De Leon Insurance

THE INSURANCE CODE OF THE PHILIPPINES (PRES. DECREE NO. 1460, AS AMENDED.) GENERAL PROVISIONS Section 1. This Decree shall be known as "The Insurance Code of 1978.*" Historical origin of insurance. (1) Mutual insurance as old as society itself. — Insurance is based upon the principle of aiding another from a loss caused by an unfortunate event. Some writers have maintained that mutual insurance is as old as society itself. It seems that benevolent societies organized for the purpose of extending aid to their unfortunate members from a fund contributed by all, have been in existence from the earliest times. They existed among the Egyptians, the Chinese, the Hindus, and the Romans and are known to have been established among the Greeks as early as the third century before Christ. 1

*"The Insurance C o d e / ' in Presidential Decree No. 612. The g e r m of the m o d e r n mercantile insurance contract appears to have been the transaction evidenced by the bottomry or respondentia bond, together with the practice of "general average" contribution, (see Sees. 101, 136.) The late Dr. Trenerry, author of a learned work on the early history of insurance, finds a primitive form of bottomry loans in the Babylonian C o d e of H a m m u r a b i (B.C. 2250.), and a m o r e highly developed form in the Hindu L a w s of Manu, so called. He conjectures that this important business practice w a s taken over by the Phoenicians, who greatly improved it and carried it on to the Greeks, w h o m a y have known and used it as early as the Trojan War. l

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(2) Origin of present day insurance attributed to merchants of Italian cities. — The practice of insurance as we know it today, as an important agency in promoting commercial and industrial transactions, is relatively of modern invention. Its origin is to be found in the mutual agreements among merchants of the Italian cities in the early middle ages engaged in common shipping ventures for distributing among the mutual contractors, the loss falling upon any one by reason of the perils of navigation. It is thus apparent that in its early forms, the law of insurance was derived from the maritime law and, as such, was part of the general law merchant, and international in its character. 2

(3) Development of insurance in England. — F r o m Italy, the practice of insuring commercial ventures against disaster rapidly extended to other maritime States of Europe. The Italian merchants coming from the flourishing commercial centers in Northern Italy, and generally known as Lombards, founded trading houses in London in the twelfth century and brought with them the custom of insuring against hazards of trade. All questions of insurance, however, were determined in accordance with the customs of merchants, and by merchant courts, or rather,

A m o n g the R o m a n s , several different forms of such societies, k n o w n as Collegia, were developed, and b e c a m e of sufficient i m p o r t a n c e u n d e r the E m p i r e to attract strict regulatory legislation. They performed m a n y of the functions of the m o d e r n m u t u a l benefit society, providing primarily funeral rites for the dead, but also aid for sick and a g e d members. A still extant copy of the by-laws of one of these R o m a n societies contains such familiar provisions as that the m e m b e r forfeits all rights to benefits by failure to pay dues or by committing suicide, a n d an earnest injunction to the m e m b e r s to read the by-laws and thus avoid lawsuits. F r o m the R o m a n Collegia probably developed the medieval guilds, which flourished throughout E u r o p e a n d undoubtedly a s s u m e d to their m e m b e r s m a n y obligations which we should n o w class as life, accident, or health insurance contracts. Some of them even w e n t so far as to provide indemnity for losses by fire and shipwreck, from the death of cattle, a n d from theft. (Vance, op. cit., pp. 8-10.) 2

F r o m the twelfth to the sixteenth centuries, the Italian republics of Venice, Florence, and Genoa flourished greatly by reason of their extensive maritime c o m m e r c e , and it w a s a m o n g these Italian merchants that the contract of insurance first received that attention which the manifest benefits to be derived from its use would justify. Insurances w e r e certainly effected as early as the beginning of the thirteenth century, a n d possibly in the tenth century. The earliest policy form k n o w n to be extant w a s written in Genoa in 1347, and a statutory form was prescribed in Florence in 1523. F r o m Italy, the c u s t o m of making mutual contracts of insurance spread rapidly o v e r the whole of c o m m e r c i a l E u r o p e , a n d early c a m e to be practiced extensively by the merchants in the towns forming the Hanseatic League. The word "policy" is a m o n u m e n t to the Italian origin of insurance, being derived from the Italian word "poliza." (ibid., pp. 10-11.)

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the custom of submitting all contracts involving mercantile rights to courts of merchants established among themselves. It was not until the middle of the eighteenth century that the c o m m o n law courts of England began to take adequate cognizance of insurance cases with the passage in 1601 of the first English Insurance Act by which a special court was established for the trial of marine insurance controversies. In 1756, with the appointment of Lord Mansfield as Chief Justice of the Court of King's Bench, there came a new era in the c o m m o n law with reference to questions involving the law merchant. In the skillful hands of this great judge who is properly called the "Father of English Commercial Law," the essential principles of the law merchant were incorporated into the common-law system of England and the common-law courts thereby rendered competent to determine all questions involving insurance. 3

(4) Development of insurance in the United States. — In general, the development of the several kinds of insurance has followed the same lines in the United States as in England. However, the insurance industry of the United States has grown to such an extent that with the exception of ocean marine insurance, the English practices and the English decisions have little influence on insurance in the United States, (see Vance, The L a w of Insurance [3rd Ed.], pp. 7-22.) (5) Development of insurance in the Philippines. — Insurance in the Philippines is rather a young institution. Prior to the 3

K n o w n to h a v e triggered the early development of insurance is Lloyd's of London (referred to as the international insurance market). It began as a 17th century coffeehouse catering to merchants, vessel owners, bankers and the first underwriters. It is known that Lloyd's Coffeehouse, an inn kept by one E d w a r d Lloyd on Tower Street in London, was, as early as 1688, a popular resort for seafaring m e n and merchants engaged in foreign trade. It b e c a m e the custom a m o n g those w h o gathered at Lloyd's to m a k e their gathering an occasion for arranging their mutual contracts of insurance against the sea perils to which their ventures were exposed. The method employed in making such insurance contracts was for the person desiring the insurance to pass around a m o n g the company assembled a slip upon which was written a description of the vessel and its cargo, with the n a m e of the master and the character of his crew, and the v o y a g e contemplated. Those desiring to become insurers of the ventures so described would write beneath the description on this slip their names or initials, and opposite thereto the amount which each w a s willing to shoulder. The term "underwriter" was believed to have originated from such a practice, (ibid., pp. 17-18.)

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19th century, insurance, in its modern sense, did not even exist. During the pre-Spanish times, when the political unit was then the family, if a member of the family died or suffered any other misfortune, it was borne by the family. When communities, such as the barangays developed, the assistance was extended accordingly. Even now, this practice of furnishing some form of assistance to bereaved members of the family of someone w h o dies still exists. Eventually, mutual benefit societies and fraternal associations were organized for the purpose of rendering assistance, in money or in kind, to their members. It m a y be that what worked much against the early development of insurance in the Philippines, aside from economic reasons (low per capita income of the people), was the fatalistic philosophy behind our oft-quoted expression 'bahala na.' Insurance, in its present concept, was first introduced in the Philippines sometime in 1829 when Lloyd's of London appointed Stracham, Murray & Co., Inc. as its representative here. Sometime in 1939, the Union Insurance Society of Canton appointed Russel & Sturgis as its agent in Manila. The business transacted in the Philippines then was limited to non-life insurance. It w a s only in 1898 that life insurance was introduced in this country with the entry of Sun Life Assurance of Canada in the local insurance market. The first domestic non-life insurance company, the Yek Tong Lin Fire and Marine Insurance Company, w a s organized on June 8, 1906, while the first domestic life insurance company, the Insular Life Assurance Co., Ltd., was organized in 1910. ("Supervision and Regulation of the Insurance Business in the Philippines," Journal of the IBP, First Quarter, 1976, p. 21, by Comm. G. CruzArnaldo) In 1950, reinsurance w a s introduced with Reinsurance Company of the Orient writing treaties for both life and non-life. The first workmen's compensation Pool was organized in 1951 as the Royal Group Incorporated. In 1949, a government agency was formed to handle insurance affairs. The Insular Treasurer was appointed Commissioner ex-officio. Social insurance was established in 1936 with the enactment of C.A. No. 186 which created the Government Service Insurance System (GSIS) which started operations in 1937. The Act covers

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government employees. It was followed m u c h later in 1954 by R.A. No. 1161 which provides for the organization of the Social Security System (SSS) covering employees of the private sector.

Sources of insurance law in the Philippines. (1) During the Spanish period, all of the provisions concerning insurance in the Philippines were found in Title VII of Book Two and Section III of Title III of Book Three of the Code of Commerce, and in Chapters II and IV of Title XII of Book Four of the old Civil Code of 1889. (2) W h e n Act No. 2427 (enacted on December 11, 1914.), otherwise known as the Insurance Act, took effect on July 1, 1915 during the American regime, the provisions of the Code of C o m m e r c e on insurance were expressly repealed. (3) Thereafter when R.A. No. 386, otherwise known as the Civil Code of the Philippines, took effect on August 30, 1950 (Lara vs. del Rosario, 94 Phil. 778 [1954].), those provisions of the old Civil Code on insurance (Arts. 1791-1797 and 1802-1808.) were also expressly repealed. (4) Presidential Decree No. 612, as amended, which ordained and instituted the Insurance Code of the Philippines, was promulgated and became effective on December 1 8 , 1 9 7 4 during the period of martial law. It repealed Act No. 2427, as amended. Before Presidential Decree No. 612, amendments to the Act were m a d e by Presidential Decrees No. 6 3 , 1 2 3 , and 317. (5) Presidential Decree No. 1460 consolidated all insurance laws into a single code known as the Insurance Code of 1978 which was issued and took effect on June 11, 1978. Basically, it reenacted Presidential Decree No. 612, as amended. It has been amended by Presidential Decree No. 1814 and Batas Pambansa Big. 874.

Laws governing insurance. (1) Insurance Code of 1978. — The law on insurance is contained now in the Insurance Code of 1978 (Pres. Decree No. 1460, as amended.) and special laws (infra.) and partly, in the pertinent provisions of the Civil Code.

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The Insurance Code primarily governs the different types of insurance contracts and those engaged in insurance business in the Philippines. It took effect on June 11, 1978, the date of its promulgation "without prejudice, however, to the effectivity dates of the various laws, decrees and executive orders which have so far amended the provisions of the Insurance Code of the Philippines. (Presidential Decree No. 612.)" (2) Civil Code. — The provisions of the Civil Code dealing on insurance are found in Articles 739 and 2012 (on void donations), Article 2011 (on the applicability of the Civil Code), Articles 2021-2027 (with respect to life annuity contracts), Article 2186 (on compulsory motor vehicle liability insurance), and Article 2207 (on the insurer's right of subrogation). The Civil Code, in the Title on Damages, provides for the insurer's right of subrogation as follows: "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 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." In other words, insurance contracts are governed primarily by the Insurance Code but if it does not specifically provide for a particular matter in question, the provisions of the Civil C o d e on contracts and other special laws shall govern. (3) Special laws. — Article 2011 of the Civil Code provides: "The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be regulated by this Code." Among such special laws on insurance are: (a) The Insurance Code of 1978 (Pres. Decree No. 1460.); (b) The Revised Government Service Insurance Act of 1977 (Pres. Decree No. 1146, as amended.), with respect to insurance of government employees; and

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(c) The Social Security Act of 1954 (R.A. No. 1161, as amended.), with respect to insurance of employees in private employment. (4) Others. — Insofar as the Civil Code is concerned, the Code of C o m m e r c e is considered a special law. (a) In addition, there is R.A. No. 656 (as amended by Pres. Decree No. 245.), known as the "Property Insurance Law," dealing with government property. (b) There is also R.A. No. 4898 (as amended by R.A. No. 5756.) providing life, disability and accident insurance coverage to barangay officials. (c) Executive Order No. 250 (July 25, 1987) increases, integrates and rationalizes the insurance benefits of barangay officials under R.A. No. 4898 and members of Sangguniang Panlalawigan, Sangguniang Panlungsod, and Sangguniang Bayan under Presidential Decree No. 1147. The insurance benefits are extended by the Government Service Insurance System. 4

(d) R.A. No. 3591 (as amended.) establishes the Philippine Deposit Insurance Corporation which insures the deposits of all banks which are entitled to the benefits of insurance under the Act. Right of subrogation of insurer to rights of insured against wrongdoer. (1) Basis of right. — The doctrine of subrogation is basically a process of legal substitution; the insurer, after paying the amount covered by the insurance policy, stepping into the shoes of the

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"Sec. 522. Insurance Coverage. — The Government Service Insurance System (GSIS) shall establish and administer an appropriate system under which the punong barangay, the m e m b e r s of the sangguniang barangay, the barangay secretary, the barangay treasurer, and the m e m b e r s of the barangay tanod shall enjoy insurance coverage as provided in this C o d e and other pertinent laws. F o r this purpose, the GSIS is hereby directed to undertake an actuarial study, issue rules and regulations, determine the premiums payable and reco m m e n d to Congress the a m o u n t of appropriations needed to support the system. The amount needed for the implementation of the said insurance system shall be included in the annual "General Appropriations Act." (Local Government Code [R.A. No. 7160], effective Jan. 1,1992.)

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insured, as it were, and availing himself of the latter's rights that exist against the wrongdoer at the time of the loss. It 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 and good conscience ought to pay. (Phil. American General Insurance Co., Inc. vs. Court of Appeals, 273 SCRA 262 [1997]; Delsan Transport Lines, Inc. vs. Court of Appeals, 369 SCRA 24 [2001].) 5

(2) Purposes of subrogation condition in policy. — Its principal purpose is to make the person who caused the loss, legally responsible for it and at the same time prevent the insured from receiving a double recovery from the wrongdoer and the insurer. The insurer is entitled to recover either directly in a suit against the wrongdoer (third party) or as the real party in interest in a suit brought by the insured and thereby fully recover or at least lessen the amount of loss it m a y have paid the insured. The rule likewise prevents tortfeasors from being free from liabilities and is thus founded on considerations of public policy. There exists a wealth of U.S. jurisprudence that whenever the wrongdoer settles with the insured without the consent of the insurer and with knowledge of the insurer's payment and right of subrogation, such right is not defeated by the settlement. (Danza's Corporation vs. Abrogar, 4 7 8 SCRA 80 [2006].) (3) Right of subrogation applicable only to property insurance. — The right of subrogation under Article 2 2 0 7 applies only to property, and not to life insurance. The value of h u m a n life is regarded as unlimited and, therefore, no recovery from a third party can be deemed adequate to compensate the insured's beneficiary. The pecuniary value of a h u m a n life to the beneficiary of a life insurance policy can seldom be determined with accuracy (except where the insurance is taken by a creditor on the life of a debtor to secure a debt). Life insurance contracts are not ordinarily contracts of indemnity, (see Chap. II, Title 2.) (4) Privity of contract or assignment by insured of claim not essential. — Payment by the insurer to the insured operates as

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F o r additional discussion, see annotations u n d e r Section 2 4 3 .

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an equitable assignment to the former of all the remedies which the latter m a y 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 written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer, (see Pan Malayan Insurance Corp. vs. Court of Appeals, 184 SCRA 54 [1990]; Phil. American General Insurance Co., Inc. vs. Court of Appeals, supra; Aboitiz Shipping Corp. vs. Insurance Company of South America, 561 SCRA 262 [2008].) The presentation in evidence of the insurance policy is not indispensable before the insurer m a y recover. The subrogation receipt, by itself, is sufficient to establish not only the relationship of the insurer and the insured, but also the amount paid to settle the insurance. (Delsan Transport Lines, Inc. vs. Court of Appeals, supra; Federal Express Corporation vs. American H o m e Assurance Company, 437 SCRA 50 [2004].) (5) Loss or injury for risk must be covered by the policy. — Under Article 2207, the cause of the loss or injury must be a risk covered by the policy to entitle the insurer to subrogation. Thus, where the insurer pays the insured for a loss which is not a risk covered by the policy, thereby effecting 'Voluntary p a y m e n t / ' the insurer has no right of subrogation against the third party liable for the loss. Nevertheless, the insurer may recover from the third party responsible for the d a m a g e to the insured property under Article 1236 of the Civil Code. (Sveriges Anfartygs Assurance Forening vs. Qua Chee Gan, 21 SCRA 12 [1967]; see also St. Paul Fire & Marine Insurance Co. vs. Macondray & Co., Inc., 70 SCRA 122 [1976]; Fireman's Fund Ins. Co. & Firestone Tire & Rubber Co. vs. Jamila, Inc., 70 SCRA 23 [1976].) (6) Right of insured to recover from both insurer and third party. — The right of subrogation given to the insurer prevents the insured from obtaining more than the amount of his loss. It is a method of implementing the principle of indemnity that is at the heart of all insurance, (see Sec. 18.) The right exists after indemnity has been paid by the insurer to the insured who can no longer go after the third party. He can only recover once. Note, however, that if the amount paid by the insurance company does not fully

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cover the injury or loss, it is the aggrieved party, i.e., the insured, not the insurer, who is entitled to recover the deficiency from the person responsible for the loss or injury, (see F.F. Cruz & Co., Inc. vs. Court of Appeals, 164 SCRA 731 [1988].) This is true in case of under-insurance. (7) Right of insured to recover from insurer instead of the third party. — The insurer cannot defeat the insured's claim for indemnity on the ground that the insured has a right to be indemnified by a third person. Having been paid a premium to make good the insured's loss, the insurer cannot compel him to seek indemnity elsewhere. (8) Right of insurer against third party limited to amount recoverable from latter by the insured. — The literal language of Article 2207 makes it clear that the insurance company that has paid indemnity "shall be subrogated to the rights of the insured against the wrongdoer or the person w h o has violated the contract." As the insurer is subrogated merely to the rights of the insured, it can necessarily recover only the amount recoverable by the insured from the party responsible for the loss. It cannot recover in full the amount it paid to the insured if it is greater than that to which the insured could lawfully lay claim against the person causing the loss. (Rizal Surety & Insurance Co. vs. Manila Railroad Co., 23 SCRA 205 [1968].) 6

By w a y of illustration, if what the insured can recover under the law from the party w h o is guilty of breach of contract is P5,000.00, then it is only said amount that is recoverable by the insurer from said party, notwithstanding that it paid the insured more than P5,000.00. Neither can the insurer recover m o r e than it paid the insured although the latter is able to recover the deficiency from the wrongdoer because of under-insurance. (see No. 5.) (9) Exercise of right of subrogation by insurer discretionary. — Whether or not the insurer should exercise the rights of the insured to which it had been subrogated lies solely within the

S e e , however, the case of C e b u Shipyard and Engineering Works, Inc. vs. William Lines, Inc., (306 SCRA 762 [1999]) given u n d e r Section 2 4 3 .

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former's sound discretion. Since its identity is not of record, it has to claim its right to reimbursement of the amount paid to the insured. (F.F. Cruz & Co., Inc. vs. Court of Appeals, supra.) (10) Loss of right of subrogation by act of insured or insurer. — The right of subrogation has its limitations to wit: (a) both the insurer (of goods covered by a a bill of lading), and the consignee are bound by the contractual stipulations under the bill of lading; and (b) the insurer can be subrogated only to the rights as the insured m a y have against the wrongdoer. Should the insured, after receiving payment from the insurer, release by his own act the wrongdoer or third party responsible for the loss or d a m a g e from liability, the insurer loses his rights against the wrongdoer since the insurer can be subrogated to only such rights as the insured m a y have. For defeating the insurer's right of subrogation, the insured is under obligation to return to the insurer the amount paid thereby entitling the latter to recover the same. Under Article 2207, the insurer is the real party-in-interest with regard to the portion of the indemnity paid for he is deemed subrogated to the rights of the insured with respect thereto. (Manila Mahogany Manufacturing Corp. vs. Court of Appeals, 154 SCRA 650 [1987]; Pioneer Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668 [1989]; Aboitiz Shipping Corp. vs. Insurance C o m p a n y of South America, supra.) Similarly, where the insurer pays the insured the value of the lost goods without notifying the carrier who has in good faith settled the claim for loss of the insured, the settlement is binding on both the insured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation, (see Pan Malayan Insurance Corp. vs. Court of Appeals, supra.) (11) Effect of assignment by insured of its rights against third party to insurer. — Where the insured (shipper/consignee of goods) has assigned its rights against defendant (carrier of goods) for damages caused to the cargo shipped to the insurer which paid the amount represented by the loss, the case is not between the insured and the insurer but one between the shipper and the carrier because the insurance company merely stepped into the shoes of the shipper. And if the shipper has a direct cause of action against the carrier on account of the damage to

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cargo, such action can be asserted or availed of by the insurer as a subrogee of the insured and the carrier cannot set up as a defense any defect in the insurance policy because it is not a privy to it. (Compania Maritima vs. Insurance Co. of North America, 12 SCRA 213 [1964].)

Applicability of the Civil Code. Article 2011 (supra.) of the Civil Code means that if the Insurance Code does not specifically provide for a particular matter in question, the provisions of the Civil Code regarding contracts shall govern. (Musngi vs. West Coast Life Insurance Co., 61 Phil. 864 [1935].) In other words, insurance contracts are governed primarily by the Insurance Code and subsidiarily, by the Civil Code, (see Art. 18, Civil Code; see also Sec. 422. ) 7

Accordingly, our Supreme Court has held that: (1) Where the insurance company's consent to the policy was vitiated by error (see Arts. 1 3 3 0 , 1 3 3 1 , Civil Code.), such fact m a y give rise to the nullity of the contract (Lucero Vda. de Sindayen vs. Insular Life Assurance Co., 62 Phil. 9 [1935].); (2) The contract for a life annuity was not perfected where the acceptance of the application by the h o m e office of the insurer (see Art. 1319, par. 2, Civil Code.) never c a m e to the knowledge of the applicant who died (Enriquez vs. Sun Life Assur. Co. of Canada, 41 Phil. 209 [1920].); (3) An insurance contract is null and void where the consideration is false or fraudulent (see Art. 1353, Civil Code; Musngi vs. West Coast Life Insurance Co., supra.); (4) Since the Insurance Act (now The Insurance Code) has no provision regarding the amount of recovery in case of rescission (see Sec. 74.), the rule found in the Civil Code which imposes the obligation of mutual restitution (see Art. 1385, Civil Code.) should apply (Filipinas Compania de Seguros vs. Nava, 17 SCRA 210 [1966].); (5) A common-law wife is disqualified from becoming the beneficiary of the insured in view of the prohibition in Article 2012 in relation to Article 739 of the Civil Code and the absence U n l e s s otherwise indicated, refers to Section in Insurance C o d e .

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of any specific provision in the Insurance Code on the matter (The Insular Life Assur. Co. vs. Ebrado, 80 SCRA 181 [1977]; see Sees. 10, 53.); and (6) The award of moral and exemplary damages in case of unreasonable delay in the payment of insurance claims (see Sec. 244.), shall be governed by the rules under the Civil Code. (Zenith Insurance Corporation vs. Court of Appeals, 185 SCRA 398 [1990].) Construction of the Insurance Code. The construction of the Insurance Code means its interpretation and this is allowed only if its provisions are not clear. (1) It is a settled rule of statutory construction that when a statute has been adopted from some other state or country and said statute has previously been construed by the courts of such state or country, the statute is usually deemed to have been adopted with the construction so given. (Cerezo vs. Atlantic Gulf & Pacific Co., 33 Phil. 425 [1916].) Thus, it has been held that since Act No. 2727, the former Insurance Act (with the exception of Chapter V [which deals with insurance companies and agents] thereof which was allegedly taken largely from the law of New York), was taken verbatim from the law of California, the courts should follow in fundamental points, at least, the construction placed by California courts on California law. (Ang Giok Chip vs. Springfield Fire & Marine Ins. Co., 58 Phil. 378 [1933].) The present Insurance Code is based principally upon Act No. 2427, as amended. (2) The rules enunciated by the best considered American authorities involving similar provisions of the Philippine law on insurance should be adopted for the purpose of having our law on insurance conform as nearly as possible to the modern law of insurance as found in the United States proper. (Gercio vs. Sun Life Assur. Co., 48 Phil. 53 [1925]; Constantino vs. Asia Life Ins. Co., 87 Phil. 248 [1950].) Sec. 2. Wherever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires:

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(1) 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. 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. (2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of this Code, shall include: (a) making or proposing to make, as insurer, any insurance contract; (b) 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; (c) 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; (d) 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. (3) As used in this Code, the term "Commissioner" means the "Insurance Commissioner." (a)* Legal concept of insurance. (1) Insurance is a type of contract. Section 2 contains the statutory definition of the contract of insurance and the acts any of which will constitute "doing an insurance business" or "transacting an insurance business." The term "assurance" is also used instead of "insurance" although the former is seldom employed. Many modern writers *Signifies that former provision in Insurance Act (Act N o . 2 4 2 7 . ) has been a m e n d e d .

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use "assurance" instead of "insurance" to describe the life insurance business, the former referring to an event like death, which must happen, and the latter, to a contingent event which m a y or m a y not occur. As used in the Code, the term "insurance" covers "assurance." The definition of the law is subject to criticism. For instance, it does not include life insurance which is a contract upon condition rather than to indemnify for no recovery can fully repay a beneficiary for loss of life which is beyond pecuniary value, (see Chap. II, Title 5.) (2) A better definition would be that, a contract of insurance is an agreement by which one party (insurer) for a consideration (premium) paid by the other party (insured), promises to pay money or its equivalent or to do some act valuable to the latter (or his nominee), upon the happening of a loss, damage, liability, or disability arising from an unknown or contingent event, (see Vance, op. cit., p. 83.) In general, an insurance contract is a promise by one person to pay another, money or any other thing of value upon the happening of a fortuitous event beyond the effective control of either party in which the promisee has an interest apart from the contract. (Edwin W. Patterson, Essentials of Insurance Law, p. 10, 1957 Ed., published by McGraw-Hill Book Co., Inc.) In insurance, the insurer, for a stipulated consideration, undertakes to compensate the insured for a future loss, damage or liability on a specified subject caused by a specified event or peril. (Sec. 3[g].) A written insurance contract is called a policy, (see Sec. 49.)

Definition of insurance from other viewpoints. A definition of insurance may be made from several viewpoints: (1) Economic. — In this sense, insurance is a method which reduces risk by a transfer and combination (or "pooling") of uncertainty in regard to financial loss; (2) Business. — As a business institution, it has been defined as a plan by which large numbers of people associate themselves

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and transfer to the shoulders of all, risks that attach to individuals. Insurance may also be looked upon as an important part of the financial world, where insurance serves as a basis for credit and a mechanism for savings and investments; (3) Mathematical. — In this sense, insurance is the application of certain actuarial (insurance mathematics) principles (see David L. Bickelhaupt, General Insurance, 1974 Ed., pp. 2931, published by Richard D. Irwin, Inc., Homewood, Illinois, 60430.) to calculate the chance of loss, (see Note 10.) Thus, in life insurance, the principles of probability are applied to statistical results of past experience represented by a mortality table. By way of illustration, suppose the mortality table shows that out of 10,000 lives, on the average, 10 die per year, the probability of death is, therefore, 1 / 1 0 0 0 or 0.001; and (4) Social. — In this sense, insurance has been defined as a social device whereby the uncertain risks of individuals m a y be combined in a group and thus m a d e more certain, with small periodic contributions by the individuals providing a fund out of which those who suffer losses m a y be reimbursed. (Robert Riegel, Jerome S. Miller, and C. Arthur Williams, Jr., Insurance Principles and Practices, p. 15, 1976 ed., published by Prentice-Hall, Inc., Englewood Cliffs, N e w Jersey.) In other words, it is a plan by which the losses of the few are paid out of the contributions of all members of a group.

Determination of the existence of the contract. (1) Nature of the contract. — The character of insurance is to be determined by the exact nature of the contract actually entered into whatever the form it takes or by whatever n a m e it may be called. Thus, it was held that an agreement entered into by a corporation, even though it was called a surety company, to indemnify for a valuable consideration another against loss by reason of uncollectible debts, was a contract of insurance and not a contract of guaranty. (Tebbets vs. Guarantee Co., 73 F. 95.) Under the Code, a contract of suretyship shall be deemed an insurance contract "if made by a surety who or which as such, is doing an insurance business," within the meaning of the Code.

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But strictly speaking, a contract of suretyship is entirely different from a contract of insurance, (see Chap. 11, Title 4; also Sees. 185, 200[2, b, d].) (2) Elements of the contract. — In determining the existence of a contract of insurance, it is important to consider the following: (a) Subject matter. — This refers to the thing insured. In fire insurance and in marine insurance, the thing insured is property; in life, health or accident insurance, it is the life or health of the person that is the subject of the contract; in casualty insurance, it is the insured's risk of loss or liability; and (b) Consideration. — The consideration for an insurance contract is the premium paid by the insured, (see Sec. 77.) Its amount is principally based on the probability of loss and extent of liability for which the insurer m a y become liable under the contract. (c) Object and purpose. — Basically, a contract of insurance is a risk-bearing contract. The principal object and purpose of insurance is the transfer and distribution of risk of loss, damage, or liability arising from an unknown or contingent event through the payment of a consideration by the insured to the insurer under a legally binding contract to reimburse the insured for losses suffered on the happening of the stipulated event. Nature and characteristics of an insurance contract. Broadly speaking, a contract of insurance has the following characteristics: (1) It is consensual because it is perfected by the meeting of the minds of the parties, (see Art. 1319, Civil Code.) So, if an application for insurance has not been either accepted or rejected, there is no contract as yet. (see Sees. 49-50.) (2) It is voluntary in the sense that it is not compulsory and the parties may incorporate such terms and conditions as they may deem convenient (see Art. 1306, ibid.) which will be binding (see Art. 1308, ibid.) provided they do not contravene any provision

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of law and are not opposed to public policy, (see Art. 1306, ibid.) It is governed by the rules which govern other contracts. (a) Although the contract of insurance is generally a voluntary contact, the carrying of insurance, particularly liability insurance, may be required by law in certain instances such as for motor vehicles (Sees. 373-389.), or employees (Arts. 168-184, Labor Code.), or as a condition to granting a license to conduct a business or calling affecting the public safety or welfare. (43 Am. Jur. 2d. 64.) (b) An insurance may arise by operation of law. By w a y of example, the War Damage Corporation Act (Sec. 5[g], Public Law 506, 77th Congress of the U.S.) m a y be given. It provides for the payment of compensation "by the War D a m a g e Corporation without requiring a contract of insurance or the payment of premium or other charge x x x as if a policy x x x was in fact in force at the time of the loss or damage." Section 5(g), according to the Supreme Court, "leaves no room for doubt about the intent of the Congress of the United States to establish, between the War D a m a g e Corporation and the owner of the property, lost or damaged, a relation identical to that existing between the insurer and the insured under a contract of insurance/' (Comm. of Internal Revenue vs. Asturias Sugar Central, Inc., 2 SCRA 1140 [1961].) 8

Social insurance (infra.) for members of the Government Service Insurance System and for employees of the private sector covered by the Social Security System (supra.) is also established by law. (3) It is aleatory in the sense that it depends upon some contingent event. But it is not a contract of chance (see Sec. 4.) although the event against the occurrence of which it is intended to provide may never occur. "By an aleatory contract, one of the 9

8

In the Philippines, the p a y m e n t of loss or d a m a g e to p r o p e r t y during the war, resulting from enemy attack or in the furtherance of the resistance m o v e m e n t , w a s m a d e through the Philippine W a r D a m a g e Commission. This basic feature distinguishes an insurance contract from other contracts (called commutative) that are presumed to represent even exchanges. The b u y e r of groceries or clothing or a television set pays about what the g o o d s are worth, and he gets immediate delivery of them, so that he is ordinarily able to tell right a w a y w h e t h e r he is getting his 9

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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/' (Art. 2010, Civil Code.) In insurance, each party must take a risk; the insurer, that of being compelled upon the happening of the contingency, to pay the entire sum agreed upon and the insured, that of parting with the amount required as premium without receiving anything therefor in case the contingency does not happen except what is ordinarily termed "protection" which is itself is a valuable consideration. (Vance, op. ext., p. 93.) (4) It is executed as to the insured after the payment of the premium, and executory on the part of the insurer in the sense that it is not executed until payment for a loss. In other words, it is a unilateral contract imposing legal duties only on the insurer w h o promises to indemnify in case of loss. The contract contemplates the payment of the premium as condition precedent to the inception of the contract but the insured usually assumes no duty to pay subsequent premiums enforceable at the suit of the insurer unless the latter has continued the insurance after maturity of the premium, in consideration of the insured's express or implied promise to pay. But he has a right to pay the stipulated premium and the insurer is under a duty to accept the payment when tendered. Of course, the insurer may not be liable if the insured fails to pay the premiums. In such a case, the insurance usually lapses, (see ibid., pp. 94, 300.) (5) It is conditional because it is subject to conditions the principal one of which is the happening of the event insured against. In addition to this main condition, the contract usually includes many other conditions (such as payment of premium or performance of some other act) which must be complied with as precedent to the right of the insured to claim benefit under it.

money's worth, (see E.W. Patterson, op. cit., pp. 2-3.) Insurance contracts, however, are aleatory in nature which m e a n s that they m a y involve the exchange of widely varying values for it is of the essence of insurance that no one knows how the risk insured against will happen. Thus, an insurer m a y be liable to pay the full amount insured under life policies of which only very few premiums have been paid.

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(6) It is a contract of indemnity (except life and accident insurance where the result is death) because the promise of the insurer is to make good only the loss of the insured, (see Sec. 18.) Any contract that contemplates a possible gain to the insured by the happening of the event upon which the liability of the insurer becomes fixed is contrary to the proper nature of insurance. Hence, no person m a y secure insurance upon property in which he has no interest. (Vance, op. cit., p. 101.) If the insured has no insurable interest, the contract is void and unenforceable (see Sees. 18-19.) as being contrary to public policy because it affords a temptation to the insured to wish or bring about the happening of the loss. (7) It is a personal contract, each party having in view the character, credit and conduct of the other. (Vance, op. cit., p. 96.) (a) As a rule, the insured cannot assign, before the happening of the loss, his rights under a property policy to others without the consent of the insurer, (see Sec. 83.) Consequently, the obligation of the insurer to pay does not attach to or run with the property whether it be real property or personal. It follows that if a person whose property is insured sells it to another, the buyer cannot be his successor in the contract of insurance unless, of course, the sale is with the consent of the insurer or unless by express stipulation of the parties, the contract is m a d e to run with the property to the transferee, (see Sees. 20, 57, 58.) Thus, where the insurance is "on account of the owner," or "for w h o m it m a y concern," or where "the loss is payable to bearer," the subsequent transferees or owners become by the terms of the contract, the real parties to the contract of insurance. Such contracts, by which the insurance is m a d e to pass from owner to owner, are of the nature of successive novations, (see Art. 1292, Civil Code.) (b) Regardless of how they are categorized {infra.), all insurance contracts share a c o m m o n trait of "personalness." 1) The category of personal insurance, which includes life, health, accident, and disability insurance, is

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plainly "personal": the insurance applies only to a particular individual, and it is not possible, for example, for the insured unilaterally declaring that his health insurance policy shall now be deemed to cover the health of someone else. 2) Liability insurance is also personal in the same sense: each person purchases coverage for his own (or a group of related persons) potential liability to others. The insurer prices the coverage depending on the characteristics and traits of the particular insured. 3) Property insurance is also "personal' in this limited sense. The insurance is on the insured's interest in the property, not on the property itself. It is the damage to the personal interest not the property that is being reimbursed under a policy of property insurance (R.H. Jerry, II, Understanding Insurance Law, pp. 2 6 5 - 2 6 6 , 1 9 8 7 ed., published by Mathew Bender & Co., Inc., N e w York.) (c) Life insurance policies, however, are generally assignable or transferable (see Sec. 181.) as they are in the nature of property and do not represent a personal agreement between insured and insurer. (8) Since an insurance is a contract, as such, it is property in legal contemplation. But unlike property policies, life insurance policies are generally assignable or transferable like any "chose in action." (see Sec. 181.) They are in the nature of property and do not represent a personal agreement between the insurer and the insured. Distinguishing elements of the contract of insurance. The contract of insurance made between the parties usually called the insured and the insurer, is distinguished by the presence of five elements, namely: (1) The insured possesses an interest of some kind susceptible of pecuniary estimation, known as "insurable interest"; (2) The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils;

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(3) The insurer assumes that risk of loss;

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(4) Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing a similar risk; and (5) As consideration for the insurer's promise, the insured makes a ratable contribution called "premium," to a general insurance fund, (see Vance, op. cit. pp. 1-2.) t

All the elements must be present, otherwise there can be no contract of insurance, and even if the contract contains all the elements, it is not an insurance contract within the context of the Insurance Code if the primary purpose of the parties is the rendering of service and not the indemnification of a party for loss, damage, or liability incurred by the latter. Insurance, a risk-distributing device. A contract possessing only the first three elements n a m e d above is a risk-shifting device, but not a contract of insurance which is fundamentally a risk-distributing {risk-sharing or risk-policy) device. Thus, in a contract of guaranty, an interest possessed by the creditor (which is the payment of the debt) is exposed to impairment by the happening of contingent events such as the insolvency of the principal debtor, and the risk of the creditor is merely assumed by the guarantor. (1) Equitably distributes losses out of a general fund contributed by all. — The device of insurance serves to distribute the risk of 10

T h e insurance company, however, by using the science of probability a n d the law of large numbers (sometimes referred to as the law of averages or the law of probabilities c a n predict with considerable a c c u r a c y the n u m b e r of insureds to similar risks w h o will incur losses during a specified period and the extent of such losses. As a result, the a m o u n t s of p r e m i u m can be calculated such that the i n c o m e therefrom should be just e n o u g h to meet expected losses incurred by that group, together with expenses, taxes a n d a reasonable profit but low enough to m a k e the insurance saleable. Thus, the risk a s s u m e d by the insurance c o m p a n y is reduced to a m i n i m u m . The probability that the prediction of total losses will not be t h r o w n off by an unexpected n u m b e r of losses, increases as the n u m b e r of similar insurance policies issued increases. In other words, w h e n the n u m b e r of similar independent risks is increased, the relative a c c u r a c y of predictions about future losses is also increased. It is impossible to predict individual losses but the insurer c a n predict certain "averages" w h e n a large number of similar policies are considered. If the n u m b e r of policies sold does not reach the safe point, the insurance c o m p a n y can reinsure its risks with another.

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economic loss among as m a n y as possible of those w h o are subject to the same kind of risk. By paying a pre-determined amount (premium) into a general fund out of which payment will be m a d e for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any m e m b e r of the group. (2) Provides protection against absorbing one's losses alone. — The member has no w a y of knowing in advance whether he will receive compensation more than he contributes or whether he will merely be paying for the losses of others in the group; but his primary goal is to exchange the gamble of doing it alone, whereby he could either escape all losses whatsoever or, suffer a loss that might be devastating, for the opportunity to pay a fixed and certain amount into the fund, knowing that the amount is the m a x i m u m he will lose on account of the particular type of risk insured against. This broad sharing of economic risk is the principle of risk-distribution. (J.F. Dobbyn, Insurance L a w in a Nutshell, 1989 ed., published by West Publishing Co., St. Paul, Minn.) 11

All contracts, either expressly or implicitly, transfer risk in one w a y or another. If a contract possesses the five elements mentioned, principally, the allocation or pooling of risks, it is a contract of insurance, whatever be its name or form, as distinguished from contracts that transfer risk but do not constitute insurance. EXAMPLE: If the parties agree that A will purchase B's house on a condition that A is able to obtain financing, B bears the risk that financing will be available to A. If financing is unavailable to A, A has no duty to buy the house. In the absence of such a condition, A bears the risk that financing will not be available, because A would still be obligated to buy the house even if he does not obtain financing.

"To ensure p a y m e n t for whatever losses that may occur due to the exposure to the peril insured against, the law mandates all insurance companies to maintain a legal reserve fund in favor of those claiming under their policies, (see Sees. 210-214.)

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Although conditioning As duty to purchase the house upon the availability of suitable financing transfers risk from A to B, this does not mean that the contract between A and B is a contract of insurance. Insurance contracts have additional characteristics. In the illustration under No. (3), in discussing "the value of transferring risk" (infra.) concerning the contract between X and Y, the contract not only transferred but also distributed risk. When Y assumed X's risk of loss as well as the risk of 99 other persons, Y was able to distribute the risk across a large group of persons possessing similar risks. The characteristic of risk distribution sets insurance contracts apart from other kinds of contracts. It can be said, then, that a contract of insurance is an agreement in which one party (the insurer), in exchange for a consideration provided by the other party (the insured), assumes the other party's risk and distributes it across a group of similarly situated persons, each of whose risk has been assumed in a similar transaction. (R.H. Jerry, II, op. cit., p. 15.) By way of insurance, existing risks are distributed so that the losses resulting from them do not fall on one person or a small group of persons.

Coping with risk.

2

The inherent uncertainty of events can be described in terms of chance or probability. In insurance, the uncertainty is normally described in terms of risk. People make judgments about risk everyday. A person usually makes some sort of calculation, perhaps instinctively, before deciding to engage or not to engage in an activity. People cope with risk in various ways. (1) Limiting the probability of loss. — One w a y to attempt to manage risk is to limit the probability of loss. For example, m a n y industries utilize complex, dangerous machinery, which place the employees who use them at some risk. However, the probability that an employee will lose a finger or hand in a cutting machine is reduced if guards or other safety devices are used around the cutting device. Similarly, concrete buildings are less likely to 12

F o r additional discussion, see annotation u n d e r Section 5 1 .

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catch fire than w o o d buildings. Thus, a builder might choose to use masonry rather than wood in a given structure or install loss prevention devices (e.g., firewalls, sprinkler systems) so as to limit the probability of loss. (2) Limiting effects of loss. — Another w a y to cope with risk is to limit the effects of loss. For example, passengers in automobiles are at risk of injury through accidents. If an accident occurs and the passenger is wearing a seat belt, the passenger is less likely to suffer injury; if an injury is suffered, it is likely to be less severe. Thus, to limit the effects of an accident should it occur, many people choose to "buckle up," thereby limiting the effects of loss. Similarly, buildings are subject to a risk of fire, regardless of the construction materials used. To limit the effects of a fire should it occur, m a n y building owners install sprinkler systems. A sprinkler system will not prevent a fire, but it will limit the effect of a fire should one occur. Diversification is a particularly important w a y of limiting the effects of loss. For example, individuals who invest in the stock market expect to make money, but they are also at risk of losing money. To minimize the risk that a sharp decline in the value of one stock will decimate the investor's assets, most investors own a wide variety of the stocks. Through this strategy, losses in one stock are m u c h more likely to be offset by profits in other stocks; if fortunate, the investor will show a net profit from the total portfolio. Of course, diversification also limits the chance, or r i s k / that the investor will benefit from a sharp increase in the value of one stock. //

,

13

(3) Self-insurance. — Sometimes people cope with risk through self-insurance. For example, a restaurant owner, cognizant of the possibility that a patron may contract food poisoning, is likely to take substantial preventive measures to limit the risk of such an occurrence. After taking such steps, a remote risk nonetheless exists that a customer might be poisoned. The owner may calculate that such an event will rarely occur and may conclude

13

T h e t w o above methods of minimizing risks through preventive measures to protect the personal and financial interests of individuals and business or at least to reduce loss involve the practice of "risk management."Transferring certain risks from the insured to the insurance c o m p a n y is the most c o m m o n method of risk management.

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that if it does occur, the damages associated with the event could easily be paid from the owner's assets. Alternatively, the owner may choose to set aside a portion of each year's profits into a special or reserve fund designated to pay the loss should it occur. In either case, the owner chooses to bear or assumes the risk himself thru special funds set aside to cover the loss. This is, in effect, self-insurance or self-financing. (4) Ignoring risk. — Sometimes, after weighing potential benefits and costs of a particular activity, and after taking appropriate steps, if any, to minimize the probability or extent of loss, the individual m a y choose to engage in the activity without doing anything further with regard to the risk. Thus, some people choose to ignore risk. For example, the tightrope walker m a y purchase special shoes to reduce the risk of falling and m a y install a safety net to minimize the amount of loss should a fall occur, but if the performer proceeds with the walk, the performer has decided both to assume the risk that remains and to bear the costs of loss should the injury materialize. The performer is not self-insuring, because the performer has no assets to compensate for his loss of life, which is one of the risks. Rather, the performer is choosing to ignore the risk. (5) Transferring risk to another. — In situations where risk cannot be managed sufficiently through preventive measures or through steps that reduce the effects of loss, and where assumption of the risk is not feasible, people usually cope with risk by transferring it to someone else (see H. Jenny, III, op. cit., pp. 10-11.) by a contractual arrangement. An example of such an arrangement is a seller's warranty of goods sold. Also, a person may, by entering into a contract of insurance, relieve himself, at least in part, from the risk of loss which under the law must be borne by him, i.e., by buying insurance. This approach to coping with risk is discussed in the next topic.

The value of transferring risk. An individual's attitude toward risk is influenced by several factors, including the probability of loss, the potential magnitude of the loss, and the person's ability to absorb the loss.

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With respect to loss, people are either risk preferring, risk neutral, or risk averse. Imagine forcing several individuals to choose between a 50% chance of losing P1,000 (which computes to an "expected loss" of P500) or a certainty of losing P500. 14

(1) Some people are risk preferring. These people would choose to forego the certain loss in the hope of incurring no loss, despite the equal probability of suffering a large loss. (2) In the same situation, many people are risk neutral, that is, indifferent to the alternatives. (3) A substantial group of people are risk averse. This group would choose to lose P500 with certainty instead of confronting the 50% chance of losing twice as much. (a) As the potential magnitude of loss increases, most people become more risk averse. This is true even though the probability of loss declines. 15

EXAMPLE: When confronted with a one in 10,000 chance of losing P10,000 (an expected loss of PI) and the prospect of losing PI with certainty, many people previously indifferent would prefer to lose PI with certainty to avoid the possibility, albeit a remote one, of suffering a substantial loss. The more wealth a person has, the less likely it is that the person will be averse to risk: a multimillionaire is more likely to be indifferent toward the choice of losing PI with certainty and confronting the one-in-10,000 chance of losing P10,000. 16

1 4

A n "expected loss" is the m a g n i t u d e of the loss, should it materialize, times the probability that it will occur. Thus, if someone has a one in t w o chances of losing P500, the expected loss is P 2 5 0 . If the chance of losing P 5 0 0 is one in ten, the expected loss is P50. (ibid., p. 11.) This discussion assumes rational behavior. Sometimes people behave irrationally and ignore risk, e.g., Ray vs. Federated Guaranty Life Ins. Co., 381 So. 2d 847 (La. App. 1980), where the insured, insane and under delusion that he possessed supernatural powers, held his head u n d e r water in bathtub and drowned, (ibid., p. 11.) With respect to m o d e r a t e beneficial risks, m a n y people are risk preferring. For example, lotteries operated by state governments have been successful because large numbers of people prefer m o d e r a t e amounts of risk: when faced with the choice of retaining one dollar in the pocket and exchanging that dollar for a one-in-a-million chance of winning several thousand dollars, m a n y people are willing to trade the dollar for the small chance of winning the large prize. However, when faced with the prospect of receiving 15

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(b) When people are averse to the risk of a loss, they are usually willing to pay someone else to assume the risk. EXAMPLE: Assume that X has a one-in-100 chance of suffering a loss of P1,000 (an expected loss of P10). Since X is risk averse, X is willing to pay P15 to someone else, Y, in exchange for Y's promise to reimburse X for X's loss, should X incur it. In other words, the value to X of having the risk assumed by someone else is P15. If 99 people similarly situated to X reach the same agreement with Y, Y will receive Pl,500 (100 times P15), and Y will have to pay one person the sum of P1,000 (since if 100 people each have a one-in-100 chance of suffering the loss, the probabilities indicate that one person probably will suffer the loss). Y earns a profit of P500, which increases Y's satisfaction. Also, the satisfaction of X and each of the 99 similarly situated people is enhanced, because each of them transfers to someone else, the risk to which they were averse. In this illustration, X and the others entered into agreements with Y to transfer risk for a price. X and the others are the insured and Y is the insurer; each of the 100 insured entered into an insurance contract with Y. A market existed in which X and Y could meet, and in which X could transfer and Y could assume risk for a price. X placed a value on having the risk transferred, and X received this value when Y assumed the risk. Also, Y benefited by assuming the risk of many people similarly situated to X and by pooling these risks together, so that each individual's risk could be distributed across the pool. The P15 which Y charged X is the insurance premium. Based on the loss experience of the pool and statistical probabilities, Y knew that collecting P15 from each insured very likely would be adequate to cover the losses of all the insureds, plus provide Y a reasonable return for putting itself at risk. An insurance contract has a variety of economic implications, a few of which are discussed subsequently, (ibid., pp. 11-12.)

P 5 0 0 with certainty and a 50% c h a n c e of receiving P 1 , 0 0 0 , m a n y people w o u l d be indifferent, a n d m a n y others would be risk averse, in that they would prefer P 5 0 0 with certainty rather than face a 50% chance of getting nothing, (ibid., p. 12.)

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Economic effects of the transfer and distribution of risk. (1) Benefit to society as a whole. — The illustration above demonstrates several aspects of the economic impact of a contract of insurance. Most obviously, X completely eliminated his risk by transferring it to Y for a price. This transfer has value for X, since X desired to be free of the risk and this objective was achieved. Moreover, the transaction had value to Y, since Y, by dealing in risk on a large scale, could earn a profit. If the costs and benefits of the transaction are viewed in this way, it can be said that since the satisfaction of both parties was improved, the transaction was a desirable one; indeed, society as a whole would be better off if a large number of similar, mutually beneficial transactions would occur. (2) Undesirable side effects. — However, total elimination of risk can have undesirable side effects. If X's risk is completely eliminated through transfer to Y, X might have less incentive to take measures that prevent the loss from occurring or minimize the effect of loss once it occurs. Thus, if Y agrees to reimburse X for d a m a g e to or loss of X's personal property, X is likely to have a reduced incentive to take steps to protect his property. Consequently, the existence of insurance could have the perverse effect of increasing the probability of loss. For example, if a mechanic knows that in the event his tools are stolen the insurer will reimburse his loss in full, the mechanic m a y be less likely to suffer the inconvenience of putting his tools in a locked storage area at the end of each working day. This phenomenon is called moral hazard. (3) Problem regarding measurement of amount of risk transferred. — T h e theoretically ideal response to the problem of moral hazard would be for the insurer to monitor the insured's behavior and adjust the premium based on the extent to which the insured takes adequate steps to safeguard his property. If such measurements were possible, the insurance would be priced in exact conformity with the amount of risk being transferred to the insurer. For obvious reasons, however, monitoring the behavior of each insured is not feasible. Even if the prospect of having a third

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party constantly inquiring into one's behavior were acceptable, the administrative costs of such a system would be prohibitive. (4) Sharing by insured of some responsibility for the risk. — To deal with the moral hazard phenomenon in most insurance transactions, the insured retains some responsibility for the risk through either a deductible or coinsurance. With a deductible, the insured bears any loss up to some stated amount with the insurer bearing the rest. With coinsurance, the insured bears some stated percentage of the loss regardless of its amount, with the insurer bearing the rest. Thus, in the foregoing example, the insured has an incentive to preserve his property, since the insured will bear some portion of any loss to himself. Requiring the insured to bear a portion of the loss is not a totally satisfactory solution for the risk averse person. On balance, however, that solution is the best one. To compensate for the moral hazard phenomenon, premiums would have to be much higher if all of the insured's risks were transferred; the insured benefits in the long run by paying lower premiums while simultaneously taking some measures that prevent loss or limit its effects. (5) Problem regarding computation of premium to be charged. — Another economic effect of an insurance contract devolves from practical limitations inherent in the process by which the fee charged the insured is computed. The amount of the fee, or premium, should equal the insured's expected loss (e.g., a onein-five probability of losing P100 computes to an expected loss of P20) plus a pro rata share of the insurer's administrative costs. 17

However, because life is uncertain, calculating each person's expected loss with absolute precision is impossible. Indeed, the expenses involved in calculating each person's expected loss would be enormous; to cover these administrative costs, premiums would be exorbitant. Moreover, if such predictions were possible on an individual basis, insurance would not be necessary, since each person would know when loss would occur

17

In the case of stock c o m p a n y (ibid., pp. 12-14.), the insurer's administrative costs should include an allowance for a reasonable profit.

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and then would take all necessary preventive measures, thereby eliminating the value of transferring risk. (6) Classification of risks. — Because of the complete impracticality of individual rating, insurers group similar risks together and charge each member of the group the same premium. Insurers will subdivide the insureds into distinct groups as long as the cost of measuring the differentiating factor is less than the premium reduction the insurer can offer members of a differentiated, better-risk group. EXAMPLE: Assume that smokers on the average have a shorter life span than non-smokers. This distinction could be the basis for an insurer offering non-smokers lower cost life insurance than smokers. However, making the distinction will involve some administrative and investigative costs. Some of these costs will result from attempting to control factors that will tend to make the smoker/non-smoker distinction inaccurate, such as problems with the trustworthiness of the data (applicants who know they can secure a lower premium will have a tendency to understate their smoking habits), the uncertainty over whether a person who has quit smoking has a different life expectancy than either a non-smoker or a presently-active smoker, and the possible differential impact of different amounts of daily smoking. If the cost of accurately distinguishing smokers from nonsmokers exceeds the premium reduction that could be offered to non-smokers, insurers will not make the distinction, since the insurer is likely to lose more smoking customers to insurers who do not make the distinction than the insurer who will gain in new non-smoking customers. (7) Sub-classification of risks. — At a certain point in any risk classification scheme, further subdivision of the group becomes too expensive relative to the benefits gained. Thus, it is inevitable that within the same group, some insureds will be better risks than others, even though all members of the group pay the same premium. In fact, any group will have a higher proportion of less desirable risks, since more applications for the insurance

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will tend to come from those who get a better bargain. This phenomenon is called adverse selection. Insurers and regulators must take into account the existence of adverse selection when deciding upon the scope of coverage and the premiums to be charged for the coverage, (ibid., pp. 1214.)

The fields of insurance. (1) In general. — The basic classification emphasizes the difference between social (government) and voluntary (private) insurance. Voluntary insurance includes the major category of commercial insurance, which is divided into personal (life and health) and property types of protection, and traditionally in property insurance, the major groupings of fire-marine and casualty-surety insurance are important. With recent trends toward broader insurance operations and contracts, the terms "multiple line insurance" and "all lines insurance" have become important. The first term has been accepted to denote not just several kinds of insurance but the combination of at least two kinds of insurance, specifically the traditional fire and casualty lines. The second is not used in a technical sense, for few insurers or contracts do include every possible kind of insurance. The term is used rather to describe the broadening nature of insurance operations which combine at least most of the basic types of insurance including the traditional fire, casualty, life, and health lines, (see note 14.) (2) Social (government) insurance. — It is compulsory and is designed to provide a minimum of economic security for large groups of persons, particularly those in the lower income groups. It concerns itself primarily with the unfavorable losses (income and costs) resulting from the perils of accidental injury, sickness, old age, unemployment, and the premature death of the family earner. The concept here is limited to that insurance which are required by the government and have for their object the provision of a minimum standard of living. The compulsion element is predicated upon the experience that some persons cannot or will not voluntarily purchase

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insurance, and the obligation of the government to protect the general welfare of its citizens. (3) Voluntary (private) insurance." — It is not based upon government compulsion and is sought by the insured to meet a recognized need for protection. It divides itself into three (3) groups: (a) Commercial insurance. — This is what persons usually have in mind when they refer to the insurance business. In contrast to cooperative plans, it receives its motivating force from the profit idea. Two major classifications are parts of commercial insurance: 19

1) Personal insurance. — This division is based on the nature of the perils; that is, whether they are more directly concerned with losses due to loss of earning power of a person. Life insurance, including annuities, and health and accident insurance are important parts of the personal category of commercial insurance; and 2) Property insurance. — In this category is included every form that has for its purpose the protection against loss arising from the ownership or use of property. There are two general classifications of property insurance. The first indemnifies the insured in the event of loss growing out of damages to, or destruction of his own property. The second form pays damages for which the insured is legally liable, the consequence of negligent acts that result in injuries to other persons or damage to their property. Included in the first classification are fire and marine insurance, and in the second are casualty and surety insurance. (b) Cooperative insurance. — The term "cooperative" is applied to associations usually operating under hospital, medical, fraternal, employee, or trade-union auspices. The associations are organized without regard to the profit 18

F o r differences between social insurance and private insurance, see annotation under Section 228. A n o t h e r classification of all kinds of insurance might contrast "individual or family" versus "business" insurance depending on the nature of the purchases (family as opposed to business firm purchases). (D.L. Bickelhaupt, op. ext., p. 69.) 19

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motive and represent, in fact, an effort to accomplish the ends of social insurance by private enterprise. Here, the non-profit cooperative objective of the insurance is emphasized; and (c) Voluntary government insurance. — This category is principally distinguished from social insurance in that there is no element of compulsion. The various plans offered are designed to benefit the entire community but are used only by those persons who wish to use the available benefits. In the category are to be found such plans as the insurance of mortgage loans and insurance of growing crops, (see D.L. Bickelhaupt, op. cit. pp. 66-74.) f

Classifications of contracts of insurance. The principal and older forms of insurance are marine (see Sec. 99.), fire (see Sec. 167.), life (see Sec. 179.) and accident, (see Sec. 180.) Their rapid growth and successful conduct have in recent years stimulated the attempts to apply the principles of insurance to contracts of indemnity for numerous other kinds of loss. These attempts have resulted in a wide extension of insurance to almost all the innumerable varying risks to which the interests of the members of a society are subject under m o d e m economic and industrial conditions. 20

The different kinds of insurance contracts written at the present time vary infinitely in n a m e and form but for convenience they may be grouped under three great heads as follows: (1) Insurance against loss or impairment of property interests, which may be either in existence or merely expected; that is, present rights or profits yet to accrue. The loss or impairment may be due to marine perils (called marine insurance), fire (called

^Historically, insurers u n d e r t o o k to issue insurance only in one of the distinct categories of risk. This w a s not entirely a voluntary choice, as statutes in m o s t states confined insurers to writing insurance in only one line. O v e r time, however, those restrictions w e r e removed, a n d m a n y insurers c o m m e n c e d w h a t w a s called multiple line underwriting, meaning the writing of insurance in all lines except life. Eventually, these insurers w e r e allowed to a d d the insurance to their lines, resulting in w h a t w a s k n o w n as all line underwriting. Today, with the practice of the multiple-line and all-line underwriting, the prospective insured can often deal with one c o m p a n y and one agent to meet all his insurance needs. (R.H. Jerry, II, op. cit., p. 33.)

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fire insurance), earthquake, explosion, etc. or due to the nonperformance of contracts of which the insured is a party (known as guaranty insurance); or the insolvency of debtors (called credit insurance); or defalcations of employees and agents (termed fidelity insurance); or theft and burglary (so there are written theft insurance policies); or defective titles or interest in property (called title insurance); (2) Insurance against loss of earning power due to death {life insurance), accidental injury, ill-health, sickness, old age or other disability, or even unemployment; and (3) Insurance against contingent liability to make payment to another, that is to say, the insured is protected against his loss with regard to claims for damages. Thus, we have reinsurance (see Sec. 95.), workmen's compensation insurance and motor vehicle liability insurance, all of which are designed to reimburse the insured for any liability he might incur to a third party, (see Sec. 174; also Sec. 99[2]; see Vance, op. cit., pp. 51-55.) A modernized classification scheme recognizes four (4) categories of insurance, namely: marine, property, personal, and liability. Property insurance is designed to indemnify the insured for loss to his property interests while personal insurance is intended to protect his personal interests. Insurance contracts are also divided into two large classes: property insurance (Nos. 1 and 3) and personal insurance (No. 2). Classification by interests protected. Another w a y to classify insurance is to categorize the subject matter according to the interests being protected by the arrangement. At least two such methods of categorization exist: the third-party/first-party distinction, and the all-risk/specifiedrisk distinction. (1) First-party versus third-party insurance. — In first-party insurance, the contract between the insurer and the insured is designed to indemnify the insured (or other insureds such as family members) for a loss suffered directly by the insured. (a) Property insurance, is first-party insurance; the damage to the property is an immediate, direct diminution of the

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insured's assets. The proceeds are paid to the insured to redress the insured's loss. (b) Liability insurance, on the other hand, is sometimes described as third-party insurance because the interests protected by the contract are ultimately those of third parties injured by the insured's conduct. Thus, if the insured negligently causes injury to a third party, the third party will possess a claim against the insured. If this claim is reduced to a judgment, the insured will suffer a loss. The insured's loss, however, is "indirect" in the sense that the third party suffers the "direct" loss. The liability insurer will reimburse the insured for any liability the insured m a y have to the third party, but in the event of payment, the insured merely serves as a conduit for transmission of the proceeds from the insurer to the third party. Thus, it is sometimes said that liability insurance is actually designed to protect unknown third parties. (c) All insurance except liability can be fairly thought of as first-party insurance. (d) In life insurance, the insured ordinarily designates a beneficiary to receive the proceeds of the policy, but this does not mean that the insurance is third-party. The loss is suffered by the insured; it is the insured w h o loses his life. Unless the owner of the policy chooses to create third-party rights in a beneficiary, it is the insured's estate that receives the proceeds. (e) Health insurance is also uneasily categorized under this framework. Frequently, the health insurer pays the provider of health care services {e.g., the hospital or doctor) directly, rather than paying the proceeds to the insured. But the loss — the illness and its expenses — is suffered directly by the insured. The health care provider suffers a "loss" in a sense when it provides medical care, but the insurance is designed, first and foremost, not to help health care providers but to help individuals w h o incur medical bills. The health care provider is similarly situated to the auto repair shop that fixes the insured's automobile damaged by a

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falling tree: the insurer m a y pay the auto repair shop directly, but this does not mean the insurance is for the benefit of the auto repair shop. (f) The first-party versus third-party insurance distinction assists in understanding the concept of "no-fault" insurance. No-fault insurance is essentially the substitution of first-party insurance for tort liability. The victim of a tort, instead of looking to the tortfeasor and his insurer for reimbursement, looks to his own insurer for first-party protection. First-party insurance is compulsory under the typical no-fault scheme. The term "no-fault" connotes that the victim recovers for his loss from his own insurer, without regard to the fault of the third party or his own contributory fault. (R.H. Jerry, II, op. cit., pp. 43-44.) (2) All-risk versus specified-risk. — Another w a y to categorize insurance according to the interests protected is the all-risk/ specified-risk distinction. All-risk insurance reimburses the insured for d a m a g e to the subject matter of the policy from all causes except those specifically excepted in the policy. In other words, all those not excluded are automatically included. Specified-risk insurance covers damage to the subject matter of the policy only if it results from specifically identified causes listed in the policy. (a) Language of the policy. — It is helpful but not necessarily determinative on whether a policy is all-risk or specifiedrisk. Language such as "this vessel is insured for physical loss or damage from any external cause" except for certain explicit exclusions is all-risk coverage. In contrast, the typical homeowner's policy which lists several insured events is ordinarily treated as a specified-risk policy. The historical development of the policy can be important in determining whether the policy covers all risks. Marine insurance, for example, has traditionally been treated as allrisk insurance. The so-called "jeweler's block insurance" was developed to provide jewelers with coverage regardless of the cause, and thus traditionally has been treated as allrisk insurance. On the other hand, homeowner's insurance,

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normally treated as specified-risk insurance, evolved by joining several distinct coverages — fire, liability, theft, etc. — in one policy. (b) Coverage of the policy. — The distinction can make a considerable difference in whether a particular loss is covered by a policy. For example, in Northwest Airlines, Inc. vs. Globe Indemnity Co. (303 Minn. 16, 225 N.W. 2d 831 [1975].), a hijacker extorted a large sum of money from the airline and then parachuted from the jet over the northwest. The airline's policy had five categories of coverage, two of which were 'Toss inside the premises" and 'Toss outside the premises." The insurer argued that the loss did not fall within the technical limits of any of these coverages, but the court reasoned that the policy read as a whole would be interpreted as all-risk coverage, meaning that the loss was covered unless the insurer could show that the specific risk was excluded. Since no explicit exclusion pertained to the hijacking risk, the insured's loss was covered. (c) Burden of proof — An important reason that the distinction between all-risk and specified-risk insurance can alter outcomes involves the effect of the distinction on the burden of proof. Under a specified-risk policy, the burden is ordinarily placed on the insured to initially prove that the loss falls within the policy's provisions on coverage. However, under an ill-risk policy, once the insured establishes that a loss occurred through some event other than an inherent defect or normal depreciation, the burden is ordinarily placed on the insurer to prove that the loss falls within an explicit exception to coverage. In property insurance, the insured has merely to show the condition of the property insured when the policy attaches and the fact of loss or d a m a g e during the period of the policy. If the causation leading to the loss is difficult to identify and prove, an all-risk policy can be highly beneficial to the insured, (ibid., pp. 44-45; see Vda. de Gabriel vs. Court of Appeals, 264 SCRA 137 [1996].) (d) Illustration. — The potential advantage to the insured of all-risk coverage is illustrated by the case of Pan American

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World Airways, Inc. vs. Aetna Casualty & Surety Co. (505 F. 2d 989 [2d Cir. 1974].) A Pan American Boeing 747 was hijacked and ultimately destroyed by members of the Popular Front for the Liberation of Palestine. The insurers argued that three specific exclusions barred Pan Asia's recovery for the loss of the aircraft: capture or seizure of property by governmental authority or agent; war, invasion, or civil war; and strikes, riots, or civil commotion. Treating the policy as all-risk coverage, the U.S. Court of Appeals held that the insurers had failed to prove that the cause of the loss w a s within the scope of the policy's exclusions which were ambiguous as applied to a "political hijacking" or an "act for political or terrorist purposes." Consistent with well established rules of interpretation, the exclusions were construed in a manner most beneficial to the insured. If the policy in Pan American World Airways had been a specified-risk policy, the insurers might have prevailed. The insurers' difficulty in showing that the cause of the loss fell within an exclusion would have instead been the insured's problem of showing that a covered peril caused the loss. If the coverage granting provisions in a specified-risk policy did not identify "hijacking" or "act for political or terrorist purposes" as covered perils, it is improbable that the insured would have succeeded in carrying its burden of bringing the loss within the terms of the policy's coverage. As in m a n y other settings, the allocation of the burden of proof can be determinative of the outcome of a case. The allrisk policy diminishes the burden placed on the insured, and thus makes pro-insured outcomes more likely, (ibid., p. 265.) (e) Other advantages of all-risk coverage. — All-risk insurance is thought to be advantageous in several respects: the coverage is presumably simpler to understand; duplication of coverages and premiums from separate, specified-risk policies is avoided; pressures toward adverse selection are minimized; and the policies are easier and less expensive for the insurer to administer. However, the most widely perceived advantage is the avoidance of gaps in coverage. Losses that would otherwise fall within the gaps of specified-

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risk coverage will be indemnified if a policy is deemed to be all-risk, (ibid., p. 264.) (f) All-risk coverage not absolute. — The observation that "all-risk insurance fills in all the gaps" needs to be, however substantially qualified. Coverage under all-risk policies is hardly absolute. For example, it is a fundamental prerequisite to any policy's coverage that the loss be "fortuitous." As explained by one court; "[t]he 'all-risk' event so covered would not include an undisclosed event that existed prior to coverage, or an event caused by the consummation during the period of coverage of an indwelling fault in the goods that had existed prior to that coverage." (see Northwest Airlines, Inc. vs. Globe Indemnity Co., supra) If a loss is certain to occur, such as loss due to normal wear and tear, the loss is not fortuitous and, therefore, is not insurable. Furthermore, exclusions can take away m u c h of what the all-risk policy gives. Also, all-risk coverage does not alter basic insurance law principles that can operate to limit coverage, such as the insurable interest requirement, causation rules, the requirement that the loss not be intentionally caused by the insured, and implied exceptions (such as the friendly fire rule). (R.H. Jerry, II, op. cit. p. 264.) An "all-risk" insurance policy covers all kinds of loss but not those due to willful and fraudulent act of the insured. (Mayer Steel Corp. vs. Court of Appeals, 274 SCRA 432 [1997].) 21

f

Classifications under the Code. Under the Insurance Code, insurance contracts are classified according to the nature of the risk involved as follows: (1) Life insurance contracts which m a y be: (a) individual life (see Sees. 179-183, 227.); (b) group life (see Sees. 50, last par., 228.); and (c) industrial life (see Sees. 229-231.); 21

O n e might say that death is certain to o c c u r and, therefore, death is not fortuitous. However, the time at which death will o c c u r is not certain. It is on this basis that death is a fortuitous event, (ibid., p. 264.)

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(2) Non-life insurance contracts which m a y be: (a) marine (see Sees. 99-166.); (b) fire (see Sees. 167-173.); and (c) casualty (see Sec. 174.); and 22

(3) Contracts of suretyship or bonding. (See Sees. 175-178.) The general definition of insurance in Section 2 can cover any kind of loss, damage, or liability arising from an unknown or contingent event. Theoretically, it would be possible for an insurance c o m p a n y to insure against any risk whatever associated with any lawful activity as long as there is no prohibition by a statute or violation of public policy. 23

Contracts written by guaranty or surety companies. A class of contracts written by guaranty or surety companies, and generally designated as guaranty insurance, comprises principally fidelity, title, bond, and security guaranty. Contracts of this kind are n o w almost regarded as those of insurance where the underwriter engages in the business for profit, especially since the terms of such contracts usually closely resemble the essential elements of an insurance contract. (Couch, Cyclopedia of Insurance Law, 1st ed., p. 45.) Like other insurance contracts, they are construed strictly against the insurer. (Couch, op. cit., p. 41.) The general rule that the bonds of guaranty and surety companies who engage in the business for profit are essentially insurance contracts and are governed by the rules of construction applicable thereto, rather than by the rules applicable to strict or pure contracts of ^These different kinds of Insurance contract apply to different types of risk with different kinds of coverage. The policies (Sec. 49.) differ in the persons and interests they protect. ^ F o r example, it has generally been held that any insurance contract that might act to discourage m a r r i a g e is unenforceable as against public policy. This rule has been applied primarily to so-called "marriage benefit insurance," whereby the insurer is bound to pay the beneficiary or his wife at the time of the beneficiary's marriage on condition that he remains single for a specified period of time. Another variation obligates the insurer to pay, at the time of marriage, a sum which increases, the longer the insured remains single. (J.F. Dobbyns, op. cit., p. 73.)

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suretyship, applies to bonds guaranteeing the carrying out or performance of contracts to do a particular act or carry out a particular project, (ibid., p. 24, cited in Luzon Surety Co., Inc. vs. City of Bacolod, 34 SCRA 509 [1970].) Under the Code, a contract of suretyship shall be deemed to be an insurance contract only if made by a surety who or which, as such, is doing an insurance business within the meaning of the Code. (Sec. 2[1, 2].)

Construction of insurance contracts. It is basic that all provisions of the insurance policy (Sees. 49-51.) should be examined and interpreted in consonance with each other. The policy cannot be construed price-meal. Certain stipulations cannot be segregated and then m a d e to control; neither do particular words or phrases necessarily determine its character. (Gulf Resort, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550 [2005].) The various stipulations in the policy shall be interpreted together, attributing to doubtful ones that sense which m a y result from all of them taken jointly. (Art. 1374, Civil Code.) (1) Where there is ambiguity or doubt. — Insurance is, in its nature, complex and difficult for the layman to understand. (Algoe vs. Pacific Meet. L. Ins., Co., 91 Wash. 324, L R A 1917A, 1237.) As a general rule, contracts of insurance are to be construed or interpreted liberally in favor of the insured and strictly against the insurer resolving all ambiguities against the latter (Young vs. Midland Textile Insurance Co., 30 Phil. 617 [1915]; Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193 [1991].), so as to effect its dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved. (43 A m . Jur. 2d. 357; Calanoc vs. Court of Appeals, 98 Phil. 79 [1955].) 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, d a m a g e or liability on the part of the insured. Limitations of liability must be construed in such a way as to preclude the Insurer from non-compliance with its obligations. (DBP Pool Accredited Insurance Companies vs. Radio Mindanao Network, Inc., 480 SCRA 314 [2006].) They

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should be construed strictly against the Insurer. (Blue Cross Health Care vs. Olivares, 544 SCRA 580 [2008].) The above principle of interpreting insurance contracts can better be understood when it is remembered that a policy of insurance is a contract of "adhesion/' that is to say, most of the terms of the contracts do not result from mutual negotiation between the parties as they are prescribed by the insurer in final printed forms which the insured m a y reject or to which he m a y "adhere" if he chooses but which he cannot change. The insurer is under the duty to make its meaning clear if it desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception or exemption. In a "bargaining contract/' in contrast to a contract of "adhesion/' both parties participate in drawing up its terms and conditions or determining its wording. A n y ambiguity in the insurance contract should, therefore, be resolved in favor of the beneficiary. (Serrano vs. Court of Appeals, 130 SCRA 327 [1984]; National Power Corp. vs. Court of Appeals, 145 SCRA 533 [1986]; Rizal Surety & Insurance C o m p a n y vs. Court of Appeals, 336 SCRA 12 [2000].) 24

Accordingly, a policy of insurance which contains exceptions or conditions tending to work a forfeiture of the policy shall be interpreted most favorably toward those against w h o m they are intended to operate and most strictly against the insurance company or the party for whose benefit they are inserted. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted. Limitations of liability must be construed in such a way as to preclude the insurer from non-compliance with its obligations. (Heirs of Coscolluela vs. Rico General Insurance Corp., 179 SCRA 511 [1989]; Geagonia vs. Court of Appeals, 241 SCRA 152 [1995]; Malayan Insurance Corp. vs. Court of Appeals, 270 SCRA 242 [1997]; Philamcare Health System, Inc. vs. Court of Appeals, 379 SCRA 356 [2002].) Where an insurance covering the insured (a lot purchaser) contains a provision that the same is effective, valid,

24

T h e interpretation of obscure words or stipulations in a contract shall not favor the party w h o caused the obscurity. (Art. 1377, Civil Code.) F o r additional discussion, see annotations under Sections 49-50.

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and binding until terminated by the insurer by disapproving the insurance application which provision is in the nature of a resolutory condition which would lead to the cessation of the insurance contract, 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 unambigiuous. (Eternal Gardens Memorial Park Corp. vs. Phil. American Life Insurance Co., 551 SCRA 1 [2008].) ILLUSTRATIVE CASES: 1. Amount recoverable in case of death by drowning is not stated in policy. Facts: The insurer has bound itself under its policy to pay P1,000.00 to P3,000.00 as indemnity for the death of the insured for bodily injury, the policy mentioning specific amounts that may be recovered. The policy, however, does not positively state any definite amount that may be recovered in case of death by drowning, although it is a ground for recovery apart from death for bodily injury. Issue: How much can the insured recover? Held: 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 as to allow a greater indemnity, i.e., P3,000.00. (Del Rosario vs. Equitable Ins. & Casualty Co., 8 SCRA 343 [1963]; see also Fieldmen's Ins. Co., Inc. vs. Vda. de Songco, 25 SCRA 70 [1968].) 2. Deceased has already been paid under the Workmen's Compensation Act from another policy. Facts: The insurance policy contained a prohibition to the effect that any "authorized driver of T (Taxi Co.) should not be entitled to any indemnity under any other policy." The deceased, however, was paid his workmen's compensation from another policy. Issue: Should such fact defeat the right to recover under such insurance policy? Held: No, despite the prohibition mentioned, it is too well settled to need the citation of authorities that what the

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law requires (as the Workmen's Compensation Act [R.A. No. 4119], now embodied in Arts. 166-208, Labor Code; see Arts. 1711, 1712, Civil Code.) enters into and forms part of every contract. Assuming, however, that there is doubt concerning the liability of the insurer, nonetheless it should be resolved in favor of the insured. Courts are to regard "with extreme jealousy" limitations of liability found in insurance policies and to construe them in such a way as to preclude the insurer from non-compliance with his obligation. (Taurus Taxi Co., Inc. vs. The Capital Insurance & Surety Co., Inc., 24 SCRA 454 [1968].) 25

3. Insured owner of a vehicle was not aware that his driver's license was irregularly issued. Facts: The "authorized driver clause" of the insurance policy states that the insurance company shall not be liable for damages caused to insured vehicle if driven by a person not "permitted in accordance with licensing laws or regulations to drive the motor vehicle covered by this policy." The vehicle was damaged during the effectivity of the policy. 26

The driver who was at the wheel of the insured car at the time of the accident, does not know how to read and write and was able to secure a driver's license without passing any examination therefor, by paying P25.00 to the Cavite Agency of the Motor Vehicles Office (now Land Transportation Office). To disprove that the license was genuine, the insurance company presented a certification of said agency that the license in question was not issued by it. There is no proof that the insured (owner of vehicle) knew that the circumstances surrounding such issuance was irregular. Issue: Is the insurer liable?

25

W h i c h provide a tax-exempt employees' compensation p r o g r a m administered by

the Employees' Compensation Commission. A foreigner whose 9 0 - d a y tourist visa had expired, cannot recover on his car insurance policy, not being authorized under the law to drive a motor vehicle without a Philippine driver's license. (Strokes vs. Malayan Insurance Co., Inc., 127 SCRA 706 [1984].) A traffic violation receipt (TVR) does not suspend the erring driver's license. It is, however, co-terminous with the confiscated license, i.e., it serves as a temporary license and that it m a y be renewed but in no case should extend beyond the expiration date of the original license. (Gutierrez vs. Capital Insurance & Surety Co., 130 SCRA 100 [1984].) 2 6

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Held: Yes. (1) A driver's license, a public document. — A driver's license that bears all the earmarks of a duly issued license is a public document which is presumed genuine. The presumption of genuineness in its issuance is not disproved by a mere certification by an agency of the MVO that it did not issue the license in question because it does not remove the possibility that said office may have been mistaken or that said license was issued by another agency, particularly in view of the fact that the person who issued the certification was not placed on the witness stand. As the law stood (in 1961) when the claim arose, the examination could be dispensed with in the discretion of MVO officials. (Sec. 26, Act No. 3992, as amended.) (2) A driver's license, a representation by the government of holder's qualification to operate motor vehicles. — The issuance of the license is a proof that MVO officials considered the driver of the insured qualified to operate motor vehicles and the insured was entitled to rely upon such license. And considering that the weight of authority is in favor of a liberal interpretation of the insurance policy for the benefit of the party insured and strictly against the insurer, no breach was committed of the above-quoted provision of the policy. (CCC Insurance Corp. vs. Court of Appeals, 31 SCRA 264 [1970].)

4. Insured car in the custody of a repair shop was taken out for a joyride by employees of the shop owner. Facts: While the insured car was in the custody of a repair shop, it was taken out for a joyride by a "resident" of the shop and several other persons. The car met an accident and was extensively damaged. The Insurance Commission ruled that the accident did not fall within the "authorized driver" clause or under the theft coverage. Issue: Is the ruling correct? Held: No. (1) Purpose of authorized driver clause. — "The ruling is too restrictive and contrary to the established principle that insurance contracts, being contracts of adhesion where the only participation of the other party is the signing of his signature or his 'adhesion' thereto, 'obviously call for greater strictness and vigilance on the part of courts of justice with a view of protecting the weaker party from abuse and imposition and prevent their becoming traps for the unwary.' The main purpose of the 'authorized driver' clause is that a person other

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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 must be duly-licensed drivers and have no disqualification to drive a motor vehicle. A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key to the shop owner and employees who are presumed to have the insured's permission to drive the car for legitimate purposes of checking or road testing the car. The mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the 'authorized driver' clause has been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license." (2) Theft clause applies. — "Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause, not the 'authorized driver' clause, that applies), where a car is admitted as in this case unlawfully and wrongfully taken by some people, be they are employees of the car shop or not to whom it had been entrusted, and taken on a long trip to Montalban without the owner's consent or knowledge, such taking constitutes or partakes of the nature of theft for purposes of recovering the loss under the policy in question. The insurer must, therefore, indemnify the car owner for the total loss of the insured car under the theft clause of the policy, subject to the filing of such claim for reimbursement or payment as it may have as subrogee against the repair shop." (Villacorta vs. Insurance Commission & Empire Insurance Company, 100 SCRA 467 [1980]; see Annotation under Sec. 243.) (3) Quantum of evidence to prove theft. — "In the absence of any provision in the policy, prior conviction for the crime of theft is not required to make the insurer liable under the theft clause policy. In a civil action for recovery on an automobile insurance, the question of whether a person using a certain automobile at the time of the accident stole it or not is to be determined by a fair preponderance of evidence and not by the rule of criminal law requiring proof of guilt beyond reasonable doubt." (Association of Baptists for World Evangelism, Inc. vs. Fieldmen's Insurance Co., Inc., 124 SCRA 618 [1983]; see Malayan Insurance Co., Inc. vs. Court of Appeals, 146 SCRA 45 [1986].)

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5. Policy contains conflicting provisions on effect of nonpayment of premium. Facts: A provision in the application for insurance with the GSIS states this condition: "That my policy shall be made effective on the first day of the month next following the month the first premium is paid; x x x." Another condition provides: "That failure to deduct from my salary the monthly premiums shall not make the policy lapse, however, the premium account shall be considered as indebtedness which, I bind myself to pay the System." The applicant, an employee of the Bureau of Public Works, died in an airplane crash. It appears that the Bureau had not remitted to the GSIS even a single premium because the Bureau's collecting officer was not advised by the GSIS to make the required deduction pursuant to the provision in the application. Issue: Should the policy be considered in force notwithstanding that not a single premium had been paid thereon? Held: Yes. The ambiguity created by the operation of the conditions should be interpreted adversely against the GSIS which prepared the insurance contract or application. This rule is especially true in insurance policies where forfeiture is involved. (Landicho vs. Government Service Insurance System, 46 SCRA 7 [1972].) 6. Insured spouses died when passenger truck they were driving was ambushed by Muslim rebels. Facts: R (insurer) paid the face value of the life insurance policies of spouses D and E (insured) but denied liability for accidental death benefits of double indemnity on the ground that the cause of their death was an excluded risk provided for in the comprehensive accident indemnity rider which provides that "the policy shall not cover loss or disability caused directly or indirectly by war, declared or undeclared, strikes, riots, and civil war, revolution, or any warlike operation." It appears that D and E died when the passenger truck they were driving was ambushed by Muslim rebels in Zamboanga del Sur. Issue: Was the death of D and E caused by "warlike operation"?

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Held: No. The ambush was an isolated one, and was not in the prosecution of hostilities between two combatants or warring parties. The vehicle was travelling for the purpose of transporting their paying passengers and not for the prosecution of any warlike operation. Even if such was the case, the passengers were not aware of such fact. The use of the term "warlike operations" right after the terms "civil war" and "revolution" must be interpreted to mean "operation in time of war." (Gonzales vs. The Phil American Life Insurance Co., I.C. Case No. 56, June 21,1976.) 7. Insurer resisted the claim of the insured on the ground that the burned oil mill is not covered by any insurance policy because the description of the insured establishment referred to another building. Facts: Respondent TE, Inc., engaged in the coconut oil milling and refining industry, owns two oil mills separately covered by fire insurance policies issued by petitioner AHA Co. The second oil mill came to be commonly referred to as the new oil mill which was gutted and consumed by fire. Respondent AHA rejected petitioner TE's claim for the insurance proceeds on the ground that no policy was issued covering the burned oil mill. According to AHA, the oil mill insured is specifically described in the policy by its boundaries in the following manner: "Front: by a driveway thence at 18 meters distance by Bldg. No. 2. Right: by an open space thence by Bldg. No. 4. Left: Adjoining thence an imperfect wall by Bldg. No. 4. Rear: by an open space thence at 8 meters distance." However, it argues that this specific boundary description clearly pertains, not to the burned oil mill, but to the other mill. In other words, the oil mill gutted by fire was not the one described by the specific boundaries in the contested policy. What exacerbates respondent's predicament, petitioner posits, is that it did not have the supposed wrong description or mistake corrected. Despite the fact that the policy in question was issued way back in 1988, or about three years before the fire, and despite the "Important Notice" in the policy that "Please read and examine the policy and if incorrect, return it immediately

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50

Sec. 2

for alteration," respondent apparently did not call petitioner's attention with respect to the misdescription. By way of conclusion, petitioner argues that respondent is "barred by the parole evidence rule from presenting evidence (other than the policy in question) of its self-serving intention (sic) that it intended really to insure the burned oil mill," just as it is "barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, because it retained the policy without having the same corrected before the fire by an endorsement in accordance with its Condition No. 28." Issue: May the insured recover under the policy notwithstanding the misdescription in the fire policy? Held: Yes. (1) Descriptive words are to be construed with the greatest liberality. — "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." 27

(2) Parties manifestly intended to insure new oil mill. — "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, 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 new oil mill building, situate (sic) at UNNO. ALONG NATIONAL HIGHWAY, BO. IYAM, LUCENA CITY UNBLOCKED.' (emphasis supplied.) If the parties really intended to protect the first oil mill, then there is no need to specify it as new. 27

See Martinez, Philippine Insurance C o d e Annotated, p. 324, citing Richard vs. Ins. Co., 27 N.W. 5 8 6 (1886), which gives the following illustration: A policy u p o n a "school house" w a s held sufficient to identify the building insured in which a school w a s kept, although it w a s not an ordinary school house; the term "store" w a s held to be a sufficient description of a building used as a restaurant and bakery.

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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 Policy No. 306-7432324-4 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 overinsurance. The imperfection in the description of the insured oil mill's, boundaries can be attributed to a misunderstanding between the petitioner's general agent, Mr. Alfredo Borja, 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. x x x It is thus clear that the source of the discrepancy happened during the preparation of the written contract." (3) Case falls within one of the recognized exceptions of the parol evidence rule. — "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. 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 aliunde, which will explain the imperfection and clarify the intent of the parties." (4) Respondent is not barred by estoppel — "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, Mr. Edison Tantuco, notified Mr. Borja (the petitioner's agent with whom respondent negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that the use of the adjective new will distinguish the insured property. The assurance convinced respondent that, despite the impreciseness

51

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in the specification of the boundaries, the insurance will cover the new oil mill." (5) Doubt is to be resolved against the insurer. — "The object of the court in construing a contract is to ascertain the intent of the parties to the contract and to enforce the agreement which the parties have entered into. In determining what the parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining the intent of the parties to the contract, the courts will consider the purpose and object of the contract." (American Home Assurance Company vs. Tantuco Enterprises, Inc., 366 SCRA 740 [2001].) (2) Where terms are clear. — The cardinal principle of insurance law of interpreting insurance contracts favorably to the insured is applicable only in cases of doubt, not when the intention of the policy is clear or the language is sufficiently clear to convey the meaning of the parties (Young vs. Midland Textile Ins. Co., supra.) although the contract m a y be rather onerous. The court is bound to adhere to the insurance contract as the authentic expression of the intention of the parties, and it must be construed and enforced according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and certain, they must be taken in their plain and ordinary sense. (Art. 1370, Civil Code; see Pacific Banking Corp. vs. Court of Appeals, 168 SCRA 1 [1988]; Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193 [1991]; N e w Life Enterprises vs. Court of Appeals, 207 SCRA 669 [1992]; Tagle vs. Court of Appeals, 466 SCRA 464 [2005].) The terms of an unambiguous insurance policy cannot be enlarged or diminished by judicial construction since the court cannot make a new contract for the parties where they themselves have employed express and unambiguous words. (American Casualty Co. vs. Myrick, 96 ALR 2d. 1352.) Moreover, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (Art. 1159, Civil Code.)

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53

ILLUSTRATIVE CASES: 1. Liability is limited to P150 if repair of insured was undertaken without notice to insurer. — Where the automobile liability policy provided that the insurer would not be liable for more than P150.00 if the insured undertook repairs of the car subject of the insurance without the knowledge of the insurer, the latter is not liable to pay a greater amount to the insured who had actually spent P307.27 for repairs due to an accident covered by the policy but which were authorized without first notifying the insurer. (Misamis Lumber Corporation vs. Capital Dev. & Surety Co., 17 SCRA 228 [1966].) 2. Insurer must be given notice of the existence of other fire policies. — In the absolute absence of notice by the insured to the insurer of the existence of other policies of insurance against fire upon the property insured when it is one of the conditions specified in the fire insurance policy, for the validity of the policy and entitlement to indemnity in case of loss, the policy is null and void and the insured cannot recover. Courts are not permitted to make contracts for the parties. Their function and duty consist simply in enforcing and carrying out the contracts actually made. 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. (Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., 47 SCRA 271 [1972]; see Pacific Banking Corp. vs. Court of Appeals, supra-, New Life Enterprises vs. Court of Appeals, supra; Sta. Ana vs. Commercial Union Assurance Co., 55 Phil. 324 [1930].) 28

But where the condition does not absolutely declare void any violation of the additional or "other insurance" clause, but on the contrary, it expressly provides that the condition "shall not apply when the total insurance or insurances in force at the time of the loss or damage is not more than P200,000.00," the policy is not totally free from ambiguity. The only reasonable

M

T h e purpose of the requirement in the policy that the insured declare other insurances 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 "fire" would be profitable to the insured. (Pioneer Insurance & Surety C o r p . vs. Yap, 61 SCRA 4 2 6 [1974]; General Insurance & Surety C o r p . vs. Ng Hua, 106 Phil. 1117 [I960].) Such a condition has been upheld as valid and as a warranty that no other insurance exists. (Geagonia vs. C o u r t of Appeals, 241 SCRA 152 [1995]; see Sees. 75, 93.)

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Sec.

conclusion is that (a) the prohibition applies only to double insurance (Sec. 93.), and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies issued. In other words, under the condition, the insurer is amenable to assume a co-insurer's liability up to the loss not exceeding P200,000.00. Forfeitures are not favored. (Geagonia vs. Court of Appeals, 241 SCRA 152 [1995].) 3. Only the amputation of hand is considered as a loss thereof. — Where the insured, an operator mechanic of a factory, suffered injuries which caused the temporary total disability of his left hand, due to the fractures of the index, middle and fourth fingers thereof, he cannot recover on the insurance policy which provides that partial disability of either hand means amputation through the bones of the wrist. As the terms of the policy are clear, express and specific that only amputation of the left hand should be considered as a loss thereof, an interpretation that would include the mere fracture or other temporary disability, not covered by the policy, would be unwarranted. The insurance contract is the law between the parties. [Ty vs. First National Surety & Assurance Co., Inc., 1 SCRA 1324 [1961 ]; see Ty vs. Filipinas Compana de Seguros, 17 SCRA 364 [1966].) 4. Action on a claim must be brought within one year from denial thereof. — Where under the terms of the policy, an action on a claim denied by the insurer must be brought within one (1) year from the denial, the contract which is the law between the parties, governs, not the rules on the prescription of actions. (Ang vs. Fulton, 2 SCRA 945 [1961].) 5. Use of motor vehicle must be "for social, domestic or pleasure purpose." — The provision of the policy on the limitation as to use reads: "Use only for social, domestic and pleasure purpose. This does not cover use for hire, or reward, or for racing, pacemaking, reliability-trial, and speed testing x x x." Is car rallying embraced within the exception? Yes. While an "auto rally is not racing as the contest is not based on speed or acceleration where the vehicle which is travelling at a higher rate of speed throughout the duration of test will be the winner" (see 36 Words and Phrases 3.), it is definitely a contest based on "precision" and "coordination of crew" as well as on "road worthiness." Since the contest was timed, controlled and conducted under the conditions with a crew

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55

to test the precision of the driver and the road worthiness of the car, the "auto rally" falls within the exception, particularly under "pace-making, reliability-trial, and speed testing" and thus, not within the coverage of the policy. (Dumoy Sawmill Inc. vs. Times Surety & Insurance Co., Inc., I.C. Case No. 132 [1976].) 6. Written permission of insurer is required before insured may effect payment in settlement of claim. — The policy specifically requires that insurer's written consent be first secured before any payment in settlement of the claim against the insured can be made. There is nothing unreasonable or objectionable in this stipulation as would warrant its nullification. The same is obviously designed to safeguard the insurer's interest against collusion between the insured and the claimant. The failure of the insured to comply with this condition contained in the insurance policy will preclude him from seeking reimbursement of the payments made. (Perla Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1990].) (3) Where contract is silent with respect to a particular matter. — Any doubt that m a y arise for failure of the contract to provide with respect to a particular matter should be resolved against the insurer. In a case, the insurer contended that the amount recoverable on a car insurance policy is subject to a deductible franchise. It w a s ruled that the deductions of P250.00 and P274.00 as deductible franchise and 20% depreciation on parts, respectively, claimed by the insurer as agreed upon in "the contract, has no basis," because "the policy does not mention any deductible franchise." (Zenith Insurance Corporation vs. Court of Appeals, 185 SCRA 398 [1990].) What constitutes doing or transacting an insurance business. (1) Name or designation by insurer not controlling. — The name by which a company or association or its certificates or policies are designated, are not determinative of the question of whether the organization is an insurance company or association, or is engaged in an insurance business, or its contracts are in the nature of insurance policies. Basically, insurance, whether fire, marine, or any other form, is that which the law defines it to be. (43 Am. Jur. 2d. 68.)

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(2) Acts deemed included by law. — The Code enumerates the acts which are deemed included in the term "doing an insurance business" or "transacting an insurance business." (Sec. 2[2].) The fact that no profit is derived from the making of insurance contracts or that no separate or direct consideration is received therefor (ibid.), indeed, the fact that the contract states that it is not an insurance policy, is not conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. (a) A company m a y be found to be engaged in an insurance business even though it expressly disclaims any intention to sell insurance. (43 A m . Jur. 2d. 69.) Thus, it has been held that a newspaper which in order to increase its circulation, promises to pay a certain amount to the heirs of one who meets death by accident while pursuing his ordinary avocation, provided a copy of the paper or a coupon taken from it is found in his possession at the time of the accident, carries an accident insurance business which is unauthorized under a charter empowering it to publish a newspaper. (Commonwealth vs. Philadelphia Inquirer, 3 Pa Dist. 7 4 2 , 1 5 Pa Co 463.) (b) While there are few cases in which a different conclusion has been reached, the majority of cases have adopted the view that a contract for the payment of burial or funeral expenses at the death of the holder is a contract of life insurance subject to the insurance laws. (43 A m . Jur. 2d. 72.) It has, for example, been ruled that a contract by an individual engaged in the undertaking business, to furnish burial in consideration of payment of varying amounts during life according to the holder's age and the service to be rendered, is within the operation of the statute governing the transaction of insurance business. (Comm. vs. Luquire Burial Asso., 104 F2 d 89; State vs. Willet, 86 NE 68; Heaton vs. Goodposter, 200 SW 2d. 120.) (c) An agreement, however, to service and repair, at a flat monthly fee, any burned out and defective parts of fluorescent fixtures has been held not to constitute an insurance contract since any element of warranty or guaranty in the agreement is merely incidental to the servicing business. (Higger vs.

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57

Rodziminsky, Inc., 19 NYS 2d 69.) Any such warranty is not generally considered insurance if it excludes losses by external accidental causes. On the other hand, a tire manufacturer was held to be engaged in the insurance business when it promised to repair or replace the tire if any defects were discovered or accidental losses incurred within a stated period. (D.L. Bickelhaupt, op. cit., p. 38.) (3) Principal object and purpose test to determine nature of contract. — M a n y of the cases are extremely difficult to reconcile. Obviously, it is not the purpose of insurance law to regulate all contracts involving assumption or distribution of risk. It is, therefore, important to distinguish insurance contracts from other contracts of contingent obligations, such as contracts of guarantee or contracts for services to be rendered on the happening of some future, uncertain event. Under the so-called "principal object and purpose test," if the principal object and purpose is "indemnity/ the contract constitutes insurance, but if it is "service," risk transfer and distribution being merely incidental, then the arrangement is not insurance and, therefore, not subject to laws regulating insurance, (see Jordan vs. Group Health Association, 107 F. 2d 239; California Physician's Service vs. Garrison, 172 P. 2d 4.) Applying this test, a corporation such as a health maintenance organization (HMO), whether or not organized for profit, whose main object is to provide the members of a group with health care services, rather than the assumption of insurance risk is not engaged in insurance business. The basic distinction between medical service corporations and ordinary health and accident insurers is that the former, undertake to provide prepaid medical services (at reduced cost, not to distribute risk like an insurer) through participating physicians, thus relieving subscribers of any further financial burden, while the latter undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contrained in the policy. Even if the former assumes the risk of paying the cost of these services that may be more than a member has prepaid, it nevertheless 7

29

29

T h e risk that the a m o u n t of insurance claims might be higher than the premiums

paid. It is also known as acturial risk.

cannot be considered as being engaged in the insurance business because any indemnification resulting from the payment for services even if rendered in case of emergency would still be incidental to main purpose of providing and arranging for health care services. (Philippine Health Care Provider, Inc. vs. Comm. of Internal Revenue, 600 SCRA 413 [2009].)

Functions of insurance. In appraising the value of any social institution, like insurance, one must consider not only its readily apparent benefits, but also its more remote consequences. The functions of insurance (which has been often referred to as "the first modern industry") are set out below. (1) Principal function. — The main function of insurance is risk-bearing. The financial losses of the few are equitably distributed over the m a n y out of a fund (premium) contributed by all. What it does is to spread the losses over a large number of persons. (a) In fire insurance, for example, the policyholders pay premiums into a c o m m o n pool, out of which those w h o suffer loss are compensated. The amount of the premium or contribution is fixed according to individual circumstances. Where fire destroys the insured property, the insurance company pays the loss from the fund created from the premiums paid by all those similarly insured. Thus, the loss is borne not by the insurer but proportionally by all those w h o contributed premiums. (b) In life insurance, every policy which does not lapse, eventually becomes a claim, but there is the same principle of spreading of risk. (2) Subsidiary functions. — The following functions, although subsidiary, are not insignificant: (a) Stimulates business enterprises. — Insurance has m a d e possible, and helps to maintain, the present-day large-scale commercial and industrial organizations. No large-scale enterprise could function in the modern world without the transference of many of its risks to insurers. It also enables industrialists and others to use their capital in the

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development of their business by paying a fixed contribution by w a y of premium and obtain financial security against the insured risks, instead of freezing capital to guard against various contingencies. (b) Encourages business efficiency and enterprise. — The natural result of the elimination of risk is an increase in business efficiency. The worry and uncertainty of such risks could seriously diminish the personal efficiency of business managers but for the w a y on which insurance relieves them of these strains. By reducing risk, insurance also increases the willingness to invest new capital in business enterprise; (c) Promotes loss-prevention. — The community would suffer m u c h greater economic impoverishment through material losses if it were not for the loss-prevention measures of insurers. In property insurance, for instance, regular inspections of steam boilers, engines, and other equipment carried out by the insurer with the making of recommendations for the efficient and economic working of the plant reduce explosions and breakdown to the minimum. Insurers encourage loss-prevention through a system of rating which allows discounts for good features and impose special conditions where the risk is unsatisfactory; (d) Encourages savings. — By protecting the individual against unforeseen events, insurance provides a climate in which savings are encouraged. A more direct stimulus, however, is provided through most life insurance policies, which include a savings or investment elements as well as a protection element; and (e) Solves social problems. — Some of the social problems which beset a modern civilized community are taken care through insurance. Many of the measures are provided through the system of social (government) insurance (such as that administered by the GSIS and the SSS) while others are provided through free enterprise insurance. The effect of the concurrent operation of both types of insurance is that compensation is available to victims of loss or injuries, while the financial difficulties arising from old age, disability, or death are mitigated.

(3) Indirect functions. — There are also various indirect functions some of which may be regarded as benefits rather than functions proper. They are as follows: (a) Investment of funds. — By reason of their principal function, insurers accumulate large funds which they hold as custodians out of which claims and losses are met. These funds themselves are invested so that not only do they earn interest to be added to the funds but they also make available huge resources for underwriting industrial, agricultural, cultural, and other projects that contribute to national development; (b) Use of reserve funds. — Because of the investment policy of insurers, their reserve funds are not static, but are used productively. This results in the reduction of the cost of insurance to the insuring public. If the reserve funds were not so used, the income they now earn would have to be obtained through higher premiums; (c) Effect on prices. — The cost of insurance to the businessman is passed on to the consumers, along with other production costs, but paradoxically, the existence of insurance benefits the consumer public in terms of reduced prices. This is because the cost of insurance is less than the cost of risk without insurance; and (d) As a basis of credit. — Credit extension is the most important phase of modern business and is contributed to by virtually all forms of insurance. Thus, in the case of a mortgage upon real estate, no mortgagee is willing to lend money unless he knows that the value of the property is protected from destruction by fire. No dealer cares to sell goods to a retailer on credit unless he has some assurance that the goods and the business of the retailer are protected from sudden disaster by fire, (see Elements of Insurance, by W.A. Dinsdale & D.C. McMurdie, 1977 ed., 7-10, published by Pittman Publishing Limited, London; Riegel, Miller & Williams, Jr., op. cit, pp. 23, 25, 26.)

— oOo —

Chapter I CONTRACT OF INSURANCE Title 1 WHAT MAY BE INSURED 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, subject to the provisions of this chapter. The consent of the husband is not necessary for the validity of an insurance policy taken out by a married woman on her life or that of her children. Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the insurance is taken on his own life and the beneficiary appointed is the minor's estate or the minor's father, mother, husband, wife, child, brother or sister. The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges of an owner under a policy. All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy, (a) Requisites of a contract of insurance. Since policies are contracts, many of the rules and general principles of contracts apply also to insurance. In order that 61

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there will be a valid and enforceable contract of insurance, it is necessary that the following be present: (1) A subject matter in which the insured has an insurable interest (see Sees. 12-14.); (2) Event or peril insured against which may be any (future) contingent or unknown event, past or future (Sec. 3.), and a duration for the risk thereof (see Sec. 51 [g].); (3) A promise to pay or indemnify in a fixed or ascertainable amount (see Sec. 2.); //

(4) A consideration for the promise, known as the p r e m i u m (see Sec. 77.); and

,,

(5) A meeting of minds of the parties upon all the foregoing essentials, (see Arts. 1 3 1 8 , 1 3 1 9 , Civil Code.) Of course, the parties must be competent to enter into the contract, (see Arts. 1327-1329, Civil Code; Sees. 6-7.) Under Section 226, it is provided that "no policy of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Insurance Commissioner/ Of course, the contract must not be for a purpose contrary to law or public policy. 7

Subject matter of contract of insurance. (1) In general — Anything that has an appreciable pecuniary value, which is subject to loss or deterioration or of which one may be deprived so that his pecuniary interest is or m a y be prejudiced, m a y properly constitute the subject matter of insurance. (2) Property insurance. — Both persons and property m a y be the subjects of insurance, but the term "subject matter" is ordinarily used in reference to the insurance of property. The property covered by a policy is regarded the subject matter of the insurance, but it is apparent that in the last analysis, it is the risk of loss of such property that is primarily involved, (see Sees. 13-14.) (3) Life, health, and accident insurance. — While it is true that in life, health, or accident insurance the person becomes the subject

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Of insurance, the matter is generally viewed as one in reference to the insured as a party to the contract. (29 Am. Jur. 216; see Sees. 10,179-183.) (4) Casualty insurance. — In insurance (not falling within the scope of the other types of insurance) against perils which may affect the person a n d / o r property of the insured and give rise to liability on his part to pay damages to others, the subject matter is the risks involved in its use, or the insured's risk of loss or liability, that he m a y suffer loss or be compelled to indemnify for the loss suffered by a third person. 1

Casualty insurance includes personal accident and health insurance as written by non-life insurance companies and all insurance against loss or liability which is not within the scope of the other types of insurance, namely, fire, marine, suretyship and life, (see Sec. 174.)

Event or peril insured against. Under Section 3 (par. 1.), the contingency or unknown event must be such that its happening will (1) damnify or cause loss to a person having an insurable interest or (2) create a liability against him. The unknown event m a y be past or future, (see Sec. 51 [f].) In a contract of insurance, the insurer is liable for a fortuitous event if it is the event or peril insured against and is the proximate cause of the loss, (see Sec. 84; also Art. 1174, Civil Code.) 2

1

A n o t h e r point of view considers as the subject matter of liability insurance the activity or process in the course of which legal liability is incurred by the insurer. Thus, the m o t o r vehicle form c o m m o n l y in use obligates the insurer to pay on behalf of the insured all s u m s which he shall b e c o m e obligated to pay for death or bodily injuries "arising out of the use of the insured vehicle." (see E.W. Patterson, op. cit, pp. 2 3 2 - 2 3 3 . Strictly speaking, an insurer does not insure against an event, i.e., insure that the event will not h a p p e n (or will happen). Thus, the fire insurer does not promise the insured that he will not have a destructive fire; the life insurance contract, even though euphemistically w o r d e d ("X c o m p a n y insures the life of Y " ) does not deceive the most ingenuous person into believing that the company guarantees eternal life. The insurer merely promises to pay a s u m of money (exceptionally, to make a restitution in kind as an alternative) if a defined event occurs. To insure an event, then, means to make such a conditional promise, {ibid., pp. 237-238.) 2

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EXAMPLES: (1) Y's vessels left for a voyage on June 15 from Manila to San Francisco, U.SA. Y insured said vessel against the perils of the sea (see Sec. 99.) "lost or not lost" on June 19 with X Insurance Co. Without the knowledge of both parties, the vessel had already sunk on June 18. Here, the sinking of the vessel is a past event at the time the policy took effect. The contract is valid and X Insurance Co. is liable because it agreed to pay even though the vessel be already lost. An insurance against an unknown past event is peculiar only to marine insurance. In case of fire insurance, the fire must be a future, not a past event. (2) Y owns a car which he drives himself. If he injures pedestrians or causes damage to property by the use of his car, he thereby incurs liability. Now he may insure himself against liability to third persons that may be created by this contingent event, (see Sec. 174.) A clear example of this kind of insurance is also seen in reinsurance, (see Sec. 95.) But if the contract is to indemnify Y against actual loss or payment to third persons, the insurance is one of indemnity merely and not against liability. (Guingon vs. Del Monte, 20 SCRA 1043 [1967].) Insurance by a married woman. A married w o m a n m a y take out an insurance on her life or that of her children without the consent of her husband (Sec. 3, par. 2.), or that of her husband, she having an insurable interest in the latter, (see Sec. 10.) She m a y also take out insurance on her paraphernal or separate property, or on property given to her by her husband. (Harding vs. C o m m . Union Assurance Co., 38 Phil. 464 [1918]; see Art. 39, Civil Code; Arts. 110, 111, Family Code [Exec. Order No. 209].) Insurance by a minor. (1) Life, health, or accident insurance. — Under Section 3 (par. 3.), a minor may enter into a valid contract of insurance provided that: (a) He is 18 years of age or over; (b) The contract is for life, health, or accident insurance;

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(c) The insurance is taken on his life; and (d) The beneficiary (the person designated to receive the proceeds of the insurance upon the happening of the event insured against) is any of those enumerated by law. (2) Other insurance. — A contract of insurance other than life, health, or accident insurance, such as fire or marine insurance, entered into by a minor is not entirely void. It is one which is merely voidable, that is, it is valid until annulled in a proper action in court by the minor or his legal representative. (Art. 1390, Civil Code.) If the contract is not disaffirmed by the minor, the insurer cannot escape liability by pleading minority as a defense because "persons w h o are capable cannot allege the incapacity of those with w h o m they contracted." (Art. 1397, ibid.) But if the contract is fair and no fraud or undue influence was practiced by the insurer, the minor cannot recover the premiums paid, if he cannot return the benefits received, (see Arts. 1385, 1241, par. 1, 1427, ibid.; Johnson vs. Northwestern Mut. L. Ins. Co., 59 N.W. 992.) The result is that an insurance company contracting with a minor is bound by the contract; the minor ordinarily is not.

Ownership of life insurance policy. (1) Interest of person who insured his own life. — Ownership of a m o d e m life insurance policy is divided between the insured and the beneficiary (infra.), the insured being the owner of its various marketing and sales features, such as the loan and cash surrender values, and the beneficiary being the owner of a promise to pay the proceeds at the death of the insured subject to the insured's right of revocation. (Gordon vs. Portland Trust Bank, 53 ALR 2d 1106; 43 Am. Jur. 2d. 310-311.) One who takes a policy of insurance on his own life becomes, in so doing, a party to the contract, even though the benefits of the insurance are to accrue to someone else known as beneficiary. Such contract remains his, at least, in part, and may be maintained by suit, if necessary, for the protection of those in whose favor it is made. (Heffelfinger vs. Comm., 302 US 690; 43 Am. Jur. 2d 310.)

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(2) Interest of beneficiary. — In general, the nature of the interest of the beneficiary depends on the terms of the insurance contract, including the existing statutes by which the insurer and its policyholders are bound. Under our Code, the married woman or the minor allowed to take out an insurance policy may exercise all the rights and privileges of an owner, as insured a n d / o r beneficiary. (Sec. 3, par. 4; see Sec. 180, par. 3.) (3) Transfer of rights to minor insured upon death of original owner of policy. — Upon the death of the original owner of a policy of insurance taken out by him on the life or health of a minor, all rights, title and interest in the policy shall automatically vest in the minor unless otherwise provided for in the policy. (Sec. 3, par. 5.) This contemplates a case where X took a life insurance on the life or health of his son Y, a minor, appointing himself (X) as beneficiary, and later X died. 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. Concept of lottery. The term "lottery" extends to all schemes for the distribution of prizes by chance, such as policy playing, gift exhibition, prize concerts, raffles at fairs, etc., and various forms of gambling. The three essential elements of lottery are: (1) consideration; (2) prizes; and (3) chance. (Uy vs. Palomar, 27 SCRA 287 [1969].) There is consideration of price paid if it appears that the prizes offered by whatever name they m a y be called came out of the fund raised by the sale of chances among the participants in order to win the prizes. Conversely, if the prizes do not c o m e out of the fund or contributions by the participants, no consideration has been paid and consequently, there is no lottery, (ibid.) Thus, there is no lottery where a company, to promote the sale of certain products, resorts to a scheme which envisions the giving away for free of certain prizes for the purchase of said products, for the participants are not required to pay more than the usual price of the products. Under the scheme, prizes can be obtained without any additional consideration. (Phil. Refining Co. vs. Palomar,

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148 SCRA 313 [1987]; Palomar vs. CFI of Manila, 165 SCRA 162 [1988].) It can be clearly seen from the language of Section 4 that a sweepstake holder cannot insure himself against the failure of his ticket to win a prize because even if he were not to win, it cannot be said that he suffered a "loss" of the prize. In other words, the failure to win a prize would not damnify or create a liability against him.

Contract of insurance not a wagering contract. A contract of insurance is a contract of indemnity and is not a wagering or gambling contract, (see Sec. 25.) While it is based on a contingency, it is not a contract of chance and is not used for profit. The very purpose of insurance is the reimbursement of the holder of insurance for actual loss suffered from specified risks. The distinctions are the following: (1) In a gambling contract, the parties contemplate gain through mere chance {i.e., occurrence of the contingent event), while in a contract of insurance, the parties seek to distribute possible loss by reason of mischance; (2) The gambler courts fortune, while the insured seeks to avoid misfortune; (3) The contract of gambling tends to increase the inequality of fortune, while the contract of insurance tends to equalize fortune (see Vance, op. ext., p. 93.); (4) The essence of gambling is this: whatever one person wins from a wager is lost by the other wagering party. In a contract of insurance, what one insured gains is not at the expense of another insured. Basically, it can be said that the entire group of insureds provides through the premiums paid, the funds which make possible the payment of all claims; and (5) As soon as a party makes a wager, he creates a risk of loss to himself where no such risk existed previously. On the other hand, the purchase of insurance does not create a new and, therefore, non-existing risk of loss to the purchaser. Instead, the only intelligent reason for purchasing insurance is that

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the purchaser faces an already existing risk of economic loss. (Protection Functions of Life and Health Insurance, by William T. Beadles, in Life and Health Insurance Handbook, edited by Gregg & Lucas [3rd ed.], p. 29, hereinafter cited as LHIH.) One can insure only if he has an insurable interest in the subject of insurance, (see Sees. 3[par. 1], 1 0 , 1 3 . ) Similarity between insurance and gambling. Insurance and gambling are similar in only one respect. In both cases, one party promises to pay a given sum to the other upon the occurrence of a given future event, the promise being conditioned upon the payment of, or agreement to pay, a stipulated amount by the other party to the contract. This means that in either case, one party m a y receive more, much more, than he paid or agreed to pay. At this point, similarity ceases between gambling and insurance. (W.T. Beadles, in L H I H , op. ext., p. 30.) EXAMPLES: (1) Ten members of a cycling team contributed P2,000.00 each to a fund available for the use of any member injured while participating in the Tour of Luzon contest. This is insurance. Each member contributes to a common fund, out of which he is reimbursed for losses he may suffer. (2) Suppose, in the same example, the agreement was that the entire sum of P20,000.00 would be given to any team member who would win the most laps. This is a wager. Here, the parties contemplate gain based upon uncertain events. Sec. 5. All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply. Applicability of provisions of Chapter 1. By virtue of Section 5, the provisions of Chapter 1 on "The Contract of Insurance" (Sees. 1-98.) are also applicable to Marine Insurance (Sees. 99-166.), Fire Insurance (Sees. 167-173.), Casualty Insurance (Sec. 174.), Suretyship (Sees. 175-178.), Life Insurance

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(Sees. 179-183.), and to any other kind of insurance (see Sec. 2.) so far as said provisions can apply. Matters not expressly provided for in the Insurance Code and special laws on insurance are regulated by the Civil Code. (Art. 2011, Civil Code.) So, an insurance contract under Republic Act No. 1161 (Social Security Act of 1954.), as amended, shall be governed primarily by the said law and subsidiarily, by Chapter 1 of the Insurance Code, and in the absence of applicable provisions in both laws, the pertinent provisions of the Civil Code shall be applied.

— oOo —

Title 2

PARTIES TO THE CONTRACT Sec. 6. Every person, partnership, association, or corporation duly authorized to transact insurance business as elsewhere provided in this Code, may be an insurer, (a) Parties to a contract of insurance. The two parties to a contract of insurance are: (1) The insurer or the party w h o assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured or to pay him a certain sum on the happening of a specified contingency or event. Under the Code, the business of insurance m a y be carried on by individuals just as much as by corporations and associations. As a matter of fact, in the early days, a large proportion of the risks was underwritten by private individuals. Gradually, this form of doing business has fallen into disuse and today, the business of insurance is conducted almost exclusively by corporations or associations. It has been stated that the State itself m a y go into insurance business (Vance, op. cit., pp. 309-310.); and (2) The insured or the second party to the contract, the person in whose favor the contract is operative and w h o is indemnified against, or is to receive a certain sum upon the happening of a specified contingency or event. He is the person whose loss is the occasion for the payment of the insurance proceeds by the insurer. The insured is not, however, always the person to w h o m the proceeds are paid. This person m a y be the beneficiary designated in the policy, (infra.) It is also possible that the insured m a y assign the proceeds of the insurance to someone else. 70

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It is said that the relation between the insurer and the insured is that of a contingent debtor and creditor, subject to the conditions of the policy and not that of trustee and cestui que trust. (Ibid., p. 116.) Terms used. (1) "Insurer" is synonymous with the term "assurer" or "underwriter." (Black's L a w Dictionary, 2nd ed.) The insurance company is sometimes called "underwriter." (2) The terms "insured" and "assured" are generally used interchangeably; but strictly speaking, the term "insured" refers to the owner of the property insured or the person whose life is the subject of the contract of insurance, while "assured," to the person for whose benefit the insurance is granted. 1

Thus, where a wife insures the life of her husband for her own benefit, the wife is the assured and the husband, the insured. The wife, the individual w h o contracts with the insurer is the owner of the policy but she is not the insured. Also, the owner of a life policy is not necessarily the one who contracted with the insurer nor the insured in the case of a purchaser of a policy on the life of another (assuming the insurable interest requirement is met). In property insurance, like fire insurance, the insured is also the assured where the proceeds are payable to him. (3) "Assured" is also used sometimes as a synonym of "beneficiary." The beneficiary is the person designated by the terms of the policy as the one to receive the proceeds of the insurance. He is the third party in a contract of life insurance (see Sees. 179-180.) for whose benefit the policy is issued and to w h o m the loss is payable. (44 C.J.S. 497.) There are occasions when the proceeds are paid to the estate of the insured. Who may be an insurer. (1) Foreign or domestic insurance company or corporation. — Before a foreign or domestic insurance company or corporation

i n s u r a n c e contracts are usually obtained through an "agent" who is ordinarily employed by the Insurance C o m p a n y or a "broker" who is ordinarily an independent contractor, (see Sees. 299-302.) In effect, the former is an agent of the applicant for Insurance.

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Sec. 6

may transact insurance business in the Philippines, it must first obtain a certificate of authority for that purpose from the Insurance Commissioner who may refuse to issue such certificate of authority if, in his judgment "such refusal will best promote the interests of the people of this country" (Sec. 187.) (2) Individual partnership, or association. — Although insurance business is ordinarily carried on by partnerships and corporations, yet any individual may be an insurer, the only requisite being that "he holds a certificate of authority from the Insurance Commissioner." (Sec. 6.) Any person, partnership, or association of persons may be given a certificate of authority if such person, partnership, or association is "possessed of the capital assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner." (see Sees. 184-186.) (a) An "insurance corporation" is defined by the Code as one "formed or organized to save any person or persons or other corporations harmless from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debts of others." (Sec. 185.) The last part of the statement of purpose refers to suretyship, (see Sec. 175.) (b) For purposes of the Code, the terms, "insurer" and "insurance company" "include all individuals, partnerships, associations, or corporations, including government-owned or controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the terms shall also include professional reinsurers defined in Section 280." (Sec. 184.) 2

2

U n d e r the General Banking L a w of 2 0 0 0 (R.A. No. 8791.), "a b a n k shall not directly e n g a g e in insurance business as the insurer." (Sec. 54.) T h r o u g h the marketing tool known as "bancassurance," insurance c o m p a n i e s are able to i m p r o v e the distribution of their insurance products through branch network. Bancassurance combines the business of banking and insurance where an insurer utilizes bank branches to distribute insur-

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Business of insurance affected with public interest. It is recognized that the business of insurance is one that is affected with a public interest and, therefore, it is subject to regulation and control by the state by virtue of the exercise of its police power or in the interest of public convenience and the general good of the people. (29 Am. Jur. 60-61.) An insurance company, in effect, is an instrumentality which gathers funds u p o n the basis of equality of risk from a greater number of persons, sufficiently large in number to arouse the element of chance to step out and the law of averages to step in as the controlling factor — and holds the numerous amounts so collected as general fund to be paid out to those w h o shall suffer losses. In this fund, which thus constitutes a guaranty against individual loss, all are interested not in some vague w a y but in a very real sense. (Tyson vs. Banton, 273 U.S. 418.) Thus, a law requiring insurance companies to file schedule of rates and prohibiting discriminatory rates, was held valid on the ground that the business of insurance affects the public welfare as to invoke and require governmental regulation. "Accidental fires are inevitable and extent of the loss is very great. The object of the regulation is to distribute the loss over as wide an area as possible. In other words, the loss is spread over the country, the disaster to an individual is shared by many, the disaster to a community shared by other communities; great catastrophies are, therefore, lessened." (German Alliance Ins. Co. vs. Lewis, 223 U.S. 889.)

Sec. 7. Anyone except a public enemy may be insured. ance policies. Presently, the BSP allows banks to sell insurance products at their branches. U n d e r the law, banks are allowed to engage in non-allied undertakings but only through subsidiaries or affiliates. To comply with the ownership rule, a major insurance company can set up a subsidiary and sell 5% of equity to a bank. The policies or products that would be sold through that bank would have to be the products of the acquired insurance unit. U n d e r present rules, only commercial and universal banks are authorized to enter into a bancassurance tie-up with insurers, while thrift bank subsidiaries are disallowed. BSP Circular No. 683 (Feb. 23, 2 0 1 0 ) prescribes the guidelines on the marketing, sale and servicing (e.g., collecting p r e m i u m s and paying claims) of micro-insurance products (as defined Ins. Memo. Cir. No. 1-2010) by a rural, cooperative, or thrift-bank provided the micro-insurance product is duly approved by the Insurance Commission.

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Capacity of party insured. (1) Natural person. — In order that a person m a y be the party insured in a contract of insurance, two essential requisites are necessary, to wit: (a) He must be competent to make a contract (see Arts. 1327-1329, Civil Code.); and (b) He must possess an insurable interest in the subject of the insurance. (Vance, op. cit. p. 143.) f

A third requisite, applicable also to juridical persons, m a y be added, i.e., that the insured must not be a public enemy. (Sec. 7.) (2) Juridical person. — A juridical person, like a partnership or a corporation, m a y take out insurance on property owned by it. (see Arts. 44, 45, Civil Code.) Note that Section 3 specifically authorizes minors, 18 years or more to take out insurance payable to a limited class of beneficiaries. Meaning of public enemy. Apublic enemy designates a nation with w h o m the Philippines is at w a r and it includes every citizen or subject of such nation. The term m a y be taken to m e a n "alien enemy." A mob, however numerous they m a y be, or robbers or thieves whoever they m a y be, are never considered public enemies for purposes of the above provision, (see Bouvier's L a w Dictionary; Russel vs. Fagan, 4 Atl. 258.) During wartime, a private corporation is deemed an enemy corporation although organized under Philippine laws if they are controlled by enemy aliens. This is the so-called "control test" whereby a corporation is deemed to have the same citizenship as the controlling stockholders in time of war. (Filipinas Cia de Seguros vs. Christern Huenefeld & Co., 89 Phil. 54 [1951]; S. Winshop vs. Phil. Trust Co., 90 P h i l 744 [1952].) Effect of war on existing insurance contracts. (1) Where parties rendered enemy aliens. — By the law of nations, all intercourse between citizens of belligerent powers which is

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inconsistent with a state of w a r is prohibited. The purpose of war is to cripple the power and exhaust the resources of the enemy. It is inconsistent that the subjects of one country should lend their assistance to protect by insurance, the commerce or property of belligerent alien subjects or to do anything detrimental to their country's interests, (see 6 Couch, Cyclopedia of Insurance Law, pp. 5352-5353.) Of course, if the parties are not rendered enemy aliens by the intervention of war, the policy continues to be enforceable according to its terms and the laws governing insurance and the general rules regarding contracts. The effect of w a r between countries of the insured and the insurer upon insurance contracts validly entered into during peacetime is a question upon which there is a decided conflict of authority. (a) With respect to property insurance. — The rule adopted in the Philippines is that an insurance policy ceases to be valid and enforceable as soon as an insured becomes a public enemy. (Filipinas Cia de Seguros vs. Christern Huenefeld & Co., Inc., supra.) (b) With respect to life insurance. — Three rules or doctrines have arisen. One of these rules is the United States Rule which declares that the contract is not merely suspended but is abrogated by reason of nonpayment of premiums, since the time of the payments is peculiarly of the essence of the contract. However, the insured is entitled to the cash or reserve value of the policy (if any), which is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force. (New York Life Ins. vs. Statham, 93 U.S. 24.) This rule has been specifically followed by our Supreme Court, (see Constantino vs. Asia Life Ins. Co., 87 Phil. 248 [1950]; also McGuire vs. The Manufacturer's Life Ins. Co., 87 Phil. 370 [1950]; Nat. Leather Co., Ins. vs. U.S. Life Ins. Co., 87 Phil. 410 [1950]; Vda. de Carrero vs. Manufacturer's Life Ins. Co., 87 Phil. 460 [1950]; Gonzaga vs. Crown Life Ins. Co., 91 Phil. 10 [1952].) (2) Where loss occurs after end of war. — Since the effect of war is not merely to suspend but to abrogate the contract of insurance between citizens of belligerent states, the termination of the war

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does not revive the contract. Consequently, the insurer is not liable even if the loss is suffered by the insured after the end of the war. 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. Insurable interest of mortgagee and mortgagor. (1) Separate insurable interests. — The m o r t g a g o r and the mortgagee have each an insurable interest in the property mortgaged (Sec. 13.), and this interest is separate and distinct from the other. Consequently, insurance taken by one in his o w n name only and in his favor alone, does not inure to the benefit of the other. (Sec. 53.) A n d in case both of them take out separate insurance policies on the same property, or one policy covering their respective interests, the same is not open to the objection that there is double insurance, (see Sec. 93.) (2) Extent of insurable interest of mortgagor. — The m o r t g a g o r of property, as owner, has an insurable interest therein to the extent of its value, even though the mortgage debt equals such value. (Higginson vs. Dall, 13 Mass. 96.) The reason is that the loss or destruction of the property insured will not extinguish his mortgage debt. (3) Extent of insurable interest of mortgagee. — The mortgagee (or his assignee) as such has an insurable interest in the mortgaged property to the extent of the debt secured, since the property is relied upon as security thereof, and in insuring, he is not insuring

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the property itself but his interest or lien thereon. His insurable interest (Sec. 10.) is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property. Such interest continues until the mortgage debt is extinguished. Thus, separate insurances (see Sec. 93.) covering different insurable interests m a y be obtained by the mortgagor and the mortgagee. (44 C.J.S. 883-884; see Palileo vs. Cosio, 97 Phil. 919 [1966] and 17 SCRA 196 [1966]; Geagonia vs. Court of Appeals, 241 SCRA 152 [1995].) (4) Extent of amount of recovery. — The mortgagor cannot recover upon the insurance beyond the full amount of his loss and the mortgagee, in excess of the credit at the time of the loss nor the value of the property mortgaged. EXAMPLE: R is the owner of a house worth P1,000,000.00 which he mortgaged to E to secure a loan of P500,000.00. The insurable interest of R, mortgagor, is P1,000,000.00, while that of E, mortgagee, is P500,000.00. The insurance taken by R upon his own interest only does not inure to the benefit of E. R may claim in case of loss, the entire proceeds or amount of his loss and may sue thereon in his own name. E has no right to claim the proceeds of the policy. Conversely, R has no interest in the insurance taken out by E on his own interest (San Miguel Brewery vs. Law Union, Inc., 40 Phil. 674 [1920].) but if the loss occurs after the debt has been discharged by payment or otherwise, E may not recover because insurance is merely a contract of indemnity. (Sec. 17.) Insurance by mortgagee of his own interest. (1) Right of mortgagee in case of loss. — Where the mortgagee, independently of the mortgagor, insures his own interest in the mortgaged property, he is entitled to the proceeds of the policy in case of loss before payment of the mortgage. (2) Subrogation of insurer to right of mortgagee. — In such case, the mortgagee is not allowed to retain his claim against the mortgagor but it passes by subrogation to the insurer to the

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extent of the insurance money paid. (Palileo vs. Cosio, 97 Phil. 919 [1955]; Lyden vs. Lawrence, 81 A. 121.) (3) Change of creditor. — In other words, the payment of the insurance to the mortgagee by reason of the loss does not relieve the mortgagor from his principal obligation but only changes the creditor, (see Arts. 1291[3], 1300, Civil Code.) So, in the preceding example, the insurer can collect from R, mortgagor, to the extent of the amount paid to E, creditormortgagee. E cannot collect both the insurance and the mortgage debt.

Insurance by mortgagor of his own interest. (1) For his own benefit. — The mortgagor m a y insure his own interest as owner for his benefit. In case of loss, the insurance proceeds do not inure to the benefit of the mortgagee w h o has no greater right than unsecured creditors in the same. (2) For the benefit of mortgagee. — It is competent, however, for the mortgagor to take out insurance for the benefit of the mortgagee, where he pays the insurance premium, making the loss payable to the mortgagee. Indeed, this is the usual practice. The mortgagee m a y be m a d e the beneficial payee in several ways: (a) He m a y become the assignee of the policy with the consent of the insurer; (b) He m a y be the mere pledgee without such consent; (c) A rider (see Sec. 50.) making the policy payable to the mortgagee "as his interest m a y appear" m a y be attached; (d) A "standard mortgage clause" containing a collateral independent contract between the mortgagee and the insurer m a y be attached; or (e) The policy, though, by its terms payable absolutely to the mortgagor; m a y 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.

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Insurance by mortgagor for benefit of mortgagee, or policy assigned to mortgagee. Under Section 8, where the 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 the mortgagee, the following are the legal effects: 3

(1) The contract is deemed to be upon the interest of the mortgagor; hence, he does not cease to be party to the contract; (2) A n y act of the mortgagor prior to the loss, which would otherwise avoid the insurance (like storing inflammable materials in the insured house) affects the mortgagee even if the property is in the hands of the mortgagee; (3) A n y act which under the contract of insurance is to be performed by the m o r t g a g o r (like payment of the premium) m a y be performed by the mortgagee with the same effect; (4) In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit; and (5) U p o n recovery by the mortgagee to the extent of his credit, the debt is extinguished. The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case. EXAMPLE: R insured his house worth Pl,200,000.00 for P1,000,000.00, with the policy providing that the loss shall be payable to E (or R subsequently, assigns the policy to E). The house was mortgaged to E as security for a loan of P600 000.00. It was totally destroyed by accidental fire. Who may recover on the policy? /

E, mortgagee, is entitled to the insurance proceeds to the extent of his credit of P600,000.00. He shall hold as trustee for R, mortgagor, the excess of P400,000.00. If before the loss, the mortgage debt had already been paid, R would be entitled to recover the P1,000,000.00 from 3

In the case of fire or marine insurance which m a y be assigned before it becomes a fixed liability (see Sec. 83.), the assignment must be with the consent of the insurer because it is a personal contract.

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the insurer. R effected the insurance in his own name and he did not cease to be a party to the original contract although the policy provided that the loss shall be payable to E (or he assigned the policy to E). Effect of standard and open clauses in fire insurance policy. (1) If a fire insurance policy contains a standard or union mortgage clause, the acts of the mortgagor do not affect the mortgagee. The purpose of the clause is to make a separate and distinct contract of insurance on the interest of the mortgagee. Thus, a mortgagee m a y procure a policy, as a contracting party in accordance with the terms of an agreement by which the mortgagor is to pay upon such insurance. (Geagonia vs. Court of Appeals, supra.) (2) An open or loss-payable mortgage clause merely provides for the payment of loss, if any, to the mortgagee as his interest may appear (see Sec. 57.) and under it, the acts of the mortgagor affect the mortgagee. If the policy is obtained by the mortgagor with a loss-payable clause in favor of the mortgagee as his interest m a y appear, the mortgagee is only a beneficiary under the contract and recognized as such by the insurer but not m a d e a party to the contract itself. 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 issuing of the policy. Thus, where the insurance policies issued by the insurer name the mortgagor as the assured and contain a mortgage clause which reads: "Loss, if any, shall be payable to X (mortgagee) as its interest m a y appear subject to the terms of this policy/' it was held that this is clearly a simple loss payable clause, not a standard mortgagee clause. (Geagonia vs. Court of Appeals, supra.) Right of mortgagee under mortgagor's policy. The contract of indemnity under such policy is primarily with the mortgagor, but the mortgagee is a third party beneficiary.

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(1) Before loss. — Before a loss occurs, the mortgagee is a conditional appointee of the mortgagor entitled to receive so much of any sum that m a y become due under the policy as does not exceed his interest as mortgagee. Such right becomes absolute upon the occurrence of the loss. (2) After loss. — If the loss happens when the credit is not due, the mortgagee is entitled to receive the money to apply to the extinguishment of the debt as fast as it becomes due. (Sisk vs. Repuane, 108 Atl. 858.) On the other hand, if the loss happens after the credit has matured, the mortgagee m a y apply the proceeds to the extent of his credit. (RD. C a r m a n & Co. vs. Zaborsky, [C.A.] 36 O.G. 1979.)

Effect of insurance by mortgagee on behalf of mortgagor. (1) Discharge of debt. — Practically the same rules obtain when the mortgagee himself procures the policy as a contracting party in accordance with the terms of an agreement by which the mortgagor is to p a y the premiums upon such insurance. U p o n the destruction of the property, the mortgagee is entitled to receive payment from the insured but such payment discharges the debt if equal to it, and if greater than the debt, the mortgagee holds the excess as trustee for the mortgagor. (2) Right to subrogation. — If there is a stipulation that the insurer shall be subrogated to the rights of the mortgagee, the payment of the policy will not discharge the debt even though the mortgagee m a y have procured the policy by arrangement with the mortgagor. (Vance, op. cit, p. 775.) If there is no such stipulation, the rule on subrogation does not apply except where the mortgagee insures only his interest, (supra.) EXAMPLE: Suppose, in the preceding example, the house was insured by E for P150,000.00. If the loss by fire occurred before the payment of the loan of P100,000.00, E would be entitled to collect from the insurer P100,000.00 only, the amount of his credit. If the loss occurred after the payment of the loan, E cannot recover because he had no insurable interest in the property mortgaged at the time of the loss.

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Sec. 9

In either case, R cannot recover because he is not the insured. 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 obligations on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of said assignee. Assignment or transfer of insurance policy. The effect of an assignment or transfer is to substitute the assignee or transferee in place of the original insured in respect to the right to claim indemnity or payment for a loss as well as the obligation to perform the conditions, if any, of the policy. The assignee, unless he makes a new contract with the insurer, acquires no greater right under the insurance than the assignor had, subject to insurer's defenses. (1) As to fire policy. — By the great weight of authorities, a fire policy before it becomes a fixed liability is not subject to assignment, being strictly a personal contract, in the absence of provision in the contract or subsequent consent of the insurer. (6 Couch 5138.) The insurer is naturally concerned about the moral character of the insured and should not be compelled to become an insurer to an assignee to w h o m he would have declined to issue a policy and w h o could materially alter the risks assumed by the insurer without his consent. (2) As to marine policy. — It is generally recognized, however, that a policy of marine insurance is assignable even without the consent of the insurer unless required by the terms of the policy. (Spring vs. South Carolina Ins. Co., 8 Wheat 268, 5 L. Ed. 614.) Nevertheless, it is believed that a marine policy just like a fire 4

4

T h e rule that marine policies are assignable without the consent of the insurer, in the absence of an express provision to the contract in the policy, b e c a m e established at a time w h e n m e a n s of c o m m u n i c a t i o n b e t w e e n distant places w e r e slow and difficult a n d great inconvenience would h a v e resulted if the o w n e r of an insured ship or c a r g o h a d to wait until he could get the consent of the insurer before he could assign it along with the insurance covering it. The inconvenience to the insured of having substituted an o w n e r w h o might, by his w a y of dealing with the ship, increase the risks a s s u m e d by the insurer. (E.W. Patterson, op. ext., 210.)

Sec. 9

CONTRACT OF INSURANCE Title 2. — Parties to the C o n t r a c t

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policy, is not assignable without the consent of the insurer, (see Sees. 5 , 1 9 , 20, 58.) (3) As to casualty policy. - The insurer's consent is also required. This type of insurance (see Sec. 174.) commonly involves moral hazards at least as great as those of fire insurance. Thus, theft and burglary insurance and motor vehicle insurance involve obvious moral hazards; hence, such policies are not freely assignable without the insurer's consent. (E.W. Patterson, op. cif,p.2[3].) (4) As to life policy. — With respect to life insurance, the policy m a y freely be assigned before or after the loss occurs, to any person whether he has an insurable interest or not. (see Sec. 181.) However, an assignment of a life policy to a person without an insurable interest, which the insured makes in bad faith and under such circumstances as where there was a preconceived agreement that the policy was to be assigned for the purpose of accomplishing an illegal purpose, that is, permitting the assignee of the policy to w a g e r on the length of life of the insured, will not be upheld. Note: A distinction must be made between the assignment or transfer (a) of the policy itself which transfers the rights to the contract to another insured, (b) of the proceeds of the policy after a loss has happened, which involves a money claim under, or a right of action on, the policy (see S e c 83.), and (c) of the subject matter of the insurance, such as a house insured under a fire policy which has the effect of suspending the insurance until the same person becomes the owner of both the policy and the thing insured, (see Sees. 19, 20, 21.) Right of mortgagor to assign insurance policy to mortgagee. The right of the mortgagor to assign or transfer an insurance policy is recognized in Section 8 of the Code. Section 9 only gives

With the establishment of telegraph, cable, radio and other modern means of communication, the justification for the rule disappears. Furthermore, marine insurance now includes insurance against perils of property on land, (see Sec. 99.)

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Sec. 9

the effect if the insurer agrees to the transfer of the policy and, at the time of his assent, imposes new obligations on the assignee. However, neither section makes a distinction as to the kind of insurance policy that is assignable.

Effect of new contract between insurer and mortgagee-assignee. The assignment of a fire insurance policy by the mortgagor to the mortgagee with the consent of the insurer does not convert the contract into one of indemnity to the mortgagee. The contract remains with the mortgagor as it is his interest alone that is covered. The assignment operates merely as an equitable transfer of the policy so as to enable the mortgagee to recover the amount due in case of loss subject to the conditions of the policy. (45 C.J.S. 438.) However, where a new and distinct consideration passes from the mortgagee to the insurer, a new contract is created between them, (ibid.) A novation of the original contract takes place. Hence, the acts of the mortgagor cannot affect the rights of the mortgagee, the assignee. (Sec. 8.) 5

— oOo —

5

Article 1291. Obligations m a y be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (Civil C o d e )

Title 3

INSURABLE INTEREST Sec. 10. Every person has an insurable 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, (a) Insurable interest in general. An insurable interest is one of the most basic of all requirements in insurance. In essence, it is that interest which the law requires the owner of an insurance policy to have in the person or thing insured. (1) Pecuniary in nature. — In general, a person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary or financial benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. (Lalican vs. Insular Life Insurance Co., Limited, 597 SCRA 159 [2009], citing De Leon, Insurance Code of the Philippines Annotated [2002 ed.], p. 85; 44 C.J.S. 870.) (a) Interest does not necessarily imply a right to the whole or a part of a thing. To have an interest in the preservation of a thing is to be circumstanced with respect to it as to have benefit from its existence and prejudice from its destruction. 85

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(b) The property of a thing and the interest devisable from it may be very different; of the first, the price is generally the measure, but by interest in a thing, every benefit or advantage arising out of or depending on such thing may be considered as being comprehended. (Dindsdale & McMundie, supra., p. 78, citing Lucena vs. Crawfurd [1806], 2 Bos. & P.N.R. 269.) (2) Exception. — The term has a somewhat broader meaning in connection with life insurance. To have an insurable interest in the life of a person, the expectation of benefit from the continued life of that person need not necessarily be of a pecuniary nature. (infra.) Necessity of insurable interest to validity of contract. The existence of insurable interest is a primary concern in determining the liability of an insurer under a policy of insurance. Insurable interest m a y be in life and health (Sec. 10.), or in property. (Sees. 1 3 , 1 4 . ) (1) The existence of insurable interest gives a person the legal right to insure the subject of the policy of insurance. In the absence of such interest, the person insuring in effect would be gambling (see Sees. 3[par. 1], 4, 18, 25.), which is prohibited by law. (Revised Penal Code, Art. 195.) It is a fundamental postulate of all insurance that it must not be a mere bet upon a future event. (44 C.J.S. 869.) (2) The rule is that an insurable interest is necessary to the validity of an insurance contract whatever the subject matter of the policy, whether upon property or life. A policy issued to a person without interest in the subject matter insured is a mere wager policy or contract and is void for illegality. (Sees. 18, 25.) The insurable interest requirement is held not to apply to industrial life insurance, (see Sees. 229-231.) Requirement, a matter of public policy. (1) As a deterrence to the insured. — The requirement of an insurable interest to support a contract of insurance is based

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upon considerations of public policy which render wager policies invalid. A wager policy is obviously contrary to public interest. It is demoralizing in that: (a) It allows the insured to have an interest in the destruction of the subject matter rather than in its preservation (Myer vs. Grand Lodge, A.O.N.W., 36 N.E. 429.); or (b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring to pass the event upon the happening of which the insurance becomes payable. (White vs. Equitable Nuptial Benefit Union, 76 Ala. 251.) (2) As a measure of limit of recovery. — The legal requirement has been devised with another object in view. If and to the extent that any particular insurance contract is a contract to pay indemnity, the insurable interest of the insured will be the measure of the upper limit of his provable loss under the contract. (E.W. Patterson, op. cit., p. 109.) The insurance should not provide the insured with the means of making a net profit from the happening of the event insured against. The requirement is enforced and the defense permitted not in the interest of the insurer but of a sound public policy.

Two general classes of life policies. Life insurance policies may be divided into two general classes. (1) Insurance upon one's life. — In one class are those taken out by the insured upon his own life (Sec. 10[a].) for the benefit of himself, or of his estate, in case it matures only at his death, or for the benefit of a third person who may be designated as beneficiary. An application for insurance on one's own life does not usually present an insurable interest question. (2) Insurance upon life of another. — In the other class belong policies taken out by the insured upon the life of another, (ibid., [a], [b], [c], and [d]; Vance, op. cit., p. 188.) When one applies for insurance on the life of another for the former's benefit, he must have an insurable interest in the life of that person.

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Sec. 10

Insurable interest in one's own life. Every person has an unlimited insurable interest in his own life (40 C.J.S. 909.) whether the insurance is for the benefit of himself or another; and it is not at all necessary that the beneficiary designated in the policy should have any interest in the life of the insured. 1

(1) Insurance taken out by insured on his life for the benefit of another. — The presence of insurable interest is really required only as evidence of the good faith of the parties. It is contrary to human experience that a person will insure his own life for the benefit of another for the purpose of speculation, to be tempted to take his own life in order to secure the payment of money to another, or designate as the beneficiary, a person interested in the destruction and not in the continuance of his life. Consequently, the mere fact that a m a n on his o w n motion insures his life for the benefit either of himself or of another is sufficient evidence of good faith to validate the contract. (29 A m . Jur. 312; Vance, op. cit., p. 188.) Although there are cases on record where the beneficiary without interest has yielded to the temptation to terminate unlawfully the life insured as if he himself had taken out the policy, the law considers this danger too slight for notice, since the selection of the beneficiary by the insured is in ordinary cases sufficient guaranty of the existence of such good faith and confidence between them as will sufficiently protect the insured. (Ibid., op. cit, p. 189.) (2) When the insurance regarded a wager policy. — An exception to the general rule exists in cases in which the court finds that a wagering policy has been taken out by the insured on his life at the behest of a third person who is n a m e d as beneficiary. Evidence of a wagering policy (see Sees. 18, 25.) is usually found in such facts as: (a) that the original proposal to take out insurance was that of the beneficiary; ]

To say that every m a n has an insurable interest in his o w n life is inaccurate, since a m a n does not suffer loss by his o w n death or at least does not survive to claim indemnity for that loss. Hence, it is better to say that the question of insurable interest is immaterial where the policy is procured by the person whose life is insured. (E.W. Patterson, op. cit., pp. 166-169.)

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(b) that premiums are paid by the beneficiary; and (c) that the beneficiary has no interest, economic or emotional, in the continued life of the insured. On finding that such a policy is primarily a wager, the court will generally void the policy entirely. (J.F. Dobbyns, op. cit, pp. 60-61.) In any case, there is no question that under our law (Sec. ll[a].), a person has an insurable interest in his own life. But if the policy is applied for and owned by someone other than the insured, the applicant-owner must have an insurable interest in the life of the insured.

Similarity between a life insurance policy and a civil donation. A donation is an act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it. (Art. 725, Civil Code.) In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of die policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 (infra.) of the Civil Code should equally operate in life insurance contracts. (The Insular Life Assur. Co. vs. Ebrado, 80 SCRA 181 [1977].) Under Article 87 of the Family Code (Exec. Order No. 209.), "Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. The prohibition shall apply also to persons living together as husband and wife without a valid marriage/' A life insurance policy taken by a spouse on his (her) life in favor of the other takes effect after the death of the insured. 2

2

T h e sentence "The prohibition does not apply when the donation takes effect after the death of the donor" in Article 133 of the Civil Code is deleted in Article 87 of the Family Code.

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Sec. 10

Insurable interest in life of another. (1) Insurance for benefit of insured. — A person cannot lawfully procure insurance for his own benefit on the life of another in whose life he has no insurable interest. (44 C.J.S. 896.) The insurable interest in the life of another must be a pecuniary one (related to money) and it exists whenever the relation between the assured and the insured, whether by blood, marriage or commercial intercourse, is such that the assured has a reasonable expectation of deriving benefit from the continuation of the life insured or of suffering detriment or incurring liability through its termination. Or to put it more briefly, the policy of the law requires that the assured shall have an interest to preserve the life insured in spite of the insurance, rather than destroy it because of the insurance. (Vance, op. cit., p. 190.) (2) Insurance for benefit of a third party. — W h e n the owner of the policy insures the life of another — the cestui que vie — and designates a third party as beneficiary, both the owner and beneficiary must have an insurable interest in the life of the cestui que vie. If the insurable interest requirement is satisfied (see Sec. 19.), a life policy is assignable regardless of whether the assignee has an insurable interest in the life of the cestui que vie. (see Sec. 181.) Under our law, in order that one m a y have an insurable interest in the life of another, it must be one of those mentioned ([a], [b], [c], and [d].) in Section 10 of the Insurance Code, i.e., the interest is pecuniary or founded upon the close relationship between the parties. Hence, the mere fact that two persons are engaged to be married does not give one an insurable interest in the life of the other. EXAMPLE: X takes an insurance on his own life and names his friend Y as beneficiary and another insurance on Y's life with himself (X) as beneficiary. The first insurance is valid because the beneficiary (Y) need not have an insurable interest in the life of the insured. The second insurance is void because X has no insurable interest on the life of Y.

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Insurable interest in life of person upon whom one depends for education or support or in whom he has a pecuniary interest. (1) When mere blood relationship sufficient. — In the United States, numerous decisions hold that pecuniary benefit is not the only test. Thus, the mere relationship of brother or sister, father or child is sufficiently close to give either an insurable interest in the life of the other. The reasoning upon which the rule is based is that the natural affection in cases of this kind is considered sufficient, if not m o r e powerful, to protect the life of the insured than any other consideration. The essential thing is this: that the policy shall be obtained in good faith, and not for the purpose of speculating upon the hazard of a life in which the insured has no interest. (Connecticut Mut. L. Ins. Co. vs. Schefer, 94 U.S. 457.) Generally, blood or material relationships fit the concept of insurable interest. In any event, the following have an insurable interest in each other's life since under the provisions of Article 195 of our Family Code (Exec. Order No. 209.), they are obliged to support each other: (a) The spouses; (b) Legitimate ascendants and descendants; (c) Parents and their legitimate children and the legitimate or illegitimate children of the latter; (d) Parents and their illegitimate children and the legitimate or illegitimate children of the latter; (e) Legitimate brothers and sisters, whether of the full or half-blood. Brothers and sisters not legitimately related, whether of the full or half-blood, are likewise bound to support each other except only when the need for support of the brother or sister, being of age, is due to a cause imputable to the claimant's fault or negligence. (Sec. 196, ibid.) (2) When pecuniary benefit essential. — In other cases, mere blood relationship {e.g., lesser degree of kinship, such as uncle or aunt, and nephew or niece, and cousins) does not create an insurable interest in the life of another. Also, mere relationship by

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affinity (e.g., son-in-law, brother-in-law, step-children) ordinarily does not constitute an insurable interest. Under our law, there must be an expectation of pecuniary benefit in the life of the insured to sustain the insurance, that is, a risk of actual monetary loss from his death. Hence, "love and affection/' "gratitude," or "friendship," by itself is not sufficient. The expectation, however, need not have legal basis whatever; it is sufficient that it be actual. Thus: (a) The assumption of parental relations when a m a n sends a girl to school and pays her expenses is sufficient to give her an insurable interest in his life. (Carpenter vs. United States L. Ins. Co., 161 P. 9.) (b) Upon like principle, a w o m a n w h o takes a girl from an orphan asylum and gives her a h o m e under circumstances calculated to raise a reasonable expectation of help and care from the girl during the declining years of the benefactress, has an insurable interest in the girl's life, although she is not formally appointed her guardian. (Thomas vs. National Ben. Assn., 86 A. 375.) (c) It is generally held that a corporation has an insurable interest in the life of an officer on whose services the corporation depends for its prosperity, and whose death will be the cause of a substantial pecuniary loss to it. (Murray vs. G.E. Higgins Co., 300 Pa. 341; see El Oriente vs. Posadas, 56 Phil. 147; see also Sec. 10[c].) (d) Similarly, a person m a y take out a policy on the life of his business partner on the theory that the latter's death m a y adversely affect the business operations which can, in turn, cause financial losses, (see Connecticut Mutual Life Ins. Co. vs. Lucha, 108 U.S. 498 [1883].) (e) In the case of employees, insurable interest is dependent upon the value of the employee to the business. One who could be easily replaced would hardly be one in w h o m the employer could reasonably claim an insurable interest. However, a chemist working on research problems might reasonably be insured, particularly if his experiments had a reasonable expectation of substantial future benefits. A

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business usually has an interest in other employees occupying key positions, such as the president, executive officers, and department heads who are important to the organization which expects to receive some necessary gain from the continuation of their lives or some financial loss from their death. However, valid insurance m a y be written when the employee himself applies for the policy and designates the employer as beneficiary, (see D.L. Bickelhaupt, op. cit., p. 226.) 3

Insurable interest of a person in life of another under a legal obligation to former. (1) Related by contract or commercial relation. — Any person so related to another, either by contract or commercial relation, that a right possessed by him will be extinguished or impaired by the death or illness of the other m a y lawfully procure insurance on the other's life. Thus, the employer m a y insure the life of the employee and vice versa: a corporation, the life of its manager; a partner, the life of his co-partner; a partnership, the life of each partner (Vance, op. cit., pp. 197-198.); and a surety, the life of his principal (Scott vs. Dickson, 108, p. 6.) although the principal has no insurable interest in the life of his surety. (Tate vs. Commercial Bldg. Assn., 33 S.E. 382.) (2) Risk that performance of obligation might be delayed or prevented. — In all the instances mentioned, it must appear that the death or illness of the insured person who is under a legal obligation, might delay or prevent its performance. (Sec. 10[c].) Accordingly, it has been held that while a partner has an insurable interest in the life of a co-partner who is indebted to him for his proportion of the capital (Connecticut Mut. L. Ins. Co. vs. Lucks, 108 U.S. 498.) or against whose skill the said partner has advanced money (Ann. Cas. 24 L. ed. 288.), a partner has no insurable interest in the life of the other if both have no capital invested and neither is indebted to the other. (Powell vs. Dewey, 31 S.E. 381.)

3

This is sometimes referred to as "key person insurance.'

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Insurable interest of creditor in life of his debtor. (1) Extent of interest. — The creditor has unquestionably an insurable interest in the life of his debtor under Section 10(c). Thus, a creditor may insure his debtor's life for the purpose of protecting his debt but only to the extent of the amount of the debt and the cost of carrying the insurance on the debtor's life. It is clear that the creditor will not be fully damnified if the insurance is limited only to the exact amount of the debt. However, the amount of the policy must not be so disproportionate to the amount of the debts and liens thereon plus the cost of the insurance as to justify the conclusion that the policy is merely a wagering or speculative one. ( C a m m a c k vs. Lewis, 15 Wall. [U.S.] 643.) For instance, a policy on the life of another for P300,000.00 to cover a debt of P50,000.00 is a mere wagering policy, and is void, (ibid.; Sees. 1 7 , 1 8 , 1 9 , 25.) (2) Right of debtor in insurance taken by creditor. — A creditor who insures the life of his debtor does not act as the agent of the latter (see Sec. 53.), cases to the contrary notwithstanding. The contract is one purely between the insurer and the insuring creditor inasmuch as by law, the creditor is given an insurable interest on the life of his debtor. (Sec. 10[c]; see Sec. 8.) In other words, the insurance does not inure to the benefit of the debtor unless, of course, the contrary is expressly stipulated. (3) Extent of the amount that may be recovered by insuring creditor. — Strictly speaking, an insurance taken by the creditor on the life of his debtor is not purely a contract of life insurance. The principle of indemnity applies in this particular kind of insurance as in the case of property insurance. ( C a m m a c k vs. Lewis, 82 Wall. [U.S.] 643.) It follows that the insuring creditor could only recover such amounts as remain unpaid at the time of the death of the debtor. If the whole debt has already been paid, then recovery on the policy is no longer permissible. (God-sall vs. Boldero, 9 East 72.) (4) Where insurance taken by debtor for the benefit of creditor. — A distinction should be m a d e between a policy taken by a debtor on his life and made payable to his creditor and one taken by a creditor on the life of his debtor. Where a debtor in good faith insures his life for the benefit of the creditor, full payment of the

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debt does not invalidate the policy; in such case, the proceeds should go to the estate of the debtor. (Crotty vs. Union Mut. L. Ins. Co., 144 U.S. 64; S. Guevarra, The Phil. Insurance Law, 1961 ed., p. 35.) (5) Where debt becomes legally unenforceable. — According to American cases, the fact that a valid debt becomes subsequently unenforceable, by reason of being barred by the statute of limitations or of the debtor's discharge in insolvency, does not cut off the insurable interest of the creditor although there is no reasonable expectation of the debtor becoming solvent so as to be able to pay his debt. The reason given is that the moral or equitable obligation of the debtor to pay his debt is not destroyed by the discharge which affects only the legal obligation to pay. (43 Am. Jur. 2d 1004.) Under our law, however, it is clear that a creditor m a y not insure the life of his debtor unless the latter has a legal obligation to him for the payment of money. (Sec. 10[c].) Insurable interest in life of person upon which an estate or interest depends. Section 10(d) provides that every person has an insurable interest in the life and health of "any person upon whose life any estate or interest vested in him depends." This simply means that one m a y insure the life of a person where the continuation of the estate or interest vested in him who takes the insurance depends upon the life insured. EXAMPLE: Suppose A receives as legacy, the usufruct of a house. The ownership of which is vested in B. It is provided in the legacy that should B die first, both the usufruct and the ownership of the property will pass to C. In this case, A has an insurable interest in the life of B for A will suffer pecuniary loss by B's death. Consent of person whose life is insured. Is the consent of the person whose life is insured essential to the validity of the insurance taken by another?

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(1) Essential to validity of policy. — A leading authority has said: "On clear principle and by the weight of authority, it is believed that all such contracts (without the consent of the insured) are contrary to public policy, and void, x x x The amount of insurance that may be validly procured is not limited strictly to the amount of the pecuniary interest to be protected. A margin must be allowed to cover premiums and other charges. But this excess of insurance offers a strong temptation to hasten the death of the insured by criminal means. The danger to the public of such insurances is largely obviated when the insured, with knowledge of all the circumstances, has given consent to the contract. His very consent is strong evidence of the good faith of the person procuring the insurance, and thus affords a needed guaranty to society." (Vance, op. cit., p. 208.) (2) Not essential to validity of policy. — It seems, however, that under our law (Sec. 10.), the consent of the person insured is not essential to the validity of the policy. So long as it could be proved that the assured has a legal insurable interest at the inception of the policy, the insurance is valid even without such consent. The presence of insurable interest takes the contract out of the class of forbidden wagers. 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, (n) Beneficiary defined. (1) In insurance cases, the term beneficiary is ordinarily used in referring to the person who is named or designated in a contract of life, health, or accident insurance as the one w h o is to receive the benefits which become payable, according to the terms of the contract, upon the death of the insured, (see 44 Am. Jur. 2d. 639.) (2) It is also used in insurance law to indicate only those persons, whether natural or juridical, who, though not parties to

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the contract, are mentioned in it as the intended recipients of the proceeds or benefits of the insurance if the insured risk occurs, (see Vance, op. cit., p. 656.) (3) A broader use of the term would include also those who, upon a proper basis of insurable interest, secure insurance for their own benefit upon the lives of others, (ibid.) Kinds of beneficiary. The beneficiary in a life insurance policy m a y be either the insured himself or his personal representatives or someone other than the insured. W h e r e the beneficiary designated is a person other than the insured, such person m a y occupy one of three relations to the insured: (1) Insured himself. — He m a y himself be the person who procures the contract and pays the premiums necessary to maintain it. Such a person is thus an immediate party to the contract and is ordinarily called the assured (Vance, op. cit., pp. 658-659.), as where the creditor insures the life of his debtor; (2) Third person who paid a consideration. — The third person named as beneficiary m a y have paid a valuable consideration for his selection as such; that is, the insured m a y have taken the policy for the benefit of a creditor or to secure some other obligation; or (3) Third person through mere bounty of insured. — The beneficiary m a y be one who gives no consideration whatsoever for any right that m a y be acquired in the policy but is designated as recipient of the proceeds of the policy through mere bounty of the insured, (ibid., p. 659.) The beneficiary designated may be the estate of the insured or a third party. In the second and third cases, the beneficiary is not a party to the contract. In all the three cases, the proceeds of the life insurance policy become the exclusive property of the beneficiary upon the death of the insured. Therefore, where the insured, before dying, was judicially declared insolvent, the proceeds should be paid to the beneficiary and not to the assignee in insolvency.

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Limitations in the appointment of beneficiary. A person may take out a policy of insurance on his own life and make it payable to whomsoever he pleases, irrespective of the beneficiary's lack of insurable interest, provided he acts in good faith and without intent to make the transaction merely a cover for a forbidden wagering contract. (44 C.J.S. 899.) Our Civil Code, however, imposes certain limitations in the appointment of a beneficiary. Article 2012 of the Civil Code provides as follows: "Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person w h o cannot make any donation to him, according to said article, (n)" Article 739 above referred to provides as follows: "The following donations shall be void: (1) Those m a d e between persons w h o were guilty of adultery or concubinage at the time of the donation; (2) Those m a d e between persons found guilty of the same criminal offense, in consideration thereof; (3) Those m a d e to a public officer or his wife, descendants and ascendants, by reason of his office. In the case referred to in No. 1, the action for declaration of nullity m a y be brought by the spouse of the donor or donee; and the guilt of the donor and donee m a y be proved by preponderance of evidence in the same action, (n)" In order that Article 739 m a y apply, it is not required that there be a previous conviction for adultery or concubinage. This can be inferred from the clause that "the guilt of the donor and donee m a y be proved by preponderance of evidence." (The Insular Life Assur. Co., Ltd. vs. Ebrado, 80 SCRA 181 [1977].) As already pointed out (under Sec. 10), a life insurance policy, in essence, is no different from a civil donation insofar as the beneficiary is concerned. Both are founded on the same consideration: liberality. A beneficiary is like a donee because

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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 a consequence, the proscription in Article 739 of the Civil Code should equally operate in life insurance contracts. EXAMPLE: M, a married man, takes out an insurance policy on his life and designates B, with whom M is cohabiting at the time, as beneficiary. The designation of B is void since M and B are guilty of concubinage at the time it is made. Hence, in case M dies, his legal heirs and not B will be entitled to the insurance proceeds. But the designation is valid if both M and B are single. The insured in a life insurance may designate any person as beneficiary unless disqualified to be so under the provisions of the Civil Code. In the absence of any beneficiary named in the life insurance policy or where the designated beneficiary is disqualified, the proceeds of the insurance will go to the estate of the deceased insured. (Vda. de Consuegra vs. GSIS, 37 SCRA 315 [1971].)

Right of insured to change beneficiary in life insurance. (1) General rule. — Section 11 abandons the former rule that unless the policy reserves to the insured the right to change the beneficiary, no such right exists and the named beneficiary has vested right in the policy of which he cannot be divested without his consent, (see 44 Am. Jur. 2d. 646, 688-689; see Gercio vs. Sun Life Assurance of Canada, 48 Phil. 53 [1925].) Now, whether or not the policy reserves to the insured the right to change the beneficiary, he has the power to so change the beneficiary without the consent of the latter who acquires no vested right but only an expectancy of receiving the proceeds under the insurance. It follows that the insured retains the right to receive the cash value of the policy, to take out loans against the cash value, to assign the policy, or to surrender it without the consent of the beneficiary.

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(2) Effect of death of insured. — The right must be exercised specifically in the manner provided in the policy or contract. But the insured's power to extinguish the beneficiary's interest ceases at his death, and cannot be exercised by his personal representatives or assignees. The beneficiary's right then becomes completely fixed. (3) Where right to change is waived. — If the right to change the beneficiary is expressly waived in the policy, then the insured has no power to make such change without the consent of the beneficiary. (a) The beneficiary acquires an absolute and vested interest to all benefits accruing to the policy from the date of its issuance and delivery, including that of obtaining a policy loan to the extent stated in the schedules of values attached to the policy. (Gercio vs. Sun Life Assurance of Canada, supra.) The beneficiary has thus a property right in the policy of which could not be deprived without his consent. (b) Neither can a new beneficiary be added to the irrevocably designated beneficiary for this would in effect reduce the latter's vested rights. (Go vs. Redfem, 72 Phil. 71 [1941].) (c) The insured does not even retain the p o w e r to destroy the contract by refusing to pay premiums for the beneficiary can protect his interest by paying the premiums (Vance, op. cit., p. 665.) for the reason that the fulfillment of an obligation may be m a d e by a third person even against the will of the debtor and if he has an interest in the fulfillment of the obligation, even against the will of the creditor, (see Art. 1236, Civil Code.)

Measurement of vested interest of beneficiary in policy. The vested right or interest of the beneficiary in a policy should be measured on its full face value and not on its cash surrender value for in case of death of the insured, said beneficiary is paid on the basis of its face value. In case the insured should discontinue paying premiums, the beneficiary m a y continue

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paying it and is entitled to automatic extended term or paidup insurance options, etc. and that said vested right under the policy cannot be divisible at any given time. An application of loan under the policy and the surrender of the policy by the insured constitute acts of disposition or alienation of property rights of the beneficiary and not merely of management or administration because they involve the incurring or termination of contractual obligations. (Nario vs. Philippine American Life Insurance Co., 20 SCRA 436 [1967].) ILLUSTRATIVE CASE: Insurer required authority from court for surrender of policy designating an unemancipated son as beneficiary. Facts: W was issued by X Co. (insurer) a 20-year endowment plan, with a face value of P5,000.00. She designated her husband H, and their unemancipated minor son S, as her irrevocable beneficiaries. After the denial by X Co. of her policy loan application, W signified her decision to surrender her policy to X Co., which she was also entitled to avail of under one of the provisions of the same policy, and demanded its cash value which then amounted to P520.00. X Co. denied the loan application and the surrender of the policy on the same ground — that the written consent for the minor son must not only be given by his father H, as legal guardian, but it must also be authorized by the court in competent guardianship proceeding. Issue: Is X Co. justified in disapproving the proposed transactions in question? 4

Held: Yes. Under Article 320 of the Civil Code, "when the property of the child is with more than two thousand pesos, the father or mother shall be considered a guardian of the child's property subject to the duties and obligations of guardians under the Rules of Court." In this case, the full face value of the policy is P5,000.00 and the minor's vested interest therein, as one of the two (2) irrevocable beneficiaries, consists of one-half (1/2) of said amount of P2,500.00. (ibid.) 4//

A r t . 225. The father and the mother shall jointly exercise legal guardianship over the property of their unemancipated common child without the necessity of a court appointment x x x." (Family C o d e )

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Note: The ruling in this case has been modified by Section 180. Where beneficiary dies before insured. (1) View that beneficiary's representative is entitled to insurance proceeds. — It would necessarily follow as a consequence of the vested interest rule, where the right to change the designated beneficiary is expressly waived in the policy, that if the beneficiary dies before the insured, his rights so vested should pass to his representatives, and on the death of the insured, the proceeds of the policy should belong, not to estate of the insured, but to the representatives of the beneficiary. But this result, however logical in form, does great violence to the purpose of the insured, who must have intended, in the ordinary case, to provide a fund for the support after his death, of those w h o m he w a s accustomed to support during his lifetime. He can scarcely have intended to make a provision for the distributees and legatees of the deceased beneficiary, who m a y well be persons without claim to his bounty or interest in his life. (Vance, op. cit., p. 710.) (2) View that estate of the insured is entitled to insurance proceeds. — In view of the above considerations, it is believed that where the beneficiary predeceases the insured, the estate of the insured should be entitled to the proceeds of the insurance especially where the designation is subject to the express condition to pay the beneficiary if he survives the insured or "if surviving." (see Indiana Ins. Co. vs. McGinnis, 101 N.E. 289.) However, most, but not all, courts hold that the mere fact that such a policy is made payable to the designated beneficiary, "his executors, 5

5

T h e requirement of an insurable interest goes back to the early 18th c e n t u r y in E n g land. At that time, life insurance policies w e r e not applied for and issued to the persons whose lives were to be insured. Often the insured did not k n o w the person w h o obtained the insurance or even that insurance h a d been effected on his life. At one time, it w a s almost a sport to w a g e r that public figures w o u l d or w o u l d not live for even such a period of time as a few days. Obviously, this w a s wagering of a peculiarly vicious nature, so vicious indeed that it shocked the conscience of an 18th century public not too highly noted for its squeamishness. In 1974, the English Parliament finally took action and enacted a law to put an end to such "a mischievous kind of gaming." ( L a w a n d the Life Insurance Contract, by J . E . Greider & VV.T. Beadles, 1974 ed., pp. 126-127 published by Richard D. Erwin, Inc., H o m e w o o d , Illinois.)

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administrators, or assigns," is sufficient to negative the implied condition that death of the beneficiary before maturity of the policy terminated all his rights to it. (Vance, op. cit., p. 712.)

Designation of beneficiary. Words used in designating the beneficiaries of a life policy will not be given their technical significance but will be construed broadly in order that the benefit of the insurance shall be received by those intended by the insured as the object of his bounty. (ibid., p. 551; see Sec. 56.) The beneficiary designated m a y be the insured or his estate, a specifically designated person or persons, or a class or classes of persons. (1) Children. — The word "children" used to designate beneficiaries, is broad enough to include the following: (a) an adopted child; or (b) an adult child not forming a part of the household of the insured; or (c) after-born children even of a marriage subsequently contracted. The word "children" in an insurance policy ordinarily means a descendant of the first degree and is never intended to include grandchildren. (29 Am. Jur. 960-961.) Where the children are named individually, other children cannot share in the insurance proceeds unless the insured subsequently amend his designation to include them. (2) Husband; wife or widow. — The word "wife" in the description of the beneficiary of life insurance is generally regarded as descriptio personae, and the fact that one who otherwise answers the description does not have the legal status of the wife of the insured does not prevent her from taking as beneficiary, as when she is designated by name, although the words "his wife" are added, (see Social Security System vs. Davac, 17 SCRA 863 [1966].) However, if the beneficiary is not named but is designated merely by a status, such as the "husband," "wife," or "widow" of the insured, the legal husband or wife as ascertained at the death of the insured, is entitled to the benefits of such insurance. (29 Am. Jur. 965-966.) Note that under our law (Arts. 2012 and 739, Civil Code, supra.), any person who is forbidden from receiving any donation,

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such as a common-law spouse, cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him. (3) Husband and children; wife and children. — A policy payable to the wife of the insured and "their children" includes children by another wife, although the prevailing view state that the beneficiaries are limited to children c o m m o n to both, (ibid., 961.) But if the designation is m a d e to the insured's "wife and children" or "my wife and children," the insurance is deemed for the benefit of all children of the insured, whether by the named wife or those of another. (Recker vs. Ins. Co., N.W. 771.) Under a policy payable to the insured's "husband and children," he and they do not take the insurance by inheritance but upon her death, the insurance money must be divided per capita among the husband and children. The same rule applies to a policy payable to "wife and children." (29 A m . Jur. 966.) (4) Family. — The term "family" is sometimes used to indicate the recipient of the proceeds of an insurance policy. In deciding whether a particular person claiming a share of the fund is of the family of the insured, the court will ascertain whether that person was so regarded by the insured. If he w a s so regarded, he will be allowed to participate although in no w a y related to the insured. (Vance, op. cit., p. 554.) (5) Heirs or legal heirs. — W h e n a life policy is m a d e payable to the insured's "heirs" or "legal heirs," these terms will not ordinarily be construed as indicating merely the heirs at law but rather that class of persons w h o would take the property of the insured in case he died intestate. Therefore, it is generally held that the widow of the deceased is entitled to take under a policy payable to his "heirs" or "legal heirs" as well as the children of the deceased, (ibid., p. 552.) (6) Estate or legal representatives of deceased. — The words "estate," "representatives," or "legal representatives," when used in designating beneficiaries, are to be construed in their strict technical sense and the courts will ordinarily assume that they are used to mean executors or administrators, unless it appears that the insured intended to use these expressions in the

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sense of heirs or next of kin. Policies payable to the insured's "executors, administrators or assigns" are clearly assets of the deceased insured's estate while those payable to his "heirs" or "next of kin" are not. (ibid., p. 657.) If no beneficiary is designated in the life insurance policy, the proceeds thereof will go to his legal heirs in accordance with law. It has been held, however, that where two women, innocently and in good faith, contracted marriage with the same man, the insured, and the latter did not designate any beneficiary who would receive the proceeds of his life insurance, each family shall be entitled to one half of the insurance benefits. (Consuegra vs. GSIS, 37 SCRA 315 [1971].) 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 which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified, (n) Forfeiture of the interest of the beneficiary in a life insurance policy. The w o r d "interest" mentioned in Section 12 means the right of the beneficiary to receive the proceeds of the life insurance policy. It does not m e a n insurable interest since the beneficiary need not have an insurable interest in the life of the insured. In case the interest of a beneficiary in a life insurance policy is forfeited as provided in Section 12, the nearest relatives, not otherwise disqualified, of the insured shall receive the proceeds of the insurance in accordance with the rules on intestate succession provided in the Civil Code. The nearest relatives of the insured in the order of enumeration are the following: (1) The legitimate children; (2) The father and mother, if living; (3) The grandfather and grandmother, or ascendants nearest in degree, if living;

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(4) The illegitimate children; (5) The surviving spouse; and (6) The collateral relatives, to wit: (a) brothers and sisters of the full blood; (b) brothers and sisters of the half-blood; and (c) nephews and nieces, (see Arts. 978, 979, 985-987, 988, 995,1003-1006, Civil Code.) (7) In default of the above, the State shall be entitled to receive the insurance proceeds, (see Art. 1011, ibid.)

Liability of insurer on death of insured. (1) Death at the hands of the law. — While m a n y courts hold that the insurer is not liable for the death of the insured at the hands of the law, even though such risk is not expressly excepted in the policy, Professor Vance, in his treatise on insurance, is of the opinion that the better view is that the death of the insured at the hands of the law — as by legal execution — is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception. (Vance, op. cit., p. 572.) (2) Death by self-destruction. — Professor Vance is also of the opinion that, by the weight of authority, death by suicide is not by implication exempted from the risks assumed by the insurer under a life insurance policy especially where the insurance is for the benefit of another rather than the insured. But procuring a policy with intent to commit suicide is obviously fraudulent and avoids the insurance, (ibid., p. 560.) In view, however, of the provision of Section 87 (infra.) see Sec. 5.), it is quite clear that the insurer is not liable in case the insured commits suicide intentionally, with whatever motive, when in sound mind. To hold otherwise is to say that the occurrence of the event, upon the happening of which the insurer undertook to pay, was intended to be left to insured's option. That view is against the very essence of the contract. (Hennessy vs. Automobile Owners' Ins. Ass'n, 282 S.W. 791; see Sec. 3.) The rule applies with equal force and there can be no recovery if the insured, being in the possession of his ordinary reasoning

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facilities, from anger, pride, jealousy, or a desire to escape from the ills of life, intentionally takes his own life. The reason for this is that the death is still caused by the voluntary act of the insured, he knowing and intending that his death shall be the result of his act. (Life Ins. Co. vs. Terry, 15 Wall. 580.) But death which is purely accidental, even though due to the insured's own carelessness or negligence is not excluded from the coverage by the words "self-destruction/' "death by his own hand," and the like which are generally considered synonymous with suicide. (Parker vs. N e w York Life Ins. Co., 125 S.E. 6 [1924].) (3) Death by suicide while insane. — Where the insured is insane, it is the settled rule in all jurisdictions that, in the absence of express conditions to the contrary (as where the policy excludes from among the risks assumed by the insurer death of the insured by suicide [or by self-destruction or by his own hand or act], "sane or insane"), the suicide of an insured while insane does not discharge the insurer from his liability on his contract. Such insanity is one of the diseases to which the insurer must have known that the insured was subject and the unwitting act of self-destruction is as m u c h the consequence of that disease as if some vital organs were totally affected. (Vance, op. cit., pp. 563565; see Sec. 180-A.) (4) Dea th caused by beneficiary.—On the broad ground of public policy that prohibits anyone from profiting by his own wrong, where the beneficiary, as principal, accomplice, or accessory (see Arts. 1 7 , 1 8 , and 19, Rev. Penal Code.), intentionally brings about the death of the insured under such circumstances as to amount to a felony, he cannot receive any benefit under the contract of insurance. His interest shall be forfeited, in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. (Sec. 12.) However, the beneficiary is not deprived of the insurance proceeds in every case where the beneficiary killed the insured. Thus, where the death of the insured was caused under circumstances as do not amount to a felony as when the killing was accidental or in self-defense, or where the beneficiary was insane, the rights of the beneficiary under the policy are not affected. It has also been held that even though the beneficiary

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was guilty of a felony, the beneficiary's interest in the insurance is not forfeited where the insured's death was not intentionally caused. (Vance, op. cit., pp. 717-718.) Suppose, the beneficiary murdered the insured prompted by a motive other than gain, are the beneficiary's rights forfeited? It may be argued that the purpose is to deter murders for gain; hence, if the beneficiary killed the insured because of jealousy for instance, the denial of recovery on the insurance policy would not have presented itself to his mind as a deterrent. However, the moral sentiment of the community is not so discriminating; punishment is still looked upon as retribution. Moreover, a court can seldom be quite sure that pecuniary gain was not a contributing motive of the crime. Hence, it is well-settled that a deliberate killing (murder) of the insured by the beneficiary suffices to work a forfeiture. The insurer m a y properly insert in the contract an express provision excepting from coverage death caused by the beneficiary, whether lawfully or unlawfully. (E.W. Patterson, op. cit., pp. 159-160.) (5) Death caused by violation of law. — The mere fact that the insured died while he w a s committing a felony or violating a law would not warrant denial of liability. To avoid liability, the insurer must further establish that the commission of the felony or the violation of law was the cause or had a casual connection with the accident resulting in the death of the insured. (A. Tolentino vs. Filipinas Life Assurance Co., Inc., I.C. Case No. 162, July 19, 1976, citing Couch on Insurance, 2d. 41:632.) ILLUSTRATIVE CASE: The insured, who died while driving his motorcycle, was not allowed to drive a motorcycle in his driver's license. Facts: While the life insurance policy with a face value of P2,000 was in force, D (insured) died as a result of a vehicular accident wherein he was bumped by a car while driving his motorcycle. The policy carried with it a Special Accident Rider providing for an additional benefit of P2,000.00 in case of death by accident. R (insurer) denied payment to D's widow of the Special Accident Rider benefits on the ground that the death of D was

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an excepted risk as he was then "committing a felony" at the time of the accident as he was not allowed to drive a motorcycle in his driver's license. Issue: Should R be exonerated from paying the Special Accident Rider benefit? Held: No. An act or omission punishable by a special law is strictly not a felony but more of the general term — crime, offense, transgression or infraction of law. Therefore, the act of driving a motorcycle without the license to do so, while in violation of a special law, particularly the Land Transportation and Traffic Code, would not constitute a "felony"; and even if such act is a "felony," the mere fact that the accident occurred while D was committing such felony would not exonerate R from paying the benefit under the Special Accident Rider to avoid liability. It must also be shown that the violation of law was the cause or had causal connection with the accident, (ibid.) 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. Insurable interest in property in general. Section 13 defines insurable interest in property. The interest m a y be in the property itself (e.g., ownership), or any relation thereto (e.g., interest of a trustee or a commission agent), or liability in respect thereof (e.g., interest of a carrier or depository of goods). The principle may be stated generally that anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. (Harrison vs. Fortlege, 161 U.S. 57.) (1) Occurrence of loss may be uncertain. — Note that under the law, it is not necessary that the interest is such that the event insured against would necessarily subject the insured to loss. It is sufficient that it might do so, and that pecuniary injury would be the natural consequence. (Rigg - Comm. Mut. Ins. Co., 25 N.E. 1058.) Thus, an insurer of property against fire has an insurable interest therein co-extensive with his liability, (see Sec. 95.) sv s

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(2) Title or right to possession not essential — What is more, although a person has no title, legal or equitable, in the property, and neither possession nor right to possession, yet he has an 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. (a) Accordingly, it has been held that where a mortgagor had sold the mortgaged premises to a vendee who assumed the payment of the mortgage debt, and had thus parted with all his interest in the property, the mortgagor yet had an insurable interest in the property because of his personal liability for the debt and his right to be subrogated to the mortgage security in case he should be compelled to make payment. (Pike vs. American Alliance Ins. Co., 124 S.E. 161; Vance, op. cit., p. 173.) (b) Similarly, a vendor or seller retains an insurable interest on the property sold so long as he has any interest therein. In other words, so long as he has a vendor's lien, i.e., he retains ownership merely to insure that the buyer will pay the price, (see Art. 1504[1], Civil Code.) Unlike die civil law concept of jus perit domino, where ownership is the basis for consideration of w h o bears the risk of loss, in property insurance, one's interest is not determined by concept of title, but whether the insured has substantial economic interest in the property. (3) Legal expectation of loss or benefit. — Insurable interest in property is not necessarily an interest in property in the sense of title, but a concern in the preservation of the property and such a relation to or connection with it as will necessarily entail a pecuniary loss in case of its injury or destruction. (Crossman vs. American Ins. Co. of Newark, 164 N.W. 428 [1917].) As a general rule, however, the expectation of benefit to be derived from the continued existence of property must have a basis of legal right, although the person insured has no title, either legal or equitable, to the property insured. (Baldwin vs. State Ins. Co., 15 N.W. 300; see Sees. 1 6 , 1 9 . ) The rule is different in life insurance, (infra.) (4) Mere factual expectation of loss. — Such expectation not arising from any legal right or duty in connection with the

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property, does not constitute an insurable interest. Thus, an owner of a gasoline filling station near a hotel has no sufficient insurable interest in the hotel simply because its burning or destruction, though it leaves the filling station physically unharmed, will lessen his income from guests of the hotel. (E.W. Patterson, op. cit, pp. 118-119.) This type of interest called "factual expectation," though usually insufficient in strict indemnity insurance, will suffice in life insurance, (see Sec. 10[b].) 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. Insurable interest in property in particular cases. Insurable interest in property need not be an existing interest. It m a y consist merely of an inchoate interest or an expectancy. (1) An existing interest. — The existing interest in a property m a y be a legal title or equitable title. Undoubtedly, the absolute owner of property has an insurable interest thereon. (a) The following are examples of persons who have insurable interest arising from legal title: trustee, as in the case of the seller of property not yet delivered; mortgagor of the property mortgaged; lessor of the property leased; lessee and sublessee may also insure the property leased or subleased; and assignee of property for the benefit of creditors. Where legal title is held in a representative capacity, as by an executor, administrator, trustee, or receiver, the representative has sufficient insurable interest for the purpose of taking out insurance on the property under his control, but any proceeds from such insurance are to be held for the benefit of those for whose benefit the representative is acting.

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(b) The following have insurable interest arising from equitable title: purchaser of property before delivery, or before he has performed the conditions of sale; mortgagee of property mortgaged; mortgagor, after foreclosure but before expiration of the period within which redemption is allowed; the beneficiary under a deed of trust; the creditors under a deed of assignment (Vance, op. cit., pp. 164-168.); a judgment debtor whose property has been seized under execution until the right to redeem or the right to have the sale set aside has been lost (44 C.J.S. 881.); and builders and constructors in the buildings pending the payment of the construction price. (Lampano vs. Jose, 30 Phil. 357 [1915].) A purchaser of an option to buy real estate has an insurable interest to the extent of the advance payment for the option. (Riegel, Miller & Williams, Jr., op. cit., p. 45.) Thus, more than one insurable interest m a y exist over the same property. (2) An inchoate interest. — Such inchoate interest must be founded on an existing interest. (a) A stockholder has an inchoate interest in the property of the corporation of which he is stockholder, which is founded on an existing interest arising from his ownership of shares in the corporation. His insurable interest is limited to the extent of the value of his interest or to his share in the distribution of the corporate assets upon dissolution, (see Vance, op. cit., p. 175.) The stockholder has an interest in the preservation of the corporate property; in its destruction, he sustains a loss in so far as the value of his stock is depreciated in consequence of such destruction, or his dividends are reduced or cut off. (Warren vs. Havenport Fire Ins. Co., 31 Iowa 464.) Note that a stockholder has neither legal nor equitable title to assets of the corporation. (b) Likewise, a partner has an insurable interest in the firm property which will support a separate policy for his benefit. (44 C.J.S. 892.) (3) An expectancy. — The expectancy must be coupled with an existing interest in that out of which such expectancy arises.

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(a) Thus, a farmer m a y insure future crops if they are to be grown on land owned by him at the time of the issuance of the policy, or although the crops are to be raised by him on the land of another, provided the crops will belong to him when produced. (Vance, op. cit., p. 177.) (b) Similarly, an owner of a business can insure against a contingency which m a y cause loss of profits resulting from the cessation or interruption of his business. (c) A n y binding contract giving rights which will be injuriously affected by the destruction of any designated property will also afford an insurable interest in such property even though the insured m a y have neither interest in the property nor specific lien upon it. So, a workman has an insurable interest in any building he m a y have contracted to repair, or an artist might insure the structure for the interior decoration of which he had been employed. (Vance, op. cit., p. 178; see Sees. 1 0 3 , 1 0 5 . ) 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. Insurable interest of carrier or depository. The reason for this provision is that the loss of the thing may cause liability to the carrier or depository to the extent of its value. (Stilwall vs. Staples, 19 N.Y. 401.) A person having a "qualified property" in chattels entitling him to possession and the right of using or dealing with them in accordance with the terms of the bailment, has such interest in the chattels as m a y be the subject of a valid contract of insurance. Such bailee m a y insure merely his interest in the chattels to protect himself against loss of the benefits to which he is entitled, or he may, and does more frequently, insure himself against the liability which he may incur upon the destruction of the chattels. (Vance, op. cit, pp. 168-169.) It has been held by our Supreme Court that a policy effected by a bailee and covering by its terms his own property and

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property held in trust, inures, in the event of loss, equally and proportionately to the benefit of all the owners of the property insured. (Lopez vs. del Rosario, 44 Phil. 98 [1922].) Under the General Bonded Warehouse Act, a warehouseman, licensed to engage in the business of receiving commodities for storage, is required to insure the same against fire. (Act No. 3893, as amended, Sec. 6.) 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. Mere contingent or expectant interest not insurable. A mere hope or expectation of benefit which m a y be frustrated by the happening of some event uncoupled with any present legal right will not support a contract of insurance. Thus: (1) Property offather Isonl spouse. — A father cannot insure his son's property nor can a son insure the property that he expects to inherit from his father as his interest is merely an expectancy of inheriting, (see Baldwin vs. State Insurance Co., 15 N.W. 300.) Similarly, a spouse has no insurable interest in the property of the other. 6

(2) Life of parents/children/spouses. — By statutory provisions, parents and children, and spouses can insure the life of each other, (see Art. 195, Family Code, in relation to Section 10[b].) Since under the law, they are under mutual obligation to support each other, a life policy is held to be a means of fulfilling that obligation or a means of saving the party entitled to support from being the subject of public charity. (Ford vs. Doll, 12 Mass. 115.)

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A possible basis for a claim to an insurable interest is Section 14(b) a n d (c). Since o n e is entitled to claim from the property of the other, the satisfaction of the latter's obligation to support the former, the former m a y be said to h a v e "an existing interest" in the property of the latter. Furthermore, the right to legitime m a y also form the legal basis of a compulsory heir's insurable interest, (see Arts. 886, 887, 2011, Civil C o d e ; see also Arts. 225-227, Family Code.)

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(3) Property of debtor — Nor can a general or unsecured creditor insure specific property of his debtor who is alive, even though destruction of such property would render worthless any judgment he might obtain. (a) But an unsecured creditor m a y insure the property of a deceased debtor since all personal liability ceases with the death of the debtor. The proceedings to subject the estate to the payment of the debt of the deceased debtor are in rem. (b) Also, an unsecured creditor who obtains a judgment in his favor becomes a judgment creditor and has been held to have insurable interest in the debtor's property as he has a right to levy on such property as m a y be necessary to satisfy the judgment. However, to recover under the insurance, he must show that the debtor has no other property out of which the judgment m a y be satisfied. (Spare vs. H o m e Mutual Ins. Co., 15 F. 707 [1883].) (c) Of course, an unsecured creditor has an insurable interest in the life of his debtor to the extent of the amount of the debt. (Sec. 10[c].) (4) Property of testator still alive. — One named as beneficiary in a will has no insurable interest in a property designated before the testator's death, however reasonable his expectation of benefit to be derived from the continued existence of the property. His expectation has no legal basis since the will has no legal effect before the death of the testator. (Vance, op. cit., pp. 162-163,173.) The will can be revoked at any time before the death of the testator unless he has expressly waived this right in the policy (Sec. 11.) in which case the beneficiary will have insurable interest. 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. Measure of insurable interest in property. As already shown, a contract of insurance is one of indemnity. Any contract of property insurance that gives to the insured more than indemnity against his actual loss that may be suffered

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by the happening of the event insured against is in the nature of a wagering policy contrary to public policy and void. Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of the credit secured by the mortgage, (see Sec. 8.) The purpose of property insurance is to indemnify a person against actual loss, and not to wager on the happening of the event. EXAMPLES: (1) X insured his property valued at P100,000.00, for P120,000.00. X suffered a total loss. The amount of the insurance (P120,000.00) is not the amount payable in the event of a loss but rather represents the maximum limit of recovery of the insured, (see Sec. 60.) Under the indemnity rule, the insurer would be liable only to pay P100,000.00. If X receives P80,000.00 from the party that caused the loss, the liability of the insurer is reduced in the same amount. Anything that reduces or diminishes the loss reduces the amount which the insurer is bound to pay. (2) Under a building contract, X constructed a house for P400,000.00 for Y who made an advance payment of P80,000.00, the balance to be paid upon delivery of the house on a certain date when Y would return from abroad and occupy the house. As X finished the construction at a much earlier date, he insured the house against fire for P400,000.00. The house was burned down before its delivery to Y. What is the extent of the insurable interest of X? It is P400,000.00 although he already received from Y P80,000.00 as advance payment because X has to replace the house destroyed with another worth P400,000.00, as per contract, not P320,000.00. (3) The financing lease contract stipulates that the equipment and motor vehicles leased shall be insured at the cost and expense of the lessee against loss, damage or destruction from fire, theft, accident, or other insurable risk for the full term of the lease. The lessee has an insurable interest in the equipment and motor vehicles leased under Section 17 as it will be directly damnified in case of loss, damage, or destruction of any of the properties leased. (Ong Lim Sing, Jr. vs. FGB Leasing Finance Corp., 524 SCRA 333 [2007].)

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Sec. 18. 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, (a) Effect of absence of insurable interest in property insured. (1) Principle of indemnity applicable. — This principle is at the basis of all contracts of property insurance. Accordingly, an insurance taken out by a person on property in which he has no insurable interest is void. It has been held that fire insurance taken on property belonging to another is void, although the insurer had full knowledge of the fact of ownership (Firemen's Fund Ins. Co. vs. Cos, 175 P. 493.) and even if the insured subsequently acquired insurable interest. (Sec. 19.) In a case, the contract of lease provides that any fire insurance policy obtained by the lessee over his merchandise inside the leased premises without the consent of the lessor is deemed assigned or transferred to the lessor. It held that such automatic assignment is void for being contrary to law and public policy, hence, the insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no interest in the property insured. (Cha vs. Court of Appeals, 277 SCRA 690 [1997].) Where the insurance is invalidated on the ground that no insurable interest exists, the premium is ordinarily returned to the insured unless he is in pari delicto with the insurer, (see Arts. 1411, 1412, Civil Code.) It is consistent with the principle of indemnity to pay the insured a benefit in an amount equal to or less than the loss but the principle is violated if he is paid a benefit more or greater than the loss. In life insurance taken by a person on his own life, it is not necessary for the beneficiary to have an insurable interest in the life insured, (see Sees. 1 0 , 1 9 , 1 8 1 . ) (2) Doctrine of waiver or estoppel not applicable. — This doctrine cannot be invoked since the public has an interest in the matter independent of the consent or concurrence of the parties. (Colver vs. Central States F. Ins. Co., 287 P. 266.) But where the real intention of the insured was to insure his goods for P15,000.00 but through the error or mistake of the insurer, the policy

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issued for P15,000.00 was for the building in which the goods were stored which building the insured never owned or had any insurable interest, it was held in case of loss of the goods, the insured can recover. (Garcia vs. Hongkong F. & M. Ins. Co., 45 Phil. 122 [1923].) This is a case where the insured's lack of insurable interest in property insured is not sufficient to avoid an insurance.

Measure of indemnity in insurance contracts. (1) Contracts of marine or fire insurance. — They are contracts of indemnity. This means that 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. The amount of indemnity m a y be determined after the loss (see Sec. 60.) or is previously fixed in the contract, (see Sec. 61.) Pursuant to the general rule regarding indemnity, the amount of insurance fixed in th? policy of a marine or fire insurance is not the exact measure of indemnity to which the insured is entitled, but the m a x i m u m indemnity which he might obtain. The insured cannot recover in excess of his actual loss. (a) In valued policies (Sec. 61.), however, the valuation of the thing insured is conclusive between the parties thereto in the adjustment of loss, if the insured has some interest at risk, and there is no fraud on his part (see Sees. 156, 171.), although it might be proved that the actual value of the thing is less. (b) Similarly, the principle of indemnity cannot be invoked by the insurer w h o agreed to repair or replace the thing insured with a new one even though the cost of the undertaking may exceed the original amount of the insurance, (see Sec. 172.) (2) Liability insurance contracts. — They are considered contracts of indemnity against liability and not against loss, (see Sec. 174.) In this type of insurance, the insurer's promise is to pay the proceeds of the policy on behalf of the insured to a third

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person to w h o m the insured is liable. If the insured suffers no loss because his liability to the third person, for some reason, cannot be enforced, the insurer has no obligation to pay the proceeds, (see Sec. 174.) (3) Life insurance contracts. - They are not contracts of indemnity. The amount fixed payable at the death of the insured is not considered as the true value of the thing insured because the life of a person is priceless, but is simply the measure of indemnity which the insurer has bound himself to pay the insured. (Young vs. The Midland Textile Ins. Co., 30 Phil. 617 [1915].) The contract of insurance m a y be to pay, on the happening of the event insured against, a certain or ascertainable sum of money, irrespective of whether or not the insured has suffered loss or of the amount of such loss if he has suffered any. The amount for which a person is insured is governed by the amount of premium that he contracted to pay. (4) Personal accident insurance contracts. — Like life policies, they are not contracts of indemnity. Life and limb are not susceptible to exact or uniform valuation. Hence, the principle of indemnity is not applicable. However, if a person effects a personal accident insurance on the life of another person, the amount recoverable is the loss sustained by the person who effected the policy. In theory, therefore, such a personal accident insurance becomes a contract of indemnity, but it is often impossible exactly to assess the injury suffered, and a policy with fixed benefits m a y be issued. (Dinsdale & McMurdie, op. cit., p. 94.) (5) Health insurance contracts. — Like life insurance contracts, health insurance contracts that provide a specific periodic income to disabled persons are not contracts of indemnity. But those that cover medical expenses are contracts of indemnity. In these contracts, only medical expenses incurred by the insured are paid. (Riegel, Miller, & Williams, Jr., op. cit., p. 58.) (6) Health care agreement. — Such an agreement with a health maintenance organization (HMO) is in the nature of a non-life insurance which is primarily a contract of indemnity. (Phil. Health Care Providers, Inc. vs. Comm. of Internal Revenue, 554 SCRA 411 [2008].) Once a 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. Being in the nature of a contract of indemnity, payment should be made to the party who incurred the expenses. Hence, the fact that the one who paid all the hospital and medical expenses was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another w o m a n who was still alive, is of no moment. She is entitled to reimbursement. (Philamcare of Health Systems, Inc. vs. Court of Appeals, 379 SCRA 356 [2002]; Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580 [2008]; see Note 6 to Sec. 174.) 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, (a) Time when insurable interest must exist. The general rule stated in this section is applicable only to insurance on property and not to life insurance except that on the life of the debtor. (1) When insurance takes effect and loss occurs. — Insurable interest in property must exist at two distinct times: on the date of execution of the contract of insurance; and on the date of the occurrence of the risk insured against, otherwise, the policy is void. Thus, if a fire occurs after the sale or alienation of the property, the former owner cannot recover on the policy. (2) When insurance takes effect. — In life insurance, the insurable interest requirement is satisfied if the interest exists at the time the policy is procured, even if it has ceased to exist at the time of the insured's death. Thus, if a debtor whose life was insured by a creditor (see Sec. 10[c].) subsequently pays the debt, remains in force provided, of course, the former creditor continues to pay the premiums.

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Most of the situations in which insurable interest m a y later disappear involve business relationships. Under the law, health, accident and disability insurance is deemed included in the terms "life" and "non-life" insurance. (Sec. 187, par. 8.) (3) When liability attaches. — In liability insurance, questions of insurable interest are not particularly important. It necessarily exists when the liability of the insured to a third party attaches, (see Sec. 174.) (4) Need not exist during intervening period. — The obvious purpose of the provision is to prevent the issue of wagering policies, (see Sec. 14[b], [c].) But the interest insured "need not exist in the meantime." (Sec. 19.) It is well-settled that in the absence of special provision in the policy to the contrary, the alienation of insured property will not defeat a recovery if the insured has subsequently reacquired the property and possesses an insurable interest at the time of loss. (Womble vs. Dubuque Fire & Marine Ins. Co., 37 N.F. 2d 263.) EXAMPLES: (1) D insured his house on May 15, 2002 for a period of one year. Without assigning the policy, he sold the house to B on July 10, 2002. If the house was accidentally burned on September 15,2002, D cannot recover because his insurable interest was no longer existing when the loss occurred. However, if on September 11, 2002, D reacquired the house from B, D may recover on the policy because insurable interest need not exist during the intervening period from July 10, 2002 when he sold the house, to September 10, 2002. (2) Suppose in the same example, C is an unsecured creditor of D for the amount of P100,000.00 and he insured D's house on September 12, 2002 for the same amount. The house burned accidentally on September 15, 2002. Has C the right to collect the proceeds of the insurance? No, because being a general creditor without any lien on D's house, C had no insurable interest when he insured it. (see Sec. 16.) But, suppose D sold the house to C before September 15, 2002 when the loss occurred. Not even then. C did not have

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insurable interest in the house when the insurance took effect. (Sec. 19.) (3) D issued a promissory note in favor of C to secure a loan of P100,000.00 payable within one (1) year. To add further protection, C insured D's life for the amount of the note for the year it was to run. D died on the 10th month after paying the note at the end of the ninth month. Can C recover on the insurance? No. The principle of indemnity applies in this case as in property insurance. Neither can the estate of D recover since the contract was purely between C and the insurer, unless, of course, the contrary was stipulated. But if the insurance was taken by D on his life for the benefit of C, the payment of the debt did not invalidate the policy which would remain in force for the full year for which the premium was paid. In this case, the proceeds of the insurance would be paid to the estate of D. (4) X corporation insures the life of Y, its President, for P100,000.00 with X as beneficiary. Thereafter, Y sells his stockholdings and severes connections with X which continues to pay the annual premiums. During the currency of the policy, Y dies. Is X entitled to recover the insurance proceeds? Yes, under Section 19.

Existence of insurable interest when risk attaches. It must be noted, however, that notwithstanding the great volume of authority to the contrary, it seems that the existence of an insurable interest at the inception of the contract, unless m a d e so by statute, is not at all necessary to its validity. It is sufficient that insurable interest exists at the time the risk attaches. (Vance, op. cit, pp. 180-181; Sec. 14[b], [c].) EXAMPLE: D, contemplating the purchase of B's house, may take out a policy of insurance under which the risk is to attach upon D's purchase and acquisition of interest in the house. In this case, the requirement of good faith and a real interest at the time of the loss is amply sufficient to satisfy the demand of public policy. (Vance, op. cit., p. 181.)

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Insurable interest in life and property distinguished. (1) As to extent of insurable interest. — Insurable interest in life (save in life insurance effected by creditor on life of debtor) is unlimited; in property, insurable interest is limited to the actual value of the interest thereon, (see Sec. 17.) (2) As to time when insurable interest must exist. — In life insurance (save that effected by creditor on life of debtor), it is enough that insurable interest exists at the time the policy takes effect and need not exist at the time of the loss (see Sec. 181.); in property insurance, it is necessary that insurable interest "must exist when the insurance takes effect and when the loss occurs, but need not exist in the meantime." (Sec. 19.) (3) As to expectation of benefit to be derived. — In life insurance, the expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient without more. Thus, a person is under no legal obligation to support a friend or a cousin. Yet one w h o is dependent on another for support has an insurable interest in the latter's life, even though there is no legal right to support if there is reasonable ground for believing that the support will be continued. (Carpenter vs. U.S.L. Ins. Co., 23 LRA 571.) In property insurance, an expectation of benefit, to be derived from the continued existence of the property insured, however likely and morally certain of realization it m a y be, will not afford a sufficient insurable interest unless that expectation has a basis of legal right. If such legal basis exists, an expected benefit, however remote, constitutes an insurable interest. (Vance, op. cit., p. 15; see Sec. 13.) Thus, an expectant heir cannot insure the property he expects to inherit. But a stockholder may insure the property of the corporation although he has no legal interest whatsoever in such property. His expectation of benefit to be derived from the continued existence of such property, however, is based upon his legal right as stockholder to demand participation in the profits of the corporation, or in its assets upon dissolution, (see Sec. 14[b].)

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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 change of interest in the insurance, suspends the insurance to an equivalent extent, until the interests in the thing and the interest in the insurance are vested in the same person. Effect, in general, of change of interest. Generally speaking, 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. (Sec. 58.) This rule is embodied in Section 20 and is in accordance with Section 19 that an insured must have an insurable interest in the property insured at the time of loss. Thus, a purchaser of insured property w h o does not take the precaution to obtain a transfer of the policy of insurance, cannot, in case of loss, recover upon such contract, as the transfer has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as the property insured. In such case, nobody can recover on the policy. The purchaser cannot recover because he has no contract with the insurer. The seller (insured) cannot also recover because having sold the property, he has no more insurable interest in the same. (San Miguel Brewery vs. L a w Union & Rock Ins. Co., 40 Phil. 674 [1920].) Note that the contract is not rendered void but is merely suspended by a change of interest. Object of rule against alienation. The object of the provision against alienation or change of interest or title is ordinarily to provide against changes which might supply a motive to destroy the property, or might lessen the interest of the insured in protecting and guarding it. (29 A m . Jur., 505.) Change of interest covered by law. The change of interest referred to in Sections 20, 21, 22, 23, and 24 means absolute transfer of the property insured such as

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the conveyance of the property by means of an absolute deed of sale. Consequently, the interest in the property insured does not pass by mere execution of a pledge or mortgage. Thus, it has been held that in a chattel mortgage, there is no alienation within the meaning of the insurance law until the mortgagee acquires a right to take possession of the property by default of the mortgagor under the terms of the mortgage. (Bachrach vs. British American Ass'n. Co., 17 Phil. 562 [1910].) Exceptions to general rule. The rule that change of interest suspends the insurance is subject to exceptions, to wit: (1) In life, health, and accident insurance (Sec. 20.); (2) A change of interest in the thing insured after the occurrence of an injury which results in a loss (Sec. 21.); (3) A change of interest in one or more of several 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) W h e n a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, m a y become the owner of the interest insured (Sec. 57.); and (7) When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but is avoided. (Art. 1306, Civil Code; see Sec. 24.) Sec. 21. A change of 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.

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Change of interest in a thing insured after loss. After a loss has happened, the liability of the insurer becomes fixed. The insured has a right to assign his claim against the insurer as freely as any other money claim. This right is absolute and cannot be delimited by agreement, (see Sees. 83, 173.) The insured has also the absolute right to transfer the thing insured after the occurrence of the loss. Such change of interest does not affect his right to indemnity for the loss. (Sec. 21.) Section 20 refers to change of interest in the thing insured before loss has occurred. Sec. 22. A change of interest in one or more of several distinct things, separately insured by one policy, does not avoid the insurance as to the others. Change of interest where several things separately insured by one policy. In connection with the above section, it is important to make a distinction between a divisible contract and an indivisible contract, (see Art. 1420, Civil Code.) (1) Effect dependent on divisibility of contract. — In the former, the cause or consideration is m a d e up of several parts while in the latter, it is entire and single. If the things are "separately insured in one policy" the contract is divisible and the violation of a condition which avoids the policy with respect to one or more of the things does not affect the others. On the other hand, if the things are insured under one policy for a gross sum and for an entire premium, the contract is indivisible so that a change of interest in one or m o r e of the things will also avoid the insurance as to the others. EXAMPLE: Suppose D is the owner of a car and a jeep. He insured the car for P500,000.00 and the jeep for P200,000.00 under a single policy for which he paid a total premium of P15,000.00. Under Section 22, the sale of the jeep will not affect the insurance of the car.

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But if the car and the jeep were not separately valued in the policy and D paid P15,000.00 as the premium for the insurance of both the car and the jeep, the sale of the jeep without the insurer's consent affects also the insurance on the car. Hence, if, after the sale of the jeep, the car was lost or destroyed, C cannot recover on the insurance of the car. (2) Divisibility of contract, a question of intention. — Whether a contract is entire or severable is a question of intention to be determined by the language employed by the parties. Where only one premium w a s paid for the entire shipment of goods, the insurance contract is indivisible and the fact that the goods (which are not separately valued) are loaded on two different vessels does not make the contract several and divisible as to the items insured. (Oriental Assurance Corp. vs. Court of Appeals, 200 SCRA 459 [1991].) It has been held that where the amount of the insurance agreed upon w a s merely apportioned among the various items insured to limit the extent of the risk of the insurer as regards each item, the contract of insurance is still indivisible. (Piatt vs. Minnesota F. Ins. Co., 23 Minn. 479.) Sec. 23. A change of 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. Change of interest by death of insured. Under Section 23, the insurance on property passes automatically, on the death of the insured, to the heir, legatee or devisee who acquired interest in the thing insured. The rights to the succession are transmitted from the moment of the death of the decedent. (Art. 777, Civil Code.) EXAMPLE: D insures his house. Thereafter, he dies. H inherits the property by will or by operation of law. The change of interest in the house by the death of D does not affect the insurance because it is likewise transferred to H who may collect on the

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policy should the house be burned later on even before he could transfer the insurance policy under his name. 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. Transfer of interest by one of the several partners, etc. jointly insured. (1) Effect where transfer is to the others. — A transfer of interest in the insured property by a partner, joint owner, or owner in common, to the others who are jointly insured, will not avoid the insurance. The rule is the same even if there is a stipulation that the insurance shall cease upon an alienation of the thing insured. (2) Reason for the rule. — The underlying principle is that each partner (or owner, or owner in common) is interested in the whole property and the hazard is not increased because the purchasing partner has acquired a greater interest in the property by a transfer of his co-partners' share. (Hartford F. Ins. Co. vs. Liddleli Co., 60 S.E. 104.) In other words, the transfer does not affect the risk because no new party is brought into contractual relationship with the insurer. (3) Exception to the rule. — But a policy will be avoided by a sale of an interest in partnership property by the partner to one of his co-partners, without the consent of the insurer and before the loss occurs, where the policy contains the condition "that in case of any sale, transfer, or change of title of any property insured by this company, or of any undivided interest therein, such insurance will be void and cease." (Hartford F. Ins. Co. vs. Ross, 85 Am. Dec. 452.) (4) Effect where transfer is to strangers. — It is alienation or transfer to a stranger or third person that will avoid the policy. A sale by a partner of his interest to a stranger ends the contract of insurance as to him but does not affect the insurance as to the others.

Sec. 2 5

CONTRACT OF INSURANCE Title 3. — Insurable Interest

129

EXAMPLE: A policy of fire insurance was issued to partnership X under its firm name. The policy makes no provision for changes in the personnel of the firm. Will the subsequent withdrawal of a partner or admission of a new partner affect the validity of the policy? No. Under Section 26, the insurance continues despite the changes in the firm's membership. The policy was taken in the name of the partnership X which has a juridical personality separate and distinct from that of each of its members, (see Art. 1768, Civil Code.) 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, (a) Stipulations prohibited in an insurance policy. There are two stipulations in an insurance policy which are declared void under this section. (1) Stipulation for the payment of loss whether the person insured has or has not any interest in the subject matter of the insurance. — A policy issued to a person without interest in the subject matter of the contract is a mere wager policy or contract and is void. (32 C.J. 1110.) A wager policy has been defined as a pretended insurance where the insured has no interest in the thing insured and can sustain no loss by the happening of the misfortunes insured against. (43 A m . Jur. 2d 964; see Sec. 25.) The policy of the law does not admit of such insurance, however willing the parties may be to enter it. The doctrine of waiver has obviously nothing to do with it. The company or its agents cannot, by waiver, invest the insured with interest he does not own. (Agricultural Ins. Co. vs. Montague, 38 Mich. 548.) The law, however, makes an exception in the cases mentioned in Section 181 regarding life insurance.

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(2) Stipulation that the policy shall be received as proof of insurable interest. — Whether or not insurable interest exists does not depend upon the contract of insurance or the stipulations therein. The insurer can always show lack of insurable interest after the issuance of a policy of insurance, (see Sec. 83.) The defense of absence of insurable interest is available only to the insurer being the only party to the insurance contract who has a legitimate interest in raising the defense. It m a y be raised by and for the benefit of the insurer alone. Wagering or gaming policies void. A contract of insurance is void for illegality unless the insured has an insurable interest in the subject matter insured. (1) A mere bet upon a future event. — It is a fundamental postulate of all insurance that it must not be a mere bet upon a future event. Wager or gaming policies are disapproved and condemned not only under statutes declaring them void, but also independently of statute, on the ground of public policy. They are regarded as detrimental to society. Such policies have a tendency to create a desire for the event, and furnish strong temptation to the party interested to bring about if possible the event insured against, (see 32 C.J. 1109; see annotations under Sees. 4 , 1 0 , 1 8 . ) (2) Non-existence of loss from occurrence of event. — Wagers suffer no loss from the occurrence of the contingent event. On the contrary, they actually profit from it. The insurable interest requirement intends to deter the insured from the temptation to bring about by unnatural means the results of the contingent event.

— oOo —

Title 4

CONCEALMENT Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment. Four primary concerns of the parties to an insurance contract. In making a contract, so highly aleatory as that of insurance, the parties have four primary concerns, to wit: (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 insurer to guard against the increase of the risk because of change in conditions; and (4) Determining whether a loss occurred and if so, the amount of such loss. (Vance, op. ext., pp. 364-365.) Devices for ascertaining and controlling risk and loss. In order to effect the above ends which at times may prove to be very difficult, several devices, technically known as concealment, representations, warranties, conditions, and exceptions, have been developed by persons engaged in the insurance business. (1) The devices of concealment (see Sec. 26.) and representations (see Sec. 36.) were originally developed for the purpose of 131

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enabling the insurer to secure the same information with respect to the risk that was possessed by the applicant for insurance, so that he might be equally capable of forming a just estimate of its quality. (2) Warranties (see Sees. 67, 68.) and conditions so far as they are affirmative, that is, dealing with conditions existing at the inception of the contract, and exceptions are used for the purpose of making more definite and certain the general words used to describe the risk the insurer undertook to bear. The general description of the risk concerned has two parts: First, the designation of the specific property interest to be covered; and Secondly, the specification of such of the perils to which that property interest would be exposed. For example: The insured m a y be required to warrant that he had not been subject to the peril of a major operation, or a condition in the form of a stipulation m a y be inserted in the policy that the policy shall be void should the insured be guilty of concealment or misrepresentation. Warranties and conditions involve facts the existence of which shows the risk to be greater than that intended to be assumed and operates to create in the insurer the power to extinguish, if he so desires, the legal relations already created. (3) Exceptions perform a similar function in making m o r e definite the coverage indicated by the general description of the risk by excluding certain specified risks that otherwise would have been included under the general language describing the risks assumed. The exception m a y be of certain property or of certain peril within the general coverage. For example: 'This policy shall not cover accounts, bills, currency, deeds, evidences of debt, money or securities; nor unless specifically n a m e d hereon in writing, bullion or manuscripts/' In a fire insurance policy, burning caused by lightning m a y be excepted from the risks assumed. (4) Executory warranties (Sec. 68.) and conditions, that is, undertakings that certain conditions should or should not exist

Sec. 2 6

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in the future, are used to enable the insurer to rescind the contract in case subsequent events increased the risk to such an extent that he is no longer willing to bear. For example: The insured may warrant that a w a t c h m a n will be kept upon the premises during the currency of the policy, or conditions m a y be inserted to the effect that the policy shall become void if any repairs are made upon the building, or the hazard otherwise increased without the written consent of the insurer. In a somewhat different way, exceptions are also used for the purpose of controlling risks. For example: If in any particular instance the insurer fears the consequences of the vacancy of the property insured, he may, instead of inserting the condition that the entire policy shall be void if the property becomes and remains vacant or unoccupied for a period of 30 days without the consent of the insurer, provide that he assumes no liability for loss while such vacancy or unoccupancy remains. In this case, the occurrence of the excepted vacancy does not give the insurer any power to rescind the contract which remains in full force and effect. (5) The insurer must also protect himself against fraudulent claims of loss; and this he attempts to do by inserting in the policy various conditions which take the form of conditions precedent. For instance, there are conditions requiring immediate notice of loss or injury and detailed proofs of loss within a limited period (see Sees. 88, 89.); and in a great many policies, there is found a condition requiring that any action thereon shall be brought within a limited time, (see Sec. 63.) It is necessary for the insurer to ascertain not only the fact of loss, but also the amount of any loss that m a y in fact have occurred. To secure such protection, the insurer inserts the various conditions providing for the appointment of appraisers, and for arbitration in case no agreement can be reached as to the amount of loss, (see Vance, op. cit., pp. 364-368.)

Concealment defined. Concealment is defined by Section 26 as a neglect to communicate that which a party knows and ought to communicate.

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Sec. 27

Requisites of concealment. Read together with Section 28, there can be no concealment unless: (1) a party knows the fact which he neglects to communicate or disclose to the other; (2) such party concealing is duty bound to disclose such fact to the other; (3) such party concealing makes no warranty of the fact concealed; and (4) the other party has not the means of ascertaining the fact concealed. Where a warranty is m a d e of the fact concealed, the non-disclosure of such fact is not concealment but constitutes a violation of warranty. (Title 7.) Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance, (as amended by B.P. Big. 874.) Effect of concealment. (1) By the insured. — As a rule, failure on the party of the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer's option. (45 C.J.S. 153.) The reason is that insurance policies are traditionally contracts uberrimae fidae (Stipcith vs. Metropolitan Life Ins. Co., 277 U.S. 311.), that is, contracts of the utmost good faith. This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are, as a rule, known to the insured only, and the insurer, in deciding whether or not to accept a risk, must rely primarily upon the information supplied to him by the applicant. It is strictly interpreted by the courts and is not limited to material facts which the applicant knows, but extends to those which he ought to know (Dindsdale & McMurdie, op. cit., pp. 85-86.) they being necessary for the insurer to evaluate the risk, either to charge a higher premium or to refuse to issue a policy altogether. Therefore, it is no defense to plead mistake or forgetfulness.

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(2) By the insurer. — The contractual duty of disclosure imposed by utmost good faith is not required of the insured alone, but is imposed with equal stringency upon the insurer; in fact, it is more upon the latter, since his dominant bargaining position carries with it stricter responsibility. (Qua Chee Gan vs. L a w Union & Rock Ins. Co., 98 Phil. 85 [1955]; Fieldmen's Insurance Co., Inc. vs. Vda. de Songco, 25 SCRA 70 [1968].) The duty of utmost good faith is breached by concealment or misrepresentation. (Sees. 44, 45.) Section 27 "entitles" the injured party to rescind a contract of insurance by reason of concealment, implying that it is optional on his part whether or not to exercise his right of rescission.

Proof of fraud in concealment. Under Section 27, the insurer need not prove fraud in order to rescind a contract on the ground of concealment. (Saturnino vs. Phil. American Life Insurance Co., 7 SCRA 316 [1963].) (1) Existence of fraud not required. — The duty of communication is independent of the intention and is violated by the fact of concealment, even when there is no design to deceive. (Sun Mut. Ins. Co. vs. Ocean Ins. Co., 107 U.S. 485.) In this jurisdiction, the legal effect of a concealment, whether intentional or unintentional, is the same, i.e., it entitles the insurer to rescind the contract of insurance, concealment being defined as "negligence to communicate that which a party knows and ought to communicate." (Saturnino vs. Phil.-American Life Insurance Co., supra; Great Pacific Life Assurance Co. vs. Court of Appeals, 89 SCRA 543 [1979].) 1

^The phrase "whether intentional or unintentional" between "concealment" and "entitles" in Section 26 of the former Insurance Act was deleted in Section 27 of the former Insurance C o d e which took effect on December 18, 1974 and in the present Insurance Code until it w a s restored by Batas Pambansa Big. 874. Section 27, according to the Supreme C o u r t in the case of Ng Gan Z e e vs. Asian Crusader Life Assurance Corp. (122 SCRA 461 [1983]), "requires that fraudulent intent on the part of the insured must be established to entitle the insurer to rescind." This ruling is no longer controlling. It was erroneously reiterated in Philamcare Health Systems, Inc. vs. Court of Appeals (379 SCRA 350 [2002]). But even with the deletion of the phrase, it is believed that proof that the concealment was intentional was not required to entitle the injured party to rescind.

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Sec. 27

(2) Reason for the rule. — Moreover, if it were necessary for the insurance company to show actual fraud on the part of the insured, "then it is plain that it would be impossible for it to protect itself and its honest policyholders against fraudulent and improper claims. It would be wholly at the mercy of any one who wished to apply for insurance, as it would be impossible to show actual fraud except in the extremest 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." (Kasprzyk vs. Metropolitan Ins. Co., 140 N.Y. 211, cited in Saturnino case, supra.) But Section 27 must be read in relation to Section 29. (3) Basis and criterion for provision. — 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 insured 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. (see Sec. 31.) 2

The principal question, therefore, must be: "Was the insurer misled or deceived into entering a contract obligation or in fixing the premium of insurance by a withholding of material information or facts within the assured's knowledge or presumed knowledge?" (Argente vs. West Coast Life Ins. Co., 51 Phil. 725 [1928].) EXAMPLE: In his application for life insurance, D did not reveal the fact that he was suffering from an ailment. (1) Whether or not D was aware of the ailment, there is no concealment (Sec. 26.) where the ailment was not material to the contract. (Sec. 31.)

2

T h e rule is thus based u p o n the assumption that the circumstances affecting the risk are more readily accessible to the insured than to the insurer and that the insurer actually trusts the insured to disclose all the facts. (E.W. Patterson, op. cit., pp. 4 5 0 - 4 5 1 . )

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(2) Whether or not D was aware of the ailment, there is concealment where the ailment was material to the contract: (a) If D was aware of the ailment but honestly believed that it was not material, the concealment is not fraudulent or intentional. (b) If D was aware of the ailment, there is fraudulent concealment where the ailment was material to the contract and D knew or believed that it was material.

Rules as to marine insurance. (1) In the United States. — The rule as stated in Section 27 applies only to (ocean) marine insurance. The reason for the contrary rule is that in marine insurance, "the subject of insurance is generally beyond the reach, and not open to the inspection of the underwriters, often in distant ports or upon the high seas x x x and the underwriter from the very necessities of his undertaking is obliged to rely upon the assured and has, therefore, the right to exact a full disclosure of all the facts known to him which m a y in any w a y affect the risk to be assumed." On the other hand, in fire and other kinds of insurance, the subject "is, or m a y be, seen and inspected before the risk is assumed and its construction, situation and ordinary hazards as well appreciated by the underwriter as by the other" and, therefore "no such necessity for reliance exists, and if the underwriter assumes the risk without taking the trouble to either examine or inquire, he cannot very well in the absence of fraud, complain that it turned out greater than he anticipated." (Hartford Protection Ins. Co. vs. Hormer, 59 Am. Dec. 684.) (2) In the Philippines. — The rule, however, that obtains in our jurisdiction, applicable to every kind of insurance, is that fraud is not essential in order that the insured may be guilty of concealment. Section 26 (now Sec. 27.) of the former Insurance Act was taken from Section 330 of the California Insurance Code and it has been held that under this provision, the presence or absence of an intent to deceive is immaterial. (Gates vs. General Casualty Co. of America, 120 F. 2d. 925; N.Y. Life Ins. Co. vs. Fleck, 12 N.W. 2d. 530; Telford vs. N.Y. Life Ins. Co., 69 P. 2d. 835; Saturnino vs. Phil. Am. Life Ins. Co., supra.)

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Sec. 2 8

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 which the other has not the means of ascertaining, and as to which he makes no warranty. Matters that must be communicated even in the absence of inquiry. This section makes it the duty of each party to a contract of insurance to communicate in good faith all facts within his knowledge only when: (1) they are material to the contract (Sees. 31, 34, 35.); (2) the other has not the means of ascertaining the said facts (see Sees. 30, 32, 33.); and (3) as to which the party with the duty to communicate makes no warranty, (see Sees. 67-76.) So, an applicant for life insurance suffering from or w h o h a d been treated or hospitalized for some ailment like pneumonia, diabetes or syphilis (De Leon vs. Crown Life Ins. Co., [C.A.] L-44842, June 20, 1939.); or incipient pulmonary tuberculosis (Musngi vs. West Coast Life Ins. Co., 61 Phil. 864 [1939].); or peptic ulcer (Yu Pang Cheng vs. Court of Appeals, 105 Phil. 930 [1959].); or cerebral congestion and Bells Palsy or that his case had been diagnosed as alcoholism or psychoneurosis (Argente vs. West Coast Life Ins. Co., 51 Phil. 725 [1928].); or cardiovascular disease (St. Ferdinand Memorial Park, Inc. vs. Great Pacific Life Assurance Corp., I.C. Case Nov. 20, Jan. 7, 1977.); or sinus tachycardia (sinus initiated; heart rate faster than 100 beats per minute, a common reaction to heart disease) and acute bronchitis (Canilang vs. Court of Appeals, 223 SCRA 443 [1993].), or that he w a s hospitalized for two weeks prior to his application for insurance (Sunlife Assur. Co. of Canada vs. Court of Appeals, 2 4 5 SCRA 268 [1995].), must disclose such facts even if not inquired into where such facts are material to the risk assumed by the insurer. The test is: If the applicant is aware of the existence of some circumstances which he knows would influence the insurer in

Sec. 2 9

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acting upon his application, good faith requires him to disclose that circumstance, though unasked. (Vance, op. cit., p. 372.) Effect of failure of insurer to verify. The effect of material concealment cannot be avoided by the allegation that the insurer could have known and discovered the illness or disease which the insured had concealed. This argument postulates an obligation of the insurance company before issuing the policy to verify the statements made by the insured in his application. But there is no such obligation. The insurance c o m p a n y has the right to rely on the statements of the insured as to material facts such as to his previous sickness, for he knows the facts, and the matter is not one of which disclosure is excused by the law. (De Leon vs. Crown Life Ins. Co., [C.A.] L-44842, June 2 0 , 1 9 3 9 . ) 3

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. When fraudulent intent necessary. Under this section, the concealment relates to the "falsity of a warranty." (see Sees. 67-76.) Unlike in ordinary concealment (Sec. 27.), the non-disclosure under Section 29 must be intentional and fraudulent in order that the contract m a y be rescinded. It is to be noted here that

3

In a case, w h e r e the insurer sought to avoid payment of a life insurance policy on the g r o u n d that the insured (a Chinese widow, 61 years old, and an illiterate w h o spoke only Chinese) concealed or misrepresented her state of health, the beneficiary contending that she could not be held guilty of concealment because the application for insurance was in English and the insurer has not proved that the terms thereof had been fully explained to her (insured) as required by Article 1332 of the Civil C o d e which stipulated: "when one of the parties is unable to read or if the contract is in a language not understood by him, and mistake of fraud is alleged, the person enforcing the contract must show that the terms thereof h a v e been fully explained to the former." Held: Article 1332 is not applicable, as the duty to show that the terms of the contract "have been fully explained" devolves on the party-beneficiary, seeking to enforce the contract, not on the one (insurer) seeking to avoid its performance. (Tang vs. Court of Appeals, 90 SCRA 236 [1979].)

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the omission is on the part of the insured and the party entitled to rescind is the insurer. Thus, in every contract of marine insurance, the warranty is implied that the ship is seaworthy (Sees. 113, 114.), the intentional and fraudulent omission on the part of the insured when applying for a policy to communicate information that his ship is in distress or in special peril would entitle the insurer to rescind because the concealment refers to matters proving or tending to prove the falsity of the warranty that the ship is seaworthy. 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; (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. Matters made the subject of special inquiries material. As a general proposition, matters m a d e the subject of inquiry must be deemed material, even though otherwise they might not be so regarded (North A m . Fire Ins. Co. vs. Throop, 22 Mich. 146.) and the insured is required to make full and true disclosure to questions asked. (Smith vs. Ins. Co., 49 N.Y. 211.) The failure of an apparently complete answer to make full disclosure will avoid the policy. But an answer incomplete on its face will not defeat the policy in the absence of bad faith. (Vance, op. cit, p. 376.)

Sec. 30

C O N T R A C T OF I N S U R A N C E Title 4. — Concealment

141

EXAMPLE: If one applying for insurance upon a building against fire is asked whether the property is encumbered and for what amount and his answer discloses one mortgage when in fact there are two, the policy issued thereon is avoided. (Rowne vs. Fifthburg Mut. Fire Ins. Co., 7 Allen [Mass.] 57.) But if to the same question he merely answers that the property is encumbered, without stating the amount of encumbrances, the issue of the policy without further inquiry, is a waiver of the omission to state the amount. (Nichols vs. Fayetee Mut. Fire Ins. Co., 1 Allen [Mass.] 63.) When there is no duty to make disclosure. The circumstances of the parties to an insurance contract, or the conditions under which it is executed m a y be such as to render it unnecessary, in the absence of questions requiring it, for the insured to disclose to the insurer, facts that would otherwise be material. (Vance, op. cit., p. 381.) Thus: (1) Matters known to, or right to be known by insurer, or of which he waives disclosure. — The insured cannot be penalized for failure to disclose matters already known to the insurer (Sec. 30[a].) for obviously, the insurer cannot say there is deception; or ought to be known to the insurer or his agent (ibid., [b]; Sec. 32.) for to hold otherwise would be to charge the insured with the default of the insurer or his agent (Bates vs. Hewit, 1867 L.R. 2 Q.B. 595.); or of which the insurer waives communication (Sec. 30[c]; Sec. 33.) for the insurer is in estoppel. (2) Risks excepted from the policy. — The insurer cannot complain of the insured's failure to disclose facts that concern only risks excepted from the policy, either expressly or by warranty, from the liability assumed under the policy. (Thomas & Mersey Marin Ins. Co. vs. Guaford Ship Co., [1911] A.C. 529.) It is important to note, however, that in this case, the undisclosed fact must not be material (Sec. 30[d], [e].) for otherwise, the rule will not apply. (3) Nature or amount of insured's interest. — Also, 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 51. (Sec. 34.)

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Sec. 31

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. Determination of materiality. (1) Test of materiality. — The test is in 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. (Vance, op. cit., p. 375.) The matter must, of course, be determined ultimately by the court. EXAMPLE: When D insured his house against fire, he did not disclose the fact that he received two letters threatening to set his house on fire if he did not pay P50,000.00 to the sender. D's house was destroyed by an accidental fire. The insurer can deny liability for the loss. (2) From the standpoint of the insurer. — A fact is material if the knowledge of it would have a "probable and reasonable influence upon the insurer in assessing the risk involved and in making or omitting further inquiries, and cause him either to reject the risk or to accept it only at a higher premium rate or on different terms though that fact m a y not even remotely contribute to the contingency upon which the insurer would become liable, or in any wise affect the risk, (ibid., p. 326; see Argente vs. West Coast Life Ins. Co., 51 Phil. 725 [1928]; Canilang vs. Court of Appeals, 223 SCRA 443 [1993].) (a) Thus, where the applicant concealed the fact that he had pneumonia, diabetes or syphillis, the policy is avoided although the cause of the death (e.g., plane crash) be totally unconnected with the material fact concealed or misrepresented. (De Leon vs. Crown Life Ins. Co., [C.A.] No. 44842, June 20, 1939.) It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the

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proposed insurance policy or in making inquiries. (Sunlife Assur. Co. of Canada vs. Court of Appeals, 245 SCRA 268 [1995].) (b) The materiality of the existence of other insurance contracts against fire upon the same property insured, when its disclosure is one of the conditions specified in the fire insurance policy, is not open to doubt. (Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., Inc., 47 SCRA 271 [1973].) (c) In non-medical insurance (which does away, with the usual medical examination before the policy is issued), the waiver by the insurance company of medical examination renders more material, the information required of the applicant concerning the previous condition of health and disease suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. (Saturnino vs. Phil. American Life Insurance Co., 7 SCRA 361 [1963]; Sunlife Assur. Co. of Canada vs. Court of Appeals, 245 SCRA 268 [1995].) (d) In a case where the insured, in his application for insurance, m a d e a negative answer which is false, to the question of whether he has consulted or been treated for elevated blood pressure and on the basis of the answer, the insurer accepted his application as a standard risk where only the routine medical examination was taken, and subsequently the insured died of hypertension, it was held that the insurer m a y rescind the contract of insurance and delay payment on the ground of concealment a n d / o r misrepresentation. The insurer was ordered to refund the premiums paid by the deceased insured with legal interest from the time payment was made. (A.V. A m o r vs. Travellers Life Insurance of the Philippines, I.C. Case No. 185, March 7,1977.) (3) When concealment regarded as intentional — 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.

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Sec. 31

The nature of the facts not conveyed to the insurer may be such that the failure of the insured to communicate must have been intentional rather than inadvertent. (Canilang vs. Court of Appeals, supra.) (a) The concealment by the insured of the fact that he "was operated on for cancer, involving complete removal of the right breast and stayed in the hospital for a period of eight (8) days" is in itself fraudulent, although the insured's doctor never told her, that the disease for which she was operated on was cancer, "as there could not have been any mistake about it, no matter what the ailment." (Saturnino vs. Phil. American Life Ins. Co., 7 SCRA 316 [1963].) (b) The withholding by the applicant, father of oneyear-old insured, of the fact that his daughter was typically a mongoloid child, of which he was fully aware, as such a congenital physical defect could never be ensconced nor disguised, in supplying essential data for the insurance application form which fact is material to the contract, constitutes fraudulent concealment. (Great Pacific Life Assn. Co. vs. Court of Appeals, 89 SCRA 543 [1979].) (c) The concealment was held intentional on the part of the insured who "could not have been unaware that his 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, [the insured] went to visit his doctor precisely because of the discomfort and concern brought about by his experiencing sinus tachycardia." (Canilang vs. Court of Appeals, supra.) But in the absence of evidence of the uninsurability of a person afflicted with chronic cough, concealment thereof is no ground for annulment of the policy. (Insular Life Assn. Co. vs. Pineda, [C.A.] 40 O.G. 285.) (4) Where fact concealed not material — The insured cannot be guilty of concealment where the fact concealed is not material. Thus, where the insured underwent an ECG (electrocardiogram) test and the results showed a normal condition but he gave a negative answer to the question whether he had such test, it

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T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

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Sec. 3 3

conditions in other countries (Beech vs. Ins. Co., 7 L. ed. 90 [1800].), or the allegiance of particular countries, the sources of his information being equally open to the insurer who is, therefore, presumed to know them. Likewise, the insurer is charged with the knowledge of the general trade usages and rules of navigation, kind of seasons, and all the risks connected with navigation. Sec. 33. The right to information of material facts may be waived, either by the terms of insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated. Right to information may be waived. The right to information of material facts m a y be waived either expressly, that is, by the terms of insurance, or impliedly, that is, by neglect to make inquiry as to the facts already communicated. If the applicant has answered the questions asked in the application, he is justified in assuming that no further information is desired. (Commonwealth Life Ins. Co. vs. Reder, 154 S.W. 906.) A waiver is a type of estoppel. EXAMPLE: In an answer to a question, the insured communicated to the insurer that he had once stayed in a hospital. The insurer did not inquire as to the cause of the confinement. In this case, the law presumes that there is implied waiver on the part of the insurer of its right to be informed of the kind of sickness which caused insured's confinement in the hospital. (see Sec. 30[c].) The Insurer is estopped in the future from using that former right to its advantage. But there is no waiver where the failure of the insurer to make further inquiries was due precisely to concealment on the part of the insured, (see Sec. 27.) 4

4

F o r one thing, life insurance c o m p a n i e s ordinarily require completion of a detailed application form, and, frequently, a medical examination. Thus, the insured would be justified in assuming that the insurer has asked all the information it d e e m s material to the approval of the application.

Sec. 3 3

CONTRACT QF INSURANCE Title 4. — Concealment

ILLUSTRATIVE CASES: 1. Insurer had every means to ascertain truth of matters alleged in application. Facts: The cause of death of the insured was certified as "Cancer of the Cervix, Stage III." The insurer's ground for denial of claim of death benefits is concealment of the fact that the insured had knowledge of and been treated for cancer of the cervix and hypertension, which fact the insured failed to reveal in her application. It appears, however, that the insured had faithfully answered the questions in the application to the best of her knowledge even indicating the addresses and names of persons, laboratories and hospitals when and where she had consultations. Issue: Was the insured guilty of concealment of fact material to the insurance contract? Held: No. The insurer had every means to ascertain the truth of the matter alleged in the application. The failure of the insurer to make inquiry constituted a waiver of its right to information of the facts. (AG. Factor vs. The Phil. American Life Insurance Co., I.C. Case No. 310, Aug. 29,1977.) 2. Insured lacked sufficient medical knowledge as to enable him to distinguish between "peptic ulcer" and "tumor." Facts: The alleged false statements given by the insured are as follows: "Operated on for a Tumor (mayoma) of the stomach. Claims that tumor has been associated with ulcer of the stomach. Tumor taken out was hard and of a hen's egg size. Operation was two years ago. Now claims he is completely recovered." It appears that the insured's ailment was diagnosed as "peptic ulcer" for which an operation known as "sub-total gastric resection" was performed; and that the specimen removed from his body was "a portion of stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension." Issue: Was the insurer, because of insured's representation, misled or deceived into entering the contract or in accepting the risk at the rate of premium agreed upon?

147

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

148

Sec. 34

Held: No. 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 peptic 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 insurer. While from the viewpoint of a medical expert, the information communicated was imperfect, the same was nevertheless sufficient to have induced the insurer to make further inquiries about the ailment and operation of the insured. Where "upon the face of the application, a question appears to be not answered at all or to be imperfectly answered and the insurer issues a policy without any further inquiry, it waives the imperfection of the answer and renders the omission to answer more fully immaterial." (Ng Zee vs. Asian Crusader Life Assurance Corp., 122 SCRA 461 [1983].) 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. Disclosure of nature and extent of interest of insured. Under Section 51(e), it is required that a policy of insurance must specify "the interest of the insured in property insured, if he is not the absolute owner thereof/' So, a mortgagee must disclose his particular interest even if no inquiry is m a d e by the insurer in relation thereto. Such requirement is m a d e so that the insurer m a y determine the extent of the insured's insurable interest, (see Sees. 1 7 , 1 8 . ) But there is no need to disclose the interest in the property insured if it is absolute. EXAMPLE: A fire insurance policy was issued to D (insured). He was described as the owner of the insured residential property. D

Sec. 3 5

CONTRACT OF INSURANCE Title 4. — Concealment

149

was only given the privilege of occupying the house, rent-free for life, by the terms of his father's will. D represented himself as the owner. Is the policy valid? No. D is guilty of misrepresentation. He should have disclosed the nature of his interest in the property inasmuch as he is not the absolute owner thereof. 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. Disclosure of judgment upon the matters in question. The duty to disclose is confined to facts. (Hart vs. British & F. Marine Ins. Co., 22 P. 302.) Hence, there is no duty to disclose mere opinion, speculation, intention or expectation. (Folsom vs. Mercantile Mut. Ins. Co., 18 Wall. 237; 38 C.J. 1056; see Sec. 101.) This is true even if the insured is asked. EXAMPLE: Suppose the insurer asks the insured the following question: "How long do you think you will live? " The insured need not answer the question; and the fact that he committed error in answering a question calling for an expression of opinion does not constitute fraud in law. (45 C.J.S. 105.)

— oOo —

Title 5

REPRESENTATION Sec. 36. A representation may be oral or written. Representation defined. Representation is a statement made by the insured at the time of, or prior to, the issuance of the policy (Sec. 37.), as to an existing or past fact or state of facts, or concerning a future happening, to give information to the insurer and otherwise induce him to enter into the insurance contract. It may also be made by the insurer but as the insured seldom desires to avoid the contract, the cases nearly always involve to representations made by the insured. Misrepresentation defined. 1

Misrepresentation in insurance is a statement (1) as a fact of something which is untrue, (2) which the insured stated with knowledge that it is untrue and with an intent to deceive, or which he states positively as true without knowing it to be true and which has a tendency to mislead, and (3) where such fact in either case is material to the risk. (43 Am. Jur. 2d 1019.) Such a misrepresentation by the insured renders the insurance contract voidable at the option of the insurer, even though innocently made and without wrongful intent. Misrepresentation m a y be viewed as the active form of concealment.

'Misrepresentation is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by satisfactory and convincing evidence. ( N g G a n Z e e vs. Asian C r u s a d e r Life Assurance Corp., 122 S C R A 461 [1983]; Great Pacific Life Insurance Corp. vs. C o u r t of Appeals, 3 1 6 S C R A 677 [1999].)

150

Sec 36

CONTRACT OF INSURANCE Title 5. — Representation

151

Form and nature of representation. (1) Information given concerning risk. — It is the duty of the person applying for insurance to give to the insurer all such information concerning the risk as will be of use to the latter in estimating its character and in determining whether or not to assume it. This information m a y be given orally, or written in papers not connected with the contract, such as circulars and prospectuses, or in the application or examiner's report, or it m a y appear in the policy itself. (2) Forms basis of contract. — However communicated, the information thus given forms the basis of the contract as made. It describes, marks out, and defines the risk assumed. If the description as relied on by the insurer, proved to be untrue in any material respect, the insurer m a y deny liability saying, "I did not assume this risk, but that which was described to me." Hence, arises the reasonable rule that the untruth of any material representation relied on by the insurer, will avoid the contract, wholly irrespective of the intent, whether innocent or fraudulent, with which such misrepresentation was made, (ibid.; see however, Sec. 45.) (3) Intended as collateral inducements. — Representations are m a d e to influence the insurer to accept the risk. Being merely collateral inducements to the contract, representations may be communicated in any manner whatsoever that is intelligible. (Vance, op. cit., p. 393.) But they are not a part of the contract unless expressly m a d e so. EXAMPLES: (1) An underwriter who has insured a vessel described as a steamer cannot be required to pay the loss of a sailing vessel; nor will he, under a policy written upon the vessel, represented to be safe in port, be liable for the loss of a vessel which at the time of the undertaking was at sea and storm tossed for the simple reason that he had not insured a vessel in that situation. (2) The insurer of a brick house is not liable for the loss of a frame house; nor is he, who insures a man of thirty, liable for the death of a man who was then fifty-five, even though in every other respect he may answer to the description of the person insured, (ibid.)

152

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sees. 37-38

But the insurer could not decline to pay for the loss of a white painted house or ship because the one insured was described as being painted green though otherwise identical in description with the subject of the loss, (ibid.) Sec. 37. A representation may be made at the time of, or before, issuance of the policy, (a) Time when representation may be made. The very nature of representation requires that it precede the execution of the contract, (see Sec. 41.) The insurer must be induced by the misrepresentation of the insured to issue the policy at a specified premium. Clearly, a representation made after the policy is issued could not have influenced either party to enter into the contract. However, a representation m a y be performed after the issuance of the policy, (see Sec. 39.) Sec. 38. The language of a representation is to be interpreted by the same rules as the language of contracts in general. Construction of representations. Representations are construed liberally in favor of the insured, and are required to be only substantially true. Warranties (Sec. 67.), by contrast, must be literally true, or the contract will fail. The circumstances under which representations are usually made to the insurer justify this rule. If the representation is written in the policy, the language in which it is expressed was chosen by the insurer; if in answer to an inquiry, the agent of the insurer usually phrases the answer to a question worded by the insurer. The great number and particularity of the inquiries m a d e and the nature of the information asked, are such that "no h u m a n being could, with safety, undertake to answer correctly and warrant the correctness of his answers." (Vance, op. cit., p. 399.)

Sec. 39

CONTRACT OF INSURANCE Title 5. — Representation

153

ILLUSTRATIVE CASES: 1. Questions as to the use of liquor. — They will be construed, if possible, as referring to habitual use and not to occasional use or even occasional sprees. (Venn. Mutual Life Ins. Co. vs. Nunnery, 176 Miss. 197.) 2. Questions as to having any illness. — In a case where the insured had stated that he had never had "any illness, local disease or injury in any organ," it was held that this representation was substantially true despite the fact that the insured had been discharged from the army because of inflammation of the eyes, which, however, had been entirely cured before the application for the policy. If it is true that there are "about fifty parts of the human body which come under the denomination of organs, including, among others, the eyes, the nerves, bones, cartilages, veins, glands of the skin, etc.," then if a finger had been broken, the skin injured or a vein cut at any period of the applicant's life, the answer given would necessarily constitute a misrepresentation which is not so. (Fitch vs. Am. Popular Life Ins. Co., 59 N.Y. 557, 17 Am. Rep. 372.) 3. Questions as to illness or disease. — They will refer to serious ailments and not to minor indispositions. (Ransom vs. The Plan Montreal Life Insurance, 276 P 2d 633.) Gastric discomfort suffered after a drinking spree cannot be considered a serious ailment but merely a minor indisposition which appeared to be of an inconsequential nature not only to an ordinary layman but even to the medical practitioner. (E. Agos vs. The Phil. American Life Insurance Co., I.C. Case No. 10, March 11,1976.) The rules referred to in Section 38 are the provisions of the Civil Code on "Interpretation of Contracts" from Article 1370 to Article 1379. 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. Kinds of representation. A representation may be: (1) oral or written (Sec. 36.); (2) made at the time of issuing the policy or before (Sec. 37.); and (3) affirmative or promissory. (Sees. 39, 42.)

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

154

Sec. 39

(1) An affirmative representation is any allegation as to the existence or non-existence of a fact when the contract begins, (see Sec. 42.) Thus, the statement of the insured that the house to be insured is used only for residential purposes is an affirmative representation. (2) A promissory representation is any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance. Nature of promissory representations. The term "promissory representation" is used in two senses: (1) First, it is used to indicate a parol or oral promise m a d e in connection with the insurance, but not incorporated in the policy. The non-performance of such a promise cannot be shown by the insurer in defense to an action on the policy, but proof that the promise was made with fraudulent intent will serve to defeat the insurance; and (2) Secondly, an undertaking by the insured, inserted in the policy, but not specifically made a warranty, is called also a "promissory representation." It is, however, in such a case, merely an executory term of the contract, and not properly a representation. (Vance, op. cit., p. 396.) A promissory representation is, therefore, substantially a condition or a warranty. EXAMPLE: An applicant for fire insurance on a building makes a promise contained in the policy that it shall be occupied, which promise induces the insurer to issue the policy at a lower rate. It is clear that the promise is not representation at all but a term of the contract, the performance of which may be made a condition of the insurer's liability. But if the promise is oral, the insurer may not be allowed to prove it by the operation of the rule of evidence forbidding the admission of parol testimony to add prior or contemporaneous terms to a written instrument. (Rules of Court, Rule 130, Sec. 9.) The promise, however, may be proved for a different purpose,

Sec. 39

CONTRACT OF INSURANCE Title 5. — Representation

155

that is, to prove that the insured had made the promise in bad faith.

Effect on policy of expressions of opinion or expectation. (1) Good faith/bad faith of the insured. — A representation of the expectation, intention, belief, opinion or judgment of the insured, although false, will not avoid a policy of insurance 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 such statement is obviously of the foregoing character since in such case the insurer is not justified in relying upon such a statement, but is obligated to make further inquiry. (43 Am. Jur. 2d 1023; see Philamcare Health Systems, Inc. vs. Court of Appeals, 379 SCRA 356 [2002].) (2) Liability of the insurer. — As to such representations, the good faith of the insured furnishes the criterion of truth, for they can be false only when the intention, opinion or belief as stated is not honestly entertained. (Vance, op. cit., p. 394.) To avoid liability, the insurer must prove both materiality of the insured's opinion and the latter's intent to deceive. If the representation is one of fact, all the insurer need to prove is its falsity and materiality as defined in Sections 44, 45, and 46. The intent to deceive is presumed. EXAMPLES: (1) The insured may express an opinion that his house is of a certain value, or that his body is wholly free from a certain disease. Here, the insurer knows that the insured's opinion may be mistaken but the fact that such opinion is honestly entertained may be of great value to him in estimating the risk. But the policy will not be avoided even if the opinion turns out to be erroneous, (see Mouler vs. Ins. Co., Ill U.S. 335.) (2) In response to a question, an applicant for a motor vehicle insurance replied: "I am a very good driver." The statement is not fraudulent as it is merely an expression of opinion. But if in fact the applicant does not know how to

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

156

Sec. 4 0

drive, he is guilty of fraudulent misrepresentation of material fact. (Sees. 44, 45.) When representation deemed a mere expression of opinion. An oral representation as to a future event or condition, over which the insured has no control, with reference to property or life insured, will be deemed a mere expression of opinion which will avoid a contract only when m a d e in bad faith. (Bryant vs. Ocean Ins. Co., 22 Pick [Mass.] 200.) EXAMPLE: The insured made an oral promise that the building insured shall be occupied. The subsequent failure to fulfill the promise if made in good faith, will not avoid the policy even though the risk be increased by the building's being unoccupied. Sec. 40. A representation cannot qualify an express provision in a contract of insurance; but it may qualify an implied warranty, (a) Effect of representation on express provisions of policy. A representation cannot qualify an express provision or an express warranty in a contract of insurance. This is so because a representation is not a part of the contract but only a collateral inducement to it. A representation, however, m a y qualify an implied warranty. EXAMPLES: (1) If the policy expressly provides that the house insured is used as a warehouse, any representation made by the insured prior to the issuance of the policy to the effect that the house was used only as a residence is not a defense in the action for recovery of the amount of insurance. (2) If the insured makes a representation that the vessel insured was deficient for the voyage because it was not duly manned, such representation may qualify the implied warranty that the vessel is seaworthy, (see Sees. 113,116.)

Sees. 41-42

CONTRACT OF INSURANCE Title 5. — Representation

157

Sec. 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards. When representation may be altered or withdrawn. A representation, not being a part of the contract of insurance, m a y be altered or withdrawn before the contract actually takes effect but not afterwards since the insurer has already been led by the representation in assuming the risk contemplated in the contract. Sec. 42. A representation must be presumed to refer to the date on which the contract goes in effect. Time to which representation refers. Representations refer only to the time of making the contract. As already shown, statements promissory of conditions to exist subsequent to the completion of the contract m a y be conditions or warranties. They cannot be representation. Hence, conditions represented as existing must be so during the making of the contract but not necessarily afterwards (Vance, op. cit., p. 405; but see Sec. 96.), and representations found to be untrue m a y be withdrawn prior to the completion of the contract but not afterwards. (Sec. 41.) It results that there is no false representation, if it is true at the time the contract takes effect although false at the time it was made and vice versa, there is false representation if it is true at the time it was m a d e but false at the time the contract takes effect. EXAMPLES: (1) If the insured represented that his vessel was in Tokyo, when in fact it was in Hongkong, but at the taking into effect of the contract, it was already in Tokyo, there is no misrepresentation. Conversely, the contract is avoided even if the representation was true at the time it was made, but false at the time the contract takes effect. Assuming the representation that the vessel was in Tokyo to be true but on the date of the execution of the contract the vessel was no longer in Tokyo but in Hongkong and is shipwrecked

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

158

Sec. 4 3

there, the insurer is not liable under the policy on the ground of false representation. In other words, a representation is a "continuing representation" until the contract takes effect, (see Stipcich vs. Metropolitan L. Ins. Co., 277 U.S. 311.) (2) At the time X applied for a life insurance policy on June 10, 2002, he had never suffered from any of the enumerated diseases including pneumonia. On July 12, 2002, he became ill with pneumonia and completely recovered on July 25, 2002. When the policy was delivered and the first premium paid on July 30, 2002, X did not disclose his having been sick with pneumonia. Is there false representation? Yes, and, therefore, the insurer is entitled to rescind the contract, (see Sec. 45.) (3) But the truth of the statement made by the insured at the date of the application that, for example, his age at his nearest birthday is thirty-five, is surely to be tested as of the date of the application. It would be absurd to say that this representation was fatally false because at the time of the acceptance of the application and the completion of the contract it was no longer true. (Vance, op. cit., p. 406.) Sec. 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information. Effect where information obtained from third persons. Under this section, the insured is given discretion to communicate to the insurer what he knows of a matter of which he has no personal knowledge. If the representation turns out to be false, he is not responsible therefor, provided he gives explanation that he does so on the information of others. EXAMPLE: If the insured has no personal knowledge of the cause of the death of his parents because they died when the insured

Sec. 4 3

C O N T R A C T OF INSURANCE Title 5. — Representation

159

was still an infant, he may report information obtained from friends and relatives, expressly stating that he does not possess knowledge personally but through others. In this case, the insured is not responsible for the truth of the information. On the other hand, where a party orders insurance, and afterwards receives information material to the risk, or has knowledge of a loss, he ought to communicate it to his agent as soon as, with due and reasonable diligence, it can be communicated for the purpose of countermanding the order, or laying the circumstances before the insurer. If he omits to do so, the policy is avoided. (M. Lanahen vs. Universal Ins. Co., 7 L. Ed. 9 8 , 1 0 5 . )

Effect where information obtained from agent of insured/insurer. (1) Agent of the insured. — If the information proceeds from an agent of the insured, whose duty it is in the ordinary course of business to communicate such information to his principal, and it was possible for the agent under such circumstances in the exercise of due diligence to have made such communication before the making of the contract, the insured will be liable for the truth. EXAMPLE: A captain of a ship is bound to communicate its loss to the owner and if the latter effects an insurance on the ship "lost or not lost" in ignorance of the antecedent loss due to the fraud or negligence of the captain, the insured cannot recover on the policy, (see Proudfoot vs. Montefine, L.R. 2 Q.B. 511.) (2) Agent of the insurer. — It must be borne in mind that the same principle applies to the insurer though in the nature of things, the question does not occur so frequently. EXAMPLE: If an insurer would effect an insurance upon a vessel "lost or not lost," when his agent under a duty of disclosing to the insurer, knew that the vessel had, in fact, arrived safely, the insurance would be void, and the insured would be entitled to a return of premium. (Vance, op- cit., p. 383.)

160

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sec. 4 4

Sec. 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations. When representation deemed false. Section 44 defines misrepresentation, (see also the definition under Sec. 36.) Unlike in the case of warranties (see Sec. 67.), representations are not required to be literally true; they need only be substantially true. In order that a policy shall be avoided, a representation relied upon must be false in a substantial and material respect. (Sec. 45.) A representation is substantially true when it is true in every particular material to the risk, or is so far true that the conduct of the insurer would not have been different if the exact truth had been alleged. Where a representation partly fails but is true or is complied with so far as is essential to the risk insured against, the policy remains in force. (32 C.J. 1290.) In marine insurance, substantial truth of a representation is not sufficient. The insured is required to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. (Sec. 107.) EXAMPLES: (1) Confinement in childbirth is not a "personal ailment" within the representation made by a married woman that she had not consulted a physician "in regard to a personal ailment" during seven years prior to her application, (see Rasicot vs. Royal Neighbors of America, 109 P. 1048.) (2) Failure of insured to include an illness occasioned by a fall from a tree from which he had completely recovered, was held not to avoid the policy, although the application blank reads: "Detail all illness, disease, operations, accidents or injuries you have since childhood." (see Missouri State Life Ins. Co. vs. Witt, 256 S.W. 46.) Query: But is it not the right of the insurer to determine the nature of the injury or illness or its ultimate effect on the insurable character of the life proposed before deciding whether or not to enter into the contract? (see Sec. 46.)

Sec. 4 5

CONTRACT OF INSURANCE Title 5. — Representation

161

(3) A statement that the applicant is in good health is held not to mean that he is in perfect health, but that he is not aware of any disease of such a serious nature as to impair his health permanently. That he is temporarily ill because of some passing malady does not render his representation substantially untrue, (see Connecticut Mut. Life Ins. Co. vs. Union Trust Co., 122 U.S. 250.) Construction of representation as affirmative. A representation written in the policy even in such form as to admit of its being construed as an executory agreement or promissory representation (Sec. 39.) will rather be construed, when possible, as an affirmative representation of a present fact (see Sec. 42.) in order to save the policy from avoidance. EXAMPLE: The insured states that a building is used for a certain purpose or that no smoking is allowed on the premises. The truth of the representation at the time the contract takes effect is sufficient to validate the insurance which will not be affected by a subsequent change in the use to which the building is put or in the practice as to smoking in the premises, (see Home Ins. Co. vs. North Little Rock Ice & Elec. Co., I l l S.W. 994; Hasford vs. Insurance Co., 127 U.S. 399.) 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. 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 B.P. Big. 874.) (a) Effect of falsity of representation. Fraud or intent to misrepresent facts is not essential to entitle the injured party to rescind a contract of insurance on the ground of false representation. 2

2

Batas Pambansa Big. 874 deleted the word "intentionally" before "false."

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To be deemed false, it is sufficient if the representation fails to correspond with the facts (Sec. 44.) in a material point. (Sec. 45.) Representations of fact are the foundation of the contract; and if the foundation does not exist, the superstructure does not arise. (Kimmball vs. Aetna Ins. Co., 9 Allen 540.) In other words, the minds of the parties never meet. EXAMPLES: (1) An applicant for life insurance denied in his application that any member of his family had been sick or that he himself had the disease, although he knew that a brother and a sister of his had died previously of pulmonary tuberculosis and he himself was already spitting blood at the time he filed his application. The misrepresentation is material and sufficient to avoid the contract of insurance (Sison vs. Manufacturer's Life Ins. Co., [C.A.] 37 O.G. 1563.) even if not intentional. (2) But it is not misrepresentation for the insured to state that he did not drink beer or other intoxicants if he drank but very seldom. (Insular Life Assurance Co. vs. Pineda, [C.A.] 40 O.G. 285.) Here, the representation is false but not in a material point.

Effect of collusion or fraud of agent of insurer. (1) Collusion with insured. — Collusion between the agent and the insured in misrepresenting the facts will vitiate the policy even though the agent is acting within the apparent scope of his authority. (Mutual Aid Union vs. Blackwall, 196 S.W. 792.) When there is collusion, the agent thereby ceases to represent his principal, and represents himself; so the insurer is not estopped from avoiding the policy. (Sison vs. Sun Life Assur. Co. of Canada, [C.A.] 47 O.G. 1954.) (2) Principal of agent. — Likewise, where the insured merely signed the application form and made the agent of the insurer fill the same for him, it was held that by doing so, the insured m a d e the agent of the insurer his own agent. (Insular Life Assur. Co. vs. Feliciano, 74 Phil. 469 [1943].) But where the insurer required its medical examiner to put the questions and fill out the answers in his own handwriting, the writer of the application is not the

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agent of the insured. (Wilson vs. Conway Ins. Co., 4 R.I. 141.) The insurer is liable when its agent writes a false answer into the application without the knowledge of the insured. (45 C.J.S. 179.) Sec. 46. The materiality of a representation is determined by the same rules as the materiality of a concealment. Materiality of representation. (1) Test of materiality. — The materiality of the representation is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to w h o m the representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries. (Sec. 31.) (2) Materiality, a judicial question. — W h o determines the materiality of the representation? It is not left to the insurance company to say after the loss has occurred that it would or would not have issued the policy had an answer been truly given. No sound principle of law would permit a determination of this question solely upon the say so of the company. The matter misrepresented must be of that character which the court can say would reasonably affect the insurer's judgment. No misrepresentation of a mere trifling matter in the applicant's health if he might honestly be mistaken about it, will render the statement false so as to avoid the policy, merely because an insurance company says that it would not have issued the policy otherwise. (Volunteer State Life Ins. Co. vs. Richardson, 244, S.W. 44.) Concealment and misrepresentation compared. (1) In concealment, the insured withholds information of material facts from the insurer, whereas in misrepresentation, the insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract. (2) The materiality of a concealment is determined by the same rules as applied in cases of misrepresentation.

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(3) A concealment on the part of the insured has the same effect as a misrepresentation and gives the insurer a right to rescind the contract. (4) Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or false representation. (5) Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the agreement, the rules on concealment and representation apply likewise to the insurer. Sec. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation, (a) Applicability of Sections 26 to 48. The provisions of Sections 26 to 35 governing concealment and Sections 36 to 48 governing representations apply not only to the original formation of the contract but also to a modification of the same during the time it is in force. Thus, where the insurer is induced to modify the insurance policy as to the rate of premium by a misrepresentation on the part of the insured in a material point, the insurer is entitled to rescind such modification. 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 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, (a) When an insurer must exercise his right to rescind. (1) In general. — A contract of insurance m a y be rescinded on the ground of concealment, or false representation, or breach

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of warranty. An action to rescind a contract, as contemplated by the first paragraph of Section 48, is founded upon and presupposes the existence of the contract, which is rescinded. Hence, a defense to an action to recover insurance that the policy was obtained through false representations, fraud and deceit is not in the nature of an action to rescind and is, therefore, not barred by the provision. There is no time limit imposed for interposing this defense. (Tan Chay vs. West Coast Life Ins. Co., 51 Phil. 80 [1927].) (2) In non-life policy. — Under the first paragraph of Section 48, in order that the insurer m a y rescind a contract of insurance, such right must be exercised prior to the commencement of an action on the contract. In other words, the insurer is no longer entitled to rescind a contract of insurance after the insured has filed an action to collect the amount of the insurance. It has been held, however, that where any of the material representations is false, the insurer's tender of the premiums and notice that the policy is cancelled before commencement of the suit thereon, operates to rescind a contract of insurance. (Argente vs. West Coast Life Ins. Co., 51 Phil. 275 [1927].) (3) In life policy. — With reference to life insurance contracts, the foregoing rulings should be understood to be qualified by the second paragraph of Section 48. By virtue of the second paragraph, the defenses mentioned are available only during the first two years of a life insurance policy.

Incontestability of life policies. Clauses in life insurance policies known as incontestable clauses stipulating that the policy shall be incontestable after a stated period are in general use, and are now required by statutes in force in many states. (Vance, op. cit., p. 575.) They create a kind of contractual statute of limitations on certain defenses that may be raised by the insurer. Incontestability means that after the requisites are shown to exist, the insurer shall be estopped from contesting the policy or setting up any defense, except as is allowed, on the ground of public policy, (infra.)

Theory and object of the incontestable clause. (1) As to the insurer. — The theory is that an insurer should have a reasonable opportunity to investigate the statements which the applicant makes in procuring his policy and that after a definite period, the insurer should not be permitted to question the validity of the policy (ibid., p. 577.), either by affirmative action or by defense to a suit brought on the life policy by the beneficiary (Powell vs. Mut. Life Ins. Co., 144 N.E. 825.) (2) As to the insured. — The clause has as its object to give the greatest possible assurance to a policyholder that his beneficiaries would receive payment without question as to the validity of the policy (Newton vs. N e w York Life Ins., 325 F. 2d 498.) or the existence of the coverage once the period of contestability passes. It is designed to protect the policyholder or beneficiary from a lawsuit contesting the validity of the policy after a considerable time has passed and evidence of the facts surrounding the purchase may be unavailable. (Note, 62 H a r v a r d L. Rev. 890 [1949].) It is a sufficient answer to the various tactics employed by insurance companies to avoid liability. Requisites for incontestability. Under our law, in order that the insurance shall be incontestable, the following requisites must be present: (1) The policy is a life insurance policy; (2) It is payable on the death of the insured; and (3) It has been in force during the lifetime of the insured for at least two (2) years from its date of issue or of its last reinstatement. (see Sees. 227[b], 228[b], 230[b].)

3

3

W h e r e different dates are concerned, however, this m a y not a l w a y s be true. F o r instance, the policy date m a y be different from the issue date, and the d a t e the first prem i u m w a s paid m a y be different yet. Since ambiguities are interpreted in favor of the policyholder or beneficiary, if the insurance b e c a m e effective on a date prior to the date of issue, the contestable period should be c o m p u t e d from the earlier date. Nevertheless, in a case w h e r e the policy was dated back six months to obtain the benefit of a lower age and lower p r e m i u m , it has been held that the contestable period c o m m e n c e d from the date of issue and not the effective date of the coverage. (Forest vs. Mutual Benefit Life Ins. Co., 89 NYS [2d] 4 8 8 [1949].)

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The period of two (2) years for contesting a life insurance policy by the insurer m a y be shortened but it cannot be extended by stipulation. The phrase "during the lifetime" simply means that the policy is no longer considered in force after the insured has died. The key phrase is "for a period of two years." (Tan vs. Court of Appeals, 174 SCRA 403 [1989].)

Effect when policy becomes incontestable. W h e n a policy of life insurance becomes incontestable, the insurer m a y not refuse to pay the same by claiming that: (1) the policy is void ab initio; or (2) it is rescissible by reason of the fraudulent concealment of the insured or his agent, no matter how patent or well-founded; or (3) it is rescissible by reason of the fraudulent misrepresentations of the insured or his agent. Since the law speaks of a policy in force for two years, the expression "void ab initio" should be understood in the sense of "voidable" and the fraud contemplated should refer to fraud in the inducement. (see Art. 1338, Civil Code.) In case of reinstated policy, the period of contestability should be counted from the date of reinstatement and not from the date of the issuance of the policy. A policy of insurance, after it has lapsed or become forfeited, as for nonpayment of premiums or breach of a 4

4

T h e incontestable clause has sometimes been criticized on the basis that it permits a fraudulent contract to be enforced after the expiration of the contestable period. In answer, the clause does not so m u c h condone fraud as limit the time within which the insurer m a y discover the fraudulent conduct and take appropriate action to cancel the contract. There are a few exceptions even after the period has run. (infra.) The purpose of the incontestable clause is to assure that after the specified period, the policy owner m a y rely upon the insurance company to carry out the terms of the contract regardless of irregularities in connection with the application which may later be discovered. The fact that having given this assurance the insurer m a y occasionally be precluded from interposing a defense based on fraud generally is considered justified by the sense of security given policy owners and beneficiaries by reason of the clause. ("Legal Concepts and Contract Provisions," by J E . Greider, in LHIH, p. 116.) The distinction is, in effect, one between a contract that is "void" and one that is "voidable." A void contract was never a contract at all; lack of insurable interest makes the contract "void." The incontestable clause bars defenses that might be asserted to render void an existing contract. (R.H. Jerry, II, op. cit, p. 202.)

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Sec. 4 8

warranty or condition, may be revived or reinstated pursuant to a provision contained in the policy or the agreement of the parties. (Perm. F. Ins. Co. vs. Malone, 56 ALR 1075.) EXAMPLE: X procured insurance on his life through fraudulent concealment or misrepresentations. (1) If X dies within two years from the issuance of the policy, the rule on incontestability does not apply because the law says that the policy must have been in force during the lifetime of the insured for a period of two years. Hence, his beneficiary cannot recover on the policy. (2) Whether or not X is dead or alive, the insurer cannot exercise the right after two years from the time the policy is issued. The fraud committed by X is cured by the lapse of the said two-year period. But if the policy is payable not upon the death of the insured but upon maturity by lapse of a certain period of time, the insurer can still ask for its annulment or rescission. ILLUSTRATIVE CASE: Insurer's approval of application for reinstatement was made after insured's death but before her death, insured had already complied with the conditions for reinstatement. Facts: During the pendency of her application for the reinstatement of her life policy which lapsed on January 14, 1971 for nonpayment of premium, D (insured) died for a cause described as "acute renal failure." The approval of the application was made by R (insurer) after her death. It appears, however, that D, before her death, had already complied with the conditions for reinstatement, namely; payment of the back premiums and submission of proof of insurability (a Health Statement). Issue: Did D's death pending approval of her application for reinstatement operate to avoid the policy? Held: No. The approval of her application was merely a mechanical act which should be granted upon compliance with the conditions mentioned. Since, in fact, R approved her application, the original policy is deemed reinstated as of the

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effective premium due shown in the policy, that is, January 14, 1971. The argument that the approval of the application is the effective date of the policy would allow R to determine the effective date and where loss has already occurred, will permit R to avoid the terms and conditions of the original policy and result in the undermining of the actual conditions which are the fundamental basis of all insurance. (Enriquez vs. The Phil. American Life Insurance Co., I.C. Case No. 13, July 21,1976.)

Defenses not barred by incontestable clause. The incontestability of a policy under the law is not absolute; otherwise, a beneficiary of any person w h o had procured a life policy m o r e than two years before his death would automatically be entitled to the proceeds upon that person's death. Incontestability only deprives the insurer of those defenses which arise in connection with the formation and operation of the policy prior to loss. (Business Law, Wyatt and Wyatt, 1963 Ed., p. 878.) The insurer m a y still contest the policy by w a y of defense to a suit brought upon the policy or by action to rescind the same, on any of the following grounds: (1) That the person taking the insurance lacked insurable interest as required by law; (2) That the cause of the death of the insured is an excepted risk; (3) That the premiums have not been paid (Sees. 77, 227[b], 228[b], 230[b].); (4) That the conditions of the policy relating to military or naval service have been violated (Sees. 227[b], 228[b].); (5) That the fraud is of a particularly vicious type, as where the policy was taken out in furtherance of a scheme to murder the insured, or where the insured substitutes another person for the medical examination, or where the beneficiary feloniously kills the insured (Vance, op. cit., pp. 582-583.);

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(6) That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened (see Sec. 242.); or (7) That the action was not brought within the time specified, (see Sec. 63.)

— oOo —

Title 6 THE POLICY Sec. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance. Sec. 50. 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. 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. Group insurance and group annuity policies, however, may be typewritten and need not be in printed form, (a) Policy of insurance defined. Section 49 defines the policy of insurance. In other words, it is the written document embodying the terms and stipulations of the contract of insurance between the insured and the insurer. Signature of the parties. The "policy" or "insurance policy" or more fully "policy of insurance," is signed only by the insurer or his duly authorized 171

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agent. It need not be signed by the insured except where express warranties are contained in a separate instrument forming part of the policy in which case the law requires that the instrument must be signed by the insured. (Sec. 70.) The standard practice is to have the prospective insured fill out and sign an application prepared by the insurer. Policy controls terms of insurance contract. (1) Measure of insurer's liability. — An insurance policy is essentially a contract between the insurer and the insured. Its terms constitute the measure of the insurer's liability, and in order to recover, the insured must show himself within the terms. (2) Presence of requisites for validity. — To create an enforceable agreement, all the requisites necessary in order that there will be a valid contract of insurance must be present, (see Sec. 2.) In the absence of fraud or mistake, a policy of insurance, upon acceptance, constitutes a valid and binding contract, superseding all preliminary agreements and negotiations. (44 C.J.S. 1070-1071.) (3) Compliance of insured with conditions of policy. — In the absence of statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and to impose whatever conditions they deem best upon their obligations not inconsistent with public policy. The compliance by the insured with the terms of the policy is a condition precedent to the right of recovery. (Young vs. Midland Textile Ins. Co., 30 Phil. 617 [1915]; Pacific Banking C o r p vs. Court of Appeals, 168 SCRA 1 [1988]; Central Assurance Corp. vs. Court of Appeals, 200 SCRA 459 [1991]; Fortune Insurance & Surety Co., Inc. vs. Court of Appeals, 244 SCRA 308 [1995].) Policy, a contract of "adhesion." (1) Terms drafted and imposed by insurer. — A policy of insurance is a contract of "adhesion," par excellence, (see Sec. 2.) The term "adhesion contract" is essentially a description of the manner by which the contract is formed: one party having superior bargaining power imposes its choice of terms on the

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other party. Ordinarily, contracts are freely negotiated by parties with roughly equivalent bargaining power. However, this classical model is far removed from the reality of the insurance business. (a) Professor Williston described the process this way: "[Insurance contracts are drafted] with the aid of skillful and highly paid legal talent, from which no deviation desired by an applicant will be permitted. The established underwriter is magnificently qualified to understand and protect its o w n selfish interests. In contrast, the applicant is a shorn lamb driven to accept whatever contract m a y be offerred on a 'take-it-or-leave-it' basis if he wishes insurance protection." (A Treatise on the L a w of Contracts, pp. 19-20, 3rd Ed. [1973].) Except for riders (infra.) which m a y later be inserted, the insured sees the contract in its final form and has had no voice in the selection or arrangement of the words employed therein. (Geagonia vs. Court of Appeals, 241 SCRA 152 [1995].) (b) Although the insured can choose from a variety of available coverages, he cannot negotiate the substance of the contract with the insurer. The policy's provisions even if mandated by statute or regulations, are drafted by industry experts. In m a n y transactions, the insured will not even see the policy he purchased until after the first premium is paid. Naturally, in the adhesion setting, a higher probability exists that the party with less bargaining power will be subjected to oppressive and unjust provisions. (R.H. Jerry, II, op. cit., pp. 104-105.) (2) Ambiguity resolved against insurer. — Since in this type of contracts, the parties do not bargain on equal footing, the weaker party's participation is reduced to the alternative "to take it or leave it." Thus, those contracts are viewed as traps for the weaker party whom the courts of justice must protect. (Gulf Resort, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550 [2005].) Consequently, where the language used in an insurance contract or application is such as to create ambiguity, the same should be resolved liberally in favor of the insured and strictly against the party responsible therefor (see Art. 1377, Civil Code.), i.e., the

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insurance company which prepared the contract. (Landicho vs. GSIS, 44 SCRA 7 [1972]; Verendia vs. Court of Appeals, 217 SCRA 417 [1993]; Malayan Insurance Corp. vs. Court of Appeals, 270 SCRA 242 [1997].), the reason being, undoubtedly, to afford the greatest protection to the insured. (a) It is well-settled that "contractual limitations of liability found in insurance contracts should be regarded by courts with a jaundiced eye and extreme care and should be so construed as to preclude the insurer from evading compliance with its just obligations." (Western Guaranty Corp. vs. Court of Appeals, 187 SCRA 652 [1990]; Heirs of Coscuella, Sr. vs. Rico General Insurance Corp., 179 SCRA 511 [1989]; Taurus Taxi Co., Inc. vs. Capital Insurance & Surety Co. Inc., 24 SCRA 454 [1968].) Thus, where the personal accident insurance policy involved specifically enumerated only ten (10) circumstances wherein no liability attaches to the insurer for any injury, disability or loss suffered by the insured as a result of any of the stipulated causes, the failure of the insurer to include death resulting from murders 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 principle of expressio unius est exclusio alterius — the mention of one thing implies the exclusion of another thing — is applicable. (Finman General Assurance Corp. vs. Court of Appeals, 213 SCRA 493 [1992].) (b) It is also a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder will be avoided if it is possible to construe the policy in a manner which would permit recovery, as for example, by finding a waiver for such a forfeiture. (Geagonia vs. Court of Appeals, supra.) (c) The rule that insurance contracts are to be construed liberally in favor of the insured and strictly against the insurer applies to suretyship agreements. (Chapter 11, Title 4.) (3) When general rule not applicable. — The courts will only rule out blind adherence to terms where facts and circumstances

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will show that they are basically one-sided. The "fine print" or "contracts of adhesion" rule does not apply where the petitioner is an acute businessman of experience who is presumed to have assented to the assailed provisions of the policy with full knowledge and, therefore, cannot claim he did not know its terms. It goes without saying that if the terms of the contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished by judicial construction. Thus, if the parties clear intent is to limit earthquake shock cover-age of the policy to two swimming pools only in a resort, the coverage cannot be extended to all of the insured properties. (Gulf Resorts, Inc., vs. Philippine Charter Insurance, Corp., 458 SCRA 550 [2005]; Fortune Insurance & Surety Co., Inc. vs. Court of Appeals, 244 SCRA 308 [1995].) 7

Policy different from contract itself. A policy of insurance is different from the contract of insurance. (1) Written instrument evidencing the contract. — The policy is the formal written instrument evidencing the contract of insurance entered into between the insured and the insurer. It is the law between them. (2) Form thereof previously approved by Insurance Commissioner. — Insurance policies generally are required in standard forms. Under Section 226, no policy of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Insurance Commissioner. It would seem from this provision that every contract of insurance in the Philippines must be evidenced by a policy and that policy must be in the form previously approved by the Insurance Commissioner. Form of contract of insurance. Modern-day insurance contracts are evidenced by writing. This writing may be informal, as a binding slip (infra.), or a written application informally accepted; or it may be formal, being the

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carefully drawn written policy in customary use. (Vance, op. ext., p. 234.) 1

Under the Code, the policy must be in printed form. Group insurance and group annuity policies, however, may be typewritten. (Sec. 50, par. 4.) In case of conflict between the written and printed portions of a policy, the written portion prevails. Qargue vs. Union Fire Insurance Co., 56 Phil. 758 [1932].) The fourth paragraph of Section 50 shall be interpreted to apply only to group life and annuity policies. (Ins. Com. Cir. Letter, Aug. 3 , 1 9 7 6 . )

Perfection of insurance contract. A contract of insurance, like other contracts, must be assented to by the parties either in person or by their agents. Under the law, assent or consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. (Art. 1319, Civil Code.) (1) Acceptance of application. — If an application for insurance has not been either accepted or rejected, there is no contract yet as it is merely an offer or proposal. (De Lim vs. Sun Life Assurance Co., 41 Phil. 263 [1920]; Development Bank of the Phils, vs. Court of Appeals, 231 SCRA 370 [1994].) (a) The mere signing of an application for life insurance and the payment of the first premium do not bind the insurer to issue a policy where there is no evidence of any contract

]

Despite a popular impression that all insurance contracts m u s t be in writing, no rule of law imposes any such universal requirement. Oral contracts of insurance h a v e been frequently enforced by courts. H o w e v e r , the enforcement of such contracts m a y be precluded or m a d e m o r e difficult in certain situations than w o u l d be the enforcement of written ones. The difficulties m a y be g r o u p e d into five heads: (1) statutes requiring a written m e m o r a n d u m (e.g., Statute of F r a u d s ) ; (2) provision of the insurance c o m p a n y ' s charter; (3) difficulty of proving an oral agreement, especially u n d e r the parol evidence rule; (4) authority of the insurer's agent to m a k e an oral contract; a n d (5) indefiniteness of the terms of the oral agreement. (E.W. Patterson, op. cit., pp. 8 1 - 8 2 . ) In any event, the issuance of a written policy is so m u c h the c u s t o m that one can safely say that the applicant and the insurance c o m p a n y from the first "contemplate that their negotiations shall be reduced to writing/' O n c e the policy h a s been issued and delivered, oral evidence will not be permitted to vary or contradict its terms. Q.E. Greider & W.T. Beadles, op. cit., p. 184.)

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between the parties that such acts should constitute a contract of insurance. (Badger vs. N e w York Life Ins. Co., Inc., 7 Phil. 381 [1907].) The contract, to be binding from the date of the application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement. (De Lim vs. Sun Life Assurance Co., supra; Great Pacific Life Assurance Corp. vs. Court of Appeals, 89 SCRA 543 [1979].) (b) Similarly, the contract is not perfected where the applicant for life insurance dies before its approval or it does not appear that the acceptance of the application ever came to the knowledge of the applicant. (Enriquez vs. Sun Life Assurance Co., 41 Phil. 269 [1920].) (c) The acceptance of an insurance policy must be unconditional, but it need not be by formal act. Reception and retention of the policy without objection beyond a reasonable time m a y be deemed to be an acceptance. (44 C.J.S. 1068; Ang Giok Chip vs. Springfield Fire & Ins. Co., 56 Phil. 375 [1931].) (2) Compliance with conditions precedent. — The parties m a y impose additional conditions precedent to the validity of the policy as a contract as they see fit. The usual conditions found in the application for insurance or in the policy are that the contract shall not become binding until the policy is delivered and the first premium paid. These conditions are valid and enforceable. (Vance, op. cit., p. 247.) Until the conditions are fulfilled, the policy is of no binding effect, (see Sec. 77.) (a) There is no valid and binding insurance contract where no premium is paid unless credit is given or there is a waiver or some agreement obviating the necessity for prepayment of the premium. (Phil. Phoenix Surety & Ins. Co. vs. Woodworks, Inc., 92 SCRA 419 [1979]; see, however, Sec. 77.) But where the premium has been previously paid, the contract is perfected upon approval of the application although the policy has not yet been issued, unless there is a

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stipulation to the contrary, (see Ocampo vs. GSIS, 78 Phil. 216 [1947].) (b) The insurance applied for has never been in force where the applicant dies after the disapproval of the insurance application notwithstanding that the initial premium has been paid and a binding deposit receipt issued, where the receipt contains the following conditions: 1) that the insurer shall be satisfied that the applicant was insurable; 2) that if the insurer does not accept the application but offers another plan, the insurance contract shall not take effect unless the applicant accepts the same; and 3) that if the applicant is not insurable and the insurer disapproves the application, the insurance applied for shall not be in force and the premium paid shall be returned to the applicant. The above are in the nature of conditions precedent and show that the binding deposit receipt is intended to be merely a provisional or temporary insurance contract (see Sec. 52.) and to be binding only upon compliance with the said conditions. In life insurance, a "binding slip" or "binding receipt" does not insure by itself. (Great Pacific Life Assurance Corp. vs. Court of Appeals, supra; see Sec. 52. (3) Cover notes. — They m a y be issued to bind the Insurance temporarily pending the issuance of the policy. (Sec. 52.) Coverage then can begin depending upon their terms. Offer and acceptance in insurance contract. In insurance transaction, it is important to know w h o makes the offer and who accepts the offer. The applicant usually makes the offer to the insurer through an application for insurance which is usually attached to policy and m a d e a part of the insurance contract. (1) In property and liability insurance. — It is the insured who technically makes an offer to the insurer, who accepts the offer, rejects it, or makes a counter-offer. The offer is usually accepted by an insurance agent on behalf of the insurer. (2) In life and health insurance. — The situation depends upon whether the insured pays the premium at the time he applies for insurance.

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(a) If he does not pay the premium, his application is considered an invitation to the insurer to make an offer, which he must then accept before the contract goes into effect. If he pays the premium with his application, his application will be considered an offer. Life and health insurance agents, however, do not have the authority to bind immediately the insurers they represent. Instead, they customarily issue a binding receipt that makes the coverage effective on (1) the date of the application, or (2) the date of the medical examination, if the insurer determines later that the applicant w a s insurable on that date. The binding receipt is, therefore, a conditional acceptance by the insurer. (Riegel, Miller & Williams, Jr., op. ext., pp. 36-37.) (b) W h e r e the application for insurance constitutes an offer by the insured, a policy issued strictly in accordance with the offer is an acceptance of the offer that perfects the contract. If the policy issued does not conform to the insured's application, it is an offer to the insured which he m a y accept or reject. (E.W. Patterson, op. ext., p. 107.)

Importance of delivery of policy. Delivery is the act of putting the insurance policy — the physical document — into the possession of the insured. (R.H. Jerry, II, op. cit., p. 156.) (1) Process of forming a contract. — The delivery of the policy is important in at least two ways: (a) as evidence of the making of a contract and of its terms; and (b) as communication of the insurer's acceptance of the insured's offer. (E.W. Patterson, op. cit., p. 92.) (2) Determination of policy period. — The fact of delivery is also important for another reason. Delivery may affect the term of the coverage. Where a policy, for example, provides that the coverage terminates one (1) y delivery, it, therefore, becomes the important fact for determining when the policy period ends. (R.H. Jerry, II, op. cit., p. 156.) e a r

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(3) Absence of delivery. — The delivery of a policy is not, however, a prerequisite to a valid contract of insurance. The contract may be completed prior to delivery of the policy or even without the delivery of the policy depending on the intention of the parties. The widespread use of binding receipts has m a d e delivery less important than it used to be in the process of forming a contract between the insurer and the insured, but delivery still has significance as the "decisive act that ordinarily marks the end of the insurer's opportunity to decline coverage." (Ibid.)

Modes of delivery of policy. (1) Actual!constructive delivery. — As has been shown, there can be no contract of insurance unless the minds of the parties have met in agreement. However, actual manual transfer of the policy is not a prerequisite to its validity unless the parties have so agreed in clear language. Constructive delivery m a y be sufficient. (a) Delivery m a y be m a d e to the insured in person or to his duly constituted agent (Lucero Vda. de Sindayen vs. Insular Life Assur. Co. Ltd., 62 Phil. 9 [1935].) or some person for the benefit of the insured. (b) Where no further conditions are to be fulfilled, a policy of insurance m a y be constructively delivered when it is deposited in the mail duly directed to the insured or his agent. (44 C.J.S. 1060.) (2) Delivery, primarily a matter of intention. — In the final analysis, whether or not the policy was delivered after its issuance, depends, not upon its manual possession by the insured but rather upon the intention of the parties which m a y be shown by their acts or words. It m a y depend on the wording of the application for Insurance. But possession by the insured raises the pre-sumption that the policy was delivered to the insured, while possession by the insurer is prima facie evidence that no delivery was made. If the application contains a provision that the insurance shall not be effective until the delivery of the policy, delivery is essential to the consummation of the contract.

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Delivery to insurer's agent as delivery to insured. Is delivery to the agent of the insurance company delivery to the insured? Suppose, the applicant dies after a life policy has been delivered to the insurance agent by the Head Office but before it is delivered to the applicant, can his beneficiary recover on the policy? There has been m u c h conflict of view on the question. (1) Beneficiary cannot recover. — One view holds that the beneficiary cannot recover for the simple reason that the insurance agent is not his agent, (see Bradley vs. N e w York Life Ins., 275 F. 657 [1921].) (2) Beneficiary can recover. — The other view says the beneficiary can recover on the theory that the contract is to be deemed complete when the policy has been delivered to the insurance agent. (a) The insured having complied with every condition required of him, actual delivery to him is not essential to give the policy binding effect, (see New York Life Ins. Co. vs. B a b c o c k , 3 0 S.E. 273 [1898].) (b) Moreover, a contrary rule would be financially unfair to the beneficiary where the amount of the premium is computed from the date of the application. In effect, the insured paid a premium for a period during which he did not actually receive any protection. On the other hand, if the insured has not died, the insurer can simply consider the contract perfected upon actual delivery of the policy to the agent. Effect of delivery of policy. (1) Where delivery conditional — Where there is conditional delivery of an insurance policy, non-performance of the condition precedent prevents the contract from taking effect. Thus, a stipulation that the policy shall not become operative unless the applicant is in good health at the time of the delivery of the policy is valid, binding and enforceable. (44 C.J.S. 1031; see

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Argente vs. West Coast Life Ins. Co., 51 Phil. 732 [1928].) Good health, of course, does not mean perfect health. (2) Where delivery unconditional. — The unconditional delivery of an insurance policy corresponding to the terms of the application ordinarily consummates the contract, and the policy as delivered becomes the final contract between the parties. Where the parties so intend, the insurance becomes effective at the same time of the delivery of the policy. (44 C.J.S. 1069.) (3) Where premium still unpaid after unconditional delivery. — But the insurer cannot be presumed to have extended credit from the mere fact of unconditional delivery of the insurance policy without the prepayment of premium; and even if such presumption m a y be inferred, there must be a clear and express acceptance by the insured of the insurer's offer to extend credit. In the absence of any clear agreement granting credit extension, the policy will lapse if the premium is not paid, at the time and in the manner specified in the policy. (Phil. Phoenix Surety & Ins. Co., Inc. vs. Woodworks, Inc., 92 SCRA 419 [1979]; see however, Sec. 77.) Rider in a contract of insurance. A rider is a small printed or typed stipulation contained on a slip of paper attached to the policy and forming an integral part of the policy. (1) Additional binding stipulations between the parties. — Riders are usually attached to the policy because they constitute additional stipulations between the parties. A n y rider, etc., properly attached to a policy is a part of the contract to the same extent and with like effect as if actually embodied in the policy. (Ang Giok Chip vs. Springfield, 56 Phil. 275 [1931].) (2) Necessity for riders, etc. — The necessity for riders, etc., is found in the fact that in the conduct of insurance business, it often becomes necessary to add a new provision to a policy, or to modify or waive an existing provision, or to make any desired change in the policy. This saves the trouble and expense of making an entirely new contract. (3) Rule in case of conflict betweem a rider, etc. and printed stipulations of a policy. — When there is an inconsistency between

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a rider and the printed stipulations in the policy, the rider prevails, as being a more deliberate expression of the agreement of the contracting parties. (C. Alvendia, The L a w of Insurance in the Philippines [1968 Ed.], p. 98.) This principle applies to the interpretation of clauses, warranties, or indorsements which are attached to policies to vary their terms. EXAMPLES: (1) The fire insurance policy on a building excludes loss by earthquake. For the payment of an additional premium, the insurer attached a rider, in which it agrees to indemnify the insured against loss by earthquake. The rider becomes a part of the policy and supersedes any part of the policy in conflict with its provisions. (2) A printed stipulation provides that any other insurance upon all or part of the thing covered by the policy should be notified in writing to the company, or the policy will be avoided, but a clause was inserted by typewriter to the following effect: "Subject to clauses G and A and other insurances with a special short period attached to the policy." There is here sufficient notification to the company that other insurances existed, (see Gonzales La O vs. Yek Tong Lin, 55 Phil. 386 [1930].)

Attached papers on insurance policy. (1) Binding effect. — As a general rule, a rider, slip, or other paper becomes a part of a contract or policy of insurance if properly and sufficiently attached or referred to therein in a manner as to leave no doubt as to the intention of the parties in such respect. (43 Am. Jur. 2d 345-346.) Section 50 (pars. 2 and 3.) states the requirements that must be observed in order that a rider, etc., may be binding on the insured. Another provision of the Insurance Code which imposes a restriction on the use of riders, etc., is Section 226 which states that no rider, etc., shall be attached to, printed or stamped upon a policy of insurance unless the form of such rider, etc., has been approved by the Insurance Commissioner.

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(2) Effect of lack of description. — 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, etc. is also mentioned and written on the blank spaces provided in the policy. (Sec. 50, par. 2.) The lack of description will not affect the other provisions of the policy except where without such rider, etc., the contract would be incomplete. 2

(a) Warranties are inserted or attached to a policy to eliminate specific potential increases of hazard during the policy term owing to 1) actions of the insured or 2) condition of the property. (Riegel, Miller and Williams, Jr., op. cit., p. 201.) An example of a warranty (Sees. 67-78.) is "Hazardous Trades Warranty" which stipulates that none of the enumerated trades considered as hazardous will be carried on the building insured. (b) A clause is an agreement between the insurer and the insured on certain matter relating to the liability of the insurer in case of loss. Thus, under the "Three-fourths Clause," the liability of the insurer shall not exceed 3 / 4 of the loss of or damage to the insured. The "Loss Payable Clause" states that the loss, if any, is payable to a named party or parties, as their interest m a y appear, (see Sec. 53.) Under the "Change of Ownership Clause" providing that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (see Sec. 57.), the insurer gives its written consent to the assignment of the thing insured. (c) An endorsement is any provision added to an insurance contract altering its scope or application. Examples of endorsements are those extending the perils covered. An endorsement m a y be in the nature of a permit such as one authorizing the removal of the insured property and providing for coverage in another location. Many endorsements are merely typewritten additions to the contract, changing its 2

The policy must specifically state the rider, etc., as applicable to such policy to be binding on the insured.

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amount, rate, or term. Errors m a y be corrected in the same manner. (D.L. Bickelhaupt, op. cit., p. 52.) An endorsement varies the terms of an original insurance contract. If the endorsement is already attached to the policy at the time of its issue, it is not an endorsement, strictly speaking. (3) Effect of lack of signature. — As a general rule, where the rider, etc. is physically attached to a policy of insurance contemporaneously with its execution and delivered to the insured so attached, and sufficient reference is m a d e in the policy, the fact that it is without the signature of the insurer or of the insured will not prevent its inclusion and construction as a part of the insurance contract. (43 Am. Jur. 2d 346-347.) The same rule applies where the rider, although issued after the original policy, w a s applied for by the insured or owner. But the countersignature of the insured or owner is required to any rider, etc. not applied for by him if issued after the delivery of the policy, which countersignature shall be taken as his agreement to the contents of the matter so attached. (Sec. 50, pars. 2 and 3.)

Effect of failure of insured to read policy. (1) Majority rule. — In most jurisdictions, the fact that it is customary for insured persons to accept policies without reading is judicially recognized. It follows that such acceptance is not negligence per se and in proceedings to reform insurance contracts, most courts hold that the insured's acceptance and retention of the policy unread is not such laches as will defeat his right to reformation. The basis for the decisions is that insurance contracts are contracts of "adhesion" and not of bargaining, that is, the insured purchases the contract prepared solely by the insurer. (Vance, op. cit., p. 257; see Del Rosario vs. Equitable Ins. & Casualty Co., 8 SCRA 343 [1963]; Sec. 2.) (2) Minority rule. On the other hand, there are many courts which apply to insurance contracts the rule of general contract law that one who accepts a contractual instrument is conclusively presumed, in the absence of fraud or mutual mistake, to know

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and assent to its contents. The insured has the duty to read his policy and is bound by his contract as written whether he reads it or not. (Vance, op. cit., pp. 257, 267.) There is no sufficient reason in contracts of insurance why a party should be relieved from the duty of exercising the ordinary care and prudence that would be exacted in relation to other contracts. (Gillen vs. Equitable Life Assur. S o c , 10 N.W. 2d 693.) 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. He m a y 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 (Ang Giok Chip vs. Springfield Fire & Ins. Co., 56 Phil. 375 [1931].), especially where the insured is a businessman and the contract concerns indemnity in case of loss in his money-making trade. (New Life Enterprises vs. Court of Appeals, 207 SCRA 669 [1992].) (3) Exceptions to minority rule. — Exceptions m a y be applied to the rule that the insured is bound to the contract if he fails to read it. (a) It is obvious that the insurer cannot complain of the failure of the insured to read his policy where the insured could not have discovered the erroneous statement by such reading. Thus, where a copy of the application containing the false statements was not attached to the policy or where the copy attached was illegible, the insured cannot be charged with any duty to read the application. (b) Likewise, it has been held that the insured's failure to read the policy is excused where he is induced by the fraud of the agent of the insurer not to read his policy. (Vance, op. cit., pp. 257, 266-267; 45 C.J.S. 742.) (c) The insured's failure to read the policy should be overlooked if the insured is illiterate or unable to read English. (Mutual of O m a h a Ins. Co. vs. Russel, 402 F.2d 339.) (d) In settings where the contracts are long, complicated and difficult to understand even if read, it m a y not be reasonable to expect people to take the time to read the

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contracts before manifesting intent to be bound by them. (R.H. Jerry, II, op. cit, p. 142.) (4) Trend in modern cases. — The reduced adherence to the rigid rule that the insured is bound to the contract if he fails to read it is simply one manifestation of the increased willingness to protect insureds and other consumers w h o would suffer forfeiture but for the relaxation of traditional contract rules. In forming a contract, an insured relies not upon the text of the policies but on the general descriptions of the coverage provided by the insurer and its agents during the time he is considering whether to submit an application. Absent a special request, an insured will not see the text of the policy until after the application has been submitted and the first premium paid. Under these circumstances, it is not surprising that the socalled "duty to read" has less significance in m o d e m cases. (Ibid.)

Insurer's duty to explain the policy. (1) Where terms of policy are clear. — In most jurisdictions, if the terms of an insurance policy are clear, unambiguous, and explicit, the insurer has no affirmative duty to explain the policy or its exclusions to the insured. As stated by one court, "[w]hen a court is reviewing claims under an insurance policy, it must hold the insured bound by clear and conspicuous provisions in the policy even if evidence suggests that the insured did not read or understand them." (Sarchett vs. Blue Shield of California, 233 Cal. Rptr. 76, 85, 729 P. 2d 267 [1987].) (2) Important caveats. — This principle, however, is subject to some important caveats. (a) Reasonable expectations of insured. — The doctrine of "reasonable expectations" can operate to impose de facto a duty on the insurer to explain the policy's coverage to the insured. If a court holds that an insured's reasonable expectations entitle him to coverage despite policy language to the contrary, the court has said, in effect, that the insurer must pay for the loss because the insurer failed to explain the limitations on coverage to the insured. In other words, if the insurer had provided an explanation of the coverage, the

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insured's expectations of different coverage would have been rendered unreasonable. (b) Options available to insured. — In the area of motor vehicle insurance where legislations have m a d e certain kinds of coverage optional, usually uninsured or underinsured motorist insurance, courts have sometimes imposed a duty on the insurer to explain the options to the insured. Where insurers have failed to do so, they have been held liable for loss despite the fact that the policy as issued did not provide the coverage. Not all courts, however, agree with this result. (c) Information expected by insured from insurer's agent. — Agents owe their customers a duty to exercise the skill and care that a reasonable agent would exercise in the circumstances. This duty encompasses in m a n y situations an obligation to explain to the customer the kinds of coverage available and to help the insured in choosing an appropriate coverage. To the extent agents and the insurers w h o retain them are held liable for the negligence of agents in performing their professional duties, a duty to explain coverage is effectively imposed upon the insurer. (d) Contractual rights of insured after denial of coverage. — When the insured disputes a denial of coverage, the duty of good faith and fair dealing m a y impose an obligation on the insurer to alert the insured to his rights. In Sarchett vs. Blue Shield of California (supra.), a 1987 California Supreme Court decision, the insurer denied the insured's claim under a health policy without informing the insured of his contractual right to impartial review and arbitration. The Court stated: "Once it becomes clear to the insurer that its insured disputes its denial of c o v e r a g e , . . . the duty of good faith does not permit the insurer passively to assume that its insured is aware of his rights under the policy. The insurer must instead take affirmative steps to make sure that the insured is informed of his remedial rights." In Sarchett, the arbitration clause was prominently displayed with a bold-face heading. Nevertheless, the Court reasoned that the insurer had reason to know that the insured was unaware of his rights, because he repeatedly protested

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the denial of coverage without requesting review by an impartial panel of physicians. (R.H. Jerry, II, op. cit., pp. 142143.)

Group insurance. (1) Advantage of contract. — Generally speaking, group insurance (see Sec. 228.) is the coverage of a number of individuals by means of a single or blanket policy, thereby effecting economies which frequently enable the insurer to sell its services at lower premium rates than are ordinarily obtainable for the same type of insurance protection on life policies sold to individuals. (Land vs. West Coast Life Ins. Co., 201 Or. 397, 270 P. 2d 154; 44 Am. Jur. 2d. 801.) (2) Form and nature of contract. — It is essentially a single insurance contract that provides coverage for m a n y individuals. In its original and most c o m m o n form, group insurance provides life or health insurance coverage for the employees of one employer. (Pineda vs. Court of Appeals, 45 SCAD 30, 226 SCRA 754 [1993].) (a) It ordinarily takes the form of insurance whereby the employees' lives are insured by the employer in consideration of a flat premium based upon the average age and such premiums are generally paid by the employer. (b) It is not indemnity insurance for the benefit of the employer but insurance upon the life of the employee for his personal benefit and the protection of those depending upon him and is in addition to and distinct from workmen's compensation insurance. (44 Am. Jur. 2d 801-802.) (c) Such contracts are generally construed as creating a contract between the employer and the insurer but for the benefit of the insured employees. (Mogee vs. Equitable Life Assur. S o c , 244 NW 518, 44 Am. Jur. 2d 801.) It affects four parties — the insurer, the employer, the insured, and the beneficiary. (Rivers vs. State Capital Life Ins. Co., 96 SE 2d 431.) (3) Collection and payment of premiums. — A group insurance plan is considered to be "contributory" if each member pays

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all or some part of the premiums and "non-contributory" if the representative (i.e., employer) pays all of the premiums. One reason for the attractiveness of group insurance as a fringe benefit to employees is that the amounts of premiums paid by the employer are tax deductible, within limits, while the premiums paid by the employee are not considered taxable income to the employee. (J.F. Dobbyn, op. cit., p. 15.) Most policies require an employee to pay a portion of the premium (contributory plan) which the employer deducts from wages or salaries while the remainder is paid by the employer. The employer, as representative of the group or administrator of the insurance program, acts as a functionary in the collection and payment of premiums and in performing related duties such as the disbursement of insurance payments to the employees. (Pineda vs. Court of Appeals, supra.) (4) Constituent parts of contract. — When group insurance is effected, a group or "master" policy is customarily issued by the insurer to the employer or analogous policyholder and certificates of participation are issued to the individual employees or participants. It is generally held then that an employee's contract of insurance under the group plan consists of the "parent" or master policy, the individual certificate being no part of such contract but only an instrument reciting the employee's right to protection under the terms of the group policy. 3

For purposes of construction, however, both the master policy and the certificate are to be considered together as parts of the same contract. (44 A m . Jur. 2d 803-804.) (5) Employer acts as agent of insurer. — In group insurance policies, the employer is the agent of the insurer. As has been said: "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 3

T h e m a s t e r policy sets forth all the t e r m s and conditions of the insurance, where the certificates of participation serve merely to inform the individual m e m b e r s of the major features of the insurance and are not, therefore, considered to be a part of the insurance contract itself. (J.F. Dobbyn, op. cit., p. 13.)

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acts entirely for its own benefit or for the benefit of its employees in undertaking administrative functions. While a reduced premium m a y 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 rearrangement. The reduction in the premium which results from the 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 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." (Pineda vs. Court of Appeals, supra, quoting Elfstrom vs. New York Life Insurance Company, 432 P. 2d 73 [Cal. Sup. Ct. 1967].) (6) Employees are real parties in interest. — Although the employer m a y 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 considering that the

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primary aim is protection for his employees and their families at the lowest possible cost, and in so doing, the employer creates goodwill with his employees, enable the employees to carry a larger amount of insurance than they could otherwise, and helps to attract and hold a permanent class of employees. (Pineda vs. Court of Appeals, supra.) 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; and (f) The risks insured against; and (g) The period during which the insurance is to continue, (a) Contents of the policy. 4

Section 51 enumerates what the policy of insurance must contain. Their inclusion in insurance policies is deemed essential to enable the parties to determine easily the nature and effect of the contract entered by them thereby avoiding lawsuits. 5

(1) Names of parties. — The names of the parties are, of course, essential in all contracts. But the mere fact that the n a m e of the insured was incorrectly spelled is of no importance whatever, provided that the identity of the party can be sufficiently established. (Travis vs. Peabody Ins. Co., 28 W. Va. 582.) N o r is it

4

A n insurance policy is entirely different from a surety bond, (see Sees. 175-176.) A s to additional matters to be stated in case of individual life or e n d o w m e n t g r o u p life, and individual life policies, see Sections 227, 228, and 2 3 0 . 5

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essential to the effectiveness of the contract that the name of the insured should appear therein, as he m a y be described in other ways than by name, such as where the policy is "for the owner" of specified property, for the benefit of "whom it m a y concern," or contains words of like import, (see Sec. 57.) (2) Amount of insurance. — This requirement is necessary in order to easily and exactly determine the amount of indemnity to be paid the insured in case of loss or damage especially if it is only partial and not total. The sum insured is a basis for calculating the premium. It, however, need not be specified in the cases of open (Sec. 60.) or running policies. (Sec. 62.) (a) The amount of insurance is the m a x i m u m limit on the insurer's liability for loss or damage suffered by the insured, as in fire insurance and casualty insurance, (see Sec. 60.) Such amount is not necessarily the value of the property insured nor the extent of liability of the insurer in the event of loss (see Sees. 6 1 , 1 5 6 , 1 7 2 . ) , unless it is otherwise stipulated. (b) In other kinds of insurance such as life insurance and health insurance and accidental death and injury insurance, a fixed sum is payable, i.e., one not measured by the proved amount of the insured's loss, (see Sec. 61.) (c) In workmen's (employees') compensation insurance (which is a kind of casualty insurance), the amount is not specified in the policy but by the law imposing liability upon the employer, which is, by reference, made part of the contract. (E.W. Patterson, op. cit., p. 235.) (d) The amount insured is the amount fixed in the policy. Where the policy of life insurance contains an "automatic increase clause" by which the increase of the insurance coverage shall depend upon the happening of an event (see Art. 1181, Civil Code.), the amount insured by the policy at the time of its issuance necessarily includes the additional sum covered by the said clause because it was already determinable at the time the transaction was entered into and formed part of the policy. (Comm. of Internal Revenue vs. Lincoln Philippine Life Insurance Company, Inc., 379 SCRA 423 [2002].)

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(e) The deductible is the stated amount to be deducted from any loss, which is shouldered by the Insured making the Insurer liable only for the excess of said amount. (3) Premium. — The requirement is also essential considering that the premium represents the consideration of the contract (see Sees. 2, 60-62, 77.), what the insured pays the insurer to assume the risk of or the value loss. 6

The rates of the premium are developed on the basis of the nature and character of the risk assumed and also on the value of the property or other interest insured. The rate or amount increases as the risk of loss increases. (a) In life insurance, the premiums are based on the average life span at any given age, predicted from statistical figures known as mortality tables. These tables enable the insurer to estimate the probability of death at each age among particular selected groups during a specified period. Thus, the life insurance policy of the father would require the payment of higher premiums than his son's. (b) In fire insurance, the factors that affect the rate of a building are its structure or construction, occupancy or use, location, and loss-prevention or protection facilities (e.g., availability of fire-fighting equipment and water supply in the vicinity), and the exposure or proximity to other risks, (see Sec. 339.) A discount or reduction in the premium rate is usually granted where such facilities are installed in the insured premises. (4) Property or life insured. — The property or life insured constitutes the subject matter of the contract, (see comments under Sec. 3.) It is clear that the insurer will not be liable if, for instance, the property lost or damaged is not that insured. It has been suggested that the proper phrase to use is "thing insured" because insurable interest m a y be in liability (see Sees. 2, 13, 15, 174.) and not in life or property. (Sees. 1 0 , 1 3 . ) 6

T h e t e r m "net premium" refers to the portion of the p r e m i u m that is chargeable directly to the risk assumed by the insurer. "Gross premium" refers to the total a m o u n t charged to the insured, which necessarily includes the net p r e m i u m plus charges for administrative expenses and profits.

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(5) Interest of insured in property. — This requirement is especially important in fire insurance policies to determine the actual d a m a g e suffered by the insured in case of loss of the property covered by the policy if he is not the absolute owner thereof, (see Sec. 34.) So, a mortgage must disclose his particular interest in the property insured by him. (6) Risks insured against. — The necessity for the requirement becomes obvious when it is considered that the insurer's undertaking is to indemnify the insured for loss, damage or liability caused or created only by the risks insured against, (see Sees. 2, 3.) Generally speaking, all forseeable losses or risks m a y be insured against except those the insurance of which would be repugnant to public policy or positively prohibited, or those which are occasioned by the insured's own fraud or misconduct. Almost any contingent or unknown event, whether past or future, m a y be insured against. (2 Am. Jur. [Rev.] 525-526.) (7) Term or duration of insurance. — The period during which the insurance is to continue must also be stated because although the loss suffered by the insured was caused by the risk insured against, the insurer would not be liable unless it occurred during such duration of the insurance. The duration m a y be expressed in terms of dates, from one specified time to another as, for example, in marine insurance, from March 26, 2010 to March 25, 2011, or in terms of distance or voyage, as for example, from Manila to Hongkong regardless of the time it takes tot complete the voyage. The period of time during which the insurer assumes the risk of loss is known as the life of the policy. Policies issued for a term of 12 months are known as annual policies while those for a less period are known as short period policies. Kinds of insurable risks.

7

The risks confronting man are ordinarily divided into three (3) classifications, namely: (1) Personal risks. — They are those involving the person. This classification of risk is chiefly concerned with the time of death 7

F o r additional discussion, see annotation under Section 2.

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Sec. 51

or disability. It is perfectly apparent that of death there is no uncertainty but the time of its occurrence. And aside from death, there is the risk of incapacity through accidental injury, illness or old age. Personal risks are often divided into life and health risks; (2) Property risks. — They are those involving loss or damage to property. This second classification of risk is that which arises from die destruction of property. The possible loss of a cargo or ship at sea is considered a risk to those engaged in maritime operations. (a) Direct losses by fire, lightning, windstorm, flood, and other forces of nature offer a constant threat of loss to real estate, as well as all kinds of personal property and property involved in any form of transportation; (b) Indirect losses also m a y occur, including loss of profits, rents, or favorable leases; and (3) Liability risks. — They are those involving liability for the injury to the person or property of others. This third classification of risk is occasioned by the operation of the law of liability (tort) and m a y sometimes be called third party risks. Whenever an individual is legally liable for any injury to another, as, for instance, through an accident when the driver of an automobile is negligent and injures a pedestrian, or when a person is injured on someone's property such risk is termed a third party risk or liability. It is so-called because when insurance is used to shift the burden of responsibility, the insurer and insured person have agreed that a "third party" (the injured person) will be paid for injuries for which the insured is legally liable. The liability risk includes both bodily injury and property damage risks. (D.L. Bickelhaupt, op. cit., p. 11.) Risk, peril, and hazards distinguished. 8

(1) Risk is the chance of loss, or the possibility of the occurrence of a loss, based on known and unknown factors. If a

8

T h e foregoing is known as negative, or undesirable risk. But risk c a n be positive in the sense that the risk is a beneficial one. F o r example, if a person h a s a one-in-100 chance of winning a contest, a chance of gain or benefit exists, rather than a c h a n c e of loss. The chance of obtaining a benefit is a positive risk.

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loss is absolutely certain to happen or not to happen, no risk is involved. 9

(2) In contrast to risk, peril is event which m a y cause a loss. It insures against, (see Sec. 3, par. 1.) and its occurence results in loss. It by a policy of insurance.

the contingent or unknown is the contingency that one Its existence creates the risk, m a y be covered or excluded

Examples of perils are fires, flood, theft, automobile accidents, illness, death, and hundreds of other causes of uncertainty. (3) Hazard is the condition or factor, tangible or intangible, which m a y create or increase the chance of loss from a given peril. Ordinarily, there are m a n y separate hazards that attach to any particular object or person. The sum total of the hazards constitute the perils which cause the risk. A practice of the insurance business divides hazards into two (2) major classifications, to wit: (a) Physical hazards. — The term includes everything relating to location, structure, occupancy, exposure, and the like such as waste paper piled under a staircase, gasoline stored in the premises, unsafe brake in a car, weak construction which m a y fail in a heavy wind, and many others; and (b) Moral hazards. — The term is applied to those factors that have their inception in mental attitudes. Included in this second group are the hazards created by dishonesty, insanity, carelessness, indifference, and other causes psychological in nature. Appraisal of moral hazards requires the study of the character of the person under consideration in the light of his reputation. It involves a consideration of the personal character of the insured that increases the possibility of loss. 10

(4) Use of term to mean another. — In practice, however, the terms are sometimes given more than one meaning. This is true even in the insurance business. Risk may be used when what is 9

I n life insurance, the risk is against premature death or that of economic loss result-

ing from premature death. Included in this type is what is referred to as morale hazard arising out of indiference to loss, resulting in carelessness, for example, by a demoralized employee in the safe-keeping or handling of property. 10

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in mind is peril or degree of hazard (e.g., Sec. 51 [f].), while a risk may refer to the subject matter of insurance. Thus, one is said to be insured against fire risks, and a risk (meaning a building) which is slated or tiled is a better risk than one which is thatched, (see Dinsdale & McMurdie, op. cit., p. 5; D.L. Bickelhaupt, op. cit., pp. 6-8.) Section 99 (1, f) refers to "risks or perils of navigation" while Section 64 (b, d) speaks of "the hazard insured against." Thus, the word "risk" is also loosely used to refer to the subject matter insured and also as a synonym of the words "peril" and "hazard."

Requirements for risks to be insurable. Not all risks are insurable. In the practice of insurance, a risk to be considered insurable must substantially meet certain requirements. It will be useful to outline these requirements. They are as follows: (1) Importance. — The loss to be insured against should be important enough to warrant the existence of an insurance contract. Obviously, to cover every small loss would increase greatly the cost of protection. For example, a person m a y not insure against losing his pen or breaking his eyeglasses. In motor vehicle insurance against loss or damage, the insurer usually restricts its payment to that portion of the loss exceeding a specified deductible amount; (2) Calculability. — The risk must permit a reasonable statistical estimate of the chance of loss and possible variations from the estimate. If the incidence of loss cannot be calculated statistically, it is impossible to determine the amount of premiums that would be required to accumulate a common fund or pool, to meet the losses arising; (3) Definiteness of loss. — The losses should be fairly definite as to cause, time, place, and amount, for otherwise, estimates of possible loss are difficult; (4) No catastrophic loss. — When large numbers of people are subject to the same kind of losses at the same time, it is an obvious deviation from the principle that the losses of the few are borne by the contributions of the many who do not suffer loss. Thus, it

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is usual to exclude political and w a r risks from most insurance policies although these risks m a y sometimes be shouldered by the State; and (5) Accidental nature. — Insurable risks must also normally be accidental in nature. Insurance is intended to cover fortuitous or unexpected losses. Intentional losses caused by the insured are usually uninsurable because they cannot be reasonably predicted, and payment for them would be against public policy. Other losses are c o m m o n as to be expected rather than unexpected. Wear and tear and depreciation are examples, (see Dinsdale & McMurdie, op. cit., pp. 4-5; D.L. Bickelhaupt, op. cit., pp. 11-13.) Requirements not absolute. The above requirements for an insurable risk are not absolute. Insurability is best described as a relative matter. Many common kinds of insurance do not perfectly meet each of the requirements. Consider, for example, the following: Is theft insurance "definite?" (that is, was the item really stolen, or just lost?) Are all drivers similar in regard to the risk of automobile accidents? (Obviously not, though they may be relatively similar within age, type of car, and other classifications). Is fire caused by "carelessness" always accidental? Aren't typhoons "catastrophic" in nature? //

,,

Insurers deal with the problem, trying to improve the insurability of a peril by such methods as limitations on the amount of coverage and locations, specific contract definitions, prohibited types, deductibles, reinsurance, and many other ways. Clearly, what is "insurable" varies among insurers, and may change over time and with the use of these limitations. (Ibid.) Sec. 52. Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within sixty days after issue of a 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.

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Cover notes may be extended or renewed beyond such sixty 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, (n) Preliminary contracts of insurance. There are two kinds of preliminary contracts of insurance, namely: preliminary contracts of present insurance and preliminary contracts of executory insurance. (1) By a preliminary contract of present insurance, the insurer insures the subject matter usually by what is known as the "binding slip," or "binder" or "cover note," the contract to be effective until the formal policy is issued or the risk rejected, (see Vance, op. cit., p. 219.) The binder is actually a temporary contract of insurance and is usually issued after the applicant pays the first premium. (a) The cover note is merely a written m e m o r a n d u m of the most important terms of a preliminary contract of insurance, intended to give temporary protection pending the investigation of the risk by the insurer, or until the issue of a formal policy, provided it is later determined that the applicant was insurable at the time it was given. By its nature, it is subject to all the conditions in the policy expected even though that policy m a y never issue, (see ibid., p. 235.) In life insurance, where an agreement is m a d e between an applicant and the insurer's agent, no liability shall attach until the insurer approves the risk. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by itself. (Great Pacific Life Assurance Corp. vs. Court of Appeals, 89 SCRA 543 [1979].) (b) Binders or cover notes serve the needs of commercial convenience and yet are more definite and reliable than

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oral agreement. While the issuance of a binder is ordinarily conclusive evidence of the making of a contract, yet the insurer m a y show the contrary by proving, for example, that he delivered the binder with an oral understanding, that it was not to take effect until other insurers had taken part of the risk. (E.W. Patterson, op. cit., 99.) (2) By a preliminary executory contract of insurance, the insurer makes a contract to insure the subject matter at some subsequent time which m a y be definite or indefinite. Under such an executory contract, the right acquired by the insured is merely to d e m a n d the delivery of a policy in accordance with the terms agreed upon and the obligation assumed by the insurer is to deliver such policy. (Vance, op. cit., pp. 219-220.) EXAMPLES: (1) X signed an application for a fire insurance of his house. The insurer accepted the application and issued a cover note for the insurance. Before the policy could be issued, the house was burned. In this case, the insurer would have to reimburse X for his loss. (2) Suppose, in the same example, the agreement of the insurer is to issue the policy within a certain date and the house was destroyed by fire before such date. Here, the insurer would not be liable on a claim for loss as there was merely an executory contract of insurance.

Issuance and renewal of cover notes. Cover notes (also called a binder) m a y be issued to afford immediate provisional protection to the insured until the insurer can inspect or evaluate the risk in question and issue the proper policy (Sec. 52, par. 1.), or until the risk is declined and notice thereof given. (1) Being of temporary nature, it is sufficient, for example, that the cover note shows by necessary implication an agreement to pay whatever rate may be fixed. (43 Am. Jur. 2d 277.) (2) The fact that no separate premium was paid on the cover note before the loss insured against occurred, does not militate

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against its binding effect as an insurance contract. By their nature, cover notes do not contain particulars that would serve as basis for the computation of the premiums and consequently, no separate premiums are intended or required to be paid therefor. (Pacific Timber Export Corp. vs. Court of Appeals, 112 SCRA 199 [1982].) (3) If a cover note is to be treated as a separate policy instead of integrating it to the regular policy to be subsequently issued, its purpose and function would be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. (Ibid.) The Code prescribes the requirements regarding the issuance and extension or renewal of cover notes. (Sec. 52.)

Rules on cover notes. (1) Insurance companies doing business in the Philippines may issue cover notes to bind insurance temporarily, pending the issuance of the policy. (2) A cover note shall be deemed to be a contract of insurance within the meaning of Section 1(1) of the Code. (3) No cover note shall be issued or renewed unless in the form previously approved by the Insurance Commission. (4) A cover note shall be valid and binding for a period not exceeding sixty (60) days from the date of its issuance, whether or not the premium therefor has been paid, but such cover note m a y be cancelled by either party upon at least seven (7) days notice to the other party. (5) If a cover note is not so cancelled, a policy of insurance shall, within sixty (60) days after the issuance of such cover note, be issued in lieu thereof. Such policy shall include within its terms the identical insurance bond under the cover note and the premium therefor. (6) A cover note m a y be extended or renewed beyond the aforementioned period of sixty (60) days with the written approval of the Insurance Commission, provided that such written approval may be dispensed with upon the certification

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of the president, vice-president, or general manager of the insurance company concerned that the risks involved, the values of such risks a n d / o r the premiums therefor have not as yet been determined or established and that such extension or renewal is not contrary to and is not for the purpose of violating any provisions of the Insurance Code, or of any of the rulings, instructions, circulars, orders or decisions of the Insurance Commissioner. (Ins. M e m o . Cir. No. 3-75, Sept. 2 9 , 1 9 7 5 , effective Oct. 2 1 , 1 9 7 6 . ) (7) Insurance companies m a y impose on cover notes a deposit premium equivalent to at least 25% of the estimated premium of the intended insurance coverage but in no case less than P500.00. (Ins. Cir. Letter, Jan. 1 7 , 1 9 8 0 . ) 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) Persons entitled to recover on policy. As already discussed, insurance is a personal contract between the insured and the insurer. (1) As against the insured, third persons have no right either in a court of equity or in a court of law to the proceeds of the policy unless there be some contract of trust, express or implied, between the insured and third persons. So that where different persons have different interests in the same property (like the mortgagor and mortgagee of the property), the insurance taken by one in his own right and in his own interest does not in any way inure to the benefit of the other. (Lampano vs. Jose, 30 Phil. 537 [1915]; see Sec. 8.) But if the bailee secures 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 payment of the loss, it has been held that the warehouseman is liable to the owner of such stored goods for his share in the insurance money. (Lopez vs. Del Rosario, 44 Phil. 98 [1922].)

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(2) As against the insurer, a third person, in the absence of any provision in the policy, has also no right to the proceeds thereof. A policy of insurance is a distinct and independent contract between the insured, and the insurer. Pursuant to Section 53, only the insured, if still alive, or the beneficiary, if the insured is already deceased, is entitled to claim the insurance proceeds upon the maturation of the policy. Again, a third person has no right in law or equity to the proceeds of an insurance unless there is a contract or trust, expressed or implied, between the insured and the third person (Bonifacio Bros., Inc. vs. Mora, 20 SCRA 261 [1967].), or the insurance contract was intended to benefit third persons who are not parties to the contract in the form of reasonable stipulations. In such case, the third party m a y directly sue and claim from the insurer. (Heirs of L.G. M a r a m a g vs. Maramag, 588 SCRA 774 [2009].) Thus, where the insurance policies on the mortgaged properties have been endorsed by the mortgagor to the mortgagee-bank, the proceeds being exclusively payable to the bank by reason of the endorsement, these policies cannot be attached by the mortgagor's other creditors up to the extent of the mortgagor's outstanding obligation in the bank's favor. Under Section 53, to the extent of the mortgagor's obligation with the bank, his interest in the subject policies had been transferred to the bank effective as of the time of the endorsement. It is basic that the first mortgagee has superior rights over junior mortgagees or attaching creditors. (Rizal Commercial Banking Corporation vs. Court of Appeals, 289 SCRA 292 [1998].) ILLUSTRATIVE CASES: 1. Proceeds of car policy payable to mortgagee. Facts: The insured had taken out a policy on his car "loss if any, payable to X," the mortgagee of the car. Issue: Is Y, the repairman, entitled to collect the cost of repair out of the insurance proceeds? Held: No. The proceeds of the policy covering the value of the repairs made on the car by Y who was authorized by the insured (owner of the damaged vehicle) to make the repairs should be paid directly to X whom the parties intend to benefit

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CONTRACT OF INSURANCE Title 6. — The Policy

and not to Y in the absence of any provision in the policy which discloses an intent to benefit the repairman in case of repair of the car. The clause in an insurance policy authorizing the owner of the damaged vehicle to contract for its repair does not mean that the repairman is entitled to collect the cost of repair out of the proceeds of the insurance. It merely establishes the procedure that the insured has to follow in order to be entitled to indemnity for repair. (Ibid.)

2. Proceeds of car policy payable, in case of death of insured driver, to his personal representatives, or to claimants or heirs of claimants. Facts: The insurance policy in favor of the insured (taxicab company) provides, inter alia, that the insurance company "will indemnify any authorized driver who is driving the motor vehicle" of the insured and in the event of death of said driver, the company shall, likewise, "indemnify his personal representatives" and the company "may, at its option, make indemnity payable directly to the claimants or heirs of claimants." Issue: Do the heirs of the deceased driver have a direct cause of action against the insurance company? Held: Yes, it being the true intention of this policy to protect the liabilities of the insured towards the passengers of the motor vehicle and the public (in other words, third parties). Thus, the policy under consideration is typical of contracts pour autrui (i.e., contracts containing a stipulation in favor of a third person; see Art. 1311, Civil Code.), this character being made more manifest by the fact that the deceased driver paid 50% of the corresponding premiums, which were deducted from his weekly commissions. Under these conditions, the heirs of the deceased driver have direct cause of action against the insurance company and since they can maintain this action by themselves, without assistance of the insured, it goes without saying that they can properly join the latter in filing complaint against the insurance company to collect the proceeds of the policy. (Coquia vs. Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968].)

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3.

Sees. 5 4 - 5 5

Proceeds of car policy payable to wife.

Facts: W claimed for a total loss of her vehicle insured by R which denied the claim on the ground that W cannot institute the action alone without joining her husband as complainants. Issue: Is the defense tenable? Held: No. It is a technical defense which has nothing to do with the merits of the case and which should receive, if ever, only a scant consideration. W, being the person in whose name and for whose benefit the insurance policy in question was issued, has in the absence of proof to the contrary, the exclusive right under Section 53 to the proceeds thereof. (A. Carlos vs. Summit Guaranty and Insurance Co., Inc., I.C. Case No. 181, Jan. 23,1976.) 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, (a) Where insurance made by an agent or trustee. An insurance m a y be taken by a person personally or through his agent or trustee since by the provision of Section 53, the insurance is to be applied exclusively to the interest of the person in whose n a m e or for whose benefit it is made, the agent or trustee when making an insurance contract for or on behalf of his principal should indicate that he is merely acting in a representative capacity by signing as such agent or trustee, or by other general terms in the policy. It has been held, however, that, where the defendant acted as plaintiff's agent for the insurance of goods stored with the defendant, the plaintiff cannot claim the benefit of the agency without sharing in the expenses. (Lopez vs. Del Rosario & Quiogue, 44 Phil. 98 [1922].) Sec. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners

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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. Where insurance effected by partner or part owner. Insurable interest in the property of a partnership exists in both the partnership and the partners. A partner has an insurable interest in the firm property which will support a policy taken out thereon for his o w n benefit. (Cowan vs. Iowa Stage Ins. Co., 40 Iowa 551.) But a partner w h o insures partnership property in his o w n n a m e limits the contract to his individual share unless the terms of the policy clearly show that the insurance was meant to cover also the shares of the other partners, (see 26 C.J.S. 86.) 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. 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. Where description of insured general. The policy of insurance must specify the parties between w h o m the contract is made. (Sec. 51 [a].) Although it is usual to insert in a policy the name of the person insured, it is not essential as he m a y be described in other ways. In any case, in order that the insurance may be applied to the interest of the person claiming the benefit of the policy, he must show that he is the person named or described or that he belongs to the class of persons comprehended in the policy. EXAMPLES: (1) Where the policy is "for the owner" of specified property, it is necessary for such person to prove that at least he was the owner of the thing insured at the time of the loss.

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Sees. 58-62

(2) Upon like principle, a policy framed, thus: "payable to X (insured), mortgagee, as his interest may appear, remainder to whomsoever, during the continuance of the risk, may become the owner of the interest insured" indicates an intention to insure the entire interest in the property and not merely the insurable interest of the mortgagee and would show exactly to whom the money, in case of loss, should be paid (San Miguel Brewery vs. Law Union & Rock Ins. Co., 40 Phil. 674 [1920].), i.e., the mortgagee and the owner of the property insured. 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. Effect of transfer of thing insured. Since a contract of insurance is a personal contract, it does not attach to or run with the property insured, (see Sees. 17, 20, and 30.) A purchaser of property w h o does not take the precaution to obtain a transfer of the policy of insurance cannot, in case of loss, recover upon such contract, as the transfer of the property has the effect of suspending the insurance until the purchaser becomes the owner of the policy as well as of the property insured. (San Miguel Brewery vs. L a w Union & Rock Ins. Co., supra.) For exceptions to this rule, see Sections 20-24 and 57. Sec. 59. A policy is either open, valued, or running. Sec. 60. An open policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss. Sec. 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specified 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.

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Kinds of policies. Insurance policies m a y be open, valued, or running. They m a y be also classified as life, fire, marine, and casualty policies. (1) An open or unvalued policy is defined in Section 60. In other words, it is one in which a certain agreed sum is written on the face of the policy not as the value of the property insured, but as the m a x i m u m limit of the insurer's liability (i.e., face value), in case of destruction by the peril insured against. The insured must establish the fair market value (FMV) of the insured property at the time of the loss. If the F M V exceeds the maximum, the latter will control; if below, the former will control. The insurer, however, only pays the actual cash value of the property as determined at the time of loss. EXAMPLE: Where a house insured for P1,000,000.00 is totally destroyed by fire, the insurer may introduce evidence to show that the property was not really worth P1,000,000.00 but some rather less sum. Thus, in case the value of the property at the time of the loss was only P800,000.00, then this is all that the insured will receive although the face value of the policy is P1,000,000.00. Of course, however, the amount written in the policy is always the limit of recovery, beyond which there is no liability upon the insurer, even if it is shown that the damage actually suffered is in excess of P1,000,000.00. (Vance, op. cit, p. 62.) In other words, the amount recoverable is determined by the amount of the loss but not exceeding the face amount of the policy. But until shown otherwise by the insurer, the house must be considered as having an actual value of P1,000,000.00, the amount of the insurance. (2) A valued policy is defined in Section 61. Therefore, it is one in which the parties expressly agree on the value of the subject matter of the insurance. (44 C.J.S. 496.) Thus, there are two values — the face value of the policy and the value of the thing insured. In the absence of fraud or mistake, the agreed value of the thing insured will be paid in case of total loss of the property, unless the insurance is for a lower amount.

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Sees. 59-62

The liability of the insurer under a life policy is measured by the face value of the policy, (see Sec. 183.) EXAMPLE: A policy insuring a ship "valued at P50 million" is a valued policy. Such a valuation, unless it is fraudulent or so grossly excessive as to indicate fraud, is conclusive upon the parties (see Sec. 156.) and in case of loss, it always furnishes the basis of settlement even though it might be proved that the actual value of the property lost is more or less, (see Harding vs. Commercial Union Assur., 38 Phil. 464 [1918].) In an open policy, the value of the property insured is not agreed upon, although the parties m a y agree on the m a x i m u m amount of recovery or limit to the liability of the insurer. In case of loss, this amount must be considered, by agreement of the insurer and the insured, the actual value of the property in the absence of evidence of greater s or lesser value. (Development Insurance Corp. vs. Intermediate Appellate Court, 143 SCRA 62 [1986].) 11

EXAMPLE: If, in the same example, the ship is insured for only P5 million, the policy is still valued as there is an agreed valuation, i.e., P10 million, but the maximum amount of recovery is P5 million. The insured value is P10 million. This is different from the sum or amount insured which is P5 million. (3) Arunning policy is defined in Section 62. This kind of policy is intended to provide indemnity for property which cannot well be covered by a valued policy because of its frequent change of location and quantity, or for property of such a nature as not to admit of a gross valuation. It also denotes insurance which

"In m a r i n e insurance, the insured is considered a co-insurer for the difference between the face a m o u n t of the policy and the value of the property, (see Sec. 157.) In fire insurance, the insured is considered a co-insurer as to the uninsured portion only w h e n there is a co-insurance clause in the policy, (see Sec. 172.)

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contemplates that the risk is shifting, fluctuating or varying, and which covers a class of property rather than any particular thing. (44 C.J.S. 494-496.) In some cases, the nature of the property insured, or the circumstances of the granting of the insurance, are such as to make it impossible to designate the subject matter of insurance with certainty or particularity. Thus, insurance m a y be carried on a constantly changing stock of goods, or on grain that is being carried to and from in the harbor on lighters. Under such circumstances, these policies are usually known as "floating," "running," or "blanket." (Vance, op. cit., p. 63.) In the United States, a blanket policy is one covering by a single amount of insurance the same kind of property at different locations or different kinds of property at a single location. Thus, insurance of several buildings together at different locations, or of a building and its content together at a single location, or stocks of goods located at different warehouses, for P400,000.00, would constitute a blanket form, (see Riegel, Miller & William, Jr., op. cit, pp. 189-190.) Running policies are in reality open policies. EXAMPLE: A retail store-corporation of the "chain-type" may have half a dozen warehouses and 10 individual stores all located at different places. The value of goods in any one of the warehouses or stores may be as little as P50,000.00 in one month and as much as PI million, in another month. If those goods are to be covered by a valued policy, either the insured must insure at least PI million in each location, in order to be sure of collecting any loss in full, in which case he pays premiums for insurance he can never collect or he must attempt to estimate closely in advance the required insurance, and he may find the amount insufficient to cover a loss completely. The remedy is a contract that has no fixed face value, the face value adjusting itself to the changing value at one specified location or at each of several locations. (Ibid.)

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Advantages of a running policy. The advantages to the insured of this form of coverage are: (1) He is neither underinsured nor overinsured at any time, the premium being based on the monthly values reported; (2) He avoids cancellations that would otherwise be necessary to keep insurance adjusted to value at each location, and for which cancellations he would be charged the expensive short rate; (3) He is saved the trouble of watching his insurance and the danger of being underinsured in spite of his care, through oversight or mistake; and (4) The rate is adjusted to 100% insurance, whereas valued policies requiring insurance only to, say 80% of the value, give either a small or no reduction for amounts of insurance above this figure. (Void., p. 190.) 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 year from the time when the cause of action accrues, is void. Validity of agreement limiting time for commencing action. (1) General rule. — A clause in an insurance policy to the effect that an action upon the policy by the insured must be brought within a certain period is valid and will prevail over the general law on limitations of actions as prescribed by the Civil Code if not contrary to Section 63. (see Teal Motor Co. vs. Orient Ins. Co., 59 Phil. 809 [1934].) The rights of the parties flow from the insurance contract; hence, they are not bound by the statute of limitations nor by exemptions thereto. (Ang vs. Fulton Fire Insurance Co., 2 SCRA 945 [1961]; E. Macias & Co. vs. China Fire Insurance Co., 46 Phil. 345 [1924].) 12

12

A n insurance policy being a written contract, any action based thereon should be brought within ten (10) years from the time the right of action a c c r u e s (Art. 1144.) which period m a y be either lengthened or shortened by the parties subject to Section 63.

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(2) Period limitation. — If the period fixed is less than one year from the time the cause of action accrues, the stipulation would be void. (Sec. 63.) In the case, however, of a policy of industrial life insurance, the period cannot be less than six (6) years after the cause of action accrues. (Sec. 231 [d].) Nature of condition limiting period for filing claim. The condition in an insurance policy that claims must be presented within a certain period after rejection is not merely a procedural requirement. The condition is an important matter essential to prompt settlement of claims against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of the loss or destruction has not yet disappeared. It is in the nature of a condition precedent to the liability of the insurer, or, in other terms, a resolutory cause, the purpose of which is to terminate all liabilities in case the action is not filed by the insured within the period stipulated. (Ang vs. Fulton Fire Insurance Co., supra; see Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193 [1991].) Where action brought against insurer's agent. The bringing of the action against the agent of the insurance company is not "merely a procedural mistake of no significance or consequence, which may be overlooked" where there is no condition in the policy that the action must be filed against the agent. The court cannot, by interpretation, extend the clear scope of the agreement beyond what is agreed upon the parties. The bringing of such action against the agent cannot have any legal effect except that of notifying the agent of the claim. Beyond such notification, the filing of the action can serve no other purpose. There is no law giving any effect to such action upon the principal. (Ibid.)

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When cause of action accrues. 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. This is because before such final rejection, there is no real necessity for bringing suit. (Eagle Star Ins. Co., Ltd. vs. Chia Yu, 96 Phil. 696 [1955].) Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated obligation of the defendant, but also an act or omission in violation of the said legal right, the cause of action does not accrue until the party obligated (insurer) refuses, expressly or impliedly, to comply with its duty to the insured to pay the amount of the insurance. This is especially true where the policy provides that no action shall be brought unless the claim is first presented extrajudicially in the manner provided in the policy, (see Pacific Banking Corp. vs. Court of Appeals, 168 SCRA 1 [1988]; Travellers Insurance & Surety Corp. vs. Court of Appeals, 272 SCRA 536 [1997].) In other words, the period for commencing an action under a policy of insurance under Section 63 is to be computed not from the time when the loss actually occurs but from the time when the insured has a right to bring an action against the insurer. Thus: 13

(1) Stipulated prescriptive period begins from happening of the loss. — Where the policy provided that no suit or action thereon "for the recovery of any claim shall be sustainable in any court of law or equity unless the insured shall have fully complied with all the terms and conditions of the policy nor unless c o m m e n c e d 13

U n d e r Section 3(b, 6) of the C a r r i a g e of Goods by Sea Act of 1 9 3 6 (C.A. N o . 65.), the carrier and the ship shall be discharged from all liability in respect of loss or d a m a g e s unless suit is brought within one (1) y e a r after delivery of the g o o d s or the d a t e w h e n the g o o d s should have been delivered. It h a s been held that the one-year period applies not only to the shipper but also to the insurer of the goods. Otherwise, w h a t the A c t intends to prohibit after the lapse of the one-year prescriptive period can be d o n e indirectly by the shipper or o w n e r of the g o o d s by simply filing a claim against the insurer even after the lapse of one (1) year. If the shipper (insured) files an action against the insurer after the one-year period, the insurer can successfully deny liability on the g r o u n d that the insured has prevented the insurer from being subrogated to the right of the insured against the carrier by filing the suit after the one-year period. (Filipino M e r c h a n t s Insurance Co., Inc. vs. Alejandro, 145 SCRA 42 [1986].)

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within twelve months next after the happening of the loss/' it has been held that the above stipulation is repugnant to Section 63 because if given effect would reduce the period allowed the insured for bringing his action to less than one year. This is so because the said cause makes the prescriptive period begin from the happening of the loss and at the same time provides that no suit on the policy shall be sustainable in any court unless the insured shall have first fully complied with all the terms and conditions of the policy among them, that which requires that, as soon as the loss is determined, written claim be filed with the carrier and that the letter to the carrier and the latter's reply should be attached to the claim papers to be sent to the insurer. It is obvious that compliance with this condition precedent will necessarily consume time and thus, shorten the period for bringing suit to less than one year, if the period is to begin from the happening of the loss and not from "the time the cause of action accrues" as provided in Section 63. (ibid.) As the stipulation is upon a written contract, the time limit is ten years from the time the cause of action accrues. (Art. 1144, Civil Code.) (2) Stipulated prescriptive period begins from rejection of claim. — On the other hand, where the policy provided that if a claim be m a d e and rejected, an "action or suit" should be commenced within twelve months after such rejection otherwise the claim would prescribe, it was held that an action filed seventeen months after the rejection had already prescribed although the insured, one month after his claim was rejected, by the insurer, had filed a complaint with the Insurance Commissioner, the Court interpreting the words "action or suit" in the policy as referring to a claim or demand in a court of justice. (Lopez vs. Filipinas Compania de Seguros, 16 SCRA 855 [1966].) The new Insurance Code, however, empowers the Insurance Commissioner to adjudicate disputes relating to an insurance company's liability to an insured under a policy issued by the former to the latter, (see Sec. 416.) Hence, a complaint or claim filed by the insured with the Office of the Insurance Commissioner would now be considered an "action" or "suit" the filing of which would have the effect of tolling or suspending the running

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of the prescriptive period. Under Section 384, "an 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 year from denial of the claim, otherwise the claimant's right of action shall prescribe." (3) Stipulated prescriptive period begins from filing of claim. — Where a fidelity bond requires action to be filed within one (1) year from the filing of the claim of loss, such condition contradicts the public policy of discouraging unnecessary litigation expressed in Section 61-A. (now Sec. 63.) Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated obligation of the defendant but also "an act or omission of the defendant in violation of said legal right," the cause of action does not accrue until the party obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this case to pay the amount of the bond). A fidelity bond is, in effect, in the nature of a contract of insurance against loss from misconduct and is governed by the same principle of interpretation. Consequently, the condition of the bond is subject to the provisions of Section 61-A (now Sec. 63.), is null and void, and action m a y be brought within the statutory period of limitation (10 years) for written contracts. ( A C C F A vs. Alpha Insurance & Surety Co., Inc., 24 SCRA 151 [1968].) Contractual limitations contained in insurance policies are regarded with extreme jealousy by courts and will be strictly construed against the insurer and should not be permitted to prevent a recovery when their just and honest application would not produce that result. (Eagle Star Ins. Co., Ltd. vs. Chia Yu, supra, citing 46 C.J.S. 273.) 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;

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217

(c) discovery of fraud or material misrepresentation; (d) discovery of willful or reckless acts or omissions increasing the hazard insured against; (e) physical changes in the property insured which result in the property becoming uninsurable; or (f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code, (n) 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, and shall state (a) which of the grounds set forth in section sixty-four 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, (n) Cancellation of non-life insurance policy. Cancellation, as the term is generaly used with regard to insurance, is broadly regarded as the right to rescind, abandon, or cancel a contract of insurance. (State Pacific Mut. L. Ins. Co. vs. Larson, 152 Fla. 729.) It is the termination by either the insurer or the insured of a policy of insurance before its expiration. A contract of insurance is permitted to lapse when the insured fails to take some action (e.g., payment of premiums) to keep the contract in force. The right of the insurer to cancellation of a policy of insurance other than life is covered by Sections 64 and 65. The insured can cancel an insurance contract at his election by surrendering the policy. Such surrender, however, entitles him to the return of the premiums on the customary short-rate basis, (see Sec. 79[b].) Section 380 refers to the cancellation of a compulsory motor vehicle liability insurance policy. Form and sufficiency of notice of cancellation by the Insurer. The conditions under which the right may be exercised are: (1) There must be prior notice of cancellation to the insured;

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(2) The notice must be based on the occurrence, after the effective date of the policy, of one or more of the grounds mentioned (Sec. 64.); (3) It must be in writing, mailed or delivered to the named insured at the address shown in the policy; and (4) It must state which of the grounds set forth is relied upon. (Sec. 65; see Sees. 380, 381.) It is the duty of the insurer upon written request of the named insured to furnish the facts on which the cancellation is based. (Sec. 65.) The premium referred to in Section 64(a) must be a premium subsequent to the first, because it speaks of nonpayment "after the effective date of the policy." Section 77 ordains 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." Prior notice of cancellation to insured. The purpose of provisions or stipulations in insurance policies 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 for his o w n protection. (Saura Import & Export Co., Inc. vs. Phil. International Surety Co., 8 SCRA 143 [1963].) (1) Notice given to insured himself — The notice should be personal to the insured and not to a n d / o r through any unauthorized person by the policy. Therefore, notice of cancellation by the insurer, given to the mortgagee of the insured but not to the insured with which the insurer had direct dealing without the prior authority of the insured, is not effective notice as to the insured owner. (Ibid.) (2) Notice delivered personally or sent by mail — The notice need not be delivered personally to the insured. It m a y be mailed. (Sec. 65.) But there is no proof that the notice, assuming it complied with the other requisites or conditions mentioned, was actually mailed to and received by the insured, where all that the insurer offers to show that the cancellation was communicated to the insured is its employee's testimony that the said cancellation

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was sent "by mail through our mailing section" without more. (Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 154 SCRA 672 [1987].) Sec. 66. In case of insurance other than life, unless the insurer at least forty-five 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 year shall be considered as if written for a term of one year. Any policy written for a term longer than one year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of one year, (n) Renewal of non-life insurance policy. (1) Asa new contract or extension of old one. — As a general rule, a renewal of insurance by the payment of a new premium and the issuance of a receipt therefor where there is no provision in the policy for its renewal, is a new contract on the same terms as the old one. But where the renewal is in pursuance of a provision to that effect, it is not a new contract but an extension of the old one. In the last analysis, however, the resolution of the question depends primarily on the intention of the parties as ascertained from the instrument itself. (43 Am. Jur. 2d 427.) 14

(2) Rights of parties. — In case of insurance other than life, the named insured is given the right to renew upon the same terms and conditions the original policy upon payment of the premium due on the effective date of the renewal unless the insurer at least

14

In the Malayan case above, the insured "meant to renew the [fire] policy if it had really been already cancelled but not if it was still effective. It w a s all conditional. As it has not been shown that there w a s a valid cancellation of the policy, there was consequently no need to renew it but to pay the premium thereon. Payment w a s thus legally m a d e on the original transaction x x x."

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forty-five (45) days in advance of the end of the period mails or delivers to the insured notice of its intention not to renew the policy or to condition its renewal upon reduction of its amount or elimination of some coverages. (Sec. 66.) The general rule is that an insurance company is bound by the greater coverage in an earlier policy where the renewal policy is issued without calling to insured's attention a reduction in the policy coverage. (Palmer vs. Hartford F. Ins. Co., 54 Conn. 488; Bauman vs. Royal Indem. Co., 36 N.J. 12.) (3) Period for giving notice of non-renewal by insurer. — For the purpose of determining whether or not the insurer has given such notice within the period prescribed, a policy written for a term of less than one (1) year is considered as if written for a term of one (1) year while a policy written for a longer term or with no fixed expiration date is considered as if written for successive policy periods terms of one (1) year. (Sec. 66.) Thus, where the term of the policy is five (5) years, the notice must be given at least 45 days before the anniversary date of any given policy year. If the 45 days rule is not complied with, the insurer may not refuse to renew a policy upon payment of the premium due. 15

Unless the insurer complies with the requirements of Sections 65 and 66, he has to renew the policy whether he likes it or not.

— oOo —

15

If the policy is for a short period, say, 40 days, the insured m u s t be given notice, upon issuance, that the policy w o u l d not be renewed u p o n its expiration.

Title 7 WARRANTIES Sec. 67. A warranty is either express or implied. Warranty defined. Warranty is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer, (see Vance, op. cit., p. 408.) A warranty m a y also be made by the insurer, (see Sec. 74.) Kinds of warranties. In the law of insurance, warranties are either affirmative (see Sec. 68.) or promissory (see Sec. 72.) and either express or implied, and there m a y be several warranties of different kinds in one policy. (1) An express warranty is an agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain acts relating to the same subjects have been or shall be done. (2) An implied warrranty is a warranty which from the very nature of the contract or from the general tenor of the words, although no express warranty is mentioned, is necessarily embodied in the policy as a part thereof and which binds the insured as though expressed in the contract, (see 29 Am. Jur. 428.) 221

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Thus, in every policy of marine insurance, there is an implied warranty that the ship is seaworthy when the policy attaches. (Sec. 113; see Sec. 126.) It would seem that implied warranties are generally warranties in marine insurance although it is infrequently applied in other than marine insurance. (43 Am. Jur. 2d 1027.) It is only in marine insurance that the law provides for implied warranties. (3) An affirmative warranty is one which asserts the existence of a fact or condition at the time it is made, (see ibid., p. 428; Vance, op. cit., p. 410.) The warranty is continuing if it is one that must be satisfied during the entire coverage period of the insurance. (4) Apromissory warranty, not infrequently called "executory" warranty, is one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted, (see ibid.) It is in the nature of a condition subsequent. (45 C.J.S. 159.) Warranty presumed affirmative. Unless the contrary intention appears, the courts will presume that the warranty is merely affirmative. EXAMPLES: (1) Where the policy describes the property as being "a two-storey structure used as a residence" there is no warranty that such structure would continue to be used. (2) The statement "watchman on premises at night" made in the policy was held to refer only to the time of making the contract and not to be a warranty that a watchman would be kept continuously on the premises thereafter. (Virginia Fire & Marine Ins. Co. vs. Buck, 13 S.E. 973.) But the answer "Yes" to the question: "Will you keep your book of accounts in an iron safe or secure in another building?" w a s held a promissory warranty breach of which precluded recovery. (Virginia Fire & Marine Ins. Co. vs. Morgan, 18 S.E. 191.)

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Sec. 68. A warranty may relate to the past, the present, the future, or to any or all of these. Time to which warranty refers. Although the provision employs the term "warranty" in general, in the case of a promissory warranty, the same m a y refer only to future events. EXAMPLES: (1) A stipulation in the policy that the insured never suffered any heart ailment is a warranty that relates to the past, while a stipulation that a building is occupied as a dwelling is a warranty that relates to the present. (2) Where the insured makes a stipulation that he would employ a watchman, or install appliances for extinguishing fires, or that he would not store or keep for sale hazardous goods in the building insured during the pendency of the policy, the warranty is one that relates to the future. Sec. 69. No particular form of words is necessary to create a warranty. Intention of parties governs. The word "warranty" used in an insurance contract does not necessarily constitute a warranty nor is the use of such word necessary to constitute a warranty. Whether a statement made by the insured in the policy is a warranty depends upon the intention of the parties in regard thereto. (43 Am. Jur. 2d 1030.) In case of doubt, a statement will be construed as a representation rather than a warranty especially if such statement is contained in any instrument other than the policy like an application which is, in itself, collateral merely to the contract of insurance. The parties must intend a statement to be a warranty and it must be included as a part of the contract. EXAMPLE: An applicant's statement that he is not afflicted with a specified disease, or that he is in good health, is presumed

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to be a representation and, if but a representation, is held to be merely a statement of opinion. Its incorrectness does not invalidate the contract unless the opinion was fraudulently given. But if such statement is warranted to be true in every respect, its incorrectness in fact will wholly avoid the policy, even though the insured acted in perfect faith. (Vance, op. ext., pp. 413-414.) It has been held that gratuitous answers written in the application, that is, answers not responsive to any questions asked, are not warranties even though the policy makes the statements in the application warranties. (Commercial Mut. Acc. Co. vs. Bates, 52 N.E. 49.)

Warranties distinguished from representations. There are well recognized distinctions between warranties and representations in contracts of insurance, to wit: (1) Warranties are considered parts of the contract, while representations are but collateral inducements to it; (2) Warranties are always written on the face of the policy, actually or by reference, while representations m a y be written in a totally disconnected paper or m a y be oral; (3) Warranties must be strictly complied with, while in representations, substantial truth only is required (Vance, op. cit., p. 412.); (4) The falsity or nonfulfillment of a warranty operates as a breach of contract, while the falsity of a representation renders the policy void on the ground of fraud (45 C.J.S. 157.); and (5) Warranties are presumed material, while the insurer must show the materiality of a representation in order to defeat an action on the policy. Before a representaion will be considered a warranty, it must be expressly included or incorporated by clear reference in the policy and the contract must clearly show that the parties intended that the rights of the insured would depend on the truth or fulfillment of the warranty. Obviously, where a statement

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is true, it is ordinarily immaterial whether it is a warranty or a representation. (Ibid.) ILLUSTRATIVE CASE: To avoid liability, insurer claims that insured violated the express terms of the Fire Extinguishing Appliances Warranty. Facts: Petitioner AHA Company contends that respondent TE Enterprises violated the express terms of the Fire Extinguishing Appliances Warranty. The said warranty provides: "WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as mentioned below shall be maintained in efficient working order on the premises to which insurance applies: -

PORTABLE EXTINGUISHERS

-

INTERNAL HYDRANTS

-

EXTERNAL HYDRANTS

-

FIRE PUMP

-

24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void and the Company shall no longer be liable for any loss which may occur." Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified therein. The breach occurred when the respondent failed to install internal fire hydrants inside the burned building as warranted. This fact was admitted by the oil mill's expeller operator. Issue: Was respondent guilty of breach of the warranty? Held: No. (1) Respondent was not required to provide for all the extinguishing appliances enumerated in the policy. — "We agree with the appellate court's conclusion that the aforementioned warranty did not require respondent to provide for all the fire extinguishing appliances enumerated therein. Additionally, we find that neither did it require that the appliances are restricted to those mentioned in the warranty. In other words, what the warranty mandates is that respondent should maintain in efficient working condition within the premises of the insured property, fire fighting equipments such as, but not limited to,

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those identified in the list, which will serve as the oil mill's first line of defense in case any part of it bursts into flame." (2) Respondent complied with the warranty. — "To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the following devices: numerous portable fire extinguishers, two fire hoses, fire hydrant, and an emergency fire engine. All of these equipments were in efficient working order when the fire occurred." (3) Warranties are strictly construed. — "It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by themselves be reasonably interpreted. That reasonableness is to be ascertained in light of the factual conditions prevailing in each case. Here, we find that there is no more need for an internal hydrant considering that inside the burned building were: (1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a connection to one of the external hydrants." (American Home Assurance Company vs. Tantuco Enterprises, Inc., 366 SCRA 740 [2001].) Sec. 70. Without prejudice to section fifty-one, 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. (a) Express warranty, where contained. (1) In a policy itself, or another instrument. — In order that a stipulation m a y be considered a warranty, it must not only be clearly shown that the parties intended it as such but it must also form part of the contract itself or if contained in another instrument, it must be signed by the insured and referred to in the policy as making a part of it. Mere reference alone is not sufficient to give this effect. (2) Validity of construed in a rider. — In the case of A n g Giok Chip vs. Springfield Fire & Mutual Insurance Co. (56 Phil. 375 [1931].), the question presented was whether a warranty contained in a rider (Warranty "F" fixing the amount of hazardous goods which might be stored in the insured building) to the policy is

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null and void on the ground that the rider was not signed by the insured and not referred to in the policy as making a part of it. (a) "Another instrument" construed as excluding a rider. — It w a s held that a rider attached to a policy is a part of the contract, to the same extent and with like effect as if actually embodied therein. Consequently, it need not be signed by the insured nor referred to in the policy as making a part of it. "Another instrument," as used in Section 70, according to the Supreme Court, could not mean a mere slip of paper like a rider, but something akin to the policy itself, which in Section 49 is defined as a written instrument in which a contract of insurance is set forth. (b) Dissenting opinion. — In a dissenting opinion, Justice Villa-Real stated: "It would certainly be an absurdity if Section 65 [now Sec. 70.] were construed as requiring that an express warranty be contained only in the policy or in another instrument signed by the insured and referred to therein as making a part thereof for the protection of such insured and at the same time permitting that such express warranty be contained in a piece of paper not signed by the insured but simply attached to the policy and referred to therein as making a part thereof, thus opening the door to fraud — it being easy to detach such rider or slip and change it with another — which is precisely what the law is trying to prevent." Sec. 71. A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty thereof. Express warranty regarding person, thing, or risk. (1) Statement must refer to a fact. — Under Section 71, the statement in the policy relating to the person or thing insured, or to the risk, must be as a fact and not as an opinion, or belief, to constitute an express warranty thereof.

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EXAMPLE: The statement of the insured as to his age, or the purpose for which the property insured is used like for dwelling, or that certain acts shall not be done, like storing hazardous goods, is an express warranty, the falsity or breach of which would avoid the policy. (2) Where statement in the nature of an opinion. — A statement in the policy which, from the very nature of the subject matter of the inquiry, can only be an expression of an opinion is not, strictly speaking, a warranty of its truthfulness. Such a statement, if deemed a warranty at all, is merely a limited warranty as to the honesty and good faith of the insured — a warranty that the statement is his honest opinion or judgment. (First National Bank vs. Hartford Fire Ins. Co., 95 U.S. 673.) EXAMPLES: (1) Where the answers in an application are qualified by the words, appended at its foot, "the above is as near correct as I remember," "to the best of my knowledge and belief," or similar words, the right to recover on the policy will not be defeated unless some answers are consciously incorrect. (Northwestern Mut. L. Ins. Co. vs. Gridley, 100 U.S. 614.) (2) There is authority to the effect that a breach of warranty as to the value of the property insured, which involves a matter of mere opinion, where the property does not have a fixed market value, must be substantial in order to constitute a ground for avoiding the policy. (Phoenix Ins. Co. vs. Pickel, 21 N.E. 546.) 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. Warranty of facts or omissions which materially affect the risk. Section 72 refers to a promissory warranty. Breach of promises or agreements as to future acts will not avoid a policy unless the promises are material to the risk. (Karp vs. Fidelity-Phoenix Ins. Co., 4k. A. 2d 529.) This is clear from Section 72.

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The act or omission is material to the risk if it increases the risk, and under the law, only substantial increase of risk works forfeiture of the policy which is avoided for increase in hazard. (45 C.J.S. 287.) EXAMPLES: (1) If it is stipulated in a policy requiring owner occupancy that the house shall not be occupied by a tenant, there is a warranty that such condition shall not take place. (2) If it is agreed that the insured shall not store inflammable materials of any kind, there is a warranty that such act will not be committed. A violation of the warrant in either case avoids the policy. 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.

When breach of warranty does not avoid policy. The general rule is that a violation of a warranty avoids a contract of insurance. Section 73, which refers to those warranties relating to the future, provides three (3) exceptions: (1) When loss occurs before time for performance. — EXAMPLE: If the insured warrants that within five days after the execution of the contract he will install fire extinguishers in the insured premises and the loss occurs on the second day without the insured having complied with the warranty, the policy is not avoided by the failure to perform said warranty. (2) When performance becomes unlawful. — EXAMPLE: The policy contains an express warranty that the insured house which at the time was rented to tenants shall cease to

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be rented and shall be used as private dwelling for the family of the insured within three months from the date of the policy. Subsequently, a law was passed prohibiting the ejectment of tenants without fixed period of lease within a period of one year in view of an emergency existing. When the loss occurs after three months the insured has not yet complied with the warranty. In this case, the omission to fulfill said warranty does not avoid the policy. (3) When performance becomes impossible. — Failure to comply with a promissory warranty m a y be due not only to legal impossibility but also to physical impossibility, (see Art. 1266, Civil Code.) EXAMPLE: If the insured warrants to change the party wall of his house to concrete within a certain period and before the date arrives, no cement is available for private use without the fault of the insured and subsequently the loss happens, the nonperformance of the warranty does not also avoid the policy.

Where insurer barred by waiver or estoppel. Breach of warranty operates to discharge the insurer from liability unless the insurer is liable because of a waiver of the warranty or an estoppel. The doctrines of waiver and warranty are two devices which frequently have been used to modify the harsh operation of the rules on concealment and warranty. (1) The omission to fulfill a warranty or condition will likewise be excused where there is a waiver on the part of the insurer. Waiver may be defined as "an intentional relinquishment of a known right." It m a y be express or implied. Failure on the part of the insurer to assert a forfeiture upon breach of warranty or condition, after knowledge thereof, amounts to a waiver or estoppel. If waiver is to be implied from conduct mainly, said conduct must be clearly indicative of a clear intent of the insurer to waive its right under the policy. (Pioneer Insurance & Surety Corp. vs. Yap, 61 SCRA 426 [1974]; see Prudential Guarantee and

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Assurance, Inc. vs. Trans-Asia Shipping Lines, Inc., 491 SCRA 411 [2006].) (2) Under estoppel, the insurer is precluded, because of some action or inaction on its part, from relying on an otherwise valid defense as against the insured who has been induced to enter into the contract by the insurer's representation or conduct. The ground of estoppel is that it would be against equity and good conscience for the insurer to assert such defense. Estoppel is different from waiver, but the result is much the same. EXAMPLES: (1) Other insurance clause violated. — The insurer, knowing that the insured has violated a clause of the policy prohibiting the making of other insurances on the same property without giving notice to the insurer, preferred to continue the policy by demanding and collecting the premium. This act constitutes a waiver of the right to rescind the insurance contract. (La O vs. Yek long Lin Fire & Marine Ins. Co., 55 Phil. 386 [1930].) (2) Premium not paid. — Similarly, an extension of time for the payment of a premium amounts to a waiver of the insurer's right to require payment of the premium on the due date or within the grace period. (3) Warranty clause violated. — The insurance company was aware, even before the policy was issued, that in the premises insured, the number of fire hydrants was less than that demanded in the warranty. Nevertheless, it issued the policy and accepted and retained the corresponding premiums. The insurer is barred by waiver or estoppel to claim violation of the said (fire hydrant) warranty. (Qua Chee Gan vs. Law Union & Rock Ins. Co., 98 Phil. 85 [1955].) (4) Insured vehicle not a common carrier. — The insurer knew all along that the insured owned a private vehicle and not a common carrier when it issued a common carrier's accident insurance policy. Not once but twice, its agents, without any objection on its part, discounted the fears of the insured, a man of scant education, that his privately owned vehicle might not fall within the terms of the policy. This is a case where the doctrine of estoppel undeniably calls for application. The insurer is estopped from alleging breach of warranty and condition in the policy. (Fieldmen's Insurance Co., Inc. vs. Vda. de Songco, 25 SCRA 70 [1968].)

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ILLUSTRATIVE CASE: Representation was made by the insured, not by the insurer. Facts: Under the common carrier's accident insurance policy issued by the insurer, the recovery of the insured (taxicab company) is limited to "all sums including claimant's (passengers in the taxicab in this case) cost and expense which the insured shall become legally liable" in the "event of accident caused by or arising out of the use of the motor vehicle." The taxicab of the insured collided with a gravel and sand truck. The lower court, while holding that the collision was due to the fault of driver of the truck, nevertheless held the taxicab operator (insured) liable to the passengers of its motor vehicle on the strength of its representation that its passengers were insured against accidents and adjudged the insurer answerable to the insured in view of its third party liability contract. Issue: Is the insurer liable to the insured under the policy? Held: No. The indemnity awarded to the passengers was not because of the accident but was exclusively predicated on estoppel — on the representation made by the insured. Had it not been for this representation, the insured would not have been liable at all. It does not appear, however, that the insurer authorized or consented to or even knew of, the representation by the insured. It follows that the insurer may not be held liable for such damages for recovery is limited by the terms and conditions of the policy. (Far Eastern Surety & Insurance Co. vs. Vda. de Misa, 25 SCRA 662 [1968].) 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. Right to rescind for violation of a material warranty. (1) Rescission by the insured. — The violation of the terms of a contract of insurance entitles either party to terminate the contractual relations. (Young vs. Midland Textile Ins. Co., 30 Phil. 614 [1915].) Thus, the insured can sue for rescission for breach of contract due to the refusal of the insurer to grant a loan applied for although this was expressly agreed upon in the policy and he

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can recover the full amount of the premiums paid by him up to the filing of the action. (Filipinas Compania de Seguros vs. Nava, 17 SCRA 210 [1966].) (2) Rescission by the insurer. — Under Section 74, the insurer is entitled to rescind a contract of insurance for violation of a warranty only if said warranty is material; otherwise, the breach thereof will not avoid the policy. (Sec. 75.) The right of the insurer to rescind under Section 74 exists even though the violation was not the direct cause of the loss. (Young vs. Midland Textile Ins. Co., supra.) Thus, where a fire policy requires the insured to give notice of the existence of other insurance policies over the same property insured, the non-disclosure thereof is a violation of a material warranty which entitles the insurer to rescind. (Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., Inc., 4 7 SCRA 271 [1972].) 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. When violation of immaterial provisions shall avoid policy. Under American jurisprudence, every warranty is conclusively presumed material, (see Vance, op. cit., p. 415.) Hence, a warranty as to any fact will preclude any inquiry as to the materiality of that fact. It need only be false. The law (Sees. 74 and 75.) makes a distinction between provisions that are material and provisions that are immaterial. The breach of any provision which is not material will not avoid the policy. (Sec. 74.) However, the parties m a y expressly stipulate that the violation of a particular provision (although immaterial) in the policy shall avoid it. (Sec. 75.) By such stipulation, the parties convert an immaterial warranty into a material one. Thus, a stipulation against procuring additional insurance without the insurer's consent although immaterial to the risk insured against, will avoid a fire insurance policy which declares that such violation shall avoid it. (45 C.J.S. 359.) Such a stipulation or condition has been upheld as valid and as a warranty no other insurance exists.

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However, to constitute a violation, the other insurance must be upon the same subject-matter, the same interest therein and the same risk. (Geagonia vs. Court of Appeals, 241 SCRA 152 [1995]; see Sec. 93.) Sec. 76. A breach of warranty without fraud, merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk. Effect of breach of warranty by insured. The breach referred to under Section 76 is one without fraud. In order that the insurer m a y be entitled to rescind a contract of insurance on the ground of a breach of warranty, fraud is not essential, (see Sec. 74.) Falsity, not fraud, is the basis of liability on a warranty. (Leonard vs. State Mut. L. Assur. Co., 24 R.I. 7, 51 A. 1049.) (1) Without fraud. — Where there is no fraud, the policy is avoided only from the time of breach (Sec. 76.) and the insured is entitled (a) to the return of premium paid at a pro rata rate from the time of breach (see Sec. 79[b].) if it occurs after the inception of the contract; or (b) to all the premiums if it is broken during the inception of the contract. In the latter case, the contract is void ab initio and never becomes binding. (2) With fraud. — W h e r e there is fraud, the policy is avoided ab initio, and the insured is not entitled to the return of the premium paid. EXAMPLE: Suppose the warranty stipulates that the insured will not store inflammable materials in the building insured. If the policy is issued on June 10, 2002 and the insured violates the warranty on June 25,2002, the insurer is exonerated only from June 25, 2002. Consequently, the insurer is liable for any loss arising before June 25, 2002 but not as to a loss occurring thereafter. In this case, the insurer is entitled to retain the premium up to June 25, 2002, the time of the breach.

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If the insured, without fraud, makes a false warranty at the time he signs the contract, he cannot recover for any loss arising thereafter because the breach prevents the policy from attaching to the risk. In other words, the contract is void ab initio but all the premiums should be returned to the insured. If the insured is guilty of fraud, he is not entitled to the return of the premiums paid. Conditions in insurance policy. In law, a condition is an event signifying in its broadest sense either an occurrence or a non-occurrence that alters the previously existing legal relations of the parties to the contract. (E.W. Patterson, op. cit, p. 238.) Insurers m a y impose whatever conditions they please upon their obligations, as long as they are not contrary to law, morals, good customs, public order, or public policy. (Art. 1306, Civil Code.) Conditions in an insurance policy are of two kinds — precedent and subsequent. (1) A condition precedent calls for the happening of some event or the performance of some act after the terms of the contract have been agreed upon, before the contract shall be binding on the parties, such as that the policy shall not take effect until delivery and payment of the first premium during the good health of the applicant. (2) A condition subsequent is that which pertains not to the attachment of the risk and the inception of the policy, but to the contract of insurance after the risk has attached and during the existence thereof (43 A m . Jur. 2d 1035.), such as the condition requiring notice and proof of loss in case of loss upon an insurance against fire, (see Sees. 88-89.) Warranties and conditions distinguished. The terms "warranty" and "conditions precedent" are often used interchangeably or synonymously. However, some courts have recognized material differences. (1) As to effect. — The best recognized distinction between the two is that warranty does not suspend or defeat the operation

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of the contract, but a breach affords either the remedy expressly provided in the contract or that furnished by law, while condition precedent is one without the performance of which the contract, although in form executed by the parties and delivered, does not spring into life. In other words, a condition precedent is a limitation to the attachment of the risk, whereas a warranty does not necessarily have that effect. (2) As to nature. — If the insured person contracts and warrants that if the representations made by him in his application for insurance are not true, the policy shall be null and void, such statements are not conditions precedent but rather of the nature of a defeasance. Also, promissory warranties are usually regarded as conditions subsequent to be performed after the policy has become a valid contract, non-performance of which will work a defeasance. (43 A m . Jur. 2d 1036.)

Exceptions in insurance policy. Exceptions are inserted in a contract of insurance for the purpose of withdrawing from the coverage of the policy, as delimited by the general language describing the risk assumed, some specific risks which the insurer declares himself unwilling to undertake. Thus, the insurer w h o issues his policy covering a certain store and its contents against loss or d a m a g e by fire m a y cut down the meaning of "contents" by excepting m o n e y and securities, and restrict the peril of "fire" by excepting fire caused by lightning. (Vance, op. cit, p. 426.)

Exceptions distinguished from warranties and conditions. In most cases, exceptions are easily distinguished from warranties and conditions. EXAMPLE: If the policy contains warranted statement that the insured building is occupied, we have an undoubted warranty. If the policy declares that "this entire policy shall be void if the insured building be or becomes vacant or unoccupied and so remained for more than ten days," we have just as clearly

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a condition. If the provision is that "this company shall not be liable for any loss while the insured building is vacant or unoccupied" we have an unmistakable exception. But the policy might be worded so as to leave the matter in doubt. Thus, if the provision above given as creating an exception should declare that "the insurer shall not be liable if the building becomes vacant," a court might well be doubtful whether a condition or an exception was intended. Ordinarily, the insurance is suspended as long as the undesirable situation exists, that is, the building remains unoccupied, but as soon as the undesirable situation is eliminated, the insurance is revived or reinstated.

Effects of breach on legal relations of parties. Warranties, conditions, and exceptions affect the legal relations of the parties quite differently. (1) On binding force of contract. — The occurrence of a breach or warranty or condition even though such breach be but temporary renders the entire contract defeasible or voidable and even though such breach may not have affected the risk or contributed to the loss in any way. But the occurrence of an excepted peril, such as the vacancy of the insured house, does not in the least affect the binding force of the contract. If a loss happens during such vacancy, it falls outside the coverage of the policy and the insurer is not liable. But if no loss occurs, and the house is reoccupied, the contract relations of the parties continue unchanged. (2) On liability where there is waiver. — Such a breach of warranty or of condition may be waived without consideration; but the insurer does not become liable for an excepted loss by waiver unless such waiver amounts to a new contract on valuable consideration. The insurer cannot, by a naked waiver, assume a non-existent duty. Nor is the defense that the loss is excepted barred by the incontestable clause, {ibid., pp. 426-427.) — oOo —

Title 8 PREMIUM 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, (a) Premium defined. An insurance premium m a y be defined as the agreed price for assuming and carrying the risk — that is, the consideration paid an insurer for undertaking to indemnify the insured against a specified peril. (43 A m . Jur. 2d 326.) Note: Where only one premium is paid for several things not separately valued or separately insured, making for only one cause or consideration, the insurance contract is entire or indivisible, not severable, or divisible, as to the items insured. It is immaterial that they are shipped or transported separately. (Oriental Assurance Corp. vs. Court of Appeals, 200 SCRA 4 5 9 [1991]; see Sees. 2 2 1 , 1 3 9 . ) Assessment defined. An assessment, in the law of insurance, is a sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses and expenses. A policy issued on the assessment plan has been defined as one where the payment of the benefit is in any manner or degree dependent bir

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upon the collection of an assessment upon persons holding similar policies. (43 A m . Jur. 2d, p. 327.) Premium distinguished from assessment. In theory, all payments of premiums and assessments are but contributions from all members of the insuring organization to make good the losses of individual members. The chief distinction, however, between premiums and assessments lies in the fact that the former are levied and paid to meet anticipated losses, while the latter are collected to meet actual losses. The payment of premium, after the first, is not enforceable against the insured; while assessments, unless otherwise agreed, are legally enforceable once levied. Hence, while premium is not a debt, an assessment, properly levied, unless otherwise expressly agreed, is a debt. (Vance, op. cit., pp. 296-297, 300.) Payment of premium ordinarily not a debt or obligation. (1) In fire, casualty, and marine insurance. — The premium payable becomes a debt as soon as the risk attaches (Sec. 77; see Sees. 79[a], 78.), and in suretyship, as soon as the contract or bond is perfected and delivered to the obligor. (Sec. 177.) The phrase "the thing insured is exposed to the peril insured against" assumes that the contract is perfected which takes place when the applicant's offer is accepted by the insurer. 1

Where, as between the insurer and the insured, there was not only a perfected contract of insurance but a partially performed one as far as the payment of the agreed premium was concerned, the obligation of the insurer to pay the insured the amount for which the policy was issued in case the conditions therefor had been complied with, arose and became binding upon it, while the obligation of the insured to pay the remainder of the total amount of the premium due became demandable. Nonpayment of the balance of the premium due does not produce the

'Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550 (2005), citing De Leon, Hector S., the Insurance Code of the Philippines (1992), p. 194.

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cancellation of the contract of insurance in the sense that it can no longer be enforced. A contrary rule would place exclusively in the hands of the insured the right to decide whether the contract should stand or not. (Phil. Phoenix Surety & Insurance Co., Inc. vs. Woodworks, Inc., 20 SCRA 1270 [1967].) ILLUSTRATIVE CASES: 1. Balance of premium was not paid. Facts: On April 1,1960, X Co. (insurer) issued and delivered to Y Co. (insured) a fire policy for the amount of P300,000.00 for a term of one year. The premium of said policy amounted to P6,000.00. On September 22,1960, Y Co. paid P3,000.00. Notwithstanding several demands, Y Co. refused to pay the balance. Issue: Did the nonpayment cancel the policy? Held: No. In this case, the risk attached upon the issuance and delivery to Y Co. on April 1,1960 of the fire policy. As the policy was effective for one (1) year, from April 1,1960 to April 1,1961, the balance of the premium was still collectible. As the contract had become perfected, the parties could demand from each other the performance of whatever obligations they had assumed. In the case of the insurer (X Co.), it had the right to demand from the insured (Y Co.) the completion of the payment of the premium due or sue for rescission of the contract. As it chose to demand specific performance of the insured's obligation to pay the balance of the premium, the latter's duty to pay is indeed indubitable, (ibid.)

2. No premium was paid. Facts: Suppose, no partial payment of the premium was made by Y Co. to X Co. Issue: May X Co. recover the unpaid premium from Y Co.? Held: No. The continuance of the insurer's obligation is conditioned upon the payment of the premium, so that no recovery can be had upon a lapsed policy, the contractual relation between the parties having ceased. In fact, if the peril insured against had occurred, X Co., as insurer, would have had

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a valid defense against recovery under the policy. (Phil Phoenix Surety & Ins., Co. vs. Woodworks, Inc., 92 SCRA 419 [1979].) Note: In the preceding case, recovery of the balance of the unpaid premium was allowed inasmuch as "there was not only a perfected contract of insurance but a partially performed one as far as the payment of the agreed premium was concerned."

3. The balance of the premium which was only partially paid, was paid only after the loss has occurred. Pacts: Private respondent X & Co. (insurer) issued a fire insurance policy in favor of T (insured) on a residential building for P600,000.00. T only paid P600.00 out of the total premium of P2,900 thus leaving a considerable balance unpaid. T paid the balance two (2) days after the insured building was completely destroyed by fire. The policy provides for payment of premium in full before the "policy shall be deemed effective, valid and binding upon the company." Issue: Is the fire insurance policy valid and enforceable upon mere partial payment of premium. Held: No. (1) Phoenix and Makati Tuscany cases not persuasive. — "The 1969 Phoenix case (supra.) is not persuasive; neither is it decisive of the instant dispute. For one, the factual scenario is different. In Phoenix, it was the insurance company that sued for the balance of the premium, i.e., it recognized and admitted the existence of an insurance contract with the insured. In the case before us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy x x x is not in force until the premium has been fully paid and duly receipted by the Company x x x x. Resultantly, it is correct to say that in Phoenix, a contract was perfected upon partial payment of the premium since the parties had not otherwise stipulated that prepayment of the premium in full was a condition precedent to the existence of a contract. In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the premium without any other precondition to its enforceability as in the instant case, the insurer in effect had shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its right to collect premium, or exact specific performance from the insured. This is not so here. By express

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agreement of the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to the occurrence of the risk insured against. In Makati Tuscany case (infra.), the parties mutually agreed that the premium could be paid in installments, which in fact they did for three (3) years, hence, this Court refused to invalidate the insurance policy. These two cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied, of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in Phoenix, and expressly, by agreeing to make premium payable in installments as in Tuscany. But contrary to the stance taken by petitioners, there is no waiver express or implied in the case at bench. Precisely, the insurer and the insured expressly stipulated that (t)his policy including any renewal thereof and/or any indorsement thereon is not in force until the premium has been fully paid to and duly receipted by the Company x x x x and that this policy shall be deemed effective, valid and binding upon the Company only when the premiums therefor have actually been paid in full and duly acknowledged." (2) Partial payment in the nature of a deposit. — "Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Section 77 of the Insurance Code the payment of partial premium by the assured in this particular instance should not be considered the payment required by the law and the stipulation of the parties. Rather, it must be taken in the concept of a deposit to be held in trust by the insurer until such time that the full amount has been tendered and duly receipted for. In other words, as expressly agreed upon in the contract, full payment must be made before the risk occurs for the policy to be considered effective and in force." (3) Premium is the 'elixir vitae' of insurance business. — "It cannot be disputed that premium is the elixir vitae of the insurance business because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence, the imperative need for its prompt payment and full satisfaction. It must be emphasized here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock, insurance firms are enabled to offer the assurance of security to the public at favorable rates. But once payment of premium is left to the whim and caprice of the insured, as when

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the courts tolerate the payment of a mere P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid even after the risk insured against has occurred, as petitioners have done in this case, on the principle that the strength of the vinculum juris is not measured by any specific amount of premium payment, we will surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise to arrive at a fair and equitable distribution of risks and benefits between the insurer and the insured." (Tibay vs. Court of Appeals, 257 SCRA 126 [1996].) Note: See UCPB General Insurance Co., Inc. vs. Masagana Telemart, Inc., 356 SCRA 307 [2001], which reconsidered previous decision of June 15,1999, Illus. Case No. 2, infra.) Dissenting Opinion: (1) Enough that payment on premium, partly or in full, made. — "The payment of premium, subject to the stated exceptions, is deemed by the foregoing provisions (Sec. 77.) to be an element essential to establish the juridical relation between the insurer and the insured. Observe, however, that the law neither requires, nor measures the strength of the vinculum juris by, any specific amount of premium payment. It should thus be enough that payment on the premium partly or in full, is made by the insured which the insurer accepts. In fine, it is either that a juridical tie exists (by such payment) or that it is not extant at all (by an absence thereof). Once the juridical relation comes into being, the full efficacy, not merely pro tanto, of the insurance contract naturally follows. Verily, not only is there an insurance perfected but also a partially performed contract. In case of loss, recovery on the basis of the full contract value, less the unpaid premium can accordingly be had; conversely, if no loss occurs, the insurer can demand the payment of the unpaid balance of the premium. The insured, on the one hand, cannot avoid the obligation of paying the balance of the premium while the insurer, upon the other hand, cannot treat the contract as valid only for the purpose of collecting premiums and as invalid for the purpose of indemnity." (2) Insurer's liability reduced proportionately by balance of premium still due. — "Nor would the non-payment of the balance due result in an AUTOMATIC cancellation of the insurance contract; otherwise, the effect would be to place exclusively in the hands of one of the contracting parties the right to decide

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whether the contract should stand or not in possible disregard of the MUTUALITY OF CONTRACTS RULE. Instead, the parties should be able to demand from each other the performance of whatever obligations they had assumed or, if desired, sue timely for the rescission of the contract, In the meanwhile, the contract endures, and an occurrence of the risk insured against triggers the insurer's liability. Forthwith, legal compensation arises under the pertinent provisions of the Civil Code under which the mutual debts are, to the extent of the concurrent amount, extinguished by mere operation of the law. The net result, such as in the case at bench, is that the insurer's liability to the insured would simply be reduced by the balance of the premium still due from the latter. Thus, it becomes TOTALLY INCONSEQUENTIAL whether the insured still remits or no longer remits payment of the balance of the premium, the insurer's liability theretofore having already attached." (3) Partial payment accepted by insurer. — "The insured HAD MADE, and the insurer HAD ACCEPTED, a partial premium payment of the policy weeks before the risk insured against took place. An insurance is an aleatory contract which, unlike a conditional agreement whose efficacy is dependent on stated conditions, is at once effective upon its perfection although the occurrence of a condition or event may later dictate the demandability of certain obligations thereunder. Founded on the autonomy of contracts, the parties, of course, are generally not prevented from imposing conditions that alone could trigger the contract's obligatory force. These conditions, however must not be contrary to law, morals, good customs, public order or public policy. To say that the provisions in the policy issued by Fortune, i.e., that the insurance shall not 'be x x x in force until the premium has been fully paid,' and that it 'shall be deemed effective, valid and binding upon the company only when the premiums therefor have actually been paid in full and duly acknowledged/ override the efficaciousness of the insurance contract despite the payment and acceptance of a part of the premium would be opposed not only to the precepts heretofore adverted to on the correct application of Section 77, but also to the intent and spirit of Section 78 which, like Section 77 is not dependent on how much premium has been paid.

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It seems quite clear to me that on the day premium payment is made by the insured, albeit only a portion of it, so long as it is accepted by the insurer, the insurance coverage becomes effective and binding, any stipulation in the policy to the contrary notwithstanding. The insurer is not without recourse; all that it needs is not to accept, if it wants to, any premium payment of less than full. But if it does accept payment, reason dictates that it should not be allowed to deny the insurance contract upon which very existence that payment is predicated." (Vitug, J.)

4. To avoid liability, insurer claims that insured forfeited the renewal policy for failure to pay the full amount of premium. Facts: Petitioner AHA Company claims that respondent TE Enterprises, Inc. forfeited the renewal policy for its failure to pay the full amount of the premium and breach of the Fire Extinguishing Appliances Warranty. The amount of the premium stated on the face of the policy was P89,770.20. From the admission of respondent's own witness, Mr. Borja, which the petitioner cited, the former only paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner argues, suffices to invalidate the policy, in accordance with Section 77 of the Insurance Code. The Court of Appeals refused to consider this contention of the petitioner. It held that this issue was raised for the first time on appeal, hence, beyond its jurisdiction to resolve, pursuant to Rule 46, Section 18 (now Rule 44, Sec. 15) of the Rules of Court. Petitioner, however, contests this finding of the appellate court. It insists that the issue was raised in paragraph 24 of its Answer, viz.: "24.Plaintiff has not complied with the condition of the policy and renewal certificate that the renewal premium should be paid on or before renewal date." Petitioner adds that the issue was the subject of the crossexamination of Mr. Borja, who acknowledged that the paid amount was lacking by P14,623.20 by reason of a discount or rebate, which rebate under Section 361 of the Insurance Code is illegal. Issue: Is petitioner's argument tenable?

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Held: No. (1) Petitioner's answer contains no specific and definite allegation of non-payment. — "It is true that the asseverations petitioner made in paragraph 24 of its Answer ostensibly spoke of the policy's condition for payment of the renewal premium on time and respondent's non-compliance with it. Yet, it did not contain any specific and definite allegation that respondent did not pay the premium, or that it did not pay the full amount, or that it did not pay the amount on time." (2) Question of supposed inadequate payment was never raised in the trial court. — "Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the supposed inadequate payment was never raised. Most significant to point, petitioner fatally neglected to present, during the whole course of the trial, any witness to testify that respondent indeed failed to pay the full amount of the premium. The thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of proving this fact. Though it briefly touched on the alleged deficiency, such was made in the course of discussing a discount or rebate, which the agent apparently gave the respondent. Certainly, the whole tenor of Mr. Borja's testimony, both during direct and cross examinations, implicitly assumed a valid and subsisting insurance policy. It must be remembered that he was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building." (American Home Assurance Company, Inc. vs. Tantoco Enterprises, Inc., 366 SCRA 740 [2001].) (2) In life insurance. — The premium becomes a debt only when in the case of the first premium, the contract has become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premium, in consideration of the insured's express or implied promise to pay. (Vance, op. cit., p. 300.) (a) A life insurance policy involves a contractual obligation wherein the insured becomes duty bound to pay the premium agreed upon lest he runs the risk of having his insurance policy lapse if he fails to pay such premiums. The fact that the insurance policy contains an automatic premium payment clause cannot divest such policy of its contractual

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nature for the result of such failure would only be for him to pay the premium plus the corresponding interest depending upon the condition of the policy. (b) There is usually no duty assumed by the insured to pay any premiums subsequent to the first. Insofar as the contract is executory, the ordinary life insurance is purely unilateral, (ibid., p. 296.) The insurer, therefore, cannot compel the insured to pay the premium because the insured is by no means a debtor of the insurer, nor is the insurer the creditor of the insured.

Effect of nonpayment of premium. The general rules of law applicable to the payment of money obligations are, of course, applicable to the payment of insurance premiums. As a general principle, the time specified for the payment of premiums is of the essence of the contract. The ability of the insurer to meet its contingent obligations to the public depends upon the prompt payment of all premiums due it. (1) First premium. — Nonpayment of the first premium unless waived (see Sec. 78.), prevents the contract from becoming binding notwithstanding the acceptance of the application nor the issuance of the policy. But nonpayment of the balance of the premium due does not produce the cancellation of the contract, (see Phil. Phoenix Surety & Insurance, Co., Inc. vs. Woodworks, Inc., 20 SCRA 1270 [1967], supra.) (2) Subsequent premiums. — Nonpayment of subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse. In case of individual life or endowment insurance and group life insurance, the policyholder is entitled to a grace period of either thirty (30) days or one (1) month within which the payment of any premium after the first may be made. (Sees. 227[a], 228[a].) In the case of industrial life insurance, the grace period is four (4) weeks, and where premiums are payable monthly, either thirty (30) days or one (1) month. (Sec. 230[a].)

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Excuses for nonpayment of premiums. (1) Fortuitous events. — Even the act of God, rendering the payment of the premium by the insured wholly impossible (see Art. 1174, Civil Code.), will not prevent the forfeiture of the policy when the premium remains unpaid. If the insured can neglect payment at maturity and yet suffer no loss or forfeiture, premiums will not be punctually paid. The insurer must have some efficient means of enforcing punctuality; hence, insurance contracts usually provide for the forfeiture of the policy upon default of prompt payment of premiums. (Wheeler vs. Connecticut Mutual Life Ins. Co., 82 N.Y. 543.) The rule is not affected by the fact that the nonpayment is due to w a r or that the insured has not been negligent. In this jurisdiction, nonpayment of 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." Insurance companies "not only calculate on the receipt of the premiums when due but on the compounding interest upon them. It is on this basis that they are enabled to offer assurance at the favorable rates they do." (National Leather Co., Inc. vs. U.S. Life Ins. Co., 87 Phil 410 [1950]; Constantino vs. Asia Life Ins., Co., 87 P h i l 248 [1950]; Phil. Phoenix Surety & Ins. Co. vs. Woodworks, Inc., 92 SCRA 419 [1979], supra.) (2) Condition, conduct or default of insurer. — Indeed, no excuse whatever will avail to prevent a forfeiture except only when the nonpayment has in some w a y been induced by the condition, conduct or default of the insurer. Thus, nonpayment is excused: (a) Where the insurer has become insolvent and has suspended business, or has refused without justification a valid tender of premiums (see Gonzales vs. Asia Life Ins. Co., 92 Phil. 197 [1952].); or (b) Where the failure to pay was due to the wrongful conduct of the insurer as when the insurer induced the beneficiary under a policy to surrender it for cancellation by falsely representing that the insurance was illegal and void, and returning the premiums paid; or

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(c) Where the insurer has in any wise waived his right to demand payment. (Vance, op. cit, pp. 326-331.) But the insurer will not be deemed to have waived his privilege of forfeiture by mere inaction or silence if the ground be default in the payment of premiums, going as it does to the whole consideration inducing the insurer to enter into the contract. Furthermore, while the insured has the privilege of continuing the policy in force by making premium payments, the insurer cannot ordinarily force the insured to make these payments.

(ibid., p. 493.)

Validity of policy where credit extension granted to insured. The first sentence of Section 72 (now Section 77) of the former Insurance Act includes the following provisions after the w o r d "against": "unless there is a clear agreement to grant the insured credit extension of the premium due." This phrase expressly permitting an agreement to extend the period to pay the premium has been omitted in Section 77 and the phrase "Notwithstanding any agreement to the contrary," added at the beginning of the second sentence. Apparently, the intention is to put a contract of insurance "except in the case of a life or an industrial life policy whenever the grace provision period applies," on a "cash-and-carry basis," and except as provided in Section 78, so that under Section 77, the premium must be paid in cash as a condition precedent for a non-life insurance policy to be valid and binding, and an agreement to grant the insured credit 2

3

4

2

T h e phrase is not found in Section 72. U n d e r Section 196(1), p r e m i u m receivables are not allowed as admitted assets in the determination of the financial condition of any insurance company. Pursuant to Section 196(10) and in implementation of the cash-and-carry provision of Section 77, the Insurance Commissioner has issued a circular letter (dated N o v e m b e r 20, 1981, superseding previous circulars, rulings or instructions on the matter inconsistent therewith) prescribing the rules on p r e m i u m receivables to be considered as admitted assets, (see annotations under Sees. 196, 197.) In other words, only premium receivables allowed as admitted assets under the circular are considered paid for purposes of Section 77. 3

4

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5

extension of the premium due is void. (see Velasco vs. Apostol, 173 SCRA 228 [1989].) In Makati Tuscany Condominium Corp. vs. Court of Appeals (infra.), the Supreme Court sustained the Court of Appeals in the latter s ruling that "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. (De Leon, The Insurance Code, at p. 235.) 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/' In UCPB General Insurance Co., Inc. vs. Masagana Telemart, Inc. (308 SCRA 259 [1999].), the Supreme Court m a d e the following ruling: "An insurance policy other than life issued originally or on renewal is not valid and binding until actual payment of the premium. The parties m a y not agree expressly or impliedly on the extension of credit or time to pay the premium and consider the policy binding before actual payment." (see Note 7.) ,

It is submitted that a credit extension agreement is valid. (1) If, under Section 78, the mere acknowledgment in the policy of receipt of premium makes the policy binding although in fact it has not been paid, there is a stronger reason to accord validity to a policy where there is a clear agreement to grant the insured credit extension of the premium due. In both cases, the insurer waives the condition of prepayment in full and has a right to recover the premium due and unpaid. 6

(2) The familiar principle is that what the law prohibits to be done directly cannot be done indirectly. To adopt the official interpretation 5

This is the interpretation of the Insurance C o m m i s s i o n and the insurance industry. A c c o r d i n g to the Commission, the "cash-and-carry" rule does not apply w h e n it will w o r k against public interest or innocent third parties. Thus, in the case of c o m p u l s o r y m o t o r vehicle insurance (Chap. VI.), w h e r e accident victims b e c o m e third p a r t y claimants, an insurance c o m p a n y cannot deny recovery on the g r o u n d that the p r e m i u m on the policy h a s not been paid. Such policy is considered already paid for, o n c e it is in the hands of the insured for the protection of innocent third persons w h o are not privy to the insurance contract. 6

In the absence of clear waiver, express or implied by the insurer, the insured cannot collect on the proceeds of the policy.

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would, in effect, establish the following rule: "Credit extension of the premium due m a y be granted: if done by express agreement, the policy is void; if done merely by an acknowledgment of receipt of premium which is actually unpaid, the policy is valid." In other words, what the parties cannot do directly, they can do indirectly. (3) The new rule is susceptible to the constitutional objection that it unduly restricts the freedom of contract particularly of the insured who m a y be the innocent victim of an unscrupulous insurer desiring to collect the whole premium for a reduced period of coverage. The deletion of the quoted phrase notwithstanding, the fact remains that there is no express prohibition by Section 77 against an agreement granting credit extension and such agreement cannot be said to be contrary to "morals, good customs, public order or public policy." (see Art. 1306, Civil Code.) "Because the freedom to contract is both a constitutional and statutory right, to uphold the right, courts are enjoined to m o v e with necessary caution and prudence in holding contracts void." (Gabriel vs. Mateo, 71 Phil. 497 [1941].) 7

(4) The ruling of the Supreme Court in U C P B General Insurance Co. (supra.) is unduly favorable to the insurer who m a y grant an extension to the insured and easily lull the latter into a false sense of security and then deny liability should the event insured against takes place. But the insurer m a y choose to demand the payment of the premium before a loss has occurred if he desires to maintain or continue the contract of insurance. 8

When policy valid and binding notwithstanding nonpayment of premium. The following are the exceptions to Section 77: (1) In the case of a life or an industrial policy whenever the grace period provision applies (Sec. 77.);

^ t w a s held that u n d e r Section 72, an insurance policy w a s automatically cancelled u p o n failure of the insured to pay the premium within the 90-day credit extension granted by the express terms of the promissory note signed by the insured. ( A C M E Shoe Rubber & Plastic Corp. vs. Court of Appeals, 134 SCRA 155 [1985].) Reconsidered and set aside on motion for reconsideration of respondent. (356 SCRA 8

307 [2001], Ulus. case No. 2, infra.)

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(2) When there is an acknowledgment in a policy or contract of insurance of receipt of premium even if there is a stipulation therein that it shall not be binding until the premium is actually paid (Sec. 78.); (3) When there is an agreement allowing the insured to pay the premium in installments and partial payment has been m a d e at the time of loss (see Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 463 [1992], infra.); (4) When there is an agreement to grant the insured credit extension for the payment of the premium (Art. 1306, Civil Code.), and loss occurs before the expiration of the credit term; and (5) When estoppel bars the insurer from invoking Section 77 to avoid recovery on a policy providing a credit term for the payment of the premiums, as against the insured w h o relied in good faith on such extension. Be that as it may, once a policy has been issued, the presumption lies that the premium has been duly paid, and where the nonpayment of the premium is attributable to the fault or misrepresentation of the insurer, the insured is entitled to recover in case of loss. ILLUSTRATIVE CASES: 1. The premium due was paid on installments. Facts: Private respondent, X Co. (insurer), issued in favor of Y Co. (insured), petitioner, an insurance policy on the latter's building for a period beginning March 1, 1982 and ending March 1, 1983. The premium was paid in four (4) installments in 1982, all of which were accepted by X Co. A renewal policy was issued for a term covering March 1,1993 to March 1,1994. The premium was paid in five (5) installments in 1993. Again, all payments were accepted by X Co. On January 20, 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-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,

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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. AH-CPP-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 (2) previous policies, stated the following reservations: "2. Acceptance of this payment shall not waive any of the company rights to deny liability on any claim under the policy arising before such payments or after the expiration of the credit clause of the policy; and "3. Subject to no loss prior to premium payment. If there be any loss, such is not covered." Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85. On October 8,1987, the trial court dismissed the complaint and the counterclaim. Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a decision modifying that of the trial court by ordering herein petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the counterclaim. The appellate court thus explained — "The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire premium. Here, the parties herein agreed to make the premiums payable in installments, and there is no pretense that the parties never envisioned to make the insurance contract binding between them. It was renewed for two succeeding years, the second and third policies being a renewal /replacement for the previous one. And the insured never informed the insurer that it was terminating the policy because the terms were unacceptable.

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While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the insurance contract valid and binding without payment of premiums, there is nothing in said section which suggests that the parties may not agree to allow payment of the premiums in installments, or to consider the contract as valid and binding upon payment of the first premium. Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by basic considerations of fairness and equity. To our mind, the insurance contract became valid and binding upon payment of the first premium, and the plaintiff could not have denied liability on the ground that payment was not made in full, for the reason that it agreed to accept installment payments, x x x" Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Section 77 and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss occurring before payment of premiums. Petitioner concludes that there cannot be a perfected contract of insurance upon mere partial payment of the premiums because under Section 77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the alleged invalid insurance policies. Issue: Are the subject policies valid even if the premiums were paid on installments? Held: Yes. (1) Insurer's intention is to honor policies payable in 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 (3) 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

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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." (2) Agreement granting credit extension is not expressly prohibited. — "We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and conclusions of the appellate court contained in its Resolution denying the motion to reconsider its Decision — 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. The reliance by petitioner on Arce vs. Capital Surety and Insurance Co. (117 SCRA 63 [1982]) is unavailing because the facts therein are substantially different from those in the case at bar. In Arce, 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. (3) Insured is not entitled to a refund of premiums. — "It appearing from the peculiar circumstances that the parties actually intended to make the three (3) 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. AHCPP-9210651) in March 1985. Moreover, as correctly observed by the appellate court, 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

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for any period, however brief or momentary." (Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462 [19921.) 2. Premiums for the policies in question were paid by the insured and accepted and received by insurer's cashier within the credit terms but after the occurrence of the loss. Facts: In a decision made by the Supreme Court on June 15,1999 (308 SCRA 259), it defined the issue to be: Whether the fire insurance policies issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 ... had been extended or renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence of the (fire) risk insured against. It resolved this issue in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela vs. Court of Appeals (191 SCRA 1 [19902]); South Sea Surety and Insurance Co., Inc. vs. Court of Appeals (244 SCRA 744 [1995]); and Tibay vs. Court of Appeals (257 SCRA 196 [1996]). Accordingly, it reversed and set aside the decision of the Court of Appeals. Respondent (insured) seasonably filed a motion for the reconsideration of the adverse verdict. The following facts, as found by the trial court and the Court of Appeals, are indeed duly established. (1) For years, petitioner (insurer) had been issuing fire policies to the respondent, and these policies were annually renewed. (2) Petitioner had been granting respondent a 60- to 90-day credit term within which to pay the premiums on the renewed policies. (3) 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 respondent, and the copy thereof allegedly sent to respondent's broker was ever transmitted to respondent. (4) The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by respondent within the 60 to 90-day credit term and were duly accepted and received by Petitioner's cashier. Issue: The core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to

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petitioner's advantage despite its practice of granting a 60- to 90-day credit term for the payment of premiums. Held: (1) Exceptions to Section 77. — "Section 77 of the Insurance Code of 1978 is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read: 'SEC. 72. An insurer is entitled to 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.' (Underscoring supplied) It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement to extend the period to pay the premium. But are there exceptions to Section 77? The answer is in the affirmative. (2) First and second exceptions. — The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace period provision applies. The second is that covered by Section 78 of the Insurance Code x x x." (3) Third exception. — "A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals (215 SCRA 463 [1992]), wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss. We said therein, thus: 'We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that the petitioners 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

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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.'" (4) Fourth exception. — "Not only that. In Tuscany, We also quoted with approval the following pronouncement of the Court of Appeals in its Resolution denying the motion for reconsideration of its decision: '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 (DE LEON, The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted.' By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany 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

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allowed even though the premium is paid after the loss but within the credit term. Moreover, 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 [under] Article 1306 of the Civil Code." (5) Fifth exception. — "Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against Petitioner, 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. Estoppel then is the fifth exception to Section 77." (UCPB General Insurance Co., Inc. vs. Masagana Telemart, Inc., 356 SCRA 307 [2001 ].) Dissenting Opinion: (1) Adverse effect of credit arrangement on integrity of legal reserve requirement. — "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."

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(2) Acknowledgment of payment of premium in lieu of mere credit arrangement. — "Section 77 of the Insurance Code 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: x x x Tf the insurer wants to favor the insured by making the policy binding notwithstanding the non-payment 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 conclusive evidence of payment of premium (Section 78). 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' (Velasco vs. Apostol, 173 SCRA 228)." (3) Non-applicability of the estoppel doctrine. — "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 vinculum juris between the insured and the insurer that it would be doubtful to have that payment validly excused even for a fortuitous event." (4) Amount of premium payment. — "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 pro tanto, 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." (Vitug, J.)

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Dissenting Opinion: (1) Insurance claim fraudulent in character. — "Respondent Masagana surreptitiously tried to pay the overdue premiums before giving written notice to petitioner of the occurrence of the fire that razed the subject property. This failure to give notice of the fire immediately upon its occurrence blatantly showed the fraudulent character of its claim. The fire totally destroyed the property on June 13, 1992; the written notice of loss was given only more than a month later, on July 14, 1992, the day after respondent surreptitiously paid the overdue premiums. Respondent very well knew that the policy was not renewed on time. Hence, the surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible disregard of the principle that insurance is a contract uberrima fides, the most abundant good faith. Respondent is required by law and by express terms of the policy to give immediate written notice of loss. This must be complied with in the utmost good faith." (2) Respondent guilty of material representation. — "The claim for insurance benefits must fall as well because the failure to give timely written notice of the fire was a material misrepresentation affecting the risk insured against. Section 1 of the policy provides: 'AH 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 devices are used by the insured or any one acting on his behalf to obtain any benefit under the policy.' In the factual milieu, the purported practice of giving 60 to 90-day credit extension for payment of premiums was a disputed fact. But it is a given fact that the written notice of loss was not immediately given. It was given only the day after the attempt to pay the delayed premiums." (3) Purported credit, a mere verbal understanding. — "At any rate, the purported credit was a mere verbal understanding of the respondent Masagana of an agreement between the insurance company (petitioner) and the insurance brokers of respondent Masagana. The president of respondent Masagana admitted that the insurance policy did not contain any proviso pertaining to the grant of credit within which to pay the premiums. Respondent Masagana merely deduced that a credit agreement existed based on previous years' practice

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Sec. 77

that they had of delayed payments accepted by the insurer as reflected on the face of the receipts issued by UCPB evidencing the payment of premiums. xxx

xxx

It must be stressed that a verbal understanding of respondent Masagana cannot amend an insurance policy. In insurance practice, amendments or even corrections to a policy are done by written endorsements or tickets appended to the policy." (4) Credit granted to insurance brokers, not to insured (respondent). — "However, the date on the face of the receipts does not refer to the date of actual remittance by respondent Masagana to UCPB of the premium payments, but merely to the date of remittance to UCPB of the premium payments by the insurance brokers of respondent Masagana. Hence, what has been established was the grant of credit to the issurance brokers not to assured. The insurance company recognized the payment to the issurance broker as payment to itself, through the actual remittance of the premium payments to the principal might be later. Once payment of the premium is made to the insurance broker, the assured would be covered by a valid and binding insurance policy, provided the loss occurred after payment to the broker has been made." (5) Estoppel not available in this case. — "Assuming arguendo that the 60 to 90-day-credit-term has been agreed between the parties, respondent could not still invoke estoppel to back up its claim. 'Estoppel is unavailing in this case,' thus spoke the Supreme Court through the pen of Justice Hilario G. Da vide, Jr., now Chief Justice. Mutatis mutandis, he may well be speaking of this case. He added that '[E]stoppel can not give validity to an act that is prohibited by law or against public policy.' The actual payment of premiums is a condition precedent to the validity of an insurance contract other than life insurance policy. Any agreement to the contrary is void as against the law and public policy." (6) When estoppel a valid exception to premium pre-payment requirement. — An incisive reading of (Section 77) would show that the emphasis was on the conclusiveness of the acknowledgment in the policy of the receipt of premium, notwithstanding the absence of actual payment of premium, because of estoppel. Under the doctrine of estoppel, an

Sec. 77

CONTRACT OF INSURANCE Title 8. — P r e m i u m

admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon, 'A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them/ This is the only case of estoppel which the law considers a valid exception to the mandatory requirement of pre-payment of premium. The law recognized that the contracting parties, in entering a contract of insurance, are free to enter into stipulations and make personal undertakings so long as they are not contrary to law or public policy. However, the law is clear in providing that the acknowledgment must be contained in the policy or contract of insurance. Anything short of it would not fall under the exception so provided in Section 78." (7) No valid and binding insurance policy created. — "Hence, because of respondent's failure to pay the premiums prior to the occurrence of the fire insured against, no valid and binding insurance policy was created to cover the loss and destruction of the property. The fire took place on June 13,1992, twenty-two (22) days after the expiration of the policy of fire insurance. The tender of payment of premiums was made only thirty (30) days after the occurrence of the fire, or on July 13,1992. Respondent Masagana did not give immediate notice to petitioner of the fire as it occurred as required in the insurance policy. Respondent Masagana tried to tender payment of the premiums overdue surreptitiously before giving notice of the occurrence of the fire." (8) Pre-payment of premium expressly stipulated. — "More importantly, the parties themselves expressly stipulated that the insurance policy would not be binding on the insurer unless the premiums thereon had been paid in full. Section 2 of the policy provides: '2. This policy including any renewal and/or endorsement thereon is not in force until the premium has been fully paid and duly receipted by the Company in the manner provided therein. x x x it is hereby declared, agreed and warranted that this policy shall be deemed effective valid and binding upon the Company when the premiums thereof have actually been paid in full and duly acknowledged in a receipt signed by any authorized official or representative!agent of the Company in such manner as provided herein.'

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Sec. 77

Thus, the insurance policy, including any renewal thereof or any endorsements thereon shall not come in force until the premiums have been fully paid and duly received by the Insurance Company No payment in respect of any premiums shall be deemed to be payment to the Insurance Company unless a printed form of receipt for the same signed by an Official or duly appointed Agent of the Company shall be given to the insured." (9) Tibay case in point. — "The case of Tibay vs. Court of Appeals (326 Phil. 931; 257 SCRA 126 [1996].) is in point. The issue raised therein was: 'May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?' In the said case, Fortune Life and General Insurance Co., Inc. issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo, on a two-storey residential building located at 5855 Zobel Street, Makati City, together with all the personal effects therein. The insurance was for P600,000.00, covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50, Violeta Tibay only paid P600.00, thus leaving a substantial balance unpaid. On March 8, 1987, the insured building was completely destroyed by fire. Two days later, or on 10 March 1987, Violeta Tibay paid the balance of the premium. On the same day, she filed with Fortune a claim for the proceeds of the fire insurance policy. In denying the claim of insurance, the Court ruled that 'by express agreement of the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to the occurrence of the risk insured against.' As expressly stipulated in the contract, full payment must be made before the risk occurs for the policy to be considered effective and in force. "No vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever resulted from the fractional payment of premium.'" (10) Factual situation in Makati Tuscany case different. — "The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of Appeals to support the contention that the insurance policies subject of the instant case were valid and effective. However, the factual situation in that case was different from the case at bar. In Tuscany, the Court held that the insurance policies were valid and binding because there was partial payment of

Sec. 78

CONTRACT OF INSURANCE Title 8. — P r e m i u m

the premiums and a clear understanding between the parties that they had intended the insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. On the basis of equity and fairness, the Court ruled that there was a perfected contract of insurance upon the partial payment of the premiums, notwithstanding the provisions of Section 77 to the contrary. The Court 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/' (11) No clear and definite agreement on the grant of a credit extension. — "In the case at bar, there was no clear and definite agreement between petitioner and respondent on the grant of a credit extension; neither was there partial payment of premiums for petitioner to invoke the exceptional doctrine in Tuscany. Hence, the circumstances in the above cited case are totally different from the case at bar, and consequently, not applicable herein." (12) Payment of premium a mandatory requisite. — "With regard to the contention that the absence of notice of nonrenewal of the policy resulted to the automatic renewal of the insurance policy we find the contention untenable. As above discussed, the law provides that only upon payment of the insurance premium will the insurance policy bind the insurer to the peril insured against and hold it liable under the policy in case of loss. Even in the absence of notice of non-renewal the assured would be bound by the law that a non life insurance policy takes effect only on the date payment of the premium was made. Verily, it is elemental law that the payment of premium is a mandatory requisite to make the policy of insurance effective. If the premium is not paid in the manner prescribed in the policy as intended by the parties, the policy is void and ineffective. {Pardo, ].) Sec. 78. An acknowledgment in a policy or contract of insurance of 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 pa» - (a) d

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Sec. 78

Effect of acknowledgment of receipt of premium in policy. (1) Waiver of condition of prepayment. — Where the policy or contract of insurance contains an acknowledgment of receipt of premium, the insurer cannot deny the truth of the receipt of the premium in an action against him on the policy even if it is actually unpaid and notwithstanding any stipulation making prepayment of the premium a condition precedent to the binding effect of the policy. The law establishes a legal fiction of payment. The reason for the rule is founded on the fact that when the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment, the acknowledgment being declared by law to be conclusive evidence of premium payment. (2) Recovery of premium if unpaid. — It must be noted, however, that the conclusive presumption extends only to the question of the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of the fact of such payment. In other words, the insurer m a y still dispute its acknowledgment but only for the purpose of recovering the premium due and unpaid. Whether payment was indeed m a d e is a question of fact. According to the Supreme Court, Section 78 should be interpreted as an exception to Section 77. (American H o m e Assurance C o m p a n y vs. Chua, 309 SCRA 250 [1999].) ILLUSTRATIVE CASE: Insurer accepted the promise of the insured who delivered a postdated check, to pay the insurance policy within 30 days. Facts: The insurer accepted the promise of the insured in the acknowledgment receipt to pay the insurance premium within 30 days from the effectivity date of a fire policy insurance on December 17, 1960, when the policy was delivered to the insured. On January 6,1961, in partial payment of the insurance premium, the insured delivered to the insurer a check for the amount of P1,000.00 postdated January 16, 1961. On January 18,1961, or two days after the insurance premium became due, the property insured was destroyed by fire.

Sec. 78

CONTRACT OF INSURANCE Title 8. — P r e m i u m

267

It appeared that the insurer tried to deposit the check only on February 20, 1961 and the same was dishonored by the bank for lack of funds although the records showed that as of January 19, 1961, the insured had a balance of Pl,193.00 with the bank. Issue: Is the insurer liable for the loss? Held: Yes. By accepting the promise of the insured to pay the insurance policy, the insurer implicitly agreed to modify the tenor of the insurance policy and, in effect, waived the provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the policy is silent as to the mode of payment, the insurer is deemed to have accepted the promissory note in the payment of the premium instead of cash. This rendered the policy immediately operative on the date it was delivered. The fact that the check was later on dishonored did not in any way operate as a forfeiture of the insured's right under the policy, in the absence of express stipulation thereon to that effect. The payment of the premium is an independent obligation the non-fulfillment of which would entitle the insurer to recover. Where credit is given by an insurance company for the payment of the premium it has no right to cancel the policy for nonpayment except by putting the insured in default and giving him personal notice. (Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134 [1975].) Note: See, however, Section 77.

Effect of acceptance of premium. Acceptance of premium within the stipulated period for payment thereof, including the agreed period of grace, merely assures continued effectivity of the insurance policy in accordance with its terms. Such acceptance does not stop the insurer from interposing any valid defense under the terms of the insurance policy, where such insurer is not guilty of any inequitable act or representation. There is nothing inconsistent between acceptance of premium due under an insurance policy and the enforcement of these terms. (Stokes vs. Malayan Insurance Co., Inc., 127 SCRA 766 [1984].)

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Sees. 79-82

Sec. 79. 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 perils 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. 80. 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 concerned. Sec. 81. A person insured is entitled to a return of the premium when the contract is voidable, on account of the 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; or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. Sec. 82. 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. When insured entitled to recover premiums. The insured has the right to recover premiums already paid or a portion thereof in the following cases: (1) When no part of the thing insured has been exposed to any of the perils insured against (Sec. 79[a].);

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CONTRACT OF INSURANCE Title 8. — P r e m i u m

269

(2) W h e n the insurance is for a definite period and the insured surrenders his policy before the termination thereof (ibid., [b].); (3) W h e n the contract is voidable because of the fraud or misrepresentations of the insurer or his agent (Sec. 81.); (4) W h e n the contract is voidable because of the existence of facts of which the insured was ignorant without his fault (ibid.); (5) W h e n the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud (ibid.); (6) W h e n there is over-insurance (Sec. 82.); and (7) W h e n rescission is granted due to the insurer's breach of contract. (Filipinas Compania de Seguros vs. Nava, 17 SCRA 216 [1966]; see Sec. 74; also Art. 1385, Civil Code.) In the cases mentioned in Nos. 1, 3, 4, and 5, the insured is entitled to a return of the entire premium paid. Of course, the insured cannot recover premiums unless they have actually been paid. Payment to insurer's agent is sufficient. The Code speaks of the return or refund of premium payments. Fees like documentary stamps tax and other taxes are not covered.

Where risk has never attached. Since premiums are paid in consideration of the assumption of specified risks by insurers, and since no premium is due unless the risk attaches, if the risk insured against does not or cannot attach, or if no part of the interest is subject to any of the specified perils, the insurer cannot claim or retain the premium thus paid, in the absence of any fraud or fault on the part of the insured. (43 Am. Jur. 2d. 951.) It would be contrary to the dictates of honesty and fair dealing to allow the insurer 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, (see Edillon vs. Manila Bankers Life Ins. Corp., 117 SCRA 187 [1982].) (1) Approval of application or acceptance of policy absent—Where the application for a policy was not approved, no premium can be recovered, and with respect to a policy requiring acceptance to be effective, the insured cannot be held liable for accruing

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Sees. 79-82

premiums if the policy is not accepted. (44 C.J.S. 1329.) And if the premium has previously been paid, it must be returned as no risk whatsoever has ever attached. If no risk attaches or contract results, there is no meeting of the minds of the parties on the subject matter of the insurance. (2) Loss occurs before effective date. — Where the insured pays in advance the annual premium on a certain property insured by him, the insurance to take effect on a certain date and the loss occurs before said date, the insured is entitled to a return of the whole premium. (3) Insured and insurer become public enemies. — Where the parties in a contract of insurance have become public enemies (see Sec. 7.) because of the existence of a state of war, justice requires that premiums paid after the declaration of w a r between the belligerent states be returned to the insured. War abrogates insurance contracts between citizens of belligerent states, and therefore, the insured is not entitled, notwithstanding the payment of premiums, to indemnity for loss occurring after such declaration of war. (see Filipinas Cia de Seguros vs. Christern Huenefeld & Co., Inc., 89 Phil. 54 [1951].)

Where insured surrenders policy before termination.

insured paid in advance for a year, cancels before the year ends.

Section 79(b) does not apply (1) where the insurance is not for a definite period (Sec. 80.); or (2) where a short period rate has been agreed upon; or (3) where the policy is a life insurance policy. If the insurance is for a definite period of time and the insured cancels his policy by surrendering his policy (provided this is allowed under the policy), the insured is entitled to recover the premiums already paid equivalent to the unexpired term at a pro rata rate. In other words, the insurer shall refund the unearned premium in proportion to the unexpired period, retaining only the earned portion corresponding to the portion expired. But there shall be deducted from the whole premiums any claim for loss or damage under the policy which has previously accrued.

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CONTRACT OF INSURANCE Title 8. — P r e m i u m

271

EXAMPLE: X insures his house for one year and pays the amount of PI6,000.00 corresponding to the premium for one year. If after the lapse of three months, X surrenders his policy, he shall be entitled to collect 3 / 4 of the premium paid or P12,000.00 representing the portion of the premium for the unexpired period of the policy. Now, suppose that the insurance of the house also covers furniture, some of which were burned prior to the cancellation of the policy and the insured paid the amount of P4,000.00 for the damage. In this case, the sum of P4,000.00 shall be deducted from P16,000.00 thereby leaving a balance of P12,000.00. X will thus be entitled to a return of P9,000.00 which is 3 / 4 of P12,000.00.

Where short period rate has been stipulated. An insurance policy is often cancelled either by the insurer or by the insured before its expiration. If a policy on which premiums have been paid for a year is cancelled by the insurer before the expiration of the year, it retains only a proportion of the annual premium that the expired time bears to the entire time. If the policy is cancelled by the insured, the pro rata return of premium will not be followed if the policy stipulates a short period rate, in which case, the insured is entitled to return of the premium in the proportion stipulated. A short period rate clause appears in most fire policies. The following is an example: "It is hereby agreed that, in the event of this policy being surrendered by the insured for cancellation, the company shall retain a premium in accordance with the following scale for the time the policy has been in force." Then follows the scale, e.g.: For 1 month or less For 2 months For 3 months For 4 months For 5 months

2

0

3

0

4

0

5

0

6

0

percent percent percent percent percent

of the Annual Rate of the Annual Rate of the Annual Rate of the Annual Rate of the Annual Rate

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For 6 months For 7 months For 8 months For 9 months For 10 months For 11 months

70 75 80 85 90 95

percent percent percent percent percent percent

Sees. 79-82

of the Annual Rate of the Annual Rate of the Annual Rate of the Annual Rate of the Annual Rate of the Annual Rate

Right to recover premiums as to life insurance. Recovery of premiums paid is not allowed in life insurance if the insured surrenders his policy. The reason is that life insurance is not a divisible contract. It is not an insurance for a single year, with a privilege of renewal from year to year by paying the annual premium but that it is an entire contract of insurance for life subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums. There is no proper relation between the annual premium and the risk of assurance for the year in which it is paid. Each installment is, in fact, part consideration of the entire insurance for life. It is the same thing where the annual premiums are spread over the whole life. The value of assurance for one year of a man's life when he is young, strong and healthy is manifestly not the same when he is old and decrepit. (Vance, op. cit., pp. 298-299.) However, the insured will be entitled to receive the "cash surrender value" of his policy "after three full annual premiums shall have been paid." (Sees. 227[f], 230[f].)

Where risk has attached. (1) Whole premium considered as earned. — The general rule is that the insurance granted is the entire consideration for the premium received; hence, if the risk has attached by reason of the contract's becoming binding upon the insurer, the whole premium must be considered as earned and, therefore, cannot be apportioned in case the risk terminates before the end of the term for which the insurance was granted. (Vance, op. cit., p. 347.) Thus, in the absence of any agreement to the contrary, "if a peril insured against has existed, and the insurer has been liable for

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273

any period, however short, the insured is not entitled to return of premiums so far as that particular risk is concerned." (Sec. 80; see Sec. 77.) EXAMPLE: X procures insurance upon a certain vessel against the perils of the sea (see Sec. 99.) for a voyage from Manila to London. The voyage is to last for 5 days. If X cancels the policy two days after the voyage has commenced, no portion of the premium is returnable because the thing insured has already been exposed to the perils insured against. (2) Where insurance divisible. — Of course, if the contract of insurance is divisible, consisting of several distinct risks for which different amounts of premiums have been paid (see Sec. 22; Art. 1420, Civil Code.), the premium paid for any particular risk is not earned until that risk has attached. EXAMPLE: Suppose the insurance procured by X upon his vessel contemplates a voyage in three (3) different stages (Sec. 117.) — from Port A to Port B, then to Port C, and finally, to Port D — and X paid a different amount of premium as regards each portion. In this case, the contract of insurance is divisible. If X cancels the policy after the vessel reaches Port A, he can recover the premiums corresponding to the two (2) other stages of the voyage as to which no risk has been assumed by the insurer, (see Sec. 79[b].)

Where the contract is voidable. (1) Fraud of the insurer or his agent. — If the policy is induced by the fraud or misrepresentation of the insurer, or his agent, the insured may, by timely action, rescind the contract and demand the return of the premiums paid by him. (Sec. 78.) EXAMPLES: (1) Where the insured is induced to take out an insurance upon the representation of the insurer's agent that the policy will be issued to him within one month, the insured may refuse

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the contract and recover back the premiums paid by him if the policy is not issued within said period. (2) Where the insurer's agent represents that in case the applicant for life insurance becomes incapacitated due to an accident, the company will pay him a monthly pension of P1,000.00 during the period of his incapacity, the insured is entitled to a return of the premium if the policy issued states nothing about this point because the policy is different from that applied for. (2) Other grounds. — The insured is also entitled to a return of the premiums when the contract is voidable "on account of facts, the existence of which the insured was ignorant without his fault; or when, by any default of the insured other than actual fraud, the insurer never incurred liability under the policy." (Sec. 81.) EXAMPLES: (1) Where the insured pays insurance premiums on his vessel not knowing that it has already been lost, he can recover back the premiums so paid in the absence of stipulation in the policy that the insurer will remain liable even if the vessel is already lost. (2) Where the insured takes a policy on a vessel under repair and pays the premium in advance but for reasons not due to actual fraud on his part, the repair of the vessel is not completed on the date when the voyage is to start, the insured, in the absence of any contrary stipulation, may recover the premium already paid. (3) Fraud of the insured. — The insured is not entitled to a return of the premium paid if the policy is annulled by reason of fraud or misrepresentation of the insured. Section 81 impliedly prohibits the return of the premium where the policy is annulled by reason of the fraud of the insured. (De Leon vs. The Crown Life Ins. Co., [C.A.] No. 41482, June 2 0 , 1 9 3 9 . )

Where there is over-insurance. In case of over-insurance by double insurance (see Sec. 93.), the insurer is not liable for the total amount of insurance taken,

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his liability being limited to the amount of the insurable interest on the property insured. Hence, he is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured. The premiums to be returned where there is over-insurance by several insurers shall be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. (Sec. 82.) EXAMPLE: Suppose X insures his house which has an insurable value of Pl,500,000.00 as follows: Insurer

Amount of insurance

Premiums paid

A Co.

Pl,200,000.00

P24,000.00

B Co.

600,000.00

12,000.00

Pl,800,000.00

P36,000.00

In this case, there is an over-insurance of P300,000.00, the amount by which the aggregate sum insured in the two policies exceeds the insurable value of the house. The proportion is P300,000.00 to Pl,800,000.00 or 1 / 6 . Hence, 1 / 6 of P24,000.00 or P4,000.00 is what A Co. must return; and 1 / 6 of P12,000.00 or P2,000.00 is what B Co. must return. Since the insurable interest of X is only Pl,500,000.00; he cannot recover the whole of the amount insured in case of loss.

Where insurance is illegal. When the insurance is void because it is illegal, the general rule is that the premiums cannot be recovered. But if, in fact, the parties are not in pari delicto, the law will allow an innocent insured to take again his premiums as when the insured was ignorant of the facts which rendered the insurance illegal. It is also held that where one, having no insurable interest in the life insured, paid premiums in the bona fide belief induced by the fraudulent statement of the insurer, that such insurance

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was valid, he may recover the premiums paid despite the fact that the contract was illegal. But it is otherwise when the insured was a conscious party to the wrong. (Foster vs. Metropolitan Life Ins. Co., 35 N.E. 849; Vance, op. cit, pp. 351-352; Arts. 1411-1412, Civil Code.) Basis of right to recover premiums. With regard to return of premium for short interest, overinsurance, and double insurance, the basis is this: (1) Insurer could have been called to pay the whole sum insured. — If the insurer could at any time, and under any conceivable circumstances, have been called on to pay the whole sum on which he has received premium, in such case the whole premium is earned and there shall be no return; (2) Insurer could have been called to pay only part of the whole sum insured. — If, on the other hand, he could never in any event have thus been called on to pay the whole, but only a part of the amount of his subscription — say a half or a fourth — he ought not retain a larger proportion than one-half or one-fourth of the premium and must return the residue. (Arnould on Marine Insurance, cited by Vance, p. 351.)

— oOo —

Title 9 LOSS Sec. 83. 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, (a) Claim in insurance defined. Claim m a y be defined as a demand for the satisfaction of a loss suffered within the purview of an insured's policy. It m a y be m a d e by the party insured, the insurer with right of subrogation, or a non-party but with a right against the insured. Effect of agreement not to transfer claim of insured after a loss. Before a loss has occurred, an insurance policy, except a life insurance policy (see Sec. 181.), is not assignable without the consent of the insurer on the theory that the policy is a personal contract between the insured and insurer. After a loss has occurred, the insured has an absolute right to transfer or assign his claim against the insurer. A stipulation which attempts to prohibit such transfer of a policy is void. (1) Agreement hinders free transmission of property. — Such a stipulation is void as against public policy for it hinders the free transmission of property from one person to another. (West Branch Ins. Co. vs. Holfenstain, 40 Pa. St. 289; see Sec. 21.) (2) Transfer involves but money claim or right of action. — After the loss has been suffered, the policy or right thereunder may be assigned without the consent of or notice to the insurer for in 277

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Sec. 84

such case, it is not the personal contract which is being assigned, but a money claim under or a right of action on the policy. (Ocean Acci. & G. Corp. vs. Southwestern Bell Teleph. Co., 122 A.L.R. 133.) (3) Transfer involves no question of moral hazard. — Such assignment of the right to collect from the insurer involves no question of moral hazard (i.e., risk of loss being deliberately or carelessly caused by the insured) because it cannot increase the insurer's risk for a loss that has already occurred. Once a loss has occurred, the duty of the insurer to pay the insurance proceeds is fixed and the transfer does no h a r m to its duty. Section 173, however, prohibits the transfer of a policy of fire insurance to any person or company w h o acts as an agent for or otherwise represents the issuing company and declares such transfer void insofar as it m a y affect other creditors of the insured. Sec. 84. 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 of which the peril insured against was only a remote cause, (a) Loss in insurance defined. Loss may be defined as the injury, damage, or liability sustained by the insured in consequence of the happening of one or more of the perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. Scope of loss. The word "loss" in insurance law embraces bodily injury, including death, or property damage or destruction, (see Bonifacio Bros. vs. Mora, 20 SCRA 261 [1969].) It also includes loss of income or profits and legal liability to a third party. In reinsurance, loss refers to the reinsurer's share of the loss on risks ceded either automatically or facultatively (see Sec. 96.)

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Liability of insurer for loss. (1) Extent of loss. — H o w much the insurer will pay depends upon whether the insured suffers a loss and the extent of that loss. (Riegel, Miller & Williams, op. ext., p. 37.) As to extent, loss m a y be total, partial, or constructive total, (see Sees. 127-131.) It is satisfied by payment of the loss, reinstatement (repair or restoration) of the property lost or damaged, or its replacement (substitution) with another similar property, (see Sec. 172) 1

(2) Cause of loss. — The insurer assumes liability only for a loss proximately caused by the perils insured against although a peril not insured against m a y have been a remote cause of the loss. (Sec. 84.) But the insurer is still liable even if the proximate cause is not the peril insured against if the immediate cause is the peril insured against, (see Sec. 86.) (3) Burden of proof where loss has occurred. — The insurer has the burden of proof to show that he is not liable. Where the insurer denies liability for a loss alleged to be due to a risk not insured against, but fails to establish the truth of such fact by concrete proofs, the insurer is liable under the terms and conditions of the policy by which it has bound itself. (Heirs of I. Coscolluela vs. Rico General Insurance Corp., 179 SCRA 511 [1989].) Stated elsewise, if a proof is made of a loss apparently within a contract of insurance, the burden is upon the insurer to prove by a preponderance of evidence, that the loss arose from a cause with is excepted or for which it is not liable, or from a cause lr

rhe a m o u n t of loss payable is affected by stipulations in the policy such as "franchise clause" in a marine c a r g o policy under which no loss is payable if it does not reach a certain amount, otherwise the entire loss is payable; "co-insurance clause" in fire insurance (see Sec. 172.)"; "deductible clause" in motor vehicle insurance against loss or damage which provides for the deduction of a stipulated amount from the d a m a g e payable; and "contribution clause" in case of double insurance, (see Sec. 94[1].) The deductible clause is a standard feature in the l o s s / d a m a g e s cover in motor vehicle insurance and m a y vary depending on the m a k e / t y p e and classification of the vehicle. By making the insured shoulder the amount of the deductible stipulated in the policy, small "nuisance claims" are eliminated and this in the long run helps provide for lower insurance premium. The insurer is liable only in excess of the deductible or the stated amount to be deducted from the loss. Furthermore, the insure shoulders a portion of the cost of brand new parts to replace damaged parts of his depreciated parts. He is charged with what is called "depreciation" or "betterment" for the improvement on his vehicle. Insurance is for indemnity and not for profit.

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which limits its liability. (Country Bankers Insurance Corporation vs. Lianga Bay and Multi-Purpose Cooperative, Inc., 374 SCRA 653 [2002]; DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network, Inc., 480 SCRA 314 [2006].)

Meaning of proximate cause. Proximate cause is that which, in a natural and continuous sequence, unbroken by any new independent cause, produces an event and without which the event would not have occurred. (Milwaukee vs. Kellog, 94 U.S. 469.) It is to be observed that the proximate cause is the efficient cause — the one that sets others in motion — to which the loss is to be attributed, although other and incidental causes m a y be nearer in time to the result and operate more immediately in producing the loss. (Lanasa Fruit S.S. & Importing Co. vs. Universal Ins. Co., 302 U.S. 556.) Proximate cause is not, therefore, equivalent to "immediate cause." 2

The doctrine of proximate cause has been defined as follows: "Was there an unbroken connection between the wrongful act and the injury, a continuous operation? Did the facts constitute a continuous succession of events, so linked together as to make a natural whole, or was there some new and independent cause intervening between the wrong and the injury?" (Milwaukee vs. Kellog, supra.) The question that needs to be asked is: If the event did not happen, could the injury have resulted? If the answer is NO, then tthe event is the proximate cause. (Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].)

2

Proximate cause has a different m e a n i n g in insurance case than it h a s in tort cases. In the latter, the rules of p r o x i m a t e cause are applied for the single p u r p o s e of fixing culpability and for that reason, the rules consider both the injury and the principal cause to fix the blame on those w h o created the situation in which the physical laws of nature operated; in the former, the concern is not with the question of culpability or w h y the injury occurred, but only with the nature of the injury and h o w it h a p p e n e d . If the nearest efficient cause of the loss is one of the perils insured against, the courts look no further; if it is not a peril insured against, recovery m a y nevertheless be had if the dominant cause is a risk or peril insured against. (43 A m . Jur. 2d. [Rev.] 526.)

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EXAMPLES: (1) If fire causes an explosion which results in a loss, fire is the proximate cause of the loss (Scripture vs. Lowell Mut. Fire Ins. Co., 57 Am. Dec. 11.) while explosion is the immediate cause. The insurer is liable where either peril is covered by the policy, (see Sec. 86.) (2) If a house is insured against fire and it is damaged by the falling of a wall of a neighboring building (a peril not contemplated by the contract) which is on fire, the fire is the proximate cause although no part of the insured house is actually on fire. (3) Even if the fire results only after the fall of the building and as a consequence of such, nevertheless, the damage, so far as it is attributable to the fire and not merely to the falling of the building, is a loss by fire. Here, the fire is the immediate cause of the loss. (4) If, however, the fall of the building, although it occurs after a fire, is not the result of the fire, the loss is not covered by the policy. (45 C.J.S. 865.) In this case, fire is just the remote cause of the loss for which an insurer is not liable. (5) An accidental injury resulting in hernia which forced the insured, as a last resort, to submit to a surgical operation which turns out to be unsuccessful, is the proximate cause of the death and not the surgical operation. (Travelers' Ins. Co. vs. Murray, 16 Colo. 296.) Here, there is an unbroken chain of causation between the accident and the death without the intervention of any new and independent cause so that the death is the direct and natural consequence of the accident.

Hostile and friendly fires explained. In determining the liability of the insurer against damage by fire, it is necessary to make a rather subtle distinction between fires that are "hostile" and those that are "friendly." The dividing line is somewhat indistinct in detail under the cases, but the traditional definition is as follows. 3

(1) When fire a friendly fire. — So long as a fire burns in a place where it was intended to burn, and ought to be, it is to be 3For definition of fire, see annotation under Section 167.

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regarded as merely an agency for the accomplishment of some purpose and not as a hostile peril. It is a friendly fire. (a) Thus, a fire burning in a furnace, or a stove, or a lamp, is considered a friendly fire; and damage that may be caused by such fires, due to their negligent management, is not considered to be within the terms of the policy. (Vance, op. cit., p. 869.) (b) So it has been held that damage caused by smoke issuing from a lamp that is turned up too high (Fitzgerald vs. Ferman Ins. Co., 62 N.Y.S. 824.) or from a stove pipe that is defective (Cannon vs. Phoenix Ins. Co., 35 S.E. 775.), or by soot or smoke issuing from a defective furnace (Levitt vs. Hartford Country Mut. Fire Ins. Co., 136 A. 572.) is not to be considered as directly caused by fire. The principle underlying these cases is simply that the policy shall not be construed to protect the insured from injury consequent upon his negligent use or management of fire, so long as it is confined to the place where it ought to be. (American Towing Co. vs. German Fire Ins. Co., 21 A. 553.) (2) When fire a hostile fire. — It is hostile when it occurs outside of the usual confines or begins as a friendly fire and becomes hostile by escaping from the place where it ought to be to some place where it ought not to be. (a) Therefore, where a fire in a chimney, due to the ignition of soot there, caused soot and smoke to issue from the stove so as to d a m a g e the property insured, the court very properly held the d a m a g e due to a hostile fire. (Way vs. Insurance Co., 43 N.E. 1032.) The fire was intended to burn in the stove and not in the chimney. (b) Likewise, where flames escaped through a crack in a stove releasing a sprinkle head above, the insurer was held liable for the issuing loss. (Pappadakis vs. Netherlands Fire Ins. Co., 242, P. 641.) (c) It has also been held, and with good reason, that even though a fire may remain entirely within its proper place, it m a y become hostile if it, by accident, becomes so excessive as to be beyond control (In O'Connor vs. Queen Ins. Co.,

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122 N.W. 1038.); and when oil leaked from the furnace, the court properly held that the fire was hostile. (Giambaloo vs. Phoenix Ins. Co., 36 N.Y.S. 2d 598.) (d) A fire caused by a lighted cigarette on a rug is, of course, a hostile fire. (Swerling vs. Connecticut Fire Ins. Co., 180 A. 343.) But recovery would not be allowed for damage to a rug accidentally dropped on a burning stove. In this case, the d a m a g e is caused by a friendly fire. Sec. 85. An insurer is liable where the thing insured is rescued from a peril insured against that 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. Extension of principle of proximate cause. Under Section 85, the insurer is liable in two cases: (1) Where the loss took place while being rescued from the peril insured against. — The insurer is liable where the insured is permanently deprived of the possession, in whole or in part, of the thing insured by a peril not insured against provided it is shown that said property would have been lost by the peril insured against had there been no attempt to rescue it. Thus, the loss of goods by theft during the removal of the goods to save them from loss by fire is covered by a policy against fire (Queen Ins. Co. vs. Paterson Drug Co., 74 So. 807.) unless, of course the policy itself contains a stipulation exempting the insurer from liability for such loss. (Caceres vs. New India Assur. Co., [C.A.] 36 O.G. 3114.) (2) Where the loss is caused by efforts to rescue the thing insured from a peril insured against. - Here, it is the efforts to rescue the thing that caused the loss. (a) Thus, damages to goods by being trampled on or thrown about in the efforts to put out the fire are covered by

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the policy of fire insurance. (Cohn vs. National Ins. Co., 70 S.W. 259.) (b) The insurer is also liable for loss caused by preparing the goods for removal from the premises although they are not actually carried out if at the time the work of removal is begun, the property is in such danger of fire that a reasonably prudent man would attempt to protect it. (Ins. Co. of North America vs. Leader, 48 S.E. 972.) (c) So also, damage to the insured property caused by water during attempt to save it from fire is generally regarded as resulting directly from the fire itself and as making the insurer liable therefor. (Cohn vs. National Ins. Co., 70, supra.) But the insured is bound to exercise a reasonable degree of care in removing the goods. The necessity for removal is to be determined not by the result alone but by the circumstances as they appear to the interested persons at the time of the fire. (White vs. Republic Fire Ins. Co., 57 Me. 91.) EXAMPLE: X was issued a fire insurance policy covering his house and its contents. At about 10 o'clock in the evening, the house caught fire and was partially destroyed. Much of the furniture was carried out of the house and left in the yard. During the night, some of the furniture was stolen. Is X entitled to recover for this later loss? No. The loss is not covered by Section 85 since the loss did not take place "in the course of such rescue" nor "caused by efforts to rescue [the furniture] from a peril insured against." Sec. 86. 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. Where proximate cause is an excepted peril. The insurer is not liable if the proximate cause of the loss is a peril excepted from the policy although the immediate cause

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is a peril not excepted. Thus, in a fire insurance policy which excludes loss through explosion, if an explosion occurs first and causes a fire which results in a loss, the insurer is not liable. In this case, the proximate cause of the loss is "explosion" which is an excepted peril; "fire" is the immediate cause but not the "proximate cause." However, if a hostile fire occurs and causes an explosion, then, "fire" is the proximate cause and the insurer is liable for the loss caused by the "explosion" notwithstanding the exception. It has been held 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. (Paris-Manila Perfumery Co. vs. Phoenix Assur. Co., 49 Phil. 753 [1926].) Sec. 87. 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 insured's agents or others. Loss by willful act or through connivance of insured. The insurer is not liable for a loss caused by the intentional act (e.g., suicide) of the insured or through his connivance. Such loss is not within the contemplation of a contract of insurance one of the requisites of which is that the risk should not be subject in any wise to the control of the parties, (see Sec. 3.) Thus, when the insured intentionally burns the insured goods and submits fraudulent proof of loss, the policy is avoided.^ (Prats & Co. vs. Phoenix Ins. Co., 52 Phil. 807 [1929]; East Furniture Co. vs. Globe & Rutgers Fire Ins. Co., 57 Phil. 576 [1932].) EXAMPLE: The insured conspired or designed to destroy the property insured. The property was burned before such conspiracy or design could be carried out. Presidential Decree No. 1613 enumerates the circumstances any of which shall constitute prima facie evidence of arson, (see note to Sec. 172.)

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Is the insurer liable? Yes, because the loss was not "caused by the willful .act or through the connivance of the insured." ILLUSTRATIVE CASE: Wife started a fire that damaged the house and some of its contents. Facts: H had an argument with his wife, W, and left his home. After he left, W started a fire that damaged the house and some of its contents. H filed a claim on the insurance policy that covered the house. The policy was in the names of H and W. Issue: Can H, an innocent co-insured, collect the policy when the jointly insured party started the fire. Held: Yes. H was not guilty of wrongdoing. When an insurance policy is ambigiuous or unclear, it must be construed against the insurer. The intentional destruction of the property by one of the co-insured should not be interpreted to deny recovery by the other co-insured unless the policy specifically so states. Since the policy does not so state, H is entitled to recovery for the damages to his property interest as covered by the policy. (Ryan vs. MFA Mutual Insurance Company, 610 SW2d 428 [lean. App. 1980.) Note: This was a case of first impression in Tennessee. The former majority among states was that the innocent insured was barred from recovery because of tthe wrongdoing of the other co-insured. Allowing the innocent party to recover would not benefit the wrongdoer in this case. Furthermore, when an insurance policy is unclear, it must be construed against the insurer. The policy here did not specifically state that the intentional destruction of the insured property by one of the co-insured would bar recovery by the other innocent co-insured. Loss caused by negligence of insured. (1) Where there is ordinary negligence. — 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. (FGU Insurance Corporation vs. Court of Appeals,

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454 SCRA 337 [2005].) The doctrine of contributory negligence does not in any w a y apply to rights under a contract of insurance. (Richards v. Standard Acc. Ins. Co., 200 R 1017.) (a) Mere negligence or carelessness on the part of the insured or of his servants, although directly causing or contributing to the loss, usually is one of the risks covered by the insurance and does not relieve the company from liability. (Ibid.) In a case where the insured lighted some straw under the barn in order to smoke out bees, and the fire rapidly spread and destroyed the property, it was held that the insured could recover for loss by fire of his b a m and its contents. (Johnson vs. Bershire Mut. Ins. Co., 4 Allen 328.) (b) An insurance policy would be of little value if it is permissible to set up a defense in every case where negligence could be shown. (Pool vs. Ins. Co., 65 N.W. 54.) "An overwhelming percentage of all insurable loss sustained because of fire can be directly traced to some act or acts of negligence. Were it not for the errant human element, the hazards insured against would be greatly diminished. It is in full appreciation of these conditions that the property owner seeks insurance and it is after painstaking analysis of them that the insurer fixes his premiums and issues the policies. It is in recognition of this practice that the law requires the insurer to assume the risk of negligence of the insured and permit recovery by an insured whose negligence proximately caused the loss." (Federal Ins. Co. vs. Terminal Trail Tours, Inc., 117 F. 2d 794 [1941].) (2) Where there is gross negligence. — But gross negligence or recklessness on the part of the insured, the consequence of which must have been palpably obvious to him at the time, will relieve the insurer from liability. This would be true, for example: (a) where the insured, in his own house, sees the burning coals in the fireplace roll down on his wooden floor and does not brush them up; or (b) where the insured sees a small fire start and makes no attempt to put it out (Gove vs. Farmer's Mut. F. Ins. Co., 97 Am. Dec. 572.); or

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(c) where a building is voluntarily set on fire to save other buildings from the effect of a conflagration and no efforts are taken to save personal property in the building although there is ample time. (First Nat. Bank vs. German Am. Ins. Co., 134 N.W. 873.) To what extent the insured's negligence must go in order to constitute gross carelessness or recklessness and thereby exonerate the insurer from liability must be evaluated in light of the circumstances surrounding each case. (FGU Insurance Corporation vs. Court of Appeals, supra.)

— oOo —

Title 10 NOTICE AND PROOF OF LOSS

Sec. 88. 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, (a) Sec. 89. 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. oral notice of loss is sufficient

Conditions before loss. 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. If he 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 can not recover. The terms of the contract constitute the measure of the insurer's liability, and noncompliance therewith by the insured bars his right of recovery. (Young vs. Midland Textile Insurance Co., 30 Phil. 617 [1915]; Stokes vs. Malayan Insurance, Co., Inc., 127 SCRA 766 [1984].) Thus, where a fire insurance policy required, as one of its conditions, the insured to give notice of other insurance, if any, upon the same property, in the absence of such notice, notwithstanding that there are other insurance policies on the property, the policy is null and void, and the insured cannot 289

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recover. (Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., Inc., 47 SCRA 271 [1972].) Similarly, where the policy provides that it shall be void if the insured shall procure any other insurance on the property without the consent of the insurer, the violation of the condition renders ipso facto the policy void. (Pioneer Insurance & Surety Co. vs. Yap, 6 SCRA 246 [1974].) As has been stated: "The insurance contract m a y be rather onerous but that in itself does not justify the abrogation of its express terms, which the insured accepted or adhered to and which is the law between the contracting parties." (Misamis Lumber Corp. vs. Capitol Insurance & Surety Co., Inc., 17 SCRA 228 [1966].)

Conditions after loss. (1) Notice and proof of loss. — Sections 88 and 89 establish conditions concerning matters after the loss that must be fulfilled before the insured becomes entitled to the benefit of the policy, namely: notice of loss must be given to the insurer (Sec. 88.) and when required by the policy, a preliminary proof of loss must likewise be given. (Sec. 89.) While an insured, in submitting his proof of loss is "not bound to give such proof as would be necessary in a court of justice" under Section 88, the same section does not give him any justification for submitting false proofs. (Yu Ban Chuan vs. Fieldmen's Insurance Co., Inc., 4 SCRA 491 [1965].) In some life and accident policies, a provision is included requiring that a certificate of the attending physician of the insured be furnished as a part of the proof of death, (see Sec. 92.) (2) Nature. — While in the form of conditions precedent, they are in nature 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 his contract is altogether contingent, but with the happening of the capital fact of loss, his liability arises and becomes properly fixed. (3) Construction. — All those conditions in the policy-making requirements of the insured after the loss are intended merely for evidential purposes and do not properly form any part of the conditions of liability. Such being the nature of these conditions,

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it is manifested 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. (Vance, op. cit, p. 894.) Indeed, with regard the submission of documents to prove loss, substantial, not strict compliance with the requirements will always be deemed sufficient. (Finman General Assurance Corporation vs. Court of Appeals, 361 SCRA 214 [2001].)

Meaning and purpose of notice of loss. (1) Notice of loss is the more or less formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against. (2) The purpose of a notice of loss is to apprise the insurance company with the occurrence of the loss, so that it m a y gather information and make proper investigation while the evidence is still fresh, and take such action as may be necessary to protect its interest (see 45 C.J.S. 1182.) from fraud or imposition; in the case of property insurance, to prevent further loss to the property.

Necessity of notice of loss. It is obvious that the insurer cannot be held liable to pay a claim unless he receives notice of that claim. Under the law, if notice of loss is not given to the insurer by the person insured or by the person entitled to the benefit of the insurance without unnecessary delay, or in a timely manner, the insurer is exonerated (Sec. 88.) or discharged from liability even though the loss is one the policy was designed to protect against. It is immaterial that if the notice is not given, the company would not be prejudiced; and if given, the company would not be benefited. It has been held that formal notice of loss is not necessary if the insurer already has actual notice (Fidelity-Phoenix F. Ins. Co. vs. Friedman, 174 S. W. 215.), but there is authority to the contrary. (Col. Sav. Bank vs. American Surety Co., 87 P. 118.)

Time for giving notice of loss. The notice must be given "without unnecessary delay." (Sec. 88.) It has been held that a requirement of the policy that notice

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of loss be given immediately or forthwith requires the giving of notice within a reasonable time. (Bachrach vs. Britain Am. Assur. Co., 17 Phil. 555 [1910].) What constitutes a reasonable time for giving notice depends on the circumstances of the particular case although the courts construe the requirement of immediate notice liberally in favor of the insured. Thus, notice will be considered as given immediately, forthwith, as soon as possible or "without unnecessary delay," if it has been given "as soon as circumstances permitted the insured, in the exercise of reasonable diligence, to communicate." (Vance, op. cit., p. 895.) The insurance contract m a y provide that the notice of loss shall be given within a stated time after the loss occurs and that failure to give the notice within such time shall preclude recovery. Such provision is valid provided the time so fixed is not unreasonably short.

Meaning and nature of proof of loss. (1) Proof of loss is the m o r e or less formal evidence given the company by the insured or claimant under a policy of the occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its liability and the amount thereof. 1

(2) It is not what is known in the law of evidence as "proof" or "evidence" for the consideration of the trial court, and it does not stand for proof in court. (45 C.J.S. 1182.) Loss and its amount m a y be determined on the basis of such proof as m a y be offered by the insured which need not be of such persuasiveness as is required injudicial proceedings. (Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 154 SCRA 672 [1987].)

Form of notice or proof of loss. The law does not make any requirement as to the form in which notice or proof of loss must be given. Accordingly, in the

l

\n the case of the "no fault" indemnity in C o m p u l s o r y M o t o r Vehicle Liability Insurance, see Section 378 (ii).

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absence of any stipulation in the policy, notice or proof m a y be given orally or in writing. However, it is advisable to give the notice or proof in writing for the protection of the insured or his beneficiary. The notice of loss m a y be in the form of an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment.

Purpose of proof of loss. The notice of loss is distinct from the proof of loss. The requirement of notice is intended merely to give the insurer information upon which he m a y act promptly in protecting the property from further loss for which he m a y be liable or to enable him to take any other immediate steps that his interests m a y require. (Vance, op. cit., 895.) The statement of loss is, however, a very much more formal requirement, and intended not only: (1) to give the insurer information by which he m a y determine the extent of his liability but also; (2) to afford him a means of detecting any fraud that m a y have been practiced upon him; and (3) to operate as a check upon extravagant claims. (Ibid.) The insurer or the insured may avail of the services of adjusters in effecting the settlement of an insurance claim, (see Sec. 324.)

Burden of proof of loss in court action. If the insured has the burden of proving that he has sufficed a loss and in life insurance, death of the insured must be proven. In an action on a fire insurance policy to recover the value of goods alleged to have been destroyed by fire, it devolves upon the plaintiff to prove the amount of his loss by a preponderance of evidence. (Go Ly vs. Yorkshire Ins. Co., 43 Phil. 633 [1922].) In this connection, the cost price is competent evidence to show the value of articles destroyed by fire. (LaO vs. Yek Tong Lin Fire & Marine Ins. Co., 55 Phil. 386 [1930].)

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But an inventory of goods destroyed by fire is a mere claim for loss and, where the insurer denies liability, does not certainly constitute evidence of loss. Testimony or evidence must be given to sustain the correctness of the claim. This is particularly true where the insurer's inventory was prepared with the intervention of the insured. Its falsity is evidence of the fraudulent character and the unmeritoriousness of the insured's claim. (Yu Ban Chuan vs. Fieldmen's Insurance Co., Inc., 14 SCRA 491 [1965].) Excuses for non-compliance with conditions. Timely compliance with the conditions is required as a condition precedent to the right to recover under the policy. However, failure on the part of the insured to comply strictly with their terms will be excused when the circumstances were such as to make strict compliance impossible. Thus, failure to give notice and proof of loss will be excused when it is due to the death or incapacity of the insured or the fact that the beneficiary had no knowledge of the existence of the policy of the insured w h o died before the fire. (Vance, op. cit., p. 901.) Where, for example, the heirs did not know about the fire policy, their delay in giving notice of loss to the insurer and furnishing proof of loss should not defeat their right to recover on the policy. Sec. 90. 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. When defects in notice or proof deemed waived. Proofs of loss satisfactory to the insurer are required to be given. But the insurer must be satisfied when the insured has done all in his power to furnish the information stipulated for in the policy. It is the duty of the dissatisfied insurer to indicate the defects in the proofs of loss as given, so that the deficiencies m a y be supplied. His retention of the defective proofs constitutes a

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CONTRACT OF INSURANCE Title 10. — Notice a n d Proof of Loss

295

waiver of his objections, (ibid., pp. 893-894.) Thus, there is waiver where the insurer: (1) Writes to the insured that he considers the policy null and void as the furnishing of the notice or proof of loss would be vain and useless (Bachrach vs. British A m . Ins. Co., 17 Phil. 555 [1910].); or (2) Recognizes his liability to pay the claim (45 C.J.S. 1209.); or (3) Denies all liability under the policy (Vance, op. cit., p. 894.); or (4) Joins in the proceedings for determining the amount of the loss by arbitration, making no objections on account of notice and preliminary proof (Carol vs. Gerard Fire Ins. Co., 13 Pac. 863.); or (5) Makes objection on any ground other than a formal defect in the preliminary proof. (McMasters & Bruce vs. Westchester County Mut. Ins. Co., 25 Wend. 397.) It has been held that a general statement that proofs are defective is not sufficient to impose on the insured the duty to supply defects not pointed out. (Ins. Co. of N. A m . vs. Hope, 58 111. 75.) Sec. 91. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his, or if he omits to take objection promptly and specifically upon that ground. When delay in presentation of notice or proof deemed waived. By the provisions of Section 91, waiver of delay in the presentation of notice or proof of loss may be made: (1) by an act of the insurer; and (2) by failure to take objection promptly and specifically upon that ground. An insurance company, by accepting payment of premium with full knowledge that the premises had been injured or destroyed by fire, is estopped from claiming that notice of the fire

296

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sec. 91

was not given forthwith to the insurer by the insured as required by the terms of the policy. (Emery vs. Svea Fire Ins. Co., 20 Pac. 88.) If the insured has attempted to comply with the stipulations of the policy and the company makes objections which necessitate amended or supplemental proofs, the insured will be allowed a reasonable time after he is appraised thereof within which to remedy the defects regardless of the time prescribed by the policy for furnishing proofs. (McCarvel vs. Phoenix Ins. Co., 66 N.W. 367.) ILLUSTRATIVE CASE: Instead of invoking delay, insurer took steps to determine cause and extent of loss. Tacts: The loss occurred on March 29, 1963. The notice of loss sent by the insured, although dated April 4, 1963, was received by the insurer only on April 15, 1963. It requested its adjuster to investigate and assess the loss on July 17, 1963. The adjuster submitted his report on August 23, 1963 and his computation of insurer's liability on September 14,1963. Issue: Was there delay in the giving of notice of loss? On this assumption, was there waiver of the delay on the part of the insurer? Held: The defense of delay cannot be sustained. The insurer's reaction upon receipt of the notice of loss was to set in motion what would be necessary to determine the cause and extent of the loss, with a view to payment thereof under the insurance agreement. Instead of invoking the ground of delay, it took steps clearly indicative that this particular ground for objection to the claim was never in its mind. The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place, so that it could determine whether delay would be a valid ground upon which to object to a claim against it. From April 1963 to July 1963, enough time was available for the insurer to determine if the insured was guilty of delay in communicating the loss to insurer. Furthermore, in the proceedings that took place in the Office of the Insurance Commissioner, the insurer did not raise the defense of delay to avoid liability when it should have done so, indicating that it did not find any delay.

Sec. 9 2

CONTRACT OF INSURANCE Title 10. — Notice and Proof of Loss

297

But even on the assumption that there was delay, waiver can be successfully raised against the insurer. (Pacific Timber Export Corp. vs. Court of Appeals, 112 SCRA 199 [1982].) Sec. 92. If the policy required, 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. Effect of failure to secure certificate or testimony of third person. If the policy requires, by w a y of preliminary proof of loss, the certificate or testimony of a person (like a notary public) other than the insured, such requirement must be complied with by the insured as part of the contract. However, the insured is only required to exercise due diligence to procure it. In the event of the refusal of such person to give the certificate or testimony, the insured must furnish reasonable evidence to the insurer that the person's refusal w a s not induced by any just grounds of disbelief of said person in the truth of the facts necessary to be certified or testified but, because of other grounds. It has been held that such requirement in the policy must be liberally construed in favor of the insured, (ibid.) — oOo —

Title 11

DOUBLE INSURANCE Sec. 93. A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. Double insurance defined. Section 93 defines double insurance. In insurance contracts, the terms "additional insurance," "other insurance," and "double insurance" are used interchangeably, although there is a technical difference in their meanings. (29 A m . Jur. 567.) In double insurance, there is co-insurance (see Sec. 157.) by two or more insurers; hence, it is also known as "co-insurance." Requisites of double insurance. There is no double insurance unless the following requisites exist: (1) The person insured is the same; (2) Two or more insurers insuring separately; (3) The subject matter is the same; (4) The interest insured is also the same; and (5) The risk or peril insured against is likewise the same. EXAMPLES: (1) X insures his house against fire with Y company and Z company. Double insurance exists in this case because all the requisites are present. The subject matter insured is the house. The interest insured is X's interest in the house. 298

S e c 93

CONTRACT OF INSURANCE Title 11. — Double Insurance

299

(2) X mortgages his house to B. Insurance taken by X and another taken by B on the same house is not double insurance because it is not on the same interest, (see Sec. 8.) (3) X insures his automobile against fire with Y company and against theft with Z company. There is no double insurance because the automobile is not insured against the same risk or peril.

Double insurance distinguished from over-insurance. Double insurance is different from over-insurance. (1) There is over-insurance when the amount of the insurance is beyond the value of the insured's insurable interest. In double insurance, there m a y be no over-insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured. (2) While in double insurance there are always several insurers, in over-insurance there m a y be only one insurer involved. F r o m the above explanation, double insurance and overinsurance m a y exist at the same time or neither m a y exist at all. Double insurance is the term used instead of "co-insurance" when the sums insured exceed the insurable interest. In such case, there is "over-insurance" by "double insurance." EXAMPLE: If X's insurable interest in a house is P1,000,000.00 and he insured it with Y company for Pl,100,000.00, there is overinsurance but there is no double insurance. On the other hand, if he insures the same house with Y company for P600,000 and Z company for P400,000.00, there is double insurance but there is no over-insurance. If the amount of insurance with Y company is P450,000.00, there is not only double insurance but also over-insurance. Now if X procures only one policy for the amount of P1,000,000.00 or a lesser amount, there is neither double insurance nor over-insurance.

300

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sec. 9 3

Binding effect of stipulation against double insurance. A policy which contains no stipulation against additional insurance is not invalidated by the procuring of such insurance. Invariably, policies of fire insurance contain a stipulation or condition that they shall be avoided if additional insurance is procured on the property without the insurer's consent, (see Sec. 75.) (1) Additional insurance obtained by the insured. — Such provision is commonly known as the additional or "other insurance" clause and is intended to prevent an increase in the moral hazard. It is valid and reasonable, and in the absence of consent, waiver or estoppel on the part of the insurer, a breach thereof will prevent a recovery on the policy. (45 C.J.S. 359-360; Santa A n a vs. Commercial Union Assur. Co., 55 Phil. 329 [1930]; Union Manufacturing Co., Inc. vs. Phil. Guaranty Co., 47 SCRA 271 [1972]; Pioneer Insurance and Surety Corp. vs. Yap, 61 SCRA 4 2 6 [1974.) However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same interest therein, and the same risk. (Geagonia vs. Court of Appeals, 241 SCRA 152 [1995].) (2) Additional insurance obtained by a third person. — The good or bad faith of the insured usually is immaterial. However, insurance obtained by a third person without the knowledge or consent of the insured will not affect his rights under the policy in the absence of ratification. (45 C.J.S. 363.) Purpose of prohibition against double insurance. The purpose of the prohibition against double insurance 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 loss would be profitable to the insured. (Pioneer Insurance & Surety Corp. vs. Yap, supra.) There is a great temptation upon dishonest persons, whose property is insured up to its full value or above it, to bring about its destruction; and the same considerations undoubtedly tend to

Sec. 9 4

CONTRACT OF INSURANCE Title 11. — Double Insurance

301

lessen the care that m a y be exercised by the honest in preventing loss. In view of these facts, as amply demonstrated by experience as they are apparent to reason, the underwriters take every precaution to avoid over-insurance. (Vance, op. cit., p. 841.) Sec. 94. Where the insured 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, 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; (c) 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 other 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. Rules for payment of claims where there is over-insurance by double insurance. As the contract of insurance is a contract of indemnity (Sec. 18.), the insured can recover no more than the amount of his insurable interest whether the insurance is contained in one policy or in several policies. The rules provided in Section 94 enunciate the principle of contribution which requires each insurer to contribute ratably to the loss or damage considering that the several insurances cover the same subject matter and interest

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

302

Sec. 9 4

against the same peril. They apply only where there is overinsurance by double insurance, that is, the insurance is contained in several policies the total amount of which is in excess of the insurable interest of the insured. Paragraph (e) governs the liability of the insurers among themselves where the total insurance taken exceeds the loss. If the loss is greater than the sum total of all the policies issued, each insurer is liable for the amount of his policy. EXAMPLE: (1) Several or solidary liability of insurers under their respective contracts (par. a). — A owns a house valued at P180,000.00 and he insures the same with three insurance companies as follows: X Company

P60,000.00

Y Company

180,000.00

Z Company

240,000.00

If the house is totally burned, A, unless the policies otherwise provide, may claim payment from each of them in such order as he may select, up to the amount for which each is liable under its contract. Thus, A may demand indemnity first from X company but the latter is liable only to the extent of P60,000.00, the amount specified in its policy. But if A elects to claim payment first from Z company, A cannot recover more than P180,000 which is the value of his insurable interest. A, may collect P60,000.00 from each of the insurers, or P180,000.00 only from Y company and nothing from X company and Z company. The exception allowed by law (i.e., "unless the policy otherwise provides") applies where the policy contains what is generally referred to as the contribution clause which stipulates that the insurance company shall not be liable to pay or contribute more than its ratable proportion of the loss or damage, (see No. 4.) (2) Where insured claims under a valued policy (par. b). — In the same example, in case A recovers P60,000.00 from X company, he must give credit as against the valuation of P180,000.00 for the sum of P60,000.00 thus received by him without regard to his actual loss. In other words, A may recover only the

Sec. 9 4

CONTRACT OF INSURANCE Title 11. — Double Insurance

303

difference of P120,000.00 from either Y company or Z company or from both of them so long as the amount recovered does not exceed P120,000.00. If A has been fully indemnified for his loss by one insurer, he cannot file subsequent claims against the others. (3) Where insured claims under an unvalued policy (par. c). — In case the policies are unvalued or open, the value of the loss must be ascertained. If the actual loss is estimated to be P150,000.00, A may recover said amount from the insurers in such order as he may select up to the amount for which they are severally liable under their respective contracts, (par. [a].) If A collects from X company P30,000.00 and from Y company P90,000.00, he can still collect from Z company the difference of P30,000.00 to make up the loss of P150,000.00 (4) Liability of each insurer to contribute ratably to the loss (par. e). — Under paragraph (e), each insurer is bound to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. The formula may be stated as follows: Amount o f policy

x

L o s s = L i a b i l i t y o f

Total insurance taken Thus, in the first example, the pro rata contribution of each of the insurers is as follows: X Company — P 60,000.00

or 1 / 8 of P180,000.00 or P22,500.00

P480,000.00 Y Company — P180,000.00

or 3 / 8 of P180,000.00 or P67,500.00

P480,000.00 Z Company — P240,000.00 or 4 / 8 of PI80,000.00 or P90,000.00 P480,000.00 Total amount recoverable = P180,000.00 So, if A is able to receive the amount of P180,000.00 from Y company under paragraph (a) of Section 94, X company and Z company are liable to reimburse Y company for their

304

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sec. 94

respective shares as indicated above. However, where there is a pro rata clause in the policy, whereby each one of the insurers is made liable only for his ratable proportion of the loss, A cannot exercise his right under paragraph (a) for he may claim from each insurer only such amount corresponding to his ratable proportion of the loss. (5) Where sum received by insured exceeds total insurance taken (par. d). — Let us now suppose that A, after receiving P60,000.00 from X company, succeeds in collecting the sum of P120,000.00 and P144,000.00 from Y company and Z company, respectively. Under paragraph (d), A must hold the amount of P144,000.00, said amount being in excess of his insurable interest in the house, in trust for the insurers X, Y, and Z. He cannot recover more than the full indemnity. Thus, 1/8 of P144,000.00 or P18,000.00 must be returned to X; 3 / 8 of P144,000.000 or P54,000.00 to Y; and 4 / 8 of P144,000.00 or P72,000.00 to Z. Pursuant to paragraph (e), X Company can recover from Y Company, Pl,500.00 and from Z Company, P18,000.00. Thus: X Company — P 60,000.00

—

amount paid to A

- 18,000.00

—

amount to be returned by A

—

amount due from Y Company

- 18,000.00

—

amount due from Z Company

P 22,500.00

— pro rata contribution

P 42,000.00 - 1,500.00 P 40,500.00

Y Company — P 120,000.00

—

amount paid to A

- 54,000.00

—

amount to be returned by A

+ 1,500.00

—

amount due to X company

P 67,500.00

—

pro rata contribution

P 144,000.00

—

amount paid to A

- 72,000.00

—

amount to be returned by A

P 66,000.00

Z Company —

Sec. 9 4

CONTRACT OF INSURANCE Title 11. — Double Insurance

P 72,000.00 + 18,000.00

—

amount due to X Company

P 90,000.00

— pro rata contribution

— oOo —

305

Title 12

REINSURANCE Sec. 95. 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. Reinsurance defined. Section 95 defines a contract of reinsurance. It is a contract whereby one party, the reinsurer, agrees to indemnify another, the reinsured (original insurer), either in whole or in part, against loss or liability which the latter m a y sustain or incur under a separate and original contract of insurance with a third party, the original insured. It has been referred to simply as "an insurance of an insurance" (44 A m . Jur. 2d. 283; see Sees. 2 1 6 - 2 2 2 , 2 8 0 - 2 8 1 , 3 1 0 312.), i.e., insurance business is transferred from one insurance company to another. Such contracts are sometimes referred to as "treaties." Reinsurance is required by law in certain cases, (see Sec. 215, par. 1.) The reinsurance of a reinsurance is called retrocession. EXAMPLE: X insures his house against fire for P1,000,000.00 with Y company. Here, the contract is only between X and Y company. If Y Company, to relieve itself of any liability or to reduce its potential liability under the contract, reinsures the risk or part of it with Z company, another contract of insurance is entered into, with Y company and Z company as the parties. 'Such" should be "an.

306

Sec. 9 5

CONTRACT OF INSURANCE Title 12. — Reinsurance

307

By giving off the whole or some portion of the risk insured, the insurer reduces the amount of its possible loss. Y company becomes the reinsured, while Z company is the reinsurer. It is obvious that in order that there may be a contract of reinsurance, it is necessary that there is an original contract of insurance; and since a contract of reinsurance like any other contract of insurance must be supported by an insurable interest, it is likewise clear that reinsurance may not be for a greater amount than the original insurance, although it may be easily for a less amount. In case the house is destroyed by fire, Z company is not bound to pay Y company more than the amount actually paid by the latter to X.

Reinsurance distinguished from double insurance. The following are the distinctions: (1) In double insurance, the insurer remains as the insurer of the original insured, while in reinsurance, the insurer becomes the insured, insofar as the reinsurer is concerned; (2) In double insurance, the subject of the insurance is property, while in reinsurance, it is the original insurer's risk (Sec. 97.); (3) Double insurance is an insurance of the same interest while reinsurance is an insurance of a different interest; (4) In double insurance, the insured is the party in interest in all the contracts, while in reinsurance, the original insured has no interest in the contract of reinsurance which is independent of the original contract of insurance (Sec. 98.); and (5) In double insurance, the insured has to give his consent, while in reinsurance, the consent of the original insured (who is hardly even aware of the reinsurance transaction) is not necessary.

Value of reinsurance. (1) From the standpoint of the insurer. — Reinsuring companies benefit from contracts of reinsurance.

308

T H E I N S U R A N C E C O D E O F T H E PHILIPPINES

Sec. 9 5

(a) Every insurance company, in accordance with its financial strength, establishes a limit on the m a x i m u m claim it wishes to pay out of its own resources. This limit is called a "retention." At the same time, a company wants its salesmen to be able to take an application for any amount the applicant is willing to seek. When such applications are for a sum over the company's retention, it handles the excess by means of reinsurance. 1) Through the use of reinsurance, then, an insurer is able to issue policies for amounts in excess of its retention limit or beyond the capacity of its financial resources in case of a loss, rather than inconvenience a client by referring him to other insurance companies. This is in the best interest of the insuring public, the insurer, and the reinsurer. 2) Also, aside from spreading risks among several insurance companies, insurance protection will be distributed to a greater proportion of those needing protection if the underwriters of m a n y companies are in position to supply insurance protection to applicants requiring large amounts and to applicants w h o are not eligible for insurance at standard rates. 3) Underwriters benefit through the placing of additional insurance in an expanded market. The insurance industry benefits by reducing the waste arising out of policies which are applied for but not issued. (b) Further, the knowledge of the industry regarding classification of impaired risks is increased in the most economical manner. Reinsuring companies serve as focal point for the collection of such risks where statistically significant volumes of consistently underwritten substandard business are accumulated and subjected to extensive analyses by an experienced staff. Improved underwriting standards are promulgated as a result of such analyses. This process is more efficient than if each insuring company found it necessary to attempt to perform its o w n underwriting research.

Sec. 9 6

CONTRACT OF INSURANCE Title 12. — Reinsurance

309

Finally, the reinsurer benefits through the acquisition of business which is expected to prove profitable in the long run. ( Reinsurance by Walter W. Steffen, in LHIH, p. 992.) //

,,

(2) From the standpoint of the insured. — The practice of reinsurance is also beneficial to the insured for the following reasons: (a) It gives insurance companies that practice in greater financial stability and thus makes the insured's individual policy more reliable; (b) If a large amount of insurance is needed, the insured m a y obtain it without negotiating with numerous companies; (c) It enables the insured to obtain protection promptly, without the delay that would be required to divide and distribute the amount among many companies; (d) All the insurance can be written under identical contract provisions, whereas otherwise these might vary with the different companies among w h o m the insurance is divided; and (e) Small companies are encouraged to divide large exposures for safety and enabled to accept a wide variety of applicants. (Riegel, Miller & Williams, Jr., op. cit, p. 125.) (3) From the standpoint of the insuring public. — Contracts or "treaties" of reinsurance are plainly beneficial to the public inasmuch as they promote both efficiency and stability in the conduct of the reinsurance business. (Vance, op. cit, p. 1066, see Sees. 216-222.) Sec. 96. Where an insurer obtains reinsurance, except under 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, (a) Duty of reinsured to disclose facts. Where an underwriter is seeking to insure his risks, his duty to disclose all material facts is no less than the similar duty

imposed on a person seeking an original insurance; the duty in both cases is one of the strictest good faith (Sun Mut. Ins. Co. vs. Ocean Ins. Co., 107 U.S. 485.) since the risk insured against in a contract of reinsurance is the probability that the original insurer may be compelled to indemnify for the loss under the policy issued by him. (New York Brewery Ins. Co. vs. New York Co., 17 Wend. 359.) Thus, a policy may be avoided where the reinsured conceals the fact that a loss has taken place or that the property is over-insured where he has knowledge thereof. EXAMPLE: X insurance company issued a fire policy covering a building owned by Y. Z insurance company accepted reinsurance coverage under the policy. Thereafter, Y married H, an ex-convict for arson. All the members of the board of directors of X were invited as guests at the wedding and knew who H was. Subsequently, the building was completely destroyed by fire. May X recover from Z notwithstanding that X did not disclose H's previous conviction for arson? No. Generally, when a contract of insurance has been entered into, the insured cannot be charged with fraudulent concealment by reason of the fact that he fails to disclose matters material to the risk arising thereafter. (45 C.J.S. 115; Sees. 31, 46.) Section 96, however, covers knowledge or information possessed by the insurer "whether previously or subsequently acquired, which are material to the risk."

Automatic and facultative methods of ceding reinsurance. Reinsurance m a y be placed in effect either automatically or facultatively. 1

^ o r glossary of important reinsurance terms, see annotations u n d e r Sections 2 1 6 222. The insurance c o m p a n y originally writing the insurance is called the "primary insurer," or "direct insurer," or "ceding insurer." It is sometimes referred to as the "direct writer." The portion of the risk retained by the primary insurer is called "net retention" or "net line," while the portion transferred to the reinsurer is called the "cession." The act of transferring the risk is called "ceding." The ceding insurer (reinsured) is known as a

Sec. 9 6

CONTRACT OF INSURANCE Title 12. — Reinsurance

311

(1) Share or participation in risk insured. — The rule in Section 96 does not apply in case of automatic reinsurance treaties under which the ceding company (reinsured) is bound to cede (give off by w a y of reinsurance) and the reinsurer is obligated to accept a fixed share of the risk which has to be reinsured under the contract. In a facultative insurance, which covers liability on individual risk, there is no obligation either to cede or to accept participation in the risk insured, each party having a free choice. But once the share is accepted, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way — payment of the share of the losses. There is no alternative or substitute prestation, (see Equitable Ins. & Casualty Co., Inc. vs. Rural Ins. & Surety Co., Inc., 4 SCRA 343 [1962].) (2) Advantage to insurer. — The main advantage to the insurer of the automatic method is avoidance of any delay in issuing its policy. The advantage to the insurer of the facultative method is that it receives the reinsurer's underwriting opinion before the policy is issued. On occasion, the reinsurer m a y have had previous applications or m a y receive concurrent applications for reinsurance on the same risk from different companies; for this reason, it m a y have more complete underwriting information than any single insurer. ("Reinsurance," by Walter W. Steffen, in LHIH, p. 1000.) (3) Protection to reinsurer. — By agreeing to accept business automatically, the reinsurer is relying on the underwriting judgment of the insurer and is bound to accept a case even though it may not agree with the underwriting decision. The reinsurer is protected by the requirement that the original insurer retains its full retention limit, which assures a measure of self-interest. In actual practice, when any question of proper underwriting

"cedant." If the reinsurer, in turn, passes to another insurer a portion of the risk reinsured, the transaction is called "retrocession." It is really the reinsurance of a reinsurance. The ceding reinsurer is called a "retrocedent" and the second assuming reinsurer is known as a "retrocessionaire." A professional reinsurer transacts solely and exclusively reinsurance business in the Philippines, (see Sec. 280.) It does not write direct insurance, its transactions being limited to insurers.

classification exists, the insurer usually does not use its automatic facility but instead secures the reinsurer's underwriting opinion by submitting the case facultatively. (Ibid.) Reinsurance treaty distinguished from reinsurance policy. The concept of one and the other is well expressed thus: "A reinsurance policy is a contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already assumed x x x. In contradistinction, a reinsurance treaty is merely an agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty. The practice of issuing policies by insurance companies includes, among other things, the issuance of reinsurance policies on standard risks and also on substandard risks under special arrangements. The lumping of the different agreements under a contract has resulted in the term known to the insurance world as 'treaties/ Such a treaty is, in fact, an agreement between insurance companies to cover the different situations described. Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for insurance; reinsurance policies or cessions x x x are contracts of insurance." (Pioneer Life Ins. Co. vs. Alliance Life Insurance Co., 30 N.E. 2d 60, 72, cited in Phil. American Life Ins. Co. vs. Auditor General, 22 SCRA 135 [1968].) It is only after a reinsurance cession is made that the obligation of the insurer to pay the reinsurance premium arises. (Ibid.) Sec. 97. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage. Nature of contract of reinsurance. The subject of the contract of reinsurance is the primary insurer's risk and not the property insured under the original policy. (1) Contract, one of indemnity against liability. — In reinsurance, the reinsurer agrees to indemnify the insurer, not against actual

Sec. 9 8

CONTRACT OF INSURANCE Title 12. — R e i n s u r a n c e

313

payment m a d e but against liabilities incurred. Therefore, it is by no means necessary that the insurer shall first have paid a loss accruing, as a condition precedent to his demanding payment of the reinsurer. In fact, the insolvency of the insurer, which precludes him from fulfilling in full the obligation incurred to the insured under the original policy, does not in any wise affect the right of the insurer to demand payment in full under the policy of reinsurance (Vance, op. cit, pp. 1068-1069.), and this is true even if the original insured should decide not to enforce his claim against the insurer. (2) Contract, separate contract of insurance is contract of reinsurance. the insurer even before insured.

from original insurance policy. — The independent of and separate from the The practice is for the reinsurer to pay the latter has indemnified the original

(3) Contract based on original policy. — The policy of reinsurance, however, is necessarily based upon the original policy, and the rights of the parties while, of course, fixed by the terms and conditions of the policy of reinsurance are yet greatly affected by the terms and conditions of the original policy upon which the reinsurance contract is based. (Vance, op. cit., p. 1068.) The reinsured risk must be the same as that covered by the original insurance policy. (4) Insurable interest requirement applicable. — The doctrine of insurable interest applies to reinsurance just as it does to any insurance contract. Therefore, the primary insurer is not entitled to contract for reinsurance exceeding the limits of the policy ceded to the reinsurer. Similarly, the reinsurer cannot provide coverage for risks beyond the scope of the coverage provided by the primary insurer. (R.H. Jerry, II, op. cit, p. 686.) (5) Rule on subrogation applicable. — In general, a reinsurer, on payment of a loss, acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss. (Pioneer Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668 [1989]; see Art. 2207, Civil Code, discussed under Sec. 1.) Sec. 98. The original insured has no interest in a contract of reinsurance.

314

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Sec. 98

Rights of original insured in contract of reinsurance. Reinsurance is a contract between the reinsured and the reinsurer by which the latter agrees to protect the former from risks already assumed. (1) The insured, unless the contract so provides, has no concern with the contract of reinsurance, and the reinsurer is not liable to the insured either as surety or otherwise. (Baltica Ins. Co. vs. Carr, 162 N.E. 178.) (2) There is no privity of contract between the original reinsured and the reinsurer. A contract of reinsurance rarely explicitly permits direct action by the original insured against the reinsurer. Liability of reinsurer to reinsured. In an action on a contract of reinsurance, as a general rule, the reinsurer is entitled to avail itself of every defense which the reinsured might urge in an action by the person originally insured. (Gibson vs. Revilla, 92 SCRA 219 [1979].) Thus, the reinsurer is not liable to the reinsured for a loss under an original policy if the latter is not liable to the original insured or for an amount more than the sum actually paid to the insured. It has been held that the clause "to pay as m a y be paid thereon" does not preclude the reinsurer from insisting upon proper proof that a loss within the terms of the original policy has taken place; it does not enable the reinsured to recover from his reinsurer to an extent beyond the subscription of the latter under the contract of reinsurance. (Ibid.) Liability of reinsurer to original insured. The original insured m a y stand in any of three (3) relations towards the reinsurer in accordance with the terms of the particular contract of reinsurance. (1) Contract of reinsurance solely between insurer and reinsurer. — In case the contract is solely between the insurer and the reinsurer, contemplating only an indemnity to the insurer against losses suffered by reason of the policies carried by him,

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the original insured has absolutely no interest in the contract and is a total stranger to it. Unless the reinsurance contract contains a stipulation assigning the right of the insurer in favor of the insured, the latter, not being a privy to the contract, has no cause of action against the reinsurer, but only against the insurer. (Artex Dev. Co., Inc. vs. Wellington Ins. Co., Inc., 51 SCRA 352 [1973].) (2) Contract of reinsurance with stipulation in favor of original insured. — The contract of reinsurance m a y contain a provision whereby the reinsurer binds himself to pay to the policyholder any loss for which the insurer m a y become liable, (see Sec. 2; also Art. 1311, par. 2, Civil Code. ) Therefore, the reinsurer who has promised to pay the losses accruing under the original policy will be liable to a suit by the original insured under the contract of reinsurance. The remedy of the insured is both against the insurer and the reinsurer, (see Coquia vs. Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968]; Guingon vs. Del Monte, 20 SCRA 1043 [1967].) 2

(3) Contract of reinsurance amounting to novation of original contract. — The original insured m a y also maintain an action directly against the reinsurer in those cases in which the circumstances attending the making of the contract of reinsurance amount to a novation of the original contract (see Art. 1291 [2], Civil Code. ) and hence, operate to discharge that contract and the original insurer from all obligations thereunder. The original insurer, however, will be released only when the insured agrees with the insurer and reinsurer to the novation, (see Art. 1293, ibid.*) 3

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A r t . 1311 x x x If a contract should contain s o m e stipulation in favor of a third person, he m a y d e m a n d its fulfillment provided he c o m m u n i c a t e d his acceptance to the obligor before its revocation. A m e r e incidental benefit or interest of a person is not sufficient. The contracting parties m u s t have clearly and deliberately conferred a favor upon a third person. A r t . 1291. Obligations m a y be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (1203) A r t . 1293. Novation which consists in substituting a new debtor in the place of the original one, m a y be m a d e even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) 3

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Such an agreement is ordinarily carried into effect by a surrender of the original policy and issuance of a new one including the same terms and conditions, by the so-called "reinsurer/' However, such a transaction is not one of technical reinsurance, for here, the so-called "reinsurer" is but substituted for the original insurer and hence, becomes the immediate insurer of the subject of the original policy. (Vance, op. cit., pp. 1070-1073.)

— oOo —

Chapter II CLASSES OF INSURANCE Title 1 MARINE INSURANCE Sub-title 1-A Definition Sec. 99. Marine insurance includes: (1) Insurance against loss of or damage to: (a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, evidences of debt, 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 transshipment, or reshipment incident thereto, including war risks, marine builder's risks, and all personal property floater risks. (b) 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 317

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insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of the ownership, maintenance, or use of automobiles). (c) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise. (d) 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. (2) "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 in 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, (a)

Transportation insurance defined. Another important part of property insurance is the very broad field of transportation insurance w h i c h is concerned with the perils of property in (or incidental to) transit as o p p o s e d to property perils at a generally fixed location. (D.L. Bickelhaupt, op. cit, p. 837.) The term does not include n o r m a l m o t o r vehicle insurance which is treated separately by law. (see Chap. VI.)

Major divisions of transportation insurance. Transportation insurance, usually k n o w n in the insurance business as marine insurance, has two major divisions, namely: (1) Ocean marine insurance. — It is one of the oldest written forms of insurance and has to do primarily with the insurance of sea perils. (D.L. Bickelhaupt, op. cit., pp. 537-538.) T h e old law

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(Act No. 2427, Sec. 92.) defines marine insurance (term used for ocean marine insurance) as "an insurance against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in m o v a b l e property, m a y be exposed during a certain v o y a g e or a fixed period of time; and 1

(2) Inland marine insurance. — It is of comparatively recent origin and covers primarily the land or over the land transportation perils of property shipped by railroads, m o t o r trucks, airplanes, and other m e a n s of transportation. It also covers risks of lake, river, or other inland w a t e r w a y transportation and other waterborne perils outside of those risks that fall definitely within the ocean marine category, (see D.L. Bickelhaupt, op. cit., p. 538.) Section 99 enumerates the coverage of m a r i n e insurance. Note that the insurance m a y be in the form of property insurance, indemnifying the insured for loss or d a m a g e to property (Sec. 99[1].) or in the form of liability insurance protecting the insured against liability for loss or d a m a g e to property or for personal injury, illness or death of another person. (Sec. 99[2].)

Scope of ocean marine insurance. O c e a n marine insurance provides protection for: (1) ships or hulls; (2) goods or cargoes; (3) earnings such as freight, passage money, commissions, or profits; and (4) liability (known as "protection and indemnity insurance") incurred by the owner or any party interested in or responsible for the insured property

'Before the promulgation of the Insurance Code of the Philippines (Presidential Decree No. 612, as amended.), which repealed the Insurance Act (Act No. 2427, as amended.), Sections 93 to 159 of the Act, which became Sections 100 to 166 of the Insurance Code of the Philippines, now the Insurance Code of 1978 (Presidential Decree No. 1460.), applied only to (ocean) marine insurance as defined in Section 92 of the old law, that is, insurance covering only movable property exposed to risks connected with navigation. It is not clear whether Sections 100 to 166 of the present Code should likewise apply only to ocean marine insurance or to both ocean and inland marine insurance. Since Title I, Chapter II of the Code makes no distinction in regard to the application of its provisions, then said Title should apply to both kinds of marine insurance as defined in Section 99 except those provisions which by their very nature contemplate "risks or perils of navigation" that fall definitely within the ocean/marine category. For example, the provisions which refer to insurance upon ship should not apply to inland marine insurance involving perils of land or air transportation only.

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by reason of maritime perils. (D.L. Bickelhaupt, op. cit., pp. 5 3 8 539.)

Risks or losses covered in ocean marine insurance. Under a marine insurance policy, all risks or losses m a y be insured against, except such as are repugnant to public policy or positively prohibited. (Bell vs. Western M & F Inc. Co., [La] 5 Rob. 423.) A general marine insurance policy w h i c h does not state the risks assured is valid and covers the usual marine risks (Parkhurst vs. Gloucester Mut. Fishing Ins. Co., 100 Mass. 301.); and in a marine policy, the general enumeration of "all other perils" etc., extends only to marine d a m a g e of like kind to those enumerated. (Thamas & Mersey M. Ins. Co. vs. Hamilton [Eng.], LR 12 AC 484 [HL].) 3

Of course, to sustain a recovery on a marine policy, the loss must have b e e n occasioned by a risk or peril insured against. Thus:

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(1) T h e contract of insurance on freight is that the perils insured against shall not prevent the ship from earning full freight 2

The origin of the practice of insurance is to be found in the mutual agreements made among merchants engaged in common shipping adventures, for distributing among the mutual contractors the loss falling upon any one by reason of the perils of navigation. It is thus apparent that in its early forms, the law of insurance was derived from the maritime law, and as such was a part of the general law merchant, and international in its character. (Vance, op. cit., p. 7.) For several centuries after its introduction into England, insurance was largely confined to marine risks, and consequently, the law of marine insurance was first developed in the English courts, (ibid., p. 17.) By way of a historical background, marine insurance developed as an "all-risk" coverage (infra.), using the phrase "perils of the sea" (infra.) to encompass the wide and varied range of risks that were covered. The subject policies contain die "Perils" clause which is a standard form in any marine insurance policy. (Malayan Insurance Corp. vs. Court of Appeals, 270 SCRA 242 [1997].) A marine risk note is not an insurance policy; it is only an acknowledgment or declaration of the insurer confirming the specific shipment covered by its marine open policy, the evaluation of the cargo, and the chargeable premium. It is the marine open policy which is the main insurance contract. It is incumbent upon the insurance company to present in evidence the policy to support its claim of subrogation (International Container Terminal Services, Inc. vs. FGU Insurance Corp., 556 SCRA 194 [2008]; Eastern Shipping Lines, Inc. vs. Prudential Guarantee and Assurance, Inc., 599 SCRA 565 [2009].) It has been held, however, that the non-presentation of the marine insurance policy in court is not fatal where its existence was already admitted by petitioner in open court, it has been properly identified by testimony duly recorded and incorporated in the records of the case, and there was no dispute as regards the loss of the cargo on the insured's vessel and the provisions of the policy. (Ibid.) 3

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for the insured in that voyage; such a contract does not undertake that the goods shall be delivered in a sound or merchantable state or that the vessel shall be safe from the dangers of the sea. (Hugg vs. Augusta Ins. & B k g . Co., 12 L. E d . 235.) (2) T h e underwriter of a vessel does not undertake for the cargo but engages only for the ability of the vessel to perform her voyage and to b e a r d a m a g e w h i c h the vessel m a y sustain in making the voyage. (Alexander vs. Baltimore Ins. Co., 9 L. Ed. 650.) Similarly, an insurance on cargo merely does not insure the ship. (3) An insurance on time by no m e a n s contains an e n g a g e m e n t that any particular v o y a g e undertaken by the insured within the prescribed period shall be performed before the expiration of the policy but only that the ship shall be capable of performing the voyage undertaken notwithstanding any loss or injury which m a y occur to h e r during the time for w h i c h she is insured. (Bradie vs. Maryland Ins. Co., 9 L. E d . 1123.) (4) In marine policies, as in other kinds of insurance, the insurer m a y except liability from certain causes. Thus, under a marine policy excluding coverage for breakage unless caused by an accident to the vessel, it has b e e n held that b a d weather causing the d a m a g e is not an accident within the policy. (Traders vs. Poland, [La App.] 181 So 2d. 879; see 44 A m . Jur. 2d 214-215.) (5) It is a well-understood and well-established rule of marine insurance that goods are presumed to be shipped under deck, that is, below the weather deck of the vessel. If the goods are shipped on deck, they are not covered by the policy unless special notice of the stowage is given to the underwriter and he accepts the enhanced risk. T h e reason for this presumption is that the deck of a vessel is not designed to carry goods. Its primary function is to make the holds watertight and to protect the cargo laden in the holds. Goods carried on deck are subject to weather damage, sea damage, and the hazard of being w a s h e d overboard. Shipowners have no legal right to load goods on deck, and if they do, such goods are at the shipowner's risk unless he had obtained the consent of the cargo owner to such stowage.

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Accordingly, underwriters cannot be expected, without special notice, to assume the risk of goods laden on deck and will be released from their contract if the insured subject is so loaded. There are certain cases, however, which m a y furnish an exception to this rule. Certain kinds of goods, dangerous in themselves, are, by custom and sometimes by law, required to be shipped on deck so that they will not endanger the other cargo and can, if necessity arises, be quickly thrown overboard. Underwriters are presumed to k n o w of these customs and legal requirements. (Marine Insurance, Its Principles and Practice, by William D. Winter, 3rd Ed., pp. 1-2 [1952], published by M c G r a w Hill Book & Co., Inc., N.Y.)

"Perils of the sea," as used in ocean marine insurance, explained. (1) Perils covered. — O c e a n marine insurance protects ships at sea and the cargo or freight on such ships from standard "perils of the sea." T h e phrase "perils of the s e a " or "perils of navigation" includes only those casualties d u e to the unusual violence or extraordinary action of w i n d and wave, or to other extraordinary causes connected with navigation. (Vance, p. 296.) (a) The phrase thus embraces all kinds of marine casualty such as shipwreck, foundering, stranding, collision, and every specie of d a m a g e d o n e to the ship or goods at sea by the violent action of the w i n d and w a v e s (45 C.J.S., 934.) or losses occasioned by the jettisoning of cargo if it is m a d e for the purpose of saving a vessel rendered u n w o r t h y during the voyage, not through the fault of the captain. (Dabney vs. N e w England Mut. Marine Ins. Co., 14 Allen 300.) (b) T h e phrase extends to barratry w h i c h in A m e r i c a n insurance law is "any willful misconduct on the part of the master or crew in pursuance of s o m e unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of the o w n e r ' s interest." Barratry requires a willful and intentional act in its commission. No honest error of judgment or mere negligence, unless criminally gross, can

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be barratry. (Roque vs. Intermediate Appellate Court, 139 S C R A 596 [1985].) (2) Perils not covered. — It does not include losses resulting from ordinary w e a r and tear or other d a m a g e usually incident to the voyage. T h e mere fact that an injury is d u e to the violence of s o m e marine force does not necessarily bring it within the protection of the policy if such violence w a s not unusual or unexpected. Thus, the insurer is not liable for a sail carried away by the violence of a tempest, for tempests are not unusual nor is the loss of a sail. But the carrying a w a y of a mast, or the loss of an anchor by a storm, will entail liability u p o n the insurer, for such damage is due only to unusual violence in the elements, and is not ordinarily to be expected as incident to navigation. (Vance, op. cit., p. 927.) (3) A relative term. — "Perils of the s e a " is a relative term and the meaning m a y vary with the circumstances. Thus, where a vessel designed for inland waters w a s insured while b e i n g towed in the Gulf of M e x i c o a n d the insurer w a s fully aware of the hazardous nature of the j o u r n e y a n d charged an extra premium, the loss w a s held to be due to perils of the sea although a sea-going vessel w o u l d not h a v e b e e n d a m a g e d by the m o d e r a t e w a v e s encountered. (Ibid.; C o m p a n i a de N a v e g a c i o n vs. Fireman's Fund Ins. Co., 277 U.S. 66.)

Perils of the sea distinguished from perils of the ship. (1) A loss which, in the ordinary course of events, results (a) from the natural and inevitable action of the sea, (b) from the ordinary wear and tear of the ship, or (c) 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 perils of the ship. The insurer does not undertake to insure against perils of the ship. T h e purpose of an ocean marine policy is to secure

'Barratry is not a peril of the sea and is not covered by a policy of insurance which does not specify barratry as a risk. (43 Am. Jr. 2d [Rev.] 752.)

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an indemnity against accidents which may happen not against event which must happen. (2) "Perils of the sea" has been said to include only such losses as are of extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being seaworthy. It is also the general rule that everything w h i c h happens through the inherent vice of the thing, or by the act of the owner, master or shipper shall not be reputed a peril if not otherwise borne in the policy. (Roque vs. Intermediate Appellate Court, supra.) Thus, it has been held that loss caused to cargo of rice by the entrance of sea water through the ship's defective pipe, of which the shipowner w a s apprised b u t failed properly to repair, was one more analogous to that which directly resulted from simple seaworthiness than to that w h i c h resulted from perils of the sea. T h e o w n e r of the d a m a g e d rice m u s t look to the shipowner for redress and not to the insurer. ( G o Tiaco vs. U n i o n Ins. Society of Canton, 40 Phil. 4 0 1 [1919]; see Cathay Insurance Co. vs. Court of Appeals, 151 S C R A 710 [1987].)

Perils of the sea must be the proximate cause of loss. As with other kinds of insurance, in ocean marine insurance, the insurer is liable only for such losses or d a m a g e s proximately caused by the perils insured against. EXAMPLES: (1) Suppose a perishable cargo is greatly damaged by the perils of the sea, and it should, in consequence thereof long afterwards, and before arrival at the port of destination, become gradually so putrescent as to be required to be thrown overboard for the safety of the crew; the immediate cause of the loss would be the act of the master and crew; but there is no doubt that the insurer would be liable for a total loss upon the ground that the operative cause was the perils of the sea. (2) Suppose a vessel which is insured against fire only is struck by lightning, and takes fire; and in order to save her

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from utter destruction, she is scuttled and sunk in shoal water and she cannot afterwards be raised; it might be said that the immediate cause of the loss was the scuttling; but in a juridical sense, it would be the fire, and the insurer would be liable therefor. (3) Suppose a vessel insured against all perils but fire is shipwrecked by a storm on a barbarous coast and burnt by the natives; it might be said that the proximate cause of the loss was the fire; and yet there is no doubt that the insurer would be held liable on the policy upon the ground that the vessel had never been delivered from the original peril of the shipwreck. (Peters & Brothers vs. Warren Ins. Co., 14 Pet. 99.)

"All risks" marine insurance policy. An all risks marine insurance policy insures against all causes of conceivable loss or d a m a g e , except as otherwise excluded in the policy or due to fraud or intentional m i s c o n d u c t on the part of the insured. (1) Scope of protection. — This type of policy has b e e n evolved to grant greater protection than that afforded by the "perils clause." It covers all losses during the v o y a g e whether arising from a marine peril or not, including pilferage losses during the war. An example of an "all risks" clause is as follows: "This insurance is against all risks of loss or d a m a g e to the subject matter insured but shall in no case d e e m e d 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." (2) Burden of proof on part of insurer to establish damage or loss that has occurred, excluded from coverage. — T h e insurance policy above covers all loss or damage to the cargo except those caused by delay or inherent vice or nature of the cargo insured. It is the duty of the insurance company to establish that said loss or damage falls within the exceptions provided for by law; otherwise, it is liable therefor. An "all risks" provision of a marine policy creates a special type of insurance which extends coverage to risks not usually

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contemplated and avoids putting upon the insured the burden of establishing that the loss was due to peril falling within the policy's coverage. The insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. (Choa Tiek Seng vs. Court of Appeals, 183 SCRA 223 [1990].) (3) Initial burden on part of insured to establish damage or loss occurred. — 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" h a s the initial burden of proving that the cargo was in good condition w h e n the policy attached and that the cargo was d a m a g e d w h e n unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. T h e basic rule, to state again, is that the insurance c o m p a n y has the b u r d e n of proving that the loss is caused by the risks excepted and for w a n t of such proof, the c o m p a n y is liable. (Filipino Merchants Insurance C o . vs. Court of Appeals, 179 S C R A 638 [1989].)

Development of inland marine insurance in the United States. (1) Need for inland transportation insurance. — T h e original marine policy primarily furnished insurance against perils while property was on board the vessel, and its development increased the scope of insurance to cover cargo from the time the property left the premises of the shipper until it w a s delivered to the premises of the consignee. This, of course, also involved coverage while the property w a s on land during transit. At the same time, the development of the land forms of transportation— the railroads, motor trucks, and airplanes — called for insurance against the perils of land transportation only. T h u s , inland marine insurance, as separate from ocean marine insurance, originated. (Riegel, Miller and Williams, Jr., op. cit., p. 302.) (2) Extension of inland marine use. — Still another surge in the use of inland marine insurance hinged upon the factor of the continuing diffusion of wealth throughout the economy.

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The ownership of fur coats, of jewelry, of h o b b y equipment and sporting equipment spread and p r o m o t e d the widespread use of insurance forms designed for these possessors. As business and c o m m e r c e grew, m a n y activities s e e m e d to be served best by extension of land m a r i n e insurance to cover property while awaiting shipment, while b e i n g prepared for shipment, while being processed, and while in storage after shipment. N e w inland marine insurance protection next c a m e to apply w h e n the act of transportation itself b e c a m e incidental to the true use of the property involved. T h e personal use of jewelry or furs, for instance, ordinarily involves no use of the transportation agencies; yet, an inland m a r i n e insurance form insures articles of j e w e l r y or furs, w h e r e v e r they m a y be, even if they are kept within the h o m e of the o w n e r for twelve m o n t h s of the year, (ibid., p. 303.) (3) Flexibility of inland marine rates and coverages. — As the d e m a n d for inland marine insurance coverages developed into a veritable b o o m , fire and casualty insurers w e r e attracted to the business. S o m e of the old marine policy w e r e retained b u t there were also incorporated in the policy, features to be found in both fire and casualty policies. Because of the flexibility of the transportation policy, m u c h broader coverage were available under inland marine contracts than could be obtained under the old fire or casualty contracts. T h e inland marine contract were particularly desirable w h e n there were concentrated values. In the case of furs, jewelry, art treasures, and the like, instead of insuring the risks against burglary, fire, and other innumerable specific perils, a single policy covering all risks had tremendous appeal. When, as was usually the case, the "all risks" policy could be obtained for a cost much less than was required for an accumulation of separate policies, the appeal of the marine policy to the buyer of insurance was natural. (D.L. Bickelhaupt, pp. 554-555.) (4) Broadening of inland marine coverage. — T h e original coverage under inland marine insurance gave protection to the policyholder in case of loss or damage resulting from the "perils of transportation." The scope was broadened until finally "all

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risks" policies were reached, an almost unlimited insurance that appears in very many of the inland marine forms. With "all risks" coverage, and with a very free description of "transportation," either actual or technical (the transportation element c a m e to involve not only actual transporting but the technical "state of transportation"), marine insurance companies received complaints from the casualty and the fire insurance companies. These complaints were resolved in 1933 in the acceptance of the insurance companies' definition of the insuring powers of marine and transportation underwriters by the National Convention of Insurance Commissioners. (Riegel, Miller, & Williams, Jur., op. cit., pp. 303-304.) (5) Present status of inland marine business. — T h e Nationwide Definition merely defines w h a t can be classified as marine insurance, as distinguished from fire and casualty insurance. It does not distinguish b e t w e e n ocean marine and inland marine insurance. T h e definition is less important today b e c a u s e multiple-line laws n o w permit a single insurer to write all types of property and liability insurance. It is still important, however, to define marine insurance, because this insurance does h a v e some distinctive characteristics, and under s o m e state laws, is still treated differently. According to the Nationwide Definition, inland marine insurance includes at least the following classes: (a) Property insurance on goods in transit by railroad, express, mail, motor truck, aircraft and (partly b y ) water. T h e majority of entirely waterborne shipments are covered by ocean marine policies, but protection against the water-transit peril is sometimes included under inland marine policies along with protection against the other contingencies. This protection is logically afforded in inland marine insurance; (b) Property insurance on goods of certain specified types, wherever they m a y be, against any peril, even though not in the course of transportation. An e x a m p l e is a jewelry floater covering "all risks." Another is the insurance on goods in the hands of a dry cleaner. Such contracts are m u c h broader policies than could be issued by either fire or casualty insurers

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at the time the definition w a s adopted, b u t for w h i c h there w a s a strong d e m a n d ; (c) Property insurance on fixed property such as bridges, tunnels and the like; on aids to navigation, such as piers, dry docks and marine railways; and on aids to communication, such as radio and television c o m m e r c i a l equipment; (d) Property insurance on a few of the means of transportation, such as small boats, railroad cars, and the like. T h e m o r e important exposures of this character are insured by other agencies, such as vessels by the o c e a n m a r i n e departments, airplanes by aviation insurers, and m o t o r vehicles by automobile insurers; a n d (e) Liability insurance, to protect transportation carriers, warehousemen, processors, a n d other bailees from the consequences of legal responsibility for property of customers while in their custody. (Riegel, Miller & Williams, Jr., op. cit., pp. 303-305.)

Classes (scope) of inland marine insurance. Basically, to be eligible for inland marine contract, the risk must involve an element of transportation. Either the property is actually in transit held by persons (bailees) w h o are not its owners, or at a fixed location but an important instrument of transportation, or is a m o v a b l e type of goods which is often at different locations. There are four (4) divisions or classes of inland marine insurance and they are the following: (1) Property in transit. — T h e insurance provides protection for property frequently exposed to loss while it is in transportation from one location to another; (2) Bailee liability. — T h e insurance provides protection to persons w h o have temporary custody of the goods or personal property of others, such as carriers, laundrymen, warehousemen, and garagekeepers; (3) Fixed transportation property. — T h e insurance covers bridges, tunnels, and other instrumentalities of transportation and communication, although as a matter of fact they are fixed

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property. They are so insured because they are held to be an essential part of the transportation system. Marine policies must exclude buildings, their furniture, fixtures, fixed contents, and supplies held in storage. They invariably extend to cover more perils than those included in the usual fire policy. In order for a risk to qualify for a marine contract, there must definitely be included some additional marine peril such as collapse, collision, or flood; and (4) Floater. — In inland marine insurance, the term is used in the sense that it provides insurance to follow the insured property wherever it m a y be located, subject always to the territorial limits of the contract. Floater policies m a y be issued for such items as jewelry, furs, works of art, contractor's equipment, theoretical property, salesmen samples, and others, (see D . L . Bickelhaupt, op. cit., pp. 556-562.) Although the basis for eligibility is the fact that transportation or movement of property is often present, the condition n e e d not necessarily occur. Floaters h a v e b e e n issued covering property that is seldom moved, (see Riegel, Miller & Williams, Jr., op. cit., p. 312.) Sub-Title 1-B Insurable Interest Sec. 100. 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. Insurable interest of insured in marine insurance. As with other insurances, marine insurance is invalid unless supported by an insurable interest in the thing insured. There can be no valid insurance unless there is something to insure. But it is held that if an insurance is taken u p o n a ship or cargo "lost or not lost," that is, the insurer expressly agrees that he will

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bound in any event, even though the vessel be already lost, the contract is binding and the insurer m u s t pay, e v e n though it be proved that the insured h a d nothing to insure w h e n the contract was made. (Pendergast vs. Glove & Rutgers Fire Ins. Co., 159 N.E. 183; Vance, op. cit., p. 911.)

Insurable interest of owner of a ship. T h e owner of a vessel undoubtedly has an insurable interest on the vessel to the extent of its value and this is true, even if he has mortgaged the s a m e (Higginson vs. Dall, 13 M a s s . 96.); or has chartered it to a third person w h o agrees to pay h i m its value in case of loss. (Sec. 100.) However, in the latter case, the insurer is liable only for that part of the loss w h i c h the insured cannot recover from the charterer. 6

The charterer of a ship h a s an insurable interest in it to the extent that he is liable to be damnified by its loss. (Sec. 106.) EXAMPLE: X is the owner of a ship valued at P10,000,000.00. He charters it to Y who agrees to pay its value in case of loss. X can still insure the vessel up to its value. If he does insure it, he can recover P10,000,000.00 from Y, the charterer. However, if X recovers P4,000,000.00, from Y, he can recover only the balance of P6,000,000.00 from the insurer. The liability of the insurer is subsidiary to that of the charterer. If the amount paid by the insurer is only P5,000,000.00, X is entitled to recover the deficiency from Y. (see Art. 2207, Civil Code.) After payment of indemnity, the right of subrogation is given to the insurer against Y in case the loss arose out of "wrong or breach of contract" on Y's part, (ibid.)

T h e shipowner's liability arising from the operation of a ship is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. This limited liability rule is subject to exceptions, namely: (1) whether the injury or death to a passenger is due either to the fault of the shipowner, or to the concurring negligence of the shipowner and the captain; (2) where the vessel is insured; and (3) in workmen's compensation claims. (Monarch Insurance Co., Inc. vs. Court of Appeals, 333 SCRA 71 [2000].)

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Sec. 100

Insurable interest and sale contracts. A person has an insurable interest if he will suffer in the event of loss of, or damage to, the subject matter insured. (1) In the case of a vessel. — T h e insurable interest is c o m m o n l y possessed by the owner, and also if money has been borrowed, by one who holds mortgage on the vessel. O n e w h o leases a vessel may agree to assume responsibility for its insurance, in which case he has an insurable interest. (2) In the case of cargo. — T h e insurable interest is in the shipper or the consignee depending upon the terms of sale. T h e following are s o m e of the c o m m o n terms of sale: (a) F.O.B. (free on board): 1) F.O.B. factory.—The b u y e r assumes responsibility w h e n the goods leave the factory; or 2) F.O.B. point of destination. — T h e b u y e r does not assume responsibility until the goods are received from the carrier. (b) C.I.F. (cost, insurance, and freight) — T h e seller assumes complete responsibility for securing all necessary insurance; and (c) C. & F. (cost and freight) — T h e b u y e r procures his own insurance. (Riegel, Miller, & Williams, Jr., op. cit., pp. 274-275.) (3) In the case of a vendee/consignee of goods in transit. — T h e v e n d e e / c o n s i g n e e has such existing interest therein as m a y be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale b e t w e e n h i m and the shipper of the goods which operates to vest in h i m an equitable title even before delivery or before he performed the conditions of the sale. T h e contract of shipment, w h e t h e r under F.O.B., C.I.F., or C. & F., is immaterial in the determination of whether the vendee has an insurable interest or not in the g o o d s in transit. T h e 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. (Filipino Merchants Insurance Co. vs. Court of Appeals, 179 S C R A 6 3 8 [1989].)

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Sec. 101. The insurable interest of the owner of a ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry.

Shipowner's and lender's insurable interest where vessel hypothecated by bottomry. A loan on bottomry is o n e w h i c h is payable only if the vessel, given as a security for the loan, c o m p l e t e s in safety the contemplated voyage. T h e lender in b o t t o m r y is entitled to receive a high rate of interest to c o m p e n s a t e h i m for the risk of losing his loan. T h e o w n e r of the vessel receives in case of loss no indemnity for his loss, but he does secure i m m u n i t y from p a y m e n t of the loan. Obviously, m a n y of the e l e m e n t s of an insurance contract are present in the b o t t o m r y loan as well as in the respondentia loan, w h i c h is secured in similar m a n n e r on the cargo or s o m e part thereof. (Vance, op. cit., p. 9.) W h e r e a vessel is b o t t o m e d , the o w n e r has an insurable interest only in the excess of its value over the a m o u n t of the bottomry loan. (Sec. 101.) T h e insurable interest of the lender on bottomry in the vessel given as security is to the extent of the loan. EXAMPLE: If the value of the vessel of X is P2,000,000.00, and he borrows from Y by way of loan on bottomry, P800,000.00, then he may effect insurance on it for only Pl,200,000.00, as this difference or excess of its value is the extent of his insurable interest. On the other hand, Y has an insurable interest in the ship given as security for the loan up to the amount thereof of P800,000.00, as the happening of the loss by a marine peril exposes him to the danger of not being able to recover the said amount. The contract of loan is similar to a marine insurance except that the money is given in advance. Sec. 102. 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.

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Sec. 103

Meaning of freightage. Section 122 gives the meaning of freightage (also called "freight") in marine insurance. In other words, it is the benefit which is to accrue to the owner of the vessel from its use in the voyage contemplated or the benefit derived from the e m p l o y m e n t of the ship. Sources of freightage. Freightage m a y be derived from: (1) the chartering of the ship; (2) its employment for the carriage of his o w n goods; and (3) its employment for the carriage of the goods of others. (Sec. 102.) Sec. 103. 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.

Insurable interest in expected or anticipated freightage. Under Section 103, the o w n e r of a ship includes not only the legal owner but also the charterer w h o expects to earn in the transportation of goods of others. (1) The freight (or freightage) covered by an ordinary m a r i n e policy is something m o r e than the interest indicated ordinarily by the use of the word "freight." (see Sec. 102.) T h e freight m o n e y assured to the shipowner m a y be: (a) freight, in its ordinary acceptation, to be earned and payable u p o n the completion of the voyage; (b) the hire of the vessel, payable by the charterer; or (c) the benefit accruing to the o w n e r from the use of his vessel in the way of profits u p o n carriage of his o w n goods. (Vance, op cit., p. 913.) (2) T h e owner of a ship has an insurable interest in expected freightage which he m a y not earn in case of the intervention of a peril insured against or other peril incident to the voyage. (Sec. 103.) The rule is the s a m e although the freight has b e e n paid in advance. (Vance, op. cit., p. 913.) However, where the agreement

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is that the freight is payable in any event, w h e t h e r the vessel is lost or is not lost, the s h i p o w n e r has no insurable interest in such freight. (44 C.J.S. 923.) B u t the shipper w h o has prepaid the freightage under such condition, has an insurable interest on the same.

Insurable interest in passage money. Passage money, unlike freight, is customarily payable in advance; it cannot be recovered if the vessel is lost before the completion of the passage. U n d e r such circumstances, the passenger can clearly insure his a d v a n c e s of p a s s a g e m o n e y but the shipowner m a y not insure it unless it is payable only u p o n the completion of the v o y a g e . (Vance, op. cit., p. 914.)

Sec. 104. 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, (a)

Insurable interest in expected freightage in a charter party. (1) When it exists. — To give an insurable interest in expected freightage, the insured m u s t h a v e an inchoate right to freight, that is, he must be in such position with regard to freight that nothing could prevent h i m from ultimately having a perfect right to it but the intervention of the perils insured against. (a) Where freight is the price to be paid for the hire of the ship under a charter party (infra.), the shipowner has an inchoate right to freight as soon as there is an inception of performance by the ship under the charter party. (b) Where the inchoate right to freight accrues as soon as the goods are actually put on board and where part of the goods has been loaded and the balance is ready, there is an insurable interest in the whole freight.

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Sec. 105

(c) Where the shipowner has m a d e a binding contract for freight and the ship is in readiness to receive the goods, he has an insurable interest. (2) When none exists. — There is no insurable interest in freight: (a) Where there is no contract and no part of the goods expected to be carried are on board, there is no insurable interest in freight although there are goods ready for shipment or the master is provided with funds for the purpose of purchasing a cargo. (b) Where the vessel is a mere "seeking ship" or a vessel looking for cargo to be transported, the owner h a s no insurable interest in freight to be earned on goods not loaded, (see 44 C.J.S. 932.) Sec. 105. One who has an interest in the thing from which profits are expected to proceed, has an insurable interest in the profits.

Insurable interest in expected profits. (1) Interest in thing involved based on some legal right. — One having a reasonable expectation of profits from a marine adventure may take out insurance to protect such profits. (Patapsco Ins. Co. vs. Coulter, 3 Pet. [U.S.] 222.) However, the interest in the goods or adventure out of which the profits are expected to be realized should be a legal interest although such interest m a y be contingent (see Sec. 14[c].) like c o m m i s s i o n to an agent or consignee. (French vs. H o p e Ins. Co., 16 Pick 397.) Thus, the owner of a cargo to be carried on a trading voyage has an insurable interest not only on the value of the cargo but also on the expected profit from the sale of the cargo which is liable to be affected by the perils of the sea. (Barclay vs. Cousins, 2 East. 544.) (2) Interest in thing involved based on a valuable consideration. — The insured has sufficient interest if it is based on a valuable consideration paid. For instance, one w h o has m a d e a contract for purchase of property which has been m a d e ready for shipment, although not loaded and w h o has contracted to sell it at a

Sec. 106

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profit, has an insurable interest in the profits. (Royal Exch. Assur. C o . vs. M'Swiney, 14 Q . B . 646.) Sec. 106. The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its loss.

Insurable interest of the charterer. By the provision of Section 106, the insurable interest of a charterer of a ship is up to the extent that he is liable to be damnified by its loss. (1) O n e w h o charters a vessel, with a stipulation to pay its value in case of loss, h a s an insurable interest to the extent of its value. (2) T h e charterer has also an insurable interest in the profits he expects to earn by carrying the g o o d s in excess of the a m o u n t he agreed to pay for the charter of the vessel. EXAMPLE: Y charters a vessel with a value of P2,000,000.00 belonging to X. It is stipulated that in case of loss, Y would pay its value. In this case, Y may insure the vessel for P2,000,000.00 as this is the extent of his insurable interest. If the agreement with A is that Y would pay P200,000.00 for the charter of the vessel, whether the vessel is lost or not lost, Y's insurable interest is P2,200,000.00. Suppose the agreement with X is that Y would pay the price of the charter only upon the safe arrival of the vessel at the port of destination. Then Y engages to carry the goods of Z for the price of P300,000.00. The expected profits of P30U000.00 exceed the chartered hire P200,000.00 by P100,000.00. In this case, Y can insure the vessel to the extent of P2,100,000.00 (P2,000,00.00 + P100,000.00) as that is the extent that he is liable to be damnified by its loss.

Types of charter parties. A charter party is a contract by which an entire ship or some principal part thereof is lent by the owner to another person for a

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specified time or use. (Puromines, Inc. vs. Court of Appeals, 220 SCRA 281 [1993].) In modern maritime law and usage, there are two (2) distinguishable types of charter parties. (1) A bareboat or demise charter is a demise of a vessel, m u c h as a lease of an unfurnished house is a demise of real property. The shipowner turns over full possession and control of his vessel to the charterer, w h o then undertakes to provide a crew and victuals and supplies and fuel for her during the term of the charter. The shipowner is not normally required by the terms of a demise charter to provide a crew, and so the charterer gets the "bareboat," i.e., without a crew. T h e charterer b e c o m e s , in effect, the owner for the voyage or service stipulated, subject to liability for damages caused by negligence. Sometimes, of course, the demise charter might provide that the shipowner is to furnish a master and crew to m a n the vessel under the charterer's direction, such that the master and crew provided by the shipowner b e c o m e the agents and servants or employees of the charterer, and the charterer (and not the o w n e r ) through the agency of the master, has possession and control of the vessel during the charter period. (2) Under a contract of affreightment, the o w n e r of the vessel leases part or all of its space to haul goods for others. It is a contract of special service to be rendered by the o w n e r of the vessel w h o retains the possession, c o m m a n d and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for the payment of the charter hire or freight. The contract m a y be either v o y a g e charter or time charter. T h e charterer is free from liability to third persons in respect to the ship. 7

(a) A voyage charter or trip charter is a contract for the carriage of goods, from one or more ports of loading to one or more ports of unloading, on one or on a series of voyages. In a voyage charter, master and crew remain in the e m p l o y

The cargo not loaded is considered as deadfreight. It is the amount paid by or recoverable from a charterer of a ship for the portion of the ship's capacity the latter contracted for but failed to occupy. Under Section 680 of the Code of Commerce, the liability for deadfreight is on the charterer. (National Food Authority vs. Court of Appeals, 311 SCRA 700 [1999].) V

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of the o w n e r of the vessel. T h e ship o w n e r supplies the ship's store, pays for the w a g e s of the master and the crew and defrays the expenses for the maintenance of the ship. A voyage charter being a private carriage, the parties m a y fully contract respecting liability for d a m a g e to the g o o d s and other matters. T h e basic principle is that the "responsibility for cargo loss falls on the o n e w h o agreed to perform the duty involved" in accordance with the terms of m o s t voyage charters. 8

(b) A time charter is a contract for the use of a vessel for a specified period of time or for the duration of o n e or more specified voyages. In this case, the o w n e r of the time-chartered vessel also retains possession a n d control through the master and crew w h o remain his e m p l o y e e s . W h a t time charterer acquires is the right to utilize the carrying capacity and facilities of the vessel a n d to designate her destinations during the term of the charter. In a demise or bareboat charter, the charterer is treated as owner pro hac vice of the vessel, the charterer assuming in large measure the customary rights a n d liabilities of the shipowner in relation to third persons w h o h a v e dealt with h i m or with the vessel. In such case, the master of the vessel is the agent of the charterer and not of the shipowner. T h e charterer or o w n e r pro hac vice, and not the general o w n e r of the vessel, is held liable for the expenses of the voyage including the w a g e s of the seamen."

T h e distinction between a "common or public carrier" (see Arts. 1732, 1733, Civil Code.) and a "private or special carrier" lies in the character of the business, such that if the undertaking is a single transaction, not a part of the genera! business or occupation, although involving the carriage of goods for a fee, the person or corporation offering such service is a private carrier. A public carrier remains as such, notwithstanding the charter of the whole or portion of a vessel by one or more persons, provided the charter is limited to the ship only, as in the case of a time charter or voyage charter. It is only when the charter includes both the vessel and its crew as in a bareboat or demise that a common carrier becomes private at least insofar as the particular voyage covering the charter party is concerned. Indubitably, a shipowner in a time or voyage charter retains possession and control of the ship, although her holds may, for the moment, be the property of the charterer. (Planters Products, Inc. vs. Court of Appeals, 226 SCRA 478 [1993].) I n a contract of affreightment, the shipper or charterer merely contracts a vessel to carry his cargo with the corresponding duty to provide for the berthing space for the loading or unloading. The charterer is merely required to exercise ordinary diligence in insuring that a berthing space be made available for the vessel. He does not make himself

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Sec. 107

(Litonjua Shipping Company, Inc. vs. National Seaman Board, 176 SCRA 189 [1989]; see Maritime Agencies & Services, Inc. vs. Court of Appeals, 187 S C R A 346 [1990]; Puromines, Inc. vs. Court of Appeals, supra; see Planters Products, Inc. vs. Court of Appeals, 226 S C R A 4 7 6 [1993]; Tabacalera Insurance C o m p a n y vs. North Front Shipping Services, Inc., 272 S C R A 527 [1997]; National Food Authority vs. Court of Appeals, 311 S C R A 700 [1999]; Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc., 315 S C R A 709 [1999]; San Miguel Corporation vs. Heirs of S. Inguito, 3 8 4 S C R A 87 [2002].) Sub-Title 1-C Concealment Sec. 107. In marine insurance, each party is bound to communicate, in addition to what is required by section twenty-eight, all the information which he possesses, material to the risk, except such is mentioned in section thirty, and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses assumes to disclose.

Meaning of concealment in marine insurance. Concealment in marine insurance is the failure to disclose a n y material fact or circumstance w h i c h in fact or l a w is within, or which ought to be within the k n o w l e d g e of o n e party and of which the other has no actual or presumptive k n o w l e d g e . This rule applies to both the assured and the underwriter, and the rests upon the doctrine of g o o d faith as well as the prevention of fraud. (3 Joyce on Insurance, 2 n d Ed., 2943.)

Rules as to misrepresentations and concealments stricter in marine insurance. T h e rules as to misrepresentations and the concealments, or omissions to state facts material to the risk are m o r e strict in cases

an absolute insurer against all events which cannot be foreseen or are inevitable. The law only requires the exercise of due diligence on the part of the charterer to scout or look for a berthing space. (National Food Authority vs. Court of Appeals, supra.)

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of marine than of fire insurance. T h i s is due to the difference in the character of the property, and the greater facility the insurer possesses in obtaining information as to its conditions and surrounding circumstances in cases of insurance on buildings, etc., than on vessels, w h i c h are often insured w h e n absent or afloat. (Armena vs. T h e Transatlantic Fire Ins. Co., 90 N.Y. 450.) 10

U n d e r Section 107, to constitute concealment, it is sufficient that the insured is in possession of the material fact concealed although he m a y not be aware of it. Thus, if the agent failed to notify his principal of the loss of a cargo and the latter, after the loss but ignorant thereof, secured insurance "lost or not" on the venture, such insurance will be void on the ground of concealment. (Proudfoot vs. Montefiore, L.R. 2 Q . B . 511.) Sec. 108. In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material.

Opinions or expectations of third persons. A party to a contract of insurance need not communicate information of his o w n j u d g m e n t to the insurer m u c h less what he learns from a third person, (see Sees. 3 5 , 43.) In marine insurance, however, the rule is quite strict because the insured is b o u n d to c o m m u n i c a t e to the insurer not only facts but also (1) beliefs or opinions of third persons or (2) expectations of third persons. T h e only requirement is that the information be in reference to a material fact. (Sec. 108.) Thus, there is concealment where the insured at the time of application for insurance did not disclose the opinion of marine experts w h o inspected the vessel insured that it w a s unseaworthy. 10

When the early contracts of marine insurance were formed, in the days when underwriters frequented the coffee shops of 18th century England, the risk to be assumed was evaluated almost entirely in reliance on information furnished by the applicant. Often the ship was far away and could not be inspected. In any case, it was the owner who was best acquainted with the condition of the ship, the circumstances of the voyage and other matters which vitally affected the degree of the risk involved. As a result, the insurance was early declared to be a contract of the highest good faith and the insurer was held to be entitled to rely upon the information submitted to him. (Legal Concepts and Contract Provisions, by J.E. Greider, in LHIH, p. 110.)

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Sees. 109-110

Sec. 109. 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.

Presumptive knowledge by insured of prior loss. (1) When rule applicable. — Section 109 establishes a rebuttable presumption of knowledge of a prior loss on the part of the insured " i f the information might possibly h a v e reached h i m in the usual m o d e of transmission and at the usual rate of c o m m u nication." (2) Reason for presumption. — T h e reason for the presumption is the quickness in the transmission of n e w s by m e a n s of modern communications. I n a s m u c h as at present, the m e a n s of transportation have rapidly a d v a n c e d due to the urgent needs of commerce, the presumption that the loss of a vessel due to the disaster of the seas w a s duly c o m m u n i c a t e d to the insured, becomes stronger. (Snow vs. Mercantile Mut. Ins. Co., 61 N.Y. 160.) (3) When rule not applicable. — T h e insured is not b o u n d , however, to use all accessible m e a n s of information at the very last instant of time to ascertain the condition of the property insured. Thus, w h e n having no cause to expect information the insured omits to call at the post office w h e r e a letter w a s received on the morning of the day the insurance w a s effected, containing the material information, he is not guilty of negligence w h i c h will vitiate the policy. (Neptune Ins. C o . vs. Robinson, 11 Gill & [Md.] 250.) Sec. 110. 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;

Sec.

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(c) The liability to seizure from breach of foreign laws of trade; (d) The want of necessary documents; (e) The use of false and simulated papers.

When concealment does not vitiate entire contract. As a rule, the c o n c e a l m e n t of a material fact entitles the injured party to rescind the entire contract of insurance. However, concealment of any of the matters indicated from paragraphs (a) to (e) of Section 110 does not avoid the policy ab initio. If the vessel be lost due to any of the causes m e n t i o n e d in Section 110, which w a s concealed, the insurer is not liable; b u t if the vessel be lost due to other perils of the sea, like a storm, the insurer is not exonerated from liability. Generally, the national character of the vessel is not a material fact; but facts lying peculiarly within the k n o w l e d g e of the insured, w h i c h will e x p o s e the property to belligerent risks or seizure and c o n d e m n a t i o n for violation of the trade or navigation laws of another country, m u s t be disclosed. (45 C.J.S. 551.) Sub-Title 1-D Representations Sec. 111. 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.

Applicability of rules on representation to marine insurance. The rules governing representations with respect to insurance policies generally have b e e n held to apply to marine insurance policies. Thus, the general rules have been applied to marine insurance with respect to the distinctions between representations and warranties and to the construction of representations, and a

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Sec. 112

substantial misrepresentation of any material fact or circumstance relating to marine insurance avoids the policy. (45 C.J.S. 552.) The general rule that a representation is material where it would influence the judgment of a prudent insurer in fixing the premium or in determining whether he would take the risk, is applicable to marine insurance. (38 C.J.S. 1062.) Effect of false representation by insured. (1) Intentional. — A n y misrepresentation of a material fact made with fraudulent intent avoids the policy. (2) Not intentional. — If the misrepresentation is not intentional or fraudulent b u t the fact misrepresented is material to the risk, the insurer m a y also rescind the contract from the time the representation b e c o m e s false. Section 111 qualifies the general provision in Section 45 under w h i c h the injured party m a y rescind the contract only "from the time w h e n the representation b e c o m e s false" although the representation is intentionally false. (3) Materiality of representations. — Representations as to the age, equipment, earnings, and particular condition or rating of a vessel; that she is to be repaired at a certain place; that she has arrived at her port of destination, or w a s at a certain place at a certain time; that other underwriters h a d insured her at a certain rate; or as to anything w h i c h concerns the state of the vessel at any particular period of her voyage, h a v e b e e n held to be material. B u t statements of the nature and a m o u n t of the cargo, where she w a s not overloaded or w h e r e the underwriter did not rely thereon, h a v e b e e n held to be immaterial. (38 C.J.S. 554.) Sec. 112. The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance. Effect of falsity of representation as to expectation. Representations of expectation or intention are to be carefully distinguished from promissory representations. T h e former are

Sec. 113

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statements of future facts or events w h i c h are in their nature contingent and which the insurer is b o u n d to k n o w that the insured could not h a v e intended to state as k n o w n facts, but as intentions or expectations merely. H e n c e , unless m a d e with fraudulent intent, their failure of fulfillment is not a ground for rescission. This rule applies to statements of the time a vessel will sail or is expected to sail, the nature of the cargo to be shipped, the a m o u n t of profits expected, the destination of the vessel, or that the insured has no doubt that he can get insurance effected for a certain premium. (45 C.J.S. 553.) Sub-Title 1-E Implied Warranties Sec. 113. In every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy.

Warranty in marine insurance defined. In marine insurance, a warranty has b e e n defined as a stipulation, either expressed or implied, forming part of the policy as to s o m e fact, condition or circumstance relating to the risk. (Hearn vs. Equitable Safety Ins. Co., 30 Wall. 494, 22 L. Ed. 398.)

Implied warranties in marine insurance. In every insurance u p o n any marine venture whether of vessel, cargo, or freight, there are conditions upon the underwriter's liability for the risks assumed, usually termed as implied warranties. That is, the insurer will not be liable for any loss under his policy in case the vessel: (1) is unseaworthy at the inception of the insurance (Sec. 113.); or (2) deviates from the agreed voyage (see Sees. 123, 124, 125.); or (3) engages in an illegal venture. (Vance, op. cit., p. 920.) Another implied warranty is that (4) the ship will carry the requisite documents of nationality or neutrality of the ship or

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cargo where such nationality or neutrality is expressly warranted. (Sec. 120.) Of course, it is also impliedly warranted that the insured has an insurable interest in the subject matter insured. Implied warranty of seaworthiness. In every voyage policy of marine insurance, there is an implied warranty that the vessel is in all respects seaworthy, and such warranty can be excluded only by clear provisions of the policy. (38 C.J. 1071-1072; Phil. A m e r i c a n General Insurance Co. vs. Court of Appeals, 273 S C R A 262 [1997].) (1) Where seaworthiness admitted by insurer. — If the policy provides that the seaworthiness of the vessel as b e t w e e n insured and insurer is admitted, the issue of seaworthiness cannot be raised by the insurer without showing concealment or misrepresentation by the insured. T h e admission of seaworthiness by the insurer m a y m e a n one or two things: (a) that the warranty of seaworthiness is to be taken as fulfilled; or (b) that the risk of unseaworthiness is assumed by the insurer. T h e insertion of such waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. (Ibid.) (2) Where unseaworthiness unknown to owner of cargo insured. — Where cargo (see Sec. 9 9 [ 1 , a].) is the subject of marine insurance, the implied warranty of seaworthiness attaches to w h o e v e r is insuring the cargo, whether he be the shipowner or not. T h e fact that the unseaworthiness of the ship w a s u n k n o w n to insured is immaterial in ordinary marine insurance and m a y not be used by him as a defense in order to recover on the marine insurance policy. Since the law provides for an implied warranty of seaworthiness in every contract of ordinary m a r i n e insurance, it becomes the obligation of a cargo o w n e r to look for a reliable c o m m o n carrier which keeps its vessels in seaworthy condition. The shipper may have no control over the vessel but he has full control in the choice of the c o m m o n carrier that will transport his goods. Or, the cargo o w n e r m a y enter into a contract of insurance which specifically provides that the insurer answers

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not only for the perils of the sea but also provides for coverage of perils of the ship. (Roque vs. Intermediate Appellate Court, 139 S C R A 5 9 6 [1985]; Phil. A m e r i c a n General Insurance Co., Inc. vs. Court of Appeals, supra.) It has b e e n held, however, that a charterer of a vessel h a s no obligation before transporting its cargo to ensure that the vessel it chartered complied with all the legal requirements. T h e duty rests u p o n the c o m m o n carrier simply for being e n g a g e d in "public services." Because of the implied warranty of seaworthiness, shippers of g o o d s are not expected w h e n transacting with c o m m o n carriers, to inquire into the vessel's seaworthiness, genuineness of its licenses and compliance with all maritime laws. (Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc., 315 S C R A 709 [1999].) (3) Where vessel found unseaworthy. — As a general rule, c o m m o n carriers are p r e s u m e d to h a v e b e e n at fault or to have acted negligently for the loss, destruction, or determination of goods, unless they prove that they observed diligence. (Arts. 1733, 1 7 3 4 , 1 7 3 5 , Civil Code.) W h e r e a vessel is found unseaworthy, a shipowner is also p r e s u m e d to be negligent since it is tasked with the maintenance of its vessel. T h o u g h its duty can be delegated, still, the shipowner m u s t exercise close supervision over its men. An exception to the limited liability doctrine which limits the insurer's liability to it pro rata share in the insurance proceeds, is w h e n the d a m a g e is due to the fault of the shipowner and the captain. In such case, the shipowner, unless it overcomes the presumption of negligence, is liable to the total value of the damage or loss. Sec. 114. 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.

What constitutes seaworthiness. Seaworthiness is a relative term depending upon the nature of the ship, the voyage, and the service in which she is at the time engaged. (American Merchant Marine Ins. Co. vs. Margaret M. Ford Corp., 269 F. 768.) Generally, for a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a

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sufficient number of competent officers and crew. T h e failure of a common carrier to maintain in seaworthy condition the vessel involved in the contract of carriage is a clear breach of its duty prescribed in Article 1755 of the Civil Code. (Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc., 315 S C R A 709 [1999].) (1) Nature of ship. — To comply with the implied warranty of seaworthiness, the vessel must be in a fit state as to repair, equipment, crew and in all other respects to perform the voyage insured and to encounter the ordinary perils of navigation. She must also be in a suitable condition to carry the cargo put on board or intended to be put on board, (see 45 C.J.S. 563.) It is not necessary that the cargo itself shall be seaworthy, (see Sec. 119.) (2) Nature of voyage. — W h a t is reasonable fitness to encounter the perils expected to arise in the course of the v o y a g e vary, naturally, with the character of the particular voyage. A vessel well fitted for the navigation of the Mississippi m i g h t be wholly unfit for a voyage on the Great Lakes, while a lake streamer would scarcely be seaworthy in the Atlantic. A crew that could be quite adequate for a vessel while passing through a canal might be insufficient for the proper handling of the s a m e vessel on the high seas. (Vance, op. tit., pp. 922-923.) (3) Nature of service. — T h e seaworthiness of a vessel is also to be determined with regard to the nature of the cargo w h i c h she undertakes to transport, the requirement b e i n g that she shall be reasonably capable of safely carrying the cargo to its port of destination. (Schults vs. Pacific Ins. Co., 14 Fla. 7 3 ; see Sec. 119.) ILLUSTRATIVE CASE: Evidence established that insured motor launch was unseaworthy. Facts: A motor launch owned by X was chartered by Y. Delivery of the motor launch was made after the date agreed upon. While manned by a complement engaged by Y, the motor launch sank. X brought an action to recover from Y the value of the motor launch or from the insurer the amount for which it was insured. It appears that at the time it sank, there was no typhoon; the waves were those caused by monsoon winds of the season; the motor launch did not touch bottom or hit anything during

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her cruise in the bay; and the water was bubbling in the engine room, from which it could be inferred that the underneath planking gave away. Issue: Will the action prosper? Held: No. Whether or not there was delivery of the motor launch on the date agreed upon becomes unimportant if the same was unseaworthy; and the preponderance of evidence established that it was unseaworthy and that it sank due to her unseaworthiness and not to the incompetence or negligence of the complement engaged by Y to man her. (Madrigal, Tiangco &

Co. vs. Hanson, Orth & Stevenson, Inc., 103 Phil. 345 [1958].)

Criterion of seaworthiness. T h e warranty of seaworthiness is not an absolute guaranty that the vessel will safely m e e t all possible perils. (Vance, op. cit., p. 923.) A perfect vessel or one impervious to the assaults of the elements is not required; nor is the best and m o s t skillful form of construction required, but only such as is sufficient for the kind of vessels insured with reference to their physical and mechanical condition, the extent of its fuel and provisions supply, the quality of its officers and crew, and its adaptability for the service in which they are employed. (45 C.J.S. 5 6 3 ; S a n M i g u e l Corporation vs. Heirs of S. Inguito, 384 S C R A 87 [2002].) Sec. 115. 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 transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage.

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When seaworthiness is complied with. (1) Commencement of risk. — The general rule is that the warranty of seaworthiness is complied with if the ship be seaworthy at the time of the c o m m e n c e m e n t of the risk. Prior or subsequent unseaworthiness is not a breach of the warranty; nor is it material that the vessel arrives in safety at the end of her voyage. There is no implied warranty that the vessel will remain in seaworthy condition throughout the life of the policy, (see Sec. 118.) (2) Exceptions. — There are three exceptions to the rule, namely: (a) In the case of time policy, the ship m u s t be seaworthy at the c o m m e n c e m e n t of every voyage she m a y undertake (Sec. 115[a].); (b) In the case of cargo policy, each vessel u p o n w h i c h the cargo is shipped or transhipped, j n u s t be seaworthy at the c o m m e n c e m e n t of each particular voyage (ibid., [b].); and 11

(c) In the case of a voyage policy contemplating a v o y a g e in different stages, the ship m u s t be seaworthy at the c o m m e n c e m e n t of each portion. (Sec. 117.) (3) Ship's actual condition at commencement of voyage. — T h e unexplained sinking of a vessel creates the presumption of unseaworthiness. T h e shipowner cannot escape liability by presenting in evidence a certificate that tends to s h o w that at the time of dry-docking and inspection (by the Philippine Coast Guard), the vessel w a s fit for voyage.

"In maritime law, transshipment is defined as "the act of taking cargo out of one ship and loading it in another," or "the transfer of goods from the vessel stipulated in the contract of affreightment to another vessel before the place of destination named in the contract has been reached," or "the transfer for further transportation from one ship or conveyance to another." In its ordinary or strictly legal acceptation, there is transshipment whether or not the same person, firm or entity owns the vessels. In other words, the fact of transshipment is not dependent upon the ownership of the transporting conveyances but rather on the fact of actual physical transfer or cargoes from one vessel to another. It is a well-known commercial usage that transshipment of freight without legal excuse, however competent and safe the vessel into which the transfer is made, is an infringement on the right of the shipper and subjects the carrier to liability if the freight is lost even by a cause otherwise excepted. (Magellan Mfg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102 [1991].)

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Seaworthiness relates to the vessel's actual condition at the time of the c o m m e n c e m e n t of the v o y a g e . T h e issuance of the certificate neither negates the presumption of unseaworthiness triggered by an unexplained sinking or establishes seaworthiness. Securing a certificate of seaworthiness, or the approval of the shipper of the cargo, or his surveyor, of the condition of the vessel or her s t o w a g e does not satisfy the vessel o w n e r ' s obligation nor does it establish due diligence if the vessel was, in fact, unseaworthy, for the cargo o w n e r has no obligation in relation to seaworthiness. (Delsan Transport Lines, Inc. vs. Court of Appeals, 369 S C R A 24 [2001].) EXAMPLES: (1) X insures his ship for a voyage between Manila and Tokyo. The implied warranty of seaworthiness is complied with if the vessel leaves Manila in seaworthy condition. (2) Suppose X insures the ship for one year, a specific length of time. If the vessel undertakes ten voyages during the period specified, the implied warranty is not complied unless the ship be seaworthy at the commencement of each voyage. (3) Suppose the insurance is upon cargo which by the terms of the policy is to be carried by two vessels: by vessel A, from Manila to Tokyo; and by vessel B, from Tokyo to San Francisco. In this case, the implied warranty applies to the commencement of each particular voyage. So the insurer is not liable in case of loss of or damage to the cargo while in vessel B, if vessel B is unseaworthy when it leaves Tokyo although vessel A leaves Manila in a seaworthy condition.

Time and voyage policies. A time policy provides coverage for a fixed period of time, at the expiration of which the insurance will lapse, while a voyage policy covers the subject matter for the voyage n a m e d in the policy until the specified voyage ends, regardless of the time it takes to complete the voyage. (1) The time policy gives protection for a stipulated period and, therefore, avoids the annoyance of constant attention to

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the termination of voyages and the renewal of policies. On hulls (vessels), they are, therefore, the c o m m o n type. By m e a n s of the time policy, the insured avoids the necessity of continually describing separate voyages m a n y of which are over similar routes. (2) The voyage policy is particularly adapted to tramp steamers and sailing vessels, inasmuch as these do not m o v e over fixed routes and their travel m a y be more easily described by separate voyage policies. Because cargoes are subject to sea risk for comparatively short periods, the voyage policy is frequently used. (Riegel, Miller & Williams, Jr., op. cit, pp. 275-276.) Sec. 116. 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.

Scope of seaworthiness of vessel. Seaworthiness requires that the vessel m u s t h a v e e q u i p m e n t and appliances appropriate to the v o y a g e in w h i c h it is e n g a g e d and the cargo it carries; it must h a v e sufficient fuel, stores and provisions to last for the entire v o y a g e ; it m u s t h a v e sufficient number of competent officers and men; and if the insurance is on cargo, the same must be properly loaded, stowed, d u n n a g e d and secured so as not to imperil the navigation of the vessel or to cause injury to the vessel or cargo. A ship, however, is not unseaworthy b e c a u s e of s o m e defect in loading or stowage w h i c h is easily curable by those on board, and w a s cured before the loss. B u t carrying a deck cargo raises a presumption of unseaworthiness w h i c h can be o v e r c o m e only by showing affirmatively that the deck cargo w a s not likely to interfere with the due m a n a g e m e n t of the vessel; and when, by a jettison or otherwise, the vessel can be m a d e seaworthy, the warranty is satisfied, (see 45 C.J.S. 564-566.)

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It is settled that the carrying of cargo on deck raises the presumption of unseaworthiness unless it can be s h o w n that the deck cargo will not interfere with the proper m a n a g e m e n t of the ship. A ship m a y not be designed to carry substantial a m o u n t of cargo on d e c k and the inordinate loading of cargo on deck m a y result in the decrease of the vessel's metacentric height thus m a k i n g it unstable. (Phil. A m e r i c a n G e n e r a l Insurance C o . vs. Court o f Appeals, 273 S C R A 2 6 2 [1997].) Sec. 117. 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.

Seaworthiness during voyage in stages. This section provides the third exception to the general rule stated under Section 115. W h e r e the policy contemplates a voyage in different stages during w h i c h the subject matter insured will be exposed to different degrees or kinds of perils, or the ship will require different kinds of equipment, she m u s t be seaworthy at the c o m m e n c e m e n t of each stage, b u t it is sufficient if at the c o m m e n c e m e n t of each stage she is seaworthy for the purpose of that stage. (Northwestern S S . C o . vs. M a r i t i m e Ins. Co., 161 F. Ed. 166.) T h e stages must be separate and distinct in order to have a different degree of seaworthiness for particular parts. (Quebec Mar. Ins. Co. vs. Commercial Bank, L.R. 3 P C . 234.) EXAMPLE: A vessel is insured for a long voyage, part of which will be in rivers and the rest across high seas and this fact appears in the policy. In this case, the warranty of seaworthiness on the vessel is applied separately to the different portions of the voyage. If the vessel is seaworthy at the beginning of the first portion of the voyage, such warranty is not complied with if at the

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commencement of the second portion of the voyage, the vessel is not in a position to encounter the ordinary perils of the sea. (Bullion vs. Lupton, 15 Com. B. 109 R.C.L) Sec. 118. When a 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, (a)

Where ship becomes unseaworthy during voyage. As a general rule, the implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk. (Sec. 115.) T h e r e is no implied warranty that the vessel will remain in a seaworthy condition throughout the life of the policy. However, w h e n the vessel b e c o m e s u n s e a w o r t h y during the voyage, it is the duty of the master, as the s h i p o w n e r ' s representative, to exercise due diligence to m a k e it seaworthy again, and if loss should occur b e c a u s e of his negligence in repairing the defect, the insurer is relieved of liability ( P a d d o c k vs. Franklin Ins. Co., 11 Pick 234; see S e c . 133.) b u t the contract of insurance is not affected as to any other risk or loss covered by the policy and not caused or increased by such particular defect. (Union Ins. C o . of Philadelphia vs. Smith, 124 U.S. 405.) Note that the benefit of exoneration is given only to an "insurer on ship or s h i p o w n e r ' s interest." Sec. 119. 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 insurance upon the cargo.

Seaworthiness as to cargo. The seaworthiness of a vessel is also to be determined with regard to the nature of the cargo w h i c h she undertakes to transport, the requirement being that she shall be reasonably

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capable of safely conveying the cargo to its port of destination. (Schultz vs. Pacific Ins. Co., 14 Fla. 73.) A ship which is seaworthy for the purpose of insurance u p o n the ship m a y yet be u n s e a w o r t h y for the p u r p o s e of insurance u p o n the cargo. Thus, a ship w a s held u n s e a w o r t h y for cargo because of a defective pipe w h i c h the s h i p o w n e r failed to repair, with the result that water entered the vessel and the cargo w a s d a m a g e d . (G. Tiaco y H e r m a n o s vs. U n i o n Ins. Society of Canton, 40 Phil. 40 [1919].) Sec. 120. 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. Express warranty as to nationality or neutrality. (1) A warranty of national character m a y be gathered from the language of the policy describing the vessel as the "Philippine," "American," "British," or " S p a n i s h " ship, etc., although an exception has b e e n m a d e w h e r e the fact recited could h a v e no relation to the risk. A warranty of nationality does not m e a n that the vessel w a s built in such country, but that the property belongs to a subject thereof. It refers to the beneficial ownership rather than to the legal title. (45 C.J.S. 557.) (2) A warranty of neutrality imports that the property insured is neutral in fact, and shall be so in appearance and conduct, that the property shall belong to neutrals, and that no act of insured or his agent shall be done which can legally compromise its neutrality. T h e warranty extends to insured's interest in all the property intended to be covered by the policy, but not to the interest of a third person not covered by the policy. (Ibid.) Implied warranty to carry requisite documents. (1) The warranty of nationality also requires that the vessel be conducted and documented as of such nation, and a breach of

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warranty in either particular will avoid the policy. The warranty is a continuing one and a change of nationality is a breach of the warranty, but the warranty is not broken by a contract for sale and transfer to an alien at a future date. (Ibid.) . (2) A warranty of neutrality requires tha t the insured property shall be accompanied by documentary evidence of its neutral character, and not by any other papers which compromise such character. The proper papers must be produced w h e n necessary to prove ownership, and such production is not excused because the papers were lost by the fault of the master. (Ibid.) Sub-Title 1-F Voyage a n d Deviation Sec. 121. When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the voyage insured is one which conforms to the course of sailing fixed by mercantile usage between those places. Sec. 122. 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. Sec. 123. Deviation is a departure from the course of the voyage insured, mentioned in the last two sections, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage. Meaning of deviation. Section 123 defines deviation. In other words, any u n e x c u s e d departure from the regular course or route of the insured v o y a g e or any other act which substantially alters the risk constitutes deviation. (45 C.J.S. 564.) Cases of deviation in marine insurance. There are four (4) cases of deviation in m a r i n e insurance, namely:

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(1) Departure from the course of sailing fixed by mercantile usage b e t w e e n the places of b e g i n n i n g and ending specified in the policy (Sec. 121.); (2) Departure from the m o s t natural, direct, and advantageous route b e t w e e n the places specified if the course of sailing is not fixed by mercantile u s a g e (Sec. 122.); (3) Unreasonable delay in pursuing the v o y a g e (Sec. 123.); and (4) T h e c o m m e n c e m e n t of an entirely different voyage, (ibid.) Sec. 124. A deviation is proper: (a) When caused by circumstances over which neither the master nor the owner of the ship has any control; (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. 125. Every deviation not specified in the last section is improper. Kinds of deviation. Deviation m a y be proper or improper. Deviation is proper in the cases enumerated in Section 124. Every deviation not specified in Section 124 is improper. (Sec. 125.) T h e insurer is not exonerated from liability for loss happening after proper deviation. T h e effect is as if there were no deviation. W h e n deviation is proper. (1) Deviation from the course of the voyage will not vitiate a policy of marine insurance if the deviation is justified or caused by actual necessity which is equal in importance to such deviation. (Maryland Ins. Co. vs. Le Roy, 3 L. Ed., 257.) Thus, the insurance is not affected:

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(a) Where the ship is compelled to head for another port by stress of weather (Graham vs. Commercial Ins. Co., 11 Johns [N.Y.] 352.); or (b) Where a departure from the course is m a d e to take on a pilot when necessary to the safety of the adventure (Pouverin vs. Louisiana State M. & F. Ins. Co., 4 B o b [La.] 234.); or in order to proceed to a place where the ship will meet a convoy if the policy warrants that the ship will not proceed from one port to another without convoy (Gordon vs. Morley, 2 Strange 1265.); or to escape capture (Whitney vs. Haven, 13 Mass. 172.); or (c) Where the master seeks another port of discharge when the water of the river to the port in w h i c h he is supposed to discharge is too shallow for his vessel to enter. (Byrne vs. Louisiana State Ins. Co., 7 Mart. [La.] 126.) (2) Such compulsory deviations are risks impliedly a s s u m e d by the underwriter. B u t while deviation to save property is not justified, unless it is to save another vessel in distress (see Burgeos vs. Equitable M a r i n e Ins. Co., 126 M a s s . 70 [1878].), a deviation for the purpose of saving life does not constitute a breach of warranty. (Sec. 124[d].) In this case, the justification rests on ground of humanity. Sec. 126. An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation.

Effect of improper deviation. Where there has b e e n any deviation or c h a n g e of the risk without just cause, the insurer b e c o m e s immediately absolved from further liability under the policy for losses occurring subsequent (not before) to the deviation. (45 C.J.S. 567.) Just as a surety is discharged if the creditor materially changes the contract with the principal debtor, irrespective of actual injury to the surety, so the marine underwriter is entitled to be discharged if the risk assumed is c h a n g e d by a deviation from the voyage insured. A n d the fact that the deviation did not increase the risk, or in any wise contribute to the loss suffered, is

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wholly immaterial. (Vance, op. cit., p. 924.) T h e underwriter can always defend himself by saying: "I n e v e r u n d e r t o o k this risk." (African Merchants C o . vs. British, Etc., Mar. Ins. Co., L.R. 8 Esch. 154.) Sub-Title 1-G Loss Sec. 127. A loss may be either total or partial. Sec. 128. Every loss which is not total is partial. Sec. 129. A total loss may be either actual or constructive.

Kinds of losses. T h e law classifies loss into either total or partial. T h e r e are t w o kinds of total loss: actual or absolute; (Sec. 130.) a n d constructive or technical. (Sec. 131.) W h e n the loss is total, the underwriter is liable for the w h o l e of the a m o u n t insured. Sec. 130. An actual total loss is caused by: (a) A total destruction of the thing insured; (b) The irretrievable loss of the thing by sinking, or by being broken up; (c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured, (a)

Meaning of actual total loss. An actual total loss exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged as no longer to exist in its original character. (Vance, op. cit., p. 935.)

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Complete physical destruction not essential to constitute actual total loss. Under Section 130, the complete physical destruction of the subject matter as in the case of fire is not essential to constitute an actual total loss. (pars, [b], [c], [d].) Such a loss m a y exist where the form and specie of the thing is destroyed although the materials of which it consisted still exist. (Pan M a l a y a n Insurance Corp. vs. Court of Appeals, 201 S C R A 382 [1991].) EXAMPLES: (1) Where a vessel sinks in deep water or runs on the reef and is broken wholly to pieces, the loss is actually total. The same is true where a vessel is so badly injured that she no longer exists as a ship but is a mere confused mass of material. (Vance, op. cit., p. 935.) Likewise, where the insured is irretrievably deprived of possession or ownership of the cargo in question (e.g., sunk gold bars which could not be retrieved), an actual total loss has been suffered. (2) The fact that insured vessel which sank and was finally raised was in such condition that much further time would be required to make the necessary repairs and install the new machinery before it could be placed in commission, and the further fact that the cost of salvage, repair, and reconstruction was more than the original cost of the vessel or its value at the time the policy was issued, constitute an actual total loss of the vessel. (Philippine Mfg. Co. vs. Union Insurance, 42 Phil. 378 [1921]; but see Sec. 139.) (3) An actual total loss is suffered where the cargo, by the process of decomposition or other chemical agency, no longer remains the same kind of thing as before. Thus, in a case, the insured rice seeds found wetted were determined to be lost and rendered valueless to the insured for planting or seeding purposes since the wetting or contact with water had definitely activated their tendency to germinate. The rice seeds were treated and would germinate upon mere contact with water. (Pan Malayan Insurance Corp. vs. Court of Appeals, supra.) Another example is where cement submerged in water becomes concrete. Here, there is a loss of species which means that the damage sustained causes the cargo to be different from the original.

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(4) There is also an actual total loss if the insured is effectively deprived of the use and possession of the property as where the property insured passes into the possession of captors or salvors, and the owners are thus in fact dispossessed, provided the owners cannot in either case recover the possession except by disproportionate exertions, expenses, or hazard. (Monroe vs. British, etc., Mar. Ins. Co., 52 Fed. 777.)

Limited liability rule. T h e s h i p o w n e r ' s or ship agent's liability is usually coextensive with his interest in the vessel such that a total loss thereof results in its extinction. In our jurisdiction, the limited liability rule is e m b o d i e d in Articles 5 8 7 , 5 9 0 a n d 8 3 7 u n d e r B o o k III of the C o d e of C o m m e r c e , thus: Art. 587. T h e ship agent shall also be civilly liable for the indemnities in favor of third persons w h i c h m a y arise from the conduct of the captain in the care of the goods which he loaded on the vessel; b u t he m a y e x e m p t h i m s e l f therefrom by abandoning the vessel with all her e q u i p m e n t and the freight it m a y h a v e e a r n e d during the voyage. Art. 5 9 0 . T h e co-owners of the vessel shall be civilly liable in the proportion of their interests in the c o m m o n fund for the results of the acts of the captain referred to in Article 587. Each co-owner m a y e x e m p t h i m s e l f from this liability by the abandonment, before a notary, of the part of the vessel belonging to him. Art. 837. T h e civil liability incurred by shipowners in the case prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and freightage served during the voyage. These articles precisely intend to limit the liability of the shipowner or agent to the value of the vessel, its appurtenances and freightage earned in the voyage, provided that the owner or agent abandons the vessel. W h e n the vessel is totally lost in which case there is no vessel to abandon, abandonment is not required. Because of such total loss, the liability of the shipowner or agent for damages is extinguished.

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Sees. 131-132

As an exception to the limited liability doctrine, a shipowner or ship agent may be held liable for damages when the sinking of the vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure the seaworthiness of the vessel. (Aboitiz Shipping Corporation vs. CA, 569 S C R A 294 [2008].) Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon, under section one hundred thirty-nine. Meaning of constructive total loss. ^constructive total loss, or, as it is sometimes called, a "technical total loss," is one in which the loss, although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat it as total by abandonment. (45 C.J.S. 1150.) Importance of distinction b e t w e e n actual and constructive total loss. It is highly important that the t w o kinds of total loss be carefully differentiated, for u p o n t h e m d e p e n d s the w h o l e doctrine of a b a n d o n m e n t (see Sees. 138, 139.), so important in the law of marine insurance. In cases of actual total loss, no a b a n d o n m e n t is necessary; but if the loss is merely constructively total, an a b a n d o n m e n t becomes necessary in order to recover as for a total loss. (38 C.J. 1136.) Sec. 132. 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. Presumption of actual total loss. Where a vessel is not heard of at all within a reasonable time after sailing, or for a reasonable time after she w a s last seen, she will be presumed to have b e e n lost from a peril insured against. To lay a foundation for the presumption, it is e n o u g h to prove that the vessel w a s not heard of at her port of departure after

Sec. 133

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she sailed without calling witnesses from her port of destination to s h o w that she never arrived there. B u t plaintiff must prove that w h e n the vessel left h e r port of outfit, she w a s b o u n d on the voyage insured. There is no fixed rule with regard to the time after which a missing vessel will be p r e s u m e d to be lost. It depends u p o n the circumstances of each case. (38 C.J. 1178.) Sec. 133. 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. 12

Nothing in this section shall prevent an insurer from requiring an additional premium if the hazard be increased by this extension of liability, (a)

Liability of insurer in case of reshipment. T h e above section contemplates an insurance u p o n cargo. (1) If the original ship be disabled, a n d the master, acting with a wise discretion, as the agent of the merchant and the shipowners, forwards the cargo in another ship, such necessary and justifiable change of ship will not discharge the underwriter on the goods from liability for any loss w h i c h m a y take place on goods subsequently to such reshipment. (Salisbury vs. St. Louis Mar. Ins. Co., 6 6 A m . D e c . 687.) (2) This rule will not be obligatory where resort must be had to distant places to procure a vessel, and there are serious impediments in the w a y of putting the cargo on board. (Bryant vs. C o m m o n w e a l t h Ins. Co., 6 Pick. [Mass.] 13.) In any case, the insurer m a y require an additional premium if the hazard be increased by the extension of liability. (Sec. 133.)

'The former provision, Section 126 of the Insurance Act, contains the following phrase between "against" and "the liability": "the master must make every exertion to procure, in the same or contiguous port, another ship for the purpose of conveying the cargo to its destination and." In view of the word "thus" before "reshipped," it would seem there was an unintentional omission of the master's duty to look for another vessel, (see Sec. 139[d].)

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Sees. 134-136

Sec. 134. 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, (a)

Additional liability of insurer of goods. The expenses specified in Section 134 refer to those necessary to complete the transportation of cargo reshipped u n d e r Section 133. The insurer is liable for t h e m in addition to paying for any loss or damage which m a y take place on the goods, due to the perils insured against. The liability, however, of the insurer under Section 134 cannot exceed the a m o u n t of the insurance. Sec. 135. Upon an actual total loss, a person insured is entitled to payment without notice of abandonment.

Right of insured to payment upon an actual total loss. (1) In constructive total loss, an a b a n d o n m e n t by the insured is necessary in order to recover for a total loss (Sec. 138.) in the absence of any provision to the contrary in the policy. (2) In case of actual total loss, the right of the insured to claim the whole insurance is absolute. H e n c e , he need not give notice of abandonment nor formally abandon to the insurer anything that may remain of the insured property. (Gordon vs. Massachusetts Fire & Marine Ins. Co., 2 Pick. [Mass.] 249.) Sec. 136. Where it has been agreed that an insurance upon a particular thing, or a 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 en-

Sec. 136

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tirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured.

Meaning of average. Average is d e n n e d by the C o d e of C o m m e r c e as any extraordinary or accidental e x p e n s e incurred during the v o y a g e for the preservation of the vessel, cargo, or b o t h and all d a m a g e s to the vessel and cargo from the t i m e it is loaded and the v o y a g e c o m m e n c e d until it ends and the cargo unloaded. (Art. 8 0 6 thereof.)

Kinds of average. Averages are of t w o kinds. T h e y are: (1) Gross or general averages w h i c h include d a m a g e s and expenses w h i c h are deliberately caused by the master of the vessel or u p o n his authority, in order to save the vessel, her cargo, or both at the s a m e t i m e from a real and k n o w n risk. (Art.

811, ibid.) A general average loss m u s t be b o r n e equally by all of the interests concerned in the venture; and (2) Simple or particular averages w h i c h include all d a m a g e s and expenses caused to the vessel or to her cargo which h a v e not inured to the c o m m o n benefit and profit of all the persons interested in the vessel and her cargo. (Art. 809, ibid.) T h e y refer to those losses which occur under such circumstances as do not entitle the unfortunate owners to receive contribution from other owners concerned in the venture as where a vessel accidentally runs aground and goes to pieces after the cargo is saved. (Vance, op. cit., p. 934.) A particular average loss is suffered by and borne alone by the owner of the cargo or of the vessel, as the case m a y be. The terms "partial loss," "particular average," and "average, unless general" are generally regarded as synonymous when used in marine insurance. (44 A m . Jur. 2d 548.)

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Sec. 136

Principle of general average contribution. General average is a principle of customary law, independent of contract, whereby, when it is decided by the master of a vessel, acting for all the interests concerned, to sacrifice any part of a venture exposed to a c o m m o n and imminent peril in order to save the rest, the interests so saved are compelled to contribute ratably or proportionately to the owner of the interest sacrificed, so that the cost of the sacrifice shall fall equally u p o n all. This practice of "general average" contribution is a device for a limited distribution of loss. T h e loss is pro tanto m a d e up by proportionate or "general average" contributions from the owners of the other interests benefited by the sacrifice. (Vance, op. cit., p. 9.)

Right of a party to claim general average contribution. The requisites to the right to claim general average contribution are: (1) There must be a c o m m o n danger to the vessel or cargo; (2) Part of the vessel or cargo w a s sacrificed deliberately; (3) T h e sacrifice m u s t be for the c o m m o n safety or for the benefit of all; (4) It must be m a d e by the master or u p o n his authority; (5) It must not be caused by any fault of the party asking the contribution; (6) It must be successful, i.e., resulted in the saving of the vessel and / o r cargo; and (7) It must be necessary. (Vance, op. cit., p. 934; M a g s a y s a y vs. Agan, 51 O.G. 1358 [March 1955]; International Harvester vs. Hamburg-American Line, 42 Phil. 845 [1922].) Examples of general average: T h e effects jettisoned to lighten the vessel, whether they belong to the cargo, to the vessel, or to the crew; the damage caused to the vessel which h a d to be opened, scuttled or broken in order to save the cargo. (Art. 811, Code of Commerce.) Jettison is the intentional casting overboard

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of any part of a venture exposed to a peril in the h o p e of saving the rest of the venture. (Vance, op. cit., p. 933.) The formalities prescribed under Articles 813 and 814 of the C o d e of C o m m e r c e m u s t be complied with in order to incur the expenses and cause the d a m a g e s corresponding to gross average. (Phil. H o m e Assurance Corp. vs. Court of Appeals, 71 S C A D 199, 257 S C R A 468 [1996].)

Liability of insurer for general average. T h e liability of the insurer for general average is clearly provided in the clause of Section 136 w h i c h states "but he is liable for his proportion of all general average loss assessed upon the thing insured." (see Sees. 164-165.) It has been held by our S u p r e m e Court that Article 8 5 9 of the C o d e of C o m m e r c e which reads: " T h e underwriters of the vessels, of the freightage and of the cargo shall be obliged to p a y for the indemnity of the gross average in so far as is required of each one of these objects respectively." is still in force. (Jargue vs. Smith Bell & Co., 56 Phil. 758 [1932].) Article 8 5 9 is mandatory in terms, and insurers, whether for the vessel or for the freightage or for the cargo, are b o u n d to contribute to the indemnity of the general average. A n d there is nothing unfair in the provision; it simply places the insurer on the same footing as other persons w h o h a v e an interest in the vessel, or the cargo therein, at the time of the occurrence of the general average and w h o are compelled to contribute. (Ibid., Art. 812, Code of C o m m e r c e ; see Sec. 164 on limit of insurer's liability.) The formula for computing the liability of the insurer may be stated as follows: Amount of insurance Total amount or value involved

General Average Loss (GAL)

Proportion of GAL for which insurer is liable

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Sec. 136

EXAMPLE: A is the owner of a vessel worth P8,000,000.00 insured against "absolute total loss only" with Y Co. The vessel ran into very heavy sea and it became necessary to jettison the cargo belonging to B valued at P1,000,000.00. As a result of the jettison, the vessel was saved together with the cargo belonging to C valued at P600,000.00 and to D valued at P400,000.00. Here, Y Co. is liable to contribute to the indemnity of the general average although the policy makes it liable only upon actual total loss of the vessel. The total value involved is P10,000,000.00, consisting of the value of the cargo sacrificed and that of the vessel and/or cargo saved. The ratable contribution of the parties will be as follows: Y Co., 4 / 5 of P1,000,000.00 or P800,000.00; B, 1 / 1 0 of P1,000,000.00 or P100,000.00; C, 3 / 5 0 of P1,000,000.00 or P60,000.00; and D, 2 / 5 0 of P1,000,000.00 or P40,000.00. Note that B contributes P100,000 as his part of the indemnity for the general average brought about by the jettison of his cargo. The liability of Y Co. cannot exceed the contributing value of the vessel, (see Sec. 164.)

Liability of insurer for particular average. Policies of marine insurance frequently contain stipulations with respect to certain class of goods which are perishable or peculiarly subject to d a m a g e under w h i c h the insurer will not be liable for loss, partial or total, arising from perils of the sea. T h e purpose of such stipulation is to protect the insurer. In addition, it m a y be agreed by the parties that the insurance shall be free from particular average. In such case, the marine insurer is liable only for general average and not for particular average unless such particular average loss h a s the effect of "depriving the insured of the possession at the port of destination of the whole" of the thing insured. (Sec. 136.) In the absence of any contrary stipulation, the insurer is liable for particular average loss. Examples of particular average: T h e d a m a g e suffered by the cargo from the time of its embarkation until it is unloaded; the damage and expenses suffered by the vessel from the time it is

Sees. 137-138

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Sec. 137. An insurance confined in terms to an actual total 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.

Scope of insurance against actual total loss. An insurance against "total loss o n l y " will cover any total loss, whether it is actual or constructive, although there is authority to the contrary. W h e r e the insurance is against "absolute" total loss or "actual" total loss, the insurer will not be liable for constructive or technical total loss. (45 C.J.S. 1148.) If the insured is deprived of the possession of the entire thing insured at the port of destination, the insurer is liable because the permanent non-arrival thereof is really an actual total loss. Sub-Title 1-H Abandonment Sec. 138. Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declared the relinquishment to the insurer of his interest in the thing insured, (a)

Meaning of abandonment. Section 138 gives the definition of abandonment in marine insurance. It has also been defined as the act of an insured in notifying the insurer that owing to damage done to the subject of the insurance, he elects to take the amount of the insurance in the place of the subject thereof, the remnant of which he cedes to the insurer. (Camberling vs. M'Call, 1 A m . Dec. 314.)

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Sec. 138

Requisites for valid abandonment. The requisites for a valid abandonment in marine insurance are: (1) There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec. 138.); (2) There must be a constructive total loss (Sec. 139.); (3) The abandonment be neither partial nor conditional (Sec. 140.); (4) It must be m a d e within a reasonable time after receipt of reliable information of the loss (Sec. 141.); (5) It must be factual (Sec. 142.); (6) It must be m a d e by giving notice thereof to the insurer which m a y be done orally or in writing (Sec. 143.); and (7) T h e notice of abandonment must be explicit and m u s t specify the particular cause of the abandonment. (Sec. 144.) The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a s h i p o w n e r ' s liability, does not apply to cases where the injury or average w a s occasioned by the s h i p o w n e r ' s o w n fault. Article 587 (supra.) of the Code of C o m m e r c e speaks only of situations where the fault or negligence is committed solely by the captain. W h e r e the shipowner is likewise to be blamed, Article 5 8 7 will not apply and such situation will be covered by the provisions of the Civil Code on C o m m o n Carriers. (Phil. A m e r i c a n General Insurance Co., Inc. vs. Court of Appeals, 273 S C R A 262 [1997].)

Necessity for abandonment. (1) W h e n the loss is only technically total, the insured cannot claim the whole insurance without showing d u e regard to the interest which the underwriter m a y take in the abandoned property. Therefore, whenever the underwriter by prompt action might be able to save s o m e portion of the insured property, he is entitled to timely notice of abandonment by the insured and he cannot be m a d e liable for a total loss without it. (Vance, op. cit., p. 938.)

Sec. 139

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But there is no obligation u p o n the insured to abandon. It is a matter of his o w n election. If he omits to abandon, he m a y nevertheless recover his actual loss. (Sec. 155.) (2) W h e n the vessel is totally lost, a b a n d o n m e n t is not required as there is no vessel to abandon. By reason of such total loss, the liability of the ship's o w n e r or agent for d a m a g e s extinguished in the absence of any finding of fault on other part. However, the insurer a n s w e r s for the d a m a g e s from w h i c h the shipowner or agent m a y be held liable. (Aboitiz Shipping Corporation vs. Court o f Appeals, 5 6 9 S C R A 2 9 4 [2008].) Sec. 139. 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 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; (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 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 is 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, (a) W h e n constructive total loss exists. As to when a constructive total loss exists, three (3) rules m a y be mentioned. (1) According to the English rule, when the subject matter of

372

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Sec. 139

the insurance, while still existent in specie, is so damaged as not to be worth, when repaired, the cost of the repairs. (2) According to the American rule, w h e n it is so damaged that the cost of repairs would exceed one-half of the value of the thing as required. The American rule is ordinarily spoken of as the "fifty percent rule." (Vance, op. cit., pp. 935, 937.) (3) In the Philippines, the insured m a y not abandon the thing insured unless the loss or d a m a g e is more than three-fourths of its value as indicated in Section 139.

Abandonment where insurance divisible and where indivisible. Under the first paragraph of Section 139, any particular portion of the thing insured separately valued by the policy m a y be separately abandoned as it is d e e m e d separately insured. Whether a contract is entire or severable is a question of intention to be determined by the language e m p l o y e d by the parties. In a case, the policy in question s h o w e d that the subject matter insured was the entire shipment of 2,000 cubic meters of logs. It was held that the fact that the logs were loaded in two different barges did not m a k e the contract of insurance several and divisible as to the items insured b e c a u s e the logs on the two barges were not separately valued or separately insured, for only one premium w a s paid for the entire shipment m a k i n g only one cause or consideration. T h e logs having b e e n insured as one inseparable unit, the totality of the shipment of logs should be the basis for the existence of constructive total loss. (Oriental Assurance Corp. vs. Court of Appeals, 2 0 0 S C R A 4 5 9 [1991].)

Criterion as to extent of loss. T h e extent of the injury to the vessel is to be considered with reference to its general market value immediately before the disaster. This has been held to be the proper rule, even though the policy is valued. It has also b e e n held, however, that the valuation of the policy is the proper criterion; and this will, of course, apply where the policy expressly provides that the value stated therein shall be taken as the basis of estimate. (45 C.J.S. 1151.)

Sees. 140-141

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In determining the extent of the loss, the expenses incurred or to be incurred by the insured recovering the thing insured (e.g., expenses of refloating a vessel) are taken into account. Sec. 140. An abandonment must be neither partial nor conditional.

Abandonment must be absolute. T h e a b a n d o n m e n t m u s t be entire and cover the w h o l e interest insured (Bidwell vs. N o r t h w e s t e r n Ins. Co., 19 N.Y. 179.); it m u s t be unconditional, unfettered by contingencies and limitations. (Patapsco Ins. C o . vs. Southgate, 8 L. E d . 243.) However, if only a part of a thing is covered by the insurance, the insured n e e d only abandon that part. Sec. 141. 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.

Abandonment must be made within a reasonable time. (1) Reliable information of loss. — W h e n the insured has received notice of a loss, he must elect within a reasonable time whether he will abandon to the insurer, and if he elects to abandon, he must give notice thereof. This is in order that the insurer m a y not be prejudiced by the delay, and m a y take immediate steps for the preservation of such of the property insured as m a y remain in existence. (2) Double character of information of loss.—What is a reasonable time is a question depending on the facts and circumstances in each case. (44 A m . Jur. 2d 541.) Thus, if from information first received, the character of the loss is not m a d e clearly to appear, the insured is entitled to a sufficient interval to ascertain its real nature, but he cannot wait an undue length of time to see whether it will be more profitable to abandon or to claim for a partial loss. After the property passes b e y o n d the control of the insured, as from an unjustifiable sale, an abandonment is too late. (45 C.J.S. 1157.)

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Sec. 142

Sec. 142. Where the information upon which an abandonment has been made proved 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.

Abandonment must be factual. (1) Existence of loss at time of abandonment. — T h e right of the insured to abandon and recover for a total loss depends u p o n the state of facts at the time of the offer to abandon, and not u p o n the state disclosed by the information received, or u p o n the state of loss at a prior or subsequent time. (Orient Mut. Ins. Co. vs. Adams, 123 U.S. 67.) (2) Effect of subsequent events. — If the a b a n d o n m e n t w h e n m a d e is good, the rights of the parties are definitely fixed, and do not b e c o m e changed by any subsequent events. If, on the other hand, the abandonment, w h e n made, is not good, subsequent circumstances will not affect it so as retroactively, to impart to it a validity which it has not at its origin. (Bradlie vs. M a r y l a n d Ins. Co., 12 Pet. 378.) Accordingly, the insured cannot a b a n d o n w h e n the thing insured is safe; or w h e n he knew, at the time of his offer to abandon, that the vessel has b e e n repaired and is successfully pursuing her voyage (Depau vs. O c e a n Ins. Co., 15 A m . D e c . 431.); and the invalidity of the a b a n d o n m e n t is not cured by the subsequent loss of the thing insured. B u t if, after a valid a b a n d o n m e n t has been made, the insured property w a s recovered, the insured cannot withdraw the abandonment. (3) Instances justifying abandonment. — It h a s b e e n held that the insured m a y a b a n d o n for a total loss u n d e r a marine insurance policy in case of capture, seizure, or detention of the ship or cargo; restraint by blockade or e m b a r g o ; w h e r e through no fault of the owner, funds for repair cannot be raised; w h e r e the voyage is absolutely lost; or where under urgent necessity, the master of a vessel at an intermediate port, m a k e s a sale of the insured property. (45 C.J.S. 1152.)

Sec. 143

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Information need not be direct or positive. T h e intelligence w h i c h authorized the insured to abandon need not be direct or positive information. T h e protest of the master, a n e w s p a p e r report, the report of a pilot, or a letter from an official or an agent, is sufficient. T h e information m u s t be of such facts a n d circumstances as to render it highly probable that a constructive total loss h a s occurred, and facts sufficient to constitute a total loss m u s t exist. B u t the facts and the information n e e d not be the s a m e . (38 C.J.S. 1155.) Sec. 143. 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, (a)

Form of notice of abandonment. T h e law requires no particular form for giving notice of abandonment. (1) T h e notice m a y be m a d e orally unless the policy requires it to be in writing, and even then a notice by telegraph is sufficient if it otherwise complies with the requirements. (45 C.J.S. 1155.) (2) If the notice be done orally, the insured must submit to the insurer within seven days from such oral notice, a written notice of the abandonment. (Sec. 143.)

By whom and to whom notice made. (1) T h e abandonment need not necessarily be m a d e by the insured but m a y be m a d e by an authorized agent, and an agent having an authority to insure has prima facie an authority to abandon. (2) The abandonment m a y be m a d e to an agent of the underwriter and abandonment to a broker w h o is agent for both parties is sufficient. (45 C.J.S. 1156.)

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Sees. 144-145

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.

Notice of abandonment must be explicit. The notice of abandonment m u s t be explicit, and not left ppen as a matter of inference from s o m e equivocal acts. There must be an intention to abandon, apparent from the c o m m u n i c a t i o n to the insurer, and a relinquishment of all rights to the insurer. (26 Patapsco Ins. Co. vs. Southgate, 8 L. Ed. 243.) The use of the w o r d " a b a n d o n " is not necessary; it is sufficient if expressions are u s e d which inform the insurer that it is the intention of the insured to give up the property insured. (Canada Sugar Ref. Co. vs. Ins. Co. of N.A., 175 U.S. 609.) B u t there is no abandonment although the insured m a y h a v e given notice of an intention to abandon, if he continues to claim a n d use the property as his own. (Louisville Underwriters vs. P o n c e , 19 S.W. 10.)

Notice of abandonment must specify particular cause thereof. The grounds for the a b a n d o n m e n t m u s t be stated with such particularity as to enable the underwriter to determine w h e t h e r or not he is b o u n d to accept the offer. (Pierce vs. O c e a n Ins. Co., 29 A m . Dec. 567.) However, it is sufficient if the notice s h o w s probable cause for the abandonment; nor is it required that it be accompanied with proof of interest or of loss. (Sec. 144.) Sec. 145. An abandonment can be sustained only upon the cause specified in the notice thereof.

Proof of other causes not admissible. The insured must state sufficient grounds for the a b a n d o n m e n t to m a k e it valid and he cannot avail himself of any ground of abandonment other than that stated at the time thereof. (Pierce

Sees. 146-147

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377

vs. O c e a n Ins. Co., 29 A m . Dec. 567.) If he assigns an insufficient cause or causes w h i c h do not in fact exist, proof of other causes will not be admitted in suing for a total loss. Sec. 146. An abandonment is equivalent to a transfer by the insured of his interest, to the insurer, with all the chances of recovery and indemnity. Effect of valid a b a n d o n m e n t . A valid a b a n d o n m e n t transfers to the insurer the interests in the subject matter covered by the policy subject to the rights and interests, if any, of third persons. T h e insurer acquires thereby the entire interest insured, together w i t h all its incidents, including rights of action w h i c h the insured has against third persons for the injury. (45 C.J.S. 1159-1160.) In other words, the insurer b e c o m e s entitled to all the rights w h i c h the insured possessed in the thing insured. The execution of a formal instrument is not necessary to effect an abandonment for, by Section 146, the act of abandonment, when accepted (Sees. 1 5 0 , 1 6 9 . ) , has all the effects w h i c h the most carefully drawn assignment w o u l d accomplish. (44 A m . Jur. 2d 542.) T h e effect of the a b a n d o n m e n t retroacts to the time of the loss. (Sec. 148.) Sec. 147. 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. Rights of insurer w h o pays partial loss as actual total loss. An election and notice of abandonment is a condition precedent to a claim for a constructive total loss. (38 C.J.S. 1147.) Under Section 147, the interest of the insured over the thing covered by the policy will be transferred to the insurer, notwithstanding the lack of abandonment, as if there had been a formal abandonment, in case the insurer pays for a loss as if it were an actual total loss. The acceptance by the insured of the

378

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 148-149

payment is deemed an offer of abandonment on his part. Hence, the insurer is entitled to whatever m a y remain of the thing insured, or its proceeds or salvage. Sec. 148. 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. Transfer of agency to insurer. The captain or master continues to be the agent of the insured until abandonment, but from the m o m e n t of a valid abandonment, the master of the vessel and agents of the insured b e c o m e the agents of the insurer, and the latter b e c o m e s responsible for all their acts in connection with the insured property and for all the expenses and liabilities in respect thereof. (45 C.J.S. 1160.)

Liability of insurer for expenses and wages. The abandonment w h e n m a d e relates b a c k to the time of the loss and if effectual, the title of the insurer b e c o m e s vested as of that date and he is responsible for the reasonable expenses incurred by the master after that date in an attempt to save the vessel. Insurers are also liable for the w a g e s of s e a m e n earned subsequent to the loss, b u t take free from any lien or liability for wages earned prior thereto. (Ibid.) Sec. 149. 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.

Effect of insurer's refusal to accept abandonment on insured's rights. Acceptance is in no case necessary if the a b a n d o n m e n t is properly made. (King vs. Middletown Ins. Co., Conn. 184.) T h e insured's right to abandon, in a policy of marine insurance, is absolute when justified by the circumstances.

Sees. 150-152

CLASSES OF INSURANCE Title 1. — Marine Insurance

379

Sec. 150. The acceptance of an abandonment may 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, (a)

Form of acceptance of abandonment. (1) An insurer's acceptance of an offered a b a n d o n m e n t need not be express. (2) It m a y be implied by conduct, as by an act of the insurer in consequence of an a b a n d o n m e n t w h i c h can be justified only under a right derived from the a b a n d o n m e n t . (Richelieu vs. Boston Marine Ins. Co., 130 U . S . 408.) Thus, w h e r e the insurer refused the a b a n d o n m e n t of a ship but took possession of the s a m e for the purpose of m a k i n g repairs and retained it for an unreasonable time, he will be d e e m e d to h a v e accepted the abandonment. (Reynolds vs. O c e a n Ins. Co., 33 A m . Dec. 727.) (3) M e r e silence after notice w o u l d not operate as an acceptance, if it is not "for an unreasonable length of time." (Sec. 150.) N o r w o u l d steps taken by the insurer to preserve the property from further loss for the benefit of all the parties a m o u n t to an acceptance. (45 C.J.S. 1158.) Sec. 151. The acceptance of an abandonment, whether expressed or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment. Sec. 152. An abandonment once made and accepted is irrevocable, unless the ground upon which it was made proves to be unfounded.

Effect of acceptance of abandonment. (1) U p o n receiving notice of abandonment, the insurer m a y accept or reject the abandonment. If he accepts, he becomes at once liable for the whole amount of the insurance, and also becomes entitled to all rights which insured possessed in the thing insured, (see Sec. 146.) (2) The acceptance of an abandonment fixed the rights of the parties (Vance, op. cit., pp. 938-939.); whether expressed or

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380

Sec. 153

implied, is conclusive upon them (Sec. 151.), and irrevocable. (Sec. 152.) (3) Therefore, the acceptance of an abandonment stops the insurer to rely on any insufficiency in the form (see Sec. 143.), time (see Sec. 141.), or right (see Sec. 139.), of abandonment. (45 C.J.S. 1158.) Whether or not the insured has a right to abandon is immaterial where the abandonment is accepted and there is no fraud. (New Orleans Ins. Co. vs. Piaggio, 16 Wall. [U.S.] 378.) The only exception provided by law is the case where the ground upon which it w a s m a d e proves to be unfounded. (Sec. 152.) Under Section 145, an a b a n d o n m e n t can be sustained only upon the ground specified in the notice thereof. Sec. 153. On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insurer of said freightage; but freightage subsequently earned belong to the insurer of the ship.

Right of insurer to freightage. W h e n abandonment is validly made, the interest of the insured in the thing covered passes to the insurer. T h e insurer of the ship b e c o m e s the o w n e r thereof after an abandonment, and his title b e c o m e s vested as of the time of loss. Hence, freightage earned subsequent to the loss belongs to the insurer of said ship. B u t freightage earned previously belongs to the insurer of said freightage w h o is subrogated to the rights of the insured up to the time of loss. EXAMPLE: Suppose a ship is chartered to carry cargo from Port A to Port C. Upon reaching Port B, the ship was damaged and abandoned to insurer X company. The ship was repaired by X company and it continued its voyage to Port C. In this case, the freightage on the cargo from Port B to Port C belongs to X company but the freightage on the cargo from Port A to Port B belongs to the insurer of said freightage.

Sees. 154-156

CLASSES OF INSURANCE Title 1. — Marine Insurance

381

Sec. 154. If an insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured.

Effect of refusal to accept a valid abandonment on insurer's liability. T h e insured's right to abandon, in a policy of marine insurance, is absolute w h e n justified by the circumstances a n d no acceptance is necessary to validate the a b a n d o n m e n t , (see Sec. 149.) (1) If the insurer declines to accept a proper abandonment, he is liable as upon an actual total loss less a n y proceeds the insured m a y h a v e received on a c c o u n t of the d a m a g e d property as w h e n the insured succeeds in selling the property as d a m a g e d . (2) If the a b a n d o n m e n t w a s improper, the insured m a y nevertheless recover to the extent of the d a m a g e proved. Sec. 155. If a person insured omits to abandon, he may nevertheless recover his actual loss.

Effect of insured's failure to make abandonment. T h e insured has an election to a b a n d o n or not, and cannot be compelled to a b a n d o n although a b a n d o n m e n t is proper. He m a y await the final event, and recover accordingly for a total or a partial loss, as the case m a y be. Note that under Section 155, the insured fails to m a k e an abandonment. On the other hand, Section 154 applies where a valid abandonment has been m a d e but the insurer refuses to accept the same without any valid reason. Sub-Title 1-1 Measure of Indemnity Sec. 156. 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

382

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 157

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. Valuation in a marine policy. (1) Object of valuation. — A policy of marine insurance may be valued or open, (see Sec. 61.) Section 156 refers to a valued marine policy. T h e object of a valuation in a policy is to fix in advance the value of the property and thus avoid the necessity of proving its actual value in case of loss. (2) Effect of valuation. — It m a y h a p p e n w h e n a vessel, for example, is insured for a long time or for a long voyage, h e r value at the end of the voyage, m a y not be the s a m e as at the beginning. But, in general, the insured value m u s t be taken to be that which is stated in the policy. It is conclusive u p o n the parties provided that (a) the insured has s o m e interest at risk a n d (b) there is no fraud on his part. If the valuation is fraudulent in fact, the insurer is entitled to rescind the contract. (3) Right to give evidence of value. — In a valued marine policy, neither party can thus give evidence of the real value of the thing insured. However, w h e n the thing h a s b e e n hypothecated by bottomry or respondentia (see Sec. 101.) before its insurance and without the k n o w l e d g e of the person w h o actually procured the insurance, the insurer m a y s h o w the real value b u t he is not entitled to rescind the contract unless he can prove that the valuation w a s in fact fraudulent.

Sec. 157. 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. When insured a co-insurer in marine insurance. In every marine insurance, the insured is expected to cover by insurance the full value of the property insured. If the value of

CLASSES OF INSURANCE Title 1. — Marine Insurance

Sec. 158

383

his interest exceeds the a m o u n t of insurance, he is considered the co-insurer for an a m o u n t determined by the difference b e t w e e n the insurance taken out and the value of the property. T h e rule is different in fire insurance, (see S e c . 172.) T h e law determines the a m o u n t recoverable according to the following formula: (Partial) Loss Value of thing insured

^

Amount of insurance

=

Amount of recovery

EXAMPLE: If a vessel valued at P500,000.00 is insured for only P400,000.00 and is damaged to the extent of P250,000.00, the insurer will be required to pay only 80% of the loss suffered, or P200,000.00; the other 20% or P50,000.00 being borne by the insured himself. (Vance, op. cit., pp. 103-104.) In the example given, we have the following computation: P250,000.00 P500,000.00 The insured is considered a co-insurer as to the uninsured portion of P100,000.00. Note that Section 157 applies only if (1) the loss is partial and (2) the amount of insurance is less than the insured's entire insurable interest in the property insured. So, in the same example, if the loss is total, the insurer is liable for the full amount of P400,000.00. On the other hand, if the property is insured to its full value, the insured is entitled to recover the full amount of the partial loss of P250,000.00. Sec. 158. Where profits are separately insured in a contract of marine insurance, the insured is entitled to recover, 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. Loss of profits separately insured. If the profits to be realized are separately insured from the vessel or cargo, the insured is entitled to recover, in case of loss,

THE INSURANCE CODE OF THE PHILIPPINES

384

Sec. 159

such proportion of the profits as the value of the property lost bears to the value of the whole property. The formula m a y be stated thus: Value of property lost Value of whole property

^

Amount of insurance

_

Amount of recovery

insured EXAMPLE: Assuming that the amount of the profits insured is P20,000.00, the value of the whole cargo from which such profits are expected to be realized is P80,000.00, and the value of the goods lost is P48,000.00, then the insured is entitled to recover P12,000.00 computed as follows: P48,000.00

o r

3 / p 2 0 0 , 0 0 0 . 0 0 = P12,000.00 5 x

P80,000.00 Sec. 159. In case of a valued policy of marine insurance on freightage or cargo, if a part of the subject is exposed to risk, the valuation applies only in proportion to such part.

Where only part of a cargo or freightage insured exposed to risk. Where cargo is insured under a valued policy b u t only a portion of the cargo is actually carried by the vessel at the time of loss, the valuation will be reduced proportionately. T h e insurer is b o u n d to return such portion of the p r e m i u m as corresponds with the portion of the cargo w h i c h h a d b e e n e x p o s e d to the risk. EXAMPLE: If 200 cavans of rice valued at P160,000.00 are insured for the same amount for a voyage in a certain vessel and only 50 cavans were actually loaded and shipped in said vessel, in case of total loss, the insured can collect only 1/4 of the entire valuation or P40,000.00 but the insurer is bound to return 3 / 4 of the premiums paid by the insured since 3 / 4 of the cargo or 150 cavans were not exposed to the risk.

Sees. 160-161

CLASSES OF INSURANCE Title 1. — Marine Insurance

385

Sec. 160. 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 were expected to arise, and the valuation fixes their amount.

Presumption of loss of profits. W h e r e profits are separately insured from the property out of which they are expected to arise, the insured, in case of partial loss of the property, is entitled merely to partial mdernnity for the profits lost. (Sec. 158.) If the property is totally lost, pro tanto the total profits are also lost. Thus, u n d e r Section 160, such loss of the profits is conclusively p r e s u m e d from the loss of the property and the valuation agreed u p o n in the policy fixes the a m o u n t of recovery. EXAMPLE: Where the value of the profits insured is fixed at P100,000.00 and the cargo out of which said profits are expected to arise is completely lost by the peril insured against, the insured can recover the total amount of P100,000.00. The loss of the profit of P100,000.00 is conclusively presumed from the total loss of the cargo and the insurer is bound by the valuation. Sec. 161. 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 its permanent value or which are necessary to prepare it for the voyage insured; (b) The value of cargo is its actual cost to the insured, when laden on board, or where that 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;

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386

Sees. 160-161

(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. Rules for estimating loss under an o p e n policy of marine insurance. Section 161 refers to an open policy while Section 156 refers to valued policies. In determining the loss under an open policy of marine insurance, the real value of the thing insured m u s t be proved by the insured in each case. Section 161 lays d o w n the value to be used for indemnity purposes. 13

(1) Value of vessel. — U n d e r paragraph (a), in ascertaining the value of a vessel, the value is to be taken as of the c o m m e n c e m e n t of the risk and not its value at the time she w a s built.

13

The insured may be made liable for demurrage. "In its strict sense, the term means the compensation provided for in the contract of affreightment for the detention of the vessel beyond the time agreed on for loading or unloading or for sailing. Essentially, demurrage is the claim for damages for failure to accept delivery. In a broad sense, every improper detention of a vessel may be considered a demurrage. Liability for demurrage, using the word in its strictly technical sense, exists only when expressly stipulated in the contract. Using the term in its broader sense, damages in the nature of demurrage are recoverable for a breach of the implied obligation to load or overload the cargo with reasonable dispatch, but only by the party to whom the duty is owed and only against one who is a party to the shipping contract. Notice of arrival of vessels or conveyances or of their placement for purposes of unloading is often a condition precedent to the right to collect demurrage charges." (Magellan Mfg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102 [1991].) The shipper or charterer is liable for the payment of demurrage claims when he exceeds the period for loading or unloading as agreed upon or the agreed "laydays" which period may or may not be stipulated in the contract. A charter party may either provide for a fixed laydays or certain general or indefinite words such as "customary quick dispatch" or "as fast as the steamer can load." The circumstances obtaining at the time of loading or unloading are to be taken, into account in the determination of "customary quick dispatch." What is a reasonable time depends on the existing as opposed to normal circumstances, at the port of loading and the custom of the port. Delay in loading or unloading the vessel runs against the charterer as soon as the vessel is detained for an unreasonable length of time from the arrival of the vessel because no available berthing space was provided for the vessel due to the negligence of the charterer or by reason of circumstances caused by the fault of the charterer. (National Food Authority vs. Court of Appeals, 311 SCRA 700 [1999].)

Sec. 162

CLASSES OF INSURANCE Title 1. — Marine Insurance

387

(2) Value of cargo. — U n d e r paragraph (b), the value of the cargo is its actual cost to the insured, w h e n laden on board, or where that cost cannot be ascertained, its m a r k e t value at the time and place of shipment. T h e expected profits from the cargo are not considered since they can be covered by a separate insurance, (see Sees. 9 9 , 1 5 8 , 1 6 0 . ) In customs law, drawback is an allowance (to the w h o l e or part only) m a d e by the g o v e r n m e n t upon the duties on imported merchandise, w h e n the importer, instead of selling it here, re-exports it, or the refunding of such duties if already paid. (Black's L a w Dictionary [1968 ed.], p. 583.) (3) Value of freightage. — U n d e r p a r a g r a p h (c), the gross freightage and not the net freightage is the basis for determining the value of the freightage. T h e reason is that the gross a m o u n t of the freightage, as the m e a s u r e of indemnity, can be easily and exactly determined. On the other hand, to take the net a m o u n t of the freightage as the basis, w o u l d lead to lawsuits over the deductions w h i c h should b e m a d e . Primage is excluded from gross freightage. It is a small compensation paid by a shipper to the m a s t e r of the vessel for his care and trouble b e s t o w e d on the s h i p p e r ' s g o o d s and which the master is entitled to retain in the absence of an agreement to the contrary with the o w n e r s of the vessels. (Ballantine's L a w Dictionary [1948 ed.], p. 64.) (4) Cost of insurance. — U n d e r paragraph (d), the cost of the insurance is always a d d e d in calculating the value of the ship, cargo, or freightage or other subject matter in an o p e n policy. Sec. 162. 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. Where cargo insured against partial loss is d a m a g e d . The foregoing provision applies if the cargo is insured against partial loss and it suffers damage as a result of which its market value at the port of destination is reduced, (see Sec. 157.)

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388

Sec. 163

The formula may be stated as follows: Market price in sound state Less: Market price in damaged state =

Reduction in value (depreciation)

Reduction in value

Amount of

Market price in sound state

insurance

_

Amount of recovery

EXAMPLE: Suppose that goods valued at P500,000.00 and insured for P300,000.00 were damaged on the way so that their market price at the port of destination was only P400,000.00. Assuming that the market price of the goods would have brought if sound is also P500,000.00, the amount recoverable is P60,000.00 determined as follows: P500,000.00 - P400,000.00 = P100,000.00 P100,000.00 P500,000.00

Q r

l

J

5 x

P300Q00

0 0

=

P60,000.00

Sec. 163. 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.

Liability of insurer for expenses incurred for repair and recovery. As a general rule, a marine insurer is not liable for m o r e than the amount of the policy. Under Section 163, however, expenses incurred in repairing the damages suffered by a vessel b e c a u s e of the perils insured against as well as those incurred for saving the vessel from such perils, such as the expenses of launching or raising the vessel or of towing or navigating it into port for her safety, are items to be borne by the insurer in addition to a total loss if that afterwards

Sees. 164-165

CLASSES OF INSURANCE Title 1. — Marine Insurance

389

takes place, (see Sees. 1 3 6 , 1 6 3 ; also Sees. 133-134 as to insurance on cargo.) Such e x p e n s e s are k n o w n as "Port of refuge" expenses. Sec. 164. A marine insurer is liable for a loss falling upon the insured, through a contribution in respect to 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, (a) Sec. 165. 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.

Rights of insured in case of general average. (1) General rule. — T h e insurer is liable for any general average loss (see Sec. 136.) w h e r e it is payable or has been paid by the insured in consequence of a peril insured against. T h e insured m a y either hold t i e insurer directly liable for the w h o l e of the insured value of the property sacrificed for the general benefit, subrogating h i m to his o w n right of contribution or demand contribution from the other interested parties as soon as the vessel arrives at her destination. In other words, the insured need not wait for an adjustment of the average. (2) Exceptions. — However, there can be no recovery for general average loss against the insurer: (a) after the separation of the interests liable to contribution, that is to say, after the cargo liable for contribution has been removed from the vessel; or (b) when the insured has neglected or waived his right to contribution.

THE INSURANCE CODE OF THE PHILIPPINES

390

Sec. 166

Limit as to liability of insurer. The liability of the marine insurer for any general average loss is limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. (Sec. 164.) In other words, the liability of the insurer shall be less than the proportion of the general average loss assessed upon the thing insured (see S e c . 136.) where its contributing value is more than the amount of the insurance. In such case, the insured is liable to contribute ratably with the insurer to the indemnity of the general average. The formula m a y be stated as follows: Amount of insurance

x

Proportion of general insurance

Value of thing insured

=

Limit of liability of insurer

EXAMPLE: Thus, in the example under Section 136, if the vessel worth P8,000,000.00 was insured by A for only P4,000,000.00 with Y Co., then Y Co. is liable for only 1/2 of P800,000.00, the proportion of the general average loss assessed upon the vessel, while A is liable to contribute the other P400,000.00. Sec. 166. In the case of a partial loss of a 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, (a)

Liability of insurer in case of partial loss of ship or its equipment. In case of a partial loss of a vessel, by c o m m o n u s a g e w h i c h has the sanction of law, there is deducted from the cost of repairs "one-third n e w for old," on the theory that the n e w materials render the vessel m u c h more valuable than it w a s before the loss. W h e n repairs are thus made, one-third of the cost of the repair is

Sec. 166

CLASSES OF INSURANCE Title 1. — Marine Insurance

391

laid upon the insured as his burden, and the implied agreement under the policy is that in case of d a m a g e to the ship by a peril within the policy, the loss shall be estimated at two-thirds of the cost of repairs fairly executed or one-third new for old, as is commonly expressed. (44 A m . Jur. 2d 527.) Section 166 prescribes the deductions to be m a d e from such cost subject to other conditions stipulated in the policy.

— oOo —

Title 2 FIRE

INSURANCE

Sec. 167. As used in this Code, the term "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, (a) Fire insurance defined. Afire insurance is a contract of indemnity by w h i c h the insurer, for a stipulated premium, agrees to indemnify the insured against loss of, or d a m a g e to, a property caused by hostile fire, (see Sec. 84.) Fire-and-extended c o v e r a g e . As used in the Code, it includes not only insurance against loss by fire, but also insurance in the so-called "allied l i n e s " that protect against loss by lightning, windstorm, etc. but only w h e n such risks are covered by extension to fire insurance policies or under separate policies (Sec. 167.) subject to the p a y m e n t of additional premiums. T h e c o v e r a g e m a y be attached by endorsements, (see Sec. 50.) Thus, a distinction is d r a w n b e t w e e n fire insurance alone and fire-and-extended coverage. Nature of fire insurance. Fire insurance is essentially a contract of indemnity. I n d e m n i t y is its sole purpose and any contract that contemplates a possible gain to the insured by the happening of the event u p o n which the liability b e c o m e s fixed is contrary to its proper nature and is not allowed. (Vance, op. cit., p. 101.) 392

Sec. 167

CLASSES OF INSURANCE Title 2. — Fire Insurance

393

Concept of fire. 1

In a case, the court defining fire, said: "Spontaneous combustion is usually a rapid oxidation. Fire is oxidation which is so rapid as to produce either a flame or a glow. Fire is always caused by combustion, but combustion does not always cause fire. T h e w o r d 'spontaneous' refers to the origin of the combustion. It m e a n s the internal development without the action of an external agent. C o m b u s t i o n or spontaneous c o m b u s t i o n m a y be so rapid as to produce fire, b u t until it does so, combustion cannot be said to be fire." (Western Woolen Mills C o . vs. Northern Assur. Co., 1 3 9 F e d . 637, cited in D.L. Bickelhaupt, p. 478.) T h e presence of heat, steam, or e v e n s m o k e is evidence of fire, but taken by itself will not prove the existence of fire. Unless accompanied by ignition, heat sufficient to cause charring or scorching does not constitute fire. To constitute fire, combustion must proceed at a rate sufficiently fast to produce a flame, a glow, or incandescence. Regardless of the a m o u n t of heat, there can be no fire until ignition takes place. T h e loss resulting from a sizable hole burned in a couch e v e n though no o n e w a s there to see the fire probably w o u l d be covered. A small scorch on a table by a cigarette w o u l d not meet the definition of fire. (D.L. Bickelhaupt, op. cit., p. 478.) In our jurisprudence, fire m a y not be considered a natural disaster or calamity since it almost always arises from s o m e act of m a n or by h u m a n means. It cannot be an act of G o d unless caused by lightning or a natural disaster or casualty not attributable to h u m a n agency. (Phil. H o m e Assurance Corp. vs. Court of Appeals, 257 S C R A 4 6 8 [1996].)

Risks or losses covered. In determining whether a risk or cause of loss is written, the scope and coverage of a fire insurance policy and the intention of the parties, as indicated by their contract controls. 'For distinction between hostile and friendly fires, see annotation under Section 84.

394

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 167

(1) Fire insurance policies now frequently contain "extended coverage" provisions bringing certain additional risks, or all other risks not excluded within the coverage of the policy. In some policies, damage or loss by explosion, lightning, earthquake, typhoon, flood, riot and other special perils may be expressly insured against in addition to that caused by fire. As thus used, these terms are given practically the same meaning as w h e n used in exceptions in such respect from the risk insured against, (see 44 Am. Jur. 2d 546.) (2) They may also extend the coverage to indirect or consequential losses. Indirect loss coverage. The standard fire contract is an agreement to repay the insured for direct loss. Nearly all other property insurance contracts are similarly restricted. It is apparent, however, that the consequences of a direct loss m a y be greater than the d a m a g e itself. If, for example, a manufacturing plant cannot operate because a fire cripples its machinery, or if an explosion destroys the refrigeration facilities of a meat-packing plant, the plant loses, during the period of inactivity, profits that it w o u l d ordinarily have earned. If a fire m a k e s half a building untenantable for six (6) months during the period of repair, the o w n e r m a y lose rents during that period. T h e attachment of a consequential loss form to the standard fire policy extends the coverage to such consequential losses. (Riegel, Miller & Williams, Jr., op. cit., p. 216.) This special coverage is k n o w n as loss of profits insurance or business interruption insurance. Kinds of indirect losses. Indirect or consequential losses m a y consist of: (1) Physical damage caused to other property (which is not usually covered by the basic insurance policy). Thus, a fire m a y interfere with heating, cooling, air conditioning, or furnishing power, and as a result goods are spoiled, or result in the loss of valuable records or papers that cannot be recopied, or decrease in value the undamaged m e m b e r of a pair (ibid., p. 217.);

Sec. 167

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395

(2) Loss of earnings due to the interruption of business by damage to insured's property; and (3) Extra expense or additional expenditure or charges incurred by the insured following d a m a g e or destruction of buildings or contents by an insured peril. E x a m p l e s are the cost of doing business at a location other than the usual premises of the insured, the e x p e n s e of maintaining a h o m e on a temporary basis elsewhere, and the e x p e n s e of demolition w h e n required by ordinance or law regulating construction or repair of buildings. {ibid., p. 238.)

Ocean marine and fire policies distinguished. A policy of insurance on a vessel e n g a g e d in navigation is a contract of ocean marine insurance although it insures against fire risks only. However, where the hazard is fire alone and the subject is an unfinished vessel, never afloat for a voyage, the contract to insure is a fire risk, especially in the absence of an express agreement that it shall h a v e the incidents of marine policy, or where it insures materials in a shipyard for use in constructing vessels. T h e same is true w h e r e a policy insures against fire, a vessel while moored and in use as a hospital. (44 C.J.S. 478.)

Importance of the distinction. It is highly important to determine w h e t h e r an insurance against risk of fire u p o n a vessel is a marine insurance or just an ordinary fire insurance for two reasons: (1) In marine insurance, the rules on constructive total loss (Sees. 131,139.) and abandonment (Sec. 138.) apply but not in fire insurance; and (2) In case of partial loss of a thing insured for less than its actual value, the insured in a marine policy is a co-insurer of the uninsured portion (Sec. 157.), while the insured m a y only become a co-insurer in fire insurance if expressly agreed upon by the parties, (see Sec. 172.)

396

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 168-169

Sec. 168. An 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, entitles an insurer to rescind a contract of fire insurance. Sec. 169. 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. W h e n alteration in thing insured entitles insurer to rescind. In order that the insurer m a y rescind a contract of fire insurance under Section 168 for any alteration m a d e in the use or condition of the thing insured, the following requisites m u s t be present: (1) T h e use or condition of the thing is specifically limited or stipulated in the policy; (2) Such use or condition as limited by the policy is altered; (3) T h e alteration is m a d e without the consent of the insurer; (4) T h e alteration is m a d e by m e a n s within the control of the insured; and (5) T h e alteration increases the risk. But a contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, w h i c h does not violate its provisions even though it increases the risk and is the cause of the loss. (Sec. 170.) Increase of risk or hazard in g e n e r a l . (1) Implied undertaking of insured. — Every contract of insurance is m a d e with reference to the conditions surrounding the subject matter of the risk and the p r e m i u m is fixed with reference thereto. (25 C.J.S. 199.) There is thus an implied promise or undertaking on the part of the insured that he will not change the premises or the character of the business carried there, or to be carried on there, so as to increase the risk of loss by fire

Sees. 168-169

CLASSES OF INSURANCE Title 2. — Fire Insurance

397

although most fire insurance policies contain a specific provision against an increase of risk or hazard. (44 A m . Jur. 2d 138.) (2) Character of the increase in risk. — An increase of hazard takes place w h e n e v e r the insured property is put to s o m e n e w use, and the n e w use increases the chance of loss. (Graley vs. American Eagle Tire Co., 257 N.Y.S. 5668.) M e r e negligent acts temporarily endangering the property will not violate the policy (Vance, op. cit., p. 846.) nor the temporary acts or conditions w h i c h h a v e ceased prior to the occurrence of the loss (e.g., s m o k i n g in bed, using kerosene to start a fire, storing a small a m o u n t of gasoline). There m u s t be an actual increase of risk a n d while it is not necessary that the increased risk should h a v e caused or contributed to the loss, still it is necessary that the increase be of substantial character. (45 C.J.S. 313-314.) Alterations avoiding policy. (1) Where risk of loss increased. — T h e policy is avoided by any alteration in the use or condition of the property insured increasing the risk as where firecrackers are placed in the insured building (Young vs. M i d l a n d Textile, Inc., Co., 50 Phil. 617 [1927].); or where a building insured as a dwelling is used as a disreputable roadside tavern and b a w d y - h o u s e (Allen vs. H o m e Int. Co., 65 Pac. 158.); or as a retail liquor store. (Western Assur. Co. vs. M c D i k e , 62 Miss. 740.) U n d e r such circumstances, the basis upon which the contract of insurance rests is changed and, therefore, there can be no recovery. (2) Where the increase no longer existing at time of loss. — T h e insurer w o u l d still be liable if the increase in hazard was no longer existing at the time of the loss as w h e n the firecrackers in the insured dwelling house had already b e e n removed and in no way contributed to the loss unless there is a breach of warranty that no hazardous goods should be stored or kept in the property insured, (see Sec. 76.) Alterations not avoiding policy. (1) Where risk of loss not increased. — There is not an increase of risk and the policy is not avoided where a different use is

398

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 168-169

made of the insured premises, which use is not of a dangerous character and does not differ materially from the use specified in the policy, even though an additional or increased premium m a y be demanded therefor. (Monteleone vs. Royal Ins. Co., 50 L R A 784.) (2) Where questioned articles required by insured's business.— Even though the policy contains certain provisions prohibiting specified articles from being kept in the insured premises, the policy will not be avoided by a violation of these provisions if the articles are necessary or ordinarily used in the business conducted in the insured premises, like benzine kept in a furniture factory for purposes of operating or for cleaning machinery. (Bachrach vs. British American Assur. Co., 17 Phil. 55 [1910].) (3) Where insured property would be useless if questioned acts were prohibited. — The making of repairs, painting or doing other acts of similar character on the thing insured are not to be regarded as increasing the risk since the property w o u l d be useless to the insured if such acts were prohibited (Vance, op. cit., p. 848.) e v e n though by reason thereof, the property m a y be e x p o s e d to s o m e additional risk. ( T h o m p s o n vs. U.S. Products a n d Shippers Ins. Co., 160 N.E. 668.) Thus, keeping in the h o u s e a small quantity of gasoline, needed for removing old paint during the course of making repairs, does not increase the risk. (Smith vs. Insurance Co., 65 N.W. 256.)

Where insured has no control or knowledge of alteration. (1) Insurer's liability unaffected. — T h e insurer is not relieved from liability if the acts or circumstances by w h i c h the risk is increased are occasioned by accident, or a cause over w h i c h the insured has no control. Thus, increase in risk resulting from adjacent premises over which the insured has no control will not avoid a policy (State Ins. Co. vs. Taylor, 24 P. 333.) unless actually known to the insured (Hartford Fire Ins. Co. vs. Borroh, 133 S.W. 465.); or from act of the insured's tenant provided the act is not known to the insured. (2) Insured's knowledge presumed. — It would seem, however, that every act of the insured's tenant substantially and perma-

Sec. 170

CLASSES OF INSURANCE Title 2. — Fire Insurance

399

nently affecting the conditions of the property so as to constitute an increase in risk, w o u l d be presumptively k n o w n to the insured. (Liverpool, etc., Inc. C o . vs. Grunther, 116 U . S . 113.)

Application of Section 75 and Section 169. An alteration in the risk or condition of the thing insured w h i c h does not increase the risk will n o t affect a contract of fire insurance. This is the rule e m b o d i e d in Section 169, and it is logical as the basis u p o n w h i c h the contract rests is n o t changed. Furthermore, it is consistent with the provision of Section 75 that the breach of an immaterial provision does not avoid the policy. However, under Section 75, the insurer is given the right to insert terms and conditions in the policy w h i c h if violated w o u l d avoid it. An alteration m a d e in the use of condition of the thing insured will thus avoid a policy u n d e r the s a m e section if such alteration is expressly prohibited although it does n o t increase the risk. Therefore, Section 169 applies to policies w h i c h are silent u p o n the subject. Sec. 170. 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 a loss.

Where act of insured not in violation of policy. If the policy does not contain any prohibition limiting the use or condition of the thing insured (Sec. 168.), an alteration in said use or condition does not constitute a violation of the policy. Hence, the contract is not affected by such alteration even though it increases the risk and is the cause of the loss. Section 170 m a y be considered as an exception to the rule laid d o w n in Section 168. However, Section 170 is n o w practically of no importance since at present, most insurance companies, to protect themselves expressly provide in every policy of fire insurance that it shall be avoided by any act of the insured which increases the risk.

THE INSURANCE CODE OF THE PHILIPPINES

400

Sees. 171-172

Sec. 171. If 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 it was at the time of the injury; but if there is a valuation in a policy of fire insurance, the effect shall be the same as in a policy of marine insurance. Sec. 172. 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 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 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. (a) 2

2

Section 164-A of the Insurance Act (Act No. 2427.) which was inserted by Republic Act No. 1481, providing for prima facie evidence of arson, was repealed by the former Insurance Code of Philippines (Pres. Decree No. 612.) by omission. Said section makes it obligatory on the part of the insurer to insert in the policy, the clause embodying the circumstances and the presumption mentioned therein, except in cases of insurance of residential building or buildings used purely for residential purposes. An insurer is not liable for a loss caused by the willful act or through the connivance of the insured (Sec. 87.), as when arson is committed by the insured or in conspiracy with another. Under Presidential Decree No. 1613 which amends the law on arson as contained in Articles 320 to 3260-B of the Revised Penal Code, arson is committed by any person who bums or sets fire on the property of another. (Sec. 1, Pres. Decree No. 1613.)

Sees. 171-172

CLASSES OF INSURANCE Title 2. — Fire Insurance

401

Measure of indemnity under an open policy. (1) Amount of actual loss sustained. — In the absence of express valuation in a fire insurance policy (see Sec. 60.), the insured is only entitled to recover the a m o u n t of actual loss sustained and the burden is u p o n h i m to establish the a m o u n t of such loss by a preponderance of evidence. (Tan C h u c o vs. Yorkshire Fire & Life Ins. Co., 14 Phil. 3 4 6 [1909].) A contract of fire insurance is a contract of indemnity. Hence, the insured is entitled to receive the amount necessary to indemnify him, or to h a v e the thing insured in the s a m e condition in w h i c h it w a s at the time of the loss. (2) Limit to amount. — T h e liability of the insurer shall in no event exceed w h a t it w o u l d cost the insured to repair, or replace the thing insured with materials of like kind and quality with proper deduction for depreciation considering the age or condition of the thing before the loss. (3) Market value in case of personal property. — In the case of goods or personal property h a v i n g a m a r k e t value w h i c h can readily be determined, such market value m a y be applied in determining the actual loss sustained.

Any of the following circumstances shall constitute prima facie evidence of arson: (1) If the fire started simultaneously in more than one part of the building or establishment; (2) If substantial amount of flammable substances or materials are stored within the building not necessary in the business of the offender nor for household use; (3) If gasoline, kerosene, petroleum or other flammable or combustible substances or materials soaked therewith or containers thereof, or any mechanical, electrical, chemical, or electronic contrivance designed to start a fire, or ashes or traces of any of the foregoing are found in the ruins or premises of the burned building or property; (4) If the building or property is insured for substantially more than its actual value at the time of the issuance of the policy; (5) If during the lifetime of the corresponding fire insurance policy more than two fires have occurred in the same or other premises owned or under the control of the offender and/or insured; (6) If shortly before the fire, a substantial portion of the effects insured and stored in a building or property had been withdrawn from the premises except in the ordinary course of business; or (7) If a demand for money or other valuable consideration was made before the fire in exchange for the desistance of the offender or for the safety of the person or property of the victim. (Sec. 6, ibid.) The building which is the object of arson including the land on which it is situated shall be confiscated and escheated to the State, unless the owner thereof can prove that he has no participation in nor knowledge of such arson despite the exercise of due diligence on his part. (Sec. 8, ibid.)

THE INSURANCE CODE OF THE PHILIPPINES

402

Sees. 171-172

Measure of indemnity under a valued policy. The effect of a valuation in a policy of fire insurance is the same as in a policy of marine insurance, (see Sections 6 1 , 1 5 6 . ) (1) Valuation conclusive between the parties. — In other words, the valuation in a policy of fire insurance is conclusive between the parties in the adjustment of either partial or total loss if the insured had an insurable interest and w a s not guilty of fraud. (Harding vs. Commercial U n i o n Ins. Co., 38 Phil. 4 8 4 [1918]; Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 154 S C R A 672 [1987].) (2) Amount stated in policy/amount of partial loss. — T h e valuation of a building or structure insured under a policy against fire may be fixed as provided in Section 172. In case of a total loss, the insured can recover the w h o l e a m o u n t so insured as stated in the policy and in case of partial loss, the full a m o u n t of the partial loss. A total loss of the insured building exists w h e n the result of the fire is such as to render the property wholly unfit for use as a building h o w e v e r valuable it m a y be as m e r e material. (Vance, op. cit., p. 886.) (3) Pro rata contribution to payment of loss. — If the thing is insured under two or more policies, each policy shall contribute pro rata to the payment of such whole or partial loss. In life insurance, the measure of indemnity is the s u m fixed in the policy. T h e principle of indemnity does not apply, (see Sec. 183.) EXAMPLE: About ten (10) years ago, X constructed a house for which he spent P300,000.00 which he insured against fire for the same amount. He renewed the insurance for the same amount every year. This year, when the house was already worth P600,000.00 (if it is rebuilt) on account of inflationary prices, 1/5 of the house was destroyed by accidental fire. How much can X recover from the insurer? It depends. If the policy is an open policy, X can recover his actual loss of P120,000.00, which is 1/5 of P600,000.00, the value of the property at the time of the loss. (Sec. 171.)

Sees. 171-172

CLASSES OF INSURANCE Title 2. — Fire Insurance

403

If the policy is a valued policy, and the house was valued at P300,000.00, X can recover only 1/5 of P300,000.00, or P60,000.00.

Insured not a co-insurer under fire policies in the absence of stipulation. U n d e r the usual contract of fire insurance, the insurer, in case of a partial loss of the subject of the contract, is required to give full indemnity for such loss up to the a m o u n t written in the policy even though the property be very inadequately insured. Thus, if property w h i c h is valued at P 1 0 0 , 0 0 0 . 0 0 is insured for P50,000.00 and is d a m a g e d by fire to the extent of one-half of its value, the insurer will be c o m p e l l e d to pay the entire P50,000.00 necessary to repair the loss. This, however, as already pointed out earlier, is not the rule in marine insurance. (Sec. 157.) But a similar result is n o w obtained in fire insurance by the insertion of a standard provision k n o w n as "co-insurance c l a u s e " in the fire insurance policy (see Sec. 93.) to e n c o u r a g e property owners to insure their property for an a m o u n t as close to full value as possible.

Reason for co-insurance clause in fire policies. T h e co-insurance clause is a clause requiring the insured to maintain insurance to an a m o u n t equal to the value or specified percentage of the value of the insured property under penalty of becoming co-insurer to the extent of such deficiency (see Vance, op. cit., p. 887.), i.e., the difference b e t w e e n the value or percentage insured and the amount of the insurance. It divides the potential risk between the insured and the insurer in case of partial loss or destruction of the insured property. Only a small percentage of fires result in the total destruction of the property insured. This is especially true where the goods or buildings insured are widely separate and where the fire protection is adequate. M a n y property owners, realizing that the possibility of total destruction is slight, desire to insure merely for a small percentage of the value of the building or goods. If they can, by insuring the property for only 2 5 % of its value, receive

THE INSURANCE CODE OF THE PHILIPPINES

404

Sees. 171-172

full indemnity for any loss in 9 5 % of the cases, they are tempted to accept this partial coverage at a cost only of one-fourth of that required for complete coverage. To prevent the property owners from taking out such small amount of insurance, and thereby reducing the premium payments and thereby increasing the rates of premium for all, the insurers often insert as a rider to the standard fire policy a so-called "co-insurance" clause. This results in reducing the recovery in case of partial loss to but a portion of the s u m n a m e d in the policy though in case of total loss, the insurer is liable for the amount n a m e d in the policy. (Ibid.) EXAMPLE: If a house valued at P500,000.00 is insured only for P300,000.00 and is damaged to the extent of P300,000.00, the insurer is liable, where there is a co-insurance clause in the policy, for 3 / 5 of the loss or only P180,000.00, 2 / 5 of the loss or P120,000.00 being borne by the insured himself. Thus, the insured is considered the co-insurer for the amount determined by the difference between the insurance taken out and the value of the property insured. This difference is assumed to be the personal risk of the insured. In case of total loss, the insurer is liable for the full amount of P300,000.00. If the insurance carried is more than P500,000.00, the value of the property, only P500,000.00, the actual fire loss, will be paid. Option to rebuild clause. Under Section 172, the mere fact that the parties h a v e fixed a valuation in the policy does not prevent them from stipulating in the policy concerning the repairing, rebuilding or replacing of buildings or structures wholly or partially d a m a g e d or destroyed. Thus, the insurer m a y be given the option to reinstate or replace the property damaged or destroyed or any part thereof, instead of paying the amount of the loss or damage. This option given to the insurer is called the option to rebuild clause. It is reserved by the insurer in order to protect h i m against unfairness in the appraisal and award rendered by a packed

Sec. 173

CLASSES OF INSURANCE Title 2. — Fire Insurance

405

board of arbitrators, or in the proof of loss. T h e insurer must exercise his option to rebuild within the time stipulated in the policy, or in the absence of stipulation, within a reasonable time. T h e choice by the insurer shall produce no effect except from the time it has b e e n c o m m u n i c a t e d to the insured. (Art. 1 2 0 1 , Civil Code.) Unless the policy has limited the cost of rebuilding to the a m o u n t of the insurance, the insurer, after electing to rebuild, can be compelled to perform his undertaking, e v e n though the cost m a y exceed the original a m o u n t of insurance. (Vance, op. cit., p. 883.) Sec. 173. 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, (n)

Pledge, etc. of fire insurance policy after a loss. (1) Consent of, or notice to, insurer not required. — After a loss has occurred, the insured m a y pledge, hypothecate, or transfer a fire insurance policy or rights thereunder. This he m a y do even without the consent of, or notice to, the insurer, (see Sees. 2 1 , 83.) In such case, it is not the personal contract which is being assigned, but a claim under or a right of action on the policy against the insurer. As a general rule, the assignee acquires no greater rights against the insurer than h a d the one to w h o m the policy was issued. (2) Limitation. — T h e right of the insured to assign his claim against the insurer after a loss has occurred, is subject to the prohibition in Section 173 against the transfer of a policy of fire insurance to any person or c o m p a n y w h o acts as agent or otherwise represents the insurer. A n y such pledge, etc. shall be void and of no effect insofar as it m a y affect other creditors of the insured. — oOo —

Title 3 CASUALTY INSURANCE

Sec. 174. 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, workmen's compensation insurance, public 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.

Casualty insurance defined. Casualty insurance includes all forms of insurance against loss or liability arising from accident or m i s h a p excluding certain types of loss or liability w h i c h are not within the scope of other types of insurance, namely: marine; fire; suretyship; and life.

Risks or losses covered. Section 174 defines casualty insurance by a process of elimination. Without the exclusion of the other types of insurance, casualty insurance would apply to almost any kind of insurance. (1) Accepting "casualty" to m e a n "accident" — that is, a violent mishap proceeding from an u n k n o w n or u n e x p e c t e d cause — casualty insurance m i g h t be p r e s u m e d to include any loss or d a m a g e w h e n an accident is the cause of the loss. (D.L. Bickelhaupt, op. cit., p. 71.) Thus, a casualty insurance policy excludes losses arising from accident w h i c h are within the coverage of the other types of insurance mentioned. 406

Sec. 174

CLASSES OF INSURANCE Title 3. — Casualty Insurance

407

(2) In burglary, robbery and theft insurance, the opportunity to defraud the insurer — the moral hazard — is so great that insurer h a v e found it necessary to fill up their policies with m a n y restrictions designed to reduce the hazard. Persons frequently excluded under such provisions are those in the insured's service and employment. T h e p u r p o s e of the exception is to guard against liability should the theft be c o m m i t t e d by o n e having unrestricted access to the property. (Fortune Insurance & Surety Co., Inc. vs. Court of Appeals, 2 4 4 S C R A 3 0 8 [1995].) Except with respect to c o m p u l s o r y m o t o r vehicle liability insurance (Chap. VI.), the Insurance C o d e contains no other provisions applicable to casualty insurance or to robbery insurance in particular. T h e s e contracts are, therefore, governed by the general provisions applicable to all types of insurance. Outside of these, the rights a n d obligations of the parties must be determined by the t e r m s of their contract, taking into consideration its purpose and always in accordance with the general purpose of insurance. (Ibid., citing M a . Clara M. C a m p o s , Insurance, 1983 Ed., p. 199.) Two general divisions of casualty i n s u r a n c e . They are as follows: (1) Insurance against specified perils w h i c h m a y affect the person and / o r property of the insured such as personal accident, robbery or theft, d a m a g e to or loss of m o t o r vehicle, insolvency of debtors, defalcation of employees, etc.; and (2) Insurance against specified perils w h i c h m a y give rise to liability on the part of the insured for claims for injuries to others or for d a m a g e to their property, such as w o r k m e n ' s compensation, motor vehicle liability, professional liability, products liability, etc. Liability insurance defined. Liability insurance has been said to be a contract of indemnity for the benefit of the insured and those in privity with him, or those to w h o m the law upon the grounds of public policy extends the indemnity against liability. (Foehrenback vs. German-American Title & Tt. Co., 217 Pa. 3 3 1 ; 43 Am. Jur. 2d 76.)

408

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Sec. 174

Under policies of this type, an indemnity is provided to the insured in respect of his legal liability to pay damages, usually arising out of negligence or nuisance and occasionally, under contract. (Dinsdale & McMurdie, op. cit., p. 83.) Liability insurable. (1) Liability for quasi-delict or non-fulfillment of contract. — Liability, as we deal in this work, is financial responsibility that one party has to another party as a consequence of doing or failing to do something. T h e doing or failing to do m a y involve negligence, or the terms of an existing contractual agreement between two or more parties. (Riegel, Miller & Williams, Jr., op. cit., pp. 425-426.) Liability involving the c o m m i s s i o n of a quasi-delict or tort (see Arts. 2176,2177, Civil Code.) is a civil injury, and not a felony or crime which is a public injury. T h e first is remedied by civil action instituted by the injured party, while the State takes action with respect to the second to punish the offender. (2) Liability for criminal negligence. — Liabilities arising out of acts of negligence w h i c h are also criminal are also insurable on the ground that such acts are accidental. Thus, a m o t o r insurance policy covering the insured's liability for accidental injury caused by his negligence, even though gross and attended by criminal consequences such as h o m i c i d e through reckless imprudence, wil not be void as against public policy. Liability consequences of deliberate criminal acts are not insurable. Thus, it was held (in Hardy vs. M o t o r Insurers' Bureau, 2 All E.R. 742 [1964].) that a motorist guilty of a deliberate crime resulting in payment of d a m a g e s to an injured third party is not entitled to recover on the policy. However, if he does not pay the damages, the injured third party can recover against the insurer. (Dindsdale & McMurdie, op. cit., 83.) 1

'At first, all liability insurance was considered of doubtful legality because it encourages the insured to be careless and because it requires the insurer to interfere in litigation to which he is not a party. (Art. 2207, Civil Code.) It was also argued that the insurer could not lawfully promise to indemnify the insured against the consequence — civil liability to injured persons — of his violation of law, e.g., traffic law. But to hold all such claims excepted would reduce indemnity to a mere shadow, and that the benefits of motor vehicle liability insurance outweighs its possible slight encouragement of carelessness.

Sec. 174

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Insurable interest in liability insurance. In liability insurance, questions of insurable interest are not particularly important. As a general rule, liability insurance, like other forms of insurance, m u s t be supported by an insurable interest in the insured, although there is s o m e authority to the contrary. (1) T h e insurable interest is to be found in the interest the insured has in the safety of persons w h o m a y maintain, or in the freedom from d a m a g e of property w h i c h m a y b e c o m e the basis of suits against h i m in case of their injury or destruction. T h e interest does not d e p e n d u p o n w h e t h e r the insured has a legal or equitable interest in property, b u t u p o n w h e t h e r he m a y be charged by law with the liability against w h i c h insurance is taken out. (ibid., 554-555.) (2) Therefore, liability insurance — assuming one qualifies as an insured — is always supported by an insurable interest. Thus, even if one w e r e to conclude that an insurable interest is not required for liability insurance, such a rule w o u l d h a v e no significant adverse implications. (R.H. Jerry, II, op. cit., p. 193.)

When liability insurance in policy payable. T h e general distinction b e t w e e n an insurance against liability and one against actual loss (or o n e of strict indemnity only) is that the coverage or liability of the insurer under the first attaches w h e n the liability of the insured to the injured third party attaches, regardless of actual loss at that time, while under the second, an action against the insurer does not lie until an actual loss is sustained by the insured, (see E.W. Patterson, op. cit., 263.) In a third party liability insurance contract, the insurer assumes the obligation of paying the injured third parties to w h o m the insured is liable. From the m o m e n t that the insured becomes liable to the third person, the insured acquires an interest in the insurance contract which may be garnished like any other credit. (Perla Compania de Seguros, Inc. vs. Ramolete, 203 S C R A 487 [1991].) In general, the class into which a particular policy falls depends on the intention of the parties as evidenced by the

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phraseology of the agreement in such respect in the policy. (43 Am. J u r . 2 d 770-771.) Right of injured person to sue insurer of party at fault. The right of the person injured to sue the insurer of the party at fault (insured) depends on whether the contract of insurance is intended to benefit third persons also or only the insured. The test applied is this: (1) Indemnity against third party liability. — W h e r e the contract provides for indemnity against liability to third persons, then third persons to w h o m the insured is liable, can sue directly the insurer upon the occurrence of the injury or event u p o n which the liability depends. T h e purpose is to protect the injured person against the insolvency of the insured w h o causes such injury and to give h i m a certain beneficial interest in the proceeds of the policy. It is as if such injured person were especially n a m e d in the policy. (Shafer vs. Judge, RTC, 167 S C R A 386 [1986].) W h e r e the contract is one of indemnity against liability, it b e c o m e s operative as soon as the liability of the person indemnified arises irrespective of whether or not he h a s suffered actual loss. (Republic Glass Corporation vs. Qua, 435 S C R A 4 8 0 [2004]; Associated Insurance & Surety Co., Inc. vs. Chua, 7 S C R A 52 [1963].) (2) Indemnity against actual loss or payment. — W h e r e 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 person's recourse being thus limited to the insured alone. (Guingon vs. Del Monte, 20 S C R A 1043 [1967].) Prior p a y m e n t by the insured is necessary in order that the obligation of the insurer m a y arise. Basis and extent of insurer's liability. (1) Contract of insurance. — T h e direct liability of the insurer under indemnity contract against third party liability does not mean that the insurer can be held solidarily liable with the

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insured and / o r the other parties found at fault. T h e liability of the insurer to the third party is b a s e d on contract; that of the insured is based on tort. (Malayan Insurance Co., Inc. vs. Court of Appeals, 165 S C R A 136 [1988]; First Integrated B o n d i n g & Insurance Co., Inc. vs. Hernando, 199 S C R A 796 [1991]; Heirs of G.U. Poe vs. M a l a y a n Insurance Co., Inc., 584 S C R A 152 [2009].) (2) Sum limited in the contract.—While in a solidary obligation the creditor m a y enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes to indemnify the insured against loss, d a m a g e or liability arising from u n k n o w n or contingent event. To m a k e the insurer solidarily liable with the latter's entire obligation b e y o n d the sum limited in the insurance contract w o u l d result in "evident breach of the concept of solidary obligations." (Vda. de M a g l a n a vs. Consolacion, 2 1 2 S C R A 2 6 8 [1992].) T h e third-party liability of the insurer is only up to the extent of the insurance policy and that required by law. A n y a w a r d b e y o n d the insurance coverage would already be the sole liability of the insured and / or the other parties, if any, at fault. (GSIS vs. Court of Appeals, 3 0 8 S C R A 559 [1999].) EXAMPLE: The policy is one whereby the insurer agreed to indemnify the insured "against all sums x x x which the insured shall become legally liable to pay in respect of a death of or bodily injury to any person x x x." Is the policy for indemnity against liability? Yes. From the fact that the insured is liable to third persons, such third persons are entitled to sue the insurer. (Ibid.) ILLUSTRATIVE CASE: Right of insurer to be subrogated to the rights of the insured against the third party responsible for the insurer's liability under the policy. Facts: M Co., insurer, issued in favor of S, insured, a private car comprehensive policy for "own damage" not to exceed P6,000.00 and a "third party liability" in the amount of P20,000.00. The insured jeep, while being driven by C, an

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employee of D Co., collided with a passenger bus belonging to P Co. causing damage to the insured vehicle and injuries to C, and T, who was riding in the ill-fated jeep. The Court of Appeals affirmed the decision of the trial court that S, D Co. and M Co. are solidarily liable for damages to T but ruled that D Co. has no obligation to reimburse M Co. for whatever amount the latter has been ordered to pay on its policy. Issue: Is the ruling correct? Held: No. Only S and D Co. are solidarily liable to T. S is made liable to T pursuant to Article 2184 of the Civil Code, while the basis of liability of D Co. is Article 2180. It thus appears that S and D Co. are the principal tortfeasors who are primarily liable to T. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidary. 2

3

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On the other hand, the basis of M Co.'s liability is its insurance contract "existing between it and S at the time of the complained vehicular accident. M Co., upon paying T the amount of P20,000.00, shall be subrogated to whatever rights S has against D Co. in accordance with Article 1217 of the Civil Code which 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. (Malayan Insurance Co. vs. Court of Appeals, supra.) 5

2

Art. 2184. In motor vehicle mishap, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune. It is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. If the owner was not in the motor vehicle, the provisions of Article 2180 are applicable. Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible, xxx xxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks even though the former are not engaged in any business industry. xxx xxx The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage. (1903a) Art. 2194. See annotations under Sections 1 and 243. 3

4

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Accident a n d health insurance. (1) Closely related purposes of coverages. — Accident and health coverages h a v e closely related purposes. Accident insurance reimburses the insured for pecuniary loss suffered as a result of injuries sustained in an accident. Health insurance, on the other hand, reimburses the insured for pecuniary loss arising out of disease-related illness. In b o t h kinds of insurance, the insured is reimbursed for medical and hospital expenses and, in the case of accident insurance and s o m e t i m e s health insurance, earnings as a result of the incapacity. 6

(2) Combination of coverages.—Accident and health coverages are often c o m b i n e d in the s a m e policy thereby protecting the insured from loss from either kind of disability. Also, accident insurance is frequently offered as a s u p p l e m e n t to life insurance. If death is caused by accident, m a n y life policies pay "double indemnity," m e a n i n g proceeds twice the a m o u n t of the policy's face value. T h e cost of the additional coverage is relatively low. Accident insurance is also provided with other coverages, most prominently with m o t o r vehicle insurance. Various kinds of specialized health insurance exist. "Major m e d i c a l " is e x p a n d e d coverage for catastrophic medical expenses. Hospitalization insurance is also widely marketed, as are other various kinds of supplementary coverages. (R.H. Jerry, II, op. cit., pp. 31-32.) (3) Burden of proof. — In accident insurance, the insured's beneficiary has the burden of proof in demonstrating that the cause of death is due to the covered peril. O n c e that fact is established, the burden then shifts to the insurer to show any excepted peril that m a y h a v e been stipulated by the parties. An

'A health care agreement which grants "living benefits," such as medical check-ups and hospitalization which a member may immediately enjoy so long as he is alive upon the effectivity of the agreement until its expiration is in the nature of non-life insurance, which is primarily a contract of indemnity. (Philamcare Health Systems, Inc. vs. Court of Appeals, 379 SCRA 356 [2002]; Blue Cross Health Care, Inc. vs. Olivares, 544 SCRA 580 [2008]; see Sec. 18.) In the case of Philippine Health Care Providers Inc. vs. Comm. of Internal Revenue (600 SCRA 413 [2009].), the Supreme Court reversed itself. It held that a corporation, such as a Health Maintenance Organization (HMO), whether or not organized for profit, whose main object is to provide the members of a group with health care services should not be considered as engaged in insurance activities. t

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"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. (Vda. de Gabriel vs. Court of Appeals, 264 S C R A 137 [1996].) Meaning of "accident" a n d "accidental" as used in accident policy. The terms "accident" and "accidental," as used in insurance contracts, have not acquired any technical meaning. T h e y are construed by the courts in their ordinary and c o m m o n acceptation. Thus, the terms have been taken to m e a n that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual and unforeseen. (1) Happening from known or unknown cause unusual and unexpected. — 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 k n o w n cause and, therefore, not expected. It is an event which h a p p e n s without any h u m a n agency or, if happening through h u m a n agency, an event which, under the circumstances, is u n u s u a l to and not expected by the person to w h o m it happens. (De La Cruz vs. Capital Insurance & Surety Co., Inc., 17 S C R A 559 [1966]; Filipino Merchants Insurance Co., Inc. vs. Court of Appeals, 179 S C R A 638 [1989]; 43 A m . Jur. 2d 627-628.) It need not be an event that is "sudden." (2) Cause may be attributable to fault or negligence. — T h e terms do not, without qualification, exclude events resulting in d a m a g e or loss due to the fault, recklessness or negligence of third parties. T h e concept "accident" is not necessarily s y n o n y m o u s with the concept of "no fault." It m a y be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man. (Pan Malayan Insurance Corp. vs. Court of Appeals, 184 S C R A 54 [1990].) 7

7

Foreseeability is an element of establishing negligence; so, "accident" may embrace events that could have been foreseen.

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Rule as to death or injury resulting f r o m "accidental" o r "accidental m e a n s . " T h e tendency of court decisions in the U n i t e d States in recent years is to eliminate the fine distinction b e t w e e n the terms "accidental" and "accidental m e a n s " and to consider t h e m as legally synonymous. (Travellers' Protective Association vs. Stephens, 185 Ark. 6 6 0 , 4 9 S.W. [3d] 3 6 4 ; Equitable Life A s s u r a n c e C o . vs. H e m e n over, 100 Colo. 2 3 1 , 67 P. [2d] 80, 110 A L R 1270, cited in De La C r u z vs. Capitol Insurance & Surety Co., Inc., supra.) A n u m b e r of courts h a v e reached the conclusion that the two concepts are so difficult to distinguish that they will be treated as essentially the s a m e in their jurisdictions. (I.E. Greider & W.T. Beadless, op. cit., p. 218.) 8

A distinction b e t w e e n the t w o is certainly not understood by the average m a n and he is the one for w h o m the policy is written. (Burr vs. C o m m e r c i a l Travellers M u t . Ecc. Ass'n., 7 N . E . [2d] 124 [1946].) (1) General rule. — T h e generally accepted rule is that death or injury does not result from accident or accidental m e a n s within the terms of an accident policy if it is the natural result of the insured's voluntary act, u n a c c o m p a n i e d by anything unforeseen except the death or injury. (2) Exception. — There is no accident w h e n a deliberate act is performed unless s o m e additional, unexpected, independent and unforeseen happening occurs w h i c h produces or 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 "Hence, it is no longer safe to rely upon the distinction between an injury which was an "accidental" result of an act which the insured intended to do and one which resulted from "accidental means" where the insured acted voluntarily to produce one result and produced another result unexpectedly. An example of the latter is the intentional pulling of a hair from the nose resulting in an abrasion through which bacteria entered and caused infection, resulting in death. (E.W. Patterson, op. cit., pp. 243-244.) Here, both the cause and the result are accidental. In the former, the result (injury) is unintended or unexpected. Death or injury could be a result of accident, but the latter does not necessarily result to the former.

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the protection of policies insuring against death or injury from accident. Thus, in a case where the participation of the insured in a boxing contest was voluntary, but the injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw h i m to the ropes of the ring and without this unfortunate incident, that is, the intentional slipping of the deceased, perhaps he could not h a v e died, the court held that his death may be regarded as accidental although boxing is attended with some risk of external injuries. In boxing, or in other equally physically vigorous 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. Of course, if the policy specifically excludes death resulting from a boxing match, the insurer is not liable for such death. (De La Cruz vs. Capitol Insurance & Surety Co., Inc., supra.)

Suicide and willful exposure to needless peril. Both are in pari matere because they b o t h signify a disregard for one's life. T h e 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. (Sun Insurance Office, Ltd. vs. Court of Appeals, 211 S C R A 5 5 4 [1992].) "Voluntary exposure to a k n o w n danger" is generally held to negate the accidental character of whatever followed from the known danger. To illustrate: A person w h o walks a tightrope 1,000 meters above the ground and without any safety device m a y 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." (Ibid.) Similarly, an insured's death as a result of playing "Russian roulette" (pulling the trigger of a revolver after spinning the cylinder with one cartridge in it) was held not within the coverage of an accident insurance. (E.W. Patterson, pp. 245-246, citing T h o m p s o n vs. Prudential Ins. Co. of America, 66 S.E. 2d, 19 [6a. App. 1951].)

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But the mere act of the insured of pointing the gun to his temple, believing that the g u n w a s not loaded and the gun fired, w h e n he pulled the trigger resulting in his death, w a s held an accident. T h e insured w a s unquestionably negligent but it should not prevent his beneficiary from recovering from the insurance policy he obtained precisely against accident where "there is nothing in the policy that relieves the insurer of the responsibility to pay the indernnity agreed u p o n if the insured is s h o w n to have contributed to his o w n accident. Indeed, m o s t accidents are caused by negligence," the firing of the g u n w a s the "additional, unexpected, independent a n d unforeseen h a p p e n i n g " that led to the insured's death. (Sun Insurance Office, Ltd. vs. Court of Appeals, supra.)

Meaning of "intentional" as used in accident policy. "Intentional," as u s e d in an accident policy excepting intentional injuries inflicted by the insured or any other person, etc., implies the exercise of the reasoning faculties, consciousness, and volition. W h e r e 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. (Biagtan vs. T h e Insular Life Assurance Co., Ltd., 44 S C R A 58 [1972].) EXAMPLE: D (insured) lifted heavy objects all day as a result of which he suffered injury to his back. For a claim to be payable under an accident policy, both the cause and the result of the death or injury must be accidental. Here, the cause was the heavy work — which was intentional. The injury, therefore, is not covered by the policy. On the other hand, if D slips and falls while lifting the heavy objects, the cause (loss of balance) and the result (injured back) are both accidental. His injury is covered by the policy. ILLUSTRATIVE CASES: 1. Insured stabbed by escaping robbers. — The house of the insured was robbed by a band of robbers; in committing the

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robbery, the robbers rushed towards the door of the second floor, and coming face to face with the owner, even if unexpectedly, stabbed him repeatedly, causing wounds on the body resulting in his death. Under the circumstances, it is contrary to all reason and logic to say that his injuries were not intentionally inflicted. (ibid.) 2. Insured was killed for the purpose of robbery. — The insured was waylaid and assassinated for the purpose of robbery. While the assassination of the insured was 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 in this case." (Hutchcrafts's Ex'r. vs. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, cited in the Biagtan case; see, however, Finman case, infra.) 3. Insured was shot while approaching place of robbery. — The insured 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 approached and stood in front of the main gate of the house, a shot was fired and it turned out afterwards that the insured was hit in the abdomen, the wound causing his death. Under the circumstances, the 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 or hit the victim. (Calanoc vs. Court of Appeals, 98 Phil. 79 [1955], cited in the Biagtan case.) 9

4. Insured died in the course of an assault or murder. — The insured and his companion were on their way home from attending a festival when they were confronted by unidentified persons. The insured died from a stab wound. The insurer denied the insurance claim on the ground that the insured's 'Comparing the Calanoc and the Biagtan cases, the Supreme Court said: "A similar possibility is clearly ruled out by the facts in the (Biagtan) case now before us. For while a single shot fired from a distance, could indeed have been fired with intent to kill or injure, nine wounds inflicted 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." (see, however, dissenting opinion of Justice Teehankee.)

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death was committed with deliberate intent which, by the very nature of a personal accident insurance policy cannot be mdernnified. According to the Supreme Court: "x x x 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 insured to expose his life to danger considering that he was just going home after attending a festival. Furthermore, the principle of expresso unius est exclusio alterius is applicable in the instant case since murder and assault not having been expressly included in the enumeration of only ten (10) circumstances that would negate liability in said insurance policy cannot be considered by implication to discharge the petitioner insurance company from liability for any injury, disability or loss suffered by the insured." This ambiguity in the insurance contract was interpreted in favor of the insured. (Finman General Assurance Corp. vs. Court of Appeals, 213 SCRA 493 [1992].)

Effect of "no action" clause in policy of liability insurance. In Guingon vs. Del Monte (20 S C R A 1043 [1967].), the policy requires that suit and final j u d g m e n t be first obtained against the insured; that only "thereafter" can the person injured recover on the policy; it expressly disallows suing the insurer as a codefendant of the insured in a suit to determine the latter's liability to the third person. The query is which procedure to follow — that of the insurance policy or the Rules of Court. It w a s held that "no action" clause in the policy cannot prevail over the Rules of Court provisions aimed at avoiding multiplicity of suits. Section 5 of Rule 2 on "joinder of causes of action" and Section 6 of 10

10

SEC. 5. Joinder of causes of action. — A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may have against an opposing party, subject to the following conditions: (a) The party joining the causes of action shall comply with the rules on joinder of parties;

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Rule 3 on "permissive joinder of causes of parties"" cannot be superseded, at least with respect to third persons not a party to the contract by a "no action" clause on the contract of insurance. (ibid.; Shaffer vs. Judge, RTC, supra.)

— oOo —

(b) The joinder shall not include special civil actions or actions governed by special rules; (c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein; and (d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test of jurisdiction. (5a) "SEC. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may except as otherwise provided in these rules, join as plaintiffs or be joined as defendant in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

Title 4 SURETYSHIP

Sec. 175. 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 and under the provisions of Act No. 536, as amended by Act No. 2206. (n)

Suretyship defined. Section 175 defines the contract of suretyship. It is an agreement whereby one (usually an insurance c o m p a n y ) undertakes to answer, under specified terms and conditions, for the debt, default or miscarriage of another (principal or obligor), such as failure to perform a contract or certain duties, or for breach of trust, negligence and the like, in favor of a third party (obligee), (see Sec. 2[1, 2].) 1

Undertakings within the scope of suretyship. A contract of suretyhip includes official recognizances, stipulations, bonds, or undertakings issued by any c o m p a n y by virtue of and under the provisions of Act N o . 536, as amended by Act No. 2206, entitled " A n Act relative to recognizances,

•There may be a co-suretyship whereby two or more parties become co-sureties in a single bond. It is unlimited when each co-surety assumes solidary liability and limited, when their obligation is joint, (see Arts. 1207, 1208, Civil Code.) Under Section 176, the liability of the surety or co-sureties is solidary. 421

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stipulations, bonds, and undertakings, and to allow certain corporations to be accepted as surety thereon." Under Act No. 536, whenever any recognizance, stipulation, bond, or undertaking conditioned for the faithful performance of any duty or of any contract m a d e with public authority (i.e., government), or for doing or refraining from doing anything in such recognizance, etc. specified is required or permitted by law to be given with one surety or with two or more sureties, the execution of the same or the guaranteeing of the performance of the condition thereof shall be sufficient w h e n executed or guaranteed by any corporation organized under the laws of the Philippines and authorized to b e c o m e a surety upon official recognizances, etc. The Act requires that such recognizance, etc. be approved by the head of Department, court, judge, officer, b o a r d or body, executive, legislative, or judicial, required to approve or accept the same. (Sec. 1 thereof.) 2

Corporate suretyship. (1) Background. — In very ancient times, it w a s the practice to take hostages, by treaty or force, from tribes w h o w e r e under obligation, as a guarantee of good conduct or fulfillment of promises. Biblical references s h o w that suretyship w a s c o m m o n in those days, and in England, it reached such proportion by the time of Cromwell's administration as to give rise to a b u r d e n s o m e number of court cases. Personal sureties were u s e d exclusively Memorandum Circular No. 622 of the Office of the President of the Philippines, dated February 12,1973, provides: "For the protection of the interest of the Government, all insurance companies shall be required to present a certification of the Insurance Commissioner regarding their financial conditions, outstanding obligations with the Government and such other matters as may, from time to time, be required by said official, before they can issue any bond or policy in favor of any government agency or office. All courts, government agencies, bureaus, and government-owned or -controlled corporations dealing with insurance companies are hereby required to furnish the Office of the Insurance Commissioner information or report of their transactions within three (3) days from the consummation thereof, stating the: (a) name of insurance company that issued the policy or bond; (b) name and address of insured or principal; (c) number of policy or bond; (d) date of issue of policy or bond; (e) amount of policy or bond; (f) outstanding obligations of or claims against the insurance company issuing the policy or bond." (Ins. Circular dated Feb. 21, 1973.)

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until a society w a s formed in 1720 to insure masters against loss through the dishonesty of their servants. In 1853, N e w York authorized the formation of c o m p a n i e s to accept fidelity and surety risks, b u t no c o m p a n y took advantages of this privilege until 1876. Corporate sureties w e r e found superior to individuals in m a n y respects and thus corporate b o n d i n g (fidelity) and surety grew to a b i g business. (Riegel, Miller & Williams, Jr., op. cit., pp. 385-396.) In the early days w h e n personal sureties w e r e utilized, cosuretyship w a s c o m m o n . With the rise of corporate sureties, reinsurance (Sec. 95.) is considered a simpler and m o r e convenient device for spreading risks, (see S e c . 2 1 5 , par. 2.) Personal sureties in property b o n d are currently allowed for bail b o n d s u n d e r the Rules of Court, (see Rule 114, Sees. 1 2 , 1 3 . ) (2) Treated like insurance. — With the c h a n g e to surety b o n d s being issued by corporations, the court b e g a n to change the rule of strictissimi juris, w h i c h favored the surety in interpreting the contract. Gradually, the insurance rule w h i c h applied to "contracts of adhesion" w a s adopted. W h e n the contract is primarily d r a w n up by one party, the benefit of the doubt goes to the other party (the insured, or obligee) in the case of an ambiguity. Suretyship, especially fidelity bonding, is thus treated like (non-life) insurance in s o m e respects'. T h e b o n d s l o o k like insurance contract, too, and they are often issued by agents w h o write both insurance contracts and b o n d s . Regulation of b o n d s likewise falls under the Office of the Insurance Commissioner. (D.L. Bickelhaupt, op. cit., p. 743.) Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee, (as amended by Pres. Decree No. 1855.) (n) Nature of liability of surety. The contract of a surety is evidenced by a writing called "surety b o n d " which is essentially a promise to guarantee the debt or obligation of the obligor.

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Sec. 176

(1) Solidary. — The liability of the surety or sureties under a bond is joint and several, or solidary. This means that upon default by the obligor in complying with his obligation as secured by the bond, the surety b e c o m e s primarily liable to the obligee w h o has right to demand payment under the terms and conditions of the bond, (see Arts. 1207-1208, 2407, Civil Code.) (2) Limited or fixed. — It is limited to the amount of the bond, (see Republic vs. Court of Appeals, 354 S C R A 285 [2001].) (3) Contractual. — It is determined strictly by the terms of the (a) contract of suretyship in relation to the (b) principal contract between the obligor and the obligee. (Sec. 176; see Zenith Insurance Corp. vs. Court of Appeals, 119 S C R A 4 8 5 [1982].) A surety is merely a collateral contract. Its basis is the principal contract or undertaking which it secures. T h e obligee does not participate in the processing and approval of the b o n d application the merits of which it is the duty of the surety to investigate and ascertain before it is approved. A n y misrepresentation m a d e by the b o n d applicant cannot, therefore, defeat the rights of the obligee. To indemnify the surety against loss, the obligor executes a (c) third contract in favor of the surety. This contract is called an "Indemnity Agreement." T h e (original) surety issuing the prime bond may cede a portion or portions of the b o n d to one or m o r e insurers or sureties under a b o n d reinsurance contract. ILLUSTRATIVE CASE: Bond makes surety liable to obligee for failure of obligor to collect from a third paty. Facts: S (surety company) issued in favor of C (obligee) a surety bond to secure the faithful compliance by P (obligor) of his obligations to C as C's distributor. The bond provides that it shall be liable in case of nonpayment of any De Luxe Products Marketing (DLPM) account in favor of C and the nonremittance of any collections due from any account booked by DLPM. C failed to collect from P for purchases made by DLPM which the latter failed to pay. S alleged as a defense that the bond of DLPM was issued in favor of P and not in favor of DLPM.

Sec. 176

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Issue: Is the surety bond liable? Held: Yes. The condition of the bond explicitly provides for S's liability in case of non-payment of any DLPM account. (Edward Keller, Ltd. vs. Workmen's Insurance Co., Inc., I.C. Case No. 378, Aug. 9,1977.)

Distinctions between suretyship and property insurance. They are the following: (1) Suretyship is an accessory contract b e c a u s e it is dependent for its existence on a principal contract, while a contract of insurance is a principal contract in itself; (2) In the first, there are always three parties: the surety; the principal debtor or obligor; and the creditor or obligee, while in the second, there are only t w o parties, the insurer and the insured; (3) T h e first is m o r e of a credit a c c o m o d a t i o n with the surety assuming primary liability, while the second is generally a contract of indemnity; (4) In the first, the surety is entitled to reimbursement from the principal and his guarantors for the loss it m a y suffer under the contract, while in the second, there is no right of recovery for the loss the insurer m a y sustain except w h e n the insurer is entitled to subrogation. In case of subrogation, however, the third party against w h o m the insurer m a y proceed is not a party to a contract; (5) Generally, a b o n d can only be cancelled by or with the consent of the obligee or by the Commissioner or by a court of competent jurisdiction, while a contract of insurance m a y be cancelled unilaterally either by the insured or by the insurer on grounds provided by law (Sec. 64.); (6) The first requires the acceptance of the obligee before it becomes valid and enforceable, while the second does not need the acceptance of any third party; and (7) The first is a risk-shifting device, the premium paid being in the nature of a service fee, while the second is a risk-distributing

426

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device, the premium paid being considered a ratable contribution to a common fund, (see Sec. 2.) Distinctions between suretyship and guaranty. By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (par. 1, Art. 2047, Civil Code.) T h e distinctions between a surety and a guarantor are as follows: (1) The surety assumes liability as a regular party to the undertaking, while the liability of the guarantor depends u p o n an independent agreement to pay if the primary debtor fails to do so; (2) The surety is primarily liable, w h i l e the guarantor is secondarily liable; and (3) The surety is not entitled to the benefit of exhaustion of the debtor's assets, while the guarantor has this right to h a v e all the property of the debtor and legal remedies against the debtor first exhausted before he can be c o m p e l l e d to p a y the creditor. (Art. 2058, ibid.) It would then follow that "while a surety undertakes to p a y if the principal does not pay, the guarantor b i n d s h i m s e l f to p a y if the principal cannot pay." (Machette vs. Hospicio de S a n J o s e & Fidelity & Surety Co., 43 Phil. 2 9 7 [1922].) In short, the surety is considered in law as being the s a m e party as the principal debtor in relation to the latter's obligation. Sec. 177. 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 per

Sec. 177

CLASSES OF INSURANCE Title 4. — Suretyship

427

centum 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 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. (n) P a y m e n t of p r e m i u m s . T h e rules are as follows: (1) T h e p r e m i u m b e c o m e s a debt as s o o n as the contract of suretyship or b o n d is perfected and delivered to the obligor (see Sec. 77.); (2) T h e contract of suretyship or b o n d i n g shall not be valid and binding unless and until the p r e m i u m therefor has b e e n paid; (3) W h e r e the obligee h a s accepted the b o n d , it shall be valid and enforceable notwithstanding that the p r e m i u m has not b e e n paid (see Philippine Pryce A s s u r a n c e Corp. vs. Court of Appeals, 230 S C R A 164 [1994].); 3

(4) If the contract of suretyship or b o n d is not accepted by, or filed with the obligee, the surety shall collect only a reasonable amount; (5) If the non-acceptance of the b o n d be due to the fault or negligence of the surety, no service fee, stamps, or taxes imposed shall be collected by the surety; and (6) In the case of a continuing b o n d (for a term longer than one year or with no fixed expiration date), the obligor shall pay the subsequent annual premium as it falls due until the contract is cancelled. (Sec. 177.) The premium is the consideration for furnishing the bond or the guaranty and the obligation to pay the same subsists for 'Sections 64 and 77 refer to insurance in general Section 177 specifically governs suretyships. (AFP General Insurance Corp. vs. Molina, 556 SCRA 630 [2008].)

428

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as long as the liability of the surety shall exist. (Reparations Commission vs. Universal Deep-Sea Fishing Corp., 83 S C R A 764 [1978]; Arranz vs. Manila Fidelity & Surety Co., 101 Phil. 272 [1957].) ILLUSTRATIVE CASES: 1. Right of principal not to pay premium where surety fails or refuses to pay loan and interest. Facts: Under the terms of the contract of suretyship, the obligation of S (surety) is that D (principal) pay C (creditor) the loan and the interest thereon, and that S shall be relieved of its obligation when the loan secured is paid. In the contract, C was given the right to sue D, or the latter and S at the same time. Issue: Can D excuse himself from the payment of the premium on the bond upon the failure or refusal of S to pay the loan and interest? Held: No. S did not promise D that it will pay the loan contracted by D for the latter's benefit. Such a promise is not implied by law either. D, therefore, cannot claim that there has been a breach on the part of S of any obligation it has made or undertaking under the suretyship contract. The failure or refusal of S to pay the debt for D's account did not have the effect of relieving D of his obligation to pay the premiums on the bond furnished. As long as the loan and interest remain unpaid, S continues to be bound to C, and as a corollary, its right to collect the premiums on the bond also continues. (Arranz vs. Manila Fidelity & Surety Co., supra.) 2. Liability of principal for renewal premiums after termination of contract of suretyship. Facts: S issued a surety bond in behalf of D and in favor of C, in consideration of which D and E executed an indemnity agreement whereby, among other things, they severally promised to pay S in advance the premium for each period of 12 months while the surety bond or any renewal thereof was in effect. About five (5) days before the expiration of the liability on the bond, C filed a civil case against S and D for the loss C allegedly suffered as a direct consequence of the failure of D to comply with its contract.

Sec. 177

CLASSES OF INSURANCE Title 4. — Suretyship

429

Upon the expiration of the 12-month life of the bond, S made a demand for the payment of the renewal premiums. According to S, as long as the bond is in full force and effect, the principal (D) should pay the corresponding renewal premium, for if the case is decided against S, it must pay the face value of its bond, and yet it is barred from collecting any consideration for the use of its bond during the pendency of the case. Issue: Is D liable to pay the renewal premiums? Held: No, since D opted not to renew the contract. More specifically, where a contract of surety is terminated under its terms, the liability of the principal for premiums after such termination ceases notwithstanding the pendency of a lawsuit to enforce a liability that accrued during its stipulated lifetime. (Capital Ins. & Surety Co., Inc. vs. Ronquillo Trading, 123 SCRA 526 [1983].) Types of surety b o n d s . 4

S o m e of the major types of surety b o n d s are: (1) Contract bonds. — T h e s e b o n d s are connected with construction and supply contracts. T h e y are for the protection of the owner against a possible default by the contractor to comply with his contract or his possible failure to pay material men, laborers, and sub-contractors. T h e position of surety, therefore, is to answer for a failure of the principal to'perform in accordance with the terms and specifications of the contract. There m a y be two bonds: (a) Performance bond. — O n e performance of the contract; and

covering

the

faithful

(b) Payment bond. — O n e covering the payment of laborers and material m e n (Wyatt & Wyatt, Business Law: Principles and Cases, 2nd Ed. [1903], pp. 895-896.); (2) Fidelity bonds. — They pay an employer for loss growing out of a dishonest act of his employee. For the purposes of underwriting, they are classified as: (a) Industrial bond. — O n e required by private employers to cover loss through dishonesty of employees; and 4

For rules and regulations governing the issuance of bonds, see Appendix "G.

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430

Sec. 177

(b) Public official bond. — O n e required of public officers for the faithful performances of their duties (see D.L. Bickelhaupt, op. cit., pp. 748-749.) and as a condition of entering upon the duties of their offices. It ordinarily includes all officers w h o have custody of public funds. T h e officials, to be sure, would be individually liable for any loss. T h e official, however, is not always in a position to m a k e good the loss. The requirement of an official bond, therefore, is to protect public funds. (Wyatt & Wyatt, op. cit., p. 896.) Note that in the case of a fidelity bond, the obligation of the employee to be honest with his employer is implied rather than contractual. T h e ordinary surety bond, on the other hand, obligates the surety to hold himself responsible for the performance of an express obligation of the principal (D.L. Bickelhaupt, op. cit., p. 744.); and (3) Judicial bonds. — T h e y are those w h i c h are required in connection with judicial proceedings. S o m e of the m o s t c o m m o n kinds are injunction bonds, attachment bonds, replevin bonds, bail bonds, and appeal bonds. T h e purpose of requiring a litigant to furnish a judicial b o n d is to indemnify the adverse party against damages resulting from the proceeding, (see Wyatt and Wyatt, op. cit., p. 896.) 5

It is a settled doctrine that the conditions of a b o n d specified and required in the provisions of the statute or regulation providing for the submission of the b o n d are incorporated or built into all bonds tendered under that statute or regulation,

5

In a Memorandum to all Clerks of Court and Branch Clerks of Court, dated September 10,1993, the Court Administrator of the Supreme Court prescribed the guidelines before approval by the Judge concerned of all applications for bail/judicial bonds. As a parallel move with that of the Supreme Court to stop the proliferation of spurious bail bonds and other judicial bonds, the following rules were issued by the Insurance Commission to govern the issuance of judicial bonds: (1) Judicial bonds can only be issued by the head office or the duly registered (with the Insurance Commission) branches and district offices of insurance companies to the exclusion of others; (2) The insurance company issuing judicial bonds shall confirm every first ten (10) days of the following month, the bonds it had issued to a particular court and shall request said court for a return confirmation of the same, both copy furnished the Supreme Court and the Insurance Commission; and (3) Requests for verification coming from the courts shall be acted upon by the concerned insurance company within two (2) days from receipt of the request. (Ins. Cir. Letter No. 24-93, dated Sept. 24,1993.)

Sec. 178

CLASSES OF INSURANCE Title 4. — Suretyship

431

even though not there set out in printer's ink. (Finman General Assurance Corp. vs. Inocencio, 179 S C R A 4 8 0 [1989].) Sec. 178. 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, (n)

Pertinent Civil Code provisions applicable in a suppletory character. Article 2047 of the Civil C o d e provides: " B y g u a r a n t y a person called the guarantor b i n d s h i m s e l f to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person b i n d s h i m s e l f solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title 1 of this B o o k shall be observed. In such case, the contract is called a suretyship." T h e second paragraph states the l a w applicable to the contract of suretyship. It e m b r a c e s Articles 1207 to 1222 of Section 4 (Joint and Solidary Obligations), Chapter 3 (Different Kinds of Obligations), Title 1 (Obligations) of the Civil C o d e . In a solidary obligation, the solidary debtor himself is the principal debtor. W h e n e v e r applicable, the provisions on guaranty from Articles 2047 to 2084 of the Civil C o d e also apply to suretyship. T h e above provisions of the Civil C o d e shall be applied in a suppletory character w h e n e v e r necessary in interpreting the provisions of a contract of suretyship. (Sec. 178.)

— oOo —

Title 5 LIFE INSURANCE* Sec. 179. Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith, (n) Sec. 180. 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. Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purposes of this Code. 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 twenty thousand pesos. 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, (a) Life insurance defined. (1) Based on Section 180, life insurance m a y be d e n n e d as insurance payable on the death' of a person, or on his surviving

*"Life and Health Insurance" under the Insurance Act. (Act No. 2427.) '"Sec. 3. Disputable presumptions. — The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: x x x x after 432

Sees. 179-180

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a specified period, or otherwise contingently on the continuance or cessation of life. (2) It has also b e e n defined as a mutual agreement by which a party agrees to p a y a given s u m on the h a p p e n i n g of a particular event contingent on the duration of h u m a n life, in consideration of the payment of a smaller s u m immediately, or in periodical payments by the other party. (44 C.J.S. 484.) (3) Essentially, life insurance is a contract to m a k e specific payments to pay to a certain person, the beneficiary, u p o n the death of a person w h o s e life h a s b e e n insured.

Parties involved in a policy of life insurance. T h e cast of characters involved in a policy of life insurance other than the insurer includes: (1) T h e owner of the polio/, w h o h a s the p o w e r to n a m e or change the beneficiary, to assign the policy (under certain conditions), cash it in for its surrender value, or use it as collateral in obtaining a loan; and the obligation to pay the premiums; (2) T h e person w h o s e life is the subject of the policy, also k n o w n as the cestui que vie; a n d (3) T h e beneficiary to w h o m the proceeds are paid. O n e person might occupy all three positions by n a m i n g his estate as beneficiary; or each of the three positions m a y be held by a separate party. (J.F. Dobbyns, op. cit., p. 71.)

an absence of seven years, it being unknown whether or not the absentee still lives, he is considered dead for all purposes, except for those of succession. The absentee shall not be considered dead for the purpose of opening his succession till after an absence of ten years. If he disappeared after the age of seventy-five years, an absence of five years shall be sufficient in order that his succession may be opened. The following shall be considered dead for all purposes, including the division of the estate among the heirs: (1) A person on board a vessel lost during a sea voyage, or an aircraft which is missing, who has not been heard of for four years since the loss of the vessel or aircraft; (2) A member of the armed forces who has taken part in armed hostilities, and has been missing for four years; (3) A person who has been in danger of death under other circumstances and his existence has not been known for four years x x x." (Rule 131, Rules of Court.)

434

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Sees. 179-180

Nature of life insurance. The nature of an insurance contract as one of indemnity is not, or is not altogether, true as to life insurance. (1) Liability absolutely certain. — T h e ordinary life insurance contemplates the certain payment of a specified s u m at an uncertain time; and the premiums are so calculated that in accordance with the insured's expectancy of life under a specified mortality table, there will be paid to the insurer in premiums and interest thereon, a s u m equal to an amount to b e c o m e due on the death of the insured plus the expense of administration. (a) In case of fire and marine insurance, the insurer takes merely a risk that a loss m a y take place within a given term, it being k n o w n by experience that such losses do not occur in a great majority of cases. (b) In ordinary life insurance, the event u p o n which the payment is to be m a d e is absolutely certain to h a p p e n at s o m e future time. In the average case, the insurer only pays b a c k the m o n e y that has been given to h i m to h o l d in quasi trust for the insured plus interest and less expenses. O n l y in the case of premature death does the insurance p a y m e n t e m b r a c e the element of indemnity. (Vance, op. cit., pp. 105-106.) (2) Amount of insurance generally without limit. — A n o t h e r reason w h y life insurance m a y not be regarded as a contract of indemnity exists in the difficulty to be encountered in fixing any sort of pecuniary value u p o n life. It is a well-recognized principle that, granting the existence of an actual interest, except w h e n the interest grows out of an obligation to pay a fixed s u m of money, there is no limit as to the a m o u n t of insurance w h i c h m a y legally be placed upon the life of any person even though that person might be one whose life w a s rather a burden u p o n the party in interest than a benefit possessing a pecuniary value, (ibid.) W h e n the insured dies, the insurer m u s t pay face the a m o u n t of the policy (or more) to the n a m e d beneficiary. (3) Life policy is a valued policy. — A policy of life insurance is treated substantially as a valued policy (see Sec. 183.) it being regarded a misnomer to speak of death as a "loss" in the sense in which the burning of a building is spoken of as a " l o s s "

Sees. 179-180

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(Wahl vs. Interstate B u s i n e s s m e n ' s Acci. Assn., 297 N.W. 395.) because there is no w a y to measure the value of a h u m a n life. Life insurance policies are "valued" by the purchaser w h e n the policy is purchased and the value placed on the insured is basically decided by the a m o u n t the purchaser is willing to p a y in premiums. The a m o u n t is determined by the factors affecting the life of the insured such as his age, health, a n d occupation. (4) Direct pecuniary loss not required. — W h e n settlement is made, the beneficiaries are under no obligation to demonstrate, as a condition precedent to recovery, a direct pecuniary loss as a result of the death of the insured. (a) A life policy is not a m e r e contract of indemnity, but is more accurately characterized as a form of investment. It is a contract to p a y the beneficiary a certain s u m of m o n e y to meet the financial crisis w h i c h m a y be caused in the event of death of the insured or any disability resulting in loss of earning p o w e r provided certain conditions are performed by the insured. (Victor vs. Louise Cotton Mills, 61 S.E. 648.) T h e measure of recovery is, therefore, the face a m o u n t of the policy and not the value of the insured's life. 2

(b) Here, it is the difficulty of deterrnining precise values that prevents life insurance- contracts from being, strictly speaking, based upon indemnity. O n e cannot say, for example, that the life of a person is worth (or not worth) precisely P50,000.00, or P100,000.00, or P1,000,000.00. Thus, the life insurance contract agrees to pay a certain stated amount rather than an a m o u n t determined after the loss to be a repayment for the loss. There can be no question raised by the insurer paying the loss as to whether or not the loss

2

Life insurance (except term insurance) is primarily thought of as an investment by the insured. In the usual case, life insurance is purchased to provide security to the insured's beneficiaries in the event the insured suffers an early death. In a real sense, the insurance is designed to "indemnify" the beneficiaries for the loss they suffered as a result of being deprived of the earning power of the insured. However, it is unrealistic to place a precise value on human life. Indeed, the most important qualities of life are incapable of being measured in economic terms. Thus, life insurance is not pure indemnity insurance, and property insurance has more indemnity characteristics than life insurance. (R.H. Jerry, II, op. cit., p. 181.)

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Sees. 179-180

of life actually resulted in an equivalent economic loss to the insured or his family. (D.L. Bickelhaupt, op. cit., pp. 89-90.) 3

(c) It is frequently the case that at the time the policy becomes payable because of the death of the insured his value as a producer has ceased. This circumstance has no bearing whatever upon the right of the beneficiary to participate fully in the policy in accordance with its terms. T h e contract of life insurance pays a certain s u m of m o n e y on the loss. (Ibid., 224.) There is no attempt to put a monetary value on life. Life insurance distinguished f r o m fire and marine insurance. (1) T h e former is not a contract of indemnity (save that effected by a creditor on life of debtor) b u t a contract of investment, while the latter are contracts of indemnity (supra.); (2) T h e former is always regarded as a v a l u e d policy (Sec. 183.), while the latter m a y be o p e n or valued; (3) A life policy m a y be transferred or assigned to any person even if he has no insurable interest (Sec. 181.), w h i l e in the case of a fire or marine policy, the transferee or assignee m u s t h a v e an insurable interest in the thing insured; (4) Unless expressly required, the consent of the insurer is not essential to the validity of the assignment of a life policy (Sec. 182.), while such consent, in the absence of waiver by the insurer, is essential in the assignment of a fire or m a r i n e policy; (5) In the former (save that effected by a creditor on life of debtor), insurable interest in the life or health of the person insured need not exist after the insurance takes effect or w h e n the loss occurs, while in the latter, the insurable interest in the

3

Wrule one individual may procure insurance on another's life for the purpose of indemnifying himself against actual loss or damage anticipated from the latter's death, the promise of the insurer is not a promise to pay loss or damage but a promise to pay a fixed sum if and when a certain event happens. The amount named in a life insurance policy is not treated as the upper limit of recovery; it is the amount payable, no more and no less. Not being a contract of indemnity, the insurer is not entitled to subrogation, i.e., to be reimbursed by a wrongdoer who caused the death of the person insured. (E.W. Patterson, op. cit., pp. 154-155.)

Sees. 179-180

CLASSES OF INSURANCE Title 5. — Life Insurance

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property insured m u s t exist not only w h e n the insurance takes effect but also w h e n the loss occurs (Sees. 1 9 , 1 8 1 . ) ; (6) In the former, insurable interest n e e d not h a v e any legal basis, while in the latter, insurable interest m u s t h a v e a legal basis (see Sec. 19.); (7) In the former, the contingency that is contemplated (i.e., death) is a certain event, the only uncertainty being the time w h e n it will take place, while in the latter, the contingency insured against m a y or m a y not occur; (8) In the former (unless written only for a term), the liability of the insurer to m a k e p a y m e n t is certain, the only uncertain element being w h e n such p a y m e n t m u s t be m a d e , while in the latter, liability is uncertain b e c a u s e the h a p p e n i n g of the peril insured against is uncertain; in other words, in the former, the amount insured will h a v e to be paid sooner or later, while in the latter, the amount insured m a y not h a v e to be paid; (9) T h e former, although it m a y be terminated by the insured, cannot be cancelled by the insurer, and, therefore, is usually a long-term contract, while the latter m a y be cancelled by either party and is usually for a term of o n e (1) year (see Sees. 65, 66.); (10) In the former, the " l o s s " to the beneficiary caused by the death of the insured can s e l d o m be measured accurately in terms of cash value, while the reverse is generally true of the loss of property; and (11) In the former, the beneficiary is under no obligation to prove actual financial loss as a result of the death of the insured in order to collect the insurance, while in the latter, the insured is required to submit proof of his actual pecuniary loss as a condition precedent to collecting the insurance, (see Title 10.) Under Article 2012 of the Civil Code, "any person w h o is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person w h o cannot make any donation to him, according to said article." (see Sec. 11.)

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Sees. 179-180

Exemption of life insurance policies from execution. In an action against the insured under a life insurance policy, may the policy be attached and sold at public auction? Under the Rules of Court, all moneys, benefits, privileges or annuities accruing or in any m a n n e r growing out of any life insurance are exempt from execution (Rule 3 9 , Sec. 12[k] thereof.) regardless of the amount of the annual p r e m i u m s paid. Before the amendment of the provision, if they exceed P500.00 "a like exemption shall exist which shall bear the s a m e proportion to the moneys, benefits, privileges, or annuities so accruing or growing out of such insurance that said P500.00 bears to the whole premiums paid." By w a y of illustration, if the p r e m i u m s paid annually amount to P l , 5 0 0 . 0 0 , only 1 / 3 of the life insurance benefits are exempt from execution. Incidentally, it has b e e n held that statutes e x e m p t i n g proceeds of life insurance from claims of creditors are regarded as exemption laws, and not as part of the insurance laws of the State, nor as designed simply to protect the insurer from harassing litigation, and should be construed liberally and in the light of, and to give effect to, their purpose of enabling an individual to provide a fund after his death for his family w h i c h will be free from the claims of creditors. (Gallardo vs. M o r a l e s , 107 Phil. 9 0 3 [1960], citing 35 C.J.S. 53-54.) Application of e x e m p t i o n to accident insurance.

(1) When accident insurance regarded as

life insurance. —

Generally speaking, a life insurance is distinct and different from an accident insurance, (see S e c . 174.) However, w h e n one of the risks insured in the latter is the death of the insured by accident, then such accident insurance m a y also be regarded as a life insurance. 1

4

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; Provided, That the terms "life" and "non-life" insurance shall be deemed to include health, accident and disability insurance. (Sec. 187, par. 8.)

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For this reason, and b e c a u s e the above-quoted provision of the Rules of Court m a k e s reference to "any life insurance," the exemption there established applies to ordinary life insurance contracts, as well as to those w h i c h although intended primarily to indemnify for risks arising from accident, likewise, 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. (Gallardo vs. Morales, supra.) (2) Burden of proof. — In an accident insurance, the insured's beneficiary has the b u r d e n of proving that the cause of death is due to the covered peril. O n c e that fact is established, the b u r d e n then shifts to the insurer to s h o w a n y e x c e p t e d peril that m a y have b e e n stipulated by the parties. An "accident i n s u r a n c e " is not thus to be likened to an ordinary life insurance w h e r e the insured's death, regardless of the cause thereof, w o u l d n o r m a l l y be compensable. T h e ordinary life insurance is akin to an "all-risks" coverage in property insurance, w h e r e the insurer, on the aspect of burden of proof, has merely to s h o w the condition of the property insured w h e n the policy attaches a n d the fact of loss or d a m a g e during the period of the policy and w h e r e thereafter, the burden would be on the insurer to s h o w any " e x c l u d e d peril." W h e n the insured risk is specified as in an accident insurance policy (e.g., for bodily injury caused solely by violent accidental external and visible m e a n s resulting in death or disability), it lies with the claimant of the insurance proceeds to initially prove that the loss is caused by the covered peril. (Vda. de Gabriel vs. Court of Appeals, 264 S C R A 137 [1996].) Kinds of life insurance policies. The kinds of individual life policies are limited in n u m b e r only by the ingenuity of the actuaries and other officials of the numerous competing companies insuring against loss of life, and only the more important and usual kinds need be mentioned. 5

Trie policies may be: (1) medical cases or those which have been issued after consideration of a medical report upon the life to be insured, in addition to the personal statement in the proposal for insurance; or (2) non-medical cases or those which have been issued after consideration of the personal statement in the proposal for insurance, without obtaining a medical report on the life of the insured, (see Cir. Letter, Oct. 29,1985.)

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Sees. 179-180

(1) Ordinary life policy is one under the terms of which the insured is required to pay a certain fixed premium annually or at more frequent intervals throughout his entire life and the beneficiary is entitled to receive payment under the policy only after the death of the insured. M a n y insurance companies consider this policy paid-up w h e n the insured reaches the age of 100. Thus, the ultimate payment of the insurance proceeds (either at that age or at death) is as certain as death itself. An alternative form of payment, however, can c o m e about by the inclusion of an investment feature through the p a y m e n t of the "cash surrender value" of the policy in case it is cancelled by the owner or it lapses through n o n p a y m e n t of premiums. Sometimes, it permits the insured to b o r r o w against the value without surrender of the policy. This policy is for the w h o l e duration of life. It carries the lowest rate of p r e m i u m . 6

This kind of policy is also k n o w n as whole life or regular life, or straight life, or cash-value insurance. (2) Limited payment life policy is one under the terms of w h i c h the premiums are payable only during a limited period of years, usually ten, fifteen, or twenty. W h e n the specified n u m b e r of premium payments h a v e b e e n m a d e , the insurance is fully paid for. It is like ordinary life policies in that it is p a y a b l e only at the death of the insured. T h e insured can take advantage of the investment aspect of the policy. If the insured should die within the specified period, his beneficiary is entitled to all the proceeds of the policy without any liability for the unpaid p r e m i u m s . Because of the limited n u m b e r of p a y m e n t s to be m a d e by the insured, the premiums are proportionately higher. This insurance does have a cash surrender value. This kind of policy is also called limited premium insurance policy.

'The policy is really a combination of a term insurance and a savings plan. A part of every premium paid covers the cost of insurance and the remainder is applied to the savings component of the policy. Thus, it is more expensive than term insurance. However, die premium does not increase over time. The amount of savings is called the policy's "cash value" or "surrender value" which increases in later years because a bigger proportion of the premium goes into savings, (see Sec. 227.)

Sees. 179-180

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(3) Term insurance policy is o n e w h i c h provides coverage only if the insured dies during a limited period. (Vance, op. cit., p. 63.) It is an insurance for a fixed or a specific term, such as two, five, or ten years. If the insured dies within the period specified, the policy is paid to the beneficiary. If he survives the period, the contract terminates or expires at the e n d of the time period. T h e premium paid is levied during the specified terms and increases with each renewal term (43 A m . Jur. 2 d . 67.) or the a m o u n t of coverage declines, and this is b e c a u s e as a person ages, the risk of death increases. T h e p r e m i u m is lower than in the case of straight life insurance because of the possibility that the insurer m a y not be obliged to pay anything in proceeds w h a t s o e v e r if the insured survives the term. Consequently, this form of life insurance is not considered to carry with it the e l e m e n t of investment. It has no loan value. There is generally no provision for p a y m e n t of a cash surrender value or investment value u p o n surrender or lapse of the policy. T h e insured m a y be given the option to convert the policy to one of whole life or e n d o w m e n t life. This kind of insurance is also k n o w n as temporary insurance. It is essentially pure insurance, i.e., it provides life insurance alone. 7

(4) Endowment policy is o n e under the terms of which the insurer binds himself to pay a fixed s u m to the insured if he survives for a specified period (maturity date stated in the policy), or, if he dies within such period, to s o m e other person indicated. T h e p r e m i u m is higher b e c a u s e the cash values of the policy grow more rapidly. This kind of policy differs from the limited payment life policy in that in the case of the latter, the policy is paid only u p o n the death of the insured. Here, the insured stands a chance of being paid the proceeds of the policy while still alive. After receiving the face amount of the policy, all coverage will terminate. It has an increasing cash surrender value but premiums are high, as payment is required even after the end of the term if the insured is still living. The proceeds on 7

Another type of Insurance is universal life that combines some aspects of term Insurance and some aspects of whole life Insurance.

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Sees. 179-180

maturity can be paid either in a lump sum or as an annuity. This type represents both term insurance and a form of annuity (right is to receive, for a definite term, fixed, periodical payments). This type of policy is thus useful in retirement planning. For the purpose of the Insurance Code, endowment contracts shall be considered life insurance contracts. (Sec. 180, par. 2.) The Insurance Code contains special provisions governing group life insurance (see Sees. 50, last par., 228.) and industrial life insurance. (Sees. 229, 330, 231.)

Scope of life insurance. The loss of earning p o w e r by persons results from their death, injury, illness, old age, or loss of e m p l o y m e n t . T h e branches of insurance covering s o m e of these contingencies h a v e not, it seems, acquired n a m e s in keeping with their purposes, so that death is a contingency covered by life insurance; injury or sickness is a contingency covered by health insurance; old age is insured by annuities or pensions; and u n e m p l o y m e n t insurance indemnifies for the loss of part of i n c o m e and is a type of social insurance. (1) Life insurance, in its simplest form, undertakes to protect the insured's family, creditors, or others against pecuniary loss which may be the outgrowth of the death of the insured. T h e loss occasioned by death against which life insurance attempts to provide protection is the cessation of the current earning p o w e r of the insured. Applying an e c o n o m i c interpretation to the concept of death, the permanent loss of current earning capacity a m o u n t s to an "economic death." F r o m the e c o n o m i c standpoint, death may be: (a) Actual death. — This classification represents the socalled "casket death"; (b) Living death. — This involves permanent disability; and (c) Retirement death. — Living b e y o n d the period of earning capacity represents this classification of death. (2) Health, accident and disability insurance provides benefits for hospital or medical expenses, or for loss of time or earning

Sees. 179-180

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443

power because of injury or illness. W h i l e health insurance is written by life insurers, injury and illness are also viewed as casualties (see D.L. Bickelhaupt, op. cit., p. 70.), that is, both as life and non-life insurance; hence, such policies m a y be issued by either life or non-life insurance companies. Like life insurance contracts, health insurance contracts that provide a specific periodic i n c o m e to disabled persons are not contracts of indemnity. But those that cover medical expenses are contracts of indemnity, (see Sees. 1 7 4 , 1 8 1 , 1 8 3 . ) In these contracts, only medical expenses incurred by the insured are paid. (Riegel, Miller and Williams, Jr., op. cit., p. 58.) Health, accident and disability insurance is d e e m e d by law as both life and non-life, (see Art. 187, par. 8.)

Contract of life annuity defined. " B y the aleatory contract of life annuity, the debtor binds himself to pay an annual pension or i n c o m e during the life of one or more determinate persons in consideration of a capital consisting of m o n e y or other property, w h o s e ownership is transferred to h i m at once with the burden of the i n c o m e . " (Art. 2 0 2 1 , Civil Code. ) 8

8

The following are the other provisions of the Civil Code on life annuity: 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 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. (1803a) Art. 2023. Life annuity shall be void if constituted upon the life of a person who was already dead at the 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 acquire 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)

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The annuity concept. The annuity has been called the "upside-down application of the life insurance principle." This concept is based on the notion that the purpose of life insurance is the scientific creation of an estate, whereas the purpose of the annuity is the scientific liquidation of an estate. Under a life insurance contract, the estate is created at death. Under the annuity contract, the estate is fully liquidated by death. Reduced to its ultimate simplicity, the idea can be expressed by comparing the nature of the t w o types of agreements. In exchange for his premium, the purchaser of life insurance expects his insurer to pay his beneficiary a specified s u m u p o n his death. For his premium, the purchaser of an annuity expects his insurer to pay him a periodic i n c o m e as long as he lives. Thus, under a life insurance contract, the insurer starts paying u p o n the death of the insured, whereas under an annuity contract, the insurer stops paying upon the death of the insured. ("Contracts-Annuities," by Robert I. Mehr, in L H I H , p. 78.) Annuity contracts distinguished f r o m ordinary life policies. Contracts of annuities differ materially from ordinary life policies and are not generally regarded as such. B u t u n d e r the law, they are considered, like e n d o w m e n t contracts, as life insurance contracts. (Sec. 180, par. 2.) T h e fact remains, however, that annuity and insurance are opposites; in this combination, one neutralizes the risk customarily inherent in the other. (1) An annuity contract, unlike the life insurance contract, insures against e c o n o m i c problems resulting from a long life, rather than an early death. (2) F r o m the insurer's viewpoint, insurance looks to longevity, while annuity, to transiency. (3) Under the ordinary life insurance policy, the insured pays to the insurer an annuity and his beneficiary receives at the Art. 2027. No annuity shall be claimed without first proving the existence of the person upon whose life the annuity is constituted. (1808)

Sec. 180-A

CLASSES OF INSURANCE Title 5. — Life Insurance

445

insured's death the l u m p s u m payment. U n d e r the usual form of annuity, the l u m p s u m is paid to the insurer immediately and the annuitant receives the annuity p a y m e n t s as long as he lives. (Vance, op. cit., p. 1020.) (4) An annuity appears m o r e like an " i n v e s t m e n t " instead of an insurance, w h i c h m a y or m a y not turn out to be profitable, while life insurance has a characteristic akin to "indemnity," i.e., the insurer will reimburse the insured's beneficiaries a large s u m u p o n the insured's death. Both provide protection from a substantial risk. A person m a y take life insurance a n d at the s a m e time enter into a contract of annuity to provide security b o t h against the risk of premature death and against the risk of long life. T h e special provisions of the Civil C o d e govern primarily such contracts. Sec. 180-A. 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 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, (as inserted by B.P. Big. 874.) Liability of insurer in case of suicide. (1) When liable. — In a life insurance contract, the insurer is liable in case of suicide in the following cases: (a) T h e suicide 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; (b) The suicide is committed after a shorter period (e.g., one year) provided in the policy although within the twoyear period; and (c) The suicide is committed in the state of insanity regardless of the date of commission, unless suicide is an excepted risk.

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Sec. 181

Note that the policy cannot provide a period longer than two (2) years. Thus, if the policy provides for a three-year period and the suicide is committed within said period but after two (2) years, the insurer is liable. (2) When not liable. — In fine, the insurer shall not be liable in three cases: (a) The suicide is not by reason of insanity and is committed within the two-year period; (b) T h e suicide is by reason of insanity b u t is not a m o n g the risks assumed by the insurer regardless of the date of commission; and (c) The insurer can show that the policy w a s obtained with the intention to c o m m i t suicide even in the absence of any suicide exclusion in the policy. Sec. 161. 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. Right of insured to assign life insurance policy.

(1) Insurable interest of assignee in life insurance not required. — All life insurance policies are declared by law to be assignable regardless of whether the assignee has an insurable interest in the life of the insured or not. (Sun Life Assur. C o . of C a n a d a vs. Ingersoll, 41 Phil. 331 [1921].) A provision in a contract of life insurance denying the insured his right to assign without the consent of the insurer will be void. (a) T h e contract, not being one of indemnity, does not require the insurable interest to continue as in the case of fire insurance, (see Sec. 19.) "Life insurance has b e c o m e in our days one of the best recognized forms of investment and self-compelled savings. So far as reasonable safety permits, it is desirable to give life policies the ordinary characteristics of property." (Grigsby vs. Russel, 2 2 2 U.S.A. 49.) To deny

Sec. 181

CLASSES OF INSURANCE Title 5. — Life Insurance

447

the right to assign a life insurance policy except to a person having an insurable interest, is to diminish appreciably the investment value of the contract to the owner, (see D.L. Bickelhaupt, op. cit., p. 294.) (b) By requiring an incipient insurable interest, the l a w restricts the class of persons w h o m a y profit from the death of the insured thereby reducing to a reasonably safe m i n i m u m the dangers of wagering and of murder. (E.W. Patterson, op. cit., p. 164.) T h e o w n e r of the policy having an insurable interest will ordinarily protect the life of the person insured by the discreet selection of an assignee. (c) No insurable interest is necessary where the policy is procured by the person w h o s e life is insured on his o w n initiative, (see Sec. 10[a].) Since he m a y n a m e any beneficiary he pleases in policy taken out by him, an assignment of the policy by h i m w o u l d not be invalidated by the lack of insurable interest of the assignee. (2) Where assignment used as a cloak to hide an illegal scheme. — T h e courts will not, however, permit the process of assignment to be used as a cloak to hide an illegal intent to m a k e contracts on h u m a n life. (Mutual Aid U n i o n vs. White, 204 S.W. 137.) T h e usual evidence of this s c h e m e is the fact that the assignment occurred almost immediately after the policy w a s issued. An assignment is to be distinguished from a change in the designated beneficiary, (see Sec. 11.) Necessity of consent of beneficiary to assignment. (1) With waiver of right to change beneficiary. — In accordance with the rule that a beneficiary of an ordinary life insurance policy which contains an express waiver of the right to change the beneficiary acquires a vested and absolute interest which cannot be divested without his consent (see Sec. 11.), it is consequently true that the insured cannot assign such a policy without the consent of the beneficiary. (2) Without such waiver. — On the other hand, where the policy contains no such waiver, the insured may assign the

448

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Sec. 182

policy without the consent of the beneficiary. The beneficiary, in the latter case, has a mere expectancy and he cannot m a k e an assignment of the policy until his interest in the proceeds thereof becomes absolutely fixed by the death of the insured, (see Mutual Ben. Life Ins. Co. vs. Sweet, 222 F. 200.) Sec. 182. 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. Notice to insurer of transfer. (1) Notice not required by policy. — If the policy does not expressly require the insured to give notice of an assignment or transfer of the policy to the insurer, such notice is not essential to the validity of the assignment. (2) Notice required by policy. — Of course, w h e r e notice to the insurer is required by the provisions of the policy, an assignment (not the policy itself) without such notice, in the absence of waiver, shall h a v e no effect so far as the insurer is concerned.' This means that the insurer without notice is relieved of any responsibility in case payment is m a d e to the beneficiary before receipt by the insurer of the notice. E v e n without notice to the insurer, the assignment is binding u p o n the assignor (insured) and the assignee. (3) Assignment with consent of insurer. — W h e t h e r or not the policy expressly requires that notice of an assignment or transfer must be given to the insurer, the assignment with the consent of the insurer creates, in effect, a novation, (see Art. 1 2 9 1 , Civil Code.) T h e assignee takes the n e w l y formed contract free of defenses available to the insurer against the insured (assignor) under the old contract.

'A literal interpretation of Section 182 makes the notice, when expressly required, "necessary to preserve validity of the policy." A policy of insurance upon life or health is declared by Section 181 as assignable. Since the consent of the insurer is not necessary to the validity of the assignment, the absence of notice to the insurer of the assignment cannot affect the validity of the policy itself. A contract of property insurance is not assignable without the consent of the insurer.

Sec. 183

CLASSES OF INSURANCE Title 5. — Life Insurance

449

EXAMPLE: X insured his life, naming his estate as the beneficiary. Later, he assigned the policy to Y who has no insurable interest in his life. X died without notifying the insurer of the transfer. A clause in the policy expressly provides that no assignment shall be effective until the insurer has been notified in writing. May Y collect from the insurer the value of the policy? In view of Section 182, the insurer may legally pay the beneficiary which shall become the trustee of the amount received in favor of Y. However, the insurer may waive the requirement as to notice and pay Y. Where such notice is not required by the policy, the insurer is under obligation to pay Y after acquiring knowledge of the assignment. Sec. 183. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of the indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

Measure of indemnity under life policy. T h e extent or a m o u n t of i n d e m n i t y payable on the death of the insured under a policy of insurance u p o n life or health is the amount fixed in the policy. In effect, Hfe policies are valued ones, (see Sec. 61.) In property insurance w h i c h is fundamentally a contract of indemnity, the m e a s u r e of indemnity depends on whether the policy is an o p e n or a valued policy, (see Sec. 171.) Strictly speaking, there could be no exact pecuniary measurement of a person's interest in his life or the life of another. Hence, a person can purchase life insurance for any a m o u n t as long as he can pay the premium. T h e exception is w h e n a person insures the life of another, as where a creditor insures the life of his debtor, (see Sec. 10[c].) In this case, the interest of the creditor in the "life of the d e b t o r " is susceptible of exact pecuniary measurement or estimation.

— oOo —

Chapter III THE BUSINESS OF INSURANCE Title 1 INSURANCE COMPANIES: ORGANIZATION, CAPITALIZATION, A N D AUTHORIZATION Sec. 184. For purposes of this Code, the term "insurer" or "insurance company" shall include all individuals, partnerships, associations, or corporations including government-owned or controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the term shall also include professional reinsurers defined in section two hundred eighty. "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. Sec. 185. 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 debts of others shall be known as "insurance corporations." The provisions of the Corporation Law* shall apply to all insurance corporations now or hereafter engaged in "Now, the Corporation Code of the Philippines (Batas Pambansa Big. 68.) which superseded the former Corporation Law. (Act No. 1459, as amended.) 450

Sees. 186-187 THE BUSINESS OF INSURANCE 451 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

business in the Philippines in so far as they do not conflict with the provisions of this chapter. Sec. 186. 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 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; nor unless the 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. Every person, partnership, or association receiving any such certificate of authority shall be subject to the insurance laws of the Philippines and to the jurisdiction and supervision of the Commissioner in the same manner as if an insurance corporation authorized by the laws of the Philippines to engage in the business of insurance specified in the certificate. Sec. 187. 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 Commissioner upon application therefor and payment by the company concerned of the fees hereinafter prescribed. The Commissioner may refuse to issue a certificate of authority to any insurance company if, in his judgment, such refusal will best promote the interests of the people of this country. No such certificate of authority shall be granted to any such company until the Commissioner shall have satisfied himself by such examination as he may make and such evidence as he may require that such company is qualified by the laws of the Philippines to transact business therein, that the grant of such authority appears to be justified in the light of local economic requirements, and 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, notwithstanding the provisions of section one hundred

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Sees. 186-187

eighty-eight, reasonably assure the safety of the interests of the policyholders and the public* In order to maintain the quality of the management of insurance companies and afford better protection of 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. The Commissioner shall prescribe the qualifications of the 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. Incumbent directors and/or officers affected by the above provisions are hereby allowed to hold on to their positions until the end of their terms or two years from the effectivity of the Decree, whichever is shorter. Before issuing such certificate of authority, the Commissioner must be 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.

*In accordance with the "Fit & Proper" requirements of Section 187 aimed at ensuring that the company direction and administration as well as the integrity and responsibility of its organizers and administrators shall afford the safety of the interest of the policyholder and the general public, only persons of good moral character, unquestioned integrity and recognized competence shall be qualified to become stockholders/directors/trustees/officer of insurance entities and mutual benefit associations or become holders of special licenses such as soliciting officials/adjusters/underwriters/actuaries, etc. In view thereof and as basis for the Insurance Commission in assessing fitness and property, it is required that new functionaries including applicants for special licenses, submit the following: (1) Duly notarized personal history statement or resume with three (3) references not related by reason of consanguinity or affinity; (2) NBI clearance; (3) Income Tax Returns (ITR) for the last three (3) years; and (4) Clearance from immediate past employer. In addition, they may also be required to appear before an officer of the Insurance Commission, it is understood that the key functionaries fully adhere to the principles of good corporate governance and mandated responsibilities in their respective companies as specified in Ins. Circular No. 13-2002-A, September 15, 2003. (Ins. Ore. Letter No. 1304, June 7, 2004.) A Corporate Governance Scorecard (CGS) has been developed by the Insurance Commission for submission by Insurance Companies and intermediaries on an annual basis starting on April 15, 2009.

Sec. 188 Title i.

THE BUSINESS OF INSURANCE 453 Insurance Companies: Organization, Capitalization, and Authorization

Such certificate of authority shall expire on the last day of June of each year and shall be renewed annually if the company is continuing to comply with the provisions of this Code or the circulars, instructions, rulings, or decisions of the Commissioner. Every company receiving any such certificate of authority shall be subject to the provisions of this Code and other related laws and to the jurisdiction and supervision of the Commissioner. 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; Provided, That the terms, "life" and "non-life" insurance shall be deemed to include health, accident and disability insurance. No insurance company shall have any equity in an adjustment company and neither shall an adjustment company have an equity in an insurance company. Insurance companies and adjustment companies presently affected by the above provision shall have two years from the effectivity of the Decree within which to divest of their stockholdings, (as amended by Pres. Decree No. 1455.) Sec. 188. Except as provided in section two hundred eighty-one, no domestic insurance company shall, if a stock corporation, engage in business in the Philippines unless possessed of a paid-up capital stock equal to at least five million pesos; Provided, That a domestic insurance company already doing business in the Philippines with a paid-up capital stock which is less than five million pesos shall have a paid-up capital stock of at least three million pesos by December thirty-one, nineteen hundred seventy-eight, four million pesos by December thirty-one, nineteen hundred seventy-nine, and five million pesos by December thirty-one, nineteen hundred eighty; Provided, further, That the Secretary of Finance may, upon recommendation of the Insurance Commissioner, increase such minimum paid-up capital stock 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 Commissioner may, as a pre-licensing requirement of a new insurance company, in addition to the paid-

454

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Sec. 189

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 million pesos, in the case of a life insurance company, or not less than five hundred thousand pesos, in the case of an insurance company other than life. 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 years. If organized as a mutual company, in lieu of such capital stock, it must have available cash assets of at least five million pesos 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 regulations which now are or hereafter may be in force, alter its organization and transform itself into a mutual insurance company, (as amended by Pres. Decree No. 1455.) Sec. 189. Every company must, before engaging in the business of insurance in the Philippines, file with the Commissioner the following: (a) A certified copy of the last annual statement or a verified financial statement exhibiting the condition and affairs of such company." (b) If incorporated under the laws of the Philippines, a copy of the articles of incorporation and by-laws, and any amendments to either, certified by the Securities and Exchange Commission to be a copy of that which is filed in its office. (c) If incorporated under any laws other than those of the Philippines, a certificate from the Securities and Exchange Commission showing that it is duly registered in the mercantile registry of that Commission in accordance with the Corporation Law. A copy of the articles of incorpo*The Insurance Commission has adopted the General Information Sheet (GIS) of the Securities and Exchange Commission (SEC) as among the reports for periodic submission. (Ins. Circ. Letter No. 26-05, Sept. 6, 2005.)

Sec. 190 THE BUSINESS OF INSURANCE 455 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

ration and by-laws and any amendments to either, if organized or formed under any law requiring such to be filed, duly certified by the officer having the custody of same, or if not so organized, a copy of the law, charter or deed of settlement under which the deed of organization is made, duly certified by the proper custodian thereof, or proved by affidavit to be a copy; also a certificate under the hand and seal of the proper officer of such state or country having supervision of insurance business therein, if any there be, that such corporation or company is organized under the laws of such state or country, with the amount of capital stock or assets and legal reserve required by this Code. (d) If not incorporated and of foreign domicile, aside from the certificate mentioned in paragraph (c) of this section, a certificate setting forth the nature and character of the business, the location of the principal office, the name of the individual or names of the persons composing the partnership or association, the amount of actual capital employed or to be employed therein, and the names of all officers and persons by whom the business is or may be managed. The certificate must be verified by the affidavit of the chief officer, secretary, agent, or manager of the company; and if there are any written articles of agreement of the company, a copy thereof must accompany such certificate. Sec. 190. The Commissioner must require as a condition precedent to the transaction of insurance business in the Philippines by any foreign insurance company, that such company file in his office a written power of attorney designating some person who shall be a resident of the Philippines as its general agent, on whom any notice provided by law or by any insurance policy, proof of loss, summons and other legal processes may be served in all actions or other legal proceedings against such company, and consenting that service upon such general agent shall be admitted and held as valid as if served upon the foreign company at its home office. Any such foreign company shall, as further condition precedent to the transaction of insurance business in the Philippines, make and file with the Commissioner an agreement or stipulation, executed

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Sec. 191

by the proper authorities of said company in form and substance as follows: "The (name of company) does hereby stipulate and agree in consideration of the permission granted by the Insurance Commissioner to transact business in the Philippines, that if at any time said company shall leave the Philippines, or cease to transact business therein, or shall be without any agent in the Philippines on whom any notice, proof of loss, summons, or legal process may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any notice provided by law, or insurance policy, proof of loss, summons, or other legal process may be made upon the Insurance Commissioner, and that such service upon the Insurance Commissioner shall have the same force and effect as if made upon the company." Whenever such service of notice, proof of loss, summons, or other legal process shall be made upon the Commissioner, he must, within ten (10) days thereafter, transmit by mail, postage paid, a copy of such notice, proof of loss, summons, or other legal process to the company at its home or principal office. The sending of such copy by the Commissioner shall be a necessary part of the service of the notice, proof of loss, or other legal process. Sec. 191. No insurance company organized or existing under the government or laws other than those of the Philippines shall engage in business in the Philippines unless possessed of paid-up unimpaired capital or assets and reserve not less than that herein required of domestic insurance companies, nor until it shall have deposited with the Commissioner for the benefit and security of the policyholders and creditors of such company in the Philippines, securities satisfactory to the Commissioner consisting of good securities of the Philippines, including new issues of stock of "registered enterprises," as this term is defined in Republic Act No. 5186, otherwise known as the Investment Incentives Act,* as amended, to the actual market value of *It has been repealed by Presidential Decree No. 1789, the Omnibus Investments Code which codified all investment incentive laws including R.A. No. 5186. They are now incorporated in the new Omnibus Investments Code, Executive Order No 226 dated July 1987.

Sees. 192-193 THE BUSINESS OF INSURANCE 457 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

not less than the minimum paid-up capital required of domestic insurance companies; Provided, That at least fifty per centum of such securities shall consist of bonds or other evidences of debt of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank. The total investment of a foreign insurance company in any registered enterprise shall not exceed twenty per centum of the net worth of said foreign insurance company nor twenty per centum of the capital of the registered enterprise, unless previously authorized in writing by the Commissioner. For purposes of this Code, the net worth of a foreign insurance company shall refer only to its net worth in the Philippines, (as amended by Pres. Decree No. 1455.) Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the benefit and security of all the policyholders of 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, with his assent, to withdraw any of such securities, 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, the securities deposited as aforesaid shall be returned upon the company's making application therefor and proving to the satisfaction of the Commissioner that it has no further liability under any of its policies in the Philippines. Sec. 193. Every foreign company doing business in the Philippines shall set aside an amount corresponding to the legal reserves of the policies written in the Philippines and invest and keep the same therein in accordance with the provisions of this section. The legal reserve therein required to be set aside shall be invested only in the classes of Philippine securities described in section two hundred; Provided, however, That no investment in stocks or bonds of any single entity shall, in the aggregate exceed twenty per centum of the net worth of the investing company or twenty per centum of the capital, of the issuing company,

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whichever is the lesser, unless otherwise approved in writing by the Commissioner. The securities purchased and kept in the Philippines under this section, shall not be sent out of the territorial jurisdiction of the Philippines without the written consent of the Commissioner. Power of state to regulate insurance business. (1) Basic reasons for governmental regulation. — T h e insurance business is heavily regulated by law because of public policy considerations to insure that every insurance c o m p a n y c o m p l y with the applicable laws in conducting its business and in its dealing with the Insured. The insurance business possesses peculiar characteristics justifying governmental control and provision. (a) The chief characteristic is that an insurance contract is an aleatory contract, that is, a contract under w h i c h the obligation of one party, the insurer, will mature ( b e c o m e immediately payable) only u p o n the h a p p e n i n g of a fortuitous event which is, generally speaking, m u c h m o r e likely not to occur during the coverage bargained for. 1

(b) Inequality of values to be exchanged characterizes insurance since the p r e m i u m paid by the insured unconditionally is ordinarily for less than the a m o u n t w h i c h the insurer m a y b e c o m e obligated to pay on a contingency w h i c h will probably not occur. T h e insured gets only a promise by the insurer and m a y never have occasion to find out, by his o w n experience, whether that promise w o u l d be performed. He is, therefore, m o r e gullible with respect to insurance and m o r e susceptible to the wiles of the salesmen. (c) The insured's inability to look out for his o w n interest is increased by the technical character of the insurance contract. 1) While s o m e insurance contracts can be written mostly in ordinary l a y m e n ' s language, virtually all of

'If the probability of the occurrence of an insured event (e.g., fire during a period of 3 years) is greater than even chance, it will be insured.

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them require either s o m e trade terms or, w h a t is likely to mislead, s o m e special m e a n i n g s given to simple terms. 2) Furthermore, the various conditions of the insure r ' s promise and of settlement, and the promises of services or benefits are likely to add up to a pretty involved contract that very few insureds can understand without the explanations given by a competent a n d honest insurance agent or broker. Hence, the latter are included within the scope of governmental regulation. 3) Moreover, an insurance cannot succeed unless it m a k e s a large n u m b e r of contracts a n d m a s s production of contracts m e a n s that the insured must ordinarily take the insurer's printed form, or do without. B e c a u s e of this, the contract of insurance is s o m e t i m e s called a "contract of adhesion." (d) All of these result in inequality of bargaining of power as between insured and insurer. T h e g o v e r n m e n t intervenes primarily to protect the interest of the insured, secondarily, to protect honest and competent insurers from unfair competition by the dishonest and incompetent. (E.W. Patterson, op. cit., pp. 2-3.) (2) Involves an exercise of police power. — It is generally recognized that the business of insurance is one that is affected with a public interest, and that it is a proper subject of regulation and control by the state by virtue of the exercise of its police power, in the interest of public convenience and the general good of the people. Indeed, it is not only the right but also the sovereign duty of a state to regulate the business of insurance. (3) Scope. — T h e power is very broad. (a) It extends to all persons seeking to engage in the transaction of insurance business, whether carried on by a domestic or foreign company, an individual, or an association, and whether applied to newly formed corporations or already engaged in the business. (b) T h e state may regulate the relations between insurer and insured in various respects as well as the affairs of an insurance company without violating due process.

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(c) It has the right to prescribe reasonable conditions prerequisite to the carrying of insurance business, provided there is no discrimination between citizens of equal merit within or without the State, (see 43 Am. Jur. 2d. 108-110.) As it is unlawful to do such business except on specified conditions, the carrying on of such business is the exercise of a franchise. (State ex rel. Rachards vs. Ackerman, 37 N . E . 828.) (4) State regulating agencies. — T h e State controls the insurance business through all departments of the government, (see Chap. VIII.) (a) T h e judicial department exercises control by deciding controversies b e t w e e n litigants. (b) T h e legislative department has broad p o w e r s to enact all legislations, necessary or expedient for the public good limited only by the provisions of the Constitution. (c) T h e executive department through a particular official or office, i.e., the Insurance Commission, is charged with the duty of seeing that the insurance laws and regulations are enforced, (see E.W. Patterson, op. cit., pp. 6-9.) (5) Stages of regulation. — T h e State m a y regulate insurance enterprises at three stages: w h e n they are launched; while they are successfully doing business; and w h e n they h a v e gotten into financial difficulties. (a) T h e first stage is controlled by the granting of charters under general laws and by the granting of licenses to n e w enterprises (see Sees. 186-187.); (b) T h e second, by the p o w e r to revoke (or refuse renewal of) licenses, by the p o w e r to e x a m i n e a c o m p a n y (see Sees. 245-246, 415.), and by the criminal penalties for various infractions of its laws (see Sees. 419-420.); and (c) T h e third, through the p o w e r of the Insurance Commissioner to appoint a conservator or receiver to take charge of the m a n a g e m e n t of the c o m p a n y or administer its assets, or a liquidator to w i n d the c o m p a n y ' s business and distribute its assets, (see Sees. 248-251.)

Sees. 184-193 THE BUSINESS OF INSURANCE 461 Title i. — Insurance Companies: Organization, Capitalization, and Authorization

Thus, from the cradle to the grave, an insurer is u n d e r official surveillance. (E.W. Patterson, op. cit., pp. 1, 9-10.)

Business of insurance conducted almost exclusively by corporations. Insurance, no doubt, m a y be carried on by individuals or partnerships, but today the business of insurance is conducted almost exclusively by corporations (exceptions are mutual benefits associations), (see Sec. 390.) Statutes h a v e b e e n enacted in almost all jurisdictions which, while varying widely in their terms and provisions, provide elaborate systems for the formation and regulation of insurance corporations. (43 A m . Jur. 2d. 141-142.) T h e various corporations, in w h o s e h a n d s m o s t of the insurance business n o w lies, differ very greatly in their nature and organization and in their charter powers. A c o m p a n y m a y be e m p o w e r e d by its charter and the laws to grant only certain types of insurance coverages. (1) A life insurance c o m p a n y is usually e m p o w e r e d to write personal accident and health insurance and annuities as well as life insurance. (2) A fire insurance c o m p a n y customarily is e m p o w e r e d to write, in addition to fire insurance, m a r i n e insurance, both ocean and inland, and certain m i n o r lines. (3) A casualty c o m p a n y m a y usually also write w o r k m e n ' s compensation insurance and accident and health insurance as well as relatively m i n o r lines such as fidelity, surety and plate glass coverage. (4) There is n o w a growing tendency to break d o w n the sharp barriers in the fire and casualty field so as to permit one c o m p a n y to write most types of fire and casualty coverages — referred to as "multiple line" underwriters. (Vance, op. cit., p. 123.) The provisions of the Corporation C o d e of the Philippines, (B.P. Big. 68.) are expressly m a d e applicable by the Insurance Code to all corporations n o w or hereafter engaged in business in the Philippines insofar as they do not conflict with the provisions of Chapter III. (Sec. 185, last par.) In other words, in case of conflict, the Insurance C o d e shall prevail.

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General requirements before an insurance company may transact insurance business. (1) Domestic insurance companies. — Before a domestic insurance company, as defined in Sections 184 and 185, m a y 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, it must comply with the following requirements: (a) It is possessed of the required paid-up capital and assets (Sec. 186, par. 1.); (b) It shall have obtained a certificate of authority for that purpose from the Insurance Commissioner u p o n application therefor and payment of the fees prescribed (Sec. 187.); and (c) It shall have filed with the Insurance C o m m i s s i o n e r the documents required under Section 189; The Commissioner may, as a pre-licensing requirement of a new insurance company, require the p a y m e n t in cash by the stockholders, in addition to the paid-up capital stock, of a contributed surplus fund of not less than P I million in the case of a life insurance company, or not less than P500,000.00 in the case of a non-life insurance company, a n d the submission by such c o m p a n y of a business plan showing its estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three (3) years. (Sec. 188, par. 2.) The contributed surplus is intended to prevent the diminution of the required paid-up capital by organizational expenses. As soon as the c o m p a n y recovers these expenses, the stockholders will be allowed to withdraw their contributions. (2) Foreign insurance companies. — In addition, if the insurer is a foreign c o m p a n y (Sec. 184.), it shall h a v e filed with the Insurance Commissioner a written power of attorney designating s o m e person w h o shall be resident of the Philippines as its agent (Sec. 190.) and deposited with the Insurance C o m m i s s i o n e r for the benefit of its policyholders and creditors satisfactory securities required under Section 191. An insurance c o m p a n y m a y not transact the business of life and non-life insurance concurrently unless specifically authorized

Sees. 184-193 THE BUSINESS OF INSURANCE 463 Title i. Insurance Companies: Organization, Capitalization, and Authorization

to do so. No insurance c o m p a n y shall h a v e any equity in an adjustment c o m p a n y and neither shall an adjustment c o m p a n y have any equity in an insurance company. (Sec. 188, pars. 8 and 9; see Chap. IV, Title V.)

Minimum capitalization requirements for new insurance and reinsurance companies and those to be rehabilitated. Only sufficiently capitalized insurance and re-insurance companies can be competitive regionally and globally and sustain public and investor confidence in the insurance industry. Non-compliant and failed insurance c o m p a n i e s cause an alarming n u m b e r of unpaid insurance claims, causing inestimable d a m a g e and prejudice to the victims of u n p a i d insurance policies. T h e result is a frustrated insurance policy-holding public and unfavorable public perception of the industry as a whole. M o s t insurance c o m p a n i e s previously put u n d e r conservatorship or receivership, or r e c o m m e n d e d for liquidation b e c a u s e of violations of statutory and regulatory requirements, primarily capital impairment and margin of solvency deficiency, and subsequently allowed to be rehabilitated, h a d failed. T h e n e w capitalization requirements are as follows: (1) Effective July 1, 2 0 0 6 , no n e w life or non-life insurance company shall be allowed to do business in the Philippines unless it has a capitalization of P I Billion, paid in cash, of which at least 5 0 % consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P200 Million. (2) Effective July 1, 2006, no n e w reinsurance c o m p a n y shall be allowed to do business in the Philippines unless it has a capitalization of P2 Billion, paid in cash, of which at least 5 0 % consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P400 Million. (3) Effective July 1, 2006, no life or non-life insurance companies under conservation or receivership or for liquidation may be rehabilitated unless it has a net worth of P I Billion Pesos,

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computed in accordance with the Insurance Code, and of which at least 5 0 % consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P200 Million. (4) Effective July 1, 2006, no reinsurance companies under conservation or receivership or for liquidation m a y be rehabilitated unless it has a net worth of P2 Billion, c o m p u t e d in accordance with the Insurance Code, and of which at least 5 0 % consists of paid-up capital and the remaining portion thereof as contributed surplus, which in no case shall be less than P 4 0 0 Million. (5) The above requirements are without prejudice to other requirements that are to be imposed under any risk-based capital method that m a y be adopted by the Insurance Commission. (Dept. of Finance Order No. 19-06, M a y 15, 2006.)

2

Deposits and withdrawal of securities by foreign insurance companies. (1) It is within the p o w e r of a State to require c o m p a n i e s doing an insurance business within its boundaries to file or deposit security for the performance of their obligations before they can issue policies within the State. (a) Such deposit constitutes a trust fund for the benefit of policyholders. A n y surplus after the satisfaction of the claims of policyholders constitutes a trust fund for the benefit of creditors of the depositing company. (43 A m . Jur. 2d. 123.) (b) T h e actual market value of the securities required to be deposited with the Insurance C o m m i s s i o n e r m u s t not be less than the m i n i m u m paid-up capital required of domestic insurance companies. (c) At least 5 0 % of the total security deposit shall consist of bonds or other evidences of debt of the g o v e r n m e n t of the To secure the solvency position of insurers and thus adequately protect the insuring public, Department of Finance Order No. 20-06 estalished fixed annual capitalization increases through the years 2006 to 2010/2011. Ins. Memo. Cir. No. 6-2006 and No. 7-2006 prescribe the Risk-Based Capital (RBC) framework for insurers. Ins. Memo. Cir. No. 10-06 integrates the compliance standard under the DOF Order No. 27-2006, and Ins. Memo. Cir. No. 6-2006 and No. 7-2006.

Sees. 184-193 THE BUSINESS OF INSURANCE 465 Title i. Insurance Companies: Organization, Capitalization, and Authorization

Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank, (see Sec. 191.) (2) On withdrawing from a State, a foreign insurance c o m pany is entitled, after having paid all liabilities, to w i t h d r a w its deposits with the State and they m a y not be attached by a foreign creditor, (see 43 A m . Jur. 2d 123; see Sees. 1 9 1 , 1 9 2 . ) Section 192 specifically confers custody over the securities upon the Insurance C o m m i s s i o n e r with w h o m these investments are required to be deposited. An implied trust is created by law (see Arts. 1 4 4 0 , 1 4 4 1 , Civil Code.) for the benefit of all claimants under subsisting insurance contracts issued by the insurance company. As the officer vested with the custody of the security deposit, the C o m m i s s i o n e r is in the best position to determine if and w h e n it m a y be released without prejudicing the rights of policy holders. (Republic vs. D e l M o n t e Motors, Inc., 504 S C R A 53 [2006].)

Entry of foreign insurance or reinsurance companies or intermediaries. In relation to Sections 184, 188, 203, 280, 2 8 1 , and 299, the following rules or guidelines h a v e b e e n promulgated: (1) Modes of entry. — A foreign insurance or reinsurance company or intermediary is allowed entry to do business in the Philippines under any of the following modes: 3

(a) Ownership of the voting stock of an existing domestic insurance or reinsurance c o m p a n y or intermediary; (b) Investment in a n e w insurance or reinsurance company or intermediary incorporated in the Philippines; or (c) Establishment of a branch. Entry under item (c) is not available to an intermediary. An applicant may avail itself of only one (1) m o d e of entry.

3

A reinsurance company is not doing business in a certain State merely because the property or lives which are insured by the original insurer company are located in that State. (State Avon Insurance PLC vs. Court of Appeals, 278 SCRA 312 [1997].)

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Sees. 184-193

(2) Basis of selection. — In the approval of entry of foreign insurance or reinsurance company or intermediary, the following factors shall be taken into consideration by the Insurance C o m mission: (a) Geographic representation and complementation; (b) Strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign insurance or reinsurance c o m p a n y or intermediary; (c) Demonstrated capacity, global reputation in underwriting innovations, and stability in a competitive environment of the applicant; (d) Reciprocity rights are enjoyed by Philippine insurance or reinsurance companies or intermediaries in the applicant's country; and (e) Willingness to fully share its technology. (3) Qualification of applicant. — O n l y those a m o n g the top 2 0 0 foreign insurance or reinsurance companies or intermediaries in the world or the top 10 in their country of origin and h a v e b e e n doing business for the last 10 years as of the date of application shall be allowed entry. To qualify as a branch or as a n e w c o m p a n y incorporated in the Philippines, the applicant m u s t be widely-owned and publicly listed in its country of origin, unless it is majority-owned by the government, (as a m e n d e d by Dept. of Finance Order N o . 100-94-A, Nov. 1 8 , 1 9 9 4 . ) The term "widely-owned" m e a n s that not a single stockholder of the applicant o w n s m o r e than twenty percent ( 2 0 % ) of its voting stock; while "publicly listed" m e a n s that its shares of stock are listed in the stock exchanges. (4) Capital requirements. — (a) For an insurance company, m i n i m u m paid-up capital of: 1) P250 million and a contributed surplus fund of P50 million, where foreign equity is sixty percent ( 6 0 % ) or more;

Sees. 184-193 THE BUSINESS OF INSURANCE 467 7iti i. Insurance Companies: Organization, Capitalization, and Authorization e

2) P 1 5 0 million and a contributed surplus of P 5 0 million, w h e r e foreign equity is m o r e than forty percent (40%) but less than sixty percent (60%); 3) P 7 5 million a n d a contributed surplus fund of P25 million, w h e r e foreign equity is forty percent ( 4 0 % ) or less. (b) For a reinsurance company, a m i n i m u m paid-up capital of: 1) P 5 0 0 million, w h e r e foreign equity is sixty percent (60%) or more; 2) P 3 0 0 million, w h e r e foreign equity is m o r e than forty percent ( 4 0 % ) b u t b e l o w sixty percent ( 6 0 % ) ; 3) P 1 5 0 million, w h e r e foreign equity in a n e w c o m p a n y incorporated in the Philippines is forty percent (40%) or less. However, any foreign insurance or reinsurance c o m p a n y seeking entry under Section 1(c) above shall deposit with the Insurance C o m m i s s i o n , securities satisfactory to the C o m m i s s i o n to the actual m a r k e t value of not less than P 3 0 0 million for an insurance c o m p a n y and P 5 0 0 million for a reinsurance company. (c) For an intermediary, a m i n i m u m paid-up capital of US$1,000,000.00 or its equivalent in Philippine pesos, 5 0 % of which to be invested in Philippine G o v e r n m e n t Securities and deposited with the Insurance C o m m i s s i o n . (5) Scope of operation. — No composite license shall be issued to an insurance c o m p a n y applicant under these guidelines. (6) Head office guaranty. — T h e h e a d office of a foreign insurance or reinsurance c o m p a n y shall guaranty prompt payment of all liabilities of its Philippine branch. (7) Entrants under Section 1 (a and b). — Foreign insurance or reinsurance company to operate as a branch or where foreign equity in said company or intermediary is more than 4 0 % shall be allowed entry within two (2) years from the effectivity of these guidelines. During this period, the number of foreign insurance or reinsurance companies or intermediaries that shall

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be allowed entry is five (5) each but may be increased to ten (10) each by approval of the President of the Philippines upon the recommendation of the Secretary of Finance. (8) Board of directors. — Subject to existing laws, non-Filipino nationals may become m e m b e r s of the board of directors of an insurance or reinsurance c o m p a n y to the extent of the foreign participation in the equity of such company. (9) Staff. — Expatriates will be allowed to occupy managerial positions in a company formed or entering under these guidelines, subject to existing laws, rules and regulations. (10) Procedural rules. — T h e existing rules of the Insurance Commission on pre-licensing requirements for n e w domestic insurance or reinsurance companies or intermediaries are also applicable to applicants under these guidelines. (Dept. of Finance Order No. 100-94, Oct. 2 4 , 1 9 9 4 . )

— oOo —

Title 2 MARGIN OF INSOLVENCY

Sec. 194. An insurance company doing business in the Philippines shall at all times maintain a margin of solvency which shall be an excess of the value of its admitted assets exclusive of its paid-up capital, in the case of a domestic company, or an excess of the value of its admitted assets in the Philippines, exclusive of its security deposits, in the case of a foreign company, over the amount of its liabilities, unearned premiums and reinsurance reserves in the Philippines of at least two per mille of the total amount of its insurance in force as of the preceding calendar year on all policies, except term insurance, in the case of a life insurance company, or of at least ten per centum of the total amount of its net premium written during the preceding calendar year, in the case of a company other than life insurance company; Provided, That, in either case, such margin shall in no event be less than five hundred thousand pesos; and Provided, further, That the term "paid-up capital" shall not include contributed surplus and capital paid in excess of par value. Such assets, liabilities and reserves shall exclude assets, liabilities and reserves included in separate accounts established in accordance with section two hundred thirtyseven. Whenever the aforementioned margin 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 interest, and paid to the treasurer of the company, within fifteen days from receipt of the order; Provided, That the company in the interim shall not be permitted to take any new risk of any kind or character unless and until it

469

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Sec. 194

make good such deficiency; and Provided, further, That a stockholder who aside from paying the contribution due from him, pays the contribution due from another stockholder by reason of the failure or refusal of the latter to do so, shall have a lien on the certificates of stock of the insurance company concerned appearing in its books in the name of the defaulting stockholder on the date of default, as well as on any interest or dividends that have accrued or will accrue to the said certificates of stock, until the corresponding payment or reimbursement is made by the defaulting stockholder, (as amended by Pres. Decree No. 1455.) Maintenance of margin of solvency at all times. Every insurance c o m p a n y doing business in the Philippines must maintain at all times the margin of solvency required under Section 194 of the Code. By the provisions of Section 194, the total admitted assets of an insurance c o m p a n y (see Title 3.) must exceed its total liabilities other than its paid-up capital or security deposits, as the case m a y be, by a relevant a m o u n t k n o w n as the

"margin of solvency." (1) Excess of admitted assets. — T h e c o m p a n y ' s financial condition must, therefore, s h o w at all times that the value of its admitted assets exclusive of its appraisal and reevaluation surplus, and of its paid-up capital, if a domestic company, or the value of its admitted assets in the Philippines exclusive of its appraisal and revaluation surplus, and of its security deposits, if a foreign company, exceeds the a m o u n t of its liabilities, unearned premium and reinsurance reserves in the Philippines — (a) by at least two per mille (i.e., P2 for every P1,000) of the total a m o u n t of its insurance in force as of the preceding calendar year on all policies, except term insurance, in the case of a life company, or (b) by at least ten per centum (i.e., P 1 0 for every P100) of the total amount of its net p r e m i u m written during the preceding calendar year, in the case of a non-life company. In either case, however, such margin shall in no event be less than P500,000.00.

Sec. 194

THE BUSINESS OF INSURANCE Title 2. — Margin of Insolvency

471

(2) Definitions. — As used in the C o d e — (a) T h e term paid-up capital shall not include contributed surplus and capital paid in excess of par value; (b) T h e terms assets, liabilities a n d reserves shall not include the assets, liabilities and reserve included in separate accounts established in accordance with Section 237 of the Code; (c) T h e phrase total amount of its insurance in force as of the preceding calendar year shall m e a n the total a m o u n t of a life c o m p a n y ' s insurance in force at the beginning of the preceding year, plus the total a m o u n t of insurance issued, revived or increased during that year, less the total a m o u n t of insurance terminated by death, lapsation, maturity, disability, surrender or other causes during that year, on all policies except term insurance; and (d) T h e phrase net premium written during the preceding calendar year shall m e a n a non-life c o m p a n y ' s gross p r e m i u m s on risks written and renewed during the preceding year in the Philippines, less returns and cancellations, plus reinsurance premiums received during that y e a r from authorized and unauthorized insurers, less reinsurance p r e m i u m s ceded during that year to authorized and unauthorized insurers. (3) Satisfaction of deficiency. — W h e n e v e r the aforementioned margin of solvency is found to be less than that required of an insurance c o m p a n y to be maintained, the deficiency shall be made good by cash to be contributed by all stockholders of record in proportion to their respective interests and paid to the treasurer of the c o m p a n y within fifteen (15) days from receipt by such company of the order of the Insurance Commissioner directing such company to m a k e good such deficiency. For purposes of the above, a professional reinsurer shall be deemed to be a non-life company. (Ins. M e m o . Cir. No. 4-75, Oct. 1,1975, effective Dec. 18,1975.) (4) Importance. — "It m a y be stressed that this margin of solvency is most important as it would improve security for the insured risks by establishing a safeguard against adverse fluctuations of the company's results, increase the company's

472

THE INSURANCE CODE OF THE PHILIPPINES

Sec 195

retention capacity, and strengthen both the company and the national market. Accordingly, part of the company's annual profits would be used for building up this solvency margin." ("Supervision and Regulation of the Insurance Business in the Philippines," Journal of the IBP, First Quarter, 1976, pp. 24-25, by Commissioner G. Cruz-Arnaldo.) Sec. 195. No domestic insurance corporation shall declare or distribute any dividend on its outstanding stocks except from profits attested in a sworn statement to the Commissioner by the president or treasurer of the corporation to be remaining on hand after retaining unimpaired: (a) The entire paid-up capital stock; (b) The margin of solvency required by section one hundred ninety-four; (c) In the case of life insurance corporations, the legal reserve fund required by section two hundred eleven; (d) In the case of corporations other than life, the legal reserve fund required by section two hundred thirteen; (e) A sum sufficient to pay all net losses reported, or in the course of settlement, and all liabilities for expenses and taxes. Any dividend declared or distributed under the preceding paragraph shall be reported to the Commissioner within thirty days after such declaration or distribution. If the Commissioner finds that any such corporation has declared or distributed any such dividends in violation of this section, he may order such corporation to cease and desist from doing business until the amount of such dividend or the portion thereof in excess of the amount allowed under this section has been restored to said corporation. Distribution of dividends to stockholders of domestic corporations.

(1) General rules applicable to corporations generally govern. — The payment of dividends to stockholders of insurance c o m p a n i e s is governed by the same general rules applicable to p a y m e n t of

Sec. 195

THE BUSINESS OF INSURANCE Title 2. — Margin of Insolvency

473

dividends to stockholders of corporations generally, (see Sec. 185, par. 2.) T h e losses must be deducted before the profits can be ascertained. Consequently, the p r e m i u m s on unexpired risks are not distributable as dividends to stockholders until a deduction has been made of an a m o u n t sufficient to cover losses w h i c h the previous business of the c o m p a n y indicates m a y reasonably be expected to occur. (Lexington Life, F & M Ins. C o . vs. Page, 56 Ky. [M B M o n ] 412; see 4 3 A m . Jur. 2 d 161.) (2) Specific requirements. — Section 195 i m p o s e s three requirements for a domestic insurance corporation declaring or distributing any dividend on its outstanding stocks: (a) T h e dividends m u s t be declared out of profits from its business; (b) T h e profits m u s t be attested in a sworn statement by its president or treasurer to be remaining on h a n d after retaining unimpaired the entire paid-up capital stock, the required margin insolvency and legal reserve fund, and the aggregate a m o u n t of its debts a n d liabilities; and (c) T h e dividend m u s t be reported to the C o m m i s s i o n e r within thirty (30) days after such declaration or distribution.

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Title 3 ASSETS Sec. 196. In any determination of the financial condition of any insurance company doing business in the Philippines, there shall be allowed and admitted as assets only such assets owned by the insurance company concerned and which consist of: 1. Cash in the possession of the insurance company or in transit under its control, and the true and duly verified balance of any deposit of such company in a financially sound commercial bank or trust company. 2. Investments in securities, including money market instruments, and in real property acquired or held in accordance with and subject to the applicable provisions of this Code and the income realized therefrom or accrued thereon. 3. Loans granted by the insurance company concerned to the extent of that portion thereof adequately secured by non-speculative assets with readily realizable values in accordance with and subject to the limitations imposed by applicable provisions of this Code. 4. Policy loans and other policy assets and liens on policies, contracts or certificates of a life insurance company, in an amount not exceeding legal reserves and other policy liabilities carried on each individual life insurance policy, contract or certificate. 5. The net amount of uncollected and deferred premiums and annuity considerations in the case of a life insurance company which carries the full mean tabular reserve liability. 6. Reinsurance recoverable by the ceding insurer: (a) from an insurer authorized to transact business in this 474

Sec. 197

THE BUSINESS OF INSURANCE Title 3 . — Assets

country, the full amount thereof; or (b) from an insurer not authorized in this country, in an amount not exceeding the liabilities carried by the ceding insurer for amounts withheld under a reinsurance treaty with such unauthorized insurer as security for the payment of obligations thereunder if such funds are held subject to withdrawal by, and under the control of, the ceding insurer. The Commissioner may prescribe the conditions under which a ceding insurer may be allowed credit, as an asset or as a deduction from loss and unearned premium reserves, for reinsurance recoverable from an insurer not authorized in this country but which presents satisfactory evidence that it meets the applicable standards of solvency required in this country. 7. Funds withheld by a ceding insurer under a reinsurance treaty, provided reserves for unpaid losses and unearned premiums are adequately provided. 8. Deposits or amounts recoverable from underwriting associations, syndicates and reinsurance funds, or from any suspended banking institution, to the extent deemed by the Commissioner to be available for the payment of losses and claims and values to be determined by him. 9. Electronic data processing machines, as may be authorized by the Commissioner to be acquired by the insurance company concerned, the acquisition cost of which to be amortized in equal annual amounts within a period of five years from the date of acquisition thereof. 10. Other assets, not inconsistent with the provisions of paragraphs 1 to 9 hereof, which are deemed by the Commissioner to be readily realizable and available for the payment of losses and claims at values to be determined by him. Sec. 197. In addition to such assets as the Commissioner may from time to time determine to be non-admitted assets of insurance companies doing business in the Philippines, the following assets shall in no case be allowed as admitted assets of an insurance company doing business in the Philippines, in any determination of its financial condition: 1. Goodwill, trade names, and other like intangible assets.

475

476

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 196-197

2. Prepaid or deferred charges for expenses and commissions paid by such insurance company. 3. Advances to officers (other than policy loans); which are not adequately secured and which are not previously authorized by the Commissioner, as well as advances to employees, agents, and other persons on mere personal security. 4. Shares of stock of such insurance company, owned by it, or any equity therein as well as loans secured thereby, or any proportionate interest in such shares of stock through the ownership by such insurance company of an interest in another corporation or business unit. 5. Furniture, furnishings, fixtures, safes, equipment, library, stationery, literature, and supplies. 6. Items of bank credits representing checks, drafts or notes returned unpaid after the date of statement. 7. The amount, if any, by which the aggregate value of investments as carried in the ledger assets of such insurance company exceeds the aggregate value thereof as determined in accordance with the provisions of this Code and/or the rules of the Commissioner. All non-admitted assets and all other assets of doubtful value or character included as ledger or non-ledger assets in any statement submitted by an insurance company to the Commissioner, or in any insurance examiner's report to him, shall also be reported, to the extent of the value disallowed as deductions from the gross assets of such insurance company, except where the Commissioner permits a reserve to be carried among the liabilities of such insurance company in lieu of any such deduction. Classification of assets of an insurance company. In the determination of the financial condition of any insurance company doing business in the Philippines, its assets m a y be: (1) Admitted assets or those assets enumerated in Section 196 owned by an insurance c o m p a n y which are allowed and

Sees. 196-197

THE BUSINESS OF INSURANCE Title 3. — Assets

477

admitted by law as assets of such c o m p a n y in the determination of its financial condition (Sec. 196.); or 1

(2) Non-admitted assets or those assets e n u m e r a t e d in Section 197 o w n e d by an insurance c o m p a n y w h i c h are not allowed by law to be admitted as assets of such c o m p a n y in the determination of its financial condition, including such assets as the Commissioner m a y from time to time determine to be nonadmitted assets. (Sec. 197.) A n y investment m a d e in violation of the applicable provisions of Title 4 of the C o d e shall be considered non-admitted assets. (Sec. 207.)

Treatment of premium as admitted assets. For the purpose of determining compliance with the margin of solvency (Sec. 194.) requirement of non-life insurance companies in addition to the assets e n u m e r a t e d in Section 196, the Insurance C o m m i s s i o n considers as admitted assets, p r e m i u m s due from the following: (1) T h e Government of the Philippines, its political sub-divisions or instrumentalities, including government-owned or controlled corporations, whether as insured, general agent, insurance broker, mortgagee or trustee, provided that in case any of said entities assume the role of a trustee, the insurance company concerned shall present proof that such premiums are held by such entity as trustee of the said company;

1

"Insured deposits" by the Philippine Deposit Insurance Corporation (PDIC) are assets deemed by the Insurance Commission to be readily available for payment of losses and claims under Section 196(10). The term maeans the amount due to any depositior for depositss in an Insured bank not of any oblifation of the depositor to the Insured bank as of the date of closure but not to exceed P250,000 as provided under R.A. No. 3591. Deposists made in all banks, other than commercial bank or trust company, which are duly authorized by the Bangko Sentral ng Pilipinas (BSP), shall be admitted as Cash in Bank to the extent of P250,000.00, the maximum amount other assets subject to the lowest of the following limitations: (1) The excess deposit in the said bank should not exceed 10% of the total admitted assets of the insurance company as of December 31 of the year next preceding the date of such investment; (2) The above amount should not exceed 25% of the total equity of the said bank during the preceding year as duly certified by the BSP; and (3) In no case should the total deposit, loan, equity, and other form of investments in the said bank exceed 25% of the total admitted assets of the insurance company as of December 31 of the year next preceding the date of such investment.

478

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 196-197

(2) Marine Hull Premiums covered by Deferred Premiums Clause " E " attached to the policy and payable in four (4) quarterly installments provided that the installments to be considered as admitted assets are only the installments due within 90 days as of cut-off date. Premium installments over 90 days due that were paid after the cutt-off date, on the other hand, can be considered as after date transaction provided that these installments are paid and supported by a schedule showing details per policy and copies of policies, validated deposit slip, with Certificate of Authority to Confirm the said deposits with the b a n k s and other pertinent documents which shall be m a d e available to the examiners for verification. (3) Premiums Receivable Account (direct agents, general agents and insurance brokers) covering policies within 90 days from inception as of the cut-off date provided the following requirements are complied with: (a) T h e receivables are properly supported by an aging schedule showing details per policy and copies of policies; (b) The m a x i m u m a m o u n t of p r e m i u m s receivables to be considered shall not exceed 2 5 % of the p r e m i u m v o l u m e net of commissions; (c) Premiums due from direct agents, general agents, or insurance brokers, not exceeding 90 days, shall be b a c k e d up by a surety b o n d issued by an insurance c o m p a n y duly authorized to do business in the Philippines. T h e direct agent or general agents or insurance brokers shall file with the Commission and maintain in force a surety b o n d in favor of the people of the Republic of the Philippines executed by a c o m p a n y authorized to b e c o m e surety u p o n official recognizance, stipulations, bonds, and undertakings, in an amount equivalent to at least 2 5 % of the direct agent's, general agent's or broker's p r e m i u m v o l u m e net of c o m m i s s i o n s for the proceeding calendar year or P l , 5 0 0 , 0 0 0 , w h i c h e v e r is higher, conditioned upon full accounting; (d) Said surety b o n d shall be submitted to the C o m m i s s i o n together with a sworn certification executed by the direct agent or general agent or insurance broker, or their president,

Sees. 196-197

THE BUSINESS OF INSURANCE Title 3. — Assets

479

or executive vice-president in the case of corporations, stating the amount of h i s / i t s total annual p r e m i u m v o l u m e from all sources for the previous calendar year, and that the a m o u n t of the b o n d is equal to at least 2 5 % of the p r e m i u m v o l u m e net of c o m m i s s i o n s or P l , 5 0 0 , 0 0 0 , w h i c h e v e r is higher. (e) Agents, general agents and insurance brokers are enjoined to submit their remittances simultaneous with the submission of their production reports to the insurance c o m p a n y concerned in its h e a d office in the Philippines within the terms and conditions set forth in their agreement; and (f) Other pertinent d o c u m e n t s are m a d e available to the examiners for verification, otherwise, unverified accounts will be disallowed. As for P r e m i u m s Receivable A c c o u n t s covering policies b e y o n d 90 days from inception w h i c h are outstanding at the end of the given calendar year and collected the following y e a r / s the s a m e shall be considered as after-date transactions, subject to the following conditions: (a) Schedule of P r e m i u m s Receivable, with the full details of the insurance policies over 90 days due m u s t be submitted simultaneously with, and during the submission period for, the Annual Statement; (b) Collections should be duly supported by official receipts and validated deposit slips together with the Certificate of Authority to Confirm the said deposits with the banks; and (c) Additional pertinent d o c u m e n t s d e e m e d necessary or required by this C o m m i s s i o n must likewise be submitted. (Ins. Cir. Letter 27-06, June 6, 2006; supersedes Ins. Cir. Letter No. 12-05.)

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Title 4 INVESTMENTS Sec. 198. No insurance company shall loan any of its money or deposits to any person, corporation or association, except upon first mortgage or deeds of trust of unencumbered, improved or unimproved real estate, including condominiums, in cities and centers of population of municipalities in the Philippines when the amount of such loan is not in excess of seventy per centum of the market value of such real estate; or upon the security of first mortgages or deeds of trust of actually cultivated, improved and unencumbered agricultural lands in the Philippines when the amount of such loan is not in excess of forty per centum of the market value of such land; or upon the purchase money mortgages or like securities received by it upon the sale or exchange of real property acquired pursuant to sections two hundred and two hundred two; or upon bonds or other evidences of debt of the Government of the Philippines or its political subdivisions authorized by law to issue bonds, or upon bonds or other evidences of debt of government-owned or controlled corporations and instrumentalities including the Central Bank, or upon obligations issued or guaranteed by the International Bank for Reconstruction and Development; or upon stocks, bonds or other evidences of debt as are specified in Section two hundred.* *No insurance company shall loan any of its money or deposits to any person, corporation or association, when the amount of such loan is in excess of: (1) 100% of the market value of bonds or other evidences of debt of the Government of the Philippines or its political subdivisions authorized by law to issue bonds or upon bonds or other evidences of debt of government-owned or controlled corporations and instrumentalities including the Central Bank; (2) 90% of the market value of bonds or other evidences of debt of private entities as are specified under Section 200; and (3) 75% of the market value of stocks as are specified in Section 200 of the Insurance Code. (Ins. Memo. Cir. No. 1-87, dated June 11, 1987.)

480

Sees. 199-200

THE BUSINESS OF INSURANCE Title 4. — Investments

481

A life insurance company, however, may lend to any of its policyholders upon the security of the value of its policy such sum as may be determined pursuant to the provisions of the policy. Loans granted upon the security of real estate for a period longer than five years shall be amortized in monthly, quarterly, semi-annual or annual installment: Provided, That no such loans shall have a maturity in excess of twenty years. The phrase "improved real estate" used above is hereby defined to mean land with permanent building or buildings erected or being erected thereon. Except as otherwise approved by the Commissioner, in case the building or buildings on land do not belong to the owner of the latter, no loan shall be granted on the security of the real estate in question unless both the owner of the building or buildings and the owner of the land sign the deed of mortgage, and unless the owner of the land is the Government of the Philippines or one of its political subdivisions, in which event the owner is not required to sign the deed of mortgage. Sec. 199. No loan by any insurance company on the security of real estate shall be made unless the title to such real estate shall have first been registered in accordance with the existing Land Registration Act,* or shall be a titulo real duly registered, or have been previously registered under the provisions of the existing Mortgage Law.** Sec. 200. (1) An insurance company may purchase, hold, own and convey such property, real and personal, as may have been mortgaged, pledged, or conveyed to it in good faith in trust for its benefit by reason of money loaned by it in pursuance of the regular business of the company, and such real or personal property as may have been purchased by it at sales under pledges, mortgages or deeds or trust for its benefit on account of money loaned by it; and such real and personal property as may have been conveyed to it by borrowers in satisfaction and dis-

*Now the Property Registration Decree. (Pres. Decree No. 1529, dated June 11,1987.) ** Discontinued by Pres. Decree No. 1529.

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 199-200

charge of loans made by the company to them; Provided, however, That any real estate purchased by an insurance company in payment or by reason of any loan made by it shall be sold by the company within twenty years after the title thereto has been vested in it. (2) An insurance company may purchase, hold, own and convey real and personal property as follows: (a) The lot with building thereon in which the company conducts and carries on its business. (b) Bonds or other evidences of debt of the Government of the Philippines or its political subdivisions authorized by law to issue bonds at the reasonable market value thereof. (c) Bonds or other evidences of debt of government owned or controlled corporations and entities, including the Central Bank. (d) Bonds, debentures or other evidences of indebtedness of any solvent corporation or institution created or existing under the laws of the Philippines; Provided, however, That the issuing, assuming or guaranteeing entity of its predecessors shall not have defaulted in the payment of interest on any of its securities and that during each of any three including the last two of the five fiscal years next preceding the date of acquisition by such insurance company of such bonds, debentures, or other evidences of indebtedness, the net earnings of the issuing, assuming or guaranteeing institution available for its fixed charges, as hereinafter defined, shall have been not less than one and one-quarter times the total of its fixed charges for such year; And Provided, further, That no life insurance company shall invest in or upon the obligations of any one institution in the kinds permitted under this sub-section and amount in excess of twenty-five per centum of the total admitted assets of such insurer as of December thirty-first next preceding the date of such investment. As used in this sub-section the term "net earnings available for fixed charges" shall mean net income after deducting operating and maintenance expenses,

Sees. 199-200

THE BUSINESS OF INSURANCE Title 4. — Investments

taxes other than income taxes, depreciation and depletion; but excluding extraordinary non-recurring items of income or expense appearing in the regular financial statement of the issuing, assuming or guaranteeing institution. The term "fixed charges" shall include interest on funded and unfunded debt, amortization of debt discount, and rentals for leased properties. (e) Preferred or guaranteed stocks of any solvent corporation or institution created or existing under the laws of the Philippines; Provided, however, That the issuing, assuming or guaranteeing entity or its predecessors has paid regular dividends upon its preferred or guaranteed stocks for a period of at least three years next preceding the date of investment in such preferred or guaranteed stocks; Provided, further, That if the stocks are guaranteed, the amount of stocks so guaranteed is not in excess of fifty per centum of the amount of the preferred or common stocks, as the case may be, of the guaranteeing corporation; And Provided, finally, That no life insurance company shall invest in or loan upon obligations of any one institution in the kinds permitted under this sub-section an amount in excess of ten per centum of the total admitted assets of such insurer as of December thirty-first next preceding the date of such investment. (f) Common stocks of any solvent corporation or institution created or existing under the laws of the Philippines upon which regular dividends shall have been paid for the three years next preceding the purchase of such stock; Provided, however, That no life insurance company shall invest in or loan upon the obligations of any one corporation or institution in the kinds permitted under this sub-section an amount in excess of ten per centum of the total admitted assets of such insurer as of December thirty-first next preceding the date of such investment. (g) Certificates, notes and other obligations issued by trustees or receivers of any institution created or existing under the laws of the Philippines which, or the assets of which, are being administered under the direction of any court having jurisdiction; Provided,

483

484

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 201-202

however, That such certificates, notes or other obligations are adequately secured as to principal and interest. (h) Equipment trust obligations or certificates which are adequately secured or other adequately secured instruments evidencing an interest in equipment wholly or in part within the Philippines; Provided, however, That there is a right to receive determined portions of rental, purchase or other fixed obligatory payments for the use or purchase of such equipment. (i) Any obligation of any corporation or institution created or existing under the laws of the Philippines which is, on the date of acquisition by the insurer, adequately secured and has qualities and characteristics wherein the speculative elements are not predominant. (j) Such other securities as may be approved by the Commissioner. (3) Any domestic insurer which has outstanding insurance, annuity or reinsurance contracts in currencies other than the national currency of the Philippines may invest in, or otherwise acquire or loan upon securities and investments in such currency which are substantially of the same kinds, classes and investment grades as those eligible for investment under the foregoing subdivisions of this section; but the aggregate amount of such investments and of such cash in such currency which is at anytime held by such insurer shall not exceed one and onehalf times the amount of its reserves and other obligations under such contracts or the amount which such insurer is required by the law of any country or possession outside the Republic of the Philippines to invest in such country or possession, whichever shall be greater. Sec. 201. An insurance company may (1) invest in equities of other financial institutions, and (2) engage in the buying and selling of short-term debt instruments: Provided, That any or all of such investments shall be with the prior approval of the Commissioner. Sec. 202. Any life insurance company may: (a) Acquire or construct housing projects and, in connection with any such project, may acquire land or any in-

Sec. 203

THE BUSINESS OF INSURANCE Title 4. — Investments

terest therein by purchase, lease or otherwise, or use land acquired pursuant to any other provision of this Code. Such company may thereafter own, maintain, manage, collect or receive income from, or sell and convey, any land or interest therein so acquired and any improvements thereon. The aggregate book value of the investments of any such company in all such projects shall not exceed at the time of such investments twenty-five per centum of the total admitted assets of such company on the thirty-first day of December next preceding; (b) Acquire real property, other than property to be used primarily for providing housing and property for accommodation of its own business, as an investment for the production of income, or may acquire real property to be improved or developed for such investment purpose pursuant to a program therefor, subject to the condition that the cost of each parcel or real property so acquired under the authority of this paragraph (a), including the estimated cost to the company of the improvement or development thereof, when added to the book value of all other real property held by it pursuant to this paragraph (b), shall not exceed twenty-five per centum of its admitted assets as of the thirty-first day of December next preceding. Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in value to twenty-five per centum of the minimum paid-up capital required under section one hundred eighty-eight, invest its fund only in securities, satisfactory to the Commissioner, consisting of bonds or other evidences of debt of the Government of the Philippines or its political subdivisions or instrumentalities or of government-owned or controlled corporations and entities, including the Central Bank of the Philippines; Provided, That such investments shall at all times be maintained free from any lien or encumbrance; And 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 one hundred ninety-two shall, so far as practicable, apply to the securities deposited under this section.

485

486

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 204-205

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, (as amended by Pres. Decree No. 1455.) Sec. 204. After satisfying the requirements contained in the preceding section, any domestic non-life insurance company, may invest, to an amount prescribed below, its funds in, or otherwise, acquire or loan upon, only the classes of investments described in section two hundred, including securities issued by any "registered enterprise," as this term is defined in Republic Act No. 5186, otherwise known as the Investment Incentives Act,* and such other classes of investments as may be authorized by the Commission for purposes of this section; Provided, That (a) no more than twenty per centum of the net worth of such company as shown by its latest financial statement approved by the Commissioner shall be invested in the lot and building in which the insurance company conducts its business; and (b) the total investment of an insurance company in any registered enterprise shall not exceed twenty per centum of the net worth of said insurance company as shown by its aforesaid financial statement nor twenty per centum of the paid-up capital of the registered enterprise excluding the intended investment, unless previously authorized by the Commissioner; and Provided, further, That such investments, free from any lien or encumbrance, shall be at least equal in amount to the aggregate amount of (a) its legal reserve, as provided in section two hundred thirteen, and (b) its reserve fund held for reinsurance as provided for in the pertinent treaty provision in the case of reinsurance ceded to authorized insurers, (as amended by Pres. Decree No. 1455.) Sec. 205. After satisfying the requirements contained in sections one hundred ninety-one, one hundred ninetythree, two hundred three and two hundred four, any nonlife insurance company may invest any portion of its funds representing earned surplus in any of the investments

'See note to Section 191.

Sees. 206-208

THE BUSINESS OF INSURANCE Title 4. — I n v e s t m e n t s

described in sections one hundred ninety-eight, two hundred and two hundred one, or in any securities issued by a "registered enterprise" mentioned in the preceding section: Provided, That no investment in stocks or bonds of any single entity shall in the aggregate, exceed twenty per centum of the net worth of the insurance company as shown in its latest financial statement approved by the Commissioner or twenty per centum of the paid-up capital of the issuing company, whichever is lesser, unless otherwise approved by the Commissioner. Sec. 206. After satisfying the minimum capital investment required in section two hundred three, any life insurance company may invest its legal policy reserve, as provided in section two hundred eleven or in section two hundred twelve, in any of the classes of securities or types of investments described in sections one hundred ninety-eight, two hundred, two hundred one and two hundred two, subject to the limitations therein contained, and in any securities issued by any "registered enterprise" mentioned in section two hundred four, free from any lien or encumbrance, in such amounts as may be approved by the Commissioner. Such company may likewise invest any portion of its earned surplus in the aforesaid securities or investments subject to the aforesaid limitations. Sec. 207. Any investment made in violation of the applicable provisions of this title shall be considered nonadmitted assets. Sec. 208. (1) All bonds or other evidences of indebtedness having a fixed term and rate of interest and held by any life insurance company authorized to do business in this country, if amply secured and if not in default as to principal or interest, shall be valued as follows: if purchased at par, at the par value; if purchased above or below par, on the basis of the purchase price adjusted so as to bring the value to par at maturity and so as to yield in the meantime the effective rate of interest at which the purchase was made, or in the discretion of the Commissioner, on the basis of the method of calculation commonly known as the pro rata method. In applying the foregoing rule the purchase price shall in no case be taken at a higher figure than the actual market value at the time of acquisition. The

487

488

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 208

Commissioner shall have the power to determine the eligibility of any such investments for valuation on the basis of amortization, and may by regulation prescribe or limit the classes of securities so eligible for amortization. All bonds or other evidences of indebtedness which in the judgment of the Commissioner are not amply secured shall not be eligible for amortization and shall be valued in accordance with paragraph two. The Commissioner may, if he finds that the interest of policyholders so permit or require, by official regulation permit or require any class or classes of insurers, other than life insurance companies, authorized to do business in this country, to value their bonds or other evidences of indebtedness in accordance with the foregoing rule. (2) The investments of all insurers authorized to do business in this country, except securities subject to amortization and except as otherwise provided in this chapter, shall be valued, in the discretion of the Commissioner, at their market value, or at their appraised value, or at prices determined by him as representing their fair market value. If the Commissioner finds that in view of the character of investments of any insurer authorized to do business in this country; it would be prudent for such insurer to establish a special reserve for possible losses or fluctuations in the values of its investments, he may require such insurer to establish such reserve, reasonable in amount, and may require that such reserve be maintained and reported in any statement or report of the financial condition of such insurer. The Commissioner may, in connection with any examination or required financial statement of an authorized insurer, require such insurer to furnish him complete financial statements and audited report of the financial condition of any corporation of which the securities are owned wholly or partly by such insurer and may cause an examination to be made of any subsidiary or affiliate of such insurer. (3) The stock of an insurance company shall be valued at the lesser of its market value or its book value as shown by its last approved annual statement or the last report on examination whichever is more recent. The book value of a share of common stock of an insurance company shall be ascertained by dividing (a) the amount of its capital and

Sec. 208

THE BUSINESS OF INSURANCE Title 4. — Investments

surplus less the value of all of its preferred stock, if any, outstanding, by (b) the number of shares of its common stock issued and outstanding. Notwithstanding the foregoing provisions, an insurer may, at its option value its holdings of stock in a subsidiary insurance company in an amount not less than acquisition cost if such acquisition cost is less than the value determined as hereinbefore provided. (4) Real estate acquired by foreclosure or by deed in lieu thereof, in the absence of a recent appraisal deemed by the Commissioner to be reliable, shall not be valued at an amount greater than the unpaid principal of the defaulted loan at the date of such foreclosure or deed, together with any taxes and expenses paid or incurred by such insurer at such time in connection with such acquisition, and the cost of additions or improvements thereafter paid by such insurer and any amount or amounts thereafter paid by such insurer on any assessments levied for improvements in connection with the property. (5) Purchase money mortgages received on dispositions of real property held pursuant to section one hundred ninety-eight shall be valued in an amount equivalent to ninety per centum of the value of such real property. Purchase money mortgages received on dispositions of real property otherwise held shall be valued in an amount not exceeding ninety per centum of the value of such real property as determined by an appraisal made by an appraiser at or about the time of disposition of such real property. (6) The stock of a subsidiary of an insurer shall be valued on the basis of the greater of (i) the value of only such of the assets of such subsidiary as would constitute lawful investments for the insurer if acquired or held directly by the insurer or (ii) such other value determined pursuant to standards and cumulative limitations, contained in a regulation to be promulgated by the Commissioner. (7) Notwithstanding any provision contained in this section or elsewhere in this chapter, if the Commissioner finds that the interests of policyholders so permit or require, he may permit or require any class or classes of insurers authorized to do business in this country to value

489

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Sees. 198-209

their investments or any class or classes thereof as of any date heretofore or hereafter in accordance with any applicable valuation or method. Sec. 209. It shall be the duty of the officers of the insurance company to report within the first fifteen 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. Investments by insurance c o m p a n i e s . The importance of a sound investment policy cannot be overemphasized because of the considerable funds w h i c h are necessarily in the hands of insurance c o m p a n i e s and w h i c h are essential to their business. Profit from investment is a vital source of income, and as a guiding rule, it will be recognized that insurers so control their investment policy as to secure the highest rate of interest consistent with maintaining the value of the capital invested and the requisite convertibility, as and w h e n required. (1) Life insurance policies are in the nature of p e r m a n e n t contracts and long-term securities are, therefore, suitable for the greater part of the life insurance fund. Different considerations, however, are present in connection with marine, fire, a n d accident insurances because it is impossible to foresee the occurrence of heavy catastrophes, resulting in an unexpected drain u p o n the funds. For the latter purpose, therefore, it is essential that securities should be readily convertible. (2) In any event, investments should be well spread in order to smooth out market fluctuations, and insurance companies, therefore, need to watch the market closely. (3) Investments, of course, are not limited to stock exchange securities, as will be evident from a glance at any c o m p a n y ' s balance sheet. Insurers grant mortgages, purchase freehold and leasehold ground rents, and, indeed, are always prepared to find n e w avenues for the investment of their funds as long

THE BUSINESS OF INSURANCE Title 4. — Investments

Sees. 198-209

491

as the capital is secure and the general conditions satisfactory. (Dindsdale & M c M u r d i e , op. cit., pp. 212-213.)

Investment of the amount of increase of paid-up capital or assets. (1) A domestic insurance c o m p a n y shall invest to the extent of an amount equal in value to 2 5 % of the required increase of the paid-up capital in accordance with and as specified u n d e r the provisions of Section 2 0 3 and h a v e the securities deposited with the Insurance Commissioner. (2) A domestic professional reinsurer shall invest to the extent of an amount equal in value to 2 5 % of the required increase of the paid-up capital in accordance with and as specified u n d e r the provisions of Section 2 8 1 and h a v e the securities deposited with the Insurance Commissioner. (3) A foreign insurance c o m p a n y or foreign professional insurer shall invest to the extent of an a m o u n t equal in value to the full extent of the m i n i m u m paid-up unimpaired capital or assets above required in accordance with and as specified under the provisions of Section 191. (4) A n e w insurance c o m p a n y or professional reinsurer must invest, before it starts to transact business as such, to the extent of the amount required and as specified under Sections 191 and 203 and h a v e the securities deposited with the Insurance Commissioner. (Ministry Order N o . 2-84, dated Jan. 1 7 , 1 9 8 4 . ) 1

Under Section 203, the securities are held as a contingency fund, to answer for all the claims against the insurance company by all its policy holders and their beneficiaries in the event the company becomes insolvent or otherwise unable to satisfy the claims against it. (see Sec. 192.) Thus, a single claimant m a y not lay stake on the securities to the exclusion of all others. The right to lay claim to the fund is dependent on the solvency of the insurer and is subject to all other obligations of the company

•Only foreign currencies acceptable to the Bangko Sentral ng Pilipinas (BSP) as part of its international reserves are allowed for foreign currency denominated investments and insurance policies. (Ins. Cir. Letter No. 9-97, Sept. 24, 1997.)

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Sees. 198-209

arising from its insurance contracts. Being a mere expectancy an inchoate interest, it has no attribute of property. (Republic vs. Del Monte Motors, Inc., 504 S C R A 53 [2006].) Investment of legal reserve. Every non-life insurance company, domestic or foreign, must set aside and maintain an amount corresponding to the legal reserves required under Section 213 (infra.) of the C o d e . (1) The amount corresponding to the aforementioned legal reserve shall, together with the amount corresponding to the reserve fund held for reinsurance ceded to authorized insurers as provided for in pertinent treaty provisions, be invested as follows: (a) In the case of a domestic company. — In the classes of investments described in Section 2 0 0 of the Insurance Code, including securities issued by any "registered enterprise," as this term is defined in Republic Act N o . 5186, otherwise k n o w n as the Investment Incentives Act, and such other classes of investments as m a y be authorized by the Commissioner, provided that (i) in case of a c o m p a n y ' s investment in the lot and building in w h i c h it will conduct its business, not more than twenty per centum ( 2 0 % ) of the net worth of such c o m p a n y as s h o w n by its latest financial statement approved by the Insurance C o m m i s s i o n e r shall be considered for purposes of this investment requirement and (ii) the total investment of such c o m p a n y in any "registered enterprise" shall not exceed twenty per centum ( 2 0 % ) of the paid-up capital of the registered enterprise excluding the intended investment, unless previously authorized in writing by the Insurance Commissioner, (see Sec. 204.) 2

(b) In the case of a foreign company. — In the classes of Philippine securities described in sub-paragraphs (b), (c), (d), (e), (f), (g), (h), and (i) of Section 200(2) of the Insurance Code, provided that no investment in stocks or b o n d s of any single entity shall, in the aggregate, exceed twenty per centum ( 2 0 % ) of the net worth in the Philippines of the investing c o m p a n y 2

See note to Section 191.

Sees. 198-209

THE BUSINESS OF INSURANCE Title 4. — Investments

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as s h o w n by its latest financial statement approved by the Insurance C o m m i s s i o n e r or t w e n t y per centum ( 2 0 % ) of the paid-up capital of the issuing company, w h i c h e v e r is the lesser, unless otherwise approved in writing by the Insurance Commissioner, provided, further, that the securities so purchased shall be kept in the Philippines and shall not be sent out of the Philippines without the written consent of the Insurance Commissioner, (see Sec. 193.) (2) T h e full a m o u n t of the legal reserve required to be set up in the b o o k s of and held by an insurance c o m p a n y doing business in the Philippines for reinsurance ceded to unauthorized foreign insurance companies, if any there b e , shall be invested only in b o n d s or other evidences of debt of the G o v e r n m e n t of the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations and entities, including the Central B a n k of the Philippines, a n d / o r other securities acceptable under Section 2 0 0 of the Insurance Code, (see Sec. 219.) T h e investments mentioned a b o v e m u s t at all times be free from any lien or e n c u m b r a n c e . (Ins. M e m o . Cir. N o . 5-75, Oct. 15, 1975, effective Jan. 1,1976.)

Foreign currency denominated investments and insurance policies. T h e following guidelines shall govern foreign currency denominated investments and insurance policies: (1) Foreign currencies allowed. — O n l y foreign currencies acceptable to the Bangko Sentral ng Pilipinas (BSP) as part of its international reserves shall be allowed. (2) Investments. — T h e following foreign currency denominated investments may be allowed: (a) Issues of the Philippine government or Philippine government-owned or controlled corporations; (b) Issues of Philippine private corporations provided these shall have a credit rating equivalent to or better than that of the Philippine government;

494

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Sees. 198-209

(c) Issues of foreign governments provided these shall have a a m i n i m u m credit rating of: BB+ as rated by S & P, or Bal as rated by Moody's, or its equivalent as rated by other international credit rating agencies acceptable to the Insurance Commission; or one notch above the credit rating of the Philippine government, whichever is higher; (d) Issues of foreign corporations provided these shall have a m i n i m u m credit rating of: B B B as rated by S & P, or Baa as rated by M o o d y ' s , or its equivalent as rated by other international credit rating agencies acceptable to the Insurance Commission; or t w o notches above the credit rating of the Philippine government, whichever is higher; (e) Loans against mortgages on real properties outside the Philippines which shall be considered surplus investments and which shall be m a d e only if the laws of the country where the property is located allow the lender to o w n real estate property in the event of foreclosure; (f) Loans guaranteed by b a n k s of foreign countries provided the guarantor b a n k has a m i n i m u m credit rating of B B B as rated by S & P, or B a a 2 as rated by M o o d y ' s , or its equivalent as rated by other international credit rating agencies acceptable to the Insurance C o m m i s s i o n ; or t w o notches above the credit rating of the Philippine government, whichever is higher; and (g) Investments in venture capital w h i c h shall be considered as surplus investments if m a d e in accordance w i t h rules and regulations, and u p o n prior approval of the Insurance Commission. Aggregate investments for each type of issues m e n t i o n e d from items (b) to (g) shall not exceed 2 5 % of the c o m p a n y ' s latest verified total admitted assets for life c o m p a n y and 2 0 % of the networth for non-life company. Reserves and other liabilities in a foreign currency m u s t be matched with assets in the s a m e currency to at least 5 0 % . Exceptions m a y be granted where the aggregate liabilities in a foreign currency are less than 1 0 % of the total foreign currency liabilities of the company. T h e pertinent provisions of the

Sees. 198-209

THE BUSINESS OF INSURANCE Title 4. — Investments

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Insurance C o d e on investments shall likewise be applicable to foreign investments. All foreign currency denominated investments must be coordinated w i t h the International Department of the Bangko Sentral ng Pilipinas (BSP). (3)

Insurance policies. —

(a) All liabilities resulting from the issuance of a foreign currency denominated policy shall be v a l u e d in the same currency used in the insurance policy. (b) All foreign currency assets shall be b o o k e d in the currency stated in the underlying i n s t r u m e n t / d o c u m e n t . In the absence of any i n s t r u m e n t / d o c u m e n t , it shall be b o o k e d in the currency of the country w h e r e the asset is physically located. (c) Only cash holdings in acceptable foreign currencies as defined in N o . (1), shall be allowed. (d) P r e m i u m related taxes and d o c u m e n t a r y s t a m p taxes shall be based on the peso equivalent of the p r e m i u m or s u m assured, as the case m a y b e , at the time the taxes are due in accordance with BIR regulations. (e) C o m m i s s i o n s shall be paid in accordance with the currency agreed u p o n in the agency contract. (f) Policy benefits and claims shall be payable in the currency of the insurance policy issued. However, p a y m e n t m a y be m a d e in another currency subject to the agreement between the claimant and the insurance company. (g) Premiums shall be billed in the s a m e currency as the policy issued. However, p a y m e n t m a y be m a d e in another currency subject to the agreement between the policyholder and the insurance company. (h) Income arising from foreign currency investments shall be recognized in the currency of the instrument, unless such instrument specifies another currency, in which case the investment income shall be valued in that currency. (i) For purposes of booking the original transaction, all foreign currency assets and liabilities shall be recorded in their original currency as mentioned in items (a) and (b)

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above, converted to Philippine peso based on the exchange rate being used by individual insurance company at the time they were acquired or incurred, provided however that these are revalued periodically as explained in item (j), below. (j) For purposes of periodic and annual reporting, the value of the foreign currency assets and liabilities shall be converted to Philippine peso based on the B S P guiding rate at the end of the reporting period. (k) Unrealized foreign exchange gain or loss shall be recognized as Fluctuation Reserve Foreign Exchange. (1) Realized foreign exchange gain or loss shall be recognized as income or loss in the Income Statement. (m) Schedules showing balance sheet items in foreign currency values and their peso equivalent, shall be submitted with the Annual Statement. In case an account consists of multiple currencies, a sub-schedule showing the currency breakdown shall likewise be submitted. (4) Rationale for offshore investments. — Offshore investments described in No. (2) above m a y be allowed to enable the insurance companies to achieve any or all of the following: (a) Risk diversification; (b) Enhanced portfolio liquidity; or (c) Ability to sell foreign currency-denominated insurance products w h i c h offer clients a w h o l e range of investment outlets from purely Philippine to non-Philippine risk or a combination of both, depending on the clients' risk and yield preferences. (Ins. Cir. Letter No. 29-05, Sept. 23, 2005; supersedes Cir. Letter No. 9-1997.) Necessity of approval of investments by the Insurance C o m m i s s i o n . (1) Investments not subject to approval. — Investments w h i c h qualify under Sections 1 9 8 , 1 9 9 , 2 0 0 ( 1 ) , 200(2)(a) to (i), 200(3), 202, 204,205 and 206 of the Insurance C o d e do not require the approval of the Insurance Commission, provided they are in accordance with the conditions and limitations set forth in said provisions of

Sees. 198-209

THE BUSINESS OF INSURANCE Title 4. — Investments

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the Code. T h e s e investments include, first m o r t g a g e loans, policy loans (for life companies), collateral loans, and purchase m o n e y mortgages (Sees. 198, 199.); real or personal property acquired by reason of loan (Sec. 200[1].); lot and building for office use, bonds of the government and g o v e r n m e n t - o w n e d or -controlled corporations and entities; bonds, preferred stocks and c o m m o n stocks of "solvent" corporations as the t e r m "solvent" is defined in the Code; trustees' and receivers' obligations, e q u i p m e n t trust obligations; and securities issued by enterprises registered under R.A. No. 5 1 8 6 (Investments Incentives Act), as a m e n d e d . (Sees. 200[2, a to 1]; 204, 205.) Life insurance c o m p a n i e s may, in addition, invest in housing projects and real estate for the production of income, subject to the limitations set forth under Section 2 0 2 of the Insurance Code. T h e y m a y also invest their legal policy reserves in any of the classes of investments m e n t i o n e d in Sections 198, 200, 2 0 1 , and 202. (2) Investments subject to approval. — Prior approval of the C o m m i s s i o n is required only for those investments which fall under: (a) Section 200(2)(j) — " S u c h other securities as m a y be approved by the Commissioner;" (b) Section 201 — "(1) invest in equities of other financial institutions and (2) e n g a g e in the b u y i n g and selling of shortterm debt instruments...;" (c) Section 2 0 6 — "securities issued by any 'registered enterprise' in such amounts as m a y be approved by the Commissioner" (reserve and surplus investments of life insurance companies); (d) Sections 1 9 1 , 1 9 3 , 204 and 2 0 5 — only for investments in excess of the 2 0 % - 2 0 % limitations set forth therein; and (e) Section 291 — "transactions between a controlled insurer and any person in its holding company system. . . loans or extensions of credit, or investments, involving 5%, or more of the insurer's admitted assets as of the thirty-first day of December next preceding."

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Sees. 198-209

For life insurance companies: all investments not requiring prior approval as enumerated in No. (1) above are considered/ qualified as reserve investments while investments enumerated under No. (2) may, upon prior approval by the Insurance C o m mission, be considered /qualified as either reserve or surplus investment. For non-life insurance companies: only investments m a d e under Sections 200 and 204 which do not require prior approval are considered /qualified as reserve investments. Investments made under the following sections are classified as surplus investments: Sections 198, 201, 200(2)(a) (in excess of 2 0 % - 2 0 % limitation), and 205 (in excess of 2 0 % - 2 0 % limitation). All other investments enumerated under No. (2) by b o t h life and non-life insurance companies may, upon prior approval by Insurance Commission, be considered / qualified as either reserve or surplus investment. (Ins. Cir. Letter No. 23-94, D e c . 1,1994.)

Dual nature of the business of insurance. Every insurance business consists of two major activities: underwriting and investment. As a general rule, n o one would b u y insurance from a c o m p a n y that does not h a v e a substantial net worth in assets over and above its current premium income. Obviously, these assets m u s t be invested and must produce an investment i n c o m e . Except for small mutual associations operating on a cooperative basis, the business of insurance is, therefore, necessarily a combination of the business of underwriting and the business of investment. In view of the dual nature of the business of insurance, an insurance company's investment whether derived from real estate, or stock or m o n e y loaned, is essentially i n c o m e from the business of insurance if the invested assets are held either as reserved funds to provide for policy obligations or as capital and surplus to provide an extra margin of safety which will be attractive to insurance buyers. (8 Mertens, L a w of Federal I n c o m e Taxation [1957], pp. 8-9, cited in the Phil. A m e r i c a n Assur. Co., Inc. vs. Comm., CTA Case No. 2318, M a y 6 , 1 9 7 4 . ) As the lending of m o n e y is a form of investment, insurance companies are not considered lending investors under the

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THE BUSINESS OF INSURANCE Title 4. — Investments

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National Internal R e v e n u e C o d e i m p o s i n g the lending investor's tax. (see Sec. 116 thereof.) Insurance c o m p a n i e s and lending investors are different enterprises in the eyes of the law. Lending investors cannot for a consideration, hold a n y o n e harmless from loss, d a m a g e or liability, n o w provide c o m p e n s a t i o n or indemnity for loss. T h e underwriting of risks is the prerogative of insurance, the great majority of w h i c h are incorporated insurance companies. ( C o m m . of Internal R e v e n u e vs. Philippine A m e r i c a n Accident Insurance Co., Inc., 453 S C R A 6 6 8 [2005].)

— oOo —

Title 5 RESERVES Sec. 210. Every life insurance company, doing business in the Philippines, shall annually make a valuation of all policies, additions thereto, unpaid dividends, and all other obligations outstanding on the thirty-first day of December of the preceding year. All such valuations shall be made upon the net premium basis, according to the standard adopted by the company, which standard shall be stated in its annual report. Such standard of valuation whether of the net level premium, full preliminary term, any modified preliminary term, or select and ultimate reserve basis, shall be according to a standard table of mortality with interest at not more than six per centum compound interest. When the preliminary term basis is used, the term insurance shall be limited to the first policy year. The results of such valuation shall be reported to the Commissioner on or before the thirtieth day of April of each year accompanied by a sworn statement of the company's actuary certifying to the figures and stating upon what mortality table it is based, upon what rate of interest the valuation is made, and the methods used in arriving at the result obtained. Sec. 211. The aggregate net value so ascertained of the policies of such company shall be deemed its reserve liability, to provide for which it shall hold funds in secure investments equal to such net value, above all its other liabilities; and it shall be the duty of the Commissioner, after having verified, to such an extent as he may deem necessary, the valuation of all policies in force, to satisfy himself that the company has such amount in safe legal 500

Sees. 212-213

THE BUSINESS OF INSURANCE Title 5. — Reserves

securities after all other debts and claims against it have been provided for. The reserve liability for variable contracts defined in section two hundred thirty-two shall be established in accordance with actuarial procedure that recognize the variable nature of the benefits provided, and shall be approved by the Commissioner. Sec. 212. Every domestic life insurance company, conducted on the mutual plan or plan in which policyholders are by the terms of their policies entitled to share in the profits or surplus shall, on all policies of life insurance heretofore or hereafter issued, under the conditions of which the distribution of surplus is deferred to a fixed or specified time and contingent upon the policy being in force and the insured living at that time, annually ascertain the amount of the surplus to which all such policies as a separate class are entitled, and shall annually apportion to such policies as a class the amount of the surplus so ascertained, and carry the amount of such apportioned surplus, plus the actual interest earnings and accretions to such fund, as a distinct and separate liability to such class of policies on and for which the same was accumulated, and no company or any of its officers shall be permitted to use any part of such apportioned surplus fund for any purpose whatsoever other than for the express purpose for which the same was accumulated. Sec. 213. 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 equal to forty per centum of the gross premiums, less returns and cancellations, received on policies or risks having not more than a year to run, and pro rata on all gross premiums received on policies or risks having more than a year to run; Provided, That for marine cargo risks the reserve shall be equal to forty per centum of the premiums written in the policies upon yearly risks, and the full amount of the premiums written during the last two months of the calendar year upon all other marine risks not terminated.

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502

Sees. 210-214

Sec. 214. In addition to its liabilities and reserves on contracts of insurance issued by it, every insurance company shall be charged with the estimated amount of all of its other liabilities, including taxes, expenses and other obligations due or accrued at the date of statement, and including any special reserves required by the Commissioner pursuant to the provisions of this Code. Reserves in general. Modern statutes require insurers to maintain reserves to assure the payment of losses covered by their policies and the return of unearned premiums. (Maryland Casualty C o . vs. U.S., 251 U.S. 342.) T h e term "reserve" or "reserves" in the law of insurance m e a n s a sum of money variously computed or estimated, which, with accretions from interest, is set aside, "reserved," as a fund with which to mature or liquidate either by p a y m e n t or reinsurance with other companies, future unaccrued and contingent claims and claims accrued but contingent and indefinite as to a m o u n t or time of payment. (43 A m . Jur. 2d. 120.) 1

Insurance companies are required by law to possess and maintain substantial legal reserves to m e e t their obligations to policyholders. This obviously cannot be a c c o m p l i s h e d through the collection of premiums alone, as the legal reserves and capital and surplus insurance companies are obligated to maintain run into millions of pesos. As such, the creation of "investment income" has long been held to be generally, if not necessarily, essential to the business of insurance. The creation of investment i n c o m e in the m a n n e r sanctioned by the laws on insurance is thus part of the business of insurance, and the fruits of these investments are essentially i n c o m e from the insurance business. This is particularly true if the invested assets are held either as reserved funds to provide for policy

]

As a precaution against their assets falling below the amount necessary to their reserve in the event of losses far in excess of those predicted, insurance companies set aside, out of income, a fund in addition to the reserve fund called the "surplus fund," 'conttgency fund" or "special reserve." In this way, an insurance company can weather a massive disaster without risking insolvency. (J.F. Dobbyns, op. cit., p. 40.)

Sees. 210-214

THE BUSINESS OF INSURANCE Title 5. — Reserves

503

obligations or as capital and surplus to provide an extra margin of safety which will be attractive to insurance buyers. ( C o m m . of Internal R e v e n u e vs. Philippine A m e r i c a n Accident Insurance Co., Inc., 453 S C R A 668 [2005].)

Reserves in life insurance. (1) Aggregate net value of policies. — T h e t e r m has a distinctive meaning in respect of life insurance maintained on the levelp r e m i u m basis. In such a situation, the a m o u n t of the p r e m i u m is necessarily greater than the mortality cost in later years. With the mortality table and an a s s u m e d rate of interest on the investment of premiums received, the a m o u n t of the a c c u m u l a t e d savings on this basis, at any date, can be mathematically c o m p u t e d . This amount constitutes the "reserve" against the policy or its net value. T h e insurer m u s t h a v e on h a n d the aggregate a m o u n t of these reserves against its outstanding policies. T h e reserve against a life insurance policy constitutes the source of its non-forfeiture value u p o n a lapse in p a y m e n t of p r e m i u m s . (Williams vs. U n i o n Cent. L. Ins. Co., 291 U.S. 170; see 43 A m . Jur. 2d. 120.) U n d e r Section 210, every life insurance c o m p a n y doing business in the Philippines is required to annually m a k e , upon the net p r e m i u m basis, a valuation of all policies, additions thereto, unpaid dividends a n d all other obligations outstanding on the 31st day of D e c e m b e r of the preceding year. T h e aggregate net value so ascertained of said policies shall be d e e m e d its reserve liability to provide for which it shall hold funds in secure investments equal to such net value, above all its other liabilities including taxes, expenses and other obligations and any special reserves required by the Commissioner, (see Sees. 211-212 and 214.) (2) Computation. — Policy reserves h a v e significance only in the aggregate. For example, if a c o m p a n y sells only P1,000.00 one-year term policies, it should have a reserve of P1,000 for each person w h o will die during the year and needs no reserve at all for those w h o will not. Since it cannot k n o w in advance the identity of the individuals in each category, it uses the death rates shown in a mortality table to determine the aggregate amount that must be paid to the beneficiaries of policyowners w h o die.

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Sees. 210-214

This amount, when related to each P1,000 policy purchased, is known as the reserve per P1,000 policy. It is also k n o w n as the "average reserve" per P1,000. Thus, the average reserve is merely a convenient device for permitting a company to determine the extent of its liabilities under certain given assumptions about interest rates and mortality rates. The purpose of a policy reserve calculation is to arrive at a reasonable, usually conservative, estimate as to h o w m u c h of the existing assets must be conserved to assure payment of future policy benefits, and h o w m u c h might be spent, perhaps as dividends to policyowners or stockholders, without endangering the c o m p a n y ' s ability to meet its policy obligations. If the assumptions are changed, the reserves will be increased or decreased. On the other hand, the assets of a c o m p a n y are more readily and objectively valued. Accordingly, the surplus to policyowners and stockholders (i.e., the difference b e t w e e n assets and liabilities) is affected significantly by the assumptions that underlie computations. ("Reserves," by William H. S c h m i d t in LHIH, p. 158.)

Reserves in property insurance. (1) Unearned premium reserve. — In the field of property insurance, the unearned p r e m i u m s must at all times be adequate to pay a full proportionate return p r e m i u m to policyholders in the event of the cancellation of a policy before it expires. T h e reserve should be adequate to reinsure the business, if necessary. The basic purpose of the reserve is to m e e t all liabilities under the contract and to pay expenses of claim services in the future. At the same time, it accounts for i n c o m e received but not yet earned and repayment if the contract is discontinued. (D.L. Bickelhaupt, op. cit., p. 211.) T h e "unearned p r e m i u m reserve" at any given time is that portion of the premium i n c o m e of property and liability insurance that is not yet earned owing to the fact that the policyholders h a v e not received the full term of protection for which the p r e m i u m was collected. It is the natural result of collecting in advance and delivering the product in the future. (Riegel, Miller & Williams, Jr., op. cit, p. 568.)

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T h e a m o u n t of reserve w h i c h every non-life insurance company doing business in the Philippines is required to maintain for unearned p r e m i u m s on its policies in force which shall be charged as a liability in the determination of its financial condition is as provided in Sections 2 1 3 a n d 2 1 4 . (2) Loss reserve. — A s e c o n d type of reserves required of property insurers is the "loss reserve." S i n c e m a n y contracts of this type do not involve i m m e d i a t e p a y m e n t of all losses that have occurred, reserves m u s t be set up to assure their payment. For example, a w o r k m e n ' s c o m p e n s a t i o n claim m a y be m a d e against the insurer today. In m a n y cases, the loss p a y m e n t s m a y be m a d e gradually according to law during a long period of disability. In automobile liability cases, it m a y be several years after a loss before a court decides w h o is liable and h o w m u c h . In such cases, an estimate of the reserve that will be n e e d e d to pay the insurer's obligation is m a d e a n d carried on its b o o k as a loss reserve. In this way, losses a n d loss expense for claims that are k n o w n but not yet paid are provided for by the insurer under the loss reserve laws of the state. (D.L. Bickelhaupt, ov. cit., pp. 2 1 1 212.)

Valuation of reserves and cash surrender values in life policies. (1) T h e reserve of a life insurance contract is a liability item representing the difference b e t w e e n the actuarially determined value of future benefits payable and future p r e m i u m s receivable. T h e funds accumulated in support of these reserves are invested by the insurance c o m p a n y in assets that are the property of the company. (2) Cash surrender values in life insurance contracts represent the insurance c o m p a n y ' s obligation to the policyowner in the event he desires to surrender the contract. Thus, while cash surrender values arise out of the level premium concept, they are necessarily equal to the reserve in any particular policy year. Minimum cash surrender values are specified by law. Life insurance companies, however, may provide surrender values in excess of those required by law. ("Savings Functions of Life Insurance," by Vane B. Lucas, in LHIH, p. 42.)

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Cash surrender value, an asset of policyowner. Schedules of cash values are incorporated in life insurance contracts and become obligations binding on the company. Thus, although the pooled life insurance assets in which accumulated funds are invested are the property of the company, the cash surrender value of each contract is a liability of the company and an asset of the policyowner. The principal s u m accumulated as cash values is guaranteed. This "guaranteed valuation of principal" is one of the most attractive features of life insurance. (Ibid.) While the amount of the surrender value is based on the reserve value of the policy, it is generally set b e l o w the reserve value for the purpose of discouraging cancellation. (J.F. Dobbyns, op. cit., p. 40.) Non-forfeiture values on termination of life policies. (1) Life insurance on the level premium basis. — It is quite unlike most other forms of insurance b e c a u s e the risk of death increases rapidly with age, and because the p r e m i u m level remains over an extended period of time. U n d e r a level p r e m i u m life insurance policy, the p r e m i u m in the early years is m o r e than is necessary to cover mortality costs; and in the later years, it is less than is necessary to cover mortality costs. T h e excess of the p r e m i u m s in the early years is accumulated to provide sufficient assets to offset the deficiency in the p r e m i u m s in the later years. The so-called "non-forfeiture provisions" define the equity to which the policyowner is entitled in the event the policy is terminated other than by death. Non-forfeiture values are available in various forms, as m a y be elected by the policyowner. ("Non-forfeiture Values and Policy L o a n s , " by Charles F.B. Richardson, in LHIH, p. 173.) (2) Recovery by policyholder of unabsorbed part of premiums already paid. — The rationale of the m i n i m u m legal requirements for non-forfeiture values was stated as follows: "It is fundamental in business relationships that contracts, other than insurance, which are terminated prior to

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their normal termination date, shall involve no loss to the party to the contract w h o is willing to continue the contract, and the party effecting discontinuance shall b e a r whatever loss is involved as a result of the termination of the transaction. It is stated elsewhere in this report that, in the case of life insurance, full forfeiture u p o n lapse is repugnant to the public interest and that it should be the policy of the State to establish a basis w h e r e b y the purchaser m a y recover in s o m e form the u n a b s o r b e d part of the p a y m e n t s already m a d e . However, it cannot be regarded as proper public policy to insist that the party to the contract w h o is willing to continue shall be m a d e to suffer loss through the inability or lack of desire of another to continue his contact. 2

Equity, therefore, w o u l d appear to d e m a n d , as a general principle, that an insurance c o m p a n y transacting any type of insurance, as one contracting party, shall be left in as favorable a position following the termination of a policy by a policyholder as it w a s prior thereto, and equity does not d e m a n d that the seceding policyholder shall be in as favorable a position after termination as he w a s prior thereto." ("Reserves," by William H. Schmidt, in L H I H , pp. 175-176.)

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2

In 1939, in order to conduct a study of non-forfeiture provisions, the National Association of Insurance Commissioners in the United States appointed a committee headed by Alfred M. Guertin which rendered its report in 1941.

Title 6 LIMIT OF SINGLE RISK

Sec. 215. No insurance company other than life, whether foreign or domestic shall retain any risk on any one subject of insurance in an amount exceeding twenty per centum of its net worth. For purposes of this section, the term, "subject of insurance" 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. Reinsurance ceded as authorized under the succeeding title shall be deducted in determining the risk retained. As to surety risks, 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. Retention limit. (1) Factors in setting retention limit. — T h e m a x i m u m a m o u n t of insurance w h i c h an insurer will carry on a policy at its o w n risk without reinsurance protection is called the retention limit of the insurer. Fundamentally, the retention limit is set so as to avoid inconvenient fluctuations in earnings b e c a u s e of claims involving large amounts. (a) Although determination of a retention limit is in part an actuarial problem, it also involves considerations not subject to precise quantitative analysis. Significant factors in setting a retention limit in life insurance are the a m o u n t of the insurer's surplus, the expected mortality, the distribution 508

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of insurance in force per life, the distribution of n e w issues of insurance by size, the distribution of in-force insurance and n e w issues by age at issue a n d underwriting classification underwriting skill, the degree of earning stability desired, and the cost of the reinsurance ceded. (b) Reinsurance agreements provide that the ceding c o m pany m a y increase its limit of retention on n e w business and also specify the conditions under w h i c h a m o u n t s of existing reinsurance m a y be reduced b e c a u s e of the increased limit of retention. A m o u n t s of reinsurance so reduced are said to be "recaptured." ("Reinsurance," by Walter W. Steffen, in L H I H , pp. 992-993.) (2) Maximum retention allowed. — U n d e r Section 2 1 5 (par. 1.), if the net worth of a non-life insurance c o m p a n y is P20,000,000.00, and it insures a building for P4,500,000.00 it m u s t reinsure the P500,000.00, the a m o u n t exceeding 2 0 % of its net worth. Without the retention capacity requirement, an insurance c o m p a n y could easily b e c o m e insolvent if hit by a series of b i g losses. As to surety risks, the a m o u n t a s s u m e d by any other c o m p a n y authorized to transact surety business and the value of any security mortgaged, etc., for the surety's protection shall be deducted in determining the risk retained, (par. 2.) In actual practice, insurance companies seldom, if ever, utilize their m a x i m u m retention limit b u t w o u l d adopt a self-imposed schedule of limits based on their estimate of the insured risk.

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Title 7 REINSURANCE TRANSACTIONS

Sec. 216. 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. Sec. 217. No insurance company doing business in the Philippines shall cede all or part of any risks situated in the Philippines by way of reinsurance directly to any foreign insurer not authorized to do business in the Philippines unless such foreign insurer or, if the services of a non-resident broker are utilized, such non-resident broker is represented in the Philippines by a resident agent duly registered with the Commissioner as required in this Code. The resident agent of such unauthorized foreign insurer or non-resident broker shall immediately upon registration furnish the Commissioner with the annual statement of such insurer, or of such company or companies where such broker may place Philippine business as of the year preceding such registration, and annually thereafter as soon as available. Sec. 218. All insurance companies, both life and nonlife, authorized to do business in the Philippines shall cede their 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. Sec. 219. Any insurance company doing business in the Philippines desiring to cede their excess risks to foreign insurance or reinsurance companies not authorized 510

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THE BUSINESS OF INSURANCE Title 7. — Reinsurance Transactions

to transact business in the Philippines may do so under the following conditions: (1) Except in facultative reinsurance and excess of loss covers, the full amount of the reserve fund required by law shall be set up in the books of and held by the ceding company for so long as the risk concerned is in force: Provided, That in case of facultative insurance, the ceding company shall show to the satisfaction of the Commissioner that the Philippine market cannot provide the facilities sought abroad. (2) The reserve fund withheld shall be invested in bonds or other evidences of debt of the Government of the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank, and/or other securities acceptable under section two hundred. Should any reinsurance agreement be for any reason cancelled or terminated, the ceding company concerned shall inform the Commissioner in writing of such cancellation or termination within thirty days from the date notice or information of such cancellation or termination is received by such company, as the case may be. Sec. 220. Every insurance company authorized to do business in the Philippines shall report to the Commissioner on forms prescribed by him the particulars of reinsurance treaties as of the first day of January of the year following the approval of this Code and shall thereafter similarly report to the Commissioner particulars of any new treaties or changes in existing treaties. Sec. 221. No credit shall be allowed as an admitted asset or as a deduction from liability, to any ceding insurer for reinsurance made, ceded, renewed, or otherwise becoming effective after January first, nineteen hundred seventy-five, unless the reinsurance shall be payable by the assuming insurer on the basis of the liability of the ceding insurer under the contract or contracts reinsured without diminution because of the insolvency of the ceding insurer nor unless under the contract or contracts of reinsurance the liability for such reinsurance is assumed by the assuming insurer or insurers as of the same effective date; nor unless the reinsurance agreement provides that

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payments by the assuming insurer shall be made directly to the ceding insurer or to its liquidator, receiver or statutory successor except (a) where the contract specifically provides another payee of such reinsurance in the event of the insolvency of the ceding insurer and (b) where the assuming insurer with the consent of the direct insured or insureds has assumed such policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under such policies and in substitution for the obligations of the ceding insurer to such payees. Sec. 222. No life insurance company doing business in the Philippines shall reinsure its whole risk on any individual life or joint lives, or substantially all of its insurance in force, without having first obtained the written permission of the Commissioner.

Power to engage in reinsurance business. As a general rule, a corporation authorized in general terms to engage in the insurance business m a y issue policies of reinsurance; hence, no e m p o w e r i n g or validating legislation is required before an insurance c o m p a n y m a y enter into a reinsurance contract as reinsurer or as reinsured. (Sachs vs. O h i o Nat. L. Ins. Co., 3 1 2 U . S . 706.) Section 2(2) expressly states that "doing an insurance b u s i n e s s " includes "reinsurance business." However, mutual insurance c o m p a n i e s not given the specific power to reinsure risks, w h i c h p o w e r is expressly given to stock companies, have no p o w e r to reinsure. (Allison vs. Fidelity M u t . Ins. Co., 116 NW 274; see, however, Sec. 270.)

Ceding of excess risks. Sections 218 and 2 1 9 are designed to curb the activities of foreign reinsurers. T h e y also insure the retention of the p r e m i u m s in the Philippines, and consequently, provide for conservation of foreign exchange. Under Section 219(1), insurance companies doing business in the Philippines desiring to cede their excess risks by w a y of facultative insurance, either directly or through brokers, to foreign insurance or reinsurance c o m p a n i e s / b r o k e r s not authorized to transact business in the Philippines, are required to s h o w to the

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satisfaction of the Insurance C o m m i s s i o n that the Philippine market cannot provide the facilities sought abroad. To insure observance of the requirement, such facultative reinsurance transactions are n o w subject to the prior approval of the Office of the Insurance Commissioner, (see Ins. Cir. Letter dated D e c . 16, 1981.)

Rules and regulations on life reinsurance transactions. T h e following rules and regulations p r o m u l g a t e d and adopted by the Insurance C o m m i s s i o n g o v e r n life reinsurance transactions in the Philippines: (1) T h e retention of a life insurance c o m p a n y on any one standard life insured shall not be less than the a m o u n t equal to one-half ( 1 / 2 ) of one percent of the latest verified stockholders equity. (2) T h e m i n i m u m retention on substandard lives shall be graded d o w n w a r d s from standard in accordance with sound underwriting practice. T h e schedules of retention limits shall be submitted to the Insurance C o m m i s s i o n prior to its adoption in any reinsurance agreement. (3) No reinsurance shall be p l a c e d abroad where the a m o u n t of risk is P3 million or less, per life standard risk, graded d o w n for substandard lives. (4) No reinsurance shall likewise be placed abroad on accident riders where the accident risk does not exceed P I . 5 million per standard risk. (5) Reinsurance treaties abroad shall be on the yearly renewable term plan (amount of risk) only. R e n e w a l of existing treaties shall be on a year to year basis and shall contain a provision for recapture of previously ceded business. To protect the c o m p a n y against unusual n u m b e r of claims as a result of j u m b o policies issued, the company m a y avail itself of the catastrophe or stop loss cover abroad. (6) Reinsurance abroad on other life insurance riders, group insurance and all other life insurance business m a y be only after it has been shown by the ceding company that such risk cannot be absorbed by the Philippine market. (Ins. Cir. Letter, Aug. 26, 1980.)

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Likewise, facultative reinsurance placements are subject to prior approval by the Insurance Commission. (Ins. Cir. Letter No. 12-09, Mar. 10, 2009.)

Glossary of important reinsurance terms. The glossary of selected reinsurance terms b e l o w will give us an overview of reinsurance terminology. (1) Assumption reinsurance. — An agreement b e t w e e n two insurers under which one insurer disposes of its entire in-force portfolio, or a specific b l o c k thereof, and the other insurer assumes the functions and all obligations to the insured connected with the policies involved. A s s u m p t i o n certificates are issued by the assuming insurer to all insureds, notifying them that it has replaced the original writing c o m p a n y and that it will be responsible for the obligations under the directly written policies previously issued by the original insurer. (2) Automatic reinsurance treaty. — An agreement b e t w e e n an insurer and a reinsurer under w h i c h the insurer is obligated to cede and the reinsurer is obligated to accept as reinsurance the amounts written by the insurer in excess of its retention limits, within prescribed limits outlined in the agreement. T h e reinsurer's liability c o m m e n c e s simultaneously w i t h the insurer. (3) Catastrophe reinsurance. — A form of nonproportional reinsurance (infra.) under w h i c h a reinsurer mdemnifies an insurer for losses in excess of a pre-established deductible arising from a single catastrophic occurrence. T h e reinsurer's liability is subject to a m a x i m u m a m o u n t per occurrence. 1

(4) Coinsurance. — A plan of indemnity reinsurance u n d e r which the reinsurer assumes the obligation on the a m o u n t reinsured in the same fashion as the insurer is obligated to the insured (excluding policy loans). For this risk the insurer usually pays to the reinsurer the gross p r e m i u m (less c o m m i s s i o n s and expense allowances) it has collected from the insured on the amount reinsured. (It should be noted, the reinsurer has no relationship with the insured or beneficiary.)

'Catastrophe reinsurance is a special type of excess reinsurance. (No. 5.)

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(5) Excess of loss. — A form of nonproportional reinsurance under which the reinsurer indemnifies the insurer for its share of a loss occurrence only after the loss to the insurer exceeds a stipulated amount or percentage, the reinsurer paying only the portion of the loss exceeding such a m o u n t or percentage. 2

(6) Facultative reinsurance treaty. — An indemnity reinsurance agreement under w h i c h there is no obligation on the part of the insurer to cede or the reinsurer to accept individual risks. T h e reinsurer retains the "faculty" to accept or reject each risk offered by the insurer. T h e reinsurer's liability c o m m e n c e s after definite approval or acceptance of the risk. (7) Modified coinsurance. — S a m e as coinsurance except the reinsurer lends the m e a n reserve to the insurer e a c h year. (Each year the current y e a r ' s m e a n reserve on the reinsured portion less the preceding y e a r ' s m e a n reserve, plus interest thereon, is paid to the insurer, if this a m o u n t is positive, or returned to the insurer, if negative.) (8) Net amount at risk. — This term is associated with the risk premium reinsurance ( R P R ) plan, (infra.) It is the reinsurer's liability in the event of death, determined by deducting from the face amount reinsured the terminal reserve thereon, according to the insurer's valuation basis for the plan of insurance issued to the insured. (9) Nonproportional reinsurance. — A plan of reinsurance under which the reinsurer provides protection in any one occurrence b e y o n d the stipulated loss, deductible, or retention accepted by the reinsured regardless of the n u m b e r of risks involved. T h e retention is stated in terms of the loss, either as a percentage or absolute amount, and as a function of either one event or a period of time during which several events producing losses take place, and is not proportionate or directly related to the risk assumed in the original policy issued to the insured. Catastrophe, stop-loss, excess of loss, or aggregate excess of loss reinsurance are examples of nonproportional reinsurance.

2

Excess reinsurance should not be confused with surplus reinsurance. (No. 18.)

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(10) Proportional reinsurance. — A plan of reinsurance under which the reinsurer provides protection in any one occurrence when the loss exceeds the retention or risk assumed by the reinsured. The retention is stated in terms of the risk assumed, either as a percentage or absolute amount, is the function of one event, and is proportionate or related to the risk assumed in the original policy issued to the insured. Risk premium reinsurance, coinsurance, and modified coinsurance are examples of proportional reinsurance. (11) Quota share. — A plan of reinsurance under which an insurer and a reinsurer are liable for a stipulated percentage of each risk written under the defined category of business on a pro rata basis (e.g., 6 0 % , insurer and 4 0 % , reinsurer). This plan of reinsurance is particularly applicable to group-underwritten business. (12) Reinsurance (or indemnity reinsurance). — A business transaction under which one party, called the reinsurer, in consideration of a p r e m i u m paid to him, agrees to indemnify another party, called the reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance which it has issued. T h e reinsured m a y also be referred to as the reassured, original company, insurer, primary insurer, direct writing company, or ceding company. (13) Reinsurance cession. — Individual policies of reinsurance issued by the reinsurer to the reinsured setting out the administrative details of the reinsurance. O n e might consider the reinsurance cession as the counterpart of the policy issued by the insurer to the insured. (14) Reinsurer. — T h e party to a reinsurance agreement w h o agrees to indemnify the other party to the agreement for losses arising out of an insurance policy written by the latter party. (15) Retention limit. — T h e m a x i m u m a m o u n t of liability which a company will carry on one life or one event at its o w n risk without reinsurance protection. (16) Retrocession. — A reinsurance transaction between reinsurers. This can best be defined by an example.

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C o m p a n y B accepts reinsurance from C o m p a n y A; C o m p a n y B then obtains reinsurance from C o m p a n y C for a portion of the business it has assumed from C o m p a n y A. C o m p a n y C is called a retrocessionaire — o n e w h o accepts reinsurance from a reinsurer. C o m p a n y B, the ceding reinsurer, is called a "retrocedant." (17) Risk premium reinsurance (RPR). — A plan of reinsurance under which an insurer purchases reinsurance for the net a m o u n t at risk allocable to a m o u n t s of insurance for which the insurer requires reinsurance, (see "Reinsurance," by Walter W. Steffen, in LHIH, pp. 1004-1005.) (18) Surplus share. — A plan of reinsurance in which the reinsurer does not participate in every risk of the original insurer but accepts only that part of the risks that go over certain limits. T h e reinsurer does not participate unless the insurance exceeds the net retention limit, (see D.L. Bickelhaupt, op. cit., p. 164.) T h e amount of the retention is conveniently referred to as a "line." EXAMPLE: X, ceding company, may retain P10,000.00 of every policy, reinsure half of all insurance in excess of this amount up to P25,000.00 with reinsurer Y and all of any insurance over P25,000.00 with reinsurer Z. Company X's. treaty thus covers 1 1/4 lines. If a policy for P5,000.00 is written, no reinsurance is involved. If it is a policy for P20,000.00, the original insurer's share is all of the first P10,000.00 and half of the second P10,000.00 while reinsurer Y's share is half of the second P10,000.00 or P5,000.00. On this risk, the ceding company has P15,000.00 insurance or 3 / 4 of the total, reinsurer Y, P5,000.00, or 1/4 of the total, and reinsurer Z, nothing. A loss of P4,800.00 would be shared in the same proportions, or P3,600.00 by the ceding company and Pl,200.00 by reinsurer Y. (Riegel, Miller & Williams Jr., op. cit., p. 132.) The treaty may provide that losses up to P10,000.00 are covered in full by X, that the first P10,000.00 of losses between P10,000.00 and P30,000.00 is paid by X, and the rest by Y, and that losses exceeding P30,000 are paid 30% by X and 70% by Y. — oOo —

Title 8 ANNUAL STATEMENTS Sec. 223. Every insurance company doing business in the Philippines shall terminate its fiscal period on the thirty-first day of December every year, and shall annually on or before the thirtieth day of April of each year render to the Commissioner a statement signed and sworn to by the chief officer of such company showing, in such form and details as may be prescribed by the Commissioner, the exact condition of its affairs on the preceding thirty-first of December. Any entry in the statement which is found to be false shall constitute a misdemeanor and the officer signing such statement shall be subject to the penalty provided for under section four hundred nineteen. Sec. 224. Every insurance company authorized under Title Ten of this Chapter to issue, deliver or use variable contracts shall annually file with the Commissioner separate annual statement of its separate variable accounts. Such statement shall be on a form prescribed or approved by the Commissioner and shall include details as to all of the income, disbursements, assets and liability items of and associated with the said separate variable accounts. Said statement shall be under oath of two officers of the company and shall be filed simultaneously with the annual statement required by the preceding section. Sec. 225. Within thirty days after receipt of the annual statement approved by the Commissioner, every insurance company doing business in the Philippines shall publish in two newspapers of general circulation in the City of Manila, one published in English and one in Pilipino, a full synopsis of its annual financial statement show518

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ing fully the conditions of its business, and setting forth its resources and liabilities.

Reports and statements. T h e p o w e r of the State to require insurance c o m p a n i e s to m a k e periodical statements and reports concerning their business, reserves, and financial conditions is well recognized, and a statute requiring insurance c o m p a n i e s to m a k e annual statements of their business and financial condition, enacted under the police power, does not impair the obligation of the contract evidenced by the charter of a c o m p a n y previously incorporated. (Eagle Ins. C o . vs. Ohio, 153 U . S . 446.) It is immaterial in this respect w h e t h e r the c o m p a n y is solvent or insolvent. (43 A m . Jur. 2d. 120.) Indeed, the requirement to file annual statements is the p r i m a r y m e a n s of alerting the Insurance C o m m i s s i o n to any danger of threatened insolvency (with the resulting inability to h o n o r obligations to insureds) on the part of any insurance company. (J.F. D o b b y n s , op. cit., p. 297.) 1

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•The Insurance Commission has adapted the General Information Sheet (GIS) of the Securities and Exchange Commission (SEC) as among the reports for periodic submission by all insurance companies, insurance and reinsurance brokers, mutual benefit associations, and other insurance intermediaries. They shall attach a duplicate copy for the Insurance Commission of the GIS submitted to SEC and stamped received by the SEC. (Ins. Cir. Letter No. 26-05, Sept. 6, 2005.)

Title 9 POLICY FORMS

Sec. 226. 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.

Standardization of insurance contracts. Insurance contracts are highly standardized through statutory or administrative regulations, voluntary agreement, or customary practice. (1) Standardization m a k e s it easier for c o n s u m e r s to study insurance contracts and to compare contracts issued by different insurers. (2) Both insurers and insureds gain from greater m e a n i n g they can attach to court interpretations of earlier contracts and from the reduction of policy conflicts in adjusting claims. Standardization, on the other hand, m a y reduce or delay the advantages of experimentations and competition. (3) Even when there is no statutory or voluntary standardization, competition and tradition favor s o m e standardization. There are advantages to selling a contract that does not differ too much from that of a competitor and from the use of language that has b e e n tested in practice. (Riegel, Miller & Williams, Jr., op. cit., pp. 58-59.)

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Power to prescribe insurance contracts and standard policies. (1) Part of power to regulate. — As a part of its p o w e r to regulate the insurance business, a State h a s the right to prescribe the kind and character of insurance contracts that m a y be m a d e . There seems to be no doubt that the legislature m a y prescribe a standard form of insurance policy a n d to permit or require insurers to use it, or provide that, in the alternative to the use of such a policy, the policy issued m u s t contain or include certain provisions. ( N e w York K. Ins. C o . vs. Gardison, 85 NE 410.) Furthermore, the State m a y delegate to an insurance official or board authority to see that the requirements prescribed by standard policy statutes are c o m p l i e d with. B u t it m a y not delegate to such official or board the p o w e r to draft such a policy and force the insurers in the state to adopt it. (King vs. Concordia F . Ins. Co., 103 N W 6 1 6 ; State vs. Great Northern R . Co., I l l N W 289.) (2) Different types of control. — T h e legislation to standardize insurance contracts h a s resulted in four different types of control over the contents of such contracts: (a) complete and compulsory standard policies; (b) required standard provisions; (c) prohibited provisions; and (d) optional forms filed in connection with rate filing and approval. (E.W. Patterson, op. cit., p. 33.) (3) Object. — T h e object of statutes prescribing standard policies has been stated to be, practically, to have but one form of policy instead of a different form for each company doing business with each c o m p a n y changing its form in order to escape the consequences of any n e w decision m a d e by the court. (Gregerson vs. Phoenix F. Ins. Co., 99 Wah. 6 3 9 ; Straker vs. Phoenix Ins. Co., 77 NW 752.) (a) T h e chief purpose of such legislation is to protect the insured and other persons having claims under insurance contracts against unfair or deceptive provisions.

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(b) Any such legislation in the long run protects honest and competent insurers against unfair competition by unscrupulous rivals w h o would, because of the insured's lack of scrutiny or inability to determine the value of the contract offered him, be able to sell a poorer contract at a lower price. In the popular lines, poor insurance will tend to drive out good insurance. (c) Moreover, where there are several different insurers on the same risk (as in fire insurance) and each limits liability (as is usually done) to its pro rata part of the full amount of insurance, the insurer with restrictive clauses might escape any liability, while the more generous insurers w o u l d bear the loss. (E.W. Patterson, op. cit., p. 33.) (4) Effect of noncompliance with standard policy statutes. — Under some statutes, policies varying from the standard form are unenforceable by the insurers issuing t h e m and subject the insurers to penalties, but are binding u p o n them. U n d e r such a statute, a provision more favorable to the insured than the standard policy m a y be enforceable by the insured. (Ottems vs. Atlas Assur. Co., 275 NW 900; 43 Am Jur. 2d 118-119.) If a statute mandates the inclusion of certain provisions in an insurance contract, they shall be deemed contained in the policy although they are actually not included in the language of the contract.

Submission of policies for approval. (1) Forms of policies. — Every insurance c o m p a n y doing business in the Philippines is, therefore, required to submit first to the Insurance Commissioner for approval the policy, certificate or contract of insurance from which it intends to issue in the Philippines, as well as the application, rider, clause, warranty, or endorsement form which will be used with, attached to, or printed or stamped upon, such policy, certificate or contract of insurance form. (Ins. C o m . Cir. Letter, dated April 2, 1976: see Sec. 226.) Of course, an insurance commissioner has no p o w e r to approve a form of policy or rider which clearly contravenes the provisions of governing statutes. (Barnett vs. Merchants' L. Ins.

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Co. 208, p. 2 7 1 ; 43 A m . Jur. 2d. 116.) T h e view is taken that such approval or disapproval is persuasive b u t not controlling upon the courts. (Drogula vs. Federal L. Ins. Co., 2 2 7 NW 692; Clark vs. Federal L. Ins. Co., 136 SE 291.) T h e v i e w has also b e e n expressed that the approval of the form of a policy by the State insurance authorities in no w a y prevents the courts from holding such policy invalid as contrary to the applicable law relating to the form of insurance contracts. (Frenzer vs. M u t u a l B e n . Health & Acci. Assn., 81 P 2 d 197; 43 A m . Jur. 117.) (2) Contents of policies. — Statutes w h i c h provide that insurance boards or officials shall h a v e the p o w e r or duty to approve or disapprove policies in accordance with statutes w h i c h prescribe in substance w h a t shall be the provisions of policies issued within the State h a v e generally b e e n u p h e l d or recognized as a proper delegation of authority. U n d e r such statutes, the approval or disapproval is not limited to purely formal matters such as the print type or m a k e - u p of the policy, b u t extends to representative matters of conformity with statutory provisions relating to the clauses and stipulations w h i c h must, m a y or m a y not be included in insurance contracts. ( N e w York L. Ins. Co. vs. Hardison, 85 NE 410.) 1

Sec. 227. 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 days or of one 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 per centum per annum for the

'The Insurance Commission requires "that no policy, certificate, or contract of insurance shall be issued in the Philippines unless the Omnibus Clause is incorporated therein as an integral part thereof providing as follows: "all applicable provisions of Presidential Decree No. 1460, otherwise known as the Insurance Code of 1978, as amended, as of the date of effectivity, latest renewal or latest reinstatement of this policy/certificate/contract of insurance, as the case may be, and all existing laws obligatory upon insurance companies as may be pertinent are deemed incorporated in this policy/certificate/contract of insurance and will supersede any agreement/contract inconsistent therewith." (Ins. Cir. Letter, Nov. 27,1985.)

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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 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. (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 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 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

Sec. 227

THE BUSINESS OF INSURANCE Title 9. — Policy Forms

shall not be more than one-fifth of the entire reserve or two and one-half per centum of the amount insured and any dividend addition thereto. (2) One or more paid-up benefit 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 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 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 of 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. (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 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. 0 ) 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, upon production of evidence of insur-

525

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ability 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. This section shall not apply to policies of group life or industrial life insurance.

General form of a life insurance policy. (1) No standard form but must include certain standard provisions. — There is no standard policy form required for life insurance contracts but all policies of life insurance m u s t include the "standard provisions" (sometimes called "general provisions" in the policy) prescribed by Section 227. (see A p p e n d i x " E . " ) It was earlier felt that a standard form of policy resulted in too m u c h uniformity of available coverages. To provide m o r e leeway with respect to coverages and at the s a m e adequately safeguard the interests of the policyholders, the l a w m a k e s certain standard provisions mandatory. Since the standard provisions establish m i n i m u m requirements only a n d an insurer may file policies with more liberal provisions, the l a w permits more flexibility in life insurance contracts than u n d e r a standard policy requirement. At the s a m e time, a considerable degree of uniformity has developed in the contracts offered by most insurance companies. (D.L. Bickelhaupt, op. cit., p. 290.)

(2) Important options and privileges given to policyholder.

—

Basically, the life insurance policy is a promise by the insurer to pay a stated a m o u n t of m o n e y to the policyholder (or his beneficiary). T h e conditions under w h i c h the benefits are paid are significant and m a y include death, s o m e types of disability, and in case of endowments, a certain maturity date set in the contract. In connection with the fundamental benefits, m a n y

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important options and privileges are granted to the policyholder. These features c o m b i n e to m a k e the life insurance contract one of the most flexible agreements ever designed. T h e o w n e r of the contract, or s o m e t i m e s his beneficiary, h a s the right to: (a) stop or change p r e m i u m p a y m e n t s ; (b) change the recipients of the benefits; (c) assign the contract rights; (d) change use of the dividends; (e) change to a different policy; (f) reinstate coverage; (g) take cash or loan values; (h) cancel the policy a n d receive accumulated benefits in a variety of w a y s ; a n d (i) use the policy proceeds by receiving l u m p s u m or installment payments. (Ibid., p. 288.)

Major classes of life insurance. T h e life insurance business has developed two basic methods of distributing life insurance contracts: (1) Individual insurance. — T h e protection is issued on the basis of individual application a n d involves a separate policy contract for each purchase. U n d e r the m e t h o d falls ordinary life insurance (Sec. 227.) and industrial life insurance (Sees. 229-230.); and (2) Group insurance. — In this method, the unit of selection is the group rather than the individual. (Sec. 228.) In the United States, credit life insurance is essentially a m e t h o d using group life policies since only one-seventh of this category of life insurance is based on life insurance contracts. T h e basic purpose of credit life insurance is to repay a debt if the borrower dies. T h e purpose of utilizing more than one system of marketing life insurance is to reach the largest possible number of insureds. The two basic methods are called the major classes of life insurance, (see ibid., pp. 255-260.)

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Special characteristics of life insurance contract. The life insurance contract has a number of unique features that contribute to its flexibility as an instrument through which savings and financial planning are enhanced. In addition, several special considerations arise from the manner in which lawmakers and the courts have attached significance to life insurance proceeds. (1) Loan privilege. — T h e availability of cash values gives rise to the policy loan privilege, under which the insurance company will advance on the security of the contract an amount that, with interest as specified in the contract, will not exceed the guaranteed cash value. T h e interest rate on such loans usually is not more than 5% or 6%. This rate exceeds the rate of return guaranteed for accumulating cash values for several reasons, one of which is the administrative expense of handling policy loans. The due date of policy loan is at the maturity of the contract or anytime prior to this date at the option of the borrower, (see Sec. 227[g].) T h e contracts of m a n y companies include a provision for automatic premium loans. This provision protects against the unintentional lapse of the contract by advancing, in the form of policy loan, the unpaid a m o u n t of a p r e m i u m due. T h e automatic premium loan is advantageous to the p o l i c y o w n e r b e c a u s e it helps to continue the contract and all its features in full force and effect. (2) Policy dividend options. — Life insurance contracts may be "participating" or "non-participating." Participating contracts are characterized by higher annual p r e m i u m s b a s e d on relatively conservative mortality, investment earnings, and expense assumptions. If actual results are better than assumed, the difference is reflected in surplus. This surplus is available for return to policyowners. T h e amount returned to the policyowner is determined annually and is called a "policy dividend." T h e s e dividends are a means for the insurance c o m p a n y to refund the premium redundancy and should not be confused with dividends payable to corporate stockholders.

THE BUSINESS OF INSURANCE Title 9. — Policy Forms

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529

Policy dividends usually are m a d e available annually on the anniversary date of the participating life insurance contract, (see Sec. 227[e].) T h e dividend m a y be taken in one of four basic forms at the option of the policy-owner: (a) in cash; (b) applied toward the p a y m e n t of the next p r e m i u m under the contracts; (c) applied to the purchase of a paid-up addition to the contracts; or (d) left on deposit with the c o m p a n y to accumulate at interest. In addition, m a n y c o m p a n i e s offer a fifth option, under which all or part of the dividend m a y be u s e d to b u y one-year term insurance. (3) Surrender options. — T h e savings feature in cash value life insurance also gives rise to the availability of surrender benefits should the policyowner wish or n e e d to discontinue his insurance coverage. Surrender benefits m a y be received at the option of the policyowner in one of three forms: cash; paid-up insurance for a reduced amount; or extended term insurance, (see Sec. 227[f].) (4) Supplementary benefits. — T h e waiver of premium benefit, a form of disability insurance, is offered for a m o d e s t additional charge by virtually all companies in connection with the life insurance contracts they issue. T h e waiver of p r e m i u m provision becomes operative whenever the insured b e c o m e s totally and permanently disabled as defined in the contract. He then becomes entitled to have waived (by the insurer) any p r e m i u m falling due after the disability commences. T h e waiver of premium does not affect any other provision of the policy. (5) Exemption from claims of creditors. — Protection against the claims of the insured's creditors or the beneficiary's creditors, or both, is available through the life insurance contract itself or through state legislation. Although the nature of non-statutory protection varies, the avoidance of claims of creditors can be of great practical importance in preserving saving for the purposes intended.

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Legislative protection takes the form of state exemption statutes. These laws generally reflect the public policy of placing a higher priority on an individual's obligation to his family than to his creditors. T h e broadest statutes exempt all types of life insurance benefits from attachment by all types of creditors, while some statutes exempt only a modest amount of proceeds payable to the w i d o w and children of the insured, (see Rules of Court, Rule 39, Sec. 13[k]; Chap. II, Title 5.) (6) Income tax treatment. — It is b e y o n d the scope of this w o r k to discuss fully the income tax treatment of life insurance and annuities. However, several aspects of the i n c o m e taxation of life insurance related to financial planning should be acknowledged. Of major significance is the fact that proceeds of life insurance paid by reason of death generally are i n c o m e tax exempt. Endowment proceeds and cash surrender values, received other than by reason of death, are to be included in gross i n c o m e to the extent that they exceed the aggregate net p r e m i u m s or other considerations paid, (see National Internal R e v e n u e C o d e of 1997, Sec. 31 [b, 1, 2].) Dividends on participating life insurance policies are regarded as a return of premium. Such dividends are not includable in gross income for i n c o m e tax purposes. However, interest earned on dividend deposits is taxable. ("Savings Functions of Life Insurance," by Vane B. Lucas, in L H I H , pp. 47-49.)

Life insurance as property. (1) Compared with other property. — It m a y be significant to consider the life insurance policy as property and to compare it with other property which the deceased insured o w n e d at the time of his death. O n e ' s "life insurance" does not transfer to heirs or beneficiaries. Rather, death transforms the life insurance policy, which during lifetime was only a bundle of promises, into cash. Whereas a decedent leaves his land and buildings, his stocks and bonds to his heirs, life insurance on his life cannot be given to anyone after his death. Instead, he leaves them the cash into which the policy has been transformed. (2) Guaranteed value at death. — W h e n the life insurance on one's life is compared, as property, with the other forms of

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property which are owned, one significant difference stands out. It is that the value of the life insurance policy is always guaranteed to be its m a x i m u m (the face of the policy) at the m o m e n t the death of the insured occurs. This characteristic — the value of the property at death — can never be k n o w n in advance for other property which one m a y o w n during his lifetime. It is true of life insurance, whether the policy was purchased today or 40 years ago, and whether death occurs today or 40 years hence. (3) Significance. — T h e insured can count on his life insurance. He can use it as the foundation for the support of his dependents after his death. Furthermore, health insurance provides a method for reducing the uncertainty of e c o n o m i c loss due to illness or disability. T h e protection functions of life and health insurance are a m o n g the m o s t important elements in making economic security an achievable goal for individuals and their families. ("Protection Functions of Life and Health Insurance," by William T. Beadles, in L H I H , pp. 36-38.)

Protection functions of life insurance. (1) Pooling of risks. — W h i l e a policy is in force, h o w can a life insurance c o m p a n y agree to pay whenever an insured dies? First is the fact that all insurance is a matter of pooling, of group-sharing of losses. For every insured w h o dies in a year, there are other new insureds w h o are not expected to die and will pay premiums for that year. In addition, the insurance c o m p a n y receives premiums that same year from thousands of policy owners whose policies h a d b e e n issued in earlier years and which are still in force on a premium-paying basis. (2) Prediction of number of death claims. — In addition to the pooling principle, life insurance relies on the ability of the insurer to predict with reasonable accuracy the number of death claims it can expect to have in a given year. (a) Operation of law of large numbers. — This surprising result arises partly from the operation of what is called "the law of large numbers." Obviously, it is not possible to predict w h e n any one person will die, unless he is literally on his death bed, and even then, the predictions may not be very

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accurate. Yet, while the life insurers cannot predict the time of death of any single insured, they are able to predict the approximate number of deaths in a certain period from a given large number of insureds. That which is impossible in relation to any one individual is entirely feasible w h e n a sufficiently large number of persons is considered. (b) Use of mortality statistics table. — Life insurers m a k e use of widely and carefully compiled mortality statistics. These might show, for example, that a m o n g insured persons aged 40, and on the basis of past experience, two out of every thousand could be expected to die during the year. This would indicate the probability of death, and experience has shown that, within broad limits, the greater the n u m b e r in the group, the closer w o u l d the actual experience approximate the probable experience. (c) Application of principle of probability. — By using probabilities based upon sufficiently conservative mortality statistics and by insuring e n o u g h lives for the law of large numbers to be relied upon, insurers are able to do the apparently impossible. T h e basic purpose of life insurance (the one to which all others are subordinate) is to create during life, an ultimate death estate of w h a t has b e e n traditionally a fixed number of pesos, payable w h e n e v e r death occurs a n d provided only that the insured's policy be in full effect at the time of death, (see ibid., pp. 28-29.)

Savings functions of life insurance. Through the m e d i u m of life insurance, h u n d r e d s of thousands of individuals h a v e accumulated savings while providing financial protection for their families. T h e s e savings are pooled by insurance companies and injected b a c k into the financial bloodstream of the e c o n o m y in the form of investments. Life insurance is one of the largest thrift institutions in the Philippines, along with savings and loan associations, savings banks, and commercial banks. The savings element is present in insured pension plans and certain forms of group life insurance. However, a m u c h larger proportion of savings is accumulated through the ownership

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of life insurance by individuals. ("Savings Functions of Life Insurance," by Vane B. Lucas, in LHIH, p. 39.)

Apportionment and distribution of policy owner dividends. A dividend is a refund of that portion of the premium paid that is in excess of the a m o u n t necessary for current benefit payments, expenses, and reserves required to cover future policy guarantees. (1) Apportionment. — Apportionment of policyowner dividends is one of the m o s t important functions of life insurance c o m p a n i e s writing participating business. Several definitions will be helpful, if not essential, to an understanding of policyowner dividends. (a) First, a policy providing for payment of dividends is called a participating policy; a policy which does not provide for p a y m e n t of dividends is a non-participating policy. (b) A mutual c o m p a n y is o w n e d entirely by its policyowners and normally writes only participating policies; in fact, in s o m e states, mutual companies are prohibited by statute (with m i n o r exceptions) from writing non-participating policies. A stock c o m p a n y is o w n e d by its shareholders and generally writes primarily non-participating policies, although m a n y stock companies offer participating policies as well. ("Surplus and Dividends," by Robert T. Jackson, in LHIH, p. 184.) (2) Distribution. — O n c e the dividend fund has been determined, the next step is distribution on individual policyowners. The whole theory of equitable dividend distribution is based on providing a return to each similar group of policyowners (referred to as a policyowner "class," a term which has peculiar legal significance in life insurance law) that shall be as closely as possible, in proportion to its contribution to the general funds available for distribution. A dividend class would be defined by some or all of the following c o m m o n characteristics: the same type of coverage, the same year of issue, the same age of issue,

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the same number of premium payments made, and the s a m e attained age. (Ibid., p. 187; see Sec. 195.) Misstatement of age. Since the annual premium on a policy written with a level premium is based upon the attained age at the inception of the policy, applicants have sometimes deliberately misstated their age. In other instances, the misstatement has b e e n the outgrowth of mistake. Life policies contain a special clause covering the subject that is equitable to both the insured and insurer. T h e clause provides that if the age of the insured has b e e n misstated, the amount payable under the policy shall be such as the p r e m i u m paid would have purchased at the correct age. (see S e c . 227[d].) This is determined by the application of simple proportion. If an applicant states his age to be such that the p r e m i u m for P1,000.00 insurance at that age is P20.00 and at the time of his death it proves the correct p r e m i u m should h a v e b e e n P25.00, the amount of proceeds payable (x) is determined as follows: P25: P20

-

P1,000: x

Hence, P25 x

=

P20,000

x

=

P800

Since age misinterpretation is covered by a special clause (infra.), it cannot fall within the scope of the incontestable clause. A g e discrepancies are most frequently discovered w h e n proofs of death are being filed. Regardless of the time of discovery, the amount due under the policy is adjusted to coincide with the amount the p r e m i u m w o u l d h a v e purchased h a d the age b e e n correctly stated. (D.L. Bickelhaupt, op. cit., pp. 297-298.) Rights of insured under a lapsed life policy. T h e rights of the insured under a lapsed policy are determined by the terms of the policy supplemented by any statute applicable. T h e usual consequences of a lapsed policy are: forfeiture of all rights; extension of insurance for a certain period; or granting paid-up insurance for a certain amount. (Vance, op. cit., p. 319.)

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(1) Forfeiture. — T h e simplest penalty to be imposed is the absolute forfeiture of all of the insured's rights. T h e law holds forfeitures with such disfavor that unless the intention is clearly expressed, n o n p a y m e n t of p r e m i u m s shall not confer upon the insurer a p o w e r to declare a forfeiture. However, the practice of insurers to stipulate in life insurance policies that nonpayment of p r e m i u m s (except as to any paid-up or extended insurance) shall result in forfeiture is so general that cases involving contracts without such stipulation are rare. But with the d e v e l o p m e n t of a more liberal spirit in the conduct of the life insurance business due largely to the growth of competition for public favor, insurers found it polite as well as just to give the policyholders the benefit of s o m e or all of the reserve value of their policies at the time of default. Hence, came the provisions for e x t e n d e d insurance for so long a time as the reserve value of the policy could suffice to purchase such term insurance, or for paid-up insurance in such an amount as could be purchased by a s u m equal to the value of the policy (ibid., pp. 319-320; see Sec. 227[g].) (2) Extended insurance. — W h e r e insurance is "extended," the insured is given the right, upon default, after the payment of at least three full annual p r e m i u m s (see Sec. 227[f].), to have the policy continued in force from the date of default for a time either stated or equal to the a m o u n t as the net value of the policy taken as a single premium, will purchase. In case of death of the insured within the extended term, he m a y recover the face value of the policy. Extended insurance is sometimes called "term insurance," "temporary insurance," or "paid-up extended insurance." (3) Paid-up insurance. — W h e r e insurance is "paid-up," the insured is given the right, upon default, after the payment of at least three annual premiums (Ibid.) to have the policy continued in force from the date of default for the whole period of the insurance without further payment of premiums. In case of death of the insured, he m a y recover only the "paid-up" value of the policy, usually less than the "paid-up" premiums, under the same conditions as the original policy. Technically, the term "paid-up" insurance is often referred to as "reduced paid-up" insurance.

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Options available to insured in life insurance. The law requires that in case of life or endowment insurance, the policy shall contain a provision specifying the options to which the policyholder is entitled in the event of default in a premium payment after three full annual premiums shall have been paid. (Sec. 227[f].) In addition to the two mentioned rights or options (extended insurance and paid-up insurance) usually granted to the insured, insurers also m a k e provision for the so-called "cash surrender value option." Pursuant to Section 227(h), and to the resolution of the Supreme Court in the case of Philippine American Life Insurance Company vs. Arnaldo (G.R. No. 57816, Jan. 6 , 1 9 8 2 . ) , it is required by the Insurance C o m m i s s i o n that no life insurance policy shall be issued or delivered in the Philippines unless its provisions on Premium Loan and Automatic Option in case of default in premium payment conform with the following conditions: (1) In the event of default in p r e m i u m payment, the P r e m i u m Loan provision shall only apply if requested in writing by the policyholder either in the application or at any time before the expiration of the grace period. (2) T h e m o m e n t there is default in p r e m i u m p a y m e n t and no option has been elected either in the application or within the time specified in the policy, one of the paid-up options specified therein shall automatically take effect. (Cir. Letter No. 18-94, Aug. 15,1994.) Cash surrender value defined. Cash surrender value, as applied to a life insurance policy, is the amount that the insured, in case of default, after the p a y m e n t of at least three full annual premiums, is entitled to receive if he surrenders the policy and releases his claims u p o n it. T h e more premiums the insured has paid, the greater will be the cash surrender value, but the value is always a lesser s u m than the total amount of premiums paid.

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Nature of cash surrender value. T h e cash surrender value arises from the fact that the fixed annual p r e m i u m is m u c h in excess of the annual risk during the earlier years of the policy, an excess m a d e necessary in order to balance the deficiency of the s a m e p r e m i u m to meet the annual risk during the latter years of the policy. (1) This excess of the p r e m i u m paid over the annual cost of insurance, with accumulations of interest, constitutes the surrender value. (2) T h o u g h this excess of p r e m i u m s paid is legally the sole property of the company, still, in practical effect, though not in law, it is the m o n e y of the assured deposited with the company in a d v a n c e to m a k e up the deficiency in later p r e m i u m s to cover the annual cost of insurance, instead of being retained by the assured and paid by h i m to the c o m p a n y in the shape of greatly-increased premiums, w h e n the risk is greatest. (3) It is the net reserve required by law to be kept by the c o m p a n y for the benefit of the assured and to be maintained to the credit of the policy. (4) So long as the policy remains in force, the company has practically no beneficial interest in it except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the insured. This is the practical, though not the legal, relation of the c o m p a n y to this fund. (Sun Life Assurance Co. of C a n a d a vs. Ingersoll, 41 Phil. 331 [1921].) Other required policy provisions. In addition to the incontestable provision (Sec. 227[b]; see Sec. 48.), the life insurance policy is also required to include several other basic policy provisions. A m o n g them are: (1) Grace period provision. — T h e purpose of the provision (Sec. 227[a].) is to give the policyholder an additional period of time within which to pay a premium he has not paid on or before the due date. In addition, the provision clarifies the respective rights of the beneficiary and the insurance company if the insured dies after the due date of the unpaid premium but within the grace period. In that event, the insurance is considered to be

538

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in force on the same basis as if the premium had been paid but the insurance company is entitled to deduct the unpaid premium from the proceeds before making settlement; i (2) Entire contract provision. — T h e policy is also required to provide specifically that the policy, and also if desired by the insurance company, the application, a copy of which is attached to the policy, shall constitute the entire contract b e t w e e n the insurance company and the policy owner. (Sec. 227[c].) In the very early days of life insurance, insuring organizations sometimes include in life insurance contracts, by reference, the provision of such documents as the charter and by-laws of the organization. This had the legal effect of making the indicated provisions of the charter and by-laws as part of the life insurance contract although there w a s no w a y to k n o w the contents of such provisions without examining the documents themselves. Since most policy owners did not h a v e access to these documents, their rights and privileges under the life insurance policy could be significantly modified without any opportunity on their part to k n o w the extent of such modifications. T h e purpose of the entire contract provision w a s to assure the policy owner that the policy itself w o u l d include the entire text of his contract with the company. Often, the entire contract provision is combined with provisions concerning representations and warranties; (3) Misstatement of age provision. — T h e age provision of the insured is of basic importance in determining the correct premium rate for life insurance. If his age has b e e n misstated no matter how innocently, the result m a y be a significant error in the amount of premiums paid as compared to the p r e m i u m that should have been paid. Such errors could be corrected either by appropriate premium adjustment or by adjusting the a m o u n t of insurance. The required provision (Sec. 227[d].) specifies the latter method; and (4) Reinstatement provision. — T h e purpose of the provision (Sec. 227[j].) is to clarify the requirements for restoring a policy that has lapsed to reinstate a policy means to restore the s a m e (Lalican vs. Insular Life Assurance Co. Limited, 5 9 7 S C R A 159 [2009], citing De Leon, Insurance C o d e of the Philippines

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Annotated [2002 ed.], p. 538.) to premium-paying status after it has been permitted to lapse. T h e law requires that the policy owner be permitted to reinstate the policy, subject to the violations specified, any time within three (3) years from the date of default of p r e m i u m payment. A longer period, being more favorable to the insured, m a y be used. "Evidence of insurability" referred to in Section 227(j) generally is held to be considerably a broader phrase than "evidence of good health" and includes such other factors as the insured's occupation, habits, financial condition, and other risk selection factors, (see "Legal Concepts and Contract Provisions," by J . E . Greider, in L H I H , pp. 116-118.)

Optional policy provisions. In addition to the provisions that are required by law to be included in the life insurance policy, several provisions customarily are included for other reasons, though they are not required. A m o n g them are: (1) Suicide provision. — In the absence of specific policy exclusion, the proceeds of a life insurance policy would be payable in the event of the suicide of the insured just as they w o u l d be on his death from any other cause. However, to permit a person to apply for life insurance with the intention of taking his o w n life in order to bring about the payment of the proceeds to his beneficiary, w o u l d violate a basic insurance principle — that the loss insured against must be fortuitous. Life insurance companies, therefore, are permitted (though not required) to include a suicide clause in their policies and it is customary to do so. An illustrative provision reads as follows: " I f within two years from the date of issue the insured shall die by suicide, whether sane or insane, the amount payable by the company shall be the premiums paid"; Section 180-A requires that the exclusion be limited to two (2) years. This period is thought sufficient to avoid the possibility that an application for life insurance will be submitted by a person w h o specifically contemplates taking his own life. At the same time, treating suicide of the insured after two (2) years from the issue or reinstatement date on the same basis as any other

540

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death protects the interest of the beneficiary or beneficiaries, whose needs, in most instances, prompted the purchase of the insurance. Note that the period of the inconstestable clause (Sec. 227[b]; Sec. 48.) and that of the suicide clause (Sec. 180-A.) run concurrently for a period of two (2) years from the policy issue date. A suicide clause, however, merely defines the risk the insurer is willing to assume. Denial of a claim because the insured's death resulted from suicide within the two-year period, therefore, is not a contest of the policy under the incontestable provision; (2) Assignment provision. — It is customary to include in individual life insurance contracts a provision relating to assignment. An illustrative assignment provision reads as follows: "The c o m p a n y assumes no responsibility for the validity or effect of any assignment of this policy, and no assignment will be recognized until it has been duly filed with the company." In the absence of a specific policy provision to the contrary, a policyowner is a s s u m e d to h a v e the right to assign his life insurance policy if and as he wishes. T h e usual assignment provision, therefore, is included to clarify the responsibilities of the c o m p a n y in the event the policy is assigned; (3) Ownership provision. — T h e provision is intended to clarify the rights of the o w n e r and the circumstances under which those rights m a y be exercised. T h e exact w o r d i n g of such provisions differs widely from c o m p a n y to c o m p a n y but the following provision is illustrative: " T h e o w n e r is as designated in the application for this policy unless otherwise provided by indorsement. T h e o w n e r shall, during the lifetime of the insured, have the sole right to exercise any privilege and to receive every benefit under this policy, subject to the rights of any irrevocably designated bene-ficiary," (4) War clauses. — Policy provisions that exclude w a r deaths from the coverage provided by the policy generally are referred to as "war clauses." Life insurance companies usually do not make use of such clauses except in times of w a r or w h e n w a r is imminent; and w h e n the war emergency has ended, the clauses

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541

usually are cancelled. It is customary to divide war clauses into two general clauses, to wit: (a) A status clause or that which provides that if the insured's death occurs while he is in military service, the c o m p a n y ' s liability w o u l d be limited to the amount of the p r e m i u m paid or the policy reserve, if larger; and (b) A result clause or that which limits the company's liability to the larger of the a m o u n t of premiums paid or the reserve, if the insured's death occurs as the result of war. This clause, being the m o r e liberal, is more widely used than the status clause; (5) Payor clause. — A life insurance c o m p a n y m a y offer a w a i v e r of p r e m i u m benefit often called a "payor benefit," which m a y be added to life insurance policy insuring the life of a child. This benefit is available for a small additional premium and is provided in an indorsement or rider, to be attached to the policy insuring the child. Such a clause provides that the premium on the child's insurance will be waived in the event premium payor (usually a parent of the insured child) dies or becomes totally disabled (as defined in the coverage) prior to the child's attainment of a specified age such as 21 or 25. T h e purpose of the payor clause is to assure that the insurance on the life of the child will be kept in force until the child reaches the specified age though the p r e m i u m payor m a y die or become totally disabled prior to that time; and (6) Policy change provision. — M o s t life insurance contracts can be changed with the consent of the company, to a different plan of insurance, if the owner wishes. Policy provisions granting this right range from very simple to relatively complex. The purpose of such provisions is to set forth the conditions governing such changes. Usually, a change m a y be m a d e to higher premium plans for the same or a smaller amount of insurance without evidence of insurability, although the owner customarily will be required to pay the difference in cash values or reserves between the policy he is exchanging and the one he is receiving. If the change is to a lower premium plan, it is customary to require satisfactory

542

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evidence of insurability and the difference in the reserves for the two plans is usually refunded by the company. {Ibid., pp. 118120.) Sec. 228. 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 days or of one 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 non-payment of premiums after it has been in force for two 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 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 a person eligible for insurance to furnish evidence of individual in-

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THE BUSINESS OF INSURANCE Title 9. — Policy Forms

surability 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 reserve 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 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 an individual certificate setting forth 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 days after such termination, and provided further that: (1) The individual policy shall be on any one of the forms, except term insurance, then customarily 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

543

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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 person, every person insured thereunder at the date of such termination whose insurance terminates and who has been so insured for five years prior to such termination date shall be entitled to have issued to him by the insurer and 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 smaller of (a) the amount of the person's life insurance protection ceasing less the amount of any life insurance for what he is or becomes eligible under any group policy issued or reinstated by the same or another reinsurer within thirty days after such termination, and (b) two thousand pesos. 0) A provision that if a person insured under the group policy dies during the thirty-day period within which he would have been entitled to an individual policy issued to him in accordance with (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. The provisions of paragraph (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

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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 non-forfeiture provisions as are required of individual life policies.

Growth of group insurance business. Group insurance (see Sec. 50, last par.), a major component of e m p l o y e e benefit plans, provides an insurance technique of considerable economic, social, and political significance. T h e purposes of the first group life insurance policies were macabre. In the early nineteenth century, slave traders named themselves the beneficiaries under insurance on the lives of shiploads of slaves b e i n g transported from Africa to America. A few decades later, group insurance w a s obtained on the lives of C h i n e s e laborers being transported from China to Panama to w o r k o n the P a n a m a Canal. It w a s not until after World War II that group insurance b e c a m e a d o m i n a n t feature of the insurance marketplace in the United States although it w a s confined largely to personal insurance (life, health, and accident) and m u c h less in property and liability insurance. (R.H. Jerry, II, op. cit., pp. 627-628.) In the United States today, a substantial and increasing part of the labor force h a s protection under group insurance, and an increasing proportion of all other persons is insured by some form of dependents' coverage, senior citizen coverage, and the like. G r o w t h of the group business over the years suggests that ultimately, the n u m b e r of persons insured might be almost as great as under social insurance. ("Fundamental Characteristics of Group Insurance," by Davis W. Gregg, in LHIH, p. 351.) 2

T h e earliest group life coverages in the United States were written to cover loss of life among a group of persons during a voyage. On this basis, Manhattan Life Insurance Company, in 1854, insured the lives of 180 Chinese laborers who were transported from China to Panama to work on the canal. Between 1910 and 1912, however, the Equitable Life Assurance Society of the U.S. developed two group life insurance plans under which all the employees of an employer were insured under one policy issued to the employer, at a premium paid by the employer, but for the benefit of the employee's survivors or designated beneficiaries. (JE. Greider & W.T. Beadles, op. cit., pp. 559-560.)

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Sec. 228

Social insurance and private insurance distinguished. 3

Social (government) insurance is generally considered to have several basic characteristics that distinguish it from private insurance. O n e authoritative textbook indicates that social insurance differs from the most c o m m o n forms of private insurance in four important respects: 4

"(1) Participation is compulsory (with a few exceptions) for all eligible persons. Otherwise s o m e individuals w o u l d elect not to be covered and the policy objective of a floor of protection for all members of a defined group w o u l d be thwarted. (2) T h e benefits are prescribed by law. There are no contracts, and it is possible (but highly improbable) that Congress will rescind the benefits in the future. Periodic c h a n g e s in the benefit structure are very likely through changes in the law. (3) The system redistributes i n c o m e in addition to providing protection through a pooling arrangement. T h e lower-income groups, the insureds with m a n y dependents, and the participants w h o were elderly w h e n the system w a s inaugurated receive m o r e benefits for their contributions than m o s t other participants. If this were not true, it w o u l d be impossible to achieve the public policy objective of a floor of protection for all participants, since some insureds w o u l d be unable to afford adequate protection. Old-age benefits during the early years of the s y s t e m w o u l d 'Government insurance, strictly speaking, means an insurance enterprise operated by the State with the government assuming ability for the payment of losses and collection of the premiums. The term is applied, however, to a variety of system ranging from mere' government subsidies to the fullest government control and responsibility. (Riegel, Miller, & Williamson, Jr., op. cit., p. 84.) Examples of laws providing for this kind of insurance are the Revised Government Service Insurance Act of 1977 (Pres. Decree No. 1146.), with respect to insurance of government employees, the Social Security Act of 1954 (R.A. No. 1161, as amended.), with respect to insurance of employees, in private employment, the Philippine Deposit Insurance Corporation Act (R.A. No. 359, as amended.), with respect to insurance of deposits of all banks which are entitled to the benefits of insurance under the Act, and the Philippine Crop Insurance Corporation Act (Pres. Decree No. 1467, as amended.), providing palay crop insurance to farmers, participation on which is compulsory upon farmers obtaining production loans for policy under the supervised credit program, and optional on the part of self-financed farmers. John G. Turnbull, C. Arthur Williams, Jr., and Earl F. Cheit, Economic and Social Security (3rd Ed.; New York: The Ronald Press Co., 1968, p. 23.) 4

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also be limited. T h e benefits are not equitable in the private insurance sense, but they are not meant to be. Other standards of performance h a v e been d e e m e d more important. In short, the system stresses 'social adequacy' rather than 'individual equity.' The contribution rates are scheduled, but Congress m a y and has revised the schedule periodically. Consequently, bankruptcy is impossible as long as the government has an effective taxing power, although it is conceivable that the taxes m a y become unbearable. An individual's contribution m a y vary yearly even though the tax rate remains fixed, for the base (annual income) u p o n which the tax is levied m a y fluctuate from year to year. T h e s e fluctuations m a y h a v e little or no effect on the benefits. (4) T h e government system is a monopolistic system. However, public pressure forces a continual reassessment of benefits and contribution rates." (cited by David W. Gregg, supra, pp. 351-352.)

Group insurance and individual insurance contrasted. W h e n group insurance is contrasted with individual insurance, a n u m b e r of unique characteristics are evident. (1) First, and probably foremost, is the group selection of risks as contrasted to individual selection. With few exceptions, group insurance is issued without medical examination or other evidence of individual insurability. 5

(2) Another characteristic of group insurance is the coverage of a number of persons under a single contract. Interestingly, the persons insured are not actually parties to the contract, since legally, the contract is between the insurer and the group policyholder, most c o m m o n l y an employer.

5

The factors influencing insurability and premiums, particularly on life or health insurance, are fairly now homogeneous for a group such as the full-time employees of a particular company. Thus, the mere fact that all of the members are employed full-time is a strong positive indication of insurability, and, therefore, the usual physical examination and other methods of screening applicants for life or health insurance can be dispensed with. Membership in the group becomes the necessary and sufficient condition to insurability under the group plan. (J.F. Dobbyns, op. cit., pp. 13-15.)

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(3) A third characteristic of group insurance is that it is essentially low-cost mass protection. A number of economies of large volume operation are obtained through mass distribution and mass administration methods. (4) Another special feature of group insurance lies in the fact that premiums usually are subject to experience rating. Except for small groups, the actual experience of an individual group m a y figure heavily in the determination of dividends or p r e m i u m rates of adjustment. Generally speaking, the larger the group, the greater the significance attached to its o w n claims and expenses in any policy year. Group insurance contracts, as a rule, are of a continuing nature, in that the contract and the plan m a y last long b e y o n d the lifetime, or membership in the plan, of any one individual. N e w persons are added to the group from time to time and others terminate their coverage. However, it is relatively rare for group coverage to be discontinued by an employer, since normally it is part of his overall employee benefit plan. It is less rare for group plans to be changed from one insurer to another. (Ibid., pp. 3 5 2 353.)

Types of group insurance. Clear and definitive classification of the types of group life a n d health insurance is difficult. Yet, brief and reasonably descriptive definition of the more significant forms s e e m s desirable. (1) Group life insurance. — Fundamentally, all forms of group life insurance are concerned with the p a y m e n t of a benefit u p o n the death of the person insured. (a) Group term. — One-year renewable term life insurance issued under a group contract to employers, creditors, unions, associations, and other eligible entities. (b) Group permanent. — Life contract that provides for s o m e permanent or cash value units. premium group permanent used been the most c o m m o n forms.

insurance under a group form of accumulation of G r o u p paid-up and level in pension funding, h a v e

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(c) Group accidental death. — A form of life insurance payable upon death as a consequence of accidental bodily injury. (Most often, this insurance is written as "group accidental death and d i s m e m b e r m e n t " coverage and, strangely, is usually classified as a form of group health insurance. Since the accidental death part of the coverage represents more than 9 0 % of the benefit payments, it is here classified as a special form of group life insurance.) G r o u p life insurance m a y be further classified by the nature of the group insured as e m p l o y e r group life, association group life, and servicemen's group life, a m o n g others. So-called "wholesale life i n s u r a n c e " has m a n y characteristics of group life yet it provides individual insurance policies with s o m e individual underwriting characteristics. "Survivors' benefit group life" is an increasingly popular form of coverage that pays an annuity to the insured's surviving spouse or children upon his death. (2) Group health insurance.—It is concerned with the provision of benefits for the loss of earning p o w e r due to disability, or for medical expenses due to illness, injury, or preventive care. Under this type are group disability i n c o m e and group medical expense insurance. Other types of group health insurance are classified essentially by the nature of the group insured or by the nature of the insurer or provider of services. T h e so-called "franchise health insurance" has certain characteristics of group health insurance but essentially is individual health insurance protection provided to groups of persons in the s a m e occupation or profession or to groups w h o cannot be written on a regular group basis under a single master policy (e.g., groups of less than ten employees). (Ibid., pp. 353-354.) Sec. 229. The term "industrial life insurance" 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 "industrial policy" are printed upon the policy as part of the descriptive matter.

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An industrial life policy 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; Provided, That the provisions of this paragraph shall not apply when the premium on the policy remains unpaid for a period of three months or twelve weeks after the grace period has expired. Sec. 230. 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 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 month or thirty 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 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 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;

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THE BUSINESS OF INSURANCE Title 9. — Policy Forms

(d) A provision that if the age of the person insured, or the age of any other 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 condition specified therein; (f) A provision that in the event of default in premium payments after three full years' premiums have been paid, the policy shall be converted into a stipulated form of insurance, and that in the event of default in premium payments after five full years' premium 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 per centum of the maximum amount insured by the policy and dividend additions thereto, if any, when the issue age is under ten years, and less an amount not to exceed two and one-half per centum of the current amount insured by the policy and dividend additions thereto, if any, if the issue age is ten 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 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 months after the application therefor is made; (h) A table that shows in figure the non-forfeiture benefit available under the policy every year upon default in

551

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payment of premiums during at least the first twenty 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 days from the due date of the premium in default, to notify the insurer in writing to which one of such forms he has selected; (j) A provision that the policy may be reinstated at any time within two years from the due date of the premium in default unless the case 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 per centum 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 months after receipt of such proof; (I) 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 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

Sec. 231

THE BUSINESS OF INSURANCE Title 9. — Policy Forms

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 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 non-participating 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 non-forfeiture 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 years of less but such term policies shall specify the mortality table, rate of interest, and method of computing reserves. Sec. 231. 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 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 had been rejected for insurance, unless such right be conditioned upon a

553

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THE INSURANCE CODE OF THE PHILIPPINES

Sees. 229-231

showing by the insurer that knowledge of such 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 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. Industrial life insurance. Industrial life insurance is d e n n e d in Section 2 2 9 . (par. 1.) T h e term derives from the fact that it is tailored to suit the needs of the class that still accounts for the majority of its purchasers —

Sees. 229-231

THE BUSINESS OF INSURANCE Title 9. — Policy Forms

555

the urban industrial class of blue-collar workers. (J.F. Dobbyns, op. cit., p. 11.) Although it is essentially whole life, term, or endowment insurance, it is distinguished by certain c o m m o n characteristics that m a k e it worthy of special treatment. (1) Written in small amounts. — In contrast to ordinary life insurance, industrial life insurance is written in small amounts. P r e m i u m s are payable either monthly or oftener and collected by c o m p a n y representatives at the h o m e of the policyholders. To meet the requirements of the industrial classes, insurers in the United States were asked in the early 1900s to provide insurance with premium p a y m e n t s adjusted to the needs of workers. This was done by m a k i n g the basic insurance coverages available in smaller amounts and so arranging premiums that they were covered by a small weekly payment of $0.05, $0.20, $0.25, or more. (2) Sold through individual solicitation. — M o s t industrial insurance is sold through individual solicitation without a medical examination, the insurer relying upon statements in the application by the applicant and the agent. M a n y policies are written on entire families including each of the children. The m e t h o d of individual solicitation per policy and collecting the premiums and the expense of handling small sums which add materially to the cost, lack of a medical screening, and the higherthan-average death rate a m o n g low-income groups account for the rate of industrial life insurance to be higher than ordinary life insurance. However, for m a n y insureds, the collection service is just as m u c h a benefit as the insurance itself, enabling many persons w h o otherwise could or would carry no insurance to have s o m e protection. (3) Adopted to a particular market. — There are now few differences between the provisions in an industrial life insurance policy and that in most ordinary policies. The industrial life policy contains m a n y of the nonforfeiture provisions and double indemnity provisions without extra premium. Industrial life insurance is, in the strict sense, not a different form of insurance protection but rather is a plan adapted to a particular market. It

556

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Sees. 229-231

has historically been of substantial importance. It introduced the uses of life insurance and the habit of thrift to many low-income individuals, (see D.L. Bickelhaupt, op. cit., pp. 259-260.) Non-payment of premiums by buyers of industrial life policies. Under Section 229, industrial life policies shall not lapse for non-payment of premium during a period of three months or twelve weeks after the expiration of the grace period if such nonpayment were due to the failure of the c o m p a n y to send its representative to the insured to collect such premium. "These policies are usually bought by those w h o do not have fixed income, such as market vendors, j e e p n e y drivers, and the like. A thirty-year-old insurance buyer of an industrial life policy with a face amount of P3,000.00 will only pay a p r e m i u m of around P2.60 per week. Considering that this kind of buyer finds it difficult to save and accumulate a b i g g e r a m o u n t for annual, semi-annual or quarterly p r e m i u m payments, he w o u l d certainly w e l c o m e an arrangement w h e r e b y the p r e m i u m s w o u l d be payable weekly if such p r e m i u m s are collected from t h e m directly. It would, therefore, be unfair to b u y e r s of industrial life policies if their policies should lapse after the usual 30-day grace period for non-payment of p r e m i u m if such n o n - p a y m e n t w a s due to the failure of the c o m p a n y to send its representative to the insured to collect such premium." ("Supervision a n d Regulation of the Insurance Business," Journal of the IBP, First Quarter, 1976, p. 27, by C o m m . G. Cruz-Arnaldo.) Existence of insurable interest. The usual rules regarding insurable interest h a v e frequently been held not to apply to industrial life insurance for several reasons. They are: (1) Since the proceeds of industrial life policies are typically small, they present little danger as an inducement to murder; (2) T h e investigation and processing of the potential defense in each case would be time-consuming and nullify the advantage

Sees. 229-231

THE BUSINESS OF INSURANCE Title 9. — Policy Forms

557

of speedy p a y m e n t of proceeds for funeral and burial expenses under the facility of payment clause (see Sec. 230[k, m].); and (3) In view of the diminutive size of the proceeds, the addition of pointless administrative costs for either the insurer or the beneficiary could destroy the current usefulness of this type of insurance. W h i l e there exists the possibility of wagering by buying up industrial life policies of those unable to meet the premiums, the evil has not b e e n considered sufficiently serious to impose the insurable interest requirement on such policies. (J.F. Dobbyns, op. cit, pp. 68-69.)

— oOo —

T i t l e 10 VARIABLE

CONTRACTS

Sec. 232. (1) No insurance company authorized to transact business in the Philippines shall issue, deliver, sell or use any variable contract in the Philippines, unless and until such company shall have satisfied the Commissioner that its financial and general condition and its methods of operations, including the issue and sale of variable contracts, are not and will not be hazardous to the public or to its policy and contract owners. No foreign insurance company shall be authorized to issue, deliver or sell any variable contract in the Philippines, unless it is likewise authorized to do so by the laws of its domicile. (2) The term "variable contract" 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 regulation under said acts.

'Now, The Securities Regulation Code Act. (R.A. No. 8799.) "Republic Act No. 2629. 558

Sees. 233-236

THE BUSINESS OF INSURANCE Title 10. — Variable Contracts

(3) In determining the qualifications of a company requesting authority to issue, deliver, sell or use variable contracts, the Commissioner shall always consider the following: (a) the history, financial and general condition of the company: Provided, That such company, if a foreign company, must have deposited with the Commissioner for the benefit and security of its variable contract owners in the Philippines, securities satisfactory to the Commissioner consisting of bonds of the Government of the Philippines or its instrumentalities with an actual market value of two million pesos; (b) the character, responsibility and fitness of the officers and directors of the company; and (c) the law and regulation under which the company is authorized in the state of domicile to issue such contracts. (4) If after notice and hearing, the Commissioner shall find that the company is qualified to issue, deliver, sell or use variable contracts in accordance with this Code and the regulations and rules issued thereunder, the corresponding order of authorization shall be issued. Any decision or order denying authority to issue, deliver, sell or use variable contracts shall clearly and distinctly state the reasons and grounds on which it is based. Sec. 233. Any insurance company issuing variable contracts pursuant to this Code may in its discretion issue contracts providing a combination of fixed amount and variable amount of benefits and for option lump-sum payment of benefits. Sec. 234. Every variable contract form delivered or issued for delivery in the Philippines, and every certificate form evidencing variable benefits issued pursuant to any such contract on a group basis, and the application, rider and endorsement forms applicable thereto and used in connection therewith, shall be subject to the prior approval of the Commissioner. Sec. 235. Illustration of benefits payable under any variable contract shall not include or involve projections of past investment experience into the future and shall conform with the rules and regulations promulgated by the Commissioner. Sec. 236. Variable contracts may be issued on the industrial life basis, provided that the pertinent provisions of

559

560

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 237

this Code and of the rules and regulations of the Commissioner governing variable contracts are complied with in connection with such contracts. Sec. 237. Every life insurance company authorized under the provisions of this Code to issue, deliver, sell or use variable contracts, shall, in connection with same, establish one or more separate accounts to be known as separate variable accounts. All amounts received by the company in connection with any such contracts which are required by the terms thereof, to be allocated or applied to one or more designated separate variable accounts shall be placed in such designated account or accounts. The assets and liabilities of each such separate variable account shall at all times be clearly identifiable and distinguishable from the assets and liabilities in all other accounts of the company. Notwithstanding any provision of law to the contrary, the assets held in any such separate variable account shall not be chargeable with liabilities arising out of any other business the company may conduct but shall be held and applied exclusively for the benefit of the owners or beneficiaries of the variable contracts applicable thereto. In the event of the insolvency of the company, the assets of each such separate variable account shall be applied to the contractual claims of the owners or beneficiaries of the variable contracts applicable thereto. Except as otherwise specifically provided by the contract, no sale, exchange or other transfer of assets may be made by a company, between any of its separate accounts or between any other investment account and one or more of its separate accounts, unless in the case of a transfer in to a separate account, such transfer is made solely to establish the account or to support the operation of the contract with respect to the separate account to which the transfer is made, or in case of a transfer from a separate account, such transfer would not cause the remaining assets of the account to become less than the reserves and other contract liabilities with respect to such separate account. Such transfer, whether into or from a separate account, shall be made by a transfer of cash, or by a transfer of securities having a valuation which could be readily determined in the market place, provided that such transfer of securities is approved by the Commissioner. The Com-

Sees. 238-240

THE BUSINESS OF INSURANCE Title 10. — Variable Contracts

missioner may authorize other transfers among such accounts, if, in his opinion, such transfers would not be inequitable. All amounts and assets allocated to any such separate variable account shall be owned by the company and with respect to the same company shall not be nor hold itself out to be a trustee. Sec. 238. Any insurance company which has established one or more separate variable accounts pursuant to the preceding section may invest any re-invest all or any part of the assets allocated to any such account in the securities and investments authorized by sections one hundred ninety-eight, two hundred, two hundred one and two hundred two for any of the funds of an insurance company in such amount or amounts as may be approved by the Commissioner. In addition thereto, such company may also invest in common stocks or other equities which are listed on or admitted to trading in a securities exchange located in the Philippines, or which are publicly held and traded in the "over-the-counter market" as defined by the Commissioner and as to which market quotations have been available; Provided, however, That no such company shall invest in excess of ten per centum of the assets of any such separate variable account in any one corporation issuing such common stock. The assets and investments of such separate variable accounts shall not be taken into account in applying the quantitative investment limitations applicable to other investments of the company. In the purchase of common capital stock or other equities, the insurer shall designate to the broker, or to the seller if the purchase is not made through a broker, the specific variable account for which the investment is made. Sec. 239. Assets allocated to any separate variable account shall be valued at their market value on the date of any valuation, or if there is no readily available market, then, in accordance with the terms of the variable contract applicable to such assets, or if there are no such contract terms then in such manner as may be prescribed by the rules and regulations of the Commissioner. Sec. 240. The reserve liability for variable contracts shall be established in accordance with actuarial procedures that recognize the variable nature of the benefits provided, and shall be approved by the Commissioner.

561

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Sees. 232-240

Variable life insurance defined. Variable life insurance has been defined as that form of life insurance contract under which the benefits, payable upon death or surrender, a n d / o r the premiums vary with the investment performance of the assets derived from the sale of those contracts. As defined, such insurance must be distinguished from life insurance contracts with benefits dependent on s o m e index as, for example, the C o n s u m e r Price Index (CPI). (see "Variable Life Insurance," by Harry Walker and Jerome S. Golden, in L H I H , p. 227.) 1

Fundamental idea behind variable life contracts. Variable life insurance is a n e w product being developed in the insurance business, designed to c o m b i n e the traditional protection and savings functions of life insurance with the growth potential associated with equities, particularly c o m m o n stock, (ibid.) T h e fundamental idea is to c h a n g e the traditional fixedvalue-life insurance, where the insurer pays a stated face value. The problem is that the specified face value does not attempt to guarantee any particular purchasing p o w e r for the consumer. In an era of continuing inflation, this is a real disadvantage to the life insurance beneficiary. To offset this disadvantage, the variable life contract bases its reserves and policy a m o u n t payable on investments primarily devoted to c o m m o n stocks. T h e theory is that as inflation raises c o m m o n stock values and dividends, the values paid u n d e r the contract will also increase hopefully as m u c h as purchasing p o w e r has decreased. T h e death payments are usually guaranteed not to fall b e l o w a m i n i m u m face value, b u t could increase if the equity values increased. (D.L. Bickelhaupt, op. cit., p. 282.) "A popular yardstick that both economists and housewives use to gauge the rise and fall of the cost of living. The experience of 1969 in the United States in which the cost of living as measured by the CPI rose by more than 6% while at the same time there was a bearish stock market, dramatizes this difference. Variable life insurance, so defined would not provide a guarantee of an increase in benefits corresponding to an increase in the cost of living, as would an index contract tied to the CPI. (Ibid.)

Sees. 232-240

THE BUSINESS OF INSURANCE Title 10. — Variable Contracts

563

Underwriting a n d administrative aspects. T h e administration of a variable life contract is more complex than that for a fixed-benefit contract. T h e following is a partial list of the administrative functions and the impact of the variable features on such functions: (1) Accounting. — Variable life insurance (VLI) operations will involve the maintenance of two investment accounts — the c o m p a n y ' s general account and a separate account. There probably will be a continuous flow of transactions between the two accounts. F o r example, gross p r e m i u m s under a V L I contract could be credited to the general account, and thus net premiums would h a v e to be transferred from the general to the separate account, (see Sec. 237.) (2) Reporting to policyowners. — T h e N A I C (National Association of Insurance C o m m i s s i o n e r s in the U.S.) model regulation requires that policyowners be mailed annually after the first year, a statement of the dollar amount of their death benefit as of a date not more than four m o n t h s previous to the mailing. In addition, the insurer is required to send the policyowner a statem e n t of the investments held in the separate account. (3) Payment of claims. — T h e payment of death benefits may involve additional calculations for V L I ' d e p e n d i n g upon how often death benefit is varied. It is expected that death benefits under most designs w o u l d vary at least annually, with some designs having death benefits which m a y vary as often as daily. Cash values probably w o u l d vary daily to reflect the most current market values in order to avoid investment anti-selection against the insurer. (4) Reinstatement and change. — Contract changes involving variable life insurance must reflect the variable nature of the contract. An unresolved question is whether companies entering the V L I market will m a k e changes from existing fixed benefit to variable life insurance on a basis that involves no new acquisition costs to the policyowners and no greater compensation to the agent than if the original policy were not changed. ("Variable Life Insurance," supra, pp. 234-235.) — oOo —

T i t l e 11 CLAIMS

SETTLEMENT

Sec. 241. (1) 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. 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: (a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue; (b) failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; (c) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; (d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (e) 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. (2) 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 564

Sec. 241

THE BUSINESS OF INSURANCE Title 11. — Claims Settlement

565

of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under this section. (3) If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of non-compliance with paragraph (1) 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.

Unfair claims settlement practices. Claims settlement is the indemnification of the loss (see Sec. 84.) suffered by the insured. T h e claimant m a y be the insured or reinsured, the insurer w h o is entitled to subrogation, or a third party w h o has a claim against the insured. Section 241 enumerates the grounds w h i c h shall be considered as sufficient cause of the suspension or revocation of an insurance c o m p a n y ' s certificate of authority. It is designed to eliminate unfair claim settlement practices. ILLUSTRATIVE CASES: 1. Repair done by insured after insurer failed to take action despite notice of accident. Facts: On its way to Baguio, a spark coming from the generator caught a fuel line, causing fire inside engine of D's vehicle which is covered by a comprehensive motor policy. R (insurer) contended that there was violation of the "Authorized Repair Limit Clause." It appeared that notice of the accident was sent to R without the latter taking any action thus compelling D to have the vehicle towed to Manila and repaired. Issue: Is D entitled to indemnity under the foregoing circumstances? Held: Yes. D, under the situation, acted in evident good faith, with no other purpose but to expedite the repair, to prevent further inconvenience, it appearing that loss of use being a consequential loss is excepted from the policy. R was ordered to pay the amount of repair and towing expenses as limited by the policy, plus attorney's fees. (Phil. Episcopal Church vs. The New Zealand Insurance Co., Ltd., I.C. Case No. 40, March 24,1977.)

THE INSURANCE CODE OF THE PHILIPPINES

566

Sec. 241

2. Repair done by an insured after insurer failed to settle claim despite the adjuster's report. Facts: A claim was filed by D (insured) for damage caused to his truck covered by a commercial vehicle comprehensive policy with R (insurer) which assigned its adjuster to investigate and inspect the damaged vehicle. An estimate of damage by C. Machineries, Inc. was submitted by the adjuster. Because R did not settle the claim despite the adjuster's report, D initiated the repair of the truck with C. Machineries, Inc. Issue: Is D entitled to be indemnified for the damages caused to his vehicle? Held: Yes. Same ruling as in preceding case. (/. Guanco vs. Summit Guaranty & Insurance Co., Inc., I.C. Case No. 115, May 31, 1977.)

Insurer's obligation to respect insured's decision to compromise third party claim. Where a policy gives the insurer control of the decision to settle claim or litigate it, the insurer nevertheless is required to observe a certain measure of consideration for the interest of the insured. In case of liability insurance, it is usually in the interest of the insured that the case be settled. The rule has c o m e to be generally accepted that while the express terms of the policy do not i m p o s e on the insurer the duty to settle the claim at all costs, there is an implied duty on his part to give due consideration to the interest of the insured in its exercise of the option to reject a compromise settlement and proceed with litigation. In insurance contracts, the law requires strict observance of the standards of good faith and fair dealing on the part of the insurer. (Yap vs. Perla C o m p a n a de Seguros, Inc., I.C. Case No. 103, Nov. 2 6 , 1 9 7 6 . ) EXAMPLE: In a suit for personal injuries filed by T against D (insured), D offered to settle for a sum that was within the policy limits of P10,000.00. R (insurer), however, refused the offer and elected to go with the trial of the case. T obtained a verdict for PI 5,000.00.

Sec. 241

THE BUSINESS OF INSURANCE Title 11. — Claims Settlement

Is R also liable for the P5,000.00, the amount in excess of the policy limits? It depends. If R acted honestly under the circumstances, the insurer has the right to refuse an offer of settlement which it believes to be unreasonable or excessive. If, on the other hand, the verdict resulted from R's negligence or bad faith, R shall be liable for the amount of P5,000.00. ILLUSTRATIVE CASE: Insured settled criminal case against him without notice to the insurer. Facts: A criminal case of Damage to Property through Reckless Imprudence was filed against D whose car, which was insured with R for own damage including third party liability, figured in a collision with another vehicle while the policy was still in force. R opted to proceed with the case notwithstanding the request of D that it be settled. When the time for his arraignment came, D failed to appear; hence, he was arrested and confined in jail, and was forced to secure another bond for his release. Having suffered the inconvenience of having a criminal case, D worked for a compromise settlement, thus resulting in the dismissal of the criminal case. R denied D's claim for reimbursement of P900.00 on the ground that D settled the case without first obtaining R's consent in violation of policy provisions. Issue: Is D entitled to reimbursement? Held: Yes. In the instant case, the case against the insured was not a civil suit; it was a criminal prosecution that he had to face. The risks to be assumed by D and R were, therefore, equal, further considering that the amount involved is small. By proceeding with the criminal case, R exhibited lack of consideration for D who was then facing the prospect of possible criminal conviction. Moreover, there was no showing that R exerted any effort to ascertain the fairness of the third party claim as to justify settlement. There was only outright rejection of D's demand that the case be settled. This alone shows R's lack of consideration arid responsibility for the interest of D. (Yap vs. Perla Compana de Seguros, Inc., supra.)

567

568

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 242

Sec. 242. The proceeds of a life insurance policy shall be paid immediately upon maturity of the policy, 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; Provided, however, That in the case of policy maturing by the death of the insured, the proceeds thereof shall be paid within sixty days, presentation of the claim and filing of the proof of the death of the insured. 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. 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.

Life insurance losses. (1) Definiteness of death. — T h e settlement of life claims usually is taken care of by the life insurance agent. Unlike other fields of insurance, in life insurance, there is no specialized claim adjuster, (see Sees. 323-324.) T h e definiteness of the death peril and the amount of insurance payable m a k e s it possible for the agent to arrange for the p a y m e n t from the insurer. In the unusual situation where a claim is questioned, the legal d e p a r t m e n t and claim department of the insurer c o m p a n y provide the necessary legal advice. (2) Proof of death. — Technically, the life insurance policy does not provide for payment upon death but rather for p a y m e n t upon submission of proof of death to the insurer. This notice m a y be given by a beneficiary or the legal representative of the insured. (3) Nature of claim. — Since life insurance in its simplest form pays a lump s u m (called a "face value") u p o n the death of the insured, m o n e y claims are death claims. (4) Income benefit provision. — E n d o w m e n t contracts and annuities m a y provide an i n c o m e benefit u p o n the survival of the insured to a fixed date or age. T h e choice as to the m e t h o d of

Sec. 242

THE BUSINESS OF INSURANCE Title 11. — Claims Settlement

569

payment m a y be m a d e by the insured or by the beneficiary if the insured has not m a d e a choice. (D.L. Bickelhaupt, op. cit., p. 192.)

Time for payment of claims in life policies. It depends. (1) In policies maturing u p o n the expiration of the term set forth therein, the proceeds are immediately payable to the insured, unless they are m a d e payable in installments or as annuity, in which case, the installments or annuities shall be paid as they b e c o m e due; and (2) In policies maturing at the death of the insured occurring prior to the expiration of the term stipulated, the proceeds are payable to the beneficiaries within 60 days after presentation of the claim and filing of proof of death.

Sixty-day period procedural in nature. W h e n the policy matures u p o n the death of the insured, the obligation of the insurer to pay arises as of that date. The sixtyday period fixed by law within w h i c h to pay the proceeds after presentation of proof of death is merely procedural in nature, evidently to determine the exact a m o u n t to be paid and the interest thereon to w h i c h the beneficiaries m a y 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 w h i c h it m a y even validly waive. It is the happening of the suspensive condition of death that renders the life policy matured and not the filing of proof of death, for even if such proof were presented, but it turns out later that the insured is alive, such filing does not give maturity to the policy. T h e delay in the presentation of proof of death does not alter the date of maturity of the policy nor the liability of the company to pay the proceeds of the insurance. (Fernandez vs. National Life Ins. Co., 105 Phil. 59 [1959].) T h e death of the insured m a y be sufficiently established by the death certificate issued by the Civil Registrar of the place where the insured died. (Londres vs. National Life Ins. Co. of the

570

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 243

Philippines, 94 Phil. 627 [1954].) The insurer's liability m a y arise on a presumption of death, (see Arts. 390, 3 9 1 , Civil Code.) Sec. 243. 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 thirty 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; but if such ascertainment is not had or made within sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein 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. Fire insurance losses. (1) Obligations of the insured. — T h e fire insurance contract imposes definite obligations u p o n the insured i m m e d i a t e l y u p o n the occurrence of a loss. (a) Two of these, the requirement of the notice of loss and obligation to file a proof of loss, are conditions with w h i c h the insured must comply before there is any liability on the part of the insurer, (see Sees. 88-89.) (b) Furthermore, after a fire, the insured is required to do everything reasonable to prevent further d a m a g e to the property insured. An insured w h o fails to protect his property adequately from further loss after the fire, cannot collect for the additional loss thus occasioned. (2) Options of settlement by the insurer. — T h e fire insurance contract usually provides for two options of settlement by the insurer: the payment of d a m a g e s for the loss; or the restoration of the subject matter of the insurance to its former condition, (see Sec. 172.) If the insurer elects to rebuild, the a m o u n t of d a m a g e recoverable for a breach is not thereafter limited to the a m o u n t of

Sec. 243

THE BUSINESS OF INSURANCE Title 11. — Claims Settlement

571

insurance. T h e option to repair or replace involves the insurer in the business of building construction and it is very uncommon to exercise the option. W h e n at all possible, insurers prefer to settle all losses by a cash payment, (see D.L. Bickelhaupt, op. cit., pp. 182-183.) (3) Sufficiency of proof of loss. — While the insurer, and the Insurance 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. Thus, where the insured's proof of loss is based on the report of insurer's adjuster w h i c h the insurer itself introduced in evidence, the report should be given weight and credence as it could very well be considered as an admission of its liability up to the amount r e c o m m e n d e d . It w o u l d have been pointless for the c o m p a n y to h a v e 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 w h i c h affords the greatest certainty of the facts in dispute and should not be perfunctorily dismissed as a worthless price of paper. (Noda vs. Cruz-Arnaldo, 151 SCRA 227 [1987].)

Liability insurance losses. (1) Difference from other losses. — The adjustment of liability claims differs from direct d a m a g e claims in that the claimant is not the insured. In representing the insurer, the adjuster (see Sec. 324.) is not dealing with a customer of the insurer as is the case in settling the usual direct d a m a g e property loss. (2) Claim for personal injuries. — Determining an adequate amount to compensate for a personal injury is not a simple process. In no other area of claim settlement are there so many uncertain factors where the measure of damages will, to a large degree, be influenced by the fallibilities and prejudices that are characteristics of h u m a n nature. Minor injuries that involve primarily a loss of time are not too difficult to handle. The same is true with respect to medical bills and hospital expenses, if any. The area of uncertainty in such

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cases involves suffering and inconvenience. The situation is quite different with more serious injuries. W h e n the injured party lives and suffers permanent injury, the problem of damages becomes increasingly complex. (3) Direct property damage claim. — T h e extent of a claim for damages to property is measured by the amount of the loss occasioned the property owner. The measure of loss is the difference in value between the property u n d a m a g e d and the property in its damaged condition. While the cost of repair may serve as a measure of damage, there is no legal obligation to restore a property to its original condition if the cost for repair exceeds the value of the property before the damage. For example, an old automobile virtually demolished, is worth a claim only for the value of the car before the accident less its salvage value. (4) Property damage liability claim. — O n e point in respect to property damage liability claims must be differentiated from direct loss insurance claims. A fire claim, for example, usually includes only payment for the direct d a m a g e to the property unless additional coverage is purchased to provide for the indirect results of the loss of use of the property, such as loss of profits or rents. In property d a m a g e liability claims, however, the loss of use may be included. T h e rental cost of a similar automobile, for instance, would be included in a liability claim against the person causing d a m a g e serious e n o u g h to prevent its use for a length of time. (D.L. Bickelhaupt, op. cit, pp. 187-189.)

Time for payment of claims in non-life policies. Section 243 refers to insurance policies other than life. T h e proceeds shall be paid within thirty (30) days after receipt by the insurer of proof of loss, and ascertainment of the loss or d a m a g e by agreement of the parties or by arbitration but not later than ninety (90) days from such receipt of proof of loss whether or not ascertainment is had or m a d e . In the case of Compulsory M o t o r Vehicle Liability Insurance, the rule is different, (see Sec. 385, par. 2.)

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Effect w h e r e claim is fraudulent. Under policies, particularly against fire, which contain a provision to the effect that all benefits under the policy shall be forfeited if the claim for loss be in any respect fraudulent, or if any false declaration be m a d e by the insured or his agent to obtain any benefit under the policy, a serious discrepancy between the actual loss and that claimed in the proof of loss, shall avoid it (see S e c . 75.) as w h e n the claim exceeds the true value of property lost by 5 0 % as to indicate that the false statements were made willfully and intentionally. (Tan Ti vs. S u n Life Ins. Office, 51 Phil. 212 [1927].) T h e s a m e is true of a claim for loss of articles and goods not existing at the time of the fire. (Sharuff & C o . vs. Baloise Fire Ins. Co., 64 Phil. 2 5 8 [1937]; Tuason vs. North China Insurance Co., Ltd., 47 Phil. 14 [1924]; East Furniture, Inc. vs. Globe & Rutgers Fire Insurance Co., 57 Phil. 5 7 6 [1932].) Fraud in any part of the claim taints the w h o l e . (Tuason vs. North China Insurance Co., supra; Uy Hu & C o . vs. Prudential Assurance Co., Ltd., 51 Phil. 231 [1927].) T h e m e r e filing of such a claim will exonerate the insurer. (Yu C u a vs. South British Insurance Co., 41 Phil. 134 [1920]; Acriche vs. L a w U n i o n & R o c k Insurance Co., 48 Phil. 592 [1926].) T h e burden of proving fraud rests on the insurer. T h e falsity of invoices submitted by the insured to prove actual existence at the b u r n e d premises of the stocks mentioned in the insured's inventory is evidence of a fraudulent claim and will avoid the insurer's liability. T h e insured's inventory of stocks is not binding on the insurer where it was prepared without the latter's intervention. (Yu B a n C h u a n vs. Fieldmen's Insurance Co., Inc., 14 S C R A 491 [1965].) Effect of false statements innocently made. T h e rights of the insured are, however, in no way prejudiced by false statements inadvertently and innocently made in his proofs of loss despite a clause in the policy providing for its forfeiture in the event of any false swearing; and although

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the false statements are as to a material matter to the insurer's liability, the insured can recover for his loss. This rule has been applied to the overvaluation of the property insured; a misstatement regarding the details of an accident or in reference to the cause of loss, as for example, a statement that goods were destroyed by fire, when, in fact, most of them were destroyed by water; a misstatement regarding the insured's title or ownership of the insured property; and the inclusion in the proofs of property not destroyed or not insured. (29 A m . Jur. 850851.) There m a y be honest mistake in valuation without fraud being involved. Numerical precision should not be expected. (Le Bog & Co. vs. Hanover Fire Ins. C o . of the City of N e w York, 1 S C R A 599 [1961].) Reference to arbitration. (1) Where arbitration not required should insurer deny liability. — A stipulation in a fire insurance policy that in the event of a loss, unless the c o m p a n y should deny liability, as a condition precedent to bringing an action on the policy by the insured, the latter should first submit to an arbitration, is o n e valid at law and unless it be first complied with, no action can be brought. But, if in the course of the settlement of the loss, the c o m p a n y should in any case refuse to pay, it will be d e e m e d to h a v e w a i v e d the condition precedent with reference to arbitration, and suit u p o n the policy will lie. (Chang vs. R o y a l E x c h a n g e Assur. Co., 8 Phil. 399 [1907].) 1

(2) Where arbitration limited to amount of insurer's liability. — An insurance contract provision for prior arbitration before resort to court action, which reads: " I f any dispute shall arise as to the amount of c o m p a n y ' s liability under this policy x x x" w a s held to apply only as to disputes regarding the a m o u n t of the insurer's liability b u t not as to any dispute as to the existence or non-existence of liability, i.e., where the insurer completely

'Where disagreements between the insured and the insurer cannot be resolved, Section 416 confers on the Insurance Commissioner the power to adjudicate claims and complaints, (see Sec. 385, par. 2.)

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denies any liability. (BayView Hotel, Inc. vs. Ker & Co., Ltd. 116 S C R A 327 [1982].) (3) Where arbitration required only when there is dispute. W h e r e there is an agreement to arbitrate and one party puts up a claim w h i c h the other disputes, the need to arbitrate is imperative. (Mindanao Portland C e m e n t Corp. vs. M c Donough Construction Co., 19 S C R A 814 [1967]; General Insurance & Surety Corp. vs. U n i o n Insurance Society of Canton, Lts., 179 S C R A 530 [1989].) Reference to arbitration was held not necessary before bringing suit in court w h e r e under the reinsurance agreement b e t w e e n two insurance companies, it is clear that the requirement of submitting for decision to arbitrators, the matter of the losses by fire or the liability of the parties thereto arises only if and w h e n the same is disputed by one of the parties, and there is no dispute b e t w e e n the parties because on the stipulation of facts, the defendant (reinsurer) has admitted that plaintiff (reinsured), h a s paid its liability to the insured, and has likewise admitted its liability as insurer u n d e r the agreement to pay the plaintiff its proportional shares, the amounts of which are not disputed. (Coquia vs. Fieldmen's Insurance Co., Inc., 26 S C R A 178 [1968].) (4) Where settlement by arbitration not invoked. — A clause in a policy concerning reference of dispute to an arbitrator, as a condition precedent to a right of action or suit upon the policy, was d e e m e d w a i v e d w h e r e none of the parties to the contract invoked the same, or m a d e any reference to arbitration during the negotiations preceding the institution of the action against the insurer; and in fact, counsel for both parties stipulated in the trial court that none of them had, at any time during said negotiations, even suggested the settlement of the issue between them by arbitration, as provided in said clause. (Ibid.) (5) Where insured voluntarily submitted to arbitration. — On the other hand, where the insured commenced an action to recover an insurance policy and then voluntarily agrees to an arbitration and submits his proofs to the arbitrator, in the absence of fraud or mistake, is estopped and bound by the award. (Chan Linte vs. Law Union & Rock Ins. Co., 42 Phil. 548 [1921].)

THE INSURANCE CODE OF THE PHILIPPINES

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Sec. 243

Right of insurer to subrogation. 2

(1) Subrogation, a normal incident of indemnity insurance. — Subrogation is the right of the insurer in certain cases, to take over the rights of the insured against the party responsible for his injury, loss or damage. Although m a n y policies including policies in the standard form n o w provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. (44 A m . Jur. 2d. 746.) Stated otherwise, w h e n the insurance c o m p a n y pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all the remedies w h i c h the insured may have for the recovery thereof. T h a t right is not dependent upon, nor does it grow out of any privity of contract or u p o n written assignment of claim. T h e loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer w h o is entitled to be subrogated pro tanto to any right of action w h i c h the insured m a y h a v e against the third person w h o s e negligence or wrongful act caused the loss. (Fireman's F u n d Ins. C o . & Firestone Tire & R u b b e r C o . vs. Jamilia, Inc., 70 S C R A 323 [1976]; Villacorta vs. Insurance Commission, 100 S C R A 4 6 7 [1980], cited u n d e r Sec. 2; M a l a y a n Insurance Co., Inc. vs. Court of Appeals, 165 S C R A 5 3 6 [1988]; see Art. 2207, Civil Code.) T h e principle of subrogation does not apply to life and accident policies as they are not contracts of indemnity. (2) Limit of recovery. — A subrogee cannot succeed to a right not possessed by the subrogor. T h e rights to w h i c h the subrogee succeeds are the same as, b u t not greater than the subrogor. Thus, as subrogee, the insurer, after paying the claim of the insured for damages under the insurance, is subrogated merely to the rights of the insured. T h e insurer can recover only the a m o u n t that is recoverable by the insured and can recover only if the insured likewise could have recovered. (Sulpicio Lines, Inc. vs. First Lepanto-Taisho Insurance Corporation, 4 6 2 S C R A 125

2

See discussion of Article 2207, Civil Code under Section 1.

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[2005].) Thus, where the right of the insured, in case of loss or damage to the g o o d s o w n e d by him, is limited or restricted by the provisions in the bill of lading issued by the c o m m o n carrier, a suit by the insurer as subrogee necessarily is subject to like limitations and restrictions. (St. Paul Fire & Marine Ins. Co. vs. Macondray & Co., Inc., 70 S C R A 122 [1976].) T h e rule does not apply where it w o u l d be "unfair and inequitable" to limit the liability of the w r o n g d o e r to the amount stipulated between him and the insured. ILLUSTRATIVE CASE: Petitioner which was found responsible for the loss of the insured vessel sought to limits its liability to the insurer, subrogee of the insured, to an amount very much lower than the amount paid for by the insurer to the insured. Facts: Petitioner CSEW is a domestic corporation engaged in the business of dry-docking and repairing of marine vessels while private respondent PGA is also a domestic corporation engaged in the non-life insurance business. WLI (plaintiff in the trial court) is the owner of a passenger cargo vessel (M/V Manila City) which caught fire and sank during the drydocking and repair, resulting in its eventual total loss, which, according to WLI and as found both by the trial court and Court of Appeals, was caused by CSEW's negligence and lack of care. CSEW argues, among others, that even assuming that it was negligent and, therefore, liable to WLI by stipulation in the Contract or Work Order, its liability is limited to PI million only and PGA should only be entitled to collect the sum stipulated in the said contract, although the total loss suffered by WLI and paid for by PGA to WLI amounted to P45 million. Issue: Should CSEW be allowed to limit its liability to PI million notwithstanding the fact that the amount paid for by PGA amounted to P45 million? Held: No. When PGA, after due verification of the merit of the insurance claim of WLI, paid the latter the total amount covered by its insurance policy, it was subrogated to the right of the latter to recover the insured loss from the liable party, CSEW, pursuant to Article 2207 of the Civil Code. (1) Validity of contracts of adhesion. — "Although in this jurisdiction, contracts of adhesion have been consistently

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upheld as valid per se, as binding as an ordinary contract, the Court recognizes instances when reliance on such contracts cannot be favored especially where the facts and circumstances warrant that subject stipulations be disregarded. Thus, in ruling on the validity and applicability of the stipulation limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of the provision sought to be enforced should be considered, bearing in mind the principles of equity and fair play." (2) Claim of WLI found to be valid and compensable. — "It is worthy to note that M / V Manila City was insured with PGA for P45,000,000.00. To determine the validity and sustain-ability of the claim of WLI for a total loss, PGA conducted its own inquiry. Upon thorough investigation by its hull surveyor, M / V Manila City was found to be beyond economical salvage and repair. The evaluation of the average adjuster also reported a constructive total loss. The said claim of WLI, was then found to be valid and compensable such that PGA 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." (3) Unfair and inequitable to limit liability of CSEW. — "Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has been sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner to P1,000,000.00 only. As aptly held by the trial court, 'it is rather unconscionable if not overstrained.' To allow CSEW to limit its liability to P1,000,000.00notwithstanding the fact that the total loss suffered by the assured and paid for by PGA 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 petitioner to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss suffered by WLI." (Cebu Shipyard and Engineering Works, Inc. vs. William Lines, Inc., 306 SCRA 762 [1999].)

Loan repayable from collection not deemed payment of insurance. It is customary for insurers, in order to save the right to their assureds and to promptly place them in funds, so that their

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business might be continued without embarrassment, to lend to their assureds the a m o u n t of the loss payable only out of money collected on account of the loss. S u c h losses are not payment of insurance. (First National B a n k of O t t a w a vs. Lloyd's of London, 116 F. 2d, 2 2 1 , 2 2 6 , cited in Galutera vs. M a e r s k Line, 11 S C R A 251 [1964].) Consequently, in a suit by the insured against the party indisputably liable for the loss, recovery should not be denied merely b e c a u s e the insured received such loan from the insurer. As the a d v a n c e m e n t does not constitute p a y m e n t of loss, the insurer is not, therefore, subrogated to the rights of the insured w h o is not divested of his right to file the suit. Furthermore, to permit the insured to recover, subject to his obligation to the insurer, w o u l d avoid unnecessary delay and multiplicity of suits in the attainment of the s a m e result, namely, the enforcement of the undisputed liability on the part of one of the parties. (Ibid.) Sec. 244. 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; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorney's fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred fortythree, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment. Liability of insurer to pay d a m a g e s and interests. (1) Finding of unreasonable delay. — Under Sections 242, 243, and 244, the Commissioner or the Court must still make a finding that the payment of the claim has been unreasonably denied or

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withheld before the insured shall be entitled to collect damages and the interest provided which has been increased from 12% to 24%. They apply only w h e n the Commissioner or the Court finds an unreasonable delay or refusal in the payment of the clauses, (see Tio Khe Chio vs. Court of Appeals, 202 S C R A 119 [1991].) In the absence of such express finding, the judgment should bear only the legal rate of 12% for the delay in the payment of the claim. It is generally agreed that an insurer may, in good faith and honesty, entertain a difference of opinion as to its liability. According, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be imposed unless the evidence and the circumstances show that such refusal w a s willful and without reasonable cause as the facts appear to a reasonable and prudent man. (Rizal Commercial Banking Corp. vs. Court of Appeals, 289 S C R A 292 [1998]; see Zenith Insurance Corporation vs. Court of Appeals, 185 S C R A 4 0 3 [1990].) T h u s , the mere fact that the evidence justified the p a y m e n t of the claim does not necessarily m e a n that the insurer, in contesting payment, acted without justification, (see Teal M o t o r Co., Inc. vs. Continental Insurance Co., 59 Phil. 804 [1934].) Where the delay in p a y m e n t w a s due to the investigation the insurer conducted to ascertain the truth of the information it received that the insured w a s not insurable at the t i m e of his application, the delay was held justifiable. ( C h u y vs. Philippine American Life Ins. Co., 95 Phil. 2 8 2 [1954].) Similarly, w h e r e the insurer was faced by the problem of determining w h o w a s the actual beneficiary of the insurance policies involved, aggravated by the claim of various creditors w h o wanted to partake of the insurance proceeds, not to mention the e n d o r s e m e n t by the insured of the policies to a b a n k to w h i c h he m o r t g a g e d the properties covered by the insurance, it w a s h e l d that the insurer was justified in withholding p a y m e n t to the insured. (Rizal Commercial Banking Corporation vs. Court of Appeals, supra.) (2) Presumption of unreasonable delay. — There is prima facie presumption of unreasonable delay, however, if the insurer fails to pay any such claim within the time prescribed in Sections 2 4 2 and 243. (Sec. 244.)

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In o n e case, the court found that there was no merit in the insurer's contention that the proofs of loss submitted by the insured were insufficient. " A s the fire which destroyed the insured property occurred on D e c e m b e r 1 9 , 1 9 8 1 and the proofs of loss were submitted from January 15, 1982 through June 2 1 , 1982 in compliance with the adjusters' numerous requests for various documents, p a y m e n t should h a v e been m a d e within 90 days thereafter or on or before S e p t e m b e r 2 1 , 1 9 8 2 . Hence, when the assured filed her complaint on D e c e m b e r 15, 1982, her cause of action h a d already accrued." T h e insurer was held liable to d a m a g e s consisting of 1 0 % of the a m o u n t of the loss as attorney's fees and to double interest ( 2 4 % ) on the said amount starting from the time the case w a s filed. (Cathay Insurance Co., Inc. vs. Court of Appeals, 174 S C R A 11 [1989].) (3) Conflicting resolutions of trial court and Commission. — Aside from the r e v o c a t i o n / suspension of license, the Insurance C o m m i s s i o n e r also has the discretion to impose upon the erring insurance companies and its directors, officers and agents, fines and penalties, as set out in Section 4 1 5 . (infra.) T h e findings of the trial court will not necessarily foreclose the administrative case before the Commission, or vice versa. True, the parties are the same, and both actions are predicated on the same set of facts, and will require identical evidence. But the issues to be resolved, the q u a n t u m of evidence, the procedure to be followed, and the reliefs to be adjudged by these two bodies are different. In the civil case, the insured must establish his case by a preponderance of evidence, or simply put, such evidence that is of greater weight, or more convincing than that which is offered in opposition to it. In an administrative case, the degree of proof required of the insured to establish his claim is substantial evidence, which has been defined as that amount of relevant evidence that a reasonable mind might accept as adequate to justify the conclusion. In addition, the procedure to be followed by the trial court is governed by the Rules of Court, while the Commission has its o w n set of rules and it is not bound by the rigidities of technical rules of procedure. These two bodies conduct independent means of ascertaining the ultimate facts of

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their respective cases that will serve as basis for their respective decisions. If, for example, the trial court finds that there was no unreasonable delay or denial of the claim, it does not automatically mean that there was in fact no such unreasonable delay or denial that would justify the revocation or suspension of the licenses of the concerned insurance companies. It only m e a n s that the insured failed to prove by preponderance of evidence that he is entitled to damages. Such finding would not restrain the Insurance Commission, in the exercise of its regulatory power, from making its o w n finding of unreasonable delay or denial as long as it is supported by substantial evidence. W h i l e the possibility that these two bodies will c o m e up with conflicting resolutions on the same issue is not far-fetched, the finding or conclusion of one w o u l d not necessarily be binding on the other given the difference in the issues involved, the q u a n t u m of evidence required, and the procedure to be followed. Moreover, public interest and public policy d e m a n d the speedy and inexpensive disposition of administrative cases. (Go vs. Office of the O m b u d s m a n , 413 S C R A 608 [2003].) Insurance companies are prone to invent excuses to avoid their just obligation. (Security Pacific Assurance Corp. vs. Tria-Infante, 4 6 8 S C R A 526 [2005].) (4) Damages, recoverable. — It is clear that u n d e r Section 244, in case of unreasonable delay in the p a y m e n t of the proceeds of an insurance policy, the d a m a g e s that m a y be awarded are: (a) Attorney's fees; (b) Other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment; (c) Interest at twice the ceiling prescribed by the M o n e t a r y Board of the amount of the claim due the insured; and (d) The amount of the claim. Section 244 does not require a s h o w i n g of b a d faith in order that attorney's fees be granted. (Prudential Guarantee and Assurance, Inc. vs. Trans-Asia Shipping Lines, Inc., 491 S C R A 411 [2006].)

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(5) Propriety of award of moral and exemplary damages and attorney's fees. — In a case, the petitioner (insurer) contends that while the complaint of the insured prayed for P I 0 , 0 0 0 moral damages, the lower court awarded twice the amount, or P20,000 without factual or legal basis; while private respondent prayed for P5,000.00 e x e m p l a r y damages, the trial court awarded P20,000.00; and while private respondent prayed for P3,000.00 attorney's fees, the trial court awarded P5,000.00. T h e propriety of the award of moral damages, exemplary d a m a g e s and attorney's fees is the m a i n issue raised by the petitioner. T h e S u p r e m e Court held: "As regards the award of moral and exemplary damages, the rules under the Civil C o d e of the Philippines shall govern. T h e purpose of m o r a l d a m a g e s is essentially indemnity or reparation, not punishment of correction. Moral damages are emphatically not intended to enrich a complainant at the expense of a defendant. T h e y are awarded only to enable the injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering he has undergone by reason of the defendant's culpable action. While it is true that no proof of pecuniary loss is necessary in order that moral d a m a g e s m a y be adjudicated, the assessment of which is left to the discretion of the court according to the circumstances of each case (Art. 2216, Civil Code.), it is equally true that in awarding moral damages in case of breach of contract, there must be a showing that the breach was wanton and deliberately injurious or the one responsible acted fraudulently or in b a d faith. In the instant case, there was a finding that private respondent (insured) was given a 'run-around' for two months, which is the basis for the award of the damages granted under the Insurance Code for unreasonable delay in the payment of the claim. However, the act of petitioner of delaying payment for two months cannot be considered as so wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into consideration also the fact that the damage on the car was only P3,460. In the pre-trial of

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the case, it was shown that there was no total disclaimer by respondent. The reason for petitioner's failure to indemnify private respondent within the two-month period w a s that the parties could not come to an agreement as regards the amount of the actual damage on the car. T h e amount of P10,000.00 prayed for by private respondent as moral damages is equitable. On the other hand, exemplary or corrective d a m a g e s are imposed by w a y of example or correction d a m a g e s public good (Art. 2229, Civil Code.) In the case of N o d a vs. CruzArnaldo (151 S C R A 2 2 7 [1987]), exemplary d a m a g e s were not awarded as the insurance c o m p a n y h a d not acted in wanton, oppressive or malevolent manner. T h e s a m e is true in the case at bar. The amount of P5,000.00 awarded as attorney's fees is justified under the circumstances of this case considering that there were other petitions filed and defended by private respondent in connection with the case, x x x Therefore, the a w a r d o f moral damages is reduced to P I 0 , 0 0 0 . 0 0 and the award of e x e m p l a r y damages is hereby deleted." (Zenith Insurance Corporation vs. Court of Appeals, 185 S C R A 398 [1990].) Where the insurer resisted the claim for indemnity on the ground that the death of the insured (who negligently shot himself) w a s covered by the exception in the insurance policy, it was held that the issue raised being one of first impression and was indeed debatable, the award of moral and exemplary damages and of attorney's fees w o u l d be unjust. (Sun Insurance Office, Ltd. vs. Court of Appeals, 211 S C R A 552 [1992].)

— oOo —

Title 12 EXAMINATION OF COMPANIES

Sec. 245. The Commissioner shall require every insurance company doing business in the Philippines to keep its books, records, accounts and vouchers in such manner that he or his authorized representatives may readily verify its annual statements and ascertain whether the company is solvent and has complied with the provisions of this Code or the circulars, instructions, ruling or decisions of the Commissioner. Sec. 246. The Commissioner shall at least once a year and whenever he considers the public interest so demands, cause an examination to be made into the affairs, financial condition and method of business of every insurance company authorized to transact business in the Philippines and of any other person, firm or corporation managing the affairs and/or property of such insurance company. Such company, as well as such managing person, firm or corporation, shall submit to the examiner all such books, papers and securities as he may require and such examiner shall also have the power to examine the officers of such company under oath touching its business and financial condition, and the authority to transact business in the Philippines of any such company shall be suspended by the Commissioner if such examination is refused and such company shall not thereafter be allowed to transact further business in the Philippines until it has fully complied with the provisions of this section. Government-owned or controlled corporations or entities engaged in social or private insurance shall similarly be subject to such examination by the Commissioner, unless their respective charters otherwise provide.

585

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Sees. 245-246

Examination of insurers. (1) Objective of the examination. — T h e examination of every insurance company doing business in the Philippines is an important task of the Insurance Commissioner. Continued solvency of insurance companies or financial ability to meet their commitments is the major objective of such detailed examinations (Sec. 245.) which shall be conducted according to law at least once a year and whenever the Commissioner considers the public interest so demands. (Sec. 246.) (2) Powers of Commissioner. — T h e checking of assets, liabilities, and reserves is part of this procedure as well as a review of almost all underwriting, investment, and claim practices of the insurer. (D.L. Bickelhaupt, op. cit., p. 204.) (a) The Commissioner is authorized to enter the offices of an insurance company, to call for its b o o k s and records, to examine its securities, count them, investigate their genuineness (e.g., by writing a letter to the person w h o appears to have given a mortgage to the insurer) and appraise their value. (b) He is also authorized to confer such p o w e r on his deputies or assistants w h o are required to m a k e a written report of facts and recommendation. (c) In the course of examinations a n d in m o r e formal hearings, the C o m m i s s i o n e r is e m p o w e r e d to administer oaths and a person w h o gives false testimony is liable to prosecution for the crime of perjury. As a rule, the C o m m i s s i o n e r does not h a v e the p o w e r to commit persons to jail for contempt or disobedience of his orders. For such punishment, he must resort to a proceeding in court. (E.W. Patterson, op. cit., p. 15; see Sec. 416, par. 9.) Examination of Insurance and reinsurance brokers. The following rules and procedures shall apply: (1) Financial statements of insurance and reinsurance brokers authorized to transact business in the Philippines shall be

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subject to yearly examination/verification. All concerned entities shall submit present all b o o k s of accounts, securities, brokers' agreement, information on policies, details on cessions or retrocessions, rates of commission and premiums as may be required by the examiner. S u c h examiner shall also h a v e the p o w e r to examine the officers of such c o m p a n y u n d e r oath touching its business and financial condition, and the authority to transact business in the Philippines of any such entity shall be suspended by the C o m m i s s i o n e r if such examination is refused and such entity shall not thereafter be allowed to transact further business in the Philippines until it has fully complied with all the requirements. (2) All m o n i e s collected or received as premium payment shall be immediately remitted to the insurance or reinsurance c o m p a n y concerned, unless a period has b e e n agreed upon w h i c h in no case shall exceed 90 days from inception of the policy. Reinsurance balances shall also be subjected to confirmation from the concerned principal and any discrepancy shall immediately be reconciled; otherwise, differences will also be subjected to the setting up of non-ledger liabilities. Likewise, p r e m i u m r e c e i v a b l e / r e c o v e r a b l e over 90 days shall also be disallowed u n l e s s proof of collection shall be submitted. (3) Proof of investments in bonds, treasury bills, stocks, real estate, loans receivable, cash on hand and in bank shall also be presented / s u b m i t t e d to the examiner and shall be subjected to disallowance if supporting documents are inadequate. (4) All other accounts, such as deferred and prepaid taxes, property and equipment, other assets, other receivables, taxes payable, long and short term liabilities shall also be subjected to disallowance as well as setting up of non-ledger liabilities upon proper determination/examination or verification by the examiner. (5) If upon examination into the financial condition of those entities, it is found that the paid up capital stock is impaired a n d / o r the networth is less than that required under Ins. Memo. Cir. No. 1-2006 (capitalization requirements for insurance and reinsurance brokers), the same shall be fully covered up in cash

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to be contributed proportionately by the stockholders on record within 15 days from receipt of the advice from the Insurance Commission. Any cash infusion by the stockholders shall also be subject to examination and verification in accordance with the provision of Anti-Money Laundering Act of 2001 (R.A. No. 9160, as amended by R. A. No. 9194.) and Ins. Cir. Letter No. 24-05B dated September 2, 2005. Likewise, when the fund is sourced from a parent company, either locallhy or abroad, the concerned entity shall submit a certified true copy of the board resolution authorizing the cash infusion from the parent c o m p a n y duly authenticated by the Philippine Consul, if applicable. (Ins. Cir. Letter N o . 9-09, Mar. 6, 2009.)

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Title 13 SUSPENSION AND REVOCATION OF

AUTHORITY

Sec. 247. If the Commissioner is of the opinion upon examination or other evidence that any domestic or foreign insurance company is in an unsound condition, or that it has failed to comply with the provisions of law or regulations obligatory upon it, or that its condition or method of business is such as to render its proceedings hazardous to the public or to its policyholders, or that its paid-up capital stock, 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 that the margin of solvency required of such company is deficient, the Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its officers and agents, and no new business shall thereafter be done by such company or for such company by its 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. (as amended by Pres. Decree No. 1455.) Suspension and revocation of license. T h e Insurance Commissioner is given the power to revoke or withhold the license or the renewal of the license of an insurance company. T h e decision made by the Commissioner shall be 589

590

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appealable to the Secretary of Finance. (Sec. 414, par. 2.) T h e action taken by the Secretary of Finance m a y be judicially reviewed to determine whether the charges upon which his action is based are supported by the evidence. However, his decision will not be disturbed unless there has been an abuse of discretion, (see 43 Am. Jur. 2d 115-116.) The Insurance Commissioner is authorized to suspend or revoke all certificates of authority granted to an insurance company for any of the grounds enumerated in Section 247.

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Title 14 APPOINTMENT OF CONSERVATOR

Sec. 248. If at any time before, or after, the suspension or revocation of the certificate of authority of an insurance company as provided in the preceding title, the 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 policyholders and creditors, he may appoint a conservator to take charge of the assets, liabilities, and the management of such company, collect all moneys and debts due said company and exercise all powers necessary to preserve the assets of said company, reorganize the management thereof, and restore its viability. The said conservator shall have the power to 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 such other powers as the Commissioner shall deem necessary. The conservator may be another insurance company doing business in the Philippines, any 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. 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 Commissioner until such time as the Commissi

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Sec. 248

sioner 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 policyholders and creditors, in which case the provisions of Title 15 shall apply.

Appointment of conservator. As a protection against insolvency and unfair treatment of claimants, policyholders and creditors, insurance regulation continues after the formation and licensing of an insurer. T h e Commissioner exercises s o m e control over m a n y phases of the operations of insurance companies. (D.L. Bickelhaupt, op. cit., p. 208.) Under Section 2 4 8 , the Commissioner, before or after suspension or revocation of the certificate of authority of an insurance company, m a y appoint a conservator to take charge of the management of such c o m p a n y if he finds that it is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity d e e m e d adequate to protect the interest of policyholders and creditors. T h e conservator shall "exercise all powers necessary to preserve the assets of the said company, reorganize the m a n a g e m e n t thereof, and restore its viability." The appointment of a conservator is only a t e m p o r a r y situation to enforce changes in the insurance c o m p a n y ' s operations, or it may be a prelude to liquidation proceedings u n d e r the provisions of Title 15 if it cannot be restored to financial stability through reorganization, (see ibid., p. 215.)

Nature of conservation proceedings. (1) As to major aspects of proceedings. — Conservatorship proceedings under Section 248 against a financially distressed insurance company are essentially in the nature of rehabilitation proceedings. As such, the conservator m a y only act with the approval of the Insurance C o m m i s s i o n e r with respect to the major aspects of rehabilitation.

Sec. 248

THE BUSINESS OF INSURANCE Title 14. — Appointment of Conservator

593

(2) As to ordinary details of administration. — 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 Commission. He is clothed with such discretion in conducting and managing the affairs of the insurance c o m p a n y placed under his control. T h e authority conferred by law u p o n h i m to reorganize the m a n a g e m e n t of the insurance c o m p a n y under his control embraces, a m o n g others, the authority to carry out a retrenchment program to prevent further dissipation of c o m p a n y funds. (Garcia vs. National Labor Relations Commission, 153 S C R A 639 [1987].) A c o m p a n y for rehabilitation is one w h o s e certificate of authority to do business has b e e n suspended either for failure to m a k e good its capital impairment and / or margin of solvency deficiency within the period prescribed under Section 194 of the Insurance C o d e or for any other causes provided in the same Code. (Dept. Finance Order No. 27-90, July 26, 1990.)

Action against conservator. T h e third paragraph of Section 2 4 8 cannot be construed to prohibit suits being brought against a conservator in his or its representative capacity, as custodian and manager of the funds and property of the c o m p a n y under conservatorship. The rule laid d o w n by the S u p r e m e Court with respect to actions against a receiver or liquidator under Section 251 (infra.) applies to the conservator. (Garcia vs. National Labor Relations Commission, supra.)

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Title 15 PROCEEDINGS UPON INSOLVENCY Sec. 249. Whenever, upon examination or other evidence, it shall be disclosed that the condition of any insurance company doing business in the Philippines is one of insolvency, or that its continuance in business would be hazardous to its policyholders and creditors, the Commissioner shall forthwith order the company to cease and desist from transacting business in the Philippines and shall designate receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its policyholders 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 insurance company. The Commissioner shall thereupon determine within thirty days 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 and shall 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 insurance company shall be determined by the Commissioner and shall be paid out of the assets of such company. If the Commissioner shall determine and confirm within the said period that the insurance company is insolvent, as defined hereunder, 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. The 594

Sec. 249

THE BUSINESS OF INSURANCE Title 15. — Proceedings Upon Insolvency

Commissioner 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, reinsure all its outstanding policies, convert the assets of the insurance company into 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 and he may, in the name of the company, institute such actions as may be necessary in the appropriate Courts to collect and recover amounts and assets of the insurance company, and to do such other acts as may be necessary to complete the liquidation as ordered by the Commissioner. The provisions of any law to the contrary notwithstanding, the actions of the Commissioner under this section shall be final and executory, and can be set aside by the Court only if there is convincing proof that the action is plainly arbitrary and made in bad faith. The Commissioner, through the Solicitor General, shall then file the corresponding answer reciting the proceedings taken and praying the assistance of the court in the liquidation of the company. No restraining order or injunction shall be issued by the Court enjoining the Commissioner from implementing his actions under this section, 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 the 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 he will pay the damages which the petitioner 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. All proceedings under this Title shall be given preference in the Courts. The Commissioner shall not be required to pay any fee to any public officer for filing,

595

596

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Sees. 250-251

recording, or any manner authenticating any paper or instrument relating to the proceedings. As used in this Title, the term "insolvency" 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 its margin of solvency required under Section 194 of this Code, (as amended by Pres. Decrees No. 1141 and 1455.) Sec. 250. In case of liquidation of an insurance 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 Commissioner shall pay all allowed claims against such company, under order of the Court, in accordance with their legal priority. Sec. 251. 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. Power to dissolve and liquidate insurance companies. The Insurance C o m m i s s i o n e r not only officiates at the birth and growth of an insurance c o m p a n y b u t also at its d e m i s e if necessary. An insurer m a y be liquidated for a n u m b e r of reasons including financial insolvency. (D.L. Bickelhaupt, op. cit., p. 214.) S o m e liquidations m a y be voluntary in nature in order to effect a corporate reorganization or merger. (Ibid.)

(1) Insolvency as a ground for dissolution or forfeiture of charter. — The right of the state to regulate and control insurance companies includes the right to m a n a g e the dissolution and liquidation of the business of an insurance company. If the business of an insurance c o m p a n y and its financial condition are such that it cannot continue its operations with safety to the public, it m a y be dissolved at the suit of the state before a judicial tribunal which after full opportunity for the c o m p a n y to m a k e defense, m a y

Sees. 250-251

THE BUSINESS OF INSURANCE Title 15. — Proceedings Upon Insolvency

597

determine whether it is insolvent or its condition is such as to render its continuance in business hazardous to the insured or to the public. (Chicago L. Ins. C o . vs. Needless, 113 US 574.) "Considering the nature of insurance transactions which depend entirely on utmost good faith especially on the part of the insurer, and where an insurance c o m p a n y has become insolvent or cannot continue to resume business with safety to its policyholders and other creditors, its assets must be preserved to settle satisfactorily and expeditiously as possible its debts and accounts. T h e action of the Insurance C o m m i s s i o n e r in connection therewith should not be h a m p e r e d unnecessarily by tedious and protracted court litigations." (Pres. D e c r e e No. 1141; see Sec. 249, par. 4.) (2) What constitutes insolvency. — As any other corporation, an insurance company, broadly speaking, must be deemed insolvent w h e n its assets are so depleted that they are insufficient for the payment of its just debts. On the other hand, an insurance c o m p a n y is not insolvent w h e n the value of its property is greater than the a m o u n t of its liabilities and it is able to pay its debts w h e n they mature although the excess of the value of its property above its liabilities m a y be less than the par value of its stock. (Shearer vs. Farmers L., Inc., Co., 2 6 2 F. 8 6 1 ; 43 A m . Jur. 2d 183.) "Insolvency," as a ground for the liquidation of an insurance company, is defined by the C o d e . (Sec. 249, last par.) (3) Irregularities as justification for dissolution. — Where the irregularities committed by an insurance company affect the faith and trust that insurance companies must c o m m a n d as well as its financial stability, public interest demands its liquidation and dissolution. In a case, an insurance c o m p a n y had been found to have committed, inter alia, the following irregularities: (a) granting loans without security, and mostly to its president and his wife; (b) disregarding several communications of the Insurance Commissioner demanding that the granting of cash advances and loans without security be stopped; worse still, increasing the amounts of such cash advances and loans; (c) issuing numerous

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Sees. 250-251

bonds far in excess of its m a x i m u m writing capacity; (d) keeping its daily collections in the company's safe a practice which is not in accordance with current sound business procedure; and (e) lack of records showing that it had cash deposited in banks. Its cash on hand was only P5,631.83 w h e n it must maintain, at all times, free from all liens, cash in b a n k amounting, at least, to P50,000.00. According to the Supreme Court, this case is clearly distinguishable from that of the G o v e r n m e n t of the P.I. vs. El H o g a r Filipino (50 Phil. 399 [1927]) and that of G o v e r n m e n t vs. Phil. Sugar Estates (38 Phil. 15 [1918].), in that both involved technical violations of the law not affecting the financial soundness of the insurance companies therein whereas those committed by the insurance c o m p a n y in the case at bar, affected adversely the interest of the parties dealing with it, as well as the stability of the firm. (Commissioner vs. Globe Assurance Co., Inc., 1 S C R A 4 6 8 [1961].) (4) Weight of Insurance Commissioner's opinion on soundness of financial plan. — Where, after due investigation, the Insurance Commissioner finds that the financial condition of an insurance company is precarious and that public interest d e m a n d s its liquidation and dissolution, his subsequent disapproval of a plan submitted by the company, to give it a chance to rehabilitate its finances within a stated period can hardly be questioned b e c a u s e being best qualified by reason of his position and experience in the field of insurance, to pass upon the soundness of the plan, his view carries weight. (Ibid.) (5) Receivership. — A statute which provides that the Insurance Commissioner of the State shall be the receiver and liquidating officer for an insurance c o m p a n y constitutes such officer the successor of any such c o m p a n y in liquidation. His title to the assets of the c o m p a n y is the consequence of a succession established for the corporation by the law which created the corporation. (Clark v. Williard, 2 9 2 US 112; 43 A m . Jur. 2d 184; see Banzon vs. Cruz, 45 S C R A 475 [1972].) (6) Rehabilitation of insolvent insurance companies. — It is also within the power of the state to provide by statute for the rehabilitation of insolvent insurance companies through the

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THE BUSINESS OF INSURANCE Title 15. — Proceedings Upon Insolvency

599

insurance c o m m i s s i o n e r subject to the approval of the court for the purpose of preventing depreciation in assets consequent upon forced liquidation. Rehabilitation is sometimes accomplished through the mutualization of the insolvent company or the reinsurance of its business. In s o m e cases, a practical method of rehabilitation requires the formation of a n e w company. (Neble vs. Carpenter, 3 0 5 US 297; 43 A m . Jur. 2d 181.)

Action against receiver or liquidator. T h e exemption from liability under Section 251 of the receiver or the liquidator d o e s not prohibit suits being brought against a receiver or liquidator in his or its representative capacity, as custodian and m a n a g e r of the funds and property of the person or firm under receivership or liquidation. To do so would w o r k inequity and injustice u p o n parties with just claims against the latter and leave t h e m without r e m e d y to pursue and recover on their claims. T h e e x e m p t i o n applies only with reference to acts done or left u n d o n e in g o o d faith by the receivership or liquidation. It does not apply to actions brought u p o n claims against the person or property under receivership or liquidation and not, in any event, u p o n claims w h i c h matured before the receivership or liquidation w a s established. (Pioneer Insurance & Surety Corp. vs. Forrun, 149 S C R A 248 [1987].)

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Title 16 CONSOLIDATION AND MERGER OF INSURANCE COMPANIES Sec. 252. Upon prior notice to the Commissioner, two or more domestic insurance companies, acting through their respective boards of directors, may negotiate to merge into a single corporation which shall be one of the constituent corporations, or consolidate into a single corporation which shall be a new corporation to be formed by the consolidation. A common agreement of the proposed merger or consolidation shall be drawn up for submission to the stockholders or members of the constituent companies for adoption and approval in accordance with the provisions of the respective by-laws of the constituent companies and all existing laws that may be pertinent. Sec. 253. Such agreement shall include, aside from the proposed merger or consolidation, provision relative to the manner of transfer of assets to and assumption of liabilities by the absorbing or acquiring company from the absorbed or dissolved company or companies; the proposed articles or merger or consolidation and by-laws of the surviving or acquiring company; the corporate name to be adopted which should not be that of any other existing company transacting similar business or one so similar as to be calculated to mislead the public; the rights of the stockholders or members of the absorbed or dissolved companies; date of effectivity of the merger or consolidation; and such particulars as may be necessary to explain and make manifest the objects and purposes of the absorbing or acquiring company. Sec. 254. Upon execution of such agreement to merge or consolidate by and between or among the boards of 600

Sec. 255-256

THE BUSINESS OF INSURANCE Title 16. — Consolidation and Merger of Insurance Companies

director of the constituent companies, notice thereof shall be mailed immediately to their policyholders and creditors. The company or companies to be absorbed or dissolved shall discharge all its accrued liabilities; otherwise, such liabilities shall, with the consent of its creditors, be transferred to and assumed by the absorbing or acquiring company, or such liabilities be reinsured by the latter. In the case of such policies as are subject to cancellation by the company or companies to be absorbed or dissolved, same may be cancelled pursuant to the terms thereof in lieu of such transfer, assumption, or reinsurance. Sec. 255. Upon approval or adoption in the meetings of the stockholders or members called for the purpose in each of the constituent companies of the agreement to merge or consolidate, all stockholders or members dissenting or objecting to the merger or consolidation shall be paid the value of their shares by the company concerned in accordance with the by-laws thereof. Sec. 256. Upon approval or adoption of the agreement to merge or consolidate by the stockholders or members of the constituent companies, the corresponding articles of merger or of consolidation shall be duly executed by the presidents and attested by the corporate secretaries and shall bear the corporate seals of the merging or consolidating companies setting forth: (1) The plan of merger or the plan of consolidation; (2) As to each corporation, the number of shares outstanding, or in case of mutual corporations, the number of members; and (3) As to each corporation, the number of shares or members voted for and against such plan, respectively. Thereafter, a certified copy of such articles of merger or consolidation, together with a certificate of approval or adoption by the stockholders or members of such articles of merger or consolidation, verified by affidavits of such officers and under the seal of the constituent companies, shall be submitted to the Commissioner, together with such other papers or documents which the Commissioner may require, for his consideration.

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Sees. 257-261

Sec. 257. The articles of merger or consolidation, signed and verified as hereinabove required, shall be filed with the Securities and Exchange Commission for its examination and approval. Sec. 258. Upon receipt from the Securities and Exchange Commission of the certificate of merger or of consolidation, the constituent companies shall surrender to the Commissioner their respective certificates of authority to transact insurance business. The absorbing or surviving company in case of merger, or the newly formed company in case of consolidation, shall immediately file with the Commissioner the corresponding application for issuance of a new certificate of authority to transact insurance business, together with a certified copy of the certificate of merger or of consolidation, and of the certificate of increase of stocks, if there is any, issued by the Securities and Exchange Commission. Sec. 259. Nothing in this title shall be construed to enlarge the powers of the absorbing or surviving company in case of merger, or the newly formed company in case of consolidation, except those conferred by the certificate of merger or of consolidation and the articles of merger or consolidation, or the amended articles of incorporation, as registered with the Securities and Exchange Commission. Sec. 260. No director, officer, or stockholder or any such constituent companies shall receive any fee, commission, compensation, or other valuable consideration whatsoever, directly or indirectly, for in any manner aiding, promoting or assisting in such merger or consolidation. Sec. 261. The merger or consolidation of companies under this Code shall be subject to the provisions of the Corporation Law,* and, in those cases specified in Republic Act No. 5455,** as amended, be further subject to the provisions of said law.

*Now, the Corporation Code of the Philippines. (Batas Pambansa Big. 68.) *The Act (Foreign Business Regulation Act) is "an act requiring that the making of investments and the doing of business within the Philippines by foreigners or business organizations owned in whole or in part by foreigners should contribute to the sound and balanced development of the national economy on a self-sustaining basis, and for other purposes." It now incorporated in the Omnibus Investments Code. (Formerly Pres.

Sec. 252-261

THE BUSINESS OF INSURANCE Title 16. — Consolidation and Merger of Insurance Companies

Definition of t e r m s . For the purpose of Title 16, the term — (1) Merger m e a n s the u n i o n of t w o companies that results in continuation of the corporate existence and survival of one constituent c o m p a n y and dissolution of the other. (2) Consolidation is the combination or union of two or more companies that results in the termination and dissolution of the corporate existence of all constituent companies and the formation of a n e w company. (3) Absorbing or acquiring c o m p a n y m e a n s the surviving company, in case of merger, or the n e w l y formed company, in case of consolidation. Absorbed c o m p a n y m e a n s the constituent c o m p a n y w h o s e corporate existence is dissolved as a result of the merger or consolidation. (4) Company or companies refers only to domestic insurance c o m p a n y or companies, (see Ins. Cir. N o . 79, M a r c h 1 8 , 1 9 7 3 . )

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Decree No. 1789, now Exec. Order No. 226, dated July, 1987.) The Foreign Investments Act of 1991 (R.A. No. 7042.), "an act to promote foreign investments, prescribing the procedures for registering enterprises doing business in the Philippines, and for other purpose," repealed Articles 44 to 56 of Book II of Executive Order No. 226.

Title 17 MUTUALIZATION OF STOCK LIFE INSURANCE COMPANIES

Sec. 262. Any domestic stock life insurance company doing business in the Philippines may convert itself into an incorporated mutual life insurer. To that end it may provide and carry out a plan for the acquisition of the outstanding shares of its capital stock for the benefit of its policyholders, or any class or classes of its policyholders, by completing with the requirements of this chapter. Sec. 263. Such plan shall include appropriate proceedings for amending the insurer's articles of incorporation to give effect to the acquisition, 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-stock corporation shall be the policyholders from time to time 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 corporation's articles of incorporation as they may be amended from time to time. Such plan shall be: (1) Adopted by a vote of a majority of the directors; (2) Approved by the vote of the holders of at least a majority of the outstanding shares at a special meeting of shareholders called for that purpose, or by the written consent of such shareholders; (3) Submitted to the Commissioner and approved by him in writing; 604

Sec. 264

THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

(4) Approved by a majority vote of all the policyholders of the class or classes for whose benefits the stock is to be acquired voting at an election by the policyholders called for that purpose, subject to the provisions of section two hundred sixty-five. The terms "policy holder" or "policyholders" as used in this chapter 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. In any case where a policy or contract names two or more persons as joint insured, payees, owners or holders thereof, the persons so named shall be deemed collectively to be one policyholder for the purpose of this chapter. In any case where a policy or contract shall have been assigned by assignment absolute on its face to an assignee other than the insurer and such assignment shall have been filed at the principal office of the insurer at least thirty days prior to the date of any election or meeting referred to in this chapter, then such assignee shall be deemed at such election or meeting to be the policyholder. For the purpose of this chapter, 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 policy. Beneficiaries under unmatured contracts shall not as such be deemed to be policyholders; (5) Filed with the Commissioner after having been approved as provided in this section. Sec. 264. The Commissioner shall examine the plan submitted to him under the provisions of sub-paragraph three of section two hundred sixty-three. He shall not approve such plan unless in his opinion the rights and interests of the insurer, its policyholders and shareholders

606

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Sec. 265

are protected nor unless he is satisfied that the plan will be fair and equitable in its operation. Sec. 265. The election prescribed by sub-paragraph four of section two hundred sixty-three shall be called by the board of directors or the president, and every policyholder of the class or classes for whose benefit the stock is to be acquired, whose insurance shall have been in force for at least one year prior to such election shall have one vote, regardless of the number of policies or amount of insurance he holds, and regardless of whether such policies are policies of life insurance or policies of health and accident insurance of annuity contracts. Notice of such election shall be given to policyholders entitled to vote by mail from the principal office of such insurer at least thirty days prior to the date set for such election, in a sealed envelope, postage prepaid, addressed to each such policyholder at his last known address. Voting shall be by one of the following methods: (1) At a meeting such policyholders, held pursuant to such notice, by ballot in person or by proxy. (2) If not by the method described in the preceding sub-paragraph, then by mail pursuant to a procedure and on forms to be prescribed by such plan. Such election shall be conducted under the direction and supervision of three impartial and disinterested inspectors appointed by the insurer and approved by the Commissioner. In case any person appointed as inspectors fails to appear at such meeting or fails or refuses to act at such election, the vacancy, if occurring in advance of the convening of the meeting or in advance of the opening of the mail vote, may be filled in the manner prescribed for the appointment of inspectors and, if occurring at the meeting or during the canvass of the mail vote, may be filled by the person acting as chairman of said meeting or designated for that purpose in such plan. The decision, act or certificate of a majority of the inspectors shall be effective in all respects as the decision, act or certificate of all. The inspectors of election shall determine the number of policyholders, the voting power of each, the policyholders represented at the meeting or voting by mail, the existence of a quorum

Sec. 266

THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

and the authenticity, validity and effect of proxies. They shall receive votes, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the results, and do such other acts as are proper to conduct the vote with fairness to all policyholders. The inspectors of election shall, before commencing performance of their duties, subscribe to and file with the insurer and with the Commissioner an oath that they, and each of them, will perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practicable. On the request of the insurer, the Commissioner, a policyholder or his proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them and execute a certificate of any fact found by them. They shall also certify the result of such vote to the insurer and to the Commissioner. Any report or certificate made by them shall be prima facie evidence of facts stated therein. All necessary expenses incurred in connection with such election shall be paid by the insurer. For the purpose of this section, a quorum shall consist of five per centum of the policyholders of such insurer entitled to vote at such election. Sec. 266. In carrying out any such plan, the insurer may acquire any shares of its own stock by gift, bequest or purchase. Any shares so acquired shall, unless as a result of such acquisition all of the shares of the insurer shall have been acquired, be acquired in trust for the policyholders of the class or classes for whose benefit the plan provides that the stock of the insurer shall be acquired as hereinafter provided. Such shares shall be assigned and transferred on the books of such insurer and approved by the Commissioner under a trust agreement approved by the Commissioner. Such trustees shall hold such stock in trust until all of the outstanding shares of capital stock of such insurer have been acquired, but for not longer than thirty years with such extensions of not more than five years each as may be granted by the Commissioner. Such extensions may be granted by the Commissioner if the plan so provides and if in his opinion the plan of acquisition of all of such stock can be completed within a reasonable period. Such trustees shall vote such stock at

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THE INSURANCE CODE OF THE PHILIPPINES

Sec. 267

all corporate meetings at which stockholders have the right to vote. When all the outstanding shares of capital stock of such insurer have been acquired, all said shares shall be cancelled, the certificate of amendment of the insurer's articles of incorporation giving effect thereto shall be filed in accordance with the provisions of the Corporation Law, and the insurer shall become a non-stock corporation for the profit of its members and such trust shall be conducted for the mutual benefit, ratably, of its policyholders of the class or classes for whose benefit the stock was acquired and shall have power to issue non-assessable policies on a reserve basis subject to all provisions of law applicable to incorporated life insurers issuing nonassessable policies on a reserve basis. Policies so issued may be upon the basis of full or partial participation therein as agreed between the insurer and the insured. Upon the termination of any such voting trust, either in accordance with its terms or as hereinabove provided, such plan of mutualization shall terminate, unless theretofore completed. Upon such termination, unless the plan of mutualization provides for the disposition of the shares acquired by the insurer under such plan or for the disposition of the proceeds thereof, the shares held by such trustees shall be disposed of in accordance with an order of the court of competent jurisdiction in the judicial district in which is located the principal office of such insurer, made upon a verified petition of the Commissioner. Sec. 267. Any such plan of mutualization may provide for the creation of a voting trust under a trust agreement for the holding and voting by three or more trustees of any portion or all of the shares of the insurer not required upon the adoption of such plan. The voting trustees shall be named in accordance with such plan or, if no provision is made therein for the naming of such trustee, then by the insurer. The voting trust agreement and voting trustees shall be subject to the approval of the Commissioner. Any or all of the trustees under such voting trust agreement may be the same person or persons as any or all of the trustees referred to in section two hundred sixtysix. Such voting trust agreement shall provide that in the event of acquisition by the insurer of any of the shares of stock held thereunder in accordance with the provisions

Sees. 268-269-A THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

of the plan, such shares so acquired together with the voting rights thereof shall be transferred by the trustees named under the provisions of section two hundred sixtysix. Any voting trust agreement created pursuant to the provisions of this section may be made irrevocable for not longer than thirty years and thereafter until the termination of the trust provided for in section two hundred sixty-six. The trust created pursuant to the provisions of this section shall terminate in any event upon termination of the trust provided for in section two hundred sixty-six. Upon the termination of the trust created pursuant to the provisions of this section, any shares held in such trust shall revert to the person entitled thereto by law. Sec. 268. Every payment for the acquisition of any shares of the capital stock of such insurer, the purchase price of which is not fixed by such plan, shall be subject to the prior approval of the Commissioner. Neither such plan, or any such payment, may be approved by the Commissioner unless he finds that the rights and interests of the insurer, its policyholders, and shareholders are protected. Sec. 269. The trustees referred to in section two hundred sixty-six shall file with such insurer and with the Commissioner a verified acceptance of their appointments and verified declarations that they will faithfully discharge their duties as such trustees. All dividends and other sums received by said trustees on the shares held by them, after paying the necessary expenses of executing their trust, shall be immediately repaid to such insurer for the benefit of all who are, or may become, policyholders of such insurance of the class or classes for whose benefit the stock of such insurer was acquired and entitled to participate in the profits thereof and shall be added to and become a part of the assets of such insurer. Sec. 269-A. If, at any time within the period provided in the plan for the acquisition of the outstanding shares of stock of the insurer, ninety percent thereof has already been acquired and transferred to the trustees under the plan, the insurer by a vote of a majority of the directors may determine to make an offer, with the permission of the Commissioner and subject to such requirement as he may specify, to acquire by purchase all of the shares not theretofore acquired under the plan, at a specified price which

610

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Sec. 269-A

the insurer considers to be their fair value as of the date of making such offer. If the offer to acquire is permitted by the Commissioner the insurer shall make a written offer by registered mail to each shareholder whose shares have not theretofore been acquired under the plan or otherwise, offering to acquire all his shares at such price if accepted in writing within thirty days after the mailing of such offer. Any shareholder accepting such offer within the time therefor shall, within sixty days after his acceptance, transfer to the insurer the certificates representing such shares and, upon doing so, shall be paid by the insurer the amount of such offer for his shares. Any share so acquired shall be assigned and transferred to the trustees under the plan and held by them as shares acquired pursuant to the plan. Each shareholder who does not accept such offer to acquire his shares within the time stated in such offer for acceptance thereof shall within fifteen days after the expiration of such offer apply to the Secretary of Finance for determination of the fair value of his shares as of the date of making such offer. The Secretary of Finance may himself, after due notice and hearing, determine upon the evidence received the fair value of the shares as of the date of making such offer, or appoint three impartial and disinterested persons to appraise the fair value of such shares with such direction as he shall deem proper and necessary to expedite the proceedings. Upon completion of the appraisal proceedings, the appraisers shall file with the Secretary of Finance their report in writing, stating the fair value of such shares as of the date of the making of such offer and setting forth their findings in support of such statement. The appraisers shall furnish each party to the proceedings a copy of their appraisal report, and within ten days after receipt thereof any such party may signify his objection, if any, to the report or move for the approval thereof. Upon the expiration of the period of ten days referred to above, the report shall be set for hearing, after which the Secretary of Finance shall issue an order adopting, modifying or rejecting the report in whole or in part or he may receive further evidence or may recommit it with instructions. Whenever the Secretary of Finance shall determine in any manner, as aforesaid, the fair value of

Sec. 269-A

THE BUSIN ESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

such shares, he may also determine the terms of payment thereof by the insurer. The expenses incidental to the proceedings including charges of the appraisers, if any, shall be paid equally by the insurer and the shareholder. The findings of the Secretary of Finance on all questions of fact raised at the hearing of the application for determination of the fair value of such shares shall be conclusive upon all parties to the proceedings. The order of the Secretary of Finance determining the fair value of the shares and the terms of payment thereof shall have the force and effect of a judgment which shall be appealable on any question of law. Such order shall become final and executory fifteen days after receipt thereof by the parties to the proceedings. Upon any such order becoming final and from which no appeal is pending, or when the time to appeal therefrom has expired, each shareholder party to the proceedings shall transfer his shares to the insurer and surrender to the said insurer the certificates representing such shares and the insurer shall make payment therefor as provided in such order. Any shares so acquired by the insurer shall be assigned and transferred to the trustees and held by them as shares acquired pursuant to the plan. Any shareholder who does not apply to the Secretary of Finance in the manner and within the time herein before prescribed shall be deemed to have accepted the offer referred to above, effective, however, upon the expiration of the time hereinabove prescribed for making such application, and such shareholder's time for accepting such offer shall, for that purpose only, be deemed to have been extended accordingly. Any offer to acquire shares made pursuant to this section, shall, except as otherwise provided herein, be irrevocable until all proceedings upon such offer have been completed or all shares have otherwise been earlier acquired by the insurer. Any shareholder who has expressly or impliedly accepted the plan or the offer to acquire his shares not theretofore acquired under the plan, and any shareholder who has rejected such plan or such offer and has applied, as aforesaid, to the Secretary of Finance for a determination

612

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Sees. 270-271

of the fair value of his shares subsequent to which an agreement has been reached or a final order issued fixing such fair value but who fails to surrender his certificates for cancellation upon payment of the amount to which he is entitled, may be compelled to do so by an order of the Secretary of Finance for that purpose and such order may provide that upon failure of such shareholder to surrender such certificates for cancellation such order shall stand in lieu of such surrender and cancellation, (as added by Pres. Decree No. 1280.) Sec. 270. Such insurer, after mutualization, shall be a continuation of the original insurer, and such mutualization shall not affect such insurer's certificate of authority nor existing suits, rights or contracts except as provided in said plan for the acquisition of the outstanding shares of the capital stock of such insurer, approved as provided in this chapter. Such insurer, after mutualization, shall exercise all the rights and powers and shall perform all the duties conferred or imposed by law upon insurers writing the classes of insurance written by it, and to protect rights and contracts existing prior to mutualization, subject to the effect of said plan. The board of directors of such insurer, prior to mutualization, may adopt amendments to its bylaws to take effect upon mutualization. Sec. 271. (1) An annual meeting of members shall be held at ten o'clock in the morning of the fourth Tuesday of March of each year at the principal office of the insurer, unless a different time or place be provided in by-laws. (2) Special meetings of the members, for any purpose or purposes whatsoever, may be called at any time by the president, or by the board of directors, or by one or more members holding not less than one-fifth of the voting power of such insurer, or by such other officers or persons as the by-laws authorize. (3) Notice of all meetings of members whether annual or special shall be given in writing to the members entitled to vote by the secretary, or an assistant secretary, or other person charged with that duty, or if there be no such officer, or in case of his neglect or refusal, by any director or member. At the option of the insurer such notice may be imprinted on premium notices or receipts or on both.

Sec. 271

THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

A notice may be given by such insurer to any member either personally, or by mail, or other means of written communication, charges prepaid, addressed to such member at his address appearing on the books of the insurer, or given by him to the insurer for the purpose of notice. If a member gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the principal office of the insurer is situated, or if published at least once in some newspaper of general circulation in the place in which said office is located. Notice of any meeting of members shall be sent to each member entitled thereto not less than seven days before such meeting, unless the by-laws provide otherwise. Notice of any meeting of members shall specify the place, the day and the hour of the meeting and the general nature of the business to be transacted. Notice of an annual meeting to be held at the time and place specified in sub-paragraph one of this section shall be sufficiently given if published at least once in each of four successive weeks in a newspaper of general circulation in the place in which the principal office of such insurer is located, and if so published, no other notice of such meeting shall be required. (4) The presence in person centum of the members entitled shall constitute a quorum for the unless otherwise provided by the

or by proxy of five per to vote at any meeting transaction of business, by-laws.

(5) Each such members shall have one vote at any meeting of members regardless of the number of policies of the amount of insurance that such member holds and regardless of whether such policies are policies of life insurance, or of health and accident insurance, or both. Any member entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the secretary of such insurer. (6) The directors of the insurer in office at the time the insurer is mutualized as provided in this chapter shall continue in office until the first annual meeting of

614

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 272

members. At the first annual meeting of members and at each annual meeting thereafter directors shall be elected by the members for the term or terms authorized by this chapter. (7) The articles of incorporation or the by-laws may provide that the directors may be divided into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than six years. In the absence of such provisions, each director, except members of the board of directors at the time the insurer is mutualized, shall be elected for a term of one year. All directors shall hold office for a term for which they are elected and until their successors are elected and qualified. A director may, but need not be a member or policyholder of the insurer of which he is acting as director. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, and each director so elected shall hold office until the next annual meeting. (8) All insurers mutualized under the provisions of this chapter shall be subject to all other applicable provisions of this Code and of the Corporation Law.* Sec. 272. The provisions of Commonwealth Act No. 83, otherwise known as the Securities Act,** as amended, shall not apply to any of the following: (a) Shares of the capital stock of such insurer acquired as provided in section two hundred sixty-six and assigned and transferred to the trustees as is provided in said section, and the assignment and transfer of said shares as so provided. (b) Any certificate or other instrument issued to a policyholder or such mutualized insurer conferring or evidencing membership in such mutualized insurer or conferring or evidencing such member's right to participate in the profits or share in the assets of such mutualized insurer by virtue of his membership therein, and the issuance of such certificate or other instrument. *Now "The Corporation Code of the Philippines" (Batas Pambansa Big. 68.) which supersede the former Corporation Law. (Act No. 1459, as amended.) "Now, RA No. 8799, otherwise known as "The Securities Regulation Code."

Seed. 262-272

THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

(c) The plan for the acquisition of the outstanding shares of the capital stock of such insurer authorized by the provisions of this chapter, the submission of said plan to the Commissioner and to the policyholders of such insurer as provided in this chapter, and the approval and carrying out of said plan or any part thereof in accordance with the provisions of this chapter.

Types of insurance organization. In general, there are three (3) kinds of insurance companies, namely: (1) Stock insurance company. — It has b e e n tersely defined as o n e o w n e d and m a n a g e d b y the stockholders w h o contribute all the capital, p a y all the losses, and take all the profits. T h e stockholders need not be policyholders (State vs. Willet, 86 NE 6 8 ; Ohio State Life Ins. Co. vs. Clark, 303 US 828.); (2) Mutual insurance company. — A cooperative enterprise, wherein the m e m b e r s constitute both insurer and insured, w h e r e the m e m b e r s all contribute, by a system of premiums and assessments, to the creation of a fund from which all losses and liabilities are paid, and wherein the profits are divided among themselves in proportion to their interest. (Minnick vs. Stale F a r m Mut. A u t o Ins. Co., 174 A 2d 706; see White Gold Marine Services, Inc. vs. Pioneer Insurance and Surety Corporation, 464 S C R A 4 4 8 [2005].) It m a y be either: (a) non-assessable mutual or one that charges a fixed p r e m i u m and the policyholders cannot be assessed. Legal reserves and surpluses are maintained to provide payment of all claims; or (b) assessable premium mutual or one that charges an initial fixed premium, and if that is not sufficient, m a y assess the policyholders to meet losses in excess of the premiums that have been charged. (Davids, Dictionary of Insurance [1959], p. 141.) Under the Insurance Code, only a domestic stock life insurance company doing business in the Philippines may convert itself into an incorporated mutual life insurer by complying with the requirements provided in Sections 263 to 269. (see Sec. 262.) All

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Sees. 262-272

mutualized insurers are subject to all applicable provisions of the Corporation Code (Sec. 271 [8].); and (3) Mixed insurance company. — O n e that has, at least in part, the nature of both stock and mutual companies, and in which a certain portion of the profits is divided among the stockholders and a distribution of other funds m a d e among the policy holders. (Pink vs. Town Taxi Co., 21 A 2d 656; see 43 A m . Jur. 2d 1 5 5 , 1 5 6 , 162.) Status of m e m b e r s of mutual insurance companies. (1) Rights and liabilities, generally. — T h e contract of insurance with a mutual insurance c o m p a n y is a peculiar contract, for although in terms a contract with the company, it is in substance a contract between the insured and all other m e m b e r s of the company. (Mutual L. Ins. C o . vs. Phinney, 178 US 327.) T h e members sustain a dual relationship inter se, a n d their interests are two-fold: they are b o t h insurers and insured. (Gaston vs. Keehn, 26 SE 2d 107.) Each person insured in such a c o m p a n y thus becomes subject to the s a m e obligations toward the other members that they bear toward h i m . (Baxter vs. Chelsea M u t . F. Ins. Co., 83 Mass. Allen 294.) (2) Duration of membership. — If the charter of the c o m p a n y contains no provisions on the subject, m e m b e r s h i p c o m m e n c e s only with the taking out of a policy and lasts only for the policy period. (Huber vs. Martin, 105 NW 1135.) It ceases with the expiration of the m e m b e r ' s policy and p a y m e n t of the liabilities incurred while the policy was in force. ( C o m m o n w e a l t h Mut. F. Ins. Co. vs. Hayden, 85 NW 443.) (3) Relationship of members to company. — S o m e courts h a v e denied that the m e m b e r s of mutual insurance c o m p a n y are b o u n d to share in the losses and are entitled to share in the profits on the basis of a partnership, except insofar as the charter or policy provides otherwise. (Mutual Guaranty F. Ins. C o . vs. Barker, 77 NW 868.) The policyholder is not a partner of the company, but his relation with the c o m p a n y is one of contract and is measured by the terms thereof. (Brown vs. Stoerkel, 41 NW 921.)

Sees. 262-272

THE BUSINESS OF INSURANCE Title 17. — Mutualization of Stock Life Insurance Companies

A mutual life insurance c o m p a n y is conducted for the benefit of its member-policyholders, w h o pay into its capital by way of premiums. To that extent, they are responsible for the payment of all its losses. " T h e cash paid in for premiums and the premium notes constitute their assets x x x . " In the event that the company itself fails before the terms of the policies expire, the memberpolicyholders do not acquire the status of creditors. Rather, they simply b e c o m e debtors for whatever p r e m i u m s that they have originally agreed to p a y the company, if they h a v e not yet paid those amounts i n full, for "[mjutual companies x x x depend solely upon x x x p r e m i u m s . " O n l y w h e n the premiums will h a v e accumulated to a s u m larger than that required to pay for c o m p a n y losses will the member-policyholders be entitled to a "pro rata division thereof as profits." (Republic vs. Sunlife Assur. C o . of Canada, 4 7 3 S C R A 129 [2005].) (4) Right to share in the common fund. — Sharing in the comm o n fund, any member-policyholder m a y choose to withdraw dividends in cash or to apply them in order to reduce a subsequent premium, purchase additional insurance, or accelerate the p a y m e n t period. Although the p r e m i u m m a d e at the beginning of a year is more than necessary to provide for the cost of carrying the insurance, the member-policyholder will nevertheless receive the benefit of the overcharge by w a y of dividends, at the end of the year w h e n the cost is actually ascertained. T h e declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the holder of the policy. That is its purpose and effect. T h e so-called "dividend" that is received by memberpolicyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock (to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. T h e quasi-appearance of profit will not change its character. It remains an overpayment, a benefit to which the member-policyholder is equitably entitled. (Ibid.)

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Sees. 262-272

(5) Rights to company property. — While the title to the property is in the company, the equitable interests therein are vested in the members the same as in case of a stock corporation. While the corporation o w n s the property, the m e m b e r s o w n the corporation. (Huber vs. Martin, 105 NW 1135.) U p o n the dissolution of the company, its general creditors are entitled to priority over the claims of the m e m b e r s for the reason that the members are, generally speaking, the debtors. (Moyer vs. Arty. Gen., 32 NJ Eq. 815.) After the payment of debts, it w o u l d appear to be that the assets belong only to m e m b e r s at the time of dissolution, which includes only present policyholders. (Powers vs. Gaty, 105 NW 1 0 1 3 , 1 1 3 5 ; 3 A m . Jur. 2d 1 6 7 - 1 6 9 , 1 9 3 . )

— oOo —

Title 18 WITHDRAWAL OF FOREIGN INSURANCE COMPANIES

Sec. 273. A foreign insurance company doing business in the Philippines, upon payment of the fee hereinafter prescribed and surrender to the Commissioner of its certificate of authority, may apply to withdraw from the Philippines. Such application shall be duly executed in writing, accompanied by evidence of due authority for such execution, properly acknowledged. Sec. 274. The Commissioner shall publish the application for withdrawal daily for a period of one week in two newspapers of general circulation in the City of Manila, one in English and the other in Pilipino. The expenses of such publication shall be paid by the insurance company filing such application. Sec. 275. Every foreign insurance company desiring to withdraw from the Philippines shall, prior to such withdrawal, discharge its liabilities to policyholders and creditors in this country. In case of its policies insuring residents of the Philippines, it shall cause the primary liabilities under such policies to be reinsured and assumed by another insurance company authorized to transact business in the Philippines. In the case of such policies as are subject to cancellation by the withdrawing company, it may cancel such policies pursuant to the terms thereof in lieu of such reinsurance and assumption of liabilities. Sec. 276. The Commissioner shall make an examination of the books and records of the withdrawing company, and if, upon such examination, the Commissioner finds that the insurer has no outstanding liabilities to residents of the Philippines, it shall cancel the withdrawing company's 619

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Sees. 273-279

certificate of authority, if unexpired, and shall permit the insurer to withdraw. The cost and expenses of all such examination shall be paid as prescribed in section four hundred seventeen. Sec. 277. Upon the failure of such withdrawing insurance company or its agents in the Philippines to pay the expenses of such publication within thirty days after the presentation of the bill therefor, the Commissioner shall collect such fee from the deposit furnished in accordance with the provisions of section one hundred ninety-one. Sec. 278. A foreign life insurance company that withdraws from the Philippines shall be considered a "servicing insurance company" if its business transactions are confined to accepting periodic premium payments from, or granting policy loans and paying cash surrender values of outstanding policies to, or reviving lapsed policies of, Philippine policyholders, and such other related services. Sec. 279. No company shall act as a servicing insurance company until after it shall have obtained a special certificate of authority to act as such from the Commissioner upon application therefor and payment by the company of the fees hereinafter prescribed. Such certificate shall expire on the last day of June of each year and shall be renewed annually, while the company continues to service its policyholders, and to comply with all the applicable provisions of law and regulations.

Regulation of foreign insurance companies. A state, in the exercise of its police powers, has very b r o a d powers to establish conditions for the admission of foreign insurance companies to do business within the state. ( E m p l o y e r ' s Liability Assur. Corp. vs. Frost, 107 A L R 1413.) After admission, they b e c o m e subject to its laws. The power of local control over foreign c o m p a n i e s has been held to extend even to preventing t h e m from concerted action in withdrawing from the state and cancelling the policies in force, because of changes m a d e in the laws under which they are doing business. (State ex rel. Broker vs. Assur. Co. of America, 158 S W 640; see 43 Am. Jur. 2d 142-145.)

Sees. 273-279

THE BUSINESS OF INSURANCE Title 18. — Withdrawal of Foreign Insurance Companies

621

Withdrawal of foreign insurance companies. (1) Procedure. — Sections 2 7 3 to 2 7 7 prescribe the procedure to be followed u p o n cessation of business of a foreign insurance company. T h e foreign insurer m u s t apply. Its application must be published in t w o newspapers. It m u s t discharge its liabilities to policy holders and creditors in this country, and cause its policies insuring Philippine residents to be taken up by other qualified insurers. T h e n the "Insurance C o m m i s s i o n e r shall m a k e an examination of the b o o k s and records of the withdrawing c o m p a n y and if u p o n such examination he finds the insurer has no outstanding liabilities to residents of the Philippines, he shall x x x permit the insurer t o withdraw." T h e procedure outlined is intended to govern the conduct of the Insurance C o m m i s s i o n e r w h e r e petitions are m a d e for return of the deposit u p o n withdrawal of foreign insurers. It does not attempt to regulate the liquidation of liabilities of such foreign insurers, nor the rights of claimants against them. Of course, there is no doubt that if the Insurance Commissioner is advised that there are unpaid claimants against the foreign insurers, he will refuse to allow withdrawal or the return of the securities deposited with h i m or such portion thereof as m a y be necessary to satisfy the local claimants. Yet it w o u l d be incorrect to assert that w h e n e v e r he allows the return of such securities, there are factually and legally no unpaid claimants. (Scottish Union & Nat. Ins. Co. vs. Macadaeg, 91 Phil. 891 [1952].) (2) When permit to withdraw may be given. — Under Section 276, the Insurance Commissioner m a y permit the foreign insurer to withdraw (and get b a c k the securities it has deposited for the benefit of policyholders) only when he finds that such foreign insurer "has no outstanding liabilities to residents of the Philippines." If the Commissioner is fully aware of pending cases against the foreign insurer, he m a y not declare that the insurer has no "outstanding liabilities" to residents of the Philippines. (Ibid.) (3) Judicial review of discretion of Commissioner. — When the Insurance Commissioner approves the withdrawal of a foreign insurance company from business in the Philippines, the courts

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Sees. 273-279

may review the discretion exercised by him and substitute their own judgment therefor, where the insurer has accrued "liabilities" which the law requires it to discharge before withdrawal. T h e law should not be interpreted as to permit foreign insurers to escape the results of pending actions against them by withdrawing from the Philippines with all the securities they have deposited, provided they get the sanction of the Commissioner. That w o u l d be giving the Commissioner discretion to frustrate orders of courts in litigations against foreign insurers and to liberate the latter from claims of local policyholders, w h o s e interest it is his principal duty to protect, and for w h o s e benefit he is given broad powers of supervision over insurance companies as are seldom conferred upon parallel agencies. (Ibid.) Section 278 states w h e n a foreign life insurance c o m p a n y that withdraws from the Philippines shall be considered a servicing insurance company. Before it can act as a servicing company, it must obtain a special certificate of authority to act as such from the Insurance Commissioner. (Sec. 279.)

Reinsurance by withdrawing foreign insurer. (1) Substitution by another insurer without the consent of insured not allowed. — T h e whole idea of the l a w is to require the foreign insurance c o m p a n y to show that it has no m o r e responsibilities to any resident here, and may, therefore, go h o m e with its securities. It is not correct to construe the second part of Section 276 as pennitting the withdrawing foreign reinsurer, without the consent of the insured, to transfer to another insurer his accrued liabilities under a policy, thus, foisting a n e w debtor u p o n the insured. It is fundamental in our civil laws (see Arts. 1 2 0 5 , 1 2 9 3 , Civil Code.) that the debtor (insurer) m a y not h a v e himself substituted by another without the consent of the creditor (the policyholder). (Ibid.) (2) Responsibility to discharge accrued and contingent liabilities. — Clearly analyzed, Section 275 consists of three parts. T h e first speaks of liabilities of the foreign insurer to policyholders and creditors. T h e second and third obviously refer to its outstanding policies, i.e., policies on which no claim has as yet arisen because the risk insured against has not yet happened. In other words,

Sees. 273-279

THE BUSINESS OF INSURANCE Title 18. — Withdrawal of Foreign Insurance Companies

623

the first refers to accrued liabilities (outstanding claims) to be discharged, the second and third, to contingent liabilities (outstanding risks) to be reinsured. T h e third permitting cancellation obviously contemplates outstanding policies on which the risk has not yet happened, b e c a u s e evidently, the insurer may not cancel a policy on which a claim has already accrued by the occurrence of the risk. N o w the second part requires the foreign insurer to "reinsure." (3) Reinsurance contemplated. — Reinsurance as defined in Section 95 is not obviously w h a t Section 2 7 5 contemplates b e c a u s e the foreign reinsurer is not thereby relieved of local responsibility. Yet the term "reinsurance" is also sometimes "applied to a contract b e t w e e n two insurers by which the one assumes the risk of the other and b e c o m e s substituted to its contracts, so that on the consent of the original policyholders, the liability of the first insurer ceases, a n d the liability of the second is substituted." (46 C.J.S. 196.) This is naturally the kind of "reinsurance" contemplated in the second part of Section 2 7 5 , i.e., reinsurance that frees the original insurer from liability. (Scottish U n i o n & Nat. Ins. C o . vs. Macadaeg, supra.)

— oOo —

Title 19 PROFESSIONAL

REINSURERS

Sec. 280. Except as otherwise provided in this Code, no person, partnership, association or corporation shall transact any business in the Philippines as a professional reinsurer until it shall have obtained a certificate of authority for that purpose from the Commissioner upon application therefor and payment by such person, partnership, association or corporation of the fees hereinafter prescribed. As used in this Code, the term "professional reinsurer" shall mean any person, partnership, association or corporation that transacts solely and exclusively reinsurance business in the Philippines. The Commissioner may refuse to issue a certificate of authority to any such person, partnership, association or corporation, if, in his judgment, such refusal will best promote public interest. No such certificate of authority shall be granted to any such person, partnership, association or corporation unless and until the Commissioner shall have satisfied himself by such examination as he may make and such evidence as he may require that such person, partnership, association or corporation is qualified by the laws of the Philippines to transact business therein as a professional reinsurer. Before issuing such certificate of authority the Commissioner must be satisfied that the name of the applicant is not that of any other known company transacting insurance or reinsurance business in the Philippines, or a name so similar as to be calculated to mislead the public. Such certificate of authority shall expire on the last day of June of each year and shall be renewed annually if such person, partnership association, or corporation is continuing to comply with the provisions of this Code, 624

Sees. 280-281

THE BUSINESS OF INSURANCE Title 19. — Professional Reinsurers

625

or the circulars, instructions, rulings, or decisions of the Commissioner and such other pertinent law, rules and regulations. Every such person, partnership, association, or corporation receiving such certificate of authority shall be subject to the provisions of this Code and other related laws, and to the jurisdiction and supervision of the Commissioner. Sec. 281. Any person, partnership, association, or corporation authorized to transact solely reinsurance business must have a paid-up capital stock of at least ten million pesos, twenty-five per centum of which must be invested in securities satisfactory to the Commissioner, consisting of bonds or other evidences of debt of the Government of the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank of the Philippines, and deposited with the Commissioner, and the remaining seventy-five per centum in such other securities as may be allowed and permitted by the Commissioner, which securities shall at all times be maintained free from any lien or encumbrance; Provided, That reinsurers already doing business as such in the Philippines shall comply with the requirement of this section by increasing their respective capital as herein provided not later than December thirty-one, nineteen hundred eighty; Provided, further, That the provisions of this chapter applicable to insurance companies shall so far as practicable be likewise applicable to professional reinsurers, (as amended by Pres. Decree No. 1455.) Types of reinsurers. (1) Basic types. — There are two basic types of reinsurers, namely: (a) Professional reinsurers or reinsurers that do reinsurance business only (Sec. 280, par. 1.); and (b) Non-professional reinsurers or insurers that do not specialize in reinsurance only. They are primary insurers which maintain reinsurance departments. They may accept reinsurance regularly or only occasionally.

626

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Sees. 280-281

(2) Special type. — A special type of reinsurer is the reinsurance pool, which is an association for the exchange of reinsurance among two or more insurers according to an automatic agreement. (Many of these pools are technically associations of insurers rather than reinsurers; thus, they are insurance pools instead of reinsurance pools, but the purposes of each are similar.) Each reinsurer receives a certain amount or proportion of the risks or losses of the other reinsurer or reinsurers, and each cedes or gives to all the others a predetermined part of its risks or losses. These pools are also for spreading infrequent catastrophic types of risks among insurers of a c o m p a n y group or fleet. (D.L. Bickelhaupt, op. cit., p. 162.) (a) M u c h greater capacity is obtained by companies joining in pools wherein six or seven c o m p a n i e s agree to accept a share and the pool itself reinsures the writings of the individual m e m b e r s and sometimes the business given to it by companies outside the pool. (b) Not only is greater capacity obtained by this practice but the share in any one risk of an individual c o m p a n y is made smaller. (c) It m a y also serve as a m e a n s of stabilizing p r e m i u m rates because the business m u s t be transferred to the pool on a uniform basis. Of course, a reinsurance c o m p a n y m a y be a m e m b e r of a pool in addition to other insurance business. (Riegel, Miller and Williams, Jr., op. cit., p. 126.)

— oOo —

Title 20 HOLDING

COMPANIES

Sec. 282. As used in this title, the following terms shall have the respective meanings hereinafter set forth unless the context shall otherwise require: (a) "Person" means an individual, partnership, firm, association, corporation, trust, any similar entity or any combination of the foregoing acting in concert; (b) "Control," including the terms "controlling," "controlled by" and "under common control with," 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 otherwise. Subject to section two hundred eighty-four, control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote forty per centum or more of the voting securities of any other person; Provided, That no person shall be deemed to control another person solely by reason of his being an officer or director of such other person; (c) "Holding company" means any person who directly or indirectly controls any authorized insurer; (d) "Controlled insurer" means an authorized insurer controlled directly or indirectly by a holding company; (e) "Controlled person" means any person, other than a controlled insurer, who is controlled directly or indirectly by a holding company; (f) "Holding company system" means a holding company together with its controlled insurers and controlled persons. 627

628

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 283-285

Sec. 283. Notwithstanding paragraph (b) of section two hundred eighty-two, the Commissioner may determine after notice and opportunity to be heard, that a person exercises directly or indirectly either alone or pursuant to an agreement with one or more other persons such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of policyholders or stockholders of the insurer that the person be deemed to control the insurer. Sec. 284. The Commissioner may determine upon application that any person, either alone or pursuant to agreement with one or more other persons, does not or will not upon the taking of some proposed action control another person. The filing of an application hereunder in good faith by any person shall relieve the applicant from any obligation or liability imposed by this title with respect to the subject of the application, except as contained in section two hundred ninety-four, until the Commissioner has acted upon the application. Within thirty days or such further period as he may prescribe, the Commissioner may prospectively revoke or modify his determination, after notice and opportunity to be heard, whenever in his judgment revocation or modification is consistent with this title. Sec. 285. Notwithstanding any other provisions of this title, the following shall not be deemed holding companies: (a) authorized insurers or reinsurers or their subsidiaries; (b) the Government of the Philippines, or any political subdivision, agency or instrumentality thereof, or any corporation which is wholly-owned directly or indirectly by one or more of the foregoing. The Commissioner may conditionally and unconditionally exempt any specified person or class of persons, from any of the obligations or liabilities imposed under this title, if and to the extent he finds the exemption necessary or appropriate in the public interest or not adverse to the interests of policyholders or stockholders and consistent with the purposes of this title.

Sees. 286-289

THE BUSINESS OF INSURANCE Title 20. — Holding Companies

Sec. 286. (1) Every person who on the date this Code takes effect is a controlled insurer and every person who thereafter becomes a controlled insurer, shall, within sixty days thereafter, or within thirty days after becoming a controlled insurer, whichever is later, register with the Commissioner. Such registration shall be amended within thirty days following any change in the identity of its holding company. The Commissioner may grant one or more reasonable extensions of the time to register. (2) Every registrant shall furnish the Commissioner with the following information concerning its holding company: (a) a copy of its charter or articles of incorporation and its by-laws, (b) the identities of its principal shareholders, officers, directors and controlled persons, and (c) information as to its capital structure and financial condition, and a description of its principal business activities. Sec. 287. Every controlled insurer shall file with the Commissioner such reports or material as he may direct for the purpose of disclosing information concerning the operations of persons within the holding company system which may materially affect the operations, management or financial condition of the insurer. Sec. 288. Every holding company and every controlled person within a holding company system shall be subject to examination by order of the Commissioner if he has cause to believe that the operations of such persons may materially affect the operations, management or financial condition of any controlled insurer with the system and that he is unable to obtain relevant information from such controlled insurer. The ground relied upon by the Commissioner for such examination shall be stated in his order, which order shall be subject to judicial review only at the instance of the person sought to be examined. Such examination shall be confined to matters specified in the order. The cost of such examination shall be assessed against the person examined and no portion thereof shall thereafter be reimbursed to it directly or indirectly by the controlled insurer. Sec. 289. The Commissioner shall keep the contents of each report made pursuant to this title and any infor-

629

630

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 290-292

mation obtained by him in connection therewith confidential and shall not make the same public without the prior written consent of the controlled insurer to which It pertains unless the Commissioner after notice and an opportunity to be heard shall determine that the interests of policyholders, stockholders or the public will be served by the publication thereof. In any action or proceeding by the Commissioner against the person examined or any other person within the same holding company system a report of such examination published by him shall be admissible as evidence of the facts stated therein. Sec. 290. Transactions within a holding company system to which a controlled insurer is a party shall be subject to the following: (a) the terms shall be fair and equitable; (b) charges or fees for services performed shall be reasonable; (c) expenses incurred and payments received shall be allocated to the insurer on an equitable basis in conformity with customary insurance accounting practices consistently applied. The books, accounts and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties. Sec. 291. The prior written approval of the Commissioner shall be required for the following transactions between a controlled insurer and any person in its holding company system: sales, purchases, exchanges, loans or extension of credit, or investments, involving five per centum or more of the insurer's admitted assets as of the thirty-first day of December next preceding. Sec. 292. The following transactions between a controlled insurer and any person in its holding company system may not be entered into unless the insurer has notified the Commissioner in writing of its intention to enter into any such transaction at least thirty days prior

Sees. 293-294

THE BUSINESS OF INSURANCE Title 20. — Holding Companies

thereto, or such shorter period as he may permit, and he has not disapproved it within such period: (a) sales, purchases, exchanges, loans or extensions of credit, or investments, involving more than one-half of one per centum but less than five per centum of the insurer's admitted assets as of the thirty-first day of December next preceding; (b) reinsurance treaties or agreements; (c) rendering of services on a regular or systematic basis; or (d) any material transaction, specified by regulation, which the Commissioner determines may adversely affect the interest of the insurer's policyholders or stockholders or of the public. Nothing herein contained shall be deemed to authorize or permit any transaction which, in the case of a noncontrolled insurer, would be otherwise contrary to law. Sec. 293. The Commissioner, in reviewing transactions pursuant to sections two hundred ninety-one and two hundred ninety-two, shall consider whether the transactions comply with the standard set forth in section two hundred ninety and whether they may adversely affect the interests of policyholders. This section shall not apply to transactions subject to other sections of this Code which impose notice or approval requirements greater than those prescribed by this title. Sec. 294. (1) No person, other than an authorized insurer, shall acquire control of any domestic insurer, whether by purchase of its securities or otherwise, except (a) after twenty days written notice to its insurer or such shorter period as the Commissioner may permit, of its intention to acquire control, and (b) with the prior written approval of the Commissioner. (2) The Commissioner shall disapprove the acquisition of control of a domestic insurer if he determines, after notice and an opportunity to be heard, that such action is reasonably necessary to protect the interests of the people of this country. The following shall be the only factors to be considered by him in reaching the foregoing determination:

631

632

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 294

(a) the financial condition of the acquiring person and the insurer; (b) the trustworthiness of the acquiring person or any of its officers or directors; (c) a plan for the proper and effective conduct of the insurer's operations; (d) the source of the funds or assets for the acquisition; (e) the fairness of any exchange of stock, assets, cash or other consideration for the stock or assets to be received; (f) whether the effect of the acquisition may be substantially to lessen competition in any line of commerce in insurance or to tend to create a monopoly therein; and (g) whether the acquisition is likely to be hazardous or prejudicial to the insurer's policyholders or stockholders. (3) The following conditions affecting any controlled insurer, regardless of when such control has been acquired, are violations of this title: (a) the controlling person or any of its officers or directors have demonstrated untrustworthiness; and (b) the effect of retention of control may be substantially to lessen competition in any line of commerce in insurance in this country or to tend to create a monopoly therein. If, after notice and an opportunity to be heard, the Commissioner determines that any of the foregoing violations exists, he shall reduce his findings to writing and shall issue an order based thereon and cause the same to be served upon the insurer and upon all persons affected thereby directing any person found to be in violation thereof to take appropriate action to cure such violation. Upon the failure of any such person to comply with such order, section two hundred ninety-eight shall become applicable. (4) The Commissioner may require the submission of such information as he deems necessary to determine whether any acquisition or retention of control complies with this title and may require, as a condition of approval of such acquisition or retention of control, that all or any portion of such information be disclosed to the insurer's stockholders. (5) Unless subject to registration under section two hundred eighty-six or unless acquisition of its control is subject to paragraphs one and two hereof, every authorized insurer shall, on or before the first day of July, nineteen hundred seventy-five, or within thirty days after any event requiring notice hereunder, whichever is

Sec. 295-298

THE BUSINESS OF INSURANCE Title 20. — Holding Companies

later, notify the Commissioner in writing of the identity of any person whom the insurer then knows or has reason to believe controls or has taken any action, other than preliminary negotiations or discussion, to acquire control of the insurer. Sec. 295. (1) Notwithstanding the control of an authorized insurer by any person, the officers and directors of the insurer shall not thereby be relieved of any obligation or liability to which they would otherwise be subject by law, and the insurer shall be managed so as to assure its separate operating identity consistent with this title. (2) Nothing herein shall preclude an authorized insurer from having or sharing a common management or cooperative or joint use of personnel, property or services with one more other persons under arrangements meeting the standards of section two hundred ninety. Sec. 296. To the extent that any information or material is set forth in forms or other matter on file with any government agency or in a registration form filed with the Commissioner by another person within the same holding company system, the controlled insurer may comply with the registration or reporting requirements of this title by referring in its registration form or report to such other filed matter and attaching a copy thereof certified by the insurer as a true and complete copy, to such registration form of report or, if such other matter is on file with the Commissioner, incorporating such matter by reference. Sec. 297. No holding company or controlled person shall directly or indirectly or through another person do or cause to be done for or in behalf of the controlled insurer any act intended to affect the insurance operations of the insurer which, if done by the insurer, would violate any provision of this Code. Sec. 298. In addition to any other penalty provided by law, the Commissioner may, upon the willful failure of any person within a holding company system to comply with this title or any regulation or order promulgated hereunder: (a) proceed under title fourteen or title fifteen, Chapter III, of this Code with respect to insurer within the holding company system; or

633

634

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 282-298

(b) revoke or refuse to renew the authority to do business in this country of an insurer within the holding company system or refuse to issue such authority to any other insurer in the system; or (c) direct that, in addition to any other penalty provided by law, such person forfeit to the people of this country a sum not exceeding five hundred pesos for a first violation and two thousand five hundred pesos for any subsequent violation. An additional sum not exceeding two thousand five hundred pesos shall be imposed for each month during which any such violation shall continue.

Regulation of holding companies. A "holding company" m e a n s any person w h o directly or indirectly controls any authorized insurer; while "control" m e a n s the possession directly or indirectly of the p o w e r to direct or cause the direction of the m a n a g e m e n t and policies of an authorized insurer or other person or corporation within the holding c o m pany system, (see Sec. 282.) U n d e r the Insurance Code, n o insurance c o m p a n y m a y b e acquired by a holding c o m p a n y without prior review by the Insurance C o m m i s s i o n e r (see S e c . 294.); all insurance c o m p a n i e s controlled by a holding c o m p a n y are required to register with the Commissioner, furnish the C o m m i s s i o n e r w i t h the required information concerning the holding c o m p a n y (see S e c . 286.), and file such reports concerning operations w h i c h m a y materially affect the operations, m a n a g e m e n t or financial condition of the controlled insurer (see Sec. 287.); and all holding c o m p a n i e s are subject to examination on matters affecting an insurance c o m p a n y which is held or on such insurance c o m p a n y ' s treatment of its policyholders, (see Sec. 288.) Conflicts of interest in transactions b e t w e e n an insurance company and its parent holding c o m p a n y or its affiliates are prohibited, (see Sees. 290-293.)

Need for regulation. (1) "While holding companies are not themselves new, the dominant motive for their formation might change from desire to

Sees. 282-298

THE BUSINESS OF INSURANCE Title 20. — Holding Companies

635

facilitate the conduct of the insurance business to a desire to shift away from the insurance business and to subordinate insurance to other business objectives. This change would increase the strain on the established regulatory system. (2) Moreover, the opportunities for pyramiding and excessive accumulation of e c o n o m i c p o w e r through the use of holding companies are real and potentially contrary to the public interest. (3) W h e n a non-insurance holding c o m p a n y system includes an insurance c o m p a n y within it, its potential for specific harm b e c o m e s greater since tempting reservoirs of liquid assets become accessible to persons without appreciation of the security needs of the insurance enterprise, and the interests of the policyholders thus b e c o m e vulnerable. (4) Furthermore, the interests of the controlling persons are potentially in conflict not only with those of the policyholders and the public b u t with those of the other shareholders of the insurance company. (5) Ideally, an insurance business, w h i c h is fiduciary in nature, affected with the public interest and intensively regulated, should not be controlled by companies neither charged with such fiduciary-like responsibilities nor regulated to assure their adherence to appropriate standards of conduct." ("Supervision and Regulation of the Insurance Business in the Philippines," Journal of the IBP, First Quarter, 1976, pp. 25-26, by C o m m i s s i o n e r G. Cruz-Arnaldo.)

— oOo —

Chapter IV SALES AGENCIES AND SERVICES Title 1 INSURANCE AGENTS AND BROKERS

Sec. 299. 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. 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 annually on the first day of January, or within six months thereafter. Such license shall be issued by the Commissioner only upon the written application of the person desiring it, such application if for a license to act as insurance agent, being approved and countersigned by the company such person desires to represent, and shall be upon a form prescribed by the Commissioner giving such information as he may require, and upon payment of the corresponding fee hereinafter prescribed. The Commissioner shall satisfy himself as to the competence and trustworthiness of the applicant and shall have the right to refuse to issue or renew and to suspend or revoke any such license in his discretion. No such license shall be valid after the thirtieth 636

Sees. 299-301

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

637

day of June of the year following its issuance unless it is renewed. (As amended by Pres. Decree No. 1455.) Sec. 300. Any person who for compensation solicits or obtains insurance on behalf of any insurance company or transmits to 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 shall be an insurance agent within the intent of this section and shall thereby become liable to all the duties, requirements, liabilities and penalties to which an insurance agent is subject. Sec. 301. 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, shall be an insurance broker within the intent of this Code, and shall thereby become liable to all the duties, requirements, liabilities and penalties to which an insurance broker is subject.

Insurance agents and brokers. (1) Generally. — T h e business of buying and selling insurance is almost entirely carried on by insurance agents, brokers, solicitors, and other persons w h o act as representatives of sellers or of buyers. T h e principles of the general law on agency apply to the relationship of insurers and insurance companies on the one h a n d and their agents on the other. (43 A m . Jur. 2d 198.) T h e Insurance C o d e does not have any provisions governing the relations b e t w e e n insurance companies and their agents. It follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers under Section 416, assume jurisdiction over controversies between the insurance companies and their agents. (Phil. American Life Ins. Co. vs. Ansaldo, 234 S C R A 509 [1994].) (2) Insurance agent. — So far as the insurer is concerned, the term refers to a person expressly or impliedly authorized to represent it in dealing with third persons in matters relating to

638

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 299-301

insurance. (Washington Nat. Co. vs. E m p l o y m e n t Secur. Com., 61 Ariz. 112.) (a) These agents are of various kinds and classes, such as general, special, local, resident, soliciting, collecting, and adjusting. T h e definition of an insurance agent under Section 300 holds true with respect to the agent mentioned in Section 299. It is a definition and interpretative clause intended to qualify the term "agent" mentioned in Section 299. The criminal information charging a person of insurance solicitation without having first secured a license to act as an insurance agent from the Commissioner m u s t state that it w a s for compensation; otherwise, no conviction is warranted. It is well-settled that to warrant conviction, every element of the crime must be alleged and proved, (see A i s p o m a vs. Court of Appeals, 113 S C R A 4 5 9 [1982].) (b) An insurance c o m p a n y m a y h a v e t w o classes of agents w h o sell its insurance policies: salaried e m p l o y e e s w h o k e e p definite hours and w o r k under the control and supervision of the company, and registered representatives w h o w o r k on commission basis. (Great Pacific Life Assurance Corp. vs. Judico, 180 S C R A 4 4 5 [1989].) T h e first is not required to secure a license if they are not given additional compensation for acting as such agents. U n d e r the first category, the relationship b e t w e e n the insurance c o m p a n y and its agents is governed by the contract of e m p l o y m e n t and the provisions of the L a b o r Code, while under the second category, the s a m e is governed by the contract of agency and the pertinent provisions of the Civil Code. Disputes involving the latter are cognizable by the regular courts. (Phil. A m e r i c a n Life Ins. C o . vs. Ansaldo, supra.) 1

(c) Payment of claims arising from the peril insured against, to which the insurer is liable, is definitely not o n e of

'If the specific rules and regulations that are enforced by an insurance company against insurance agents or managers are such that would directly affect the means and methods by which such agents or managers would achieve the objectives set by the company, they are its employees. (Tongko vs. Manufacturers Life Insurance Co., Inc., 570 SCRA 503 [2008].)

Sees. 299-301

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

639

the liabilities of an insurance agent. (Pandimin Philippines, Inc. vs. M a r i n e M a n n i n g M a n a g e m e n t Corp., 4 6 0 S C R A 418 [2005].) (3) Insurance broker. — T h e term refers to one who acts as a m i d d l e m a n b e t w e e n the insured and the insurer, and w h o solicits insurance from the public and either places the insurance with a c o m p a n y selected by the insured, or in the absence of any selection by him, then with the c o m p a n y selected by such broker. (43 A m . Jur. 2 d 199.) (a) An insurance broker, by definition under Section 3 0 1 , cannot issue policies nor can it involve itself in the process of its issuance. O n l y insurance companies and their general agents, in s o m e cases, are allowed to issue insurance policies. An insurance c o m p a n y cannot allow an insurance broker to issue policies in its b e h a l f either tacitly or by a special power of attorney or by any other instruments. (Ins. Cir. Letter No. 11-94, April 2 5 , 1 9 9 4 . ) (b) T h e insurance broker in theory represents the insured (see Sec. 301.) and not the insurance company. So, where a renewal notice w a s sent by the insured to his insurance broker but the latter did not relay the information to the insurance company, any loss occurring after the expiration of the policy will not m a k e the c o m p a n y liable because as far as it is concerned the policy was not renewed. Brokers are not salaried employers of the insurance company, and consequently, they have a different legal relationship with the company. T h e practice in the insurance industry, however, is for the insurance c o m p a n y to pay the commission of both agents and brokers. (c) T h e broker, w h e n he deals with an applicant for Insurance is, in effect, the applicant's agent. A broker may, however, be an agent of the insured for some purposes and the agent of the insurer for others, or he may purport to represent only the insurer. Dual agency is not prohibited so long as the agent's duties' owed two principles are not incompatible. A broker may be either an insurance broker or a reinsurance broker. A reinsurance broker is defined in Section 310.

640

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Sees. 299-301

(d) As explicitly prescribed by Sections 300 and 306, the role for which an insurance agent m a y be licensed as such by the Insurance Commission is just to solicit, obtain, or negotiate insurance in behalf of an insurance company and performs acts necessary or incidental thereto, such as delivery of the policy and collection of the premium, but not to undertake the liability of the principal under the policies or bonds issued, or assume the specific role of an insurer as defined under Section 184 as to include all individuals, partnerships, associations or corporations engaged as principals in the insurance business and as such can only be licensed to enter into an agreement to undertake, for a consideration, to indemnify another against loss, damage, or liability arising from an u n k n o w n or contigent event. In view thereof, all insurance c o m p a n i e s are enjoined from — 1) requiring their liability under, or

insurance

agents

to

assume

2) demanding from their insurance agents the reimbursement of the a m o u n t s paid on claims arising from such policies or b o n d s issued. (Cir. Letter N o . 1 2 / 8 8 , D e c . 19,1988.) (4) Distinctions. — A broker sustains no fixed and p e r m a n e n t employment by, or relation to, any principal, b u t h o l d s h i m s e l f out for e m p l o y m e n t by the public generally, his e m p l o y m e n t in each instance being that of a special agent for a single object, whereas an agent sustains a fixed a n d p e r m a n e n t relation to the principal w h o m he represents and to w h o m he o w e s a p e r m a n e n t and continued allegiance. In other words, the second is tied to a particular company. Every insurance broker is in a sense an agent but the latter term is the m o r e generic, and every insurance agent is not a broker. (43 A m . Jur. 2d 199.) Regulation of insurance agents and brokers. (1) Licensing. — T h e right of a state to regulate and control the insurance business includes the right to regulate and control the

Sees. 299-301

SALES AGENCIES AND SERVICES Title 1. —Insurance Agents and Brokers

641

agents and brokers through which such business is carried on. ( C G o r m o n & Young vs. Hartford F. Ins. Co., 2 8 2 US 251.) Thus, the State has the right to require that all persons w h o engage in the insurance business within its borders first secure a license from a designated authority authorizing the engaging in such business. (Robertson vs. California, 5 2 8 US 440.) It may prescribe the qualifications requisite for the granting of such license. All insurance and reinsurance brokers applying for issuance or renewal of license are required to include a m o n g their primary purposes the purpose to act as insurance or reinsurance broker a n d to include in the business, corporate n a m e the descriptive w o r d s "insurance b r o k e r s " or "reinsurance broker" to properly represent the c o m p a n y ' s operation, in order to avoid confusion a m o n g the insuring public. 2

(2) Revocation or suspension of license — T h e power to enact laws prescribing and fixing the qualifications of agents and requiring t h e m to obtain certificates of registration and licenses also includes the power, after due notice and hearing, to revoke such certificates and licenses for cause, (see Sees. 305, 312, 317, 3 2 1 , 3 2 2 , 330.) T h e order or decision of the Insurance C o m m i s s i o n e r m u s t specifically find and state the act or acts of w h i c h the licensee w h o s e license is revoked is found guilty, and it is insufficient that the revocation is m a d e merely because the licensee is not "trustworthy." Findings must be m a d e as to the specific act or acts which constitute the violation. (Goldman vs. Pink, N Y S 2d 5 6 2 ; see 43 A m . Jur. 2d 125-129.)

Licensing requirements and limitations. (1) No insurance c o m p a n y doing business in the Philippines, or any agent thereof, shall pay any commission or any compensation to any person for services in obtaining insurance, unless such person shall h a v e first procured from the Insurance Commissioner a license to act as an insurance agent (Sees. 299,

2

General agents and insurance and reinsurance brokers are required to submit a copy of their audited financial statements covering the results of operations. In the year on or before May 31 of the following year. (Ins. Cir. Letter No. 18-06 and No. 19-06, May 19, 2006.)

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Sees. 299-301

301.), variable contract agent, general agent, insurance broker (Sec. 301.), or reinsurance broker (Sec. 310, par. 2.), as the case may be. 3

(a) A "variable contract agent" is any person w h o sells or offers for sale variable contracts, as defined in Section 232(2) of the Insurance Code, or does or performs any act or thing in the sale, negotiation, making or consummating of any such contract other than for himself. (b) A "general agent" is any person w h o , 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 negotiation of such insurance and e m p o w e r e d by such c o m p a n y to do such other acts and things for and on its b e h a l f in the conduct of its business as specified in the general a g e n c y agreement executed by and b e t w e e n them, (see Sec. 300.) (2) No person shall act as insurance agent, etc. in the Philippines without first procuring a license so to act from the Insurance Commissioner. (a) S u c h license shall be issued only if, u p o n written application of the person desiring it and p a y m e n t of the corresponding fee therefor, such person is found qualified and not otherwise disqualified for such license. S u c h license shall be valid until midnight of 30th day of J u n e of the y e a r following its issuance unless sooner revoked or suspended for cause, and m a y be renewed annually on the 1st day of January, or within six (6) m o n t h s thereafter, (see Sec. 2 9 9 , par. 2.) (b) A license issued to a partnership, association or corporation to act as an insurance agent, etc. shall authorize only the individual n a m e d in the license, (see Sec. 364.) Exercise or attempted exercise of such authority by an individual not so n a m e d in the license with the k n o w l e d g e

3

Ins. Cir. Letter No. 3-2009 (Jan. 22,2009) grants provisional authority to sell or solicit Insurance business pending issuance of regular license subject to prescribed guidelines.

Sees. 299-301

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643

or consent of the licensee shall constitute cause for the revocation or suspension of the license. (c) An insurance c o m p a n y already licensed as such needs a separate license to act insurance agent. (White Gold Marine Services, Inc. vs. Pioneer Insurance and Surety Corporation, 464 S C R A 498 [2005].) (4) No insurance c o m p a n y doing business in the Philippines, or any agent thereof, shall pay to any person licensed to act as insurance agent, variable contract agent or general agent, nor shall such person receive, any commission or other compensation for the insurance on his life or property, or other interests appertaining thereto, unless such person has secured for or placed with the s a m e c o m p a n y at least an equal amount of outside business during the period covered by his license. This rule also applies in the case of a partnership, association or corporation licensed to act as insurance agent, variable contract agent or general agent w h i c h obtains or procures insurance on the life or property, or other interests appertaining thereto, of such partnership, association or corporation, or any of its partners, m e m b e r s or stockholders. (5) No person shall be licensed to act as an insurance agent or general agent of more than o n e life insurance company, and/ or as general agent of more than one (1) non-life insurance company, and as insurance agent of more than seven (7) other non-life insurance companies. No person licensed as an insurance agent or general agent shall be licensed as an insurance broker, nor shall a person licensed as an insurance broker be licensed as an insurance agent or general agent in the same kind of business. The same limitation shall apply to the individual n a m e d in the license issued to a partnership, association or corporation to act as an insurance agent, general or insurance broker. No person, however, shall be licensed to act as general agent unless he has been licensed as an ordinary agent and actively engaged as such for at least one year. (6) No official or employee of an insurance brokerage or an adjustment company and no individual adjuster shall be licensed to act as its insurance agent or general agent.

644

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Sees. 299-301

(7) No application for license of an employee with the rank of manager and above, of an insurance company to act as its insurance agent or general agent shall be entertained unless it is accompanied by a board resolution authorizing said employee to act as such. (Ins. M e m o . Cir. N o . 3-93, June 2 8 , 1 9 9 3 , as amended Ins. M e m o Cir. No. 2-94, July 1 5 , 1 9 9 4 . ) The Insurance C o d e governs the licensing requirements and other particular duties of insurance agents b u t it does not for the application of the Labor C o d e with regard to labor standards and labor relations. (Great Pacific Life Assur. Corp. vs. National Labor Relations Commission, 187 S C R A 694 [1990].)

Application for license. (1) The application for the issuance or renewal of a license to act as insurance agent or general agent shall be u p o n forms prescribed by the Insurance Commissioner. F o r a partnership, association or corporation, the application shall designate the individual w h o is to exercise the p o w e r granted by the license. S u c h application shall be a c c o m p a n i e d by a copy of the applicant's income tax return for the preceding year a n d privilege tax receipts for the current year if applying for renewal of license. (2) T h e application for the issuance of a general agent's license shall, in addition, be a c c o m p a n i e d by a c o p y of the general agency agreement entered into by a n d b e t w e e n the applicant and the insurance c o m p a n y concerned, limiting the power of the agent to solicitation of insurance business only, together with a copy of the p o w e r of attorney duly executed by the insurance c o m p a n y e m p o w e r i n g the applicant to receive notices, summonses, and legal processes for and in b e h a l f of the said company in connection with actions or legal proceedings against such company. (3) In order to facilitate the processing of applications for renewal of insurance agent's l i c e n s e s / particularly with respect to the income earned by the applicant concerned, it shall be considered sufficient compliance with the "actively e n g a g e d "

Effective February 15,2006, the Commission started an electronic way of processing and renewal of life insurance agents application for license.

Sees. 299-301

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645

requirement (infra.), if it is certified under oath by the president or the e x e c u t i v e / s e n i o r vice-president (if there be more than o n e vice-president) or the vice-president (if there be only one vice-president) of the insurance c o m p a n y which such applicant represents that he h a s e x a m i n e d the i n c o m e tax return of the said applicant for the preceding year and found that the amount of commission or other compensation which the latter has received for services rendered as insurance agent of said company for the year amounted to at least P3,600.00. (4) The said certification shall be accompanied by a statement of waiver, jointly signed by the insurance company and the insurance agent concerned, to the effect that if the aforementioned certification be found to be false in any respect, the license so renewed in consideration of such certification shall be immediately cancelled without prior notice. The parties responsible therefor shall then be dealt with in the manner called for in the premises. (5) An alien applicant for renewal of the insurance agent's license w h o has b e e n licensed as such by the Insurance C o m m i s s i o n before S e p t e m b e r 3 0 , 1968, and has continually b e e n so licensed, shall submit proof that he has submitted the report prescribed in Section 2, Rule TV of the Implementing Rules of Republic Act No. 5455, to the Board of Investments. (6) In case an insurance a g e n f s or general agent's license for life business is denied renewal on the ground that he has not b e e n actively engaged as such agent or general agent as provided above, such agent or general agent may, upon submission of a sworn certification executed by a responsible officer of the insurance company concerned that such agent has to his credit business to which he is entitled to renewal commissions, be issued a special license to service existing policies solicited by h i m and receive renewal commissions therefor. But in no case shall he solicit n e w business under said license, nor shall such license be renewed annually for more than five (5) years. (7) An insurance agent or general agent who, for not having been actively engaged as such, failed to qualify for renewal of his license during the period prescribed for such renewal may, after one year following the expiration of said license, apply for the

646

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 302

issuance of a new license upon showing that such applicant has undergone training in the kind or kinds of business contemplated in the license applied for in the company he desires to represent for at least forty (40) hours during the last six (6) months prior to his application. (Ins. M e m o . Cir. No. 3-93, supra.) An insurance or reinsurance broker, whether single proprietorship, partnership or corporation is considered in a serviceoriented business subject to value-added tax (VAT) pursuant to Section 102(a) of the National Internal R e v e n u e C o d e . B o t h b r o kers are required by the Insurance C o m m i s s i o n to pay the VAT before their licenses as such m a y be renewed by the C o m m i s sion. (Ins. Cir. Letter No. 3-90 C L , Feb. 1 9 , 1 9 9 0 . ) Sec. 302. Every applicant for an insurance broker's license shall file with the application and shall thereafter maintain in force while so licensed, a bond in favor of the people of the Republic of the Philippines executed by a company authorized to become surety upon official recognizances, stipulations, bonds and undertakings. The bond shall be in such amount as may be fixed by the Commissioner, but in no case less than one hundred thousand pesos, and shall be conditioned upon full accounting and due payment to the person entitled thereto of funds coming into the broker's possession through insurance transactions under license. The bond shall remain in force until released by the Commissioner, or until cancelled by the surety. Without prejudice to any liability previously incurred thereunder, the surety may cancel the bond on thirty days advance written notice to both the broker and the Commissioner. Upon approval of the application, the applicant must file two errors and omission (professional liability or professional indemnity) policies issued separately by two insurance companies authorized to do business in the Philippines, satisfactory to the Commissioner to indemnify the applicant against any claim or claims for breach of duty as insurance broker which may be made against him by reason of any negligent act, error or omission, whenever or wherever committed or alleged to have been committed, on the part of the applicant or any person who has been,

Sec. 302

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

647

is now, or may hereafter during the subsistence of the policies be employed by the said applicant in his capacity as insurance broker, provided that the filing of any claim or claims under one of such policies shall preclude the filing of the said claim or claims under the other policy. The said policies shall be in such amounts as may be prescribed by the Insurance Commissioner, depending upon the size or amount of the broking business of the applicant but in no case shall the amount of each of such policies be less than five hundred thousand pesos, (as amended by Pres. Decree No. 1455.)

Surety bond required of insurance brokers. T h e applicant for an insurance b r o k e r ' s license must file with the application a b o n d in the a m o u n t of P500,000.00 in favor of the p e o p l e of the Republic of the Philippines executed by a c o m p a n y authorized to b e c o m e surety upon official recognizances, stipulations, b o n d s or undertakings under Act No. 536, as a m e n d e d by A c t N o . 2 2 0 6 , w h i c h b o n d shall be maintained in force while so licensed. T h e b o n d shall be conditioned u p o n full accounting and due p a y m e n t to the person entitled thereto of funds coming into the b r o k e r ' s possession through insurance transactions under license. (Ins. M e m o Cir. No. 2-85, Aug. 7 , 1 9 8 5 . ) T h e b o n d is intended primarily for the protection of the insured against non-delivery to the insurance c o m p a n y of the p r e m i u m s paid. S u c h b o n d is not necessary in the use of an insurance agent, for p a y m e n t to h i m is payment to his principal — the insurance company. 5

Errors and omissions insurance policy required of insurance brokers. U p o n approval of the application, but before the issuance or renewal of an insurance b r o k e r ' s or reinsurance broker's license,

5

Ins. Memo. Cir. No. 1-06, April 24, 2006, prescribes the capitalization requirements for existing insurance and reinsurance brokers and new entrants effective July 1, 2006. The Circular stipulates the amounts and schedule of compliance on or before December 31, 2006, 2007, 2008, and 2010.

648

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 303

the applicant must also file two (2) errors and omissions insurance policies (professional liability or professional indemnity policy) issued separately by t w o (2) insurance companies authorized to do business in the Philippines, satisfactory to the Insurance Commissioner. (1) Purpose. — The policies shall indemnify the applicant against any claim or claims for breach of duty as insurance broker or reinsurance broker, as the case m a y be, w h i c h m a y be available against such applicant by reason of any negligent act, error or omission, whenever or wherever committed or alleged to have been committed on the part of said applicant or any person who has been, is now, or m a y thereafter during the subsistence of the policies, be employed b y the said applicant in the conduct of any business conducted by or on behalf of the applicant in his capacity as insurance broker or reinsurance broker, as the case may be. (2) Total limit of liability. — T h e total limit of liability of the said two policies shall be equivalent to 1 0 0 % of the b r o k e r ' s insurance-related i n c o m e (commissions a n d / o r fees) for the preceding fiscal year, but not exceeding a m a x i m u m of P 1 0 million (subject to periodic review should there be changes in the market conditions), or in the event that no insurance c o m p a n y could issue such policy by such limit of liability, the deficiency in amount shall be satisfied by the applicant by depositing such kinds of government securities specified in Section 2 0 3 of the Insurance C o d e with, and satisfactory to, the Insurance Commissioner, free from any lien or e n c u m b r a n c e , equivalent to said deficiency, likewise to a n s w e r subsidiarily for the applicant's liability arising from its brokering business. With respect to the errors and omissions policies, in no case shall the limit of liability of each policy be less than P500,000.00. (Ins. M e m o . Cir. No. 2-85, supra.) Sec. 303. The Commissioner shall, in order to determine the competence of every applicant to have the kind of license applied for, require such applicant to submit to a written examination and to pass the same to the satisfaction of the Commissioner. Such examination shall be held

Sees. 303-304

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

649

at such times and places as the Commissioner shall from time to time determine. Sec. 304. An applicant for the written examination mentioned in the preceding section must be of good moral character and must not have been convicted of any crime involving moral turpitude. He must satisfactorily show to the Commissioner that he has been trained in the kind of insurance contemplated in the license applied for. Such examination may be waived if it is shown to the satisfaction of the Commissioner that the applicant has undergone extensive education and/or training in insurance.

Qualifications for insurance agent's license. (1) To qualify for a license to act as an insurance agent or general agent, the applicant must: (a) be a resident of the Philippines; (b) be trustworthy; and (c) pass the written examination prescribed, otherwise e x e m p t from taking the same.

if not

(2) In case the applicant is a partnership, association or corporation, such applicant m u s t be domiciled in the Philippines and e m p o w e r e d under its articles of incorporation to transact the kind of business applied for. T h e individual to be named in the license applied for must possess the above qualifications. (Ins. M e m o . Cir. No. 3-93, supra.)

Qualifications for insurance or reinsurance broker's license. An applicant for a b r o k e r ' s license must have the following qualifications: (1) He must be a Filipino citizen. However, an alien who has been licensed and doing business as such broker on August 8, 1985 (date of effectivity of Ins. M e m o . Cir. No. 2-85, supra.) may be allowed to continue as such broker, provided that he has a permanent resident status;

650

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Sees. 303-304

(2) He must have at least ten (10) years experience as: (a) a sales and / o r underwriting executive (at least department manager level) in an insurance brokerage firm or insurance company, or (b) a general agent. The above requirement m a y be reduced to five (5) years if the applicant holds at least an associateship from the Insurance Institute of Asia and the Pacific (HAP), the Chartered Insurance Institute (CII) or a similar educational institution acceptable to the Commissioner; and (3) He must have had no history of unprofessional conduct known to the Insurance Commissioner, other brokers and insurance companies. (Ins. M e m o . Cir. N o . 2-85, supra.) The chief operating officer of a broker must be a Filipino citizen and must possess the above qualifications. However, an alien w h o has been appointed to and w a s occupying such position at the time of the effectivity of the circular m a y be allowed to continue holding such position, provided that he has a permanent resident status. A broker which is a stock corporation m a y be issued separate licenses as an insurance and reinsurance broker, provided that the corporation shall h a v e separate soliciting officials, separate errors and omissions policies (infra.) and separate b o o k s of accounts for its insurance and reinsurance brokering operations. A license issued to any person, partnership, association or corporation to act as insurance or reinsurance broker shall authorize only the individual or individuals n a m e d in the license. Exercise or attempted exercise of such authority by an individual not so n a m e d in the license, with the k n o w l e d g e or consent of the licensee shall constitute cause for the revocation or suspension of the license. (Ibid.)

Qualifications for authorization of life insurance agents to sell or offer for sale variable contracts. No person shall sell or offer for sale a variable contract, or do or perform any act or thing in the sale, negotiation, making

Sees. 303-304

SALES AGENCIES AND SERVICES Title 1. —Insurance Agents and Brokers

651

or c o n s u m m a t i n g of any variable contract unless such person shall have a valid and current license from the Commission authorizing such person to act as a variable contract agent. No license shall be issued unless and until such person shall show to the satisfaction of the C o m m i s s i o n that he has satisfied the following qualifications: (1) He has b e e n duly licensed to act as a life insurance agent for at least three (3) years; (2) He has satisfactorily completed a training program on variable contracts; and (3) He has passed the written examination prescribed by the C o m m i s s i o n for such purpose, unless e x e m p t e d from taking the s a m e (under Item 4.7 of Ins. M e m o . Cir. N o . 2 - 8 1 , Dec. 1 7 , 1 9 8 1 ) . (Ins. M e m o . Cir., M a y 2 1 , 1 9 8 5 . )

Qualifications for authorization of life insurance companies to issue, deliver, sell or use variable contracts. A n y life insurance c o m p a n y authorized to transact business in the Philippines requesting authority to issue, deliver, sell or use variable contracts must s h o w to the satisfaction of the Commission that it has satisfied, in addition to the requirements of the Code relative to variable contracts, the following qualifications: (1) T h e company, during each of any 3 including the last 2 of the 5 fiscal years next preceding the date of authorization to issue, deliver, sell or use variable contracts, shall not have experienced a net loss from operations; (2) T h e company, during each of any 3 including the last 2 of the 5 fiscal years next preceding the date of authorization, shall have maintained surplus accounts in excess of the minimum margin of solvency required of not less than P1,000,000.00; (3) The company shall initially transfer and allocate to the designated separate variable contract account in cash or other acceptable investment or a combination of both, an amount equal to at least P1,000,000.00 from the unassigned surplus of the company; and

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Sees. 303-304

(4) The company shall at all times maintain in the designated separate variable contract account a surplus which shall be an excess of the value of the admitted assets of such account over its liabilities and reserves of at least two per mille of the total amount of the insurance in force of its variable contracts as of the preceding year, or ten per centum of the total value of the admitted assets in the variable contract account as of the preceding year, whichever is greater. T h e surplus shall in no event be less than P1,000,000.00; and provided, further, that in the determination of the margin of solvency requirements of the company, the total amount of its insurance in force stated under Section 194 of the Insurance C o d e shall be d e e m e d to exclude the insurance in force on the variable contracts. (Ins. M e m o . Cir. N o . 1-85, July 1 8 , 1 9 8 5 . )

Examination required of applicant. (1) T h e applicant for license shall qualify h i m s e l f in a written examination for the kind of license applied for, if not otherwise e x e m p t from taking the same. T h e applicant for such examination must be of g o o d moral character and m u s t not h a v e been convicted of any crime involving moral turpitude. He must satisfactorily s h o w that he has b e e n trained in the k i n d or kinds of insurance contemplated in the license applied for. A grade of 7 0 % shall be necessary to pass the examination. (2) No such examination shall be required of the following: (a) O n e w h o presently holds, or previously held at anytime during the last ten (10) years, a license (excluding a temporary certificate of authority) of the k i n d applied for; (b) O n e w h o has successfully completed the Insurance Agents' Course conducted by the Insurance Institute for Asia and the Pacific or an a c a d e m i c course a n d / o r training program, satisfactory — to the Insurance Commissioner, in the kind or kinds of insurance contemplated in the license applied for; and (c) O n e who, because of his previous connections with any insurance company, or with any office or firm handling insurance matters, is found by the Insurance C o m m i s s i o n e r

Sec. 305

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

653

to be trustworthy and competent to transact the business contemplated in the license applied for. (Ins. M e m o . Cir. No.

3-93, supra.)

Issuance of limited license. (1) In order to increase the n u m b e r of Filipinos with life insurance protection, n e w insurance agents w e r e issued certificate of authority to act as such e v e n without passing the required insurance agent's examination, provided that said agents shall sell personal accident insurance policies only. (Ins. Cir. Letter No. 11-97, Oct. 1 3 , 1 9 9 7 . ) T h e Insurance C o m m i s s i o n no longer issues limited license for agents of personal accident policies. Those w h o intend to sell or solicit such policies shall have to apply for license to sell them. However, agents w h o were already issued license for personal accident m a y continue to possess the license and are allowed to r e n e w their licenses. (2) Existing limited licenses to solicit fire and motor car insurance (under CL N o . 12-99) shall continue to be effective until the date of their expiry. T h o s e intending to sell or solicit fire and m o t o r insurance shall h a v e to pass the qualifying examination for non-life agents. (Ins. Cir. Letter No. 4-09, Jan. 22, 2009.) Sec. 305. An application for the issuance or renewal of a license to act as an insurance agent or insurance broker may be refused, or such license, if already issued or renewed, shall be suspended or revoked if the Commissioner finds that the applicant for, or holder of, such license: (a) has willfully violated any provision of this Code; or (b) has intentionally made a material misstatement in the application to qualify for such license; or (c) has obtained or attempted to obtain a license by fraud or misrepresentation; or (d) has been guilty of fraudulent or dishonest practices; or (e) has misappropriated or converted to his own use or illegally withheld moneys required to be held in a fiduciary capacity; or

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654

Sees. 306-307

(f) has not demonstrated trustworthiness and competence to transact business as an insurance agent or insurance broker in such manner as to safeguard the public; or (g) has materially misrepresented the terms and conditions of policies or contracts of insurance which he seeks to sell or has sold; or (h) has failed to pass the written examination prescribed, if not otherwise exempt from taking the same. In addition to the foregoing causes, no license to act as insurance agent or insurance broker shall be renewed if the holder thereof has not been actively engaged as such agent or broker in accordance with such rules as the Commissioner may prescribe. (As amended by Pres. Decree No. 1814.) Sec. 306. 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. 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. 6

Sec. 307. Any provision of existing laws to the contrary notwithstanding, no person shall, within the Philippines, sell or offer for sale a variable contract or do or perform any act or thing in the sale, negotiation, making or consummating of any variable contract other than for himself unless such person shall have a valid and current license from the Commissioner authorizing such person to act as

6

In the instant case, the best evidence of such authority is the fact that the petitioner [insurer] accepted the check and issued the official receipt for the payment. It is, as well, bound by its agent's acknowledgment of receipt of payment." (American Home Assurance Company vs. Chua, 309 SCRA 250 [1999].)

Sees. 308-309

SALES AGENCIES AND SERVICES Title 1. — Insurance Agents and Brokers

a variable contract agent. No such license shall be issued unless and until the Commissioner is satisfied, after examination that such person is by training, knowledge, ability and character qualified to act as agent. Any such license may be withdrawn and cancelled by the Commissioner after notice and hearing, if he shall find that the holder thereof does not then have the qualifications required for the issuance of such license. Sec. 308. 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 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. It shall be the duty of said general agent to notify the Commissioner of his post office address in the Philippines, or any change thereof. Notices, summons, or processes of any kind sent by registered mail to the last registered 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. 7

Sec. 309. 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 ten thousand pesos, or imprisonment of six months, or both at the discretion of the court; Provided, That the provisions of this Section shall not apply to reinsurance. 7

As to foreign insurance company, see Section 190.

655

656

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 305-309

Denial, suspension, or revocation of license. The grounds are enumerated in Section 305. An application for the issuance or renewal of a license to act as an insurance agent or general agent shall likewise be refused if the applicant has been declared insolvent or bankrupt, or being a previous holder of a license, has not been actively engaged as such agent. 8

A license to act as insurance agent or general agent m a y likewise be revoked upon the termination of the agency contract, in which event the insurance c o m p a n y concerned shall give immediate notice in writing to the Insurance Commissioner. (Ins. Memo. Cir. No. 3-93, supra.) "Actively e n g a g e d " requirement. (1) T h e term "actively e n g a g e d " m e a n s that the license holder shall have earned, during the year following the issuance of the license, commission or other c o m p e n s a t i o n for services rendered as such insurance agent, variable contract agent, general agent, insurance broker or reinsurance broker a m o u n t i n g to at least P3,600.00. (2) In case the license holder is a partnership, association or corporation, the term "actively e n g a g e d " applies to the individual n a m e d in the license. (3) Except where the applicant has u n d e r g o n e the required training (No. 7, supra.), an application for the issuance of a license to act as an insurance agent, variable contract agent, general agent, insurance broker or reinsurance broker shall likewise be refused if the applicant, being a previous holder of a license of the kind applied for, which expired without h a v i n g b e e n renewed during the current year, has not b e e n actively e n g a g e d as such agent or broker during the effectivity of his last license, (ibid.) — oOo —

"The fees for the issuance or renewal are as follows: Each license issued to an insurance agent — P100: to a general agent — P200.00. In case the licensee is a partnership, association or corporation, the licensee shall pay a full additional license fee for each prospective individual named in the license in excess of one. (Ins. Memo. Cir. No. 3-93, supra.)

Title 2 REINSURANCE BROKERS

Sec. 310. Except as provided in the next succeeding title, no person shall act as reinsurance broker in the Philippines unless he is authorized as such by the Commissioner. A reinsurance broker is 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 negotiating contracts of reinsurance, or placing risks of effecting reinsurance, for any insurance company authorized to do business in the Philippines. Sec. 311. Upon application and payment of the corresponding fee hereinafter prescribed, and the filing of two errors and omissions (professional liability or professional indemnity) policies hereinafter described, a person may, if found qualified,, be issued a license to act as reinsurance broker by the Commissioner. No such license shall be valid, however, after the thirtieth day of June of the year following its issuance unless it is renewed. The errors and omissions (professional liability or professional indemnity) policies mentioned above shall indemnify the applicant against any claim or claims for breach of duty as a reinsurance broker which may be made against him by reason of any negligent act, error or omission, whenever or wherever committed or alleged to have been committed, on the part of the applicant or any person who has been, is now or may hereafter during the subsistence of the policies be employed by the said applicant in his capacity as a reinsurance broker; Provided, That the filing of any claim or claims under one of such policies shall preclude the filing of the said claim or claims

657

658

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 310-312

under the other policy. The said policies shall be issued separately by two insurance companies authorized to do business in the Philippines and shall be in such amounts as may be prescribed by the Insurance Commissioner, depending on the size and the amount of the brokerage business of the applicant, but in no case shall the amount of each of such policies be less than five hundred thousand pesos, (as amended by Pres. Decree No. 1455.) Sec. 312. The Commissioner may recall, suspend, or revoke license granted to a reinsurance broker for violation of any existing law, rule and regulation, or any provision of this Code after due notice and hearing. Reinsurance brokers. 1

A reinsurance broker is an intermediary b e t w e e n a c o m p a n y that desires reinsurance and a receptive reinsurer. F o r this service, the broker receives a c o m m i s s i o n from the reinsurer recouped from the rate charged to the primary writer (insurer). Such brokers are useful because: (1) T h e y are able to suggest favorable facilities to primary writers; (2) T h e y can furnish information o n the policies, capacity, and financial condition of reinsurers, especially foreign companies; (3) T h e y prevent embarrassment to the ceding c o m p a n y if the proposition proves unacceptable to the reinsurer; (4) They secure reciprocators for reciprocal agreements; and (5) They secure uniformity w h e r e there are several participating companies. Such services are particularly useful to small c o m p a n i e s needing reinsurance and m a y reduce the e x p e n s e of the primary writer by eliminating the need for reinsurance personnel. Brokers first arose w h e n reinsurance w a s sought in foreign countries, and their w o r k increased w h e n treaties increased. S o m e companies do not solicit brokerage business and deal directly only with 'For qualifications of applicant for a reinsurance broker's license, see Insurance Memorandum Circular No. 2-85. (Title 1, supra.)

Sees. 310-312

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659

primary writers. For the reinsurance company, the broker is primarily a "producer" of business, receiving his compensation from the reinsurer, although in other respects, he represents the primary writer. (Riegel, Miller & Wiliams, Jr., op. cit., p. 127.)

— oOo —

Title 3 RESIDENT AGENTS Sec. 313. No person shall act as resident agent, as hereinafter defined, unless he is registered as such with the Commissioner. Sec. 314. The term "resident agent," as used in this title, is one duly appointed by a foreign insurer or broker not authorized to do business in the Philippines to receive in its behalf notices, summons and legal processes in connection with actions or other legal proceedings against such foreign insurer or broker. Sec. 315. The application for a certificate of registration as resident agent filed with the Commissioner must be accompanied with: (a) a copy of the power of attorney, duly notarized and authenticated by the Philippine Consul in the place where such foreign insurer or broker is domiciled, empowering the applicant to act as resident agent and to receive notices, summons and legal processes for and in behalf of such foreign insurer or broker in connection with any action or legal proceeding against such foreign insurer or broker; and (b) a copy of the corresponding certificate issued by the Board of Investments as required under Section 4 of Republic Act No. 5455, if such foreign insurer or broker is not otherwise exempt from such requirement. 1

Sec. 316. It shall be the duty of such resident agent to notify immediately the Commissioner of any change of his office address. Sec. 317. No certificate of registration issued to a resident shall be valid after the thirtieth day of June of the year following its issuance unless it is renewed. 'See note to Section 261. 660

Sees. 313-317

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661

The Commissioner may, after due notice and hearing, recall or cancel the certificate of registration issued to a resident agent for violation of any existing law, rule or regulation, or any provision of this Code, (as amended by Pres. Decree No. 1455.)

Principal duty of resident agent. As provided in Section 314, the duty of the resident agent is to receive in b e h a l f of a foreign insurer or broker not authorized to do business in the Philippines, notices, s u m m o n s e s and legal processes in connection with actions or other legal proceedings against such foreign insurer or broker, (see Sec. 190.) Section 128 of the Corporation C o d e of the Philippines (Batas Pambansa Big. 36.) provides the rules regarding the service of s u m m o n s , processes a n d all legal notices on a foreign corporation w h e n it is a party in a case pending in court, (see Sec. 185, par. 2 of the Insurance Code.) It has been held that Section 14, Rule 17 of the Rules of Court (now Rule 14 under the R e v i s e d Rules of Court) on the manner of acquiring jurisdiction over a foreign corporation, is applicable only if the foreign corporation, whether licensed or not, actually transacts business in the Philippines. (Pacific Micronesian Line vs. Del Rosario, 96 Phil. 23 [1954].) U n d e r said section of the Rules of Court, service m a y be m a d e on the foreign corporation's "resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines."

— oOo —

Title 4 NON-LIFE COMPANY UNDERWRITER

Sec. 318. No person shall act, and no company shall employ any person, as non-life company underwriter, whose duty and responsibility it shall be to select, evaluate and accept risks for, and to determine the terms and conditions, including those pertaining to amounts of retentions, under which such risks are to be accepted by the company, unless such underwriter is registered as such with the Commissioner. Sec. 319. Every non-life insurance company doing business in the Philippines must maintain at all times a register of risks accepted and a claims register for each line of risks engaged in by such non-life insurance company with such entries therein as are now or as may hereafter be required by the Commissioner, and it shall be the responsibility of the underwriter on the particular line of risk involved to see to it that the said registers are well maintained and kept, and that all entries therein are properly and correctly recorded. Such registers shall be open to inspection and examination of duly authorized representative of the Commissioner at all times during business hours. Sec. 320. No person shall be registered with the Commissioner, unless such person shall be at least twenty one years of age on the date of such registration; a resident of the Philippines; of good moral character and with no conviction of any crime involving moral turpitude; has had at the time such registration is made at least two years of underwriting work in the particular line of risk involved; and has passed such qualifying written examination that the Commissioner shall conduct at such time and in such 662

Sees. 318-322

SALES AGENCIES AND SERVICES Title 4. — Non-Life Company Underwriter

place as he may decide to hold for applications desiring to act as underwriters. Such examination shall not be required of any person who has served as non-life company underwriter for a period of at least five years, if the Commissioner is satisfied of the applicant's competence as shown by the results of his underwriting work in the non-life insurance company or companies that employed him in that capacity. The minimum underwriting experience herein required may be reduced or waived if it is shown to the satisfaction of the Commissioner that the non-life company underwriter has undergone extensive education and/or training in insurance. Sec. 321. Any applicant who misrepresents or omits any material fact in his application for registration as a non-life company underwriter, or commits any dishonest act in taking or in connection with the qualifying written examination for underwriters, shall be barred from being registered as such non-life company underwriter and, if already registered, his registration shall be cancelled and the certificate of registration issued in his favor shall be recalled immediately by the Commissioner. In the event that the certificate of authority of a nonlife insurance company to transact business is suspended or revoked due to business failure arising largely from the imprudent and injudicious acceptance of risks by the underwriter concerned, the registration of such underwriter shall likewise be cancelled and his certificate of registration shall be recalled by the Commissioner, and no similar certificate shall thereafter be issued in his favor. Sec. 322. No certificate of registration issued to an underwriter shall be valid after the thirtieth day of June of the year following its issuance unless it is renewed. The Commissioner may, after due notice and hearing, also suspend or cancel such certificate for violation of existing laws, rules and regulations or of any provision of this Code, (as amended by Pres. Decree No. 1455.) Employment of non-life company underwriters. (1) Every non-life insurance company is required to employ at least one non-life company underwriter, duly registered with

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the Insurance Commission, for each line of risks, namely, fire, marine, casualty and suretyship, engaged in by such company. (2) Every such company is furthermore required to see to it that each of its branches, extensions, general agencies, a n d / o r service offices which it has authorized to issue insurance policies or bonds have in their employ the underwriters mentioned above also duly registered with the C o m m i s s i o n for each line of risks such branch, etc. is authorized to write and issue. (Ins. Cir. Letter, April 1 5 , 1 9 7 7 ; see Ins. Cir. No. 68, Nov. 2 , 1 9 6 6 ; Ins. M e m o . Cir. No. 1-90, March 2 , 1 9 9 0 ; see Sees. 318-319.) (3) No person registered with the Insurance C o m m i s s i o n as non-life c o m p a n y underwriter shall be licensed as non-life insurance agent in view of the conflict of interest that will arise from the nature of the w o r k of an underwriter and agent. T h e Certificate of Registration of a non-life c o m p a n y underwriter who is also licensed as insurance agent shall not be renewed unless the certificate of authority to act as agent is surrendered to the Commission for cancellation. (Ins. M e m o . Cir. N o . 3-91, Sept. 19,1991.)

Insurance underwriting. 1

The underwriters of a c o m p a n y are those w h o h a v e the task of accepting, rejecting, or revising insurance contracts which the marketing system brings to the insurer. A general description of underwriting is simple; it is the selection and rating of risks which are offered to an insurer. (1) Selection. — It implies that there are s o m e acceptances and some rejections or that not all risks will be accepted for insurance. Obviously, it w o u l d not be a sound business practice for an insurer to write an insurance contract for every individual w h o asks for protection against loss. Naturally, the insurer does

'The term is often used in a variety of other ways besides the meaning here. It is frequently used to refer to the agent or salesmen or one who writes or does business in insurance. Sometimes, the underwriters are the actual insurers, as when one refers to the underwriters at Lloyd's of London. The term originated there, with the practice of each underwriter writing his acceptance of part of the risk under the broker's description of the desired insurance. (D.L. Bickelhaupt, op. cit., p. 140.)

Sees. 318-322

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not want b a d risks, or those which s e e m to offer a high probability of loss. On the other hand, even b a d risks could be accepted if the price charged for the contract were high enough to pay for all losses and expenses and still permit the insurer a profit on the business. T h e purpose of underwriting is thus found to be the acquisition by the insurer of selected insureds w h o at least in the long run will return a profit to stockholders (or policyholders of a mutual type insurer.) (2) Rating or pricing. — T h e pricing of insurance contracts is a specialized part of underwriting w h i c h requires the services of experts. Basically, insurance rates are calculated by actuaries (infra.) w h o apply sound principles of mathematics to the particular pricing problems of insurance. T h e fundamental part of most insurance rates is the estimate of future losses, (see D.L. Bickelhaupt, op. cit., pp. 140-147; see Sec. 349.)

— oOo —

Title 5 ADJUSTERS

Sec. 323. No person, partnership, association, or corporation shall act as an adjuster, as hereinafter defined, unless authorized so to act by virtue of a license issued or renewed by the Commissioner pursuant to the provisions of this Code; Provided, That in the case of a natural person, he must be a Filipino citizen and in the case of a partnership, association or corporation, at least sixty per centum of its capital must be owned by citizens of the Philippines. Sec. 324. An adjuster may be an independent adjuster or a public adjuster. The term "independent adjuster" 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 "public adjuster" 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. Sec. 325. For every line of insurance claim adjustment, adjusters shall be licensed either as independent adjusters or as public adjusters. No adjuster shall act on behalf of an insurer unless said adjuster is licensed as an independent adjuster; and no adjuster shall act on behalf of an insured unless said adjuster is licensed as a public adjuster; Provided, however, That when a firm or person has been 666

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licensed as a public adjuster, he shall not be granted another license as independent adjuster and vice versa. No license, however, shall be required of 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. Sec. 326. Such license or any renewal thereof may be issued by the Commissioner upon written application filed by the person interested on the form or forms prescribed by the Commissioner, which shall contain such information as he may require, and upon payment of the corresponding fee hereinafter prescribed. Sec. 327. The Commissioner shall conduct, at such times, and in such places as he may decide to hold, written examinations to determine the competence and ability of applicants desiring to act as adjuster of insurance claims. Sec. 328. No adjuster's license issued hereunder shall be valid after the thirtieth day of June of the year following the issuance of such license unless it is renewed, (as amended by Pres. Decree No. 1455.) Sec. 329. Nothing contained in this title shall apply to any duly licensed attorney-at-law 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. Sec. 330. The Commissioner may suspend or revoke any adjuster's license if, after giving notice and hearing to the adjuster concerned, the Commissioner finds that the said adjuster: (1) has violated any provision of this Code and of the circulars, rulings and instructions of the Commissioner or has violated any law in the course of his dealings as an adjuster; or (2) has made a material misstatement in the application for such license; or (3) has been guilty of fraudulent or dishonest practices; or (4) has demonstrated his incompetence or untrustworthiness to act as adjuster; or (5) has made patently unjust valuation of loss; or (6) has failed to make a report of the adjustment he proposed within sixty days from the date of the filing of the claim by the insured with the insurer, unless prevented so to do by reasons beyond his control; or has refused to

667

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allow an examination into his affairs or method of doing business as hereinafter provided. Sec. 331. Every adjuster shall submit to the Commissioner a quarterly report of all losses which are the subject of adjustment effected by him during each month in the form prescribed by the Commissioner. The report shall be filed within one month after the end of each quarter. Sec. 332. Every adjuster shall keep his or its books, records, reports, accounts, and vouchers in such manner that the Commissioner or his duly authorized representatives may readily verify the quarterly reports of the said adjuster and ascertain whether the said adjuster has complied with the provisions of law or regulations obligatory upon him or whether the method of doing business of the said adjuster has been fair, just and honest. Sec. 333. The Commissioner shall, at least once a year and whenever he considers the public interest so demands, cause an examination to be made into the affairs and method of doing business of every adjuster. Sec. 334. Any violation of any provision of this title shall be punished by a fine of not more than ten thousand pesos, or by imprisonment in the discretion of the court; Provided, That, in case of a partnership, association or corporation, the said penalty shall be imposed upon the partner, president, manager, managing director, director or person in charge of its business or responsible for the violation. Adjustment of claims defined. Adjustment of claims is the process of ascertaining the liability of the insurer (or the proportional share in the liability of each insurer if there are m o r e than one) arising u n d e r an insurance contract or policy and the a m o u n t or indemnity w h i c h the insured is entitled to receive under said contract or policy. Kinds of adjusters. Adjusters fall into five (5) categories: (1) Agents as adjusters. — A g e n c y involves a principal w h o authorizes a second party, an agent, to create, modify, or terminate

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contractual relations b e t w e e n himself and a third party. To create an agency relationship, it is not necessary that the agreement be reduced in writing. However, in the business of insurance, a written document, the agency contract or "commission of authority," usually designates the parties and outlines the specific authority of the agent to act for the principal or insurer. (D.L. Bickelhaupt, op. cit, p. 96.) (a) In property insurance. — M a n y agents have the authority of their c o m p a n i e s to settle a claim immediately with the policyholder. F o r smaller and uncomplicated losses, this is the most expedient and efficient w a y to pay claims. (b) In life insurance. — T h e agent is often involved directly in the loss payment. T h e life agent usually forwards the death notice a n d certificates to the insurer and the check is issued by the c o m p a n y for delivery to the policyholder's beneficiary by the agent. Life insurers do not have the problem of determining the extent of loss payment that is c o m m o n in property insurance losses. An exception would be the extra p a y m e n t s for accidental death, which requires legal investigation and definition in s o m e cases (ibid., pp. 178-179.); (2) Staff or company adjusters.' — T h e y are salaried employees of an insurance c o m p a n y for the adjustment of claims filed under policies issued by such insurance company. No license is required of t h e m by law. (Sec. 325, par. 2.) S o m e insurers use staff adjusters almost exclusively, while others are more apt to use the services of other types of adjusters available (D.L. Bickelhaupt, op. cit, p. 180.); (3) Independent adjusters. — T h e term is defined by law. (see Sec. 324.) Independent adjusters are experts w h o have made lossadjusting a business. S o m e have specialized in particular fields. They w o r k for the insurers w h o request their services (ibid.); (4) Adjustment bureaus. - These are separate corporations supported by m a n y insurers that regularly use their services. Their sole business is claim adjustment, (ibid., p. 181.) In the United

'Also called "in-house" adjusters.

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States, insurance companies formed or encouraged adjustment bureaus or companies to do cooperatively what the individual companies would otherwise have to do. In 1971, following an anti-trust investigation by the Department of Justice, insurers divested themselves of ownership in these bureaus (Riegel, Miller and Williams, Jr., op. cit., p. 113.); and (5) Public adjusters. — T h e term is denned by law. (see Sec. 324.) As the name implies, public adjusters represent the public in contrast to the adjusters w h o represent insurers. T h e y are retained by the insured to represent the latter in negotiating loss settlement. Sometimes, attorneys will be retained by the insured to perform a similar function. (D.L. Bickelhaupt, op cit., pp. 1 8 1 182.) 2

The provisions of Title 5 do not apply to any duly licensed attorney-at-law w h o acts or aids in adjusting insurance claims as an incident to the practice of his profession and w h o does not advertise himself as an adjuster. (Sec. 329.)

Liability of a settling or claim agent under an insurance policy. In one case, the m a i n issue is w h e t h e r or not a local settling or claim agent of a disclosed principal — a foreign insurance company — can be held jointly and severally liable with said principal under the latter's marine cargo insurance policy, given that the agent is not a party to the insurance contract. (1) T h e scope and extent of the functions of an adjustment and settlement agent do not include personal liability. His func-

2

No adjuster, independent or public, shall be licensed as such by the Insurance Commission unless a clearance from the National Intelligence Coordinating Authority (NICA), among other clearances required, is submitted showing no derogatory information against such adjuster, aside from compliance with other licensing requirements. No company (in-house) adjusters shall be appointed as such unless he secures a prior clearances from the NICA, Bureau of Internal Revenue (BIR), National Bureau of Investigation (NBI), and previous employer. (Ins. Memo. Cir. No. 4-93, approved Dec. 24,1993.) In addition, a public or independent adjuster upon an application for an original license or renewal thereof, is required to post a surety bond in the amount of P50,000.00 for each line of insurance business claim adjustment conditioned upon the faithful and honest performance of the duties as such adjuster. (Ins. Cir. Letter, dated April 1, 1979.) Such posting shall be co-terminous with the license of the adjuster. (Ins. Memo. Cir. No. 4-93, supra.)

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tions are merely to settle and adjust claims in behalf of his principal if those claims are proven and undisputed, and if the claim is disputed or is disapproved by the principal, the agent does not assume any personal liability. T h e recourse of the insured is to press his claim against the principal. It is immaterial that only the agent is sued or both the agent and the principal are impleaded. T h e agent cannot be sued n o r held liable whether singly or solidarily with the principal. (Smith Bell & Co., Inc. vs. Court of Appeals, 267 S C R A 5 3 0 [1997], citing Salonga vs. Warner, Barnes & Co., Ltd., 88 Phil. 125 [1951].) U n d e r Article 1311 of the Civil Code, contracts are binding only upon the parties (and their assigns and heirs) w h o execute them. (2) Article 1207 of the Civil C o d e clearly provides that "there is solidary liability only w h e n the obligation expressly so states, or w h e n the l a w or the nature of the obligation requires solidarity." T h e well-entrenched rule is that solidary obligation cannot lightly be inferred. It must be positively and clearly expressed. Section 190 of the Insurance C o d e is quite clear as to the purpose and role of a resident agent. Such agent, as a representative of the foreign insurance company, is tasked only to receive legal processes on behalf of its principal and not to answer personally for any insurance claims. (Ibid.) (3) Lastly, being a m e r e agent and representative, such agent is also not the real party-in-interest. If the party sued is not the proper party, any decision that m a y be rendered against him would be futile for the decision cannot be enforced or executed. (Ibid.; see Rules of Court, Rule 3, Sec. 2.)

Services of adjusters. They may be enumerated as follows: (1) furnishing of prompt aid and advice following a loss, for an adjuster usually arrives very promptly after the loss; (2) aids in preventing further damage; (3) examination of policies and explanation of contract terms to the insured;

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(4) aid in securing promptness of settlement by supplying the formation and assistance of repairs, replacements, engineering service, salvage, and the like; (5) appraisal of values; and (6) assistance in making inventories, securing expert opinions, and preparing necessary documents. Satisfactory service by agents and brokers in writing policies, of course, promotes satisfactory adjustments. (Riegel, Miller, & Williams, Jr., op. cit., p. 170.)

Report of claim/loss adjustment to insurance company. The following are the regulations of the Insurance C o m m i s s i o n on this matter: (1) No report of adjustment on any insurance loss claim shall be submitted by an independent adjuster or a " c o m p a n y " or "in-house" adjuster, and no insurance c o m p a n y concerned shall receive, acknowledge, and / o r accept such report, unless the same is under oath, duly subscribed and s w o r n to before a notary public or any public officer authorized to administer oaths by the adjuster rendering the s a m e . Such adjustment report, however, m a y be qualified in such manner as m a y be necessary and insofar as to matters about which the adjuster rendering or subrnitting the s a m e h a s no first hand knowledge or information. (2) No fee or salary, as the case m a y be, shall be paid to the adjuster concerned for services rendered in the adjustment of insurance losses or claims unless the corresponding final report under oath had b e e n duly submitted within 60 days from date of filing of claim by the insured with the insurance c o m p a n y concerned, except w h e n prevented so to do for reasons b e y o n d the adjuster's control. (3) Failure of the c o m p a n y concerned to receive such adjustment report within 60 days as specified a b o v e from the adjuster assigned cannot be a valid reason for it to withhold p a y m e n t or settlement of the loss or claim. (Ins. M e m o . Cir. N o . 4-93, Dec. 24, 1993.)

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Report of claim/loss adjustment to Insurance Commission. (1) Every adjuster, independent a n d / o r company (in-house) must submit to the Insurance C o m m i s s i o n e r the quarterly report within the period as required under Section 331. (2) To facilitate the implementation of the provisions of Paragraph (b), N o . 6, Section 13 of Presidential Decree No. 1185, otherwise k n o w n as the "Fire C o d e of the Philippines," to the effect that: "Sec. 3. Appropriation and Sources of Income, xxx " b . To partially provide for the funding of the Fire Service the following x x x fees which shall accrue to the general fund o f the National G o v e r n m e n t are hereby imposed: x x x "(6) Two per centum ( 2 % ) of the service fees received from fire, earthquake, and explosion hazard pre-insurance survey and post loss service of insurance adjustment companies doing business in the Philippines directly through agents," xxx every independent adjuster m u s t also indicate in their quarterly reports required to be submitted to the Insurance Commission the amount of the adjustment fee charged against the insurer or insurance c o m p a n y concerned for the adjustment services of claims and / o r losses of fire insurance and other line covers allied thereto as contemplated under the provision of Section 167 of the Insurance Code, rendered during the period or quarter covered upon which the 2% levy or assessable fee chargeable under the above quoted provisions of the Fire C o d e shall be computed and collected. (Ibid.; Ins. M e m o . Cir. No. 4-78, Nov. 10, 1978.)

Licensing of adjusters. (1) Qualifications. — A person, partnership, association, or corporation may apply for a license as an adjuster. In the case of a natural person he must be a Filipino citizen and in the case of a partnership, association or corporation, at least 6 0 % of its capital must be owned by citizens of the Philippines. (Sec. 323.) (a) Natural person. — In addition:

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1) The applicant must be of good moral character and must not have been convicted of a crime involving moral turpitude nor have been convicted of any offense by final judgment; 2) He shall have at least ten (10) years experience in the line of adjustment be'ing applied for with any adjustment firm or insurance c o m p a n y or m u s t have successfully completed the insurance adjuster's course conducted by the Insurance Institute for Asia and the Pacific and / o r a program satisfactory to the Insurance Commission in the line of business being applied for or passed the adjuster's examination given by the Insurance Commission; 3) He must have a paid-up capital of at least P250,000.00. (b) Juridical person. — In addition: 1) T h e President, General M a n a g e r or Chief Operating Officer of the applicant shall be of g o o d moral character and must not h a v e b e e n convicted of a crime involving moral turpitude n o r h a v e b e e n convicted of any offense by final judgment; and 2) T h e President, General Manager, or Chief Operating Officer of the applicant shall h a v e at least ten (10) years experience in the line of adjustment b e i n g applied for with any adjustment firm or insurance c o m p a n y or must have successfully completed the insurance adjuste r ' s course conducted by the Insurance Institute for Asia and the Pacific and / o r program satisfactory to the Insurance C o m m i s s i o n in the line of business b e i n g applied for or passed the adjuster's examination given by the Insurance Commission. 3) Applicant must have at least a paid-up capital of P500,000.00. (c) Common requirements. — T h e y are as follows: 1) Submission of a 3-year business plan; 2) That the application of an adjuster m a y be referred to the Association of Philippine Adjustment C o m p a n i e s

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and Insurance and Surety Association of the Philippines for c o m m e n t as to applicant's moral integrity, honesty and trustworthiness; and 3) A pre-licensing examination of applicant's office premises and b o o k s of accounts and b a n k d e p o s i t / s shall be conducted by the Insurance C o m m i s s i o n to determine if applicant is ready to do business as an adjuster. (2) Renewal of adjuster's license. — T h e requirements are as follows: (a) Information sheet shall be submitted yearly with renewal application for license showing the updated lists of owners, partners a n d / o r stockholders and their corresponding shares of stockholdings. Further, the information sheet should contain the names of current directors and officers of the corporation. (b) No license to act as an adjuster shall be renewed if the holder thereof has not b e e n actively engaged as such in accordance with such rules as the Commissioner may prescribe. T h e term "actively engaged" should be taken to mean that the license holder shall h a v e earned, during the year following the issuance of the license, adjustment fees for services rendered as such adjuster amounting to at least P500,000.00 if a partnership or corporation and P250,000.00 if a sole proprietorship or an individual. (3) Employees of existing licensed adjustment firms. — They may be licensed and authorized to act for and in behalf of their firm provided that they h a v e the following qualifications: (a) Applicant must be of good moral character and must not have b e e n convicted of a crime involving moral turpitude nor have been convicted of any offense by final judgment. (b) Applicant shall have at least five (5) years experience in the line of adjustment being applied for with any adjustment firm or insurance company or must have successfully completed the insurance adjuster's course conducted by the Insurance Institute for Asia and the Pacific a n d / o r program

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satisfactory to the Insurance Commission in the line of business being applied for or passed the adjuster's examination given by the Insurance Commission. (Ins. M e m o . Cir. No. 4-93, supra.)

Establishment of branch or regional offices. Before establishing a branch or regional office within the Philippines or elsewhere, insurance adjusters, public or independent, must give prior notice and obtain approval from the Insurance Commission. In addition to the duly licensed and registered adjuster in the H o m e Office, such branch or regional office m u s t h a v e a qualified adjuster duly licensed by and registered with this Commission on each of the fire, marine, casualty, a n d / o r surety line of insurance loss adjustment w h i c h the branch or regional office intends to engage in. (Ibid.)

Prohibited acts. (1) T h e cause or causes by w h i c h an adjuster's license m a y be suspended or revoked are specified under Section 3 3 0 of the Code. (2) A n y adjuster, independent a n d / o r c o m p a n y (inhouse), found by the Insurance C o m m i s s i o n e r to h a v e either received, exacted, a n d / o r d e m a n d e d m o n e y or other form of consideration directly or indirectly from an insurance claimant for an expeditious and favorable r e c o m m e n d a t i o n of the settlement of the claim, and / o r r e c o m m e n d i n g p a y m e n t of claim in an amount which is either excessive or unreasonably m e a g e r as a result of the failure of claimant to satisfy such consideration so demanded or being exacted by the adjuster shall be d e e m e d to have committed a fraudulent or dishonest act, demonstrating his untrustworthiness, thus reflecting adversely against his practices and methods of doing business as such adjuster. An independent adjuster found to h a v e committed such prohibited acts shall no longer be qualified, therefore, to hold any further his license as such and, accordingly, shall be divested of the privilege. A c o m p a n y (in-house) adjuster found likewise

Sees. 323-334

SALES AGENCIES AND SERVICES Title 5. — Adjusters

677

to have committed similar acts shall be separated immediately from the e m p l o y of the insurance company. (3) No adjuster, independent and / o r c o m p a n y (in-house) shall be authorized, delegated, or entrusted the duty to deliver checks or cash to the claimants in settlement of insurance claims serviced by such adjuster. (Ibid.) (4) No adjustment c o m p a n y shall h a v e any equity in an insurance c o m p a n y or vice versa. (Ibid.)

— oOo —

Title 6 ACTUARIES

Sec. 335. No life insurance company shall be licensed to do business in the Philippines nor shall any life insurance company doing business in the Philippines be allowed to continue doing such business unless they shall engage the services of an actuary duly accredited with the Commissioner who shall, during his tenure of office, be directly responsible for the direction and supervision of all actuarial work connected with or that may be involved in the business of the insurance company. Sec. 336. Any person may be officially accredited by the Commissioner to act as an actuary in any life insurance company or in any mutual benefit association authorized to do business in the Philippines upon application therefor and the payment of the corresponding fee hereinafter prescribed; Provided, That: (1) he is a fellow of good standing of the Actuarial Society of the Philippines at the time of his appointment and remains in such good standing during the tenure of his engagement; or (2) in the case of one who is not a fellow of the Actuarial Society of the Philippines, he meets all the requirements of the said Society for accreditation as a fellow of the Society, and has been given permission by the pertinent government authorities in the Philippines to render services in the Philippines, in the event that he is not a citizen of the Philippines. No certificate of registration issued under this title shall be valid after the thirtieth day of June of the year following its issuance unless it is renewed. (As amended by Pres. Decree No. 1455.) Sec. 337. The following documents, which are from time to time submitted to the Commissioner by a life insurance 678

Sees. 335-338

SALES AGENCIES AND SERVICES Title 6. — Actuaries

679

company authorized to do business in the Philippines, shall be duly certified by an accredited actuary employed by such company: (1) Policy reserves and net due and deferred premiums. (2) Statements of bases and net premiums, loading for gross premiums, and on non-forfeiture values and reserves, when applying for approval of gross premiums, reserves and non-forfeiture values. (3) Policies of insurance under any plan submitted to the Commissioner as required by law. (4) Annual statements and valuation reports submitted to the Commissioner as required by law. (5) Financial projection showing the probable income and outgo, and reserve requirements, enumerating the actuarial assumptions and bases of projections. (6) Valuation of annuity funds or retirement plans. Any life insurance company authorized to do business in the Philippines may employ any person who is not officially accredited under either of the qualifications for any kind of actuarial work, provided that he shall not, at any time, have the authority to certify to the correctness of the foregoing documents. Sec. 338. No accredited actuary shall serve more than one client or employer at the same time. However, one already in the employ of an insurance company may be allowed by the Commissioner to serve a mutual benefit association or any other insurance company, provided the following conditions are first complied with: (a) that the request to engage his services by the other employer is in writing; (b) that his present employer acquiesced to it in writing; and (c) that he furnishes the Commissioner with copies of said request and acquiescence. Actuary defined. An actuary is an officer of a mercantile or insurance company skilled in financial calculations, especially respecting such subjects as the expectancy or the duration of life. (1 Bouvier's L a w Dictionary [3rd ed.], 130.)

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Sees. 335-338

He is one whose business or profession is to calculate insurance risks and premiums. Actuarial work in insurance. (1) In life insurance. — T h e rates of premium are fixed by a separate actuarial staff. With the aid of mortality tables and the accumulated experience of his o w n and other companies, the actuary diagnoses mortality trends, fixes rates of premium, devises formulas for distributing dividends, estimates the costs of policy provisions, and deals with all the mathematical problems of the business. (Riegel, Miller and Williams, Jr., op. cit., p. 93.) (2) In property and liability insurance. — T h e role of the actuary varies according to the line of insurance and whether the insurer uses rating bureau rates or develops its own. (ibid., pp. 93-94, 239.) The mortality table. T h e basic obligation of life insurers is to p a y death benefits, so they must k n o w the expected life span of an insured group. The mortality table is the instrument by w h i c h the probability of living or dying is measured. This is a table s h o w i n g the probable death rate at each age, and by starting with a given n u m b e r at a given age, it shows h o w m a n y persons will probably die during each succeeding year. Life insurance actuaries construct tables s h o w i n g the mortality experience of large groups of people. A p p l y i n g the principles of probability and large numbers, they can predict closely the number of deaths and the time of their occurrence in any large group. T h e greater the accuracy of predictions, the greater the number of cases under observation. Large n u m b e r s permit variations from the average to cancel each other. T h e size of the group is built up by accumulating like cases over a long period of time and as the groups are increased over time, the actual results tend to equal the expected results. (D.L. Bickelhaupt, op. cit, p. 239.) — oOo —

Title 7 RATE

ORGANIZATION AND

RATE

MAKING Sec. 339. 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 shall be known as a "rating organization." The term "rate" as used in this title 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. Sec. 340. Every rating organization which now exists or which may hereafter be formed shall be subject to the provisions of this title. Sec. 341. No rating organization hereafter formed shall commence rate-making operations until it shall have obtained a license from the Commissioner. Before obtaining such license, such rating organization shall file with the Commissioner a notice of its intention to commence ratemaking operations, a copy of its constitution, articles of agreement or association, or of incorporation, and its by-laws, a list of insurance companies that have agreed to become members or subscribers, and such other information concerning such rating organization and its operations as may be required by the Commissioner. If the Commissioner finds that the organization has complied with the provisions of law and that it has a sufficient number of members or subscribers and is otherwise qualified to function as a rating organization, the Commissioner may issue a license to such rating organization authorizing it 681

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Sees. 342-343

to make rates for the kinds of insurance or subdivisions thereof as may be specified in such license. No license issued to a rating organization shall be valid after the thirtieth day of June of the year following its issuance unless it is renewed. No rating organization which now exists and is not licensed pursuant to this section shall continue rate-making operations until it shall have obtained from the Commissioner a license which he may issue if satisfied that such organization is complying with the provisions of this title. Every rating organization shall notify the Commissioner promptly of every change in (1) its constitution, its articles of agreement or association or its certificate of incorporation, and its by-laws, rules and regulations governing the conduct of its business, and (2) its list of members and subscribers. A "member" means an insurer who participates in or is entitled to participate in the management of a rating organization. A "subscriber" means an insurer which is furnished at its request with rates and rating manuals by a rating organization of which it is not a member, (as amended by Pres. Decree No. 1455.) Sec. 342. Each rating organization shall furnish its rating service without discrimination to all of its members and subscribers, and shall, subject to reasonable rules and regulations, permit any insurance company doing business in the Philippines, not admitted to membership, to become a subscriber to its rating services for any kind of insurance or subdivisions thereof. Notice of proposed changes in such rules and regulations shall be given to subscribers. The reasonableness of any rule or regulation in its application to subscribers, or the refusal of any rating organization to admit an insurance company as a subscriber, shall, at the request of any subscriber or any such insurance company, be reviewed by the Commissioner at a hearing held upon at least ten days' written notice to such rating organization and to such subscriber or insurance company. The Commissioner may, after such hearing, issue an appropriate order. Sec. 343. No rating organization or any other association shall refuse to do business with, or prohibit or prevent the

Sees. 344-348

SALES AGENCIES AND SERVICES Title 7. — Rate Organization and Rate Making

payment of commissions to, any person licensed as an insurance broker pursuant to the provisions of Title One of this chapter. Sec. 344. Rating organizations shall be subject to examination by the Commissioner, as often as he may deem such examination expedient, pursuant to the provisions of this Code applicable to the examination of insurance companies. He shall cause such an examination of each rating organization to be made at least once in every five years. Sec. 345. The Commissioner may suspend or revoke the license of any rating organization which fails to comply with his order within the time limited by such order, or any extension thereof which he may grant. The Commissioner may determine when a suspension of license shall become effective and it shall remain in effect for the period fixed by him, unless he modifies or rescinds such suspension. Sec. 346. Any rating organization may subscribe for or purchase actuarial, technical or other services, and such services shall be available to all members and subscribers without discrimination. Sec. 347. Any rating organization may provide for the examination of policies, daily reports, binders, renewal certificates, endorsements or other evidences of insurance, or the cancellation thereof, and may make reasonable rules governing their submission. Such rules shall contain a provision that in the event an insurance company does not within sixty days furnish satisfactory evidence to the rating organization of the correction of any error or omission previously called to its attention by the rating organization, it shall be the duty of the rating organization to notify the Commissioner thereof. All information so submitted for examination shall be confidential. Sec. 348. Cooperation among rating organizations or among rating organizations and insurers in rate making or in other matters within the scope of this title is hereby authorized, provided the filings resulting from such cooperation are subject to all provisions of this title which are applicable to filings generally. The Commissioner may review such cooperative activities and practices and if he finds that any such activity or practice is unfair or unrea-

683

684

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 349

sonable or otherwise inconsistent with the provisions of this title, he may issue a written order specifying in what respects such activity or practice is unfair or unreasonable, or otherwise inconsistent with the provisions of this title, and requiring the discontinuance of such activity or practice. Sec. 349. 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, 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 years next preceding the year in which the review is made. (e) Risks 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.

Sees. 350-354

SALES AGENCIES AND SERVICES Title 7. — Rate Organization and Rate Making

Sec. 350. No rating organization and no insurance company which makes and files its own rates shall make or promulgate any rate or schedule of rates which is to be applied to any fire risk on the condition that the whole amount of insurance on any risk or any specified part thereof shall be placed with the members of or subscribers to such rating organization or with such insurer. Sec. 351. Every insurance company doing business in the Philippines shall annually file with the rating organization of which it is a member or subscriber, or with such other agency as the Commissioner may designate, a statistical report showing a classification schedule of its premiums and losses on all kinds or types of insurance business to which section three-hundred forty-nine is applicable, and such other information as the Commissioner may deem necessary or expedient for the administration of the provisions of this title. Sec. 352. Every non-life rating organization and every non-life insurance company doing business in the Philippines shall file with the Commissioner, except as to risks which by general custom of the business are not written according to manual rates or rating plans, every rate manual, schedule of rates, classification of risks, rating plan, and every other rating rule and every modification of any of the foregoing which it proposes to use. An insurance company may satisfy its obligation to make such filings for any kind or type of insurance by becoming a member of or subscriber to a rating organization which makes such filings for such kind or type of insurance, and by authorizing the Commissioner to accept such filings of the rating organization on behalf of such insurance company. Sec. 353. Every manual or schedule of rates and every rating plan filed as provided in the preceding section shall state or clearly indicate the character and extent of the coverage to which any such rate or any modification thereof will be applied. Sec. 354. The Commissioner shall review filings as soon as reasonably possible after they have been made in order to determine whether they meet the requirements of this title. When a filing is not accompanied by the information upon which the insurance company supports

685

686

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 355-358

such filing, and the Commissioner does not have sufficient information to determine whether such filing meets the requirements of this title, he shall require such insurance company to furnish the information upon which it supports such filing. The information furnished in support of a filing may include: (1) the experience or judgment of the insurance company or rating organization making the filing; (2) its interpretation of any statistical data it relies upon; (3) the experience of other insurance companies or rating organization; or (4) any other relevant factors. Sec. 355. 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 sixty 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 ten 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 sixty-day period. Sec. 356. No member or subscriber of a rating organization, and no insurance company doing business in the Philippines, or agent, employee or other representative of such company, and no insurance broker shall charge or demand a rate or receive a premium which deviates from the rates, rating plans, classifications, schedules, rules and standards, made and last filed by a rating organization or by or on behalf of the insurance company, or shall issue or make any policy or contract involving a violation of such rate filings. Sec. 357. Notwithstanding any other provisions of this title, upon the written application of the insurer, stating his reasons therefor, filed with and approved by the Commissioner, a rate in excess of that provided by a filing otherwise applicable may be used on any specific risk. Sec. 358. Whenever the Commissioner shall determine, after notice and a hearing, that the rates charged or filed on any class of risks are excessive, discriminatory,

Sees. 359-361

SALES AGENCIES AND SERVICES Title 7. — Rate Organization and Rate Making

inadequate or unreasonable, he shall order that such rates be appropriately adjusted. For the purpose of applying the provisions of this section, the Commissioner may from time to time approve reasonable classifications of risks for any or all such classes, having due regard to the past and prospective loss experience, including conflagration or catastrophe hazards, if any, to all other relevant factors and to a reasonable profit. Sec. 359. Nothing contained in this title shall be construed as requiring any insurer to become a member of or subscriber to any rating organization. Sec. 360. Agreements may be made among insurance companies with respect to the equitable apportionment among them of insurance which may be afforded applicants who are in good faith entitled to but are unable to procure such insurance through ordinary methods and such insurance companies may agree among themselves on the use of reasonable rates and modifications for such insurance, such agreements and rate modifications to be subject to the approval of the Commissioner; Provided, however, That the provisions of this section shall not be deemed to apply to workmen's compensation insurance. Sec. 361. 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 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

687

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THE INSURANCE CODE OF THE PHILIPPINES

Sees. 339-363

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 because of his race. Sec. 362. 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. Sec. 363. If the Commissioner, after notice and hearing, finds that any insurance company, rating organization, agent, broker or other person has violated any of the provisions of this title, it shall order the payment of a fine not to exceed five hundred pesos for each such offense, and shall immediately revoke the license issued to such insurance company, rating organization, agent, or broker. The issuance, procurement or negotiation of a single policy or contract of insurance shall be deemed a separate offense. Underwriters' associations a n d rating bureaus. Prior to any legislation on the subject, voluntary associations variously called "board of underwriters," "rating bureaus," or "insurance e x c h a n g e s " were frequently organized by insurance companies or agents for the purpose of promoting the business, welfare, and convenience of the parties thereto, and to secure uniformity in the business. S u c h combinations were generally

Sees. 339-363

SALES AGENCIES AND SERVICES Title 7. — Rate Organization and Rate Making

669

held not to violate any public policy, even though one of the purposes w a s to secure uniformity in rates and premiums to be charged for insurance upon the different classes of property. (Aetna Ins. Co. vs. C o m m o n w e a l t h , 51 S W 624.) 1

However, if the purpose and effect of such associations is to eliminate competition as to the rates charged for, and the conditions of, insurance, they w o u l d be invalid as a restraint of trade. (National U n i o n Ins. C o . vs. Dickinson, 194 SW 254; United States vs. South Eastern Underwriters Assn., 323 US 811.)

Regulation of rates. (1) Necessity of regulation. — T h e validity of legislation conferring u p o n the state the p o w e r to regulate the rates charged by insurers is u p h e l d on the ground that the insured has no bargaining p o w e r to protect himself against excessive rates. "The price of insurance is not fixed over the counters of the companies by what A d a m S m i t h calls the higgling of the market, but formed in the councils of the underwriters, promulgated in schedules of practically controlling constancy which the applicant for insurance is powerless to oppose and which, therefore, has led to the assertion that the business of insurance is of monopolistic character" and that "it is illusory to speak of a liberty of contract." (E.W. Patterson, p. 3 9 , citing G e r m a n Alliance Ins. Co. vs. Gewis, 233 U S . 389 [1914].)

'In the Philippines, the rating organization of non-life insurance companies is the Philippine Insurance Rating Association (PIRA). It was organized in March 1954 as the Philippine Rating Bureau, but in 1973, at the suggestion of the Insurance Commissioner, the new name was adopted because the word "Bureau" is often mistaken for a government entity for it ordinarily connotes a government agency. The Philippine Insurance Rating Association is an organization of about 108 non-life insurance companies (about 14 of which are foreign) members licensed by the Office of the Insurance Commissioner, in accordance with its Circular No. 54 (dated Feb. 26, 1954), requiring every association or group of insurance companies engaged in the making of premium rates and policy conditions to obtain a license from that office. This insurance association establishes tariff rates in respect of fire, earthquake, riot and civil commotion and motor vehicle insurance and surety and fidelity bonds, and whenever applicable, marine insurance business. It also establishes policy wording for these classes of insurance business, subject to the approval of now the Insurance Commission. It is managed by a governing committee composed of seven members and presided by a chairman. A violation of tariff rates is called a "breach." The rates are floors or minimums mandatory on all members. An insurance company that does not observe them is considered engaged in unfair competition.

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Sees. 339-363

(2) Extent of regulation. — The power of a state to regulate and control the business of insurance includes the power to regulate insurance rates and to require the submission of documents to determine whether lawful rates are being charged. (a) With respect to rates, however, the Insurance C o m missioner has no power not conferred upon h i m by the express letter or reasonable construction of the statute. T h e right given the Commissioner to approve or disapprove rate schedules filed by insurance companies does not include the right to regulate the declaration of dividends, out of distributable earnings, to the policyholders. (43 A m . Jur. 2d, 123-124.) (b) T h e method of control over rates is to require full information about all rating organizations, to require every insurer subject to the law to file its rates either by itself or through a rating organization (see Sees. 351-353.), and to e m p o w e r the Insurance C o m m i s s i o n e r to order a correction or adjustment of the rates charged (see Sees. 354-358.), either on his o w n initiative or on complaint from insureds or competitors. (E.W. Patterson, op. cit., p. 40.) (c) Property and liability insurance rates are subject to close regulations, life a n d health insurance rates to m u c h less restrictive regulation. Two major reasons for this difference in treatment are that property and liability insurance rates (a) are often m a d e by insurers pricing (legally) in concert, and (b) are more difficult to understand and to establish. (Riegel, Miller & Williams, Jr., op. cit., p. 62.) (3) Requirements as to rates. — Property and liability insurance rates must be reasonable (not too high) and adequate (not too low) for the class of risks to which they apply and not unfairly discriminatory between risks involving essentially the s a m e hazards and expense elements, (see Sees. 349[b, c], 355, 358.) (a) Rates are considered reasonable and adequate w h e n they produce sufficient revenue to pay all losses and expenses of doing business, and in addition, produce a reasonable profit, (see D.L. Bickelhaupt, op. cit., p. 2 1 0 ; Riegel, Miller & Williams, Jr., op. cit., p. 62.)

Sees. 339-363

SALES AGENCIES AND SERVICES Title 7. — Rate Organization and Rate Making

691

(b) State-made insurance rates, if not confiscatory, are generally upheld. T h e y will not be set aside merely because the aggregate collections are not sufficient to yield a reasonable profit or just compensation to certain companies that happen to e n g a g e in such business, (see 43 A m . Jur. 2d 125; Aetna Ins. C o . vs. H y d e , 2 7 5 U.S. 440.) In a case, the petitioner, a life insurance underwriter or agent w a s found to h a v e i n d u c e d private respondent to take a life insurance policy by promising h i m a rebate equivalent to 5 0 % of the just annual p r e m i u m payment, w h i c h w o u l d be taken out of her c o m m i s s i o n on the policy. This promise w a s held covered equally by Sections 3 6 1 and 3 6 3 . (Lumibao vs. Intermediate Appellate Court, 189 S C R A 4 6 9 [1990].)

Combinations among insurance companies. T h e test as to w h e t h e r a given agreement constitutes unlawful machination or a combination in restraint of trade is whether under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is or is not reasonable. (Ferrazzini vs. Gsell, 34 Phil. 697 [1916].) Restrictions u p o n trade m a y be upheld w h e n not contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in w h o s e favor it is imposed. (Ollendorf vs. A b r a h a m s o n , 38 Phil. 585 [1918].) T h e question the court must ordinarily consider is whether the restraint imposed is such as merely regulates and promotes competition, or whether it is such as m a y suppress or even destroy competition. (Board of Trade of Chicago vs. U.S., 246 US 2 3 1 , 62 L. ed. 683 [1918], cited in Filipinas Cia de Seguros vs. Mandanas, 17 S C R A 391 [1966].) Applying this test, the S u p r e m e Court held that Article 22 of the constitution of the Philippine Rating Bureau (now, Philippine Insurance Rating Association) which provides that m e m b e r s of the Bureau "agree not to represent nor to effect rein-surance with, nor accept reinsurance from, any company, body, or underwriter licensed to do business in the Philippines not a m e m b e r of good standing of this Bureau" is not unlawful, unreasonable or contrary to public policy. Its purpose is not to eliminate competition but to promote ethical practices among

692

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 339-363

non-life insurance companies, although incidentally, it may discharge, and hence, eliminate unfair competition through under-rating, which, in itself, is eventually injurious to the public. The limitation upon reinsurance in said article does not, affect the public at all for whether there is reinsurance or not the liability of the insurer in favor of the insured is the same. W h a t is more, whatever the Bureau m a y do in the matter of rate fixing is not decisive insofar as the public is concerned, for no insurance company in the Philippines m a y charge a rate of p r e m i u m that has not been approved by the Insurance Commissioner. It does not, therefore, constitute an illegal or u n d u e restraint of trade. (Ibid.)

— 0O0 —

Title 8 PROVISION C O M M O N TO AGENTS,

BROKERS,

AND

ADJUSTERS

Sec. 364. A license issued to a partnership, association or corporation to act as an insurance agent, general agent, insurance broker, reinsurance broker, or adjuster shall authorize only the individual named in the license who shall qualify therefor as though an individual licensee. The Commissioner shall charge, and the licensee shall pay, a full additional license fee as to each respective individual so named in such license in excess of one. Licenses and certificates of registration issued under the provisions of this Chapter may be renewed by the filing of notices of intention on forms to be prescribed by the Commissioner and payment of the fees therefor, (as amended by Pres. Decree No. 1455.) Types of insurer representatives. T h e applicant for insurance m a k e s contact with the insurer through one or m o r e of the following: (1) Agent. — T h e authority under which the insurer operates is delegated through an agency contract. (a) In property and liability insurance. — He may either be a general agent in which case, he can bind a risk and thereby make insurance effective immediately and prior to the actual delivery of the policy; or a limited agent, in which case, his powers are restricted, and he must operate within the scope of the authority delegated to him. Incidentally, secret limitations do not bind a third party and the agent may bind 693

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Sec. 364

the principal if he is acting within the scope of his authority, (see D.L. Bickelhaupt, op. cit., pp. 116-117.) (b) In life insurance. — T h e agent is merely a solicitor, with no power to bind the company. T h e c o m p a n y is responsible for his acts while he is acting within the scope of his real or implied authority, but because his authority is limited strictly to the solicitation of business, the c o m p a n y still retains the right to accept or reject the risk he secures. (Riegel, Miller & Williams, Jr., op. cit., p. 97.) T h e life insurance agent is authorized to receive the first p r e m i u m due on the application obtained by him, but not subsequent premiums. An exception is the "industrial" life insurance agent w h o does collect renewal p r e m i u m s regularly at the h o m e of the policyholder; (2) Solicitor. — He is an individual authorized by an insurance agent or broker to solicit contracts of insurance or annuities. He acts only on behalf of one agent or broker; (3) Broker. — Unlike the agent w h o legally represents the insurer, the broker acts on b e h a l f of the insured. He is an independent contractor and is remunerated usually on a commission basis. His principal function is to assist the applicant for insurance in placing risks. T h e broker h a s b e e n termed an anomaly in that he serves the insured, yet is paid by the insurer; and (4) Service representative. — He is a specialist e m p l o y e d by the insurer on a salary basis to w o r k with and assist agents in writing specialized lines. C o m p a n y officers, managers, or general agents of insurance companies e m p l o y e d on a salary basis are not included in the category of service representatives. A license is not required of a service representative, (see D.L. Bickelhaupt, op. cit., pp. 118-120.)

— oOo —

Chapter V SECURITY FUND Sec. 365. There is hereby created a fund to be known as the "Security Fund" which shall be used in the payment of allowed claims against an insurance company authorized to transact business in the Philippines remaining unpaid by reason of the insolvency of such company. The said Fund may also be used to reinsure the policy of the insolvent insurer in any solvent insurer authorized to do business in the Philippines as provided in section two hundred fortynine. In the event of national emergency or calamity, the Fund may likewise be used to pay insured claims which otherwise would not be compensable under the provisions of the policy. No payment from the Security Fund shall, however, be made to any person who owns or controls ten per centum or more of the voting shares of stock of the insolvent insurer and no payment of any one claim shall exceed twenty thousand pesos. Sec. 366. Such Fund shall consist of all payments made to the Fund by insurance companies authorized to do business in the Philippines. Payments made by life insurance companies shall be treated separately from those made by non-life insurance companies and the corresponding fund shall be called "Life Account" and "Non-Life Account," respectively, and shall be held and administered as such by the Commissioner in accordance with the provisions of this title. The "Life Account" shall be utilized exclusively for disbursements that refer to life insurance companies, while the "Non-Life Account" shall be utilized exclusively for disbursements that refer to nonlife insurance companies. Sec. 367. All insurance companies doing business in the Philippines shall contribute to the Security Fund, Life 695

696

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 368

or Non-Life Account, as the case may be, on or before the fifteenth day of June, nineteen hundred and seventyfive the aggregate amount of five million pesos for each Account. The contributions of the life insurance companies and of the non-life insurance companies shall be in direct proportion to the ratio between a particular life insurance company or a particular non-life insurance company's net worth and the aggregate net worth of all life insurance companies or all non-life insurance companies, as the case may be, as shown in their latest financial statements approved by the Commissioner. This proportion applied to the five million pesos shall be the contribution of a particular company to the corresponding Account of the Security Fund. The amount of five million pesos in each Account shall be in the form of a revolving trust fund. The respective contributions of the companies shall remain as admitted assets in their books and any disbursements therefrom shall be deducted proportionately from the contributions of each company which will be allowed as deductions for income tax purposes. Any earnings of the Fund shall be turned over to the contributing companies in proportion to their contributions. in the case of disbursements of funds from the Fund as provided in the foregoing paragraph, the life and nonlife companies, as the case may be, shall replenish the amount disbursed in direct proportion to the individual company's net worth and the aggregate net worth of the life or non-life companies, as the case may be. However, in no case shall the Fund exceed the aggregate amount of ten million pesos, or five million pesos for each Account. Should the Fund, Life or Non-Life Account, as the case may be, be inadequate for a disbursement as provided for, then the Life or Non-Life companies, as the case may be, shall contribute to the Fund their respective shares in the proportion previously mentioned. Sec. 368. The Commissioner may adopt, amend, and enforce all reasonable rules and regulations necessary for the proper administration of the Fund and of the Accounts. In the event any insurer shall fail to make any payment required by this title, or that any payment made is incorrect, he shall have full authority to examine all

Sees. 369-371

SECURITY FUND

the books and records of the insurer for the purpose of ascertaining the facts and shall determine the correct amount to be paid and may proceed in any court of competent jurisdiction to recover for the benefit of the Fund or of the Account concerned any sum shown to be due upon such examination and determination. Any insurer which fails to make any payment to the Fund or to the Account concerned when due, shall thereby forfeit to Fund or Account concerned a penalty of five per centum of the amount determined to be due as provided by this title, plus one per centum of such amount for each month of delay or fraction thereof, after the expiration of the first month of such delay, but the Commissioner, if satisfied that the delay was excusable, may remit all or any part of such penalty. The Commissioner, in his discretion, may suspend or revoke the certificate of authority to do business in the Philippines of any insurance company which shall fail to comply with this title or to pay any penalty imposed in accordance therewith. Sec. 369. The accounts created by this title shall be separate and apart from each other and from any other fund. The Treasurer of the Philippines shall be the custodian of the Life Account and Non-Life Account of the Security Fund; and all disbursements from any Account shall be made by the Treasurer of the Philippines upon vouchers signed by the Commissioner or his deputy, as hereinafter provided. The moneys of said Account may be invested by the Commissioner only in bonds or other evidences of debt of the Government of the Philippines or its political subdivisions or instrumentalities. The Commissioner may sell any of the securities in which an Account is invested, if advisable, for its proper administration or in the best interest of such Account. Sec. 370. Payments from either the Life Account or Non-Life Account, as the case may be, shall be made by the Treasurer of the Philippines to the Commissioner, upon the authority of appropriate certificate filed with him by the Commissioner acting in such capacity. Sec. 371. The Commissioner may, in his discretion, designate or appoint a duly authorized representative or representatives to appear and defend before any court or other body or official having jurisdiction over any or all

697

698

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 365-372

actions or proceedings against principals or assureds on insurance policies or contracts issued to them where the insurer has become insolvent or unable to meet its insurance obligations. The Commissioner shall have, as of the date of insolvency of such insurer or as of the date of its inability to meet its insurance obligations, only the rights which such insurer would have had if it has not become insolvent or unable to meet its insurance obligations. For the purpose of this title the Commissioner shall have the power to employ such counsel, clerks and assistants as he may deem necessary. Sec. 372. The expense of administering an Account shall be paid out of the Account concerned. The Commissioner shall serve as administrator of the Fund and of the Accounts without additional compensation, but may be allowed and paid from the Account concerned expenses incurred in the performance of his duties in connection with said Account. The compensation of those persons employed by the Commissioner shall be deemed administration expense payable from the Account concerned. The Commissioner shall include in his annual report to the Secretary of Finance a statement of the expenses of administration of the Fund and of the Life Account and Non-Life Account for the preceding year. Security F u n d . The Security F u n d created assures the p a y m e n t of allowed claims against an insurance c o m p a n y w h i c h remains u n p a i d by reason of insolvency of such company. It will not only provide assistance to companies on the brink of b a n k r u p t c y but also assure continued trust and confidence in the industry from the public. The Fund has also a secondary purpose. In the event of national emergency or calamity (e.g., war, riots, rebellion, earthquake, or flood), the Fund m a y likewise be used to pay insured claims which otherwise would not be c o m p e n s a b l e under the provisions of the policy. (Sec. 365.) — oOo —

Chapter VI COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE Sec. 373. For purposes of this chapter: (a) "Motor Vehicle" is any vehicle as defined in section three, paragraph (a) of Republic Act Number 4136 otherwise known as the "Land Transportation and Traffic Code." (b) "Passenger" 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. (c) "Third-party" is any person other than a passenger as defined in this section and shall 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, as likewise defined herein, or his employee in respect of death or bodily injury arising out of and in the course of employment, fas amended by Pres. Decree No. 1814.) (d) "Owner" or "Motor vehicle owner" means the actual legal owner of a motor vehicle, in whose name such vehicle is duly registered with the Land Transportation Commission. 1

(e) "Land transportation operator" means the owner or owners of motor vehicles for transportation of passenger for compensation, including school buses. 'Replaced by the Land Transportation Office (LTO), an enforcement agency and the Land Transportation Franchising and Regulatory Board (LTFRB), a quasi-judicial franchising and regulatory body. 699

700

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Sees. 374-377

(f) "Insurance policy" or "Policy" refers to a contract of insurance against passenger and third-party liability for death or bodily injuries arising from motor vehicle accidents, (as amended by Pres. Decrees No. 1455 and 1814.) Sec. 374. 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 or bodily injury of the thirdparty or passenger, as the case may be, arising from the use thereof, (as amended by Pres. Decrees No. 1455 and 1814.) Sec. 375. 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 this Chapter. (As amended by Pres. Decree No. 1455.) Sec. 376. The Land Transportation Commission 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. (As amended by Pres. Decree No. 1455.) Sec. 377. 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 the insurance policy or surety bond issued by an 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 three hundred seventy-four. (1) In the case of a land transportation operator, the insurance or guaranty in cash or surety bond shall cover liability for death or bodily injuries of third parties and/or passengers arising out of the use of such vehicle in the amount not less than twelve thousand pesos per passen-

Sees. 374-377

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

ger or third party and an amount for each of such categories, in any one accident, of not less than that set forth in the following scale: (a) Motor vehicles with an authorized capacity of twenty-six or more passengers: Fifty thousand pesos; (b) Motor vehicles with an authorized capacity of from twelve to twenty-five passengers: Forty thousand pesos; (c) Motor vehicles with an authorized capacity of from six to eleven passengers: Thirty thousand pesos; (d) Motor vehicles with an authorized capacity of five or less passengers: Five thousand pesos 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 accidents the 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 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. (2) 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: I.

Private Cars (a) Bantam: Twenty thousand pesos (b) Light: Twenty thousand pesos (c) Heavy: Thirty thousand pesos

II.

Other Private Vehicles

(a) Tricyles, motorcycles and scooters: Twelve thousand pesos;

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Sees. 378-379

(b) Vehicles with an unladen weight of 2,600 kilos or less: Twenty thousand pesos; (c) Vehicles with an unladen weight of between 2,601 kilos and 3,930 kilos: Thirty thousand pesos; (d) Vehicles with an unladen weight over 3,930 kilos: Fifty thousand pesos; 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 therein. (As amended by Pres. Decrees No. 1455 and 1814.) Sec. 378. 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 — (i) The total indemnity in respect of any one person shall not exceed five thousand pesos; (ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (a) Police report of accident; and (b) Death certificate and evidence sufficient to establish the proper payee; or (c) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; (iii) 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 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. Sec. 379. 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

Sees. 380-381

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

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. No insurance company may issue the policy of insurance or surety bond required under this Chapter unless so authorized under existing laws. 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. (As amended by Pres. Decrees No. 1455 and 1814.) Sec. 380. 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 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 bond has been made or posted with the Commissioner and which meets the requirements of this Chapter, or an endorsement of revival of the cancelled one. (As amended by Pres. Decree No. 1455.) Sec. 381. 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 to replace the policy or surety bond to be cancelled, or make a cash deposit in sufficient amount with the Commissioner, and without any gap, file the required

THE INSURANCE CODE OF THE PHILIPPINES

704

Sees. 382-384

documentation with the Land Transportation Commission, and notify the insurance company concerned of the cancellation of its policy or surety bond. (As amended by Pres. Decree No. 1455.) Sec. 382. 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. Sec. 383. 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 assistant or restitution insofar as can fairly be ascertained. Sec. 384. 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 months from the date of the 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 year from denial of the claim, otherwise, the claimant's right of action shall prescribe. (As amended 2

2

If the written notice of claim is filed beyond six (6) months from the date of the accident, that claim shall be deemed waived. If the action for recovery is brought after one (1) year from denial of the claim, the right of action shall prescribe, (see Vda. de Gabriel vs. Court of Appeals, 264 SCRA 137 [1996].) Absent a written notice of claim no cause of action can accrue for there can be no opportunity for the insurer to even reject a claim (see Sec. 63.) if none has been filed in the first place. (Travellers Insurance Surety Corp. vs. Court of Appeals, 272 SCRA 536 [1997].) The amendment by Batas Pambansa Big. 874 consists in the insertion of "loss or" before "injury" and substituting "denial of the claim" in the place of "date of accident." In a case, an extrajudicial demand for payment was made on the insurance company

Sees. 385-387

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

by Pres. Decree No. 1814 and B.P. Big. 874.) Sec. 385. The insurance company concerned shall forthwith ascertain the truth and extent of the claim and make payment within five working days after reaching an agreement. If no agreement is reached, the insurance company shall pay only the "no fault" indemnity provided in section three hundred seventy-eight without prejudice to the claimant 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 limitations provided in section four hundred sixteen. (As amended by Pres. Decree No. 1455.) 3

Sec. 386. 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. Sec. 387. 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. The commission of an agent procuring the said policy or bond shall in no case exceed ten per centum of the amount of the premiums therefor.

but the company failed to respond to the same. Nevertheless, the complaint was filed even before a denial of the claim was made by the company. It was held that for all legal purposes, the prescriptive period has not begun to run. The cause of action arises only and starts to run upon the denial of the claim by the insurer. (Summit Guaranty & Insurance Co., Inc. vs. Arnaldo, 158 SCRA 332 [1988].) To prevent insurance companies from evading their responsibility to the insured through the clever scheme of making the insured believe that their claims would be settled in order that the latter will not find it necessary to immediately bring suit, the oneyear period under Section 384 was changed from the "date of the accident" to "denial of the claim." The insured's cause of action does not accrue until the insurer refuses, expressly or impliedly, to comply with its duty. (Country Bankers Insurance Corp. vs. Travellers Insurance & Surety Corp., 176 SCRA 523 [1989]; see Sec. 241[1, c].) T h e second paragraph of Section 385 was (inadvertently?) omitted by Presidential Decree No. 1455 but included in the official text published by the Insurance Commission.

706

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 373-389

Sec. 388. 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 but not more than one thousand pesos and/or imprisonment for not more than six months. The violation of section three hundred seventy-seven by a land transportation operator shall be a sufficient cause for the revocation of the certificate of public convenience issued by the Board of Transportation covering the vehicle concerned. 4

Sec. 389. Whenever any violation of the provisions of this chapter is committed by a corporation or association, or by a government office or entity, the executive officer or officers of said corporation, association or government officer or entity who shall have knowingly permitted, or failed to prevent, said violation shall be held liable as principals. Meaning of motor vehicle. Under Section 3(a) of Republic A c t N o . 4 1 3 6 , a motor vehicle shall m e a n any vehicle propelled by any p o w e r other than muscular p o w e r using the public highways, but excepting road rollers, trolley cars, street sweepers, sprinklers, l a w n m o w e r s , bulldozers, graders, forklifts, amphibian trucks, and cranes if not used in public highways, vehicles w h i c h run only on rails or tracks, and tractors, trailers and traction engines of all kinds u s e d exclusively for agricultural purposes. 5

Trailers having any n u m b e r of wheels, w h e n propelled or intended to be propelled by attachment to a m o t o r vehicle shall be classified as separate m o t o r vehicle with no p o w e r rating. For meaning of other terms, see Section 3 7 3 .

'Now, Land Transportation Franchising and Regulatory Board (LTFRB). ^Public highway shall mean every public thoroughfare, public boulevard, driveway, avenue, park, alley and callejon, but shall not include roadway upon grounds owned by private persons, colleges, universities, or other similar institutions. (Ins. Memo. Cir. No. 3-81, Oct. 7,1981.)

Sees. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Meaning of motor vehicle liability insurance. Motor vehicle liability insurance is a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property d a m a g e that m a y be sustained by another arising from the use and operation of a motor vehicle by its owner, (see C o m p u l s o r y M o t o r Vehicle Liability Insurance, p. 3, prepared and distributed by the Insurance Commission.)

How protection is obtained. Usually it is obtained purely on voluntary basis by a motor vehicle o w n e r to m e e t his needs in connection with whatever liability m a y be incurred in operating the vehicle. At present, however, m o t o r vehicle liability insurance must, to a certain extent, be taken on compulsory basis by a motor vehicle owner. (ibid.) 6

Prerequisite regarding the operation and registration of motor vehicles. S e c t i o n 3 7 4 of the Insurance C o d e enjoins a land transportation operator (LTO) or a m o t o r vehicle o w n e r ( M V O ) not to operate his vehicle in public h i g h w a y s unless there is in force in relation thereto a policy insurance or guaranty in cash or surety bond to indemnify the death or bodily injury of the third party or passenger, as the case m a y be, arising from the use thereof what the law mandates is third party liability coverage for such death or bodily injury. 7

9

*A valid non-life insurance company with a valid certificate of authority or license to operate in the Philippines and in good standing is authorized to issue three (3)-year compulsory third party liabilitiy (CTPL) policies. (Ins. Cir. Letter No. 9-06, Jan. 25, 2006.) starting May 2, 2005. The CTPL sales for private cars, commercial vehicles, tricycles, and motorcycles are prescribed in Ins. Cir. Letter No. 10-05A, April 25, 2005. ''Passenger 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. (Ins. Cir. Letter No. 3-81, supra.) "Third party is any person other than a passenger as defined above and shall 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, as likewise defined herein, or his employee in respect of death or bodily injuries arising out of and in course of employment. (Ibid., supra.)

THE INSURANCE CODE OF THE PHILIPPINES

708

Sees. 373-389

The Land Transportation Office (formerly Land Transportation Commission) will register or renew the registration of a motor vehicle only if there is in force in relation thereto such insurance or guaranty in cash or surety bond. (Sec. 376.)

Spirit behind or need for compulsory third party liability insurance. The overriding consideration in compelling m o t o r vehicle owners or operators to have third party liability insurance or surety bonds is to assure victims of m o t o r vehicle accidents and / or their dependents, especially w h e n they are poor, i m m e d i a t e financial assistance or indemnity regardless of the financial capability of motor vehicle o w n e r s or operators responsible for the accident sustained. T h e insurer's liability is primary and accrues immediately upon the occurrence of the injury or event upon which the liability depends, and does not d e p e n d on the recovery of j u d g m e n t by the injured party against the insured. (Schafer vs. Judge, RTC, 167 S C R A 3 8 6 [1986]; First Integrated Bonding & Insurance Co., Inc. vs. H e r n a n d o , 199 S C R A 796 [1991].) T h e injured or the heirs of a deceased victim of a vehicular accident m a y sue directly the insurer of the vehicle. (GSIS vs. Court of Appeals, 3 0 8 S C R A 559 [1997].) 9

10

The toll of traffic losses in the form of either death or bodily injuries (and d a m a g e to property) h a s reached an alarming proportion with the ever increasing use of m o t o r vehicles. It is of the essence, therefore, that M V O s inflicting such losses m u s t be capable of answering for d a m a g e s caused and duly c o m p e n s a t e the victims. Compulsory motor vehicle liability insurance (CMVLI) is the answer to the existing n e e d to assure financial ^Surety bond or bond insofar as the subject matter herein is concerned, means an undertaking to secure the indemnification of passenger and third-party liability for death or bodily injuries arising from motor vehicle accidents. (Ibid.) '"Although the victim may proceed directly against the insurer for indemnity, 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 third 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 in solidum with the insured and /or the other parties found at fault. The liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on tort. (Ibid.; Tiu vs. Arriesgado, 437 SCRA 426 [2004].)

Sees. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

assistance and relief to victims regardless of the financial capability of M V O s responsible for such traffic losses. (CMVLI, supra, p. 4.) Note: Presidential D e c r e e No. 1814 which amended Chapter VI deleted property d a m a g e from compulsory coverage under the C M V L I . Thus, the compulsory insurance only covers death of or bodily injuries to persons involved in vehicular accidents. T h e a m e n d m e n t w a s effected b e c a u s e of alleged tremendous losses encountered by the insurance industry under the scheme arising from padded a n d s o m e t i m e s non-existent third party property d a m a g e claims e v e n involving personnel of insurance companies, a n d the p r e m i u m s generated by the unified pooling system under the Philippine M o t o r Vehicle Liability Pool (PMVLP) c o m p o s e d of non-life insurance companies, which has been abolished, could not adequately meet such losses. " O w n d a m a g e " coverage to the insured motor vehicle is not also required by law. T h e parties, however, m a y agree upon a separate insurance to cover d a m a g e to property. 11

T h e deletion of property d a m a g e m a k e s possible substantial increase of the a m o u n t s in the schedule of indemnities for professional fees and hospital charges to approximate the present rates of medical costs w h i c h has been felt to be inadequate with a concomitant decrease in p r e m i u m rates.

Effect of insured's violation of policy condition on insurer's liability to third-party claimant. T h e insurer's liability to any party attaches during the effectivity of the policy in the absence of any showing that the same has been cancelled with proper notice to all parties concerned. The primary purpose of compulsory third party liability insurance is to afford protection to third persons who are not parties to the contract and w h o might surfer loss or injury on account of the accident. To allow, therefore, the insurer to escape liability by interposing the defense that the owner of the insured motor vehicle has violated the contract would be to defeat the "See Insurance Memorandum Circular No. 4-2006 on CMVLI coverage, Appendix F.

710

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 373-389

very purpose of the law. (Bonifacio Bus vs. Towers Assurance Corp., I.C. Case No. 4 5 1 , Dec. 9, 1977.)

Persons subject to the CMVLI requirement. Owners of motor vehicles subject are those w h o are generally classified either as a: (1) Motor Vehicle O w n e r ( M V O ) or one w h o is the actual legal owner of a motor vehicle in w h o s e n a m e such vehicle is registered with the Land Transportation Office; or (2) Land Transportation Operator (LTO) or one w h o is the owner of a motor vehicle or vehicles being used for conveying passengers for compensation including school buses. (Sec. 377.)

Substitutes for a CMVLI policy. M V O s or LTOs, instead of a C M V L I policy, m a y either: (1) Post a surety b o n d with the Insurance C o m m i s s i o n e r who shall be m a d e the obligee or creditor in the b o n d in such amount or amounts required as limits of indemnity to a n s w e r for the same losses sought to be covered by a C M V L I policy; or (2) M a k e a cash deposit with the Insurance C o m m i s s i o n in such amount or amounts required as limits of indemnity also for the same purpose. After the cash deposit has b e e n proceeded against by the Insurance Commissioner, such cash deposit should be replenished or such surety b o n d should be restored by the M V O or L T O in the right amount or amounts required as limit of liability within sixty (60) days after impairment or expiry, as the case m a y be, otherwise he shall secure the insurance policy required. (Ibid.)

Scope of coverage required. (1) For owners of private m o t o r vehicles, the coverage m u s t be comprehensive against third party liability for death or bodily injuries. In case a private motor vehicle is being used to transport passengers for compensation, such coverage shall, in addition, include passenger liability; and (2) For operators of land transportation, the coverage m u s t also be comprehensive against both passenger and third-party

Sees. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

liabilities for death or bodily injuries. The insurer may extend additional other risks at its option, (ibid.; see Ins. M e m o . Cir. No 3-81.) Section 3 7 7 prescribes the m i n i m u m limits of indemnity of tine comprehensive coverage for different kinds of private motor and public utility vehicles. An insurance policy which places the insurer's liability for all d a m a g e s arising out of death or bodily injury sustained by one person as a result of any one accident at P I 2 , 0 0 0 is valid as the a m o u n t complies with the m i n i m u m fixed by the law. (Perla C o m p a n i a de Seguros, Inc. vs. Court of Appeals, 185 S C R A 741 [1990].) In case of excess over the m i n i m u m limit of coverage, such excess should be d e e m e d as to h a v e b e e n taken on voluntary basis and not compulsory. (Sec. 378.)

Duty of MVO or LTO contemplating cancellation of his cover. (1) Give to the insurance or surety company concerned a written notice of his intention to cancel; (2) Secure, before the insurance policy or surety bond ceases to be effective, another similar policy or b o n d to replace that one cancelled; or (3) Without m a k i n g any such replacement, make a cash deposit in sufficient amount with the Insurance Commissioner and secure a certification from the Insurance Commissioner regarding the deposit m a d e for presentation to and filing with the L a n d Transportation Office. (CMVLI, supra, p. 12; Sees. 380-381.)

Effect of cancellation of cover. U p o n receipt of such notice and cancel from the insurance company, the Office shall order the confiscation of the plates of the motor vehicle concerned, unless it receives any of the following: (1) an evidence or proof of a new and valid C M V L I cover which may be either an insurance policy or guaranty in cash or surety bond;

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Sees. 373-389

(2) a signed duplicate of an endorsement or addendum issued by the insurance company concerned showing revival or continuance of the C M V L I cover; or (3) a certification issued by the Insurance Commissioner to the effect that a cash deposit in the amount required as limit of indemnity has been made with h i m by the M V O or LTO. (CMVLI, supra, p. 12; Sec. 380.)

No-fault indemnity claim. The term "no-fault" connotes that the victim of a tort can recover for his loss from his insurer without regard to his o w n contributory fault or the fault of the tortfeasor. T h e fundamental purpose of the "no-fault" provision is to guarantee compensation or indemnity to persons suffering loss in m o t o r vehicle accidents. (1) Claim subject to certain conditions. — U n d e r Section 378, the insurance c o m p a n y concerned shall pay any claim for death or bodily injuries sustained by a passenger or third party without the necessity of proving fault or negligence of any kind subject to certain conditions, (see also Sec. 385.) This no-fault claim does not apply to property damage. If the total indemnity claim exceeds P5,000 (now P15,000), and there is controversy in respect thereto, the finding of fault m a y be availed of by the insurer only as to the excess. The first P5,000.00 (now P15,000) should be paid without regard to fault. ( C M V L I , supra, p. 13; see Sees. 243, 378, 3 8 4 , 3 8 5 . ) (2) Claim against insurer of vehicle in which victim is an occupant. — Section 378 (par. iii.) is very clear that the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting, or dismounting from. T h e claimant is not free to choose from which insurer he will claim the "no-fault i n d e m n i t y " as the law, by using the word "shall," makes it m a n d a t o r y that the claim be made against the insurer of such vehicle. That said vehicle might not be the one that caused the accident is of no m o m e n t since the law itself provides that the party paying the claim m a y recover against the owner of the vehicle responsible for the accident. This is precisely the essence of the "no-fault indemnity" insurance which was introduced in order to provide victims of vehicular accidents or their heirs immediate compensation although in a limited amount, pending final determination of w h o is

Sees. 373-389

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responsible for the accident and liable for the victim's injuries or death. So, it is immaterial whether or not fault or negligence lies with the other vehicle involved in the accident. (3) Claim against insurer of vehicle responsible for accident. — In any other case (i.e., the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle. Note that Section 3 7 3 (par. iii.) uses the general term "occupant" to distinguish it from a "passenger" and a "third party." (Sec. 3 7 3 [ b and c].) Thus, as used, "occupant" includes b o t h a "passenger" and a "third party" so long as they are riding in or mounting or dismounting from a motor vehicle. (Perla C o m p a n i a de Seguros, Inc. vs. Ancheta, 164 S C R A 144 [1988].)

Certificate of cover. T h e M V O or L T O procuring a C M V L I cover, aside from the corresponding insurance policy or guaranty in cash or surety bond, shall also be issued by the insurance c o m p a n y concerned a Certificate of C o v e r in the form approved by the Insurance Commissioner. T h e Certificate of C o v e r will serve as the substantiating documentation that will be accepted by and filed with the LTC during registration of m o t o r vehicles as proof of insurance upon such motor vehicle. It is also a secondary proof of such coverage and m a y be presented in the investigation of traffic accident by the M V O or in the investigation of traffic accident by the M V O or LTO, or his representative, to G o v e r n m e n t agents charged with the duty to enforce traffic laws, rules and regulations. (CMVLI, supra, p. 16; Sec. 376.)

Limitations with respect to CMVLI cover solicitation. They are: (1) No government office or agency having the duty of implementing the provisions of the Insurance Code on CMVLI shall act as agent in procuring the insurance policy or surety bond required; (2) No official or employee of such office or agency shall similarly act as such agent; and

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(3) The commission of an agent procuring the corresponding insurance policy or surety bond shall in no case exceed 1 0 % of the amount of premiums therefor. (Sec. 387.)

Limitations as to use of insured vehicle under the master private vehicle policy. Under the master private m o t o r vehicle policy, it is provided that the policy does not cover: (1) Use for the hauling a n d / o r carrying of logs, lumber, sand, gravel, bottled beverages, gasoline products, a n d / o r other inflammable articles or materials; (2) Use for racing, pacemaking, reliability trial or speed testing, or use for any purpose in connection with the m o t o r trade; or (3) Use for the carriage of passengers or for hire or reward.

Limitations as to use of insured vehicle under the master commercial vehicle policy. The master commercial vehicle policy does not cover: (1) Use for the hauling and / o r carrying of logs, lumber, sand, gravel, bottled beverages, gasoline products, a n d / o r other inflammable articles or materials if actual use of the vehicle relating to any of the said object be different from that declared in the proposal or declaration in the application for insurance; (2) Use for racing, pacemaking, reliability trial, or speed testing; (3) Use for the carriage of passengers or for hire or reward; or (4) Use for any purposes in connection with the m o t o r trade. Limitations (1) and (2) m a y be deleted and the risks n a m e d therein covered by the policy u p o n agreement and p a y m e n t of 205 additional p r e m i u m to the company.

Limitations as to use of insured vehicle under the master land transportation operators policy. The master land transportation operators policy does not cover:

Sees. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

(1) Use for hauling and / o r carrying of logs, lumber, sand, gravel, bottled beverages, gasoline products, a n d / o r other inflammable articles or materials; or (2) Use for racing, pacemaking, reliability trial or speed testing; or use for any purpose in connection with the motor trade.

Limitations as to use of the insured vehicle under the master motorcycle policy. The master motorcycle policy does not cover: (1) Use for the hauling a n d / o r carrying of logs, lumber, sand, gravel, bottled beverages, gasoline products, a n d / o r other inflammable articles or materials; (2) U s e for racing, pacemaking, reliability trial, or speed testing; (3) U s e for the carriage of passengers or for hire or reward; or (4) U s e for any purpose in connection with the motor trade.

The malus system under CMVLI. Under the "malus system," a vehicle owner w h o suffered an accident resulting in a loss during the immediately preceding policy period, is required to pay a surcharge upon renewal of his coverage in addition to the basic premium equivalent to the product of the amount of loss paid multiplied by the rate of premium for the vehicle. T h e surcharge shall in no case be less than P30.00. The system was recommended by the defunct Philippine Motor Vehicle Liability Pool (See Appendix D - l . ) and approved by the Insurance Commission. It took effect on January 1,1980.

Where insured himself or his driver without license or with expired license. (1) Standard authorized driver clause. — This clause in a private motor vehicle policy reads as follows:

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A U T H O R I Z E D DRIVER. Any of the following:

Sees. 373-389

no fault clause authorized drivers clause theft clause

(a) the insured, (b) any person driving on the insured's order or with his permission; Provided, 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 motor vehicle by order of a court of law or by reason of any enactment or regulation in that behalf. (2) Requirement of a license. — T h e clause limits the use of the insured vehicle to two (2) persons only, namely, the insured himself or any person on his (insured's) permission. U n d e r the second category, the words "any person" is qualified by the phrase "x x x on the insured's order or with his permission." Thus, if the person driving is other than the insured, he m u s t h a v e b e e n duly authorized by the insured to drive the vehicle, to m a k e the insurance c o m p a n y liable for the driver's negligence. T h e m a i n purpose of the "authorized driver clause" is that a person other than the insured owner, w h o drives the vehicle on the insured's order or with his permission, m u s t be a duly licensed driver and has no disqualification to drive as m o t o r vehicle. (Villacorta vs. Insurance Commission, 100 S C R A 4 6 7 [1980].) T h e requirement of a license does not apply w h e r e the person driving is the insured himself. W h i l e the m o t o r vehicle law prohibits a person from operating a m o t o r vehicle on the highway without a license or with an expired license, an infraction of the law on the part of the insured is a b a r to recovery u n d e r the insurance contract. It, however, renders h i m subject to the penal provisions of the motor vehicle law. (Palermo vs. P y r a m i d Insurance Co., Inc., 161 S C R A 677 [1988].) (3) When theft clause applicable. — W h e r e a car is unlawfully and wrongfully taken without the o w n e r ' s consent or knowledge, such taking constitutes, theft, and, therefore, it is the "theft c l a u s e " and not the "authorized driver clause" that should apply. Theft is an entirely different legal concept from that of accident, and clearly, the risk against accident is distinct from the risk against theft. T h e "authorized driver c l a u s e " in a typical insurance policy

Sees. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

is in contemplation or anticipation of accident in the legal sense in which it should be understood, and not of an event such as theft. There is no causal connection b e t w e e n the possession of a valid driver's license and the loss of a vehicle. (Perla Compania de Seguros, Inc. vs. Court of Appeals, 2 0 8 S C R A 487 [1992].)

Pertinent provisions of the Civil Code. T h e following provisions should be noted: "Art. 2176. W h o e v e r by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the d a m a g e done. S u c h fault or negligence, if there is no pre-existing contractual relation b e t w e e n the parties, is called quasi-delict and is g o v e r n e d by the provisions of this Chapter. (1902a) Art. 2 1 7 7 . Responsibility for fault or negligence under the preceding article is entirely separate and distinct from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover d a m a g e s twice for the same act or omission of the defendant. xxx

xxx

Art. 2180. T h e obligation imposed by Article 2176 is d e m a n d a b l e not only for one's o w n acts or omissions, but also for those of person for w h o m one is responsible. xxx

xxx

Employers shall be liable for damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. xxx

xxx

T h e responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage. (1903a) xxx

xxx

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the

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vehicle, could have, by the use of due diligence, prevented the misfortune. It is disputably presumed that a driver w a s negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. If the owner was not in the motor vehicle, the provisions of Article 2180 are applicable. Art. 2185. Unless there is proof to the contrary, it is presumed that a person driving a m o t o r vehicle has b e e n negligent if at the time of the mishap, he w a s violating any traffic regulation. Art. 2186. Every o w n e r of a m o t o r vehicle shall file with the proper government office a b o n d executed by a government-controlled corporation or office, to a n s w e r for damages to third persons. T h e a m o u n t of the b o n d and other terms shall be fixed by the c o m p e t e n t public official."

— oOo —

Chapter VII MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS FOR CHARITABLE USES Title 1 MUTUAL BENEFIT ASSOCIATIONS

Sec. 390. 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 to 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, shall be known as a mutual benefit association within the intent of this Code. Any society, association, or corporation principally organized as a labor union shall be governed by the Labor Code notwithstanding any mutual benefit feature provisions in its charter as incident to its organization. In no case shall a mutual benefit association be organized and authorized to transact business as a charitable or benevolent organization, and whenever it has this feature as incident to its existence, the corresponding charter 719

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Sec. 391

provision shall be revised to conform with the provision of this section. Mutual benefit associations, already licensed to transact business as such on the date this Code becomes effective, having charitable or benevolent feature shall abandon such incidental purpose upon effectivity of this Code if they desire to continue operating as such mutual benefit associations. (As amended by Pres. Decree No. 1455.) Sec. 391. A mutual benefit association, before it may transact as such, must first secure a license from the Commissioner. The application for such license shall be filed with the Commissioner together with certified true copies of the articles of incorporation or the constitution and by-laws of the association, and all amendments thereto, and such other documents or testimonies as the Commissioner may require. No license shall be granted to a mutual benefit association until the Commissioner shall have been satisfied by such examination as he may make and such evidence as he may require that the association is qualified under existing laws to operate and transact business as such. The Commissioner may refuse to issue a license to any mutual benefit association if, in his judgment, such refusal will best promote the interest of the members of such association and of the people of this country. Any license issued shall expire on the last day of June of the year following its issuance and, upon proper application, may be renewed if the association is continuing to comply with existing laws, rules and regulations, orders, instructions, rulings and decisions of the Commissioner. Every association receiving any such license shall be subject to the supervision of the Commissioner; Provided, That no such license shall be granted to any such association if such association has no actuary. All mutual benefit associations existing and licensed as such under the provisions of Article Eight, Chapter FortyOne of the Revised Administrative Code, as amended by 1

'Act No. 2711, Presidential Decree No. 1500, dated June 11, 1978, was issued during the period of martial law as the Revised Administrative Code of 1978. It has not been implemented. Executive Order No. 292 issued by the President on July 25, 1987 promulgates the Administrative Code of 1987.

Sec. 392

MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS FOR CHARITABLE USES Title 1. — Mutual Benefit Associations

Act No. 3612, shall, upon effectivity of this Code, surrender their respective licenses to the Commissioner and apply for new licenses under the provisions of this Code if they still desire to continue operating as such mutual benefit associations. Sec. 392. No mutual benefit association shall be issued a license to operate as such unless it has constituted and established a Guaranty Fund by depositing with the Commissioner an initial minimum amount of ten thousand pesos in cash, or in government securities with a total value equal to such amount, to answer for any valid benefit claim of any of its members. 2

All moneys received by the Commissioner for this purpose must be deposited by him in interest-bearing deposits with any bank or banks authorized to transact business in the Philippines for the account of the particular association constituting the Guaranty Fund. Any accrual to such fund, be it interest earned or dividend additions on moneys or securities so deposited, may, with the prior approval of the Commissioner, be withdrawn by the association if there is no pending benefit claim against it, including interest thereon or dividend additions thereto. The Commissioner, prior to or after licensing a mutual benefit association, may require such association to increase its Guaranty Fund from the initial minimum amount required to an amount equal to at least ten per centum of its assets, if such assets exceed one hundred thousand pesos but in no case shall such increase exceed the maximum amount of capital investment required of a domestic insurance company under section two hundred and three of this Code. (As amended by Pres. Decree No. 1455.)

T h e Guaranty Fund answers for any valid benefit claim of any of its members. To protect the interest of their members, other stockholders, and the general public as a whole, the Guaranty Fund of mutual benefit associations has been increased as follows: for existing MBAs — P12,500,000.00, on or before December 31, 2006; and by any new MBA or one that is sought to be rehabilitated — not less than 25% of minimum paid-up capital required for new insurance companies or P125 Million. (Ins. Memo. Cir. No. 2-06, April 24, 2006.)

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Sees. 393-397

Sec. 393. Every mutual benefit association licensed to do business as such shall issue membership certificates to its members specifying the benefits to which such members are entitled. Such certificate, together with the articles of incorporation of the association or its constitution and by-laws and all existing laws as may be pertinent shall constitute the agreement, as of the date of its issuance, between the association and the member. The membership certificate shall be in a form previously approved by the Commissioner. Sec. 394. A mutual benefit association may, by reinsurance agreement, cede in whole or in part any individual risk or risks under certificates of insurance issued by it, only to a life insurance company authorized to transact business or to a professional reinsurer authorized to accept like risks in the Philippines; Provided, That copy of the draft of such reinsurance agreement shall be submitted to the Commissioner for his approval. The association may take credit for the reserves on such ceded risks to the extent reinsured. Sec. 395. The constitution or by-laws of a mutual benefit association must distinctly state the purpose for which dues and/or assessments are made and collected and the portion thereof which may be used for expenses. Death benefit and other relief funds shall be created and used exclusively for paying benefits due the members under their respective membership certificates. A general fund shall likewise be created and used for expenses of administration of the association. Sec. 396. Every outstanding membership certificate must have, after three full years of being continuously in force, an equity value equivalent to at least fifty per centum of the total membership dues collected thereon. Sec. 397. Every mutual benefit association must accumulate and maintain, out of the periodic dues collected from its members, sufficient reserves for the payment of claims or obligations for which it shall hold funds in securities satisfactory to the Commissioner consisting of bonds of the Government of the Philippines, or any of its political subdivisions and instrumentalities, or in such

Sees. 398-399

MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS FOR CHARITABLE USES Title 1. — Mutual Benefit Associations

other good securities as may be approved by the Commissioner. The reserve liability shall be established in accordance with actuarial procedures and shall be approved by the Commissioner. The articles of incorporation or the constitution and by-laws of a mutual benefit association must provide that if its reserve as to all or any class of certificates become impaired, its board of directors or trustees may require that there shall be paid by the members to the association the amount of the members' equitable proportion of such deficiency as ascertained by said board and that if the payment be not made it shall stand as an indebtedness against the membership certificates of the defaulting members and draw interest not to exceed five per centum per annum compounded annually. Sec. 398. A mutual benefit association may invest such portion of its funds as shall not be required to meet pending claims and other of any of the classes of investments or types of securities in which life insurance companies doing business in the Philippines may invest. It may also grant loans to members on the security of a pledge or chattel mortgage of personal properties of the borrowers, or in the absence thereof, on the security of the membership certificate of the borrowing members, in which event such loan shall become a first lien on the proceeds thereof. Sec. 399. The Commissioner or any of his duly designated representatives, shall have the power of visitation, audit and examination into the affairs, financial condition, and methods of doing business of all mutual benefit associations, and he shall cause such examination to be made at least once every two years or whenever it may be deemed proper and necessary. Free access to the books, records and documents of the association shall be accorded to the Commissioner, or to his representatives, in such manner that the Commissioner or his representatives may readily verify or determine the true affairs, financial condition, and method of doing business of such association. In the course of such examination, the Commissioner or his duly designated representatives

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shall have authority to administer oaths and take testimony or other evidence on any matter relating to the affairs of the association. All minutes of the proceedings of the board of directors or trustees of the association, and those of the regular or special meetings of the members, shall be taken, and a copy thereof, in English or in Pilipino, shall be submitted to the Commissioner's representatives or examiners in the course of such examination. A copy of the findings of such examination, together with the recommendations of the Commissioner, shall be furnished the association for its information and compliance, and the same shall be taken up immediately in the meetings of the board of directors or trustees and of the members of the association. Sec. 400. Every mutual benefit association shall, annually on or before the thirtieth day of April of each year, render to the Commissioner an annual statement in such form and detail as may be prescribed by the Commissioner, signed and sworn to by the president, secretary, treasurer, and actuary of the association, showing the exact condition of its affairs on the preceding thirty-first day of December. Sec. 401. No money, aid or benefit to be paid, provided or rendered by any mutual benefit association, shall be liable to attachment, garnishment, or other process, or be seized, taken, appropriated, or applied by any legal or equitable process to pay any debt or liability of a member or beneficiary, or any other person who may have a right thereunder, either before or after payment. Sec. 402. Any member of a mutual benefit association shall have the right at all times to change the beneficiary or beneficiaries or add another beneficiary or other beneficiaries in accordance with the rules and regulations of the association unless he has expressly waived this right in the membership certificate. Every association may, under such rules as it may adopt, limit the scope of beneficiaries and provide that no beneficiary shall have or obtain any vested interest in the proceeds of any certificate until the certificate has become due and payable under the terms of the membership certificate.

Sees. 403-406

MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS FOR CHARITABLE USES Title I. — Mutual Benefit Associations

Sec. 403. Any chapter affiliate independently licensed as a mutual benefit association may consolidate or merge with any other similar chapter affiliate or with the mother association. Sec. 404. Any mutual benefit association may be converted into and licensed as a mutual life insurance company by complying with the requirements of the pertinent provisions of this Code and submitting the specific plan for such conversion to the Commissioner for his approval. Such plan, as approved, shall then be submitted to the members either in the regular meeting or in a special meeting called for the purpose for their adoption. The affirmative vote of at least two-thirds of all the members shall be necessary in order to consider such plan as adopted. No such conversion shall take effect unless and until approved by the Commissioner. Sec. 405. No mutual benefit association shall be dissolved without first notifying the Commissioner and furnishing him with a certified copy of the resolution authorizing the dissolution, duly adopted by the affirmative vote of two-thirds of the members at a meeting called for that purpose, the financial statement as of the date of the resolution, and such other papers or documents as may be required by the Commissioner. No dissolution shall proceed until and unless approved by the Commissioner and all proceedings in connection therewith shall be witnessed and attested by his duly designated representative. No mutual benefit association shall be officially declared as dissolved until after the Commissioner so certifies that all outstanding claims against the association have been duly settled and liquidated. Sec. 406. The Commissioner shall after notice and hearing, have the power either to suspend or revoke the license issued to a mutual benefit association if he finds that the association has: (a) failed to comply with any provision of this Code; (b) failed to comply with any other law or regulation obligatory upon it; (c) failed to comply with any order, ruling, instruction, requirement, or recommendation of the Commissioner;

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(d) exceeded its power to the prejudice of its members; (e) conducted its business fraudulently or hazardously; (f) rendered its affairs and condition to one of insolvency; or (g) failed to carry out its aims and purposes for which it was organized due to any cause. After receipt of the order from the Commissioner suspending or revoking the license, the association must immediately exert efforts to remove such cause or causes which brought about the order, and, upon proper showing, may apply with the Commissioner for the lifting of the order and restoration or revival of the license so revoked or suspended. Sec. 407. For failure to remove such cause or causes which brought about the suspension or revocation of the license of a mutual benefit association, the Commissioner shall apply under this Code for an order from the proper court to liquidate such association. The provisions of titles fourteen and fifteen, chapter three pertaining to the appointment of a conservator and proceedings upon insolvency of an insurance company, shall, insofar as practicable, apply to mutual benefit associations. Sec. 408. To secure the enforcement of any provision under this title, the Commissioner may issue such rules, rulings, instructions, orders and circulars, subject to the approval of the Secretary of Finance. Sec. 409. The violation of any provision of this title shall subject the person violating or the officer of the association responsible therefor to a fine of not exceeding one thousand pesos, or imprisonment of not exceeding three years imprisonment, at the discretion of the court. Distinguished f r o m mutual insurance companies. While it has b e e n said that there is no distinction b e t w e e n mutual insurance companies and mutual benefit societies, except where a statute has created a difference, and while insurance

Sees. 391-409

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727

principles are applicable in the case of mutual benefit certificates, benefit societies as usually constituted are materially different from mutual insurance companies. T h e y differ chiefly in that: (1) T h e y partake of m a n y of the characteristics and incidents of fraternal societies; (2) T h e m e m b e r s h i p is generally limited to those belonging to a particular organization or order; and (3) T h e real purpose of the societies or certificates issued by them is not that of indemnification or security against loss, but of contribution a n d relief against distress or misfortune. (43 A m . Jur. 2d. 162.)

— 0O0 —

Title 2 TRUSTS FOR CHARITABLE USES

Sec. 410. The term "trust for charitable uses," within the intent of this Code, shall include, all real or personal properties or funds, as well as those acquired with the fruits or income therefrom or in exchange or substitution thereof, given to or received by any person, corporation, association, foundation, or entity, except the National Government, its instrumentalities or political subdivisions, for charitable, benevolent, educational, pious, religious, or other uses for the benefit of the public at large or a particular portion thereof or for the benefit of an indefinite number of persons. Sec. 411. The term "trustee" shall include any individual, corporation, association, foundation, or entity, except the National Government, its instrumentalities or political subdivisions, in charge of, or acting for, or concerned with the administration of, the trust referred to in the section immediately preceding and with the proper application of trust property. Sec. 412. The term "trust property" shall include all real or personal properties or funds pertaining to the trust as well as those acquired with the fruits or income therefrom or in exchange or substitution thereof. Sec. 413. All trustees shall, before entering in the performance of the duties of their trust, obtain a certificate of registration from the Commissioner. Trustees who are already discharging the duties of their trust on the date this Code becomes effective may continue as such, subject to the provisions of this Code. 728

Sees. 410-413

MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS FOR CHARITABLE USES Title 2. — Trusts for Charitable Uses

All provisions of this Code governing mutual benefit associations and such other provisions herein, whenever practicable and necessary, shall be applicable to trusts for charitable uses.

The trust relationship. (1) Meaning of trust. — It is a fiduciary relationship where one person holds legal title to property with an obligation to keep or use it for the benefit of the equitable owner, usually another person. (2) Parties. — T h e o n e w h o causes the trust to c o m e into existence is called the settlor, the grantor, the trustor, the creator, or, if the trust is created in a will, the testator. T h e trustee is the one w h o holds the property for the benefit of another called the beneficiary or the cestui que trust. T h e trustee m a y be a natural person or a corporation. Even though there are at least three parties to a trust, they are not necessarily different legal entities. For example, the grantor of a trust m a y also be a trustee; a beneficiary m a y be one of the trustees; or the grantor m a y also be a beneficiary. At least two different legal entities are usually necessary for a valid trust. (3) Trust property. — T h e property to which the trustee has legal title m a y be any recognized property interest in any personal or real property or an enforceable contract right. The trust property is usually called the corpus, res, or principal of the trust, (see Sec. 411.) (4) Duty of a trustee. — T h e trustee must deal with the trust property honestly, putting the beneficiary's interest above his own. T h e grantor of the trust, therefore, must use care in selecting a responsible trustee — one in w h o m he has the utmost confidence. T h e relationship between the trustee and beneficiary also should have confidence in the integrity and fairness of the trustee and in his ability to treat different classes of trust beneficiaries impartially. If the beneficiary has no part in the selection of a trustee, the grantor should consider carefully this trustee-beneficiary relationship when selecting a trustee. (5) Trust instrument. — T h e trustee must follow closely the guiding instrument in administering the trust. If the trust

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THE INSURANCE CODE OF THE PHILIPPINES

Sees. 410-413

instrument directs something to be done, the trustee has no choice; he must carry out the direction except in those rare cases where he would apply to the proper court for relief. Modern trust instruments give the trustee wide discretion in investments, in a day-to-day management, and even in paying and withholding of income and principal. Naturally, the trustee chosen must be willing to accept the discretion given to him, and the grantor should be satisfied that he will use the discretion conscientiously and without fear of a later discharge. ("Trust and Their Uses," by V.N. Woolfolk, in LHIH, pp. 856-857.)

Types of trust. Trusts m a y be classified variously — by the formality of their creation, by the nature of the trust property, by the time of their creation, by their duration, and by the nature of the trustee's duties, among others. Estate planners normally are concerned with express trusts — those created intentionally in writing. T h e y m a y be testamentary trusts — those created in a will; or living or inter vivos trusts — those that c o m e in operation during the grantee's lifetime. A m o n g living trusts, those revocable and a m e n d a b l e during the grantor's lifetime are as important as those that cannot be changed — irrevocable trusts, (ibid., p. 857.)

— oOo —

Chapter VIII THE INSURANCE COMMISSIONER Title 1 ADMINISTRATIVE AND ADJUDICATORY

POWERS

Sec. 414. 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 this Code, and shall, notwithstanding any existing laws to the contrary, have sole and exclusive authority to regulate the issuance and sale of variable contracts as defined in section two hundred thirty-two and to provide for the licensing of persons selling such contract, and to issue such reasonable rules and regulations governing the same. The Commissioner may issue such rulings, instructions, circulars, orders and decisions as he may deem necessary to secure the enforcement of the provisions of this Code, subject to the approval of the Secretary of Finance. Except as otherwise specified, decisions made by the Commissioner shall be appealable to the Secretary of Finance. Sec. 415. 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 731

732

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 416

Commissioner, or any commission of irregularities, and/ or conducting business in an unsafe or unsound manner as may be determined by the Insurance Commissioner, the following: (a) fines not in excess of five hundred pesos a day; (b) suspension, or after due hearing, removal of directors and/or officers and/or agents. Sec. 416. 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 interests, 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 one hundred thousand pesos. The insurer or surety may, in the same action, file a counterclaim against the insured or the obligee. The insurer or surety may also file a cross-claim against a co-party for any claim arising out of the transaction or occurrence that is the subject matter of the original action or for a counterclaim therein. With leave of the Commissioner, an insurer or surety may file a third-party complaint against its reinsurers for indemnification, contribution, subrogation or any other relief, in respect of the transaction that is the subject matter of the original action filed with the Commissioner. 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

Sec. 416

THE INSURANCE COMMISSIONER Title 1. — Administrative and Adjudicatory Powers

733

courts, but the filing of a complaint with 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 days from receipt of copy of such order, ruling, or decision, a notice of appeal to the Intermediate Appellate Court in the manner provided for in the Rules of Court for appeals from the the Regional Trial Court to the Intermediate Appellate Court. (As amended by B.R Big. 874.) 1

As soon as a decision, order or ruling has become final and executory, the Commissioner shall motu proprio or on motion of the interested party, issue a writ of execution requiring the sheriff or the proper officer to whom it is directed to execute said decision, order or award, pursuant to Rule thirty-nine of the Rules of Court. 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. In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Commissioner may invoke the aid of any Court of First Instance within the jurisdiction of which such proceeding is carried on, or where such person resides or carries on his own business, in requiring the attendance and testimony of witnesses and the production of books, papers, documents, contracts or other records. And such court may issue an order requiring such person to appear before the Commissioner, or officer designated by the Commissioner, there to produce records, if so ordered or to give testimony touching the matter in question. Any failure to 2

'The amendment by Batas Pambansa Big. 874 transfers the matter of appeal of the decision, order or ruling of the Commissioner from the Supreme Court to the Intermediate Appellate Court, now Court of Appeals. Now, Regional Trial Court. 2

734

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 414-416

obey such order of the court may be punished by such court as a contempt thereof. A full and complete record shall be kept of all proceedings had before the Commissioner, or the officer thereof designated by him, and all testimony shall be taken down and transcribed by a stenographer appointed by the Commissioner. A transcribed copy of the evidence and proceeding, or any specific part thereof, of any hearing taken by a stenographer appointed by the Commissioner, being certified by such stenographer to be a true and correct transcript of the testimony on the hearing of a particular witness, or of a specific proof thereof, carefully compared by him from his original notes, and to be a correct statement of evidence and proceeding had in such hearing so purporting to be taken and subscribed, may be received as evidence by the Commissioner and by any court with the same effect as if such stenographer were present and testified to the facts so certified. (As amended by Pres. Decree No. 1455.)

Government regulation of insurance. T h e Insurance C o m m i s s i o n e r is given w i d e latitude of discretion, to regulate the insurance industry so as to protect the insuring public. T h e general regulatory authority of the Insurance C o m m i s s i o n e r is described in Section 4 1 4 . Included in his regulatory responsibilities is the duty to hold the security deponents under Sections 191 and 2 0 3 for the benefit and security of all policyholders. (Republic vs. D e l M o n t e Motors, Inc., 5 0 4 S C R A 53 [2006].) T h e general purpose of insurance regulation is to protect the public against insolvency or unfair treatment by insurers. Insurance is generally classed as a business w h i c h is "affected with public interest." This characteristic is the reason why m a n y forms of government regulation of insurance are deemed necessary. (D.L. Bickelhaupt, op. cit., p. 197.) Three basic m e t h o d s of providing insurance regulation are available to the government: (1) Legislation. — This is the foundation of insurance regulation. The insurance law is n o w e m b o d i e d in the Insurance Code of 1978. (Pres. Decree No. 1460.)

Sees. 414-416

THE INSURANCE COMMISSIONER Title 1. — Administrative and Adjudicatory Powers

735

(2) Administrative action. — This is also very important, as m a n y of the specific applications of insurance law are left in the hands of the Insurance Commissioner. The major powers of the Commissioner are licensing, examination, and investigation of insurance companies. (a) Licensing is a check on the insurer's financial condition to ascertain that it has the required capital and surplus for the kinds of insurance permitted in the license, (see Sees. 186191.) T h e C o m m i s s i o n e r has considerable power to refuse to issue a renewal license as well as the p o w e r of suspension or revocation. He also conducts examinations through his Office w h i c h determine the issuance of agent's or broker's licenses, (see Sees. 247-299.) (b) T h e examination of insurance companies once they have been licensed is also an important task of the Commissioner. T h e checking of assets, liabilities, and reserves is part of this procedure, as well as a review of almost all underwriting, investment, and claim practices of the insurers. The basic idea of continual regulations is that most obligations of insurers extend years into the future, and the state should provide supervision to see that the promises in the contract are fulfilled. (see Sees. 245-246.) 3

(c) T h e investigation powers of the Commissioner extend to a wide variety of powers to determine whether or not insurers or their representatives are meeting the requirements of the law. Free access to records and b o o k s of the insurers and hearings on such matters as rate violations or unfair trade practices are examples of his authority. As a result of such procedures, which are often informal, the Commissioner m a y issue administrative rulings or advisory opinions with regard to the business conduct of insurers or their agents. In extreme cases, he m a y declare the insolvency of an 'All insurance companies, insurance brokers, reinsurance brokers, mutual benefit associations, and trusts for charitable uses authorized to transact business in the Philippines are required to submit on or before January 31 every year starting 2008, a duly accomplished Self-Assessment Questionnaire on Corporate Governance Principles and Leading Practices. (Ins. Cir. Utter No. 31-05, Sept. 26, 2005, as amended by Ins. Cir. Letter No. 3-08, Jan. 17, 2008.)

THE INSURANCE CODE OF THE PHILIPPINES

736

Sees. 414-416

insurer in liquidation or rehabilitation proceedings. All such powers have as their major goal the protection of insurance policyholders and claimants, (see Sees. 414-416, 245-247.) (3) Court action. — T h e extremely broad authority of the Commissioner is subject to some measure of review and interpretation by the courts. (a) ducted rulings carried

The notice and hearing procedures which are conby the Commissioner in order to arrive at official may be reviewed by the courts to determine if he h a s out his duties in conformity with law.

(b) His discretionary power is also subject to m a n d a m u s (relief against breach or abuse of official power) and injunction (to prevent irreparable injury) actions by aggrieved parties. (c) In addition to the courts being used in private actions against the Commissioner, the reverse m a y be true. T h e Commissioner may, for example, petition the courts to enforce compliance with the law or his rulings, (see Sec. 416.) Court action is of lesser importance than the first two methods but of great value in regulation b e c a u s e of its everpresent potential effect in providing detailed interpretations of troublesome parts of the law. (D.L. Bickelhaupt, op. cit., 200-206.) W h e n courts decide a case, they apply rules to a particular fact situation and announce a decision that operates retroactively on the parties. W h e n they intepret language or decide cases through application of the doctrines of w a i v e r or estoppel, or determine coverage questions through application of the reasonable expectations doctrine, or experiment with the rapidly evolving duty of good faith and fair dealing, courts are affecting conduct of companies and individuals not parties to the litigation and, therefore, are regulating the business of insurance. (R.H. J e r r y II, op. cit., p. 91.)

Powers and duties, generally, of an Insurance Commissioner. The general duty and function of the Insurance C o m m i s s i o n e r is to regulate and supervise the transaction of insurance business so as to protect the interest of the public, to execute the insurance

Sees. 414-416

THE INSURANCE COMMISSIONER

737

Title 1. — Administrative and Adjudicatory Powers

laws, and to see that violations of the insurance laws are properly dealt with or punished. (1) Conferred by law. — Statutes which provide that an insurance board or official shall h a v e the power to regulate and review rates, to serve as a statutory receiver or liquidator of insurance companies, to approve or disapprove the amendment of their by-laws, to e x a m i n e t h e m with reference to their assets, financial condition, and m e t h o d s of doing business and to take corrective action, to require that the salaries of officers of mutual insurance c o m p a n i e s be reasonable and based upon sound business practice, and to require restitution of excessive and exhorbitant a m o u n t s so paid, and to approve or disapprove the purchase of property by an insurance company, have generally b e e n u p h e l d or recognized as a proper delegation of administrative or ministerial duties, rather than of legislative powers. (43 A m . Jur. 2d 114.) (2) Exercise generally not subject to judicial review. — Where provision has b e e n m a d e for an appeal to the court from any regulation, order, or rate adapted by an insurance board or official, such a provision gives a speedy and adequate remedy, and an injunction will not lie to restrain such board or official from proceeding in a matter within its or his jurisdiction. As an application of the nature of exhaustion of remedies, a court will refuse to take jurisdiction of a matter while it is still pending before the board or official, since the administrative remedy has not been fully exhausted at that point. Moreover, certain acts of a superintendent of insurance m a y not be subject to judicial review. (ibid., 115.) It has been held that a superintendent's decision disapproving purchase of certain real estate by an insurance company for c o m p a n y use was not subject to judicial review, in the absence of specific statutory authority. (Guardian Life Ins. Co. vs. Bohlinger, 124 NE 2d 110.)

Nature of powers of the Insurance Commission. T h e Insurance Commission is an administrative agency vested with regulatory power as well as with adjudicatory authority. (1) Regulatory or non-quasi-judicial. — Among the several regulatory or non-quasi-judicial duties of the Insurance

738

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 414-416

Commissioner is the authority to issue, or refuse issuance of, a certificate of authority to a person or entity desirous of engaging in insurance business in the Philippines, and to revoke or suspend such certificate of authority u p o n a finding of the existence of statutory grounds for such revocation or suspension. T h e grounds for revocation or suspension of an insurer's certificate of authority are set out in Section 241 and Section 247. The general regulatory authority of the Insurance C o m m i s sioner is described in Section 4 1 4 w h i c h also specifies the authority to which a decision of the Insurance C o m m i s s i o n e r rendered in the exercise of his regulatory function m a y be appealed. S u c h authority is limited to the business of insurance as defined in Section 2(2). (2) Adjudicatory or quasi-judicial. — T h e adjudicatory authority of the Insurance Commissioner is generally described in Section 416 (infra.) which also specifies the authority to w h i c h appeal m a y be taken from a final order or decision of the C o m m i s s i o n e r given in the exercise of his adjudicatory or quasi-judicial power. In a case, the insured originally sought remedies w h i c h w o u l d have required the Insurance C o m m i s s i o n e r to adjudicate on matters pertaining to performance and satisfaction by the insurer of its legal obligations under its insurance policy. However, both parties later agreed before the Insurance C o m m i s s i o n e r to submit the case for resolution on the sole issue of w h e t h e r or not revocation or suspension of insurer's certificate to e n g a g e in insurance was justified. T h e scope of the issues involved h a v i n g been so limited, the Insurance C o m m i s s i o n e r w a s left with the task of administratively determining w h e t h e r or not insurer was guilty of an act or acts constituting a statutory ground for revocation or suspension of its certificate of authority. It was held that the Insurance C o m m i s s i o n e r ' s resolution dismissing the insured's complaint and order denying its motion for reconsideration w a s issued in the performance of its administrative and regulatory duties and functions and should have been appealed by the insured to the Office of the Secretary of Finance. T h e petition for certiorari filed with the S u p r e m e Court was neither proper nor appropriate substitute for such appeal. The insured, in effect, violated provisions of the Insurance Code.

Sees. 414-416

THE INSURANCE COMMISSIONER Title 1. — Administrative and Adjudicatory Powers

739

In this case, the insured h a d chosen to litigate the substantive aspects of its insurance claim against the insurer in a different f o r u m — a judicial one — for it instituted a separate civil action for damages before the Regional Trial Court after efforts at amicable settlement of the administrative case h a d failed. The claim was in excess of P100,000 and, therefore, falls outside the quasi-judicial jurisdiction of the Insurance C o m m i s s i o n e r under Section 416. (Almendres M i n i n g Corp. vs. Insurance Commission, 160 S C R A 656 [1988]; Go vs. Office of the Ombudsman, 413 S C R A 608 [2003].)

Commissioner's decisions, regulations, and rulings. The Insurance C o m m i s s i o n e r ' s official acts are of two general types: (1) Adjudications or decisions in individual cases. — In these cases, he acts like a j u d g e and is required, in some instances to give interested parties a formal hearing. (E.W. Patterson, op. cit., pp. 12-13.) Section 4 1 6 e m p o w e r s the C o m m i s s i o n to adjudicate claims and complaints involving any loss, d a m a g e or liability being claimed or sued u p o n any kind of insurance, bond, reinsurance contract, or m e m b e r s h i p certificate where the amount thereof, excluding interests, cost and attorney's fees, does not exceed in any single claim P100,000.00. A n y decision, order, or ruling rendered by the Commissioner after a hearing has the force and effect of a j u d g m e n t appealable to the Court of Appeals, (see Summit Guaranty & Insurance Co., Inc. vs. Court of Appeals, 110 S C R A 241 [1981].) Under Section 416, the p o w e r of the Commissioner does not cover the relationship affecting the insurance company and its agents but is limited to adjudicating claims and complaints filed by the insured against the insurance company. Since a contract of agency between an insurance company and its agents is not included within the meaning of an insurance business, as defined in Section 2(2) of the Insurance Code, although the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title 1 of the Code. Section 2 cannot be invoked to

740

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 414-416

give jurisdiction over the same to the Insurance Commissioner. Expressio unius est exclusio alterius. (Phil. American Life Ins. Co. vs. Ansaldo, 234 S C R A 509 [1994].) (2) Issuance in the form of regulations, rulings, etc. — T h e power of the Insurance Commissioner to issue "reasonable rules and regulations," "rulings, instructions, and circulars, orders or decisions" as he m a y deem necessary to secure the enforcement of the Insurance Code is conferred by Section 414. (a) Formal promulgation of official regulations. — T h e Insurance Commissioner is authorized by law to m a k e regulations, which are the general rules applicable to classes of insurers, agents or other persons subject to the statute. Such official regulations are, in effect, subordinate legislation and should be officially promulgated so as to bring them to the attention of all persons subject to them. However, official regulations that conflict with the statute, or that go b e y o n d the scope of the C o m m i s s i o n e r ' s p o w e r s are invalid. (E.W. Patterson, op. cit., p. 13.) (b) Making of rulings. — B e c a u s e of the informality of his procedure, the C o m m i s s i o n e r often m a k e s "rulings" that express his views as to the m e a n i n g of the insurance law without being clearly either an adjudication or a regulation. Sometimes they are given in connection with official acts, and sometimes merely as advice or admonition. On difficult questions of law, he often asks the opinion of the Secretary of Justice which he is likely to follow m o r e scrupulously than he does the rulings of his predecessors in Office. The Commissioner, unlike a court of law, is not b o u n d by precedents. He is free to disregard rulings previously m a d e by himself or by his predecessors. In practice, he generally adheres to his prior rulings. Yet changed conditions sometimes necessitate modification or reversal of prior rulings, (ibid., pp. 13-14.)

Creation and organizational history of the Insurance Commission. The Insurance Commission w a s formerly referred to as the Office of the Insurance Commissioner. T h e law that created the

Sees. 414-416

THE INSURANCE COMMISSIONER Title 1. — Administrative and Adjudicatory Powers

741

Office of the Insurance C o m m i s s i o n e r as an independent office is Republic Act No. 275," which took effect upon the formal opening of the Central B a n k of the Philippines on January 3, 1949 and which, in effect, superseded the provisions of Executive Order No. 54, dated April 2 1 , 1947, and Section 169 of Act No. 2427, otherwise k n o w n as the Insurance Act. (1) Under A c t N o . 2427, which took effect on July 1, 1915, the Insular Treasurer, in addition to his official title, was designated Insurance C o m m i s s i o n e r ex-officio. The government agency w h i c h supervised insurance business in this country w a s therefore, until D e c e m b e r 3 1 , 1941, or for a period of over 26 years, only a division, called the Insurance Division, of the Bureau of the Treasury. (2) During the J a p a n e s e occupation of the Philippines, the Insurance Division w a s separated from the Bureau of Treasury and b e c a m e a part of the pre-war Bureau of Banking, then called the Bureau of Financing. T h e latter n a m e was changed to Bureau of Credits and Investments near the end of the e n e m y occupation. (3) S o o n after the liberation of Manila and the establishment of the government of the C o m m o n w e a l t h of the Philippines on February 2 7 , 1 9 4 5 , the Insurance Division again became a part of the Bureau of Treasury. However, under Executive Order No. 54, which b e c a m e effective on April 2 1 , 1 9 4 7 , the Insurance Division was separated once more from the Bureau of Treasury, and again merged with the Bureau of Banking. A n d then, under Republic Act No. 275 which took effect upon the formal opening of the Central B a n k of the Philippines on January 3, 1949, the Office of the Insurance C o m m i s s i o n e r c a m e into being, with the Insurance Division as its nucleus. (4) On N o v e m b e r 29, 1972, Pres. Decree No. 63 was promulgated, amending certain sections of Act No. 2427, otherwise k n o w n as the Insurance Act, as amended. The amendments

4

An Act changing the name of the Bureau of Banking to that of "Office of the Insurance Commissioner," providing for the assessment upon insurance companies to cover the excess of the expenses of the Office of the Insurance Commissioner relating to insurance companies, agents and insurance matters over its income from certain sources, and for other purposes.

742

THE INSURANCE CODE OF THE PHILIPPINES

Sees. 414-416

increased, among others, the m i n i m u m capital required of domestic companies and gave the Insurance Commissioner certain adjudicatory powers. (5) On December 1 8 , 1 9 7 4 , the insurance laws were codified with the promulgation of Pres. Decree N o . 612, otherwise k n o w n as the Insurance Code, (see pp. 1-2, Information Data and Statistics, published by the Insurance Commission.) T h e present Insurance Code of 1978 w a s promulgated by the President of the Philippines under his martial law p o w e r s on J u n e 1 1 , 1 9 7 8 . (6) T h e Insurance C o m m i s s i o n is presently attached to the Department of Finance. (Sec. 57[c], Exec. Order N o . 127, Jan. 29, 1987.)

Objectives of insurance regulation. The objectives of insurance regulation w h i c h the Insurance Code seeks to attain have b e e n stated as follows: (1) To m a k e insurance available to all w h o w a n t a n d n e e d it; (2) To assure that the insurance product is of high quality and reliability; and (3) To ensure that the price of insurance be not excessive, inadequate, discriminatory or destructive of competition, (see p. 2, Information Data and Statistics.) Historically, the principal objective h a s b e e n to preserve the solvency of insurance companies. O t h e r objectives h a v e b e e n fair treatment of insureds and fair competition a m o n g insurance companies (Riegel, Miller and Williams, Jr., op. cit., p. 61.), i.e., to provide through the exercise of administrative p o w e r s m o r e speedy and effective protection of the insuring public a n d to set a higher standard of fair competition than that w h i c h prevails in m a n y lines of merchandising. (E.W. Patterson, op. cit., p. 40.)

Duties and functions of the Insurance Commission. In order to carry out the above objectives, the Insurance Commission exercises under the Insurance C o d e the following specific duties and functions:

Sees. 414-416

THE INSURANCE COMMISSIONER Title 1. — Administrative and Adjudicatory Powers

743

(1) To insure the solvency of insurance companies. — (a) To issue certificates of authority to insurance companies that m e e t the m i n i m u m legal requirements (Sec. 187.); (b) To suspend or revoke the certificates of authority of companies that are in u n s o u n d condition or that have failed to comply with the provisions of law or regulations obligatory upon them, or w h o s e condition or m e t h o d of business is such as to render their proceedings hazardous to the public or their policyholders (Sec. 247.); (c) To require insurance companies to keep books, records, accounts and vouchers (Sec. 245.); (d) To require the setting up of reserves (Sees. 210-214.); (e) To require the filing of annual statements showing the exact condition of the affairs of the insurance company (Sec. 223); (f) To require adequate rates (Sees. 349, 354, 358.); (g) To pass upon and approve certain investments (Sees. 1 9 1 , 1 9 3 , 1 9 8 , 200, 2 0 1 , 202.);

classes

of

(h) To cause an examination, at least once a year and as often as the public interest so demands, to be m a d e into the financial conditions of insurance companies (Sec. 246.); (i) To act as depository of securities required of insurance companies for the benefit and security of their policyholders and creditors (Sees. 1 9 1 , 1 9 2 , 203.); (j) To see that no non-life insurance company shall retain any risk on any one subject of insurance in an amount exceeding 2 0 % of its net worth (Sec. 215.); (k) To rehabilitate or liquidate companies (Sees. 248 to 251.); and

insolvent insurance

(1) To maintain and administer the P10 million Security Fund for the payment of allowed claims against insolvent insurance companies, as well as the Guaranty Fund to answer for any valid benefit claim of benevolent association members. (Sees. 365-372.)

THE INSURANCE CODE OF THE PHILIPPINES

744

Sees. 414-416

(2) To assure fair trade practices of insurance companies and their agents. — (a) To approve policy forms (Sec. 226.); (b) To require that rates be equitable and reasonable (Sees. 34, 354, 358.); (c) To adjudicate claims and complaints involving any insurance loss, damage or liability where the amount involved does not exceed P100,000.00 in any single claim (Sec. 416.); (d) To prohibit unfair claims settlement practices (Sec. 241.); and (e) To accept service of notice, proof of loss, s u m m o n s or other legal process for foreign insurance c o m p a n i e s without an agent on w h o m such notice of loss, proof of loss, s u m m o n s or other legal process m a y be served. (Sec. 190.) (3) To assure reasonable insurance service. — (a) To license agents, brokers, adjusters, resident agents, non-life c o m p a n y underwriters, actuaries and rating organizations. (Sees. 229-341, 364.) (4) To promote national interest. — (a) To pass upon and approve investments of insurance companies' funds to insure that technical reserves arising from insurance and reinsurance operations are invested locally (Sees. 1 9 1 , 1 9 3 , 1 9 8 , 200-208.); (b) To require insurance c o m p a n i e s to increase their retention of local risks a n d / o r reinsure locally before ceding to unauthorized foreign companies w h e n e v e r technically feasible (Sees. 216-223.); (c) To pass upon and approve reinsurance treaties (ibid.); and (d) To pass upon remittances of reinsurance p r e m i u m on risks ceded abroad and of claims for losses payable abroad, (see pp. 2-4, Information Data and Statistics, supra.) — oOo —

Title 2 FEES

AND

OTHER SOURCES

OF FUNDS

Sec. 417. (1) For the issuance or renewal of certificates of authority, licenses and certificates of registration, pursuant to pertinent provisions of this Code, the Commissioner shall collect and receive fees which shall be not less than the following: For each certificate of authority issued to an insurance company doing business in the Philippines, two hundred pesos. For each special certificate of authority issued to a servicing insurance company, one hundred pesos. For each license issued to a general agent of an insurance company, fifty pesos. For each license issued to an insurance agent, twentyfive pesos. For each license issued to an agent of variable contract policy, twenty-five pesos. For each license issued to an insurance broker, one hundred pesos. For each license issued to an insurance adjuster, one hundred pesos. For each certificate of registration issued to an actuary, fifty pesos. For each certificate of registration to a resident agent, fifty pesos. For each certificate of registration issued to a rating organization, one hundred pesos. 745

746

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 417

For each certificate of registration issued to a non-life company underwriter, fifty pesos. For each license issued to a mutual benefit association, ten pesos. For each certificate of registration issued to a trust for charitable uses, ten pesos. All certificates of authority and all other licenses, as well as all certificates of registration, issued to any person, partnership, association or corporation under the pertinent provisions of this Code for which no expiration date has been prescribed, shall expire on the last day of June of each year and shall be renewed annually upon application therefor and payment of the corresponding fee, if the licensee or holder of such license or certificate is continuing to comply with all the applicable provisions of existing laws, and of rules, instructions, orders and decisions of the Commissioner. (2) For the filing of the annual statement referred to in section two hundred twenty-three, the Commissioner shall collect and receive from the insurance company so filing a fee of five hundred pesos; Provided, That a fine of one hundred pesos shall be imposed and collected by the Commissioner for each week of delay, or any fraction thereof, in the filing of the annual statement. For the filing of annual statement referred to in section four hundred, the Commissioner shall collect and receive from the mutual benefit association so filing a fee of ten pesos; Provided, That a fine often pesos shall be imposed and collected by the Commissioner for each week of delay, or any fraction thereof, in the filing of the annual statement. (3) For the examination prescribed in section two hundred forty-six, the Commissioner shall collect and receive fees according to the amount of its total assets, in the case of a domestic company, or of its assets in the Philippines, in the case of a foreign company, as follows: (a) Two million pesos or more but less than four million pesos, Four hundred pesos; (b) Four million pesos or more but less than six million pesos, Eight hundred pesos;

Sec. 418

THE INSURANCE COMMISSIONER Title 2. — Fees and Other Sources of Funds

747

(c) Six million pesos or more but less than eight million pesos, One thousand, two hundred pesos; (d) Eight million pesos or more but less than ten million pesos, One thousand, six hundred pesos; (e) Ten million pesos or more, Two thousand pesos; Provided, That if the said examination is made in places outside the Greater Manila Area, besides these fees, the Commissioner shall require of the company examined the payment of the actual and necessary travelling and subsistence expenses of the examiner or examiners concerned. For the examination prescribed in section three hundred ninety-nine, the Commissioner shall collect and receive a minimum fee of one hundred pesos from the mutual benefit association examined: Provided, That if such association has total assets of more than one hundred thousand pesos, an additional fee of ten pesos for every fifty thousand pesos in excess thereof shall be imposed; Provided, further, That such fee shall not exceed two thousand pesos. (4) For the filing of an application to withdraw from the Philippines under title eighteen, the Commissioner shall collect and receive from the foreign company so withdrawing a fee of one thousand pesos. (5) The Commissioner may fix and collect fees or charges for documents, transcripts, or other materials which may be furnished by him not in excess of reasonable cost. (As amended by Pres. Decree No. 1455.) 1

Sec. 418. If the total expenses of the Insurance Commission for every fiscal year exceed the aggregate amount of the fees collected under the pertinent provisions of this Code, the excess shall be charged against the Insurance Fund, which shall hereafter be created out of the proceeds of taxes on insurance premiums mentioned in section two 'Executive Order Nos. 194 and 218 (Jan. 13 and March 15, 2000, respectively) directs all National Government Agencies and government-owned and controlled corporations to increase their rates of fees and charges by not less than 20%. Ins. Memo. Cir. No. 3-06, June 28, 2006 (supersedes IMC No. 1-2000) prescribes the increased fees and charges.

THE INSURANCE CODE OF THE PHILIPPINES

7 4 8

Sees. 417-418

hundred fifty-five' of the National Internal Revenue Code, as amended; Provided, however, That pending the creation of said Insurance Fund, the provisions of sections two, three and four of Republic Act Number Two hundred seventyfive, shall continue to remain in force and effect.

Insurance Fund. Section 418 of the Insurance C o d e created the Insurance F u n d out of the proceeds of taxes on insurance p r e m i u m s imposed by Section 255 of the former National Internal R e v e n u e C o d e (NLRC), and from which fund the Insurance C o m m i s s i o n will derive its operating expenses in lieu of the special assessments being m a d e by the Office of the Insurance C o m m i s s i o n e r from insurance companies in accordance with the provisions of Sections 2, 3, and 4 of Republic Act N o . 2 7 5 . (supra.) To harmonize the provisions of Section 2 5 5 of the National Internal Revenue C o d e with the provisions of Section 4 1 8 of the Insurance Code so as not to disturb the collection of the p r e m i u m tax which accrues to the general fund, Section 2 5 5 w a s a m e n d e d by Presidential Decree N o . 739. Section 2 5 5 is n o w Section 123 of the National Internal R e v e n u e C o d e of 1997. Section 123 reads as follows: " S e c . 123. Taxes on life insurance premiums. — There shall be collected from every person, company, or corporation (except purely cooperative c o m p a n i e s or associations) doing insurance business of any sort in the Philippines a tax of five (5) per cent of the total p r e m i u m s collected, w h e t h e r such prem i u m s are paid in money, notes, credits, or any substitute for money; but p r e m i u m s refunded within six (6) m o n t h s after payment on account of rejection of risk or returned for other reason to a person insured shall not be included in the taxable receipts; nor shall any tax be paid u p o n reinsurance by a company that has already paid the tax; nor u p o n p r e m i u m s collected or received by any b r a n c h of a domestic corporation, firm or association doing business outside the Philip-

2

Now, Section 123, as amended by Presidential Decree No. 1994 and R.A. No. 8424, limiting its application to life insurance premiums.

Sees. 417^18

THE INSURANCE COMMISSIONER Title 2. — Fees and Other Sources of Funds

749

pines on account of any life insurance of the insured who is a nonresident, if any tax on such premiums is imposed by the foreign country where the b r a n c h is established nor upon p r e m i u m s collected or received on account of any reinsurance, if the insured, in case of personal insurance, resides outside the Philippines, if any tax on such premiums is imp o s e d by the foreign country w h e r e the original insurance has b e e n issued or perfected; n o r u p o n that portion of the p r e m i u m s collected or received by insurance companies on variable contracts (as defined in Section 232[2] of the Insurance C o d e ) in excess of the a m o u n t s necessary to insure the lives of variable contract owners. Cooperative c o m p a n i e s or associations are such as are conducted by the m e m b e r s thereof with the m o n e y collected from a m o n g themselves and solely for their o w n protection and not for profit." T h e Insurance C o m m i s s i o n h a s b e e n designated by the Bureau of Internal R e v e n u e as the latter's deputy collector for the collection of the p r e m i u m tax due from insurance companies subject to the audit of the C o m m i s s i o n on Audit or by the internal auditors of the BIR. A P r e m i u m Tax Return (BIR F o r m No. 2001.) is required to be filed with the Insurance Commission. (Ins. Cir. Letter No. 1-86.) Pursuant to Section 123, the 5% p r e m i u m tax is based on the total p r e m i u m s collected. As there is no law which prohibits insurance c o m p a n i e s to bill the 5% p r e m i u m tax to the insured, said tax can be charged separately to the insured (BIR Ruling No. 121-93.) and shall not be included in computing the premium. The premium tax shall not be included in computing premiums for non-tariff lines of insurance. (Ins. Cir. Letter No. 7-93.)

— oOo —

MISCELLANEOUS PROVISIONS Sec. 419. Any person, company or corporation subject to the supervision and control of the Commissioner who violates any provision of this Code, for which no penalty is provided, shall be deemed guilty of a penal offense, and upon conviction be punished by a fine not exceeding ten thousand pesos or imprisonment of six months, or both, at the discretion of the court. If the offense is committed by a company or corporation, the officers, directors, or other persons responsible for its operation, management, or administration, unless it can be proved that they have taken no part in the commission of the offense, shall likewise be guilty of a penal offense, and upon conviction be punished by a fine not exceeding ten thousand pesos or imprisonment of six months, or both, at the discretion of the court. Sec. 420. All criminal actions for the violation of any of the provisions of this Code shall prescribe after three years from the discovery of such violation: Provided, That such actions shall in any event prescribe after ten years from the commission of such violation. Sec. 421. Any person, partnership, association or corporation heretofore authorized, licensed or registered by the Insurance Commissioner shall be deemed to have been authorized, licensed or registered under the provisions of this Code and shall be governed by the provisions thereof; Provided, however, That where any such person, partnership, association or corporation is affected by the new requirements of this Code, said person, partnership, association or corporation shall, unless otherwise herein provided, be given a period of one year from the effectivity of this Code within which to comply with the same.

750

Sees. 419^124

MISCELLANEOUS PROVISIONS

751

Sec. 422. Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of this Code shall be deemed repealed. Sec. 423. Should any provision of this Code or any part thereof be declared invalid, the other provisions, so far as they are separable from the invalid ones, shall remain in force. Sec. 424. This Code shall take effect immediately. Effectivity. As provided in Section 2 of Presidential Decree No. 1460, "the provisions of the Insurance C o d e of 1978 shall take effect immediately without prejudice, however, to the effectivity dates of the various laws, decrees and executive orders which have so far a m e n d e d the provisions of the Insurance Code of the Philippines on J u n e 1 1 , 1 9 7 8 . (Presidential Decree No. 612.)" T h e n e w C o d e w a s promulgated on J u n e 11, 1978 by the President under the 1973 Constitution and in the exercise of his martial law powers. — oOo —

Appendix "A" INSURANCE COMMISSION I. O R G A N I Z A T I O N A L C H A R T

1985 INSURANCE COMMISSIONER ASST. INSURANCE COMMISSIONER

TECHNICAL STAFF

ACTUARIAL DIVISION

REGULATION DIVISION

STATISTICS & RESEARCH DIVISION

LICENSING DIVISION

FIELD EXAMINATION I DIVISION

FIELD EXAMINATION II DIVISION

RATING DIVISION

FINANCIAL ANALYSIS DIVISION

INVESTMENT SERVICE DIVISION

REINSURANCE DIVISION

LIQUIDATION & CONSERVATION DIVISION

•PAID

ADMINISTRATIVE DIVISION

BUDGET DIVISION

ACCOUNTING DIVISION

PLANNING & MANAGEMENT DIVISION

PUBLIC ASSISTANCE AND INFORMATION DIVISION "CAD CLAIMS ADJUDICATION DIVISION

REGIONAL OFFICES

Appendix A INSURANCE COMMISSION

753

II. F U N C T I O N S 1. Insurance C o m m i s s i o n e r (1) Establishes general policies, directs and coordinates C o m m i s s i o n activities; (2) Sees to it that all laws relating to insurance, insurance companies, insurance adjusters and brokers and other insurance matters, mutual benefit associations and trusts for charitable uses are faithfully executed; (3) Coordinates with other government agencies on matters relating to insurance; and (4) Performs the duties as are i m p o s e d upon h i m by the Insurance C o d e . 2. Assistant I n s u r a n c e C o m m i s s i o n e r (1) Directs, supervises, coordinates a n d / or synchronizes the w o r k of the division chiefs; (2) Assists the Insurance C o m m i s s i o n e r in the perform a n c e of his duties; and (3) Acts as Insurance C o m m i s s i o n e r in his absence. 3. Technical Staff (1) Provides the necessary assistance to the Insurance C o m m i s s i o n e r in the formulation of economic policies, guidelines and standards of investments, credit and lending operations of insurance companies; (2) C o n d u c t s technical studies and researches insurance, reinsurance and investment fields; and

in

(3) Gives assistance to the Insurance Commissioner in the proper action on s o m e papers referred to them for further study. 4. Actuarial Division (1) Checks the computation of and analyzes the actuarial valuations and formulations on premium rates, nonforfeiture values, benefit levels, policy reserves, other actuarially computed liabilities and their asset counterparts,

THE INSURANCE CODE OF THE PHILIPPINES

reinsurance premium rates, retention limits relating to the formulations of the insurance plans being proposed to be reinsured, premium rates and benefit levels of accident and health insurance plans of non-life insurance companies, contribution rates and benefit levels of mutual benefit associations; (2) Evaluates and acts upon applications for increase in the policy loan interests rates under the life insurance plans and contracts; (3) Analyzes and accumulates data on the mortality experience of life insurance companies and morbidity experience under the accident and health insurance policies of non-life insurance companies; reviews the policy contract verifying its consistency with the actuarial formulation and assumptions; (4) Passes upon business plans and projections of mutual benefit associations applying for license; (5) Reviews and passes u p o n the mutual benefit association's m e m b e r s h i p certificate verifying its consistency with the actuarial formulations; and (6) Monitors and analyzes the d e v e l o p m e n t s in the actuarial field, here and abroad, a n d studies their implications on both practices of local insurance industry and the policies of the Insurance C o m m i s s i o n . Regulation Division (1) Supervises the conduct of hearings of administrative complaints brought against Insurance C o m m i s s i o n personnel and officials and employees of insurance companies, arising from violations of existing insurance laws, rules and regulations; (2) Acts and processes requests for approval of non-life policy forms, riders, clauses, warranties, endorsements and b o n d forms; (3) Coordinates with other divisions in the approval of life insurance policy forms on matters relating to the legal responsibilities of both parties to the contract;

Appendix A INSURANCE COMMISSION

755

(4) Prepares drafts of circulars, circular letters and m e m o r a n d u m circulars, relating to insurance regulations; and (5) Gives advice to the Insurance Commissioner on the legal problems of the C o m m i s s i o n . Statistics a n d R e s e a r c h Division (1) Prepares annual reports of the Insurance Commission w h i c h includes a m o n g others, compilations and tabulations of financial status of life and non-life insurance companies, v o l u m e of business transacted by them, technical results of operations, a m o u n t of investments, and securities deposited by insurance companies, mutual benefit associations and other regulated companies; (2) Prepares other technical reports of the Insurance C o m m i s s i o n to the Ministry of Finance and other agencies, including the U N D P ; (3) C o n d u c t s studies and researches on various aspects of insurance business including its role in the development of our national e c o n o m y ; and (4) Conducts researches on a continuing basis on various projects in cooperation with the U N C T A D / U N D P especially on insurance education in Asia for the staff of insurance supervisory authorities. Licensing Division (1) Processes applications for and issues licenses to insurance companies, general agents, ordinary agents, brokers, adjusters, rating organizations, non-life company underwriters, actuaries, mutual benefit associations and trusts for charitable uses; (2) R e n e w s such licenses; conducts qualifying insurance agents', non-life company underwriters' and adjusters' examinations; and (3) Issues suspension orders to unscrupulous entities and associations under its supervision.

THE INSURANCE CODE OF THE PHILIPPINES

Investment Services Division (1) Passes upon requests for approval of investments of insurance companies and mutual benefit associations; (2) Assists the Insurance Commissioner in the management and administration of the P 1 0 M Security F u n d contributed / d e p o s i t e d by life and non-life insurance companies, domestic and foreign, Guaranty F u n d put up by mutual benefit associations and investing thereof to maximize profit for these companies, and securities deposited in compliance with the capital, reserve, statutory and other investment requirements of the Commission; (3) Analyzes and controls the acceptance and releases of security deposits and the interest earnings of insurance companies; (4) Undertakes researches on investments, credit operations and related topics; (5) Verifies the monthly report of investments of insurance companies and mutual benefit associations; and (6) Coordinates with other agencies of the g o v e r n m e n t on matters affecting investments and credit operations of insurance companies. Reinsurance Division (1) Processes applications of insurance a n d reinsurance companies to purchase foreign e x c h a n g e remittance abroad and the issuance of corresponding certifications used by the Central B a n k as its basis in the approval of dollar remittances to its foreign counterparts/affiliates and reinsurance c o m p a n i e s / b r o k e r s ; (2) Analyzes particulars of reinsurance t r e a t i e s / c o v e r notes, etc., submitted by insurance c o m p a n i e s for approval; (3) Analyzes requests of insurance c o m p a n i e s to reinsure, facultatively with foreign r e i n s u r e r s / b r o k e r s not authorized to do business in the Philippines, risks that cannot be placed locally; (4) Conducts studies and researches on various aspects of reinsurance business; and

Appendix A INSURANCE COMMISSION

757

(5) Coordinates with the Central B a n k and other government agencies on matters affecting foreign exchange remittances of insurance companies. 10. Liquidation a n d Conservation Division (1) Supervises the w o r k relating to the winding up of the business operations and affairs of insurance companies, mutual benefit associations and trusts for charitable uses subject of liquidation and dissolution proceedings, such cases initiated under the Insurance Act, which has been instituted in Court; (2) Takes charge of c a s e s / i n c i d e n t s brought to Court for assistance in the Liquidation Proceedings; (3) Supervises the w o r k relating to companies under conservatorship a n d / o r rehabilitation in close coordination with the appointed conservator / r e c e i v e r on aspects of rehabilitation a n d restoration of the companies' liabilities, and undertakes an analytical studies on actions taken by the r e c e i v e r s / c o n s e r v a t o r s ; and (4) R e v i e w s rehabilitation plans submitted by the m a n a g e m e n t of suspended companies and monitors the actual rehabilitation being undertaken thereon. 11. Field E x a m i n a t i o n Division I (1) Supervises the examination of the affairs, financial condition and methods of doing business of non-life i n s u r a n c e / r e i n s u r a n c e companies, domestic and foreign, including its regional, district and branch offices, insurance intermediaries and other entities engaged in non-life insurance business; and (2) Examines holding company and every controlled person within a holding company system. 12. Field Examination Division II (1) Supervises the examination of the affairs, financial condition and methods of doing business of life insurance/ reinsurance companies, domestic and foreign, state-owned insurance corporations, including its regional, district and

758

THE INSURANCE CODE OF THE PHILIPPINES

branch offices, insurance intermediaries and other entities engaged in life insurance business; (2) Examines holding companies and every controlled person within a holding company system; and (3) Supervises the examination of the affairs, financial condition and methods of doing business of mutual benefit associations and trust for charitable uses to determine if these associations comply with the requirements of law and that their operations redound to the benefit of their members and beneficiaries and to protect its m e m b e r from fraudulent transactions of the officers. 13. R a t i n g D i v i s i o n (1) Supervises the examination of non-life insurance companies, its branches, regional and district offices, general agents and insurance brokers to determine compliance w i t h / o r violations of tariff rates; (2) Inspects insurance risks and evaluates fire hazards to establish correct rates and for listing purposes; (3) Conducts continuous study of rating system; (4) R e c o m m e n d s changes in rate structures; and (5) Checks and analyzes statistical reports of adjusters on claims of insurance c o m p a n i e s offered for adjustment to determine compliance with established standards. 14. Financial A n a l y s i s D i v i s i o n (1) Verifies and analyzes the annual and interim financial statements of insurance companies, mutual benefit associations and trusts for charitable uses to determine the soundness of their financial condition; (2) Checks the activities of the associations for the protection of m e m b e r s from fraudulent transactions of the officers; and (3) Issues certifications pertaining to the financial condition, results of operation and m e t h o d s of doing business of insurance/reinsurance companies, mutual benefit associations and trusts for charitable uses.

Appendix A INSURANCE COMMISSION

759

15. Claims Adjudication Division (1) Dockets, hears and adjudicates formal claims filed with this C o m m i s s i o n against insurance /reinsurance companies, mutual benefit associations and other entities engaged in insurance operations involving loss, damage or liability w h i c h does not e x c e e d one hundred thousand pesos (P100,000) in any single claim. Its decisions, orders or rulings rendered after a hearing shall have the force and effect of a j u d g m e n t w h i c h is appealable only to the appellate court. 16. Public Assistance a n d Information Division (1) Assists the insuring and the general public in all matters b r o u g h t to this C o m m i s s i o n against entities or individuals e n g a g e d in insurance activities and associations with b e n e v o l e n t and charitable features arising from various offenses, malpractices, and the like, including informal cases filed with the C o m m i s s i o n ; (2) Gives free legal and technical advice to the general public w h o c o m e to or write the Commission seeking solutions to their insurance problems; (3) Advises policyholders and the insuring public on the steps to be taken in order to enforce their rights a n d / or defend t h e m against m a l p r a c t i c e s / a b u s e s of insurance companies and their intermediaries; (4) Acts on various queries regarding insurance matters coming from the various agencies of government, from the general and the insuring public; (5) Assists insurance companies and other entities engaged in insurance activities in disseminating information to the general public on the need for insurance protection and the benefits derived from it including the contributions of the industry to the development of the nation's economy, with the end in view of reaching the countryside; and (6) Undertakes public relations work for the Commission; and performs other related activities.

760

THE INSURANCE CODE OF THE PHILIPPINES

17. District Offices (Dagupan, C e b u a n d D a v a o ) (1) Assist the insuring public in all matters pertaining to formal and informal cases filed with this Commission, especially those involving third party liability within the region; (2) Settle complaints against insurance companies, general agents, brokers, adjusters, mutual benefit associations and charitable trusts; (3) Supervise and conduct insurance agent's, underwriter's and adjuster's examination within the region; (4) E x a m i n e the financial condition, affairs and methods of doing business of insurance c o m p a n i e s ' branches, regional and district offices, insurance intermediaries, mutual benefit associations and trusts for charitable uses operating within the region; (5) Conduct insurance information dissemination in the region; and (6) Perform such other duties w h i c h the Insurance Commissioner m a y delegate from time to time. 18. B u d g e t D i v i s i o n (1) Provides the necessary assistance to the Insurance Commissioner on plarining, control, b u d g e t a r y and related matters and r e c o m m e n d s remedial measures w h e n necessary; (2) Provides the m a n a g e m e n t with b o t h historical and future data and integrates all the functions of the Commission by drawing on a set of subsystems; (3) Coordinates and correlates the activities of the organization into the m o s t profitable and economical channels by m e a n s of a balanced and unified program; (4) Plans and prepares the C o m m i s s i o n ' s annual, supplemental and special budget estimates and other budgetary requirements as well as the corresponding justifications; (5) Prepares the necessary w o r k and financial plans, the realignment of expenditures in accordance with the General Appropriations Act, Appropriation Reserves, and

Appendix A INSURANCE COMMISSION

761

the quarterly allotments by program, project and activity; controls allotment of appropriations; (6) Acts as fiscal adviser of the Commission; (7) R e v i e w s fiscal d o c u m e n t s and accounts relating to disbursement of funds; including the expense vouchers covering p a y m e n t against authorized allotments; (8) Conducts study on salaries and other employees' fringe benefits; (9) Sees to it that all insurance companies doing business in the Philippines pay periodically the premium tax; coordinates with the Bureau of Internal Revenue and the D e p a r t m e n t of B u d g e t and M a n a g e m e n t on the establishment of the Insurance C o m m i s s i o n funds pursuant to the provisions of Section 4 1 8 of the Insurance Code, as amended, and P.D. N o . 7 3 9 , as a m e n d e d ; and (10) Performs other duties assigned from time to time by superiors. Planning and Management Division (1) Provides m a n a g e m e n t with complete, accurate and timely data for use in decision-making process to eliminate the problems associated with the use of inconsistent and incomplete data by providing a m e a n s for preparing and presenting information in a uniform manner; (2) Assists the m a n a g e m e n t in reducing the time and v o l u m e of information required to m a k e decision by reporting to each level of m a n a g e m e n t only the necessary degree of detail and usually only the exceptions from the standard norm, and thus meet the needs of each organizational unit with a m i n i m u m of duplication while at the same time serving the organization as a whole; (3) Designs and installs the systems and procedures for the various units of the Commission; (4) Evaluates previous existing systems and procedures and coordinates with the other divisions on the effective implementation thereof and recommends measures for its improvement; and

762

THE INSURANCE CODE OF THE PHILIPPINES

(5) Conducts management audit to determine efficiency in the agency operations. 20. Accounting D i v i s i o n (1) Takes charge of the accounting and bookkeeping of the Insurance Commission funds; (2) Prepares financial statements and reports of the Commission to the Department of Finance, and the Commission on Audit; processes all disbursements charged against the special and / o r regular funds; and (3) Certifies to the availability of funds. 21. Administrative Division (1) Supervises and coordinates personnel administration functions such as employee recruitment, selection, training, performance evaluation, promotions, transfers, retirement and the improvement and m a i n t e n a n c e of e m p l o y e e relations; (2) Supervises and coordinates general service functions such as records, mail m a n a g e m e n t , library, general clerical, janitorial, security, transportation, property utilization, and building maintenance and repair; (3) Implements administrative policies and decides on routine e m p l o y e e relations, p r o b l e m s a n d conflicts; (4) Supervises cash collection, disbursement and proper cash custody; (5) Passes other reports; tion; prepares for the proper

u p o n vouchers, payrolls, requisitions and supervises supply procurement and distribuOffice Orders, Circulars and M e m o r a n d u m guidance of the e m p l o y e e s ;

(6) Passes u p o n appointments and correspondence for the signature of the Insurance Commissioner; and (7) Reviews, checks, and certifies communications, and signs communications and other papers as delegated. — oOo —

Appendix "B" RULES OF PROCEDURE GOVERNING ADMINISTRATIVE CASES BEFORE THE INSURANCE COMMISSION Insurance M e m o r a n d u m Circular No. 1-93, Dec. 3 , 1 9 9 2 Pursuant to Executive Order No. 26 dated October 7, 1992, and in conjunction with B o o k VII of the Administrative Code 1987 (Executive Order N o . 292.), the Insurance Commission hereby promulgates the following Rules of Procedure governing actions or proceedings before it. RULE I GENERAL PROVISIONS Section 1. Applicability. — These rules shall apply to all administrative cases brought before the Insurance Commission in the exercise of its powers and functions under the Insurance Code. Section 2. Construction. — These rules shall be liberally construed to promote public interest and to assist the parties in obtaining just, speedy and inexpensive determination of every action brought before the Insurance Commission. Section 3. Nature of Proceedings. — Proceedings before the Insurance Commission shall be summary in nature not necessarily adhering to or following the technical rules of evidence obtaining in the courts of law. The Rules of Court may apply in said proceedings in suppletory character whenever practicable. 763

764

THE INSURANCE CODE OF THE PHILIPPINES

Section 4. Verification of Pleadings. — Complaints filed under these rules must be verified. R U L E II PARTIES Section 1. Complainant and Respondent. — In all administrative cases filed with the Insurance Commission, the party initiating the action shall be called the Complainant and the party against w h o m action is made shall be called the Respondent. R U L E HI COMMENCEMENT OF ACTION Section 1. Caption and Title. — In all complaints and pleadings filed with the Insurance Commission, the full n a m e of all parties, as far as they are known, shall be stated in the caption. Section 2. Docket Numbers and Calendar of Cases. — All cases shall be numbered and docketed consecutively and entered into an appropriate docket book. Corresponding code n u m b e r s a n d / or abbreviation m a y be used for reference. Section 3. Summons. — U p o n docketing of the complaint, the Insurance C o m m i s s i o n shall issue s u m m o n s requiring r e s p o n d e n t / s to file its A n s w e r / C o u n t e r - A f f i d a v i t within fifteen (15) days from receipt thereof. C o p y of the complaint shall be sent to the respondent together with the s u m m o n s . Section 4. Service of Summons, Writs and Processes. — All summons, writs and processed shall be served either by registered mail or personally to the complainant and the r e s p o n d e n t / s and any interested party prior to the proceedings. Section 5. Default. — S h o u l d the respondent fail to answer the complaint within the reglementary period as provided for in the summons, he shall be declared in default a n d the Insurance Commission shall proceed with the hearing ex-parte, and shall decide the case on the evidence presented. However, respondent who filed his answer but failed to appear in person or by counsel on the preliminary hearing m a y be considered as in default and proceedings shall proceed ex-parte.

Appendix B RULES OF PROCEDURE GOVERNING ADMINISTRATIVE CASES BEFORE THE INSURANCE COMMISSION

RULE IV PRE-TRIAL AND AMICABLE SETTLEMENT Section 1. Pre-trial Conference. — In any action, the Commission shall direct the parties and their counsel before the actual hearing to appear before h i m for a pre-trial conference to consider: (a) the possibility of an amicable settlement; (b) the simplification of the issues; (c) the pleadings;

necessity

or

desirability

of a m e n d m e n t to

the

(d) the possibility of obtaining admission or stipulation of facts; (e) the e x c h a n g e and acceptance of service of exhibits to be offered in evidence; (f) the limitation of the n u m b e r of witnesses; (g) the admissibility a n d relevance of evidence proposed to be submitted by the parties; (h) such other matters as m a y aid in the just speedy and inexpensive disposition of the case. All the parties and their attorneys shall attend the pre-trial conference. T h e presence of a party is indispensable unless his counsel is authorized to enter into agreement on any or all the above matters. T h e parties shall inform each other of the nature and character of evidence they proposed to offer, indicating the purpose of each item of evidence. Section 2. Records of Pre-trial Conference. — After the pretrial conference, the C o m m i s s i o n shall issue an order which recites the action taken thereat, the amendments allowed on the pleadings, and / o r the agreements made by the parties as to any of the matters considered. Such order shall limit the issues for the formal hearing to those not disposed of by admissions and agreements of the parties and when entered shall serve as the guide in the subsequent course of action or hearing unless modified before the formal hearing to prevent manifest injustice. Section 3. Amicable Settlement. - Unless it shall be prejudicial to public interest or to third parties, the Insurance Commission

766

THE INSURANCE CODE OF THE PHILIPPINES

shall endeavor to effect an amicable settlement of the case at any stage of the proceedings, provided it shall not be contrary to any law, rule or regulation nor against public policy. T h e settlement shall be reduced in writing duly signed by the parties and their counsel, which shall be the basis of an order or decision of the Commission. RULE V PROCEEDINGS BEFORE THE DESIGNATED HEARING OFFICER Section 1. Hearing Officer. — T h e Hearing Officer shall conduct hearings and shall be e m p o w e r e d to administer oaths and affirmations, to issue subpoenas, take evidence and to c o m p e l attendance of parties and witnesses and the production of any books, papers, correspondence, m e m o r a n d a , or other records relevant or material to the case under inquiry. Section 2. Affidavit and Depositions. — Unless otherwise provided by special laws and without prejudice to Section 12, Chapter 3, B o o k VII of the Administrative C o d e of 1987, the mandatory use of affidavits in lieu of direct testimonies shall be required. In any hearing, the hearing officer, u p o n appropriate order, may cause the deposition of witnesses residing within or without the Philippines to be taken in the m a n n e r prescribed under Rule 24 of the Rules of Court. W h e r e witnesses reside in a place distant from Manila and it w o u l d be inconvenient and expensive for them to appear personally before the Hearing Officer, a M u n i c i p a l / R e g i o n a l Trial Court J u d g e or any C l e r k of Court may be requested to take depositions of such witnesses in any case pending before the Commission. It shall be the duty of the official so requested to set promptly a date or dates for the taking of such depositions giving timely notice to parties, a n d on said date to proceed to take the depositions, reducing t h e m in writing. After the depositions have b e e n taken, the requested official shall certify the correctness of the depositions thus taken and forward the same as soon as possible to the Insurance Commission. It shall be the duty of the respective parties to furnish stenographers for

Appendix B RULES OF PROCEDURE GOVERNING ADMINISTRATIVE CASES BEFORE THE INSURANCE COMMISSION

7^7

the taking and transcribing of the testimonies taken. In case there are no stenographers available, the testimony shall be taken by such person as the M u n i c i p a l / R e g i o n a l Trial Court Judge or any Clerk of Court m a y designate. T h e Hearing Officer may also request a notary public to take the deposition in the manner herein provided. Section 3. Postponement. — A n y motion for postponement or continuance of hearing m a y be granted or denied by the Hearing Officer. S u c h motion, u p o n meritorious reason must be filed with the C o m m i s s i o n and copy thereof furnished the other party at least five (5) days before the date of hearing, otherwise, it shall not be considered; Provided, however, That no more than three (3) postponements shall be granted to any party. RULE VI DISPOSITION OF CASE Section 1. Disposition of Case. — Unless a different period is fixed by special law, all contested cases or incidents shall be decided within thirty (30) days from the date of submission for resolution. A case or incident is d e e m e d submitted for resolution upon expiration of the period for filing m e m o r a n d u m , position paper or last pleading required of the parties. T h e Hearing Officer shall submit a draft of his resolution to the Insurance Commissioner within twenty (20) days from date of submission of the case for resolution. T h e Insurance Commissioner shall h a v e twenty (20) days from date of submission of the draft of the resolution to approve the same and decide the case. Unless otherwise provided by special laws, the parties may be required to submit in addition to the memorandum, position paper, or last pleading required of them, a draft of the decision they seek, stating clearly and distinctly the facts and the law upon which it is based. Following the termination of the hearing or trial, the Hearing Officer charged with resolving the case may, after considering and appreciating the applicable laws, rules and regulations and the evidence submitted, adopt in whole or

768

THE INSURANCE CODE OF THE PHILIPPINES

in part either of the parties' draft decisions, or reject both. This requirement shall likewise be applied to motions or applications for orders other than the final judgment. RULE VII MOTION FOR RECONSIDERATION Section 1. Motion for Reconsideration. — Only one motion for reconsideration shall be allowed which shall be decided within fifteen (15) days from date of submission for resolution. T h e motion for reconsideration may be based on any of the following specific grounds: (a) Newly discovered evidence which could not h a v e been discovered and produced at the trial and w h i c h if admitted, would probably alter the results. (Sec. 1[16], Rule 37, Rev. Rules of Court.) (b) The decision is not supported by the evidence on record. (Sec. 39[b], P.D. No. 807.) (c) Errors of law or irregularities h a v e b e e n committed prejudicial to the interest of the respondent. (Sec. 39[b], P.D. N o . 807.) (d) Fraud, accident, mistake or excusable negligence which ordinary prudence could h a v e guarded against and by reason of which such aggrieved party has probably b e e n impaired of his rights. (Sec. l [ a ] , Rule 37, Rev. Rules of Court.) If the motion is denied, the m o v a n t m a y appeal during the remaining period for appeal reckoned from notice of the resolution of denial. No other pleading shall be allowed other than one motion for reconsideration and opposition thereto. Section 2. Opposition to Motion for Reconsideration. — Within fifteen (15) days from receipt of a copy of the M o t i o n for Reconsideration, the adverse party m a y file his opposition thereto and serve a copy thereof u p o n the movant. Section 3. When Deemed Submitted. — After the opposition is filed, or at the expiration of the period for filing the same without any such opposition having been filed, the motion for reconsideration shall be deemed submitted for resolution unless

Appendix B RULES OF PROCEDURE GOVERNING ADMINISTRATIVE CASES BEFORE THE INSURANCE COMMISSION

7^

the Hearing Officer shall consider it necessary to hear the parties, in which case the C o m m i s s i o n shall issue the corresponding order or notice to that effect. R U L E VIII ORDERS AND RESOLUTIONS Section 1. Finality of the Order or Resolution. — Unless otherwise provided by special laws, any order or resolution in the absence of appeal therefrom, shall b e c o m e final and executory after fifteen (15) days from the date of receipt thereof. RULE IX APPEAL FROM ORDER OR RESOLUTION Section 1. How Appeal Taken. — A n y party to the contested case affected by a final order, ruling or resolution of the Insurance C o m m i s s i o n may, within fifteen (15) days from receipt of such order, ruling or resolution, file a notice of appeal and m e m o r a n d u m of appeal with the Secretary of Finance, copies of which shall be served on the Insurance Commission and on the adverse party. RULEX EFFECTIVITY Section 1. Effectivity. — These rules shall take effect upon approval by the Secretary of Finance. Manila, Philippines, D e c e m b e r 3 , 1 9 9 2 .

— oOo —

Appendix "C" SYNOPSIS OF ANNUAL STATEMENTS

(CIR. LETTER NO. 8-89* APRIL 11,1997.)

S U B J E C T : Synopsis of Annual Statement in PILIPINO' TO

:

All Insurance Companies Philippines

Doing Business

in

the

2

Under the provisions of Section 2 2 5 of the Insurance Code, every insurance c o m p a n y doing business in the Philippines shall publish in two newspapers of general circulation in the City of Manila, one published in English and another in P I L I P I N O , a full synopsis of its financial statement s h o w i n g fully the condition of its business, and setting forth its resources and liabilities, within thirty days after receipt of the annual statement by the Commissioner. For the purpose of having uniform synopsis, attached is a listing of c o m m o n l y used terms and accounts with official translation in P I L I P I N O for guidance and i m m e d i a t e reference. 3

ENGLISH I.

PILIPINO

DESCRIPTION 1.

Synopsis of Annual Statement

B u o d ng Taunang Ulat

*The listing attached to Circular Letter dated March 15,1973 is superseded. 'Now, Filipino. Now, Section 225 of the Insurance Code. New Accounts to be reported, see Note, infra. 2

3

770

Appendix C SYNOPSIS OF ANNUAL STATEMENTS

Statement of Financial Condition

Ulat sa Kalagayang Pananalapi

3.

Philippine Business

Pangangalakal sa Pilipinas

4.

Worldwide Business

Pangangalakal sa Buong Daigdig

771

5. Margin of S o l v e n c y Deficiency

Kakulangang Halaga sa Pagiging Matatag

6.

Capital Impairment

K a b a w a s a n g Halagang Puhunan

Subsequently covered up in full

B u o n g Napagtakpan

This Synopsis, prepared from the Annual Statement, approved by the Insurance C o m m i s s i o n e r is published pursuant to Section 2 2 5 of the Insurance C o d e

A n g B u o d na ito na hinango sa Taunang Ulat pinagtibay ng Komisyo-nado ng Seguro ay inilathala alinsunod sa Seksiyon 225 ng Sinusugang Batas sa Seguro

Variable Contract Accounts

Napag-iiba-ibang Kasunduan

8.

II. A C C O U N T S C O M M O N T O B O T H L I F E A N D NON-LIFE, DOMESTIC AND FOREIGN ASSETS

MGA

ARI-ARIAN

1.

Bonds

Mga Bono

2.

Stocks

M g a Sapi

3.

Real Estate

M g a Ari-ariang di Natitinag (Lupa at Gusali)

4.

Purchase M o n e y Mortgages

M g a Pautang na may Sanglang Ari-ariang Nailit

5.

Mortgage Loans

Pautang sa mga Maysangla

6.

Collateral Loans

Mga Pautang na may Panagot

THE INSURANCE CODE OF THE PHILIPPINES

772

7.

Guaranteed Loans

M g a Garantisadong Pautang

8.

Other Loans

Iba pang m g a Pautang

9.

Short-term Investments

M g a Maigsing Kasunduan sa Pamumuhunan

10.

Security Fund

Panagot na Pondo

11.

Other Investments

Iba pang m g a P a m u m u h u n a n

12.

Cash on Hand and in Banks

Salapi sa Tanggapan at m g a Bangko

13.

Commissions Receivables

M g a Singiling K o m i s y o n g Reaseguro

14.

Accrued Investment I n c o m e

M g a Natipong Tubo at Iba pang Kita sa P a m u m u h u n a n na Singilin

15.

Accounts / Notes Receivables

M g a Singiling P a u t a n g / M g a Singiling Pautang na m a y Kasulatan

16.

E D P Machine

Mga Makina ng EDP

17.

Other Admitted Assets

M g a Iba pang Kinikilalang

Total Admitted Assets

K a b u u a n g Kinikilalang m g a Ari-arian

18.

LIABILITIES

m g a Ari-arian

MGA

PANANAGUTAN

19. Commissions Payable

M g a Bayaring K o m i s y o n

20. Accrued Expenses

M g a Natipong G u g u l i n

2 1 . Taxes Payable

M g a Bayaring B u w i s

22. Accounts / Notes Payable

M g a Bayaring U t a n g / M g a Bayaring Utang na m a y Kasulatan

23. Dividends Payable

M g a Bayaring Pakinabang

24. Unearned Investment Income

Tubong di pa Kinita sa P a m u muhunan

25. Other Liabilities

Iba pang mga Pananagutan

Appendix C SYNOPSIS OF ANNUAL STATEMENTS

26. Total Liabilities C.

NET WORTH/TRUSTEED SURPLUS

K a b u u a n g m g a Pananagutan NETONG HALAGA/1PINAGKATIWALANG PANAGOT NA LAGAK AT KALABISANG KITA

27. Capital S t o c k

Saping P u h u n a n

28. Capital Paid in Excess of Par Value

B a y a d na Puhunan sa Labis na Halagang Nimel

29.

A m b a g n g m g a Aksiyonista

Contributed Surplus

3 0 . Special Surplus Funds

Kalabisang Pondong Espesyal

31.

Fluctuation Reserve S t o c k / B o n d Investment

Reserba sa Pagbabago-bago ng Saping Puhunan

32.

Fluctuation Reserve Foreign Exchange

Reserba sa Pagbabago-bago ng Halaga ng Palitan

33.

Revaluation Reserve

Reserba sa Pagbabago ng Ha-laga ng Ari-ariang di Natitinag (lupa at gusali)

34.

Retained Earnings / Earned Surplus

Kalabisang Kinita na Walang Kinauukulan

D.

II.

773

TOTAL LIABILITIES AND NET WORTH/ TRUSTEED SURPLUS

KABUUANG MGA PANANAGUTAN AT NETONG HALAGA/1PINAGKATIWALANG PANAGOT NA LAGAK AT KALABISANG KITA

A C C O U N T S OF LIFE C O M P A N I E S 1.

Policy Loans

2.

Net Life Insurance Premium & Annuity

M

a

s a

P o l i s a

g Pautang Netong Buhay at Taunang Bayad na Ipinagpaliban at di Nasisingil

THE INSURANCE CODE OF THE PHILIPPINES

774

Consideration, Due and Uncollected 3. Accident and Health Premiums D u e and Uncollected

M g a Prima ng Sakuna at Kalusugan na Ipinagpaliban at di Nasisingil

4.

Aggregate Reserve for Accident Policies & Contract

M g a Natipong Reserba sa mga Polisa at K a s u n d u a n

5.

Aggregate Reserve for Accident and Health Policies

M g a Natipong Reserba sa m g a Polisa ng Sakuna at Kalusugan

6.

Supplementary Contracts without Life Contingencies

Karagdagang Kasunduan sa walang N a g a n a p na Pangyayari

7. Policy and Contract Claims

Paghahabol sa Polisa at Kasunduan

8. Policyholders' Dividends Experience Refunds D u e and Unpaid

M g a B a y a r i n at Ibabalik na Pakinabang ng mga nakaseguro na Ipinagpaliban

Policyholders' Dividend Accumulation

Natipong P a k i n a b a n g n g m g a Nakaseguro

10. Policyholders' Dividends & Experience Refunds Payable in the following year

M g a B a b a y a r a n at Ibabalik na P a k i n a b a n g n g m g a Nakaseguro sa S u s u n o d na Taon

11.

H a l a g a n g Pansamantalang Pinigil sa m g a Polisang Ipinagpaliban na Pakinabang

9.

A m o u n t Provisionally Held for Deferred Dividend Policie

12. Premiums and Annuity Consideration Received in A d v a n c e

Prima at Taunang B a y a d na P a u n a n g Tinanggap

Appendix C SYNOPSIS OF ANNUAL STATEMENTS

13.

Liability for P r e m i u m Deposit F u n d s

775

Pananagutang Pondo sa P r i m a n g Nakalagak

IV. A C C O U N T S O F V A R I A B L E C O N T R A C T S

2.

Variable Contract A c c o u n t — Special Fund

Mapag-iiba-ibang Kasunduan Kalabisang Pondong Espesyal

Variable Contract A c c o u n t Retained Earnings

Mapag-iiba-ibang Kasunduan Natirang kinita

V. A C C O U N T S O F N O N - L I F E C O M P A N I E S 1.

P r e m i u m Receivable

M g a Primang Singilin

2. Premium Due From Ceding Companies

Tatanggapin sa m g a Nagbigay ng Reaseguro

3.

P r e m i u m Reserve Withheld B y C e d i n g Companies

Primang Inilaan ng m g a Nagbigay ng Reaseguro

4.

L o s s Reserve Withheld By Ceding Companies

P r i m a n g Inilaan para sa Kapin-salaan ng m g a Nagbigay ng Reaseguro

5.

Reinsurance Recoverable on Losses

Reasegurong Masisingil sa Kapinsalaan

6. Other Reinsurance Accounts Receivable

M g a Iba pang Reasegurong Masisingil

7. Salvage Recoverable

M g a Labing Masisingil

8. Losses and Claims Payable

M g a Bayaring Kapinsalaan at Paghahabol

9.

M g a Bayaring Gastos Kaugnay ng Kapinsalaan at Paghahabol

Loss Adjustment Expenses Payable

10. Reserve for Unearned Premium

Reserba sa Primang di pa Kinita

11.

Takdang Bayarin sa mga Tumanggap ng Reaseguro

Premium D u e to Reinsurers

THE INSURANCE CODE OF THE PHILIPPINES

776

12. Premium Reserve Withheld for RI

Pondong Inilaan para sa m g a Tumanggap ng Reaseguro

13. Loss Reserve Withheld forRI

Primang Inilaan para sa Kapinsalaan ng m g a Tumanggap ng Reaseguro

14. Other RI Accounts Payable

M g a Iba pang Reasegurong Bayarin

15. Return Premiums Payable

M g a Bayaring Primang Isasauli

VI. A C C O U N T S O F F O R E I G N I N S U R A N C E C O M P A N I E S 1.

Due from H o m e Office

M g a Tatanggapin sa P u n o n g Tanggapan

2. D u e to H o m e Office

M g a Bayarin sa P u n o n g Tanggapan

3. D u e to Other Foreign Branches

M g a Bayarin s a m g a Banyagang Sangay

4. Statutory Deposit

L a a n g Panagot sa L a g a k Ayon sa Batas

5. H o m e Office A c c o u n t

Pananagutan ng Punong Tanggapan

6. H o m e Office Inward Remittances

Padalang H a l a g a n g Tulong ng P u n o n g Tanggapan

Note: As a supplementary to Circular Letter No. 8 / 89, Circular Letter No. 14-97 (Dec. 2, 1997) w a s issued to add the following accounts with the corresponding translation in Pilipino. Life Receivable from life Insurance Pools

M g a Singilin sa S a m a h a n Ng Seguro sa B u h a y

Non-Life Catastrophe Loss Reserve

Reserba sa Pinsala sa Kalamidad

Appendix C SYNOPSIS OF ANNUAL STATEMENTS

777

Life a n d N o n - L i f e 1. Investment in Treasury Bills 2.

Deposit for Subscription

3. Contingency Surplus Further, the term to be used to describe the excess of assets over liabilities should be Stockholders' Equity with the translation in Pilipino as Ekwiti Ng Mga Istakholders.

— oOo —

Appendix "D" UNIFORM CHART OF ACCOUNTS

(NOV.

SUBJECT TO

: :

27,1991.)

Uniform Chart of Accounts All Non-Life Insurance Companies Transact Business in the Philippines

Authorized

to

It has been observed that there are certain diversities of account classification being used by non-life insurance companies, resulting in difficulties in the preparation of various statements and reports required by this C o m m i s s i o n . To mirumize difficulties, the attached chart of accounts enumerating the m i n i m u m accounts and subsidiary l e d g e r s / sub-accounts/schedules that should be maintained by a non-life insurance c o m p a n y and the special groupings and sub-groupings that should be made, was designed. All non-life insurance companies are enjoined to use this chart, starting January 1, 1982. It is understood, however, that a non-life insurance c o m p a n y m a y maintain m o r e accounts depending on the needs of m a n a g e m e n t . Chart of Accounts for Non-life Insurance C o m p a n i e s ASSETS 1.

Bonds

2.

Stocks

3.

Real Estate

3a.

Accumulated Depreciation — Building 778

Appendix D UNIFORM CHART OF ACCOUNTS

4.

Purchase M o n e y Mortgages

5.

M o r t g a g e Loans

6.

Collateral L o a n s

7.

Guaranteed L o a n s

CO

Other Loans

9.

Short-Term Investments

779

10.

Security F u n d

11.

O t h e r Investments

12.

Cash o n H a n d

13.

Cash in B a n k s

14.

P r e m i u m s Receivable

15.

P r e m i u m s D u e from Ceding C o m p a n i e s — Treaty

16. P r e m i u m s Facultative

Due

from

Ceding

Companies

—

17. P r e m i u m Reserve Withheld by Ceding Companies — Treaty 18. P r e m i u m Reserve Withheld by Ceding Companies — Facultative 19. Treaty

Loss Reserve Withheld by Ceding Companies —

20. L o s s Reserve Withheld by Ceding Companies — Facultative 21.

Reinsurance Recoverable on Paid Losses — Treaty

22. Reinsurance Facultative 23. Treaty

Reinsurance

Recoverable

on

Paid

Recoverable on Unpaid

24. Reinsurance Recoverable Facultative

on Unpaid

Losses

—

Losses — Losses —

25.

Commissions Receivable — Treaty Reinsurers

26.

Commissions Receivable — Facultative Reinsurers

27.

Other Reinsurance Accounts Receivable

THE INSURANCE CODE OF THE PHILIPPINES

780

28.

Salvage Recoverable

29.

Accounts Receivables

30.

Notes Receivables

31.

Accrued Investment Income

32.

Other Receivables

32a. 33.

Allowance for Doubtful Accounts Electronic Data Processing Machine

33a. Accumulated Processing Machine 34.

Depreciation

—

Electronic

Data

Furniture, Fixtures, and Office Equipment

34a. Accumulated Depreciation — Furniture, Fixtures and Office Equipment 35.

Transportation Equipment

35a. Accumulated Equipment 36.

Deposits

37.

Prepayments

Depreciation

—

Transportation

38.

Leasehold and Leasehold Improvements

39.

Other Assets LIABILITIES

1.

Losses and Claims Payable — Direct Business

2.

Loss Adjustment Expense P a y a b l e — D i r e c t Business

3.

Reserve for U n e a r n e d P r e m i u m s

4.

Commissions Payable — Direct Business

5.

Premiums D u e to Reinsurers — Treaty

6.

Premiums D u e to Reinsurers — Facultative

7. Treaty

Losses and Claims Payable to Ceding Companies —

8. Loss Adjustment Expenses Payable to Ceding C o m panies — Treaty

Appendix D UNIFORM CHART OF ACCOUNTS

781

9. Losses and Claims Payable to Ceding Companies Facultative 10. Loss Adjustment C o m p a n i e s — Facultative 11. Treaty

Expenses

Payable

to

Ceding

C o m m i s s i o n s Payable to Ceding Companies

12. C o m m i s s i o n s Payable to Ceding Companies — Facultative 13.

P r e m i u m Reserve Withheld for Reinsurers — Treaty

14. tative

P r e m i u m Reserve Withheld for Reinsurers — Facul-

15.

Loss Reserve Withheld for Reinsurers — Treaty

16.

Loss Reserve Withheld for Reinsurers — Facultative

17.

Other Reinsurance Accounts Payable

18.

Return P r e m i u m s Payable

19.

I n c o m e Tax Payable

20.

P r e m i u m Tax Payable

21.

Other Taxes and Licenses Payable

22.

Deposit for Real Estate U n d e r Contract to Sell

23.

Accrued Expenses

24.

Accounts Payable

25.

Notes Payable

26.

Dividends Payable

27.

D u e to H o m e Office"

28.

D u e to Other Foreign Branches**

29.

Other Liabilities NET

1.

WORTH*/TRUSTEED

SURPLUS**

Subscribed Capital Stock*

Note: * " without *

— applicable to domestic companies — applicable to branches of foreign companies — applicable to domestic companies and branches of foreign companies

THE INSURANCE CODE OF THE PHILIPPINES

782

2.

Subscription Receivable*

3.

Capital Stock Paid-Up*

4.

Treasury Stocks*

5.

Capital Paid in Excess of Par Value*

6.

Contributed Surplus

7.

Special Surplus Funds

A. ments B. 8.

9.

Fluctuation Reserve — Stock and B o n d InvestRevaluation Reserve — Real Estate

Retained Earnings* / Earned Surplus* A.

Appropriated/Assigned

B.

Unappropriated / Unassigned*

Statutory Deposits**

10.

H o m e Office Account**

11.

H o m e Office Inward Remittances** INCOME

AND

EXPENSES

ACCOUNTS

1.

Gross P r e m i u m s — Direct Business

2.

Reinsurance P r e m i u m s A s s u m e d — Treaty

3.

Reinsurance P r e m i u m s A s s u m e d — Facultative

4.

Returns and Cancellations

5.

Reinsurance P r e m i u m s C e d e d — Treaty

6.

Reinsurance P r e m i u m s C e d e d — Facultative

7.

Interest Income

8.

Dividend I n c o m e

9.

Rent Income

10.

Gain (Loss) on Sale of Investments

11.

Other Investment I n c o m e

12.

Commission Income — Treaty

13.

Commission Income — Facultative

14.

Other Underwriting Income

Appendix D UNIFORM CHART OF ACCOUNTS

15.

Losses — Direct Business

16.

Losses on Reinsurance A s s u m e d — Treaty

17.

Losses on Reinsurance A s s u m e d — Facultative

783

18. Salvage Recoveries or Loss Recoveries on Direct Business 19.

Loss Recoveries on Reinsurance Ceded — Treaty

20.

L o s s Recoveries on Reinsurance C e d e d — F a c u l t a t i v e

21.

L o s s Adjustment Expenses — Direct

22. L o s s Adjustment Expenses on Reinsurance Assumed — Treaty 23. L o s s Adjustment Expenses on Reinsurance Assumed — Facultative 24. 25. Treaty

C o m m i s s i o n Expenses — Direct Business C o m m i s s i o n Expenses on Reinsurance Assumed —

26. C o m m i s s i o n Expenses on Reinsurance Assumed — Facultative 27.

Other Underwriting Expenses

28.

Provision for I n c o m e Tax

29.

P r e m i u m Tax

30.

Other Taxes and Licenses

31.

Interest Expenses

32.

Salaries and Wages

33.

Allowances and Bonuses

34.

S S S Contributions

35.

Pag-Ibig Fund Contributions

36.

Other Employee Benefits

37.

Directors' Fees and Allowances

38.

Rental Expenses

39.

Agency Expenses

40.

Repairs and Maintenance

THE INSURANCE CODE OF THE PHILIPPINES

784

41.

Light and Water

42.

Advertising and Promotions

43.

Representation and Entertainment

44.

Professional and Technical Development

45.

Professional Fees

46.

Management Fees

47.

Printing, Stationery and Office Supplies

48.

Communication and Postage

49.

Donations and Contributions

50.

Association and Pool D u e s

51.

Depreciation and Amortization

52.

Transportation and Travel Expenses

53.

Other Operating Expenses

Definition of Accounts ASSETS 1. Bonds.—This represents the cost (adjusted for amortization of d i s c o u n t / p r e m i u m w h e n applicable) of investments in b o n d s registered in the n a m e of the company, issued by government or private corporations, whether domestic or foreign. 2. Stocks. — This represents the cost of investments in preferred and c o m m o n stocks of financial and non-financial institutions. 3. Real Estate. — This represents the cost of real estate properties, whether for office and other uses, and real estate acquired in satisfaction of debt, including the cost of addition or capital improvements thereon. In the absence of a recent appraisal acceptable to the C o m missioner, foreclosed real estate shall not be recorded at an amount greater than the unpaid principal of the defaulted loan at the date of such foreclosure, together with any taxes and expenses paid or incurred in connection with such foreclosure.

Appendix D UNIFORM CHART OF ACCOUNTS

785

3a. Accumulated Depreciation — Building. — This represents the aggregate of the estimated depreciation provided by the c o m p a n y on its buildings. 4. Purchase Money Mortgages. — This represents the uncollected portion of the consideration on the sale of real estate o w n e d by the company, w h e r e b y title to the property sold has been transferred to the buyer, and subject of a deed of sale with mortgage. 5. Mortgage Loans. — This represents the outstanding balances of loans secured by first mortgages on real estate properties. U n p a i d interest on these loans should not form part of this account but recorded under Accrued Investment Income. 6. Collateral Loans. — This represent the outstanding balances of loans secured by first mortgages on real estate properties. U n p a i d interest on these loans should not form part of this account b u t recorded under Accrued Investment Income. 7. Guaranteed Loans. — These are outstanding balances of loss with acceptable guarantee. 8. Other Loans. — This represents outstanding balances of loans which can not be classified under any of the foregoing loan accounts. 9. Short-Term Investments. — This represents costs of placements in commercial papers, repurchase agreements, and other short-term debt instruments for a period not exceeding one year. 10. Security Fund. — This represents the contributions of the c o m p a n y to the Security Fund, Non-Life Account. 11. Other Investments. — This represents all other investments which the c o m p a n y m a y have but which cannot be properly classified under the investment accounts previously mentioned. 12. Cash on Hand. — This represents the total amount of undeposited collecting and working funds in the possession of the company. 13. Cash in Banks. — This represents the company's current, savings, time a n d / o r fixed deposit account balances in any bank. 14. Premiums Receivable. — This represents uncollected premiums on direct business including those solicited by general

786

THE INSURANCE CODE OF THE PHILIPPINES

agents and insurance brokers. Documentary stamps and fire taxes receivable may be included provided they are properly segregated and corresponding liabilities are set up. 15. Premiums Due from Ceding Companies — Treaty. — This represents all reinsurance premiums due to the c o m p a n y as a result of treaty acceptances from ceding companies. 16. Premiums Due from Ceding Companies — Facultative. — This represents all reinsurance premiums due to the c o m p a n y as a result of facultative acceptance from ceding companies. 17. Premium Reserve Withheld by Ceding Companies — Treaty. — This pertains to a portion of the reinsurance p r e m i u m withheld by ceding companies in accordance with treaty agreements. 18. Premium Reserve Withheld by Ceding Companies — Facultative. — This pertains to a portion of the reinsurance p r e m i u m withheld by ceding companies in accordance with facultative agreements. 19. Loss Reserve Withheld by Ceding Companies — Treaty. — This pertains to a portion of the reinsurance p r e m i u m withheld by ceding companies under treaty agreements, as reserve for losses. 20. Loss Reserve Withheld by Ceding Companies — Facultative. — This pertains to a portion of the reinsurance p r e m i u m s withheld by the ceding companies under facultative reinsurances as reserve for losses. 2 1 . Reinsurance Recoverable on Paid Losses — Treaty. — This represents the amount recoverable from reinsurers under treaty agreements as their share in paid losses a n d loss adjustment expenses. T h e share of the reinsurers on whatever salvage or recoveries from losses or claims sustained shall be deducted from this account. 22. Reinsurance Recoverable on Paid Losses — Facultative. — This represents the amount recoverable from reinsurance under facultative reinsurances as their share in paid losses and loss adjustment expenses. T h e share of the reinsurers on whatever salvage recoveries from losses or claims sustained shall be deducted from this account.

Appendix D UNIFORM CHART OF ACCOUNTS

787

23. Reinsurance Recoverable on Unpaid Losses — Treaty. This represents the a m o u n t recoverable from reinsurers under treaty agreements as their share on unpaid losses and loss adjustment expenses. T h e share of the reinsurers on whatever salvage recoveries from losses or claims sustained shall be deducted from this account. 24. Reinsurance Recoverable on Unpaid Losses — Facultative. — This represents the a m o u n t recoverable from reinsurers under facultative reinsurances as their share on unpaid losses and loss adjustment expenses. T h e share of the reinsurers on whatever salvage recoveries from losses or claims sustained shall be deducted from this account. 25. Commissions Receivable — Treaty Reinsurers. — This represents all kinds of c o m m i s s i o n s due but not yet collected on reinsurance business under treaty agreements. 26. Commissions Receivable — Facultative Reinsurers. — This represents all kinds of c o m m i s s i o n s due but not yet collected on reinsurance business under facultative reinsurances. 27. Other Reinsurance Accounts Receivable. — This represents all other reinsurance accounts receivable not classifiable under any of the foregoing reinsurance accounts receivable. 28. Salvage Recoverable. — This represents the estimated recoveries the c o m p a n y m a y h a v e from losses on surety policies issued. 2 9 . Accounts Receivable. — This represents receivables from non-insurance and non-reinsurance transactions of the company. 30. Notes Receivable. — This represents receivables by the company evidenced by promissory notes. 3 1 . Accrued Investment Income. — This represents the uncollected dividends, interest, rent and other investment income already earned. 32. Other Receivables. — This represents all other receivables which cannot be classified if any of the receivable accounts previously mentioned. 32a. Allowance for Doubtful Accounts. — This may be set up to provide for possible losses arising from non-collection of any or all of the above receivable accounts.

788

THE INSURANCE CODE OF THE PHILIPPINES

33. Electronic Data Processing Machine. — This represents the cost of the electronic data processing equipment owned by the company. 33a. Accumulated Depreciation — Electronic Data Processing Machine. — This represents the accumulated depreciation provided by the company on the electronic data processing machine which has been charged against operations. 34. Furniture, Fixtures and Office Equipment. — This represents the cost of furniture, fixtures, and office equipment used in the operations. 34a. Accumulated Depreciation — Furniture, Fixtures, and Office Equipment. — This represents the accumulated depreciation on furniture, fixtures and office equipment w h i c h has b e e n charged against operations. 35. Transportation Equipment. — This represents the cost of motor vehicles and other transportation e q u i p m e n t o w n e d by the company and used in the business. 35a. Accumulated Depreciation — Transportation Equipment. — T h i s represents the accumulated depreciation on transportation equipment which has b e e n charged against operations. 36. Deposits. — This represents refundable deposits m a d e for use of public utilities, compliance with requirements of insurance and reinsurance pools, and other specific purposes. 37. Prepayments. — This represents all p a y m e n t s for expenses not yet incurred at the time of p a y m e n t w h i c h will be amortized over a period usually not exceeding o n e year. 38. Leasehold and Leasehold Improvements. — This represents the cost of building and / o r improvements introduced on leased properties, including the cost of leasehold rights and other expenses incurred in making the properties ready for use and occupancy. T h e cost of the leasehold and leasehold improvements shall be amortized over the term of the lease contract or estimated useful life of the improvement whichever is shorter. 39. Other Assets. — This represents all other assets which can not be classified under any of the foregoing asset accounts.

Appendix D UNIFORM CHART OF ACCOUNTS

789

LIABILITIES 1. Losses and Claims Payable — Direct Business. — This represents the total a m o u n t of losses and claims due and payable to policyholders and other claimants. 2. Loss Adjustment Expense Payable — Direct Business. — This represents adjustment expenses already incurred but not yet paid in connection with the settlement of losses and claims. 3. Reserve for Unearned Premiums. — This represents the unearned portion of p r e m i u m i n c o m e recognized from policies in force as at report date. Setting up reserves shall be in accordance with the provisions of the Insurance C o d e and related rulings of the Insurance C o m m i s s i o n . 4. Commissions Payable — Direct Business. — This represents unpaid commissions on the c o m p a n y ' s direct business, payable to ordinary agents, general agents and insurance brokers. 5. Premiums Due to Reinsurers — Treaty. — This represents reinsurance p r e m i u m s payable by the c o m p a n y to all its facultative reinsurers. 6. Premiums Due to Reinsurers — Facultative. — This represents reinsurance p r e m i u m s payable by the company to all its facultative reinsurers. 7. Losses and Claims Payable to Ceding Companies — Treaty. — This represents the losses and claims due and payable to ceding companies under treaty agreements. 8. Loss Adjustment Expenses Payable to Ceding Companies — Treaty. — This represents the unpaid share of the company in the loss adjustment expenses incurred in connection with its treaty agreements. 9. Losses and Claims Payable to Ceding Companies — Facultative. — This represents the losses and claims due and payable to ceding companies on assumed facultative business. 10. Loss Adjustment Expenses Payable to Ceding Companies — Facultative. — This represents unpaid share of the company in the loss adjustment expenses incurred in connection with its facultative reinsurance.

790

THE INSURANCE CODE OF THE PHILIPPINES

11. Commissions Payable to Ceding Companies — Treaty. — This represents unpaid commissions on the company's assumed business under treaty agreements. 12. Commissions Payable to Ceding Companies — Facultative. — This represents unpaid commissions on the company's assumed business under facultative agreements. 13. Premium Reserve Withheld for Reinsurers — Treaty. — This represents a portion of the reinsurance p r e m i u m ceded to reinsurers which was withheld by the c o m p a n y in accordance with treaty agreements and / o r laws, rules, and regulations. 14. Premium Reserve Withheld for Reinsurers — Facultative. — This represents a portion of the reinsurance p r e m i u m ceded to reinsurers which was withheld by the c o m p a n y in accordance with facultative agreements a n d / o r laws, rules and regulations. 15. Loss Reserve Withheld for Reinsurers — Treaty. — This represents a portion of the reinsurance p r e m i u m ceded to reinsurers which was withheld by the c o m p a n y as reserve for losses in accordance with treaty agreements a n d / o r laws, rules and regulations. 16. Loss Reserve Withheld for Reinsurers — Facultative. — This represents a portion of the reinsurance p r e m i u m ceded to reinsurers which was withheld by the c o m p a n y as reserve for losses in accordance with facultative agreements a n d / o r laws, rules and regulations. 17. Other Reinsurance Accounts Payable. — This represents all other reinsurance accounts payable not classifiable under any of the foregoing reinsurance accounts payable. 18. Return Premiums Payable. — This represents the aggregate premiums to be refunded to the insureds due to endorsement or cancellation of the policies. 19. Income Tax Payable. — This represents the unpaid balance of the income tax liability of the company. 20. Premium Tax Payable. — This represents the unpaid balance of the premiums tax liability. 2 1 . Other Taxes and Licenses Payable. — This represents all unpaid taxes other than income and p r e m i u m taxes due the government.

Appendix D UNIFORM CHART OF ACCOUNTS

791

22. Deposit for Real Estate Under Contract to Sell. — This represents the installment payments received by the company on real estate sold under contract to sell, title to which is still in the n a m e of the company. 2 3 . Accrued Expenses. — This represents expenses already incurred but not yet paid. 24. Accounts Payable. — This represents the obligations of the c o m p a n y arising from non-insurance and non-reinsurance transactions. 25. Notes Payable. — This represents obligations a n d / o r indebtedness evidenced by promissory notes executed by the company. 2 6 . Dividends Payable. — This represents the unpaid cash dividends declared by the Board of Directors of the company to stockholders of record as of a certain date. 27. Due to Home Office.** — This represents the liability for amount a d v a n c e d by the H o m e Office for the account of the Philippine branch or a m o u n t remitted by the H o m e Office for losses and expenses of the branch. 28. Due to Other Foreign Branches.** — This represents the liability for the a m o u n t advanced or remitted to the Philippine branch by other foreign branches. 29. Other Liabilities. — This represents liability accounts which cannot be classified under any of the foregoing liabilities accounts. NET

WORTH*/TR USTEED

SURPLUS**

1. Subscribed Capital Stock* — This represents the capital stock subscribed as at report date. 2. Subscription Receivable* — This represents the unpaid portion of the subscribed capital stock of the company. 3. Capital Stock Paid-Up.* — This represents the total par value of fully paid shares. Note: — —

applicable to domestic companies applicable to branches of foreign companies

THE INSURANCE CODE OF THE PHILIPPINES

792

4. Treasury Stocks.* — This represents stocks already issued but re-acquired by the company. 5. Capital Paid in Excess of Par Value* — This represents premium on sale of capital stock. 6. Contributed Surplus.* — This represents contributions of stockholders to the company in compliance with the requirements of the Insurance Code. 7.

Special Surplus Funds. — This m a y include the following:

A. Fluctuation Reserve — Stock and Bond Investments. — This represents the unrealized appreciation in market value of stock and b o n d investments, as at a given report date. B. Revaluation Reserve — Real Estate. — This represents appreciation or increase in b o o k value of real estate allowed under existing rules and regulations as at a given report date. 8. Retained Earnings/Earned Surplus.* — This represents the balance of the accumulated profits or losses from c o m p a n y ' s operations. The company's Board of Directors m a y appropriate a portion of this account for specific p u r p o s e / s . 9. Statutory Deposits.** — This represents the m a r k e t value of the securities deposited with the Insurance C o m m i s s i o n by branches of foreign companies authorized to do business in the Philippines. 10. Home Office Account. **—This represents the balance of the accumulated profits or losses from operations of the Philippine Branch. 11. Home Office Inward Remittances.** — This represents the remittances from h e a d office to the Philippine branches of authorized foreign companies, in compliance with the requirements of the Insurance C o d e .

INCOME

AND

EXPENSES

ACCOUNTS

1. Gross Premiums — Direct Business. — This represents the aggregate premiums arising from direct business of the c o m p a n y for the period being reported.

Appendix D UNIFORM CHART OF ACCOUNTS

793

2. Reinsurance Premiums Assumed — Treaty.—This represents the aggregate p r e m i u m s assumed from ceding companies under treaty agreements. 3. Reinsurance Premiums Assumed — Facultative. — This represents the aggregate p r e m i u m s assumed from ceding companies under facultative agreements. 4. Returns and Cancellations. — This represents premiums on policies cancelled or partially modified. 5. Reinsurance Premiums Ceded — Treaty. — This represents p r e m i u m on outward cessions under treaty agreements. 6. Reinsurance Premiums Ceded — Facultative. — This represents p r e m i u m s on outward cessions under facultative agreements. 7. Interest Income. — This represents income from interestbearing investments and b a n k accounts. 8. Dividend Income. — This represents cash and property dividends from stock investments of the company. 9. Rent Income. — This represents income derived from real estate properties being leased out by the company. 10. Gain (Loss) on Sale of Investments. — This represents gain or loss on the sale of investments. 11. Other Investment Income. — This represents income from investments w h i c h cannot be classified under any of the foregoing investment i n c o m e accounts. 1

12. Commission Income — Treaty. — This represents commissions due to the c o m p a n y for its outward cessions under treaty agreements. 13. Commission Income — Facultative. — This represents commissions due the company for its outward cessions under facultative agreements. 14. Other Underwriting Income. — This represents underwriting income not classifiable under any of the foregoing underwriting income accounts.

'Account Nos. 7 to 11 may be recorded net of any final taxes paid..

794

THE INSURANCE CODE OF THE PHILIPPINES

15. Losses on Direct Business. — This represents the aggregate losses and claims the company has incurred on direct business. 16. Losses on Reinsurance Assumed — Treaty. — This represents the aggregate losses and claims the company has incurred on its acceptances under reinsurance treaty agreements. 17. Losses on Reinsurance Assumed — Facultative. — This represents the aggregate losses and claims the company has incurred on its acceptances under facultative reinsurances. 18. Salvage Recoveries or Loss Recoveries on Direct Business. — This represents the net amount recovered or recoverable on account of losses on direct business. 19. Loss Recoveries on Reinsurance Ceded — Treaty. — This represents the aggregate share of the reinsurers on the claims and losses and adjustments expenses of the c o m p a n y on business ceded under treaty agreements. 20. Loss Recoveries on Reinsurance Ceded — Facultative. — This represents the aggregate share of the reinsurers on the claims and losses and adjustment expenses of the c o m p a n y on business ceded under facultative reinsurances. 2 1 . Loss Adjustment Expenses — Direct. — This represents the gross expenses for the adjustment of claims and losses against the company arising out of direct business. 22. Loss Adjustment Expenses on Reinsurance Assumed — Treaty. — This represents the expenses for the adjustment of claims and losses arising out of the c o m p a n y ' s share on reinsurance acceptances under the treaty agreements. 23. Loss Adjustment Expenses on Reinsurance Assumed — Facultative. — This represents the expenses for the adjustment expenses of claims and losses, arising out of the c o m p a n y ' s share on reinsurance acceptances under facultative reinsurances. 24. Commission Expenses — Direct Business. — This represents the commissions given to insurance intermediaries for direct business solicited for the company. 25. Commission Expenses on Reinsurance Assumed — Treaty. — This represents commissions given to ceding companies under treaty agreements.

Appendix D UNIFORM CHART OF ACCOUNTS

795

26. Commission Expenses on Reinsurance Assumed — Facultative. — This represents commissions given to ceding companies under facultative reinsurances. 27. Other Underwriting Expenses. — This represents underwriting expenses not classifiable under any of the foregoing underwriting expenses accounts. 2 8 . Provision for Income Tax. — This represents the amount set up for the estimated i n c o m e tax for the reported period. 29. Premium Tax. — This represents the percentage tax on net retained premiums. 30. Other Taxes and Licenses. — This represents taxes and licenses other than i n c o m e and p r e m i u m taxes. 3 1 . Interest Expenses. — This represents the interest expense on all borrowings of the company. 32. Salaries and Wages. — This represents compensation of officers and employees.

the

regular

3 3 . Allowances and Bonuses. — This represents allowances and bonuses of officers and employees. 34. SSS Contributions. — This represents the company's contributions to the Social Security S y s t e m for the benefit of its employees. 35. Pag-ibig Fund Contributions. — This represents the company's share in the Pag-ibig Fund for the benefit of its employees. 36. Other Employee Benefits. — This represents all other benefits given by the c o m p a n y to its officers and employees. 37. Directors' Fees and Allowances. — This represents fees and allowances granted to directors. 38. Rental Expenses — This represents expenses of the company for the use of premises and equipment. 39. Agency Expenses. — This represents expenses of the company in connection with agency operations. 40. Repairs and Maintenance. — This represents expenses for •••y.. - ..-A rimulenance of company's properties.

796

THE INSURANCE CODE OF THE PHILIPPINES

4 1 . Light and Water. — This represents light and water expenses of the company. 42. Advertising and Promotions. — This represents expenses for advertising and publicity to promote the business of the company. 43. Representation and Entertainment. — This pertains to the representation and entertainment expenses for the promotion of the business of the company. 44. Professional and Technical Development. — This represents expenses in developing professional and technical capabilities of the officers and employees of the company. 45. Professional Fees. — This represents expenses for professional services rendered for the c o m p a n y by other entities / persons. 46. Management Fees. — This represents fees arising from a management contract. 47. Printing, Stationery and Office Supplies. — This represents expenses for printed materials, stationery and various office supplies used in business. 48. Communication and Postage. — This represents expenses incurred for postage stamps used, telephone services, cables and telegrams and other m e a n s of communication. 49. Donations and Contributions. — This represents donations and contributions m a d e by the company. 50. Association and Pool Dues. — This represents expenses in connection with m e m b e r s h i p in associations and pools. 5 1 . Depreciation and Amortization. — This represents the depreciation and amortization of c o m p a n y ' s assets. 52. Transportation and Travel Expenses. — This represents expenses for the travel of directors, officers and employees in connection with business operations. 53. Other Operating Expenses. — This represents all other expenses which cannot be classified under any of the foregoing operating expenses accounts.

Appendix D UNIFORM CHART OF ACCOUNTS

797

Subsidiary Ledgers or Records In general, subsidiary ledgers or records should be maintained for the following accounts: Al)

Bonds

A 2 ) Stocks A3)

Real State —

a.

Land

b.

Building

A4)

Purchase M o n e y Mortgages

A5)

Mortgage Loans

A6)

Collateral L o a n s

A7)

Guaranteed Loans

A8)

Other Loans

A9)

Short-Term Investments

All)

O t h e r Investments

A12)

C a s h on H a n d

A13)

C a s h in B a n k

A14)

P r e m i u m s Receivables

A 2 8 ) Salvage Recoverable A29)

Accounts Receivable

A30)

Notes Receivable

A31)

Accrued Investment Income

A32)

Other Receivables

A32a)

Allowance for Doubtful Accounts — for each type of receivable.

A34)

Furniture, Fixtures and Office Equipment

A34a)

Accumulated Depreciation — Furniture, Fixtures and Office Equipment

A35)

Note:

A L N

— — —

Transportation Equipment

Assets Liabilities Network

THE INSURANCE CODE OF THE PHILIPPINES

798

A35a)

Accumulated Depreciation—Transportation Equipment

A36) Deposits A37)

Prepayments

A38) Leasehold and Leasehold Improvements A39) Other Assets LI)

Losses and Claims Payable

L2) Loss Adjustment Expense Payable L3) Reserve for Unearned P r e m i u m s L4) Commissions Payable — Direct Business L21) Other Taxes and Licenses Payable L23) Accrued Expenses L24) Accounts Payable L25) Notes Payable L26) Dividends Payable L29) Other Liabilities N6)

Contributed Surplus

For Each C e d i n g C o m p a n y : A15)

P r e m i u m s D u e from C e d i n g C o m p a n i e s — Treaty

A16)

Premiums D u e from C e d i n g C o m p a n i e s — Facultative

A17)

P r e m i u m Reserve Withheld by C e d i n g C o m p a n i e s — Treaty

A18)

Premium Reserve Withheld by Ceding C o m p a n i e s — Facultative

A19)

Loss Reserve Withheld by C e d i n g C o m p a n i e s — Treaty

A20)

Loss Reserve Withheld by Ceding C o m p a n i e s — Facultative

L7)

Losses and Claims Payable to Ceding C o m p a n i e s — Treaty

Appendix D UNIFORM CHART OF ACCOUNTS

799

L8)

Loss Adjustment Expenses Companies — Treaty

Payable

L9)

Losses and Claims Payable to Ceding Companies Facultative Payable

to

to

Ceding

LIO)

Loss Adjustment Expenses Companies — Facultative

Ceding

Lll)

Commissions Payable to Ceding Companies — Treaty

L12)

Commissions Payable to Ceding Companies — Facultative

L17)

Other Reinsurance Accounts Payable

For Each Reinsurer A21)

Reinsurance Recoverable on Paid Losses — Treaty

A22)

Reinsurance Facultative

A23)

Reinsurance Recoverable Treaty

A24)

Reinsurance Facultative

A25)

Commissions Receivable — Treaty Reinsurers

A26)

Commissions Receivable — Facultative Reinsurers

A27)

Other Reinsurance Accounts Receivable

Recoverable

on

Paid

Losses

—

on Unpaid Losses —

Recoverable on Unpaid

Losses —

L5)

Premiums Due to Reinsurers — Treaty

L6)

Premiums Due to Reinsurers — Facultative

L13)

Premium Reserve Held for Reinsurers — Treaty

L14)

Premium Reserve Held for Reinsurers — Facultative

L15)

Loss Reserve Held for Reinsurers — Treaty

L16)

Loss Reserve Held for Reinsurers — Facultative

In cases where a particular general ledger account is composed of very few individual accounts, subsidiary ledgers need not be maintained. Instead, a schedule or continuing analysis of the account may be maintained to keep track of the account details.

THE INSURANCE CODE OF THE PHILIPPINES

800

Accounts that Should be Grouped to Facilitate Preparation of Statements or Reports to be S u b m i t t e d to the I n s u r a n c e Commission A l ) Bonds l . A Deposited with the Insurance Commission. — This comprises investment mostly in government b o n d s deposited with the Insurance C o m m i s s i o n as security for the benefit of policyholders and creditors in accordance with the provisions of the Insurance Code and related circulars of the Insurance Commission. This account is further classified into: 1. Domestic Government Issues. — This classification pertains to investment in government securities generally consisting of bonds, treasury b i l l s / n o t e s and certificates of indebtedness issued and guaranteed by the Philippine government, its political subdivisions and instrumentalities a n d / o r corporations-owned a n d / o r -controlled by the government; 2. Domestic Private Issues. — This classification pertains to investments in b o n d s and other debt instruments issued by private entities. l . B Not Deposited with the Insurance Commission. — This account is further classified into: 1.

Domestic Government Issues

2.

Domestic Private Issues

3. Foreign Government Issues. — This classification pertains to investments in foreign g o v e r n m e n t b o n d s and securities such as U.S. Treasury Notes and Bonds, which shall be recorded at their respective foreign currency values and at their corresponding local currency equivalent to the dates of transactions. 4. Foreign Private Issues.—This classification pertains to investments in foreign commercial and industrial bonds and other debt instruments. T h e s e investments should be recorded at their respective foreign currency values at their corresponding local currency equivalent on the dates of transactions.

Appendix D UNIFORM CHART OF ACCOUNTS

A2)

801

Stocks 2.A Domestic Issues. — These are stocks issued by companies organized and incorporated in the Philippines and are further classified into: 1. Financial Institutions. — This classification pertains to the cost of investments in stocks of banks, non-bank financial intermediaries and institutions including insurance companies. 2. Non-Financial Institutions. — This classification pertains to the cost of investments in stocks of public utilities, commercial and industrial entities. This account is further classified into: a) Public Utilities. — This pertains to the cost of investments in stocks of establishments engaged in passenger and freight transportation by railways, highways, water or air warehousing, telephone and telegraph communication, and the supplying of electricity, gas, water and other sanitary services. b) Industrial. — This classification pertains to the cost of investments in stocks of domestic industrial companies. This is further sub-classified into: b.l) Board of Investments (BOI)-Registered. — T h e s e are investments in stocks of BOI-Registered industrial companies. (R.A. No. 5186, as amended.) b.2) Non-BOI Registered. — T h e s e are investments in stocks of industrial companies not registered with the Board of Investments under R.A. No. 5186, as amended. c) Commercial and Miscellaneous. — This classification pertains to the cost of investments in stocks of commercial companies and other entities. 2.B Foreign Issues. — This classification pertains to investments in stocks of foreign companies organized or incorporated outside the Philippines and may further be classified into financial and non-financial institutions.

THE INSURANCE CODE OF THE PHILIPPINES

802

A3)

Real Estate 3.A Company Premises. — This includes the cost of real properties for office use. 3.B Foreclosed Real Estate. — This includes real properties other than those used for c o m p a n y premises acquired by the company judicially or extrajudicially in settlement of loans a n d / o r acquired for other reasons. 3.C Real Estate Under Contract to Sell. — This represents the recorded value of real estate under contract to sell with a duly executed agreement to sell title to w h i c h is still in the name of the company.

A12)

Cash on Hand

12.A Cash in Company's Office. — This includes cash kept within the c o m p a n y premises, such as petty cash fund, commission fund, documentary s t a m p fund, etc. 12.B Deposit in Transit. — These are the cash and checks already deposited per c o m p a n y records b u t not yet taken up per b a n k statement. A13)

Cash in Banks

13.A Cash in Banks — Domestic. — This includes the company's total deposit account balances with any authorized b a n k within the Philippines. 13.B Cash in Banks — Foreign. — This includes the company's total deposit account balances with any b a n k outside the Philippines. 13.C Suspended Banks. — This includes the company's total deposit account balances with any unauthorized bank. A29)

L23)

Accounts Receivable 29.A

Affiliates

29.B

Others

Notes Payable 23.A

Affiliates

23.B

Others

Appendix D UNIFORM CHART OF ACCOUNTS

803

The following Accounts: A

—

4

Premiums Receivable

L

—

1

Losses and Claims Payable — Direct Business

L

—

18

L

—

3

Reserve for U n e a r n e d Premiums

IE —

1

Gross P r e m i u m s — Direct Business

IE

—

2

Reinsurance P r e m i u m s A s s u m e d — Treaty

IE —

3

Reinsurance P r e m i u m s A s s u m e d — Facultative

IE

—

4

Returns and Cancellation

IE —

5

Reinsurance P r e m i u m s Ceded — Treaty

IE —

6

Reinsurance P r e m i u m s Ceded — Facultative

IE —

12

C o m m i s s i o n I n c o m e — Treaty

IE —

13

C o m m i s s i o n I n c o m e — Facultative

IE —

15

Losses — Direct Business

IE —

16

Losses on Reinsurance A s s u m e d — Treaty

IE —

17

Losses on Reinsurance A s s u m e d — Facultative

IE

—

18

Salvage Recoveries or Loss Recoveries on Direct Business

IE

—

19

Loss Recoveries on Reinsurance Ceded — Treaty

IE

—

20

IE

—

21

Loss Adjustment Expenses — Direct Business

IE

—

22

Loss

Return P r e m i u m s Payable

Loss Recoveries Facultative

Adjustment

on

Reinsurance

Ceded —

Expenses

on

Reinsurance

Expenses

on

Reinsurance

A s s u m e d — Treaty IE

—

23

Loss

Adjustment

A s s u m e d — Facultative IE

—

24

Commission Expenses — Direct Business

IE

—

25

Commission Expenses on Reinsurance Assumed

—

— Treaty 26 Commission Expenses on Reinsurance Assumed — Facultative

IE

THE INSURANCE CODE OF THE PHILIPPINES

15

Premiums Treaty

Due

from

Ceding

Companies

—

16

Premiums D u e Facultative

from

Ceding

Companies

—

17

Premiums Reserve Withheld by Ceding C o m panies — Treaty

18

Premiums Reserve Withheld by Ceding C o m panies — Facultative

19

Loss Reserve Withheld by Ceding C o m p a n i e s — Treaty

20

Loss Reserve Withheld by Ceding C o m p a n i e s — Facultative

21

Reinsurance Recoverable on Paid Losses — Treaty

22

Reinsurance Recoverable on Paid Losses — Facultative

23

Reinsurance Recoverable on U n p a i d Losses — Treaty

24

Reinsurance Recoverable on U n p a i d Losses — Facultative

25

C o m m i s s i o n s Receivable — Treaty Reinsurers

26

C o m m i s s i o n s Receivable — Facultative Reinsurers

27

Other Reinsurance A c c o u n t s Receivable

5

P r e m i u m s D u e to Reinsurers — Treaty

6

P r e m i u m s D u e to Reinsurers — Facultative

7

Losses and Claims Payable to Ceding C o m p a n i e s — Treaty

8

Loss Adjustment Expenses Payable to Ceding Companies — Treaty

9

Losses and Claims Payable to Ceding C o m p a n i e s — Facultative

10

Loss Adjustment Expenses Payable to Ceding Companies — Facultative

Appendix D UNIFORM CHART OF ACCOUNTS

805

L

—

11

C o m m i s s i o n s Payable to Ceding Companies Treaty

L

—

12

C o m m i s s i o n s Payable to Ceding Companies Facultative

L

—

13

L

—

14

L

—

15

Loss Reserve Held for Reinsurers — Treaty

L

—

16

Loss Reserve Held for Reinsurers — Facultative

L

—

17

Other Reinsurance Accounts Payable

L

—

20

P r e m i u m Tax Payable

P r e m i u m Reserve Held for Reinsurers — Treaty P r e m i u m Reserve Facultative

Held

for

Reinsurers

—

Should be classified as follows: 1.

Fire

2.

Earthquake/Fire/Shock

3.

Typhoon / Flood / Tidal Wave

4.

O c e a n Marine

5.

Inland Marine

6.

M a r i n e Hull

7.

Aviation

8. Judicial B o n d s 9. Judicial Criminal Bonds 10. Customs Bonds 11.

Other B o n d s

12. Compulsory Motor Vehicle Liability (CMVL) — Land Transportation Operators 13. Compulsory Motor Vehicle Liability (CMVL) — NonLand Transportation Operators 14. Other than C M V L — Land Transportation Operators 15. Other Operators

than

CMVL

—

Non-Land

Transportation

THE INSURANCE CODE OF THE PHILIPPINES

806

16. Health and Accident 17.

Burglary/Theft/Larceny

18. Other Casualties

All reinsurance accounts should further be grouped as follows: 1.

Authorized — Domestic C o m p a n i e s

2. Authorized — Foreign C o m p a n i e s 3. Unauthorized — A S E A N countries 4.

Unauthorized — other than A S E A N countries

— oOo —

Appendix "E" STANDARD LIFE INSURANCE POLICY PROVISIONS

(CIR. LETTER NO.

SUBJECT TO

: :

14-93 CL, JUNE 25,1993.)

Standard Life Insurance Policy Provisions All Life Insurance companies authorized to transact business in the Philippines

For purposes of expediting the evaluation and approval of individual insurance plans, life insurance companies shall use the attached standard life insurance policy provisions. A n y of the attached standard life insurance policy provisions or portions thereof not applicable to single or term policies shall to that extent not be incorporated therein. This Circular shall not apply to policies of group life or industrial life insurance. This Circular takes effect immediately. T h e Policy D a t a page must include the following: A. Basic Information 1.

Policy N u m b e r

2.

Policy Date

3.

Owner

4.

Insured

5. A g e of Insured As of Policy Date 6. Policy A m o u n t 7. Life Insurance Plan 8. Maturity / Expiry / Termination Date 807

THE INSURANCE CODE OF THE PHILIPPINES

808

Schedule of Benefits and Premiums 1.

Form No.

2. Benefit Description 3. Benefit A m o u n t 4.

Premiums a.

Premiums (annual and selected modes)

b.

D u e dates of the selected m o d e s

c.

M a x i m u m Years Payable

Others 1.

F o r m No.

2. Authorized Signatories 3. Issued Date INSURING CLAUSE Subject to the terms and conditions of this Policy while in full force and effect, the C o m p a n y will p a y at its H e a d Office the A m o u n t of Insurance to the designated Beneficiaries u p o n the death of the insured, or the Pure E n d o w m e n t A m o u n t to the O w n e r u p o n the survival of the insured at maturity date. A n y indebtedness or lien under this Policy will be deducted from such payable amount. The A m o u n t of Insurance and the Pure E n d o w m e n t A m o u n t are each equal to the Policy A m o u n t (for level benefit contracts). In addition, any then paid-up additional life insurance a m o u n t and any then remaining dividend accumulation are payable. The A m o u n t s of Insurance and the Pure E n d o w m e n t A m o u n t s are defined as follows (for varying benefit amounts): GENERAL PROVISIONS 1.

Grace Period

After the payment of the initial premium, any p r e m i u m due must be paid not later than 31 days after its due date. A n y unpaid premium is deductible from the benefits that m a y arise during the 31-day grace period.

Appendix E STANDARD LIFE INSURANCE POLICY PROVISIONS

809

2. Incontestability Except for n o n - p a y m e n t of p r e m i u m s or any other grounds recognized by l a w and jurisprudence, the C o m p a n y cannot contest this Policy after it has b e e n in force during the lifetime of the Insured for t w o (2) years from date of issue of this Policy or of its last reinstatement. 3.

Entire Contract

T h e C o m p a n y issues this Policy in consideration of its application and the receipt of its initial premium. This Policy, its application, a c o p y of w h i c h is attached, and all attached riders and e n d o r s e m e n t s constitute the entire Contract. Only the C h a i r m a n of the B o a r d of Directors, the President, or officers duly authorized in writing by the Board of Directors have the authority to modify this contract. A n y such modification must be in writing and duly signed by the authorized officer. 4.

Effectivity of Policy a n d Policy Date

This policy b e c o m e s effective only u p o n the payment of its initial p r e m i u m and its delivery to the O w n e r while the Insured is alive and in g o o d health. T h e Policy Date, shown in the policy data p a g e will be u s e d to determine p r e m i u m due dates, policy years and policy anniversaries. 5. M i s s t a t e m e n t of A g e T h e age at issue of the insured is his age [last/nearest] birthday as of the Policy Date. 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 p r e m i u m 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 C o m p a n y will refund the corresponding premiums actually received by the Company less any indebtedness under this Policy. 6.

Suicide

In case of suicide by the Insured within the first two (2) years from the date of issue of this Policy or of its last reinstatement,

THE INSURANCE CODE OF THE PHILIPPINES

810

if any, the then pertinent provisions of the Insurance Code, as amended, will apply. Where the suicide is not compensable, the liability of the Company is limited to the refund to the O w n e r of the premiums actually received by the C o m p a n y for the then current policy year without interest, plus the cash value as of the end of the then previous policy year, if any, less all indebtedness under this Policy. 7.

Non-participating/Participating a.

For Non-participating Contracts

This Policy is non-participating and does not share in the divisible surplus of the Company. b.

For Participating Contracts

The C o m p a n y will determine yearly as a dividend that part, if any, of the divisible surplus of the C o m p a n y as m a y be distributed to this Policy. 8. D i v i d e n d s (for participating contracts) Dividends m a y be payable on this Policy as of each policy anniversary date. U p o n written request, such dividends m a y be: (1) paid in cash to the Owner; or (2) applied to any p r e m i u m due; or (3) left to accumulate with interest at a rate set by the Company; or (4) applied as paid-up additional participating [non-participating] life insurance. If no option is elected, Option [ C o m p a n y ' s choice] automatically applies. A n y option elected applies only to subsequent dividends. 9.

Non-forfeiture

If this Policy has an available C a s h Value as set forth in the Table of Non-Forfeiture Values, the O w n e r may, by written request, elect any of the options below. If a premium due is not paid and no option is chosen by the end of the Grace Period, then the Automatic Option provision will apply.

Appendix E STANDARD LIFE INSURANCE POLICY PROVISIONS

811

Option 1. Net Surrender Value (for non-participating contract) T h e O w n e r m a y surrender this Policy for its Net Surrender Value w h i c h is the Cash Value derived from the Table of NonForfeiture Values, less any indebtedness under this Policy. Option 1. Net Surrender Value (for participating contract) T h e O w n e r m a y surrender this Policy for its Net Surrender Value, w h i c h is the C a s h Value derived from the Table of NonForfeiture Values, together with any cash value of paid-up insurance from dividends and remaining dividend accumulation, less any indebtedness u n d e r this policy. Option 2. Paid-Up Insurance This Policy m a y be continued without further premiums as participating [non-participating] Paid-Up Insurance with a reduced a m o u n t of insurance equal to the level amount corresponding to the Net Surrender Value at the then attained age of the Insured for the remaining duration of this Policy. Option contract)

3.

Extended

Term

Insurance

(for

non-participating

This Policy m a y be continued without further premiums as a non-participating Extended Term Insurance with a level amount of insurance equal to the a m o u n t of insurance for the then policy year less any indebtedness under this Policy. T h e duration of the term insurance is w h a t corresponds at the then attained age of the Insured to the Net Surrender Value. If the Net Surrender Value is more than e n o u g h to continue the extended term insurance until the maturity date, the excess is used to provide the corresponding amount of Paid-Up Pure E n d o w m e n t payable to the Owners at maturity date if the Insured is then alive. Option 3.

Extended Term Insurance (for participating contract)

This Policy m a y be continued without further premiums as a participating [non-participating] Extended Term Insurance with a level amount of insurance equal to the amount of insurance for the then policy year less any indebtedness under this Policy. The amount of insurance is equal to the amount of insurance

THE INSURANCE CODE OF THE PHILIPPINES

812

of the life insurance plan for the then policy year together with any then paid-up insurance amount and remaining dividend accumulation. The duration of the term insurance is what corresponds at the then attained age of the Insured to the Net Surrender Value. If the Net Surrender Value is more than enough to continue the extended term insurance until the maturity date, the excess is used to provide the corresponding amount of PaidUp Pure Endowment payable to the O w n e r at maturity date if the Insured is then alive. 10. Policy L o a n At any time after a Cash Value is available under this Policy and while this Policy is in force other than as Extended Term Insurance, the O w n e r m a y obtain a loan for an a m o u n t not exceeding the Cash Value on the sole security of this Policy and its proper assignment. T h e loan will be charged interest at a rate approved by the Insurance C o m m i s s i o n as c o m m u n i c a t e d to the borrower on the date the loan is effected. T h e loan together with interest is payable on or before the next policy anniversary, but, if it is not paid, both loan and interest automatically b e c o m e s a n e w loan on the policy anniversary, on w h i c h interest will be charged at the rate in effect from that date. All loans and their interest are deducted automatically from any amount payable by the C o m p a n y under this Policy. This Policy automatically terminates if the total debt under this Policy exceeds the Cash Value. T h e C o m p a n y m a y postpone the granting of a loan, other than to pay a p r e m i u m due, for not m o r e than six (6) months after receiving the written application for the loan. 11. P r e m i u m L o a n O p t i o n a.

For Non-Participating Contract

If the Premium L o a n Option is elected, any p r e m i u m due remaining unpaid at the end of its Grace Period is automatically paid as a Policy Loan. However, if the Net Surrender Value is not enough, the next smaller m o d e p r e m i u m is paid

Appendix E STANDARD LIFE INSURANCE POLICY PROVISIONS

813

instead, provided this is not less than a quarterly premium. If the N e t Surrender Value is still less than a quarterly premium, this Policy remains in force only for that proportion of a quarter of a year which the Net Surrender Value bears to the quarterly premium. W h e n the N e t Surrender Value b e c o m e s less than the quarterly m o d e p r e m i u m due, the O w n e r will be informed in writing of the remaining term of coverage. b.

For Participating Contract

If the P r e m i u m L o a n Option is elected, any premium due remaining unpaid at the end of the Grace Period is automatically paid as a withdrawal from the remaining dividend accumulation and as a Policy Loan for any deficiency in the dividend accumulation. However, if the Net Surrender Value is not enough, the next smaller m o d e premium is paid instead, provided this is not less than a quarterly premium. If still less than a quarterly premium, this Policy remains in force only for that proportion of a quarter of a year which the then N e t Surrender Value bears to the quarterly premium. W h e n the Net Surrender Value becomes less than the quarterly m o d e p r e m i u m due, the O w n e r will be informed in writing of the remaining term of coverage. 12. T a b l e of Non-Forfeiture Values T h e attached Table of Non-Forfeiture Values shows the Cash Values, Paid-Up Insurance amounts and Extended Term Insurance durations. Policy Values beyond those shown in this Table are available upon written request. Except for the years and days under Extended Term Insurance, all values shown are on the basis of per thousand of policy amount. 13. Automatic O p t i o n If a premium due remains unpaid and no option is chosen by the Owner at the end of the Grace Period, the Company's choice: Net Surrender Value, Paid-Up Insurance or Extended Term Insurance Option is deemed to have been chosen.

THE INSURANCE CODE OF THE PHILIPPINES

814

14. Settlement Option Settlement options other than lump sum are available upon written application to the Company. 15. R e i n s t a t e m e n t Subject to the approval of the Company, this Policy m a y be reinstated at any time within three (3) years from the due date of the premium in default provided: a. the policy has not b e e n surrendered for cash or converted to Extended Term Insurance which has expired; b. a written application for reinstatement is submitted to the C o m p a n y together with evidence of insurability of the Insured satisfactory to the C o m p a n y ; and c. all amounts necessary to put the Policy in force are received by the Company. 16. Important Notice The Insurance Commission, with offices in Manila, is the government office in charge of the enforcement of all laws relating to insurance and has supervision over insurance companies. It is ready at all times to render assistance in settling any controversy between an Insurance C o m p a n y and a policyholder relating to insurance matters. OPTIONAL PROVISIONS 1.

Assignment

T h e C o m p a n y is not b o u n d by any assignment of this Policy unless duly endorsed on this Policy. T h e C o m p a n y assumes no responsibility for the effect, sufficiency or validity of any assignment. T h e C o m p a n y has the right not to endorse any reassignment by any assignee. 2.

Claim Settlement

For any claim under this Policy, this Policy must be submitted at the office of the C o m p a n y together with due proof for the claim and all other requirements satisfactory to the Company.

Appendix E STANDARD LIFE INSURANCE POLICY PROVISIONS

3.

815

Beneficiary

T h e Beneficiaries are the persons designated to receive the proceeds of this Policy u p o n the death of the insured. Unless otherwise changed, the Beneficiaries are as designated in the attached application for this Policy. If all Beneficiaries are designated as "revocable," the O w n e r m a y delete any Beneficiary or designate n e w Beneficiaries and exercise any and all other rights and privileges under this Policy while in force. If any Beneficiary is designated "irrevocable," notwithstanding any contrary provision, the consent of all such irrevocable Beneficiaries is required before the O w n e r can exercise any and all other rights and privileges under this Policy. Beneficiaries are classified either as a primary Beneficiary or as a secondary (or contingent) Beneficiary. Surviving Beneficiaries in the s a m e beneficiary classification share equally in the death benefit proceeds for that Beneficiary classification, unless otherwise specified. T h e death benefit proceeds are payable to primary Beneficiaries surviving at the death of the Insured; if no primary Beneficiary survives the insured, to secondary Beneficiaries surviving at the death of the insured; or if no Beneficiary survives the insured, to the o w n e r if alive, otherwise, to the estate of the Insured. T h e O w n e r can change any beneficiary or beneficiaries designated by written notice satisfactory to the Company, together with the written consent of all irrevocable Beneficiaries, subject to any assignment of the Policy in the records of the Company. 4.

Premium

All premiums are payable at the Head Office or other duly designated offices, or to duly authorized agents. The m o d e of premium payments is as stated in the Application for this Policy unless changed subject to rules in effect at the time of such change.

THE INSURANCE CODE OF THE PHILIPPINES

816

5. Limitation of Action No legal action on this Policy m a y be filed after five (5) years from the time the cause of action accrues. 6.

Currency

All amounts of m o n e y in this Policy are in the legal currency of the Philippines. The provision of Article 1250 of the Civil C o d e of the Philippines (R.A. No. 386.) which reads: "In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of p a y m e n t x x x . " is understood and agreed not to apply in determining the extent of any liability of the C o m p a n y in this Policy. SPECIAL PROVISIONS 1.

Term Plans with no cash values (a) Forfeiture This Policy has no cash value. (b) Policy loan No loan including P r e m i u m L o a n is available in this Policy.

2. Term Plans with cash values (a) Policy loan No loan including P r e m i u m L o a n is available in this Policy. (b) Non-Forfeiture Provisions — s a m e as for permanent plans. OPTIONAL PROVISIONS FOR TERM PLANS 1. Optional Conversion N u m b e r of years such conversion is allowed and m a n n e r of computation for b a c k premiums are left to C o m p a n y ' s discretion.

Appendix E STANDARD LIFE INSURANCE POLICY PROVISIONS

817

Following is a sample: This Policy, if in force, m a y be converted without evidence of insurability to a n e w policy on the Insured at any time ([a] or [b]) (a)

before the Policy Anniversary.

(b)

prior to age of the Insured.

T h e n e w Policy m a y be on any w h o l e life insurance or e n d o w m e n t plan with level a m o u n t of insurance then being issued by the C o m p a n y T h e a m o u n t of insurance of the n e w policy m a y not be m o r e than the then a m o u n t of insurance of this Policy. T h e n e w p r e m i u m s will be b a s e d on rates then in use for the then attained age of the Insured, and the applicable risk class u n d e r this Policy. T h e conversion b e c o m e s effective only u p o n approval by the C o m p a n y of the proper written application for the conversion duly signed by the Owner, all assignees, and all irrevocable Beneficiaries; and u p o n receipt of the full initial premium for the n e w policy. 2.

Renewal

Left to the C o m p a n y ' s discretion, although not needed if renewal terms are included in the schedule of benefits and premiums. Following is a sample: If at the end of the term of this Policy, the insured has not reached age , the Policy m a y be renewed for the period shown in the schedule of Benefits and Premiums. Renewal will be effective u p o n p a y m e n t of the p r e m i u m corresponding to the Insured's attained age. If under the terms of a rider providing benefits in the event of a total and permanent disability attached to this Policy, a premium due at the end of the term of this Policy would be waived. This Policy will automatically be renewed in accordance with this renewal provision.

— 0O0 —

Appendix "F" COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE COVERAGE

(INS. MEMO. CIR. NO. 4.06, JULY 26, 2006.)

SUBJECT

:

Compulsory Motor (CMVLI) Coverage

Vehicle

Liability

Insurance

TO

:

All Non-Life Insurance Companies, Insurance Brokers, Insurance Adjusters and All Others Concerned

In the interest of the public and pursuant to the authority vested in me by the provisions of Section 4 1 4 in relation to Chapter VI of the Insurance C o d e of 1978, the Limits of Liability, Schedule of Indemnities for Bodily Injury a n d / o r Death, and Premium Rates prescribed under Insurance M e m o r a n d u m Circular No. 1-96 dated N o v e m b e r 4 , 1 9 9 6 are hereby revised as follows: I.

L I M I T S OF L I A B I L I T Y

The limits for third party liability for all C M V L I coverage shall be O n e H u n d r e d T h o u s a n d Pesos (P100,000.00) each for all types of motor vehicles with an additional O n e H u n d r e d Thousand Pesos (P100,000.00) for passenger liability if the motor vehicles is used as a public utility vehicle. II. S C H E D U L E O F I N D E M N I T I E S F O R B O D I L Y I N J U R Y AND/OR DEATH T h e following Schedule of Indemnities shall be observed in the settlement of claims for death, bodily injuries, professional fees and hospital charges for services rendered to traffic accident victims under the C M V L I policy. 818

Appendix F COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE COVERAGE

A.) D E A T H I N D E M N I T Y Burial and Funeral Expenses B.)

30,000.00

BODILY INJURIES A N D FRACTURES

Types of Accommodation Or Professional Attendance Extended 1.

P70,000.00

Hospital Rooms

Maximum Reimbursable Fees and/or Services Rendered Maximum of 45 days per accident

Charges P500.00/day 2,000.00

Laboratory Examination, fees, x-rays 2.

Surgical Expenses

Major Operation Medium Operation Minor Operation

7,500.00 5,000.00 1,500.00

3.

Anaesthesio- Major Operation logisf s Fees Medium Operation Minor Operation

2,500.00 2,000.00 500.00

4.

Operating Room

Major Operation Medium Operation Minor Operation

1,500.00 1,000.00 500.00

5.

Medical Expenses

For daily visits of Practitioner or specialists The total amount of medical expenses must not exceed (For single period of confinement)

6.

7.

Drugs and Medicines

Ambulance

Actual value of drugs and medicines used but not to exceed Actual amount charged for ambulance transport but not to exceed

P400.00/day

5,000.00

20,000.00

1,500.00

THE INSURANCE CODE OF THE PHILIPPINES

820

PERMANENT DISABLEMENT

AMOUNT

Loss of or Loss of Use of: Two limbs

50,000.00

Both hands, or All fingers or Both thumbs

50,000.00

Both feet

50,000.00

One hand and one foot

50,000.00

Sight of both eyes

50,000.00

Injuries resulting in being permanently bedridden

50,000.00

A n y other injury causing permanent total disablement

50,000.00

A r m at or above elbow

20,000.00

A r m between elbow and wrist

15,000.00

Hand 15,000.000 Four fingers and t h u m b of one h a n d

15,000.00

Four fingers

12,000.00

Let at or above knee

20,000.00

Leg below knee

15,000.00

One foot

15,000.00

All toes of one foot

10,000.00

Thumb Index

8,000.00 finger

Sight of one eye

6,000.00 20,000.00

Hearing — both ears

30,000.00

Hearing — one ear

15,000.00

III. NO FAULT I N D E M N I T Y A n y 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 P15,000.00 for all m o t o r vehicles. IV. Set forth h e r e u n d e r are the respective rates of p r e m i u m for one-year and three-year C M V L I coverage.

Appendix F COMP' 'LSORY MOTOR VEHICLE LIABILITY INSURANCE COVERAGE

VEHICLE CLASSIFICATION

BASIC PREMIUM

DST 12.50%

EVAT 12.00%

LGT TOTAL 0.75% PREMIUM

For One-Year CMVL/ Coverage 1.

Private Cars (including jeeps & Utility Vehicles)

447.11

55.89

53.65

3.35

560.00

2.

Light/Medium Trucks (Own Goods) Not Over 3,930 kgs.

487.03

60.88

58.44

3.65

610.00

3.

Heavy Trucks (Own Goods) and Private Buses over 3,930 kgs.

958.08

119.76

114.97

7.19

1,200.00

4.

AC and Tourists Cars

590.82

73.85

70.90

4.43

740.00

5.

Taxi, PUJ and Mini Bus

878.24

109.78

105.39

6.59

1,100.00

6.

PUB and Tourists Bus

1,157.69

144.71

138.92

8.68

1,450.00

7.

Motorcycles / Tricycles / Trailers

199.60

24.95

23.95

1.50

250.00

For Three-Year CMVLI Coverage 1.

Private Cars (including jeeps & Utility Vehicles)

1,285.43

162.67

154.25

9.64

1,610.00

2.

Light/Medium Trucks (Own Goods) Not Over 3,930 kgs.

1,397.21

162.67

167.67

10.48

1,750.00

3.

Heavy Trucks (Own Goods) and Private Buses over 3,930 kgs.

2,746.51

162.67

329.58

20.60

3,440.00

4.

AC and Tourists Cars

1,692.61

162.67

203.11

12.69

2,120.00

5.

Taxi, PUJ and Mini Bus

2,514.97

162.67

301.80

18.86

3,150.00

6.

PUB and Tourists Bus

3,313.37

162.67

397.60

24.85

4,150.00

7.

Motorcycles / Tricycles / Trailers

574.85

162.67

68.98

4.31

720.00

This Circular shall apply to all C M V L I policies that shall be issued on or after January 1,2007.

— 0O0 -

Appendix "G" ISSUANCE

OF BONDS

(INS. MEMO. CIR. NO. 1-7, MARCH 1,1977.)

SUBJECT

TO

:

:

Rules and regulations governing the issuance of bonds in the Philippines in favor of the government and other persons All Non-Life Insurance Companies Doing Business in the Philippines:

Pursuant to the authority granted to the undersigned by Section 414 of Presidential Decree N o . 612, otherwise k n o w n as the Insurance Code, the following rules a n d regulations are hereby promulgated: (1) All b o n d forms which are to be used in the Philippines by an insurance c o m p a n y m u s t at least be in duplicate and m u s t be consecutively and serially pre-numbered, in the m a n n e r indicated in the attached Schedule A, such consecutive serial number to be printed in bold color on the original and copies of such b o n d forms. (2) A n y b o n d form destroyed in the course of preparation shall be plainly m a r k e d with the w o r d "destroyed" and shall be preserved and placed in a separate file by the insurance company concerned. In the event any b o n d form is lost, the insurance company shall submit without delay to the Insurance Commission a sworn statement of its President or Vice-President and Treasurer explaining in detail the circumstances of such loss and definitely stating that such lost b o n d form w a s never issued in favor of anyone. (3) Every insurance c o m p a n y authorized to issue bonds in the Philippines shall maintain a b o n d registry b o o k which shall 822

Appendix G ISSUANCE OF BONDS

823

be open to the public and to duly authorized representatives of the Insurance C o m m i s s i o n during all reasonable business hours. Every b o n d issued by an insurance c o m p a n y shall be entered and recorded in numerical and chronological order in the bond registry book, such entry and record to indicate the consecutive serial n u m b e r of the b o n d issued, the date and place where it had been issued, the face a m o u n t of the bond, the kind of nature of the bond, the nature of the obligation secured by the bond, the agency or instrumentality of the government or the person in w h o s e favor the b o n d h a d b e e n issued, as well as an indication that the b o n d is outstanding or h a d b e e n cancelled. Should such b o n d registry b o o k be lost or destroyed or should any p a g e or p a g e s thereof be r e m o v e d therefrom, the insurance c o m p a n y to w h i c h such b o n d registry b o o k belongs shall submit without delay to the Insurance Commission a sworn statement of its President or Vice-President and Treasurer explaining in detail the circumstances of such loss, destruction or removal. A n d an insurance c o m p a n y which b o n d registry b o o k h a d b e e n lost or totally destroyed shall immediately desist from issuing n e w b o n d s until such lost or totally destroyed bond registry b o o k shall h a v e b e e n reconstituted. In case any page or pages of a b o n d registry b o o k had b e e n removed therefrom, a reconstitution of such p a g e or pages should be made without delay by the insurance c o m p a n y concerned. (4) Should the certificate of authority granted to an insurance company be suspended or revoked by the Insurance Commissioner, the insurance c o m p a n y concerned shall, without delay, surrender its b o n d registry b o o k as well as all its unused bond forms to the Insurance Commissioner or to his duly authorized representatives. (5) All insurance companies authorized to issue bonds in the Philippines are hereby prohibited from issuing signed blank b o n d forms to their agents. (6) Every insurance company must install nine (9) liability registers corresponding to the general classifications in Schedule A. In addition, a subsidiary liability register for each type of bond falling under any of the general classifications must be

824

THE INSURANCE CODE OF THE PHILIPPINES

maintained where every bond issued shall be entered and recorded in numerical and chronological order. Violation or non-compliance with any of the above rules and regulations shall constitute a sufficient ground for the suspension or revocation of the certificate of authority granted to the insurance c o m p a n y concerned as well as the certificate of its officers, general agents, and agents under Section 247 of the Insurance C o d e and for the imposition of such other sanctions as those mentioned in Section 4 1 5 of the same Code. This Insurance M e m o r a n d u m Circular supersedes Circular No. 66 dated September 19, 1966 of the Office of the Insurance Commissioner and shall take effect immediately u p o n its approval by the Secretary of Finance. (Approved by the Secretary of Finance, March 11,1977.) SCHEDULE A (1) For purposes of the foregoing Insurance M e m o r a n d u m Circular, bond forms c o m m o n l y issued by an insurance c o m p a n y shall be classified and shall bear the abbreviated s y m b o l s or codes and shall be pre-numbered by prefixing the abbreviated symbols or codes to the proposed serial n u m b e r as indicated hereunder: Class o f B o n d J U D I C I A L CIVIL Administrator B o n d Appeal B o n d Attachment, B o n d to Lift Attachment B o n d Guardian's B o n d Heirs B o n d Heirs B o n d (Two Years) Injunction B o n d Injunction B o n d To Lift Receiver's B o n d Receiver, B o n d To Appoint Receiver, B o n d To Lift Replevin B o n d

Symbol JCL JCL(l) JCL(2) JCL(3) JCL(4) JCL(5) JCL(6) JCL(7) JCL(8) JCL(9) JCL(IO) JCL(ll) JCL(12) JCL(13)

Number

00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001

Appendix G ISSUANCE OF BONDS

Replevin Bond, Counter Supersedeas Etc.

825

JCL(14) JCL(15) JCL(-)

00001 00001 00001

JUDICIAL CRIMINAL Appeal Bond Bail B o n d

JCR JCR(l) JCR(2)

00001 00001

FIREARMS

F

Firearm B o n d P6.00 — P10.00 Firearm B o n d , R O T C A r m o r y Firearm D e a l e r ' s B o n d INTERNAL REVENUE Cigarette S t a m p B o n d Internal R e v e n u e B o n d (Payment of Deficiency Taxes) Internal R e v e n u e B o n d (Payment of Taxes U n d e r Protest)

F(l) F(2) F(3)

00001 00001 00001

IR

IR(D

00001

IR(2)

00001

IR(3)

00001

CUSTOMS Advance Baggage Bond Anti-Dumping Bond Arrastre B o n d Berthing B o n d C o m m o n Carrier B o n d Compensating Tax B o n d B r o k e r ' s B o n d , Customs Export B o n d Export Bond, R e General Importers B o n d General B o n d e d Warehouse Surety B o n d Wharfage B o n d Etc.

C C(l) C(2) C(3) C(4) C(5) C(6) C(7) C(8) C(9) C(10) C(ll) C(12) C(13) C(-)

00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001

GUARANTY Bid Bond, Standing Bid Bond, O n e Bid Only Broker's Bond, Merchandise

G G(l) G(2) G(3)

00001 00001 00001

826

THE INSURANCE CODE OF THE PHILIPPINES

Broker's Bond, Pawnshop Broker's Bond, Real Estate Broker's Bond, Ship Broker's-Dealer's B o n d — Stock Fishpond Bond Forestry Bond Guaranty Payment Manufacturer's Official B o n d Payment B o n d Performance B o n d Reconstituted Title B o n d Reconstituted Title B o n d (2 yrs.) Surety B o n d Sweepstake B o n d (One D r a w ) Sweepstake B o n d (One Year) Warehouse, Rice B o n d e d Etc.

G(4) G(5) G(6) G(7) G(8) G(9) G(10) G(ll) G(12) G(13) G(14) G(15) G(16) G(17) G(18) G(19) G(-)

00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001 00001

FIDELITY Fidelity B o n d (Blanket) Fidelity B o n d (Individual)

FID FID(l) FID(2)

00001 00001

PROMISSORY NOTE Promissory Note

PN PN

00001

IMMIGRATION Immigration B o n d

IM IM

00001

(2) All b o n d forms issued by the regional or b r a n c h offices of an insurance c o m p a n y must follow the s a m e pattern of numbering as prescribed in the preceding paragraph and further prefixing thereto the complete or abbreviated n a m e of the official station of the regional or b r a n c h offices. For instance, the C e b u branch office of an insurance c o m p a n y w h i c h issues a Bail Bond must indicate this n u m b e r on the bond: CEBU/JCR(2) —00001

or

C E B / J C R ( 2 ) — 00001

(3) All bond forms which are not standard in nature or which are seldom used by an insurance company in view of the fact that

Appendix G

ISSUANCE OF BONDS

827

the obligees dictate their o w n terms and conditions on the bonds must likewise be n u m b e r e d in accordance with paragraph 1 of this Schedule. 1

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'The following rules govern the issuance of judicial bonds by all non-life insurance companies authorized to become surety upon official recognizances, stipulations, bonds and undertaking: (1) Judicial bonds can only be issued by the head office or branches and district offices of insurance companies, duly registered with the Insurance Commission to the exclusion of others; (2) The insurance company issuing judicial bonds shall confirm every first 10 days of the following month, the bonds it had issued to a particular court, copy furnished the Supreme Court and the Insurance Commission. However, in the event that the court requests for a special or an urgent verification of a particular bond, the insurance company shall act upon it within three (3) working days from date of receipt and forward a copy to the Insurance Commission; (3) Penalties. — (a) For failure to submit the list of judicial bonds a company has issued for a particular month within 10 days of the following month, a penalty of P500.00 day of delay; (b) For failure to act on the court's request within three (3) working days from receipt of the request, a penalty of P500.00 per day of delay; and (c) For failure to comply with any of the foregoing rules, a surety company cannot invoke the defense that the bond in question is a fake bond and hence, shall be liable to pay its obligation under the bond. (Ins. Memo. Cir. No. 1-2000, Nov. 13, 2000.)

Appendix "H" MINIMUM REQUIREMENTS FOR APPROVAL OF INSURANCE PLANS/FORMS

(CIR.

LETTER NO.

11/90 CL, JULY 10,1990.)

SUBJECT

:

Minimum requirements for the approval of insurance plans/forms for policy, certificate or contract of insurance, application, rider, clause, warranty or endorsement

TO

:

All life insurance companies doing business in the Philippines

Pursuant to Section 2 2 5 of the Insurance Code, which provides that, " N o policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner, a n d 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 forms of such application, rider, clause, warranty or endorsement h a s b e e n approved by the Commissioner," the following m i n i m u m requirements are hereby promulgated: I.

New Plans/Forms A. For plans to be sold as basic policy. 1. The documents to be submitted shall consist of the following: a.

two (2) copies of final draft of policy form:

b. brief and concise description of the insurance plan(s) for which the policy is to be used; 828

Appendix H MINIMUM REQUIREMENTS FOR APPROVAL OF INSURANCE PLANS/FORMS

g2g

c. complete table of gross premium rates including policy fee, if any; d.

actuarial notes enumerating the following:

1. formulations and assumptions used in asset share studies; 2. valuation bases used in the determination of legal policy reserves and other reserves on contract of insurance, including any special reserves as m a y be required by the Insurance Code; 3. bases used in the computations of nonforfeiture values. e. asset share calculations for the complete duration of the policy, or 20 policy years, whichever is shorter, for decennial ages which shall contain, a m o n g others, the following: 1.

gross p r e m i u m

2. direct expenses such as commissions, d o c u m e n t a r y stamp tax, p r e m i u m tax, etc. 3.

mortality rates

4.

withdrawal rates

5.

death benefit cost

6.

surrender cost

7.

increase in reserves

8.

contribution to general expenses (optional)

f. schedule of terminal reserves for the same duration as stated in (e) for decennial ages including the corresponding net valuation premiums. *g.l. table of non-forfeiture values available under the policy for the same duration as stated in (e) for decennial ages upon initial filing.

'Whenever applicable.

830

THE INSURANCE CODE OF THE PHILIPPINES

2. table of non-forfeiture values available under the policy for the entire duration of the plan or 20 years, whichever is shorter, for all ages upon submission of printed forms. h. a short-form actuarial report (letter-form) prepared and signed by the duly accredited Actuary of the company for the plan(s) which shall contain in substance the following: 1. a statement certifying that the actuarial formulations used are accurate and in accordance with generally accepted actuarial principles; 2. a statement of opinion that the actuarial assumptions used in the p r e m i u m rates and valuation bases used in the calculation of legal policy reserves, and other reserves on contract of insurance including any special reserves as m a y be required by the Insurance C o d e are adequate and bear reasonable and appropriate relationship to the c o m p a n y ' s experience; *3. a statement certifying that the cash surrender values and one or m o r e paid-up benefits available under the policy are c o m p u t e d in accordance with the pertinent provisions of the Insurance Code. T h e abovestated report shall: a.

mention the n a m e of plan(s);

b. be addressed to the Insurance C o m m i s sioner in a letterhead stationery, either of the C o m p a n y or that of the Actuary; and c. indicate the position/title of the Actuary in the c o m p a n y and his privilege tax receipt number. Enclosed is a sample of short-form actuarial report. (Annex " A . " ) 'Whenever applicable.

Appendix H MINIMUM REQUIREMENTS FOR APPROVAL OF INSURANCE PLANS/FORMS

i. Illustrative policies.

dividends

for participating

2. T h e specimen policy, certificate or contract of insurance shall contain the following: a. the name, address (in case of foreign company, the local address should be indicated), telephone n u m b e r ( s ) tax account n u m b e r of the company; b. a statement that documentary stamps are affixed and properly cancelled with respect to the policy; c. the applicable term, whether PARTICIPATING or N O N - P A R T I C I P A T I N G , in b o l d letters, preferably on the face of the policy; d. provision for necessary blank spaces, with the corresponding headings for the descriptive title or n a m e of any rider, clause, warranty or endorsement as m a y be attached to the policy; and e. in substance, the applicable provisions as specified u n d e r Chapter III, Title 9. Policy Forms or Title 10. Variable Contracts, and other provisions w h i c h the c o m p a n y m a y d e e m necessary for the insurance plan; f.

the provision:

" T h e Insurance Commission, with head office at United Nations Avenue, Manila, is the G o v e r n m e n t Office in charge of the enforcement of all laws relating to insurance and has supervision over insurance companies. It is ready at all times to render assistance in settling any controversy between an insurance company and a policyholder relating to insurance matters." B.

For application(s) and related form(s) 1. T h e documents to be submitted shall consist of the following: a. two (2) copies of the final draft of the form(s); and

THE INSURANCE CODE OF THE PHILIPPINES

832

b. types of all insurance plans/policies for which the form(s) i s / a r e to be used. 2.

The form(s) shall contain, among others: a. the applicant's choice of premium default option (Premium Loan; or any of the paid-up options; and b. the applicant's designation.

choice

of

beneficiary

C. For riders, clauses, warranties and endorsements to be attached to basic policies. The documents to be submitted shall consist of the following: 1.

two (2) copies of the final draft of the form(s);

2. brief and concise description of the feature/ mechanics of the attachment(s); 3. types of all insurance p l a n s / p o l i c i e s to which the form(s) i s / a r e to be attached; and 4. II.

all applicable items under A above.

Revised Plans/Forms

For revision/ modification of existing plan(s) a n d / o r form(s), the documents to be submitted shall consist of the following: A. all applicable items under I. A, B, C, as the case m a y b e ; B. specimen copy of the form(s) being revised clearly indicating which particular provisions are r e v i s e d / m o d i f i e d , as the case m a y be; and It is understood that the policy, certificate, or other evidence of contract of insurance shall conform with the pertinent provisions of the Insurance Code.

Appendix H MINIMUM REQUIREMENTS FOR APPROVAL OF INSURANCE PLANS/FORMS

gjg

A n n e x "A" Sample of Short F o r m Actuarial Report Date

T h e Insurance C o m i s s i o n e r 1071 United Nations Avenue Ermita, M a n i l a Madam: I hereby certify that the actuarial formulations used for are accurate and in accordance with generally accepted actuarial principles, and, in my opinion, the actuarial assumptions therefor, such as the mortality, withdrawal, interest, a n d expenses, are adequate and bear a reasonable and appropriate relationship to the c o m p a n y ' s experience. *Further, I hereby certify that the cash values and paidup benefits are c o m p u t e d in accordance with the pertinent provisions of the Insurance Code.

Very truly yours,

N a m e of Accredited Actuary Position/Title P T R No.

— 0O0 —

"Whenever applicable.

Appendix "I" PRESIDENTIAL D E C R E E NO. 530

G R A N T I N G C H A R T E R T O T H E "ASIAN I N S T I T U T E O F I N S U R A N C E , INC." T O O R G A N I Z E A S A N O N - S T O C K , NON-PROFIT CORPORATION. W H E R E A S , insurance is vital to the socio-economic life of a country; W H E R E A S , in m a n y countries of Asia, domestic insurance companies do not find facilities to educate and train their personnel in insurance and in insurance m a n a g e m e n t ; W H E R E A S , the Philippines h a s earned in East Asia a reputation for leadership in various fields, a m o n g w h i c h are insurance, insurance education and m a n a g e m e n t ; W H E R E A S , consonant with this leadership in insurance, insurance education and m a n a g e m e n t , it b e h o o v e s the Philippines to set up to offer to its Asian neighbors the facilities they need and lack for insurance education training and m a n a g e m e n t ; W H E R E A S , such facilities as w o u l d enable the Philippines to discharge this assumed responsibility with effectiveness and prestige would require both capable people and financing in a significant amount; W H E R E A S , there are capable individuals and entities in the Philippine Insurance Industry interested to set up a non-stock, non-profit institution that w o u l d carry out the purposes and aims as hereinabove stated, with the e n d in v i e w of establishing in this country a center of learning for insurance in Asia particularly Far East Asia; W H E R E A S , if given proper incentives the financing needed might be raised from persons and entities, both within and 834

Appendix I PRESIDENTIAL DECREE NO. 530

835

outside the Philippine Insurance Industry, w h o will contribute to the Institution by w a y of donation, bequest, endowment, or other forms; NOW, T H E R E F O R E , I, F E R D I N A N D E. M A R C O S , President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and decree: S E C T I O N 1. A n y provisions of law, decree, executive order, administrative order, letter of instruction, or rules and regulations to the contrary notwithstanding, there shall be created a nonstock and non-profit corporation to be called and n a m e d the " A S I A N I N S T I T U T E O F I N S U R A N C E , INC."' t o carry out the purposes of this decree as hereinabove enunciated and to form, establish and operate an Institute for the purpose to ensure its continuous existence for a period of 50 years. T h e Insurance C o m m i s s i o n e r shall approve, the Articles of Incorporation and B y - L a w s of the " A s i a n Institute of Insurance, Inc." to ascertain in the carrying out of the purposes herein enunciated and u p o n approval of the said Articles and By-Laws, the s a m e shall be forwarded to and recorded in the office of the Securities and E x c h a n g e C o m m i s s i o n . S E C . 2. This Decree shall take effect and shall be implemented immediately. D O N E in the City of Manila, this 7th day of August, in the year of O u r Lord, nineteen hundred and seventy-four.

— oOo —

'In 1975, it became the Insurance Institute for Asia and the Pacific (IIAP). Its board of trustees is composed of 15 members, among the foreign members are insurance companies from all the ASEAN nations as well as those from China.

Appendix "J" PRESIDENTIAL D E C R E E NO. 1270

AUTHORIZING THE ORGANIZATION AND LICENSING OF A PROFESSIONAL REINSURER TO BE K N O W N AS THE NATIONAL REINSURANCE CORPORATION OF THE PHILIPPINES A N D DESIGNATING SAID CORPORATION AS T H E N A T I O N A L I N S T I T U T I O N T H A T W I L L S U B S C R I B E TO THE CAPITAL STOCK OF T H E ASIAN R E I N S U R A N C E CORPORATION. W H E R E A S , it is the policy of the state to p r o m o t e and develop a strong national insurance industry and to provide for its integration in the country's e c o n o m i c and social development; W H E R E A S , in line with this policy, there is a pressing need to provide a well-coordinated a n d efficient m a c h i n e r y in reinsurance for the purpose of achieving a higher national retention indispensable to the growth of healthy insurance and reinsurance markets; W H E R E A S , in line also with this policy, it is desirable to utilize the regional retention capacity to the m a x i m u m by participating in regional or international cooperation or arrangement in insurance and reinsurance; W H E R E A S , the Republic of the Philippines on S e p t e m b e r 30, 1977 signed the Agreement establishing the A s i a n Reinsurance Corporation; W H E R E A S , there is a need to h a v e an organization through which the Philippine insurance and reinsurance markets m a y participate in the Asian Reinsurance Corporation or in any other regional or international cooperation or arrangement in insurance and reinsurance;

836

Appendix J PRESIDENTIAL DECREE NO. 1270

837

W H E R E A S , Article III, Section 2, of the said Agreement establishing the Asian Reinsurance Corporation allows a Member-State to designate and authorize a national institution to subscribe to and purchase the shares of capital stock allotted to a Member-State; NOW, T H E R E F O R E , I, F E R D I N A N D E. M A R C O S , President of the Republic of the Philippines, by virtue of the powers vested in me by the Constitution do hereby decree, order and m a k e as part of the law of the land the following: S E C T I O N 1. National Reinsurance Corporation of the Philippines: Authority to license. — A n y provision of law, decree, executive order, administrative order, letter of instruction, or rules and regulations to the contrary notwithstanding, authority is hereby granted to the Insurance C o m m i s s i o n e r to license a corporation to be organized under the provisions of Act No. 1459, otherwise k n o w n as the Corporation Law, as a professional reinsurer under Presidential Decree N o . 612, otherwise k n o w n as the Insurance Code, which corporation shall be k n o w n as the "National Reinsurance Corporation of the Philippines." 2

3

S E C . 2. T h e Insurance C o m m i s s i o n e r shall approve the Articles of Incorporation and B y - L a w s of the said corporation to ascertain the carrying out of the purposes herein above-enumerated and, upon approval of the said Articles of Incorporation and ByLaws, shall forward the same to the Securities and Exchange C o m m i s s i o n for registration. S E C . 3. T h e National Reinsurance Corporation of the Philippines is hereby designated as the national institution authorized to subscribe to the portion of the capital stock of the Asian Reinsurance Corporation allotted to the Republic of the Philippines in the amount of US$500,000. T h e Insurance Commissioner is hereby designated as the Philippine representative to the Council of M e m b e r s of the Asian Reinsurance Corporation. S E C . 4. U p o n the commencement of operations of the National Reinsurance Corporation of the Philippines, all non2

Now, Bates Pambansa Big. 68, otherwise known as the Corporation Code of ippines. 'Now, Presidential Decree No. 1460.

838

THE INSURANCE CODE OF THE PHILIPPINES

life insurance and reinsurance companies doing business in the Philippines shall cede to the National Reinsurance Corporation of the Philippines at least ten percent (10%) of their outward reinsurance placed with unauthorized foreign reinsurers, and all life insurance companies doing business in the Philippines shall cede to the National Reinsurance Corporation of the Philippines at least ten percent (10%) of all n e w reinsurance placed which would otherwise be outward foreign reinsurance as well as of the renewals of such n e w reinsurance placements. The aforesaid compulsory cessions from insurance companies shall be accorded the best terms and conditions afforded by the existing treaties. S E C . 5. Effectivity. — This Decree shall take effect immediately. D O N E in the City of Manila, this 2 2 n d day of D e c e m b e r in the year of O u r Lord, nineteen hundred and seventy-seven.

— oOo —