. ^G.R. No. 161539, June 27, 2008. “G.R. No. 171406, April 4, 2011.

CLA3L? SUIT^ZMZNT AND SUBROGATION'

273

ccutrsn or policy, or any provision thereof, respondent had no reason :c present the insurance contract or policy as evidence during the

PROBLEMS: U L borrows P50.000 from M payable 360 days after date at 12% p e r i o secure the loam L mortgages big, house and lot in favor G: M. io protect himself from certain contingencies, M insures the nouse tor me rull amount of the loan with Rock Insurance Co. A fire creaks out and bums the house and M collects from the insurance company the full value of the insurance. Upon maturity of loan, the insurance company demands payment from L. The latter refuses on me ground that the loan had been extinguished by the insurance payment which M received from the insurance company. He further contends that it is bad enough to lose a house but it is worse if one has to pay off a paid obligation to somebody who has not extended any loan to him. Besides, he states, that the insurance payment should inure to his benefit because he owns the house. Pass upon the merit of L’s contention. A:

The loan of L was not extinguished by the insurance payment which M received from the insurance company. In addition, the insurance payment did not inure to the benefit of L. The interest that was insured was the interest of M. Hence, the proceeds should only apply to the interest of M. The refusal on the part of L to pay the insurer on the ground that he cannot pay his obligation to the person or entity who did not extend the loan is also untenable. The right of the insurance company is not based on contract but on the right of subrogation under Article 2207 of the New Civil Code. The insurance company is subrogated to the rights of M the moment it paid M the proceeds the insurance policy.

2.

SB Corporation delivered to BAE Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to consignee. The shipment was covered by an airway bill with the words, ‘REFRIGERATE WHEN NOT IN TRANSIT and ‘PERISHABLE’ stamp marked on its face. That same day, BAE insured the cargoes with American Home Assurance Company (AHAC). The following day, BAE turned over the custody of said cargoes to Federal Express (FE), which transported that, same to Manila and were stored at Cargohaus’ warehouse. However, the goods were stored only in a room with two (2) air conditioners running, to cool the place instead of a refrigerator. Later, a government agency duly examined the goods and declared the “ELISA reading” of vaccines are below the positive reference serum. As a consequence SB abandoned the shipment and declared

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

274

‘total loss’ for the unusable shipment. The consignee filed with AHAC through its representative in the Philippines, the Philam Insurance Co., Inc. (‘PHILAM’) that recompensed SB. Thereafter, PHILAM filed an action for damages against the petitioner imputing negligence on either or both of them in the handling of cargo. Does PHILAM have a cause of action or personality to sue? A:

3.

Yes, PHILAM and AHAC have personality to sue by virtue of the right of subrogation. Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurer’s entitlement to subrogation p r o t a n t o equips it with a cause of action in case of a contractual breach or negligence. In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes, it stands in the place and in substitution of the consignee. ( F e d e r a l E x p r e s s C o r p o r a t i o n v . A m e r i c a n H o m e A s s u r a n c e C o m p a n y a n d P h i l a m I n s u r a n c e C o m p a n y , I n c . , G . R . N o . 1 5 0 0 9 4 , A u g u s t 1 8 , 2 0 0 4 )

During the effectivity of an insurance policy (with a face value of P20,000.00) issued by MICO, and more particularly on December 19, 1967, at about 3:30 in the afternoon, the insured jeep, while being driven by one Mr. JC, an employee of SLRM, Inc. collided with a passenger bus belonging to Mr. SC the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries to the driver, JC, and the MCV, who was riding in the ill-fated jeep. The trial court held Mr. SC and SLRM, Inc., solidarily liable to MCV for the amount of P29,103.00. It was ruled that Mr. MCV may enforce the entire obligation on only one of said solidary debtors. If Mr. SC as solidary debtor is made to pay for the entire obligation (P29,103.00) and MICO as insurer of Mr. SC is compelled to pay P20,000.00, can MICO claim reimbursement from SLRM, Inc.? A:

Yes, MICO can claim reimbursement from SLRM. MICO, upon paying the injured party Mr. MCV the amount of not exceeding P20,000.00, shall become the subrogee of the insured, Mr. SC; as such, it is subrogated to whatever rights the Mr. SC has against SLRM Inc. SLRM is liable under Article 2180 of the New Civil Code for the negligent acts of its employee who was a joint tortfeasor. SLRM is solidarily liable and is therefore obligated to reimburse Mr. SC. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each. In accordance with Article 1217, MICO, upon payment to Mr. MCV and thereby becoming the subrogee of solidary debtor Mr. SC, is entitled to reimbursement from respondent SLRM,

CHAPTER 8 CLAIMS SETTLEMENT AND SUBROGATION

275

Inc. MICO has the right to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00). ( M a l a y a n I n s u r a n c e C o m p a n y , I n c . v . T h e H o n . C o u r t o f A p p e a l s , e t a l . , G . R . N o . L 3 6 4 1 3 , S e p t e m b e r 2 6 , 1 9 8 8 ) From March 6, 1970 to March 6, 1971, petitioner insured its Mercedes Benz four-door sedan with respondent insurance company. On May 4, 1970 the insured vehicle was bumped and damaged by a truck owned by SMC. For the damage caused, respondent insurance company paid petitioner P5,000.00 in amicable settlement. Petitioner’s general manager executed a Release of Claim, subrogating respondent company to all its right to action against SMC, the person responsible. On December 11, 1972, respondent company demanded reimbursement from SMC of the amount it had paid petitioner. SMC refused on the ground that it had already paid petitioner P4,500.00 for the damages to petitioner’s motor vehicle, as evidenced by a cash voucher and a Release of Claim discharging SMC all actions, claims, demands as a consequence of the accident. Can insurer exercise its right of subrogation against SMC? A:

No. The insurer can no longer recover from SMC. Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer. ( M a n i l a M a h o g a n y M a n u f a c t u r i n g C o r p o r a t i o n v . C o u r t o f A p p e a l s a n d Z e n i t h I n s u r a n c e C o r p o r a t i o n , G . R . N o . 5 2 7 5 6 , O c t o b e r 1 2 , 1 9 8 7 )

CHAPTER 9 DOUBLE INSURANCE When two or more insurers issue separate insurance policies over the same subject, the inevitable conflict results and the danger that fraud may permeate the transactions becomes greater. Moral hazard is increased. “Although the insured may retain an interest in the preservation of the property, the motive for its preserration would not be as strong if several policies existed upon the property aggregating the sum in excess of its actual value. Certainly, the insured may not be as watchful and careful of the acts of others as he would if the property were not so fully protected.”1 With the danger brought about by two or more insurance over the same subject matter, law-making body deemed it proper to clarify the rules on double insurance and the possible concurrent situation of over- insurance. §1. DEFINITION. The concept of double insurance is provided for in Section 93 of the Insurance Code which provides:

SEC. 95. A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. §2. REQUISITES. Based on Section 95, it is clear that double insurance is present if the following requisites will concur: (1) The same person is insured; (2) There are two or more insurers that insured the person separately; (3) (4)

The insurance is over the same subject; The same interest is involved; and

‘9 Couch 12-13. 276

CHAPTER 9 DOUBLE INSURANCE

o
5) m e same peril is insured against.2 a. Thus, there is double insurance if the owner of a house will insure it with two insurers. For example. Mr. X owns a house and he insures it wdth ABC Insurance Corporation against fire for P500.000.00 and XYZ Insurance Corporation also against fire for P6GQ,000.00. The same person is insured, Mr. X, and there are two insurers, ABC and XYZ. The two policies cover the same subject .natter, the house of Mr. X and the same interest of Mr. X as owner is involved. In addition, the same peril is insured against fire. b. There is no double insurance if the owner and the lessee of the same house insures the same with two insurers. For instance, if Mr. A owns a house which he leased to Mr. B, there will be no double insurance if Mr. A will insure the house with ABC Insurance Corporation and Mr. B will insure it with XYZ Insurance Corporation. Two separate interests are insured by different persons. c. There is no double insurance if the mortgagor and the mortgagee separately insures the mortgaged property. The two insurance policies do not involve the same interest. 3 d. Mr. X owns a house and he insures it with ABC Insurance Corporation against fire for P500,000.00 and with XYZ Insurance Corporation against flood for P600,000.00. There is no double insurance because although the same person and subject are involved in both insurance policies, the peril insured against are different. e. T h e r e is also no double insurance if the owner and the carrier separately insured the same goods. The Carrier’s insurance interest is recognized under Section 15 of the Insurance Code.4

§2.01. DOUBLE INSURANCE IN LIFE INSURANCE. It should be noted that there can be double insurance in life insurance but there can never be over-insurance. The life of a person can be insured for any amount and it would still be inadequate because of the: intrinsic value of life.

y .SVr Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc., et til., (\,H. No. 184'iOO, .July 11, 2012 for a substantially the same enumeration of the rwju mites.

Hu/tra,

‘Armando (loagonia v. Court of Appeals, G.R. No. 114427, February 6, 1995. ^Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc., et al.,

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

278

§3. NO GENERAL PROHIBITION AGAINST DOUBLE INSURANCE. The implication of the rules on double-insurance 5 under the Insurance Code is that double-insurance is not prohibited. a. By way of exception R.A. No. 10607 modified Section 64(f) of the Insurance Code by providing that the insurance policy can be rescinded upon:

(f) Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; b. The language of Section 64(f) shows that the policy can be rescinded if two conditions are present: (1) another insurance coverage is discovered; and (2) the total insurance is in excess of the value of the property insured. Strict interpretation of the provision indicates that the general rule is that taking other insurance coverage is not prohibited provided that the total insurance is not in excess of the value of the property insured. §4. OTHER INSURANCE CLAUSE. Taking of another insurance policy over the same property may also be prohibited by stipulation in what is known as the “Other Insurance Clause.” §4.01. ALTERNATIVE FORMS. The other insurance clause may appear in different forms. These include the following: (1) A condition that states that procurement of additional insurance without the consent of the insurer renders void the policy i p s o f a c t o . 6 (2) A provision that requires the insured to disclose the existence of any other insurance on the property. Otherwise, the contract may be avoided for material concealment. (3) A warranty that there is no other existing insurance over the same property. a. The standard fire policy used by insurance companies usually contains a condition that the insured shall give notice to the insurer of any insurance or insurances already effected, or which may subsequently be effected covering any property or properties

B

Sections 93 and 94,1.C. Ulpiano Sta. Ana v. Commercial Union Assurance Company, G.R. No. L-32889, November 20, 1930. 6

CHAPTER 9 DOUBLE INSURANCE

279

and unless such notice is given and the particulars of such insurance or insurances is stated, all benefits under the policy shall be forfeited. §4.02. RATIONALE. The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a peril like fire would be profitable to the insured.7 The “Other Insurance Clause” prevents the increase of the moral hazard explained in the introduction to this Chapter. §4.03. VALIDITY. The validity of a clause in a fire insurance policy to the effect that the procurement of additional insurance without the consent of the insurer renders i p s o f a c t o the policy void is well-settled. 8 The law also authorizes insurance companies to terminate the contract at any time, at its option, by giving notice and refunding a ratable proportion of the premium. It was held that an additional insurance, unless consented to, or unless a waiver was shown, i p s o f a c t o avoided the contract, and the fact that the company had not, after notice of such insurance, cancelled the policy, did not justify the legal conclusion that it had elected to allow it to continue in force. The terms of the policy which required the insured to declare other insurances, the statement in question must be deemed to be a statement (warranty) binding on both insurer and insured, that there was no other insurance on the property. The annotation must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitled the insurer to rescind. Such misrepresentation is fatal. The materiality of non-disclosure of other insurance policies is not open to doubt.9 a. The rule upholding the validity of the “other insurance clause” is longstanding. Thus, the Supreme Court reviewed the prevailing jurisprudence in one case:10

7

Pioneer Insurance and Surety Corporation v. Olivia Yap, G.R. No. L-36232, December 19,

1974. 8 Ulpiano Sta. Ana v. Commercial Union Assurance Company, G.R. No. L-32889, November 20, 1930. ^oneer Insurance and Surety Corporation v. Oliva Yap, ibid..; General Insurance & Surety Corporation v. Ng Hua, G.R. No. L-14373, January 30, 1960. 10 Union Manufacturing Company, Inc. and Republic Bank v. Philippine Guaranty Co., Inc., G.R. No. L-27932, October 30, 1972; see also Sta. Ana v. Commercial Union Assurance Company, Ltd., 55 Phil. 329; General Insurance & Surety Corporation v. Ng Hua, G.R. No. L14373, January 30, 1960; Union Manufacturing Company, Inc. v. Philippine Guaranty Co., Inc., G.R. No. L-27932, October 30, 1972.

280

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

“It is to S a n t a A n a v . C o m m e r c i a l U n i o n A s s u r a n c e Co., a 1930 decision, that one turns to for the first explicit formulation as to the controlling principle. As was made clear in the opinion of this Court, penned by Justice Villa-Real: “Without deciding whether notice of other insurance upon the same property must be given in writing, or whether a verbal notice is sufficient to render an insurance valid which requires such notice, whether oral or written, We hold that in the absolute absence of such notice when it is one of the conditions specified in the fire insurance policy, the policy is null and void.” The next year, in A n g G i o k C h i p v . S p r i n g f i e l d F i r e & M a r i n e I n s . C o . , the conformity of the insured to the terms of the policy, implied from the failure to express any disagreement with what is provided for, was stressed in these words of the p o n e n t e , Justice Malcolm: “It is admitted that the policy before Us was accepted by the plaintiff. The receipt of this policy by the insured without objection binds both the acceptor and the insured to the terms thereof. The insured may not thereafter be heard to say that he did not read the policy or know its terms, since it is his duty to read his policy and it will be assumed that he did so.” As far back as 1915, in Y o u n g v . M i d l a n d T e x t i l e I n s u r a n c e C o m p a n y , it was categorically set forth that as a condition precedent to the right of recovery, there must be compliance on the part of the insured with the terms of the policy. As stated in the opinion of the Court through Justice Johnson: “If the insured has violated or failed to perform the conditions of the contract, and such a violation or want of performance has not been waived by the insurer, then the insured cannot recover. Courts are not permitted to make contracts for the parties. The function and duty of the courts consist simply in enforcing and carrying out the contracts actually made. While it is true, as a general rule, that contracts of insurance are construed most favorably to the insured, yet contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous they must be taken and understood in their plain, ordinary and popular sense.” More specifically, there was a reiteration of this S a n t a A n a ruling in a decision by the then Justice, later Chief Justice, Bengzon, in G e n e r a l I n s u r a n c e & S u r e t y C o r p . v . N g H u a . Thus: “The annotation then, must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitles the insurer to rescind. ( S e c . 6 9 , I n s u r a n c e A c t ) Such misrepresentation is fatal in the light of our views in S a n t a A n a v . C o m m e r c i a l U n i o n A s s u r a n c e C o m p a n y , L t d . . . . The materiality of non-disclosure of other insurance policies is not open to doubt.” As a matter of fact, in a 1966 decision, M i s a m i s L u m b e r C o r p . v . C a p i t a l I n s . & S u r e t y C o . , I n c . , Justice J.B.L. Reyes, for this Court, made manifest anew its adherence to such a principle in the face of an assertion that thereby a highly unfavorable provision for the insured would be accorded recognition. This is the language used: “The insurance contract may be rather ponerous (‘one sided,’ as the lower court put it), but that in itself does not justify the abrogation of its express terms, terms which the insured accepted or adhered to and which is the law between the contracting parties.” (Citations omitted.)

CHAPTER 9 DOUBLE INSURANCE

281

§4.04. ADDITIONAL INSURANCE. An interesting case involving the application of the “Other Insurance Clause” is E m i l i o G o n z a l e z L a ’ O v . Y e k T o n g L i n F i r e & M a r i n e I n s u r a n c e C o . , L t d . 1 1 where the defendant insurer Yek Tong Lin Fire & Marine Insurance Co., Ltd. (hereinafter referred to as YTL) denied the claim for the amount of two (2) insurance policies totaling P100,000.00 upon leaf tobacco belonging to the plaintiff, which was damaged by the fire that destroyed the building on Soler Street No. 188, where said tobacco was stored, on January 11, 1928. The claim was denied on the ground that the insured-plaintiff obtained additional insurance coverage totaling P190,000.00 for the tobacco. At the time of the fire, the plaintiff had in the warehouse, more than 6,200 bales of leaf tobacco worth over P300,000.00 or more than the sum total of all the insurances taken out with all the insurance companies. YTL argued that the claim was validly denied because the plaintiff failed to notify the defendant corporation in writing, of other insurance policies obtained by him, he has violated Article 3 of the conditions of the policies in question, thereby rendering these policies null and void. Article 3 of the conditions of the policies in question prescribes: “ART. 3. Any insurance in force upon all or part of the things insured must be declared in writing by the insured and he should cause the company to insert or mention it in the policy, and without such requisite said policy will be regarded as null and void, and the assured deprived of all rights of indemnity in case of loss.” (1) The Supreme Court rejected the argument stating that “it may be said that the tobacco insured in the other companies was different from that insured with the defendant, since the number of bales of tobacco in the warehouse greatly exceeded that insured with the defendant and the other companies put together. And according to the doctrine enunciated in 2 6 C o r p u s J u r i s 1 8 8 , to be insurance of the sort prohibited the prior policy must have been insurance upon the same subject matter, and upon the same interest therein.” In other words, the Supreme Court believed that the “Other Insurance Clause” cannot be invoked if the other insurance is only an additional insurance to cover the remaining value of the goods. a. No recent case involves the very same issue involved in the G o n z a l e z L a ’ O case cited above. The doctrine in the same case has not yet been abandoned. However, it is believed that if a similar case will be resolved by the Supreme Court, the ruling in the G o n z a l e z L a ’ O case should already be abandoned because even

n

G.R. No. 33131, December 30, 1930.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

282

if the insurance coverage is less than the total value of the goods, the insurance should still be considered an insurance over the same subject matter. There was no physical segregation of the portion of the goods that were insured, hence, the insurance is over the undivided or ideal portion of the goods.

PROBLEMS: 1.

Pedro Reyes applied for a fire insurance on his house. In his application, it was asked the following question: “Is the house insured with another insurance company? If so, how much?” His answer was “No.” The fact, however, was that the house had been insured with the FGU for P100,000.00. The application was approved and made a part of the policy. Subsequently, a fire occurred in the neighboring house, and spread to the house of Pedro Reyes which was completely burned. Demand for payment having been refused by the insurer, Pedro Reyes filed a complaint. May he recover? Reason. A:

2.

No. Pedro Reyes may not recover because he was guilty of con cealment. The existence of another insurance is a material fact that should have been disclosed to the insurer. Section 26 of the Insurance Code defines concealment as “a neglect to communicate that which a party knows and ought to communicate.” Section 27 also of the Insurance Code, provides further that “a concealment whether intentional or unintentional entitled an injured party to rescind a contract of insurance.” In the case at bar, there was concealment of the fact that his house was already insured with FGU. Therefore, the Insurance Company may rescind the contract, and Pedro Reyes may no longer recover.

A fire insurance policy in favor of the insured contained a stipulation that the insured shall give notice to the company of any insurance already effected or which may subsequently be effected, covering the property insured and unless such notice be given before the occurrence of any loss, all benefits shall be forfeited. The face of the policy bore the annotation “Co-insurance declared.” The things insured were burned, it turned out that several insurance were obtained on the same goods for the same term. The insurer refused to pay on the ground of concealment. May the insured recover? Reason. A:

Yes, the insured may recover from the insurer. The insurer cannot claim that there was material concealment. The problem states that the face of the policy bore an annotation, “Co- insurance declared.” This annotation is notice to the insurer as to the existence of other insurance contracts on the property insured. The insurer should have inquired about the details of such other insurance if it was really concern about them. ( G e n e r a l I n s u r a n c e a n d S u r e t y C o r p o r a t i o n v . N g H u a , G . R . N o . L - 1 4 3 7 3 , J a n u a r y 3 0 , 1 9 6 0 )

CHAPTER 9 DOUBLE INSURANCE

283

§5. OVER-INSURANCE BY DOUBLE INSURANCE. There is over-insurance if the insured takes out an insurance over the property insured in an amount which is in excess of the value of his insurable interest. a. Over-insurance may exist even if there is only one insurer and one policy. For example, if Mr. A owns a house valued at P500,000.00, there is over-insurance if he insures it with ABC Corporation for P700,000.00. b. Over-insurance may likewise exist if there is double insurance. For example, Mr. X owns a house valued at P400,000.00 and he insures it with ABC Insurance Corporation against fire for P300,000.00 and XYZ Insurance Corporation against fire for P300,000.00. There is over-insurance by double insurance. c. It does not follow, however, that there will be overinsurance if there is double insurance. In fact, there can be underinsurance even if there is double-insurance. For example, Mr. X owns a house valued at P400,000.00 and he insures it with ABC Insurance Corporation against fire for P100,000.00 and XYZ Insurance Corporation against fire for P100,000.00. There is double insurance in this case but there is no over-insurance. The taking of another insurance without over-insurance is not a ground to rescind the policy under Section 64(f). §5.01. RULES IN CASE OF OVER-INSURANCE BY DOUBLE INSURANCE. If there is over-insurance by doubleinsurance, it is necessary to determine from whom and how much can the insured recover. It is also necessary to determine the rights of the insurers i n t e r s e . a. In determining the rights of the insured, one indispensable consideration is that an insurance contract is a contract of indemnity. Hence, the insured cannot recover more than what he lost. The insured is not supposed to profit from his loss even if he has two or more insurers. Thus, if there is over-insurance, he cannot recover beyond his loss. It is well to emphasize, however, that is true only with respect to property insurance because insurance over the life of a person is not a contract of indemnity and there cannot be overinsurance over the life of any person. b.

Section 96 of the Insurance Code provides the rules, v i z . :

284

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

SEC. 96. Where the insured in a policy other than life is over insured by double insurance: (a) The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; (b) Where the policy under which the insured claims is a valued policy, any sum received by him under any other policy shall be deducted from the value of the policy without regard to the actual value of the subject matter insured; (c) Where the policy under which the insured claims is an unvalued policy, any sum received by him under any policy shall be deducted against the full insurable value, for any sum received by him under any policy; (d) Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; (e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. a. As explained earlier, under Section 64 as amended by R.A. No. 10607, the policy can be rescinded if the insurer discovers that the insured took another insurance policy where the total coverage will exceed the value of the property insured. Thus, the rules under above-quoted Section 96 will apply if the there was prior consent of the insurers in taking the insurance or double insurance is not prohibited in the policy even if the total coverage is in excess of the value of the property. b. The wording of Section 96(b) was modified by R.A. No. 10607. Originally, Section 9412 provides that “where the policy under

12 Section 94 is the provision of Insurance Code of 1978 that was later renumbered to Section 96 by R.A. No. 10607.

CHAPTER 9 DOUBLE INSURANCE

286

which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured ” Now' the provision simply states that “where the policy under w'hich the insured claims is an unvalued policy, any sum received by him under any policy shall be deducted against the full insurable value, for any sum received by him under any policyr Thus, the insurer will already deduct the amount that was previously received by the insurer. c. Similarly, Section 96(c) was modified because under the old provision, Section 94(c),13 provides that “where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy.” Now, Section 96(c) simply states that “in an unvalued policy, any sum received by the insurer under any policy shall be deducted against the full insurable value, for any sum received by him under any policy ” §6. COLLATERAL SOURCE RULE. Under the collateral source mile, the defendant is prevented from benefiting from the plaintiffs receipt of money from other sources. Thus, the question is whether or not a person who recovered from an insurer the proceeds of a life insurance policy, can still recover from other sources. The Supreme Court explained the rule in Mitsubishi Motors Philippines Salaried Employees Union

(MMPSEU) v. Mitsubishi Motors Philippines Corp.:14 “Under this rule, if an injured person receives compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the damages which he would otherwise collect from the tortfeasor. In a recent Decision 40 by the Illinois Supreme Court, the rule has been described as “an established exception to the general rule that damages in negligence actions must be compensatory.” The Court went on to explain that although the rule appears to allow a double recovery, the collateral source will have a lien or subrogation right to prevent such a double recovery. In Mitchell v. Haidar, the collateral source rule was rationalized by the Supreme Court of Delaware: The collateral source rule is ‘predicated on the theory that a tortfeasor has no interest in, and therefore no right to benefit from monies received by the injured person from sources unconnected with the defendant’. According

13

Insurance Code of 1978. G.R. No. 175773, June 17, 2013. M

286

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

to the collateral source rule, ‘a tortfeasor has no right to any mitigation of damages because of payments or compensation received by the injured person from an independent source.’ The rationale for the collateral source rule is based upon the quasipunitive nature of tort law liability. It has been explained as follows: The collateral source rule is designed to strike a balance between two competing principles of tort law: (1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a defendant is liable for all damages that proximately result from his wrong. A plaintiff who receives a double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer. Thus, the tortfeasor is required to bear the cost for the full value of his or her negligent conduct even if it results in a windfall for the innocent plaintiff.”

a. Thus, “the collateral source rule applies in order to place the responsibility for losses on the party causing them. Its application is justified so that ‘the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of contracts or other relations that may exist between the injured party and third persons.’ Thus, it finds no application to cases involving no-fault insurances under which the insured is indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the losses.” b. It was earlier opined that it is believed that the Collateral Source Rule applies in cases involving life insurance. It is submitted that the amount of life insurance received by the insurance beneficiary of the deceased victim of t o r t should be ignored even if the beneficiary is the same plaintiff in the t o r t case. The value of the life of the deceased can never be quantified and any amount received as proceeds of life insurance can never be equal to the value of the life of the victim. 15 On the other hand, the Collateral Source Rule does not apply if damage consists in damage to property that is covered by an insurance policy. The insurer shall indemnify the insured for the loss and shall be subrogated to the rights of the insured.16

15

Timoteo B. Aquino, Torts and Damages, 2016 Ed., p. 16 817. Ibid.

CHAPTER 10 REINSURANCE Prof. C.H. Golding observed that it is a reasonably safe assumption that reinsurance began to be practiced immediately after the beginning of the practice of insurance. The earlier recorded example of reinsurance was in the year 1370 where the insurer of a voyage from Genoa to Sluys reinsured part of the voyage, that is, from Cadiz to Sluys and retained the part of the voyage through the Mediterranean. 1 On the other hand, the first known reinsurance treaty was entered into in France in 1821. 2 Since then, the number of reinsurance transactions grew exponentially in direct proportion to the growth of direct insurance business. In the meantime, the rules that apply to reinsurance had undergone a virtual metamorphosis. §1. DEFINITION. The Insurance Code defines reinsurance as follows:

SEC. 97. A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance. a. A reinsurance transaction is defined as “an agreement between two parties, called the reinsured (ceding company, a term also often used — especially in relation to reinsurances on a proportional basis) and reinsurer, respectively, whereby the reinsurer agrees to accept a certain fixed share of the reinsured’s risk upon terms set out in the agreement.”3 The original insurer, who, having issued a policy to an insured to cover a certain risk, desires to relieve itself of part thereof. 4 It cannot exist without an original insurance coverage.

*C.H. Golding, Golding: The Law and Practice of Reinsurance, 5th Ed., 1987, p. 2, edited by K.V. Louw, hereinafter referred to as “Golding.” 2 Golding, ibid. 3 Golding, p. 7. 4 Golding, ibid. 287

288

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§1.01. NATURE. Reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage/' The peril insured against is the risk that the insurer will suffer a loss when it will be required to pay the original insured. The risk of damage to the property insured by the insurer (reinsured) is not assumed by the reinsurer although the same damage triggers the liability of the reinsurer. The importance of reinsurance was explained in this wise: “Reinsurance plays an essential role in the strategic decisions of insurers to enter or leave the marketplace for insurance products. Reinsurance is frequently used to increase an insurer’s capacity to write new business in a marketplace. By ‘laying-off a portion if a risk on another insurer, a ceding insurer is able to reduce the reserves it is required to maintain and increase the assets on is balance sheet, thus freeing the ceding insurer to issue additional policies.”* 6 §1.02. DISTINCTIONS. Reinsurance should be distinguished from doubleinsurance which involves the same insured and the same risk and subject matter. It should also be distinguished from the co-insurance clause under which the risk of loss of a percentage in the value of the insured property is assumed by the insured himself. The insured absorbs the loss to the extent of the deficiency in the insurance of the insured property. The insurer will be liable only for such proportion of the loss or damage as the amount of the insurance bears to the percentage of the full value of the property insured. §2. PARTIES. The parties to the contract are the original insurer (now called the reinsured) and the reinsurer. The reinsured is also called the “ceding company” or the “direct-writing company.” A reinsurer of the reinsurer is called “retrocessionaire.” a. No privity between original insured and reinsurer. Section 100 of the Insurance Code makes it clear that “the original insured has no interest in a contract of reinsurance.” Thus, the original insured cannot file an action to recover from the reinsurer even if he has difficulty in recovering from the original insurer.

6 Section 99, I.C.; See Circular Letter No. 2014-42 dated September 30, 2014 as well as Circular Letter Nos. 12-2008, 14-2008 and 12-2009 for the Rules and Regulations on Reinsurance Transactions. 6 John K. DiMugno and Paul E.B. Glad, California Insurance Law Handbook, 2010 Ed., p. 1911 citing Travelers Indemnity Co. v. Gillespie, 50 Cal. 3d 82 (1990).

CHArrRK 1 0 REINSURANCE

vm

There is no privity between the original insured and the reinsurer. Reinsurance is therefore the insurance of an insurance.7 b. Direct recourse against reinsurer. The original insured may be allowed to directly sue the reinsurer if the reinsurance policy contains a stipulation p o u r a u t r u i in favor of the original insured which is allowed under the second paragraph of Article 1311 of the New Civil Code. 8 The stipulation must be clear and unmistakable that such right is given to the original insured. However, it is important to note that notwithstanding such provision allowing direct recourse by the original insured against the reinsurer, the original insured’s right to sue the original insurer (re-insured) directly and solely would not be affected or curtailed in any way. without prejudice to the insurer in turn filing a third party complaint against the reinsurer.9 (1) It is to the advantage of the insured that a stipulation p o u r a u t r u i is inserted in the reinsurance policy. The original insured is, from a purely economic standpoint, vitally interested in the practice of reinsurance. “Since the reinsured depends on the reinsurer for the payment of its share of loss, it follows that property owners can be vitally affected, depending on the financial strength of the reinsurer. As a matter of fact, reinsurers have insured the insurance placed by the property owner with the original (direct-writing) company, and failure on the reinsurer’s part to meet a loss may, in turn, cause the direct-writing insurer to fail in meeting its liability to the insured/’10 c. Reinsurer not a party in an action against the insurer. Since the reinsurer is not a party to the original insurance contract, the reinsurer cannot intervene as matter of right in an action filed by the original insured against the insurer. In one case, the reinsurer filed a motion for intervention arguing that intervention was proper because it was obliged to pay any amount that may be paid under the original policies. The Supreme Court declared that the reinsurer need not intervene because the said reinsurer can

’Communication and Information Systems Corporation v. Mark Sensing Australia Pty. Ltd., G.R. No. 192159, January 25, 2017. 8 Artex Development Co., Inc. v. Ellington Insurance, Co., Inc., G.R. No. L-29508, June 27, 1973, 9 Ibid. 10 S.S.Huebner, Kenneth Black, Jr. & Bernard L. Webb, Property and Liability Insurance, 4th (1996) Ed., p. 610, hereinafter referred to as “Huebner, Black & Webb.’

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

290

avail itself of any defense that the reinsured may have under the original policy. In other words, the reinsurer is not precluded from insisting upon proper proof that a loss, strictly within the terms of the original policy, has taken place.11 d. Assignment. The original insured may likewise directly sue the reinsurer if the insurer-reinsured assigns the proceeds of the reinsurance policies to the original insured.12 This presupposes that the right to recover already accrued and the original insured is the assignee of such right against the reinsurer.

PROBLEM: 1. X Insurance Company, a domestic corporation, entered into a reinsurance treaty with Y Reinsurance Company, foreign corporation. Y does not have any office in the Philippines and it does not likewise have agents. The reinsurance treaty was entered into through an international broker. Among the policies that X ceded under the treaty is the liability under a fire insurance policy obtained by YCM. Thereafter, the property insured by YCM was razed by fire and X partially paid YCM under the original policy. In addition, X assigned all the proceeds of the reinsurance policies. X thereafter filed a case against Y. Service of summons was made through the Insurance Commission. Y argues summons were invalidly served and that the court has no jurisdiction over its person because it is a foreign corporation not doing business in the Philippines. X rebutted the argument of Y stating that Y was doing business in the Philippines because all the original insurance contracts that were reinsured were executed in the country and all original insured are residents of the Philippines. Whose argument is correct? A:

The argument of Y is correct. It is not doing business in the Philippines. It does not appear at all that Y had performed any act which would give the general public the impression that it had been engaging, or intends to engage in its ordinary and usual business undertakings in the country. The reinsurance treaties between X and Y was made through an international insurance broker, and not through any entity or means remotely connected with the Philippines. Moreover, there is authority to the effect that a reinsurance company is not doing business in a certain state merely because the property or fives which

n Ivor Robert Dayton Gibson v. Hon. Pedro A. Revilla, et al., G.R. No. L-41432, July 30, 1979; See Communication and Information Systems Corp. v. Mark Sensing Australia Pty. Ltd., G.R. No. 192159, January 25, 2017. 12 See Avon Insurance, et al. v. Court of Appeals, et al., G.R. No. 97642, August 29, 1997.

DOUBLE-INSURANCE REINSURANCE 1. The insurer remains in such capacity only. 1. The insurer becomes an insured (reinsured) in the reinsurance policy. 2. There is only one insured. 2. There are two separate insured. 3. The subject matter is the property insured. 3. The subject matter is the liability of the insured. 4. Involves separate interests. 4. The same interest is insured. 5. Same peril is insured against in separate 5. Different perils are insured against in separate policies. policies.

REINSURANCE 1. Two separate contracts are involved.

CO-INSURANCE 1. There is only one contract.

2. The liability is fixed in a separate contract between different parties.

2. The obligation on the part of the insured is fixed by law or in a clause stipulated upon. 3. The insured will not shoulder part of the3. loss The insured will share in the loss contemplated contemplated by the reinsurance contract. by the original contract.

4. Not mandated by law in marine insurance.

4. Co-insurance is provided by law in marine insurance.

292

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§4. FUNCTIONS. From the perspective of the original insurer (reinsured), the primary function of reinsurance is to absorb those surplus amounts on each risk accepted by the reinsured which go beyond what it can safely retain for its own account.13 Reinsurance is a method whereby an original insurer distributes its risks by giving off the whole or some portion thereof to another insurer, with the object of reducing the amount of its possible loss.14 a. The significant functions include the following: (1) It gives insurers the benefit of greater stability resulting from a widespread business. “By accepting many risks and scaling down by reinsurance, all those that are larger than the normal carrying capacity of the ceding company justifies, uncertainty is reduced through the application of the law of large numbers.” 15 In catastrophic losses, the reinsured is likewise protected. (2) “Reinsurance enables insurers to have a single risk capacity to accommodate policies of large amounts, with the knowledge that they can protect themselves against staggering losses by adjusting risks in such a manner as to reduce the probability of serious inroad into their capital and surplus.”16 §5. KINDS. There are two basic types of reinsurance transactions, namely: (1) Facultative Reinsurance; and (2) Automatic Treaty. §5.01. FACULTATIVE REINSURANCE. Facultative reinsurance is an optional, case-by-case method used when the ceding company receives an application for insurance. The reinsurer is under no obligation to accept the insurance. Its advantage is flexibility since the reinsurance contract can be made to fit a particular case.17 Each risk to be reinsured is individually offered to and accepted by or declined by the reinsurer.18 a. The term “facultative” is used in insurance contracts merely to define the right of the reinsurer to accept or not to accept participation in the risk insured. But once the share is accepted, the obligation is absolute and the liability assumed thereunder can

13

Golding, p. 18.

14

Golding, p. 17. Huebner, Black & Webb, pp. 610-611. 16 Huebner, Black & Webb, p. 611. 17 Redja, p. 546. 18 Golding, p. 36. 16

CHAPTER 10 REINSURANCE

293

be discharged by one and only way — payment of the share of the losses.19 b. A facultative reinsurance contract is not the equivalent or a type of facultative obligation contemplated under the New Civil Code. There is a facultative obligation under the New Civil Code when only one prestation has been agreed upon but the obligor may render another in substitution. 20 There is no alternative nor substitute prestation in reinsurance. §5.02. TREATY. Automatic treaty involves a prior agreement between the insurer and the reinsurer that the reinsurer is compelled to accept what is being ceded by the insurer. It may also be provided that the insurer is compelled to cede a particular type of insurance to the reinsurer. Automatic treaty may be “Quota-share Treaty,” “Surplus-share Treaty,” “Excess-of-loss Treaty,” and “Reinsurance Pool.”21 (1)

Q u o t a - s h a r e T r e a t y — The insurer and the reinsurer agree to share losses and premiums based on some proportion.

(2)

S u r p l u s - s h a r e T r e a t y — The reinsurer accepts in excess of the ceding company’s retention limit up to a maximum amount.

(3)

E x c e s s - o f - L o s s T r e a t y — Losses in excess of the retention limit are paid by the reinsurer up to some maximum limit. This is often used for catastrophic loss.

(4)

R e i n s u r a n c e P o o l — It is an organization of insurers that underwrites reinsurance on a joint basis.

§6. INSURABLE INTEREST. Like all types of insurance contracts, the presence of insurable interest is indispensable in reinsurance. In reinsurance, the reinsured has no interest in the property or life that is originally insured. However, the requirement of insurable interest is complied with by the fact that the reinsured has issued the original policy and accepted liability to its original insured.22

19 Equitable Insurance and Casualty Company, Inc. v. Rural Insurance and Surety Co., Inc., G.R. No. L-17436, January 31, 1962. 20

Article 1206, New Civil Code. Redja, pp. 546-547.

21

22

Golding, p. 8.

ESSENTIALS OF INSURANCE LAW

294

^Republic Act No. 10607 with Notes on Pre-Need Act)

§7. PREMIUM. The re-insured is required to pay the premium to the reinsurer. The same rules that apply ordinary insurance policies apply to reinsurance contracts. Even with respect to reinsurance contracts, the re-insurer is entitled to payment of t he premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of reinsurance issued by the re-insurance company is valid and binding unless and until the premium thereof has been paid. However, the exceptions are applicable as well. Hence, the re-insured is also allowed to pay the reinsurance premiums on installment basis.23 §8. OBLIGATION. The reinsurer is obligated to pay the insurer or ceding company the moment the latter is exposed to liability. For example, if the building that was insured was destroyed and the original insured demanded payment from the insurer, the insurer can in turn already demand payment from the reinsurer. At that time, the reinsured is already exposed to the peril insured against in the reinsurance contract. §8.01. MEASURE OF LIABILITY. Following the basic principle in insurance, a reinsurance contract is a contract of indemnity. The extent of the liability of the reinsurer is measured by the extent of the liability of the reinsured under the original policy and the amount of the reinsurance. The reinsurance cannot exceed the amount of the liability of the insurer under the original policy. If the insurer entered into an amicable settlement with the original insured with the latter accepting an amount lesser than the face value of the original policy, the reinsurer should likewise be liable for such lesser amount even if the reinsurance covers the entire face value of the policy. This is consistent with the characteristic of reinsurance as an insurance against liability. The limit is the extent of the liability of the reinsured. §8.02. GOOD FAITH. Reinsurance is also a contract u b e r r i m a e f i d a e . The doctrine of good faith that applies to direct insurance is equally applicable to reinsurance. It has been stated that the foundation of reinsurance are the following:24 * (1)

Full information, so far as possessed by the reinsured, as to the risk on which the reinsurance is requested.

23 Government Service Insurance System v. Prudential Guarantee and Assurance, Inc., G.R. Nos. 165585 and 176982, November 20, 2013. ^Golding, p. 9.

CHAPTER 10 REINSURANCE

(2)

296

Full information as to the amount retained by the reinsured on the identical property which the reinsurance is requested.

a. Duty to communicate. Consistently, the reinsured has a specific obligation to disclose all representations and all the knowledge and information he possesses under Section 98 which states:

SEC. 98. Where an insurer obtains reinsurance, except under automatic reinsurance treaties, he must communicate all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk. b. Therefore, the insurer or ceding company in facultative reinsurance must communicate (1) representations of the original insured, and (2) knowledge and information he possesses whether previously or subsequently acquired. These facts may affect the decision of the reinsurer to accept the ceded insurance. c. “The duty of disclosure in reinsurance business is qualified by one important fact, that is, it is transacted between parties who are equally experts in their business. This will sometimes relax to a minor degree the duty imposed upon the reinsured.”25 d. Duty to communicate in a treaty. In the case of an automatic treaty, the reinsurer will no longer decide whether or not to accept the insurance. Hence, representations or other information need not be disclosed by the insurer because the reinsurer is compelled to accept what is being ceded. “Under this method, it may not be possible for the reinsured to give full information as to the nature of the risk to be reinsured or its own retention, in respect to every cession to be made under a treaty. To have to do this would go a long way to defeat the objects for which this method of reinsurance was devised.”26 (1) However, the duty of good faith remains in automatic treaty. “It is incumbent upon the reinsured to make a full disclosure of all the material facts in the negotiations

2 6

G

296

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

leading up to the completion of the contract.” 27 In addition, in the general operation of the treaty, the reinsured is bound to exercise the utmost good faith towards its reinsurer.28 (2) Thus, before entering into a treaty, the reinsurer is necessarily interested in acquiring general knowledge of the reinsured and the latter must give information that relates to the following: ( i ) The standing and reputation of the reinsured; ( i i ) The experience and quality of its management; (iii) The general underwriting policy of the reinsured; ( i v ) The company’s limit of retention and their relationship with the total premium income; and ( v ) The different areas from which the business is derived.29 e. Bordereau. In this connection, it is well to note that in a form called Bordereau, the policy form shows loss history and premium history with respect to specific risks.30 The reinsurer uses this information to establish the reinsurance premium. §9. CANCELLATION. Reinsurance policies may be cancelled on the same grounds as ordinary insurance policies. For example, there can be cancellation of policies on the ground of nonpayment of premium or material misrepresentation or fraud. a. Cancellation of the reinsurance treaty does not automatically result in the cancellation of the reinsurance contracts entered into pursuant thereto. Reinsurance Contracts may continue despite the cancellation of the treaty.31 PROBLEM: 1. Six (6) reinsurance contracts were entered into between insurer X and reinsurer Y. Of the six (6) reinsurance contracts two (2) contain provisions “that in the event of termination of this Agreement..., the liability of Y under current cessions shall c o n t i n u e i n f u l l f o r c e a n d e f f e c t u n t i l t h e i r n a t u r a l e x p i r y ...;” and the 4th paragraph of Article VI of the Personal Accident Reinsurance Treaty states: “4. On the termination of this Agreement from any cause whatever, the liability of the REINSURER (Y) under any current cession including any

27

Golding, p. 11.

™Ibid. ^Golding, p. 22. ^Rubin, p. 58. 31 Fieldmen’s Insurance Company, Inc. v. Asia Surety and Insurance Company, Inc., G.R. No. L-23447, July 31, 1970.

CHAPTER 10 REINSURANCE

297

amounts due to be ceded under the terms of this Agreement and which are not cancelled in the ordinary course of business s h a l l c o n t i n u e i n f u l l f o r c e u n t i l t h e i r e x p i r y unless the COMPANY (X) shall, prior to the thirty-first December next following such notice, elect to withdraw the existing cessions ...” The two reinsurance contracts have a term of one year which expires on June, 2007. The Reinsurance Treaty was terminated on March 6, 2007. Will the two reinsurance contracts remain effective despite the termination of the treaty? A:

Yes, the two (2) contracts shall remain in force until June, 2007. The provisions in the contracts quoted in the problem clearly and expressly recognize the continuing effectivity of policies ceded under them for reinsurance notwithstanding the cancellation of the contracts themselves. Insofar as the two (2) reinsurance agreements with the express stipulations afore-quoted are concerned, Y cannot validly claim that the cancellation or the termination of the treaty carried with it i p s o f a c t o the termination of all reinsurance cessions thereunder. Such cessions continued to be in force until their respective dates of expiration. Thus, Y cannot avoid liability which arose by reason of a loss covered by the original policies which occurs before June, 2007. ( F i e l d m e n ’ s I n s u r a n c e C o m p a n y , I n c . u . A s i a S u r e t y a n d I n s u r a n c e C o m p a n y , I n c . , G . R . N o . L - 2 3 4 4 7 , J u l y 3 1 , 1 9 7 0 )

CHAPTER 11 MARINE INSURANCE Marine insurance is said to be the oldest form of insurance. As trade and commerce developed necessitating shipment of goods from one place to another, primitive types of securities were developed to secure the vessels and cargoes. These eventually developed into what is known as marine insurance. It is an important tool in commerce and is often indispensably part of commercial credit transactions as one of the documents included in what is known as the commercial set.1

§1. DEFINITION. The term marine insurance cannot be given a simple definition; it has no unified conception. One might suppose that this type of insurance is limited to insurance that secures vessels and its cargoes against the perils of navigation. However, the present law does not limit marine insurance to the risks of navigation. It is well to quote Section 101 of the Insurance Code which defines Marine Insurance by enumeration:

SEC. 101. Marine Insurance includes; (a)

Insurance against loss of or damage to:

(1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for ship-

lf The commercial set usually includes the bill of lading, sight draft, and evidence of insurance. They are tender documents that are being used in letters of credit transactions.

298

CHAPTER 11 MARINE INSURANCE

299

ment or while awaiting shipment, or during any delays, storage, transshipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks; (2) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); (3) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and (4) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways. (b) Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person. §2. KINDS OF MARINE INSURANCE. There are two basic types of marine insurance, namely: (1) Ocean Marine Insurance; and (2) Inland Marine Insurance. However, Section 101 of the Insurance Code is so broad that it even includes another type that is neither Ocean Marine Insurance nor Inland Marine Insurance, that is, Aircraft Hull Policy, which is a type of Aviation Insurance.

ESSENTIALS OF INSURANCE LAW

300

(Republic Act No. 10607 with Notes on Pre-Need Act)

§2.01. OCEAN MARINE INSURANCE. Ocean Marine Insurance is what was contemplated under the old Insurance Law 2 which defines marine insurance as “an insurance against risks connected with navigation, to which a ship, cargo, freightage, profits, or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time.” Broadly speaking, the different kinds of Ocean Marine Insurance may be grouped into four, v i z . : (1) (2)

Insurance over the vessel, craft and other conveyances; Insurance for the protection of the carrier against liability to others for loss or damage to the property of another;

(3)

Insurance over cargoes that are being transported; and

(4) Insurance over freight and income. a. Insurance over the vessel. The different insurance policies over the vessel include:3 (1) Hull Policies — Insurance for the loss or damage to the vessel and which are further classified according to the type of vessel and/or the nature of water that is being navigated. (2) Builder’s Risk Policy — This relates to the construction, conversion and repair of the hull. (3) Port Risk Only Policy — This covers perils to which the vessel might be exposed while in port including fire, collision, or damage while being transferred from one dock to another. (4) Fleet Policies — As the term implies, this is an insurance that covers a fleet of ships. (5)

Full Form Policy — This covers both total and partial loss.

(6) Total Loss Only Policy — As the term implies this insures total loss only and is resorted to for the purpose of obtaining favorable premium rate. b. Insurance against liability. The second group of Ocean Marine Insurance Policies protects the owner of the carrier or vessel against liability to other persons. These include:

Section 92, Act 2427. 3

See Huebner, Black & Webb, pp. 165 to 167.

CHAPTER 11 MARINE INSURANCE

301

(1) Running Down Clause — It is the clause in an insurance policy that insures liability for collision. (2) Marine Protection and Indemnity Insurance — It is an insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person.4 (3) Excess Protection and Indemnity Insurance — This insurance covers damage or liability in excess of the value of the ship which is the limit of liability under the real and hypothecary nature of maritime law and its consequent limited liability rule. Excess liability is an exception to the limited liability rule under Maritime law. This includes cases when the shipowner itself was negligent. (4) Water Pollution Liability — Insurance that covers the liability of the carrier in water pollution cases. c. Insurance over the cargo. Cargo Policies insure the goods that are being shipped against loss or damages. They may be classified depending on whether they are shipped in a river, lake, or whether it is coastwise shipping or international shipping. They may likewise be classified into: (1) Trip or Single Risk Cargo Policy — It covers a particular shipment of goods. (2) Open Cargo Policy — The shipper insures all its shipments as described in the policy irrespective of route, time of shipment, or class of approved vessel. There is automatic coverage. Thus, in one case, the Court said that a marine open policy is the blanket insurance to be undertaken by the insurer on all goods to be shipped by the consignee during the existence of the contract.5 (i) It was noted that a Marine Risk Note is not the Open Cargo policy. It merely constitutes an acknowledg-

4

Par. 2, Section 101, I.C.

5

Malayan Insurance Co., Inc. v. Jardine Davies Transport Services, Inc., G.R. No. 181300, September 18, 2009.

302

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

ment or declaration of the shipper about the specific shipment covered by the marine insurance policy, the evaluation of the cargo and the chargeable premium.6 d. Insurance over freightage and income. A Marine Insurance Policy may cover loss of freightage for failure to complete the voyage or delivery of the goods. Section 102 of the Insurance Code defines freightage as “all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others.” This also covers insurance policies for the loss of income contemplated in Section 105 of the Insurance Code. e. Compulsory Passenger and Cargo Liability Insurance — R.A. No. 9295 otherwise known as the “ D o m e s t i c S h i p p i n g D e v e l o p m e n t A c t o f 2 0 0 4 ” requires compulsory coverage for passengers and cargoes. Sections 14 and 15 thereof provide:

SEC. 14. Compulsory Insurance Coverage for Passenger and Cargo. — To meet its financial responsibility for any liability which a domestic ship operator may incur for any breach of the contract of carriage, every domestic ship operator shall be required to submit annually the following: (1) Adequate insurance coverage for each passenger in an amount to be computer in accordance with existing laws, rules and regulations, and the total amount of such coverage shall be equivalent to the total number of passenger accommodations being offered by the vessel; (2) Adequate insurance coverage for cargo in an amount to be computed in accordance with existing laws, rules and regulations, and the total amount of such coverage shall be equivalent to the total cargo capacity being offered by the vessel; and (3) If a domestic ship operator should offer both passenger and cargo service, then the total insurance coverage shall be in the total sum equivalent to that stipulated in paragraphs (1) and (2) of this section. 6 Malayan Insurance Co., Inc. v. Jardine Davies Transport Services, Inc., G-R No. 181300, September 18, 2009.

CHAPTER 11 MARINE INSURANCE

303

Provided, That if a domestic ship operator should operate more than one (1) vessels, the amount of insurance coverage required under this section, for purposes of providing financial capacity, shall be the amount equivalent to the total number of passenger accommodations, or total cargo capacity, or both, of the largest operating vessel which the domestic ship operator may have: Provided, further, That the total insurance coverage which may be required of any domestic ship operator shall not exceed the value of such vessel: Provided, finally, That adequate insurance coverage shall be obtained from any duly licensed insurance company or international protection and indemnity association. SEC. 15. Other Insurance Coverage. — The MARINA shall have the power to require every ship operator to obtain such other compulsory insurance coverage necessary to adequately cover claims for damages. (1) MARINA Rules. A compulsory insurance in the amount of P200,000.00 for each passenger is imposed on shipowners/operators. It is the shipowner/operator who is liable to pay the amount of P200,000.00 if no insurance is obtained or if the passenger is unmanifested. In addition, an insurance coverage for each survivor of a maritime accident in the amount of P50,000.00 is likewise required.7 (2) Period Covered. Memorandum Circular No. 40 provides the following rules on the period during which there is insurance coverage: The insurance should attach from the time the passenger sets foot on the boarding gangway or ladder leading to the deck, continues during the entire course of the voyage covered by the passenger ticket or coupon until the passenger shall have left the disembarking gangway or ladder at the port of destination. It is understood that the insurance shall continue during the time the vessel calls on designated or intermediate ports provided the passenger stays on board. Should any passenger in transit disembark at such

7 See Section 14.1, Rule V, IRR of R.A. No. 9295; MARINA Circular No. 40 and MARINA Circular 2009-18, Series of 2009.

3f>4

ESSENTIALS OF INSURANCE LAW Republic Act No. 10607 with Notes on Pre-Need Act)

designated or intermediate port not his destination, the insurance shall be deemed suspended as at the moment the passenger leaves the ladder or disembarking gangway and shall remain suspended whilst on land. The cover for such passenger is restored as at the moment he sets foot on the gangway or ladder to board the vessel. If the passenger continues to stay on board the vessel beyond the port of destination designated in his passenger ticket or coupon without leave from the vessel authorities, then the insurance shall cease, insofar as such passenger is concerned, as at the moment the vessel’s anchor is raised to commence the voyage beyond the passenger’s destination. In a ddition, if the vessel, whilst at sea, sinks or has to be abandoned because of fire, stranding, agrounding, or capsizing or other perils at sea, the insurance shall remain in full force until the passengers reach or are safely brought to the nearest port of refuge or safety. (3) Claims Settlement. The MARINA rules provide that the insurance company shall pay any claim for death or bodily injury sustained by a manifested passenger without the necessity of proving fault or negligence on the part of the car carrier. Immediate payment shall be upon presentation of the following proofs (a) In case of death — death certificate and evidence sufficient to establish the proper payee. For purposes of this coverage, a passenger is presumed dead if he is missing and cannot be located after six (6) months from date of casualty. For claims settlement purposes, therefore, a certification from the Philippine Coast Guard to the effect that the passenger is missing and cannot be located despite diligent search would suffice.* 9 (b) In case of bodily injury resulting in permanent disability — certification from a licensed physician.10 In case of dispute, the same shall be settled by the Insurance Commission in accordance with existing law.11 §2.02. INLAND MARINE INSURANCE. Marine insurance may likewise cover risks that do not relate to navigation itself

^Memorandum Circular No. 40. »Ibld. x0 Ibid. "Ibid.

CHAPTER 11 MARINE INSURANCE

305

or transit of goods and passengers. The growth of transportation facilities and the expansion of inland business and commerce saw the need for a new type of insurance that cannot be covered by ocean marine insurance and ordinary property or life insurance. Inland marine insurance include insurance over cargoes, infrastructure and floaters. a. Insurance policies over goods that are being imported or exported. These include: (a) Insurance over goods that are “being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment,” 12 and (b) Bailee policies for goods in storage. b. Insurance over means of and infrastructure for transportation and communications. These are policies that cover “bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways.”13 c. Personal Property Floaters.14 These policies are called floaters because the protection follows the insured properties wherever they may be found or located. The properties are covered whether they are in transit or in a fixed location. These floaters include insurance over “precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise.” 15 They also include “personal effects floaters” like those covering the personal effects of tourists and travelers. Likewise included are “wedding gift floaters,” “cold storage floaters,” “bicycle floaters,” and “mobile machinery and equipment floaters.” §2.03. AVIATION INSURANCE. Section 101 includes insurance over an aircraft as part of Marine Insurance. This includes different Aircraft Hull Policies which may take different forms defending on the type of aircraft. a. An Aircraft Hull Policy may cover all risks “ground and flight” which means that all damages both on the ground and in

12

Paragraph 1(a), Section 13 101,1.C. Paragraph 1(d), Section 14 Paragraph 1(c), Section 15

Ibid.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

306

flight are included. It may also cover insurance over the aircraft while the same is not in motion. §3. PERIOD COVERED. Marine insurance policies must state the period covered by the insurance.16 The period covered may likewise depend on the type of insurance involved. For instance, Ocean Marine Insurance may be further classified into "voyage policies” or “time policies.” “Voyage policies” cover the voyage to and from a particular place while “time policies” cover a stated period of time. Other terms or clauses used in policies that indicate the period covered by the insurance include the “Warehouse to Warehouse Clause,” the “Loss or Not Lost Clause,” and “At and From Clause ” a. Warehouse to Warehouse Clause. This simply means that the shipper is insured from the time his goods leave the warehouse until their delivery to the warehouse of the consignee. b. Lost or Not Lost Clause. The vessel or the shipment is covered even if they may have been destroyed already at the time of the issuance of the policy. This is an example of the situation contemplated under Section 2 of the Insurance Code that a past event may be insured against. The fact of loss should be unknown to the parties. c. “At and From Clause.” The coverage is effective while the vessel is at and from a designated port. If the policy covers only the vessel, “ f r o m ” the port, the period when the vessel is still at the port is not covered. §4. RISKS INSURED AGAINST. The peril insured against would depend on whether the policy is an “All Risk Policy” or a “Named Peril Policy.” §4.01. All RISK POLICY. An all risk policy insures against all conceivable causes loss or damage except as otherwise excluded in the policy or one due to fraud or intentional misconduct on the part of the insured. It covers all losses during the voyage whether arising from a marine peril or not. 17 The nature of an “all risk policy” was explained in one case18 in this wise:

16

1990.

Section 51,1.C. 17 Choa Tiek Seng v. Hon. Court of Appeals, et al., G.R. No. 84507, March 15,

18 Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R. No. 85141, November 28, 1989.

CHAPTER 11 MARINE INSURANCE

307

An “all risks policy” should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind. The terms “accident” and “accidental,” as used in insurance contracts, have not acquired any technical meaning. They are construed by the courts in their ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention and design, and which is unexpected, unusual and unforeseen. An accident is an event that takes place without one’s foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected. The very nature of the term “all risks” must be given a broad and comprehensive meaning as covering any loss other than a willful and fraudulent act of the insured. This is pursuant to the very purpose of an “all risks” insurance to give protection to the insured in those cases where difficulties of logical explanation or some mystery surround the loss or damage to property. An “all risks” policy has been evolved to grant greater protection than that afforded by the “perils clause,” in order to assure that no loss can happen through the incidence of a cause neither insured against nor creating liability in the ship; it is written against all losses, that is, attributable to external causes. The term “all risks” cannot be given a strained technical meaning, the language of the clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it extends to all damages/losses suffered by the insured cargo except (a) loss or damage or expense proximately caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or nature of the subject matter insured. Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an “all risks” policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured under an “all risks insurance policy” has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. As [the Court] held in P a r i s - M a n i l a P e r f u m e r y C o . v . P h o e n i x A s s u r a n c e C o . , L t d . , the basic rule is that the insurance company has the burden of proving that the loss is caused by the risks excepted and for want of such proof, the company is liable. Coverage under an “all risks” provision of a marine insurance policy creates a special type of insurance which extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of establishing that the loss was due to the peril falling within the policy’s coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. A marine insurance policy providing that the insurance was to be “against all risks” must be construed as creating a special insurance and extending to other risks than are usually contemplated, and covers all losses except such as arise from the

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

308

fraud of the insured. The burden of the insured, therefore, is to prove merely that the goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils. To impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the broad protective purpose of ‘all risks’ insurance.

a. An example of an all-risk clause that was c i t e d i n o n e c a s e i s a s f o l l o w s : 1 9 “5. This insurance is against all risks of loss or damage to the subject-matter insured but shall in no case be deemed to extend to cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be payable irrespective of percentage.’' b. The insurer may provide for exclusions from the “all-risk” clause. For example, the Marine Open Policy involved in one case provided certain exceptions like unsuitable packaging, inherent vice, delay in voyage and vessels unseaworthiness. In this case, however, the insurer had the burden of proving that the case falls under the exception. 20 The usual exclusions are the FC&S clause and the SR&CC clause. (1) Free of capture and seizure (FC&S) clause — This clause eliminates coverage for losses caused by war, piracy, or virtually any lawful or unlawful taking or seizure of the vessel or cargo.21 (2) Strikes, riots and civil commotion (SR&CC) clause — The policy excludes strikes, labor disturbances, riots, vandalism, sabotage or malicious acts. §4.02. NAMED PERILS POLICY. Alternatively, the insurance policy may specify the perils insured against in what is known as the “ P e r i l s C l a u s e . ” a. Examples. An example of a typical “Perils Clause,” which is a standard form in marine insurance policy, was involved in one case22 and reads:

19

supra.

Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng,

20 New World International Development (Phils.), Inc. v. NYK-FilJapan Shipping Corp., G.R. No. 171468, August 24, 2011. 21 Malayan Insurance Corporation v. The Hon. Court of Appeals & TKC Marketing Corporation, G.R. No. 119599, March 20, 1997. 22 Ibid.

CHAPTER 11 MARINE INSURANCE

309

“Touching the adventures which the said INSURER, are content to hear, and to take upon them in this voyage; they are of the Seas; Men- of*War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, Condition, or quality so ever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof. AND in case of any loss or misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the defense, safeguards, and recovery of the said goods and merchandises, and ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said INSURER, will contribute according to the rate and quantity of the sum herein INSURED. AND it is expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed by the said INSURER, that this writing or Policy of INSURANCE shall be of as much Force and Effect as the surest Writing or policy of INSURANCE made in LONDON. And so the said INSURER, are contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true Performance of the Premises; confessing themselves paid the Consideration due unto them for this INSURANCE at and after the rate arranged.”

b.

Another example of a “Perils Clause” reads:

“Touching the adventures which the said INSURER is content to bear and takes upon itself in this voyage, they are all of the seas, fires, assailing thieves, jettisons, barratry of the master and crew and all other like perils, losses and misfortunes that have or shall come to the hurt, detriment or damage of said goods or any part thereof.”

c. Perils of the Sea. By way of a historical background, it is well to note that marine insurance developed as an all-risk coverage, using the phrase “ p e r i l s o f t h e s e a ” to encompass the wide and varied range of risks.23 (1) The meaning of the expression “perils ... of the seas . . . and all other perils, losses, and misfortunes,” used in describing the risks covered by policies of marine insurance, has been the subject of frequent discussion. However, certain propositions relative thereto are now so generally accepted as 23 Malayan Insurance Corporation v. The Honorable Court of Appeals and TKC Marketing Corporation, supra.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

310

to be considered definitely settled. 24 “ P e r i l s o f t h e s e a ” refers only to fortuitous accidents or casualties of the seas. 25 They do not include the natural and ordinary action of the sea or wave which may result in what may be described as wear and tear. 26 “ P e r i l s o f t h e s e a ” are restricted to such accidents and misfortunes only as proceed from mere sea-damage, that is, such as arise, e x v i d i v i n a from stress of weather, winds and waves, from lightning and tempests, rocks and sands. 27 The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen.28 (2) The Supreme Court explained in T r a n s i m e x , C o . v . M a f r e A s i a n I n s u r a n c e C o r p . 2 9 that the phrase “perils of the sea” carries the same connotation. Although the term has not been definitively defined in Philippine jurisprudence, courts in the United States of America generally limit the application of the phrase to weather that is “so unusual, unexpected and catastrophic as to be beyond reasonable expectation.” Accordingly, strong winds and waves are not automatically deemed perils of the sea, if these conditions are not unusual for that particular sea area at that specific time, or if they could have been reasonably anticipated and foreseen.” There was no peril of the sea in the case because the vessel faced winds of only up to 40 knots. Hence, the winds were below the PAGASA mandated threshold of 45 to 50 knots to be considered a “storm” under Article 1734(1). The Court likewise explained: “As a side note, we observe that there are no definite statutory standards for determining the existence of a “storm” or “peril of the sea” that would exempt a common carrier from liability. Hence, in marine insurance cases, courts are constrained to rely upon their own understanding of these terms of art, or upon imprecise accounts of the speed of the winds encountered and the strength of the waves experienced by a vessel. To obviate uncertainty, it may be time for Congress to lay down specific rules to distinguish ‘storms’ and other ‘perils of the sea’ from the ordinary action of the wind and waves. While uniform measures of severity may prove difficult to establish, the

24 La Razon Social “Go Tiacoy Hermanos” v. Union Insurance Society of Canton, Ltd., G.R. No. 13983, September 1, 1919. 25

Dover, p. 262.

26

Ibid. citing Cargo ex Xantho v. Owners of Xantho, 1887. 21 Ibid. 28

La Razon Social v. Union Insurance Society of Canton, supra. G.R. No. 190271, September 14, 2016.

29

CHAPTER 11 MARINE INSURANCE

311

legislature may consider providing more detailed standards to be used by the judiciary in resolving maritime cases. These may include wind velocity, violence of the seas, the height of the waves, or even the expected weather conditions in the area involved at the time of the incident.”

d. Distinguished from Perils of the Ship. It is also well- settled that a loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship’s owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the “ p e r i l o f t h e s h i p . "The insurer undertakes to insure against perils of the sea and similar perils, not against perils of the ship.30 (1) For example, the entrance of the sea water into the ship’s hold through the defective pipe was not due to any accident which happened during the voyage, but to the failure of the ship’s owner properly to repair a defect, the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which results from perils of the sea.31 (2) Perils of the sea likewise include the rusting of steel pipes that are being transported, caused by the toll on the cargo of the wind, water and salt conditions.32 Other cases and examples were summarized as follows: “The second of the decision from the House of Lords from which We have quoted

(Wilson, Son & Co. v. owners of Cargo per the Xantho [1887], 12 A. C., 503) arose upon the following facts: The owners of certain cargo embarked the same upon the steamship Xantho. A collision took place in a fog between this vessel and another ship, Valuta. An action was thereupon instituted by the owners of the cargo against the owners of the Xantho. It was held that if the collision occurred without fault on the part of the carrying ship, the owners were not liable for the value of the cargo lost by such collision. Still another case was decided in the House of Lords upon the same date as the preceding two, which is equally instructive as the others upon

30

La Razon Social v. Union Insurance Society of Canton, supra.

31

Ibid.

32

Cathay Insurance Co. v. Hon. Court of Appeals and Remington Industrial Sales Corporation, G.R. No. 76145, June 30, 1987.

ESSENTIALS OK INSURANCE LAW (Republic Art No. 10607 with Notes on Pro-Need Act)

$12

the question now under consideration. We refer to H a m i l t o n , F r a s e r & C o . v . l \ m c i o r f i$ C o . . ( f l 8 8 7 J . 1 2 A . C . , 5 I S ) , where it appeared that rice was shipped under a charter party and bills of lading which expected “dangers and accident of the sea." During the voyage rats gnawed a hole in a pipe on board the ship, whereby sea water effected an entrance into the ship’s hold and damaged the rice. It appeared that there was no neglect or default on the part of the shipowners or their servants in the matter of attending to the cargo. It was held that this loss resulted from an accident or peril of the sea and that the shipowners were not responsible. Said Bramwell: “No question of negligence exists in this case. The damage was caused by the sea in the course of navigation with no default in any one. I am, therefore, of opinion that the damage was caused by peril of the sea within the meaning of the bill of lading." The point which discriminates this decision from that now before Us is that in the present case the negligence of the shipowners must be accepted as established. Undoubtedly, if in H a m i l t o n , F r a s e r & C o . v . P a n d o r f & C o . , ( [ 1 8 8 7 ] , 1 2 A . C . , 5 1 8 ) , it had appeared that this hold had been gnawed by the rats prior to this voyage and the owners, after having their attention directed to it, had failed to make adequate repairs, the ship would have been liable. The three decisions in the House of Lords above referred to contain elaborate discussions concerning the liability of shipowners and insurers, respectively, for damage happening to cargo in the course of a sea voyage; and it would be presumptuous for Us to undertake to add to what has been there said by the learned judges of that high court. Suffice it to say that upon the authority of those cases there is no room to doubt the liability of the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is not liable; for, generally speaking, the shipowner excepts the perils of the sea from his engagement under the bill of lading, while this is the very peril against which the insurer intends to give protection. As applied to the present case it results that the owners of the damages rice must look to the shipowner for redress and not to the insurer.”33 e. Perils. Other perils included in the ( ( P e r i l s C l a u s e ” include fires, assailing thieves, jettisons, barratry of the master and crew and all other like perils, losses and misfortunes: (1) Fire and Related Perils. The policy may likewise provide that the insurer is liable if the goods and/or the vessel are destroyed or damaged by fire and other losses due to heat, smoke, vessel, or odor or from water, steam or chemicals. (2) Jettison. This is usually involved in “General Average” where the goods are thrown overboard to save other cargoes and/or the ship.

33

La Razon Social v. Union Insurance Society, supra.

ciiArriOK 1 1 MARINE INSURANCE

313

(B) Barratry. It is an act committed by the master or crew of the ship for some unlawful or fraudulent purpose contrary to their duty to the ship owner.84 (4) Assailing Thieves. This refers to the theft of cargo committed by force and does not include clandestine theft, pilferage, or theft by passengers or crew. (5) All Other like Perils. The words “all other perils, losses, and misfortunes” or “all other like perils” in a standard “Perils Clause” are to be interpreted as covering risks which are of like kind ( e j u s d e m g e n e r i s ) with the particular risks which are enumerated in the preceding part of the same clause of the contract. They have always been held or assumed to be restricted to cases ‘akin to’ or resembling’ or ‘of the same kind as’ those specially mentioned. Thus, there must be some casualty, something which could not be foreseen as one of the necessary incidents of the adventure.34 35 f. Clauses that Modify Coverage. Certain perils are not usually covered by the typical “Perils Clause” because they are not perils of the sea or like perils. Hence, it is necessary to include certain clauses to modify the insurance coverage with respect to the perils that are covered, the property covered and the losses that are covered. Other clauses remove certain perils from the coverage. These include the “Inchmaree Clause,” the “SR&CC,” “FC&S”36 and other clauses discussed below. (1) Inchmaree Clause. This is a clause that is included in a hull policy to cover loss or damage through the bursting of the boiler, breaking of shafts or through latent defects of the machinery and equipment, hull or its appurtenances and faults or errors in the navigation or management of the vessel. 37 The Inchmaree Clause should be expressly provided for because damage of this sort are not included in the term “perils of the sea.” The case where the clause originated was narrated by our Supreme Court in one of the above-cited cases:38

34 Timoteo B. Aquino and Ramon Paul L. Hernando, Essentials of Transportation and Public Utilities Law, 2016 Ed., p. 200 citing 70 Am. Jur 2d 968, hereinafter referred to as “Aquino and Hernando.” 35 La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., G.R. No. 13983, September 1, 1919. 36 See 4.01 of this Chapter. 37 Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., et al., G.R. No. 132607, May 5, 1999. 38 La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., supra.

314

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

M x x x Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser & Co., [1887], 12 A. C., 484 arose upon the following state of facts: In March, 1884, the Inchmaree was lying at anchor off Diamond Island and was about to start upon her

voyage. To this end it became necessary to fill up her boilers. There was a donkey-engine with a donkey-pump on board, and the donkey-engine was set to pump up water from the sea into the boilers. Those in charge of the operation did not take the precaution of making sure that the valve of the aperture leading into one of the boilers was open. This valve happened to be closed. The result was that the water being unable to make its way into the boiler was forced back and split the air-chamber and so disabled the pump. It was held that whether the injury occurred through negligence or accidentally without negligence, it was not covered by the policy, since the loss did not fall either under the words “perils of the seas” or under the more general words “all other perils, losses, and misfortunes.” Lord Bramwell, in the course of his opinion quoted with approbation as definition given by Lopes L.J. in Pandorf v. Hamilton (16 Q. B. D., 629), which is as follows: In a seaworthy ship damage to goods caused by the action of the sea during transit not attributable to the fault of anybody, is a damage from a peril of the sea.”

(2) Running Down Clause is a clause that makes the insurer liable in collision cases. (3) Delay Clause exempts the insurer from liability if there was delay in the voyage. (4) Sue and Labor (S&L) Clause requires the insured and his representative to take all reasonable steps that are necessary to limit or reduce an imminent loss. Indemnity will be given by the insurer for such effort. (5) Protection and Indemnity (P&I) Clause insures the shipowner from liability for damages caused by the ship to wharves, piers and other harbor installations. (6) Institute War Clause (IWC) may be expressly provided to be deemed to form part of the policy if the FC&S clause will be deleted. The clause provides that the insurance covers risks covered by the FC&S including capture, seizure, arrest, restraint or detainment. When the IWC is deemed part of the policy, it also includes arrest by ordinary judicial process and not necessarily only by means of political acts. Consistent with the general purpose of the clause, the IWC includes seizure or detention by civil authorities.39

39 Malayan Insurance Corporation v. The Hon. Court of Appeals & TKC Marketing Corporation, G.R. No. 119599, March 20, 1997.

CHAPTER 11 MARINE INSURANCE

315

(7) Memorandum Clause provides for the list of goods for which the insurer will be liable unless damage exceeds a stated percentage of total value. §4.03. INLAND MARINE INSURANCE PERILS. The nature of inland marine insurance prevents the application of some of the rules that are applicable to ocean marine insurance. Nevertheless, there may likewise be all-risk policies in inland marine insurance. With respect to named perils policies, the perils that can be named in the policies depend upon the nature of the property insured against. a. For example, the named perils in insurance coverage over instrumentalities of transportation are obviously different from personal property floaters. Similarly, a builder’s policy will cover perils that are different from bailee policies.

PROBLEMS: 1.

A shipped 100 pieces of plywood from Davao City to Manila. He took a marine insurance policy to insure the shipment against loss or damage due to perils of the sea, barratry, fire, jettison, pirates, and other such perils. When the ship left the port of Davao, the shipman in charge forgot to secure one porthole, through which the seawater seeped during the voyage, damaging the plywood. A filed a claim against the insurance company which refused to pay on the ground that the loss or damage was not due to a peril of the sea or any of the risks covered by the policy. It was admitted that the sea was reasonably calm during the voyage and that no strong wind or waves were encountered by the vessel. How would you decide the case? Explain. A:

2.

I will rule in favor of the insurer. The insurer can deny the claim of A because the loss was not caused by perils of the sea or other similar perils. Perils of the sea includes only those casualties due to the unusual violence or extraordinary action of the wind or waves or to other extraordinary causes connected with navigation. No such peril occurred in this case.

The policy of marine insurance issued by the Union Insurance Society of Canton, Ltd., upon a cargo of rice belonging to the plaintiffs, Go Tiaoco Brothers purports to insure the cargo from the following among other risks: “Perils ... of the seas, men of war, fire, enemies, pirates, rovers, thieves, jettisons, . . . barratry of the master and mariners, and of all other perils, losses, and misfortunes that have or shall come to the hurt, detriment, or damage of the said goods and merchandise or any part thereof.” The cargo was transported in the early days of May, 1915, on the steamship H o n d a g u a from the port of Saigon to

:no

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

Cebu. On discharging the rice from one of the compartments in the after hold, upon arrival at Cebu, it was discovered that one thousand four hundred seventythree sacks and been damages by seawater. The loss so resulting to the owners of rice, after proper deduction had been made for the portion saved, was three thousand eight hundred seventy five pesos and twenty-five centavos (P3,875.25). It appears that the drainpipe which served as a discharge from the water closet passed down through the compartment where the rice in question was stowed and thence out to sea through the wall of the compartment, which was a part of the wall of the ship. The joint or elbow where the pipe changed its direction was of cast iron; and in course of time it had become corroded and abraded until a longitudinal opening had appeared in the pipe about one inch in length. This hole had been in existence before the voyage was begun, and an attempt had been made to repair it by filling with cement and bolting over it a strip of iron. The effect of loading the boat was to submerge the vent, or orifice, of the pipe until it was about 18 inches or 2 feet below the level of the sea. As a consequence the sea water rose in the pipe. Navigation under these conditions resulted in the washing out of the cementfilling from the action of the seawater, thus permitting the continued flow of the salt water into the compartment of rice. Is the insurer liable on this policy for the loss caused in the manner above stated? A:

No. The insurer is not liable. In the present case, the entrance of the sea water into the ship’s hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship’s owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which results from perils of the sea. ( L a R a z o n S o c i a l " G o T i a c o y H e r m a n o s v . U n i o n I n s u r a n c e S o c i e t y o f C a n t o n , L t d . , G . R . N o . 1 3 9 8 3 , S e p t e m b e r 1 , 1 9 1 9 )

§5. INSURABLE INTEREST. In general, a person has insurable interest in property if he will benefit from its continued existence and he will be damnified by its loss. Section 13 of the Insurance Code provides that the presence of insurable interest in property can be determined by asking if the insured has 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 said insured. The specific rules on insurable interest in Marine Insurance are consistent with the general rule. Thus, Sections 102 to 108 provides:

CHAPTER 11 MARINE INSURANCE

317

SEC. 102. The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss: Provided, That in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer. SEC. 103. The insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry. SEC. 104. Freightage, in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others. SEC. 105. The owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. SEC. 106. The interest mentioned in the last section exists, in case of a charter party, when the ship has broken ground on the chartered voyage. If a price is to be paid for the carriage of goods it exists when they are actually on board, or there is some contract for putting them on board, and both ship and goods are ready for the specified voyage. SEC. 107. One who has an interest in the thing from which profits are expected to proceed has an insurable interest in the profits. SEC. 108. The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its loss. §5.01. INSURABLE INTEREST OVER THE SHIP. Based on the foregoing provisions, it is clear that the following persons have insurable interest over the vessel: a. Shipowner. Ownership is the most basic type of existing interest which can be insured. Thus, the owner of the ship can normally insure the vessel up to its full value.

318

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(1) If the ship is being chartered, the shipowner’s insurable interest over the full value of the ship is maintained. This is true even if the charterer agreed to pay the value of the ship in case of loss thereof. 40 Nevertheless, if the charterer contractually bound himself to pay the value of the ship in case of loss, the shipowner may recover from the insurer only the portion that he cannot recover from the charterer. (2) If the ship is hypothecated by a loan on bottomry, the insurable interest of the shipowner is limited to the amount not covered by the loan. 41 In a loan on bottomry, the borrower (shipowner) will not be required to pay the loan if the vessel will not safely reach its destination. b. Charterer. The charterer has insurable over the ship to the extent that he is liable to be damnified by its loss.42 c. Lender on Bottomry. The lender in a loan on bottomry has insurable interest over the ship up to the extent of the loan.43 d. Mortgagee. The vessel may be mortgaged by the shipowner. Hence, consistent with the general rules on insurable interest, the mortgagee of the vessel may likewise insure the same vessel because he will be damnified by its loss. §5.02. INSURANCE OVER CARGO. Both the shipowner and the shipper have insurable interest over the goods. The shipowner may be damnified by the loss of the goods under the contract of carriage while the shipper as owner of the goods or seller obviously has a present interest to protect. a. Goods in Transit. It should be noted in this connection that the consignee (buyer) has insurable interest over the goods even if there are still no transfer of ownership while the goods are in transit. The rule was discussed by the Supreme Court in this wise: “Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale. The perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title even before delivery

40

Section 41 102,1.C. Section 42 Section 43 Section 103,1.C.

CHAPTER 11 MARINE INSURANCE

319

or before he performed the conditions of the sale. The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance. Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them. C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods and freight to the named destination. It simply means that the seller must pay the costs and freight necessary to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.”44 45 a. In M a l a y a n I n s u r a n c e C o . , I n c . v . P h i l i p p i n e F i r s t I n s u r a n c e C o . 4 b Wyeth Philippines, Inc. and respondent Reputable Forwarder Services entered into a contract of carriage whereby the latter undertook to transport and deliver the former’s products to its customer. Wyeth insured the products with the respondent insurer while Reputable secured a separate insurance policy from the petitioner over the same products. Unfortunately, the products were hijacked by armed men. The Supreme Court observed that both Wyeth and Reputable had insurable interest over the goods. The policy issued by the respondent insurer “was in consideration of the legal and/or equitable interest of Wyeth over its own goods.” On the other hand, what was issued by the petitioner insurer to Reputable was “over the latter’s insurable interest over the safety of the goods, which may become the basis of the latter’s liability in case of loss or damage to the property and falls within the contemplation of Section 15 of the Insurance Code.”

44 Filipino Merchants Insurance Co., Inc. v. Court of Appeals and Choa Tiek Seng, G.R. No. 85141, November 28, 1989. 45 G.R. No. 119599, March 20, 1997.

320

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§5.03. INSURANCE OVER FREIGHTAGE AND INCOME, The shipowner has an insurable interest over the expected freightage. As already noted earlier, freightage, in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others. 46 Thus, freightage may arise either (1) as consideration for a charter party, or (2) as consideration for the carriage of goods. Under Section 105, the owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. a. The charterer may likewise have insurable interest over his expected freightage. For example, if a person is using the vessel of another under a bareboat charter to transport his own goods and that of others, the charterer has insurable interest in the expected freightage. b. When interest exists. Section 106 of the Insurance Code provides that “the interest mentioned in the last section exists, in case of a charter party, when the ship has broken ground on the chartered voyage. If a price is to be paid for the carriage of goods it exists when they are actually on board, or there is some contract for putting them on board, and both ship and goods are ready for the specified voyage.” In summary, the insurable interest over expected freightage arises: (1) If there is charter party — when the ship has broken ground on the chartered voyage. (2) In carriage of goods — when the goods are actually on board or there is some contract for putting them on board, and both ship and goods are ready for the specified voyage. c. Advance Freightage. The shipowner has no insurable interest over the freightage if the shipper or chatterer had already paid the freightage in advance and without obligation to refund the same in case of loss. In this case, the shipowner will not be damnified by the loss. d. Profits. Section 107 of the Insurance Code provides that one who has an interest in the thing from which profits are expected

46

Section 104,1.C.

CHAPTER 11 MARINE INSURANCE

321

to proceed has an insurable interest in the profits. For example, Mr. X shipped his goods through a certain vessel. The value of the goods is P500,000.00 and Mr. X already agreed with Mr. Y (seller) that he (X) will acquire for P600,000.00 the same the moment it reaches the port of destination. In this case, there is an expected profit in the amount of P100,000.00 and Mr. X has insurable interest over that profit.

PROBLEMS: 1. This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and seeks to recover from the defendant insurance company the amount of P51,568.62 representing damages to said shipment which has been insured by the defendant insurance company under Policy No. M-2678. The defendant brought a third party complaint against third party defendants C o m p a g n i e M a r i t i m e D e s C h a r g e u r s R e u n i s and/or E. Razon, Inc. seeking judgment against the third (sic) defendants in case judgment is rendered against the third party plaintiff. It appears from the evidence presented that in December 1976, plaintiff insured said shipment with defendant insurance company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms. Actually, what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant’s surveyor ascertained and certified that in such discharge 105 bags were in bad order condition as jointly surveyed by the ship’s agent and the arrastre contractor. The condition of the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6-Razon. The cargo was also surveyed by the arrastre contractor before delivery of the cargo to the consignee and the condition of the cargo on such delivery was reflected in E. Razon’s Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant’s surveyor has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a survey report Exhibit F with the findings on the extent of shortage or loss on the bad order bags totaling 227 bags amounting to 12,148 kilos, Exhibit F-l. Based on said computation the plaintiff made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62 (Exhibit C) the computation of which claim is contained therein. A formal claim statement was also presented by the plaintiff against the vessel dated December 21, 1976,

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

322

Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay the claim. Consequently, the plaintiff brought an action against said defendant as adverted to above and defendant presented a third party complaint against the vessel and the arrastre contractor. a.

Does the consignee have insurable interest over the goods?

b.

Is the insurer liable?

A:

a. Yes, the consignee has insurable interest. The private respondent, as consignee of the goods in transit under an invoice containing the terms under “C & F Manila,” has insurable interest in said goods. He will already be damnified by the loss of the goods even before delivery. b.

Yes, the insurer is liable. In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer is liable under the policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the authorities and jurisprudence it discussed — “ . . . it is believed that in the absence of any showing that the losses/damages were caused by an excepted peril, i . e . , delay or the inherent vice or nature of the subject matter insured, and there is no such showing, the lower court did not err in holding that the loss was covered by the policy. “There is no evidence presented to show that the condition of the gunny bags in which the fishmeal was packed was such that they could not hold their contents in the course of the necessary transit, much less any evidence that the bags of cargo had burst as the result of the weakness of the bags themselves. Had there been such a showing that spillage would have been a certainty, there may have been good reason to plead that there was no risk covered by the policy. ( S e e B e r k v . S t y l e [ 1 9 5 6 J c i t e d i n M a r i n e I n s u r a n c e C l a i m s , i b i d . , p . 1 2 5 ) . Under an ‘all risks’ policy, it was sufficient to show that there was damage occasioned by some accidental cause of any kind, and there is no necessity to point to any particular cause.” ( F i l i p i n o M e r c h a n t s I n s u r a n c e C o . , I n c . v . C o u r t o f A p p e a l s a n d C h o a T i e k S e n g , G . R . N o . 8 5 1 4 1 , N o v e m b e r 2 8 , 1 9 8 9 )

§6. CONCEALMENT. In marine insurance, each party is bound to communicate all the information which he possesses material to the risk. A party must state the exact and whole truth in

CHAPTER 11 MARINE INSURANCE

323

relation to all matters that he represents or upon inquiry discloses or assumes to disclose.47 Just like the other types of insurance, the necessity for disclosure to the insurer by the insured “of all material facts is of vital importance to the former, as it is on the facts placed before him during the negotiations which precede the conclusion of the contract that he reaches his decision as to the acceptance or declinature, as the case may be, of the risk.”48 Thus, Section 109 provides:

SEC. 109. In marine insurance each party is bound to communicate, in addition to what is required by Section 28, all the information which he possesses, material to the risk, except such as is mentioned in Section 30, and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. a. Belief or Expectation. However, the rules in insurance are stricter than in ordinary insurance. For instance, Section 110 provides:

SEC. 110. In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material. (1) Ordinarily, belief or expectation of third persons are not material and need not be disclosed. In marine insurance, even information on the belief or expectation of a third person in reference to a material fact is material.49 For example, if a third person believes that there is something wrong with engine of the vessel, the insured is bound to disclose the same belief because it has reference to a material fact. Similarly, if the insured has expectation that the repair to the vessel was not correctly made, then the insured must make such disclosure. b. Presumption. Section 111 of the Insurance Code provides that “a person insured by a contract of marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication.” The

47

Section 109,1.C. Dover, p. 49 Section 110,1.C. 48

324

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

presumption in this case is rebuttable. However, in the present age of advanced technology, it would seem that the presumption would always arise. There is hardly any situation when the usual means of communication will not reach the person insured. In fact, insurers may insist that the presence of up to date and adequate means of communications should be warranted by the insured. c. Cases when causation necessary. As a general rule, the insurer may rescind the insurance contract even if the risk concealed is not the cause of the loss. However, the Insurance Code provisions on marine insurance provide for certain exceptions. Thus, Section 112 enumerates certain cases where the insurer will be exonerated only if the risk concealed is the cause of the loss.

SEC. 112. A concealment in a marine insurance, in respect to any of the following matters, does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: (a) The national character of the insured; (b) The liability of the thing insured to capture and detention; (c) The liability to seizure from breach of foreign laws of trade; (d) (e)

The want of necessary documents; The use of false and simulated papers.

d. Distinctions. Concealment in ordinary insurance may be distinguished from concealment in marine insurance as follows: (1) In ordinary insurance, belief and expectations of third persons need be disclosed while in marine insurance the beliefs and expectations of third persons as to material facts should be disclosed; and (2) In the cases enumerated in Section 112, the insurer is exonerated only if the same are the causes of the loss while in ordinary insurance, the general rule is that the insurer is always exonerated even if the matter concealed is not the cause of the loss. §7. REPRESENTATION. Representations are statements made to give information to the insurer, and otherwise induce him to enter into the insurance contract.50 A representation is a collateral

^ance, p. 359.

CHAPTER 11 MARINE INSURANCE

325

communication made to the other party in writing or by word of mouth which induces the other to enter into a contract of insurance. Representation is not part of the contract but is merely a collateral inducement. Consequently, they are made at the time or before the issuance thereof. The statutory rules on representation are dictated by the demands of good faith. “Were it not for the observance of good faith, the conduct of marine insurance would be impossible; at least, without a complete reorganization of its structure and great increase in cost to enable insurers to investigate the circumstances surrounding every proposition of insurance.”51 a. Materiality. The general rule in insurance is that the materiality of the facts represented is determined using the same rules that apply to concealment. Representation in marine insurance is material if it will affect the decision of the insurer to take the risk or to fix the premium and other terms and conditions of the policy. In the case of marine insurance, the specific obligation of the insured is expressed in Section 113.

SEC. 113. If a representation by a person insured by a contract of marine insurance, is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract. b. Expectation. Only factual representations are covered by the rules on representation. Expectations of the insured are not material unless it will amount to a promissory representation. A representation as to a matter of expectation or belief is true if it be made in good faith. 52 The contract will be avoided only if there is fraud, as expressly provided for in Section 114:

SEC. 114. The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance. (1) For example, if it is represented that the vessel is to set sail by a date specified, this is a representation on a matter of fact and the insurer may avoid the contract if the vessel

51

Dover, p.Dover, 344. p. 352. 52

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

326

will sail on another date. However, if the representation were merely in the form that it was intended that the vessel should sail on or by a date stated, the contract would not be affected as long as it was clear that the representation was a mere hope or expectation and not a binding undertaking.53 §8. IMPLIED WARRANTIES. One peculiarity of marine insurance is the presence of implied warranties which are by law considered natural elements of the contract of marine insurance. These warranties are implied in the sense that they are deemed part of the contract even in the absence of contractual stipulations. The implied warranties in marine insurance under the Insurance Code are as follows: (1) Warranty of Seaworthiness, (2) Warranty that the ship has the documents of neutrality or nationality, (3) Warranty against improper deviation, and (4) Warranty of legality of the voyage. §8.01. SEAWORTHINESS. It is universally accepted that in every contract of marine insurance, a warranty is implied that the ship shall be seaworthy at the time of the inception of the voyage. A finding that the vessel is unseaworthy precludes recovery from the insurer.54 The fact that the unseaworthiness of the vessel is unknown to the insured is immaterial and may still be used as a defense of the insurer. 55 This rule is accepted under the old Insurance Law56 as well as the Insurance Code.

SEC. 115. In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy. a. A ship is seaworthy if it is able to withstand the rigors of the voyage and that it has been properly laden, provided with competent crew and equipped with the appropriate appurtenances and equipment. Sections 116 and 118 of the Insurance Code clearly provide:

53

Dover, supra.

54

Madrigal, Tiangco and Co. v. Hanson, Ort and Stevenson, Inc., G.R. No. L-6106-07, April 18, 1958. 55 Isabel Roque, et al. v. Hon. Intermediate Appellate Court and Pioneer Insurance & Surety Corp., G.R. No. L-66935, November 11, 1985. 56 Section 106, Act No. 2427.

(’IIAI’TKK 1 I MARI NR INSIJRANCK

327

SEC. 116. A ship is seaworthy when reasonably fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy. SEC. 118. A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be properly laden, and provided with a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage. b. It is also well-settled that a ship which is seaworthy for the purpose of insurance upon the ship may yet be unseaworthy for the purpose of insurance upon the cargo. This is also referred as “car go worthiness.” This warranty applies even if the shipper availed of the services of a common carrier. “It becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vessels seaworthy. He may have no control over the vessel but he has full control in the selection of the common carrier that will transport his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture.” 57

SEC. 121. A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo. (1) In one case,58 a cargo of wheat was laden upon a ship which had a porthole insecurely fastened at the time of the lading. This porthole was about one foot above the water line; and in the course of the voyage seawater entered

57 The Philippine American General Insurance Co., Inc. v. Court of Appeals & Felman Shipping Lines, G.R. No. 116940, June 11, 1997; Isabel Roque, et al. v. Hon. Intermediate Appellate Court and Pioneer Insurance & Surety Corp., supra. ^La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., G.R. No. 13983, September 1, 1919, citing Steel v. State Line Steamship Co. ([1877], L. R. 3 A. C., 72).

328

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the compartment where the sacks of wheat were stored and damaging the same. It was held that the ship was unseaworthy with reference to the cargo in question. (2) Another case59 involved a cargo of jute. During the voyage, the vessel encountered stormy weather, as a consequence of which the cargo shifted its position and broke a pipe leading down through the hold from the water closet, with the result that water entered the vessel and the jute was damaged. It was found that the cargo was improperly stowed and that the owners of the ship were chargeable with negligence for failure to protect the pipe by putting a case over it. It was accordingly held that the ship was unseaworthy.60 c. Waiver. The warranty of seaworthiness is waived if the insurer paid the insured the value of the lost cargoes. However, the waiver of the warranty of seaworthiness for insurance purposes does not likewise mean that the insurer can no longer raise the fact the vessel is not seaworthy when said insurer will exercise its right of subrogation against the party who is at fault.61 d.

When must the ship be seaworthy.

SEC. 117. An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk, except in the following cases: (a) When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time; (b) When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transshipped at an intermediate port, the implied warranty is not

59 La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., No. 13983, September 1, 1919, citing Gilroy, Sons & Co. v. Price & Co. ([1893], 18 A. C., 56). ^La Razon Social “Go Tiaco y Hermanos” v. Union Insurance Society of Canton, Ltd., ibid. 61 Delsan Transport Lines, Inc. v. The Hon. Court of Appeals and American Home Assurance Corporation, G.R. No. 127897, November 15, 2001.

CHAPTER 11 MARINE INSURANCE

329

complied with unless each vessel upon which the cargo is shipped, or transshipped, be seaworthy at the commencement of each particular voyage. SEC. 119. Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion. (1) Based on the above-quoted provisions and prevailing jurisprudence, the seaworthiness of the vessel must exist as follows:

(i) voyage.

Voyage policy — at the commencement of the

(ii) Time policy — at the commencement of every voyage commenced during the stipulated time. (iii) Voyage in stages — at the commencement of each portion or stage. (iv) Port policy — at the time the vessel is exposed to any risk at the port. (v) Cargo policy and the goods are to be transshipped — at the commencement of each particular voyage. (2) Generally, it is only the commencement of the voyage that is the reckoning point to determine if the implied warranty of seaworthiness was complied with. If the vessel becomes unseaworthy after the commencement of the voyage, then there is no breach of warranty. The exception is provided for in Section 120 which provides:

SEC. 120. When the ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom. (3) For example, a typhoon damaged the vessel on its way to destination forcing it to seek refuge in another port. If

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

330

the shipowner did not repair or delays in repairing the vessel even if it was in a position to do so without unnecessary delay, the insurer will be exonerated from any loss arising therefrom. If, for instance, the shipowner would have still earned the profits that he was originally expecting had he expeditiously repaired the vessel, then the insurer is not liable if the shipowner did not make such repairs without justifiable reason.

PROBLEMS: 1. Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of one year whereby the said common carrier agreed to transport Caltex’s industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner took on board its vessel, MT Maysun 2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with the private respondent, American Home Assurance Corporation. On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City. Unfortunately, the vessel sank in the early morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel oil. Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and FiftySeven Centavos (P5,096,635.67) representing the insured value of the lost cargo. Exercising its right of subrogation under Article 2207 of the New Civil Code, the private respondent demanded of the petitioner the same amount it paid to Caltex. The private respondent denied the claim arguing that it cannot be said that it was at fault because the seaworthiness of the vessel was deemed admitted. Is the denial of the claim proper? A:

No, the denial of the claim is improper. It is true that the payment made by the private respondent for the insured value of the lost cargo operates as waiver of its (private respondent) right to enforce the term of the implied warranty against Caltex under the admission of the vessel’s seaworthiness by the private respondent as to foreclose recourse against the petitioner for any liability under its contractual obligation as a common carrier. The fact of payment grants the private respondent subrogatory right which enables it to exercise legal remedies that would otherwise be available to Caltex as owner of the lost cargo against the petitioner common carrier. ( D e l s a n T r a n s p o r t L i n e s , I n c . v . C o u r t o f A p p e a l s , G . R . N o . 1 2 7 8 9 7 , N o v e m b e r 1 5 , 2001)

CHAPTER 11 MARINE INSURANCE

331

§8.02. DOCUMENTS OF NATIONALITY OR NEUTRALITY.

SEC. 122. Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon. a. The following are the implied warranties contemplated under Section 122 of the Insurance Code: (1) the vessel has the requisite documents of nationality or neutrality if nationality or neutrality is expressly warranted; and (2) the vessel will not carry documents that will cast reasonable suspicion on its nationality or neutrality if nationality or neutrality is expressly warranted. b. The nationality or neutrality is not impliedly warranted. It is the presence of documents and the absence of documents that will cast suspicion that are impliedly warranted. However, the implied warranties flow from the express warranty of neutrality or nationality. §8.03. LEGALITY. The long standing custom in marine insurance is that there is an implied warranty that the adventure is a lawful one and that so far as the insured can control the matter, the adventure shall be carried out in a lawful manner.62 a. If an integral voyage is illegal in any respect at its commencement, no insurance can legally be effected on any part of it, though such part, taken by itself, would be legal.63 b. Even in the absence of a provision in the Insurance Code, the warranty is still implicit from the provisions of the New Civil Code because a contract with an illegal object is void. Insurance upon any venture contemplating the violation of law is, like any other contract to the same effect, void.64 §9. THE VOYAGE AND DEVIATION. §9.01. ROUTE. The route that a vessel should take is governed by Sections 123 and 124 of the Insurance Code which provide:

62

Dover, p.Dover, 379. ^Vance, p. 844. 63

332

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

SEC. 123. When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the voyage insured in one which conforms to the course of sailing fixed by mercantile usage between those places. SEC. 124. If the course of sailing is not fixed by mercantile usage, the voyage insured by a marine insurance policy is that way between the places specified, which to a master of ordinary skill and discretion, would mean the most natural, direct and advantageous. a. The course of the voyage shall be determined in the following order: (1) The course agreed upon by the parties; (2) If nothing was agreed upon, one which conforms to the course of sailing fixed by mercantile usage; (3) If there is no mercantile usage, one which a master of ordinary skill and discretion would find to be the most natural, direct and advantageous. §9.02. DEVIATION. Deviation is (1) a departure from the course of the voyage insured, mentioned in Sections 123 and 124 of the Insurance Code, or (2) an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage.65 Deviation may be proper deviation and improper deviation. It is only in case there is improper deviation that the insurer will not be liable for the loss. a. Deviation is proper in the situations enumerated in Section 126. Every deviation that is not excused under Section 126 is considered improper deviation. Section 126 provides an exclusive list of cases when deviation is proper.

SEC. 126. A deviation is proper: (a) When caused by circumstances over which neither the master nor the owner of the ship has any control;

65

Section 127,1.C.

CHAPTER 11 MARINE INSURANCE

333

(b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; (c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or (d) When made in good faith, for the purpose of saving human life or relieving another vessel in distress. SEC. 127. Every deviation not specified in the last section is improper. SEC. 128. An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation. b. Consequently, there is no improper deviation if an earthquake that triggered huge waves caused the master of the vessel to deviate from the agreed course of navigation. There is likewise no improper deviation if the usual route was not followed in order to avoid pirates. c. The cases contemplated by paragraphs (c) and (d) of Section 126 of the Insurance Code expressly require that good faith. This means that even if the peril to be avoided turned out to be nonexistent, there would still be no improper deviation so long as the deviation was done in good faith. PROBLEMS: 1. Vessel A and its cargoes were insured by its owner with X Insurance Co. against perils of the sea and those cause by typhoon, earthquake, theft and acts of pirates and other similar perils. While the vessel was on its way to Singapore to deliver the goods that were shipped from Manila, the captain of the vessel changed its route because of the information that it received from the Coast Guard that an earthquake occurred along the agreed route making it dangerous to travel in the area. The vessel and its cargoes were later destroyed because the vessel was attached by pirates. X Insurance Co. later denied the claim of the shipowner on the insurance policy on the ground that although the loss was directly caused by a peril insured against there was improper deviation because there was really no earthquake along the agreed route. Is the insurer correct? A:

No, the insurer was not correct. There was no unlawful deviation because there was reasonable ground for the captain of the vessel in good faith to conclude that there was valid ground to change

334

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the course of the voyage. The captain relied on the information given to him by the Coast Guard, hence, it was reasonable for him to believe that it was necessary to avoid a peril. §10. LOSS. Loss in insurance means the injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune insured against by the marine insurer. §10.01. KINDS OF LOSS. A loss may be either (1) total, or (2) partial. 66 Every loss which is not total is partial.67 a. A total loss may likewise be either (1) actual, or (2) constructive. As the term implies, there is really no total loss in constructive total loss. The law however will allow recovery that is equivalent to the amount that may be recovered in actual total loss provided that there is abandonment. The law provides that a constructive total loss is one which gives to a person insured a right to abandon. 68 On the other hand, upon an actual total loss, a person insured is entitled to payment without notice of abandonment.69 (1) The marine insurance policy may limit the liability to actual loss. However, under Section 139 of the Insurance Code, an insurance confined in terms to an actual loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured. b. Actual Total Loss. Generally speaking, there is actual total loss if the subject-matter is destroyed or so damaged as to cease to be a thing of the kind insured or where the insured is irretrievably deprived thereof. 70 Section 132 provides that an actual total loss is caused by: (i) A total destruction of the thing insured; (ii) The irretrievable loss of the thing by sinking, or by being broken up;

^Section 67 129,1.C. Section 68 Section 69 Section 70 Dover, p. 411.

CHAPTER 11 MARINE INSURANCE

335

(iii) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (iv) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. (1) There is actual total loss of the vessel if it is rendered valueless to the owner. To render it valueless to the owner, it is not necessary that there should be an actual or total loss or destruction of all the different parts of the entire vessel. The question here is whether, under the conditions then and there existing, the vessel is of any value to the owner. If it is not of any value to the owner, then there is an actual loss or a “total destruction of the thing insured” within the meaning of the law. Thus, there is total loss of the ship when she has sustained such extensive damage that it would not be reasonably practical to repair her. The ordinary measure of prudence which the courts have adopted is this: If the ship, when repaired, will not be worth the sum which it would be necessary to expend upon her, the repairs are, practically speaking, impossible, and it is a case of total loss.71 (2) Indeed, the complete physical destruction of the subject matter is not essential to constitute an actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist as where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before.72 c. Constructive Total Loss. In broad terms, there is constructive total loss where “the thing insured has been reduced to such a state or placed in such a position by the perils insured against as to make its total destruction or annihilation though not inevitable, yet highly imminent or its ultimate arrival under the terms of the policy, though not utterly hopeless, yet exceedingly doubtful.” 73 Constructive total loss is sometimes called “commercial

71 Philippine Manufacturing Co. v. Union Insurance Society of Canton, Ltd., G.R. No. L16473, November 22, 1921. 72 Pan Malayan Insurance Corporation v. Court of Appeals, et al., G.R. No. 95070, September 5, 1991. 73 Dover, p. 417.

336

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

total loss” or a “conventional total loss” based on arithmetical computation. In this jurisdiction, the computation is fixed in the law itself, thus:

SEC. 141. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (a) If more than three-fourths (3/4) thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than three-fourths (3/4); (c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths (3/4) the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or (d) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned unless the ship is also abandoned. (1) If the goods are shipped, as one separate unit, the total number or quantity of goods serve as the basis of determining the existence of constructive total loss even if the goods are shipped separately.74 (2) There was constructive total loss in another case where the value of the loss was established to be 3/4 of the total loss. “The estimates given by the three disinterested and qualified shipyards show that the damage to the ship would

74 0riental Assurance Corporation v. Court of Appeals and Panama Saw Mill Co., Inc., G.R. No. 94052, August 9, 1991.

CHAI*TER 11 MARINE INSURANCE

337

exceed P270,000,000.00, or 3/4 of the total value of the policies P360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the damage sustained by the vessel.” The adjustment report likewise confirmed such fact.75 d. Presumed Actual Total Loss. Generally, the fact of actual total loss should be established by sufficient evidence. However, Section 134 provides for an exception under which two (2) requisites must concur: (1) Continued absence of the ship for a considerable length of time; and (2) The vessel has not been heard of.

SEC. 134. An actual loss may be presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case. e. Reshipment. Sections 135 and 136 deal with reshipment of the cargo whenever the vessel can no longer continue its voyage because of the peril insured against:

SEC. 135. When a ship is prevented, at an intermediate port, from completing the voyage, by the perils insured against, the liability of a marine insurer on the cargo continues after they are thus reshipped. Nothing in this section shall prevent an insurer from requiring an additional premium if the hazard be increased by this extension of liability. SEC. 136. In addition to the liability mentioned in the last section, a marine insurer is bound for damages, expenses of discharging, storage, reshipment, extra freightage, and all other expenses incurred in saving cargo reshipped pursuant to the last section, up to the amount insured. Nothing in this or in the preceding section shall render a marine insurer liable for any amount in excess of the insured value or, if there be none, of the insurable value. 75 Keppel Cebu Shipyard v. Pioneer Insurance and Surety Corp., G.R. Nos. 18088081, September 25, 2009.

338

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(1) The rules that can be derived from Sections 135 and 136 whenever the ship is prevented from completing its voyage because of a peril insured against, are as follows: (i) If the goods are reshipped, the insurance over the goods continue when they are thus reshipped; (ii) The insurer may require the additional premium if the hazard is increased by this extension of liability; (iii) The marine insurer is bound to pay for damages, expenses of discharging, storage, reshipment, extra freightage, and all other expenses incurred in saving cargo reshipped pursuant to the last section, up to the amount insured; and (iv) The marine insurer shall not be liable for any amount in excess of the insured value or, if there be none, of the insurable value. (2) A controversy involving Section 135 concerns its variance with the provisions of the old law. Section 126 of Act No. 2427 provided that when a ship is prevented, at an intermediate port, from completing the voyage, by the perils insured against, the master must make every exertion to procure, in the same or a contiguous port, another ship, for the purpose of conveying the cargo to its destination; and the liability of a marine insurer thereon continues after they are thus reshipped. Thus, Section 135 of the Insurance Code does not contain the following clause: “the master must make every exertion to procure, in the same or a contiguous port, another ship, for the purpose of conveying the cargo to its destination.” It is opined by some commentators that the deletion of the clause is unintentional as indicated by the words “thus reshipped” in Section 135. (3) However, it is submitted that there is no basis to assume that the deletion was unintentional. It is respectfully submitted that the obligation which is no longer in the statute cannot be read into the provision. It should be noted that the deleted portion pertains to an obligation of the master who is not a party to the insurance contract. In the absence of an express statement in the statute, no liability should be imposed on the carrier or its master; they did not voluntarily assume such obligation and no additional compensation is

CHAPTER 11 MARINE INSURANCE

339

given to them. At any rate, Section 135 as it is now worded favors the insured even in the absence of a statutory obligation on the part of the master to reship the goods. In the absence of statutory obligation, the parties to the contract must stipulate an obligation to reship. If the goods were thus reshipped based on the contractual obligation, the goods would still be covered by the policy. In addition, if the ship was not able to continue with the voyage because the carrier failed to exercise extraordinary diligence, the carrier may not escape or lessen its liability if it will reship the goods in another vessel so that it will also reach its destination on time. In such case, the reshipment would still be covered by the original insurance. (4) Another problem regarding Section 135 is with respect to the right of the insurer to ask for additional premium. The statute provides that the additional premium may be demanded if the hazard be increased by the extension of liability. Obviously, the hazard is always being increased because the vessel is prevented from leaving an intermediate port and the goods will be transferred to another vessel. Necessarily, there will also be delay in the departure in the intermediate port. If those things will be considered, then the insurer will always be given the right to ask for additional premium. Hence, if the intention is really to give additional benefit to the insured or to make the provision favorable to the insured, Section 133 should be construed in such a way that the increase in the hazard that is referred to should be a hazard other than those that usually accompany the reshipment. PROBLEMS: 1. RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to stormy weather, the ship carrying the rice became submerged in sea water and with it, the cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the insurer because the rice was no longer fit for human consumption. Admittedly, the rice could still be used for animal feed. Is RC’s claim for total loss justified? A:

Yes, RC’s claim for total loss was justified. Although the rice can still be used for animal feed, they can no longer for the use that they are originally intended or for the use that they are intended according to their nature. Actual total loss may exist even if there is no complete physical destruction of the thing insured. (Pan Malayan Insurance Corporation v.

CA, et al., G.R. No. 95070, September 5, 1991; 201 SCRA 382)

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

340

2.

An insurance company issued a marine insurance policy covering a shipment by sea from Mindoro to Batangas of 1,000 pcs. of Mindoro garden stones against Total Loss Only. The stones were loaded in two lighters, the first, with 600 pcs. and the second with 400 pieces. Because of rough seas, damage was caused to the second lighter resulting in the loss of 325 out of the 400 pcs. The owner of the shipment filed claims against the insurance company on the ground of constructive total loss in as much as more than three-fourths of the value of the stones had been lost in one of the lighters. Is the insurance company liable under its policy? Why? A:

3.

No. The insurance company is not liable because there was no total loss. The liability of the insurer under the policy is for ‘Total Loss Only.’ The insurance was over the 1,000 pieces of garden stones and only 325 were lost. In fact, there was even no constructive total loss even if the loss constitutes 2/3 of the stones shipped in the second lighter. Although they were shipped on separate lighters, the two shipment totaling 1,000 pieces of garden stones were under a single and indivisible coverage.

Sometime in January 1986, private respondent Panama Sawmill Co., Inc. (Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it against loss for PIM with petitioner Oriental Assurance Corporation (Oriental Assurance). The logs were loaded on two (2) barges: (1) on barge PCT7000, 610 pieces of logs with a volume of 1,000 cubic meters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters. On 28 January 1986, the two barges were towed by one tugboat, the MT “Seminole.” But, as fate would have it, during the voyage, rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs out of the 598 pieces loaded thereon. Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its contracted liability was for “TOTAL LOSS ONLY.” Was the refusal to pay valid? A:

Yes, the insurer validly refused to pay. There was neither actual total loss nor constructive total loss. Hence, the insurer is not liable because the insurance is for TOTAL LOSS ONLY. The policy in question shows that the subject matter insured was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not make the contract several and divisible as to the items insured. The logs on the two barges were not separately valued or separately insured. Only one premium was paid for the entire shipment, making for only one cause or consideration. The insurance contract must, therefore, be considered indivisible. Thus, for purposes of determining if there was constructive total loss,

CHAPTER 11 MARINE INSURANCE

341

the total number of logs should be considered and no the logs shipped on each barge. The logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of logs, the shipment cannot be said to have sustained a constructive total loss under Section 139(a) of the Insurance Code. ( O r i e n t a l A s s u r a n c e C o r p o r a t i o n v . C o u r t o f A p p e a l s a n d P a n a m a S a w M i l l C o . , I n c . , G . R . N o . 9 4 0 5 2 , A u g u s t 9 , 1 9 9 1 ) In July, 1917, the defendant insured the plaintiffs lighter for the sum of Pi6,000, and issued its policy for such insurance, which recites that the steel tank lighter P h i l m a c o is insured “for and during the space of twelve calendar-months from July 6, 1917 to July 5, 1918, both dates inclusive, upon the hull, machinery, tackle, apparel, boats or other furniture of the good ship or vessel,” and that “the assured is and shall be rated and valued on hull, engine and pumping machinery, whereof this policy insures pesos sixteen thousand, P. I. C. Warranted against the absolute total loss of the lighter only. Warranted trading between Bitas, Tondo, or Pasig River and steamers in the Bay of Manila or harbor.” In consideration thereof, the plaintiff paid the defendant P960 as a premium for such insurance. About July 1, 1918, and during the life of the policy and as a result of a typhoon, the lighter was sunk in the Manila Bay, of which the plaintiff notified the defendant and demanded payment of the full amount of its policy, which the defendant refused, and denied its liability. The cost of salvage and the necessary repairs were substantially equal to the original cost of the lighter and its value as stipulated in the policy. Was there total loss of the vessel? A:

Yes, there was total loss. At the time the lighter was sunk and in the bottom of the bay under the conditions then [and] there existing, it was of no value to the owner, and, if it was of no value to the owner, it would be a actual total loss. To render it valueless to the owner, it is not necessary that there should be an actual or total loss or destruction of all the different parts of the entire vessel. The question here is whether, under the conditions then and there existing, and as the lighter laid in the bottom of the bay, was it of any value to the owner. If it was not of any value to the owner, then there was an actual loss or a “total destruction of the thing insured” within the meaning of the insurance law at that time. The lighter was sunk about July 1, 1918. After several futile attempts, it was finally raised September 20, 1918. It is fair to assume that in its then condition much further time would be required to make the necessary repairs and install the new machinery before it

KSSKNT1AUS OF INSURANCE LAW ^Republic Act No. 10(>07 with Notes on Pre-Need Act)

could again bo placed in commission. During all that time the owner would be deprived of the use of its vessel or the interest on its investment. When those questions are considered the testimony is conclusive that the cost of salvage, repair, and reconstruction was more than the original cost of the vessel of its value at the time the policy was issued. As found by the trial court "it is difficult to see how there could have been a more complete loss of the vessel than that which actually occurred ” Upon the facts that shown here, any other construction would nullify the statute, and, as applied to the conditions existing in the Manila Bay, this kind of a policy would be worthless, and there would not be any consideration for the premium. A ship is a total loss when she has sustain [ed] such extensive damage that it would not be reasonably practical to repair her. The ordinary measure of prudence which the courts have adopted is this: If the ship, when repaired, will not be worth the sum which it would be necessary to expend upon her, the repairs are, practically speaking, impossible, and it is a case of total loss. (Philippine Manufacturing Co. v. Union Insurance Company

of Canton, Ltd., G.R. No. L-16473, November 22, 1921) §11. ABANDONMENT. Abandonment is defined in Section 140 as the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured. a. Distinguished from Abandonment in Maritime Law. Abandonment of the vessel in marine insurance is different from abandonment of the vessel made by the ship owner in maritime law. It should be recalled that the real and hypothecary nature of maritime law limits the liability of the carrier to the value of the vessel. Abandonment of the vessel, its appurtenances and the freightage is an indispensable requirement before the ship owner or ship agent can enjoy the benefits of the limited liability principle. If the carrier does not want to abandon the vessel, then he is still liable even beyond the value of the vessel. b. For example, in the case of P h i l i p p i n e S h i p p i n g C o m p a n y v . G a r c i a ,76 which is an action for damages instituted by the Philippine Shipping Company for the loss of Steamship u N t r a . S r a . d e L o u r d e s *'as a result of the collision with the Steamship “N a v a r r a ” of Garcia, it was found that the “ ' N a v a r r a ” was responsible for the collision. The claim of the Philippine Shipping is that the defendant

70

6 Phil. 281.

CHAI'I'hJi l l MAKINK ISfitJi 1ANCK

MVl

should pay PI8,000.00, the value of the “ N a v a r r a ” a t t h e time of its loss, in accordance with the provision of Article 837 of the Code of Commerce, and that it was i m m a t e r i a l that the “ N a v a r r a ” h a d been entirely lost provided the value could he ascertained since the extent of liability of the owner of the colliding vessel resulting from the collision is to be determined by its value. T h e Supreme Court speaking through the then Chief Justice Arellano held that the rule is that in the case of collision, abandonment of the vessel is necessary in order to limit the liability of the shipowner or the agent to the value of the vessel, its appurtenances and freightage earned in the voyage in accordance with Article 837 of the Code of Commerce. The only instance where such abandonment is dispensed with is when the vessel was entirely lost. In such case, the obligation is thereby extinguished. c. Under the limited liability rule in maritime law, there is no need for constructive total loss of the vessel and the abandonment is made in favor of the persons to whom the carrier is liable. In marine insurance, there is a need for c o n s t r u c t i v e total loss and the abandonment is made in favor of the insurer. It would only be possible for the insurer to benefit from the abandonment of the vessel in maritime law if it is exercising its right of subrogation. In other words, after paying the insured who is entitled to claim damages from the carrier, the insurer is subrogated to the rights of the insured and is therefore subject to the defenses and is entitled to the benefits that the insured may have. d. It should be noted in this connection that the limited liability rule in maritime law does not apply to the insurer. Thus, in V a s q u e z v . C o u r t o f A p p e a l s , 7 1 the Supreme Court explained that the total loss of the vessel did not extinguish the liability of the carrier’s insurer. “Despite the loss of the vessel, therefore, its insurance answers for the damages that a shipowner or agent, may be held liable for by reason of the death of its passengers.” §11.01. REQUISITES. The requisites for a valid abandonment are reflected in the following provisions of the Insurance Code:

SEC. 140. Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured.

^G.R. No. L-42926, September 13, 1985.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

344

SEC. 142. An abandonment must be neither partial nor conditional. SEC. 143. An abandonment must be made within a reasonable time after receipt of reliable information of the loss, but where the information is of a doubtful character, the insured is entitled to a reasonable time to make inquiry. SEC. 145. Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing; Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven days from such oral notice. SEC. 144. A notice of abandonment must be explicit, and must specify the particular cause of the abandonment, but need state only enough to show that there is probable cause therefor, and need not be accompanied with proof of interest or of loss. SEC. 147. An abandonment can be sustained only upon the cause specified in the notice thereof. a. Based on the foregoing provisions, an abandonment shall be considered effective only if the following requisites are present:78 (1) There must be an actual relinquishment by the person insured of his interest in the thing insured ( S e c . 1 4 0 , I C P ) ; (2)

There must be a constructive total loss ( S e c .

1 4 1 ,

ICP); (3) The abandonment be neither partial nor conditional ( S e c . 1 4 2 , I C P ) ; (4) It must be made within a reasonable time after receipt of reliable information of the loss ( S e c . 1 4 3 , I C P ) ; (5) It must be factual ( S e c . 1 4 4 , I C P ) ; (6) It must be made by giving notice thereof to the insurer which may be done orally or in writing ( S e c . 1 4 5 , I C P ) ] and

78

Sundiang and Aquino, p. 66.

CHAPTER 11 MARINE INSURANCE

345

(7) The notice of abandonment must be explicit and must specify the particular cause of the abandonment ( S e c . 1 4 6 , I C P ) . b. Abandonment can neither be partial nor conditional. The insurer is supposed to get whatever remains of the vessel, cargo or freightage, hence, the insured cannot abandon only part of the subject property. For instance, the insured cannot abandon only half of the cargo in favor of the insurer. Similarly, the insured cannot impose the condition that the abandonment is valid only if the ship cannot be salvaged. c. Abandonment must be made within a reasonable time. What is considered reasonable time depends upon the circumstances of each case. d. Section 141 uses the word “ m a y ” indicating that there is discretion to abandon and to claim for total loss. “Properly considered, the word “may” in the provision is intended to grant the insured . . . the option or discretion to choose the abandonment of the thing insured ... or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured against.79 §11.02. EFFECTS OF ABANDONMENT. Abandonment transfers all the rights of the insured over the thing insured to the insurer. In other words, the insurer becomes the owner of what remains of the property that is the subject of the insurance.

SEC. 148. An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity. SEC. 149. If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment. SEC. 150. Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer and for his benefit.

79 Keppel Cebu Shipyard v. Pioneer Insurance and Surety Corp., G.R. Nos. 180880-81, September 25, 2009.

346

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

SEC. 155. On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insurer of said freightage; but freightage subsequently earned belongs to the insurer of the ship. §11.03. ACCEPTANCE OF ABANDONMENT. If all the requisites are complied with for a valid abandonment, the insurer may not reject the abandonment. Thus, the rights of the insured are not prejudiced by the fact that the insurer refuses to accept the abandonment. 80 In other words, the insured would still be entitled to compensation for total loss despite the refusal of the insurer to accept. However, there is still an advantage if the insurer express or impliedly accepted the abandonment because the abandonment whether express or implied is conclusive upon the parties and is deemed an admission of the loss and the sufficiency of the abandonment.81

SEC. 151. Where notice of abandonment is properly given, the rights of the insured are not prejudiced by the fact that the insurer refuses to accept the abandonment. SEC. 152. The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as an acceptance. SEC. 153. The acceptance of an abandonment, whether express or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment. SEC. 156. If an insurer refuses to accept a valid abandonment, he is liable as upon actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured. §11.04. REVOCATION. Abandonment is generally irrevocable. The abandonment can be revoked only when the ground proves to be unfounded as in the case where there was in fact no constructive total loss.

^Section 151,1.C. 81 Section 153,1.C.

CHAPTER 11 MARINE INSURANCE

347

SEC. 154. An abandonment once made and accepted is irrevocable, unless the ground upon which it was made proves to be unfounded. SEC. 144. Where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was then in fact no total loss, the abandonment becomes ineffectual. §11.05. EFFECT OF FAILURE TO ABANDON. No abandonment can be made if there is partial loss which is not considered constructive total loss. In which case, the insurer is still liable for such partial loss. The same will result if there is constructive total loss but the insurer failed or refused to abandon. Thus, if a vessel is insured for its full value of P10 Million and there is loss valued at P9 Million, the insurer will be liable for P9 Million if the insured did not abandon. This is in accordance with Section 157 of the Insurance Code which provides: SEC. 157. If a person insured omits to abandon, he may nevertheless recover his actual loss. PROBLEMS: 1. An inter-island vessel, Insured for 2 million against total or constructive loss, sank in 150 feet of water, one mile of Paranaque during a typhoon. After the typhoon, the ship owner gave a written notice of abandonment of his interest in the entire sunken ship to the insurance company. Refusing to accept the offer of abandonment, the insurer hired salvors to refloat the vessel at a total cost of P40,000. Because the refloated vessel needed repairs, the insurer issued invitation to bid for repairs. Several firms submitted separate sealed bids ranging from PI.2 million to Pi.3 million for the complete refurbishing and/or restoration of the vessel to its original condition. On the basis of the following facts, the insurance company rejected the claim of the ship owner of total loss on the ground that there was no constructive loss. Is the position of the insurance company as to the absence of constructive total loss well-taken? Reasons. A Yes, the position of the insurance company that there was no constructive total loss is well-taken. However, the denial of the claim was invalid because there was actual total loss. While the ship was at the bottom of the sea, the ship is rendered valueless to the owner of the vessel for the purpose for which it was held. The law does not require that all parts of the vessel is destroyed.

348

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(See Section 130, Insurance Code; Philippine Manufacturing Co. v. Insurance Society of Canton, Ltd., 42 Phil. 378 [1921]) It should be noted, however, that there is an alternative view to the effect that there is no actual total loss because the vessel is not irretrievably lost by sinking within the contemplation of Section 130[b] of the Insurance Code. Moreover, there is also a view that there is no constructive total loss in the present case. The sum that is necessary for the restoration of the vessel was only PI.34 million. Only P40,000 was necessary for salvors to refloat the vessel and PI.3 million was necessary for the restoration of the vessel to its original condition. Hence, the amount is not more than 3/4 of the value of the vessel (P2 Million).

§12. MEASURE OF INDEMNITY. The amount of indemnity in marine insurance is affected by the type of policy involved. A policy may be a valued policy where the value of the property is fixed therein. It may also be an open policy where no value of property is fixed in the policy. a. Valued Policy. In a valued policy, the valuation is conclusive upon the parties except when there is fraud when the valuation was fixed. SEC. 158. A valuation in a policy of marine insurance is conclusive between the parties thereto in the adjustment of either a partial or total loss, if the insured has some interest at risk, and there is no fraud on his part; except that when a thing has been hypothecated by bottomry or respondentia, before its insurance, and without the knowledge of the person actually procuring the insurance, he may show the real value. But a valuation fraudulent in fact, entitles the insurer to rescind the contract.

b. Open Policy. In a valued policy, there is no conclusive value that is fixed therein. The determination of the value of the thing insured is governed by the following provisions: SEC. 163. In estimating a loss under an open policy of marine insurance the following rules are to be observed: (a) The value of a ship is its value at the beginning of the risk, including all articles or charges which add to

CHAPTER 11 MARINE INSURANCE

349

its permanent value or which are necessary to prepare it for the voyage insured; (b) The value of the cargo is its actual cost to the insured, when laden on board, or where the cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising money for its purchase, or to any drawback on its exportation, or to the fluctuation of the market at the port of destination, or to expenses incurred on the way or on arrival; (c) The value of freightage is the gross freightage, exclusive of primage, without reference to the cost of earning it; and (d) The cost of insurance is in each case to be added to the value thus estimated. §12.01. CO-INSURANCE CLAUSE. There is always coinsurance in marine insurance in accordance with Section 159 which provides:

SEC. 159. A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. (1) The requisites for the application of co-insurance in marine insurance are as follows: (a) There must be partial loss, and (b) There is under-insurance meaning the insurance coverage is less than the value of the property insured. (2) Based on Section 159, the amount that the insurer is required to pay in case of partial loss is the proportion between the amount insured and the value of the whole interest in the property. Thus, the share of the insurer is determined on the basis of the following: Amount of Partial Loss/Value of the Interest in Property x Amount of Insurance = Share of the Insurer8 2

82 This formula can likewise be expressed as follows: Amount of Insurance/ Value of Property x Value of Damage = Share of Insurer. In the given example, 8,000,000/10,000,000 X 400,000 = 320,000.

350

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(3) For example, the vessel valued at P10 Million is insured by its owner A with X Insurer for P8 Million. Later, the vessel was damaged and the damage is valued at P400,000. Under the circumstances, the insurer is liable in the amount of P320,000 (400,000/10,000,000 X 8,000,000 = 320,000). This means that the owner of the vessel shouldered the loss up the extent of P80,000. (4) The co-insurance clause is not applicable if there is total loss. Thus, in the preceding example, if the vessel worth P10 Million was totally lost, the insurer is liable up to P8 Million which is the face value of the insurance policy. (5) Section 159 applies only to marine insurance. A co- insurance clause may be part of an ordinary property insurance only if there is as stipulation to that effect. Hence, if the insurance is fire insurance, there will be co-insurance only if a co-insurance clause is expressly stipulated in the policy. §12.02. FREIGHTAGE OR CARGO. In case of a valued policy of marine insurance on freightage or cargo, if a part only of the subject is exposed to the risk, the valuation applies only in proportion to such part.83 §12.03. PROFITS. Marine insurance over profits may be a valued policy. Thus, Section 162 of the Insurance Code provides that:

SEC. 162. When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they are expected to arise, and the valuation fixes their amount. (1) For example, the shipowner insured the profits that he expects from the sale of the goods that he is transporting in his ship for a particular voyage. If the profits are fixed at PI Million in the policy, the insurer is liable for such amount upon the total loss of the goods in transit. The amount fixed in the policy as profits is conclusively presumed to be the amount of the profits which were lost. (2) However, where profits are separately insured in a contract of marine insurance, the insured is entitled to recover,

83

Section 161,1.C.

CHAPTER 11 MARINE INSURANCE

351

in case of loss, a proportion of such profits equivalent to the proportion which the value of the property lost bears to the value of the whole. 84 Thus, the amount payable shall be determined on the basis of the following formula:

Value of Lost Property/Total Value of Property x Expected Profits = Liability (3) For example, the shipowner insured his expected profit in the amount of P50,000.00 which was supposed to be derived from the goods that are being shipped worth PI00,000.00. If good worth P60,000.00 are lost, the insurer shall be liable in the amount of P30,000.00 (60,000/100,000 X 50,000 = 30,000). §12.04. PARTIAL LOSS OF CARGO. Section 164 of the Insurance Code provides that if cargo insured against partial loss arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market price at that port, of the thing so damaged, bears to the market price it would have brought if sound. §12.05. SUE AND LABOR CLAUSE. Sue and Labor Clause requires the insured and his representative to take all reasonable steps that are necessary to limit or reduce an imminent loss. Indemnity will be given by the insurer for such effort. On the other hand, it may likewise be provided that the insured may exert effort in recovering the property and the consequences thereof are provided for as follows:

SEC. 165. A marine insurer is liable for all the expenses attendant upon a loss which forces the ship into port to be repaired; and where it is stipulated in the policy that the insured shall labor for the recovery of the property, the insurer is liable for the expense incurred thereby, such expense, in either case, being in addition to a total loss, if that afterwards occurs. §12.06. APPLICATION OF OLD MATERIALS. In the case of a partial loss of the ship or its equipment, the old materials are to be applied towards payment for the new. Unless otherwise stipulated in the policy, a marine insurer is liable for only twothirds

84

Section 160, l.C.

852

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10007 with Notea on Pro-Need Act)

(2/3) of the remaining cost of repairs after such deduction, except that anchors must be paid in full.85 §13. AVERAGES. Article 806 of the Code of Commerce provides that averages are all extraordinary or accidental expenses which may be incurred during the voyage in order to preserve the vessel, the cargo or both and any damage or deterioration which the vessel may suffer from the time it puts to sea from port of departure until it casts anchor in the port of destination as well as those suffered by the merchandise from the time they are loaded in the port of shipment until they are loaded of consignment. §13.01. FPA CLAUSE. Open cargo policies may contain what is known as FPA (Free from Particular Average) clause which limits liability in case of partial loss. Particular average is also known as simple average under the Code of Commerce. The rule in this jurisdiction is provided for in Section 138 of the Insurance Code which provides:

SEC. 138. Where it has been agreed that an insurance upon a particular thing, or class of things, shall be free from particular average, a marine insurer is not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the whole of such thing, or class of things, even though it becomes entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured. a. It should be noted, however, that two basic types of FPA clauses may be inserted in the policy namely: (a) FPA-American Conditions (FPAAC); and (b) FPA-English Conditions (FPA-EC). (1) When FPAAC is provided for, a particular average is not payable unless the loss is caused by the vessel’s being stranded, sunk, burnt, on fire or in collision.86 (2) Under the FPAEC, the particular average is not payable unless the carrying vessel has been stranded, sunk, burnt, or in collision. If any of those perils occurs, the FPAEC

“Section 168,1.C. “Jerome Trupin and Arthur Flitner, Commercial Property Insurance and Risk Management, Vol. 2, 1999 5th Ed., p. 26, hereinafter called “Trupin & Flitner.”

CHAPTER 11 MARINE INSURANCE

353

is breached and the particular average caused by a peril of the sea or any other insured peril during the voyage will be covered even if there is no causal connection between the stranding, sinking, burning or collision and the particular average loss.87 §13.02. SIMPLE OR PARTICULAR AVERAGE. Implicit from Section 138 is the rule that simple or particular average may be covered by the insurance policy. The Code of Commerce defines simple or particular averages as all the expenses and damages caused to the vessel or to her cargo which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo. 88 If a damage is not a general average, the same can be considered particular average. 89 Article 810 of the Code of Commerce provides that “the owner of the goods which gave rise to the expense or suffered the damage shall bear the simple or particular averages.” a. Examples of simple or particular averages provided for under Article 809 of the Code of Commerce are as follows: (1) The losses suffered by the cargo from the time of its embarkation until it is unloaded, either on account of inherent defect of the goods or by reason of an accident of the sea or f o r c e m a j e u r e , and the expenses incurred to avoid and repair the same. (2) The losses and expenses suffered by the vessel in its hull, rigging, arms, and equipment, for the same causes and reasons, from the time it puts to sea from the port of departure until it anchors and lands in the port of destination. (3) The losses suffered by the merchandise loaded on deck, except in coastwise navigation, if the marine ordinances allow it. (4) The wages and victuals of the crew when the vessel is detained or embargoed by legitimate order or f o r c e m a j e u r e , if the charter has been contracted for a fixed sum for the voyage. (5) The necessary expenses on arrival at a port, in order to make repairs or secure provisions.

87

Jerome Trupin and Arthur Flitner, supra. 809, Code of Commerce. ^Article m

Ibid.

354

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(6) The lowest value of the goods sold by the captain in arrivals under stress for the payment of provisions and in order to save the crew, or to meet any other need of the vessel, against which the proper amount shall be charged. (7) The victuals and wages of the crew while the vessel is in quarantine. (8) The loss inflicted upon the vessel or cargo by reason of an impact or collision with another, if it is accidental and unavoidable. If the accident should occur through the fault or negligence of the captain, the latter shall be liable for all the losses caused. (9) Any loss suffered by the cargo through the fault, negligence, or barratry of the captain or of the crew, without prejudice to the right of the owner to recover the corresponding indemnity from the captain, the vessel, and the freightage. §13.03. GENERAL AVERAGE. A general or gross average shall include all the damages and expenses which are deliberately caused in order to save the vessel, its cargo or both at the same time, from real and known risk.90 a. Requisites. The Supreme Court adopted the requisites of general averages stated by Senator Tolentino in his commentaries on the Code of Commerce:91 (1) There must be a common danger; (2) For the common safety part of the vessel or of the cargo or both is sacrificed deliberately; (3) From the expenses or damages caused follows the successful saving of the vessel and cargo; and (4) The expenses or damages should have been incurred or inflicted after taking proper legal steps and authority. b. Rationale. Such claims have their foundation in equity, and rest upon the doctrine that whatever is sacrificed for the common benefit of the associated interests shall be made good by all the interests which are exposed to the common peril and which were saved from the common danger by the sacrifice.

90

Article 811, Code of Commerce. A. Magsaysay, Inc. v. Agan, 96 Phil. 504. See also Compagme de Commerce, et al. v. Hamburg America, et al., 36 Phil. 590. 91

CHAPTER 11 MARINE INSURANCE

355

c. Common Danger. The requirement that there must be common danger “means, that both the ship and the cargo, after has been loaded, are subject to the same danger, whether during the voyage, or in the port of loading or unloading; that the danger arises from the accidents of the sea, dispositions of the authority, or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent.”92 d. Voluntary Sacrifice. There must be voluntary sacrifice of a part for the benefit of the whole in order to justify general average contribution. For example, it may involve a voluntary jettison or casting away of some portion of the associated interests for the purpose of avoiding the common peril from the whole to a particular portion of those interests. It cannot involve a damage which resulted beyond the control of the captain and crew or without any intention on their part. As a matter of fact, the Code of Commerce prescribes a procedure in deciding whether a sacrifice should be made.93 e. Successful Saving. The general average contribution cannot be demanded if the vessel and other cargo that are sought to be saved were in fact not saved. Article 860 of the Code of Commerce provides “if, notwithstanding the jettison of merchandise, breakage of masts, ropes, and equipment, the vessel shall be lost running the same risk, no contribution whatsoever by jettison of gross average shall be proper. The owners of the goods saved shall not be liable for the indemnification of those jettisoned, lost, or damaged.” f. Mandatory Legal Steps. It is also indispensable that the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority. In this connection, the proper steps and authority for making the sacrifice are prescribed in Articles 813 to 815 of the Code of Commerce.94 g. Examples. Examples of general averages under the Code of Commerce are enumerated in Article 811 thereof as follows: (1) The goods or cash invested in the redemption of the vessel or of the cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel

92 Aquino and Hernando, Essentials of Transportation and Public Utilities Law, 2011 Ed., p. 458. 93 Ibid. 9 *Ibid.

356

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

detained during the time the settlement or redemption is being made. (2) The goods jettisoned to lighten the vessel, whether they belong to the cargo, to the vessel, or to the crew, and the damage suffered through said act by the goods which are kept on board. (3) The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned, in order to save the cargo, the vessel, or both. (4) The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place it in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred. (5) The damage suffered by the goods of the cargo by the opening made in the vessel in order to drain it and prevent its sinking. (6) The expenses caused in order to float a vessel intentionally stranded for the purpose of saying it. (7) The damage caused to the vessel which had to be opened, scuttled or broken in order to save the cargo. (8) The expenses for the treatment and subsistence of the members of the crew who may have been wounded or crippled in defending or saying the vessel. (9) The wages of any member of the crew held as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it. 10 11 12

(10) The wages and victuals of the crew of a vessel chartered by the month, during the time that it is embargoed or detained by force majeure or by order of the government, or in order to repair the damage caused for the common benefit. (11) The depreciation resulting in the value of the goods sold at arrival under stress in order to repair the vessel by reason of gross average. (12)

The expenses of the liquidation of the average.

§13.04. WHO WILL PAY GENERAL AVERAGE. Code of Commerce expressly provides that gross or general average shall

CHAPTER 11 MARINE INSURANCE

357

be borne by those who benefited from the sacrifice. Article 812 of the Code of Commerce provides that “in order to satisfy the amount of the gross or general averages, all the persons having an interest in the vessel and cargo therein at the time of the occurrence of the average shall contribute.” On the other hand, Article 859 of the Code of Commerce provides that the insurers of the vessel, of the freightage and of the cargo shall be obliged to pay for the indemnification of the gross average, insofar as is required of each one of the objects respectively. a. Therefore, Article 859 of the Code of Commerce imposes a statutory obligation on the part of the marine insurer to shoulder the share pertaining to the property that it insured. Thus, the insurer of the vessel is obliged to pay the general average contribution pertaining to the vessel. The obligation of the insurer under Article 859 subsists even if the marine insurance policy provides that the liability of the insurer is for “ t o t a l l o s s o n l y .,%5 The Supreme Court explained: ‘The article is mandatory in its terms, and the insurers, whether for the vessel or for the freight or for the cargo, are bound to contribute to the indemnity of the general average. And there is nothing unfair in that provisions; it simply places the insurer on the same footing as other persons who have an interest in the vessel, or the cargo therein at the time of the occurrence of the general average and who are compelled to contribute (Art. 812, Code of Commerce). In the present case, it is not disputed that the ship was in grave peril and that the jettison of part of the cargo was necessary. If the cargo was in peril to the extent of call for general average, the ship must also have been in great danger, possibly sufficient to cause its absolute loss. The jettison was therefore as much to the benefit of the underwriter as to the owner of the cargo. The latter was compelled to contribute to the indemnity; why should not the insurer be required to do likewise? If no jettison had take place and if the ship by reason thereof had foundered, the underwriter’s loss would have been many times as large as the contribution now demanded.”

b. The computation of the general average contribution of the insurer is governed by Sections 166. The pertinent provisions provide:

SEC. 166. A marine insurer is liable for a loss falling upon the insured, through a contribution in respect to ^Francisco Jarque v. Smith Bell & Co., Ltd., et al., G.R. No. L-32986, November 11,1930, 56 Phil. 758.

358

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the thing insured, required to be made by him towards a general average loss called for by a peril insured against; provided, that the liability of the insurer shall be limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. SEC. 167. When a person insured by a contract of marine insurance has a demand against others for contribution, he may claim the whole loss from the insurer, subrogating him to his own right to contribution. But no such claim can be made upon the insurer after the separation of the interests liable to contribution, nor when the insured, having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of that right. SEC. 168. In the case of a partial loss of ship or its equipment, the old materials are to be applied towards payment for the new. Unless otherwise stipulated in the policy, a marine insurer is liable for only two-thirds of the remaining cost of repairs after such deduction, except that anchors must be paid in full. (1) Formula. Section 166 provides that the liability of the insurer shall be limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. Based on this rule, the formula for the determination of the general average contribution of the insurer is as follows: Amount of Insurance /Value of Property Insured GA Contribution of Insured = Amount to be paid.

X

(2) For example, the insurer insured the goods of Mr. X that is being carried in the vessel. The value of the goods is P20,000 while the insurance thereon is only Pi5,000. If the general average contribution pertaining to Mr. X is P4,000, the liability of the insurer for the general average is P3,000 (15,000/20,000 X 4,000). (3) The liability of the insurer may however be reduced if there are materials that are left because Section 168 provides that the old material shall be applied for the acquisition of new materials.

CHAPTER 11 MARINE INSURANCE

359

§13.05. SUBROGATION. The person whose property was sacrificed is entitled to general average payments. For example, the goods of Mr. X amounting P30,000, were jettisoned to save the ship. The goods are insured with Y Insurer for its full value. In this case, Mr. X can claim the total loss in the amount of P30,000 from Y Insurer but the latter is subrogated to the rights of Mr. X to claim from the person benefitted their general average contribution. This is in accordance with Section 165 of the Insurance Code quoted above.

a. The insured cannot claim from the insurer the amount of his loss if the said insurer cannot be subrogated to the rights of the insured. Thus, the insured cannot claim in the following instances: (1) If there is already separation of interest liable to the contribution; (2) If the insured neglects to claim contribution although he has opportunity to enforce the same; and (3)

If the insured waives the right to claim contribution.

CHAPTER 12 FIRE INSURANCE

The discovery of fire is one of the most important milestones in the progress of mankind. But while discovery of fire is a leap for man, fire is also a bane for countless individuals. The lyrical pen of Mr. Justice Cruz provides a striking description of the role of insurance when one’s property is destroyed by fire: “When a person’s house is razed, the fire usually burns down the efforts of a lifetime and forecloses hope for the suddenly somber future. The vanished abode becomes a charred and painful memory. Where once stood a home, there is now, in the sighing wisps of smoke, only a gray desolation. The dying embers leave ashes in the heart. For peace of mind and as a hedge against possible loss, many people now secure fire insurance. This is an aleatory contract. By such insurance, the insured in effect wagers that his house will be burned, with the insurer assuring him against the loss, for a fee. If the house does burn, the insured, while losing his house, wins the wagers. The prize is the recompense to be given by the insurer to make good the loss the insured has sustained. It would be a pity then if, having lost his house, the insured were also to lose the payment he expects to recover for such loss. Sometimes it is his fault that he cannot collect, as where there is a defect imputable to him in the insurance contract. Conversely, the reason may be an unjust refusal of the insurer to acknowledge a just obligation, as has happened many times.”1

§1. CONCEPT. As used in the Insurance Code, the term “fire insurance” shall include insurance against loss by: (1) fire, (2) lightning, (3) windstorm, (4) tornado, (5) earthquake, and (6) other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.2 Thus, fire insurance

Malayan Insurance Co., Inc. v. Gregoria Cruz Arnaldo, et al., G.R. No. L-67835, October 12, 1987. 2

Section 169,1.C. 360

CHAJTKK VJ. KIRK INHIJKANCK

301

rovers not only damage or IOHH by fir«* but also allied risks if they are covered by extensions and separate policies.

a. Fire. The term “fire” baa been defined an oxidation of a degree that is sufficient to produce a visible flame. As observed in one case: “No definition of fire can be found that does not include the idea of visible heat or light, and this is also the popular meaning given to the word. The slow decomposition of animal and vegetable matter in the air is caused hy combustion. Combustion keeps up the animal heat of the body. It causes the wheat to heat in the bin and in the stack. It causes hay in the stack and in the mow of the barn to heat and decompose. It causes the sound tree of the forest, when thrown to the ground, in the course of years to decay and molder away, until it becomes again a part of the earth. Still we never speak of these processes as ‘fire.’ And why? Because the process of oxidation is so slow that it does not, in the language of the witness at the trial, produce a ‘flame or glow.’ ”r* b. Hostile Fire Only. Liability on the part of the insurer will ensue only if there is a “hostile fire” and not a “friendly fire.” “A hostile fire is one that is uncontrolled, whereas a friendly fire is one contained in its proper receptacle. Once a fire has passed outside the limits assigned to it, it becomes a hostile fire. So long as the fire remains friendly, it is generally held that no right of recovery arises under the policy. Thus, if the fire remains controlled and no ignition results, damage to the receptacle itself or to other property by scorching, blistering, cracking, overheating, or soot are damages that are not insured. The same rule applies to property that falls accidentally or is thrown unintentionally into a friendly fire.” 3 4 However, “if fire escapes its confines, it becomes an insured peril. Thus, in a case where fire escapes through a crack in the oven and sets fire to the kitchen floor covering, the fire is hostile and the resulting loss is covered by the contract.”5 c. Lightning. The policy may provide that the insurer is liable for losses caused by the discharge of atmospheric electricity. The said loss may be covered even if no fire results. If fire results, the loss is compensable because fire is the immediate cause so long as lightning is not an excepted peril.

3

(1905).

Westem Woolen Mill Co. v. Northern Assurance Co. of London, 139 Fed. 637, 639

4

Hueber, Black and Webb, p. 113.

Hbid.

302

ESSENTIALS OK INSURANCE LAW (Republic Arl. NO. 10007 with Notes on Pro Need Act.)

d. Windstorm. In some insurance policies, the coverage for windstorm stipulates that velocity of the wind. For example, it is provided in some policies that the* wind must h(; of at least, a minimum velocity of 75 miles per hour. “I lowever, evidence of velocity is often absent, so currently the peril is considered in terms of effect rather than establishing a condition. If the wind is of such a force as to cause damage, it is deemed a windstorm and the resulting losses are covered.”*'

e. Earthquake. The coverage for earthquake is usually covered by a separate policy or extension rather than part of an existing coverage because it w i l l increase the cost of policy to the point that it would not be equitable. Moreover, insurance against earthquake normally requires special terms and conditions. Hence, earthquake peril is always an exclusion from an ordinary fire insurance policy. §2. PROPERTY INSURED. The insured property must be adequately described in the policy. It was observed that in construing the words used to describe the property, the greatest liberality is shown by the courts in giving effect to the insurance.6 7 a. In one case, the Supreme Court took cognizance of the custom of insurance agents of inspecting or examining the insured property before writing the policy and mistake as to the identity and character of the property insured — a building in the cited case - is extremely unlikely. 8 Hence, it was pointed out that courts are inclined to consider that the policy covers any building which the parties manifestly intended to insure however inaccurate the description may be.9 §3. ALTERATION. The effect of alteration on the thing insured would depend on the nature of alteration and its effect on the risk. The governing statutes are Sections 168 and 169 which provide:

SEC. 170. An alteration in the use or condition of a thing insured from that to which it is limited by the 6 Huebner, Black and Webb, p. 126, citing Fidelity Phoenix Fire Insurance Co. of New of York v. Board of Education of the Town of Rosedale, 6 CCH 739. 7 American Home Assurance Company v. Tantuco Enterprises, Inc., G.R. No. 138941, October 8, 2001.

Hbid. »Ibid.

CHAPTER 12 FIRE INSURANCE

n«»

policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance. SEC. 171. An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not increase the risk, does not affect a contract of fire insurance. a. Based on the foregoing provisions, it is clear that alteration will prevent recovery on the policy only if the following requisites are present: (1)

The alteration is on the use or condition of the thing insured;

(2)

The use or condition of the thing insured is limited in the policy;

(3) (4)

The alteration is without the consent of the insurer; The alteration is within the control of the insured;

and (5) The alteration increases the risk.10 b. There is an increase in the hazard or risk if there is a substantial change of conditions affecting the risk as materially to increase it. However, mere negligence temporarily endangering the property does not violate the law.11 12 c. For example, a house was insured against fire and the policy provides that the house shall be used only as the residence of the insured. If the house was converted into a bakery without the consent of the insurer, there will be material alteration that will entitle the insurer to rescind the policy. The change in the use of the thing by the insured increases the risk. d. In M a l a y a n I n s u r a n c e C o m p a n y , I n c . u . P A P C o . L t d . , ( P h i l . B r a n c h ) ™ the Supreme Court considered as an alternative ground for denying the claim or rescinding the policy on the ground

w See Malayan Insurance Company, Inc. v. PAP Co., Ltd., (Phil. Branch), G.R. No. 200784, August 7, 2013.

11 12

Vance, p. 731.

Supra.

864

ESSENTIALS OF INSURANCE LAW

(Republic Act No. 10607 with Notes on Pre-Need Act)

of material alteration. The insured machineries and equipment were transferred from one building to another that was not stipulated in the policy without the consent of the insurer. The Supreme Court declared that the alteration of the location increased the risk of loss. Although the building where the machineries and equipment were stored was not insured, the change in the location of the machineries and equipment changes the condition of the thing insured. §4. SUBSEQUENT ACTS OF THE INSURED. A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss.13 §5. MEASURE OF INDEMNITY. The measure of indemnity would depend on the type of policy that will be issued by the insurer. The rule in a valued policy is different from the rule in an open policy. §5.01. VALUED POLICY. In a valued policy, the valuation fixed in the policy shall be binding on the parties. The rule is the same in marine insurance. Hence, a valuation in a policy of fire insurance is conclusive between the parties thereto in the adjustment of either partial or total loss, if the insured has some interest at risk, and there is no fraud on his part; but a valuation fraudulent in fact, entitles the insurer to rescind the contract.14 a. An independent appraiser may be required to fix the value of the thing insured. Section 174 applies:

SEC. 174. Whenever the insured desires to have a valuation named in his policy, insuring any building or structure against fire, he may require such building or structure to be examined by an independent appraiser and the value of the insured’s interest therein may then be fixed as between the insurer and the insured. The cost of such examination shall be paid for by the insured. A clause shall be inserted in such policy stating substantially that the value of the insured’s interest in such building or structure has been thus fixed. In the absence of any change increasing the risk without the consent of the insurer or of fraud on the part of the

13

Section 14 172,1.C. Sections 173 and 158,1.C.

CHAPTER 12 FIRE INSURANCE

365

insured, then in case of a total loss under such policy, the whole amount so insured upon the insured’s interest in such building or structure, as stated in the policy upon which the insurers have received a premium, shall be paid, and in case of a partial loss the full amount of the partial loss shall be so paid, and in case there are two (2) or more policies covering the insured’s interest therein, each policy shall contribute pro rata to the payment of such whole or partial loss. But in no case shall the insurer be required to pay more than the amount thus stated in such policy. This section shall not prevent the parties from stipulating in such policies concerning the repairing, rebuilding or replacing of buildings or structures wholly or partially damaged or destroyed. b. Option to Rebuild Clause. The last sentence of Section 174 refers to what is known as the Option to Rebuild Clause. The parties may stipulate that the insurer may cause the repair, rebuilding, or replacement of the buildings or structures wholly or partially destroyed or damaged. (1) Professor Vance states that the insurer is also apt at times to suffer from the perverted valuation made by appraisers friendly to the insured. While the insurer would have the same right to avoid the award or appraisement, if unfairly made, as would the insured, he would hardly be so successful in proving fraud. Therefore, the insurer may escape the prejudice by providing for an option to rebuild, repair or replace the loss or damage. The “option to rebuild” clause operates as a wholesale check upon the insured in estimating the value of the damaged goods.15 §5.02. OPEN POLICY. In an open policy where there is no valuation in the policy, the measure of indemnity in an insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition in which at the time of the injury.16 §5.03. INDIRECT LOSSES. What was discussed earlier are in the nature of direct damage to the insured property. However, the occurrence of fire and other allied perils may produce two types

16

Vance, pp. 16 766-767. Section 173,1.C.

3^5

ESSENTIALS OF INSURANCE LAW {Republic Act No. 10607 with Notes on Pre-Need Act)

of losses namely: (1) financial loss due to the direct physical damage of physical property: and (2) the indirect or consequential losses arising out of the loss of use of the property.17 a. Consequential losses may be covered by insurance that may involve time element. Included are: (1) Business Interruption Insurance - This insurance may provide that the insurer is liable for the loss suffered consisting of loss of earnings comprising of the net profits that could have been realized had the business continued and expenses that continue despite the interruption of the business.18 (2) Extra Expense Insurance - This insurance covers extraordinary7 expenses that may be incurred in an effort to avoid any interruption of service. It covers additional expenses over and above the normal cost of doing business if necessitated by a fire or other insured peril at the described premises.19 (3) Rent Insurance — This protects the insured from loss of rental income. In other words, the rent insurance protects the insured against either loss of income from property or loss of used of the property.20 §6. PROHIBITIONS. Section 175 of the Insurance Code provides that no policy of fire insurance shall be pledged, hypothecated, or transferred to any person, firm or company who acts as agent for or otherwise represents the issuing company, and any such pledge, hypothecation, or transfer hereafter made shall be void and of no effect insofar as it may affect other creditors of the insured. a. Non-Alienation Clause. The fire insurance policy cannot be transferred without the consent of the insurer. Even if the alienation is allowed in the insurance policy, it is also required that the transferee has insurable interest over the insured property. (1) It was explained however that the “non-alienation clause” is not violated by the execution of a chattel mortgage. There is no alienation within the meaning of the clause by the mortgage of the property until foreclosure.21

17

Huebner, Black and Webb, p.260. 259. Ibid., p. 19 Ibid., p. 273. “ibid., p. 282. 21 E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715, December 20, 1919. lg

CHAPTER 12 FIRE INSURANCE

367

§7. CO-INSURANCE. A co-insurance clause is always part of marine insurance. In marine insurance, there is co-insurance by operation of law; there is no need for stipulation. However, a co- insurance clause may likewise be inserted in a fire insurance policy. There will be no co-insurance without such express stipulation. a. Co-insurance means the insured shall be paid only in the proportion that the amount of insurance purchased bears to the minimum amount of insurance that the contract requires the insured to carry.22 Co-insurance is apportionment of losses between an insurer and its insured such that the insurer will pay a fraction of each loss equal to the so-called coinsurance apportionment ratio.23 b. A simple formulation of the procedure for determination of the amount to be paid by the insurer is as follows: Amount of Insurance/Value of Property x Amount of Loss = Amount Payable. c. In G a l i a n v . S t a t e A s s u r a n c e C o m p a n y , 2 4 the co-insurance clause provides as one of the conditions of the policy: “If the property hereby insured shall, at the breaking out of any fire, be collectively of greater value than the sum insured thereon, then the insured shall be considered as being his own insurer for the difference, and shall bear a ratable proportion of the loss accordingly. Every item, if more than one, of the policy shall be separately subject to this condition.” The property insured was worth P4,512.00. The salvage amounted to P120.40. This left a partial loss amounting to P4,391.60. As the property was insured for only P3,000.00, the insurer must bear a portion of the loss represented by a fraction the numerator of which is the amount of the insurance and the denominator of which is the value of the property at the time of the fire. This entitled the insured to a judgment against the insurer for P2,919.92. §8. SOUND VALUE DISTINGUISHED FROM REPLACEMENT COST VALUE. There are many cases when the insured will be surprised to receive much less than the amount that it will spend to repair or to rebuild the insured property because of the terms and conditions provided for in the policy. Thus, if the policy provides that the method of valuing the insured property is at its

22

Huebner, Black and Webb, p. 96. ^George L. Head, Insurance to Value, 1971 Ed., p. ^G.R. No. Lr-8405, February 10, 1915. 39.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

368

“Sound Value,” also known as “Actual Cash Value” (ACV), the value of the property (and therefore the amount payable by the insurer) is computed by deducting the depreciation from the replacement cost. The depreciation is determined on the basis of the useful life of the property to establish the remaining life thereof. This is not the same of book value of the property. a. Thus, the amount payable by the insurer would be higher if the method of valuing the property is the “Replacement Cost Value” (RCV) under which the depreciation shall not be deducted. The valuation may also on the basis of Fixed Value which is a fixed pre-determined valuation. Necessarily, the premium for such policies may be higher than policies where the valuation is on the basis of the ACV. §9. EXCEPTIONS. The insurance may exclude different perils from the coverage of the policy. Thus, the parties may provide that losses caused by war, insurrection, rebellion, invasion, and other similar causes are excepted perils. The policy may likewise provide for a theft clause that excludes loss through theft. a. War and Related Risks. A policy may expressly exclude war, invasion, civil commotion, or to the abnormal conditions arising therefrom from the perils insured against. However, the mere fact that fire destroyed the thing insured when there is war does not automatically prevent recovery. There can still be recovery if the loss was occasioned by a cause independent of, and unrelated to war, invasion, civil commotion, or to the abnormal conditions arising therefrom. Recovery is permitted if the fire “was purely an ordinary and accidental one.” 25 b. Intentional Act. Even in the absence of stipulation, the insurer may refuse to pay if the loss was the result of intentional act of the insured. 26 However, the fact that the loss was the result of the intentional act of the insured must be established by sufficient evidence.27 The Supreme Court observed in one case, “Neither the interest of justice nor public policy would be promoted by an omission of the courts to expose and condemn incendiarism once the same

25

FiIipinas Compania de Seguros v. Tan Chuaco, G.R. No. L-1559, January 31,

1950. 26 Section 89, I.C. See also Moises Ariche, et al. v. The Law Union and Rock Insurance Co., Ltd., et al., G.R. Nos. L-24454-24456, January 12, 1996. 27 E.M. Bachrach v. British American Assurance Company, G.R. No. L-5715, December 20, 1919.

CHAPTER 12 FIRE INSURANCE

369

is established by competent evidence. It would tend to encourage rather than suppress that great public menace if the courts do not expose the crime to public condemnation when the evidence in a case xxx has really been committed.”28 §10. WARRANTY. In addition to the statutory provisions regarding alterations, the insurance policy may likewise include express warranties regarding the use and condition of the insured premises. a. Thus, the policy may expressly warrant that the insured property cannot be used for storage of inflammable substances. The policy must clearly state the warranty. There is no breach if there is no provision in the policy prohibiting the keeping of paints and varnishes upon the premises where the insured property was stored. No violation of the policy can be invoked by the insurer if paints and varnishes are stored.29 b. Even if there is prohibition regarding storage of paints and varnishes, there is no violation thereof if it is understood that the keeping thereof is incidental to the business. For example, if the property insured consisted mainly of household furniture kept for the purpose of sale. The preservation of the furniture in a salable condition by retouching or otherwise is incidental to the business. It is well-settled that the keeping of inflammable oils on the premises, though prohibited by the policy, d o e s n o t v o i d i t i f s u c h k e e p i n g i s i n c i d e n t a l t o t h e b u s i n e s s :30 Thus, where a furniture factory keeps benzene for the purposes of operation, or where it is used for the cleaning machinery, the insurer cannot on that ground avoid payment of loss, though the keeping of the benzene on the premises is expressly prohibited.31

28 The East Furniture, Inc. v. The Globe & Rutgers Fire Insurance Co. of New York, G.R. No. L-35848, November 22,1932.

^E.M. Bachrach v. British American Assurance Company, supra. 30 Ibid., citing Davis v. Pioneer Furniture Company, 78 N. W. Rep., 596; Faust v. American Fire Insurance Company, 91 Wis., 158. 31 Ibid., citing Mears v. Humboldt Insurance Company, 92 Pa. St., 15; 37 Am. Rep., 647.

CHAPTER 13 LIFE INSURANCE “The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That might frighten the insurance people to death.ffL §1. GENERAL CONCEPTS. Section 181 of the Insurance Code defines life insurance as an insurance on human lives and insurance appertaining thereto or connected therewith. Section 181 provides:

SEC. 181. 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. a. Various definitions are stated in a case:2 “Life insurance is a contract whereby one party insures a person against loss by the death of another. (Petition of Robbins, 140 A. 366, 367, 126 Me. 555.) An insurance on life is a contract by which the insurer, for a stipulated sum, engages to pay a certain amount of money if another dies within the time limited by the policy. (Cason v. Owens, 26 S. E. 75, 76, 100 Ga. 142.)

'Sun Insurance Office (Ltd.) v. The Court of Appeals and Nerissa Lim, G.R. No. 92383, July 17, 1992. 2 Gallardo v. Morales, G.R. No. L-12189, April 29, 1960. 370

CHAPTER 13 LIFE INSURANCE

371

Life insurance includes in which the payment of the insurance money is contingent upon the loss of life. ( B o w l e s s v . M u t u a l B e n . H e a l t h & A c c i d e n t A s s n . , C . C . A . V a . 9 9 F . 2 d 4 4 . 4 8 , 4 9 . ) A contract for life insurance is really a contract for insurance for one year in consideration of an advanced premium, with the right of assured to continue it from year to year upon payment of a premium as stipulated. ( M u t u a l L i f e I n s . C o . 1 0 0 P a 1 7 2 , 1 8 0 . ) In its broader sense, ‘life insurance' includes accident insurance, since life is insured under either contract. ( A m e r i c a n T r u s t & B a n k i n g C o . v . L e s s l y , 1 0 6 S . W . 2 d . 5 5 1 , 5 5 2 , 1 7 1 T e n n . 5 6 1 , 1 1 1 A . L . R . 5 9 . ) Under statute providing that ‘any life insurance’ on life of husband shall insure to benefit of widow and children exempt from husband’s debt, proceeds of policy insuring against death by accident insured to widow’s benefit free from husband’s debts. ( C o d e 1 9 3 2 , B 8 4 5 6 . A m e r i c a n T r u s t & B a n k i n g C o . v . L e s s l y , 1 0 6 S . W . 2 d 5 5 1 , 1 7 1 T e n n . 5 1 1 I I I A . L . R . 5 9 . ) policy’ ( C o M u t P a r

Insurance policy, providing for payment in case of accidental death, is ‘life insurance to such extent within state statue (sic.) prescribing incontestable period for policies. d e S . C . 1 9 3 2 s s 7 9 8 6 , 7 9 8 7 ; P a c i f i c . L i f e I n s . C o . o f C a l i f o r n i a v . k e r , C . C A . S . C . , 7 1 F . 2 d 8 7 2 , 8 7 5 . )

‘Life insurance’ includes all policies of insurance in which payment of insurance money is contingent upon loss of life. . . . ( S m i t h v . E q u i t a b l e L i f e A s s u r . S o c . o f U . S . , 8 9 S . W . 2 d 1 6 5 , 1 6 7 , 1 6 9 T e n n . 4 7 7 . ) Insurance policy including a death benefit and a health or accident disability benefit constituted a ‘life insurance policy’ within meaning of Law 1926, c. 118, S. 134, imposing privilege tax on insurance companies with different rates as between life insurance companies and other companies, in view of provisions of Code 1906, ss 2576, 2598 ( H e m i n g w a y ’ s C o d e 1 9 2 7 , s s 5 8 3 0 , 5 8 5 6 ) , and Law 1924, c. 191, s I ( H e m i n g w a y ’ s C o d e 1 9 2 7 , s 5 9 9 5 ) ; it being immaterial that in some policy forms the health and disability feature was more valuable assent a showing that death provision was inserted to avoid the higher tax. ( U n i v e r s a l L i f e I n s . C o . v . S t a t e , 1 2 1 S o . 8 4 9 , 8 5 0 , 1 5 5 M i s s . 3 5 8 . ) ( 2 5 W o r d s & P h r a s e s 2 6 0 , 2 6 1 , 2 6 2 . ) When the application was made, Harris W. Rimmer carried life insurance with the Equitable Life Assurance Society, for $10,000, payable upon proof of death, with a provision that upon death by accident the amount of insurance payable would be increased to $20,000. The plaintiff insisted that this was life insurance, a disclosure of which was not called for in question 10, while the defendant insisted it was accident insurance that should have been disclosed and further insisted that, it being a fact material to the risk the failure to disclose the policy in the Equitable Life Assurance Society rendered the policy issued to the applicant void. . . . The court might have gone further and held that the failure of the applicant to characterize the

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

372

Society as accident insurance did not constitute a false answer to the inquiry of what accident or health insurance he was carrying. The policy in the Equitable Life Assurance Society covered loss of life from natural as well as external and accidental causes, and was life insurance. The mere addition of the double indemnity clause providing for increased insurance upon proof of death by accident did not divest the policy of its character of insurance on life, or make the contract o t h e r t h a n l i f e i n s u r a n c e , for insurance on life includes all policies of insurance in which the payment of the insurance money is contingent upon the loss of life. (Logan u. Fidelity & Casualty Co., 146Mo. 114, 47 S.W. 948. See also Johnson v. Fidelity & Guaranty Co., 148 Mich. 406, 151 N.W. 593, L.R.A. 1916A, 475; Zimmer v. Central Accidental Co., 207 Pa. 472, 56 A. 1003; Wright v. Fraternities Health & Accident Ass’n. 107 Me. 418, 78A. 475, 32 L.R.A. [N.S.J 461; Metropolitan Life Ins. Co. v. Ins. Com’r 208 Mass. 386, 94 N.E. 477; Standard Life & Accident Ins. Co. v. Caroll, 86 F. 567, 41 L.R.A. 194; Wahl v. Interstate Business Men’s Accident Ass’n 201 Iowa; 1355, 207 N.W. 395, 50 A.L.R. 1377.) (Provident Life & Accident Ins. Co. v. Rimmer, 12 S. W. 2d Series, 365, 367.)” b. Valued Policy. Life insurance is not a contract of indemnity. Consistently, the interest of the person insured in his or another person’s life is generally not susceptible of exact pecuniary measurement. Hence, the measure of indemnity is whatever is fixed in the policy.

SEC. 186. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. c. An example of a situation where the interest of a person insured is susceptible of exact pecuniary measurement is the case of a creditor who insures the life of the debtor. The interest of the insured creditor is measurable because it is based on the value of the indebtedness. d. At any rate, it is also not correct to say that insurer will accept the application for life insurance coverage for any amount without regard to economic value. The foundation of life insurance is not an abstract philosophical framework but the economic value of human life. One concept that is widely accepted is known as “human life value” which was proposed by Prof. Huebner in the 1920s in the United States. 3 Under this framework of analysis, “human life value

3

Huebner & Black, p. 15.

CHAPTER 13 LIFE INSURANCE

373

is a measure of the actual future earnings or service of an individual, that is, the capitalized value of an individual’s net future earnings after subtracting selfmaintenance costs.”4 An insurer that accepts and approves all life insurance applications is courting disaster because individuals have different human life values and should not therefore be insured under the same terms and conditions. A prudent insurer must do all of the following: (1) set the various classes of risks and applicants to determine who among them belong to the so- called “sub-standard” group, (2) establish the limits for the various classes of risks, (3) adopt selection and classification procedures that will permit the placing of applicants for life insurance into the proper categories.5 §2. KINDS. Under the Insurance Code, an insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life. 6 Accordingly, life insurance may be classified into (1) Whole Life Insurance, (2) Term Insurance, and (3) Endowment Policy. a. Whole Life Insurance. Whole life insurance offers permanent protection. The life of the person is covered for life. It may further be classified according to the modes of payment of premium, that is, it may be (1) Single Premium - there single or onetime payment of substantial amount of premium; (2) Continuous Premium or Ordinary Life Insurance - premiums are paid until the death of the insured; or (3) Limited Payment Period - premium are paid for a limited number of year. (1) Cash Value Life Insurance is a form of life insurance where the premiums paid are sufficient to pay not only the insurance claims and expenses but it also a cash value or a savings fund within the policy. Unlike a term insurance which does not have cash values, cash value for whole life insurance is guaranteed.7 Under a whole life insurance policy, a reserve is accumulated that eventually equals the face value of the policy. The accumulated cash values may eventually provide the basis for a policy loan. It can also support the non-forfeiture

4

Huebner & Black, p. 15. Huebner & Black, Chapters 32 and 33, pp. 442-463. 6 Section 182, 1st paragraph, I.C. 7 Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., 2009, Sec. 8.4. 5

374

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

options - meaning the policy will not necessarily be forfeited for nonpayment of premium because the savings fund can be used for such purpose. b. Term Insurance. In term insurance, the insurer promises to pay the fact amount of the policy to the beneficiary if the insured dies within a specified period. The contract expires without value if the insured survives the period. The distinguishing features of a term insurance are: (1) It has a fixed period, and (2) Little or no cash values are accumulated.8 (1) In life insurance, the policy matures either upon the expiration of the term set forth therein in which case its proceeds are immediately payable to the insured himself, or upon his death occurring at any time prior to the expiration of such stipulated term, in which case, the proceeds are payable to his beneficiaries. Thus, in one case, the policy matured upon the death of the insured on November 2, 1944, and the obligation of the insurer to pay arose as of that date. The period provided by law within which to pay the proceeds after presentation of proof of death is merely procedural in nature, evidently to determine the exact amount to be paid and the interest thereon to which the beneficiaries may be entitled to collect in case of unwarranted refusal of the company to pay, and also to enable the insurer to verify or check on the fact of death which it may even validly waive. It is the happening of the suspensive condition of death that renders a life policy matured and not the filing of proof of death which is merely procedural, for even if such proof were presented but if turns out later that the insured is alive, such filing does not give maturity to the policy. The insured having died on November 2, 1944, during the Japanese occupation, the proceeds of his policy should be adjusted accordingly.9 (2) Term Insurance may be further classified into “shortterm insurance,” “long-term insurance,” “renewable insurance,” or “convertible insurance.” Convertible term insurance can be converted into a whole life policy or endowment policy within a certain period without proof of insurability.

®Mehr and Cammack, p. 365. Teresa Vda. de Fernandez, et al. v. The National Life Insurance Company of the Philippines, G.R. No. L-9146, January 27, 1959.

CHAPTER 13 LIFE INSURANCE

375

(3) A “term insurance” is used for short term need. For example, a loan may provide as a condition that the borrower is insured for the entire term of the loan. In addition, in the case of convertible or renewable policy, the same may be resorted to by someone who cannot afford long term protection but at the same time gain benefit of dispensing with proof of insurability. c. Endowment Policy. The parties may also enter into what is known as an endowment policy. If a policy of insurance provides that the proceeds shall be payable to the assured, if he lives to a certain date, and, in case of his death before that date, then they shall be payable to the beneficiary designated. 10 The interest of the beneficiary is a contingent one, and the benefit of the policy will only inure to such beneficiary in case the assured dies before the end of the period designated in the policy. 11 Under an endowment of policies payable to the insured at the expiration of a certain period, if alive, but providing for the payment of a stated sum to a designated beneficiary in case of the insured death during the period mentioned, the insured and the beneficiary take contingent interests. The interest of the insured in the proceeds of the insurance depends upon his survival at the expiration of endowment period. Upon the insured’s death, within the period, the beneficiary will take, as against the personal representative or the assignee of the insured. Upon the other hand, if the insured survives the endowment period, the benefits are payable to him or to his assignee, notwithstanding a beneficiary is designated in the policy.12 (1) An endowment life insurance policy is a variation of cash value life insurance. The policy provides level death benefits and cash values that increase with duration so that a policy’s cash value equals its death benefit at maturity, but the policy also allows the purchaser to specify the policy’s maturity date.13 d. Industrial Life Insurance. The term * i n d u s t r i a l l i f e i n s u r a n c e ” as used in this Code shall mean that form of life insurance under which the premiums are payable either monthly or oftener,

10 Mariano J. Villanueva v. Pablo Oro, G.R. No. L-2227, August 31, 1948, citing Couch, Cyclopedia of Insurance Law, Vol. 2, Sec. 343, p. 1023. “Mariano J. Villanueva v. Pablo Oro, ibid. 12 Ibid., citing 29 Am. Jur., Section 1277, pp. 952, 953. 13 Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., 2009, Sec. 8.17.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

376

if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila, and if the words “ i n d u s t r i a l p o l i c y ” are printed upon the policy as part of the descriptive matter.14 e. Variable Life or Variable Unit-Linked (VUL) Insurance Contractor Policy. This is “any insurance 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 there under 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.”15 f. Participating Policy is one which gives the holder a right to participate in such dividends as may be declared in his class from saving due to favorable mortality and investment experience. 16 Non-participating carries no dividends requiring uniform premium payments, ordinarily at a lower rate than participating policies.17 The dividends are generated because of “favorable experience, such as higher-than-expected investment returns or lower-thanexpected mortality and/or expenses for operations.”18 g. While accident insurance is different from life insurance, there is authority for the view that when one of the risks insured in the accident insurance is death of the insured by accidents, then such accident insurance may also be regarded as life insurance.19 h. A provision in a policy that provides for funeral/cash benefit in case of death by natural causes or illness is considered life insurance and are not supposed to be included in an Accident and Health Policy.20

14

Section 235,1.C. See also Articles 2021 to 2027, New Civil Code. Section 238(b), I.C.; See Circular Letter No. 2017-34, June 15, 2017, Revised Guidelines on Variable Life Insurance Contracts. 16 Vance, p. 46. 17 Ibid. 18 Beam, Jr. and Wiening, Fundamentals of Insurance Planning, 3rd Ed., 2009, Sec. 8.24. 19 Gallarado v. Morales, G.R. No. 12189, April 29, 1960. 20 Par. 7.14,1.C. Circular Letter 2015-58-A dated December 21, 2015. 15

CHAPTER 13 LIFE INSURANCE

377

§3. ANNUITY. The Insurance Code provides that every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purpose of the Code.21 The second paragraph of Section 181 of the Code provides:

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. a. Strictly speaking a contract of insurance may be distinguished from “annuities” which can be considered an investment rather than a specie of insurance. A contract of life insurance involves “payments of amounts known as premium by the insured over a period of years in return for which the insurer creates an immediate estate in a fixed amount in the event of his death while in good standing.” 22 In insurance, “there is an immediate hazard of loss thrown upon the insurer, with the required performance by the insured of certain obligations at designated intervals of time.”23 “An annuity contract is diametrically opposed to this. The person designated as the recipient is the person paying the money. He pays in a fixed sum at one time, in return for which the company must then perform a series of obligations over a period of years, at designated times. The hazard of loss is no longer upon the company but upon the recipient who may die before any benefits are received. Instead of creating an immediate estate for the benefit of others, he has reduced his immediate estate in favor of future contingent income.”24 b. Thus, while life insurance gives protection for premature death, an annuity gives protection for excessive longevity. 25 There is also a pooling of money in annuity but the same spreads the risk that some of those who contribute to the pool will live beyond their life expectancy and outlive their income. “While life insurance can

21

Section 181, 2nd Paragraph, I.C.

22

1 Appleman, Insurance Law and Practice, Section 83, p. 76 (1941) cited in Prudential Insurance Company v. Howell, 148 A (2d) 145 (1959). ^Ibid. 24 Ibid. 25 Beam, Jr., et al., p. 335.

378

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

provide a financial hedge against dying too soon, annuity can provide a hedge against living too long.”26 c. An annuity may be classified into annuity certain, or life annuity. Life annuity may be (1) whole life annuity, or (2) temporary life annuity. In an Annuity Certain, the annuity payments are made for a definite period without being linked to the duration of a specified human life. Life annuity is linked to the life of a specified person. Whole life annuity is the type where payment of annuity is made so long as the person is alive. In a temporary life annuity, payments are terminated either at the death of the specified person or at a fixed period.27 §4. LIFE ANNUITY UNDER THE CIVIL CODE. It should be noted that Life Annuity is one of the aleatory contracts under the New Civil Code. Article 2010 of the New Civil Code provides that “by 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.” The provisions of the New Civil Code on the aleatory contract of life annuity read as follows:

Art. 2021. The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income. (1802a) Art. 2022. The annuity may be constituted upon the life of the person who gives the capital, upon that of a third person, or upon the lives of various persons, all of whom must be living at the time the annuity is established. It may also be constituted in favor of the person or persons upon whose life or lives the contract is entered into, or in favor of another or other persons. (1803) Art. 2023. Life annuity shall be void if constituted upon the life of a person who was already dead at the

26

Beam, Jr., et al., p. 335. Beam, Jr., and Wiening, supra, Section 11.2. 27

CHAPTER 13 LIFE INSURANCE

379

time the contract was entered into, or who was at that time suffering from an illness which caused his death within twenty days following said date. (1804) Art. 2024. The lack of payment of the income due does not authorize the recipient of the life annuity to demand the reimbursement of the capital or to retake possession of the property alienated, unless there is a stipulation to the contrary; he shall have only a right judicially to claim the payment of the income in arrears and to require a security for the future income, unless there is a stipulation to the contrary. (1805a) Art. 2025. The income corresponding to the year in which the person enjoying it dies shall be paid in proportion to the days during which he lived; if the income should be paid by installments in advance, the whole amount of the installment which began to run during his life shall be paid. (1806) Art. 2026. He who constitutes an annuity by gratuitous title upon his property, may provide at the time the annuity is established that the same shall not be subject to execution or attachment on account of the obligations of the recipient of the annuity. If the annuity was constituted in fraud of creditors, the latter may ask for the execution or attachment of the property. (1807a) Art. 2027. No annuity shall be claimed without first proving the existence of the person upon whose life the annuity is constituted. (1808) §5. MINOR AS INSURED. The third and fourth paragraphs of Section 182 of the Insurance Code as amended by R.A. No. 10607 provide:

“In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the mother, of any minor, who is an insured or a beneficiary under a contract of life, health, or accident insurance, may exercise, in behalf of said minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the minor in the particular act involved does not exceed Five hundred thousand pesos (P500,000.00) or in such reasonable amount as

380

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

may be determined by the Commissioner. Such right may include, but shall not be limited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the Policy, and giving the minor’s consent to any transaction on the policy. “In the absence or in case of the incapacity of the father or mother, the grandparent, the eldest brother or sister at least eighteen (18) years of age, or any relative who has actual custody of the minor insured or beneficiary, shall act as a guardian without need of a court order or judicial appointment as such guardian, as long as such person is not otherwise disqualified or incapacitated. Payment made by the insurer pursuant to this section shall relieve such insurer of any liability under the contract.” a. The present rule is the exception to the provisions of the Family Code.28 Under Section 182 of the Insurance Code, the parents may exercise any right under the policy without court authority or the giving of a bond where the interest of the minor in the particular act does not exceed P500,000.00. Article 225 of the Family Code provides that if the market value of the property or the annual income of the child exceeds P50,000.00, the parent concerned shall be required to furnish a bond in such amount as the court may determine but not less than 10% of the value of the property or annual income, to guarantee the performance of the obligations prescribed for general guardians. A petition for approval of the bond is required.29 Under Section 182 of the Insurance Code, a court order and a bond are both unnecessary for the exercise of the right of the minor under the policy provided that the interest of the minor does not exceed P500,000.00. The latter amount of P500,000.00 is more realistic under present circumstances because the expenses to be incurred in filing a petition for approval of a bond may be more than what the amount of the property itself if the minimum amount is just P50,000.00. b. Article 225 of the Family Code likewise provides for joint exercise of legal guardianship over the properties of an

28 Article 225, Executive Order No. 209, Family Code. See also Luz Pineda, et al. v. Court of Appeals, G.R. No. 105562, September 27, 1993. 29 Article 225, Executive Order No. 209, Family Code.

HIAITKR l.'i LIPK INSl/RANOK

UH 1

unomnnripnted common child without the necessity of a court appointment. It is the? father’s decision that will prevail in case of disagreement unless there is a judicial order to the contrary. When the above-quoted paragraphs of Section 182 of the Insurance Code was modified by R.A. No. 10607, the legislators did not reconcile (he same with Article 225 with respect to joint administration of the minor’s properties. Section 182 still provides that the father, or in the latter’s absence or incapacity, the mother, of any minor, may exercise, in behalf of said minor, any right under the policy. In the previous edition of this work, it was opined that the provisions of Article 225 of the Family Code on joint exercise of legal guardianship should be deemed to have impliedly modified Section 182 (previously numbered Sec. 180) and the rule on joint administration would be deemed to be incorporated in the Insurance Code. However, with the re-enactment of the old rules under Section 182, it is clear that the evident intent is to give the father the primary authority to exercise the rights under the minor’s policy. It is only when he is incapacitated that the mother can exercise such right. c. Hence, under the new provisions of Section 182, the following can exercise the rights of the minor under a life insurance policy where he is an insured or beneficiary: (1) (2)

Father; Mother but only in the absence or incapacity of the father;

(3) In the absence of the father or the mother, the following may exercise the right without need of court appointment: (i) (ii)

the grandparent, the eldest brother or sister at least eighteen (18) years of age, or

(iii) any relative who has actual custody of the minor insured or beneficiary. §6. SUICIDE CLAUSE. The policy may provide for suicide as an excepted peril. Contrarily, the policy may also include suicide as a peril insured against. However, a stipulation in the policy is not necessary for the insurer to be liable even in the case of suicide provided that the policy has been in force for period of two years from the date of issue or last reinstatement. Section 183 of the Insurance Code provides:

382

ESSENTIALS OF INSURANCE LAW ^Republic Act No. 10607 with Notes on Pre-Need Act)

SEC. 183. The insurer in a life insurance contract shall be liable in case of suicide only when it is committed after the policy has been in force for a period of two (2) years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide committed in the state of insanity shall be compensable regardless of the date of commission. a. The insurer is liable in case of suicide even before the two year period in any of the following cases: (1) When a shorter period is provided for in the policy. For example, the policy may provide that the insurer is liable in case of suicide if it has been in force for at least one year. (2) When the suicide was committed in the state of insanity. For example, the insured became insane one month after the issuance of the policy. A week thereafter, the insured committed suicide while he was still insane. The insurer is liable in this case. §7. ACCIDENTAL DEATH BENEFIT CLAUSE. The life insurance policy may provide for an accidental death benefit clause which gives the beneficiaries additional benefits if the death of the insured is through accidental means. Thus, the policy may provide for an additional amount if the death of the insured resulted directly from bodily injury effected solely through external and violent means sustained in an accident and independently of all other causes. This rule was explained in one case:30 “A gun which discharges while being cleaned and kills a bystander; a hunter who shoots at his prey and hits a person instead; an athlete in a competitive game involving physical effort who collides with an opponent and fatally injures him as a result: these are instances where the infliction of the injury is unintentional and therefore would be within the coverage of an accidental death benefit clause such as that in question in this case. But where a gang of robbers enter a house and coming face to face with the owner, even if unexpectedly, stab him repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally inflicted, regardless of whether they prove fatal or not. As it was, in the present case they did

^’Emilia T. Biagtan, et al. v. The Insular Life Assurance Company, Ltd., G.R- No. L25579, March 29, 1972.

CHAPTER 13 LIFE INSURANCE

383

prove fatal, and the roEbers have been accused and convicted of the crime of robbery with homicide. The c a s e of O j . l a r . o c tr. Col. r i o f A p p e a l s , 9 8 P h i l . 7 9 , is relied upon by the trial court in support of its decision. The facts in that case, however, are different from those obtaining here. The insured there was a watchman in a certain company, who happened to be invited by a policeman to come along as the latter was on his way to investigate a reported robbery going on in a private house. As the two of them, together with the owner of the house, approached and stood in front of the main gate, a shot was fired and it turned out afterwards that the watchman was hit in the abdomen, the wound causing his death. Under those circumstances, this Court held that it could not be said that the killing was intentional for there was the possibility that the malefactor had fired the shot to scare the people around for his own protection and not necessarily to kill of hit the victim. A similar possibility is clearly ruled out by the facts in the case now before Us. For while a single shot fired from a distance, and by a person who was not even seen aiming at the victim, could indeed have been fired without intent to kill or injure, nine wounds indicted with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned. The manner of execution of the crime permits no other conclusion. Court decisions in the American jurisdiction, where similar provisions in accidental death benefit clauses in insurance policies have been construed, may shed light on the issue before Us. Thus, it has been held that '‘intentional” as used in an accident policy excepting intentional injuries inflicted by the insured or any other person, e t c . , implies the exercise of the reasoning faculties, consciousness, and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of a third person the insurer is relieved from liability as stipulated. In the case of H u t c h c r a f t ’ s E x ’ r . v . T r a v e l e r s ’ I n s . C o . , 8 7 K y . 3 0 0 , 8 S . W . 5 7 0 , 1 2 A m . S t . R e p . 4 8 4 , the insured was waylaid and assassinated for the purpose of robbery. Two ( 2 ) defenses were interposed to the action to recover indemnity, namely: (1) that the insured having been killed by intentional means, his death was not accidental, and (2) that the proviso in the policy expressly exempted the insurer from liability in case the insured died from injuries intentionally inflicted by another person. In rendering judgment for the insurance company, the Court held that while the assassination of the insured was as to him an unforeseen event and therefore accidental, the clause of the proviso “that excludes the (insurer’s) liability, in case death or injury is intentionally inflicted by any other person, applies to this case.” I n Butero v. Travelers’ Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 7 1 S . W . 8 1 1 , the insured was shot three times by a person unknown late on a dark and stormy night, while working in the coal shed of a railroad company. The policy did not cover death resulting from “intentional

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

3S4

injuries inflicted by the insured or any other person.” The inquiry was as to the question whether the shooting that caused the insureds death was accidental or intentional; and the Court found that under the facts, showing that the murderer knew his victim and that he fired with intent to kill, there could be no recovery under the policy which excepted death from intentional injuries inflicted by any person.”

a. The death of the insured is still compensable under the Accidental Death Clause if the insured died because a malefactor had fired the shot that killed the insured merely to scare away the people around the malefactor for the latter’s protection and not necessary to kill the insured.31 b. The death of the insured was accidental when he ruptured his intestine after he jumped a few feet to the floor. The death was accidental “because although his act of jumping was intentional, the result (rupturing his intestine) was not. 32 The death was also accidental where the death was caused by contaminated dental equipment. 33 However, routine jogging that resulted in ocular pressure in the insured’s eye was not considered accidental.34 PROBLEM: 1. The facts are stipulated. Juan S. Biagtan was insured with defendant Insular Life Assurance Company under Policy No. 398075 for the sum of P5,000 and, under a supplementary contract denominated “Accidental Death Benefit Clause, for an additional sum of P5,000 if “the death of the Insured resulted directly from bodily injury effected solely through external and violent means sustained in an accident... and independently of all other causes.” The clause, however, expressly provided that it would not apply where death resulted from an injury “intentionally inflicted by a third party.” On the night of May 20, 1964 or during the first hours of the following day a band of robbers entered the house of the insured Juan S. Biagtan. In committing the robbery, the robbers, on reaching the staircase landing of the second floor, rushed towards the doors of the second floor room, where they suddenly met a person near the door of one of the rooms who turned out to be the insured Juan S. Biagtan who received thrusts from their sharp-pointed instruments, causing wounds on the body of said Juan

^'Virginia Calanoc v. Court of Appeals, G.R. No. L-8151, December 16, 1955. Di Mugno and Glad, p. 1620, citing Harloe v. California State Life Ins. Co., 206 Cal. 141, 273 P. 560 (1928). M Ibid., citing Horton v. Travelers’ Ins. Co., 45 Cal. App. 462, 187 P. 1070 (2d Dist. 1920). M Ibid., citing Williams v. Hartford Accident & Indemnity Co., 158 Cal. App. 3d 229, 204 Cal. Rptr. 453 (2d Dist. 1984). 32

CHAPTER 13 LIFE INSURANCE

385

S. Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964”; Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the basic amount of P5,000 but refused to pay the additional sum of P5,000 under the accidental death benefit clause, on the ground that the insured’s death resulted from injuries intentionally inflicted by third parties and therefore was not covered. Plaintiffs filed suit to recover. The only issue to be resolved is whether under the facts, the wounds received by the insured at the hands of the robbers — nine in all, five of them mortal and four non-mortal — were inflicted intentionally. The trial court ruled in the negative finding that the wounds were not inflicted intentionally. Is the trial court correct in its finding? A:

No. The trial court committed a plain error in concluding that the wounds were inflicted unintentionally. The wounds were inflicted upon the deceased, all by means of thrusts with sharp- pointed instruments wielded by the robbers. This is a physical fact as to which there is no dispute. So is the fact that five of those wounds caused the death of the insured. Whether the robbers had the intent to kill or merely to scare the victim or to ward off any defense he might offer, it cannot be denied that the act itself of inflicting the injuries was intentional. (Emilia T, Biagtan, et al. v. The Insular Life Assurance Company, Ltd., G.R. No. L-25579, March 29, 1972)

§8. TRANSFER OF POLICY. The policy of life insurance may be the object of voluntary and involuntary transfer. Insurable interest on the part of the transferee is not necessary. Notice to the insurer is not even necessary. SEC. 184. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. SEC. 185. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required. §9. EXEMPT FROM EXECUTION. Proceeds of life insurance policies are exempt from execution under Section 13(k) of Rule 39 of the Rules of Civil Procedure which declares as exempt from execution “monies, benefits, privileges, or annuities accruing or in any manner growing out of any life insurance.” The exemption is

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

386

not limited to life insurance defined in Section 179 of the Insurance Code. When the Rules of Court make reference to “any life insurance,” the exemption there established applies to ordinary life insurance contracts, as well as to those which, although intended primarily to indemnify for risks arising from accident. It includes policies that insure against loss of life due, either to accidental causes, or to the willful and criminal act of another, which, as such, is not strictly accidental in nature. Indeed, it has been held that statutes of this nature seek to enable the head of the family to secure his widow and children from becoming a burden upon the community and, accordingly, should merit a liberal interpretation.35

§10. INSOLVENCY. There is resolute attitude of Courts upon the proposition that the assignee acquires no beneficial interest in insurance effected on the life of the insolvent, except to the extent that such insurance contains assets which can be realized upon as of the date when the petition of insolvency is filed. This attitude is manifest if the question has arisen under provisions like Section 32 of the Insolvency Law which provides the properties that are exempt from execution do not pass to the assignee.36 Similarly, under Section 113 of R.A. No. 10142, legal title of properties exempt from execution does not pass to the liquidator. a. The explanation is to be found in the consideration that the destruction of a contract of life insurance is not only highly prejudicial to the insured and those dependent upon him, but is inimical to the interests of society. Insurance is a species of property that should be conserved and not dissipated. As is well known, life insurance is increasingly difficult to obtain with advancing years, and even when procurable after the age of 50, the cost is then so great as to be practically prohibitive to many. Insolvency is a disaster likely to overtake men in mature life; and one who has gone through the process of bankruptcy usually finds himself in his declining years with the accumulated savings of years swept away and earning power diminished. The courts are therefore practically unanimous in refusing to permit the assignee in insolvency to wrest from the insolvent a policy of insurance which contains in it no present realizable assets. 37

35

Gallardo v. Morales, G.R. No. L-12189, April 29, 1960. This corresponds to Section 14 of the American Bankruptcy Act of 1867, or under Section 70(a) of the American Bankruptcy Act of 1898. 37 Sun Life Assurance Company of Canada v. Frank B. Ingersoll, G.R. No. 16475, November 8, 1921. 36

CHAPTER 13 LIFE INSURANCE

387

§11. CONTENTS OF POLICY. The forms of insurance policies are subject to the approval of the Insurance Commission. The insurer can insert stipulation that is not contrary to law, moral, good customs and public policy so long as the approval is secure. However, in the case of Individual Life Insurance, Endowment Policy, Group Life Insurance Policy and Industrial Life Policy, 3* the Insurance Code requires certain mandatory provision. The mandatory provision for Individual Life Insurance and Endowment Policy are as follows:

SEC. 233. In the case of individual life or endowment insurance, the policy shall contain in substance the following conditions: (a) A provision that the policyholder is entitled to a grace period either of thirty (30) days or of one (1) month within which the payment of any premium after the first may be made, subject at the option of the insurer to an interest charge not in excess of six percent (6%) per annum for the number of days of grace elapsing before the payment of the premium, during which period of grace the policy shall continue in full force, but in case the policy becomes a claim during the said period of grace before the overdue premium is paid, the amount of such premium with interest may be deducted from the amount payable under the policy in settlement; (b) A provision that the policy shall be incontestable after it shall have been in force during the lifetime of the insured for a period of two (2) years from its date of issue as shown in the policy, or date of approval of last reinstatement, except for nonpayment of premium and except for violation of the conditions of the policy relating to military or naval service in time of war; (c) A provision that the policy shall constitute the entire contract between the parties, but if the company desires to make the application a part of the contract it may do so provided a copy of such application shall be indorsed upon or attached to the policy when issued, and in such case the policy shall contain a provision that 38

38

See Sections 229, 230 and 231,1.C.

388

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the policy and the application therefor shall constitute the entire contract between the parties; (d) A provision that if the age of the insured is considered in determining the premium and the benefits accruing under the policy, and the age of the insured has been misstated, the amount payable under the policy shall be such as the premium would have purchased at the correct age; (e) If the policy is participating, a provision that the company shall periodically ascertain and apportion any divisible surplus accruing on the policy under conditions specified therein; (f) A provision specifying the options to which the policyholder is entitled to in the event of default in a premium payment after three (3) full annual premiums shall have been paid. Such option shall consist of: (1) A cash surrender value payable upon surrender of the policy which shall not be less than the reserve on the policy, the basis of which shall be indicated, for the then current policy year and any dividend additions thereto, reduced by a surrender charge which shall not be more than one- fifth (1/5) of the entire reserve or two and one-half percent (2 1/2%) of the amount insured and any dividend additions thereto; and 2 (2) One or more paid-up benefits on a plan or plans specified in the policy of such value as may be purchased by the cash surrender value. (g) A provision that at any time after a cash surrender value is available under the policy and while the policy is in force, the company will advance, on proper assignment or pledge of the policy and on sole security thereof, a sum equal to, or at the option of the owner of the policy, less than the cash surrender value on the policy, at a specified rate of interest, not more than the maximum allowed by law, to be determined by the company from time to time, but not more often than once a year, subject to the approval of the

CHAPTER 13 LIFE INSURANCE

any existing indebtedness on the policy and any unpaid balance of the premium for the current policy year, and may collect interest in advance on the loan to the end of the current policy year, which provision may further provide that such loan may be deferred for not exceeding six (6) months after the application therefor is made; (h) A table showing in figures cash surrender values and paid-up options available under the policy each year upon default in premium payments, during at least twenty (20) years of the policy beginning with the year in which the values and options first become available, together with a provision that in the event of the failure of the policyholder to elect one of the said options within the time specified in the policy, one of said options shall automatically take effect and no policyholder shall ever forfeit his right to same by reason of his failure to so elect; (i) In case the proceeds of a policy are payable in installments or as an annuity, a table showing the minimum amounts of the installments or annuity payments; (j) A provision that the policyholder shall be entitled to have the policy reinstated at any time within three (3) years from the date of default of premium payment unless the cash surrender value has been duly paid, or the extension period has expired, upon production of evidence of insurability satisfactory to the company and upon payment of all overdue premiums and any indebtedness to the company upon said policy, with interest rate not exceeding that which would have been applicable to said premiums and indebtedness in the policy years prior to reinstatement. Any of the foregoing provisions or portions thereof not applicable to single premium or term policies shall to that extent not be incorporated therein; and any such policy may be issued and delivered in the Philippines which in the opinion of the Commissioner contains provisions on any one or more of the foregoing requirements more favorable to the policyholder than hereinbefore required.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

390

This section shall not apply to policies of group life or industrial life insurance. a. Group Life Insurance. In a group life insurance, a group of individuals are covered by one master contract. Thus, policyholder may be an employer who obtains a group insurance coverage over the lives of his employees. The nature of this contract was explained in one case:39 “This practice is usual in the group insurance business and is consistent with the jurisprudence thereon in the State of California — from whose laws our Insurance Code has been mainly patterned — which holds that the employer-policyholder is the agent of the insurer. Group insurance is a comparatively new form of insurance. In the United States, the first modern group insurance policies appear to have been issued in 1911 by the Equitable Life Assurance Society. Group insurance is essentially a single insurance contract that provides coverage for many individuals. In its original and most common form, group insurance provides life or health insurance coverage for the employees of one employer. The coverage terms for group insurance are usually stated in a master agreement or policy that is issued by the insurer to a representative of the group or to an administrator of the insurance program, such as an employer. The employer acts as a functionary in the collection and payment of premiums and in performing related duties. Likewise falling within the ambit of administration of a group policy is the disbursement of insurance payments by the employer to the employees. Most policies, such as the one in this case, require an employee to pay a portion of the premium, which the employer deducts from wages while the remainder is paid by the employer. This is known as a contributory plan as compared to a non-contributory plan where the premiums are solely paid by the employer. Although the employer may be the titular or named insured, the insurance is actually related to the life and health of the employee. Indeed, the employee is in the position of a real party to the master policy, and even in a non-contributory plan, the payment by the employer of the entire premium is a part of the total compensation paid for the services of the employee. Put differently, the labor of the employees is the true source of the benefits, which are a form of additional compensation to them. It has been stated that every problem concerning group insurance presented to a court should be approached with the purpose of giving to it every legitimate opportunity of becoming a social agency of real consequence * 27

39

Luz Pineda, et al. v. Hon. Court of Appeals, et al., G.R. No. 105562, September

27, 1993.

CHAKffcR y/f UFK J.'.BL'RAN'CF considering that the ftnmbry mm is to provide the employer with e means of procuring insurance \tr
In E l f f i L r o r n v . N e w Y o r k L i f e I n s u r a n c e ( ' C o m p a n y , the California Supreme Court, explicitly ruled that in group insurance policies, the employer is the agent of the insurer. Thus:

We are convinced that the employer is the agent of the insurer in performing the duties of administering group insurance policies. It cannot be said that, the employer acts entirely for its own benefit or for the benefit of its employees in undertaking administrative functions. While a reduced premium may result if the employer relieves the insurer of these tasks, and this, of course, is advantageous to both the employer and the employees, the insurer also enjoys significant advantages from the arrangement. The reduction in the premium which results from employeradministration permits the insurer to realize a larger volume of sales, and at the same time the insurer’s own administrative costs are markedly reduced. xxx

The most persuasive rationale for adopting the view that the employer acts as the agent of the insurer, however, is that the employee has no knowledge of or control over the employer’s actions in handling the policy or its administration. An agency relationship is based upon consent by one person that another shall act in his behalf and be subject to his control. It is clear from the evidence regarding procedural techniques here that the insureremployer relationship meets this agency test with regard to the administration of the policy, whereas that between the employer and its employees fails to reflect true agency. The insurer directs the performance of the employer’s administrative acts, and if these duties are not undertaken properly the insurer is in a position to exercise more constricted control over the employer’s conduct. I n Neider v. Continental Assurance Company, w h i c h Elfstrom, i t w a s h e l d t h a t :

was

cited

in

[tjhe employer owes to the employee t h e d u t y o f g o o d f a i t h a n d d u e c a r e in attending to the policy, and that the employer should make clear to the employee anything required of him to keep the policy in effect, and the time that the obligations are due. In its position as administrator of the policy, We feel also that the employer should be considered as the agent of the insurer, and a n y o m i s s i o n o f d u t y to the employee in its administration should be a t t r i b u t a b l e t o t h e i n s u r e r .”

392

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(1) The mandatory provisions for a group life insurance are provided for under Section 234 of the Insurance Code as follows:

SEC. 234. No policy of group life insurance shall be issued and delivered in the Philippines unless it contains in substance the following provisions, or provisions which in the opinion of the Commissioner are more favorable to the persons insured, or at least as favorable to the persons insured and more favorable to the policyholders: (a) A provision that the policyholder is entitled to a grace period of either thirty (30) days or of one (1) month for the payment of any premium due after the first, during which grace period the death benefit coverage shall continue in force, unless the policyholder shall have given the insurer written notice of discontinuance in advance of the date of discontinuance and in accordance with the terms of the policy. The policy may provide that the policyholder shall be liable for the payment of a pro rata premium for the time the policy is in force during such grace period; (b) A provision that the validity of the policy shall not be contested, except for nonpayment of premiums after it has been in force for two (2) years from its date of issue; and that no statement made by any insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two (2) years during such person’s lifetime nor unless contained in a written instrument signed by him; (c) A provision that a copy of the application, if any, of the policyholder shall be attached to the policy when issued, that all statements made by the policyholder or by persons insured shall be deemed representations and not warranties, and that no statement made by any insured shall be used in any contest unless a copy of the instrument containing the statement is or has been furnished to such person or to his beneficiary; (d) A provision setting forth the conditions, if any, under which the insurer reserves the right to require

CHAPTER 13 LIFE INSURANCE

a person eligible for insurance to furnish evidence of individual insurability satisfactory to the insurer as a condition to part or all of his coverage; (e) A provision specifying an equitable adjustment of premiums or of benefits or of both to be made in the event that the age of a person insured has been misstated, such provision to contain a clear statement of the method of adjustment to be used; (f) A provision that any sum becoming due by reason of death of the person insured shall be payable to the beneficiary designated by the insured, subject to the provisions of the policy in the event that there is no designated beneficiary, as to all or any part of such sum, living at the death of the insured, and subject to any right reserved by the insurer in the policy and set forth in the certificate to pay at its option a part of such sum not exceeding Five hundred pesos (P500.00) to any person appearing to the insurer to be equitably entitled thereto by reason of having incurred funeral or other expenses incident to the last illness or, death of the person insured; (g) A provision that the insurer will issue to the policyholder for delivery to each person insured a statement as to the insurance protection to which he is entitled, to whom the insurance benefits are payable, and the rights set forth in paragraphs (h), (i) and (j) following; (h) A provision that if the insurance, or any portion of it, on a person covered under the policy ceases because of termination of employment or of membership in the class or classes eligible for coverage under the policy, such person shall be entitled to have issued to him by the insurer, without evidence of insurability, an individual policy of life insurance without disability or other supplementary benefits, provided application for the individual policy and payment of the first premium to the insurer shall be made within thirty (30) days after such termination, and provided further that: “(1) The individual policy shall be on any one of the forms, except term insurance, then custom-

39

394

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

arily issued by the insurer at the age and for an amount not in excess of the coverage under the group policy; and “(2) The premium on the individual policy shall be at the insurer’s then customary rate applicable to the form and amount of the individual policy, to the class of risk to which such person then belongs, and to his age attained on the effective date of the individual policy. (i) A provision that if the group policy terminates or is amended so as to terminate the insurance of any class of insured persons, every person insured thereunder at the date of such termination whose insurance terminates and who has been so insured for five (5) years prior to such termination date shall be entitled to have issued to him by the insurer an individual policy of life insurance subject to the same limitations as set forth in paragraph (h), except that the group policy may provide that the amount of such individual policy shall not exceed the amount of the person’s life insurance protection ceasing; (j) A provision that if a person insured under the group policy dies during the thirty (30)-day period within which he would have been entitled to an individual policy issued to him in accordance with paragraphs (h) and (i) above and before such individual policy shall have become effective, the amount of life insurance which he would have been entitled to have issued to him as an individual policy shall be payable as a claim under the group policy whether or not application for the individual policy or the payment of the first premium has been made; (k) In the case of a policy issued to a creditor to insure debtors of such creditor, a provision that the insurer will furnish to the policyholder for delivery to each debtor insured under the policy a form which will contain a statement that the life of the debtor is insured under the policy and that any death benefit paid thereunder by reason of his death shall be applied to reduce or extinguish indebtedness.

CHAPTER 13 LIFE INSURANCE

395

The provisions of paragraphs (f) to (j) shall not apply to policies issued to a creditor to insure his debtors. If a group life policy is on a plan of insurance other than term, it shall contain a non-forfeiture provision or provisions which in the opinion of the Commissioner is or are equitable to the insured or the policyholder: Provided, That nothing herein contained shall be so construed as to require group life policies to contain the same nonforfeiture provisions as are required of individual life policies. b. Industrial Life Insurance. Section 235 of the Insurance Code provides that the term i n d u s t r i a l l i f e i n s u r a n c e as used in this Code shall mean that form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila, and if the words i n d u s t r i a l p o l i c y are printed upon the policy as part of the descriptive matter. (1) An industrial life policy shall not lapse for non-payment of premium if such nonpayment was due to the failure of the company to send its representative or agent to the insured at the residence of the insured or at some other place indicated by him for the purpose of collecting such premium. However, this rule shall not apply when the premium on the policy remains unpaid for a period of three (3) months or twelve (12) weeks after the grace period has expired.40 (2) The mandatory provisions for industrial life insurance are provided for under Section 236 of the Insurance Code which provides:

SEC. 236. In the case of industrial life insurance, the policy shall contain in substance the following provisions: (a) A provision that the insured is entitled to a grace period of four (4) weeks within which the payment of any premium after the first may be made, except that where premiums are payable monthly, the period of

40

Section 235, Insurance Code.

396

ESSENTIALS OF INSURANCE LAW ^Republic Act No. 10607 with Notes on Pre-Need Act)

grace shall be either one (1) month or thirty (30) days; and that during the period of grace, the policy shall continue in full force, but if during such grace period the policy becomes a claim, then any overdue and unpaid premiums may be deducted from any amount payable under the policy in settlement; (b) A provision that the policy shall be incontestable after it has been in force during the lifetime of the insured for a specified period, not more than two (2) years from its date of issue, except for nonpayment of premiums and except for violation of the conditions of the policy relating to naval or military service, or services auxiliary thereto, and except as to provisions relating to benefits in the event of disability as defined in the policy, and those granting additional insurance specifically against death by accident or by accidental means, or to additional insurance against loss of, or loss of use of, specific members of the body; (c) A provision that the policy shall constitute the entire contract between the parties, or if a copy of the application is endorsed upon and attached to the policy when issued, a provision that the policy and the application therefor shall constitute the entire contract between the parties, and in the latter case, a provision that all statements made by the insured shall, in the absence of fraud, be deemed representations and not warranties; (d) A provision that if the age of the person insured, or the age of any person, considered in determining the premium, or the benefits accruing under the policy, has been misstated, any amount payable or benefit accruing under the policy shall be such as the premium paid would have purchased at the correct age; (e) A provision that if the policy is a participating policy, the company shall periodically ascertain and apportion any divisible surplus accruing on the policy under the conditions specified therein; (f) A provision that in the event of default in premium payments after three (3) full years’ premiums have been paid, the policy shall be converted into a

CHAPTER 13 LIFE INSURANCE

stipulated form of insurance, and that in the event of default in premium payments after five (5) full years’ premiums have been paid, a specified cash surrender value shall be available, in lieu of the stipulated form of insurance, at the option of the policyholder. The net value of such stipulated form of insurance and the amount of such cash value shall not be less than the reserve on the policy and dividend additions thereto, if any, at the end of the last completed policy year for which premiums shall have been paid (the policy to specify the mortality table, rate of interest and method of valuation adopted to compute such reserve), exclusive of any reserve on disability benefits and accidental death benefits, less an amount not to exceed two and one-half percent (2 1/2%) of the maximum amount insured by the policy and dividend additions thereto, if any, when the issue age is under ten (10) years, and less an amount not to exceed two and onehalf percent (2 1/2%) of the current amount insured by the policy and dividend additions thereto, if any, if the issue age is ten (10) years or older, and less any existing indebtedness to the company on or secured by the policy; (g) A provision that the policy may be surrendered to the company at its home office within a period of not less than sixty (60) days after the due date of a premium in default for the specified cash value: Provided, That the insurer may defer payment for not more than six (6) months after the application therefor is made; (h) A table that shows in figures the nonforfeiture benefits available under the policy every year upon default in payment of premiums during at least the first twenty (20) years of the policy, such table to begin with the year in which such values become available, and a provision that the company will furnish upon request an extension of such table beyond the year shown in the policy; (i) A provision that specifies which one of the stipulated forms of insurance provided for under the provision of paragraph (f) of this section shall take effect in the event of the insured’s failure, within sixty

397

398

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(60) days from the due date of the premium in default, to notify the insurer in writing as to which one of such forms he has selected; (j) A provision that the policy may be reinstated at any time within two (2) years from the due date of the premium in default unless the cash surrender value has been paid or the period of extended term insurance expired, upon production of evidence of insurability satisfactory to the company and payment of arrears of premiums with interest at a rate not exceeding six percent (6%) per annum payable annually; (k) A provision that when a policy shall become a claim by death of the insured, settlement shall be made upon receipt of due proof of death, or not later than two (2) months after receipt of such proof; (l) A title on the face and on the back of the policy correctly describing its form; (m) A space on the front or the back of the policy for the name of the beneficiary designated by the insured with a reservation of the insured’s right to designate or change the beneficiary after the issuance of the policy. The policy may also provide that no designation or change of beneficiary shall be binding on the insurer until endorsed on the policy by the insurer, and that the insurer may refuse to endorse the name of any proposed beneficiary who does not appear to the insurer to have an insurable interest in the life of the insured. Such policy may also contain a provision that if the beneficiary designated in the policy does not surrender the policy with due proof of death within the period stated in the policy, which shall not be less than thirty (30) days after the death of the insured, or if the beneficiary is the estate of the insured, or is a minor, or dies before the insured, or is not legally competent to give valid release, then the insurer may make any payment thereunder to the executor or administrator of the insured, or to any of the insured’s relatives by blood or legal adoption or connections by marriage or to any person appearing to the insurer to be equitably entitled thereto by reason of having incurred expense for the

CHAPTER 13 LIFE INSURANCE

maintenance, medical attention or burial of the insured; and (n) A provision that when an industrial life insurance policy is issued providing for accidental or health benefits, or both, in addition to life insurance, the foregoing provisions shall apply only to the life insurance portion of the policy. Any of the foregoing provisions or portions thereof not applicable to nonparticipating or term policies shall to that extent not be incorporated therein. The foregoing provisions shall not apply to policies issued or granted pursuant to the nonforfeiture provisions prescribed in provisions of paragraphs (f) and (i) of this section, nor shall provisions of paragraphs (f), (g), (h), and (i) hereof be required in term insurance of twenty (20) years or less but such term policies shall specify the mortality table, rate of interest, and method of computing reserves. (3) Prohibited stipulations in an industrial life policies enumerated in Section 237 of the Insurance Code:

SEC. 237. No policy of industrial life insurance shall be issued or delivered in the Philippines if it contains any of the following provisions: (a) A provision that gives the insurer the right to declare the policy void because the insured has had any disease or ailment, whether specified or not, or because the insured has received institutional, hospital, medical or surgical treatment or attention, except a provision which gives the insurer the right to declare the policy void if the insured has, within two (2) years prior to the issuance of the policy, received institutional, hospital, medical or surgical treatment or attention and if the insured or the claimant under the policy fails to show that the condition occasioning such treatment or attention was not of a serious nature or was not material to the risk; (b) A provision that gives the insurer the right to declare the policy void because the insured has been rejected for insurance, unless such right be conditioned upon a showing by the insurer that knowledge of such

400

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

rejection would have led to a refusal by the insurer to make such contract; (c) A provision that allows the company to pay the proceeds of the policy at the death of the insured to any person other than the named beneficiary, except in accordance with a standard provision as specified under the provisions of paragraph (m) of the preceding section; (d) A provision that limits the time within which any action at law or in equity may be commenced to less than six (6) years after the cause of action shall accrue; and

(e) A provision that specifies any mode of settlement at maturity of less value than the amount insured by the policy plus dividend additions, if any, less any indebtedness to the company on the policy and less any premium that may by the terms of the policy be deducted, payments to be made in accordance with the terms of the policy. Nothing contained in this section nor in the provision of paragraph (b) of the preceding section, relating to incontestability, shall be construed as prohibiting the life insurance company from placing in its industrial life policies provisions limiting its liability with respect to: (1) Death resulting from aviation other than as a fare-paying passenger on a regularly scheduled route between definitely established airports; and (2) Military or naval service: Provided, That if the liability of the company is limited as herein provided, such liability shall in no event be fixed at an amount less than the reserve on the policy (excluding the reserve for any additional benefits in the event of death by accident or accidental means or for benefits in the event of any type of disability), less any indebtedness on or secured by such policy; nor shall any provision of this section apply to any provision in an industrial life insurance policy for additional benefits in the event of death by accident or accidental means.

CHAPTER 13 LIFE INSURANCE

401

§12. LIFE INSURANCE EQUATION. In business of life insurance, in the long run, the incoming premiums and investment earnings must be equal to the outgoing payment of losses, expenses and profits. 41 The way the business works was summarized in this wise:

“Since there is no assurance that the death rate will exactly follow the expectation in the given year, insurers collect somewhat more than they need to pay the expected claims. In addition to this, they must add a “loading” to the mortality cost in order to have enough to pay the operating expenses of the company. Finally, funds held for reserves or surplus are invested and the investment income is used to reduce the cost of insurance. If the insurer is able to operate at an expense less than it calculated, or the death claims do not equal the expectations, savings are accumulated and at the end of the business year they may be apportioned back to policyholders as a dividend or to stockholders as profits”42 a. Mortality Table. It is therefore important to make proper calculations to attain the equality of values mentioned above. This is done with the help of mortality tables prepared by actuaries. The mortality table is the instrument that measures the probability or living or dying. The table shows the probable death rate at each age.43

41

Bickelhaupt, p. 42 227. Ibid. 43 Bickelhaupt, p. 239.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE Casualty insurance and accident insurance is of later origin as it was derived mainly from the practice of life insurance. However, it has been said that it more clearly accords with the original purposes (of insurance) than life insurance. “Under life insurance, the insurer undertakes to pay a certain sum upon the happening of an event which will certainly take place, the only contingency being with reference to the time at which death will occur. On the other hand, the accident insurer merely assumes the risk of misfortune which may or may not happen, and which in fact in the majority of cases never does happen. Therefore, in pure accident insurance, there is little of the investment feature that requires the reservation of reserve fund which plays an important part in the conduct of life insurance business.”1 §1. DEFINITION. Section 176 of the Insurance Code provides that:

SEC. 176. 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.

^ance, p. 867. 402

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

a.

403

Thus, casualty insurance includes the following: (1)

Burglary and theft insurance.

(2)

Personal accident and health insurance as written

by non-life insurance companies. (3)

Plate glass insurance.

(4)

Employer’s liability insurance.

(5)

Motor vehicle liability insurance.

(6) Other substantially similar kinds of insurance. b. Examples of insurance policies that are substantially similar to those expressly enumerated under Section 176 include: (1) Pollution Liability Insurance, (2) Pharmacist Liability Insurance, ( 3 ) Medical Malpractice Insurance, (4) Garage Insurance, and (5) Directors and Officers Liability Insurance. §1.01. DISTINGUISHED FROM ACCIDENT INSURANCE. Casualty insurance is strictly speaking different from Accident Insurance. Accident Insurance is defined as “an insurance policy which provides coverage, singly or in combination, for death, dismemberment, disability or hospital and medical care caused by accident or special kinds of accidents.”2 §2. GOVERNING RULES. Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable to casualty insurance contracts. These contracts are governed by the general provisions applicable to all types of insurance. Outside of these, the rights and obligations of the parties must be determined by the terms of their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law.3 §3. THEFT AND ROBBERY INSURANCE. It has been aptly observed that in burglary, theft and robbery insurance, “the opportunity to defraud the insurer — the moral hazard — is so great that insurers have found it necessary to fill up their policies with countless restrictions, many designed to reduce this hazard. Seldom

'^Paragraph 5.1, I.C. Circular Letter No. 2015-58-A dated December 21, 2015. ^Fortune Insurance and Surety Company, Inc. v. Court of Appeals and Producer’s Bank of the Philippines, G.R. No. 115278, May 23, 1995.

ESSENTIALS OF INSURANCE I,AW (Republic Act No. 10607 with Notes on Pre-Need Act)

404

does the insurer assume the risk of all losses due to the hazards insured against.” 4 a. For example, persons frequently excluded under such provisions are those in the insured’s service and employment. The purpose of the exception is to guard against liability should the theft be committed by one having unrestricted access to the property. In such cases, the terms specifying the excluded classes are to be given their meaning as understood in common speech. The terms “service” and “employment” are generally associated with the idea of selection, control, and compensation.5 b. When the theft and robbery insurance uses the term “employee,” it contemplates any person who qualifies as such as generally and universally understood, or jurisprudentially established in the light of the four standards in the determination of the employer-employee relationship, or as statutorily declared even in a limited sense as in the case of Article 106 of the Labor Code which considers the employees under a “labor-only” contract as employees of the party employing them and not of the party who supplied them to the employer.6 PROBLEM: 1. The plaintiff bank was insured by the defendant insurer against theft and robbery. An armored car of the plaintiff, while in the process of transferring cash in the sum of P725,000 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said cash. The robbery took place while the armored car was traveling along Taft Avenue in Pasay City; the said armored car was driven by Benjamin Magalong y de Vera, escorted by Security Guard Saturnino Atiga y Rosete. Driver Magalong was assigned by PRC Management Systems with the plaintiff by virtue of an Agreement executed on August 7, 1983; the Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff by virtue of a contract of Security Service executed on October 25, 1982. After an investigation conducted by the Pasay police authorities, the driver Magalong and guard Atiga were charged, together with Edelmer Bantigue y Eulalio, Reynaldo Aquino and John Doe, with violation of

4 Fortune Insurance and Surety Company, Inc. v. Court of Appeals and Producer’s Bank of the Philippines, supra. b Ibid. 6 Ibid.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

4or>

P.D. No. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the said crime before Branch 112 of the Regional Trial Court of Pasay City. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of P725,000, but the latter refused to pay as the loss is excluded from the coverage of the insurance policy specifically under the “General Exceptions'’ thereof which reads: “GENERAL EXCEPTIONS The company shall not be liable under this policy in respect of XXX XXX XXX

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee, partner, director, trustee or authorized representative of the Insured whether acting alone or in conjunction with others. . . . ” The plaintiff opposes the contention of the defendant and contends that Atiga and Magalong are not its “officer, employee, trustee or authorized representative” at the time of the robbery. Did the defendant validly deny the claim? A:

Yes, the defendant insurer validly denied the claim. But even granting for the sake of argument that these contracts were not “labor-only” contracts, and PRC Management Systems and Unicorn Security Services were truly independent contractors, Magalong and Atiga were, in respect of the transfer of Producer’s money from its Pasay City branch to its head office in Makati, its “authorized representatives” who served as such with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored vehicle which would carry the money; and Atiga to provide the needed security for the money, the vehicle, and his two other companions. In short, for these particular tasks, the three acted as agents of Producers. A “representative” is defined as one who represents or stands in the place of another; one who represents others or another in a special capacity, as an agent, and is interchangeable with “agent.” In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the insurance policy. ( F o r t u n e I n s u r a n c e a n d S u r e t y C o m p a n y , I n c . v . C o u r t o f A p p e a l s a n d P r o d u c e r ’ s B a n k o f t h e P h i l i p p i n e s , G . R . N o . 1 1 5 2 7 8 , M a y 2 3 , 1 9 9 5 )

406

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§4. PERSONAL ACCIDENT AND HEALTH INSUR- ANCE. This type of insurance normally includes: (1) Income Coverage. (2) Coverage for Loss of Life, Sight or Limb, or (3) Medical Expenses Coverage. §4.01. ACCIDENT. One of the issues pertaining to personal accident insurance is the meaning of the term “accident.” It has been observed that the words “accident” and “accidental” have never acquired any technical signification in law, and when used in an insurance contract are to be construed and considered according to the ordinary understanding and common usage and speech of people generally. Courts are practically agreed that the words “accident” and “accidental” in substance mean that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The definition that has usually been adopted by the courts is that an accident is an event that takes place without one’s foresight or expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known case, and therefore not expected.7 a. It has been held that death through “sunstroke” is considered death through accidental means. The opinion of Justice Car- dozo is cited in support of this opinion: “Sunstroke, though it may be a disease according to the classification of physicians, is none the less an accident in the common speech of men ... The suddenness of its approach and its catastrophic nature . . . have made that quality stand out when thought is uninstructed in the mysteries of science. . . Violent it is for the same reason, and external because the train of consequences is set in motion by the rays of the sun beating down upon the body, a cause of operating from without.

-1 ■

ti N U-

In my view this man died from an accident. What killed him was a heat-stroke coming suddenly and unexpectedly upon him while at work. Such a stroke is an unusual effect of a known cause, often, no doubt, threatened, but generally averted by precautions which experience, in this instance, had not taught. It was an unlooked for mishap in the course of his employment. In common language, it was a case of accidental death.”8

7 Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim, G.R. No. 92383, July 17, 1992. 8 Dissenting Opinion in Landress v. Phoenix Mutual Life Insurance Company, 291 U.S. 491 (1934) cited in Raley v. Life & Casualty Ins. Co. of Tennessee, 117 A. (2d) 110 (D.C.C.A, 1955).

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

407

§4.02. WILLFUL EXPOSURE TO NEEDLESS PERILS. Personal accident policies often expressly exclude injuries caused by the willful exposure of the insured to needless peril. It should be noted at the outset that suicide and willful exposure to needless peril are i n p a r i m a t e r i a because they both signify a disregard for one’s life. The only difference is in degree, as suicide imports a positive act of ending such life whereas the second act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters above the ground and without any safety device may not actually be intending to commit suicide, but his act is nonetheless suicidal. He would thus be considered as “willfully exposing himself to needless peril” within the meaning of the exception in question.9 a. Accident insurance policies were never intended to reward the insured for his tendency to show off or for his miscalculations. They were intended to provide for contingencies. Hence, when one miscalculates and jumps from the Quezon Bridge into the Pasig River in the belief that he can overcome the current, he has willfully exposed himself to peril and must accept the consequences of my act. If one drowns, his beneficiary cannot go to the insurance company to ask them to compensate them for the insured’s failure to swim as well as he thought he could. It is clear that when the insured braved the currents of the river, he deliberately exposed himself to a known peril. 10 b. At any rate, even in the absence of the express exclusion of willful exposure to needless perils, such willful exposure may likewise be deemed excluded under the rule that insurers are exonerated by the gross negligence of the insured.11 §4.03. VOLUNTARY ACTS. The generally accepted rule is that death or injury does not result from accident or accidental means within the terms of an accident-policy if it is the natural result of the insured’s voluntary act, unaccompanied by anything unforeseen except the death or injury. There is no accident when a deliberate act is performed unless some additional, unexpected, independent, and unforeseen happening occurs which produces or

9

Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa Lim,

supra. l0

Ibid. FGU Insurance Corporation v. The Court of Appeals, et al., G.R. No. 137775, March 31,

n

2005.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

408

brings about the result of injury or death. In other words, where the death or injury is not the natural or probable result of the insured’s voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of the policies insuring against death or injury from accident. There is no accident when a deliberate act is performed unless some additional, unexpected, independent and unforeseen happening occurs which produces or brings about their injury or death.12

i> -c

t : 11

. M iin

a. In one case, the insured died because of his participation in a boxing contest. While the participation of the insured in the boxing contest is voluntary, the injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he could not have received that blow in the head and would not have died. The fact that boxing is attended with some risks of external injuries does not make any injuries received in the course of the game not accidental. In boxing as in other equally physically rigorous sports, such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does, the injury or death can only be accidental or produced by some unforeseen happening or event as what occurred in this case.13 PROBLEMS: 1. The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed that there was no suicide. It argued, however, that there was no accident either. Pilar Nalagon, Lim’s secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10 o’clock in the evening, after his mother’s birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had previously removed the magazine. As she watched the television, he stood in front of her and pointed the gun at her. She pushed it aside and said it might be

12 Sun Insurance Office, Ltd. v. The Hon. Court of Appeals, G.R. No. 92383, July 17, 1992; Simon De la Cruz v. The Capital Insurance, G.R. No. L21574, June 30, 1966. 13 Simon De la Cruz v. The Capital Insurance and Surety Co., Inc., G.R. No. L-21547, June 30, 1966.

j f

j

j j [ ( | [

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

400

loaded. He assured her it was not and then pointed it to his temple. The next moment there was an explosion and Lim slumped to the door. He was dead before he fell. The petitioner insurer denied the claim on the ground that the death of the insured was not caused by accident and that the same is covered by this provision:

Exceptions — The company shall not be liable in respect of. 1. Bodily injury\ xxx xxx xxx b. consequent upon. i) The insured persons attempting to commit suicide or wilfully exposing himself to needless peril except in an attempt to save human life. Is the death of the insured covered by the covered by the accident insurance? Is it covered by the exceptions? A:

Yes, the death of the insured is covered by the policy and does not fall under the exceptions. An accident is an event which happens without any human agency or, if happening through human agency, an event which, under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been defined as an injury which happens by reason of some violence or casualty to the insured without his design, consent, or voluntary co-operation. Hence, the incident that resulted in Lim’s death was indeed an accident. This was the firing of the gun, which was the additional unexpected and independent and unforeseen occurrence that led to the insured person’s death. It cannot be said that Lim had willfully exposed himself to needless peril. Lim had removed the magazine from the gun and believed it was no longer dangerous. He expressly assured the secretary that the gun was not loaded. It is submitted that Lim did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless. Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from recovering from the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly made in the contract to relieve the insurer from liability, and none of these exceptions is applicable

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

410

i n t h e c a s e a t b a r . (Sun Insurance Office, Ltd. v. The Hon. Court of Appeals and Nerissa him, G.R. No. 92383, July 17, 1992) 2. On October 22, 1986, deceased Carlie Surposa was insured with petitioner Finman General Assurance Corporation under Finman General Teachers Protection Plan Master Policy No. 2005 and Individual Policy No. 08924 with his parents, spouses Julia and Carlos Surposa, and brothers Christopher, Charles, Chester and Clifton, all surnamed Surposa, as beneficiaries. The perils insured against include “accidents” and “accidental death.” While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18, 1988 as a result of a stab wound inflicted by one of the three unidentified men without provocation and warning on the part of the former as he and his cousin, Winston Surposa, were waiting for a ride on their way home along Rizal-Locsin Streets, Bacolod City after attending the celebration of the “ M a s k a r r a Annual Festival.” Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of claim with the petitioner insurance company which denied said claim contending that murder and assault are not within the scope of the coverage of the insurance policy because the death was not accidental. Is the denial of the claim valid? A:

No, the denial was not valid. The terms ‘accident’ and ‘accidental,’ as used in insurance contracts have not acquired any technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes place without one’s foresight or expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected. In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an assault or murder as a result of his voluntary act considering the very nature of these crimes. In the first place, the insured and his companion were on their way home from attending a festival. They were confronted by unidentified persons. The record is barren of any circumstance showing how the stab wound was inflicted. Nor can it be pretended that the malefactor aimed at the insured precisely because the killer wanted to take his life. In any event, while the act may not exempt the unknown perpetrator from criminal liability, the fact remains that the happening was a pure accident on the part of the victim. The insured died from an event that took place without his foresight or expectation, an event that proceeded from an unusual effect of a known cause and, therefore, not expected. Neither can it be said that there was a capricious desire on the part of the accused to expose his life to danger considering that he was just going home after

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

411

attending a festival. (Finman General Assurance Corporation v. The Hon. Court of Appeals and Julia Surposa, G.R. No. 100970, September 2, 1992) §5. GLASS INSURANCE. Normally, glass insurance insures against breakage or damage caused by chemicals accidentally or maliciously applied. There is breakage when the break penetrates through the entire thickness of the glass. 14 a. In addition to the cost of the glass, the policy may likewise provide for coverage for the following: (1) repairing or replacing damage to the frame, (2) boarding up or installing temporary plates in openings, (3) removing and replacing any fixtures and other obstructions, and (4) removal of debris of covered property resulting from a covered loss.15 §6. EMPLOYER’S LIABILITY INSURANCE. Insurance against employer’s liability covers injuries sustained by their employees which arise out of and in the course of the insured employee’s employment. a. Usual exclusions in Employer’s Liability Insurance include: (1) When there is serious or willful misconduct on the part of the insured, (2) When the employee was hired in violation of law, (3) When the insured failed to comply with health and safety regulations, and (4) When the employer discharges, coerces, or discriminates against an employee. §7. MOTOR VEHICLE LIABILITY INSURANCE. Under this policy, the insurer becomes liable for the damage or injury caused in the operation of motor vehicles. This type of insurance may be voluntary or compulsory and covers death, incapacity or injury and damage to property. However, motor vehicle liability insurance is not limited to third party liability. It may be comprehensive and may cover damage or injury to the person or property of the insured himself or third persons. §7.01. DIRECT LIABILITY. The third party victim may proceed directly against the insurer for indemnity. It is significant to point out that the right of a third person to sue the insurer depends on whether the contract of insurance is intended to benefit third persons also or only the insured. The right of the person injured to * 6

14

Huebner, Black and Webb, p.Ibid., 304. p. 305. l6

412

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

sue the insurer of the party at fault (insured), depends on whether the contract of insurance is against liability to third persons or for the benefit of the insured. a. Test. The test that can be applied is this: Where the contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable can sue the insurer. Where the contract is for indemnity against actual loss or payment, then third persons cannot proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him through payment to third persons, said third persons’ recourse being thus limited to the insured alone. 16 The Supreme Court observed:17

:

n

11 •:

. dJ AJ N/ 1

“It is settled that where the insurance contract provides for indemnity against liability to a third party, such third party can directly sue the insurer. ( C o q u i a v . F i e l d m a n ’ s I n s u r a n c e C o . , I n c . , G . R . N o . 2 3 2 7 6 , N o v e m b e r 2 9 , 1 9 6 8 , 2 6 S C R A 1 7 8 ) . The liability of the insurer to such third person is based on contract while the liability of the insured to the third party is based on tort. ( M a l a y a n I n s u r a n c e C o . , I n c . v . C A , L - 3 6 4 1 3 , S e p t e m b e r 2 6 , 1 9 8 8 , 1 6 5 S C R A 5 3 6 ) . This rule was explained in the case of S h a f e r v . J u d g e , R T C o f O l o n g a p o C i t y , B r . 7 5 , G . R . N o . 7 8 8 4 8 , N o v e m b e r 1 4 , 1 9 8 8 : ‘The injured for whom the contract of insurance is intended can sue directly the insurer. The general purpose of statutes enabling an injured person to proceed directly against the insurer is to protect injured persons against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy, and statutes are to be liberally construed so that their intended purpose may be accomplished. It has even been held that such a provision creates a contractual relation which inures to the benefit of any and every person who may be negligently injured by the named insured as if such injured person were specifically named in the policy. ‘In the event that the injured fails or refuses to include the insurer as party defendant in his claim for indemnity against the insured, the latter is not prevented by law to avail of the procedural rules intended to avoid multiplicity of suits. Not even a ‘no action’ clause under the policy which requires that a final judgment be first obtained against the insured and that only thereafter can the person insured recover on the policy 16 Travellers Insurance & Surety Corporation v. Hon. Court of Appeals and Vicente Mendoza, G.R. No. 82036, May 22,1997; Dionisia Guingon, et al. v. Iluminado Del Monte, et al., G.R. No. L-22042, August 17, 1967, 20 SCRA 1043. 17 First Integrated Bonding & Insurance Company, Inc. v. The Hon. Harold M. Hernando, et al., G.R. No. 51221, July 31, 1991.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

413

b. Not joint tortfeasor. The third party liability is only up to the extent of the insurance policy and those required by law. While it is true that where the insurance contract provides for indemnity against liability to third persons, and such persons can directly sue the insurer, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held liable i n s o l i d u m with the insured and/or the other parties found at fault for all the damages sustained by the insured. For the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on tort.18 However, the insurer may be held solidarily liable up to the extent that the insurer may be held liable under the contract of insurance. Thus, if the damage is less than the face value of the policy, the insurer may be held solidarily liable up to the full value of the damage or loss.19 c. Policy as measure of liability. The nature of the liability of the insurer and the insured v i s - a - v i s the third party injured in an accident is measured by or circumscribed by the policy.20 The extent of the liability and manner of enforcing the same in ordinary contracts should also be distinguished from extent and manner in insurance contracts. While in solidary obligations, the creditor may enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes for a consideration to indemnify the insured against loss, damage or liability arising from an unknown or contingent event and the indemnity is fixed in the policy.21 d. No action clause disallowed. However, if direct liability to third party is provided for, a “ n o a c t i o n c l a u s e ” cannot be provided for in the policy. A “ n o a c t i o n c l a u s e ” i s a clause that disallows suit against the insurer unless final judgment is obtained by a third party against the insured. This clause cannot prevail over the Rules of Court. It cannot override procedural rules aimed at avoidance of multiplicity of suits.22

18 Malayan Insurance Co., Inc. v. Philippine First Insurance Co., Inc. and Reputable Forwarder Services, Inc., G.R. No. 184300, July 11, 2012; Heirs of George Poe v. Malayan Insurance Co., G.R. No. 156308, April 7, 2009; Government Service Insurance System v. Court of Appeals, 308 SCRA 559 (1999). 19 William Tiu, et al. v. Pedro A. Arriesgado, et al., G.R. No. 138060, September 1, 2004, 437 SCRA 426, 449. 20 Figuracion Vda. de Maglana, et al. v. Honorable Francisco Z. Consolacion, et al., G.R. No. 60506, August 6, 1992. Zl lbid. 22

Dionisia Guingon, et al. v. Iluminado Del Monte, et al., G.R. No. L-22042, August 17, 1967.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

414

PROBLEM: 1. Mr. JA insured his jeepneys against third party liability with C Insurance. The insurance policies contain the following stipulation: E. Action Against Company No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied with all of the terms of this Policy, nor until the amount of the Insured’s obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant, and the Company. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by the Policy. Nothing contained in this policy shall give any person or organization any right to join the Company as a co-defendant in any action against the Insured to determine the Insured’s liability. Bankruptcy or insolvency of the Insured or of the Insured’s estate shall not relieve the Company of any of its obligations hereunder. One of the drivers of Mr. JA was negligent in operating a jeepney covered by the insurance policy and Mr. GG was bumped as a consequence. Thereafter, Mr. GG filed a case against Mr. JA and C Insurance. The insurer is asking for the dismissal of the case arguing that it cannot be included in the action because of the above-quoted action clause. Should the case against the insurer be dismissed? A:

No. The action against the insurer should proceed. It is true that the policy requires that suit and final judgment be first obtained against the insured; that only “thereafter” can the person injured recover on the policy and it expressly disallows suing the insurer as a codefendant of the insured in a suit to determine the latter’s liability. However, the “no action” clause in the policy of insurance cannot prevail over the Rules of Court provision aimed at avoiding multiplicity of suits. A “no action” clause in a policy of insurance cannot override procedural rules aimed at avoidance of multiplicity of suits. Similarly, in the instant case the provisions of the Rules of Court on “Joinder of causes of action” and “permissive joinder of parties” cannot be superseded, a t l e a s t w i t h r e s p e c t t o t h i r d p e r s o n s n o t a p a r t y t o t h e c o n t r a c t by a “no action” clause in the contract of insurance. ( G u i n g o n v . l l l u m i n a d o d e l M o n t e , e t a l . , G . R . N o . L 2 2 0 4 2 , A u g u s t 1 7 , 1 9 6 7 )

§7.02. AUTHORIZED DRIVER CLAUSE. This is a typical provision in a Motor Vehicle Liability Insurance. As the term

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

415

implies, this means that the insurer will be liable only if the driver is an “authorized driver” at the time of the accident. A typical provision may state that the driver at the time of the accident must be “permitted in accordance with the licensing or other laws or regulations to drive the Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of Law or by reason of any enactment or regulation in that behalf.” 23 It was explained in an early case:24 “The cases cited by the appellant are a p r o p o s . In C r a h a n v . A u t o m o b i l e U n d e r w r i t e r s , I n c . , e t a l ., 1 7 6 A . ( P a . ) 8 1 7 , a clause in the policy excluding loss while the motor vehicle ‘is being operated by any person prohibited by law from driving an automobile was held to be free from doubt or ambiguity, reasonable in its terms and in furtherance of the policy of the law prohibiting unlicensed drivers to operate motor vehicles. In Z a b o n i c k v . R a l s t o n , e t a l . , 2 6 1 N . W . ( M i c h . ) 3 1 6 , the insured was driving with an expired license, in violation of law ( A c t N o . 9 1 o f t h e P u b l i c A c t s o f 1 9 3 1 ) , when the accident occurred. Under a provision in the policy that the insurer shall not be liable while the automobile is operated ... by any person prohibited by law from driving, the insurance company was absolved, the Supreme Court of Michigan saying: To require a person to secure an operator’s license and meet certain requirements before driving an automobile is a regulation for the protection of life and property, the wisdom of which can scarcely be questioned. The Legislature has also provided that every three years such licenses expire and may be renewed under certain conditions. If one fails to comply with the regulation, the statute says, he or she shall not drive a motor vehicle upon the highway. Under the terms of the contract, while under such statutory prohibition, plaintiff could not recover under his policy. To permit such recovery, notwithstanding the lack of a driver’s license, would tend to undermine the protection afforded the public by virtue of Act No. 91. The exclusion clause in the contract invoked by appellant is clear. It does not refer to violations of law in general, which indeed would tend to render automobile insurance practically a sham, but to a specific situation where a person other than the insured himself, even upon his order or with his permission, drives the motor vehicle without a license or with one that has already expired. No principle of law or of public policy militates against the validity of such a provision.”

23

1988.

Andrew Palermo v. Pyramid Insurance Company, Inc., G.R. No. L-36480, May 31,

^Arturo R. Tanco, Jr. v. Philippine Guaranty Company, G.R. No. L-17312, November 29, 1965.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

416

a. The main purpose of the “authorized driver” clause is to make sure that a person other than the insured owner who drives the car on the insured’s order (such as his regular driver, or with his permission, such as a friend or member of the family or the employees of a car service or repair shop) is a duly licensed driver and has no disqualification to drive a motor vehicle.25 26 b. The “authorized driver clause” applies only when the driver “is driving on the insured’s order or with his permission.” It does not apply when the person driving is the insured himself. Operating an automobile on a public highway without a license, which act is a statutory crime is not precluded by public policy from enforcing a policy indemnifying her against liability for bodily injuries inflicted by use of the automobile.26 While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway without a license or with an expired license, an infraction of the Motor Vehicle Law on the part of the insured, is not a bar to recovery under the insurance contract. It however renders him subject to the penal sanctions of the Motor Vehicle Law.27 §7.03. THEFT CLAUSE. The motor vehicle insurance may contain a theft clause that makes theft a risk insured against. The taking of a vehicle by another person without the permission or authority from the owner thereof is sufficient to place it within the ambit of the word theft as contemplated in the policy, and is therefore, compensable.28 a. Theft clause likewise applies when one takes the motor vehicle of another without the latter’s consent even if the motor vehicle is later returned, there is theft - there being intent to gain as the use of the thing unlawfully taken constitutes gain.29 b. In ! P a r a m o u n t I n s u r a n c e v . S p o u s e s R e m o n d e u l a z , 3 0 the insurance policy over the vehicle likewise contained a theft clause. Possession of the vehicle was entrusted to another to the a certain Sales who was supposed to introduce repairs who permanently deprived the owners of possession thereof. Hence, there was theft

25

Villacorta v. Insurance Commission, 100 SCRA 467.

26

Andrew Palermo v. Pyramid Insurance Company, Inc., G.R. No. L-36480, May 31, 1988.

2n

Ibid.

28 Malayan Insurance Co., Inc. v. Court of Appeals, 230 Phil. 145, 147 (1986). People v. Bustinera, G.R. No. 148233, June 8, 2004. ^G.R. No. 173773, November 28, 2012. 29

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

417

of the vehicle. Although there was turn-over of physical possession of the vehicle, there was no transfer of physical possession. The failure of the owner of the repair shop to return the subject vehicle to insured owner constitutes theft and the insurer is for the loss of insured vehicle under the “theft clause.” c. Not Covered by Malicious Damage Clause. The theft clause also applies even if the person who took the vehicle is an employee of the insured. In A l p h a I n s u r a n c e a n d S u r e t y C o m p a n y v . C a s t o r i l the insurance policy over a car included theft as a risk insured against. One of the exclusions or the risks that is not covered by the insurance was “malicious damage” caused by the insured, members of the family and those employed by the insured. It was argued that taking of the vehicle by the driver of the insured constitutes “malicious damage” and is not covered by the theft clause. The Supreme Court rejected the argument explaining that the exclusion for “material damage” refers to damage that is the direct result of the deliberate or willful acts where the deliberate plan or purpose was to cause damage to the vehicle for purposes of defrauding the insurer. §7.04. AUTHORIZED DRIVER CLAUSE AND THEFT CLAUSE DISTINGUISHED. Where a car is unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and, therefore, it is the ‘THEFT” clause, and not the “AUTHORIZED DRIVER” clause that should apply. Theft is an entirely different legal concept from that of accident. Theft is committed by a person with the intent to gain or, to put it in another way, with the concurrence of the doer’s will. On the other hand, accident, although it may proceed or result from negligence, is the happening of an event without the concurrence of the will of the person by whose agency it was caused. Clearly, the risk against accident is distinct from the risk against theft. The “authorized driver clause” in a typical insurance policy is in contemplation or anticipation of accident in the legal sense in which it should be understood, and not in contemplation or anticipation of an event such as theft.31 32 a. It is worthy to note that there is no causal connection between the possession of a valid driver’s license and the loss of a

31

G.R. NO. 198174, September 2, 2013.

32

Perla Compania de Seguros, Inc. v. The Court of Appeals, Herminio Lim and Evelyn Lim, G.R. No. 96452, May 7, 1992.

418

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

vehicle through theft. To rule otherwise would render car insurance practically a sham since an insurance company can easily escape liability by citing restrictions that are not applicable or germane to the claim, thereby reducing indemnity to a shadow.33 §8. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI). The Insurance Code makes it mandatory for all motor vehicles to be covered by motor vehicle liability insurance as defined and governed by Sections 386 to 402 thereof. Motor vehicles will not be registered by the Land Transportation Commission 34 without the required insurance. Thus, Sections 387 to 389 as amended provides:

SEC. 387. 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. 388. The Commissioner shall furnish the Land Transportation Office with a list of insurance companies authorized to issue the policy of insurance or surety bond required by this chapter. SEC. 389. The Land Transportation Office shall not allow the registration or renewal of registration of any motor vehicle without first requiring from the land transportation operator or motor vehicle owner concerned the presentation and filing of a substantiating documentation in a form approved by the Commissioner evidencing that the policy of insurance or guaranty in cash or surety bond required by this chapter is in effect.

^Perla Compania de Seguros, Inc. v. The Court of Appeals, Herminio Lim and Evelyn Lim, supra. ^Section 375 (As amended by P.D. No. 1814) provides that the Commissioner shall furnish the Land Transportation Commissioner with a list of insurance companies authorized to issue the policy of insurance or surety bond required by the Code.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

419

a. Rationale. The nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended to provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of the negligent operation and use of motor vehicles. The victims and/or their dependents are assured of immediate financial assistance, regardless of the financial capacity of motor vehicle owners.35 b. No Unreasonable Denial. Section 392 of the Insurance Code provides that “no land transportation operator or owner of motor vehicle shall be unreasonably denied the policy of insurance or surety bond required by this chapter by the insurance companies authorized to issue the same, otherwise, the Land Transportation Commission shall require from said land transportation operator or owner of the vehicle, in lieu of a policy of insurance or surety bond, a certificate that a cash deposit has been made with the Commissioner in such amount required as limits of indemnity in section three hundred seventy-seven to answer for the passenger and/or third-party liability of such land transportation operator or owner of the vehicle.” The authority to engage in the casualty and/ or surety lines of business of an insurance company that refuses to issue or renew, without just cause, the insurance policy or surety bond therein required shall be withdrawn immediately. c. Premium. Premiums are paid by the operators or owners of vehicles. It shall be unlawful for a land transportation operator or owner of motor vehicle to require his or its drivers or other employees to contribute in the payment of premiums.36 d. Agents. No government office or agency having the duty of implementing the provisions of this chapter nor any official or employee thereof shall act as agent in procuring the insurance policy or surety bond provided for herein.37 (1) The commission of an agent procuring the said policy or bond shall in no case exceed ten p e r c e n t u m (10%) of the amount of the premiums therefor.38 e. Damage Coverage. The liability covered is for death and bodily injury. Section 374 of the Insurance Code provides that

36

William Tiu v. Pedro Arriesgado, et al., G.R. No. 138060, September 1, 2004. 36Section 399,1.C. 37

Section 400,1.C.

s*Ibid.

420

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the Compulsory Motor Vehicle Liability Insurance covers “death, bodily injury, and/or damage to property.” However, the phrase “damage to property’’ appears in both Sections 386(f) and 387 of the Insurance Code. The Insurance Commission believes that the words “and damage to property” in Section 386(f) is merely descriptive and the prevailing provision for purposes of determining the coverage of the policy is Section 387 which contains the disjunctive words “and/or.” The Insurance Commission therefore concluded that the amended Insurance Code “makes the acquisition of property damage coverage merely optional on the part of the policy owner, and not mandatory.”39 §8.01. DEFINITIONS. The following terms may be defined for purposes of applying the provisions on Compulsory Motor Vehicle Liability Insurance:40 (1) “ M o t o r V e h i c l e ” i s any vehicle as defined in Section 3, paragraph (a) of Republic Act No. 4136 otherwise known as the “Land Transportation and Traffic Code.” Section 3, paragraph [a] of the Land Transportation and Traffic Code provides that a “Motor Vehicle” means any vehicle propelled by any power other than muscular power using the public highways, but excepting road rollers, trolley cars, street-sweepers, sprinklers, lawn mowers, bulldozers, graders, fork-lifts, amphibian trucks, and cranes if not used on public highways, vehicles which run only on rails or tracks, and tractors, trailers and traction engines of all kinds used exclusively for agricultural purposes. The law likewise provides that trailers having any number of wheels, when propelled or intended to be propelled by attachment to a motor vehicle shall be classified as separate motor vehicle with no power rating. (2) “ P a s s e n g e r ” is any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare.41

39 Circular Letter No. 2014-52 dated December 15, 2014. (The Insurance Commission noted that P.D. 1814 deleted the words “damage to property” and “and/ or damage to property” from the coverage of CMLVI that were previously part of P.D. 612. RA 10607 reintegrated the same words in the present law.) 40 Section 386(a), I.C. 41 Section 386(b), I.C.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

421

(3) “ T h i r d - P a r t y ” is any person other than a passenger and shaU also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment.42 (4) “ O w n e r ” or “ M o t o r v e h i c l e o w n e r ” means the actual legal owner of a motor vehicle, in whose name such vehicle is duly registered with the Land Transportation Commission.43 (5) “ L a n d t r a n s p o r t a t i o n o p e r a t o r ” means the owner or owners of motor vehicles for transportation of passengers for compensation, including school buses.44 (6) “ I n s u r a n c e P o l i c y ” or “ P o l i c y ” refers to a contract of insurance against passenger and thirty-party liability for death or bodily injuries and damaged to property arising from motor vehicle accidents.45 §8.02. ALTERNATIVE COMPLIANCE. Under Section 390, every land transportation operator and every owner of a motor vehicle shall, before applying for the registration or renewal of registration of any motor vehicle, at his option, either: (1) Secure an insurance policy issued by any insurance company authorized by the Commissioner; or (2) Post a surety bond issued by any insurance company authorized by the Commissioner; or (3) Make a cash deposit in such amount which is the required limit of liability for Compulsory Motor Vehicle Liability Insurance. a. It should be noted that the cash deposit made to, or surety bond posted with, the Commissioner shall be resorted to by him in cases of accidents the indemnities for which to third-parties and/or passengers are not settled accordingly by the land transportation operator. In that event, the said cash deposit shall be replenished or such surety bond shall be restored within 60 days after impairment

42

Section 386(c), SectionI.C. ““Section “Section 386(f), I.C. 43

422

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

or expiry, as the case may be, by such land transportation operator, otherwise, he is required to secure the insurance policy. The aforesaid cash deposit may be invested by the Commissioner in readily marketable government bonds and/or securities. §8.03. COVERAGE. Section 390 of the Insurance Code provides for the coverage of the CMVLI:

SEC. 390. Every land transportation operator and every owner of a motor vehicle shall, before applying for the registration or renewal of registration of any motor vehicle, at his option, either secure an insurance policy or surety bond issued by any insurance company authorized by the Commissioner or make a cash deposit in such amount as herein required as limit of liability for purposes specified in Section 387. (a) In the case of a land transportation operator, the insurance guaranty in cash or surety bond shall cover liability for death or bodily injuries of thirdparties and/or passengers arising out of the use of such vehicle in the amount not less than Twelve thousand pesos (P12,000.00) per passenger or thirdparty and an amount, for each of such categories, in any one accident of not less than that set forth in the following scale: (1) Motor vehicles with an authorized capacity of twenty-six (26) or more passengers: Fifty thousand pesos (P50,000.00); (2) Motor vehicles with an authorized capacity of from twelve (12) to twenty-five (25) passengers: Forty thousand pesos (P40,000.00); (3) Motor vehicles with an authorized capacity of from six (6) to eleven (11) passengers: Thirty thousand pesos (P30,000.00); (4) Motor vehicles with an authorized capacity of five (5) or less passengers: Five thousand pesos (P5,000.00) multiplied by the authorized capacity. Provided, however, That such cash deposit made to, or surety bond posted with, the Commissioner shall be resorted to by him in cases of

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

indemnities for which to third-parties and/or passengers are not settled accordingly by the land transportation operator and, in that event, the said cash deposit shall be replenished or such surety bond shall be restored within sixty (60) days after impairment or expiry, as the case may be, by such land transportation operator, otherwise, he shall secure the insurance policy required by this chapter. The aforesaid cash deposit may be invested by the Commissioner in readily marketable government bonds, and/or securities. (b) In the case of an owner of a motor vehicle, the insurance or guaranty in cash or surety bond shall cover liability for death or injury to third-parties in an amount not less than that set forth in the following scale in any one accident: (1)

Private Cars (i) Bantam: Twenty thousand pesos (P20,000.00); (ii) Light: Twenty thousand pesos (P20,000.00); and (iii) Heavy: Thirty thousand pesos (P30,000.00). (2)

Other Private Vehicles (i) Tricycles, motorcycles and scooters: Twelve thousand pesos (P12,000.00); (ii) Vehicles with an unladen weight of 2,600 kilos or less: Twenty thousand pesos (P20,000.00); (iii) Vehicles with an unladen weight of between 2,601 kilos and 3,930 kilos: Thirty thousand pesos (P30,000.00); and (iv) Vehicles with an unladen weight over 3,930 kilos: Fifty thousand pesos (P50,000.00). The Commissioner may, if warranted, set forth schedule of indemnities for the payment of claims for death or bodily injuries with the coverages set forth herein.

424

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes oo Pre-Need Acs J

a. Amount of Coverage Per IC Circular. The last paragraph of Section 390 of the Insurance Code states that “the Commissioner may, if warranted, set forth schedule of Indemnities for the payment of claims for death or bodily injuries setting forth the each coverage” Accordingly, the Insurance Commissioner issued Insurance Memorandum Circular No. 4-2006 dated July 26. 2006 providing for the amount of the compulsory coverage for CMVLL* The said Circular provides for the third party liability’ coverage of P100,000.00 with additional P100,000.00 coverage for passenger liability for public utility vehicle. b. Schedule of Indemnity. The Circular likewise provides that the death indemnity is P70,000.00 while the indemnity for burial and funeral expenses is P30,000.00. The schedule of indemnity for bodily injuries and fractures are likewise provided for.47 c. Maximum Indemnity. It should be noted that the previous Insurance Memorandum Circular fixed the maximum indemnity for death at P12,000.00 per victim and the maximum limit per accident was pegged at P50,000.00. An insurer in an indemnity contract for third party liability is directly liable to the injured party up to the extent specified in the agreement but it cannot be held solidarily liable beyond that amount.4* It means that the insurer’s maximum liability for any single accident will not exceed P50,000.00 regardless of the number of passengers killed or injured therein. 49 If we apply the ruling in the said cases to Insurance Memorandum Circular No. 4-2006, this means that the present maximum liability per accident is now P100,000.00 (plus another P100,000.00 for passengers of a common carrier) irrespective of the number of victims. However, the present rules issued by the Land Registration and Franchising Regulatory Board (LTFRB) requires insurance coverage on a per passenger or per person basis. 50 The LTFRB rules provide for enhanced and detailed benefits for the required Passenger Personal Accident Insurance Program. For example, under the LTFRB rules, the benefit for accidental death is

48 In relation to Section 390,1.C. IMC No. 4-2006 dated July 26, 2006 repealed IMC No. 1-96. 41 Ibid. See Appendix “C” of this work. 4M William Tiu v. Pedro Arriesgado, et al., G.R. No. 138060, September 1, 2004. 49First Quezon City Insurance Company, Inc. v. The Hon. Court of Appeals, et al., G.R. No. 98414, February 8, 1993. 50 See Eastern Assurance and Surety Corporation v. LTFRB, G.R. No. 149717, October 7, 2003 (re validity of LTFRB rules).

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

425

PI50,000.00 per passenger while loss of two limbs and loss of sign in both eyes are both covered by a required P75,000.00 insurance coverage per passenger.61 (1) Nevertheless, the parties may voluntarily enter into an insurance contract that provides for a bigger coverage. The owner of the motor vehicle may likewise secure a “comprehensive” insurance coverage that makes the liable vehicle for his own damage as well as liability to third persons. §8.04. NO FAULT INDEMNITY CLAUSE. Section 391 of the Insurance Code allows a passenger or third party to recover without proof of fault or negligence on the party of the driver of the insured vehicle:

SEC. 391. Any claim for death or injury to any passenger or third-party pursuant to the provisions of this chapter shall be paid without the necessity of proving fault or negligence of any kind: Provided, That for purposes of this section: (a) The total indemnity in respect of any person shall not be less than Fifteen thousand pesos (P15,000.00); (b) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (c)

Police report of accident; and

(d) Death certificate and evidence sufficient to establish the proper payee; or (e) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; (f) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim, shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In 51 51 LTFRB Memorandum Circular No. 2014-002 dated January 23, 2014 and LTFRB Memorandum Circular No. 2001-010 dated February 28, 2001 which were issued by the LTFRB under Section 5(k) of Commonwealth Act No. 146 as amended by E.O. No. 202. (The detailed schedule of benefits per passenger is provided for).

426

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. a. Limitations. From a reading of the provision, which is couched in straightforward and unambiguous language, the following rules on claims under the “no fault indemnity” provision, where proof of fault or negligence is not necessary for payment of any claim for death or injury to a passenger or a third party, are established:52 (1)

A claim may be made against one motor vehicle only.

(2) If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which he is riding, mounting or dismounting from. (3) In any other case (i . e ., if the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle. (4) In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. (5) The total indemnity in respect of any person shall not exceed fifteen thousand pesos (P15,000.00);53 (6) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (i)

Police report of accident, and

(ii) Death certificate and evidence sufficient to establish the proper payee, or (iii) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed.

52 Section 391, I.C.; Perla Compania de Seguros, Inc. v. Hon. Constante Ancheta, et al„ G.R. No. L-49699, August 8, 1988. “Section 391(a), I.C.; Paragraph III, Insurance Memorandum Circular No. 42006, July 26, 2006. The original amount fixed by Section 378 (now Section 391) was P5,000.00.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

427

b. Insurance Memorandum Circular No. 4-2006 provides for an increased coverage under the “No-Fault Indemnity Clause.” This was later adopted under Section 391(a) as amended by R.A. No. 10607. The Circular provides:

III. NO FAULT INDEMNITY Any claim for death or bodily injuries sustained by a passenger or third party shall be paid without the necessity of proving fault or negligence of any kind provided the total indemnity in respect of any person shall be fifteen thousand pesos (Php15,000.00) for all motor vehicles. §8.05. CANCELLATION OF CMVLI. The rules on cancellation of the CMVLI policy are embodied in Sections 380 and 381 of the Insurance Code which provides:

SEC. 393. No cancellation of the policy shall be valid unless written notice thereof is given to the land transportation operator or owner of the vehicle and to the Land Transportation Commission at least fifteen (15) days prior to the intended effective date thereof. Upon receipt of such notice, the Land Transportation Commission, unless it receives evidence of a new valid insurance or guaranty in cash or surety bond as prescribed in this chapter, or an endorsement of revival of the cancelled one, shall order the immediate confiscation of the plates of the motor vehicle covered by such cancelled policy. The same may be re-issued only upon presentation of a new insurance policy or that a guaranty in cash or surety band has been made or posted with the Commissioner and which meets the requirements of this chapter, or an endorsement or revival of the cancelled one. SEC. 394. If the cancellation of the policy or surety bond is contemplated by the land transportation operator or owner of the vehicle, he shall, before the policy or surety bond ceases to be effective, secure a similar policy of insurance or surety bond to replace the policy or surety bond to be cancelled or make a cash deposit in sufficient amount with the Commissioner and

428

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

without any gap, file the required documentation with the Land Transportation Commission, and notify the insurance company concerned of the cancellation of its policy or surety bond. §8.06. CHANGE OF OWNERSHIP. Transfer of ownership does not suspend the policy provided that Section 395 of the Insurance Code is complied with.

SEC. 395. In case of change of ownership of a motor vehicle, or change of the engine of an insured vehicle, there shall be no need of issuing a new policy until the next date of registration or renewal of registration of such vehicle, and: Provided, That the insurance company shall agree to continue the policy, such change of ownership or such change of the engine shall be indicated in a corresponding endorsement by the insurance company concerned, and a signed duplicate of such endorsement shall, within a reasonable time, be filed with the Land Transportation Commission. §8.07. CLAIMS SETTLEMENT. In the settlement and payment of claims, the indemnity shall not be availed of by any accident victim or claimant as an instrument of enrichment by reason of an accident, but as an assistance or restitution insofar as can fairly be ascertained.54

SEC. 397. Any person having any claim upon the policy issued pursuant to this chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting forth the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six (6) months from the date of accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or the courts within one (1) year from denial of the claim, otherwise, the claimant’s right of action shall prescribe.

54

Section 396,1.C.

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

429

a. Prescriptive Period. The prescriptive period is one year from the time the cause of action accrues. The period is counted from the date of rejection by the insurer as this is the time when the cause of action accrues. If the claim has not been rejected then there has yet been no accrual of cause of action and prescription has not yet set in. 65 Thus, in one case, the insured made an extrajudicial demand for payment but the insurer failed to respond to the same and the complaint was filed even before a denial of the claim was made by petitioner. The Supreme Court ruled that for all legal purposes, the one-year prescriptive period provided for in Section 384 of the Insurance Code has not begun to run. The cause of action arises only and starts to run upon the denial of the claim by the insurance company.56 b. Section 398 of the Insurance Code provides for two periods — that is, the six-month period for filing the notice of claim and the one-year period for bringing an action or suit. The Supreme Court observed that there is absolutely nothing in the law which mandates that the two periods must always concur. On the contrary, it is very clear that the one-year period is only required in proper cases. Had the lawmakers intended it to be that the two periods must concur, then the phrase “in proper cases” would not have been inserted.57 c. Indeed, the Supreme Court has ruled with consistency that the prescriptive period to bring suit in court under an insurance policy begins to run from the date of the insurer’s rejection of the claim filed by the insured, the beneficiary or any person claiming under an insurance contract. However, this ruling is premised upon the compliance by the persons suing under an insurance contract, with the indispensable requirement of having filed the written claim mandated by Section 397 of the Insurance Code. Absent such written claim filed by the person suing under an insurance contract, no cause of action accrues under such insurance contract, considering that it is the rejection of that claim that triggers the running of the 55

55 Summit Guaranty & Insurance Co., Inc. v. The Honorable Gregoria Arnaldo, G.R. No. L-48546, February 29, 1988; Summit Guaranty & Insurance Co., Inc. v. The Hon. Jose C. de Guzman, etc., et al., G.R. No. 50997; Summit Guaranty & Insurance Co., Inc. v. The Hon. Gregoria C. Arnaldo, etc., G.R. No. L-48679; and Summit Guaranty & Insurance Co., Inc. v. The Hon. Ramon B. Jabson, etc., G.R. No. L-48758; Travellers Insurance & Surety Corporation v. Hon. Court of Appeals and Vicente Mendoza, supra. ^Summit Guaranty & Insurance Co., Inc. v. The Honorable Gregoria Arnaldo, supra.

hl

IbidL.

430

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

one year prescriptive period to bring suit in court, and there can be no opportunity for the insurer to even reject a claim if none has been filed in the first place.58 d. Section 385 of the Insurance Code provides for the procedure that will be undertaken after the claim, duly supported by documents, is filed with the insurance company:

SEC. 398. The insurance company concerned shall forthwith ascertain the truth and extent of the claim and make payment within five (5) working days after reaching an agreement. If no agreement is reached, the insurance company shall pay only the no-fault indemnity provided in Section 391 without prejudice to the claimant from pursuing his claim further, in which case, he shall not be required or compelled by the insurance company to execute any quit claim or document releasing it from liability under the policy of insurance or surety bond issued. In case of any dispute in the enforcement of the provisions of any policy issued pursuant to this chapter, the adjudication of such dispute shall be within the original and exclusive jurisdiction of the Commissioner, subject to the limitations provided in Section 439. §8.08. PENALTY CLAUSES.

SEC. 401. Any land transportation operator or owner of motor vehicle or any other person violating any of the provisions of the preceding sections shall be punished by a fine of not less than Five hundred pesos (P500.00) and/or imprisonment for not more than six (6) months. The violation of Section 390 by a land transportation operator shall be a sufficient cause for the revocation of the certificate of public convenience issued by the Land Transportation Franchising and Regulatory Board covering the vehicle concerned. SEC. 402. Whenever any violation of the provisions of this chapter is committed by a corporation or asso

58 TraveUers Insurance & Surety Corporation v. Hon. Court of Appeals afl Vicente Mendoza, supra.

a

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

431

ciation, or by a government office or entity, the executive officer or officers of said corporation, association or government office or entity who shall have knowingly permitted, or failed to prevent, said violation shall be held liable as principals.

PROBLEMS: 1. Mr. Gonzales was the owner of a car insured with Masagana Insurance Company for “Own Damage,” “Theft,” and “Third Party Liability” effective May 14, 1986 to May 14, 1987, the car was brought to a machine shop for repairs. On May 11, 1987, while in the custody of the machine shop, the car was taken by one of the employees (of the machine shop) to show off to his girlfriend. While on the way to his girlfriend’s house, the car smashed into a parked truck and was expensively damaged, Mr. Gonzales filed a claim for recovery under the policy but was refused payment. The insurance company averred that the car was stolen, and therefore, was not covered by the “Theft” clause. It was also argued that there was a violation of the Authorized Driver Clause because the drivers are not authorized. Decide the merits of the insurer’s contentions, with reasons. A:

I would decide in favor of the insured. Theft is a peril insured against under the “Theft Clause.” Theft was committed in the present case because unlawful and wrongful taking of the car by persons without the knowledge and consent of the owner constitutes theft under Article 308 of the Revised Penal Code. The crime is committed whether the persons who took the instrument are employees of the car shop or not to whom it had been entrusted. Even temporary taking is sufficient to warrant the finding the theft was committed. The contention that the “Authorized Driver Clause” bars recovery is also not tenable. The Theft Clause and not the Authorized Driver Clause is applicable. Under the Authorized Driver Clause, the insured cannot recover if the driver at the time of the accident does not have the required driver’s license. It does not mean that the “authorized driver” clause has. been violated if there was unlawful taking of the car. ( S e e V i l l a c o r t a v . I n s u r a n c e C o m m i s s i o n e r , 1 0 0 S C R A 4 6 7 )

2.

Spouses PA and FA were passengers of the passenger bus operated by Mr. T. The bus collided with a cargo truck causing injury to Mr. PA and the death of FA. Mr. PA filed a complaint for breach of contract of carriage against Mr. T, his driver Mr. R and PPS Insurance Company praying that they be held jointly and solidarity liable for P500,000 the value of the damage or injury. PPS admitted that it issued a P300,000 policy against third party liability over the bus of Mr. T but claims

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

432

that it cannot be held solidarily liable for the total. Assume that the amount being claimed can be duly established, that the negligence of the driver of Mr. T was the proximate cause of the loss and that the negligent act is a peril insured against. a. Is the insurer correct in claiming that it cannot be held jointly and severally liable? b.

What if the loss was only P250,000, can the insurer be held solidarily

liable? A:

(a) Yes, the insurer is correct in claiming that it cannot be held jointly and severally liable for P500,000. The Lability of the insurer is based on the contract of insurance and not on tort. Hence, the insurer can be made liable only up to the extent fixed in the policy and not for every natural and probable consequence of the negligent act of the insured or his agent. (b) Yes, the insurer can be held solidarily liable. If the loss is P250,000, the same is well within the limit prescribed in the policy which is P300,000. The insurer can be held directly liable because the insurance is against third party liability subject to the qualification that such Lability is only up to the extent specified in the agreement. It cannot be held sohdarily Lable beyond that amount. ( S e e W i l l i a m T i u , e t a l . v . P e d r o A r r i e s g a d o , G . R . N o . 1 3 8 0 6 0 , S e p t e m b e r 1 , 2 0 0 4 )

3.

HL insured his brand new car with P insurance company for comprehensive coverage wherein the insurance company undertook to indemnify him against loss or damage to the car: a) by accident; b) by fire, external explosion, burglary, theft; and c) maLcious act. After a month, the car was carnapped while parked in the parking space in front of the International Hotel in Makati. HL’s wife who was driving the car before it was carnapped, reported the incident immediately to various government agencies in comphance with the insurance requirements. Because the car could not be recovered, HL filed a claim for the loss of the car with the insurance company but it was denied on the ground that his wife who was driving the car when it was carnapped was in possession of an expired driver’s license, a violation of the authorized driver’s clause of the insurance company. May the insurance company be held Lable to indemnify HL for the loss of the insured vehicle? Explain. A:

Yes. The insurance company is Lable. Theft is a peril insured against hence, the insurer is Lable under the theft clause. The fact that HL’s wife was driving a car with an expired driver’s Lcense at the time it was carnapped is immaterial. ( S e e P e r l a C o m p a n i a d e S e g u r o s v . C A , 2 0 8 S C R A 4 8 7 )

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

433

Sheryl insured her newly acquired car, a Nissan Maxima, against any loss or damage for P50,000 and against third party liability for P20,000 with the XYZ Insurance Corp. (XYZ). Under the policy, the car must be driven only by an authorized driver who is either a) the insured; or b) any person driving on the insured’s order or with his permission: P r o v i d e d , That the person driving is permitted in accordance with the licensing or other laws or regulations to drive the motor vehicle and is not disqualified from driving such a vehicle by order of a court. During the effectivity of the policy, the car, then driven by Sheryl herself, who had no driver’s license, met an accident and was extensively damaged. The estimated cost of repair was P40,000. Sheryl immediately notified XYZ, but the latter refused to pay on the policy alleging that Sheryl violated the authorized driver clause when she drove it without a driver’s license. Is the insurer correct? A:

No. The insurer is not correct in denying the claim on the ground that there is a violation of the Authorized Driver Clause. The clause can be invoked only if the person driving the vehicle is other than the insured. It does not apply if the person driving the vehicle is the insured herself. Thus, the insurer is liable because it is immaterial that the insured did not have a driver’s license. ( P a l e r m o v . P y r a m i d I n s u r a n c e , G . R . N o . 3 6 4 8 0 , M a y 3 1 , 1 9 8 8 )

Mayari obtained a comprehensive insurance policy on his car. The policy carried the standard Authorized Driver Clause which states that the insurance company is not liable for any loss, accident or damages sustained while the car is being driven by someone other than a duly authorized driver. One day, Mayari allowed his friend, Kaibigan to drive the car. Kaibigan figured in a mishap and the car was a total loss. Kaibigan had been driving for the past five years but it appears that his license was irregularly issued because he cannot read or write; neither did he take any of the prescribed driver’s tests. After the initial license was issued, he merely asked his wife to go to the LTC office to get a renewal of his license. Mayari did not know about the irregularity in the driver’s license of Kaibigan. Can Mayari recover on the insurance policy? Explain. A:

No. Mayari cannot recover under the policy. The Authorized Driver Clause requires that the driver other than the insured must have a valid driver’s license at the time of the accident. What Kaibigan possessed is a license that was irregularly issued. Hence, Kaibigan was in possession of an invalid license at the time of the accident. For all intents and purposes, the license is legally non-existent. It should be noted however that there is another view to the effect that the Authorized Driver Clause is not violated because the license has not yet been revoked at the time of the

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

434

accident. The view is that until his license is revoked, it cannot be said that he does not have a license at the time of the accident. However, it is believed that the view that the Authorized Driver Clause is violated is the better view.

6.

Driving his car one night, Mr. A crossed an intersection as the signal light turned green. Suddenly, he saw an old woman crossing the street just a few feet from his car. He applied the brakes immediately but the same, he hit the woman, who turned out to be senile already. He brought her to the hospital where she was confined for three days due to her injuries. Upon her discharge, A had to pay the hospital bill which amounted to P2,000 including x-rays, doctor’s fee and medicines. Being covered by the compulsory Lability policy required of all vehicle owners under the Insurance Code, A referred the matter to his insurance company, which refused to reimburse him, claiming that since A was not at fault (it was admitted that he was not speeding or in any way negligent), there was no third party liability for which the insurance company could be liable under A’s policy. Is the insurance company liable to reimburse Mr. A for the hospital expenses? Explain. A:

7.

Jose, driving his own car, together with his wife, Maria, were on then- way home from their respective offices when a car driven by Pedro hit them from behind which was in turn hit by a gasoline tanker driven by Mario, causing the car to turnturtle, thus resulting to the death of Maria. All motor vehicles being insured, Jose filed his claim for the death of Maria against the insurers of said three motor vehicles under the No-Fault Indemnity Clause under Section 378 of Insurance Code. If Jose includes in the claim damage for his car, will the claim prosper? Why? A:

8.

Yes, the insurance company is liable. Mr. A can recover under the No-Fault Indemnity Clause provided for under Section 378 of the Insurance Code which provides for indemnity up to P15,000 (previously P5,000). It is not necessary to establish fault or negligence under this provision and all that is required is for Mr. A to present the police report of the accident and the medical report as well as the hospital receipts.

No, the claim of Jose claim for damages for his car will not prosper. The No-Fault Indemnity Clause covers only claims for death or injury to any passenger or third party. It does not apply to damage to property that is being claimed by Jose. 8

Jose, driving his own car, together with his wife, Maria, were on their way home from their respective offices when a car driven by Pedro hit them from behind which was in turn hit by a gasoline tanker driven by Mario, causing the car to turn-turtle, thus resulting to the death of Maria. All motor vehicles being insured, Jose filed his claim for the death of Maria against the insurers of said three motor vehicles under

CHAPTER 14 CASUALTY INSURANCE AND COMPULSORY THIRD PARTY LIABILITY INSURANCE

435

the No-Fault Indemnity Clause under Section 378 of Insurance Code. Will Jose’s claim for the death of Maria against insurers of said three motor vehicles prosper and up to what amount? Reasons. A:

No, Jose’s claim for the death of Maria will not prosper against all the insurers of three motor vehicles. The claim under the No-Fault Indemnity Clause may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle, in which the occupant is riding, mounting, or dismounting from. Hence, the insurer of the vehicle where Maria is riding is the only one that can be made liable.

While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the latter. Roberto sued Cezar and the third party liability insurer for damages and/or insurance proceeds. The insurance company moved to dismiss the complaint, contending that the liability of Cesar has not yet been determined with finality. Is the contention of the insurer correct? Explain. A:

No. The contention of the insurer is not correct. A final judgment is not required before the insurer can be made liable under a third party liability insurer. The liability of the insurer accrues immediately upon the occurrence of the injury or event upon which the liability depends. ( S e e S h e r m a n S h a f e r v . J u d g e , R T C , O l o n g a p o C i t y , B r a n c h 7 5 , e t a l , G . R . N o , L - 7 8 8 4 8 , N o v e m b e r 1 4 , 1 9 9 8 ; 1 6 7 S C R A 3 8 6 )

CHAPTER 15 SURETYSHIP Security for financial obligation is not a modern concept. It has been said that the earliest form of suretyship dates back to biblical times and was personal in nature.1 In the Philippines, collaterals were already used to secure debts before the arrival of Magellan in these shores. Historian William Henry Scott noted the use in pre- Spanish time of “ G a o n ” which was a kind of involuntary collateral seized until the debt was paid. 2 When the Spaniards came, there was likewise already in existence in the archipelago a security known as “T o k o d ” that is somewhat similar to our present day concept of a surety. “ T o k o d ” allows the creditor “to collect a debt from somebody other than the debtor, who thus effectively acquired a new creditor who then had to collect as best as he could.”3 §1. GENERAL CONCEPTS. By suretyship, a person known as surety binds himself solidarily to the creditor to fulfill the obligation of the principal debtor. On the other hand, Sections 177 and 178 of the Insurance Code provides:

SEC. 177. 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.

Jerome Trupin and Arthur L. Flitner, Commercial Property Insurance and Risk Management, Vol. 2, 5th Ed., p. 231, hereinafter referred to as “Trupin and Flitner.” 2 William Henry Scott, Barangay, Sixteenth Century Philippine Culture and Society, 1994 Ed., p. 135. Hbid.

436

SURETYSHIP

INSURANCE

There are three parties. The principal, There are two parties, the insurer and the obligee and surety. insured. The surety, in theory, expects no loss to occur. The insurer expects loss to occur and in some cases, like life insurance, the loss is a certainty. The surety has the right of reimbursement against the defaulting The insurer does not have the right of principal. reimbursement from the insured. Insurance covers losses that are beyond the control of the insured. The surety guarantees qualities that are within the control of the insured, that is, the insured's character, honesty, and integrity to perform the obligation.

§1.02. THREE “Cs.” Theoretically, the surety expects no loss to occur. Before issuing a bond, the surety should undertake the required investigations in order to determine if the principal can and will perform its obligations. Thus, prior to the issuance of the bond, the surety will apply what is referred to by the American Insurance Institute as the three "Cs” of suretyship, namely, c h a r a c t e r , c a p a c i t y ,

4

Section 2,1.C.

SURETY The surety insures the debt.

GUARANTY The guarantor insures the debtor’s solvency. The guarantor is subsidiarily liable.

The surety is primarily liable.

The surety is not entitled to the benefit The guarantor is entitled to the benefit of excussion. of excussion.

a. The Supreme Court explained: “While a guarantor may bind himself solidarily with the principal debtor, the liability of a 5

53-54.

Trupin and Flitner, p. 233. See also David Porter, Fundamentals of Bonding, pp.

^Trupin and Flitner, p. 233. 7 Title XV, Book IV, Articles 2047 to 2084, New Civil Code. 8 Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998.

CHAPTER 15 SURETYSHIP

439

guarantor is different from that of a solidary debtor. Thus, Tolentino explains: “A guarantor who binds himself i n s o l i d u m with the principal debtor under the provisions of the second paragraph does not become a solidary codebtor to all intents and purposes. There is a difference between a solidary codebtor, and a f i a d o r i n s o l i d u m (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the f i a n s a ; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code”9 §1.04. CIVIL CODE APPLICABLE. The New Civil Code provisions on surety applies suppletorily in accordance with the following provision:

SEC. 180. Pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship. §1.05. NATURE OF LIABILITY. Suretyship involves two types of relationship - the underlying principal relationship between the creditor and the debtor, and the accessory surety relationship between the principal and the surety.10 “The creditor accepts the surety’s solidary undertaking to pay if the debtor does not pay. Such acceptance, however, does not change in any material way the creditor’s relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor.” 11 The Supreme Court explained the nature of the liability of the surety in this wise: “Section 17512 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the surety, guarantees

9

Inciong, Jr. v. Court of Appeals, G.R. No. 96405, June 26, 1996. Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd., G.R. Nos. 158820-21, June 5, 2009. 10

ll

Ibid.

12

Now Section 177.

440

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

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 under Act 536, as amended. Suretyship arises upon the solidary binding of a person - deemed the surety - with the principal debtor, for the purpose of fulfilling an obligation. Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.”13 a. The Supreme Court explained in S t r o n g h o l d I n s u r a n c e C o . , I n c . v . T o k y u C o n s t r u c t i o n C o m p a n y , L t d . 1 4 that “the surety is considered in law as possessed of the identity of the debtor in relation to whatever is adjudged touching upon the obligation of the latter. Their Labilities are so interwoven as to be inseparable. Although the contract of a surety is, in essence, secondary only to a valid principal obligation, the surety’s liability to the creditor is direct, primary, and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.” It was further explained that “a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. However, a surety is not released by a change in the contract, which does not have the effect of making its obligation more onerous.”15

T h u s , i n First Lepanto-Taisho Insurance Corp. v. Chevron Philippines, Inc.,16 t h e bond that was issued by the petitioner b.

13 First Lepanto-Taisho Insurance Corp. v. Chevron Philippines, Inc., G.R. No. 177839, January 18, 2012. See also Philippine Charter Insurance Corp. v. Central Colleges of the Philippines, G.R. Nos. 180631-33, February 22, 2012. 14 G.R. Nos. 158820-21, June 5, 2009 citing Trade and Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corp., G.R. No. 139290, November 11, 2005. 1B Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd., ibid., citing Intra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008. l6 Supra.

CHAPTER 15 SURETYSHI P

441

was supposed to secure the obligations under written contract between the respondent and the latter’s distributor. Under the circumstances, the Supreme Court ruled that respondent is charged with notice of the specified form of the agreement or at least the disclosure of basic terms and conditions of its distributorship and credit agreements with its distributor after its acceptance of the bond delivered by the latter. However, it never made any effort to relay those terms and conditions of its contract with the distributer upon the commencement of its transactions with said client, which obligations are covered by the surety bond issued by petitioner. Since the bond that was issued and accepted by respondent specifically referred to a “written agreement,” then the surety is not liable in the absence of such written agreement. c. Because of the solidary nature of its obligation, the surety is not an indispensable party in a suit against the principal. Neither is the principal an indispensable party in an action to claim indemnity from the surety.17 §1.06. EXTENT OF LIABILITY. The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the contract. 18 §2. THE PARTIES. There are three persons involved in a contract of suretyship. These are the principal, the obligee, and the surety (obligor). a. Principal. The principal is the person whose obligation is secured by the bond or suretyship. He is the person who agrees to perform certain acts — the person who fulfills certain obligations. b. Obligee. The obligee is the person in whose favor the bond is issued or the undertaking of the surety is made. He will be paid or reimbursed if the principal fails to perform his obligation. In relation to the obligation of the principal and the surety, the obligee is the creditor or the active subject. c. Surety. The surety is the party who answers for the debt, default or obligation of the principal. The liability of the surety or

17 Ldving@Sense, Inc. v. Malayan Insurance Company, Inc., G.R. No. 193753, September 26, 2012. 18 Stonghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd.,

supra.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

442

sureties shall be joint and several with the obligor and shall be limited to the amount fixed in the agreement.19 The surety undertakes that the debt shall be paid 20 and this undertaking is usually in the form of a bond. §3. PREMIUM. The surety may be liable even if the bond is already accepted by the obligee. An accepted bond is valid and binding whether or not the premium has been paid by the principal.21 Section 179 of the Insurance Code provides:

SEC. 179. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety: Provided, That if the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only a reasonable amount, not exceeding fifty percent (50%) of the premium due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of the contract or bond: Provided, however, That if the nonacceptance of the bond be due to the fault or negligence of the surety, no such service fee, stamps or taxes shall be collected. In the case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent jurisdiction, as the case may be. §4. INTERPRETATION. The obligation of the surety is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. 22 Thus, a surety may bind himself for less, but not for more

19

Section 178,1.C. Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998. 21 Philippine Pryce Assurance Corporation v. Court of Appeals, 230 SCRA 164 20

[1994]. 22

Section 176 (as amended by P.D. No. 1455), I.C.

CHAPTER 15 SURETYSHIP

443

than the principal both as regards the amount and the onerous nature of the conditions.23 The liability of the surety cannot be extended by implication.24 a. Under the New Civil Code, the suretyship will not be effective without a valid obligation. Nevertheless, a surety may guarantee a voidable or unenforceable contract.25 b. As already stated, Section 180 of the Insurance Code provides that the pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship. Hence, even the doctrines and interpretation of the Supreme Court should also be applied whenever there is a need to interpret the provisions of suretyship contracts. c. Just like the contract of insurance, the contract of suretyship is a contract of adhesion. Hence, suretyship agreements or bonds must be construed strictly against the surety. In case of doubt, the doubt must be resolved against the surety who received consideration for the issuance of the bond and who prepared the language of the bond.26 Article 2055 of the New Civil Code provides that a guaranty (suretyship) is not presumed; it must be express and cannot extend to more than what is stipulated. Nevertheless, Justice J.B.L Reyes commented that the rule of strict interpretation must be limited to gratuitous guaranties. “There is no reason for favoring those who make guaranty a profession and who charge premiums for the risk they run, besides demanding a counter guaranty that protects them from all loss.”27 d. “ C o m p l e m e n t a r y C o n t r a c t s C o n s t r u e d - t o g e t h e r D o c t r i n e ” finds application in construing surety agreements. According to this doctrine, an accessory contract must be read in its entirety and together with the principal agreement.28 For instance, under this doc-

23

Article 2054, New Civil Code. Visayan Surety & Insurance Corporation v. Court of Appeals, 364 SCRA 631 (2001).

24

^Article 2052, New Civil Code. 26 Philippine National Bank v. Court of Appeals, 198 SCRA 767 (1991). 27 Justice J.B.L. Reyes, Observations on the New Civil Code on Points Not Covered by Amendments already Proposed, reproduced in Ipse Loquitur, p. 260, Balane, editor. ^Stronghold Insurance Company, Inc. v. Spouses Stroem, G.R. No. 204689, January 21, 2015.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

444

trine the silence of the accessory contract in this case could only be construed as acquiescence to the main contract.29 §5. KINDS OF BONDS. The surety business of insurance companies usually takes the form of issuance of bonds. Traditionally, bonds may be classified into Fidelity Bond and Surety Bond. a. Fidelity Bond is a bond that answers for the loss of an employer who is the obligee, for the dishonesty of the employee. b.

Surety Bond may be further classified into the following: (1) Contract bonds which include (a) Bid Bond; (b) Performance Bond; (c) Payment Bond; and (d) Maintenance Bond; (2) Legal Bonds; (3) Judicial Bonds; c. Contract Bonds. As the term implies, this bond guarantees the performance of contractual obligations. (1) Bid Bond30 — A proposal or bid bond has for its purpose the assurance of the owner of the project, the good faith of the bidder and that the bidder will enter into a contract with the project owner should his proposal be accepted. (2) Performance Bond — It is designed to afford the project owner security that the bidder (the contractor) will faithfully comply with the requirements of the contract awarded to the contractor and make good damages sustained by the project owner in case of the contractor’s failure to so perform.31 (3) Payment Bond — This bond secures the payment of bills for the labor and materials used in building a project. (4) Maintenance Bond — This bond answers for breach of warranties in a building project; the principal agrees to correct poor workmanship and to replace defective materials.

29 Stronghold Insurance Company, Inc. v. Spouses Stroem, supra. Trade and Investment Development Corporation of the Philippines v. Roblett Industrial and Construction Corporation, et al., G.R. No. 139290, November 11,2005. 3l Ibid. 30

CHAPTER 15 SURETYSHIP

445

d. Legal Bonds. They are bonds that are submitted “ i n v i r t u e o f a p r o v i s i o n o f l a w . ’ * 2 T h e s e i n c l u d e 'License and Permit Bonds” which are bonds imposed by law to guarantee that the persons concerned will comply with the provisions of the license or permit issued to him. For example, corporations that deploy workers abroad are required by law to post a bond with the Philippine Overseas Employment Administration. Similarly, the Corporation Code requires the filing of a bond if a foreign corporation will secure a license to do business. Legal bonds likewise include Customs and Internal Revenue Bonds. e. Judicial Bonds. They are bonds that are issued in virtue of judicial orders and/or pursuant to the Rules of Court. Examples are: (1) Replevin Bond; (2) Injunction Bond; (3) Attachment Bond; (4) Supersedeas Bond in ejectment cases; (5) Administrator’s Bond; or (6) Bail bond in criminal cases. The rules on the issuance of the Certificates of Accreditation and Authority for corporate surety bonds are embodied in the Guidelines on Corporate Surety Bond issued by the Supreme Court on August 6, 2004.32 33 f. Classification of the Insurance Commission. In the Rules and Regulations Governing the Issuance of Bonds in the Philippines 34 issued by the Insurance Commission, bonds are classified into: (1) Judicial Civil Bonds; (2) Judicial Criminal Bonds; (3) Firearms Bonds; (4) Internal Revenue Bonds; (5) Customs Bonds; (6) Guaranty Bonds; (7) Fidelity Bonds; (8) Promissory Notes; and (9) Immigration Bonds. §6. CONTINUING SURETY. Unless a specific period is fixed in the contract or the bond, the obligation of the surety subsists so long as the principal obligation subsists. There may even be cases when a surety may enter into a Continuing Surety. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. 35 The issuance of this type of bond is consistent with Article 2053 of the New Civil Code which provides

32

Article 2082, New Civil Code. ^See Circular No. 04-970-SC. ^Insurance Memorandum Circular No. 1-7, March 1, 1977. ^Atok Finance Corporation v. Court of Appeals, 222 SCRA 232 (1999).

446

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

that a surety may also be given as security for future debts, the amount of which is not yet known. a. Section 179 of the Insurance Code provides that in “continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent jurisdiction, as the case may be.” §7. REIMBURSEMENT. A surety who paid the obligee can recover what he paid from the principal. Normally, this right is also covered by a separate Indemnity Agreement signed by the principal in favor of the surety whereby the principal expressly agrees to reimburse the surety whatever amount that it will be required to pay the oblige. In other words, the Indemnity Agreement is executed in favor of the surety.36 a. An Indemnity Agreement may provide either or both “indemnity against payment” and “indemnity against liability.” In \ other words, the parties may provide that the surety can recover upon actual payment to the obligee and/or the moment the liability to the principal arises.37 b. The Indemnity Agreement usually includes the signature of another person who makes himself solidarily liable with the principal. In the case of corporations, its officers often affix their signatures to make them solidarily liable. This is known as the joint and solidary signature of the officer (JSS) or the signature of the “coindemnitor.” tt Nt \/r Pr'

c. For the protection of the insurer-bonding company, it is more prudent to obtain a security for the performance of the obligations of the principal under the Indemnity Agreement like a mortgage. Otherwise, the bonding company will have to go through the inconvenience of litigation. This becomes more important if the bonding company will issue a “high risk” bond like a supersedeas bond in labor cases or an appeal bond in ejectment cases. §8. EXTINGUISHMENT. The obligation of the surety is extinguished at the same time as that of the principal and for some causes as all other obligations.38

36

Mercantile Insurance Co., Inc. v. Ysmael, Jr. & Co., 169 SCRA 66Manila (1989).Surety & Fidelity Co. v. Court of Appeals, 191 SCRA 38 Article 2076, New Civil Code. 37

CHAPTER 15 SURETYSHIP

447

a. It also basic that suretyship is extinguished if there is material alteration or novation of the principal obligation. 39 For example, an extension granted to the debtor by the creditor without the consent of the surety extinguishes the surety. 40 As a corollary to this rule, the surety is not released from its obligation if the changes in the agreement does not substantially or materially alter the surety’s obligation to guarantee the performance of its principal. 41

PROBLEM: 1. TCCL, was awarded by the Manila International Airport Authority a contract for the construction of the Ninoy Aquino International Airport (NAIA) Terminal 2. On July 2, 1996, respondent entered into a Subcontract Agreement-with GE for the construction of the project’s Storm Drainage System (SDS) for P33,007,752 and Sewage Treatment Plant (STP) for P23,500,000, or a total contract price of P56,507,752. The parties agreed that the construction of the SDS and STP would be completed on August 10, 1997 and May 31, 1997, respectively. In accordance with the terms of the agreement, TCCL paid GA 15% of the contract price, as advance payment, for which the latter obtained from S Insurance Company two Surety Bonds to guarantee its repayment to TCCL. GA also obtained from S Insurance Performance Bonds to guarantee to respondent due and timely performance of the work. Both bonds were valid for a period of one year from date of issue. GA defaulted in the performance of her obligations and on February 10, 1997, TCCL manifested in writing its intention to terminate the subcontract agreement. TCCL also demanded that S Insurance comply with its undertaking under its bonds. On February 26, 1997, TCCL and GA agreed to revise the scope of work, reducing the contract price for the SDS phase from P33,007,752 to Pi,175,175 and the STP from P23,500,000 to Pll,095,930.50, fixing the completion time on May 31, 1997. Gabriel thereafter obtained from T Surety Company Bonds to guarantee the repayment of the advance payment given by respondent to Gabriel and the completion of the work for the SDS. Still, GA failed to accomplish the works within the agreed completion period. Eventually, on April 26, 1997, GA abandoned the project. On August 8, 1997, TCCL served a letter upon GA terminating their and demanded from Gabriel the return of the balance of the advance payment. TCCL likewise demanded the payment of the additional amount that it incurred in completing the project. Finally, TCCL made formal demands against S Insurance and T Surety to

39

Security Bank and Trust Company, Inc. v. Cuenca, 341 SCRA 781 (2000). 40

Article 2079, New Civil Code. People’s Trans-East Asia Insurance Coi > Holdings, Inc., G.R. No. 172404, August 13, 2014. 41

v. Doctors of New Millennium

448

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

make good their obligations under their respective performance and surety bonds. However, all of them failed to TCCL’s demand. S Insurance denied the claim of TCCL based on the following grounds: (a) It was allegedly released from liability because of the novation of the principal obligation when the contract price was reduced and the completion time was extended; and (b) It was allegedly released from liability because of the issuance of new bonds by T Surety. Are the grounds relied upon tenable? A: The grounds relied upon by S Insurance are not tenable. S Insurance is liable to TCCL. The revision of the subcontract agreement did not in any way make the obligations of both the principal and the surety more onerous. To be sure, GA never assumed added obligations, nor were there any additional obligations imposed, due to the modification of the terms of the contract. Failure to receive any notice of such change did not, therefore, exonerate petitioner from its liabilities as surety. With respect to the issuance, the impending expiration of the bonds issued by S Insurance. The issuance of the new bonds, the fact remains that the event insured against, which is the default in the performance of GA’s obligations set forth in the subcontract agreement, already took place. By such default, the liability of S Insurance had already set in. Thus, S Insurance remains solidarily liable with Gabriel, subject only to the limitations on the amount of its liability as provided for in the Bonds themselves. However, considering that the performance bonds issued by petitioner were valid only for a period of one year, its liabilities should further be limited to the period prior to the expiration date of said bonds. (Stronghold Insurance Company, Inc. v. Tokyu Construction Company, G.R. Nos. 158820-21, June 5, 2009)

a

CHAPTER 16 REGULATION OF INSURANCE BUSINESS The insurance industry is one of the most heavily regulated industries because it is impressed with public interest. Insurance companies hold funds paid by the public so that they can maintain a pool of funds to answer for unfortunate events. However, the purpose of the funds received by insurers is not limited to claim settlement. Insurance companies are also financial intermediaries that help channel funds from the public to productive endeavors. Economic development will be directly affected if the insurance industry is weak. These considerations justify the intervention by the State in the operation of insurance companies. §1. SOURCES OF REGULATION. In general, regulation may be made by: (1) law or statute, (2) administrative regulation, and (3) court decisions. a. The primary source of insurance regulations is the Insurance Code. It contains provisions that regulate the formation, organization, financial structure, business and practices and other facets of insurance contract and the business of insurance. b. Other regulations can be found in the administrative rules and regulations issued by the Insurance Commissioner in the performance of its functions. The Insurance Commissioner is the administrative authority who is vested under the Insurance Code with the power to regulate insurers and the business of insurance. 1 c. Section 192 provides that “every entity receiving any such certificate of authority shall be subject to the insurance and other applicable laws of the Philippines and to the jurisdiction and supervision of the Commissioner.” d. The decisions of the Supreme Court form part of the law of the land. Hence, the interpretations of the Court of the provisions

Section 437, I.C. 449

450

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

of statutes and administrative regulations are part of the regulatory blanket that covers parties who are involved in the business of insurance including the insurers, insured, insurance agents, insurance brokers, underwriters, or adjusters. §1.01. AUTHORITY OF LGU RESTRICTED. R.A. No. 10607 inserted a paragraph in Section 193 that effectively limits the authority of Local Government Units over insurance companies. The last paragraph of Section 193 expressly provides:

No insurance company issued with a valid certificate of authority to transact insurance business anywhere in the Philippines by the Insurance Commissioner, shall be barred, prevented, or disenfranchised from issuing any insurance policy or from transacting any insurance business within the scope or coverage of its certificate of authority, anywhere in the Philippines, by any local government unit or authority, for whatever guise or reason whatsoever, including under any kind of ordinance, accreditation system, or scheme. Any local ordinance or local government unit regulatory issuance imposing such restriction or disenfranchisement on any insurance company shall be deemed null and void ab initio. §2. REASONS AND BASES OF REGULATION. Regulation of insurance business is being undertaken pursuant to the police powers of the State. Regulation is generally necessary because of the following: (1) It is necessary to maintain the solvency of the insurers; (2) Consumer information is inadequate; (3) It is neces sary to insure reasonable rates; (4) It is necessary to make insurance available to all persons who need insurance coverage; and (5) It is necessary to ensure that the practice of insurance is ethical and competent. 2 §3. AREAS OF REGULATION. The principal areas of regulation include the following: (1) Formation of insurers; (2) Licensing of insurers; (3) Financial Regulation; (4) Rate Regulation; (5) Policy Forms Regulation; (6) Licensing of other persons involved in insurance business including agents, brokers, underwriters, adjusters, actuaries and the like; and (7) Regulation of sales practices and consumer protection.

2

Redja, p. 576; Huebner, Black & Webb, p. 641.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

451

§4. FORMATION AND LICENSING OF INSURERS. Section 190 of the Insurance Code states that the terms “ i n s u r e r or i n s u r a n c e c o m p a n y shall include all partnerships, associations, cooperatives 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 term shall also include professional reinsurers defined in Section 288.” a. “ D o m e s t i c C o m p a n y ” shall companies formed, organized or existing under the laws of the Philippines. 3

include

b. “ F o r e i g n c o m p a n y ” when used without limitation shall include companies formed, organized, or existing under any laws other than those of the Philippines. 4

§4.01. APPLICABLE LAW. With respect to insurance corporations, the provisions of the Corporation Code of the Philippines shall apply unless the provisions of the Insurance Code provide otherwise.5 Thus, in case of conflict with the provisions of the Insurance Code and the Corporation Code, the Insurance Code prevails when it comes to insurance corporations. §4.02. BASIC REQUIREMENTS. There are two basic requirements for the formation of insurance corporations, t o w i t : 6 (1)

It must possess the capital and assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner;

(2)

The Insurance Commissioner had granted a certificate to the effect that the insurer has complied with the provisions of the Insurance Code;

(3)

It must have obtained a certificate of authority to transact business from the Insurance Commissioner.

§4.03. CERTIFICATE OF AUTHORITY. Section 193 of the Insurance Code provides that “no insurance company shall transact any insurance business in the Philippines until after it shall have obtained a certificate of authority for that purpose from the * *

3

Section 190,1.C.

*Ibid. Section 191,1.C. Sections 192 and 193,1.C.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

452

Commissioner.” Section 193 likewise provides that “the certificate of authority issued by the Commissioner shall expire on the last day of December, three (3) years following its date of issuance, and shall be renewable every three (3) years thereafter, subject to the company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or decisions of the Commission.” a. The law provides that “no insurance company may be authorized to transact in the Philippines the business of life and non-life insurance concurrently, unless specifically authorized to do so by the Commissioner.” 7 The terms l i f e and n o n - l i f e insurance shall be deemed to include health, accident and disability insurance.8 §4.04. WHEN ISSUANCE OF CERTIFICATE CAN BE REFUSED. The Insurance Commissioner may refuse to issue a Certificate of Authority in any of the following cases:9 (1) (2)

If such refusal will best promote the interest of the people; If the Commissioner has not satisfied himself upon examination that such company is qualified by the laws of the Philippines to transact business therein;

(3)

If the Commissioner is not satisfied that the grant of such authority appears to be justified in the light of economic requirements;

(4)

If the Commissioner is not satisfied that the direction and administration, as well as the integrity and responsibility of the organizers and administrators, the financial organization and the amount of capital, reasonably assure the safety of the interests of the policyholders and the public; and

(5)

If the Commissioner is not satisfied that the name of the company is not that of any other known company transacting a similar business in the Philippines, or a name so similar as to be calculated to mislead the public.

§4.05. SUSPENSION AND CANCELLATION OF AUTHORITY. Section 254 of the Insurance Code provides that the Commissioner, upon examination, is authorized to suspend or revoke *

’Section 193,1.C. *Ibid.

Hbid.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

453

all certificates of authority granted to the insurance company, its officers and agents in the following cases: (1)

There is evidence that any domestic or foreign insurance company is in an unsound condition; or

(2)

That any domestic or foreign insurance company has failed to comply with the provisions of law or regulations obligatory upon it; or

(3)

That any domestic or foreign insurance company’s condition or method of business is such as to render its proceedings hazardous to the public or to its policyholders; or

(4) That any domestic or foreign insurance company’s net worth requirement, in the case of a domestic stock company, 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; or (5) That the margin of solvency required of such company is deficient. a. Restoration of Business. No new business shall thereafter be done by such company or for such company by its agent 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 company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years. §4.06. OTHER ASPECTS OF CORPORATE ORGANIZATION. The following areas are likewise regulated under the Insurance Code: (1) Financial Regulations including regulations on capitalization,10 solvency,11 assets,12 investments,13 and reserves;14

10

Section 194,1.C.

"Sections 200 to l2 Sections 202 to 13 203,1.C. Sections 204 to "Sections 216 to 220,1.C.

<* (ZB

454

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(2)

Limitation on Risks;15

(3)

Consolidation and merger of Insurance Companies.16

(4) (5)

Regulation of directors and officer;17 Regulation imposing reportorial requirements like financial reporting framework18 and annual statements;19

(6) Examination of Insurance Companies; §5. DIRECTORS AND OFFICERS. The Commissioner may refuse to issue a certificate until the Commissioner shall have satisfied himself that the direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of the interests of the policyholders and the public.20

a. In order to maintain the quality of the management of the insurance companies and afford better protection to policyholders and the public in general, any person of good moral character, unquestioned integrity and recognized competence may be elected or appointed director or officer of insurance companies in accordance with the pertinent provisions contained in the corporate governance circulars prescribed by the Commissioner. In addition hereto, the Commissioner shall prescribe the qualifications of directors, executive officers and other key officials of insurance companies for purposes of this section. No person shall concurrently be a Director and/or Officer of an insurance company and an adjustment company.21 §5.01. CORPORATE GOVERNANCE. On September 26, 2005, the Insurance Commission issued Circular No. 31-2005 promulgating a Code of Corporate Governance Principles and Leading Practices which is meant to achieve policyholder and market investor confidence and to sustain the growth of the insurance industry. The Code likewise seeks to enhance the corporate responsibility of insurers and intermediaries, promote the interest

15

Section 221,1.C. Sections 252 to 17 Section 193,1.C. 18 Section 189,1.C. 19 Sections 229 to 20 Section 193,1.C. 16

2l

Ibid.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

455

of their stakeholders specifically those of policyholders, claimants and creditors. a. Corporate governance means the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.22 §6. FINANCIAL REGULATIONS. Financial regulations are imposed on insurance companies to help maintain the healthy financial status of the companies. This healthy state of insurance companies will, in turn, help in the effort of the government to maintain a stable economy because insurance companies are also considered financial intermediaries. a. Asymmetric Information and Adverse Selection. Moreover, the financial regulations are also part of the regulations that are meant to guard against asymmetric information in insurance business. This asymmetric information arises when one of the parties has insufficient knowledge about the other party in the contract that makes it impossible to make the correct decision before entering into the contract. One of the problems involved when there is asymmetric information is “adverse selection” under which a person who is more likely to be unreliable is the more likely to seek out the transaction. After entering into the contract, the problem of moral hazards will also be guarded against. On the part of the consumers, they must be assured that the insurance company with whom that they are entering into an insurance contract can be relied upon to pay the insurance proceeds upon the happening of the peril insured against. Financial regulations give the consumers sufficient information about the insurer. In addition, financial regulations likewise seek to assure the public that insurance companies are in a state of robust financial condition and are therefore financially capable of answering the losses of their clients. §6.01. PAID-UP CAPITAL AND NET WORTH. Section 194 of the Insurance Code provides for the required paid-up capital and net worth of insurance companies. Section 194 provides:

SEC. 194. Except as provided in Section 289, no new domestic fife or non-life insurance company shall, in a stock corporation, engage in business in

“Section 1(1), Circular No. 31-2005.

456

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the Philippines unless possessed of a paid-up capital equal to at least One billion pesos (P1,000,000,000.00): Provided, That a domestic insurance company already doing business in the Philippines shall have a net worth by June 30, 2013 of Two hundred fifty million pesos (P250,000,000.00). Furthermore, said company must have by December 31, 2016, an additional Three hundred million pesos (P300,000,000.00) in net worth; by December 31,2019, an additional Three hundred fifty million pesos (P350,000,000.00) in net worth; and by December 31, 2022, an additional Four hundred million pesos (P400,000,000.00) in net worth. The Commissioner may, as a pre-licensing requirement of a new insurance company, in addition to the paid-up capital stock, require the stockholders to pay in cash to the company in proportion to their subscription interests a contributed surplus fund of not less than One hundred million pesos (P100,000,000.00). He may also require such company to submit to him a business plan showing the company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three (3) years. If organized as a mutual company, in lieu of such net worth, it must have available total members equity in an amount to be determined by the Insurance Commission above all liabilities for losses reported; expenses, taxes, legal reserve, and reinsurance of all outstanding risks, and the contributed surplus fund equal to the amounts required of stock corporations. A stock insurance company doing business in the Philippines may, subject to the pertinent law and regulation which now or hereafter may be in force, alter its organization and transform itself into a mutual insurance company. The Secretary of Finance may, upon recommendation of the Commissioner, increase such minimum paid-up capital stock or cash assets requirement under such terms and conditions as he may impose, to an amount which, in his opinion, would reasonably assure the safety of the interests of the policyholders and the public. The minimum paid-up capital and net worth requirement must

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

457

require the adoption of the risk-based capital approach and other internationally accepted forms of capital framework. For the purpose of this section, net worth shall consist of: (a)

Paid-up capital;

(b)

Retained earnings;

(c) Unimpaired surplus; and (d) Revaluation of assets as may be approved by the Commissioner. The Commission may adopt for purposes of compliance with capital build up requirement under this Code the recognition as part of the capital account, capital notes or debentures which are subordinate to all credits and senior only to common capital stocks. The President of the Philippines may order a periodic review every two (2) years the capital structure set out above to determine the capital adequacy of the local insurance industry from and after the integration and liberalization of the financial services, including insurance, in the ASEAN Region. For this purpose, a review committee consisting of representatives from the Department of Finance (DOF), the Insurance Commission (1C), the National Economic and Development Authority (NEDA), the Securities and Exchange Commission (SEC) and other agencies which the President may designate shall conduct the review and may recommend to the President to adopt for implementation the necessary capital adjustment. a. Paid-Up Capital Requirement for New Insurance Company. Section 194 as amended by R.A. No. 10607 adopt the capitalization requirement prescribed by the Insurance Commission and the Department of Finance for new insurance companies effective July 1, 200623 which provides that no new life or non-life insurance company shall be allowed to do business in

“Department Order No. 27-06.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act/

458

the Philippines unless it has a capitalization of One Billion Pesos (Php1,000,000,000) paid in cash. Section 194 now pro\ides that “except as provided in Section 289, no new domestic life or non-life insurance company shall, in a stock corporation, engage in business in the Philippines unless possessed of a paid-up capital equal to at least One billion pesos (Pi,000,000,000).” Under the implementing regulation, the Insurance Commission may also require, as a prelicensing requirement of the new insurance company, in addition to the required capital or assets, that the “stockholders or parent company to pay in cash to the company in proportion to their subscription or interests, a contributed surplus fund of not less than PKX^OOO^OO.OO.” 24 b. Mandatory Net Worth. In addition to the paid-up capital requirement, the new law likewise provides for a mandatory Net Worth. Net Worth shall consist of: (1)

Paid-up capital;

(2)

Retained earnings;

(3)

Unimpaired surplus; and

(4) Revaluation of assets as may be approved by the Commissioner. c. Paid-up Capital of Reinsurance Companies. No new reinsurance company shall be allowed to do business in the Philippines unless it has a capitalization of P2,000,000,000.00, paid in cash, of which at least 50% consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P400,000,000.00. d. Capitalization for Existing Company. The Insurance Commission likewise increased the minimum capitalization requirements of existing companies because the current requirements are inadequate relative to: (1) the needed business infrastructures and quality management team that will ensure better service to all stakeholders and expand its market penetration; and (2) the adequate allowance for increased business volatility and for mitigating market imperfections. 25 The Insurance Commission likewise observed that the capital bases must be rebuilt because low

24 Insurance Commission Circular Letter No. 2015-02-A dated January 13, 2015; Sec. 194,1.C. 2B

Department Order No. 27-06.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

459

capitalization levels have resulted in low retention ratios and heavy reliance on reinsurance and that the solvency positions of insurers must be secured and stable capital bases reduce insolvency risk and afford better protection for the insuring public.26 §6.02. MARGIN OF SOLVENCY.27 Section 200 of the Insurance Code provides that “an insurance company doing business in the Philippines shall at all times maintain the minimum paid-up capital, and net worth requirements as prescribed by the Commissioner. Such solvency requirements shall be based on internationally accepted solvency frameworks and adopted only after due consultation with the insurance industry associations.” a. If the Commissioner finds the paid-up capital and net worth be found to be less than that herein required to be maintained, the Commissioner shall forthwith direct the company to make good any such deficiency by cash, to be contributed by all stockholders of record in proportion to their respective interests, and paid to the treasurer of the company, within 15 days from receipt of the order.28 §6.03. ADMITTED ASSETS. The assets which can and cannot be part of admitted assets are specified in Sections 202 and 203 of the Insurance Code. Admitted assets are assets that are allowed by law to be part of assets that will be part of the bases in determining the financial conditions of the insurance company. These assets are limited to assets that are legally or beneficially owned by the insurance company.29 Non-admitted assets are the assets that will not be allowed to be carried on the balance sheet of the insurance company. 30 They are believed to be of marginal quality or of little liquidity for policyholders if the insurer should get into financial difficulty.31 §6.04. DIVIDEND POLICY. The Insurance Code prohibits the declaration or distribution of dividends if the following are impaired: (1) The entire paid-up capital stock;32 (2) The margin of solvency;33

26

Department Order No. 27-06. Section 200,1.C. 28 Ibid. ^Section 202,1.C. 30 Section 203,1.C. 31 Burton T. Beam, Jr., David L. Bickelhaupt, Robert M. Crowe,& Barbara S. Poole, Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 130, hereinafter cited as Beam, Jr., et al., p. 130. 32 Section 201,1.C. "Ibid. 27

460

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(3) In the case of life insurance corporation, the legal reserve fund;34 (4) In the case of corporations other than life, the legal reserve fund; 35 and (5) A sum sufficient to pay all net losses reported, or in the course of settlement, and all liabilities for expenses and taxes.36 §6.05. INVESTMENTS. The type, nature and amounts of investments of insurance companies are likewise regulated.37 The Insurance Code provides for limitations on (1) loans and the security therefor, 38 (2) purchase or ownership of assets,39 (3) purchase or ownership of securities40 including bonds.41 R.A. No. 10607 made important changes on Title 4, Sections 204 to 214 of the Insurance Code not only by providing for additional investment items but also by reinforcing the safeguards. Title 4 contains one of the most amendments under R.A. No. 10607. a. Reportorial Requirement. Section 215 of the Insurance Code provides that it shall be the duty of the officers of the insurance company to report within the first 15 days of every month all such investments as may be made by them during the preceding month, and the Commissioner may, if such investments or any of them seem injudicious to him, require the sale or disposal of the same. The report shall also include a list of investments sold or disposed of by the company during the same period. §6.06. RESERVES. Legal reserves are provided for under the Insurance Code for Life Insurance Companies and Non-Life Insurance Companies. 42 In Insurance Law, reserve is not equivalent to surplus but is in fact obligations to the insured.

a. Simply defined, in life insurance, reserve is the amount that, together with future premiums, interests and benefit of survivorship, will be sufficient, according to valuation assumptions, to pay future claims. 43 Under the Insurance Code, all “such valuations shall be made according to the standard adopted by the company, as

34

Sections 201 and 35 217.1.C. Sections 201 and ^Section 201(e), I.C. 37 See Sections 204 to 215, 38 See Section 204 to 206, 39 See Section 206, I.C. 40 See Sections 207, I.C. 41 See Section 217, I.C. 42 Sections 216 to 220, I.C. 43 Huebner and Black, p. 349.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

461

prescribed by the Commissioner in accordance with internationally accepted actuarial standards, which standard shall be stated in its annual report.” 44 The amended provisions already remove the words “net premium basis” with respect to valuation.45 “The aggregate net value so ascertained of the policies of the company shall be deemed its reserve liability” which shall be provided for by holding funds in secure investments equal to such net value. 46 b. Section 219 of the Insurance Code provides that “every insurance company, other than life, shall maintain a reserve for unearned premiums on its policies in force, which shall be charged as a liability in any determination of its financial condition. Such reserve shall be calculated based on the twenty-fourth (24th) method.”47 §6.07. EXAMINATIONS AND REPORTS. The solvency of insurance companies is monitored and maintained through reports submitted by the insurance companies and through examinations undertaken by the Insurance Commission. a. Insurance companies are required to keep its books, records, accounts and vouchers in such manner that they may be readily examined by the Insurance Commissioner or his agent to determine the solvency of the insurance companies.48 Examination shall be done at least once a year and whenever the Insurance Commissioner considers the public interest demands an examination of the affairs, financial condition and method of business of the insurance company.49 b. The Insurance Code likewise provides that insurance companies are required to submit annual statements.50 §6.08. LIMIT OF SINGLE RISK. Section 221 of the Insurance Code provides that “no insurance company other than life, whether

44

Section 216,1.C. Previously Section 210,1.C., now Section 216,1.C. ^Section 217,1.C. 47 Section 219,1.C. which was previously Section 213 which provides that in non life insurance, the Insurance Code provides that every non-life insurance company must maintain a reserve for unearned premiums on its policies that are in force which shall be charged as a liability for the determination of its financial condition. The reserve was fixed at 40% of the gross premiums with certain deductions. ^Section 245,1.C. 49 Section 246,1.C. “See Sections 223 to 225,1.C. 45

462

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

foreign or domestic, shall retain any risk on any one subject of insurance in an amount exceeding twenty percent (20%) of its net worth. For purposes of this section, the term s u b j e c t o f i n s u r a n c e shall include all properties or risks insured by the same insurer that customarily are considered by non-life company underwriters to be subject to loss or damage from the same occurrence of any hazard insured against.”

(1) The Commissioner may issue regulations providing for a maximum limit on the overall retained risks of insurers to serve as a catastrophe cover requirement for the same. 51 (2) Reinsurance ceded as authorized under the succeeding title shall be deducted in determining the risk retained. As to surety risk, deduction shall also be made of the amount assumed by any other company authorized to transact surety business and the value of any security mortgaged, pledged, or held subject to the surety’s control and for the surety’s protection. 52 §7. SECURITY DEPOSIT. Section 209 of the Insurance Code provides that every domestic insurance company shall maintain a security deposit to be held by the Insurance Commissioner. Section 209 provides:

SEC. 209. Every domestic insurance company shall, to the extent of an amount equal in value to twenty-five percent (25%) of the minimum net worth required under Section 194, invest its funds only in securities, satisfactory to the Commissioner, consisting of bonds or other instruments of debt of the Government of the Philippines or its political subdivisions or instrumentalities, or of governmentowned or -controlled corporations and entities, including the Bangko Sentral ng Pilipinas: Provided, That such investments shall at all times be maintained free from any lien or encumbrance: Provided, further, That such securities shall be deposited with and held by the Commissioner for the faithful performance by the depositing insurer of all its obligations under its insurance contracts. The provisions of Section 198 shall, so far as practicable, apply to the securities deposited under this section. * 62

“Section 62 221,1.C. Ibid.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

463

Except as otherwise provided in this Code, no judgment creditor or other claimant shall have the right to levy upon any of the securities of the insurer held on deposit under this section or held on deposit pursuant to the requirement of the Commissioner. a. As worded, the Section 209 of the Insurance Code expressly and clearly states that the security deposit shall be (1) answerable for all the obligations of the depositing insurer under its insurance contracts, (2) at all times free from any liens or encumbrance, and (3) exempt from levy by any claimant. The Supreme Court explained the nature of security deposit under Section 209 (previously Section 203):

“Our Insurance Code is patterned after that of California. Thus, the ruling of the state’s Supreme Court on a similar concept as that of the security deposit is instructive. E n g w i c h t v . P a c i f i c S t a t e s L i f e A s s u r a n c e C o . held that the money required to be deposited by a mutual assessment insurance company with the state treasurer was “a trust fund to be ratably distributed amongst all the claimants entitled to share in it. Such a distribution cannot be had except in an action in the nature of a creditors’ bill, upon the hearing of which, and with all the parties interested in the fund before it, the court may make equitable distribution of the fund, and appoint a receiver to carry that distribution into effect.” Basic is the statutory construction rule that provisions of a statute should be construed in accordance with the purpose for which it was enacted. That is, the securities are held as a contingency fund to answer for the claims against the insurance company by a l l its policy holders and their beneficiaries. This step is taken in the event that the company becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay stake on the securities to the exclusion of all others. The other parties may have their own claims against the insurance company under other insurance contracts it has entered into. X X X

Included in the above regulatory responsibilities is the duty to hold the security deposits under Sections 19163 and 203 of the Code, for the benefit and security of all policy holders. In relation to these provisions, Section 19254 of the Insurance Code states: “Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the benefit and security of all the policyholders of 64

53

Now Section 64 197,1.C. Now Section 198,1.C.

464

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

the company depositing the same, but shall as long as the company is solvent, permit the company to collect the interest or dividends on the securities so deposited, and, from time to time, w i t h h i s a s s e n t , t o w i t h d r a w a n y o f s u c h s e c u r i t i e s , upon depositing with said Commissioner other like securities, the market value of which shall be equal to the market value of such as may be withdrawn. In the event of any company ceasing to do business in the Philippines t h e s e c u r i t i e s d e p o s i t e d a s a f o r e s a i d s h a l l b e r e t u r n e d u p o n t h e c o m p a n y ’ s m a k i n g a p p l i c a t i o n t h e r e f o r a n d p r o v i n g t o t h e s a t i s f a c t i o n o f t h e C o m m i s s i o n e r t h a t i t h a s n o f u r t h e r l i a b i l i t y u n d e r a n y o f i t s p o l i c i e s i n t h e P h i l i p p i n e s ” (Emphasis supplied) Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate the insurance industry so as to protect the insuring public. The law specifically confers custody over the securities upon the commissioner, with whom these investments are required to be deposited. An implied trust is created by the law for the benefit of all claimants under subsisting insurance contracts issued by the insurance company. As the officer vested with custody of the security deposit, the insurance commissioner is in the best position to determine if and when it may be released without prejudicing the rights of other policy holders. Before allowing the withdrawal or the release of the deposit, the commissioner must be satisfied that the conditions contemplated by the law are met and all policy holders protected.”55 b. An individual policy holder cannot garnish the security deposit to satisfy his claim against the insurer on his policy. To allow the garnishment of that deposit would impair the fund by decreasing it to less than the percentage of paid-up capital that the law requires to be maintained. Further, garnishment would create a preference of credit over the other policy holders and beneficiaries. 56 The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all other obligations of the company arising from its insurance contracts. In the absence of insolvency proceedings, an individual insured’s interest on the security deposit is merely inchoate. Being a mere expectancy, it has no attribute of property. In addition, if there is still no insolvency proceedings against the

55 Republic of the Philippines v. Del Monte Motors, Inc., G.R. No. 156956, October 9, 2006, 504 SCRA 53; See also Capital Insurance and Company, Inc. v. Del Monte Motor Works, Inc., G.R. No. 159979, December 9, 2015 (the Court cannot order the release of the security deposits levied upon by the sheriff). 56 Republic of the Philippines v. Del Monte Motors, Inc., ibid.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

465

insurer, it would be impossible to establish at this time which claimants are entitled to the security deposit and in what pro-rated amounts. Only after all other claimants under subsisting policies issued by insurer have been heard can an individual insured’s share can be determined.57 §8. REGULATION OF PERSONS INVOLVED IN THE BUSINESS. The Insurance Code likewise regulates other entities that are engaged in insurance business or are part of the industry. Thus, the Insurance Code contains provisions on: (1) Reinsurers,58 (2) Mutual Life Insurers,59 (3) Holding Companies,60 (4) Foreign Companies, (5) Insurance Agents and Brokers, (6) Reinsurance Brokers, (7) Resident Agents, (8) Non-Life Insurance Underwriter, (9) Adjusters, (10) Actuaries, (11) Rating Organizations, and (12) Self-Regulatory Organizations. §8.01. REINSURANCE BUSINESS. An insurance company doing business in the Philippines may accept reinsurances only of such risks, and retain risk thereon within such limits, as it is otherwise authorized to insure.61 a. Required Cession to Reinsurers. Section 224 of the Insurance Code provides that “all insurance companies, both life and non-life, authorized to do business in the Philippines shall cede their excess risks to other companies similarly authorized to do business in the Philippines in such amounts and under such arrangements as would be consistent with sound underwriting practices before they enter into reinsurance arrangements with unauthorized foreign insurers.” b. The preference under Section 224 is to cede the risk to domestic reinsurers. However, Section 225 of the Insurance Code provides that “any insurance company doing business in the Philippines desiring to cede their excess risks to foreign insurance or reinsurance companies not authorized to transact business in the Philippines may do so under such terms and conditions which the Commissioner may prescribe.” “Should any reinsurance

57

Republic of the Philippines v. Del Monte Motors, Inc., supra.

See Sections 222 to 228,1.C. governing reinsurance transactions. S9 See Sections 268 to 289,1.C. which governs mutualization of stock

58

^Sections 290 to 306,1.C. Section 222, I.C; See Communication and Information Systems Corporation v. Mark Sensing Australia Pty. Ltd., G.R. No. 192169, January 25, 2017. 61

ESSENTIA I OE INSURANCE LA 7/ (Republic Act No. 10607 with Note-, on W^Ne*^ Actj

466

agreement be for any reason cancelled or terminated, the ceding company concerned shall inform the Commissioner in vrming of such cancellation or termination within thirty ( ? / ) ) days from the date of such cancellation or termination or from the date notice 0/ information of such cancellation or termination is received by seen company as the case may be.”02 §8.02. FOREIGN COMPANIES. Foreign companies are companies formed, organized or existing under any laws other than those of the Philippines. These companies are likewise subject to regulation of the Insurance Commission. 03 a. Resident Agent. Appointment of a resident agent of the foreign company is also required. The resident agent will receive summons and legal processes in connection with actions and other legal proceedings. 62 63 64 b. Capital. No foreign company shall be allowed to do business in the Philippines unless it has a capitalization of P3,000,000,000.00, paid in cash, of which at least 50% consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P400,000,000.00. §8.03. HOLDING COMPANIES. Holding company means any person who directly or indirectly controls any authorized insurer.65 The holding company and the controlled insurer or person are subject to certain regulatory provisions. For instance, there are transactions between these persons that are certain requirements including prior approval by the Commissioner in certain instances.66 a. The following terms are defined by Section 290 of the Insurance Code in relation to holding companies: (1) C o n t r o l , including the terms c o n t r o l l i n g , c o n t r o l l e d b y and u n d e r c o m m o n c o n t r o l w i t h , means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities by a contract other than a commercial contract for goods or non-management services or

62

Section 225,1.C. Sections 196 to 199,1.C. 64 Sections 313 to 317,1.C. 65 Section 290(c), I.C. 66 See for example Sections 298 and 299, I.C. 63

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

467

otherwise. Subject to Section 292, control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote 40% or more of the voting securities of any other person: P r o v i d e d , That no person shall be deemed to control another person solely by reason of his being an officer or director of such other person. (2) C o n t r o l l e d i n s u r e r means an authorized insurer controlled directly or indirectly by a holding company. (3) C o n t r o l l e d p e r s o n means any person, other than a controlled insurer, who is controlled directly or indirectly by a holding company. (4) H o l d i n g c o m p a n y s y s t e m means a holding company together with its controlled insurers and controlled persons. §8.04. SELF-REGULATORY ORGANIZATIONS. One of the innovations under R.A. No. 10607 is the introduction of Self- Regulatory Organizations in the Insurance Code. Section 430 provides that “the Commissioner shall have the power to register as a selfregulatory organization, or otherwise grant licenses, and to regulate, supervise, examine, suspend or otherwise discontinue, as a condition for the operation of organizations whose operations are related to or connected with the insurance market such as, but not limited to, associations of insurance companies, whether life or nonlife, reinsurers, actuaries, agents, brokers, dealers, mutual benefit associations, trusts, rating agencies, and other persons regulated by the Commissioner, which are engaged in the business regulated by this Code.” a. Thus, as contemplated by Section 430 a Self-Regulatory Organization is an association of entities whose operations are related to or connected with the insurance market such as, but not limited to, associations of insurance companies, whether life or nonlife, reinsurers, actuaries, agents, brokers, dealers, mutual benefit associations, trusts, rating agencies, and other persons regulated by the Commissioner. Thus, the new provisions of the Insurance Code under R.A. No. 10607 regulates associations that have long been existing in this jurisdiction. b. The recognition of self-regulatory organizations is also a recognition that “to the extent that a business provides adequate self-regulation, government regulation is often unnecessary, or at least can be somewhat diminished. For insurance, it is not realistic

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

468

to think that the entire job of regulation can be done by internal, as opposed to external, methods of supervision.”67 c. Section 430 further provides that “the Commissioner may prescribe rules and regulations which are necessary or appropriate in the public interest or for the protection of investors to govern self-regulatory organizations and other organizations licensed or regulated pursuant to the authority granted hereunder including, but not limited to, the requirement of cooperation within and among all participants in the insurance market to ensure transparency and facilitate exchange of information .” d. Since the aim is self-regulation, an association cannot be registered as a self-regulatory organization unless the Commissioner determines that “the association is so organized and has the capacity to be able to carry out the purposes of this Code and to comply with, and to enforce compliance by its members and persons associated with its members, with the provisions of this Code, the rules and regulations thereunder, and the rules of the association.” 68 §8.05. OTHER PERSONS SUBJECT TO REGULATION. The Insurance Code regulates the qualifications, authority and other matters relating to insurance brokers and agents. The concept of brokers and agents are discussed in Chapter 2 of this work. In addition to brokers and agents, the following persons are likewise involved and are subject to regulations:

67

(1)

R e i n s u r a n c e B r o k e r — one who, for compensation, not being a duly authorized agent, employee or officer of an insurer in which any reinsurance is effected, acts or aids in any manner in negotiation contracts of reinsurance or placing risks of effecting reinsurance for any insurance company.69

(2)

N o n - l i f e C o m p a n y U n d e r w r i t e r — a person whose duty and responsibility is to select, evaluate and accept risks for, and to determine the terms and conditions, including those pertaining to amounts of relations, under which such risks are to be accepted by the company.70

Burton T. Beam, Jr., Davil L. Bickelhaupt, Robert M. Crowe, and Barbara S. Poole, Fundamentals of Insurance for Insurance Financial Planning, 3rd Ed., 2002, p. 118. 68 Section 431,1.C, 69 Sections 319 to 321,1.C. 70 Sections 327 to 331,1.C.

CHAPTER 16

REGULATION OF INSURANCE BUSINESS

469

(3)

A d j u s t e r — He may be a public adjuster or an independent adjuster. The term * ' i n d e p e n d e n t a d j u s t e r ” means any person, partnership, association or corporation which, for money, commission or any other thing of value, acts for or on behalf of an insurer in the adjusting of claims arising under insurance contracts or policies issued by such insurer. The term “ p u b l i c a d j u s t e r ” means any person, partnership, association or corporation which, for money, commission or any other thing of value, acts on behalf of an insured in negotiating for, or effecting, the settlement of a claim or claims of the said insured arising under insurance contracts or policies, or which advertises for or solicits employment as an adjuster of such claims.71

(4)

A c t u a r y — the person who makes financial calculations for the life insurance company and who will certify the documents such as reserves and net due and deferred premium, valuation of annuity funds or retirement plans, financial projections and the like. 72 The functions of the actuary include the calculation of the following with the help of a mortality table: (1) premium rates, (2) gains and losses from insurance operations, (3) nonforfeiture benefits on lapse or surrender, (4) dividends on participating contracts, and (5) value of contract liabilities.73

(5)

R a t e O r g a n i z a t i o n — Every organization which now exists or which may hereafter be formed for the purpose of making rates to be used by more than one insurance company authorized to do business in the Philippines.74

a. Adjusters. Two conditions must be complied with in order to be allowed to act as an adjuster: (1) the citizenship requirement — for natural persons, he/she must be a Filipino citizen and for juridical entities, at least 60% of its capital must be owned by Filipino citizens; and (2) he/she must secure a license from the Insurance Commission.75

7

‘Sections 332 to 343,1.C.; See Circular Letter No. 2015-24, dated May 8, 2015. 72 Sections 344 to 347,1.C. 73 Bickelhaupt, p. 239. 74 Section 348,1.C. 7B Section 332,1.C.

470

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. Exception to License Requirement. By way of exception, a license is not necessary for adjusting insurance claims for the following: (1) A lawyer who acts or aids in adjusting insurance claims as an incident to the practice of his profession and who does not advertise himself as an adjuster;76 and (2) Any company adjuster who is a salaried employee of an insurance company for the adjustment of claims filed under policies issued by such insurance company.77 §9. CORPORATIONS IN DISTRESS. The Insurance Code provides for rules that deal with Insurance Corporations that are in financial distress. These corporations may either be placed under conservatorship, receivership, or may be ultimately dissolved and liquidated.78 §9.01. CONSERVATORSHIP. A conservator may be appointed if at any time before, or after, the suspension or revocation of the certificate of authority of an insurance company, the Insurance Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity deemed adequate to protect the interest of policy holders and creditors. 79 The Supreme Court explained:80 “Conservatorship proceedings against a financially distressed insurance company are statutory in nature and are resorted to only if and when the Insurance Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity deemed adequate to protect the interest of policy holders and creditors. In other words, the insurance company placed under conservatorship is facing financial difficulties which require the appointment of a conservator to take charge of its assets, liabilities, and management aimed at preserving its assets and restoring its viability as a going business enterprise. xxx Rightly so, for conservatorship proceedings contemplate, not the liquidation of the insurance company involved, but a conservation of com

76

Section 338,1.C.; Circular Letter No. 2016-24, dated May 8, 2016.

71

Ibid. Sections 255 to 257,1.C. Section 255,1.C. “Elias Garcia v. National Labor Relations Commission, G.R. No. L-6782 September 4, 1987. 78 79

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

471

pany assets and business during the period of stress by the Commissioner of Insurance, who thereafter yields control to the regular officers of the company. The power of the Insurance Commissioner with respect to the statutory proceedings against insolvent or delinquent insurer is of general public concern, to which contract and property rights must yield. Essentially, conservatorship under Section 248 of the Insurance Code is in the nature of rehabilitation proceedings. As such, the CONSERVATOR may only act with the approval of the Insurance Commissioner with respect to the major aspects of rehabilitation. With respect to the ordinary details of administration, the CONSERVATOR has implied authority by virtue of his appointment to proceed without the approval of the Insurance Commissioner. He is clothed with such discretion in conducting and managing the affairs of the insurance company placed under his control.” a. Powers of Conservator. The conservator shall have the following powers and functions: (i) Take charge the assets, liabilities, and the management of the company; (ii)

Collect all moneys and debts due said company;

(iii) Exercise all powers necessary to preserve the assets of said company and restore its viability; (iv)

Reorganize the management of the company;

(v) Overrule or revoke the actions of the previous management and board of directors of the said company, any provision of law, or of the articles of incorporation or by-laws of the company, to the contrary notwithstanding; and

(vi) Other powers as the Commissioner shall deem necessary.81 (1) The retrenchment of personnel is one of the powers of the conservator. Retrenchment as a consequence of conservatorship proceedings against an insurance company in financial difficulties is a cost-saving measure resorted to by the conservator to preserve the assets of the company for the protection not only of the policy-holders and creditors but also of the investors and the public in general.82

81

Section 255,1.C. Elias Garcia v. National Labor Relations Commission, supra. 82

472

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

b. Qualifications and Remunerations of Conservator. The conservator may be another insurance company doing business in the Philippines, by officer or officers of such company, or any other competent and qualified person, firm, or corporation. The remuneration of the conservator and other expenses attendant to the conservation shall be borne by the insurance company concerned.83 c. Free and Harmless Clause. The conservator, just like a receiver and liquidator,84 shall not be subject to any action, claim or demand by, or liability to, any person in respect of anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of the powers conferred on the conservator.85 (1) However, this could not be construed to prohibit suits against the conservator or the receiver as custodian and manager of the funds and property of the insurance company. To do so would work inequity and injustice upon parties with just claims. The exemption against liability applies only with reference to acts done or left undone in good faith by the receiver or conservator in the discharge of his functions.86 d. The conservator appointed shall report and be responsible to the Commissioner until such time as the Commissioner is satisfied that the insurance company can continue to operate on its own and the conservatorship shall likewise be terminated should the Commissioner, on the basis of the report of the conservator or of his own findings, determine that the continuance in business of the insurance company would be hazardous to policy holders and creditors.87 §9.02. RECEIVERSHIP. The proceedings on insolvency provided for in Section 256 of the Insurance Code applies whenever, upon examination or other evidence, the condition of the insurance company falls under any of these two cases: (1) The condition of any insurance company doing business in the Philippines is one of insolvency. “Insolvency”

“Section 255,1.C. 84 Section 257,1.C. “Section 255,1.C. “Pioneer Insurance and Surety Corporation v. The Hon. Willelmo C. Fortun, et al., G.R. No. L-44959, April 15, 1987. s7 Ibid.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

473

shall mean the inability of an insurance company to pay its lawful obligations as they fall due in the usual and ordinary course of business as may be shown by its failure to maintain the margin of solvency. (2) The continuance in business of the insurance company would be hazardous to its policyholders and creditors. a. Actions of Commissioner. In any of the two cases specified above, the Commissioner shall issue the orders and undertake the actions specified hereunder:88 (1) Order the company to cease and desist from transacting business in the Philippines and designate a receiver; (2) Within ninety (90) days from the appointment of a receiver, to determine whether the insurance company may be reorganized or otherwise placed in such condition so that it may be permitted to resume business with safety to its policyholders and creditors;89 (3) If the insurance company is determined to be insolvent or cannot resume business with safety to its policyholders and creditors, he shall, if the public interest requires, order its liquidation, indicate the manner of its liquidation and approve a liquidation plan and implement it immediately. (4) In connection with number 3, appoint a liquidator who will undertake the liquidation of the company. b.

Powers of the Receiver. Upon his designation, the receiver shall:90

(1) Immediately take charge of its assets and liabilities; (2) Collect and gather all the assets and administer the same for the benefit of its policyholders and creditors; (3) Exercise all the powers necessary for the preceding purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the insurance company.

““Section 256,1.C. ^nd paragraph, Section 256,1.C., as amended by R.A. No. 10607. ““Section 256,1.C.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

474

c.

Functions of the Liquidator.91 (1) Take over the functions of the receiver previously designated;

(2) Reinsure all the outstanding policies of the company; (3) Convert the assets of the insurance company to cash, or sell, assign or otherwise dispose of the same to the policyholders, creditors and other parties for the purpose of settling the liabilities or paying the debts of such company; (4) Institute actions in the name of the company as may be necessary in the appropriate Court to collect and recover accounts and assets of the insurance company; and (5) To do such other acts as may be necessary to complete the liquidation as ordered by the Commissioner.

T

d. Binding Effect of the Actions of Commissioner. The actions of the Commissioner under Section 256 shall be final and executory, and can be set aside by the Court upon petition by the company and only if there is convincing proof that the action is plainly arbitrary and made in bad faith.92 (1) No restraining order or injunction shall be issued by the Court enjoining the Commissioner from implementing his actions unless there is convincing proof that the action of the Commissioner is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or Judge of the Court in which the action is pending a bond executed in favor of the Commissioner in an amount to be fixed by the Court. The restraining order or injunction shall be refused or, if granted, shall be dissolved upon filing by the Commissioner, if he so desires, of a bond in an amount twice the amount of the bond of the petitioner or plaintiff conditioned that it will pay the damages which the petition or plaintiff may suffer by the refusal or the dissolution of the injunction. The provisions of Rule 58 of the New Rules of Court insofar as they are applicable shall govern the issuance and dissolution of the restraining order or injunction contemplated in this Section.93

91

Se c.Ibi 92 93

Ibi d.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

475

§9.03. CAPITALIZATION WHILE UNDER CONSERVATORSHIP. The corporations under conservatorship or receivership are subject to the following capitalization requirements effective July 1, 2006:94 95 (1) No life or non-life insurance companies under conservation or receivership or for liquidation may be rehabilitated unless it has a net worth of PI,000,000,000.00, computed in accordance with the Insurance Code, and of which at least 50% consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P200,000,000.00. (2) No reinsurance companies under conservation or receivership or for liquidation may be rehabilitated unless it has a net worth of P2,000,000,000.00, computed in accordance with the Insurance Code, and of which at least 50% consists of paid- up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P400,000,000.00. §10. RATE REGULATION. Section 348 of the Insurance Code provides that the term “ r a t e ” “shall generally mean the ratio of the premium to the amount insured and shall include, as the context may require, either the consideration to be paid or charged for insurance contracts, including surety bonds, or the elements and factors forming the basis for the determination or application of the same, or both. a. On the part of the insurer, it is required for ratemaking that the amount of premium is fixed in such a way that the amount paid by an individual combined with payments by other customers must provide for the losses sustained, the expenses of operation, a reasonable allowance for profit, and whenever necessary, an accumulation of reserve for catastrophes.96 b. Rate Organization. Insurance companies may be members or subscribers to rating organizations. As noted earlier, a r a t e o r g a n i z a t i o n is an organization formed for the purpose of making rates to be used by more than one insurance company authorized to do business in the Philippines. 96 A rate organization develops rates based on pooled experience of its members or

94

Administrative Order No. 27-06. Black & Huebner, “Section 348,1.C. 95

476

ESSENTIALS OF INSURANCE LAW Act No. 10607 with Notes on Pre-Need Act)

subscribers. The advantages of utilizing a rate organization include the following: they provide more credible statistical data for rate making: < 2 ) they' make available a group of highly qualified experts at minimum cost; and ( Z ) to the extent that they require adherence to their rates, they reduce the possibility of cutthroat competition, unfair discrimination, and insolvency.97 §10.01. PURPOSES OF RATE REGULATION. The purpose of rate regulation is to ensure that the rates imposed by insurers are adequate, reasonable and no unfairly discriminatory.98 Thus, the basic standards under rating laws include: (1) the rates must be adequate for the class of business to which they apply; (2) that no rate be unfairly discriminatory; and (3) the rates shall not be unreasonably excessive/*7 a. Consistently, Section 358 of the Insurance Code provides:

SEC. 358. Every rating organization and every insurance company which makes and files its own rates, shall make rates for all risks rated by such organization or insurance company in accordance with the following provisions: (a) Basic classification, manual, minimum, class, or schedule rates or rating plans, shall be made and adopted for all such risks. Any departure from such rates shall be in accordance with schedules, rating plans and rules filed with the Commissioner; (b) Rates shall be reasonable and adequate for the class of risks to which they apply; (c) No rate shall discriminate unfairly between risks involving essentially the same hazards and expense elements or between risks in the application of like charges and credits; (d) Consideration shall be given to the past and prospective loss experience, including the conflagration and catastrophe hazards, if any, to all factors reasonably attributable to the class of risks, to a reasonable profit,

^ W i"Beam, et al., p. 127.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

477

to commissions paid during the most recent annual period and to past and prospective other expenses. In case of fire insurance rates, consideration shall be given to the experience of the fire insurance business during a period of not less than five (5) years next preceding the year in which the review is made; (e) Risk may be grouped by classifications for the establishment of rates and minimum premiums. Classification rates may be modified to produce rates for individual risks in accordance with rating plans which establish standards for measuring variations in hazards or expense provisions, or both. Such standards may measure any difference among risks that can be demonstrated to have a probable effect upon losses or expenses. §10.02. POWER OF THE COMMISSIONER OVER RATES. Section 364 of the Insurance Code provides that “if the Commissioner finds that any rate filings theretofore filed with him do not comply with the provisions of this title or that they provide rates or rules which are inadequate, excessive, unfairly discriminatory or otherwise unreasonable, he may order the same withdrawn and at the expiration of 60 days thereafter, the same shall be deemed no longer on file. Before making any such finding and order, the Commissioner shall give notice, not less than 10 days in advance, and a hearing, to the rating organization, or to the insurer, which filed the same. Such order shall not affect any contract or policy made or issued prior to the expiration of such 60-day period.” §11. POLICY FORMS. The use of policy forms is likewise regulated under the Insurance Code. Section 232 provides that “no policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner, and 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.” §12. SALES PRACTICES AND CONSUMER PROTECTION. Regulations designed to protect consumers include rules on the registration of insurance brokers, insurance agents and other persons involved in insurance business.

478

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§12.01. PROHIBITIONS. In addition, the Insurance Code likewise defines certain acts that are prohibited for the protection of consumers. These include twisting, rebate of premium, misrepresentation, and other acts. a. Twisting. Twisting means inducing an insured to drop an existing policy in one company for another policy in another company due to misrepresentation. b. Rebate. The prohibition on rebate of premium is designed to ensure fair and equitable treatment of all policymakers by preventing one insured from obtaining an unfair price advantage over another.100 Section 370 of the Insurance Code specifically prohibits the following acts on insurance company doing business in the Philippines or any agent thereof, no insurance broker, and no employee or other representative of any such insurance company, agent, or broker, directly or indirectly, to give or share a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of such insured, either as an inducement to the making of such insurance or after such insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefits to accrue thereon. c. Hidden Agreement. It is prohibited for insurance company doing business in the Philippines or any agent thereof, no insurance broker, and no employee or other representative of any such insurance company, agent, or broker to make, procure or negotiate any contract of insurance or agreement as to policy contract, other than is plainly expressed in the policy or other written contract issued or to be issued as evidence thereof.101 d. Additional Inducement. It is prohibited for insurance company doing business in the Philippines or any agent thereof, no insurance broker, and no employee or other representative of any such insurance company, agent, or broker to give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract of insurance.

e. Discrimination. It is prohibited for insurance company doing business in the Philippines or any agent thereof, no insurance 100

Redja, p. 582. 101 Section 370,1.C.

CHAPTER 16 REGULATION OF INSURANCE BUSINESS

479

broker, and no employee or other representative of any such insurance company, agent, or broker to make any discrimination against any Filipino in the sense that he is given less advantageous rates, dividends or other policy conditions or privileges than are accorded to other nationals because of his race. f. Misrepresentation. Special rules against misrepresentation are provided for in Section 371 which provides as follows:

SEC. 371. No insurance company doing business in the Philippines, and no officer, director, or agent thereof, and no insurance broker or any other person, partnership or corporation shall issue or circulate or cause or permit to be issued or circulated any literature, illustration, circular or statement of any sort misrepresenting the terms of any policy issued by any insurance company of the benefits or advantages promised thereby, or any misleading estimate of the dividends or share of surplus to be received thereon, or shall use any name or title of any policy or class of policies misrepresenting the true nature thereof; nor shall any such company or agent thereof, or any other person, partnership or corporation make any misleading representation or incomplete comparison of policies to any person insured in such company for the purpose of inducing or tending to induce such person to lapse, forfeit, or surrender his said insurance. g. Unfair Claims Settlement. Penalties are provided for unfair claims settlements practices.102 The acts enumerated in Section 247 (discussed in Chapter 8 of this work) shall be considered unfair claims settlement practices if committed without just cause and performed with such frequency as to indicate a general business practice. (1) Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under Section 247.103

102

Section 247,1.C.; See Chapter 8, Section 1.01. Section 247(b), I.C. 103

480

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

(2) If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of noncompliance may be treated as a separate violation of this section and shall be considered sufficient cause for the suspension or revocation of the company’s certificate of authority.104 §13. ANTI-MONEY LAUNDERING. Insurance companies are covered institutions under the Anti-Money Laundering Act of 2001.105 Consequently, in 2005, the Insurance Commission promulgated the Guidelines in the Preparation of the Revised Operating Manual in Combating Money-Laundering and Financing of Terrorism for Insurance Commission Covered Institution.106 §13.01. LAYERING. Under the Guidelines,107 layering is defined as the separation of the criminal proceeds from their source by the creation of layers of transactions designed to disguise the audit trail and provide the appearance of legitimacy. The Guidelines provide that insurance companies may provide a potential avenue which may allow a dramatic alteration of the form of funds. 108 Money laundering and the financing of terrorism using reinsurance may likewise occur by establishing fictitious reinsurance companies, reinsurance intermediaries, fronting arrangements and captives or by the misuse of normal reinsurance transactions.109

104

Section 247(b), I.C. RA. No. 9194 as amended by RA. No. 9160. 106 I.C. Circular Letter 32-2006, September 18, 107 Section 2(b), ibid. l05

108

2bwf.

los

Ibid.

CHAPTER 17 THE INSURANCE COMMISSIONER

The Insurance Commission is headed by a Commissioner and is appointed by the President. It is on the Insurance Commissioner that the law imposes the duty to regulate insurance companies. The broad powers that the Insurance Commissioner possesses are the key to the enforcement of insurance laws in this jurisdiction.1 §1. INSURANCE COMMISSIONER. The Insurance Commissioner regulates insurance companies and pre-need companies in the Philippines. The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies, and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully executed and to perform the duties imposed upon him by the Insurance Code.2 a. In addition, the Insurance Commissioner have sole and exclusive authority to regulate the issuance and sale of variable contracts 3 and to provide for the licensing of persons selling such contracts, and to issue such reasonable rules and regulations governing the same.4 §2. TERM OF THE COMMISSIONER. The Insurance Commissioner shall be appointed by the President of the Republic of the Philippines for a term of six years without reappointment and who shall serve as such until the successor shall have been appointed and qualified.5 If the Insurance Commissioner is removed

burton T. Bean, Jr., David L. Bickelhaupt, Robert M. Crowe and Barbara S. Poole, Fundamentals of Insurance for Financial Planning, 3rd Ed., 2002, p. 122, hereinafter cited as “Bean, Bickelhaupt, Crowe and Poole.” 2 Section 414, I.C. 3 See Section 232, I.C. 4 Section 414, I.C. 5 lst paragraph, Section 437, I.C. as amended by R.A. No. 10607. 481

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

482

before the expiration of his term of office, the reason for the removal must be published.6 a. The logic of the rule that the President chooses that head insurance regulatory official is that the Chief Executive is ultimately responsible for the economic success during the latter’s term. 7 The longer term of six years will free the Insurance Commissioner of the vagaries of politics. §3. AUTHORITY OF THE COMMISSIONER. The Com missioner may issue such rulings, instructions, circulars, orders and decision as he may deem necessary to secure the enforcement of the provisions of this Code, subject to the approval of the Secretary of Finance. 8 The Supreme Court observed in Republic of the Philippines u. Del Monte Motors, Inc.9 that: “The Insurance Code has vested the Office of the Insurance Commission with both r e g u l a t o r y and a d j u d i c a t o r y authority over insurance matters. The general regulatory authority of the insurance commissioner is described in Section 414 of the Code as follows: X X X

Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to issue) certificates of authority to persons or entities desiring to engage in insurance business in the Philippines; (2) revoke or suspend these certificates of authority upon finding grounds for the revocation or suspension; (3) impose upon insurance companies, their directors and/or officers and/or agents appropriate penalties — fines, suspension or removal from office — for failing to comply with the Code or with any of the commissioner’s orders, instructions, regulations or rulings, or for otherwise conducting business in an unsafe or unsound manner.”

a. Specific Functions. In addition to the foregoing, the Commissioner shall have the following powers and functions: (a) Formulate policies and recommendations on issues concerning the insurance industry, advise Congress and other government agencies on all aspects of the insurance industry and propose legislation and amendments thereto;

6

Section 414,1.C. Bean, Bickelhaupt, Crowe and Poole, p. 122. 8 Section 437,1.C. 9 G.R. No. 156956, October 9, 2006, 504 SCRA 53. 7

CHAPTER 17 THE INSURANCE COMMISSIONER

(b) Approve, reject, suspend or revoke licenses or certificates of registration provided for by this Code; (c) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (d) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; (e) Enlist the aid and support of, and/or deputize any and all enforcement agencies of the government in the implementation of its powers and functions under this Code; (f) Issue cease and desist orders to prevent fraud or injury to the insuring public; (g) Punish for contempt of the Commissioner, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; (h) Compel the officers of any registered insurance corporation or association to call meetings of stockholders or members thereof under its supervision; (i) Issue subpoena duces tecum and summon witnesses to appear in any proceeding of the Commission and, in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (j) Suspend or revoke, after proper notice and hearing, the license or certificate of authority of any entity or person under its regulation, upon any of the grounds provided by law; (k) Conduct an examination to determine compliance with laws and regulations if the circumstances so warrant as determined by appropriate rules and regulations;

483

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

484

(l) Investigate not oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe and sound basis: Provided, That, the deficiencies/ irregularities found by or discovered by an audit shall be immediately addressed; (m) Inquire into the solvency and liquidity of the institutions under its supervision and enforce prompt corrective action; (n) To retain and utilize, in addition to its annual budget, all fees, charges and other income derived from the regulation of insurance companies and other supervised persons or entities; (o) To fix and assess fees, charges and penalties as the Commissioner may find reasonable in the exercise of regulation; and (p) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the express powers granted the Commission to achieve the objectives and purposes of this Code.10 §4. SECURITY FOR THE COMMISSIONER AND OTHER OFFICERS. Section 437 as amended by R.A. No. 10607 expressly provides for indemnity for costs and expenses of litigation that arises in the performance of the functions of the Commissioner, Deputy Commissioner and other Officers, thus:

The Commission shall indemnify the Commissioner, Deputy Commissioner, and other officials of the Commission, including personnel performing supervision and examination functions, for all costs and expenses reasonably incurred by such persons in connection with any civil or criminal actions, suits or proceedings to which they may be made a party to by the reason of the performance of their duties and functions, unless they are finally adjudged in such actions, suits or proceedings to be liable for negligence or misconduct.

10

Section 439,1.C. as amended by R.A. No. 10607.

CHAPTER 17 THE INSURANCE COMMISSIONER

485

In the event of settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Commission is advised by external counsel that the persons to be indemnified did not commit any negligence or misconduct: The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Commission in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Commissioner, Deputy Commissioner, officer or employee to repay the amount advanced should it ultimately be determined by the Commission that the person is not entitled to be indemnified. §5. ADMINISTRATIVE SANCTIONS. Administrative sanctions may be imposed by the Insurance Commissioner in accordance with the following statutory provisions:

SEC. 438. In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner is hereby authorized, at his discretion, to impose upon insurance companies, their directors and/or officers and/or agents, for any willful failure or refusal to comply with, or violation of any provision of this Code, or any order, instruction, regulation, or ruling of the Insurance Commissioner, or any commission or irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Insurance Commissioner, the following: (a)

Fines not less than Five thousand pesos

(P5,000.00) and not more than Two hundred thousand pesos (P200,000.00); and

(b) Suspension, or after due hearing, removal of directors and/or officers and/or agents. a. The administrative case is separate and distinct from the case to enforce insurance claim.11

“Malayan Insurance Co., Inc. v. Lin, G.R. No. 207277, January 16, 2017; Al- mendras Mining Corp. v. Office of the Insurance Comm., 243 Phil. 805 (1988); Go v. Office of the Ombudsman, 460 Phil. 14 (2003).

486

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

§6. QUASI-JUDICIAL FUNCTIONS. The Insurance Commission has limited quasi-judicial functions. It has jurisdiction over insurance claims if any single claim does not exceed P5,000,000.00. The jurisdiction is concurrent with regular courts. Section 439 provides:

SEC. 439. The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for which such insurer may be liable under a contract of suretyship, or for which a reinsurer may be sued under any contract of reinsurance it may have entered into; or for which a mutual benefit association may be held liable under the membership certificates it has issued to its members, where the amount of any such loss, damage or liability, excluding interest, cost and attorney’s fees, being claimed or sued upon any kind of insurance, bond, reinsurance contract, or membership certificate does not exceed in any single claim Five million pesos (P5,000,000.00). The power of the Commissioner does not cover the relationship between the insurance company and its agents/brokers but is limited to adjudicating claims and complaints filed by the insured against the insurance company. The Commissioner may authorize any officer or group of officers under him to conduct investigation, inquiry and/or hearing and decide claims and he may issue rules governing the conduct of adjudication and resolution of cases. The Rules of Court shall have suppletory application. The party filing an action pursuant to the provisions of this section thereby submits his person to the jurisdiction of the Commissioner. The Commissioner shall acquire jurisdiction over the person of the impleaded party or parties in accordance with and pursuant to the provisions of the Rules of Court. The authority to adjudicate granted to the Commissioner under this section shall be concurrent with that of the civil courts, but the filing of a complaint with

CHAPTER 17

THE INSURANCE COMMISSIONER

the Commissioner shall preclude the civil courts from taking cognizance of a suit involving the same subject matter. Any decision, order or ruling rendered by the Commissioner after a hearing shall have the force and effect of a judgment. Any party may appeal from a final order, ruling or decision of the Commissioner by filing with the Commissioner within thirty (30) days from receipt of copy of such order, ruling or decision a notice of appeal to the Court of Appeals in the manner provided for in the Rules of Court for appeals from the Regional Trial Court to the Court of Appeals. For the purpose of any proceeding under this section, the Commissioner, or any officer thereof designated by him is empowered to administer oaths and affirmation, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, documents, or contracts or other records which are relevant or material to the inquiry. A full and complete record shall be kept of all proceedings had before the Commissioner, or the officers thereof designated by him, and all testimony shall be taken down and transcribed by a stenographer appointed by the Commissioner. In order to promote party autonomy in the resolution of cases, the Commissioner shall establish a system for resolving cases through the use of alternative dispute resolution. a. The quasi-judicial function of the Insurance Commissioner is limited to resolving claims “where the amount of any such loss, damage or liability, excluding interest, cost and attorney’s fees, being claimed or sued upon any kind of insurance, bond, reinsurance contract, or membership certificate does not exceed in any single claim Five million pesos (P5,000,000).” 12 The power to adjudicate claims and complaints involve any loss, damage or liability for which an insurer may be answerable: (1) Under any kind of policy or contract of insurance; or

12

Section 439,1.C., as amended by RA. No. 10607.

487

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

488

(2) For which such insurer may be liable under a contract of suretyship; or (3) For which a reinsurer may be sued under any contract of reinsurance it may have entered into; or (4) For which a mutual benefit association may be held liable under the membership certificates it has issued to its members. b. Hence, its quasi-judicial power does not cover the relationship affecting the insurance company, its agents but it is limited to claims filed by the insured against the insurance company. Thus, in one case, the issue of legality of an agency agreement falls within the jurisdictions of regular courts and not the Insurance Commissioner.13 Section 439 as amended by R.A. No. 10607 expressly adopts this rule and now expressly provides that: ‘The power of the Commissioner does not cover the relationship between the insurance company and its agents/brokers but is limited to adjudicating claims and complaints filed by the insured against the insurance company.” c. However, the Insurance Commission has jurisdiction over complaints against insurance agents who were terminated due to settlement or compromise.14 d. The jurisdiction of the Insurance Commissioner is concurrent with regular courts. However, only one case can be maintained. The moment a case is filed with the Insurance Commissioner, the insured or beneficiary can no longer file a case in Court.

§7. PROCEDURE. The rules that apply in administrative proceedings before the Insurance Commission are embodied in Insurance Memorandum 201401.15 The principal objective of the rules is to adjudicate or settle claims and complaints and/or assist the parties in obtaining just, speedy and inexpensive determination of claims and complaints involving any loss, damage or liability for

13

(1994).

Philippine American Life Insurance Company v. Ansaldo, 234 SCRA 509

14

Circular Letter No. 2015-45 dated September 8, 2015; Circular Letter No. 17-

2006. 15 RuIes of Procedure Governing Trial and Hearing of Claim Cases on Insurance, Reinsurance, and those Arising under the Membership Certificates Issued by Mutual Benefit Associations, in the Insurance Commission.

CHAPTER 17

THE INSURANCE COMMISSIONER

489

which the insurer may be held liable.16 The Rules of Court may apply in said proceedings in suppletory character whenever practicable.17 a. The rules provide that “except as to the amount of actual damages, legal interest, attorney’s fees and costs which include filing fees and litigation expenses, no other form of damages shall be recoverable” in the case filed before the Insurance Commission.18 b. For small claims where the amount claims does not exceed P200,000.00, the applicable rule is 2016 Rules of Procedure for Small Claims Cases before the Insurance Commission which took effect on September 1, 2016.19 c. It should be noted that under the 1987 Rules of Civil Procedure, decisions of the Insurance Commission are appealable to the Court of Appeals within 15 days from receipt of the decision.20 d. In one case, the Supreme Court explained that the findings of the Insurance Commission are entitled to great respect: “x x x His (Insurance Commissioner) interpretation of the provisions of the law carries great weight and consideration, as he is the head of a specialized body tasked with the regulation of insurance matters and primarily charged with the implementation of the Insurance Code. The emergence of the multifarious needs of modern society necessitates the establishment of diverse administrative agencies. In addressing these needs, the administrative agencies charged with applying and implementing particular statutes have accumulated experience and specialized capabilities. Thus, in a long line of cases, this Court has recognized that their construction of a statute is entitled to great respect and should ordinarily be controlling, unless clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws.”21 §8. PRE-NEED. Section 55 of the Pre-Need Code (R.A. No. 9829) gives exclusive original jurisdiction to the Insurance Commission over claims involving pre-need plans. Sections 55 and 56 of the Pre-Need Code provide:

16

Section 3, Rule 1, Insurance Memorandum No. 2014-1. Section 4, Rule 1, Insurance Memorandum No. 2014-1. 18 Section 1, Rule 20, Insurance Memorandum No. 2014-1. insurance Memorandum Circular No. 2016-1. 20 Rule 43, Rules of Civil Procedure; Section 1, Rule 14, Insurance Memorandum No. 2014-1. 21 Republic of the Philippines v. Del Monte Motors, Inc., G.R. No. 156956, October 9, 2006, 504 SCRA 53. 17

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

SEC. 55. Claims. — The Commission shall have the primary and exclusive power to adjudicate any and all claims involving pre-need plans. If the amount of benefits does not exceed One hundred thousand pesos (P100,000.00), the decision of the Commission shall be final and executory. SEC. 56. Review of Commission Orders or Decisions. — Any person aggrieved by an order or decision of the Commission, whether in relation to its settlement of a claim of a planholder or in the exercise of its regulatory authority, may appeal the order or decision to the Court of Appeals by petition for review in accordance with the pertinent provisions of the Rules of Court.

CHAPTER 18 PRE-NEED PLANS Pre-Need Plans is not a new invention in the Philippines. It has been with us since 1966.1 The collapse of the Pre-Need Industry starting in 2004 brought about untoward hardships among plan holders who were left holding empty bags. For instance, thousands of holders of educational plans lost the amount due for the education of their children as one pre-need company after another closed their businesses. With the immensity of the problems of the industry, the fact that the pre-need business is now under the regulatory powers of the Insurance Commission is an affirmation of the trust reposed on the expertise of this government agency. §1. GOVERNING LAW AND STATE POLICY. The governing law is Republic Act No. 9829 otherwise known as Pre-Need Code of the Philippines. 2 a. Section 2 of the Pre-Need Code provides the objectives thereof:3 (1) Regulate the establishment of pre-need companies and place their operation on sound, efficient and stable basis; (2) Derive the mobilization of savings;

optimum

advantage

from

them

in the

(3) Prevent and mitigate, as far as practicable, for the protection of planholders practices prejudicial to public interest; and (4) Regulate, through an empowered agency, companies based on prudential principles to promote sound-

pre-need

EttpiZ/business.inquirer.net/143337/list-of-distres8ed-preneed-firm8. (Accessed: Jan. 14, 2014Ed.) 2

Section 1, R.A. No. 9829 otherwise known as the Pre-Need Code of the Philippines, referred to herein as PNC. Enumerated in Section 2, Rule 1 of the Implementing Rules and Regulations of R.A. No. 9829, hereinafter referred to as IRR.

491

/ 492

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

/ ness, stability and sustainable growth of the pre-need industry. §2. PRE-NEED PLAN DEFINED. “P r e - n e e d p l a n s ” are contracts, agreements, deeds or plans for the benefit of the plan- holders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds as may in the future be determined by the Commission. 4 a. The “ B e n e f i t s ” that will be received by the beneficiary of the plan “refers to the payment of monetary considerations and/ or performance of future services which the pre-need company undertakes to deliver either to the planholder or his beneficiary at the time of actual need or agreed maturity date, as specified in the pre-need plan.”5 b. As the term implies, a pre-need plan covers a specific need of the planholder in the future. The planholder will invest to cover for such future need; hence, the planholder will save “pre-need” or before the need. §3. PARTIES. The parties in a pre-need plan are the Pre- Need Company, the Planholder and the Beneficiary. a. Pre-need company “refers to any corporation registered with the Commission and authorized/licensed to sell or offer to sell pre-need plans. The term “pre-need company” also refers to schools, memorial chapels, banks, nonbank financial institutions and other entities which have also been authorized/licensed to sell or offer to sell pre-need plans insofar as their pre-need activities or business are concerned.” 6 No person is allowed to operate a pre-need company or engage in the business of a pre-need company unless licensed by the Commission.7 It is required that the word “Plan” or “Plans” is included in the corporate name of the company.8

4

Section 4, PNC.

6

Ibid. Ibid.

6 7

Section 10, Rule 3, IRR. Circular Letter No. 2015-41, dated August 3, 2015. 8

CHAPTER 18 PRE-NEED PLANS

493

b. Planholder “refers to any natural or juridical person who purchases pre-need plans from a pre-need company for whom or for whose beneficiaries’ benefits are to be delivered, as stipulated and guaranteed by the pre-need company. The term includes the assignee, transferee, and any successor-ininterest of the planholder.”9 c. Beneficiary “refers to the person designated by the plan- holder as the recipient of the benefits in the pre-need plan.”10 §3.01. OTHER PERSONS REGULATED BY THE COMMISSIONER. Although not parties to the plan, the following persons or entities are also regulated by the Commissioner: (1)

“Sales counselors” refers to natural persons who are engaged in the sale of, or offer to sell, or counsel of prospective planholders for the purpose of selling, whether or not on commission basis, pre-need plans upon the authority of the pre-need company.11

(2)

Actuary — a professional duly accredited by the Insurance Commission, who, among other things, deals with the financial impact of risk and uncertainty and who has been trained in mathematics and statistics in calculating premiums, dividends, pensions, reserves, employee benefits and risks.12

(3)

General agent — a corporation or entity engaged in the sales of, or offering to sell, or advising prospective planholders for the purpose of selling pre-need plans in behalf of the pre-need company and/or performing other acts and things in its behalf in the conduct of its business as specified in the general agency agreement executed by and between them.

(4) “Affiliate of, or affiliated with, a specified person” refers to a person that directly or indirectly, through one (1) or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. Exercising control over a legal entity shall mean any one of the following: (1) owning either solely or together with affiliated persons more than twenty-five percent (25%)

IRR.

Section 4(d), PNC. 10 Section 4(e), PNC. “Section 4(h), PNC. 12 Section 3(a), Rule 1, IRR to the Pre-Need Code, hereinafter referred to as

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

494

of the outstanding capital stock of a legal entity: and ( 2 ) an officer or director of such legal entity.13

being

§3.02. SUSPENSION OR REVOCATION OF AUTHORITY. The authority to operate given to pre-need companies may be suspended or revoked in accordance with Section 48 of the Pre-Need Code which states that the Commission may suspend or revoke all certificates of authority granted to such pre-need company, its officers and agents, after notice and hearing in the following cases when the Commission is of the opinion, upon examination or other evidence: (1)

That any pre-need company is in an unsound condition: or

(2)

That it has failed to comply with the provisions of law or regulations; or

(3)

That its condition or method of business is such as to render its proceedings hazardous to the public or to its planholders; or

(4) That its paid-up capital stock is impaired or deficient. a. No new business shall thereafter be done by such company or for such company by its agent in the Philippines. The Commission may not lift the order of suspension or revocation of the said authority until the concerned pre-need company shall have submitted a viable business plan showing the company’s estimated receipts and disbursements, as well as the basis therefor for the next succeeding three years.14 §4. KINDS OF PRE-NEED PLANS. The plans that may be issued by preneed companies include (1) Life Plans, (2) Pension Plans, (3) Educational Plans, (4) Memorial or Interment Plans, and other plans identified by the Commission.15 Other plans that are expressly defined in the Pre-Need Code are as follows: (1) “Fixed value plans” refers to pre-need plans whose benefits and costs are fixed and predetermined at the inception or purchase of the plan.16

13

Section 4, PNC. Section 48, PNC; Section 51, 15 Section 4, PNC; Section 10, 16 Section 4, PNC. 14

CHAPTER 18 PRE-NEED PLANS

495

(2)

“In-force plan” refers to a plan for which the pre-need company has an outstanding obligation for the delivery of benefits or services or payment of termination value.17

(3)

“Lapsed plan” refers to a plan that is delinquent in payment of installments provided for in the contract, the delinquency of which extends beyond the grace period provided for in the plan or contract.18

(4)

“Cancelled plan” refers to a plan that can no longer be reinstated by reason of delinquency in the payment of installments for more than two years or a longer period as provided in the contract, counted from the expiry of the grace period provided for in the plan or contract.

(5)

“Scheduled benefit plans” refers to plans the date of availment of the benefits of which is set at the inception or purchase of the plan.

(6)

“Contingent benefit plans” refers to plans the timing of the provision of the benefits of which is conditional on the occurrence of the contingency.

§5. PRE-NEED CONTRACT. Section 17 of the Pre-Need Code provides that “All forms, including amendments thereto, relating to the pre-need plans shall be approved by the Commission. No pre-need contracts or certificates shall be issued or delivered within the Philippines unless in the form previously approved by the Commission.” a. The Standard provisions of the different kinds of preneed plan including Pension Plan, Educational Plans, and Memorial Plans are provided for Insurance Commission Circular Letter No. 2016-11 dated March 8, 2016. §5.01. INTERPRETATION. Section 3 of the Pre-Need Code provides that “Any doubt in the interpretation and implementation of any provision in this Code shall be interpreted in favor of the rights and interests of the planholder.” On the other hand, Section 4 provides that “the terms not otherwise defined under this Code shall be construed in their usual and commonly understood trade, business, commercial, or investment meaning.”

17

Section 4, lPNC. *Ibid.

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

496

a. A Pre-Need Plan is a contract of adhesion and the stipulations are generally unilaterally prepared and imposed by company on a take-it-or-leave-it basis. 19 Thus, it should be liberally construed in favor of the planholder. b. A contract of adhesion, wherein one party imposes a readymade form of contract on the other, is not strictly against the law. A contract of adhesion is as binding as ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. Not every contract of adhesion is an invalid agreement. 20 Hence, the fact that the pre-need plan is a contract of adhesion does not mean, however, that planholder cannot be bound by its terms nor can the planholder unilaterally change it to suit her whim.21

PROBLEM: In 1982, Visitacion Gavina Gaw (petitioner) bought a pre-need Provincial Memorial Plan with Pacific Plans, Inc. (private respondent) under Pre-Need Agreement No. 93945-5. In the morning of July 9, 1996, petitioner’s mother died. Immediately thereafter, petitioner’s brother engaged Funeraria Baluyot to perform the mortuary services on their mother’s remains. It was in the evening of the same date that petitioner informed private respondent of her intention to assign her plan to her mother. When private respondent’s representative arrived to pick up the corpse, private respondent found out that it had already been embalmed and a casket provided. Thus, private respondent denied petitioner’s request for the rendition of memorial services. Later, petitioner negotiated with Funeraria Tolete, a servicing mortuary accredited by private respondent, for viewing and interment, and for the replacement of the casket that was to be provided under the memorial plan. The pertinent provision of Pre-Need Agreement No. 93945-5 are the following stipulations: III

REQUEST FOR RENDITION OF MEMORIAL SERVICES

PACIFIC shall have the sole and exclusive right to make all negotiations and necessary arrangements with a mortuary of its choice for the rendition of memorial services provided for in this Pre-Need Agreement. When memorial services contracted for is requested to be rendered and performed in a locality where such is not available, PACIFIC shall be allowed and authorized to make reasonable substitution and/or adjustments thereof.

19

Gaw v. Court of Appeals, G.R. No. 147748, April 19, 2006. 20 Dio v. St. Ferdinand Memorial Park, Inc., G.R. No. 169578, November 30,

2006. 21

Gaw v. Court of Appeals, supra.

CHAPTER 18 PRE-NEED PLANS

V. ASSIGNMENT The planholder may designate another member of his family or any third person alive on the date of this Pre-Need Agreement arul l/jcated at the time of assignment within 25 kilometers from the nearest branch of PACIFIC, to receive the memorial services described herein, subject UJ the following conditions: 1. Any and all installments due on the Pre-Need Agreement shall be accelerated and the outstanding balance thereon fully paid before the memorial services contracted for can be effected. 2. The designation shall be in writing, in proper form, and shall become valid and effective only upon approval thereof by PACIFIC. 3. Such transfer shall automatically terminate all insurance coverages being then enjoyed by the planholder under Paragraph VI. xxx Aggrieved by private respondent’s acts, petitioner filed on December 12, 1996, a complaint for damages with the Metropolitan Trial Court (MeTC) of Pasay City, Branch 44. Petitioner alleged that because of private respondent’s failure to render the necessary memorial services, she was constrained to sell her family’s farm lot valued at P150,000.00 for only P50,000.00 in order to pay for the memorial services, and she also incurred additional funeral expenses amounting to P23,500.00. Is private respondent liable for the damages sought by petitioner? A:

No, the petitioner is not liable. The pre-need plan is the law between petitioner and private respondent and they are bound by its stipulations. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Time, being of essence, it is, therefore, imperative for the planholder, his heirs, successors and assigns, to give immediate notification directly to, and acknowledged by PACIFIC, for the latter to make said arrangements. Such notice may be communicated to PACIFIC either in person, by telephone or cable. Private respondent’s refusal to reimburse petitioner of the expenses she incurred for her mother’s funeral is not without basis. The provisions of Pre-Need Agreement No. 93945-5 set out in clear terms the respective rights and obligations of petitioner and private respondent. Under paragraph III, private respondent had the sole right to make all negotiations and necessary arrangements for the memorial services. On the other hand, it was necessary for petitioner to immediately notify private respondent of the need for the memorial services. Thus, when petitioner’s mother died in the morning of July

498

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

9, 1996, it was petitioner’s responsibility to notify private respondent immediately; however, it was only in the evening of said date that petitioner informed private respondent, and at that juncture, the remains were already embalmed and a casket provided for. This, of course, pre-empted private respondent from exercising its sole prerogative of arranging for the memorial services on the remains of petitioner’s mother, and effectively violated the terms of the pre-need plan. The “upgrading” of the casket likewise violated the terms of the pre-need plan. Under paragraph 1A (SERVICES) of Pre-Need Agreement No. 93945-5, one of the services to be provided by private respondent is a memorial casket pre-selected by petitioner. When petitioner opted for another casket, again, this contravened the terms of the pre-need plan inasmuch as there is already a casket that has been selected by petitioner herself at the time the contract was entered into. Petitioner cannot complain that she did not like the casket that was made available because the memorial plan clearly provided that the casket to be used is the one that she pre-selected. Whatever expenses she incurred for the purchase of the different casket should be solely borne by her, as private respondent did not consent thereto and was never a party to the transaction. It is fundamental that contracts can only bind the parties who had entered into it, and it cannot favor or prejudice a third person. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to the contract. Thus, the CA was correct in upholding the ruling of the RTC that private respondent is not liable for any damages. As correctly stated by the CA: Evidently, petitioner not only failed to comply with her obligation to immediately inform respondent PPI of the fact of death, she encroached on respondent PPI’s sole and exclusive right to make all negotiations and necessary arrangements with a mortuary of its choice for the rendition of memorial services. She likewise breached the contract when she availed of a coffin different from that provided under her memorial plan. Verily, she must be solely responsible for the expenses incurred. Pre-Need Agreement No. 93945-5 is, indeed, a contract of adhesion in that the stipulations therein were unilaterally prepared and imposed by private respondent on a take-it-or-leave-it basis. This does not mean, however, that petitioner cannot be bound by its terms nor can she unilaterally change it to suit her whim. A contract of adhesion is “as binding as ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely.”16 Neither will the Court interpret the terms and conditions of the pre-

CHAPTER 18 PRE-NEED PLANS

499

need plan since its language is explicit and leaves no doubt as to the intention of the parties. As the Court held in T h e I n s u l a r L i f e A s s u r a n c e C o m p a n y , L t d . v . C o u r t o f A p p e a l s : fA] court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed. ( G a w v . C o u r t o f A p p e a l s , G . R . N o . 1 4 7 7 4 8 , A p r i l 1 9 , 2 0 0 6 ) §6. REGISTRATION AND DISCLOSURE OF INFORMATION. Pre-Need Plans were previously governed by the Securities Regulations Code. They were considered securities under the same Code. However, although Pre-Need Plans are no longer securities that are within the power of the Securities and Exchange Commission, the regime of full disclosure of information to investors is carried over to the Pre-Need Code. Sections 14, 18, and 19 of the Pre-Need Code provide:

SEC. 14. Registration of Pre-need Contracts/Pians. — Within a period of forty-five (45) days after the grant of a license to do business as a pre-need company, and for every pre-need plan which the pre-need company intends to offer for sale to the public, the pre-need company shall file with the Commission a registration statement for the sale of pre-need plans pursuant to this Code. The Commission shall promulgate rules governing the registration of pre-need plans and the required documents which include, among others, the viability study with certification, under oath, of a pre-need actuary accredited by the Commission, any information brochure, a copy of the pre-need plan, and information and documents necessary to ensure the protection of planholders and the general public. Said rules shall further set forth the conditions under which such registration may be denied, revoked, suspended or withdrawn, and the remedies of pre-need companies in such instances. SEC. 18. Pre-need Advertising Ruies. — Pre-need plans shall be advertised and sold in an appropriate

500

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

non-misleading manner in accordance with the rules to be prescribed by the Commission. It shall be unlawful for any pre-need company to advertise itself or its pre-need plans unless the Commission has approved such advertising material. The Commission shall have a period often (10) working days to approve or deny the advertising material and failure to act within the said period shall cause the advertising material to be approved. For purposes hereof, the Commission shall have the power to define the scope of its advertising rules to appropriately cover advertising or other communications to the public. Any person who sells or offers to sell any preneed plan or contract by any means or instruments of communication in violation of this section shall be liable to the person purchasing such pre-need contract who may sue to recover the consideration paid for such pre-need contract with interest thereon. In addition hereto, the Commission shall have the power to pursue the erring pre-need company in an administrative or criminal proceeding. A fine of One hundred thousand pesos (P100,000.00) shall be imposed on any pre-need company found to have violated this Section: Provided That a second violation of this Section shall, in addition to the fine imposed, result in the suspension of the license of the pre-need company. SEC. 19. Disclosures to Prospective Planholders. — No registered pre-need plan shall be sold to prospective planholders unless an information brochure, which has been filed with the Commission, has been provided to the purchaser. The information brochure shall contain an explanation of the principal features of the pre-need plan, a statement that the planholder may avail of a default or reinstatement period within which to reinstate his lapsed plan, and the conditions of the same and the rates of return for scheduled benefit plans and illustrative yields for contingent benefit plans, and such other information that the Commission shall require by rule. a. Hence, no pre-need company can offer plans to the public unless the same is registered with the Commission. “As the foregoing

CHAI’TKR 1H IMtK-NEKI) PLANS

r,
provisions are necessary for the protection of investor and the public in general, even the Pre-Need Code, which now governs preneed companies and their activities, contains similar conditions for the regulation of pre-need plans.”" b. Thus, in P r i m a m a n i l a , I n c . v . S e c u r i t i e s a n d K o u i h a n g e C o m m i s s i o n ,22 23 there was advertisement of the pre-need plan products in the website of the issuer without securing a license. It was discovered that the website contained the company's offer for sale thereon of the pension plan product with instructions on how interested applicants and planholders could pay their premium payments for the plan. One of the payment options was through bank deposit to the company’s given bank account. Hence, a cease and desist order against the company was held to be proper. c. Disclosure of information is the function of Registration Statements that are submitted to the Commission. Brochures are likewise subject to the approval of the Commission. Misleading statements in advertisements are likewise prohibited. In addition, reportorial requirements are imposed on pre-need companies.24 d. Within 45 days after the grant of a license to do business as a pre-need company, and for every pre-need plan which the company intends to offer for sale to the public, the pre-need company must file with the Commission, among other things, the following:25 (1) Duly accomplished Registration Statement; (2) Board Resolution authorizing the registration of the applicant’s pre-need plan; (3)

Opinion of independent counsel on the legality of the issue; and

(4) Supporting documents such as Articles and By- Laws, Trust Agreement, related contracts and other documents specified by the Commission;26

22 Primamanila Plans, Inc. v. Securities and Exchange Commission, G.R. No. 193791, August 6, 2014.

“Primamanila Plans, Inc. v. Securities and Exchange Commission, ibid. “Sections 41 to 45, PNC; Sections 44 to 48, Rule 10, IRR. “Section 14, Rule 4, IRR. “See Section 14(4)(i) to (xvi), Rule 4, IRR for the complete list of supporting documents.

502

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act>

(5) Audited Financial Statement accompanied by an audit report of the certifying auditors as of a date not more than 90 days prior to the date of filing of the registration statement; and (6)

Actuarial Feasibility Study.

§7. CONSIDERATION. Pre-Need Companies are obligation to pay the benefits under the Plan so long as the consideration agreed upon is paid by the planholder in the form of cash or installment amounts.

a. Section 23 of the Pre-Need Code states the rules in case of nonpayment by the planholder of the consideration agreed upon:

SEC. 23. Default; Reinstatement Period. — The preneed company must provide in all contracts issued to planholders a grace period of at least sixty (60) days within which to pay accrued installments, counted from the due date of the first unpaid installment. Nonpayment of a plan within the grace period shall render the plan a lapsed plan. Any payment by the planholder after the grace period shall be reimbursed forthwith, unless the planholder duly reinstates the plan. The planholder shall be allowed a period of not less than two (2) years from the lapse of the grace period or a longer period as provided in the contract within which to reinstate his plan. No cancellation of plans shall be made by the issuer during such period when reinstatement may be effected. Within thirty (30) days from the expiration of the grace period and within thirty (30) days from the expiration of the reinstatement period, which is two (2) years from the lapse of the grace period, the pre-need company shall give written notice to the planholder that his plan will be cancelled if not reinstated within two (2) years. Failure to give either of the required notices shall preclude the pre-need company from treating the plans as cancelled. b. The rules are similar to the rules under the Insurance Code in the sense that the planholder can prevent the plan to permanently lapse if the following remedies are availed of: (1) Pay within the 60-day grace period counted from the due date of the first unpaid installment; and

CHAPTER 18 PRE-NEED PLANS

503

(2) Reinstate the plan within a period of not less than two years from the lapse of the grace period unless a longer period is provided for in the plan.27 §8. TERMINATION OF THE PLAN. The termination of the plan can be at the instance of the planholder or the pre-need company. With respect to the planholder, termination is a matter of right and with corresponding right to demand the termination value of the plan. With respect to the pre-need company, termination is always subject to the consent of the planholder. §8.01. TERMINATION BY PLANHOLDER. A planholder may terminate his pre-need plan at any time by giving written notice to the issuer.28 a. A pre-need plan shall contain a schedule of termination values to which the planholder is entitled to upon termination. Such schedule of termination value shall be required for all in-force preneed plans and shall be fair, equitable and in compliance with the Commission issuances. The termination value of the preneed plan shall be pre-determined by the actuary of the pre-need company upon application for registration of the pre-need plans with the Commission and shall be disclosed in the contract.29 §8.02. TERMINATION BY PRE-NEED COMPANY. Any offer by the pre-need company to terminate the pre-need plan for consideration exceeding the termination value provided in the plan contract shall not require the prior approval of the Commission, provided that the following concur: (1)

The consideration shall be below the pre-need reserves for the specific plan;

(2) (3)

The offer is accepted by the planholder; and The offer shall not prejudice the planholders who do not avail of such offer.30

§9. CLAIMS SETTLEMENT. The planholder is entitled to the benefits or proceeds of the plans within the following period:31

See also Section 25, Rule 6, IRR. Section 24, PNC; Section 26, Rule 6,

27

28

"Ibid.

^Section 24, PNC; Section 26, Rule 6, 31 Section 26, Pre-Need Code.

504

ESSENTIALS OF INSURANCE Iv\W (Republic Act No. 10607 with Notes on Pre-Need Act)

(1)

In the case of scheduled benefit plans, the proceeds of the plan shall be paid immediately upon maturity of the contract, unless such proceeds are made payable in installments or as an annuity, in which case the installments or annuities shall be paid as they become due.

(2)

In the case of contingent benefit plans, the benefits shall be paid by the pre-need company 30 days upon submission of all necessary documents.

a. In the case of scheduled benefit plans, refusal or failure to pay the claim within 15 days from maturity or due date will entitle the beneficiary to collect interest on the proceeds of the plan for the duration of the delay at the rate twice the legal interest unless such failure or refusal to pay is based on the ground that the claim is fraudulent.32 It is necessary, however that the planholder has duly complied with the documentary requirements of the pre-need company.33 b. Delay in the payment will entitle the planholder to damages in accordance with Section 28 of the Pre-Need Code which provides:

SEC. 28. Consequences of Delay or Default — In case of any litigation for the enforcement of any preneed plan, it shall be the duty of the Commission to determine whether the payment of the claim of the planholder has been unreasonably denied or withheld. If found to have unreasonably denied or withheld the claim, the pre-need company shall be liable to pay damages, consisting of actual damages, attorney’s fees and legal interest, to be computed from the date the claim is made until it is fully satisfied: Provided, That the failure to pay any such claim within the time prescribed in Section 26 hereof shall be considered prima facie evidence of unreasonable delay in payment. §10. UNFAIR CLAIMS SETTLEMENT. Section 25 of the Pre-Need Code expressly provides that “no pre-need company shall refuse, without just cause, to pay or settle claims arising under 32

Section 26, 33 PNC. Ibid.

CHAPTER 18 PRE-NEED PLANS

505

coverages provided by its plans nor shall any such company engage in unfair claim settlement practices. Any of the following acts by a pre-need company, if committed without just cause, shall constitute unfair claims settlement practices and may result in the suspension or revocation of the company’s certificate of authority: (1) Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to coverages at issue; (2) Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its plan; (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its plan;

(4) Failing to provide prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (5) Compelling planholders to institute suits or recover amounts due under its plan by offering, without justifiable reason, substantially less than the amounts ultimately recovered in suits brought by them. a. Evidence as to the number and types of valid and justifiable complaints to the Commission against a pre-need company shall be deemed admissible in an administrative or judicial proceeding brought under Section 25. §11. TRUST FUND. Trust fund is a fund set up from the planholders’ payments to pay for the cost of benefits and services, termination values payable to planholders and other costs necessary to ensure the delivery of benefits or services to planholders as provided for in the contracts.34 a. The Trust Fund is mandated by Section 30 of the Pre- Need Code with provides that:

SEC. 30. Trust Fund. — To ensure the delivery of the guaranteed benefits and services provided under

^Section 30, Pre-Need Code; See Circular Letter No. 2015-43 dated August 7, 2015 which provides for the “Guidelines on the Management of the Trust Fund Surplus of Pre-Need Companies.”

506

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

a pre-need plan contract, a trust fund per pre-need plan category shall be established. A portion of the installment payment collected shall be deposited by the pre-need company in the trust fund, the amount of which will be as determined by the actuary based on the viability study of the pre-need plan approved by the Commission. Assets in the trust fund shall at all times remain for the sole benefit of the planholders. At no time shall any part of the trust fund be used for or diverted to any purpose other than for the exclusive benefit of the planholders. In no case shall the trust fund assets be used to satisfy claims of other creditors of the preneed company. The provision of any law to the contrary notwithstanding, in case of insolvency of the pre-need company, the general creditors shall not be entitled to the trust fund. Except for the payment of the cost of benefits or services, the termination values payable to the planholders, the insurance premium payments for insurance-funded benefits of memorial life plans and other costs necessary to ensure the delivery of benefits or services to planholders, no withdrawal shall be made from the trust fund unless approved by the Commission. The benefits received by the planholders shall be exempt from all taxes and the trust fund shall not be held liable for attachment, garnishment, levy or seizure by or under any legal or equitable processes except to pay for the debt of the planholder to the benefit plan or that arising from criminal liability imposed in a criminal action. The trust fund shall at all times be sufficient to cover the required pre-need reserve. b. The Trust Fund is for the sole benefit of the planholders and cannot be used to satisfy the claims of other creditors of the insolvent pre-need corporation. The Supreme Court explained: “First, it must be stressed that a person is considered as a beneficiary of a trust if there is a manifest intention to give such a person the beneficial interest over the trust properties. This is the considered opinion expressed in the Restatement of the Law of Trust (Restatement) which Justice Vicente Abad Santos has described in his contribution to the Philippine Law Journal as containing the more salient principles, doctrines and rules on the subject. Here, the terms of the trust agreement plainly confer the status of beneficiary to the planholders, not to Legacy. In the recital clauses of the said agreement, Legacy bound itself to provide for the sound,

CHAPTER 18 PRE-NEED PLANS

507

prudent and efficient management and administration of such portion of the collection “for the benefit and account of the planholders,” through LBP (as the trustee). This categorical declaration doubtless indicates that the intention of the trustor is to make the planholders the beneficiaries of the trust properties, and not Legacy. It is clear that because the beneficial ownership is vested in the planholders and the legal ownership in the trustee, LBP, Legacy, as trustor, is left without any iota of interest in the trust fund. This is consistent with the nature of a trust arrangement, whereby there is a separation of interests in the subject matter of the trust, the beneficiary having an equitable interest, and the trustee having an interest which is normally legal interest.

x x x It is clear from Section 16 that the underlying congressional intent is to make the planholders the exclusive beneficiaries. It has been said that what is within the spirit is within the law even if it is not within the letter of the law because the spirit prevails over the letter. This will by the legislature was fortified with the enactment of R.A. No. 9829 or the Pre-Need Code in 2009. The Congress, because of the chaos confounding the industry at the time, considered it necessary to provide a stronger legal framework so that no entity could claim that the mandate and delegated authority of the SEC under the SRC was nebulous. The PreNeed Code cemented the regulatory framework governing the preneed industry with precise specifics to ensure that the rights of the pre-need planholders would be categorically defined and protected. . . .”35

§12. REGULATION OF PRE-NEED COMPANIES. In addition to the abovediscussed rules, there are other provisions in the Pre-Need Code to ensure protection of the planholders and to make sure that the planholders will get their benefits. These include: (1) Regulations on the management of the pre-need company; 36 (2) Rules on Licensing of Sales Counselors and General Agents; 37 (3) Rule for Accreditation of Actuaries;38 (4) Reportorial Requirements of Pre-need Companies; 39 (5) Examination of Pre-Need Companies by the Commission at least once a year and whenever the needs of public interests so demands;40 (6) Imposition of Financial Accounting

36

Securities and Exchange Commission v. Laigo, G.R. No. 188639, September 2,

2015. ^Sections 7 to 13, PNC; Sections 7 to 12, Rule 3, IRR. 37

Sections 20 to 22, PNC; Sections 22 to 24, Rule 5, IRR. Sections 16, 39, and 40, PNC; Sections 41 to 43, Rule 9, IRR. 39 Sections 41 to 45, PNC; Sections 44 to 48, Rule 10, IRR. 40 Section 46, PNC; Section 49, Rule 10, IRR. 38

R88 ENTTA l A 0 V INSURA NC E I AW (k*rv\iYnit. Act N>». 10607 with Notes on Pre-Need Act)

y,',;

t.h<; CornrruMiony 1 (7) Rules on Conservatorship and Insolvency; * and (8) Imposition of Administrative H h m f i and Criminal Penalties.** '■iUih'ihrri* by 4

a It should be recalled that Health Maintenance Organizations Of MO) are now under the supervision of the Insurance Commission pursuant to E.O. No. 192 dated November 12, 2015 issued by the Office of the President. Supervision was transferred to the Insurance Commission from the Department of Health. HMO refers to a juridical entity legally organized to provide or arrange for the provision of pre-agreed or designated health care services to its enrolled members for a fixed prepaid fee for a specified period of t,ime.“ The specific powers of the Insurance Commission in relations to HMOs are enumerated in the Executive Order.41 42 43 * 45 §13. PRE-NEED COMPANIES IN DISTRESS. It should be noted that preneed companies, as debtors, are excluded from the operation of the FRIA and still governed by the Pre-Need Code with respect to insolvency and rehabilitation. 46 The governing statutory provides are Sections 49 to 52 of the Pre-Need Code that provides:

SEC. 49. Appointment of Conservator. — If at any time before or after the suspension or revocation of the license of a pre-need company as provided in Section 27 hereof, the Commission finds that such company is in a state of continuing inability or unwillingness to comply with the requirements of the Code and/or orders of the Commission, a conservator may be appointed to take charge the assets, liabilities, and the management of such company, collect all moneys and debts due the company and exercise all powers necessary to preserve the assets of the company, reorganize its management, and restore its viability. The conservator shall have the power to overrule or revoke the actions of the previous management and board of directors of the said company,

41

Section 47, PNC; Section 50, Rule 11, IRR. Sections 49 to 52, PNC; Sections 52 to 55, Rule13, IRR. 43 Sections 53 to 54, PNC; Sections 56 to 57, Rule 14, IRR. “DOH Administrative Order No. 34 Series of 1994; E.O No. 192 dated November 12, 42

2015. 45

Section 4, E.O. No. 192 dated November 12, 2015. Section 5, Financial Rehabilitation and Insolvency Act of 2010, R.A- No- 10142.

48

CHAPTER 18 PRE-NEED PLANS

any provision of law, or of the articles of incorporation or bylaws of the company, to the contrary notwithstanding, and such other powers as the Commission shall deem necessary. The conservator may be another pre-need company, by officer or officers of such company, or any other competent and qualified person, firm or corporation. The remuneration of the conservator and other expenses attendant to the conservation shall be borne by the pre-need company. The conservator shall not be subject to any action, claim or demand by, or liability to, any person in respect of anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of the powers conferred on the conservator. The conservator appointed shall report and be responsible to the Commission until such time as the Commission is satisfied that the preneed company can continue to operate on its own and the conservatorship shall likewise be terminated should the Commission, on the basis of the report of the conservator or of his own findings, determine that the continuance in business of the pre-need company would be hazardous to planholders and creditors, in which case the provisions of Chapter XVI shall apply. SEC. 50. Proceedings Upon Insolvency. — Whenever, upon examination or other evidence, it shall be disclosed that the condition of any pre-need company is one of insolvency, or that its continuance in business would be hazardous to its planholders and creditors, the Commission shall forthwith order the company to cease and desist from transacting business and shall designate a receiver to immediately take charge of its trust fund, assets and liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its planholders and creditors, and exercise all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the pre-need company. The Commission shall thereupon determine within thirty (30) days whether the pre-need company may be reorganized or otherwise placed in such condition so that it may be permitted to resume business with safety to its planholders and creditors and shall

509

510

ESSENTIAL OF INSURANCE LAW (Republic Act No. 10007 with Notes on l*ro-Neo
prescribe the conditions under which such resumption of business shall take place as well as the time for fulfillment of such conditions. In such case, the expenses and fees in the collection and administration of the preneed company shall be determined by the Commission and shall be paid out of the assets of such company. If the Commission shall determine and confirm within the said period that the pre-need company is insolvent, as defined hereunder, it shall, if the public interest so requires, order its liquidation, indicate the manner of its liquidation and approve a liquidation plan and implement it immediately. The Commission shall designate a competent and qualified person as liquidator who shall take over the functions of the receiver previously designated and, with all convenient speed, distribute the trust fund exclusively to the planholders in proportion to termination values of their respective pre-need plans, convert the assets of the pre-need company to cash, or sell, assign or otherwise dispose of the same to the planholders, creditors and other parties for the purpose of settling the liabilities or paying the debts of such company and he may, in the name of the company, institute such actions as may be necessary in the appropriate Court to collect and recover accounts and assets of the pre-need company, and to do such other acts as may be necessary to complete the liquidation as ordered by the Commission. The provisions of any law to the contrary notwithstanding, the actions of the Commission under this section shall be final and executory, and can be set aside by the Court upon petition by the company and only if there is convincing proof that the action is plainly arbitrary and made in bad faith. The Commission shall then file the corresponding answer reciting the proceeding taken and praying for the assistance of the Court in the liquidation of the company. No restraining order or injunction shall be issued by the Court enjoining the Commission from implementing his actions under this section, unless there is convincing proof that the action of the Commission is plainly arbitrary and made in bad faith and the petitioner files a bond in favor of the Commission with the Court in an amount

CHAPTER 18 PRE-NEED PLANS

fixed by it. The restraining order or injunction shall be refused or, if granted, shall be dissolved upon filing by the Commission, if he so desires, of a bond in an amount twice the amount of the bond of the petitioner conditioned that it will pay the damages which the petition may suffer by the refusal or the dissolution of the injunction. The Court shall give preference to all proceedings under this chapter. The Commission shall not be required to pay any fee to any public officer for filing, recording, or in any manner authenticating any paper or instrument relating to the proceedings. As used in this Title, the term “Insolvency” shall refer to the financial condition of a pre-need company that is generally unable to pay its liabilities as they fall due in the ordinary course of business or that has liabilities that are greater than its assets. In case of liquidation of a preneed company, after payment of the cost of the proceedings, including reasonable expenses and fees incurred in the liquidation to be allowed by the Court, the Commission shall pay all allowed claims against such company, under order of the Court, in accordance with their legal priority. The receiver or the liquidator, as the case may be, designated under the provisions of this title shall not be subject to any action, claim or demand by, or liability to, any person in respect of anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of the powers conferred on such receiver or liquidator. SEC. 51. Commission’s Power to Assume Trustee Functions. — In cases where the Commission has ordered the liquidation of the pre-need company, the Commission may immediately take custody of the trust fund established by the pre-need company, and the preneed company shall forthwith deliver custody and an accounting of the same. Henceforth, the Commission shall have the full power and control over the Fund to satisfy the pre-need company’s obligations to planholders. SEC. 52. Liquidation. — (a) In cases where the Commission determines that the pre-need company shall be liquidated, it shall have the power to commence

511

512

ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act)

insolvency proceedings in the appropriate court which shall have jurisdiction over the assets of the pre-need company, excluding trust fund assets that have been established exclusively for the benefit of planholders. (b) Proceedings in court shall proceed independently of proceedings in the Commission for the liquidation of claims, and creditors of the pre-need company shall have no personality whatsoever in the Commission proceedings to litigate their claims against the trust funds. (c) In liquidating claims of planholders, the Commission shall ensure that all planholders receive an equitable distribution of their claims, considering the amounts each has paid into their plans, the termination values due each planholder, the present value of their claims and other equitable considerations. The only other claims which may be satisfied by the Commission out of the trust funds are the claims for trustees’ fees which are reasonable and can be shown to have been incurred in the administration of the trust fund, and taxes incurred under trust. a. A Stay Order issued by the court in a rehabilitation proceeding involving a pre-need company applies to a claim for reimbursement of the tuition fees and other expenses allegedly covered by a plan that was incurred by a planholder. The Court ruled that if it will allow the reimbursement action against petitioner to proceed, and if planholder’s claim were granted, the latter would be in a position to assert a preference over other creditors. Certainly, the planholder’s “claim for reimbursement cannot be considered as an ordinary expense of petitioner for the conduct of its usual business operations.”47

47 College Assurance Plan Philippines, Inc. v. Spouses Lao, G.R. No. 19303 August 6, 2014 (Extended Resolution).