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FAR and AP Management Advisory Services Regulatory Framework for Business Transactions Others  Insurance Home / Regulatory Framework for Business Transactions / RFBT Pre-recorded Content / Concepts Summaries / Insurance REO.CPA.ACADEMICS.F2.06.00 INSURANCE INSURANCE LAW (PD 612, as amended by RA No. 10607) CONCEPT/ELEMENTS/CHARACTERISTICS OF AN INSURANCE CONTRACT DEFINITION: A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. Suretyship is a contract where a person binds himself solidarily to the creditor to fulfill the obligation of the debtor in case the latter should fail to do so. A contract of suretyship shall be deemed to be an insurance contract, within the meaning of the Insurance Code, only if made by a surety who or which, as such, is doing an insurance business. CONCEPT/CHARACTERISTICS OF INSURANCE: 1. Risk-distributing device – it serves to distribute the risk of economic loss among as many possible to those who are subject to the same kind of risk. 2. Contract of adhesion – considering that usually it is the insurance company that prepares the terms and conditions of the contract and the other party merely “adheres” to the said contract. 3. Aleatory – it is generally aleatory, considering that the payment of the insurance claims is contingent upon the happening of an event which may or may not happen or that which may happen at an indeterminate time. Although it may be considered cumulative given that there is still equivalence in prestations as to the payment of premiums being equivalent to the protection given. 4. Contract of Idemnity (for property insurance) – in the sense that the owner of the property may recover only upto the amount of actual loss sustained. 5. Contract of Utmost Good Faith (uberrimae fides contract) – it is a contract of good faith which requires the applicant to make certain disclosures affecting risks of which he may be aware, or material facts, which the he knows or ought to know. 6. Personal Contract – as a rule, a contract of insurance is not transmissible since the personal qualifications of the applicant/insured were considered in the approval. (Sundiang, Sr. and Aquino, Reviewer on Commercial Law, 2014 Edition, p.78-80) ELEMENTS OF AN INSURANCE CONTRACT: 1. The insurer has an insurable interest; 2. The insured is subject to a risk of loss by the happening of the designated peril; 3. The insurer assumes the risk; 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. (Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2, 1986 ed. p. 6, cited in Philamcare Health Systems, Inc. vs. Court of Appeals and Trinos, GR No. 125678, March 18, 2002) CLASSES OF INSURANCE CONTRACTS UNDER THE INSURANCE CODE (INCLUDING VARIABLE CONTRACTS) LIFE INSURANCE a. Individual Life - 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. b. Group Life – 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. [KEETON, R.E. & WIDISS, A.I., Doctrines, and Commercial Practice 1988 ed., s 2.6 (a).,]. 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. (xcited in Luz Pineda, et al. vs. Court of Appeals, GR No. 105562, September 27, 1993) c. Industrial Life - 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 industrial policyare printed upon the policy as part of the descriptive matter. An industrial life policy shall not lapse for nonpayment 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. This 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. (Section 235, Insurance Code) NON-LIFE INSURANCE: a. Marine Insurance i. Insurance against loss of or damage to: i. 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 shipment or while awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks; ii. 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); iii. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and iv. 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. ii. 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. (Section 101, Insurance Code) b. Fire Insurance - shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. (Section 169, Insurance Code) c. Casualty – 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. (Section 176, Insurance Code of the Philippines) CONTRACT OF SURETYSHIP – provided above 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 seven and a half percent (7.5%) of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and b. The maximum sum of guaranteed benefits is not more than one thousand (1,000) times of the current daily minimum wage rate for nonagricultural workers in Metro Manila. VARIABLE INSURANCE - shall mean 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. It shall not be deemed to be a security or securities as defined in The Securities Act, as amended, or in the Investment Company Act, as amended, nor subject to regulations under said Acts INSURABLE INTEREST LIFE INSURANCE: that interest which the insurer is required to have in the person of the insured. Every person who has an insurable interest in the life and health: 1. Of himself, of his spouse, and of his children; 2. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; 3. 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 4. Of any person upon whose life any estate or interest vested in him depends. (Sec. 10) Children: no distinction for legitimate and illegitimate. The designation of the illegitimate children as beneficiaries in the deceased father’s insurance policy is valid because there is no legal proscription that exists in naming as beneficiary the children of illicit relationships. (Heirs of Loreto Maramag vs. Maramag) Test: is whether or not the person is interested in the preservation of the insured life despite the insurance. (Sundiang, Sr. and Aquino, Commercial Law Reviewer, 2014 edition p. 99) Measure: conditions sine qua non: 1. Positive: will you be benefited if the person does not die; 2. Negative: the amount of loss and effect of that loss, or the amount by which you will be damnified. No Insurable Interest: Art. 2012 of the Civil Code provides that anyone who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by a person who cannot make any donation to him Creditor: may only insure the life of the debtor upto the amount of the debt. Such that if the debt has been paid prior to death, the creditor can no longer recover. However, if the debtor insures his own life for the benefit of the creditor, upon full payment of the debt, the insurance will inure to the benefit of the debtor’s estate upon death. Debt unenforceable or insolvency of the debtor: does not make the insurance unenforceable. The unenforceability and insolvency of the debtor discharges only his “legal” obligation to pay, not the moral obligation to settle the debt. Consent: of the person whose life is insured is not essential to the validity of an insurance taken by another as long as the insured has a legal insurable interest at the inception of the policy. PROPERTY INSURANCE: insurable interest in property is any interest therein, or liability in respect thereof, and it may consist in: 1. An existing interest, 2. An inchoate interest founded on existing interest, or 3. Any expectancy coupled with an existing interest. In general, a person has an insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or possession of the property. Hence, pecuniary interest over the property is always necessary. Stockholder: has an inchoate interest on the property of the corporation which is founded on his existing stock ownership. Contractor of a Building: has an interest on the building he is required to deliver to the owner prior to such delivery, as a requirement for collection. INSURABLE INTEREST IN PROPERTY VS. IN LIFE IN PROPERTY IN LIFE Limited to the actual value of the interest thereon Unlimited (save in life insurance effected by a creditor on the life of the debtor) Insurable interest exists when the insurance takes effect AND when the loss occurs, but need not exist in the meantime Insurable interest exists at the time the policy takes effect and need not exist at the time of the loss There must be a legal basis as to the expectation of the benefit Need not have such legal basis Beneficiary must have insurable interest over the thing insured The beneficiary need not have insurable interest of the life of the insured if the insured himself secured the policy. INSURABLE INTEREST ON MORTGAGED PROPERTY Mortgagor: as owner, has an insurable interest to the extent of its value, even though the mortgage debt equals such value. Mortgagee: has an insurable interest in the mortgaged property to the extent of the debt secured; such interest continues until the mortgage debt is extinguished. Loss Payable Mortgage Clause: the mortgagor secures an insurance over the property and designates the mortgagee as the beneficiary (or assigns the policy of insurance to the 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 1. 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, 2. but any act which, under the contract of insurance which is to be performed by the mortgagor, may be performed by the mortgagee. (Sec. 8, Insurance Code) BENEFICIARY: 1. Property – must have insurable interest; 2. Life a. If the insurance is taken by the insured on his own life, he may designate anybody as beneficiary even those without insurable interest; b. If the insurance is taken by a third person on the life of the insured, he must have insurable interest. ASSIGNEE: 1. Property – must have insurable interest and the assignment must be with the consent of the insurer; 2. Life – the assignee need not have insurable interest. EFFECT OF CHANGE OF INTEREST IN INSURED PROPERTY: General Rule: a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. (Sec. 20) Exceptions: 1. Inlife, health and accident insurance. (Sec. 20) 2. achange of interest in the thing insured after the occurrence of an injury which results in a loss. (Sec. 21); 3. achange of interest in one or more of several distinct things, separately insured by one policy. (Sec. 22); 4. A change of interest by will or succession on the death of the insured (Sec. 23); 5. A transfer of interest by one of several partners, joint owners or owners in common, who are jointly insured, to the others. (Sec. 24); 6. When a policy is 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. (Sec. 57). When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided. Consent: of the insurer is generally required, since the personal qualifications of the insured are considered by the insurer. However, such consent is only necessary if there will be alienation of the property. PERFECTION OF THE CONTRACT OF INSURANCE PERFECTION: A contract of insurance is a consensual contract which is perfected by the meeting of the minds between the insured and the insurer. Thus, the Supreme Court in one case held that “[t]here can be no contract of insurance unless the minds of the parties have met in agreement.” (Pilar De Lim vs. Sun Life Assurance Company of Canada, GR No. L-15774, Nov. 29, 1920) In the usual course, it is the insured who will fill-up an application to be insured subject to the insured’s approval. The mere submission of an application without the corresponding approval, even if no memorandum or rejection as provided, does not result in a perfected contract of insurance. (Great Pacific Life Assurance Company vs. CA, GR No. L-31845, April 30, 1979) PREMIUMS: this is the consideration paid by the insured to the insurer for undertaking the assumption of the risk covered by the insurance contract. As a general rule, there can be no binding contract of insurance if there is no payment of the premium, considering that it is one of the elements of an insurance contract. EXCEPTIONS: (enumerated by the Supreme Court in its resolution of the Motion for Reconsideration for the case of UCPB General Insurance Co., Inc. vs. Masagana Telemart, Inc., GR No. 137172, April 4, 2001): 1. Whenever a grace period provision applies as provided under Section 77 of the Insurance Code. 2. If there is an agreement to grant the insured credit extension of the premium due under Section 72 of the Insurance Code. 3. If the parties intended the policies to be valid despite payment of insurance premiums in installment as laid down in the case of Makati Tuscany Condominium Corporation vs. Court of Appeals 4. If the insurer granted 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. 5. When the parties are barred by estoppel. RESCISSION OF INSURANCE CONTRACTS A NON-LIFE Insurance Policy may be CANCELLED by the insurer on the following ground: 1. Nonpayment of premium; 2. Conviction of a crime arising out of acts increasing the hazard insured against; 3. Discovery of fraud or material misrepresentation; 4. Discovery of willful or reckless acts or omissions increasing the hazard insured against; 5. Physicalchanges in the property insured which result in the property becoming uninsurable; 6. Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or 7. A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code. OTHER GROUNDS FOR RESCISSION OR CANCELLATION OF THE INSURANCE CONTRACT: 1. Concealment – a neglect to communicate that which a party knows and ought to communicate. (Section 26, Insurance Code) A concealment, whether intentional or unintentional, entitles the injured party to rescind the contract of insurance. (Section 27) Note that under Section 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. 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. No duty to disclose: except in answer to inquiries of the other: (a) Those which the other knows: e.g., gender if the name given is obviously that of a man or woman. (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: e.g., occupation: soldier. “do you engage in an activity which will require you to handle firearms” and you failed to supply an answer such question. (c) Those of which the other waives communication: e.g., “do you smoke” not answered, and the policy is still issued. If the answer is yes, and how many packs are consumed is asked but not answered but the policy is still issued. (d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material: e.g., body part insurance on legs and you failed to answer the question “do you smoke” – not material. (e) Those which relate to a risk excepted from the policy and which are not otherwise material. (Section 30, Insurance Code) 2. False Representation or Misrepresentation. A representation may be oral or written and may be made at the time of, or before, issuance of the policy. (Section 36 and 37, Insurance Code) 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. (Section 45, Insurance Code) 3. Breach of Warranty A warranty may either be expressed or implied, and may relate to the past, the present, the future or to any or all of these. (Sections 67 and 68, Insurance Code) A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as fact, is an express warranty thereof. (Section 71) 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. (Section 74) Immaterial breaches: a breach of warranty that is immaterial generally does not avoid the contract of insurance except when the parties stipulated that its breach will avoid the policy regardless of materiality. CLAIMS SETTLEMENT AND SUBROGATION LIFE INSURANCE: 1. If there is a maturity – immediately upon such maturity; 2. If the policy matures upon death – within 60 days after presentation of the claim and filing of the proof of the death of the insured. PROPERTY INSURANCE: 1. Ascertainment of loss is either by agreement or by arbitration – within 30 days after proof of loss is received by the insurer and ascertainment of the loss or damage is made; 2. If no ascertainment is made within 60 days after receipt of proof of loss – within 90 days after such receipt. Delay: non-compliance with the above periods entitles the beneficiary to: 1. Interest – for the duration of the delay at a rate TWICE the legal interest; 2. Attorney’s fees and other litigation expenses; 3. Appropriate damages under the Civil Code like moral and exemplary. PRESCRIPTION: 1. In the absence of stipulation, 10 years. 2. However, the parties may validly agree on a shorter period provided it is NOT less than 1 year from the time the cause of action accrues. The cause of action accrues from the time of the final rejection of the claim and not from the time of loss. If there is a motion for reconsideration, the one year period is to be counted from the date of first denial and not on the denial of the reconsideration. If they agreed on a period of 1 year from the time the cause of action accrues, it shall be reckoned from the initial denial of the claim and not on the resolution of the MR. SUBROGATION: is a normal incident of indemnity property insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Such right is not dependent upon nor does it grow out of any privity of contract. Payment to the insured makes the insurer an assignee in equity. The rights of the insurer are those which are available to the insured at the time of payment. No Right of Subrogation: 1. The insured by his own act releases the wrong-doer/third person liable for the loss; (e.g., quitclaim) 2. Where the insurer pays the insured for a loss or risk not covered by the policy; 3. In life insurance; 4. For recovery of loss in excess of insurance coverage. CLAIMS: 1. Notice – must be given without undue delay. Otherwise, the insurer is exonerated; 2. Proof – the insurer may give the best evidence he has. Even if there is a stipulated requirement of proof, substantial compliance thereof would suffice.