Double Insurance Reinsurance Notes

Page |1

Title XI Double Insurance Section 93. A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. Section 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 the insurers are severally liable under the respective contracts; (b)Where the policy under which the insured claims is 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 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 ratable to the loss in proportion to the amount for which he is liable under his contract.

Page |2

Title XII Reinsurance Section 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. *”Such” should be “an.”

Section 96. Where an insurer obtains reinsurance, except under reinsurance treaties, he must communicate all the representation of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk. Section 97. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage. Section 98. The original insured has no interest in a contract of reinsurance.

Page |3

Title XI Double Insurance Section 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: • •

• •

A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. In insurance contracts, the terms “additional insurance,” “other insurance,” and “double insurance” are used interchangeable, although there is a technical difference in their meanings. In double insurance, there is co-insurance (Section 157) by two or more insurers; Hence, it is also known as “co-insurance.”

Section 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.

Requisites of Double Insurance * Based on Section 93, it is clear that double insurance

is present if the following requisites will concur: a. the same person is insured; b. there are two or more insurers that insured the person separately c. the insurance is over the same subject; d. the same interest is involved; and e. the same peril is insured against. Examples:

Page |4

(1) There is double insurance if the owner of the a house will insured it with two insurers. = Mr. X owns a house and he insures it with ABC Insurance Corp. against fire for P500K and XYZ Insurance Corp. also against fire for P600K. = the same person is insured, Mr. X and there are two insurers, ABC and XYZ. The two policies cover the same subject matter, the house of Mr. X and the same interest of Mr. X as owner is involved. = In addition, the same peril is insured against, fire. (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. (Section 8) (3) There is not double insurance if the owner and lessee of the same house insures the same with two insurers. For instance: = If Mr. A owns a house which he leased to Mr. B, there will be no double insurance if Mr. A will insure the house with ABC Insurance Corp., and Mr. B will insure it to XYZ Insurance Corp. = Two separate interests are insured by different person. (4) 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 (5) There is no double insurance if the mortgagor and the mortgagee separately insures the mortgaged property. = the two insurance policies do not involved the same interest. (Geagonia vs. CA No. 114426, 6 Feb. 1995) (6) Mr. X owns a house and he insures it with ABC Insurance Corp. against fire for P500K and with XYZ Insurance Corp. against flood for P600K. = there is no double insurance because although the same person and subject are involved in both insurance policies, the peril insured against are different.

Page |5

(7) It should be noted that there can be double insurance in life insurance but there can never be over-insurance. = the life of a person can be insured for any amount and it would be inadequate because of the intrinsic value of life.

Double Insurance distinguished from OverInsurance * Double insurance is different from over-insurance Over-insurance

Double insurance

There is over-insurance when the amount of the insurance is beyond the value of the insured’s insurable interest.

There may be no overinsurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured. In over-insurance there In double insurance there may be only one insurer are always several insurers involved. * From the above explanation, double insurance and over-insurance may exist at the same time or neither may exist at all. * Double insurance is the term used instead of “coinsurance” when the sums insured exceed the insurable interest. * In such case, there is “over-insurance” by “double insurance.” Examples: (1) If X’s insurable interest in a house is P1M and he insured it with Y Company for P1.1M, there is over-insurance but there is no double insurance. On the other hand, if he insures the same house with Y Co. for P600K and Z Co. for P400K, there is double insurance but there is not over-insurance. If the amount of insurance with Z Co. is P450K, there is not only double insurance but also over-insurance.

Page |6

Now if X procures only one policy for the amount of P1M or a lesser amount, there is neither double insurance nor overinsurance. Notes from Aquino Book OVER INSURANCE BY DOUBLE INSURANCE * There is over-insurance if the insured takes out an insurance over the property insured in an amount which is in excess of the value of his insurable interest. (1) Over-insurance may exist even if there is only one insurer and one policy. = If Mr. A owns a house valued at P500K, there is overinsurance if he insures it with ABC Corp. for P700K. (2) Over-insurance may likewise exist if there is double insurance. = Mr. X owns a house valued at P400K and he insures it with ABC Corp. against fire for P300K and XYZ Corp. against fire for P300K. = there is over-insurance by double insurance. (3) It does not follow, however, that there will be overinsurance if there is double insurance. = in fact, there can under-insurance even if there double insurance. = If Mr. X owns a house valued at P400K and insures it with ABC Corp. against fire for P100K and XYZ Corp. against fire for P100K. = there is double insurance in this case but there is no over-insurance. RULES IN CASE OF OVER-INSURANCE BY DOUBLE INSURANCE * If there is over-insurance by double insurance, it is necessary to determine from whom and how much can the insured recover. * It is also necessary to determine the rights of the insurers inter se. (as among themselves, the insurers) a. In determining the rights of the insured, one indispensable consideration is that an insurance contract is a contract of indemnity.

Page |7

=hence, the insured cannot recover more than what he lost. The insured is not supposed to profit from his loss even if he has two or more insurers. = thus, if there is over-insurance, he cannot recover beyond his loss. = it is well to emphasize, however, that this is true only with respect to property insurance because insurance over the life of a person is not a contract of indemnity and there cannot be over-insurance over the life of any person. b. Refer to Section 94 for the rules in case of overinsurance by double insurance.

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 policy. * Invariably, policies of fire insurance a stipulation or condition that they shall be avoided if additional insurance is procured on the property without the insurer’s consent. (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. = 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. (2)Additional insurance obtained by a third person. –

Page |8

= 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.

Purpose of prohibition insurance • • • • •

against

double

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 loss would be profitable to the insured. There is a great temptation upon dishonest persons, whose property is insured up to its full value or above, to bring about its destruction; And the same considerations undoubtedly tend to lessen the care that may 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 overinsurance.

Notes from Aquino Book OTHER INSURANCE CLAUSE • The implication of the rules on double insurance under the Insurance Code is that double insurance is not prohibited. • However, it may be prohibited by stipulation in what is known as the “Other Insurance Clause.” ALTERNATIVE FORMS. The other insurance clause may appear in different forms. These include the following:

Page |9

(1) A condition that states that procurement of additional insurance without the consent of the insurer renders void the policy ipso facto; (2) A provision that requires the insured to disclose the existence of any other insurance on the property. Otherwise, the contract may be avoided for material concealment; (3) A warranty that there is no other existing insurance over the same property. •

The standard fire policy used by insurance companies usually contains a condition that the insured shall give notice to the insurer of any insurance or insurances already effected, of which may subsequently be effected covering any property or properties and unless such notice is given and the particulars of such insurance or insurances is stated, all benefits under the policy shall be forfeited.

VALIDITY • The validity of the a clause in a fire insurance policy to the effect that the procurement of additional insurance without the consent of the insurer renders ipso facto the policy void is well-settled. • The law also authorizes insurance companies to terminate the contract at any time, at its option, by giving notice and refunding a ratable proportion of the premium. • It was held that an additional insurance, unless consented to, or unless a waiver was shown, ipso facto avoided the contract, and the fact that the company had not, after notice of such insurance, cancelled the policy, did not justify the legal conclusion that it had elected to allow it to continue in force. • The terms of the policy which required the insured to declare other insurances, the statement in question must be deemed to be a statement (warranty) binding on both the insurer and insured, that there were no other insurance on the property.

P a g e | 10

• • •

•

The annotation must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitled the insurer to rescind. Such misrepresentation is fatal. The materiality of non-disclosure of other insurance policies is not open to doubt. (Pioneer Insurance & Surety Corp., vs. Olivia Yap, No. L-36232, 19 Dec. 1974) (Union Mfg. Co., Inc., and Republic Bank vs. Phil. Guaranty Co. Inc., No. L-27932, 30 Oct. 1972)

ADDITIONAL INSURANCE • An interesting case involving the application of “Other Insurance Clause” is Emilio Gonzales La’O vs. Yek Tong Lin Fire and Marine Insurance (YTL) denied the claim for the amount of two insurance policies totaling P100K upon leaf tobacco belonging to La’O, which was damaged by fire that destroyed the building, where said tobacco was stored, on Jan. 11, 1928. • The claim was denied on the ground that the insured obtained additional insurance coverage totaling P190K for the tobacco. • At the time of the fire, the plaintiff had in the warehouse, more than 6,200 bales of leaf tobacco worth P300K or more than the sum total of all the insurances taken out with all the companies. • YTL argued that the claim was validly denied because La’O failed to notify it in writing, of other insurance policies obtained by him, he has violated Art. 3 of the conditions of the policies in question, thereby rendering these policies null and void. • The SC rejected the argument stating: =”It may be said that the tobacco insured in the other companies was different from that insured with YTL, since the number of bales of tobacco in the warehouse greatly exceeded that insured with YTL and other companies put together. = According to the doctrine enunciated in 26 Corpus Juris 188, to be insurance of the sort prohibited the prior policy must have been insurance upon the same subject matter, and upon the same interest therein.”

P a g e | 11

•

= In other words, the SC believed that the “Other Insurance Clause” cannot be invoked if the other insurance only an additional insurance to cover the remaining value of the goods. No recent case involves the very same issue involved in the Gonzalez La’O case cited above. = the doctrine in the same case has not yet been abandoned. However, it is believed that if a similar case will be resolved by the SC, the ruling in the Gonzalez La’O case should already be abandoned because even if the insurance coverage is less than the total value of the goods, the insurance should still be considered an insurance over the same subject matter. = there was no physical segregation of the portion of the goods that were insured, hence, the insurance is over the undivided or ideal portion of the goods.

PROBLEMS: From Aquino Book (1) Pedro Reyes applied for a fire insurance on his house. In his application, it was asked the following question: = “Is the house insured with another insurance company? If so, how much?” = His answer was “No.” = The fact, however, was that the house had been insured with the FGU for P100K. The application was approved and made part of the policy. Subsequently, a fire occurred in the neighboring house, and spread to the house of Pedro which was completely burned. Demand for payment having been refused by the insurer, Pedro filed a complaint. = May he recover? Reason. Answer: No. Pedro may not recover because he was guilty of concealment. The existence of another insurance is a material fact that should have been disclosed to the insurer. = Section 26 of the IC defines concealment as “a neglect to communicate that which a party knows and ought to communicate.” = Section 27 also of the IC, provides further that a “concealment whether intentional or unintentional entitled an injured party to rescind a contract of insurance.” = In the case at bar, there was concealment of the fact that his house was already insured with FGU. Therefore, the

P a g e | 12

Insurance Company may rescind the contract, Pedro may no longer recover.

(2) A fire insurance policy in favor of the insured contained a stipulation that the insured shall give notice to the company of any insurance already effected, covering the property insured and unless such notice be given before the occurrence of any loss, all benefits shall be forfeited. The face of the policy bore the annotation “Co-insurance declared.” The things insured were burned, it turned out that several insurances were obtained on the same goods for the same term. The insurer refused to pay on the ground of concealment. = May the insured recover? Reason. Answer: Yes, the insured may recover from the insurer. The insurer cannot claim that there was material concealment. The problem states that the face of the policy bore an annotation “Co-insurance Declared.” This annotation is notice to the insurer as to the existence of other insurance contracts on the property insured. The insurer should have inquired about the details of such insurance if it was really concern about them. (General Insurance and Surety Corp. vs. Ng Hua, No. L-14373, 30 Jan. 1960)

Section 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 the insurers are severally liable under the respective contracts;

P a g e | 13

(b)Where the policy under which the insured claims is 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 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 ratable 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, 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 ratable to the loss or damage considering that the several insurances cover the same subject matter and interest against the same peril. They apply only where there is over-insurance by double insurance, that is, the insurance is contained in several policies the total amount of

P a g e | 14

•

•

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 (paragraph a) = A owns a house valued at P180,000 and he insures the same with three insurance companies as follows: X Company 60,000 Y Company 180,000 Z Company 240,000 Total 480,000 = 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 the contract. =Thus, A may demand indemnity first from X Co. but the latter is liable only to the extent of P60,000, the amount specified in is policy. = But if A elects to claim payment first from Z Co., A cannot recover more than P180,000 which is the value of his insurable interest. = A may collect P60,000 from each of the insurers, or P180,000 only from Y Co. and nothing from X and Z Co. = The exception allowed by law (i.e., “unless the policy otherwise provides”) applies where the policy contain 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. (Refer to No. 4 of this Example)

P a g e | 15

(2) Where insured claims under a valued policy (paragraph b). = A owns a house valued at P180,000 and he insures the same with three insurance companies as follows: X Company Y Company Z Company Total

60,000 180,000 240,000 480,000

= In case A recovers P60,000 from X Co., he must give credit as against the valuation of P180,000 for the sum of P60,000 thus received by him without regard to his actual loss. = In other words, A may recover only the difference of P120,000 from either Y Co. or Z co. or from both of them so long as the amount recovered does not exceed P120,000. = 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 (paragraph 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, A may recover said amount from the insurers in such order as he may select up to amount for which they are severally liable under their respective insurance contracts. (par a). = If A collects from: X Company Y Company

30,000 90,000 120,000

He can still collect from Z Co. the amount of P30,000, the difference to make up for the loss of P150,000. (150,000 – 120,000 = 30,000) (4) Liability of each insurer to contribute ratable to the loss (paragraph e) = under paragraph (e), each insurer is bound to contribute ratable to the loss in proportion to the amount for which he is liable under his contract.

P a g e | 16

= The formula may be stated as follows: AMOUNT OF POLICY X LOSS = LIABILITY OF THE TOTAL INSURANCE INSURER TAKEN = Thus, in the first example, the pro rata contribution of each of the insurers is as follows: X Co. 60,000/480,000 or 1/8 x 180,000 = P22,500 Y Co. 180,000/480,000 or 3/8 x 180,000 = P67,500 Z Co. 240,000/480,000 or 4/8 x 180,000 = P90,000 TOTAL (sched 1) P180,000 = So, if A is able to receive the amount of P180,000 from Y Co. under paragraph (a) of Section 94, X Co. and Z Co. are liable to Y Co. for their respective shares as indicated above. = However, where there is 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 (paragraph d). = Let us now suppose that A, after receiving P60,000 from X Co., succeeds in collecting the sum of P120,000 and P144,000 from Y and Z, respectively. = Thus, A collected a total sum of: X Company 60,000 Y Company 120,000 Z company 144,000 Total 324,000 = Under paragraph (d), A must hold the amount of P144,000, 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, the following amounts that should be returned to each of the insurer are computed as follows: X Co. 60,000/480,000 or 1/8 x 144,000 = P18,000 Y Co. 180,000/480,000 or 3/8 x 144,000 = P54,000 Z Co. 240,000/480,000 or 4/8 x 144,000 = P72,000 TOTAL (sched 2) P144,000

P a g e | 17

= Pursuant to paragraph (e), X Co. can recover from Y Co. P1,500 and from Z Co. P18,000. = Computed as follows: (a) Pro X Co. Y Co. Z Co. TOTA L X Company

rata contribution of each insurance company 60,000/480,000 or 1/8 x 180,000 = P22,500 180,000/480,000 or 3/8 x 180,000 = P67,500 240,000/480,000 or 4/8 x 180,000 = P90,000 P180,000

Amount X Co. paid to A Less: a. Ratable share in the total insurance (Sched 1) b. Excess to be returned by A (Sched 2) Amount due from Y Co. and Z Co. Amount due from Y Co. Amount due from Z Co. Total

P60,000 (22,500) (18,000) P19,500 P1,500 18,000 P19,500

Computed as follows: Y Company Amount Y Co. paid to A Less: c. Ratable share in the total insurance (Sched 1) d. Excess to be returned by A (Sched 2) Amount due to X Co.

P120,000 (67,500) (54,000) (P1,500)

Z Company Amount Z Co. paid to A Less: e. Ratable share in the total insurance (Sched 1) f. Excess to be returned by A (Sched 2) Amount due to X Co.

P144,000 (90,000) (72,000) (P18,000)

P a g e | 18

Title XII Reinsurance Section 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. *”Such” should be “an.”

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 may sustain or incur under a separate and original contract of insurance with a third party, the original insured.

P a g e | 19

= it has been referred to simply as “an insurance of an insurance”, 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 (Sec. 25, par. 1). = the reinsurance of a reinsurance is called “retrocession.” Section 215, par. 1

No insurance company other than life, whether foreign or domestic shall retain any risk on any one subject of insurance in an amount exceeding 20% of its networth. 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. Maximum retention allowed (under Section 215, par 1) = if the networth of a non-life insurance company is P20M and it insures a building for P4.5M it must reinsure the P500K and amount exceeding 20% of is networth. Without the retention capacity requirement, an insurance company could easily become insolvent if hit by a series of big losses. = As to surety risks, the amount assumed by any other company authorized to transact surety business and the value of the any security mortgaged, etc., for the surety’s protection shall be deducted in determining the risk retained. Example: • X insures his house against fire for P!M with Y Co. Here, the contract is only between X and Y Co. • If Y Co. to relieve itself of any liability or to reduce its potential liability under the contract, reinsures the risk or part of it with

P a g e | 20

•

•

•

Z Co., another contract of insurance is entered into, with Y Co. and Z Co. as the parties. By giving off the whole or some portion of the risk insured, the insurer reduces the amount of its possible loss. Y Co. becomes reinsured, while Z Co. 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 Co. is not bound to pay Y Co. more than the amount actually paid by the latter to X.

Reinsurance distinguished from double insurance: Double insurance

= the insurer remains as the insurer of the original insured = the subject of the insurance is property Double insurance

= is an insurance of the same interest = the insured is the party in interest in all the contract, = the insured has to give his consent

Reinsurance

= the insurer becomes the insured, insofar as the reinsurer is concerned = it is the original insurer’s risk Reinsurance

= is an insurance of a different interest = the original insured has no interest in the contract of reinsurance which is independent of the original insurance contract = the consent of the original insured (who is hardly even aware of the reinsurance transaction) is not necessary

Reinsurance distinguished from Co-insurance Reinsurance

= two separate contracts

Co-insurance

= there is only one

P a g e | 21

are involved = the liability is fixed in a separate contract between different parties = the insured will not shoulder part of the loss contemplated by the reinsurance contract = not mandated by law in marine insurance

Value of reinsurance

contract = the obligation on the part of the insured is fixed by law or in a clause stipulated upon = the insured will share in the loss contemplated by the original contract = co-insurance is provided by law in marine insurance

(1)From the standpoint of the insurer. – = reinsuring companies benefit from contract so reinsurance. (a)Every insurance company, in accordance with its financial strength, establishes a limit on the maximum claim it wishes to pay out of its own resources. The limit is called a “retention.” = at the same time, a company wants its salesman 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 company. 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 many companies are in

P a g e | 22

position to supply insurance protection to applicants requiring large amounts and to applicants who 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 polices 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 own underwriting research. = finally, the reinsurer, benefits through the acquisition of business which is expected to prove profitable in the long run. (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 may obtain it without negotiating with numerous companies; c. It enables the insured to obtain protection promptly, without delay that would be required

P a g e | 23

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 whom the insurance is divided; and e. Small companies are encouraged to divide large exposures for safety and enabled to accept wide variety of applicants. (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 insurance business. Section 96. Where an insurer obtains reinsurance, except under reinsurance treaties, he must communicate all the representation of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk.

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, 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 to him. Thus, policy may be avoided where the reinsured conceals the fact the a loss has taken place or that the property is over-insured where he has knowledge thereof.

P a g e | 24

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, and exconvict 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 reinsurance 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. • 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 insurance • Reinsurance may be placed in effect either automatically or facultatively1 1

Footnote •

Facultative reinsurance treaty = an indemnity reinsurance agreement under which there is no obligation on the part of the insurer to cede or the reinsurer to accept individual risks. = the reinsurer retains the “faculty” to accept or reject each risk offere by the insurer. = the reinsurer’s liability commences after definite approval or acceptance of the risk. = facultative reinsurance is an optional, case-to-case method used when the ceding company receives an application for insurance. The reinsurer is under no obligation to accept the insurance. Its advantage is flexibility since the reinsurance contract can be made to fit a particular case. Each risk to be insured is individually offered to and accepted by or decline by the reinsurer.

P a g e | 25

= the term “facultative” is used in insurance contracts merely to define the right of the reinsurer to accept or not to accept participation in the risk insured. But once the share is accepted, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way – payment of the share of the losses. = a facultative reinsurance contract is not equivalent or a type of facultative obligation contemplated under the NCC. There is facultative obligation under the NCC when only one prestation has been agreed upon but the obligor may render another substitution. There is no alternative nor substitute prestation in reinsurance. = the insurance company originally writing the insurance is called “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 “cedant.” = if the reinsurer, in turn, passes to another insurer 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. (Sec. 280). = It does not write direct insurance, its transaction being limited to insurers.

(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 way 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

P a g e | 26

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. (2)Advantage to insurer. – = the main advantage to the insurer of the automatic method is avoidance of nay delay in issuing its policy. The advantage to the insurer of the facultative method is that is receives the reinsurer’s underwriting opinion before the policy is issued. = on occasion, the reinsurer may have had previous applications or may receive concurrent applications for reinsurance on the same risk from different companies; = for this reason, it may have more complete underwriting information than any single insurer. (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 classification exists, the insurer usually does not use its automatic facility but instead secures the insurer’s underwriting opinion by submitting the case facultatively.

P a g e | 27

Reinsurance treaty distinguished from reinsurance policy Reinsurance Policy

= it is a contract of indemnity one insurer makes with another to the protect the first insurer from a risk it has already assumed

•

• • • • •

Reinsurance Treaty

= is merely an agreement between to 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 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 are contracts of insurance. It is only after a reinsurance cession is made that the obligation of the insurer to pay the reinsurance premium arises.

Section 97. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage.

Nature of contract of reinsurance

P a g e | 28

•

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 payment made 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; and this is true even if the original insured should decide not to enforce his claim against the insurer. (2)Contract, separate from original insurance policy. – = the contract of insurance is independent of and separate from the contract of reinsurance. = the practice is for the reinsurer to pay the insurer even before the latter has indemnified the original insured. (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

P a g e | 29

and conditions of the original policy upon which the reinsurance contract is based. = 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. (5)Rule on subrogation applicable. – = in general, a reinsurer, on payment of loss, acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss.

Section 98. The original insured has no interest in a contract of reinsurance.

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.

P a g e | 30

(2) There is no privity of contract between the original reinsured (or is this insured?) and the reinsurer. = the 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 entitle to avail itself of every defense which the reinsured might urge in an action by the person originally insured. • Thus, the reinsurer is not liable to the reinsured for a loss under the 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 may 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.

Liability of reinsurer to original insured •

The original insured may stand in any of the 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, the

P a g e | 31

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. (2)Contract of reinsurance with stipulation in favor of original insured.= the contract of reinsurance may contain provision whereby the reinsurer binds himself to pay the policyholder any loss for which the insurer may become liable. (Sec 2; Art. 1311, par 2 of CC1) = 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. 1

Footnote:

•

Art. 1311(par 2) “pour au trui” = xxx If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

(3)Contract of reinsurance amounting to novation of original contract. – = the original insured may 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. (Art. 1291[2]) CC2);

P a g e | 32

= 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. (Art. 1293 CC3) = 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.

Footnote: (2) Art. 1291 = Obligations may be modified by: a. Changing their object or principal conditions; b. Substituting the person of the debtor; c. Subrogating a third person in the rights of the creditor. (3) Art. 1293. = Novation which consists in substituting a new debtor in the place of the original one, may be made 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 Art. 1236 and 1237.