Insurance de Leon Doc

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THE
INSURANCE CODE
OF THE
PHILIPPINES
(PRES. DECREE NO. 1460, AS AMENDED.)

GENERAL PROVISIONS
Section 1. This Decree shall be known as “The Insur
ance 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 Code," in Presidential Decree No. 612.
'The germ of the modem 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 Secs. 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 Code of Hammurabi (B.C. 2250.), and a more
highly developed form in the Hindu Laws of Manu, so called. He conjectures that
this important business prac-tice was taken over by the Phoenicians, who greatly
improved
it
and
carried
it
on
to
the
Greeks, who may have known and used it as early as the Trojan War.

1

2

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 1

(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 modem 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. — From 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,

Among the Romans, several different forms of such societies, known as
Collegia, were developed, and became of sufficient importance under the Empire to
attract strict regulatory legislation. They performed many of the functions of the
modem mutual ben-efit society, providing primarily funeral rites for the dead, but
also aid for sick and aged members. A still extant copy of the by-laws of one of
these Roman societies contains such familiar provisions as that the member forfeits
all rights to benefits by failure to pay dues or by committing suicide, and an
earnest injunction to the members to read the by-laws and thus avoid lawsuits.
From the Roman Collegia probably developed the medieval guilds, which flourished
throughout Europe and undoubtedly assumed to their members many obligations
which we should now class as life, accident, or health insur-anc^contracts. Some of
them even went so far as to provide indemnity for losses by fire
and shipwreck, from the death of cattle, and from theft. (Vance, op. cit., pp. 8-10.)
*From the twelfth to the sixteenth centuries, the Italian republics of Venice,
Florence, and Genoa flourished greatly by reason of their extensive maritime
commerce, and it was among 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 were certainly effected as early as the beginning'iff die
thirteenth century, and possibly in the tenth century. The earliest policy form known
to be extant was written in Genoa in 1347, and a statutory form was prescribed in
Florence in 1523. From Italy, the custom of making mutual contracts of insurance
spread rapidly over the whole of commercial Europe, and early came to be practiced
extensively by the merchants in the towns forming the Han-seatic League. The word
"policy" is a monument to the Italian origin of insurance, being derived
from the Italian word “poliza.” (ibid., pp. 10-11.)

Sec. 1

GENERAL PROVISIONS

3

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 common law courts of England began to take adequate
cogni-zance 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
common law with reference to questions involving the law
merchant. In the skill-ful 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
systemof England
and the common-law courts thereby
rendered
compe-tent
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 Law 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

3Known to have 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 Edward Lloyd on Tower
Street in London, was, as early as 1688, a popular resort for seafaring men and
merchants engaged in foreign trade.
It became the custom among those who gathered at Lloyd's to make their
gather-ing 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
among the company assembled a slip upon which was written a description of the
vessel and its cargo, with the name of the master and the character of his crew, and
the voyage contemplated. Those desiring to become insurers of the ventures so
described would write beneath the de-scription on this slip their names or initials,
and opposite thereto the amount which each was willing to shoulder. The term
"underwriter" was believed to have originated from such a practice, (ibid., pp. 17-18.)

4

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 1

19th century, insurance, in its modem 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 wasborne
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 who 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 may 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 was 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, was 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.
Cruz-Amaldo) In 1950, reinsurance was 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

Sec. 1

GENERAL PROVISIONS

5

government employees. It was followed much 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) When
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 Commerce 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 18,1974 during the period of martial
law. It repealed Act No. 2427, as amended. Before Presidential
Decree No. 612, amendments to the Act were made by
Presidential Decrees No. 63,123, 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.

6

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 1

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 Code 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
laws. Matters not expressly provided for in such
laws shall be regulated by this Code."

special
special

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

Sec. 1

GENERAL PROVISIONS

7

(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 Commerce 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 0uly 25, 1987)
increases, integrates and rationalizes the insurance
benefits of barangay officials under R.A. No. 4898 and
members of Sangguniang Panlalawigan,
Sangguniang
Panlungsod,
andSangguniang 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

4"Sec. 522. Insurance Coverage. — The Government Service Insurance System
(GSIS) shall establish and administer an appropriate system under which the punong
barangay, the members of the sangguniang barangay, the barangay secretary, the
barangay treasurer, and the members of the barangay tanod shall enjoy insurance
coverage as provided in this Code and other pertinent laws. For this purpose, the GSIS
is hereby directed to undertake an actuarial study, issue rules and regulations,
determine the premiums payable and rec-ommend to Congress the amount 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.)

8

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 1

insured, as it were, and availing himself of the latter's rights
that exist against the wrongdoer at the time of the loss.5 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].)
(2) Purposes of subrogation condition in polio/. — 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 may 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, 478 SCRA 80 [2006].)
(3)
Right of subrogation applicable only to property insurance.
— The right of subrogation under Article 2207 applies only
to property, and not to life insurance. The value of human
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 human 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

5For additional discussion, see annotations under Section 243.

Sec. 1

GENERAL PROVISIONS

9

an equitable assignment to the former of all the remedies
which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of,
any privity of contract or upon 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 may 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
Home
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
payment," 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 damage 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

10

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 1

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
third party. — The insurer cannot defeat the insured's claim
indem-nity on the ground that the insured has a right to
indemnified by a third person. Having been paid a premium
make good the insured's loss, the insurer cannot compel him
seek indem-nity elsewhere.

the
for
be
to
to

(8) Right of insurer against third party limited to amount
reco-verable 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
who 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.6
(Rizal Surety & Insurance Co. vs. Manila Railroad Co., 23
SCRA 205 [1968].)
By way of illustration, if what the insured can recover
under the law from the party who 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 more 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

“See, however, the case of Cebu Shipyard and Engineering Works, Inc. vs. Willi
am Lines, Inc., (306 SCRA 762 [1999]) given under Section 243.

Sec. 1

GENERAL PROVISIONS

11

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 may 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 damage from liability, the
insurer loses his rights against the wrongdoer since the insurer
can be subrogated to only such rights as the insured may
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 Company 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

12

THE INSURANCE CODE OF THE PHILIPPINES

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

Sec. 1

insurer as
up as a
is not a
of North

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. 1330,1331, Civil Code.), such fact
may 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 home office of the
insurer (see Art. 1319, par. 2, Civil Code.) never came 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

^Unless otherwise indicated, refers to Section in Insurance Code.

Sec. 2

GENERAL PROVISIONS

13

of any specific provision in the Insurance Code on the
matter (The Insular Life Assur. Co. vs. Ebrado, 80 SCRA 181
[1977]; see Secs. 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.
(Ze-nith Insurance Corporation vs. Court of Appeals, 185 SCRA
398 [1990].)

Construction of the Insurance Code.
The construction of the Insurance Code means its
interpreta-tion 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 modem 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:

14

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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
in-surance contract, within the meaning of this Code,
only if made by a surety who or which, as such, is doing
an insur-ance business as hereinafter provided.
(2) The term “doing an insurance business” or
“trans -acting 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 voca-tion 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
busi-ness within the meaning of this Code; (d) doing or
propos-ing to do any business in substance equivalent
to any of the foregoing in a manner designed to
evade the provi-sions 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 modem writers

'Signifies that former provision in Insurance Act (Act No. 2427.) has been amended.

Sec. 2

GENERAL PROVISIONS

15

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 may or may 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 othe
r viewpoints.
A definition of insurance may be made from several
view-points:
(1) Economic. — In this sense, insurance is a method
which reduces risk by a transfer and combination (or "pooling")
of un-certainty 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

16

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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 certainactuarial (insurance mathematics)
principles(see David L. Bickelhaupt, General Insurance,
1974 Ed.,
pp. 29-31, 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, 1/1000 or 0.001; and
(4) Social. — In this sense, insurance has been defined as
a social device whereby the uncertain risks of individuals may
be combined in a group and thus made more certain, with
small periodic contributions by the individuals providing a fund
out of which those who suffer losses may 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, New 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
name 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.

Sec. 2

GENERAL PROVISIONS

17

But strictly speaking, a contract of suretyship is entirely
different from a contract of insurance, (see Chap. 11, Title 4; also
Secs. 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 may
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
die 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 Secs. 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

18

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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
(Secs.
373389.),
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 way
of example, the War Damage Corporation Act (Sec. 5[g],
Public Law 506, 77th Congress of the U.S.) may be given. It
provides for
the payment
of
compensation8 "by
the War
Damage 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 Damage 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].)
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.9 "By an aleatory contract, one of the

8In the Philippines, the payment of loss or damage to property during the war,
re-sulting from enemy attack or in the furtherance of the resistance movement, was
made through the Philippine War Damage Commission.
This basic feature distinguishes an insurance contract from other contracts
(called commutative) that are presumed to represent even exchanges. The buyer of
groceries or clothing or a television set pays about what the goods are worth, and he
gets
immediate
delivery of them, so that he is ordinarily able to tell right away whether he is getting his

Sec. 2

GENERAL PROVISIONS

19

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. cit., 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 who 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 means that they may 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 may be liable to pay the full amount
insured under life policies of which only very few premiums have been paid.

20

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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 may 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 Secs. 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 made to run with
the property to the transferee, (see Secs. 20, 57, 58.) Thus,
where the insurance is "on account of the owner," or "for
whom it may 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 made
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 common trait of "personalness."
1) The category of personal insurance, which includes life, health, accident, and disability insurance,
is

Sec. 2

GENERAL PROVISIONS

21

plainly "personal": the insurance applies only to a
particu-lar 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 some-one 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.
265-266,1987
ed., published by Mathew Bender & Co., Inc., New 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 legalcontemplation. 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 calledthe
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
the destruction
or
impairment
happening of designated perils;

to a risk of loss through
of
that
interest
by
the

22

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(3) The insurer assumes that risk of loss;10
(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
insured makes
a
"premium," to
(see Vance, op. cit., pp. 1-2.)

for

the
insurer's
promise,
the
ratable contribution called
a
general
insurance fund,

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
named 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

10The insurance company, however, by using the science of probability and the
law of large numbers (sometimes referred to as the law of averages or the law of
probabilities can predict with considerable accuracy the number of insureds to similar
risks who will incur losses during a specified period and the extent of such losses.
As a result, the amounts of premium can be calculated such that the income
therefrom should be just enough to meet expected losses incurred by that group,
together with expenses, taxes and a reason-able profit but low enough to make the
insurance saleable. Thus, the risk assumed by the
insurance company is reduced to a minimum.
The probability that the prediction of total losses will not be thrown off by an
un-expected number of losses, increases as the number of similar insurance policies
issued increases. In other words, when the number of similar independent risks is
increased, the relative accuracy of predictions about future losses is also increased. It
is impossible to predict individual losses but the insurer can predict certain
"averages" when a large number of similar policies are considered. If the number of
policies sold does not reach the safe point, the insurance company can reinsure its risks
with another.

Sec. 2

GENERAL PROVISIONS

23

economic loss among as many as possible of those who 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 made for an economic loss of a defined type, each
member contributes to a small degree toward compensation
for losses suffered by any member of the group.
(2) Provides protection against absorbing one’s losses alone.
— The member has no way 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 maximum he will lose on
account of the particular type of risk insured against.11
This
broad sharing of economic risk is the principle
of
riskdistribution. (J.F. Dobbyn, Insurance Law in a Nutshell, 1989
ed., published by West Publishing Co., St. Paul, Minn.)
All contracts, either expressly or implicitly, transfer risk
in one way or another. If a contract possesses the five
elements mentioned, principally,
the
allocation or poolingof
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 payment 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 Secs. 210-214.)

24

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

Although conditioning A's 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.12
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 way to attempt
to manage risk is to limit the probability of loss. For example,
many 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

12For additional discussion, see annotation under Section 51.

Sec. 2

GENERAL PROVISIONS

25

catch fire than wood 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 way 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, many
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 way 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 much 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 "risk," 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

13The two 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 company is the most common method of risk management.

26

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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
ben-efits and costs of a particular activity, and after taking
appropri-ate steps, if any, to minimize the probability or
extent of loss, the individual may choose to engage in the
activity without do-ing anything further with regard to the
risk. Thus, some people choose to ignore risk.
For example, the tightrope walker may purchase special
shoes to reduce the risk of falling and may 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.

Sec. 2

GENERAL PROVISIONS

27

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
PI,000
(which
computes
to
an "expected loss"
of
P500)14
or a certainty of losing P500.
(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
most people become more risk averse.15
though the probability of loss declines.

of loss increases,
This is true even

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

14An “expected loss" is the magnitude of the loss, should it materialize, times
the probability that it will occur. Thus, if someone has a one in two chances of
losing P500, the expected loss is P250. If the chance of losing P500 is one in ten, the
expected loss is P50. (ibid., p. 11.)
15This 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 under water in bathtub and drowned,
(ibid., p. 11.)
“With respect to moderate beneficial risks, many people are risk preferring. For
ex-ample, lotteries operated by state governments have been successful because large
num-bers of people prefer moderate 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 win-ning several thousand dollars, many people are willing to trade the
dollar
for
the
small
chance of
winning the large prize. However, when faced with the prospect of receiving

28

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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 PI,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 PI,500 (100 times P15), and Y will have to pay one
person the sum of PI,000 (since if 100 people each have a onein-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
impli-cations,
a
few
of
which
are
subsequently, (ibid., pp. 11-12.)

economic
discussed

P500 with certainty and a 50% chance of receiving PI,000, many people would be
indiffer-ent, and many others would be risk averse, in that they would prefer P500
with certainty rather than face a 50% chance of getting nothing, (ibid., p. 12.)

Sec. 2

GENERAL PROVISIONS

29

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 damage 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
per-verse 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 may 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. —The 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
each insured is not feasible. Even if the prospect of having a third

of

30

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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 one-in-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

17In the case of stock company (ibid., pp. 1214.), the insurer's administrative costs
should include an allowance for a reasonable profit.

Sec. 2

GENERAL PROVISIONS

31

and then would take all necessary preventive measures,
thereby eliminating the value of transferring risk.
(6) Classification of risks. — Because of the complete
impracti-cality of individual rating, insurers group
similar
risks together and charge each member of the group the same
premium. Insur-ers 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 differenti-ated, 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
admi-nistrative 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

32

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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. 12-14.)

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
casualtysurety 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 experienc
e that some persons cannot or will not
voluntarily purchase

Sec. 2

GENERAL PROVISIONS

33

insurance, and the obligation of the government to protect
the general welfare of its citizens.
(3) Voluntary (private) insurance. ,8 —
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:
1) Personal insurance.'9 — 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
tradeunion
auspices.
The
associations
are organized without regard to the profit

,8For differences between social insurance and private insurance, see annotation
un-der Section 228.
’’Another classification of all kinds of insurance might contrast "individual or
fam-ily" versus "business" insurance depending on the nature of the purchases
(family as opposed to business firm purchases). (D.L. Bickelhaupt, op. cit., p. 69.)

34

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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.)

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 modem economic and industrial conditions.20
The different kinds of insurance contracts written at the
present time vary infinitely in name 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 undertook to issue insurance only in one of the distinct
cate-gories of risk. This was not entirely a voluntary choice, as statutes in most states
confined insurers to writing insurance in only one line. Over time, however, those
restrictions were removed, and many insurers commenced what was called multiple
line underwriting, meaning the writing of insurance in all lines except life.
Eventually, these insurers were allowed to add the insurance to their lines, resulting
in what was known as all line un-derwriting. Today, with the practice of the
multiple-line and all-line underwriting, the prospective insured can often deal with
one company and one agent to meet all his insur-ance needs. (R.H. Jerry, II, op. cit., p. 33.)

Sec. 2

GENERAL PROVISIONS

35

fire insurance), earthquake,
explosion,
etc.
or
due
to
the
non-performance 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 way 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/
specified-risk distinction.
(1) First-party versus third-party insurance. — In firstparty 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 th
e

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

insured's assets. The proceeds are paid to the insured to
re-dress the insured's loss.
(b)
Liability
insurance,
on
the
other
hand,
is
sometimes described as third-party insurance because the
interests pro-tected by the contract are ultimately those of
third parties injured by the insured's conduct. Thus, if the
insured negli-gently causes injury to a third party, the third
party will pos-sess 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 may 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 who 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 who incur medical bills.
The health care provider is similarly situated to the
auto repair shop that fixes the insured's automobile damaged by a

Sec. 2

GENERAL PROVISIONS

37

falling tree: the insurer may 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 nofault 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
way
to
categorize insurance
according to
the
interests
protected is the all-risk/ specified-riskdistinction.
All-risk
insurance
reimburses
the insured for damage
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 specified-risk. 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 eventsis
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 all-risk
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 all-risk insurance. On the other
hand, homeowner's insurance,

THE INSURANCE CODE OF THE PHILIPPINES

normally treated as specified-risk insurance, evolved
joining several distinct coverages — fire, liability, theft, etc.
— in one policy.

Sec. 2

by

(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 "loss
inside the premises" and
"loss 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 illrisk 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 damage during the period of the policy. If the
causation leading to the loss is difficult to identify and
prove, an all-nsk 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

:.2

GENERAL PROVISIONS

39

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 was within the scope of the policy's
exclu-sions which were ambiguous as applied to a "political
hijack-ing" 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 many other settings, the allocation of the burden
of proof can be determinative of the outcome of a case. The
all-risk 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
insur-ance 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-

40

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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.21 Furthermore, exclusions can take
away much of what the all-risk policy gives. Also, allrisk 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 "allrisk" 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].)

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

21One might say that death is certain to occur and, therefore, death is not
fortuitous. However, the time at which death will occur is not certain. It is on this basis
that death is a fortuitous event, (ibid., p. 264.)

Sec. 2

GENERAL PROVISIONS

41

(2) Non-life insurance contracts which may be:
(a) marine (see Secs. 99-166.);
(b) fire (see Secs. 167-173.); and
(c) casualty (see Sec. 174.); and
(3) Contracts of suretyship or bonding.n (See Secs. 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 company 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 guarant
y 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 now 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 thebusiness 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

22These 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.

“For example, it has generally been held that any insurance contract that might
act to discourage marriage is unenforceable as against public policy. This rule has
been ap-plied 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 in-surer to pay, at the time of marriage, a sum which
increases, the longer the insured re-mains single. (J.F. Dobbyns, op. cit., p. 73.)

42

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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
(Secs. 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
made
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 may result from all of them taken jointly.
(Art. 1374, Civil Code.)
(1) Where there is ambiguity or doubt. — Insurance is, in
its nature,
complex
anddifficult
for the
layman
to
understand. (Algoe vs. Pacific Meet. L. Ins., Co., 91
Wash. 324, LRA 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 Am. 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, damage 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

Sec. 2

GENERAL PROVISIONS

43

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 may reject
or to which he may "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 specialproviso, 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.
Any
ambiguity in the insurance contract
should, therefore,
be
resolved in favor of the beneficiary.24
(Serrano vs. Court of
Appeals, 130 SCRA 327 [1984]; National Power Corp. vs. Court of
Appeals, 145 SCRA 533 [1986]; Rizal Surety & Insurance
Company vs. Court of Appeals, 336 SCRA 12 [2000].)
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 whom 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
noncompliance 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,

24The interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity. (Art. 1377, Civil Code.)
For additional discussion, see annotations under Sections 49-50.

44

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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 PI,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

Sec. 2

GENERAL PROVISIONS

45

law requires (as the Workmen's Compensation Act [R.A.
No. 4119], now embodied in Arts. 166-208, Labor Code;25 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].)

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
?

“Which provide a taxexempt employees' compensation program administered by
the Employees' Compensation Commission.
26A foreigner whose 90-day tourist visa had expired, cannot recover on his car
insur-ance policy, not being authorized under the law to drive a motor vehicle without
a Philip-pine 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 may 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].)

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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 daim 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 crther 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

.2

GENERAL PROVISIONS

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 dulylicensed
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, die 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].)

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

5. Policy contains conflicting provisions on effect of
non-payment 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"?

.2

GENERAL PROVISIONS

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., l.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 b
y
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

50

THE INSURANCE CODE OF THE PHILIPPINES

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 selfserving 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
notwithstanding the misdescription in the fire policy?

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.27 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."
(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
acces-sories 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.

27See Martinez, Philippine Insurance Code Annotated, p. 324, citing Richard vs.
Ins. Co., 27 N.W. 586 (1886), which gives the following illustration: A policy upon a
"school house" was held sufficient to identify the building insured in which a school
was kept, although it was not an ordinary school house; the term “store" was held to
be a sufficient description of a building used as a restaurant and bakery.

.2

GENERAL PROVISIONS

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
peti-tioner'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

52

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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 may 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]; New 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.)

Sec. 2

GENERAL PROVISIONS

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 lat-ter 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 notify-ing 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,28
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].)
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

“The purpose of the requirement in the policy that the insured declare other
insur-ances 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 Corp. vs. Yap,
61 SCRA 426 [1974]; General Insurance & Surety Corp. 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. Court of Appeals, 241 SCRA 152 [1995]; see Secs. 75,93.)

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Sec. 2

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

Sec. 2

GENERAL PROVISIONS

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 may 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
was 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.)

56

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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 may be found to be engaged in
an insurance
business
even though
it expressly
disclaims
any intention to sell insurance. (43 Am.
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 undera
charter
empowering
it to publish a
newspaper.
(Commonwealth
vs.
Philadelphia
Inquirer,
3
Pa
Dist.
742,15 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 Am. 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.

Sec. 2

GENERAL PROVISIONS

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. — Many 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 risk29 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

29The risk that the amount of insurance claims might be higher than
the premiums paid. It is also known as acturial risk.

58

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

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
modem 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 many 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 common pool, out of which those who
suf-fer
loss
are
compensated.
The
amount
of
the
premium or contribution
is fixed
according
to individual
circumstances. Where
fire
destroys the insured property, the insurance com-pany 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 who contributed premiums.
(b) In life insurance, every policy which
lapse, eventually becomes a claim, but there is
principle of spreading of risk.
(2) Subsidiary functions. — The following
although subsidiary, are not insignificant:

does not
the same

functions,

(a) Stimulates
business
enterprises.
— Insurance has
made possible, and helps to maintain, the present-day
large-scale commercial
and
industrial organizations.
No
large-scale enterprise
could
function
in
the
modem
world
without the transference of
many
of
its
risks
to
insurers.
It
also
enables industrialists and others to use their capital in the

:.2

GENERAL PROVISIONS

59

development
of
their
business
by
paying
a
fixed
contribution by way 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 way 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
much
greater economic
impoverishment
through material losses if it
were
not
for the lossprevention 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 modem 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.

60

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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
modem
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
wom-an 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 au-thorized to do business in the
Philippines, provided the insurance is taken on his own
life and the beneficiary ap-pointed 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 gener
al
principles of contracts apply also to insurance. In order that

61

62

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 3

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 Secs. 12-14.);
(2) Event or peril insured against which may be any
(future) contingent or unknown event, past or future (Sec.
3.), and a duration for the risk thereof (see Sec. 51 [g].);
(3) A promise to pay or indemnify in a fixed or
ascertainable amount (see Sec. 2.);
(4) A consideration for the promise, known as the
"premium" (see Sec. 77.); and
(5) A meeting of minds of the parties upon all the
foregoing essentials, (see Arts. 1318,1319, Civil Code.)
Of course, the parties must be competent to enter into
the contract, (see Arts. 1327-1329, Civil Code; Secs. 6-7.)
Under Section 226, it is provided that "no policy of
insurance shall be issued or delivered within the Philippines
unless in the form previously approved by the Insurance
Commissioner."
Of course, the contract must not be for a
purpose contrary to law or public policy.

Subject matter of contract of insurance.
(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 may be
prejudiced,
may
properly
constitute
the
subjectmatter
of insurance.
(2) Property insurance. — Both persons and property may
be the subjects of insurance, but the term "subject matter"
is ordinarily used in reference to the insurance of property.
The property covered by a policy is regarded the subject
matter of the insurance, but it is apparent that in the last
analysis, it is the risk of loss of such property that is primarily
involved, (see Secs. 13-14.)
(3) Life, health, and accident insurance. — While it is true that
in life, health, or accident insurance the person becomes the subject

Sec. 3

CONTRACT OF INSURANCE
Title 1. — What May Be Insured

63

of insurance, the matter is generally viewed as one in reference
to the insured as a party to the contract. (29 Am. Jur. 216; see
Secs. 10,179-183.)
(4) Casualty insurance. — In insurance (not falling within
the scope of the other types of insurance) against perils which
may affect the person and/or property of the insured and give
rise to liability on his part to pay damages to others, the
subject matter is the risks involved in its use, or the insured's
risk of loss or liability, that he may suffer loss or be compelled
to indemnify for the loss suffered by a third person.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.2
The unknown event may be
past or future, (see Sec. 51 [f].) In a contract of insurance, the
insurer is liable for a fortuitous event if it is the event or peril
insured against and is the proximate cause of the loss, (see Sec.
84; also Art. 1174, Civil Code.)

â– Another point of view considers as the subject matter of liability insurance the
ac-tivity or process in the course of which legal liability is incurred by the insurer.
Thus, the motor vehicle form commonly in use obligates the insurer to pay on behalf
of the insured all sums which he shall become obligated to pay for death or bodily
injuries "arising out of the use of the insured vehicle." (see E.W. Patterson, op. cit., pp. 232-233.
2Strictly speaking, an insurer does not'insure against an event, i.e., insure that
the event will not happen (or will happen). Thus, the fire insurer does not promise
the in-sured that he will not have a destructive fire; the life insurance contract,
even though euphemistically worded ("X company 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 sum 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.)

64

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 3

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
sinldng 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 woman may take out an insurance on her life
or that of her children without the consent of her husband
(Sec. 3, par. 2.), or that of her husband, she having an
insurable interest in the latter, (see Sec. 10.) She may also take
out insurance on her paraphernal or separate property, or on
property given to her by her husband. (Harding vs. Comm.
Union Assurance Co., 38 Phil. 464 [1918]; see Art. 39, Civil
Code; Arts.-110, 111, Family Code [Exec. Order No. 209].)

Insurance by a minor.
(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;

Sec. 3

CONTRACT OF INSURANCE
Title 1. — What May Be Insured

65

(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 who are capable cannot allege the incapacity
of those with whom 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 modem 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.)

66

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 4

(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 and/or 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 ticketin 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 may 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 come 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,

Sec. 4

CONTRACT OF INSURANCE
Title 1. — What May Be Insured

67

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. cit., 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

68

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 5

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 Secs. 3[par. 1], 10,13.)

Similarity between insuranc
e and gambling.
Insurance and gambling are similar in only one respect.
In both cases, one party promises to pay a given sum to
the other upon the occurrence of a given future event, the
promise being conditioned upon the payment of, or agreement
to pay, a stipulated amount by the other party to the contract.
This means that in either case, one party may receive
more, much more, than he paid or agreed to pay. At this point,
similarity ceases between gambling and insurance. (W.T. Beadles,
in LHIH, op. cit., 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
provi-sions 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" (Secs. 1-98.) are also applicable to
Marine Insurance (Secs. 99-166.), Fire Insurance (Secs. 167-173.),
Casualty Insurance (Sec. 174.), Suretyship (Secs. 175-178.), Life Insurance

Sec. 5

CONTRACT OF INSURANCE
Title 1. — What May Be Insured

69

(Secs. 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 who 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 may 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 may 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 who 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 whom
the proceeds are paid. This person may be the beneficiary
designated in the policy, (infra.) It is also possible that the insured
may assign the proceeds of the insurance to someone else.

70

Sec. 6

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

71

It is said that the relation between the insurer and the
insured is that of a contingent debtor and creditor, subject to
the condi-tions 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 Law 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 who 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 Secs. 179-180.) for whose benefit the policy is
issued and to whom the loss is payable. (44 C.J.S. 497.) There
are occasions when the proceeds are paid to tl)e 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



•Insurance contracts are usually obtained through an "agent" who is ordinarily
em-ployed by the Insurance Company, or a "broker" who is ordinarily an
independent
con-tractor. (see Secs. 299302.) In effect, the former is an agent of the applicant for Insurance.

72

THE INSURANCE CODE OF THE PHILIPPINES

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 Secs. 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
asso-ciations.
Unless
the
context
otherwise
requires,
the
terms shall also
include
professional
reinsurers defined in
Section 280."2
(Sec. 184.)

2Under the General Banking Law of 2000 (R.A. No. 8791.), "a bank shall not
di-rectly engage in insurance business as the insurer." (Sec. 54.) Through the
marketing tool known as “bancassurance," insurance companies are able to improve
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-

Sec. 7

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

73

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

Sec. 7. Anyone except a public enemy may be insured.

ance policies. Presently, the BSP allows banks to sell insurance products at their
branches. Under 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. Under 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, 2010)
prescribes the guidelines on the marketing, sale and servicing (e.g., collecting
premiums and paying claims) of micro-insurance products (as defined Ins. Memo.
Cir. No. 1-2010) by a rural, cooperative, or thrift-bank provided the microinsurance product is duly approved by the Insurance Commission.

74

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 7

Capacity of party insured.
(1) Natural person. — In order that a person may be the
party insured
in
a
contract
of
insurance,
two
essential
requisites are necessary, to wit:
(a) He must be competent to make a contract (see
Arts. 1327-1329, Civil Code.); and
(b) He must possess an insurable interest in the subject
of the insurance. (Vance, op. cit., p. 143.)
A third requisite, applicable also to juridical persons,
may be added, i.e., that the insured must not be a public
enemy. (Sec. 7.)
(2) Juridical person. — A juridical person, like a
partnership or a corporation, may take out insurance on
property owned by it. (see Arts. 44, 45, Civil Code.) Note that
Section 3 specifically authorizes minors, 18 years or more to take
out insurance payable to a limited class of beneficiaries.

Meaning of public enemy.
A public enemy designates a nation with whom the
Philippines is at war and it includes every citizen or subject of
such nation. The term may be taken to mean "alien enemy." A
mob, however numerous they may be, or robbers or thieves
whoever they may be, are never considered public enemies for
purposes of the above provision, (see Bouvier's Law Dictionary;
Russel vs. Fagan, 4 Atl. 258.)
During wartime, a private corporation is deemed an
enemy corporation
although
organized
under
Philippine laws
if
they are controlled by
enemy aliens. This is the so-called "control test" whereby a
corporation is deemed to have the same citizenship as the
controlling stockholders in time of war. (Filipinas Cia de
Seguros vs. Christem Huenefeld & Co., 89 Phil. 54 [1951];
S. Winshop vs. Phil. Trust Co., 90 Phil. 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

Sec. 7

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

75

inconsistent with a state of war is prohibited. The purpose of
war is to cripple the power and exhaust the resources of the
enemy. It is inconsistent that the subjects of one country should
lend their assistance to protect by insurance, the commerce or
property of belligerent alien subjects or to do anything
detrimental
to
their country's
interests,
(see
6
Couch,
Cyclopedia of Insurance Law, pp. 5352-5353.)
Of course, if the parties are not rendered enemy aliens
by the intervention of war, the policy continues to be
enforceable according to its terms and the laws governing
insurance and the general rules regarding contracts. The effect
of war between countries of the insured and the insurer upon
insurance contracts validly entered into during peacetime is a
question upon which there is a decided conflict of authority.
(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.
Christem 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

76

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 8

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 insur-ance 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
per-formed by the mortgagor.
Insurable interest of
mortgagee
and mortgagor.
(1) Separate insurable interests. — The mortgagor 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 own name only and in his favor alone, does not
inure to the benefit of the other. (Sec. 53.) And 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
mortgagor 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. Dali, 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

Sec. 8

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

77

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 may
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 PI,000,000.00 which
he mortgaged to E to secure a loan of P500,000.00. The
insurable interest of R, mortgagor, is PI,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

78

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 8

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,
creditor-mortgagee. E cannot collect both the insurance and the
mortgage debt.

Insurance by mortgagor of his
own interest.
(1) For his own benefit. — The mortgagor may 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
who 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 may be made the beneficial payee in
several ways:
(a) He may become the assignee of the policy with
the consent of the insurer;
(b) He may be the mere pledgee without such consent;
(c) A rider (see Sec. 50.) making the policy payable to
the mortgagee "as his interest may appear" may be attached;
(d) A
"standard
mortgage
clause"
collateral independent contract between the
the insurer may be attached; or

containing
a
mortgagee and

(e) The policy, though, by its terms payable
absolutely to the mortgagor; may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds.

Sec. 8

79

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

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
insurance3 to the mortgagee, the following are the legal effects:
(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) Any 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) Any act which under the contract of insurance is to
be performed by the mortgagor (like payment of the premium)
may 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) Upon recovery by the
his credit, the debt is extinguished.

mortgagee to

the extent

of

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
PI,200,000.00
for
PI,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 PI,000,000.00 from

3In the case of fire or marine insurance which may 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.

80

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 8

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
may
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 losspayable clause in favor of the mortgagee as his interest may
appear, the
mortgagee is only
a
beneficiary
under
the contract and recognized as such by the
insurer but not made a party to the contract itself. 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 may 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.

Sec. 8

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

81

(1) Before loss. — Before a loss occurs, the mortgagee is a
con-ditional appointee of the mortgagor entitled to receive so
much of any sum that may 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 may
apply the proceeds to the extent of his credit. (P.D. Carman &
Co. vs. Zaborsky, [C.A.] 36 O.G. 1979.)

Effect of insurance by mortgage
e 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 pay the premiums
upon such insurance. Upon 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 may 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.

82

THE INSURANCE CODE OF THE PHILIPPINES

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
insur-ance 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 whom he
would have declined to issue a policy and who 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 policy4
just like a fire

4The 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, became established
at a time when means of communication between distant places were slow and
difficult and great inconvenience would have resulted if the owner of an insured ship
or cargo had 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 owner who might, by his way of dealing with the ship, increase
the risks assumed by the insurer. (E.W. Patterson, op. cit., 210.)

Sec. 9

CONTRACT OF INSURANCE
Title 2. — Parties to the Contract

83

policy, is not assignable without the consent of the insurer,
(see Secs. 5,19, 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. cit, p. 2[3].)
(4) As to life policy. — With respect to life insurance,
the policy may 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 wager 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 Sec. 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 Secs. 19, 20, 21.)

Right of mortgagor to assign insuranc
e 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 modem means of
com-munication, the justification for the rule disappears. Furthermore, marine
insurance now includes insurance against perils of property on land, (see Sec. 99.)

84

THE INSURANCE CODE OF THE PHILIPPINES

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.5 Hence, the acts of the mortgagor cannot
affect the rights of the mortgagee, the assignee. (Sec. 8.)
— oOo —

5Article 1291. Obligations

may 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 Code)

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
pecuni-ary 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 perfor-mance; and
(d) Of any person upon whose life any estate or
inter-est vested in him depends, (a)
Insurable interest in general.
An insurable interest is one of the most basic of all
require-ments 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

86

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 10

(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 intere
st 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 may be in life and health (Sec.
10.), or in property. (Secs. 13,14.)
(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 Secs. 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.
(Secs. 18, 25.)
The insurable interest requirement is held not to apply
to industrial life insurance, (see Secs. 229-231.)

Requirement, a matter of publi
c policy.
(1) As a deterrence to the insured. — The requirement of
an insurable interest to support a contract of insurance is based

Sec. 10

87

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

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
in-sured, having nothing to lose and everything to gain, to
bring to pass the event upon the happening of which the
insur-ance 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
classes.

insurance

policies

may

be

divided

into

two

general

(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.

88

THE INSURANCE CODE OF THE PHILIPPINES

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 man on his own
motion insures his life for the benefit either of himself or of
another is sufficient evidence of good faith to validate the
contract. (29 Am. 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 named as
beneficiary. Evidence of a wagering policy (see Secs. 18, 25.) is
usually found in such facts as:
(a) that the original proposal to take out
insurance was that of the beneficiary;

â– To say that every man has an insurable interest in his own life is inaccurate,
since a man does not suffer loss by his own 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.)

Sec. 10

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

89

(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 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
(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

2The 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.

90

THE INSURANCE CODE OF THE PHILIPPINES

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. — When 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 may 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.

Sec. 10

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

91

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 dedsions 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 more 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
legiti-mate or illegitimate children of the latter;
(d) Parents and their illegitimate children and the
legiti-mate 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 claim-ant'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

92

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 10

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
man 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 woman who takes a girl
from an orphan asylum and gives her a home 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 may take out a policy on the life
of his business partner on the theory that the latter's death
may 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 whom 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

Sec. 10

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

93

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.3
However, valid
insurance may be written when the employee himself
applies
for
the
policy
and
designates
the
employer as beneficiary, (see D.L. Bickelhaupt, op. cit., p. 226.)

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 may lawfully
procure insurance on the other's life. Thus, the employer may
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.)

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

94

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 10

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. (Cammack
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.; Secs. 17,18,19, 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. (Cammack 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 made 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

Sec. 10

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

95

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 may
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 may 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?

THE INSURANCE CODE OF THE PHILIPPINES

96

Sec. 11

(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 circum-stances, 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 ex-pressly 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 who 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

Sec. 11

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

97

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 may be either
the insured himself or his personal representatives or someone
other than the insured. Where the beneficiary designated is a
person other than the insured, such person may occupy one
of three relations to the insured:
(1) Insured himself. — He may 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. 658659.), as where the creditor insures the life of his debtor;
(2) Third person who paid a consideration. — The third
person named as beneficiary may have paid a valuable
consideration for his selection as such; that is, the insured
may 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
may
be
one
who
gives
no
consideration
whatsoever for any right that may 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.

98

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 11

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 who 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 made between persons who were guilty of
adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the
same criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason of his office.
In the case referred to in No. 1, the action for
declaration of nullity may be brought by the spouse of
the donor or donee; and the guilt of the donor and donee
may be proved by preponderance of evidence in the same action, (n)"
In order that Article 739 m$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 may
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

Sec. 11

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

99

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.
die 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 conmnt 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.

100

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 11

(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 power 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 made 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 interes
t 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 may continue

Sec. 11

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

101

paying it and is entitled to automatic extended term or
paid-up 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?
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"Art. 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 ap-pointment x x x." (Family Code)

102

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 11

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 whom he was 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 may 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 die express
condition to pay the beneficiary if he survives the insured or
"if surviving."5 (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,

5The requirement of an insurable interest goes back to the early 18th century in
Eng-land. At that time, life insurance policies were not applied for and issued to the
persons whose lives were to be insured. Often the insured did not know the person
who obtained the insurance or even that insurance had been effected on his life. At
one time, it was al-most a sport to wager that public figures would or would not live
for even such a period of time as a few days. Obviously, this was wagering of a
peculiarly vicious nature, so vi-cious 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." (Law and die Life Insurance Contract, by J.E. Greider &
W.T. Beadles, 1974 ed., pp. 126-127 published by Richard D.
Erwin, Inc, Homewood, Illinois.)

Sec 11

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

103

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
may be die 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
des-cription 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. 965966.)
Note that under our law (Arts. 2012 and 739, Civil
Code, supra.), any person who is forbidden from receiving any donation,

104

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 11

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
pay-able 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 common to
both, (ibid., 961.) But if the designation is made 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 Am. Jur. 966.)
(4) Family. — The term "family" is sometimes used
indicate the recipient of the proceeds of an insurance
deciding whether a particular person claiming a share
fund is of the family of the insured, the court will
whether that person was so regarded by the insured. If
so regarded, he will be allowed to participate although
way related to the insured. (Vance, op. cit., p. 554.)

to
policy. In
of the
ascertain
he was
in no

(5) Heirs or legal heirs. — When a life policy is made
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 who 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

Sec. 12

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

105

sense of heirs or next of kin. Policies payable to
insured's "executors,
administrators
assigns" are
clearly
assets
the deceased insured's estate while those payable to
"heirs" or "next of kin" are not. (ibid., p. 657.)

the
or
of
his

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 prin-cipal, accomplice, or accessory in willfully
bringing about the death of the insured; in which event,
the nearest rela-tive of the insured shall receive the
proceeds of said insur-ance if not otherwise disqualified,
(n)
Forfeiture of the interest of
the beneficiary in a life insurance
policy.
The word "interest" mentioned in Section 12 means the
right of the beneficiary to receive the proceeds of the life
insurance policy. It does not mean 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
nearest in degree, if living;

and

grandmother,

or

ascendants

106

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 12

(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, 985987, 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 many 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 thf
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

Sec. 12

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

107

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. New 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 much the consequence of that disease as if some vital
organs
were
totally
affected.
(Vance,
op.
cit.,
pp.
563565; see Sec. 180-A.)
(4) Death 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.
17,18,
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

108

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 12

was guilty of a felony, the beneficiary's interest in
insurance is not forfeited where the insured's death was
intentionally caused. (Vance, op. cit., pp. 717-718.)

the
not

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 may
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 was 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

Sec. 13

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

109

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
per-sonal, 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 may 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. (Riggs vs. 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.)

110

THE INSURANCE CODE OF THE PHILIPPINES

Sec 13

(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 the civil law concept of
jus
peril
domino, where
ownership
is
the
basis for
consideration of who 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 Secs. 16,19.) 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

Sec 14

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

111

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
inter-est; 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 may consist merely of an inchoate interest or an expectancy.
(1) An existing interest. — The existing interest in a
property may 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.

112

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 14

(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 may exist over th
e 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.

Sec. 15

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

113

(a) Thus, a farmer may 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 may cause loss of profits resulting
from the cessation or interruption of his business.
(c) Any 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 may
have neither interest in the property nor specific lien upon
it. So, a workman has an insurable interest in any building
he may 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 Secs. 103,105.)

Sec. 15. A carrier or depository of any kind has
an in-surable 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 may be the subject of a valid contract
of insurance. Such bailee may 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

114

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 16

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
jn 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 may be
frustrated by the happening of some event uncoupled with
any present legal right will not support a contract of insurance. Thus:
(1) Property of father/son/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.)

6A possible basis for a claim to an insurable interest is Section 14(b) and (c). Since
one is entitled to claim from the property of the other, the satisfaction of the latter's
obliga-tion to support the former, the former may be said to have "an existing
interest" in the property of the latter. Furthermore, the right to legitime may also form
the legal basis of a compulsory heir's insurable interest, (see Arts. 886,887,2011, Civil
Code; see also Arts. 225-227, Family Code.)

Sec. 17

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

115

(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 may 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 may 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 may be satisfied.
(Spare vs. Home 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. 162163,173.) 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
prop-erty 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

116

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 17

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 PI00,000.00. 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].)

Sec. 18

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

117

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 intere
st 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
ordinarilyreturned 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 Secs. 10,19,181.)
(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
PI5,000.00
but through the error or mistake of the insurer, the policy

118

THE INSURANCE CODE OF THE PHILIPPINES

Sec 18

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 may 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 the policy of a marine or fire
insurance is not the exact measure of indemnity to which the
insured is entitled, but the maximum 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 Secs.
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 who 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

Sec. 18

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

119

person to whom 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
in-demnity. 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 in-demnity 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 may 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 may
be issued. (Dinsdale & McMurdie, op. cit.r 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 SCRA411 [2008].) Once a
member incurs hospital, medical or any

120

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 19

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 woman 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 intere
st 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.

Sec. 19

CONTRACT OF INSURANCE

121 Title 3. — Insurable Interest

Most of the situations in which insurable interest may
later disappear involve business relationships. Under the law,
health, accident and
disability insurance
is
deemed
included
in
the
terms "life" and
"nonlife" 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 PI00,000.00 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

122

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 19

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 intere
st 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 made 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.)

Sec. 19

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

123

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 who 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 may 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].)

124

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 20

Sec. 20. Except in the cases specified in the next
four sections, and in the cases of life, accident, and
health in-surance, 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 who 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. Law 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 Am. 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

Sec. 21

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

125

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) When a policy is so framed that it will inure to the
benefit of whomsoever, during the continuance of the risk, may
become the owner of the interest insured (Sec. 57.); 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.

126

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 22

Change of interest in a thing insure
d 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
Secs. 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 thing
s 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 made 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
more 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.

Sec 23

CONTRACT OF INSURANCE
Title 3. — Insurable Interest

127

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
die parties. Where only one premium was 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 was 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. (Platt 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 die death of D does not affect the
insurance
because it is likewise transferred to H who may collect on the

128

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 24

policy should the house be burned later on even before h
e could transfer the insurance policy under his name.

Sec. 24. A transfer of interest by one of several
part-ners, 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. 25

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 insuranc
e 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 Am. 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.

130

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 25

(2) Stipulation that the policy shall be received as proof of
insur-able 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 may 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 Secs. 4,10,18.)
(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
conceal-ment.
Four primary concerns of the partie
s 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
amount of such loss. (Vance, op. cit., pp. 364-365.)

and

if

so,

the

Devices for ascertaining and controllin
g 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

132

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 26

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 Secs. 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 may 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 may 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
more 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, may 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
named hereon in
writing, bullion or manuscripts."
In a fire insurance policy, burning caused by lightning
may be excepted from the risks assumed.
(4) Executory warranties (Sec. 68.) and conditions,
undertakings that certain conditions should or should not exist

that

is,

Sec. 26

CONTRACT OF INSURANCE
133 Title 4. — Concealment

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 watchman will be kept upon the
premises during the currency of the policy, or conditions may
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 Secs. 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 may 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
com-municate that which a party knows and ought to communicate.

134

THE INSURANCE CODE OF THE PHILIPPINES

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
fact concealed; and

concealing

makes

no

warranty

of

the

(4) the other party has not the means of ascertaining the
fact concealed.
Where a warranty is made of the fact concealed, the nondis-closure of such fact is not concealment but constitutes a
violation of warranty. (Title 7.)

Sec. 27. A concealment whether intentional or
uninten-tional entitles the injured party to rescind a
contract of in-surance. (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.

Sec. 27

CONTRACT OF INSURANCE
135 Title 4. — Concealment

(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. Law 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. (Secs. 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.
(Satumino vs. Phil. American Life Insurance Co., 7 SCRA 316 [1963].)
(1) Existence of fraud not required. — The duty of
communica-tion 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 jurisdic-tion, the legal effect of a concealment,
whether intentional or unintentional,1 is the same, i.e., it entitles
the insurer to rescind the contract of insurance, concealment
being defined as "negli-gence to communicate that which a
party knows and ought to communicate."
(Satumino vs.
Phil.-American
Life
Insurance Co.,
supra; Great Pacific Life Assurance Co. vs. Court of Appeals,
89 SCRA 543 [1979].)

'The phrase "whether intentional or unintentional” between "concealment” and
"en-titles" in Section 26 of the former Insurance Act was deleted in Section 27 of the
former In-surance Code which took effect on December 18,1974 and in the present
Insurance Code until it was restored by Batas Pambansa Big. 874. Section 27,
according to the Supreme Court in the case of Ng Gan Zee 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.

136

THE INSURANCE CODE OF THE PHILIPPINES

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.2 (see Sec. 31.)
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.)

The rule is thus based upon 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. 450-451.)

Sec. 27

CONTRACT OF INSURANCE
137 Title 4. — Concealment

(2) Whether or not D was aware of the ailment, there is
concealment where the ailment was material to the contrac
t:
(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 may in any way affect the risk to be assumed."
On the other hand, in fire and other kinds of
insurance, the subject "is, or may 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
therisk 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; Satumino vs. Phil. Am. Life Ins. Co., supra.)

138

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 28

Sec. 28. Each party to a contract of insurance
must communicate to the other, in good faith, ail 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 communicate
d 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 (Secs. 31, 34, 35.);
(2) the other has not the means of ascertaining the said
facts (see Secs. 30, 32, 33.); and
(3) as to which the party with the duty to
communicate makes no warranty, (see Secs. 67-76.)
So, an applicant for life insurance suffering from or who
had been treated or
hospitalized for
some ailment
like
pneumonia, diabetes or syphilis (De Leon vs. Crown Life Ins.
Co., [C.A.] L-44842, June20, 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 was
hospitalized for two weeks prior to his application for
insurance (Sunlife Assur. Co. of Canada vs. Court of Appeals,
245 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. 29

CONTRACT OF INSURANCE
139 Title 4. — Concealment

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 company 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.3
(De Leon vs.
Crown Life Ins. Co., [C.A.] L-44842, June 20,1939.)

Sec. 29. An intentional and fraudulent omission, on
the part of one insured, to communicate information
of mat-ters 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 Secs. 67-76.)
Unlike
in
ordinary
concealment
(Sec.
27.),
the
nondisclosure under Section 29 must be intentional and fraudulent
in order that the contract may be rescinded. It is to be noted here that

3In a case, where the insurer sought to avoid payment of a life insurance policy on
the ground that the insured (a Chinese widow, 61 years old, and an illiterate who
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 Code
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 have 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-benefidary, seeking to
enforce the contract, not on the one (insurer) seeking to avoid its performance.
(Tang vs. Court of Appeals, 90 SCRA 236 [1979].)

140

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 30

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 (Secs. 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
follow-ing, 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 rea-son 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 other-wise material; and
(e) Those which relate to a risk excepted from the
pol-icy, and which are not otherwise material.
Matters made the subject of special inquiri
es material.
As a general proposition, matters made the subject of
inquiry must be deemed material, even though otherwise
they might not be so regarded (North Am. 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

CONTRACT OF INSURANCE
141 Title 4. — Concealment

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 may 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
com-plain 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 impor-tant 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.)

142

THE INSURANCE CODE OF THE PHILIPPINES

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 may 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
misrepre-sented. (De Leon vs. Crown Life Ins. Co., [C.A.]
No. 44842, June 20, 1939.) It is sufficient that his nondisclosure mis-led the insurer in forming his estimates of the risks of
the

Sec. 31

CONTRACT OF INSURANCE
143 Title 4. — Concealment

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. (Satumino 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, made 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 may rescind the contract of insurance and
delay payment on the
ground of
concealment and/or
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.
Amor
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.

144

THE INSURANCE CODE OF THE PHILIPPINES

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." (Satumino 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

Sec. 32

CONTRACT OF INSURANCE
145 Title 4. — Concealment

was held that the failure of the insured to reveal the fact did
not amount to concealment as would vitiate the contract. Since
the result of the test was negative, even if the test was related to
the insurer, the same would not have affected its decision to
insure the deceased. (E. Agos vs. The Phil. American Life Insurance Co.,
I. C. Case No. 10, March 11,1976.)

Time when information acquired.
As a corollary to the rule of materiality stated above, it
follows that no information possessed by one party can be
material, in the sense of requiring disclosure, unless it is possible
that it may influence the other in the making of the contract.
(1) After contract has become effective. — Therefore, if the
contract
is
already
complete
and
binding
before
the
information in question is acquired, there can be no duty
resting upon the insured to disclose it, even though the policy
is yet to issue. (Vance, op. cit., p. 378.) In other words,
concealment must take place at the time the contract is entered
into in order that the policy may be avoided and not
afterwards. The duty of disclosure
ends with the completion and effectivity of the
contract. The rule is different in reinsurance,
(see Sec. 96.)
(2) Before contract becomes effective. — If the contract is to
be effective only upon the issuance of the policy, an applicant for
life insurance, for instance, is under a duty to disclose to the
insurer, changes in his health occurring or coming to his
knowledge between the date of submitting his application after
satisfactory medical
examination and the date
the policy
is
delivered.
(Stipcich
vs.
Metropolitan
Life Ins. Co., 277 U.S. 311.)

Sec. 32. Each party to a contract of insurance is
bound to know all the general causes which are open to
his inqui-ry, equally with that of the other, and which
may affect the political or material perils contemplated;
and all general usages of trade.
Matters each party bound to know.
Under Section 32, the insured need not communicate
public events, such as that a nation is at war or the laws and political

146

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 33

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
the general trade usages and rules of navigation, kind
seasons, and all the risks connected with navigation.

of
of

Sec. 33. The right to information of material facts
may be waived, either by the terms 6f insurance or by
neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is
communi-cated.
Right to information may be waived.
The right to information of material facts may 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.4 (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.)

4For one thing, life insurance companies 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
deems material to the approval of the application.

Sec. 33

CONTRACT OF INSURANCE
147 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. (A.G. 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 "subtotal 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?

148

THE INSURANCE CODE OF THE PHILIPPINES

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 exte
nt 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 made by the insurer in relation thereto. Such requirement is
made so that the insurer may determine the extent of the
insured's insurable interest, (see Secs. 17,18.)
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. 35

CONTRACT OF INSURANCE
149 Title 4. — Concealment

was only given the privilege of occupying the house, rentfree 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 matte
rs 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.
Misrepresentation1 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 may be viewed as the active form of
con-cealment.

’Misrepresentation is an affirmative defense. To avoid liability, the insurer has
the duty to establish such a defense by satisfactory and convincing evidence. (Ng Gan
Zee vs. Asian Crusader Life Assurance Corp., 122 SCRA 461 [1983]; Great Pacific
Life Insurance Corp. vs. Court of Appeals, 316 SCRA 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 may 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 may 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 may 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 made to influence the insurer to accept the risk. Being
merely collateral inducements to the
contract,
representations
maybe communicated
in
any
manner
whatsoever that is
intelligible. (Vance, op. cit., p. 393.) But they
are not a part of the contract unless expressly made 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 may be performed after the issuance
of the policy, (see Sec. 39.)

Sec. 38. The language of a representation is to be
in-terpreted 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
writ-ten 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 made
and the nature of the information asked, are such that "no
human 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. (Penn. 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. (Secs. 39,42.)

154

THE INSURANCE CODE OF THE PHILIPPINES

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
con-cerning 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 made
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
condition or a warranty.

is,

therefore,

substantially

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,

a

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 expression
s 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

156

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 40

drive, he is guilty of fraudulent misrepresentation
of material fact. (Secs. 44,45.)

When representation deemed a mer
e 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 made 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 expres
s 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, may 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 Secs. 113,116.)

Secs. 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 altere
d or withdrawn.
A representation, not being a part of the contract of
insurance, may 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 may 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 may 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 made 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

158

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 43

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 informa-tion which he has upon the subject, and
which he believes to be true, with the explanation that
he does so on the in-formation 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 obtaine
d from third persons.
Under this section, the insured is given discretion to
com-municate 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. 43

CONTRACT 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 communi-cated 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. 98,105.)

Effect where information obtaine
d 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

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 44

Sec. 44. A representation is to be deemed false
when the facts fail to correspond with its assertions or
stipula-tions.
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
ailment" within the representation made by
that she had not consulted a physician
personal ailment" during seven years
application,
(see
Rasicot
vs.
America, 109 P. 1048.)

not a "personal
a married woman
"in regard to a
prior to her
Royal Neighbors of

(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. 45

CONTRACT OF INSURANCE
161 Title 5. — Representation

(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., Ill
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 en-titled to rescind the contract from the time
when the repre-sentation 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

2Batas Pambansa Big.

874 deleted the word "intentionally" before "false."

162

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 45

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. (Sisoa 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 made 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

Sec. 46

CONTRACT OF INSURANCE
Title 5. — Representation

163

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
deter-mined by the same rules as the materiality of a
conceal-ment.
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 whom 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. — Who determines the
materiality of the representation? It is not left to the
insur-ance 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 mat-ter misrepresented must be of that character
which the court can say would reasonably affect the insurer's
judgment. No misrep-resentation of a mere trifling matter in the
applicant7 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 com-pany says that it would not have
issued
the
policy
otherwise. (Volunteer State Life Ins. Co. vs.
Richardson, 244, S.W. 44.)

Concealment and misrepresentatio
n 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.

164

THE INSURANCE CODE OF THE PHILIPPINES

(3) A concealment on the part of
same effect as a misrepresentation and
right to rescind the contract.

Secs. 47-48

the insured has the
gives the insurer a

(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 com* mencement 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 rescind-ible by reason of the
fraudulent concealment or misrepre-sentation of the
insured or his agent, (a)
When an insurer must exercise
his right to rescind.
(1) In general. — A contract of insurance may be
rescinded on the ground of concealment, or false representation, or breach

Sec. 48

CONTRACT OF INSURANCE
Title 5. — Representation

165

of warranty. An action to rescind a contract, as contemplated
by the first paragraph of Section 48, is founded upon and
presup-poses 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 may 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.)

166

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 48

Theory and object of the incontestabl
e clause.
(1) As to the insurer. — The theory is that an insurer
should have
a
reasonable
opportunityto
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. New 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 Harvard 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
incontestable, the following requisites must be present:

shall

be

(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.3 (see Secs. 227[b], 228[b], 230[b].)

3Where different dates are concerned, however, this may not always be true.
For instance, the policy date may be different from the issue date, and the date the
first pre-mium was paid may be different yet. Since ambiguities are interpreted in
favor of the policyholder or beneficiary, if the insurance became effective on a date
prior to the date of issue, the contestable period should be computed from the earlier
date. Nevertheless, in a case where the policy was dated back six months to obtain the
benefit of a lower age and lower premium, it has been held that the contestable period
commenced from the date of issue and not the effective date of the coverage. (Forest
vs. Mutual Benefit Life Ins. Co., 89 NYS [2d] 488 [1949].)

Sec. 48

CONTRACT OF INSURANCE
Title 5. — Representation

167

The period of two (2) years for contesting a life
insurance policy by the insurer may 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.
When a policy of life insurance becomes incontestable,
the insurer may 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 wellfounded; or
(3) it is rescissible by reason of the fraudulent
misrepresenta-tions 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.4 (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

4The 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 an-swer, the clause does not so much condone fraud as limit the time
within which the insurer may 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 may 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
may 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. ("Le-gal 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, n, op. cit., p. 202.)

168

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 48

warranty or condition, may be revived or reinstated
pursuant to a provision contained in the policy or the
agreement
of
the
parties.
(Penn. 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

Sec. 48

CONTRACT OF INSURANCE
Title 5. — Representation

169

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 incontestab
le clause.
The incontestability of a policy under the law is not
absolute; otherwise, a
beneficiary of
any
person
who
hadprocured a life policy more 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 may still contest the policy by way 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 (Secs. 77,
227[b], 228[b], 230[b].);
(4) That the conditions of the policy relating to military
or naval service have been violated (Secs. 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.);

170

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Sec. 48

(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 pert 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 endorse-ment.
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

172

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

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 insuranc
e 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 Corp 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

Secs. 49-50

CONTRACT OF INSURANCE
173 Title 6. — The Policy

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 own selfish interests. In
contrast, the applicant is a shorn lamb driven to accept
whatever contract may be offerred on a 'take-it-or-leave-it'
basis if he wishes insurance protection." (A Treatise on the
Law of Contracts, pp. 19-20, 3rd Ed. [1973].) Except for
riders (infra.) which may 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 many 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
SCRA550
[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

174

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

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 SCRA511 [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

Secs. 49-50

CONTRACT OF INSURANCE
175 Title 6. — The Policy

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].)

Policy different from contract itself.
A policy of insurance is different from the contract of
insur-ance.
(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

176

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

carefully drawn written policy in customary use. (Vance, op.
cit., p. 234.)
Under the Code, the policy must be in printed form.1
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. 0argue 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. 3,1976.)

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 must be in writing,
no rule of law imposes any such universal requirement. Oral contracts of insurance
have been frequently enforced by courts. However, the enforcement of such contracts
may be precluded or made more difficult in certain situations than would be the
enforcement of written ones. The difficulties may be grouped into five heads: (1)
statutes requiring a written memorandum (e.g., Statute of Frauds); (2) provision of
the insurance company's charter; (3) difficulty of proving an oral agreement,
especially under the parol evidence rule; (4) authority of the insurer's agent to make
an oral contract; and (5) indefiniteness of the terms of the oral agreement.
(E.W. Patterson, op. cit., pp. 81-82.)
In any event, the issuance of a written policy is so much the custom that one
can safely say that the applicant and the insurance company from the first
"contemplate that their negotiations shall be reduced to writing." Once the policy has
been issued and de-livered, oral evidence will not be permitted to vary or contradict
its terms. (J-E. Greider & W.T. Beadles, op. cit., p. 184.)

Secs. 49-50

CONTRACT OF INSURANCE
Title 6. — The Policy

177

between the parties that such acts should constitute a
contract of insurance. (Badger vs. New 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 may 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
may 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

178

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

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 may 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 who
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 made a part of
the insur-ance 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.

Secs. 49-50

CONTRACT OF INSURANCE
179 Title 6. — The Policy

(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 was insurable on that date. The binding
receipt is, therefore, a conditional acceptance by the
insurer. (Riegel, Miller & Williams, Jr., op. cit., pp. 36-37.)
(b) Where 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 may accept or reject. (E.W. Patterson, op. cit., 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)
year after delivery,
it, therefore, becomes the important
fact
for
determining
when the policy period ends. (R.H. Jerry, II, op. cit., p.
156.)

180

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

(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 made
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 may be sufficient.
(a) Delivery may be made 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 may 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 afterits issuance, depends, not upon its manual
possession by the insured but rather upon the intention of the
parties which may be shown by their acts or words. It may
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.

Secs. 49-50

CONTRACT OF INSURANCE
181 Title 6. — The Policy

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 much 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. New 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. Babcock, 30 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 o
f policy.
(1)
Where
delivery
conditional.

Where
there
is
conditional delivery of
an
insurance policy, nonperformance
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

182

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

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 may 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.
Any
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

Secs. 49-50

CONTRACT OF INSURANCE
183 Title 6. — The Policy

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 Law 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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Secs. 49-50

(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.2 (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.
(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 (Secs. 6778.) 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 may 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
insur-ance
contract
altering
its
scope
or
application.
Examples of endorsements are
those extending
the
perilscovered.
An endorsement may be
in the nature of a permit such as one authorizing the
removal of the insured property and provid-ing for
coverage in another
location.
Many
endorsements are
merely typewritten additions to the contract, changing its

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

Secs. 49-50

CONTRACT OF INSURANCE
185 Title 6. — The Policy

amount, rate, or term. Errors may 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 en-dorsement 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 made 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, was 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 o
f 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
conclusive-ly
presumed, in the absence of
fraud or mutual
mistake, to know

186

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Secs. 49-50

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. Soc.,
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 may not thereafter be
heard to say that he did not read the policy or know its terms
since it is his duty to read his policy and it will be assumed that
he did so (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 may 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 Omaha 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
may not be reasonable to expect people to take the time to read the

Secs. 49-50

CONTRACT OF INSURANCE
187 Title 6. — The Policy

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
who
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
so-called "duty to read" has less significance in modem 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 "reasonableexpectations" 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

188

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Secs. 49-50

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 made 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 many 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
who 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 may 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 coverage,... 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

Secs. 49-50

CONTRACT OF INSURANCE
189 Title 6. — The Policy

the denial of coverage without requesting review by an
impartial panel of physicians. (R.H. Jerry, II, op. cit., pp.
142-143.)

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 many
individuals. In its original and most common 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. Soc., 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

190

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 49-50

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
employeesor 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 Am. 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

^The master policy sets forth all the terms and conditions of the insurance, where
the certificates of participation serve merely to inform the individual members 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.)

Secs. 49-50

CONTRACT OF INSURANCE
191 Title 6. — The Policy

acts entirely for its own benefit or for the benefit of
its employeesin undertaking administrative functions. While
a reduced premium may result if the employer relieves
the insurer of these tasks, and this, of course, is
advantageous to both the employer and the employees, the
insurer also enjoys significant advantages from
the
rearrangement.
The reduction in the premium which results
from the employer-administration 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 may be the titular or named insured, the insurance
is actually related to the life and health of the employee. Indeed,
the employee is in the position of a real party to the master policy,
and even in a non-contributory plan, the payment by the
employer of the entire premium is a part of the total
compensation paid for the services of the employee. Put
differently, the labor of the employees is the true source of the
benefits, which are a form of additional compensation to them.
It has been stated that every problem concerning group
insurance presented to a court should be approached with
the purpose of giving to it every legitimate opportunity of
becoming a social agency of real consequence considering that the

192

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 51

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
con-tinue. (a)

Contents of the policy.
Section 51 enumerates what the policy of insurance4
must contain.5
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.
(1) Names of parties. — The names of
course, essential in all contracts. But the mere
of the insured was incorrectly spelled is
whatever, provided
that
the identity
can be
sufficiently
established.
Ins. Co., 28 W. Va. 582.) Nor is it

4An insurance policy

the parties are, of
fact that the name
of no importance
of
the party
(Travis vs. Peabody

is entirely different from a surety bond, (see Secs. 175-176.)
life or endowment, gro
up life, and individual life policies, see Sections 227,228, and 230.
5As to additional matters to be stated in case of individual

Sec. 51

CONTRACT OF INSURANCE
193 Title 6. — The Policy

essential to the effectiveness of the contract that the name of
the insured should appear therein, as he may 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 may
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 maximum 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 Secs. 61,156,172.), 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].)

194

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Sec. 51

(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 Secs. 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 Masurer 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 may be in liability (see Secs.
2,13,15, 174.) and not in life or property. (Secs. 10,13.)

6The
term “net premium" refers to the portion of the premium that is
chargeable directly to the risk assumed by the insurer. "Gross premium" refers to the
total amount charged to the insured, which necessarily includes the net premium plus
charges for ad-ministrative expenses and profits.

Sec. 51

CONTRACT OF INSURANCE
195 Title 6. — The Policy

(5) Interest of insured in property. — This requirement is
especially important in fire insurance policies to determine
the actual damage 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 Secs. 2, 3.) Generally speaking, all
forseeable losses or risks may 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, may 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
may 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

7For additional discussion,

see annotation under Section 2.

196

THE INSURANCE CODE OF THE PHILIPPINES

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 the 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 may 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 may 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.
(1) Risk is the chance of loss,8 or the possibility of
the occurrence of a loss, based on known and unknown factors. If a

8The foregoing is known as negative, or undesirable risk. But risk can be positive
in the sense that the risk is a beneficial one. For example, if a person has a one-in-100
chance of winning a contest, a chance of gain or benefit exists, rather than a chance of
loss. The chance of obtaining a benefit is a positive risk.

Sec. 51

CONTRACT OF INSURANCE
197 Title 6. — The Policy

loss is absolutely certain to happen or not to happen, no risk
is involved.’
(2) In contrast to risk,
peril is the contingent or
unknown event which may cause a loss. It is the contingency
that one insures against, (see Sec. 3, par. 1.) Its existence
creates the risk, and its occurence results in loss. It may be
covered or excluded by a policy of insurance.
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 may create or increase the chance of loss from a
given peril. Ordinarily, there are many 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 may 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,10 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.
(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

’In 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
indife-rence to loss, resulting in carelessness, for example, by a demoralized
employee in the safe-keeping or handling of property.

198

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 51

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 may 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

Sec. 52

CONTRACT OF INSURANCE
199 Title 6. — The Policy

is usual to exclude political and war risks from most
insurance policies although these risks may 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
common 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.

200

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 52

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 regu-lations governing such
extensions for the purpose of pre-venting such
violations and may by such rules and regula-tions
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
preli-minary
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 memorandum
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 may never issue, (see ibid., p. 235.)
In life insurance, where an agreement is made
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

Sec. 52

CONTRACT OF INSURANCE

201 Title 6. — The Policy

oral agreement. While the issuance of a binder is
ordinarily conclusive
evidence
of
the
making
of
a
contract, yet the insurer may 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
insur-er makes a contract to insure the subject matter at some
subse-quent time which may be definite or indefinite. Under
such an executory contract, the right acquired by the insured
is merely to demand 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) may 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

202

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 52

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 may 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 may 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

Sec. 53

CONTRACT OF INSURANCE
203 Title 6. — The Policy

of the president, vice-president, or general manager of the
insurance
company
concerned
that
therisks involved, the
values of such risks and/or 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. Memo. Cir. No. 3-75, Sept.
29,1975, effective Oct. 21,1976.)
(7) Insurance companies may 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. 17,1980.)

Sec. 53. The insurance proceeds shall be applied
exclu-sively 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].)

204

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 53

(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 wasintended to benefit third
persons who are not parties to the contract in the form of
reasonable stipulations. In such case, the third party may
directly sue and claim from the insurer. (Heirs of L.G.
Maramag 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

.53

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].)

206

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 54-55

3. 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
princi-pal or beneficiary is the real party in interest may
be indi-cated by describing the insured as agent or
trustee, or by other general words in the policy, (a)

Where insurance made by a
n agent
or trustee.
An insurance may 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 name 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 copartners

Secs. 56-57

CONTRACT OF INSURANCE
207 Title 6. — The Policy

or other part-owners, it is necessary that the terms of
the policy should be such as are applicable to the joint or
com-mon interest.

Where insurance effected by partn
er 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 own benefit. (Cowan vs. Iowa
Stage Ins. Co., 40 Iowa 551.) But a partner who insures
partnership property in his own name 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 intend-ed 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 whom 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 may 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.

208

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 in-sured.

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 Secs. 17, 20,
and 30.) A purchaser of property who 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. Law 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
ascer-tained 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.

Secs. 59-62

CONTRACT OF INSURANCE
209 Title 6. — The Policy

Kinds of policies.
Insurance policies may be open, valued, or running.
They may 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 maximum 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 FMV 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 PI,000,000.00 is totally
destroyed by fire, the insurer may introduce evidence to
show that the property was not really worth PI,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 PI,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 PI,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 PI,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.

210

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 may agree on the
maximum 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 greater11 s or lesser
value.
(Development
Insurance Corp. vs. Intermediate Appellate Court, 143 SCRA 62
[1986].)
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) A running 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

nIn marine insurance, the insured is considered a co-insurer for the difference
be-tween the face amount 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 when there is a co-insurance clause in the policy, (see Sec. 172.)

Secs. 59-62

CONTRACT OF INSURANCE

211 Title 6. — The Policy

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 may
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.)

212

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 63

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. (Ibid., 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 tim
e 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 Code12 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].)

,2An insurance policy being a written contract, any action based thereon should
be brought within ten (10) years from the time the right of action accrues (Art. 1144.)
which period may be either lengthened or shortened by the parties subject to Section 63.

Sec. 63

CONTRACT OF INSURANCE
213 Title 6. — The Policy

(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.)

214

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 63

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.13 Thus:
(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 commenced

13Under Section 3(b, 6) of the Carriage of Goods by Sea Act of 1936 (C.A. No.
65.), the carrier and the ship shall be discharged from all liability in respect of loss or
damages unless suit is brought within one (1) year after delivery of the goods or the
date when the goods should have been delivered. It has been held that the one-year
period applies not only to the shipper but also to the insurer of the goods. Otherwise,
what the Act intends to prohibit after the lapse of the one-year prescriptive period
can be done indirectly by the shipper or owner of the goods 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 ground that the in-sured 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 Merchants Insurance Co., Inc. vs. Alejandro, 145 SCRA 42 [1986].)

Sec. 63

CONTRACT OF INSURANCE
215 Title 6. — The Policy

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 made 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
fileda 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

216

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 64

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 may be brought within the statutory period of
limitation (10 years) for written contracts. (ACCFA 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 effec-tive 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;

Sec. 65

CONTRACT OF INSURANCE
217 Title 6. — The Policy

(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
re-sult in the property becoming uninsurable; or
(f) a determination by the Commissioner that the
con-tinuation of the policy would violate or would place
the in-surer 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;

218

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 65

(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 Secs. 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 non-payment "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
own 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 and/or 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
may 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

Sec. 66

CONTRACT OF INSURANCE
219 Title 6. — The Policy

was sent "by mail through our mailing section" without
more. (Malayan Insurance Co., Inc. vs. Cruz-Amaldo, 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) As a 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.14 (43 Am. Jur. 2d 427.)
(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

14In the Malayan case above, the insured "meant to renew the [fire] policy if it had
re-ally been already cancelled but not if it was still effective. It was all conditional. As
it has not been shown that there was a valid cancellation of the policy, there was
consequently no need to renew it but to pay the premium thereon. Payment was thus
legally made on the original transaction x x x."

220

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 66

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) year15
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.
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 —

,5If the policy is for a short period, say, 40 days, the insured must be
given notice, upon issuance, that the policy would not be renewed upon
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 may 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 may 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

222

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 67

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,
presume that the warranty is merely affirmative.

the

courts

will

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?" was
held a promissory warranty breach of which precluded
recovery. (Vir-ginia Fire & Marine Ins. Co. vs. Morgan, 18 S.E. 191.)

Secs. 68-69

CONTRACT OF INSURANCE
223 Title 7. — Warranties

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 may
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
would employ a watchman, or install appliances
extinguishing fires, or that he would not store or keep
sale hazardous goods in the building insured during
pendency
of
policy, the warranty is one that relates to the future.

he
for
for
the
the

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
repre-sentation
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

224

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 68-69

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. cit., 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
and representations in contracts of insurance, to wit:

warranties

(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 may be
written in a totally disconnected paper or may 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

Secs. 68-69

CONTRACT OF INSURANCE
225 Title 7. — Warranties

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,

226

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 70

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 may 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 Ang
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

Sec. 71

CONTRACT OF INSURANCE
227 Title 7. — Warranties

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 was 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 regardin
g 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.

228

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 72

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 omission
s 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. FidelityPhoenix Ins. Co., 4k. A. 2d 529.) This is clear from Section 72.

Sec. 73

CONTRACT OF INSURANCE
229 Title 7. — Warranties

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
perfor-mance 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 doe
s 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

230

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 73

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 may 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 b
y 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 may 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

Sec. 73

Assurance, Inc. vs.
SCRA 411 [2006].)

CONTRACT OF INSURANCE
231 Title 7. — Warranties

Trans-Asia

Shipping

Lines,

Inc.,

491

(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 Tong 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].)

232

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 74

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. deMisa, 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 violatio
n 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

Sec. 75

CONTRACT OF INSURANCE
233 Title 7. — Warranties

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., 47 SCRA 271 [1972].)

Sec. 75. A policy may declare that a violation of
speci-fied provisions thereof shall avoid it, otherwise
the breach of an immaterial provision does not avoid
the policy.

When violation of immateri
al 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
(Secs. 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 may 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.

234

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 76

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
ex-onerates an insurer from the time that it occurs, or
where it is broken in its inception, prevents the policy
from attach-ing to the risk.

Effect of breach o
f warranty
by insured.
The breach referred to under Section 76 is one without
fraud. In order that the insurer may 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. — Where 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.

Sec. 76

CONTRACT OF INSURANCE
235 Title 7. — Warranties

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
may
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 Am. Jur. 2d 1035.), such as the
condition requiring notice and proof of loss in case of loss upon an
insurance against fire, (see Secs. 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

236

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 76

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
Am. 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 who issues his policy
covering a certain store and its contents against loss or damage
by fire may cut down the meaning of "contents" by excepting
money and securities, and restrict the peril of "fire" by
excepting fire caused by lightning. (Vance, op. cit., p. 426.)

Exceptions distinguished fro
m warranties
and conditions.
In most cases, exceptions
warranties and conditions.

are

easily

distinguished

from

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

Sec. 76

CONTRACT OF INSURANCE
237 Title 7. — Warranties

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 relation
s 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
pre-mium 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 may 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 Am. 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 459 [1991]; see Secs. 221,139.)

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

238

Sec. 77

CONTRACT OF INSURANCE
239 Title 8. — Premium

upon the collection of an assessment
similar policies. (43 Am. Jur. 2d, p. 327.)

upon

persons

holding

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 de
bt or obligation.
(1) In
fire,
casualty,
and
marine
insurance.

The
premium payable becomes a debt as soon as the risk attaches1
(Sec. 77; see Secs. 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.
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

â– Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 5
50
(2005), citing De Leon, Hector S., the Insurance Code of the Philippines (1992), p. 194.

240

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

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

.77

CONTRACT OF INSURANCE
Title 8. — Premium

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.
Facts: 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

242

THE INSURANCE CODE OF THE PHILIPPINES

Sec .77

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

Sec. 77

CONTRACT OF INSURANCE
243 Title 8. — Premium

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

THE INSURANCE CODE OF THE PHILIPPINES

Sec.

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.

Sec. 77

CONTRACT OF INSURANCE
245 Title 8. — Premium

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,}.)

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
cross-examination 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?

246

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

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

Sec. 77

CONTRACT OF INSURANCE
247 Title 8. — Premium

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.
(Secs. 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].)

248

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

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 war 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 Phil. 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 way 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

Sec. 77

CONTRACT OF INSURANCE
249 Title 8. — Premium

(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 ordinarilyforce
the
insured to makethese payments. {ibid., p. 493.)

Validity of policy where credit extensio
n granted to insured.
The first sentence of Section 72 (now Section 77) of
the former
Insurance
Act includes
the following
provisions after the word "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,"2 on a "cash-and-carry basis,"3 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,4 and an agreement to grant the insured credit

^The phrase is not found in Section 72.
3Under Section 196(1), premium receivables are not allowed as admitted assets
in the determination of the financial condition of any insurance company. Pursuant to
Sec-tion 196(10) and in implementation of the cash-and-carry provision of Section
77, the Insurance Commissioner has issued a circular letter (dated November 20,
1981, super-seding previous circulars, rulings or instructions on the matter
inconsistent therewith) prescribing the rules on premium receivables to be considered
as admitted assets, (see annotations under Secs. 196,197.) In other words, only
premium receivables allowed as admitted assets under the circular are considered
paid for purposes of Section 77.
4As to cover notes, see Section 52.

250

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

extension of the premium due is void.5 (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 made 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 may 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

5This is the interpretation of the Insurance Commission and the insurance
industry. According to the Commission, the "cash-and-carry" rule does not apply
when it will work against public interest or innocent third parties. Thus, in the
case of compulsory motor vehicle insurance (Chap. VI.), where accident victims
become third party claim-ants, an insurance company cannot deny recovery on the
ground that the premium on the policy has not been paid. Such policy is considered
already paid for, once it is in the hands of the insured for the protection of innocent
third persons who are not privy to the insurance contract.
6In the absence of clear waiver, express or implied by the insurer, the insured cann
ot collect on the proceeds of the policy.

Sec. 77

CONTRACT OF INSURANCE
251 Title 8. — Premium

would, in effect, establish the following rule: "Credit extension
of the premium due may 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 may 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 777 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 move with
necessary caution and prudence in holding contracts void."
(Gabriel vs. Mateo, 71 Phil. 497 [1941].)
(4) The ruling of the Supreme Court in UCPB General
Insurance Co.8 (supra.) is unduly favorable to the insurer who
may 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
may choose to demand the payment of the premium before a
loss has occurred if he desires to maintain or continue the contract
of insurance.

When policy valid and binding notwithstandin
g 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.);

7It was held that under Section 72, an insurance policy was automatically
cancelled upon failure of the insured to pay the premium within the 90-day credit
extension grant-ed by the express terms of the promissory note signed by the insured.
(ACME Shoe Rub-ber & Plastic Corp. vs. Court of Appeals, 134 SCRA 155 [1985].)

'Reconsidered and set aside on motion for reconsideration of respondent.
(356 SCRA 307 [2001], nius. case No. 2, infra.)

252

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

(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
made 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 who
relied in good faith on such extension.
Be that as it may, once a policy
pre-sumption lies that the premium has
where the nonpayment of the premium
fault or misrepresentation of the insurer,
to recov-er in case of loss.

has been issued, the
been duly paid, and
is attributable to the
the insured is entitled

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,

.77

CONTRACT OF INSURANCE
Title 8. — Premium

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. AHCPP-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
tbat 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.

254

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

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
install-ments. — "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

.77

CONTRACT OF INSURANCE
Title 8. — Premium

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. AH-CPP-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

THE INSURANCE CODE OF THE PHILIPPINES

Sec.

for any period, however brief or momentary." (Makati
Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462
[1992].)
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 60to 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

Sec. 77

CONTRACT OF INSURANCE
257 Title 8. — Premium

petitioner's advantage despite its practice of granting a 60to 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

THE INSURANCE CODE OF THE PHILIPPINES

Sec.

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
con-clusion 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

Sec. 77

CONTRACT OF INSURANCE
259 Title 8. — Premium

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."

260

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 77

(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 'If the insurer wants to favor the insured by
making the policy binding notwithstanding the nonpayment of premium, a mere credit agreement would not
be sufficient. The remedy would be for the insurer to
acknowledge in the policy that premiums were paid
although they were not, in which case the policy
becomes binding because such acknowledgment is a
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.)

Sec. 77

CONTRACT OF INSURANCE
261 Title 8. — Premium

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 ]une 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:
'All benefits under the policy shall be forfeited if
the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if
any fraudulent means or 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

262

THE INSURANCE CODE OF THE PHILIPPINES

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. Davide, 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 prepayment 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
263 Title 8. — Premium

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 prepayment 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.'

264

THE INSURANCE CODE OF THE PHILIPPINES

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

.78

CONTRACT OF INSURANCE
Title 8. — Premium

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 non-renewal 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, notwith-standing any stipulation therein that it
shall not be binding until the premium is actually paid, (a)

266

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 78

Effect of acknowledgment of recei
pt 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 may still dispute its
acknowledgment but only for the purpose of recovering the
premium due and unpaid. Whether payment was indeed made is a
question of fact.
According to the Supreme Court, Section 78 should be
interpreted as an exception to Section 77. (American Home
Assurance Company 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 PI,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
267 Title 8. — Premium

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
PI,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].)

268

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 79-82

Sec. 79. A person insured is entitled to a return of
pre-mium, 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 deduct-ing 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 in-curred any liability under the policy.
Sec. 82. In case of an over insurance by several
insur-ers, the insured is entitled to a ratable return of
the pre-mium, 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 recov
er 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].);

Secs. 79-82

CONTRACT OF INSURANCE
269 Title 8. — Premium

(2) When the insurance is for a definite period and the
insured surrenders his policy before the termination thereof {ibid., [b].);
(3) When the contract is voidable because of the fraud
or misrepresentations of the insurer or his agent (Sec. 81.);
(4) When the contract is voidable because of the existence
of facts of which the insured was ignorant without his fault (ibid.);
(5) When the insurer never incurred any liability under the
policy because of the default of the insured other than
actual
fraud (ibid.);
(6) When there is over-insurance (Sec. 82.); and
(7) When 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

270

THE INSURANCE CODE OF THE PHILIPPINES

premiums if the policy is not accepted. (44 C.J.S.
if the premium has previously been paid, it must be
no risk whatsoever has ever attached. If no risk
contract results, there is no meeting of the minds of
on the subject matter of the insurance.

Secs. 79-82

1329.) And
returned as
attaches or
the parties

(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
war 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. Christem Huenefeld
& Co., Inc., 89 Phil. 54 [1951].)

Where insured surrenders polic
y before termination.
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.

Secs. 79-82

CONTRACT OF INSURANCE
271 Title 8. — Premium

EXAMPLE:
X insures his house for one year and pays the amount
of P16,000.00 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.............................

20
30
40
50
60

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

272

THE INSURANCE CODE OF THE PHILIPPINES

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

70
75
80
85
90
95

Secs. 79-82

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

Right to recover premiums as to li
fe 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 dung 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." (Secs. 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

Secs. 79-82

CONTRACT OF INSURANCE
273 Title 8. — Premium

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

274

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 79-82

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 PI,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 20,1939.)

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,

Secs. 79-82

CONTRACT OF INSURANCE
275 Title 8. — Premium

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 overinsurance 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 PI,500,000.00 as follows:

Insu

Amount of insurance Premiums paid

rer
A

PI,200,000.00
600,000.00
PI,800,000.00

P24,000.00
12,000.00
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 PI,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 PI,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

276

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 79-82

was valid, he may recover the premiums paid despite
fact that the contract was illegal. But it is otherwise when
insured was a conscious party to the wrong. (Foster
Metropolitan Life Ins. Co., 35 N.E. 849; Vance, op. cit., pp.
352; Arts. 1411-1412, Civil Code.)

the
the
vs.
351-

Basis of right to recover premiums.
With regard to return of premium for short interest,
over-insurance, 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.
(Amould 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 may be defined as a demand for the satisfaction of
a loss suffered within the purview of an insured's policy. It may
be made 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 transf
er 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

278

THE INSURANCE CODE OF THE PHILIPPINES

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
assign-ment 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 harm to its duty.
Section 173, however, prohibits the transfer of a policy
of fire insurance to any person or company who acts as an
agent for or otherwise represents the issuing company and
declares such transfer void insofar as it may 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 contem-plated 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.)

Sec. 84

CONTRACT OF INSURANCE
279 Title 9. — Loss

Liability of insurer for loss.
(1) Extent of loss. — How much the insurer will pay
depends upon whether the insured suffers a loss and the
extent of that loss.1 (Riegel, Miller & Williams, op. cit., p. 37.)
As to extent, loss may be total, partial, or constructive total,
(see Secs. 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)
(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 may 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
with-in 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

•The amount of loss payable is affected by stipulations in the policy such as
"fran-chise clause" in a marine cargo 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 insur-ance (see Sec. 172.); "deductible clause" in motor vehicle insurance
against loss or dam-age which provides for the deduction of a stipulated amount
from the damage payable; and "contribution clause" in case of double insurance,
(see Sec. 94[1].)
The deductible clause is a standard feature in the loss/damages cover in
motor vehicle insurance and may vary depending on the make/type 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.

280

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 84

which
limits
its
liability.
(Country
Bankers
Insurance
Corpora-tion 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 may 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].)

2Proximate cause has a different meaning in insurance case than it has in tort
cases. In the latter, the rules of proximate cause are applied for the single purpose
of fixing culpability and for that reason, the rules consider both the injury and the
principal cause to fix the blame on those who created the situation in which the
physical laws of nature operated; in the former, the concern is not with the question
of culpability or why the injury occurred, but only with the nature of the injury and
how it happened. 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 may
nevertheless be had if the dominant cause is a risk or peril insured against. (43 Am. Jur. 2d.
[Rev.] 526.)

Sec. 84

CONTRACT OF INSURANCE
281 Title 9. — Loss

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 fires3 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.
(1) When fire a friendly fire. — So long as a fire bums 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.

282

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 84

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 damage the property insured, the
court very properly held the damage due to a hostile fire.
(Way vs. Insurance Co., 43 N.E. 1032.) The fire was intended
to bum 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 may become hostile if it, by accident, becomes so
excessive as to be beyond control (In O'Connor vs. Queen Ins. Co.,

Sec. 85

CONTRACT OF INSURANCE
283 Title 9. — Loss

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 damage 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 per-manently 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 proxima
te 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

284

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 86

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
con-tract 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 a
n 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

Sec. 87

CONTRACT OF INSURANCE
285 Title 9. — Loss

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 bums the insured
goods and submits fraudulent proof of loss, the policy is
avoided.4 (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 con-stitute prima facie evidence of arson, (see note to Sec. 172.)

286

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 87

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 SW 2d 428 [Tean. 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 coinsured.

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,

Sec. 87

CONTRACT OF INSURANCE
287 Title 9. — Loss

454
SCRA
337
[2005].)
The
doctrine
of
contributory
negligence does not in any way apply to rights under a contract
of insurance. (Richards v. Standard Acc. Ins. Co., 200 P. 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 bam 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 bam 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 jrus 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

288

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 87

(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.

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

290

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 88-89

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 may 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 policymaking 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,

Secs. 88-89

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

291

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
may 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

292

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 88-89

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 imme-diately, 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 communi-cate." (Vance, op. cit., p. 895.)
The insurance contract may 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 more 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 may be determined on the basis of such proof as may be
offered by the insured which need not be of such
persuasiveness as is required injudicial proceedings. (Malayan
Insurance Co., Inc. vs. Cruz-Amaldo, 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

'In the case of the "no fault" indemnity in Compulsory Motor Vehicle Liability
In-surance, see Section 378 (ii).

Secs. 88-89

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

293

absence of any stipulation in the policy, notice or proof may
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 may be in the form of an informal
or provisionalclaim 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 may act promptly in
protecting the property from further loss for which he may be
liable or to enable him to take any other immediate steps that
his interests may 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
may determine the extent of his liability but also; (2) to afford
him a means of detecting any fraud that may 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;<?f 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].)

294

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 90

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 noncompliance 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 who 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 proo
f 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 may be supplied. His retention of the defective proofs
constitutes a

Sec. 91

295

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

waiver of his objections, (ibid., pp. 893-894.) Thus,
waiver where the insurer:
(1) Writes to the insured that he considers
and void as the furnishing of the notice or
would be vain and useless (Bachrach vs. British
17 Phil. 555
[1910].); or
(2) Recognizes his liability to
pay the claim (45 C.J.S. 1209.); or

there is
the policy null
proof of loss
Am. Ins. Co.,

(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. Am. vs.
Hope, 58 111. 75.)

Sec. 91. Delay in the presentation to an insurer of
no* tice 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
the presentation of notice or proof of loss may be
an act of the insurer; and (2) by failure to
promptly and specifically upon that ground.
An
insurance
company,
by
accepting
premium with
full knowledge
premises had been injured or destroyed by
from claiming that notice of the fire

of delay in
made: (1) by
take objection
payment
of
that the
fire, is estopped

296

THE INSURANCE CODE OF THE 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.
Facts: 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. 92

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 rea-sonable diligence to procure it, and
in case of the refusal of such person to give it, then to
furnish reasonable evi-dence 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 certifica
te or testimony of third person.
If the policy requires, by way 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 was 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
per-son js 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 Am. 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

Sec. 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 overinsurance.

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 may 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 may be only one
insurer involved.
From the above explanation, double insurance and overinsurance may exist at the same time or neither may 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 PI,000,000.00
and he insured it with Y company for PI,100,000.00, there is
over-insurance 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 overinsurance.
Now if X procures only one policy for the amount
of PI,000,000.00 or a lesser amount, there is neither
double insurance nor over-insurance.

300

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 93

Binding effect of stipulation again
st 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
provi-sion is commonly known as the additional or "other
insurance" clause and is intended to prevent an increase in the
moral haz-ard. 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 Ana vs. Commercial Union Assur. Co., 55 Phil. 329 [1930];
Union Manu-facturing Co., Inc. vs. Phil. Guaranty Co., 47
SCRA 271 [1972]; Pioneer Insurance and Surety Corp. vs. Yap, 61
SCRA 426 [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 doub
le insurance.
The purpose of the prohibition against double insurance
to prevent over-insurance and thus avert the perpetration
fraud. The public, as well as the insurer, is interested
preventing the situation in which a loss would be profitable
the insured. (Pioneer Insurance & Surety Corp. vs. Yap, supra.)

is
of
in
to

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. 94

CONTRACT OF INSURANCE
Title 11. — Double Insurance

301

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 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 pol-icy 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
insur-able 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
propor-tion 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
containedin
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

302

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 94

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 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
240,000.00

If the house is totally burned, A, unless the
policies otherwise provide, may claim payment from each of
diem 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 PI80,000.00 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

.94

CONTRACT OF INSURANCE
Title 11. — Double Insurance

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 of policy x Loss = Liability of
insurer 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
P480,000.00

or

i/s of P180,000.00 or P22,500.00

Y Company —
P180,000.00
P480,000.00

0r

3/8 of P180,000.00 or P67,500.00

Z Company —
P240,000.00 or 4/8 of P180,000.00
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

THE INSURANCE CODE OF THE PHILIPPINES

Sec.

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, PI,500.00 and from Z Company, P18,000.00. Thus:
X Company —
P 60,000.00
-18,000.00
P 42,000.00




amount paid to A
amount to be returned by A



amount due from Y Company

-1,500.00
P

— amount due from Z Company

40,500.00

— pro rata contribution

-18,000.00
P
22,500.00

Y Company —
P

amount paid to A
amount to be returned by A

120,000.00
-54,000.00

amount due to X company

P 66,000.00

pro rata contribution

P 67,500.00
Z Company —
P 144,000.00— amount paid to A
- 72,000.00— amount to be returned by A

Sec. 94

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 may 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 Am. Jur. 2d. 283; see Secs.
216-222,280-281,310-312.), 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 PI,000,000.00 with V
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. 95

CONTRACT OF INSURANCE
307 Title 12. — Reinsurance

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 fro
m 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

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 95

(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. 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 distri-buted to a greater proportion of those needing
protection if the underwriters of many companies are in
position to supply insurance protection to applicants
requiring large amounts and to applicants who are not
eligible for insur-ance 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 own underwriting research.

Sec. 96

CONTRACT OF INSURANCE
309 Title 12. — Reinsurance

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.
of reinsurance is also beneficial to the
following reasons:

— The practice
insured for the

(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 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 whom 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 Secs. 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 previ-ously 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

310

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 96

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; Secs. 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 facultativ
e methods
of ceding reinsurance.
Reinsurance may be placed
in effect either automatically or facultatively.1
•For glossary of important reinsurance
terms, see annotations under Sections 216-222.
The insurance company originally writing the insurance is called the "primary
in-surer," 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. 96

CONTRACT OF INSURANCE
311 Title 12. — Reinsurance

(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 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 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. ("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.

312

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 97

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 distinguish
ed 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
synony-mous. 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. 98

CONTRACT OF INSURANCE
313 Title 12. — Reinsurance

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 (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 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
reinsur-ance, 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 con-tract of reinsurance.

314

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 98

Rights of original insured in contra
ct 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
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. (Ibid.)

Liability of reinsurer to original insured.
The original insured may 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
the reinsurer,
contemplating
only an
indemnity
to
the insurer
against losses suffered by reason of the policies carried by him,

and

Sec. 98

CONTRACT OF INSURANCE
315 Title 12. — Reinsurance

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 may contain a
provision whereby the reinsurer binds himself to pay to the
policyholder any loss for which the insurer may become liable,
(see Sec. 2; also Art. 1311, par. 2, Civil Code.2) 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].)
(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 (see Art. 1291 [2], Civil Code.3) 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.4)

2Art. 1311 x x x 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 suf-ficient. The contracting parties must have clearly and deliberately conferred
a favor upon a third person.
3Art. 1291. Obligations may 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)
4Art. 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 Articles 1236 and 1237. (1205a)

316

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 98

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 socalled "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 1A
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, prof-its, 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
ap-pertaining to a marine, inland marine, transit or
trans-portation insurance, including liability for
loss of or damage arising out of or in connection
with
the
con-struction,
repair,
operation,
maintenance
or
use
of
the
subject
matter of such insurance (but not including life
317

318

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

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 other-wise.
(d) Bridges, tunnels and other instrumentalities
of transportation and communication (excluding
build-ings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transporta-tion, 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
owner-ship,
operation,
chartering,
maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use in ocean or
inland waterways including liability of the in-sured 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 which is concerned
with the perils of property in (or incidental to) transit as
opposed to property perils at a generally fixed location. (D.L.
Bickelhaupt, op. cit., p. 837.)
The term does not include normal motor vehicle
insurance which is treated separately by law. (see Chap. VI.)

Major divisions of transportation insurance.
Transportation insurance, usually known in the
business as marine insurance, has two major divisions, namely:

insurance

(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.) The old law

Sec. 99

CLASSES OF INSURANCE
Title 1. — Marine Insurance

319

(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 movable property, may
be exposed during a certain voyage or a fixed period of time;1 and
(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, motor trucks, airplanes, and other means
of transportation. It also covers risks of lake, river, or other
inland waterway 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 marine insurance.
Note that the insurance may be in the form of property
insurance, indemnifying the insured for loss or damage to
property (Sec. 99[1].) or in the form of liability insurance
protecting the insured against liability for loss or damage to
property or for personal injury, illness or death of another person.
(Sec. 99[2].)

Scope of ocean marine insurance.
Ocean 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
De-cree No. 612, as amended.), which repealed the Insurance Act (Act No. 2427, as
amend-ed.), 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
ap-ply 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 insur-ance involving perils of land
or air transportation only.

320

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

by reason of maritime perils.2 (D.L. Bickelhaupt, op. cit., pp.
538-539.)

Risks or losses covered in ocea
n marine
insurance.
Under a marine insurance policy, all risks or losses may
be insured against, except such as are repugnant to public
policy or positively prohibited.3 (Bell vs. Western M & F Inc.
Co., [La] 5 Rob. 423.) A general marine insurance policy which
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
damage of like kind to those enumerated. (Thamas & Mersey M.
Ins. Co. vs. Hamilton [Eng.], LR 12 AC 484 [HL].)
Of course, to sustain a recovery on a marine policy, the
loss must have been occasioned by a risk or peril insured
against.4 Thus:
(1) The contract of insurance on freight is that the perils
in-sured against shall not prevent the ship from earning full freight
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.)
3By way of a historical background, marine insurance developed as an "allrisk" 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].) ‘
4A marine risk note is not an insurance policy; it is only an acknowledgment or
decla-ration 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 Con-tainer 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 nonpresentation 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
testimonly 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.)

Sec. 99

CLASSES OF INSURANCE
Title 1. — Marine Insurance

321

for the insured in that voyage; such a contract does not
under-take 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. & Bkg. Co., 12 L. Ed. 235.)
(2) The 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 bear damage which the vessel may
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 means contains an
engagement that any particular voyage 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 may occur
to her during the time for which she is insured. (Bradie vs.
Maryland Ins. Co., 9 L. Ed. 1123.)
(4) In marine policies, as in other kinds
the insurer may except liability from certain
under a marine policy
excluding coverage
breakage
unless
caused by an
vessel, it has been held that bad weather causing
not an accident within the policy. (Traders
App.] 181 So 2d. 879; see 44 Am. Jur. 2d 214-215.)

of insurance,
causes. Thus,
for
accident to the
the damage is
vs. Poland, [La

(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. The 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
washed 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.

322

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

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 may
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 know
of these customs and legal requirements. (Marine Insurance, Its
Principles and Practice, by William D. Winter, 3rd Ed., pp. 1-2
[1952], published by McGraw Hill Book & Co., Inc., N.Y.)

“Perils of the sea,” as used in ocean mari
ne insurance, explained.
(1) Perils covered. — Ocean marine insurance protects
ships at sea and the cargo or freight on such ships from
standard "perils of the sea." The phrase "perils of the sea" or
"perils of navigation" includes only those casualties due to
the unusual violence or extraordinary action of wind 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
damage done to the ship or goods at sea by the violent
action of the wind and waves (45 C.J.S., 934.) or losses
occasioned by the jettisoning of cargo if it is made for the
purpose of saving a vessel rendered unworthy during the
voyage, not through the fault of the captain. (Dabney vs.
New England Mut. Marine Ins. Co., 14 Allen 300.)
(b) The
phrase
extends
to
barratry
which
in
American insurance law is "any willful misconduct on the
part of the master or crew in pursuance of some unlawful
or fraudulent purpose without the consent of the owners,
and to the prejudice of the owner's interest." Barratry
requires a willful and intentional act in its commission.
No
honest
error
of judgment or mere negligence, unless
criminally gross, can

Sec. 99

323

CLASSES OF INSURANCE
Title 1. — Marine Insurance

be barratry.5 (Roque
139 SCRA 596 [1985].)

vs.

Intermediate

Appellate

Court,

(2) Perils not covered. — It does not include losses
resulting from ordinary wear and tear or other damage usually
incident to the voyage. The mere fact that an injury is due to the
violence of some marine force does not necessarily bring it
within the protection of the policy if such violence was 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 away of a mast,
or the loss of an anchor by a storm, will entail liability upon 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 sea" is a relative term
and the meaning may vary with the circumstances. Thus,
where a vessel designed for inland waters was insured while
being towed in the Gulf of Mexico and the insurer was fully
aware of the hazardous nature of the journey and charged an
extra premium, the loss was held to be due to perils of the sea
although a sea-going vessel would not have been damaged by
the moderate waves encountered. (Ibid.; Compania
de
Navegacion
vs. Fireman's
Fund Ins. Co., 277 U.S. 66.)

Perils of the sea distinguished from per
ils 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. The 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.)

324

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

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 tire 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
which
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 was apprised
but failed properly to repair, was one more analogous to
that which directly resulted from simple
seaworthiness
than
to
that
which resulted from perils of the sea.
The owner of the damaged rice must look to the shipowner for
redress and not to the insurer. (Go Tiaco vs. Union Ins. Society
of Canton, 40 Phil. 401 [1919]; see Cathay Insurance Co. vs.
Court of Appeals, 151 SCRA 710 [1987].)

Perils of the sea must be the proxima
te cause of loss.
As with other kinds of insurance, in ocean marine
insurance, the insurer is liable only for such losses or damages
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

Sec. 99

CLASSES OF INSURANCE
Title 1. — Marine Insurance

325

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.)

“Ail risks” marine insurance policy.
An all risks marine insurance policy insures against all
causes of conceivable loss or damage, except as otherwise
excluded in the policy or due to fraud or intentional misconduct
on the part of the insured.
(1) Scope of protection. — This type of policy has been
evolved to grant greater protection than that afforded by
the "perils clause." It covers all losses during the voyage
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
damage to the subject matter insured but shall in no case
deemed to extend to cover loss, damage, or expense
proximately caused by delay or inherent vice or nature of
the subject matter insured. Claims
recoverable
hereunder shall
be payable irrespective of
percentage."
(2) Burden of proof on part of insurer to establish damage
or loss that has occurred, excluded from coverage. — The
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

326

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

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"
has the initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was
damaged when unloaded from the vessel; thereafter, the burden
then shifts to the insurer to show the exception to the
coverage. The basic rule, to state again, is that the insurance
company has the burden of proving that the loss is caused by
the risks excepted and for want of such proof, the company is
liable. (Filipino Merchants Insurance Co. vs. Court of Appeals, 179
SCRA 638 [1989].)

Development of inland marin
e insurance
in the United States.
(1) Need
for
inland
transportation
insurance.

The
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 was delivered to the premises of the consignee.
This, of course, also involved coverage while the property was
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. Thus, 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.

Sec. 99

CLASSES OF INSURANCE
Title 1. — Marine Insurance

327

The ownership of fur coats, of jewelry, of hobby equipment
and sporting equipment spread and promoted the widespread
use of insurance forms designed for these possessors.
As business and commerce grew, many activities seemed
to be served best by extension of land marine insurance to
cover property while
awaiting shipment,
while being
prepared
for shipment, while being processed,
and
while in storage after shipment. New inland
marine
insurance protection
next came to apply when the
act of transportation itself became incidental to the true use of
the property involved. The personal use of jewelry or furs, for
instance, ordinarily involves no use of the transportation
agencies;
yet, an inland marine insurance
form insures articles of jewelry or furs, wherever they may be,
even if they are kept within the home of the owner for twelve
months of the year, (ibid., p. 303.)
(3) Flexibility of inland marine rates and coverages. — As
the demand for inland marine insurance coverages developed
into a veritable boom, fire and casualty insurers were attracted
to the business. Some of the old marine policy were retained
but 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,
much broader coverage were available under inland marine
contracts than could be obtained under the old fire or casualty
contracts. The inland marine
contract were
particularly
desirablewhen 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. — The 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

328

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 99

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 came 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.
— The
Nationwide Definition merely defines what can be
classified as
marine insurance, as distinguished from fire and
casualty insurance. It does not distinguish between ocean
marine and inland marine insurance.
The
definition
is
less
important
today
because multiple-line laws now 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 have some distinctive
characteristics,
and
under
some
state
laws,
is
still treated differently.
According to the Nationwide Definition,
insurance includes at least the following classes:

inland

marine

(a) Property insurance on goods in transit by railroad,
express, mail, motor truck, aircraft and (partly by) water.
The 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 may be, against any peril, even though
not in the course of transportation. An example is a jewelry
floater covering "all risks." Another is the insurance on
goods in the hands of a dry cleaner. Such contracts are
much broader policies than could be issued by either fire or casualty
insurers

Sec. 99

CLASSES OF INSURANCE
Title 1. — Marine Insurance

329

at the time the definition was adopted, but for which
there was a strong demand;
(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 commercial equipment;
(d) Property insurance on a few of the means of
transportation, such as small boats, railroad cars, and the
like. The more important exposures of this character are
insured by other agencies, such as vessels by the ocean
marine departments, airplanes
by
aviation insurers,
and motor
vehicles
by automobile insurers; and
(e) Liability insurance, to protect transportation
carriers, warehousemen, processors,
and
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 inlan
d 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) who
are not its owners, or at a fixed location but an important
instrument of transportation, or is a movable 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. —The insurance provides protection
for property frequently exposed to loss while it is in
transportation from one location to another;
(2) Bailee liability. — The insurance provides protection
to persons who have temporary custody of the goods or
personal property of others, such as carriers, laundrymen,
warehousemen, and garagekeepers;
(3) Fixed transportation property. — The insurance covers
bridges, tunnels, and other instrumentalities of
transportation and communication, although as a matter of fact
they are fixed

330

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 100

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 may be located, subject always to the
territorial limits of the contract. Floater policies may 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 need not necessarily occur. Floaters have been 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
insur-able interest in it, even when it has been chartered
by one who covenants to pay him its value in case of
loss; Pro-vided, 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 upon a ship or
cargo "lost or not lost," that is, the insurer expressly agrees that he will

Sec. 100

CLASSES OF INSURANCE
Title 1. — Marine Insurance

331

bound in any event, even though the vessel be already lost,
the contract is binding and the insurer must pay, even though
it be proved that the insured had nothing to insure when 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.
The 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 same (Higginson vs. Dali, 13
Mass. 96.); or has chartered it to a third person who agrees to
pay him its value in case of loss. (Sec. 100.) However, in the
latter case, the insurer is liable only for that part of the loss
which the insured cannot recover from the charterer.6
The charterer of a ship has 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.)

The shipowner's liability arising from the operation of a ship is merely coextensive 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].)

332

THE INSURANCE CODE OF THE PHILIPPINES

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. — The insurable interest is
commonly possessed by the owner, and also if money has been
borrowed, by one who holds mortgage on the vessel. One
who 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. — The insurable interest is in
the shipper or the consignee depending upon the terms of sale.
The following are some of the common terms of sale:
(a) F.O.B. (free on board):
1) F.O.B. factory.—The buyer
when the goods leave the factory; or

assumes

responsibility

2) F.O.B. point of destination. — The buyer does
not assume responsibility until the goods are received
from the carrier.
(b) C.I.F. (cost, insurance, and
assumes complete
responsibility
necessary insurance; and

freight)
for

— The
securing

seller
all

(c) C. & F. (cost and freight) — The buyer 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. —
The vendee/consignee has such existing interest therein as
may be the subject of a valid contract of insurance. His interest
over the goods is based on the perfected contract of sale
between him and the shipper of the goods which operates to
vest in him an equitable title even before delivery or before
he performed the conditions of the sale. The contract of
shipment, whether under F.O.B., C.I.F., or C. & F., is
immaterial in the determination of whether the vendee has an
insurable interest or not in the goods in transit. The perfected
contract of sale even without delivery vests in the vendee an
equitable title, an existing interest over the goods sufficient to
be the subject of insurance. (Filipino Merchants Insurance Co.
vs. Court of Appeals, 179 SCRA 638 [1989].)

Secs. 101-102

333

CLASSES OF INSURANCE
Title 1. — Marine Insurance

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 wh
ere vessel hypothecated by bottomry.
A loan on bottomry is one which is payable only if the vessel, given as a security for the loan, completes in safety the
con-templated voyage. The lender in bottomry is entitled to
receive a high rate of interest to compensate him for the risk of
losing his loan. The owner of the vessel receives in case of loss
no indem-nity for his loss, but he does secure immunity from
payment of the loan.
Obviously, many of the elements of an insurance contract
are present in the bottomry loan as well as in the respondentia
loan, which is secured in similar manner on the cargo or some
part thereof. (Vance, op. cit., p. 9.)
Where
a
vessel
is
bottomed,
the
owner
has
an
insurable interest only in the excess of its value over the
amount of the bottomry loan. (Sec. 101.) The 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 PI,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
marine insurance, signifies all the benefits derived
the owner, either from the chartering of the ship or
employment
for
the carriage
his own goods or those of others.

of
by
its
of

334

THE INSURANCE CODE OF THE PHILIPPINES

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
employment of the ship.

Sources of freightage.
Freightage may be derived from: (1) the chartering of
the ship; (2) its employment for the carriage of his own 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
inter-est 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 owner of a ship includes not only the
legal owner but also the charterer who expects to earn in
the transportation of goods of others.
(1) The freight (or freightage) covered by an ordinary
marine policy is something more than the interest indicated
ordinarily by the use of the word "freight." (see Sec. 102.) The
freight money assured to the shipowner may be: (a) freight,
in its ordinary acceptation, to be earned and payable upon
the
completion
of
the voyage;
(b)
the
hire
of the vessel, payable by the charterer; or
(c) the benefit accruing to the owner from the use of his vessel
in the way of profits upon carriage of his own goods. (Vance, op
cit., p. 913.)
(2) The owner of a ship has an insurable interest in
expected freightage which he may 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 same although the freight
has been
paid in advance. (Vance, op. cit., p. 913.) However,
where the agreement

Sec. 104

CLASSES OF INSURANCE
Title 1. — Marine Insurance

335

is that the freight is payable in any event, whether the
vessel is lost or is not lost, the shipowner has no insurable
interest in such freight. (44 C.J.S. 923.) But the shipper who 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.
Under
such
circumstances,
the passenger can clearly insure his
advances of passage money but the shipowner may not insure
it unless it is payable only upon the completion of the voyage.
(Vance, op. cit., p. 914.)

Sec. 104. The interest mentioned in the last section
ex-ists, 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 voy-age. (a)

Insurable interest in expected
freightage in a charter party.
(1) When it exists. — To give an insurable interest in
expected freightage, the insured must have an inchoate right
to freight, that is, he must be in such position with regard to
freight that nothing
could prevent
him
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.

336

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 105

(c) Where the shipowner has made a binding contract
for freight and the ship is in readiness to receive the goods,
he has an insurable interest.
(2) When
in freight:

none exists.



There

is

no insurable interest

(a) Where there is no contract and no part of
goods expected to be carried are on board, there is
insurable interest in freight although there are goods ready
shipment or the master is provided with funds for
purpose of purchasing a cargo.

the
no
for
the

(b) Where the vessel is a mere "seeking ship" or a
vessel looking for cargo to be transported, the owner has no
insur-able 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 may be contingent (see
Sec. 14[c].) like commission to an agent or consignee. (French vs.
Hope 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 who has made a
contract for purchase of property which has been made ready
for ship-ment, although not loaded and who has contracted to sell it at a

Sec. 106

337

CLASSES OF INSURANCE
Title 1. — Marine Insurance

profit, has an insurable interest in the profits. (Royal Exch.
Assur. Co. vs. M'Swiney, 14 Q.B. 646.)

Sec. 106. The charterer of a ship has an insurable
inter-est 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) One who charters a vessel, with a stipulation to pay
its value in case of loss, has an insurable interest to the extent of
its value.
(2) The charterer has also an insurable interest in the
profits he expects to earn by carrying the goods in excess of the
amount 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 P300,000.00 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 partie
s. 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

338

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 106

specified time or use. (Puromines, Inc. vs. Court of Appeals,
220 SCRA 281 [1993].) In modem 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,
much 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, who 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. The charterer
becomes, 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 man
the vessel under the charterer's direction, such that the master and
crew provided by the shipowner become the agents and
servants or employees of the charterer, and the charterer (and
not the owner) through the agency of the master, has possession
and control of the vessel during the charter period.
(2) Under a contract of affreightment, the owner 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 owner of the
vessel
who
retains
the
possession, command 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.7 The contract may be either voyage charter or time
charter. The charterer is free from liability to third persons in
respect to the ship.
(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 employ

TTie cargo not loaded is considered as deadfreight. It is the amount paid by or
recov-erable 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].)

Sec. 106

CLASSES OF INSURANCE
Title 1. — Marine Insurance

339

of the owner of the vessel. The ship owner supplies
the ship's store, pays for the wages 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
may fully contract respecting liability for damage to the
goods and other matters. The basic principle is that the
"responsibility for cargo loss falls on the one who agreed
to perform the duty involved" in accordance with the terms
of most 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 one or
more specified voyages. In this case, the owner of the timechartered vessel also retains possession and control through
the master and crew who remain his employees. What
time charterer acquires is the right to utilize the carrying
capacity and facilities
of
the vessel
and 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 and liabilities of the
shipowner in relation to third persons who have dealt with
him or with the vessel. In such case, the master of the vessel
is the agent of the charterer and not of the shipowner. The
charterer or owner pro hac vice, and not the general owner of the
vessel, is held liable for the expenses of the voyage including the
wages of the seamen.9

8The 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 general 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
por-tion 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].)
9In 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

340

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 107

(Litonjua Shipping Company, Inc. vs. National Seaman Board,
176 SCRA 189 [1989]; see Maritime Agencies & Services,
Inc. vs. Court of Appeals, 187 SCRA 346 [1990]; Puromines,
Inc. vs. Court of Appeals, supra; see Planters Products, Inc. vs.
Court of Appeals, 226 SCRA 476 [1993]; Tabacalera Insurance
Company vs. North Front Shipping Services, Inc., 272 SCRA
527 [1997]; National Food Authority vs. Court of Appeals, 311
SCRA 700 [1999]; Caltex [Phils.], Inc. vs. Sulpicio Lines, Inc.,
315 SCRA 709 [1999]; San Miguel Corporation vs. Heirs of S.
Inguito, 384 SCRA 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 sec-tion 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
any material fact or circumstance which in fact or law is
within, or which ought to be within the knowledge of one
party and of which the other has no actual or presumptive knowledge.
This rule applies to both the assured and the underwriter,
and the rests upon the doctrine of good faith as well as the
prevention of fraud. (3 Joyce on Insurance, 2nd Ed., 2943.)

Rules as to misrepresentations a
nd concealments
stricter in marine insurance.
The rules as to misrepresentations and the concealments,
or omissions to state facts material to the risk are more 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.)

Sec. 108

CLASSES OF INSURANCE
Title 1. — Marine Insurance

341

of marine than of fire insurance. This 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, which are often insured when absent or afloat.10
(Armena vs. The Transatlantic Fire Ins. Co., 90 N.Y. 450.)
Under
Section
107,
to
constitute
concealment,
it
is
sufficient that the insured is in possession of the material fact
concealed although he may 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 own judgment to the insurer
much less what he learns from a third person, (see Secs. 35, 43.)
In marine insurance, however, the rule is quite strict
because the insured is bound to communicate to the insurer
not only facts but also (1) beliefs or opinions of third
persons or (2) expectations of third persons. The 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 who
inspected the vessel insured that it was unseaworthy.

10When the early contracts of marine insurance were formed, in the days when
un-derwriters 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. Of-ten 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 insur-ance 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.)

342

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 b
y insured
of prior loss.
(1) When rule applicable. — Section 109 establishes a
rebut-table presumption of knowledge of a prior loss on the part
of the insured "if the information might possibly have reached
him in the usual mode of transmission and at the usual rate of
commu-nication."
(2) Reason for presumption. — The reason for the
presumption is the quickness in the transmission of news
by means of modem communications. Inasmuch as at present,
the means of transportation have rapidly advanced due to the
urgent needs of commerce, the presumption that the loss of a
vessel due to the disaster of the seas was duly communicated
to the insured, becomes stronger. (Snow vs. Mercantile Mut.
Ins. Co., 61 N.Y. 160.)
(3) When rule not applicable. — The insured is not
bound, however, to use all accessible means of information at
the very last instant of time to ascertain the condition of the
property insured. Thus, when having no cause to expect
information the insured omits to call at the post office where a
letter was received on the morning of the day the insurance was
effected, containing the material information, he is not guilty
of negligence which will vitiate the policy. (Neptune Ins. Co.
vs. Robinson, 11 Gill & [Md.] 250.)

Sec. 110. A concealment in a marine insurance, in
re-spect 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
de-tention;

Sec. Ill

CLASSES OF INSURANCE
Title 1. — Marine Insurance

343

(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 vitia
te entire contract.
As a rule, the concealment 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 mentioned in Section
110, which was concealed, the insurer is not liable; but 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
knowledge of the insured, which will expose the property to
belligerent risks or seizure and condemnation for violation of
the trade or navigation laws of another country, must 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 o
n representation
to marine insuranc
e.
The
rules
governing
representations
with
respect
to
insurance policies generally have been 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

344

THE INSURANCE CODE OF THE PHILIPPINES

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 representati
on by insured.
(1) Intentional. — Any misrepresentation
fact made with fraudulent intent avoids the policy.

of

a

material

(2) Not intentional. — If the misrepresentation is not
intentional
or
fraudulent but the
fact
misrepresented
is
material to the risk, the insurer may also rescind the contract
from the time the representation becomes false. Section 111
qualifies the general provision in Section 45 under which the
injured party may rescind the contract only "from the time
when
the
representation
becomes
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 was at a certain place at a certain time; that
other underwriters had insured her at a certain rate; or as to
anything which concerns the state of the vessel at any
particular period of her voyage, have been held to be
material. But statements of the nature and amount of the cargo,
where she was not overloaded or where the underwriter did
not rely thereon, have been 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
con-tract of marine insurance.

Effect of falsity of representati
on as to expectation.
Representations of expectation or intention are to be
carefully distinguished from promissory representations. The former are

Sec. 113

CLASSES OF INSURANCE
345 Title 1. — Marine Insurance

statements of future facts or events which are in
nature contingent and which the insurer is bound to
that the insured could not have intended to state as
facts, but as intentions or expectations merely. Hence,
made with fraudulent intent, their failure of fulfillment is
ground for rescission.

their
know
known
unless
not a

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 amount 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 been defined as a
stipulation, either expressed or implied,
forming
part
of
the policy as to some 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 upon 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 Secs. 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

346

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 113

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. American General Insurance
Co. vs. Court of Appeals, 273 SCRA 262 [1997].)
(1) Where seaworthiness admitted by insurer. — If the
policy provides that the seaworthiness of
the vessel
as
between insured and insurer is admitted,
the
issue
of
seaworthiness cannot be raised by the insurer
without
showing
concealment
or misrepresentation
by
the
insured. The admission of seaworthiness by the insurer may
mean 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. The 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. 99[1, a].) is the subject of marine
insurance, the implied warranty of seaworthiness attaches to
whoever is insuring the cargo, whether he be the shipowner or
not. The fact that the unseaworthiness of the ship was unknown
to insured is immaterial in ordinary marine insurance and may
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
sea-worthiness
in
every
contract
of
ordinary
marine
insurance, it becomes the obligation of a cargo owner to look
for a reliable common 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 common
carrier that will transport his goods. Or, the cargo owner may
enter
into
a
contract
of
insurance
which specifically provides that the insurer answers

Sec. 114

CLASSES OF INSURANCE
Title 1. — Marine Insurance

347

not only for the perils of the sea but also provides for
coverage of perils of the
ship.
(Roque
vs.
Intermediate
Appellate Court, 139 SCRA 596 [1985]; Phil. American General
Insurance Co., Inc. vs. Court of Appeals, supra.) It has been
held, however, that a charterer of a vessel has no obligation
before transporting its cargo to ensure that the vessel it
chartered complied with all the legal requirements. The duty
rests upon the common carrier simply for being engaged in
"public
services."
Because
of
the implied
warranty
of
seaworthiness, shippers of goods are not expected
when
transacting
with common
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 SCRA 709 [1999].)
(3) Where vessel found unseaworthy. — As a general rule,
common carriers are presumed to have been at fault or to
have acted
negligently
for
the
loss,
destruction,
or
determination of goods, unless they prove that they observed
diligence. (Arts. 1733, 1734,1735, Civil Code.) Where a vessel is
found unseaworthy, a shipowner is also presumed to be negligent
since it is tasked with the maintenance of its vessel. Though its
duty can be delegated, still, the shipowner must 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 when the damage 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

348

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 114

sufficient number of competent officers and crew. The 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. Sulpido Lines, Inc., 315 SCRA 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.—What is reasonable fitness to
encounter the perils expected to arise in the course of the
voyage vary, naturally, with the character of the particular
voyage. A vessel well fitted for the navigation of the
Mississippi might 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 same vessel on the high seas. (Vance, op. cit., pp. 922923.)
(3) Nature of service. — The seaworthiness of a vessel is
also to be determined with regard to the nature of the cargo
which she undertakes to transport, the requirement being that
she shall be reasonably capable of safely carrying the cargo to
its port of destination. (Schults vs. Pacific Ins. Co., 14 Fla. 73; 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

Sec. 115

349

CLASSES OF INSURANCE
Title 1. — Marine Insurance

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.
The
warranty
of
seaworthiness
is
guaranty that the vessel will safely meet
(Vance, op. cit., p. 923.)

not
an
absolute
all possible perils.

A perfect vessel or one impervious to the assaults of
the elements is not required; nor is the best and most 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. 563; San
Miguel Corporation vs. Heirs of S. Inguito, 384 SCRA 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 voy-age 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
estab-lished custom of the trade, is to be transhipped
at an in-termediate 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.

350

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 115

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
commencement 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.
rule, namely:



There

are

three

exceptions

to

the

(a) In the case of time policy, the ship must be
seaworthy at the commencement of every voyage she may
undertake (Sec. 115[a].);
(b) In the case of cargo policy, each vessel upon which
the cargo is shipped or transhipped,11 must be seaworthy at
the commencement of each particular voyage (ibid., [b].); and
(c) In the case of a voyage policy contemplating a
voyage in
different stages,
the
ship must
be
seaworthy at
the commencement of each portion. (Sec. 117.)
(3) Ship's actual condition at commencement of voyage. —
The unexplained
sinking of a
vessel creates the
presumption of unseaworthiness. The
shipowner
cannot
escape liability
by presenting in evidence a
certificate that tends to show that at the time of dry-docking
and inspection (by the Philippine Coast Guard), the vessel was 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 com-mercial 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].)

Sec. 115

CLASSES OF INSURANCE
Title 1. — Marine Insurance

351

Seaworthiness relates to the vessel's actual condition at
the time of the commencement of the voyage. The 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 stowage
does not satisfy the vessel owner's obligation nor does it
establish due diligence if the vessel was, in fact, unseaworthy,
for
the
cargo
owner
has no
obligation
in relation
to
seaworthiness.
(Delsan
Transport
Lines,
Inc.
vs.
Court of
Appeals, 369 SCRA 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
com-mencement 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 named
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

352

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 116

the termination of voyages and the renewal of policies. On
hulls (vessels), they are, therefore, the common type. By
means of the time policy, the insured avoids the necessity of
continually describing separate voyagesmany
of
which are
over
similar routes.
(2) The voyage policy is particularly adapted to tramp
steamers and sailing vessels, inasmuch as these do not move
over fixed routes and their travel may 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. 275276.)

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 of-ficers 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
must
have
equipment and appliances appropriate to the voyage in which it
is engaged and the cargo it carries; it must have sufficient fuel,
stores and provisions to last for the entire voyage; it must
have sufficient number of competent officers and men; and if
the insurance is on cargo, the same must be properly loaded,
stowed, dunnaged 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 because of some
defect in loading or stowage which is easily curable by those on
board, and was cured before the loss. But carrying a deck cargo
raises a presumption of unseaworthiness which can be
overcome only by showing affirmatively that the deck cargo
was not likely to interfere with the due management of the
vessel; and when, by a jettison or otherwise, the vessel can be
made seaworthy, the warranty is satisfied, (see 45 C.J.S. 564-566.)

Sec. 117

CLASSES OF INSURANCE
Title 1. — Marine Insurance

353

It is settled that the carrying of cargo on deck raises
the presumption of unseaworthiness unless it can be shown that
the deck cargo will not interfere with the proper management of
the ship. A ship may not be designed to carry substantial
amount of cargo on deck and the inordinate loading of cargo
on deck may result in the decrease of the vessel's metacentric
height thus making
it
unstable.
(Phil.
American
General
Insurance Co. vs. Court of Appeals, 273 SCRA 262 [1997].)

Sec. 117. Where different portions of the voyage
con-templated by a policy differ in respect to the
things req-uisite 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. Where the policy contemplates a
voyage in different stages during which the subject matter
insured will be exposed to different degrees or kinds of perils,
or the ship will require different kinds of equipment, she must
be seaworthy at the commencement of each stage, but it is
sufficient if at the commencement of each stage she is seaworthy
for the purpose of that stage. (Northwestern SS. Co. vs. Maritime
Ins. Co., 161 F. Ed. 166.)
The 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

354

THE INSURANCE CODE OF THE PHILIPPINES Secs. 118-119

commencement of the second portion of the voyage, the
vessel is not in a position to encounter the ordinary perils of
the sea. (Buillon 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
unreason-able delay in repairing the defect exonerates
the insurer on ship or shipowner’s interest from liability
from any loss arising therefrom, (a)

Where ship become
s 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.)
There
is
no
implied warranty that the
vessel will remain in a seaworthy condition throughout the life
of the policy.
However, when the vessel becomes unseaworthy during
the voyage, it is the duty of the master, as the
shipowner's representative, to exercise due diligence to make
it seaworthy again, and if loss should occur because of his
negligence in repairing the defect, the insurer is relieved of
liability (Paddock vs. Franklin Ins. Co., 11 Pick 234; see Sec. 133.)
but 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. Co. of Philadelphia vs. Smith, 124
U.S. 405.)
Note that the benefit of exoneration is given only to
an "insurer on ship or shipowner'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 which she undertakes
to transport, the requirement being that she shall be reasonably

Sec. 120

CLASSES OF INSURANCE
Title 1. — Marine Insurance

355

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
upon the ship may yet be unseaworthy for the purpose of
insurance upon the cargo. Thus, a ship was held unseaworthy
for cargo because of a defective pipe which the shipowner
failed to repair, with the result that water entered the vessel
and the cargo was damaged. (G. Tiaco y Hermanos vs. Union
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 national-ity or neutrality and that it will not carry
any documents which cast reasonable suspicion thereon.
Express warranty as to nationalit
y or neutrality.
(1) A warranty of national character may be gathered from
the language of the policy describing the vessel as the
"Philippine," "American," "British,"
or
"Spanish"
ship,
etc., although
an exception
has
been
made where the fact recited could have no relation to the
risk. A warranty of nationality does not mean that the vessel
was 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. The 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

356

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 121-123

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 that 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
when
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 and Deviation

Sac. 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
mer-cantile 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
unexcused departure from the regular course or route of the
insured voyage 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 marine
insurance, namely:

Secs. 124-125

CLASSES OF INSURANCE
Title 1. — Marine Insurance

357

(1) Departure
from
the
course of sailing
fixed by
mercantile usage between the places of beginning and ending
specified in the policy (Sec. 121.);
(2)
Departure
from
the
most
natural,
direct,
and
advantageous route between the places specified if the course of
sailing is not fixed by mercantile usage (Sec. 122.);
(3)
Unreasonable delay in pursuing the voyage (Sec. 123.); and
(4) The commencement 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 s
ec-tion is improper.
Kinds of deviation.
Deviation may 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.)
The insurer is not exonerated from liability for loss
happening after proper deviation. The effect is as if there were no deviation.

When 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:

358

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 126

(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 made to
take on a pilot when necessary to the safety of the
adventure (Pouverin vs. Louisiana State M. & F. Ins. Co., 4
Bob [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 which 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
assumed by the underwriter. But while deviation to save
property is not justified, unless it is to save another vessel in
distress (see Burgeos vs. Equitable Marine Ins. Co., 126 Mass.
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
happen-ing to the thing insured subsequent to an
improper devia-tion.
Effect of improper deviation.
Where there has been any deviation or change of the
risk without
just
cause,
the insurer
becomes
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 changed by a deviation from the voyage insured.
And the fact that the deviation did not increase the risk, or in
any wise contribute to the loss suffered, is

Secs. 127-130

CLASSES OF INSURANCE
Title 1. — Marine Insurance

359

wholly immaterial. (Vance, op. cit., p. 924.) The underwriter
can always defend himself by saying: "I never undertook this
risk." (African Merchants Co. 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
construc-tive.
Kinds of losses.
The law classifies loss into either total or partial. There are
two kinds of total loss: actual or absolute; (Sec. 130.) and
constructive or technical. (Sec. 131.)
When the loss is total, the underwriter is liable for the
whole of the amount 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.)

360

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 130

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 may
exist where the form and specie of the thing is destroyed
although the materials of which it consisted still exist. (Pan
Malayan Insurance Corp. vs. Court of Appeals, 201 SCRA 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.

Sec. 130

CLASSES OF INSURANCE
Title 1. — Marine Insurance

361

(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.
The shipowner'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 embodied in Articles 587, 590 and 837
under Book III of the Code of Commerce, thus:
Art. 587. The ship agent shall also be civilly liable for
the indemnities in favor of third persons which may arise
from the conduct of the captain in the care of the goods
which he loaded on the vessel; but he may exempt himself
therefrom by
abandoning
the
vessel
with
all
her
equipment and the freight it may have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly
liable in the proportion of their interests in the common
fund for the results of the acts of the captain referred to in Article 587.
Each co-owner may exempt himself from this liability
by the abandonment, before a notary, of the part of the
vessel belonging to him.
Art. 837. The 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. When 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.

362

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 SCRA 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.
A 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 between
actual and constructive total loss.
It is highly important that the two kinds of total loss
be carefully
differentiated,for
upon
them
depends
the whole doctrine
of
abandonment
(see Secs. 138, 139.), so important in the law of marine insurance.
In cases of actual total loss, no abandonment is
necessary; but if the loss is merely constructively total, an
abandonment 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 was last
seen, she will be presumed to have been lost from a peril insured against.
To lay a foundation for the presumption, it is enough to
prove that the vessel was not heard of at her port of departure after

Sec. 133

CLASSES OF INSURANCE
Title 1. — Marine Insurance

363

she
sailed without
calling
witnesses from
her
port
of
destination to show that she never arrived there. But plaintiff
must prove that when the vessel left her port of outfit, she
was bound on the voyage insured. There is no fixed rule
with regard to the time after which a missing vessel will be
presumed to be lost. It depends upon the circumstances of each case.
(38 C.J. 1178.)

Sec. 133. When a ship is prevented, at an
intermedi-ate port, from completing the voyage, by the
perils insured against, the liability of a marine insurer
on the cargo con-tinues 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.
The above section contemplates an insurance upon carg
o.
(1) If the original ship be disabled, and 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 which may
take place on goods subsequently to such reshipment. (Salisbury
vs. St. Louis Mar. Ins. Co., 66 Am. Dec. 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 way of putting the cargo on board.
(Bryant vs. Commonwealth Ins. Co., 6 Pick. [Mass.] 13.)
In any case, the insurer may require an additional
premium if the hazard be increased by the extension of liability. (Sec. 133.)

12The
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].)

364

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
pur-suant 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 in-sured 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
under Section 133. The insurer is liable for them in addition to
paying for any loss or damage which may take place on the
goods, due to the perils insured against.
The liability, however, of the insurer under Section 134
cannot exceed the amount 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 upo
n an actual total loss.
(1) In constructive total loss, an abandonment 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. Hence, 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

CLASSES OF INSURANCE
Title 1. — Marine Insurance

365

tirely worthless; but such insurer is liable for his
propor-tion of
all general average loss assessed upon the thing insured.
Meaning of average.
Average is defined by the Code of Commerce as any
extraordinary
or
accidental
expense
incurred
during
the
voyage for the preservation of the vessel, cargo, or both and all
damages to the vessel and cargo from the time it is loaded and
the voyage commenced until it
ends and the
cargo
unloaded. (Art. 806 thereof.)

Kinds of average.
Averages are of two kinds. They are
:
(1) Gross or general averages which include damages and
expenses which are deliberately caused by the master of
the vessel or upon his authority, in order to save the vessel,
her cargo, or both at the same time from a real and known risk.
(Art. 811, ibid.)
A general average loss must be borne equally by all of
the interests concerned in the venture; and
(2) Simple or particular averages which include all damages
and expenses caused to the vessel or to her cargo which
have not inured to the common benefit and profit of all the
persons interested in the vessel and her cargo. (Art. 809, ibid.)
They 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 may be.
The
terms
"partial
loss,"
"particular
average,"
and
"average, unless
general"
are
generally
regarded as
synonymous
when
used
in marine insurance. (44 Am. Jur. 2d 548.)

366

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 136

Principle of general averag
e 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 common 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 upon all.
This practice of "general average" contribution is a
device for a limited distribution of loss. The loss is pro tanto
made up by
proportionate or
"general
average"
contributions fromthe owners of the other interests
benefited by the sacrifice. (Vance, op. cit., p. 9.)

Right of a party to claim general avera
ge contribution.
The requisites to the right to claim general average
contribu-tion are:
(1)
There must be a common danger to the vessel or cargo; (2)
Part of the vessel or cargo was sacrificed deliberately;
(3) The sacrifice must be for the common safety or for
the benefit of all;
(4) It must be made by the master or upon 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/or cargo; and
(7) It must be necessary. (Vance, op. cit., p. 934;
Magsaysay vs. Agan, 51 O.G. 1358 [March 1955]; International
Harvester vs. Hamburg-American Line, 42 Phil. 845 [1922].)
Examples of general average: The 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
had to be opened, scuttled or broken in order to save the
cargo. (Art. 811,
Code of Commerce.) Jettison is the intentional casting overboard

Sec. 136

CLASSES OF INSURANCE
Title 1. — Marine Insurance

367

of any part of a venture exposed to a peril in the hope of
saving the rest of the venture. (Vance, op. cit., p. 933.)
The formalities prescribed under Articles 813 and 814 of
the Code of Commerce must be complied with in order to incur
the expenses and cause the damages corresponding to gross
average. (Phil. Home Assurance Corp. vs. Court of Appeals, 71
SCAD 199, 257 SCRA 468 [1996].)

Liability of insurer for general average.
The
liability
of
the
insurer
for
general
average
is
clearly provided in the clause of Section 136 which states
"but he is liable for his proportion of all general average loss
assessed upon the thing insured." (see Secs. 164-165.) It has
been held by our Supreme Court that Article 859 of the Code
of Commerce which reads:
"The underwriters of the vessels, of
the
freightage and of the cargo shall be obliged to
pay 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 859 is mandatory in terms, and insurers,
whether for the vessel or for the freightage or for the cargo,
are bound to contribute to the indemnity of the general
average. And there is nothing unfair in the provision; it
simply places the insurer on the same footing as other
persons who have an interest in the vessel, or the cargo
therein, at the time of the occurrence of the general average
and who are compelled to contribute. (Ibid., Art. 812, Code of
Commerce; 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 valu
e
involved

General Average _ Proportion of
Loss (GAL) ” for which insurer
*s liable

GAL

368

THE INSURANCE CODE OF THE PHILIPPINES

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 PI,000,000.00 or P800,000.00; B, 1 /10 of
PI,000,000.00 or P100,000.00; C, 3/50 of PI,000,000.00 or
P60,000.00; and D, 2/50 of PI,000,000.00 or P40,000.00.
Note that B contributes PI00,000 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 damage under
which the insurer will not be liable for loss, partial or total,
arising
from
perils
of
the
sea.
The
purpose of such stipulation is to protect the insurer.
In addition, it may 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 has
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: The damage 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

Secs. 137-138

CLASSES OF INSURANCE
Title 1. — Marine Insurance

369

put to sea from the port of departure until it anchors in the
port of destination; wages and victuals of the crew when the
vessel is detained or embargoed by legitimate order or force
majeure.XArt. 809, Code of Commerce.)

Sec. 137. An insurance confined in terms to an
actual total loss does not cover a constructive total loss,
but cov-ers any loss, which necessarily results in
depriving the in* sured of the possession, at the port
of destination, of the entire thing insured.

Scope of insurance against actu
al total loss.
An insurance against "total loss only" will cover any total
loss, whether it is actual or constructive, although there is
authority to the contrary. Where 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 Am. Dec. 314.)

370

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 138

Requisites for valid abandonment.
The requisites for a valid abandonment in marine insuranc
e are:
(1) There must be an actual relinquishment by the
person insured of his interest ih 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 made 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 made by giving notice thereof to the
insurer which may be done orally or in writing (Sec. 143.); and
(7) The notice of abandonment must be explicit and
must 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
shipowner's liability, does not apply to cases where the injury or
average was occasioned
by the
shipowner's
own fault.
Article 587 (supra.) of the Code of Commerce speaks only of
situations where the fault or negligence is committed solely by
the captain. Where the shipowner is likewise to be blamed,
Article 587 will not apply and such situation will be covered
by the provisions of the Civil Code
on
Common
Carriers.
(Phil.
American
General
Insurance
Co., Inc. vs. Court of Appeals, 273 SCRA 262 [1997].)

Necessity for abandonment.
(1) When the loss is only technically total, the insured
can-not claim the whole insurance without showing due
regard to the interest which the underwriter may take in the
abandoned property. Therefore, whenever the underwriter by
prompt action might be able to save some portion of the insured
property, he is entitled to timely notice of abandonment by the
insured and he cannot be made liable for a total loss without
it. (Vance, op. cit., p. 938.)

Sec. 139

CLASSES OF INSURANCE
371 Title 1. — Marine Insurance

But there is no obligation upon the insured to abandon.
It is a matter of his own election. If he omits to abandon, he
may nevertheless recover his actual loss. (Sec. 155.)
(2) When the vessel is totally lost, abandonment is not
required as there is no vessel to abandon. By reason of
such total loss, the liability of the ship's owner or agent for
damages extinguished in the absence of any finding of fault
on other part. However, the insurer answers for the damages
from which the shipowner or agent may be held liable.
(Aboitiz
Shipping
Corporation
vs. Court of Appeals, 569 SCRA 294 [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
actu-ally 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 ei-ther 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, hor another ship
procured by the master, within a reasonable time and
with reason-able diligence to forward the cargo,
without incurring the like expense or risk mentioned in
the preceding sub-para-graph. But freightage cannot in
any
case
be
abandoned,
unless the ship is also abandoned, (a)
When constructive total loss exists.
As to when a constructive total loss exists, three (3) rules
may be mentioned.
(1) According to the English rule, when the subject matter of

372

THE INSURANCE CODE OF THE PHILIPPINES

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, when 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 may not abandon the
thing insured unless the loss or damage is more than threefourths of its value as indicated in Section 139.

Abandonment where insurance divisib
le and where indivisible.
Under the first paragraph of Section 139, any
particular portion of the thing insured separately valued by
the policy may be
separately abandoned as
it
is
deemed
separately
insured. Whether a contract is entire or
severable is a question of intention to be determined by the language
employed by the parties.
In a case, the policy in question showed 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 make the contract of
insurance several and divisible as to the items insured because
the logs on the two barges were not separately valued or
separately insured, for only one premium was paid for the
entire shipment making only one cause or consideration. The
logs having been 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, 200 SCRA 459 [1991].)

Criterion as to extent of loss.
The 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 been 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.)

Secs. 140-141

CLASSES OF INSURANCE
Title 1. — Marine Insurance

373

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.
The abandonment must be entire and cover the whole
interest insured (Bidwell vs. Northwestern Ins. Co., 19 N.Y. 179.);
it must be
unconditional,
unfettered
by
contingencies
and
limitations. (Patapsco Ins. Co. vs.
Southgate, 8 L. Ed. 243.) However, if only a part of a thing is
covered by the insurance, the insured need only abandon that part.

Sec. 141. An abandonment must be made within a
rea-sonable 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 withi
n a reasonable time.
(1) Reliable information of loss. —When 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 may not be prejudiced by the delay, and may take
immediate steps for the preservation of such of the property
insured as may remain in existence.
(2) Double
character
ofinformation
of
loss.—What
is
a
reasonable time is a question depending on the facts and
circumstances in each case. (44 Am. Jur. 2d 541.) Thus, if
from information first received, the character of the loss is not
made 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
beyond the control of the insured, as from an unjustifiable
sale, an abandonment is too late. (45 C.J.S. 1157.)

374

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 142

Sec. 142. Where the information upon which an
aban-donment 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 aban-donment becomes ineffectual.
Abandonment must be factual.
(1) Existence of loss at time of abandonment. —
the insured to abandon and recover for a total
upon the state of facts at the time of the offer to
not upon the state disclosed by the information
upon the state of loss at a prior or subsequent
Mut. Ins. Co. vs. Adams, 123 U.S. 67.)

The right of
loss depends
abandon, and
received, or
time. (Orient

(2) Effect of subsequent events. — If the abandonment
when made is good, the rights of the parties are definitely fixed,
and do not become changed by any subsequent events. If, on
the other hand, the abandonment, when 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.
Maryland Ins. Co., 12 Pet. 378.)
Accordingly, the insured cannot abandon when the thing
insured is safe; or when he knew, at the time of his offer to
abandon, that the vessel has been repaired and is successfully
pursuing her voyage (Depau vs. Ocean Ins. Co., 15 Am. Dec.
431.); and the invalidity of the abandonment is not cured by
the subsequent loss of the thing insured. But if, after a valid
abandonment has been made,
the insured
property
was
recovered, the insured cannot withdraw the abandonment.
(3) Instances justifying abandonment. — It has been held
that the insured may abandon for a total loss under a
marine insurance policy in case of capture, seizure, or detention
of the ship or cargo; restraint by blockade or embargo; where
through no fault of the owner, funds for repair cannot be
raised; where the voyage is absolutely lost; or where under
urgent necessity, the master of a vessel at an intermediate port,
makes a sale of the insured property. (45 C.J.S. 1152.)

Sec. 143

CLASSES OF INSURANCE
Title 1. — Marine Insurance

375

Information need not be
direct or positive.
The intelligence which authorized the insured to abandon
need not be direct or positive information.
The protest of the master, a newspaper report, the report
of a pilot, or a letter from an official or an agent, is sufficient.
The information must be of such facts and circumstances as to
render it highly probable that a constructive total loss has
occurred, and facts sufficient to constitute a total loss must exist.
But the facts and the information need not be the same. (38 C.J.S. 1155.)

Sec. 143. Abandonment is made by giving notice
there-of to the insurer, which may be done orally, or in
writing; Provided, That if the notice be done orally, a
written no-tice of such abandonment shall be submitted
within seven days from such oral notice, (a)
Form of notice of abandonment.
The law requires no particular form for giving notice
of abandonment.
(1) The notice may be made 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) The abandonment need not necessarily be made
the insured but may be made by an authorized agent, and
agent having an authority to insure has prima facie
authority to abandon.
(2) The abandonment may be made to an agent
the underwriter and abandonment to a broker who is agent
both parties is sufficient. (45 C.J.S. 1156.)

by
an
an
of
for

376

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 b
e explicit.
The notice of abandonment must be explicit, and not left
open as a matter of inference from some equivocal acts. There
must be an intention to abandon, apparent from the
communication 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 word "abandon" is not necessary; it is
sufficient if expressions are used 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.) But there is no abandonment although the insured may
have given notice of an intention to abandon, if he continues
to claim and use the
property as his own. (Louisville Underwriters vs. Ponce, 19
S.W. .)

Notice of abandonment must specif
y particular cause thereof.
The grounds for the abandonment must be stated with
such particularity as to enable the underwriter to determine
whether or not he is bound to accept the offer. (Pierce vs. Ocean
Ins. Co., 29 Am. Dec. 567.) However, it is sufficient if the
notice shows 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
abandonment to make it valid and he cannot avail himself of
any ground of abandonment other than that stated at the time thereof.
(Pierce

Secs. 146-147

377

CLASSES OF INSURANCE
Title 1. — Marine Insurance

vs. Ocean Ins. Co., 29 Am. Dec. 567.) If he assigns an
insufficient cause or causes which 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 abandonment.
A valid abandonment 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. The insurer acquires
thereby the entire interest insured, together with all its
incidents, including rights of action which the insured has
against third persons for the injury. (45 C.J.S. 1159-1160.) In
other words, the insurer becomes entitled to all the rights
which 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 (Secs. 150,169.), has all the effects
which the most carefully drawn assignment would accomplish.
(44 Am. Jur. 2d 542.) The effect of the abandonment 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 who pays partial lo
ss as actual total loss.
An election and notice of abandonment is a
precedent to a claim for a constructive total loss. (38 C.J.S. 1147.)

condition

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

Secs. 148-149

payment is deemed an offer of abandonment on his part.
Hence, the insurer is entitled to whatever may 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 moment of a valid
abandonment, the master of the vessel and agents of the
insured become the agents of the insurer, and the latter
becomes 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 expense
s and wages.
The abandonment when made relates back to the time of
the loss and if effectual, the title of the insurer becomes
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
wages of seamen earned subsequent to the loss, but 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 abandonment
is properly made. (King vs. Middletown Ins. Co., Conn. 184.)
The insured's right to abandon, in a policy of marine
insurance, is absolute when justified by the circumstances.

Secs. 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 abandonment
need not be express.
(2) It may be implied by conduct, as by an act of the
insurer in consequence of an abandonment which can be
justified only under
a
right derived
from
the
abandonment.
(Richelieu vs. Boston Marine Ins. Co.,
130 U.S. 408.) Thus, where the insurer refused the
abandonment of a ship but took possession of the same for
the purpose of making repairs and retained it for an
unreasonable time, he will be deemed to have accepted
the abandonment. (Reynolds vs. Ocean Ins. Co., 33 Am. Dec. 727.)
(3) Mere silence after notice would not operate as an
acceptance, if it is not "for an unreasonable length of
time." (Sec. 150.) Nor would steps taken by the insurer to
preserve the property from further loss for the benefit of all the
parties amount 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) Upon receiving notice of abandonment, the insurer
may 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

380

THE INSURANCE CODE OF THE PHILIPPINES

implied, is
(Sec. 152.)

conclusive

upon

them (Sec.

Sec. 153

151.), and

irrevocable.

(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 was made proves to be unfounded.
(Sec. 152.) Under Section 145, an abandonment 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 in-surer of said freightage; but freightage
subsequently earned belong to the insurer of the ship.
Right of insurer to freightage.
When abandonment is validly made,
insured in the thing covered passes to the insurer.

the

interest

of

the

The insurer of the ship becomes the owner thereof after
an abandonment, and his title becomes vested as of the time of
loss. Hence, freightage earned subsequent to the loss belongs
to the insurer of said ship. But freightage earned previously
belongs to the insurer of said freightage who 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.

Secs. 154-156

CLASSES OF INSURANCE
Title 1. — Marine Insurance

381

Sec. 154. If an insurer refuses to accept a valid
aban-donment, he is liable as upon an actual total loss,
deduct-ing 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 abando
n-ment on insurer’s liability.
The insured's right to abandon, in a policy of marine
insurance, is absolute when justified by the circumstances
and no acceptance is necessary to validate the abandonment,
(see Sec. 149.)
(1) If the insurer declines to accept a proper abandonment,
he is liable as upon an actual total loss less any proceeds the
insured may have received on account of the damaged property
as when the insured succeeds in selling the property as damaged.
(2) If the abandonment was improper, the insured may
nevertheless recover to the extent of the damage proved.

Sec. 155. If a person insured omits to abandon, he
may nevertheless recover his actual loss.
Effect of insured’s failure to mak
e abandonment.
The insured has an election to abandon or not, and
cannot be compelled to abandon although abandonment is
proper. He may await the final event, and recover accordingly
for a total or a partial loss, as the case may be.
Note that under Section 155, the insured fails to make
an abandonment. On the other hand, Section 154 applies
where a valid abandonment has been made 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
in-terest
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
re-spondentia, before its insurance, and without the
knowl-edge 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. The 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 may happen when a vessel,
for example, is insured for a long time or for a long voyage, her
value at the end of the voyage, may not be the same as at the
beginning. But, in general, the insured value must be taken to be
that which is stated in the policy. It is conclusive upon the
parties provided that (a) the insured has some interest at risk
and (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, when the thing has been
hypothecated by bottomry or respondentia (see Sec. 101.) before
its insurance and without the knowledge of the person who
actually procured the insurance, the insurer may show the real
value but he is not entitled to rescind the contract unless he
can prove that the valuation was 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 in-sured 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

Sec. 158

383

CLASSES OF INSURANCE
Title 1. — Marine Insurance

his interest exceeds the amount of insurance, he is considered
the co-insurer for an amount determined by the difference
between the insurance taken out and the value of the property.
The rule is different in fire insurance, (see Sec. 172.)
The law determines the amount recoverable according to
the following formula:
(Partial) Loss
Value of thing insure
d

Amount
of
insuran
c

Amount
of
recover

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 computatio
n: P250,000.00
P500,000.00
The insured is considered a co-insurer as to the
uninsured portion of PI00,000.00.
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
con-tract of marine insurance, the insured is entitled to
recov-er, 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 th
e
vessel or cargo, the insured is entitled to recover, in case of loss,

384

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 159

such proportion of the profits as the value of the property
lost bears to the value of the whole property.
The formula may be stated thus:
Value of property lost ^ Amount of = Amount of
Value of whole property

insurance

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 or 3/5 x P200,000.00 =
P12,000.00 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 freightag
e insured exposed to risk.
Where cargo is insured under a valued policy but only
a portion of the cargo is actually carried by the vessel at the time
of loss, the valuation will be reduced proportionately. The
insurer is bound to return such portion of the premium as
corresponds
with the portion of the cargo which had been exposed 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.

Secs. 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
conclu-sively 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.
Where 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
indemnity for the profits lost. (Sec. 158.) If the property is
totally lost, pro tanto the total profits are also lost. Thus, under
Section 160, such loss of the profits is conclusively presumed from
the loss of the property and the valuation agreed upon in the
policy fixes the amount of recovery.
EXAMPLE:
Where the value of the profits insured is fixed at
PI00,000.00 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
pre-sumed 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 ascer-tained, 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;

386

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 160-161

(c) The value of freightage is the gross freightage,
ex-clusive of primage, without reference to the cost of
earn-ing 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 open 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 must be
proved by the insured in each case. Section 161 lays down the
value to be used for indemnity purposes
13

(1) Value of vessel. — Under paragraph (a), in ascertaining
the value of a vessel, the value is to be taken as of the
commencement of the risk and not its value at the time she was built.

'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 "cus-tomary 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. — Under paragraph (b), the value of
the 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 shipment. The expected profits
from the cargo are not considered since they can be covered by
a separate insurance, (see Secs. 99,158,160.) In customs law,
drawback is an allowance (to the whole or part only) made by
the government upon the duties on imported merchandise,
when the importer, instead of selling it here, re-exports it, or
the
refunding
of
such
duties if
already paid.
(Black's Law Dictionary [1968 ed.], p. 583.)
(3) Value of freightage. — Under paragraph (c), the gross
freightage and not the net freightage is the basis for
determining the value of the freightage. The reason is that the
gross amount of the freightage, as the measure of indemnity, can
be easily and exactly determined. On the other hand, to take
the net amount of the freightage as the basis, would lead to
lawsuits over the deductions which should be made.
Primage is excluded from gross freightage. It is a small
compensation paid by a shipper to the master of the vessel
for his care and trouble bestowed on the shipper's goods and
which the master is entitled to retain in the absence of an
agreement to the contrary with the owners of the vessels.
(Ballantine's Law Dictionary [1948 ed.], p. 64.)
(4) Cost of insurance. — Under paragraph (d), the cost of
the insurance is always added in calculating the value of the
ship, cargo, or freightage or other subject matter in an open policy.

Sec. 162. If cargo insured against partial loss
arrives at the port of destination In a damaged
condition, the loss 6f the insured is deemed tb be the
same proportioh 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 lo
ss is damaged.
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.)

THE INSURANCE CODE OF THE PHILIPPINES

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

^

Market price in sound state

Amount

of

=

Amount

of

insurance

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 or / xP3oo/ooo.OO
= P60,000.00 P500,000.00
1

5

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 ex-pense, in either case, being
in addition to a total loss, if that afterwards occurs.

Liability of insurer for expenses incurr
ed for repair and recovery.
As a general rule, a marine insurer is not liable for more
than the amount of the policy.
Under Section 163, however, expenses incurred in
repairing the damages suffered by a vessel because 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

Secs. 164-165

389

CLASSES OF INSURANCE
Title 1. — Marine Insurance

takes place, (see Secs. 136,163; also Secs. 133-134 as to
insurance on cargo.) Such expenses are known 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 gen* eral average loss called for by a
peril insured against: Pro-vided, 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
ma-rine insurance has a demand against others for
contribu-tion, he may claim the whole loss from the
insurer, subro-gating 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 gener
al average.
(1) General rule. —
The insurer
is liable for any
general average loss (see Sec. 136.) where it is payable or has
been paid by the insured in consequence of a peril insured
against. The insured may either hold the insurer directly liable
for the whole of the insured value of the property sacrificed
for the general benefit, subrogating him to his own 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
for general average loss against the insurer:

can

be

no

(a) after the separation of the interests
contri-bution, that is to say, after the cargo
contribution has been removed from the vessel; or

recovery
liable to
liable for

(b) when the insured has neglected or waived his right
to contribution.

390

THE INSURANCE CODE OF THE PHILIPPINES

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 Sec. 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 may be stated as follows:
Amount of
insurance

Proportion of general Limit of
insurance
=

liability of

Value of
thing
inEXAMPLE

insurer

:

Thus, in the example under Section 136, if
vessel worth P8,000,000.00 was insured by A for
P4,000,000.00 with Y Co., then Y Co. is liable for only
of P800,000.00, the proportion of the general average
assessed
upon
vessel, while A is liable to contribute the other P400,000.00.

the
only
1/2
loss
the

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 common usage
which has the sanction of law, there is deducted from the cost of
repairs "one-third new for old," on the theory that the new
materials render the vessel much more valuable than it was before
the loss. When 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 damage 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 Am. Jur. 2d 527.)
Section 166 prescribes the deductions to be made from suc
h cost subject to other conditions stipulated in the policy.

— oOo —

Title 2
FIRE INSURANCE
Sec. 167. As used in this Code, the term “fire
insur -ance” shall include insurance against loss by
fire, light -ning, windstorm, tornado or earthquake and
other allied risks, when such risks are covered by
extension
to
fire
in-surance
policies or under separate policies, (a)
Fire insurance defined.
A fire insurance is a contract of indemnity by which the
insurer, for a stipulated premium, agrees to indemnify the
insured against loss of, or damage to, a property caused by
hostile fire, (see Sec. 84.)

Fire-and-extended coverage.
As used in the Code, it includes not only insurance
against loss by fire, but also insurance in the so-called "allied
lines" that protect against loss by lightning, windstorm, etc. but
only when such risks are covered by extension to fire
insurance policies or under separate policies (Sec. 167.) subject
to the payment of
additional
premiums. The
coverage
may
be
attached by endorsements, (see
Sec. 50.)
Thus, a distinction is drawn between fire insurance alone
and fire-and-extended coverage.

Nature of fire insurance.
Fire insurance is essentially a contract of indemnity.
Indemnity is its sole purpose and any contract that contemplates
a possible gain to the insured by the happening of the event
upon which the liability becomes fixed is contrary to its proper
nature and is not allowed. (Vance, op. cit., p. 101.)

392

Sec. 167

CLASSES OF INSURANCE

393 Title 2. — Fire Insurance

Concept of fire.
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. The
word 'spontaneous' refers to the origin of
the combustion. It means the internal development without
the action of an external agent. Combustion
or
spontaneous combustion may be so rapid as to produce
fire, but until it does so, combustion cannot be said to
be fire." (Western Woolen Mills Co. vs. Northern Assur.
Co., 139 Fed. 637, cited in D.L. Bickelhaupt, p. 478.)
The presence of heat, steam, or even smoke 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 amount of heat, there can be no fire until
ignition takes place. The loss resulting from a sizable hole burned
in a couch even though no one was there to see the fire
probably would be covered. A small scorch on a table by a
cigarette
would
not
meet
the
definition
of
fire.
(D.L.
Bickelhaupt, op. cit., p. 478.)
In our jurisprudence, fire may not be considered a
natural disaster or calamity since it almost always arises
from some act of man or by human means. It cannot be an
act of God unless caused by lightning or a natural disaster or
casualty
not attributable
to
human
agency.
(Phil.
Home
Assurance Corp. vs. Court of Appeals, 257 SCRA 468 [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 when 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
conse-quential 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 may be greater than the damage 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
would ordinarily have earned. If a fire
makes half a
building untenantable for six (6) months during the period of
repair, the owner may lose rents during that period. The
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
known
as
loss
of
profits
insurance
or
business interruption insurance.

Kinds of indirect losses.
Indirect or consequential losses may consist o
f:
(1) Physical damage caused to other property (which is not
usually covered by the basic insurance policy). Thus, a fire
may 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 member of a pair (ibid., p. 217.);

Sec. 167

CLASSES OF INSURANCE
Title 2. — Fire Insurance

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 damage or destruction of
buildings or contents by an insured peril. Examples are the
cost of doing business at a location other than the usual
premises of the insured, the expense of maintaining a home on
a temporary basis elsewhere, and the expense of demolition
when required by ordinance or law regulating construction or
repair of buildings. (ibid., p. 238.)

Ocean marine and fire policie
s distinguished.
A policy of insurance on a vessel engaged 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 have the incidents of
marine policy, or where it insures materials in a shipyard for
use in constructing vessels. The same is true where 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
whether
an
insurance against risk of fire upon 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 (Secs. 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 coinsurer of the uninsured portion (Sec. 157.), while the insured
may 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

Secs. 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.
When alteration in thing insur
ed entitles insurer to rescind.
In order that the insurer may rescind a contract of
fire insurance under Section 168 for any alteration made in the
use or condition of the thing insured, the following requisites
must be present:
(1) The 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)
The alteration is made without the consent of the insurer;
(4) The alteration is made by means within the control of
the insured; and
(5) The 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, which
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 general.
(1) Implied undertaking of insured. — Every contract of
insurance
is
made
with
reference
to
the
conditions
surrounding the subject matter of the risk and the premium
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

Secs. 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 Am. Jur. 2d 138.)
(2) Character of the increase in risk. — An increase of
hazard takes place whenever the insured property is put to
some new use, and the new use increases the chance of loss.
(Graley vs. American Eagle Tire Co., 257 N.Y.S. 5668.)
Mere negligent acts temporarily endangering the
property will not violate the policy (Vance, op.
cit., p. 846.) nor the temporary acts or conditions which
have ceased prior to the occurrence of the loss (e.g., smoking
in bed, using kerosene to start a fire, storing a small amount
of gasoline). There must be an actual increase of risk and
while it is not necessary that the increased risk should have
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. — The 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. Midland Textile, Inc., Co., 50 Phil. 617 [1927].); or
where a building insured as a dwelling is used as a
disreputable roadside tavern and bawdy-house (Allen vs. Home
Int. Co., 65 Pac. 158.); or as a retail liquor store. (Western
Assur. Co. vs. McDike, 62 Miss. 740.) Under 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. —
The insurer would still be liable if the increase in hazard
was no longer existing at the time of the loss as when the
firecrackers in the insured dwelling house had already been
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

Secs. 168-169

made of the insured premises, which use is not of a dangerous
I
character and does not differ materially from the use specified in |
the policy, even though an additional or increased premium
may i be demanded therefor.
(Monteleone vs. Royal Ins. Co., 50 LRA
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 would be
useless to the insured if such acts were prohibited (Vance, op.
cit., p. 848.) even though by reason thereof, the property may
be exposed to some additional
risk.
(Thompson
vs.
U.S.
Products and Shippers Ins. Co., 160 N.E. 668.) Thus, keeping in
the house 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 contr
ol
or knowledge of alteration.
(1) Insurer's liability unaffected. — The insurer is not
relieved from liability if the acts or circumstances by which
the risk is increased are occasioned by accident, or a cause
over which 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

nently affecting the conditions of the property
constitute an increase in
risk, would
be
presumptively known
to the
(Liverpool, etc., Inc. Co. vs. Grunther, 116 U.S. 113.)

399

so

as

to

insured.

Application of Section 75 and Section 169.
An alteration in the risk or condition of the thing
insured which does not increase the risk will not affect a
contract of fire insurance. This is the rule embodied in Section
169, and it is logical as the basis upon which the contract rests
is not 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 which if violated
would avoid it. An alteration made in the use of condition of
the thing insured will thus avoid a policy under the same
section if such alteration is expressly prohibited although it
does not increase the risk. Therefore, Section 169 applies to
policies which are silent upon 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 violatio
n 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 may be considered as an exception to the
rule laid down in Section 168.
However,
Section
170
is
now
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.

400

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 171-172

Sec. 171. If there is no valuation in the policy, the
mea-sure of indemnity in an insurance against fire is
the ex-pense it would be to the insured at the time of
the com-mencement 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
valu-ation named in his policy, insuring any building
or struc-ture 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 be -tween the insurer and the insured. The
cost of such exami-nation 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
in-sured’s interest in such building or structure, as
stated in the policy upon which the insurers have
received a pre-mium, 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 in -terest 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.2 (a)

2Section 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
conniv-ance 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.)

Secs. 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 amount of actual loss
sustained and the burden is upon him to establish the amount
of such loss by a preponderance of evidence. (Tan Chuco vs.
Yorkshire Fire & Life Ins. Co., 14 Phil. 346 [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 have the thing insured in the same condition in which it
was at the time of the loss.
(2) Limit to amount. — The liability of the insurer shall
in no event exceed what it would 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 having a market value which
can readily
be
determined,
such
market
value
may
be
applied in determining the actual loss sustained.

Any of the following circumstances shall constitute prima fade evidence of arson:
(1) If the fire started simultaneously in more than one part of the building or
establish-ment; (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 elec-tronic contrivance designed to start a fire, or
ashes or traces of any of die 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 die corresponding fire insurance policy more than two fixes 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 ef-fects insured and
stored in a building or property had been withdrawn from die 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.)

402

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 171-172

Measure of indemnity under a value
d policy.
The effect of a valuation in a policy of fire insurance is
the same as in a policy of marine insurance, (see Sections 61,156.)
(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 was not
guilty of fraud. (Harding vs. Commercial Union Ins. Co., 38
Phil. 484 [1918]; Malayan Insurance Co., Inc. vs. CruzAmaldo, 154 SCRA 672 [1987].)
(2) Amount stated in policy/amount of partial loss. — The
valua-tion 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 whole amount so insured
as stated in the policy and in case of partial loss, the full
amount of the par-tial loss. A total loss of the insured building
exists when the result of the fire is such as to render the
property wholly unfit for use as a building however valuable it
may be as mere 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 sum
fixed in the policy. The 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.)

Secs. 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.
Under 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 amount
written
in
the
policy even though the property be very inadequately insured.
Thus, if property which is valued at PI00,000.00 is insured
for P50,000.00 and is damaged by fire to the extent of one-half
of its value, the insurer will be compelled 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 now obtained in fire
insurance by the insertion of a standard provision known as
"co-insurance clause" in the fire insurance policy (see Sec. 93.)
to encourage property owners to insure their property for an
amount as close to full value as possible.

Reason for coinsurance clause in fire
policies.
The co-insurance clause is a clause requiring the insured
to maintain insurance to an amount 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 between 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. Many 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 25% of its value, receive

404

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 171-172

full indemnity for any loss in 95% of the cases, they are
tempted to accept this partial coverage at a cost only of onefourth 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 sum named in the policy though in case of
total loss, the insurer is liable for the amount named in the policy.
(Ibid.)
EXAMPLE:
If a house
for P300,000.00
P300,000.00, the
insurance clause
P180,000.00,2 / 5
insured himself.

valued at P500,000.00 is insured only
and is damaged to the extent of
insurer is liable, where there is a coin the policy, for 3 / 5 of the loss or only
of the loss or P120,000.00 being borne by the

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 have
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 damaged
or destroyed. Thus, the insurer may 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 him
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. The insurer
must exercise his option to rebuild within the time stipulated
in the policy, or in the absence of stipulation, within a
reasonable time. The choice by the insurer shall produce no
effect except from the time it has been communicated to the
insured. (Art. 1201, Civil Code.)
Unless the policy has limited the cost of rebuilding to
the amount of the insurance, the insurer, after electing to
rebuild, can be compelled to perform his undertaking, even
though the cost may exceed the original amount 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 com-pany 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 inso-far as it may affect other creditors of
the insured, (n)
Pledge, etc. of fire insurance polic
y after a loss.
(1) Consent of, or notice to, insurer not required. — After a
loss has occurred, the insured may pledge, hypothecate, or
transfer a fire insurance policy or rights thereunder. This he
may do even without the consent of, or notice to, the insurer,
(see Secs. 21, 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 had
the one to whom the policy was issued.
(2) Limitation. — The 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 company who acts
as agent or otherwise represents the insurer. Any such pledge,
etc. shall be void and of no effect insofar as it may 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, exclud-ing certain types of loss which by law
or custom are con-sidered 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 insur-ance 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
mishap excluding
certain types of loss or liability which 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 mean "accident" — that is, a
violent mishap proceeding from an
unknown
or
unexpected cause — casualty insurance might be presumed to
include any loss or damage when 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
which 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 have found it necessary to fill up their
policies with many restrictions
designed
to
reduce
the
hazard. Persons frequently excluded under such
provisions are those in the insured's service and employment.
The purpose of the exception is to guard
against liability should the theft be committed by one
having unrestricted access to the property. (Fortune Insurance
& Surety Co., Inc. vs. Court of Appeals, 244 SCRA 308 [1995].)
Except

with respect to compulsory motor vehicle
liability insurance
(Chap.
VI.),
the
Insurance
Code contains no other provisions applicable to
casualty
insurance
or to
robbery insurance in particular.
These
contracts
are,
therefore,
governed by
the
general
provisions applicable to all types of insurance. Outside
of
these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into
consideration its purpose and always in accordance with
the general purpose of insurance. (Ibid., citing Ma.
Clara M. Campos, Insurance, 1983 Ed., p. 199.)

Two general divisions of casualty insuranc
e. They are as follows:
(1) Insurance against specified perils which may affect
the person and / or property of the insured such as personal
accident, robbery or theft, damage to or loss of motor vehicle,
insolvency of debtors, defalcation of employees, etc.; and
(2) Insurance against specified perils which may give rise
to liability on the part of the insured for claims for injuries
to others
or
for damage to their
property, such as
workmen'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 whom the law upon the grounds of public
policy extends the indemnity against
liability.
(Foehrenback
vs.
German-American
Title & Tt. Co., 217 Pa. 331; 43 Am. Jur. 2d 76.)

THE INSURANCE CODE OF THE PHILIPPINES

408

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. The doing or failing to do
may 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 commission 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. The 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 which are also criminal are also insurable
on the ground that such acts are accidental. Thus, a motor
insurance policy covering the insured's liability for accidental
injury caused by his negligence, even though gross and
attended by criminal consequences such
as
homicide
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. Motor Insurers' Bureau,
2 All E.R. 742 [1964].) that a motorist guilty of a deliberate
crime resulting in payment of damages 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
encour-ages 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 ex-cepted 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

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

409

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, must be supported by an
insurable interest in the insured, although there is some
authority to the contrary.
(1) The insurable interest is to be found in the interest
the insured has in the safety of persons who may maintain,
or in the freedom from damage of property which may
become the basis of suits against him in case of their injury
or destruction. The interest does not depend upon whether the
insured has a legal or equitable interest in property, but upon
whether he may be charged by law with the liability against
which 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 were to conclude that an insurable
interest is not required for liability insurance, such a rule
would have no significant adverse implications. (R.H. Jerry, II,
op. cit., p. 193.)

When liability insurance in polic
y payable.
The
general
distinction between
an
insurance
against
liability and one against actual loss (or one of strict
indemnity only) is that the coverage or liability of the insurer
under the first attaches when 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 whom the insured is liable. From
the moment that die 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 SCRA 487 [1991].)
In general, the class into which a particular
depends on the intention of the parties as evidenced by the

policy falls

THE INSURANCE CODE OF THE PHILIPPINES

410

Sec. 174

i phraseology of the agreement in such respect in the policy.
(43 Am. Jur. 2d 770-771.)
1

Right of injured person to sue insur
er of party at fault.
i

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 insure
d. The test applied is this:
(1) Indemnity against third party liability. — Where the
contract provides
for
indemnity
against
liability
to
third
persons, then third persons to whom the insured is liable, can
sue directly the insurer upon the occurrence of the injury or
event upon which the liability depends. The purpose is to
protect the injured person against the insolvency of the insured
who causes such injury and to give him a certain beneficial
interest in the proceeds of the policy. It is as if such injured
person were especially named in the policy. (Shafer vs. Judge,
RTC, 167 SCRA 386 [1986].) Where the contract is one of
indemnity against liability, it becomes operative
as
soon
as
the liability
of
the person indemnified
arises
irrespective of whether or not he has suffered actual loss.
(Republic Glass Corporation vs. Qua, 435 SCRA 480 [2004];
Associated Insurance & Surety Co., Inc. vs. Chua, 7 SCRA
52 [1963].)
(2) Indemnity against actual loss or payment. — Where the
con-tract 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 SCRA 1043 [1967].) Prior
payment
by
the
insured is necessary in order that the obligation
of the insurer may arise.

Basis and extent of insurer’s liability.
(1) Contract of insurance. — The 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

Sec. 174

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

411

insured and/or the other parties found at fault. The liability
of the insurer to the third party is based on contract; that of
the insured is based on tort. (Malayan Insurance Co., Inc. vs.
Court of Appeals, 165 SCRA 136 [1988]; First Integrated
Bonding & Insurance Co., Inc. vs. Hernando, 199 SCRA 796
[1991];
Heirs
of
G.U. Poe vs. Malayan Insurance Co., Inc., 584 SCRA 152 [2009].)
(2) Sum limited in the contract.—While in a solidary
obligation the creditor may enforce the entire obligation against
one of the solidary debtors, in an insurance contract, the
insurer undertakes to indemnify
the
insured against
loss, damage
or
liability arising from unknown or
contingent event. To make the insurer solidarily
liable
with the latter's entire obligation beyond
the sum
limited in the insurance contract would result in "evident
breach of the concept of solidary obligations." (Vda. de
Maglana vs. Consolacion, 212 SCRA 268 [1992].) The thirdparty liability of the insurer is only up to the extent of the
insurance policy and that required by law. Any award beyond
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, 308 SCRA 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 far 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

412

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 174

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 solidarity 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 solidarity liable to T. S
is made liable to T pursuant to Article 21842 of the Civil
Code, while the basis of liability of D Co. is Article 2180.3
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 quasidelict is solidary.
4

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

2Art. 21S4. 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.
3Art. 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
men-tioned prove that they observed all the diligence of a good father of a family to
prevent damage. (1903a)
4 Art. 2194.
’See annotations under Sections 1 and 24
3.

Sec. 174

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

413

Accident and health insurance.
(1) Closely related purposes of coverages. — Accident and
health coverages
have
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 both
kinds of insurance, the insured is reimbursed for medical and
hospital expenses and, in the case of accident insurance and
sometimes health insurance, earnings as a result of the incapacity.
(2) Combination of coverages.—Accident and health coverages
are often combined in the same policy thereby protecting
the insured from loss from either kind of disability. Also,
accident insurance is frequently offered as a supplement to life
insurance. If death is caused by accident, many life policies
pay "double indemnity," meaning proceeds twice the amount of
the policy's face value. The cost of
the additional coverage is relatively low.
Accident insurance is also provided with other
coverages, most
prominently
with
motor
vehicle
insurance. Various kinds of specialized health insurance exist.
"Major medical" is expanded 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. Once
that fact is established, the burden then shifts to the insurer
to
show
any
excepted peril that may have
been stipulated by the parties. An

6A health care agreement which grants "living benefits," such as medical checkups 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 corpora-tion, such as a Health Maintainance
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.

414

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 174

"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 SCRA 137 [1996].)

Meaning of “accident” and “accidental
” as used in accident policy.
The
terms
"accident"
and
"accidental,"
as
used
in
insurance contracts, have not acquired any technical meaning.
They are
construed by the courts in their ordinary and common
accept-ation. Thus, the terms have been taken to mean 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 known cause and, therefore, not expected. It is an
event
which
happens
without any human agency or, if
happening through human agency, an event which, under the
circumstances, is unusual to and not expected by the person
to whom it happens. (De La Cruz vs. Capital Insurance &
Surety Co., Inc., 17 SCRA 559 [1966]; Filipino Merchants
Insurance Co., Inc. vs. Court of Appeals, 179 SCRA 638
[1989]; 43 Am. Jur. 2d 627-628.) It need not be an event that is
"sudden."
(2) Cause may be attributable to fault or negligence. — The
terms do not, without qualification, exclude events resulting in
damage or loss due to the fault, recklessness or negligence of
third parties. The concept "accident" is not necessarily
synonymous with the concept of "no fault." It may 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 SCRA 54 [1990].)
7

7Foreseeability is an element of establishing
negligence; so, "accident" may embrace events that could have been foreseen.

Sec. 174

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

415

Rule as to death or injury resulting fro
m “accidental” or “accidental means.”
The tendency of court decisions in the United States in
recent years
is to
eliminate thefine distinction
between
the terms "accidental" and "accidental means" and to
consider them
as legally
synonymous (Travellers'
Protective
Association
vs. Stephens, 185 Ark. 660,49 S.W.
[3d] 364; Equitable Life Assurance Co. vs. Hemen over, 100 Colo.
231, 67 P. [2d] 80, 110 ALR 1270, cited in De La Cruz vs.
Capitol Insurance & Surety Co., Inc., supra.) A number of
courts have reached the conclusion that the two concepts are
so difficult to distinguish that they will be treated as essentially
the same in their jurisdictions. (J.E. Greider & W.T. Beadless, op.
cit., p. 218.)
8

A distinction between the two is certainly not understood
by the average man and he is the one for whom the policy is
written. (Burr vs. Commercial Travellers Mut. Ecc. Ass'n., 7 N.E.
[2d] 124 [1946].)
(1) General rule.
death or injury does
within the terms of
of the insured's
by
death or injury.

— The generally accepted rule is that
not result from accident or accidental means
an accident policy if it is the natural result
voluntary
act, unaccompanied
anything
unforeseen except the

(2) Exception. — There is no accident when a deliberate act
is performed unless
some
additional,
unexpected,
independent and unforeseenhappening
occurs
which 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

8Hence, 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 pull-ing 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.

416

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 174

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 him to the ropes of
the ring and without this unfortunate incident, that is, the
intentional slipping of the deceased, perhaps he could not have
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 exposur
e to needless peril.
Both are in pari matere because they both signify a
disregard for one's life. The only difference is in degree, as
suicide imports a positive act of ending such life whereas the
second act indicates a reckless risking of it that is almost
suicidal in intent. (Sun
Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA554 [1992].)
"Voluntary exposure to a known danger" is generally
held to negate the accidental character of whatever followed
from the known danger.
To illustrate: A person who walks a tightrope 1,000
meters above the ground and without any safety device may not
actually be intending to commit suicide, but his act is
nonetheless suicidal. He would thus be considered as "willfully
exposing
himself
to needless
peril."
(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
Thompson
vs.
Prudential
Ins.
Co.
of
America,
66
S.E. 2d, 19 [6a. App. 1951].)

Sec. 174

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

417

But the mere act of the insured of pointing the gun to
his temple, believing that the gun was not loaded and the gun
fired, when he pulled the trigger resulting in his death, was
held an accident. The insured was 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 indemnity
agreed upon if the insured is shown to have contributed to
his own accident. Indeed, most accidents are caused by
negligence," the firing of the gun was the "additional,
unexpected, independent and unforeseen happening"
that
led to the insured's death. (Sun Insurance Office, Ltd. vs.
Court of Appeals, supra.)

Meaning of “intentional” as use
d in accident policy.
"Intentional," as used 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. Where a provision of the
policy excludes intentional injury, it is the intention of the
person inflicting the injury that is controlling.
If
the
injuries
suffered
by the insured
clearly resulted from the
intentional act of a third person, the insurer is relieved from
liability
as
stipulated.
(Biagtan
vs.
The
Insular
Life
Assurance Co., Ltd., 44 SCRA 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

418

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 174

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,9
98 Phil. 79 [1955], cited in the Biagtan case.)
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 cleairly 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 consid-ered 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.)

Sec. 174

CLASSES OF INSURANCE
Title 3. — Casualty Insurance

419

death was committed with deliberate intent which, by
the very nature of a personal accident insurance policy
cannot be indemnified.
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 polic
y of liability insurance.
In Guingon vs. Del Monte (20 SCRA 1043 [1967].), the
policy requires that suit and final judgment be first obtained
against the insured; that only "thereafter" can the person
injured recover on the policy; it expressly disallows suing the
insurer as a co-defendant of the insured in a suit to determine
the latter's liability to the third person.
The query is which procedure to follow —â–  that of
the insurance policy or the Rules of Court. It was 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

10SEC. 5. Joinder of causes of action. — A party may in one pleading assert, in the
alter-native 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;

420

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 174

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.; Shafter vs. Judge, RTC, supra.)
11

— 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, die joinder may be allowed in the Regional Trial
Court provided one of die 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
mon-ey, die 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 other-wise 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 die 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 perfor-mance 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
company)
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 company by virtue of and under the provisions of Act
No.
536,
as
amended
by Act No. 2206, entitled "An 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

422

THE INSURANCE CODE OF THE PHILIPPINES

stipulations, bonds, and undertakings, and
corporations to be accepted as surety thereon."

to

Sec. 175

allow

certain

Under
Act
No.
536,
whenever
any
recognizance,
stipulation, bond, or
undertaking conditioned
for the
faithful performance of any duty or of any contract
made 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 when executed or guaranteed
by
any corporation organized under the
laws
of
the Philippines and authorized to become a surety upon
official recognizances, etc.
The Act requires that such recognizance, etc. be
approved by the head of Department, court, judge, officer, board
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 was the
practice to take hostages, by treaty or force, from tribes who
were under obligation, as a guarantee of good conduct or
fulfillment of promises. Biblical references show that suretyship
was common in those days, and in England, it reached such
proportion by the time of Cromwell's administration as to give
rise to a burdensome number of court cases. Personal
sureties were used exclusively

Memorandum Circular No. 622 of the Office of the President of the Philippi
nes, 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
-con-trolled 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.)

Sec. 176

CLASSES OF INSURANCE
423 Title 4. — Suretyship

until a society was formed in 1720 to insure masters against
loss through the dishonesty of their servants.
In 1853, New York authorized the formation of companies
to accept fidelity and surety risks, but no company took
advantages of this privilege until 1876. Corporate sureties were
found superior to
individuals
in
many respects
and
thus
corporate bonding (fidelity) and surety grew to
a big business. (Riegel, Miller & Williams, Jr., op. cit., pp. 385-396.)
In the early days when personal sureties were utilized,
co-suretyship
was
common.
With the rise
of
corporate
sureties, reinsurance
(Sec.
95.)
is
considered a simpler and more convenient device for spreading
risks, (see Sec. 215, par. 2.) Personal sureties in property bond
are currently allowed for bail bonds under the Rules of Court, (see
Rule 114, Secs. 12,13.)
(2) Treated like insurance. — With the change to surety
bonds being issued by corporations, the court began to
change the rule of strictissimi juris, which favored the surety
in interpreting the
contract.
Gradually,
the
insurance rule
which
applied
to
"contracts of
adhesion"
was
adopted.
When
the
contract
is primarily drawn 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 some respects. The bonds
look like insurance contract, too, and they are often issued by
agents
who write
both
insurance
contracts
and
bonds.
Regulation of bonds 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
bond"
which
is
essentially
a
promise
to
guarantee the debt or obligation of the obligor.

424

THE INSURANCE CODE OF THE PHILIPPINES

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 becomes primarily liable to the obligee who 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 SCRA 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 SCRA 485 [1982].) A
surety is merely a collateral contract. Its basis is the principal
contract or undertaking which it secures. The obligee does not
participate in the processing and approval of the bond
application the merits of which it is the duty of the surety to
investigate
and
ascertain before
it
is
approved.
Any
misrepresentation
made
by
the
bond
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." The (original) surety issuing the
prime bond may cede a portion or portions of the bond to one
or more insurers or sureties under a bond 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 non-remittance 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

CLASSES OF INSURANCE
425 Title 4. — Suretyship

Issue: Is the surety bond liable?
Held: Yes. The condition of the bond explicitly provide
s
for S's liability in case of nonpayment of any DLPM account.
(Edward Keller, Ltd. vs. Workmen's Insurance Co., Inc., I.C. Case
No. 378, Aug. 9,1977.)

Distinctions between suretyshi
p and property insurance.
They are the following:
(1) Suretyship is an accessory contract because it is
dependent for its existence on a principal contract, while
contract of insurance is a principal contract in itself;

a

(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 two parties, the insurer
and the insured;
(3) The first
surety assuming
is

is more of a credit accomodation with
primary liability,while the
second
generally a contract of indemnity;

the

(4) In the first, the surety is entitled to reimbursement
from the principal and his guarantors for the loss it may suffer
under the contract, while in the second, there is no right of
recovery for the loss the insurer may sustain except when the
insurer is entitled
to subrogation.
In
case of
subrogation, however,
the third
party against whom the insurer may proceed is not a party to a
contract;
(5) Generally, a bond 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
maybe
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

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 177

device, the premium paid being considered a ratable
contribution to a common fund, (see Sec. 2.)

Distinctions between suretysh
ip 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.) The 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
upon an independent agreement to pay if the primary debtor
fails to do so;
(2) The surety is primarily liable, while 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 have
all the property of the debtor and legal remedies against the
debtor first exhausted before he can be compelled to pay the
creditor. (Art. 2058, ibid.)
It would then follow that "while a surety undertakes to
pay if the principal does not pay, the guarantor binds himself to
pay if the principal cannot pay." (Machette vs. Hospido de San
Jose & Fidelity & Surety Co., 43 Phil. 297 [1922].) In short, the
surety is considered in law as being the same party as the
principal debtor in relation to the latter's obligation.

Sec. 177. The surety is entitled to payment of the
pre-mium as soon as the contract of suretyship or bond
is per-fected and delivered to the obligor. No contract
of sure-tyship 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 sure-ty; 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
427 Title 4. — Suretyship

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 non* acceptance 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 fells 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)
Payment of premiums.
The rules are as follows:
(1) The premium becomes a debt as soon as the contract
of suretyship or bond is perfected and delivered to the obligor
(see Sec. 77.);
(2) The contract of
valid and binding unless
been paid;

suretyship or bonding shall not be
and until the premium therefor has

(3) Where the obligee has accepted the bond, it shall be
valid and enforceable notwithstanding that the premium has
not been paid
(see Philippine Pryce Assurance Corp. vs. Court
of Appeals, 230 SCRA 164 [1994].);
3

(4) If the contract of suretyship or bond is not accepted by,
or filed with the obligee, the surety shall collect only a
reasonable amount;
(5) If the non-acceptance of the bond 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 bond (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

Actions 64 and 77 refer to insurance in general Section 177 specifically gov
erns suretyships.
(AFP General Insurance Corp. vs. Molina, 556 SCRA 630 [2008].)

428

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 177

as
long
as
the
liability
of
the
surety
shall
exist.
(Reparations Commission
vs.
Universal Deep-Sea
Fishing
Corp.,
83
SCRA 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

429

CLASSES OF INSURANCE
Title 4. — Suretyship

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 52611983].)

Types of surety bonds.
Some of the major types of surety bonds
are:
(1) Contract bonds. — These bonds are connected with
construction and supply contracts. They 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. The 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 may be two bonds:
(a) Performance bond.

performance of the contract; and

One

covering

the

faithful

(b) Payment bond. — One covering the payment of
laborers and material men (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. — One required by private
employers to cover loss through dishonesty of employees; and

‘For rules and regulations governing the issuance of bonds, see Appendix "G."

430

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 177

(b) Public official bond. — One 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 who
have custody of public funds. The officials, to be sure, would
be individually liable for any loss. The official, however, is
not always in a position to make 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. The 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. — They are those which are required
in connection with judicial proceedings. Some of the most
common kinds
are injunction
bonds, attachment bonds,
replevin
bonds, bail bonds
and
appeal
bonds.
The purpose of requiring
a litigant to furnish a
judicial bond 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 bond
specified and
required in
the provisions
of the
statute
or regulation providing for the submission of
the
bond
are
incorporated
or
built into all
bonds tendered under that statute or regulation,

5In a Memorandum to all Clerks of Court and Branch Clerks of Court, dated
Sep-tember 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
spuri-ous 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 is-sued 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 re-turn 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. 2493, dated Sept. 24,1993.)

Sec. 178

CLASSES OF INSURANCE
431 Title 4. — Suretyship

even though not there set out in printer's ink. (Finman
General Assurance Corp. vs. Inocencio, 179 SCRA 480 [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 applica
ble in a suppletory character.
Article 2047 of the Civil Code provides:
"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.
If
a
person
binds
himself
solidarity
with
the
principal debtor, the provisions of Section 4, Chapter 3, Title
1 of this Book shall be observed. In such case, the contract
is called a suretyship."
The second paragraph states the law applicable to the
contract of suretyship. It embraces Articles 1207 to 1222 of
Section 4 (Joint and Solidary Obligations), Chapter 3 (Different
Kinds of Obligations), Title 1 (Obligations) of the Civil Code. In
a solidary obligation,
the
solidary
debtor
himself
is
the
principal debtor. Whenever applicable, the
provisions on
guaranty from
Articles
2047
to 2084
of the Civil Code also apply to suretyship.
The above provisions of the Civil Code shall be applied
in asuppletory character whenever 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
there-with. (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
endow-ments 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.

o

(1) Based on Section 180, life insurance may be defined as
insurance payable on the death of a person, or on his surviving
1

‘"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

Secs. 179-180

CLASSES OF INSURANCE
Title 5. — Life Insurance

433

a specified period, or otherwise contingently on the
continuance or cessation of life.
(2) It has also been defined as a mutual agreement by which
a party agrees to pay a given sum on the happening of a
particular event contingent on the duration of human life, in
consideration of the payment of a smaller sum immediately, or
in periodical payments by the other party. (44 C.J.S. 484.)
(3) Essentially, life insurance is a contract to make
specific payments to pay to a certain person, the beneficiary,
upon the death of a person whose life has been insured.

Parties involved in a policy of li
fe insurance.
The cast of characters involved in a policy of life
insurance other than the insurer includes:
(1) The owner of the polio/, who has the power to name
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) The person whose life is the subject of the policy, also
known as the cestui que vie; and
(3) The beneficiary to whom the proceeds are paid.
One person might occupy all three positions by naming
his estate as beneficiary; or each of the three positions may be
held by a separate party. (J.F. Dobbyns, op. cit., p. 71.)

an absence of seven years, it being unknown whether or not die 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 die 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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.

The
ordinary
life
insurance contemplates the certain
payment
of
a
specified sumat 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 sum equal to an amount to become 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 may take place within a
given term, it being known by experience that such losses do
not occur in a great majority of cases.
(b) In ordinary life insurance, the event upon which
the payment is to be made is absolutely certain to happen at
some future time. In the average case, the insurer only
pays back the money that has been given to him to hold in
quasi trust for the insured plus interest and less expenses.
Only in the case of premature death does the insurance
payment embrace the element of indemnity. (Vance, op. cit., pp. 105106.)
(2) Amount of insurance generally without limit. — Another
reason why life insurance may not be regarded as a contract
of indemnity exists in the difficulty to be encountered in fixing
any sort of pecuniary value upon life. It is a well-recognized
principle that, granting the existence of an actual interest, except
when the interest grows out of an obligation to pay a fixed sum
of money, there is no limit as to the amount of insurance which
may legally be placed upon the life of any person even though
that person might be one whose life was rather a burden upon
the party in interest than a benefit possessing a pecuniary
value, (ibid.) When the insured dies, the insurer must pay face
the amount of the policy (or more) to the named 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 "loss"

CLASSES OF INSURANCE
Title 5. — Life Insurance

Secs. 179-180

435

(Wahl vs. Interstate Businessmen's Acci. Assn., 297 N.W.
395.) because there is no way to measure the value of a
human life. Life insurance policies
are "valued"
by
the
purchaserwhen the policy is purchased and the
value placed on the insured is basically decided by the amount
the purchaser is willing to pay in premiums. The amount is
determined by the factors affecting the life of the insured such as his
age, health, and occupation.
(4) Direct pecuniary loss not required. — When 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 mere contract of indemnity,
but is more accurately characterized as a form of
investment. It is a contract to pay the beneficiary a certain
sum of money to meet the financial crisis which may be
caused in the event of death of the insured or any disability
resulting in loss of earning power provided
certain
conditions
are
performed by the insured.
(Victor vs. Louise Cotton Mills, 61 S.E. 648.) The measure of
recovery is, therefore, the face amount of the
policy and not the value of the insured's life.
(b) Here, it is the difficulty of determining precise
values that prevents life insurance contracts from
being, strictly speaking,
based upon indemnity.
One
cannot say, for example, that the life of a person is worth
(or not worth) precisely
P50,000.00,
or
P100,000.00,
or
PI,000,000.00.
Thus, the life insurance contract agrees to
pay
a
certain
stated amount rather than an amount
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

2Life 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 inca-pable of being measured in economic terms.
Thus, life insurance is not pure indemnity insurance, and property insurance has
more indemnity characteristics than life insur-ance. (R.H. Jerry, II, op. cit., p. 181.)

436

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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.
The contract of life insurance pays a certain sum of money
on
the
loss.
(Ibid.,
224.) There is
no attempt to put a
monetary value on life.

Life insurance distinguished
from fire and marine insurance.
(1) The former is not a contract of indemnity (save that
effected by a creditor on life of debtor) but a contract of
investment, while the latter are contracts of indemnity (supra.);
(2) The former is always regarded as a valued policy
(Sec. 183.), while the latter may be open or valued;
(3) A life policy may be transferred or assigned to any
person even if he has no insurable interest (Sec. 181.), while in
the case of a fire or marine policy, the transferee or assignee
must have 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 marine 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 when the loss occurs, while in the latter, the insurable interest in the

3While 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. Pat-terson, op. cit., pp. 154-155.)

Secs. 179-180

CLASSES OF INSURANCE
Title 5. — Life Insurance

437

property insured must exist not only when the insurance
takes effect but also when the loss occurs (Secs. 19,181.);
(6) In the former, insurable interest need not have any
legal basis, while in the latter, insurable interest must have 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 when it will take place, while in the latter, the
contingency insured against may or may not occur;
(8) In the former (unless written only for a term), the
liability of the insurer to make payment is certain, the only
uncertain element being when such payment must be made,
while in the latter, liability is uncertain because the happening
of the peril insured against is uncertain; in other words, in
the former, the amount insured will have to be paid sooner or
later, while in the latter, the amount insured may not have to be paid;
(9) The former, although it may be terminated by the
insured, cannot be cancelled by the insurer, and, therefore, is
usually a long-term contract, while the latter may be cancelled
by either party and is usually for a term of one (1) year (see Secs. 65, 66.);
(10) In the former, the "loss" to the beneficiary caused
by the death of the insured can seldom 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 who
is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a life insurance policy by the
person who cannot make any donation to him, according to said
article." (see Sec. 11.)

438

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 179-180

Exemption of life insurance policie
s 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 manner growing
out of any life insurance are exempt from execution (Rule
39, Sec. 12[k] thereof.) regardless of the amount of the annual
premiums paid. Before the amendment of the provision, if they
exceed P500.00 "a like exemption shall exist which shall bear
the same 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 way of
illustration, if the premiums paid annually amount to PI,500.00,
only 1 / 3 of the life insurance benefits are exempt from execution.
Incidentally, it has been held that statutes
exempting 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 which will be free from the claims of
creditors.
(Gallardo
vs.
Morales,
107
Phil.
903
[1960], citing 35 C.J.S. 53-54.)

Application of exemption to accide
nt insurance.
(1) When accident insurance regarded as life insurance. —
Generally speaking, a life insurance is distinct and different
from an accident insurance, (see Sec. 174.) However, when
one of the risks insured in the latter is the death of the
insured by accident, then such accident insurance may also be
regarded as a life insurance.
4

4No insurance company may be authorized to transact in the Philippines the
busi-ness 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.)

Secs. 179-180

439

CLASSES OF INSURANCE
Title 5. — Life Insurance

For this reason, and because the above-quoted provision
of the Rules of Court makes reference to "any life insurance,"
the exemption there
established applies
to
ordinary
life
insurance contracts, as well as to those which
although intended primarily to indemnify
for risks arising from
accident, 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 burden of proving that the cause
of death is due to the covered peril. Once that fact is
established, the burden then shifts to the insurer to show any
excepted peril that may have been stipulated by the parties.
An "accident insurance" is not thus to be likened to an
ordinary life insurance where the insured's death, regardless of
the cause thereof, would normally be compensable.
The ordinary life insurance is akin to an "all-risks"
coverage in property insurance, where the insurer, on the aspect
of burden of proof, has merely to show the condition of
the property insured when the policy attaches and the fact of
loss or damage during the period of the policy and where
thereafter, the burden would be on the insurer to show any
"excluded peril." When the insured risk is specified as in an
accident insurance policy (e.g., for bodily
injury
caused
solely by
violent accidental external and visible means
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
SCRA 137 [1996].)

Kinds of life insurance policies.
The kinds of individual life policies are limited in
number 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

^The policies may be: (1) medical cases or those which have been issued after
con-sideration 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,
with-out obtaining a medical report on the life of the insured,
(see Cir. Letter, Oct. 29,1985.)

440

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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. Many insurance companies consider this
policy paid-up when 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 come
about by the inclusion of an investment feature through the
payment of the "cash surrender value" of the policy in case it is
cancelled by the owner or it lapses through nonpayment of
premiums. Sometimes, it permits the insured to borrow against
the value without surrender of the policy. This policy is for
the whole duration of life. It carries the lowest rate of premium.
6

This kind of policy is also known as whole life or regular life,
or straight life, or cash-value insurance.
(2) Limited payment life policy is one under the terms of
which the premiums are payable only during a limited period
of years, usually ten, fifteen, or twenty. When the specified
number of premium payments have been made, the insurance
is fully paid for. It is like ordinary life policies in that it is
payable only at the death of the insured. The 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 premiums. Because of the limited number of
payments to be made 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.

6The 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 sav-ings component of the policy. Thus, it is more expensive than term
insurance. However, the 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 propor-tion of the premium goes into savings, (see Sec. 227.)

Secs. 179-180

CLASSES OF INSURANCE
Title 5. — Life Insurance

441

(3) Term insurance policy is one which 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 end of the
time period. The premium paid is levied during the specified
terms and increases with each renewal term (43 Am. Jur. 2d.
67.) or the amount of coverage declines, and this is because as
a person ages, the risk of death increases.
The premium is lower than in the case of straight life
insurance because of the possibility that the insurer may not be
obliged to pay anything in proceeds whatsoever if the insured
survives the term. Consequently, this form of life insurance is
not considered to carry with it the element of investment. It has
no loan value. There is generally no provision for payment of
a cash surrender value or investment value upon surrender or
lapse of the policy. The insured may be given the option to
convert the policy to one of whole life or endowment life.
This kind of insurance is also known as temporary
insurance. It is essentially pure insurance, i.e., it provides
insurance alone.

life

7

(4) Endowment policy is one under the terms of which
the insurer binds himself to pay a fixed sum to the insured
if he survives for a specified period (maturity date stated in
the policy), or, if he dies within such period, to some other
person indicated. The premium is higher because 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 upon 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

7Another type of Insurance is universal life that combines some aspects of ter
m In-surance and some aspects of whole life Insurance.

THE INSURANCE CODE OF THE PHILIPPINES

442

Secs. 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 Secs. 50, last par.,
228.) and industrial life insurance. (Secs. 229, 330, 231.)

Scope of life insurance.
The loss of earning power by persons results from
their death,
injury, illness,
old age, or loss
of
employment.
The branches of insurance covering some
of these contingencies have not, it seems, acquired names 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 unemployment insurance indemnifies for the
loss of part of income 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. The loss occasioned by death against which life
insurance attempts to provide protection is the cessation of the
current earning power of the insured. Applying an economic
interpretation to the concept of death, the permanent loss of
current earning capacity amounts to an "economic death." From
the economic standpoint, death may be:
(a) Actual death. —
This classification represents the so-called "casket death";
(b) Living death. —
This involves permanent disability; and
(c) Retirement death. — Living beyond the period
of
earning capacity represents this classification of death.
(2) Health, accident and disability insurance provides
for hospital or medical expenses, or for loss of time or earning

benefits

Secs. 179-180

CLASSES OF INSURANCE
Title 5. — Life Insurance

443

power because of injury or illness. While 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 may be
issued by either life or non-life insurance companies.
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, (see Secs. 174,181,183.) 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 deemed by law as
both life and non-life, (see Art. 187, par. 8.)

Contract of life annuity defined.
"By the aleatory contract of life annuity, the debtor binds
himself to pay an annual pension or income during the life of one
or more determinate persons in consideration of a capital
consisting of money or other property, whose ownership is
transferred to him
at once with the burden of the income." (Art. 2021, Civil Code.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 execu-tion 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 at-tachment of the property. (1807a)

444

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 179-180

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 two types of
agreements. In exchange for his premium, the purchaser of
life insurance expects his insurer to pay his beneficiary a
specified sum upon his death. For his premium, the purchaser of
an annuity expects his insurer to pay him a periodic income as
long as he lives. Thus, under a life insurance contract, the
insurer starts paying upon the death of the insured, whereas
under an annuity contract, the insurer stops paying
upon
the
deathof
the insured.
("ContractsAnnuities," by Robert I. Mehr, in LHIH, p. 78.)

Annuity contracts distinguished fr
om ordinary life policies.
Contracts of annuities differ materially from ordinary life
policies and are not generally
regarded
as
such.
But
under the law, they are considered, like endowment
contracts, as life insurance contracts. (Sec. 180, par. 2.) The 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, insures against
from
than an early death.

contract,
unlike
economic
a

(2) From the insurer's viewpoint,
longe-vity, while annuity, to transiency.

the
life
insurance
problems resulting
long life,
rather

insurance

looks

(3) Under the ordinary life insurance policy, the
pays to the insurer an annuity and his beneficiary receives at the

to
insured

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

445

CLASSES OF INSURANCE
Title 5. — Life Insurance

insured's death the lump sum payment. Under the usual
form of annuity, the lump sum is paid to the insurer
immediately and the annuitant receives the annuity payments as
long as he lives. (Vance, op. cit., p. 1020.)
(4) An annuity appears more like an "investment" instead
of an insurance, which may or may 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 sum upon the insured's death.
Both
provide
protection
from
a
substantial
risk.
A
person may take life insurance and at the same time enter into a
contract of annuity to provide security both against the risk of
premature death and against the risk of long life.
The special provisions
primarily such contracts.

of

the

Civil

Code

govern

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, un-less the policy provides a shorter
period; Provided, how-ever, 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) The 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
two-year period; and
(c) The suicide is committed in the state
insanity regardless of the date of commission,
suicide is an excepted risk.

of
unless

446

THE INSURANCE CODE OF THE PHILIPPINES

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
committed within the two-year period;

of

insanity

and

is

(b) The suicide is by reason of insanity but is not
among the risks assumed by the insurer regardless of the
date of commission; and
(c) The insurer can show that the policy was
obtained with the intention to commit suicide even in the
absence of any suicide exclusion in the policy.

Sec. 181. 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 recov-ered.

Right of insured to assign lif
e 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. Co. of
Canada 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) The 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
become 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, 222 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
law restricts the class of persons who may profit from the
death of the insured thereby reducing to a reasonably safe
minimum the dangers of wagering and of murder. (E.W.
Patterson, op. cit., p. 164.) The owner 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 whose life is insured on
his own initiative, (see Sec. 10[a].) Since he may name any
beneficiary he pleases in policy taken out by him, an
assignment of the policy by him would not be invalidated
by the lack of insurable interest of the assignee.
(2) Where assignment used as a cloak to hide an illegal scheme.
— The courts will not, however, permit the process of
assignment to be used as a cloak to hide an illegal intent to
make contracts on human life. (Mutual Aid Union vs. White, 204
S.W. 137.) The usual evidence of this scheme is the fact that
the assignment occurred almost immediately after the policy was issued.
An assignment is to be distinguished from a change in
the designated beneficiary, (see Sec. 11.)

Necessity of consent of beneficiar
y 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

THE INSURANCE CODE OF THE PHILIPPINES

policy without the consent of the beneficiary.
in the latter case, has a mere expectancy and
an assignment of the policy until his interest
thereof becomes absolutely fixed by the death of
Mutual Ben. Life Ins. Co. vs. Sweet, 222 F. 200.)

Sec. 182

The beneficiary,
he cannot make
in the proceeds
the insured, (see

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, where 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 have 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 made to the
beneficiary before receipt by the insurer of the notice. Even
without notice to the insurer, the assignment is binding upon
the assignor (insured) and the assignee.
9

(3) Assignment with consent of insurer. — Whether 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.
1291, Civil Code.) The assignee takes the newly formed
contract free of defenses available to the insurer against the
insured (assignor) under the old contract.

9A
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 as-signable 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.
The extent or amount of indemnity payable on the death
of the insured under a policy of insurance upon life or health
is the amount fixed in the policy. In effect, life policies are
valued ones, (see Sec. 61.) In property insurance which is
fundamentally a contract of indemnity, the measure of
indemnity depends on whether the policy is an open 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 amount as long as he can pay the premium. The
exception is when 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 debtor" is
susceptible of exact pecuniary measurement or estimation.

— oOo —

Chapter III
THE BUSINESS OF INSURANCE
Title 1
INSURANCE COMPANIES: ORGANIZATIO
N,
CAPITALIZATION, AND 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 com-pensate any person or persons or
other corporations for any such loss, damage, or
liability, or to guarantee the per-formance 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 su-perseded the former Corporation Law.
(Act No. 1459, as amended.)
450

Secs. 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
Phil-ippines except as agent of a person or corporation
autho-rized 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 un-less 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 in-surance 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 speci-fied in the certificate.
Sec. 187. No insurance company shall transact any
in-surance 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 com-pany 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
capi-tal, notwithstanding the provisions of
section one hundred

452

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
poli-cyholders and the public in general, any person of
good moral character, unquestioned integrity and
recognized competence may be elected or appointed
director or offi-cer of insurance companies. The
Commissioner shall pre-scribe 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
offi-cer 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
Com-missioner must be satisfied that the name of the
company is not that of any other known company
transacting a simi-lar 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
ensur-ing that the company direction and administration as well as the integrity
and respon-sibility 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 /direc-tors /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. Circ. Letter No. 13-04, 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
THE BUSINESS OF INSURANCE
453 Title 1. — 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 deci-sions of the Commissioner. Every
company receiving any such certificate of authority
shall be subject to the provi-sions of this Code and
other related laws and to the juris-diction
and supervision of the Commissioner.
No insurance company may be authorized to
transact in the Philippines the business of life and
non-life insur-ance 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
ad-justment company and neither shall an adjustment
com-pany have an equity in an insurance company.
Insurance companies and adjustment companies
pres-ently 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 insur-ance company already doing
business in the Philippines with a paid-up capital stock
which is less than five million pesos shall have a paidup 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 recom-mendation 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

THE INSURANCE CODE OF THE PHILIPPINES

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 pe-sos, in the case of a life insurance
company, or not less than five hundred thousand pesos,
in the case of an insur-ance company other than life.
He may also require such company to submit to him
a business plan showing the company’s estimated
receipts and disbu rsements, as well as the basis
therefor, for the next succeeding three years.
If organized as a mutual company, in lieu of such
cap-ital 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 out-standing risks, and the
contributed surplus fund equal to the amounts required
of stock corporations. A stock insur-ance company
doing business in the Philippines may, sub-ject to the
pertinent law and regulations which now are or hereafter
may be in force, alter its organization and trans-form
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
Com-missioner 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
Ex-change 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
submis-sion. (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
orga-nized 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 hav-ing 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 sec-tion, 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 certifi-cate.
Sec. 190. The Commissioner must require as a
con-dition 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 attor-ney 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

456

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 191

by the proper authorities of said company in form and
sub-stance 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 Phil-ippines, 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 no-tice, 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 Philip-pines, 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,
sum-mons, or other legal process shall be made upon
the Com-missioner, he must, within ten (10) days
thereafter, trans-mit 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 Phil-ippines shall engage in business in the
Philippines unless possessed of paid-up unimpaired
capital or assets and re-serve not less than that herein
required of domestic insur-ance companies, nor until it
shall have deposited with the Commissioner for the
benefit and security of the policy-holders 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.

Secs. 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
do-mestic 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 Philip-pines, its political subdivisions and
instrumentalities, or of government-owned or controlled
corporations and enti-ties, 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 securi-ties 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 re-quired 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,

THE INSURANCE CODE OF THE PHILIPPINES

458

Secs. 184-193

whichever is the lesser, unless otherwise approved in
writ-ing
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 insuran
ce business.
(1) Basic
reasons
for
governmental
regulation.

The
insurance business is heavily regulated by law because of
public policy considerations to insure that every insurance
company comply with the applicable laws in conducting its
business and in its dealing with the Insured.
The
insurance business possesses
justifying governmental control and provision.

peculiar

characteristics

(a) The chief characteristic is that an insurance con tract is
an aleatory contract, that is, a contract under which the
obligation of one party, the insurer, will mature (become
immediately payable)
only upon
the happening
of a
fortuitous
event which is, generally speaking,
much more likely not to occur during the coverage bargained
for
1

(b) Inequality of values to be exchanged characterizes
insur-ance
since
the
premium
paid
by
the
insured
unconditionally is ordinarily for less than the amount which
the insurer may become obligated to pay on a contingency
which will pro-bably not occur. The insured gets only a
promise by the in-surer and may never have occasion to
find out, by his own experience, whether that promise
would be performed. He is, therefore, more gullible with
respect
to
insurance
and
more susceptible to the wiles
of the salesmen.
(c) The insured's inability to look out for his own
interest is increased by the technical character of the insurance contract.
1) While some insurance contracts can
be written mostly in ordinary laymen's language,
virtually all of

'If the probability of the occurrence of an insured event (e.g., fire during a perio
d of 3 years) is greater than even chance, it will be insured.

Secs. 184-193
THE BUSINESS OF INSURANCE
459 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

them require either some trade terms or, what is likely
to mislead, some special meanings given to simple terms.
2) Furthermore, the various conditions of the
insur-er's promise and of settlement, and the promises
of ser-vices 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 and honest insur-ance agent or broker. Hence,
the latter are included with-in the scope of governmental
regulation.
3) Moreover, an insurance cannot succeed unless
it makes a large number of contracts and mass
production of contracts means that the insured must
ordinarily take the insurer's printed form, or do without.
Because of this, the contract of insurance is sometimes
called a "contract of adhesion."
(d) All of these result in inequality of bargaining of
power as
between insured
and insurer. The
government
intervenes primarily to protect the
interest of the insured, secondarily, to
protect
honest
and
competent
insurers
from unfair competition
the
dishonest
and
incompetent.
(E.W. Patterson, op.
cit., pp. 2-3.)

by

(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. — The 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) The 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.

THE INSURANCE CODE OF THE PHILIPPINES

460

Secs. 184-193

(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. — The State controls the
insurance business through all departments of the government,
(see Chap. VIII.)
(a) The judicial department exercises control by
deciding controversies between litigants.
(b) The legislative department has broad powers to
enact all legislations, necessary or expedient for the public
good limited only by the provisions of the Constitution.
(c) The 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. — The State may regulate
insurance enterprises at three stages: when they are launched;
while they are successfully doing business; and when they have
gotten into financial difficulties.
(a) The first stage is controlled by the granting of
charters under general laws and by the granting of licenses
to new enterprises (see Secs. 186-187.);
(b) The second, by the power to revoke (or refuse
renewal of) licenses, by the power to examine a company
(see Secs. 245-246,
415.),
and
by
the
criminal
penalties for
various
infractions of its laws (see Secs. 419-420.); and
(c) The

third, through the power of the
Insurance
Commissioner
to
appoint
a
conservator or receiver to take charge of the management
of the company or administer its assets, or a liquidator to
wind
the
company's
business
and distribute its assets,
(see Secs. 248-251.)

Secs. 184-193
THE BUSINESS OF
INSURANCE
Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

461

Thus, from the cradle to the grave, an insurer is under official
surveillance. (E.W. Patterson, op. cit., pp. 1, 9-10.)

Business of insurance conducted almo
st exclusively by corporations.
Insurance, no doubt, may 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 have been 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 Am. Jur. 2d.
141-142.)
The various corporations, in whose hands most of the
insurance business now lies, differ very greatly in their nature
and organization and in their charter powers. A company may
be empowered by its charter and the laws to grant only certain
types of insurance coverages.
(1) A life insurance company is usually empowered to write
personal accident and health insurance and annuities as well as
life insurance.
(2) A fire insurance company customarily is empowered to
write, in addition to fire insurance, marine insurance, both ocean
and inland, and certain minor lines.
(3) A casualty company may usually also write workmen's
compensation insurance and accident and health insurance as
well as relatively minor lines such as fidelity, surety and plate
glass coverage.
(4) There is now a growing tendency to break down the sharp
barriers in the fire and casualty field so as to permit one company
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 Code of the Philippines,
(B.P. Big. 68.) are expressly made applicable by the Insurance
Code to all corporations now 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 Code shall prevail.

462

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 184-193

General requirements before an insurance compa
ny may transact insurance business.
(1) Domestic insurance companies. — Before a domestic
insur-ance company, as defined in Sections 184 and 185, may
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 require-ments:
(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
upon
application therefor and payment of the fees prescribed (Sec. 187.);
and
(c) It shall have filed with the Insurance
Commissioner the documents required under Section 189;
The Commissioner may, as a pre-licensing requirement
of a new insurance company, require the payment in cash
by the stockholders, in addition to the paid-up capital stock,
of a contributed surplus fund of not less than PI 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, and
the submission by such company 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 company recovers these expenses,
the stockholders will be allowed to withdraw their contributions.
(2) Foreign insurance companies. — In addition, if the insurer
is a foreign company (Sec. 184.), it shall have filed with the
Insurance Commissioner
a written power of attorney
designating
some person who shall be resident of
the Philippines as its agent (Sec. 190.) and deposited with the
Insurance Commissioner for the benefit
of its policyholders
and creditors
satisfactory securities required under
Section 191.
An insurance company may not transact the business of
life and non-life insurance concurrently unless specifically authorized

Secs. 184-193
THE BUSINESS OF INSURANCE
463 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

to do so. No insurance company shall have
an adjustment
company
and
shall an adjustment
company have
an
insurance
company.
(Sec.
188,
pars.
9; see Chap. IV, Title V.)

any
any
8

equity in
neither
equity in
and

Minimum capitalization requirements for n
ew insurance
and reinsurance companies
and those to be rehabilitated.
Only
sufficiently
capitalized
insurance
and
reinsurance companies can
be
competitive
regionally
and
globally
and
sustain public and investor confidence in the insurance industry.
Non-compliant and failed insurance companies cause an
alarming number of unpaid insurance claims, causing inestimable damage and prejudice to the victims of unpaid
insurance policies. The result is a frustrated insurance policyholding
pub-lic and unfavorable public perception of the
industry as a whole. Most
insurance companies previously
put
under
conservator-ship or receivership, or recommended
for liquidation because of violations of
statutory
and
regulatory
requirements,
primarily capital impairment and
margin of solvency deficiency, and subsequently allowed to be rehabilitated, had failed.
The new capitalization requirements are as follow
s:
(1) Effective July 1, 2006, no new life or non-life
insurance company shall be allowed to do business in the
Philippines unless it has a capitalization of PI Billion, paid in
cash, of which at least 50% consists of paid-up capital and the
remaining portion thereof as contributed surplus, which in no case
shall be less than P200 Million.
(2) Effective July 1, 2006, no new reinsurance company
shall be allowed to do business in the Philippines unless it
has a capitalization of P2 Billion, paid in cash, of which at
least 50% consists of paid-up capital and the remaining
portion thereof as
contributed surplus, which in no case shall be less than P400
Million.
(3) Effective July I, 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 PI Billion Pesos,

464

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 184-193

computed in accordance with the Insurance Code, and of
which at least 50% consists of paid-up capital and the remaining
portion thereof as contributed surplus, which in no case shall be
less than P200 Million.
(4) Effective July
1,
2006,
no
reinsurance companies
under conservation or receivership or
for liquidation
may
be rehabilitated unless it has a net worth of
P2 Billion, computed in accordance with the Insurance Code,
and of which at least 50% consists of paid-up capital and
the remaining
portion thereof as contributed surplus, which
in no case shall be less than P400 Million.
(5) The above requirements are without prejudice to
other requirements that are to be imposed under any risk-based
capital method
that
may
be
adopted
by
the
Insurance
2
Commission. (Dept, of Finance Order No. 19-06, May 15, 2006.)

Deposits and withdrawal of securitie
s by foreign insurance companies.
(1) It is within the power of a State to require
companies 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. Any surplus after the satisfaction of the
claims of policyholders constitutes a trust fund for the
benefit of creditors of the depositing company. (43 Am. Jur. 2d. 123.)
(b) The actual market value of the securities required
to be deposited with the Insurance Commissioner must not
be less than the minimum paid-up capital required of
domestic insurance companies.
(c) At least 50% of the total security deposit shall
consist of bonds or other evidences of debt of the government of the

2To secure the solvency position of insurers and thus adequately protect the
insur-ing public, Department of Finance Order No. 20-06 estalished fixed annual
capitalization increases through the years 2006 to 2010/2011. Ins. Memo. Cir. No. 62006 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.

Secs. 184-193
THE BUSINESS OF INSURANCE
465 Title 1. — 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
com-pany is entitled, after having paid all liabilities, to
withdraw its deposits with the State and they may not be
attached by a foreign creditor, (see 43 Am. Jur. 2d 123; see Secs. 191,192.)
Section 192 specifically confers custody over the
securities upon the Insurance Commissioner with whom
these investments are required to be deposited. An implied trust
is created by law (see Arts. 1440,1441, 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
Commissioner is in the best position to determine if and when
it may be released without prejudicing the rights of policy
holders. (Republic vs. Del Monte Motors, Inc., 504 SCRA 53
[2006].)

Entry of foreign insurance or reinsuran
ce companies or intermediaries.
In relation to Sections 184, 188, 203, 280, 281, and 299,
the following rules or guidelines have been 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:
(a)
Ownership of the voting stock of an existing domestic
insurance or reinsurance company or intermediary;
(b) Investment in a new insurance or reinsurance
company or intermediary incorporated in the Philippines;
or (c) Establishment of a branch.
3

Entry under item (c) is not available to an intermediary.
An applicant may avail itself of only one (1) mode of entiy.

3A 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].)

466

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 Com-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 company or intermediary;
(c) Demonstrated capacity, global reputation
writing
innovations,
and
stability
in
a
environ-ment of the applicant;

in undercompetitive

(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. — Only those among the top
200 foreign
insurance
or
reinsurance
companies
or
intermediaries in the world or the top 10
in their country of
origin and have been 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 new company
incorporated in
the Philippines,
the applicant
must be
widely-owned and publicly listed in its
country of origin, unless it is majority-owned by the government,
(as amended by Dept, of Finance Order No. 100-94A, Nov. 18,1994.)
The term "widely-owned" means that not a single
stockholder of the applicant owns more than twenty percent
(20%) of its voting stock; while "publicly listed" means that
its shares of stock are listed in the stock exchanges.
(4) Capital requirements. —
(a) For an insurance company, minimum paidup capital of:
1) P250 million and a contributed surplus fund of
P50 million, where foreign equity is sixty percent
(60%) or more;

Secs. 184-193
THE BUSINESS OF INSURANCE
467 Title 1. — Insurance Companies: Organization, Capitalization, and Authorization

2) P150 million and a contributed surplus of
P50 million, where foreign equity is more than forty
percent (40%) but less than sixty percent (60%);
3) P75 million and a contributed surplus fund of
P25 million, where foreign equity is forty percent
(40%) or less.
(b) For
capital of:

a

reinsurance

company,

a

minimum

paid-up

1) P500 million, where foreign equity is sixty
percent (60%) or more;
2) P300 million, where foreign equity is more
than forty percent (40%) but below sixty percent (60%);
3) P150 million, where
company
incorporated
in
percent (40%) or less.

foreign equity in a
the
Philippines
is

new
forty

However,
any
foreign
insurance
or
reinsurance
company seeking entry under Section 1(c) above shall
deposit with the Insurance
Commission,
securities
satisfactory
to
the Commission to
the actual market value of not less than P300 million for
an
insurance
company
and
P500
million
for
a
reinsurance company.
(c) For an intermediary, a minimum paid-up capital
of US$1,000,000.00
or its
equivalent
in
Philippine
pesos,
50%
of
which to be invested in Philippine Government Securities
and deposited with the Insurance Commission.
(5) Scope of operation. — No composite license shall be
issued to an insurance company applicant under these guidelines.
(6) Head
office
guaranty.
— The
head
foreign insurance or
reinsurance company
guaranty
prompt
payment of all liabilities of its Philippine branch.

office

of
a
shall

(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
40% 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

468

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 184-193

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, nonFilipino nationals may become members of the board of
directors of an insurance or reinsurance company 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.

The
existing
rules
of
the
Insurance Commission
on pre-licensing requirements
for
new
domestic insurance or
reinsurance
companies
or
intermediaries are also applicable
to
applicants
under
these
guidelines.
(Dept,
of
Finance
Order No. 100-94, Oct. 24,1994.)

— 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 thirty-seven. 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

470

THE INSURANCE CODE OF THE PHILIPPINES

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 solven
cy at all times.
Every
insurance
company
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 company
(see Title 3.) must exceed its total liabilities other than its paidup capital or security deposits, as the case may be, by a
relevant amount known as the "margin of solvency."
(1) Excess

of admitted assets. — The company's
financial condition must, therefore, show 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
amount
of
its
liabilities,
unearned
premium and reinsurance reserves in the Philippines —
(a) by at least two per mille (i.e., P2 for every PI,000)
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 company, or
(b) by at least ten per centum (i.e., P10 for every
P100) of the total amount of its net premium written
during the preceding calendar year, in the case of a nonlife 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 Code —
(a) The term paid-up capital shall not include
contributed surplus and capital paid in excess of par value;
(b) The terms assets, liabilities and reserves shall not
include the assets, liabilities and reserve included in
separate accounts established in accordance with Section
237 of the Code;
(c) The phrase total amount of its insurance in force as
of the preceding calendar year shall mean the total amount of
a life company's insurance in force at the beginning of
the preceding year, plus the total amount of insurance
issued, revived or increased during that year, less the total
amount of insurance terminated by death, lapsation,
maturity, disability, surrender or other causes during that
year, on all policies except term insurance; and
(d) The
phrase
net
premium
written
during
the
preceding calendar year shall mean a non-life company's gross
premiums on risks written and renewed during the preceding
year in the Philippines,
less returns and cancellations,
plus reinsurance premiums received
during
that year from authorized
and unauthorized
insurers,
less
reinsurance
premiums
ceded
during that year to authorized and unauthorized insurers.
(3)
Satisfaction
of
deficiency.

Whenever
the
aforementioned margin of solvency is found to be less than that
required of an insurance company
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 company within fifteen (15) days from receipt by
such company of the order of the Insurance Commissioner
directing such company to make good such deficiency.
For purposes of the above, a professional reinsurer shall
be deemed to be a non-life company. (Ins. Memo. Cir. No. 4-75,
Oct. 1,1975, effective Dec. 18,1975.)
(4) Importance. — "It may be stressed that this margin
of solvency is most important as it would improve security
for the
insured
risks
by establishinga
safeguardagainst
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
de-clare 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
pre-ceding 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 cor-poration.

Distribution of dividends to stockhold
ers of domestic corporations.
(1) General rules applicable to corporations generally govern.
— The payment of dividends to stockholders of insurance
companies is governed by the same general rules applicable to payment of

Sec. 195

THE BUSINESS OF INSURANCE
Title 2. — Margin of Insolvency

473

dividends to stockholders of corporations generally, (see Sec.
185, par. 2.) The losses must be deducted before the profits can
be ascertained. Consequently, the premiums on unexpired risks
are not distributable as dividends to stockholders until a
deduction has been made of an amount sufficient to cover losses
which the previous business of the company indicates may
reasonably be expected to occur. (Lexington Life, F & M Ins. Co.
vs. Page, 56 Ky. [M B Mon] 412; see 43 Am. Jur. 2d 161.)
(2) Specific requirements. —
Section 195
imposes three
requirements for a domestic insurance corporation declaring
or distributing any dividend on its outstanding stocks:
(a) The dividends must be declared out of profits from
its business;
(b) The profits must be attested in a sworn
statement by its president or treasurer to be remaining on
hand after retaining
unimpaired the
entire paid-up
capital
stock,the required margin insolvency
and legal reserve fund, and the
aggregate amount of its debts and liabilities; and
(c) The dividend must be reported to the
Commissioner within thirty
(30) days after such declaration or distribution.

— oOo —

Title 3
ASSETS
Sec. 196. In any determination of the financial
condi-tion of any insurance company doing business in
the Phil-ippines, 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 ac-cordance 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
con-cerned 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
com-pany, 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
premi-ums and annuity considerations in the case of a
life insur-ance 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
475 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 with-held under a reinsurance treaty with
such unauthorized insurer as security for the payment
of obligations thereun-der if such funds are held subject
to withdrawal by, and un-der 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 re-coverable 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
rein-surance treaty, provided reserves for unpaid
losses and unearned premiums are adequately provided.
8. Deposits or amounts recoverable from
underwrit-ing associations, syndicates and
reinsurance funds, or from any suspended banking
institution, to the extent deemed by the Commissioner
to be available for the pay-ment 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 Com-missioner to be readily realizable and
available for the pay-ment of losses and claims at
values to be determined by him.
Sec. 197. In addition to such assets as the
Commis-sioner may from time to time determine to be
non-admitted assets of insurance companies doing
business in the Phil-ippines, 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 con-dition:
1. Goodwill, trade names, and other like
intangible assets.

476

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 pre-viously authorized by the Commissioner,
as well as ad-vances 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 in-surance company exceeds the aggregate value
thereof as determined in accordance with the provisions
of this Code and/or the rules of the Commissioner.
Ali non-admitted assets and all other assets of
doubtful value or character included as ledger or nonledger 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 per-mits a
reserve to be carried among the liabilities of such
insurance company in lieu of any such deduction.

Classification of assets of a
n insurance
company.
In the determination of the financial condition of any
insurance company doing business in the Philippines, its
assets maybe:
(1) Admitted assets or those assets enumerated
196 owned by an insurance company which are allowed and

in

Section

Secs. 196-197

THE BUSINESS OF INSURANCE
477 Title 3. — Assets

admitted by law as assets of such company in the
determination of its financial condition1 (Sec. 196.); or
(2) Non-admitted
assets
or
those
assets
enumerated in
Section 197 owned by an insurance company which are
not allowed by law to be admitted as assets of such company in
the determination of its financial condition, including such
assets as the Commissioner may from time to time determine
to be non-admitted assets. (Sec. 197.)
Any investment made in violation of the applicable
provisions of Title 4 of the Code shall be considered nonadmitted 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 enumerated in Section 196,
the Insurance Commission considers as
admitted
assets,
premiums due from the following:
(1) The Government of the Philippines, its
political
subdivi-sions
or
instrumentalities,
including
governmentowned 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
as-sets 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. De-posists 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

Secs. 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 banks and other pertinent
documents
which
shall
be
made
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 require-ments are
complied with:
(a) The receivables are properly supported by an
aging schedule showing details per policy and copies of policies;
(b) The maximum amount of premiums receivables to
be considered shall not exceed 25% of the premium volume
net of commissions;
(c) Premiums due from direct agents, general agents,
or insurance brokers, not exceeding 90 days, shall be
backed up by a surety bond issued by an insurance
company duly authorized
to do business in
the
Philippines.The direct agent
or
general
agents
or
insurance brokers shall file with the Commission and
maintain in force a surety bond in favor of the people of
the Republic of the Philippines executed by a company
authorized to become
surety upon official recognizance,
stipulations, bonds, and undertakings, in
an amount
equivalent to at least 25% of the direct agent's, general agent's
or broker's premium volume net of commissions for the
proceeding calendar year
or
PI,500,000,
whichever
is higher, conditioned upon full accounting;
(d) Said surety bond shall be submitted to the
Commission together with a sworn certification executed
by
the
direct
agent or general agent or insurance broker, or their president,

Secs. 196-197

THE BUSINESS OF INSURANCE
479 Title 3. — Assets

or executive vice-president in the case of corporations,
stating the amount of his/its total annual premium volume
from all sources for the previous calendar year, and that
the amount of the bond is equal to at least 25% of the
premium
volume
net of commissions or PI,500,000, whichever 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 company
concerned in its head office in the
Philippines within the terms and conditions set forth in
their agreement; and
(f) Other pertinent
the examiners
for
unverified

documents are made available
verification, otherwise,
accounts will be disallowed.

to

As

for Premiums Receivable Accounts covering
policies beyond 90 days from inception which are
outstanding at the end of the given calendar year and collected
the following year/s the same shall be considered as after-date
transactions, subject to the following conditions:
(a) Schedule of Premiums Receivable, with the full
details of the insurance policies over 90 days due must
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
withthe
Certificate of Authority to Confirm the said deposits with
the banks; and
(c) Additional pertinent documents deemed
necessary
or required by this Commission must likewise be
submitted. (Ins. Cir. Letter 27-06, June 6,2006; supersedes Ins.
Cir. Letter No. 12-05.)

— oOo —

Title 4
INVESTMENTS
Sec. 198. No insurance company shall loan any of
its money or deposits to any person, corporation or
associa-tion, except upon first mortgage or deeds of
trust of un-encumbered, improved or unimproved real
estate, includ-ing 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 mort-gages 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 pur-chase
money mortgages or like securities received by it
upon the sale or exchange of real property acquired
pursu-ant 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 obli-gations 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,
cor-poration 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

Secs. 199-200

THE BUSINESS OF INSURANCE
481 Title 4. — Investments

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
month-ly, quarterly, semi-annual or annual installment:
Provided, That no such loans shall have a maturity in
excess of twen-ty 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 oth-erwise approved by the Commissioner, in
case the build-ing 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 mort-gage, 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
se-curity 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.

482

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
com-pany conducts and carries on its business.
(b) Bonds or other evidences of debt of the
Gov-ernment 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
govern-ment owned or controlled corporations
and entities, including the Central Bank.
(d) Bonds, debentures or other evidences of
in-debtedness 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 se-curities 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
indebt-edness, 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 insur-ance company
shall invest in or upon the obligations of any one
institution in the kinds permitted under this subsection 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,

Secs. 199-200

THE BUSINESS OF INSURANCE
483 Title 4. — Investments

taxes other than income taxes, depreciation and
deple-tion; but excluding extraordinary nonrecurring items of income or expense appearing in
the regular finan-cial statement of the issuing,
assuming or guarantee-ing 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 prede-cessors 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 institu-tion in the kinds
permitted under this sub-section an amount in
excess of ten per centum of the total admit-ted
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 pur-chase 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 subsection an amount in excess of ten per centum of
the total admitted assets of such insurer as of
December thirty-first next preced-ing the date of such
investment.
(g) Certificates, notes and other obligations
is-sued 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,

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 201-202

That such certificates, notes or other
obliga-tions are adequately secured as to principal
and inter-est.
(h)
Equipment
trust
obligations
or
certificates which are adequately secured or other
adequately se-cured instruments evidencing an
interest in equipment wholly or in part within the
Philippines; Provided, how-ever, That there is a
right to receive determined por-tions 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, ad-equately 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
in-surance, annuity or reinsurance contracts in
currencies other than the national currency of the
Philippines may in-vest 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 invest-ments and of
such cash in such currency which is at any-time held
by such insurer shall not exceed one and one-half
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
eq-uities of other financial institutions, and (2) engage
in the buying and selling of short-term debt
instruments: Provid-ed, 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
con-nection with any such project, may acquire land
or any inhowever,

.203
THE BUSINESS OF INSUR
ANCE 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 ac-commodation 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 es-timated cost to
the company of the improvement or de-velopment
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 preced-ing.
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 governmentowned or controlled corporations and entities,
including the Central Bank of the Philippines;
Provided, That such investments shall at all times be
main-tained 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.

486

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 204-205

Except as otherwise provided in this Code, no
judg-ment 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 re-quirement of the Commissioner, (as
amended by Pres. De-cree No. 1455.)

Sec. 204. After satisfying the requirements
contained in the preceding section, any domestic nonlife 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 Com-mission
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
ap-proved 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 com-pany 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 au-thorized 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 ninety-three, two hundred three and two
hundred four, any non-life insurance company may
invest any portion of its funds representing earned
surplus in any of the investments

‘See note to Section 191.

Secs. 206-208

THE BUSINESS OF INSURANCE
487 Title 4. — Investments

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
invest-ment required in section two hundred three,
any life in-surance 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 nine-ty-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” men -tioned 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
ap-plicable provisions of this title shall be considered
non-admitted assets.
Sec. 208. (1) All bonds or other evidences of
indebt-edness 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 pur-chased at par, at the par
value; if purchased above or be-low 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 pur-chase 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

488

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 208

Commissioner shall have the power to determine the
eligi-bility 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, autho-rized 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
amor-tization 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 estab-lish 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 autho-rized 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

489 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 fore-going 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 acquisi-tion 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 de-faulted loan at the date of such
foreclosure or deed, to-gether with any taxes and
expenses paid or incurred by such insurer at such
time in connection with such acquisi-tion, and the cost
of additions or improvements thereafter paid by such
insurer and any amount or amounts there-after paid
by such insurer on any assessments levied for
improvements in connection with the property.
(5) Purchase money mortgages received on
disposi-tions of real property held pursuant to section
one hun-dred 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 ap-praiser at
or about the time of disposition of such real property.
(6) The stock of a subsidiary of an insurer shall be
val-ued 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 regu-lation 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 re-quire, he may permit or require any
class or classes of in-surers authorized to do business
in this country to value

490

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 198-209

their investments or any class or classes thereof as of
any date heretofore or hereafter in accordance with any
appli-cable valuation or method.
Sec. 209. It shall be the duty of the officers of the
insur-ance company to report within the first fifteen
days of ev-ery 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 companies.
The importance of a sound investment policy cannot be
overemphasized because
of
the
considerable
funds
which
are necessarily in the hands of insurance
companies
and
which 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 when required.
(1) Life
insurance
policies
are
in
the
nature
of
permanent 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, and accident insurances
because
it
is
impossible to foresee
the occurrence of
heavy
catastrophes,
resulting
in
an
unexpected
drain
upon 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
company's balance sheet.
Insurers grant
mortgages,
purchase
freehold and leasehold ground rents,
and,
indeed,
are
always
prepared to find new avenues for
the investment of their funds as long

Secs. 198-209

THE BUSINESS OF INSURANCE
Title 4. — Investments

491

as the capital is secure and the general conditions
satisfactory. (Dindsdale & McMurdie, op. cit., pp. 212-213.)

Investment of the amount of
increase of paid-up
capital or assets.
(1) A domestic insurance company shall invest to the
extent of an amount equal in value to 25% of the required
increase of the paid-up capital in accordance with and as
specified under the provisions of Section 203 and have the
securities deposited with the Insurance Commissioner.
(2) A domestic professional reinsurer shall invest to the
extent of an amount equal in value to 25% of the required increase
of the paid-up capital in accordance with and as specified
under the provisions of Section 281 and have the securities
deposited with the Insurance Commissioner.
(3) A foreign insurance company or foreign
professional insurer shall invest to the extent of an
amount equal in value to the full extent of the minimum
paid-up
unimpaired
capital
or assets
above
required
in
accordance with and as specified under the provisions of Section
191.
(4) A new insurance company 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 have the securities
deposited with the Insurance Commissioner.1 (Ministry Order No. 284, dated Jan. 17,1984.)
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 may 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.)

492

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 SCRA 53 [2006].)

Investment of legal reserve.
Every non-life insurance company, domestic or foreign,
must set aside and maintain an amount corresponding to
legal reserves required under Section 213 (infra.) of the Code.

the

(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 200 of
the
Insurance Code, including securities
issued
by
any
"registered enterprise," as this term is defined in Republic Act
No. 5186, otherwise known as
the Investment
Incentives Act,2 and such other classes of investments as
may be authorized by the Commissioner, provided that (i)
in case of a company's investment in the lot and building
in which it will conduct its business, not more than twenty
per centum (20%) of the net worth of such company as
shown by its latest financial statement approved by the
Insurance Commissioner shall be
considered for purposes of this investment requirement and
(ii) the
total
investment
of
such
company
in
any
"registered enterprise" shall not exceed twenty per centum
(20%) 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.)
(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 bonds of any
single entity shall, in the aggregate, exceed twenty per
centum
(20%)
of the net worth in the Philippines of the investing company

2See note to

Section 191.

Secs. 198-209

THE BUSINESS OF INSURANCE
493 Title 4. — Investments

as shown by its latest financial statement approved by
the Insurance Commissioner or twenty per centum (20%) of
the paid-up capital of the
issuing
company,
whichever
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) The full amount of the legal reserve required to be set
up in the books of and held by an insurance company doing
business in the Philippines for reinsurance ceded to
unauthorized foreign insurance companies, if any there be,
shall be invested only 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 of
the Philippines, and/or other securities acceptable
under Section 200 of the Insurance Code, (see Sec. 219.)
The investments mentioned above must at all times be
free from any lien or encumbrance. (Ins. Memo. Cir. No. 5-75,
Oct. 15, 1975, effective Jan. 1,1976.)

Foreign currency denominated
investments and insurance policies.
The following guidelines shall govern foreign currency
denominated investments and insurance policies:
(1) Foreign currencies allowed. — Only foreign
currencies acceptable to the Bangko Sentral ng
Pilipinas (BSP) as part of its international reserves shall be allowed.
(2) Investments. — The 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 198-209

(c) Issues of foreign governments provided these shall
have a a minimum 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 minimum credit rating of: BBB as rated by S &
P, or Baa as rated by Moody's, or its equivalent as rated
by other
international credit rating agencies acceptable
to the Insurance Commission;
or
two
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 made only if
the laws of the country where the property is located
allow
the
lender
to
own
real estate property in the
event of foreclosure;
(f) Loans guaranteed by banks of foreign
countries provided the guarantor bank has a
minimum credit rating of BBB as rated by S & P, or Baa2
as rated by Moody's, or its equivalent as rated by other
international credit rating agencies
acceptable
to the
Insurance Commission; or two notches above
the credit
rating of the Philippine government, whichever is higher; and
(g) Investments in venture capital which shall be
consi-dered as surplus investments if made in accordance
with rules and regulations, and upon prior approval of
the Insurance Commission.
Aggregate

investments for each type of issues
mentioned from items (b) to (g) shall not exceed
25% of the company's latest verified total admitted assets for
life company and 20% of the networth for non-life company.
Reserves and other liabilities in a foreign currency must
be matched with assets in the same currency to at least
50%. Exceptions may be granted where the aggregate liabilities
in a foreign currency are less than 10% of the total foreign
currency liabilities of the company. The pertinent provisions of the

Secs. 198-209

THE BUSINESS OF INSURANCE
495 Title 4. — Investments

Insurance Code on investments shall likewise be
applicable to foreign
investments.
All
foreign
currency
denominated investments
must
be
coordinated
with the
International Department of the Bangko Sentral ng Pilipinas
(BSP).
(3) Insurance policies. —
(a) All liabilities resulting from the
foreign currency denominated policy shall
the same currency used in the insurance policy.

issuance of a
be valued in

(b) All foreign currency assets shall be booked
the currency
stated
in
the
underlying instrument/document.
the absence of any instrument/document, it shall
booked in the currency of the country where the asset
physically located.
(c) Only cash holdings in acceptable
as defined in No. (1), shall be allowed.

foreign

in
In
be
is

currencies

(d) Premium related taxes and documentary stamp
taxes shall be based on the peso equivalent of the premium
or sum assured, as the case may be, at the time the taxes
are due in accordance with BIR regulations.
(e) Commissions shall be paid in accordance
the currency agreed upon in the agency contract.

with

(f) Policy benefits and claims shall be payable in
the currency of the insurance policy issued. However,
payment may be made in another currency subject to the
agreement between the claimant and the insurance company.
(g) Premiums shall be billed in the same currency as
the policy issued. However, payment may be made 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)

496

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 198-209

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 BSP
guiding rate at the end of the reporting period.
(k) Unrealized foreign exchange gain or loss
be recognized as Fluctuation Reserve Foreign Exchange.
(1) Realized foreign exchange gain or loss
recognized as income or loss in the Income Statement.

shall
shall

be

(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 may 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 which offer clients a whole range of
investment outlets
from purely Philippine to
nonPhilippine 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 investment
s by the Insurance Commission.
(1) Investments not subject to approval. — Investments
which qualify under Sections 198,199,200(1), 200(2)(a) to (i),
200(3), 202, 204,205 and 206 of the Insurance Code 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

Secs. 198-209

THE BUSINESS OF INSURANCE
497 Title 4. — Investments

the Code. These investments include, first mortgage loans,
policy loans (for life companies), collateral loans, and purchase
money mortgages (Secs. 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 government-owned or
-controlled corporations
and
entities;
bonds, preferred
stocksand
common
stocks
of
"solvent"
corporations as the term "solvent" is defined in the Code;
trustees' and receivers' obligations, equipment trust obligations;
and securities issued by enterprises registered under R.A. No.
5186 (Investments Incentives Act), as amended. (Secs. 200[2, a
to 1]; 204, 205.)
Life insurance companies may, in addition, invest in
housing projects and real estate for the production of income,
subject to the limitations set forth under Section 202 of the
Insurance Code. They may also invest their legal policy
reserves in any of die classes of investments mentioned in
Sections 198, 200, 201, and 202.
(2) Investments
the Commission is
fall under:

subject to approval. — Prior approval of
required only for those investments which

(a) Section 200(2)(j) — "Such other securities as may
be approved by the Commissioner;"
(b) Section 201 — "(1) invest in equities of other
financial institutions and (2) engage in the buying and selling
of short-term debt instruments...;"
(c)
Section
206

"securities
issued
'registered enterprise'
in
such
amounts
as
approved by the Commissioner" (reserve and
investments
of
life
insurance companies);

by
any
may
be
surplus

(d) Sections 191,193,204 and 205 — only for
investments in excess of the 20%-20% 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."

498

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
Com-mission,
be
considered/qualified as
either reserve or surplus
investment.
For non-life insurance companies: only investments made
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
20%-20%
limitation), and 205 (in excess of 20%-20% limitation).
All other investments enumerated under No. (2) by both
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. 2394, Dec. 1,1994.)

Dual nature of the business of insurance.
Every insurance business
underwriting and investment.

consists

of

two

major

activities:

As a general rule, no one would buy insurance from a
company that does not have a substantial net worth in assets
over and above its current premium income. Obviously, these
assets must be invested and must produce an investment
income. 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 money loaned,
is essentially income 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, Law of Federal Income Taxation [1957], pp.
8-9,
cited
in
the
Phil.
American
Assur.
Co.,
Inc. vs. Comm., CTA Case No. 2318, May 6,1974.)
As the lending of money is a form of investment,
insurance companies are not considered lending investors under the

Secs. 198-209

THE BUSINESS OF INSURANCE
499 Title 4. — Investments

National
Internal
Revenue
Code
imposing
the
lending
investor's tax.
(see Sec. 116 thereof.)
Insurance companies
and lending investors are different enterprises in the eyes
of the law. Lending investors cannot for a consideration,
hold anyone harmless from loss, damage or liability, now
provide compensation
or
indemnity
for
loss.
The
underwriting of risks is the prerogative of insurance, the great
majority of which are incorporated insurance companies. (Comm,
of
Internal
Revenue
vs.
Philippine
American
Accident Insurance Co., Inc., 453 SCRA 668 [2005].)
— oOo —

Title 5
RESERVES
Sec. 210. Every life insurance company, doing
busi-ness 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 De-cember of the preceding year. All
such valuations shall be made upon the net premium
basis, according to the stan-dard adopted by the
company,
which
standard
shall
be stated in its
annual report.
Such standard of valuation whether of the net level
pre-mium,
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 com-pany’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 li-ability, 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

Secs. 212-213
THE BUSINESS OF INSU
RANCE 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 ac-cordance with actuarial procedure that recognize
the vari-able nature of the benefits provided, and shall
be approved by the Commissioner.
Sec. 212. Every domestic life insurance company,
con-ducted 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
sur-plus, 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.

502

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 210-214

Sec. 214. In addition to its liabilities and reserves
on contracts of insurance issued by it, every insurance
com-pany 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 Commis-sioner pursuant to the provisions of this
Code.

Reserves in general.
Modem statutes require insurers to maintain reserves to
assure the payment of losses covered by their policies and
the return of unearned premiums. (Maryland Casualty Co. vs.
U.S., 251 U.S. 342.)
The term "reserve" or "reserves" in the law of insurance
means 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 payment
or reinsurance with
other companies, future
unaccrued
and contingent
claims and claims
accrued but contingent and indefinite as to amount
or time of payment.1 (43 Am. Jur. 2d. 120.)
Insurance companies are required
by
law
to
possess
and maintain
substantial
legal
reserves
to
meet
their
obligations to policyholders. This
obviously cannot be
accomplished 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 income in the manner
sanctioned by the laws on insurance is thus part of the business
of insurance, and the fruits of these investments are essentially
income from the insurance business. This is particularly true
if the invested
assets are held either as reserved funds to provide for policy

â– 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," “contigency 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.)

Secs. 210-214

THE BUSINESS OF INSURANCE
503 Title 5. — Reserves

obligations or as capital and surplus to provide an extra
margin of safety which will be attractive to insurance buyers.
(Comm, of Internal Revenue vs. Philippine American Accident
Insurance Co., Inc., 453 SCRA 668 [2005].)

Reserves in life insurance.
(1) Aggregate net value of policies. — The term has a
distinctive meaning in respect of life insurance maintained on
the level-premium basis. In such a situation, the amount of the
premium is necessarily greater than the mortality cost in later
years. With the mortality table and an assumed rate of interest
on the investment of premiums received, the amount of the
accumulated
savings on this basis, at any date, can be
mathematically computed. This amount constitutes the "reserve"
against the policy or its net value. The insurer must have
on hand the aggregate amount of these reserves against its
outstanding policies. The reserve against a life insurance policy
constitutes the source of its non-forfeiture value upon a lapse in
payment
of
premiums.
(Williams
vs.
Union
Cent. L. Ins. Co., 291 U.S. 170; see 43 Am. Jur. 2d. 120.)
Under Section 210, every life insurance company doing
business in the Philippines is required to annually make,
upon the
net premium basis, a valuation of all policies,
additions thereto,
unpaid
dividends
and
all
other
obligations outstanding on the 31st day of December of the
preceding year. The aggregate net value so ascertained of said
policies 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 including taxes, expenses
and other obligations and any special reserves required by
the Commissioner, (see Secs. 211-212 and 214.)
(2) Computation. — Policy reserves have significance only
in the aggregate. For example, if a company sells only
PI,000.00 one-year term policies, it should have a reserve of
PI,000 for each person who will die during the year and needs
no reserve at all for those who will not. Since it cannot know 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
who die.

504

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 210-214

This amount, when related to each PI,000 policy purchased,
is known as the reserve per PI,000 policy. It is also known as
the "average reserve" per PI,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
how much of
the
existing
assets
must
be
conserved to assure payment of future policy benefits, and
how much might be spent, perhaps as
dividends
to
policyowners
or stockholders,
without endangering the
company'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 company are
more readily and objectively valued.
Accordingly,
the
surplus to policyownersand
stockholders
(i.e.,
the
difference
between assets and liabilities) is affected significantly by the
assumptions that underlie computations. ("Reserves," by William
H. Schmidt in LHIH, p. 158.)

Reserves in property insurance.
(1) Unearned premium reserve. — In the field of property
insurance, the unearned premiums must at all times be
adequate
to pay a full proportionate return premium to policyholders
in the event of the cancellation of a policy before it expires.
The reserve should be adequate to reinsure the business, if
necessary. The basic purpose of the reserve is to meet all
liabilities under the contract and to pay expenses of claim
services in the future. At the same time, it accounts for income
received but not yet earned and repayment if the contract is
discontinued. (D.L. Bickelhaupt, op. cit., p. 211.)
The "unearned premium reserve" at any given time is
that portion of the premium income of property and liability
insurance that is not yet earned owing to the fact that the
policyholders have not received the full term of protection for
which the premium 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.)

Secs. 210-214

THE BUSINESS OF INSURANCE
505 Title 5. — Reserves

The amount of reserve which every non-life insurance
com-pany doing business in the Philippines is required to
maintain for
unearned premiums
on its
policies in
force
which
shall be charged as a liability in
the
determination
of
its
financial
condition is as provided in Sections 213 and 214.
(2) Loss reserve. — A second type of reserves required
of property insurers is the "loss reserve." Since many contracts
of this type do not involve immediate payment of all losses
that have occurred, reserves must be set up to assure their payment.
For example, a workmen's compensation claim may be
made against the insurer today. In many cases, the loss
payments may be made gradually according to law during a
long period of disability.
In automobile liability cases, it may be several years after
a loss before a court decides who is liable and how much. In
such cases, an estimate of the reserve that will be needed to
pay the insurer's obligation is made and carried on its book
as a loss reserve. In this way, losses and loss expense for
claims that are known but not yet paid are provided for by the
insurer under the loss reserve laws of the state. (D.L.
Bickelhaupt, op. cit., pp. 211-212.)

Valuation of reserves and cash surrend
er values in life policies.
(1) The reserve of a life insurance contract is a liability
item representing the
difference between
the
actuarially
determined value of future benefits
payable and future premiums receivable. The funds accumulated
in support of these reserves are invested by the insurance
company in assets that are the property of the company.
(2) Cash surrender values in life insurance contracts
repre-sent the insurance company'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.)

506

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 210-214

Cash surrender value, a
n 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 sum 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 below the
reserve value for the purpose of discouraging cancellation. (J.F.
Dobbyns, op. cit., p. 40.)

Nonforfeiture values on
termination
of life policies.

(1) Life insurance on the level premium basis. — It is quite unlike
most other forms of insurance because the risk of death
increases rapidly with age, and because the premium level
remains over an extended period of time. Under a level
premium life insurance policy, the premium in the early years
is more than is necessary to cover mortality costs; and in the
later years, it is less than is necessary to cover mortality costs.
The excess of the premiums in the early years is accumulated
to
provide
sufficient
assets
to
offset the deficiency in the premiums 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 may be elected by
the policyowner. ("Non-forfeiture Values and Policy
Loans,"
by Charles F.B. Richardson, in LHIH, p. 173.)
(2) Recovery by policyholder of unabsorbed part of premiums
already
paid.

The
rationale
of
the
minimum
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

Secs. 210-214

THE BUSINESS OF INSURANCE
507 Title 5. — Reserves

their normal termination date, shall involve no loss to
the party to the contract who is willing to continue the
contract, and the party
effecting
discontinuance
shall bear whatever loss is involved as a result
of the termination of the transac-tion. It is stated elsewhere
in this report2
that, in the case of life insurance, full
forfeiture upon lapse is repugnant to the public interest and
that it should be the policy of the State to establish a basis
whereby the purchaser may recover in some form the
unabsorbed part of the payments already made. However,
it cannot be regarded as proper public policy to insist
that the party to the contract who is willing to continue shall
be made to suffer loss through the inability or lack of
desire of another to continue his contact.
Equity, therefore, would appear
to
demand,
as
a
general principle, that an insurance company
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 was prior thereto, and equity
does not demand that the seceding policyholder shall be in
as favorable a position after termination as he was prior
thereto." ("Reserves," by William H. Schmidt, in LHIH, pp. 175-176.)

— 0O0 —

2In 1939, in order to conduct a study of non-forfeiture provisions, the National
Asso-ciation 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,
wheth-er foreign or domestic shall retain any risk on any
one sub-ject of insurance in an amount exceeding
twenty per cen-tum of its net worth. For purposes of this
section, the term, “subject of insurance” shall include all
properties or ris ks insured by the same insurer that
customarily are consid-ered 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
succeed-ing 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. — The maximum
amount of insurance which an insurer will carry on a policy at
its own 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
because
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 amount of the insurer's surplus,
the expected mortality, the distribution

508

Sec. 215

THE BUSINESS OF INSURANCE
Title 6. — Limit of Single Risk

509

of insurance in force per life, the distribution of new issues
of insurance by size, the distribution of in-force insurance
and new
issues
by
age
at
issue
and
underwriting
classification underwriting skill,
the degree of
earning
stability
desired,
and the cost of the reinsurance ceded.
(b) Reinsurance agreements provide that the ceding
com-pany may increase its limit of retention on new
business and also specify the conditions under which
amounts of existing reinsurance may be reduced because of
the increased limit of retention. Amounts of reinsurance so
reduced are said to be "recaptured." ("Reinsurance," by
Walter W. Steffen, in LHIH, pp. 992-993.)
(2) Maximum retention allowed. — Under Section 215 (par.
1.), if the net worth of a non-life insurance company is
P20,000,000.00, and it insures a building for P4,500,000.00 it
must reinsure the P500,000.00, the amount exceeding 20% of
its net worth. With-out
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 au-thorized
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 maximum retention limit but would adopt a selfimposed schedule of limits based on their estimate of the insured risk.

— oOo —

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 Phil-ippines unless such foreign
insurer or, if the services of a non-resident broker are
utilized, such non-resident bro-ker 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
insur-er or non-resident broker shall immediately upon
registra-tion 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
non-life, 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
for-eign insurance or reinsurance companies
not authorized
510

Secs. 220-221

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 ced-ing company for so long as the risk
concerned is in force: Provided, That in case of
facultative insurance, the ced-ing company shall show
to the satisfaction of the Com-missioner 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 instrumenta-lities, or of governmentowned or controlled corporations and entities, including
the Central Bank, and/or other se-curities 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 cancella-tion or termination within thirty days
from the date notice or information of such
cancellation or termination is re-ceived by such
company, as the case may be.
Sec. 220. Every insurance company authorized to
do business in the Philippines shall report to the
Commis-sioner on forms prescribed by him the
particulars of rein-surance 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
as-set or as a deduction from liability, to any ceding
insurer for reinsurance made, ceded, renewed, or
otherwise be-coming effective after January first,
nineteen hundred sev-enty-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 in-surer nor unless
under the contract or contracts of rein-surance 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

512

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 216-222

payments by the assuming insurer shall be made
directly to the ceding insurer or to its liquidator,
receiver or statu-tory 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 ced-ing 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
individ-ual 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
may
issue
policies of
reinsurance; hence, no empowering
or validating
legislation is required before an insurance company may enter
into a reinsurance contract as reinsurer or as reinsured. (Sachs
vs. Ohio Nat. L. Ins. Co., 312 U.S. 706.) Section 2(2) expressly
states that "doing an insurance business" includes "reinsurance business."
However,
mutual
insurance
companies
not
given
the
specific power to reinsure risks, which power is expressly given
to stock companies, have no power to reinsure. (Allison vs.
Fidelity Mut. Ins. Co., 116 NW 274; see, however, Sec. 270.)

Ceding of excess risks.
Sections 218 and 219 are designed to curb the activities
of foreign reinsurers. They also insure the retention of the
premiums 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 way
of facultative insurance, either directly or through brokers, to
foreign insurance or reinsurance companies/brokersnot authorized
to transact business in the Philippines, are required to show
to the

Secs. 216-222

513

THE BUSINESS OF INSURANCE
Title 7. — Reinsurance Transactions

satisfaction

of the Insurance Commission that the
Philippine market cannot providethe
facilities
sought
abroad.
To insure observance
of
the
requirement,
such
facultative
reinsurance transactions are now
subject to the prior approval of the Office of the Insurance
Commissioner, (see Ins. Cir. Letter dated Dec. 16, 1981.)

Rules and regulations on life reinsuranc
e transactions.
The
adopted

following rules
and
regulations promulgated
by the Insurance Commission govern life
reinsurance transactions in the Philippines:

and

(1) The retention of a life insurance company on any
one standard life insured shall not be less than the amount
equal to one-half (1/2) of one percent of the latest verified
stockholders equity.
(2) The minimum retention on substandard lives shall be
graded downwards from standard in accordance with sound
underwriting practice. The schedules of retention limits shall
be submitted to the Insurance Commission
prior
to its
adoption in any reinsurance agreement.
(3) No reinsurance shall be placed abroad where the
amount of risk is P3 million or less, per life standard risk,
graded down for substandard lives.
(4) No reinsurance shall likewise
accident riders where the accident
PI.5 million per standard risk.

be placed
risk does

abroad on
not exceed

(5) Reinsurance treaties abroad shall be on the yearly
renew-able term plan (amount of risk) only. Renewal 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 company against unusual number of claims as a result of
jumbo policies issued, the company may 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 may 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.)

514

THE INSURANCE CODE OF THE PHILIPPINES

Likewise, facultative reinsurance placements are
prior
approval
by
the
Insurance
Commission.
Letter No. 12-09, Mar. 10, 2009.)

Secs. 216-222

subject to
(Ins.
Cir.

Glossary of important reinsurance terms.
The glossary of selected reinsurance terms below will give
us an overview of reinsurance terminology.
(1) Assumption
reinsurance.

An
agreement
between
two insurers under which one insurer disposes of its
entire in-force
portfolio, or a specific
block
thereof,
and the
other insurer assumes the functions and all
obligations to the insured connected with the policies involved.
Assumption certificates are issued by the assuming insurer to
all insureds, notifying them that it has replaced the original
writing company 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 between
an insurer and a reinsurer under which the insurer is
obligated to c6de 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. The
reinsurer's liability commences simultaneously with the insurer.
(3) Catastrophe reinsurance. — A form of
nonproportional reinsurance (infra.)
under
which a reinsurer indemnifies an
insurer
for
losses in excess of a pre-established deductible arising from a
single
catastrophic
occurrence.
The
reinsurer's
liability
is
subject to a maximum amount per occurrence.1
(4) Coinsurance.

A plan of indemnity reinsurance
under which the
reinsurer assumes
the obligation
on the
amount 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 premium (less commissions 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.)

Secs. 216-222

THE BUSINESS OF INSURANCE
Title 7. — Reinsurance Transactions

515

(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 amount or percentage.2
(6)
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 offered by the insurer. The reinsurer's liability
commences after definite approval- or acceptance of the risk.
(7) Modified coinsurance. — Same as coinsurance except
the reinsurer lends the mean reserve to the insurer each year.
(Each year the current year's mean reserve on the reinsured
portion less the preceding year's mean reserve, plus interest
thereon, is paid to the insurer, if this amount is positive, or
returned to the insurer, if negative.)
(8) Net amount at risk. — This term is associated with
the risk premium reinsurance (RPR) 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 beyond the stipulated loss,
deductible,
or
retention accepted by the reinsured regardless
of the number of risks involved. The 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.

2Excess

reinsurance should not be confused with surplus reinsurance. (No. 18.)

516

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 216-222

(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
insurance are examples of proportional reinsurance.

modified

co-

(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., 60%, insurer and 40%,
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 premium
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.
The reinsured may 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. One might consider the reinsurance cession as the
counterpart of the policy issued by the insurer to the insured.
(14) Reinsurer. — The party to a reinsurance agreement
who 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. —
The
maximum
amount
of
liability which a company will carry on one life or one event at
its own risk without reinsurance protection.
(16) Retrocession.

A
reinsurance transaction
reinsurers. This can best be defined by an example.

between

Secs. 216-222

THE BUSINESS OF INSURANCE
Title 7. — Reinsurance Transactions

517

Company B accepts reinsurance from Company A;
Company B then obtains reinsurance from Company C for a
portion of the business it has assumed from Company A.
Company C is called a retrocessionaire — one who accepts
reinsurance from a reinsurer.
Company 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 amount at risk allocable to amounts 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. The reinsurer does not participate unless the
insurance exceeds the net retention limit, (see D.L. Bickelhaupt,
op.
cit.,
p.
164.)
The
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 P5,000.00is 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 PI,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 ex-act 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 sepa-rate 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 insur-ance 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
Pilipi-no, a full synopsis
of its annual financial statement show-

518

Secs. 223-225

THE BUSINESS OF INSURANCE
Title 8. — Annual Statements

519

ing fully the conditions of its business, and setting
forth its resources and liabilities.

Reports and statements.
The power of the State to require insurance companies
to make periodical statements and reports concerning their
business, reserves, and financial conditions is well
recognized, and a statute requiring insurance companies to
make 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 company
previously incorporated.
(Eagle Ins. Co. vs. Ohio, 153 U.S. 446.)
It is immaterial in this respect whether the company is
solvent or insolvent. (43 Am. Jur. 2d. 120.) Indeed, the
requirement to file annual statements is the primary means of
alerting the Insurance Commission to any danger of threatened
insolvency (with the resulting inability to honor obligations to
insureds) on the part of any insurance company.1 (J.F. Dobbyns, op.
cit., p. 297.)
— oOo —

'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 makes it easier
study insurance contracts and to compare
different insurers.

for consumers
contracts issued

to
by

(2) Both
insurers
and
insureds
gain
from
greater
meaning they
can attach to
court
interpretations of earlier contracts and from the reduction
of policy conflicts in adjusting claims. Standardization, on the
other
hand,
may
reduce
or
delay
the
advantages of experimentations and competition.
(3) Even
when
there
is no
statutory
or
voluntary
standard-ization,
competition
and
tradition favor
some
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 been tested
in practice. (Riegel, Miller & Williams, Jr., op. cit., pp. 58-59.)

520

Sec. 226

THE BUSINESS OF INSURANCE

521 Title 9. — Policy Forms

Power to prescribe insuranc
e contracts
and standard policies.
(1) Part of power to regulate. — As a part of its power
to regulate the insurance business, a State has the right to
prescribe the kind and character of insurance contracts that may
be made. There seems to be no doubt that the legislature
may prescribe a standard form of insurance policy and to
permit or require insurers to use it, or provide that, in the
alternative to the use of such a policy, the policy issued must
contain
or
include
certain
provisions.
(New York K. Ins. Co. vs. Gardison, 85 NE 410.)
Furthermore, the State may delegate to an insurance
official or
board
authority to
see that
the
requirements
prescribed by standard policy statutes are
complied with. But it may not delegate to such official or
board the power to draft such a policy and force the insurers in
the state to adopt it. (King vs. Concordia F. Ins. Co., 103 NW
616; State vs. Great Northern R. Co., Ill NW 289.)
(2) Different
types
of
control.

The
standardize insurance contracts has resulted in
types of control over the contents of such contracts:

legislation
to
four different

(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.

— The 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
company
changing
its
form
in
order to
escape
the
consequences of
any
new
decision
made
by
the court.
(Gregerson vs. Phoenix F. Ins. Co., 99 Wah. 639; Straker vs.
Phoenix Ins. Co., 77 NW 752.)
(a) The chief purpose of such legislation is to protect
the insured
and
other
persons having claims under
insurance contracts against unfair or deceptive provisions.

522

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 226

(b) Any such legislation in the long run protects
honest and
competent insurers against unfair
competition by unscrupulous rivals who 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 would 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 them and
subject the insurers to penalties, but are binding upon them.
Under such a statute, a provision more favorable to the
insured than the standard policy may be enforceable by the
insured. (Ottems vs. Atlas Assur. Co., 275 NW 900; 43 Am Jur.
2d 118-119.) If a statute mandatesthe 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 company 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. Com. Cir. Letter,
dated April 2, 1976: see Sec. 226.)
Of course, an insurance commissioner has no power to
approve a form of policy or rider which clearly contravenes
the provisions of governing statutes. (Barnett vs. Merchants' L. Ins.

Sec. 227

THE BUSINESS OF INSURANCE
523 Title 9. — Policy Forms

Co. 208, p. 271; 43 Am. Jur. 2d. 116.) The view is taken that
such approval or disapproval is persuasive but not controlling
upon the courts. (Drogula vs. Federal L. Ins. Co., 227 NW 692;
Clark vs. Federal L. Ins. Co., 136 SE 291.) The view has also
been expressed that the approval of the form of a policy by the
State insurance authorities in no way prevents the courts
from holding such policy invalid as contrary to the applicable
law relating to the form of insurance contracts. (Frenzer vs.
Mutual Ben. Health & Acci. Assn., 81 P2d 197; 43 Am. Jur. 117.)
(2) Contents of policies. — Statutes which provide that
insurance boards or officials shall have the power or duty
to approve or disapprove policies in accordance with statutes
which prescribe in substance what shall be the provisions of
policies issued within the State have generally been upheld or
recognized as a proper delegation of authority. Under such
statutes, the approval or disapproval is not limited to purely
formal matters such as the print type or make-up of the policy,
but extends to representative matters of conformity with
statutory
provisions relating
to
the
clauses
and
stipulations which must, may or may not be included in
insurance contracts.1 (New York L. Ins. Co. vs. Hardison, 85 NE
410.)

Sec. 227. In the case of individual life or
endowment insurance, the policy shall contain in
substance the follow-ing 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

lrThe Insurance Commission requires "that no policy, certificate, or contract of
insur-ance 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 compa-nies 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.)

524

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

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 inter-est 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 reinstate-ment, except for nonpayment of premium and except for violation of the
conditions
of
the
policy
relating
to
military
or naval service in time of war.
(c) A provision that the policy shall constitute
the entire contract between the parties, but if the
company desires to make the application a part of the
contract, it may do so provided a copy of such
application shall be indorsed upon or attached to the
policy, when issued, and in such case the policy shall
contain a provision that the policy and the application
therefor
shall
constitute
the
en-tire contract
between the parties.
(d) A provision that if the age of the insured is
consid-ered in determining the premium and the benefits
accruing under the policy, and the age of the insured
has been mis-stated, 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 pre-mium 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 ad-ditions thereto, reduced
by a surrender charge which

Sec. 227

THE BUSINESS OF INSURANCE
525 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 pur-chased 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 ap-proval of the
Commissioner; and that the company will de-duct 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
provi-sion 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 ef-fect 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
in-stallments or as an annuity, a table showing the
minimum amounts of the installments or annuity payments.
(j) A provision that the policyholder shall be
entitled to have the policy reinstated at any time within
three 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-

526

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

ability satisfactory to the company and upon payment
of all overdue premiums and any indebtedness to the
com-pany 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
favor-able
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
must include the "standard provisions"(sometimes called
"general provisions"
in the policy) prescribed by Section
227. (see Appendix "E.")
It was earlier felt that a standard form of policy resulted
in too much uniformity of available coverages. To provide
more leeway with respect to coverages and at the same
adequately safeguard the
interests of
the policyholders,
the law makes certain
standard
provisions
mandatory. Since
the
standard provisions establish minimum
requirements only and an insurer may file policies with more
liberal provisions, the law permits more flexibility in life
insurance contracts than under a standard policy requirement. At
the same 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 amount of money to the policyholder
(or his beneficiary). The conditions under which the benefits
are paid are significant and may include death, some types
of disability, and in case of endowments, a certain maturity
date
set
in
the
contract. In connection with the fundamental benefits, many

Sec. 227

THE BUSINESS OF INSURANCE
527 Title 9. — Policy Forms

important
options
and
privileges
are
granted
to
the
policyholder. These features combine to make the life insurance
contract one of the most flexible agreements ever designed. The
owner of the contract, or sometimes his beneficiary, has the right to:
(a) stop or change premium payments;
(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 and receive accumulated benefits in a
variety of ways; and
(i)
use the policy proceeds by receiving lump sum or
installment payments. (Ibid., p. 288.)

Major classes of life insurance.
The life insurance business has developed two basic
methods of distributing life insurance contracts:
(1) Individual insurance. — The protection is issued on
the basis of individual
application
and involves a
separate
policy contract
for each purchase. Under the method falls ordinary life
insurance (Sec. 227.) and industrial life insurance (Secs. 229230.); 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 method
using group life
policies
since
only
oneseventh
of
this
category
of life insurance is based
on life insurance contracts. The basic purpose
of credit life insurance is to repay a debt if the borrower dies.
The 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.)

528

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

Special characteristics of lif
e 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. — The 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. The 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].)
The contracts of many companies include a provision
for automatic
premiumloans. This
provision protects
against
the unintentional lapse of the contract by
advancing, in the form of policy loan, the unpaid amount of a
premium due. The automatic premium loan is advantageous to
the policyowner because 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
"nonparticipating."
Participating contracts
are characterized by
higher annual premiums based 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.
The
amount
returned
to
the
policyowner is determined annually and is called a "policy
dividend." These dividends are a means for the insurance
company to refund the
premium
redundancy
and
should
not be confused with dividends payable to corporate stockholders.

Sec. 227

THE BUSINESS OF INSURANCE
529 Title 9. — Policy Forms

Policy dividends usually are made available annually on
the anniversary date of the participating life insurance
contract, (see Sec. 227[e].) The dividend may be taken in one of
four basic forms at the option of the policy-owner:
(a) in cash;
(b)
applied toward the payment of the next premium
under the contracts;
(c) applied to the purchase of a paidup addition to the contracts; or
(d) left on deposit with
the company to accumulate at interest.
In addition, many companies offer a fifth option, under
which all or part of the dividend may be used to buy oneyear term insurance.
(3) Surrender options. — The savings feature in cash value
life insurance also gives rise to the availability of surrender
benefits should the policyowner wish or need to discontinue his
insurance coverage. Surrender benefits may 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. — The waiver of premium benefit,
a form of disability insurance, is offered for a modest
additional charge by virtually all companies in connection
with the life insurance contracts they issue. The waiver of
premium provision becomes
operative
whenever the
insured
becomes
totally
and
permanently
disabled as defined in the contract. He then becomes entitled to
have waived (by the insurer) any premium falling due after the
disability
commences.
The 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 thebeneficiary'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.

530

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

Legislative protection takes the form of state
exemption statutes. These laws generally reflect the
public policy of placing a higherpriority
on an individual's
obligation
to his family than to his creditors. The 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
widow
and
children
of
the
insured,
(see
Rules
of
Court, Rule 39, Sec. 13[k]; Chap. II, Title 5.)
(6) Income tax treatment. — It is beyond the scope of this
work to discuss fully the income tax treatment of life
insurance and annuities. However, several aspects of the income
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 income
tax exempt. Endowment
proceeds and cash surrender
values, received other than by reason of death, are to be
included in gross income to the extent that they exceed the
aggregate net premiums or other considerations
paid,
(see
National Internal Revenue Code 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 income tax purposes. However,
interest earned on
dividend
deposits
is
taxable.
("Savings Functions of Life
Insurance," by Vane B. Lucas, in LHIH, pp. 47-49.)

Life insurance as property.
(1) Compared with other property. — It may be significant
to consider the life insurance policy as property and to
compare it with other property which the deceased insured
owned at the time of his death. One'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. — When the life
insurance on one's life is compared, as property, with the other forms of

Sec. 227

THE BUSINESS OF INSURANCE
531 Title 9. — Policy Forms

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 maximum (the face of the policy) at the
moment the death of the insured occurs. This characteristic —
the value of the property at death — can never be known in
advance for other property which one may own 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. — The 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 economic
loss due to illness or disability. The protection functions of
life and health insurance are
among
the most
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 LHIH, pp. 36-38.)

Protection functions of life insurance.
(1) Pooling of risks. — While a policy is in force, how can a
life insurance company 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 who dies in a year, there
are other new insureds who are not expected to die and will
pay premiums for that year. In addition, the insurance company
receives premiums that same year from thousands of policy
owners whose policies had been 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 when any one person will die, unless he
is
literally
on
his
death bed, and
even then, the predictions may not be very

532

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

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 when a sufficiently large number of persons is
considered.
(b) Use of mortality statistics table. — Life insurers
make use of
widely
and
carefully compiled
mortality
statistics. These might show, for example,
that among 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 number in the group, the closer would the
actual experience approximate the probable experience.
(c) Application of principle of probability. — By using
pro-babilities
based upon
sufficiently
conservative
mortality statistics and by insuring
enough lives for the law of large numbers to be relied
upon, insurers are able to do the apparently impossible.
The basic purpose of life insurance (the one to which all
others are subordinate) is to create during life, an ultimate
death estate of what has been traditionally a fixed number
of pesos, payable whenever death occurs and 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 medium of life insurance, hundreds of
thousands
of
individuals
have
accumulated
savings while
providing financial
protection
for
their
families.
These
savings are pooled by insurance companies and injected back
into the financial bloodstream of the economy 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 much
larger proportion of savings is accumulated through the ownership

Sec. 227

THE BUSINESS OF INSURANCE
533 Title 9. — Policy Forms

of life insurance by individuals. ("Savings Functions of
Life Insurance/' by Vane B. Lucas, in LHIH, p. 39.)

Apportionment and distributio
n of policy owner dividends.
A dividend is a refund of that portion of the premium
paid that is in excess of the amount necessary for current
benefit payments, expenses, and reserves required to cover
future policy guarantees.
(1) Apportionment.

Apportionment
dividends is one of the most important
insurance companies
writing
participating
definitions will be helpful, if not essential, to
of policyowner dividends.

of
policyowner
functions of life
business.
Several
an understanding

(a) First, a policy providing for payment of dividends
is called a participating policy; a policy which does not
provide for payment of dividends is a non-participating policy.
(b) A mutual company is owned entirely by its
policy-owners and normally writes only participating policies;
in fact, in some states, mutual companies are prohibited
by statute (with minor
exceptions) from writing nonparticipating policies. A stock
company is owned by its
shareholders and
generally
writes
primarily
non-participating policies, although
many
stock
companies
offer
participating
policies as well. ("Surplus and
Dividends," by Robert T. Jackson, in LHIH, p. 184.)
(2) Distribution. — Once the dividend fund has been
deter-mined, 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 common
characteristics: the same type of coverage, the same year of issue, the
same age of issue,

534

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

the same number of premium payments made, and the same
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 been the outgrowth of mistake.
Life
policies
contain
a
special
clause
covering
the
subject that is equitable to both the insured and insurer. The
clause provides that if the age of the insured has been
misstated, the amount payable under the policy shall be such
as the premium paid would have purchased at the correct age.
(see Sec. 227[d].) This is
determined
by the
application
of simple
proportion. If an applicant states his age
to be such that the premium for PI,000.00 insurance at that age
is P20.00 and at the time of his death it proves the correct
premium should have been P25.00, the amount of proceeds payable
(x) is determined as follows:
P25: P20
Hence, P25 x

=

PI,000: 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. Age discrepancies are most frequently discovered when
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 premium would have purchased
had the age been correctly stated. (D.L. Bickelhaupt, op. cit., pp. 297298.)

Rights of insured under a lapsed lif
e policy.
The rights of the insured under a lapsed policy are
deter-mined by the terms of the policy supplemented by any
statute applicable. The
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.)

Sec. 227

THE BUSINESS OF INSURANCE
535 Title 9. — Policy Forms

(1) Forfeiture. — The simplest penalty to be imposed is
the absolute forfeiture of all of the insured's rights. The law
holds forfeitures with such disfavor that unless the intention is
clearly expressed, nonpayment of premiums shall not confer
upon the insurer a power to declare a forfeiture. However, the
practice of insurers to stipulate in life insurance policies that
nonpayment of premiums (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 development 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 some or
all of the reserve value of their policies at the time of default.
Hence, came the provisions for extended 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 sum equal to the value
of the policy (ibid., pp. 319-320; see Sec. 227[g].)
(2) Extended insurance. — Where insurance is "extended,"
the insured is given the right, upon default, after the
payment of at least three full annual premiums (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 amount 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 may
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. — Where 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 may 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 paidup" insurance.

536

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

Options available to insured in lif
e 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 make 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. 6,1982.), it is
required by the Insurance Commission 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 premium payment, the
Premium 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) The moment there is default in premium payment
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
payment of at least three full annual premiums, is entitled to
receive if he surrenders the policy and releases his claims
upon it. The more premiums the insured has paid, the greater
will be the cash surrender value, but the value is always a
lesser sum than the total amount of premiums paid.

Sec. 227

THE BUSINESS OF INSURANCE
537 Title 9. — Policy Forms

Nature of cash surrender value.
The cash surrender value arises from the fact that the fixed
annual premium is much in excess of the annual risk during
the earlier years of the policy, an excess made necessary in
order to balance the deficiency of the same premium to meet
the annual risk during the latter years of the policy.
(1) This excess of the premium paid over the annual
cost of
insurance,
with accumulations
of
interest,
constitutes
the surrender value.
(2) Though this excess of premiums paid is legally the
sole property of the company, still, in practical effect, though
not in law, it is the money of the assured deposited with the
company in advance to make up the deficiency in later premiums
to cover the annual cost of insurance, instead of being retained
by the assured and paid by him to the company in the shape of
greatly-increased premiums, when the risk is greatest.
(3) It is the net reserve required by law to be kept by
the company 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 company to this fund. (Sim
Life Assurance Co. of Canada 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. Among them are:
(1) Grace
period
provision.

The
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

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 227

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;
(2) Entire contract provision. — The policy is also
required to provide specifically that the policy, and also if
desired by the insurance company, die application, a copy of
which is attached to the policy, shall constitute the entire
contract between 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 was no way to
know
the
contents
of
such
provisions
without
examining the documents themselves.
Since most policy owners did not have access to these
documents,
their
rights
and
privileges
under
the
life
insurance policy could be significantly modified without any
opportunity on their part to know the extent of such
modifications. The purpose of the entire contract provision was
to assure the policy owner that the policy itself would include
the entire text of his contract with the company. Often, the
entire contract provision is
combined withprovisions
concerning
representations
and warranties;
(3) Misstatement of age provision. — The age provision of
the insured is of basic importance in determining the
correct premium rate for life insurance. If his age has been
misstated no matter how innocently, the result may be a
significant error in the amount of premiums paid as compared
to the premium that should have been paid. Such errors could
be corrected either by appropriate premium adjustment or by
adjusting the amount of insurance. The required provision (Sec.
227[d].) specifies the latter method; and
(4) Reinstatement
provision.

The
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 same (Lalican
vs.
Insular
Life Assurance Co.
Limited,
597 SCRA
159
[2009], citing De
Leon,
Insurance Code of the Philippines

Sec. 227

THE BUSINESS OF INSURANCE
539 Title 9. — Policy Forms

Annotated [2002 ed.], p. 538.) to premium-paying status
after it has been permitted to lapse. The 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 premium payment. A longer period, being more
favorable to the insured, may 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 LHIH, 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. Among 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 would be on his death from any other cause. However, to
permit a person to apply for life insurance with the intention of
taking his own life in order to bring about the payment of the
proceeds to his beneficiary, would 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:
"If 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 who 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

THE INSURANCE CODE OF THE PHILIPPINES

protects the interest of the beneficiary or
beneficiaries, whose needs, in most instances,
the purchase of the insurance.

Sec. 227

death

prompted

Note that the period of the inconstestable clause (Sec.
227[b]; Sec. 48.) and that of the suicide clause (Sec. 180A.) 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 company 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 assumed to have the right to
assign his life insurance policy if and as he wishes.
The usual assignment provision, therefore, is included to
clarify the responsibilities of the company in the event the
policy is assigned;
(3) Ownership provision. — The provision is intended to
clarify the rights of the owner and the circumstances
under which those rights may be exercised. The exact wording
of such provisions differs widely from company to company
but the following provision is illustrative: "The owner is as
designated in the application for this policy unless otherwise
provided by indorsement. The owner 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 war
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 war or
when war is imminent; and when the war emergency has ended, the
clauses

Sec. 227

THE BUSINESS OF INSURANCE
541 Title 9. — Policy Forms

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 company's liability would be limited to the amount of
the premium 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 amount of premiums
paid or the reserve, if the insured's death occurs as the result
of war. This clause, being the more liberal, is more widely
used than the status clause;
(5) Payor clause. — A life insurance company may offer
a waiver of premium benefit often called a "payor benefit,"
which may 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.
The 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 premium payor may
die or become totally disabled prior to that time; and
(6) Policy change provision. — Most 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 may be made 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

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 228

evidence of insurability and the difference in the reserves for
the two plans is usually refunded by the company. (Ibid., pp.
118-120.)

Sec. 228. No policy of group life insurance shall be
is-sued 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 state-ment 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 instru -ment 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 instru-ment containing the
statement is or has been furnished to
such person or to his beneficiary.
(d) A provision setting forth the conditions, if any,
un-der which the insurer reserves the right to require a
person eligible for insurance to furnish evidence
of individual in-

.228
THE BUSINESS OF INSUR
ANCE 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 ben-eficiary designated by the insured, subject to
the provi-sions 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
policy-holder 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 per-son 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 ben-efits, 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 fur-ther 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
ex-cess
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

544

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 228

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 pol-icy.
(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 termi-nation 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 be-comes 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.
(j) 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 en-titled 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
in-sure 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 state-ment 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 indebt-edness.
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
nonforfeiture provision or provisions which in

Sec. 228

THE BUSINESS OF INSURANCE
545 Title 9. — Policy Forms

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 employee benefit plans, provides an insurance
technique of considerable economic, social, and political significance.
The 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 being transported from Africa to America. A few
decades later, group insurance was obtained on the lives of
Chinese laborers being transported from China to Panama to
work on the Panama Canal.
It was not until after World War
II that group
insurance became
a
dominant
feature
of
the insurance marketplace in the United States although
it was confined largely to personal insurance (life, health, and
accident) and much 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
has
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.
Growth of the group business over the years suggests that
ultimately, the number of persons insured might be almost
as great as under
social
insurance.2
("Fundamental
Characteristics of Group Insurance," by Davis W. Gregg, in LHIH, p. 351.)

The 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.
(J.E. Greider & W.T. Beadles, op. cit., pp. 559-560.)

546

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 228

Social insurance and private insuran
ce distinguished.
Social
(government)
insurance3
is
generally
considered
to have several basic characteristics that distinguish it
from private
insurance.
One
authoritative
textbook4
indicates
that social insurance differs from the most
common forms of private insurance in four important respects:
"(1) Participation is compulsory (with a few exceptions)
for all eligible persons. Otherwise some individuals would elect
not to be covered and the policy objective of a floor of protection
for all members of a defined group would be thwarted.
(2) The 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 changes
in the benefit structure are very likely through changes in the law.
(3)
The
system
redistributes
income
in
addition
to
providing protection through
a
pooling
arrangement. The
lower-income
groups,
the
insureds with many dependents, and the participants who were
elderly when the system was inaugurated receive more benefits
for their contributions than most other participants. If this
were not true, it would be impossible to achieve the public
policy objective of a floor of protection for all participants,
since some insureds would be unable to afford adequate
protection. Old-age benefits during the early years of the system would

Government insurance, strictly speaking, means an insurance enterprise
operated by the State with the government assuming ability for the payment of losses
and collec-tion 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 gov-ernment 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 Insur-ance 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 Philip-pine Crop Insurance Corporation Act (Pres.
Decree No. 1467, as amended.), providing palay crop insurance to farmers,
participation on which is compulsory upon farmers ob-taining production loans for
policy under the supervised credit program, and optional on the part of selffinanced farmers.
4John G. Turnbull, C. Arthur Williams, Jr., and Earl F. Cheit, Economic and Social
Secu-rity (3rd Ed.; New York: The Ronald Press Co., 1968, p. 23.)

Sec. 228

THE BUSINESS OF INSURANCE
547 Title 9. — Policy Forms

also be limited. The benefits are not equitable in the
private insurance sense, but they are not meant to be. Other
standards of performance have been deemed more important. In
short, the system stresses 'social adequacy' rather than 'individual equity.'
The contribution rates are scheduled, but Congress may
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 may become
unbearable. An individual's contribution may vary yearly
even though the tax rate remains fixed, for the base (annual
income) upon which the tax is levied may fluctuate from year
to year. These fluctuations may have little or no effect on the benefits.
(4) The
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 individu
al insurance contrasted.
When
group
insurance
is
contrasted
with
insurance, a number of unique characteristics are evident.

individual

(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 commonly an employer.

5The
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
insur-ability under the group plan.
(J.F. Dobbyns, op. cit., pp. 13-15.)

548

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 228

(3) A third characteristic of group insurance is that it
is essentiallylow-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
may figure heavily in the determination of dividends or
premium rates of adjustment. Generally speaking, the larger the
group, the greater the significance attached to its own 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 may last long
beyond the lifetime, or membership in the plan, of any one
individual. New 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. 352-353.)

Types of group insurance.
Clear and definitive classification of the types of group life
and health insurance is difficult. Yet, brief and reasonably
descriptive definition of the more significant forms seems desirable.
(1) Group life insurance. — Fundamentally, all forms of
group life insurance are concerned with the payment of a
benefit upon 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
insurance
under
a
group contract
that
provides
for
some
form
of
accumulation of permanent or cash value units. Group
paid-up and level premium group permanent used in
pension funding, have been the most common forms.

Sec. 229

THE BUSINESS OF INSURANCE
549 Title 9. — Policy Forms

(c) Group accidental death. — A form of life insurance
pay-able upon death as a consequence of accidental bodily
injury. (Most often, this insurance is written as "group
accidental death and dismemberment" coverage and,
strangely, is usu-ally classified as a form of group health
insurance. Since the accidental death part of the coverage
represents more than 90% of the benefit payments, it is here
classified as a special form of group life insurance.)
Group life insurance may be further classified by the nature
of the group insured as employer group life, association group
life, and servicemen's group life, among others. So-called
"wholesale life
insurance"
has many
characteristics
of
grouplife
yet it provides individual
insurance policies
with
some
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 power due to
disability, or for medical expenses due to illness, injury, or
preventive care. Under this type are group disability income 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. The 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 same occupation or
profession or to groups who 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 statu-tory 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.

550

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 230

An industrial life policy shall not lapse for nonpayment 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 pre-mium after the first may be made, except that
where pre-miums 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 nonpayment of premiums and ex-cept 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 addi-tional
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
en-tire contract between the parties, or if a copy of the
appli-cation 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 state-ments made by the insured
shall, in the absence of fraud, be deemed
representations and not warranties;

.230
THE BUSINESS OF INSUR
ANCE 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
poli-cy, the company shall periodically ascertain and
apportion any divisible surplus accruing on the policy
under the con-dition specified therein;
(f) A provision that in the event of default in
premi-um 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 policy-holder. 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 ad-opted 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 ap-plication therefor is made;
(h) A table that shows in figure the non-forfeiture
ben-efit available under the policy every year upon default in

552

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 230

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
stipu-lated 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 pro-duction of evidence of insurability
satisfactory to the com-pany 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
cor-rectly 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 benefi-ciary 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 pro-vision
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
benefi-ciary 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
553 Title 9. — Policy Forms

release, then the insurer may make any payment
thereun-der 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 provi-sions 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 nonforfeiture provisions prescribed in provisions of
paragraphs (f) and (i) of this section, nor shall
provisions of paragraphs (f), (g), (h), and (i) hereof be
required in term insurance of twenty 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
de-clare 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 occasion-ing
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
de-clare the policy void because the insured had been
reject-ed for insurance, unless such right be conditioned
upon a

554

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 accor-dance 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 indebted-ness 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 in-contestability, shall be construed as
prohibiting the life in-surance 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 pas-senger on a regularly
scheduled route between definite-ly 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 in-surance policy for additional benefits
in the event of death by accident or accidental means.

Industrial life insurance.
Industrial life insurance is defined in Section 229. (par. 1.)
The 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 —

Secs. 229-231

THE BUSINESS OF INSURANCE
555 Title 9. — Policy Forms

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 common
characteristics that make it worthy of special treatment.
(1) Written in small amounts. — In contrast to ordinary
life insurance, industrial life insurance is written in small
amounts. Premiums are payable either monthly or oftener and
collected by company representatives at the home 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 payments adjusted to
the needs of workers. This was done by making 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. — Most 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. Many policies
are written on entire families including each of the children.
The method 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
higher-than-average
death
rate
among
low-income
groups
account for the rate of industrial life insurance to be higher than
ordinary life insurance. However, for
many
insureds,
the collection
service is just as much a benefit as the
insurance itself, enabling many persons who otherwise could or
would carry no insurance to have some 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
many
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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 229-231

has historically been of substantial importance. It introduced
the uses of life insurance and the habit of thrift to many lowincome individuals, (see D.L. Bickelhaupt, op. cit., pp. 259-260.)

Nonpayment 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 company to
send its representative to the insured to collect such premium.
"These policies are usually bought by those who do not
have fixed
income,
such
as
market vendors,
jeepney 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 premium of around P2.60 per
week. Considering that this kind of buyer finds it difficult to
save and accumulate a bigger amount for annual, semi-annual
or quarterly premium payments, he would certainly welcome
an arrangement whereby the premiums would be payable
weekly if such premiums are collected from them directly. It
would, therefore, be unfair to buyers of industrial life policies if
their policies should lapse after the usual 30-day grace period
for non-payment of premium if such non-payment was due to
the failure of the company to send its representative to the
insured
to
collect
such
premium."
("Supervision
and
Regulation of the Insurance Business," Journal of the IBP, First
Quarter, 1976, p. 27, by Comm. G. Cruz-Amaldo.)

Existence of insurable interest.
The
usual
rules
regarding
frequently been held not to apply
for several reasons. They are:

insurable
interest
have
to industrial life insurance

(1) Since the proceeds of industrial life policies are
typically small, they present little danger as an inducement to murder;
(2) The investigation and processing of the potential
defense in each case would be time-consuming and nullify the advantage

Secs. 229-231

THE BUSINESS OF INSURANCE
557 Title 9. — Policy Forms

of speedy payment 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.
While there exists the possibility of wagering by buying
up industrial life policies of those unable to meet the premiums,
the evil has not been considered sufficiently serious to impose
the insurable
interest
requirement
on
such
policies.
(J.F.
Dobbyns, op. cit., pp. 68-69.)

— oOo —

Title 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 Commis-sioner that its financial and
general condition and its meth-ods 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 is-sued 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 port-folio 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 pay-able 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
Com-pany 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

Secs. 233-236

THE BUSINESS OF INSURANCE
Title 10. — Variable Contracts

(3) In determining the qualifications of a company
re-questing 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 own-ers in the Philippines,
securities satisfactory to the Com-missioner 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 corre-sponding order of authorization
shall be issued. Any de-cision 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 pay-ment of benefits.
Sec. 234. Every variable contract form delivered or
is-sued 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
in-dustrial life basis, provided
that the pertinent provisions of

559

THE INSURANCE CODE OF THE PHILIPPINES

Sec.

this Code and of the rules and regulations of the
Commis-sioner governing
variable
contracts are
complied with in connection with such contracts.
Sec. 237. Every life insurance company authorized
un-der 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 as-sets and liabilities of each
such separate variable account shall at all times be
clearly identifiable and distinguish-able 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 vari-able
account shall not be chargeable with liabilities aris-ing
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
ap-plicable thereto. In the event of the insolvency of the
com-pany, 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 as-sets of the account to become less
than the reserves and other contract liabilities with
respect to such separate ac-count. Such transfer,
whether into or from a separate ac-count, shall be
made by a transfer of cash, or by a transfer of securities
having a valuation which could be readily de-termined in
the market place, provided that such transfer
of securities is approved by the Commissioner. The Com-

Secs. 238-240
THE BUSINESS OF INSURAN
CE Title 10. —
Variable Contracts

missioner may authorize other transfers among such
ac-counts, if, in his opinion, such transfers would not
be in-equitable. 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
estab-lished one or more separate variable accounts
pursuant to the preceding section may invest any reinvest 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 com-pany 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 limita-tions 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 proce-dures that recognize the variable
nature of the benefits provided, and shall be approved
by the Commissioner.

562

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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, and/or 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 some index
as, for example, the Consumer Price Index. (CPI).1 (see "Variable
Life Insurance," by Harry Walker and Jerome S. Golden, in
LHIH, p. 227.)

Fundamental idea behin
d variable
life contracts.
Variable life insurance is a new product being
developed in the insurance business, designed to combine the
traditional protection
and savings
functions
of
life
insurance
with
the growth
potential
associated with equities, particularly common stock, (ibid.)
The fundamental idea is to change the traditional
fixed-value-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 power 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
amount payable
on
investments primarily devoted to common
stocks. The theory is that as inflation raises common stock
values and dividends, the values paid under the contract will
also increase hopefully as much as purchasing power has
decreased. The death payments are usually guaranteed not to
fall below a minimum face value, but 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 mar-ket, 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.)

Secs. 232-240

THE BUSINESS OF INSURANCE
Title 10. — Variable Contracts

563

Underwriting and administrative aspects.
The administration of a variable life contract is more
complex than that for a fixed-benefit contract. The 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
company's
general
account
and
a
separate
account.
There probably will be a continuous flow of transactions
between the two accounts.
For example, gross premiums under a VLI contract could
be credited to the general account, and thus net premiums
would have to be transferred from the general to the separate
account, (see Sec. 237.)
(2) Reporting
to
policyowners.

The NAIC (National
Asso-ciation of Insurance Commissioners in the U.S.) model
regula-tion 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 months previous to the
mailing. In addition, the insurer is required to send the
policyowner a state-ment of the investments held in the separate account.
(3) Payment of claims. — The payment of death benefits
may involve
additional
calculations for
VLI
depending upon
how often
death
benefit
is
varied. It is expected that death benefits under most designs
would vary at least annually, with some designs having death
benefits which may vary as often as daily. Cash values probably
would 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 VLI market will make 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 —

Title 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
perti-nent facts or policy provisions relating to
coverages at issue;
(b) failing to acknowledge with reasonable
prompt-ness pertinent communications with respect
to claims arising under its policies;
(c)
failing
to
adopt
and
implement
reasonable standards for the prompt investigation
of claims aris-ing under its policies;
(d) not
attempting
in
good
faith
to
effectuate prompt, fair and equitable settlement of
claims sub-mitted 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
jus-tifiable complaints to the Commissioner against an
insur-ance company, and the Commissioner’s complaint
experi -ence 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
admin-istrative 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
sec-tion, 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. The claimant may be the
insured or reinsured, the insurer who is entitled to subrogation,
or a third party who has a claim against the insured.
Section 241 enumerates the
grounds which
shall be
consid-ered as sufficient cause of the suspension or revocation of
an in-surance company's certificate of authority. It is designed
to elimi-nate 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.)

566

THE INSURANCE CODE OF THE PHILIPPINES

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 come to be
generally accepted that while the express terms of the policy do
not impose 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 Compana de Seguros, Inc., I.C. Case No. 103, Nov. 26,1976.)
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 P15,000.00.

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 and responsibility for the interest of D. (Yap vs.
Perla Compafia 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, pre-sentation 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. — The 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 Secs. 323-324.) The definiteness of the
death peril and the amount of insurance payable makes it
possible for the agent to arrange for the payment from the
insurer. In the unusual situation where a claim is questioned,
the legal department and claim department of the insurer
company provide the necessary legal advice.
(2) Proof of death. — Technically, the life insurance policy
does not provide for payment upon death but rather for payment
upon submission of proof of death to the insurer. This notice
may 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 sum (called a "face value") upon the death
of the insured, money claims are death claims.
(4) Income benefit provision. — Endowment contracts and
annuities may provide an income benefit upon the survival
of the insured to a fixed date or age. The choice as to the method of

Sec. 242

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

569

payment may be made by the insured or by the beneficiary if
the insured has not made a choice. (D.L. Bickelhaupt, op. cit., p. 192.)

Time for payment of claims in
life policies.
It depends.
(1) In policies maturing upon the expiration of the
term set forth therein, the proceeds are immediately payable
to the insured, unless they are made payable in installments
or as annuity, in which case, the installments or annuities shall
be paid as they become 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.
When the policy matures upon the death of the insured,
the obligation of the insurer to pay arises as of that date. The
sixty-day period fixed by law within which to pay the proceeds
after presentation of proof of death is merely procedural in
nature, evidently to determine the exact amount to be paid
and the interest thereon to which the beneficiaries may be
entitled to collect in case of unwarranted refusal of the company
to pay, and also to enable the insurer to verify or check on the
fact of death which it may even validly waive.
It is the happening of the suspensive condition of
death that renders 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. The 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].)
The death of the insured may 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 may
arise on a presumption of death, (see Arts. 390, 391, 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 ascer-tainment 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. — The fire insurance
contract imposes
definite
obligations
upon
the
insured
immediately upon 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
which the insured must comply before there is any liability
on the part of the insurer, (see Secs. 88-89.)
(b) Furthermore, after a fire, the insured is required
to do everything reasonable to prevent further damage to
the property insured. An insured who 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. — The fire
insurance contract
usually
provides
for
two
options
of
settlement by the insurer: the payment of damages 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 amount of damage recoverable for a breach is not thereafter limited to the amount
of

Sec. 243

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

571

insurance. The option to repair or replace involves the insurer
in the business of building construction and it is very uncommon
to exercise the option. When 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 which 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 recommended. It would have
been pointless for the company to have introduced said report
as its evidence if it did not agree with its findings and
ultimate proposals. Being in the nature of an admission against
interest, it is the best evidence which affords the greatest
certainty
of
the
facts
in
dispute
and should
not
be
perfunctorily
dismissed
as
a
worthless
price
of paper.
(Noda vs. Cruz-Amaldo, 151 SCRA 227 [1987].)

Liability insurance losses.
(1) Difference from other losses. — The adjustment of
liability claims differs from direct damage 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 damage 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 human 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

572

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 243

cases involves suffering and inconvenience. The situation is
quite different with more serious injuries. When the injured
party lives and suffers permanent injury, the problem of
damages becomes increasingly complex.
(3) Direct property damage claim. — The 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 undamaged 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. — One 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 damage 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 damage liability claims, however, the loss
of use may be included. The rental cost of a similar
automobile, for instance, would be included in a liability claim
against the person causing damage serious enough 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.
The proceeds shall be paid within thirty (30) days after receipt
by the insurer of proof of loss, and ascertainment of the loss or
damage 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 made.
In the case of Compulsory Motor Vehicle Liability
Insurance, the rule is different, (see Sec. 385, par. 2.)

Sec. 243

THE BUSINESS OF INSURANCE
573 Title 11. — Claims Settlement

Effect where 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 made 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 Sec. 75.) as when the claim exceeds the true
value of property lost by 50% as to indicate that the false
statements were made willfully and intentionally. (Tan Ti vs.
Sun Life Ins. Office, 51 Phil. 212 [1927].)
The same is true of a claim for loss of articles and goods
not existing at the time of the fire. (Sharuff & Co. vs. Baloise Fire
Ins. Co., 64 Phil. 258 [1937]; Tuason vs. North China Insurance
Co., Ltd., 47 Phil. 14 [1924]; East Furniture, Inc. vs. Globe &
Rutgers Fire Insurance Co., 57 Phil. 576 [1932].) Fraud in any
part of the claim taints the whole. (Tuason vs. North China
Insurance Co., supra; Uy Hu & Co. vs. Prudential Assurance
Co., Ltd., 51 Phil. 231 [1927].) The mere filing of such a claim
will exonerate the insurer. (Yu Cua vs. South British Insurance
Co., 41 Phil. 134 [1920]; Acriche vs. Law Union & Rock
Insurance Co., 48 Phil. 592 [1926].)
The burden of proving fraud rests on the insurer.
The falsity of invoices submitted by the insured to
prove actual existence at the burned premises of the stocks
mentioned in the insured's inventory is evidence of a fraudulent
claim and will avoid the insurer's liability. The insured's
inventory of stocks is not binding on the insurer where it was
prepared without the latter's
intervention. (Yu
Ban
Chuan
vs.
Fieldmen's
Insurance
Co., Inc., 14 SCRA 491 [1965].)

Effect of false statements innocentl
y made.
The 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

574

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 243

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 Am. Jur. 850-851.) There may be honest mistake in
valuation without fraud being involved. Numerical precision
should not be expected. (Le Bog & Co. vs. Hanover Fire Ins.
Co. of the City of New York, 1 SCRA 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 company 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,1 is one
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 company should in any case refuse to pay, it will be
deemed to have waived the condition precedent with reference
to arbitration, and suit upon the policy will lie. (Chang vs.
Royal Exchange Assur. Co., 8 Phil. 399 [1907].)
(2) Where arbitration limited to amount of insurer's liability.
— An
insurance
contract
provision
for
prior
arbitration
before resort to court action, which reads: "If any dispute shall
arise as to the amount of company's liability under this policy x
x x" was held to apply only as to disputes regarding the
amount of the insurer's liability but 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,
Sec-tion 416 confers on the Insurance Commissioner the power to adjudicate claims
and com-plaints. (see Sec. 385, par. 2.)

Sec. 243

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

575

denies any liability. (BayView Hotel, Inc. vs. Ker & Co., Ltd.,
116 SCRA 327 [1982].)
(3) Where arbitration required only when there is dispute.
— Where there is an agreement to arbitrate and one party
puts up a claim which the other disputes, the need to
arbitrate is imperative. (Mindanao Portland Cement Corp. vs.
Me Donough Construction
Co., 19
SCRA
814
[1967];
General Insurance
& Surety Corp. vs.
Union Insurance Society of Canton, Lts., 179 SCRA 530 [1989].)
Reference to arbitration was held not necessary before
bringing
suit
in
court
where
under
the
reinsurance
agreement between 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 when the same is disputed by one of the
parties, and there is no dispute between the parties because on
the stipulation of facts, the defendant (reinsurer) has admitted
that plaintiff (reinsured), has paid its liability to the insured,
and has likewise admitted its liability as insurer under the
agreement to pay the plaintiff its proportional shares, the
amounts
of
which
are
not
disputed.
(Coquia vs. Fieldmen's Insurance Co., Inc., 26 SCRA 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 deemed waived where none of the parties to the
contract invoked the same, or made 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].)

576

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 243

Right of insurer to subrogation.
(1) Subrogation,2
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 many policies including
policies in the standard form now 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 Am. Jur. 2d. 746.)
Stated otherwise, when the insurance company pays for
the loss, such payment operates as an equitable assignment to
the insurer of the property and all the remedies which the
insured may have for the recovery thereof. That right is not
dependent upon, nor does it grow out of any privity of
contract or upon written assignment of claim. The loss in the
first instance is that of the insured but after reimbursement or
compensation, it becomes the loss of the insurer who is entitled
to be subrogated pro tanto to any right of action which the insured
may have against the
third person
whose negligence
or
wrongful act caused the loss. (Fireman's Fund Ins. Co. &
Firestone Tire & Rubber Co. vs. Jamilia, Inc., 70 SCRA 323
[1976]; Villacorta vs. Insurance Commission, 100 SCRA 467
[1980], cited under Sec. 2; Malayan Insurance Co., Inc. vs.
Court of Appeals, 165 SCRA 536 [1988]; see Art. 2207, Civil Code.)
The principle of subrogation does not apply to
and accident policies as they are not contracts of indemnity.

life

(2) Limit of recovery. — A subrogee cannot succeed to a
right not possessed by the subrogor. The rights to which the
subrogee succeeds are the same as, but 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. The insurer can recover
only the amount that is recoverable by the insured and can
recover only if the insured
likewise
could
have
recovered. (Sulpicio
Lines,
Inc. vs. First LepantoTaisho Insurance Corporation, 462 SCRA 125

2See discussion

of Article 2207, Civil Code under Section 1.

Sec. 243

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

577

[2005].) Thus, where the right of the insured, in case of loss
or damage to the goods owned by him, is limited or restricted
by the provisions in the bill of lading issued by the common
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 SCRA 122 [1976].) The rule
does not apply where it would be "unfair and inequitable" to
limit the liability of the wrongdoer 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 dry-docking 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

578

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 243

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 (PI,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 sustainability 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 PI,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
PI,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

Sec. 244

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

579

business might be continued without embarrassment, to lend
to their assureds the amount of the loss payable only out of
money collected on account of the loss. Such losses are not
payment of insurance. (First National Bank of Ottawa vs. Lloyd's
of London, 116 F. 2d, 221,226, cited in Galutera vs. Maersk Line,
11 SCRA 251 [1964].)
Consequently, in a suit by the insured against the
party indisputably liable for the loss, recovery should not be
denied merely because the insured received such loan from the
insurer. As the advancement does not constitute payment of
loss, the insurer is not, therefore, subrogated to the rights of
the insured who is not divested of his right to file the suit.
Furthermore, to permit the insured to recover, subject to his
obligation to the insurer, would avoid unnecessary delay and
multiplicity of suits in the attainment of the same 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
per -son 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 in-sured, from the date following the time
prescribed in sec-tion two hundred forty-two or in
section two hundred forty-three, 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 damages
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

580

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 244

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 when 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 SCRA 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 was willful and without reasonable
cause as the facts appear to a reasonable and prudent man.
(Rizal Commercial Banking Corp. vs. Court of Appeals, 289
SCRA 292 [1998]; see Zenith Insurance Corporation vs. Court of
Appeals, 185 SCRA 403 [1990].) Thus, the mere fact that the
evidence
justified
the
payment
of
the claim
does not
necessarily mean that the insurer, in contesting payment,
acted without justification, (see Teal Motor Co., Inc. vs.
Continental Insurance Co., 59 Phil. 804 [1934].)
Where the delay in payment was due to the
investigation the insurer conducted to ascertain the truth of
the information it received that the insured was not insurable at
the time of his application, the delay was held justifiable.
(Chuy vs. Philippine American Life Ins. Co., 95 Phil. 282
[1954].) Similarly, where the insurer was faced by the problem
of determining who was the actual beneficiary of the insurance
policies involved, aggravated by the claim of various creditors
who wanted to partake of the insurance
proceeds,
not to
mention the
endorsement
by the insured of the
policies to a bank to which he mortgaged the properties
covered by the insurance, it was held that the insurer was
justified in withholding payment to theinsured.
(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 242 and 243. (Sec. 244.)

Sec. 244

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

581

In one 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. "As the
fire
which destroyed
the insured property
occurred on
December 19,1981 and the proofs of loss were submitted from
January 15, 1982 through June 21, 1982 in compliance with
the
adjusters'
numerous
requests
for various
documents,
payment should have been made within 90 days thereafter or
on or before September 21,1982. Hence, when the assured filed
her complaint on December 15, 1982, her cause of action had
already accrued." The insurer was held liable to damages
consisting of 10% of the amount of the loss as attorney's fees
and to double interest (24%) on the said amount starting
from the time the case was filed. (Cathay Insurance Co., Inc.
vs. Court of Appeals, 174 SCRA 11 [1989].)
(3) Conflicting resolutions of trial court and Commission. —
Aside
from
the
revocation/
suspension
of
license,
the
Insurance Commissioner 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 415. (infra.)
The 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 quantum 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 own 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

582

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 244

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
means 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
own
finding
of
unreasonable delay or denial as long as it is supported by
substantial evidence. While the possibility that these two bodies
will come up with conflicting resolutions on the same issue
is not far-fetched, the finding or conclusion of one would
not necessarily be binding on the other given the difference in
the
issues
involved,
the
quantum
of
evidence
required, and the procedure to be followed.
Moreover, public interest and public policy demand the
speedy and inexpensive disposition of administrative cases.
(Go vs. Office of the Ombudsman, 413 SCRA 608 [2003].)
Insurance companies are prone to invent excuses to avoid their
just obliga-tion. (Security Pacific Assurance Corp. vs. TriaInfante, 468 SCRA 526 [2005].)
(4) Damages, recoverable. — It is clear that under Section
244, in case of unreasonable delay in the payment of the
proceeds of
an insurance policy, the
damages that may 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 Monetary
Board of the amount of the claim
due the insured; and (d) The amount of the
claim.
Section 244
order that
(Prudential
Shipping Lines,

does not
attorney's
Guarantee
Inc., 491

require a showing of bad faith in
fees
be
granted.
and Assurance, Inc. vs. Trans-Asia
SCRA 411 [2006].)

Sec. 244

THE BUSINESS OF INSURANCE
Title 11. — Claims Settlement

583

(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 P10,000
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
exemplary
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.
The
propriety
of
the
award
of
exemplary damages and attorney's fees is
raised by the petitioner. The Supreme Court held:

moral
damages,
the main issue

"As regards the award of moral and exemplary
damages, the rules under the Civil Code of the Philippines shall
govern.
The purpose of moral damages 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. They 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 damages
may
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 bad faith.
In
the
instant
case,
there
was
a
finding
that
private respondent
(insured)
wasgiven
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

584

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 244

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 was that the parties could not come to
an
agreement
as
regards the amount of the actual
damage on the car. The amount of P10,000.00 prayed for
by
private respondent as moral damages is equitable.
On the other hand, exemplary or corrective damages
are imposed by way of example or correction damages
public good (Art. 2229, Civil Code.) In the case of Noda vs.
Cruz-Amaldo (151
SCRA 227
[1987]),
exemplary
damages were not
awarded
as
the
insurance
company
had
not
acted
in wanton,
oppressive or malevolent manner. The same 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 defendedby
private
respondent in connection with the case, x x x
Therefore,
the award of moral damages
is
reduced
to
P10,000.00 and the award of exemplary damages is hereby
deleted." (Zenith Insurance Corporation vs. Court of Appeals, 185
SCRA 398 [1990].)
Where the insurer resisted the claim for indemnity on
the ground that the death of the insured (who negligently
shot himself) was 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 would be unjust.
(Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 552 [1992].)

— oOo —

Title 12
EXAMINATION OF COMPANIES
Sec. 245. The Commissioner shall require every
insur-ance 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 af-fairs, 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 per-son, 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
busi-ness 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
enti-ties engaged in social or private insurance shall
similarly be subject to such examination by the
Commissioner, un-less
their respective charters otherwise provide.

585

586

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 245-246

Examination of insurers.
(1) Objective of the examination. — The 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. — The 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 books and
records, to examine its securities, count them, investigate
their genuine-ness (e.g., by writing a letter to the person
who appears to have given a mortgage to the insurer)
and appraise their value.
(b) He is also authorized to confer such power on
his deputies or assistants who are required to make a
written report of facts and recommendation.
(c) In the course of examinations and in more
formal hearings, the
Commissioner
is
empowered
to administer oaths
and
a
person who gives false testimony is liable to prosecution for
the crime of perjury.
As a rule, the Commissioner does not have the power
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 Insuranc
e and reinsurance
brokers.
The following rules and procedures shall apply:
(1) Financial statements of insurance and reinsurance
kers authorized to transact business in the Philippines shall be

bro-

Secs. 245-246

THE BUSINESS OF INSURANCE
Title 12. — Examination of Companies

587

subject to yearly examination/verification. All concerned entities shall submit present all books of accounts, securities,
bro-kers'
agreement,
information
on
policies,
details
on
cessions or retrocessions, rates of commission and premiums as
may be re-quired by the examiner.
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
entity shall be suspended by the Commissioner
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
monies
collected
or
received
as
premium
payment shall be immediately remitted to the insurance or
reinsurance company
concerned, unless a
period has
been
agreed
upon which 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, premium receivable/recoverable over 90 days
shall also be disallowed unless 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/submitted 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 and/or 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

588

THE INSURANCE CODE OF THE PHILIPPINES

to be contributed proportionately by
record within 15 days from receipt of
Insurance Commission.

Secs. 245-246

the stockholders
the advice from

on
the

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 company duly
authenticated by the Philippine Consul, if applicable. (Ins. Cir.
Letter No. 9-09, Mar. 6, 2009.)

— oOo —

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 regula-tions obligatory upon it, or that its
condition or method of business is such as to render
its proceedings hazard-ous 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 sol-vency
required of such company is deficient, the Commissioner is authorized to suspend or revoke all
certificates of authority granted to such insurance
company, its offi-cers 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.
The Insurance Commissioner is given the power to revoke
or withhold the license or the renewal of the license of an
insurance company. The decision made by the Commissioner shall be

589

590

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 247

appealable to the Secretary of Finance. (Sec. 414, par. 2.) The
action taken by the Secretary of Finance may 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.

— oOo —

Title 14
APPOINTMENT OF CONSERVATOR
Sec. 248. If at any time before, or after, the
suspen-sion or revocation of the certificate of authority
of an in-surance 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 condi-tion 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
neces-sary 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 direc-tors 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 con-servator 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
respon-sible to the Commissioner until such time as the
Commis-

591

592

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 248

sioner is satisfied that the insurance company can
con-tinue
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 find-ings, 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.
The Commissioner exercises some control over many phases of
the operations of insurance companies. (D.L. Bickelhaupt, op.
cit., p. 208.)
Under Section 248, the Commissioner, before or after
suspension or revocation of the certificate of authority of
an insurance company, may appoint a conservator to take charge
of the management of such company if he finds that it 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.
The
conservator
shall "exercise all powers necessary to preserve
the
assets
of
the
said
company,
reorganize
the management thereof, and restore its viability."
The appointment of a conservator is only a temporary
situation to enforce changes in the insurance company's
operations, or it may be a prelude to liquidation proceedings
under 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 may only act with the approval
of
the
Insurance Commissioner with respect to the
major aspects of rehabilitation.

Sec. 248

THE BUSINESS OF INSURANCE
593 Title 14. — Appointment of Conservator

(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 company
placed under his control. The authority conferred by law upon
him to reorganize the management of the insurance company
under his control embraces, among others, the authority to
carry out a retrenchment program to prevent further dissipation
of company funds. (Garcia vs. National Labor
Relations Commission, 153 SCRA 639 [1987].)
A company for rehabilitation is one whose certificate of
authority to do business has been suspended either for
failure to make good its capital impairment and/or margin of
solvency deficiency within the period prescribed under Section
194 of the Insurance Code or for any other causes provided
in the same Code. (Dept. Finance Order No. 27-90, July 26,1990.)

Action against conservator.
The third paragraph of Section 248 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 company under conservatorship.
The rule laid down by the Supreme 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.)

— oOo —

Title 15
PROCEEDINGS UPON INSOLVENCY
Sec. 249. Whenever, upon examination or other
evi-dence, it shall be disclosed that the condition of any
insur-ance 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 Com-missioner 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 reor-ganized 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 condi-tions 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 deter-mined 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
595 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
notwith-standing, 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
prefe-rence in the Courts. The Commissioner shall
not be required to pay any fee to any public officer for
filing,

596

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 ob-ligations 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
compa-ny, 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 liabil-ity 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 liquidat
e insurance
companies.
The Insurance Commissioner not only officiates at the
birth and growth of an insurance company but also at its
demise if necessary. An insurer may be liquidated for a number
of reasons including financial insolvency. (D.L. Bickelhaupt, op. cit.,
p. 214.)
Some liquidations may 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 manage the dissolution
and
liquidation of the business of an insurance
company. If the business of an insurance company and its
financial condition are such that it cannot continue its
operations with safety to the public, it may be dissolved at the
suit of the state before a judicial tribunal which after full
opportunity for the company to make defense, may

Secs. 250-251
THE BUSINESS OF INSURANCE
597 Title 15. — Proceedings Upon Insolvency

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. Co. 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 company
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.
The action of the Insurance Commissioner
in
connection
therewith
should not
be hampered unnecessarily by
tedious and
protracted
court litigations." (Pres.
Decree No. 1141; see Sec. 249, par. 4.)
(2) What constitutes insolvency. — As any other
corporation, an insurance company, broadly
speaking,
must
be
deemed insolvent when its assets are so depleted
that they are insufficient for the payment of its just debts. On the
other hand, an insurance company is not insolvent when the
value of its property is greater than the amount of its
liabilities and it is able to pay its debts when they mature
although the excess of the value of its property above its
liabilities may be less than the par value of its stock. (Shearer vs.
Farmers L., Inc., Co., 262 F. 861; 43 Am. Jur. 2d 183.)
"Insolvency," as a ground for the liquidation of an
insurance company, is defined by the Code. (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 command as well as
its
financial stability, public interest demands its liquidation and
dissolution.
In a case, an insurance company 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

598

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 250-251

bonds far in excess of its maximum 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 when
it must maintain, at all times, free from all liens, cash in
bank amounting, at least, to P50,000.00.
According to the Supreme Court, this case is clearly
dis-tinguishable from that of the Government of the P.I. vs. El
Hogar Filipino (50 Phil. 399 [1927]) and that of Government
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
committedby
the
insurance
company 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 SCRA 468
[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
demands
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 because 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
company
constitutes
such officer the successor of any such
company in liquidation. His title to the assets of the company is
the consequence of a succession established for the corporation
by the law which created the corporation. (Clark v. Williard,
292 US 112; 43 Am. Jur. 2d 184; see Banzon vs. Cruz, 45 SCRA 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

Secs. 250-251
THE BUSINESS OF INSURANCE
599 Title 15. — Proceedings Upon Insolvency

insurance commissioner subject to the approval of the court
for the purpose of preventing depreciation in assets consequent
upon forced
liquidation.
Rehabilitationis
sometimes
accomplished through the mutualization
of
the
insolvent company
or
the reinsurance of its business. In
some cases, a practical method of rehabilitation requires the
formation
of
a
new
company.
(Neble vs. Carpenter, 305
US 297; 43 Am. Jur. 2d 181.)

Action against receiver or liquidator.
The exemption from liability under Section 251 of the
receiver or the liquidator does not prohibit suits being brought
against a receiver or liquidator in his or its representative
capacity, as custodian and manager of the funds and property
of the person or firm under receivership or liquidation. To do
so would work inequity and injustice upon parties with just
claims against the latter and leave them without remedy to
pursue and recover on their claims.
The exemption applies only with reference to acts done
or left undone in good faith by the receivership or liquidation.
It does not apply to actions brought upon claims against the
person or property under receivership or liquidation and not,
in any event, upon claims which matured before the
receivership or liquidation was established. (Pioneer Insurance
& Surety Corp. vs. Fortun, 149 SCRA 248 [1987].)

— oOo —

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 cor-poration 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 pro-posed 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 exist-ing company
transacting similar business or one so simi-lar 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
consolida-tion; and such particulars as may be
necessary to explain and make manifest the objects
and purposes of the ab-sorbing 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 dis-senting or objecting to the merger or
consolidation shall be paid the value of their shares
by the company con-cerned in accordance with the bylaws 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
out-standing, 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.

602

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 ex-amination 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
en-large 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,
com-mission,
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 Repub-lic 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
603 Title 16. — Consolidation and Merger of Insurance Companies

Definition of terms.
For the purpose of Title 16, the term —
(1) Merger means the union of two companies that
results in continuation of the corporate existence and survival
of one constituent company 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 new company.
(3) Absorbing or acquiring company means the surviving
company, in case of merger, or the newly formed company,
in case
of
consolidation.
Absorbed
company
means
the
constituent company whose corporate existence is dissolved as
a result of the merger or consolidation.
(4) Company or companies refers only to domestic
insurance company or companies, (see Ins. Cir. No. 79, March 18,1973.)

— oOo —

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 pro-vide and carry out a plan for the
acquisition of the out-standing 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
proceed-ings 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 nonstock 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 con-sent of such shareholders;
(3) Submitted to the Commissioner and approved
by him in writing;

604

. 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 subparagraph 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

THE INSURANCE CODE OF THE PHILIPPINES

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 subparagraph 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
607 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

608

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 there-tofore 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 disposi-tion of the proceeds thereof,
the shares held by such trust-ees 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 trust-ees shall be subject to the
approval of the Commissioner. Any or all of the
trustees under such voting trust agree-ment may be
the same person or persons as any or all of the
trustees referred to in section two hundred sixty-six.
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

Secs. 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 sixty-six. 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 Commis-sioner 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
hun-dred 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, af-ter 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 in-surance 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
there-tofore acquired under the plan, at
a specified price which

609

610

THE INSURANCE CODE OF THE PHILIPPINES

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 BUSINESS 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 -tiises 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 aH 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 by-laws 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 onefifth of the voting power of such insurer, or by such
other officers or persons as the by-laws authorize.
(3) Notice of ail 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
613 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 or by proxy of five
per centum of the members entitled to vote at any
meeting shall constitute a quorum for the transaction
of business, unless otherwise provided by the 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
provi-sions 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.) whi
ch superseded 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
615 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 been tersely defined
as one owned and managed by the stockholders who
contribute all the capital, pay all the losses, and take all the
profits. The stockholders need not be policyholders (State vs.
Willet, 86 NE 68; Ohio State Life Ins. Co. vs. Clark, 303 US 828.);
(2) Mutual insurance company. — A cooperative
enterprise, wherein
the
members
constitute
both
insurer
and
insured, where the members 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 Farm Mut. Auto Ins. Co., 174 A
2d 706; see White Gold Marine Services, Inc. vs. Pioneer
Insurance
and
Surety
Corporation,
464
SCRA
448
[2005].) It may be either:
(a) non-assessable mutual or one that charges a fixed
premium 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, may
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

616

THE INSURANCE CODE OF THE PHILIPPINES Secs. 262-272

mutualized insurers are subject to all applicable provisions of
the Corporation Code (Sec. 271 [8].); and
(3) Mixed insurance company. — One 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 made among the
policy holders. (Pink vs. Town Taxi Co., 21 A 2d 656; see 43 Am.
Jur. 2d 155,156, 162.)

Status of members of mutual insuran
ce companies.
(1) Rights and liabilities, generally. — The contract of
insurance with a mutual insurance company 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
members of the company. (Mutual L. Ins. Co. vs. Phinney,
178 US 327.) The members sustain a dual relationship inter
se, and their interests are two-fold: they are both insurers
and insured. (Gaston vs. Keehn, 26 SE 2d 107.) Each person
insured in such a company thus becomes subject to the same
obligations toward the other members that they bear toward
him. (Baxter vs. Chelsea Mut. F. Ins. Co., 83 Mass. Allen 294.)
(2) Duration of membership. — If the charter of the
company contains no provisions on the subject, membership
commences 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 member's policy and payment
of the liabilities incurred while the policy was in force.
(Commonwealth Mut. F. Ins. Co. vs. Hayden, 85 NW 443.)
(3) Relationship of members to company. — Some courts
have denied that the members of mutual insurance company are
bound 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.
Co. vs. Barker, 77 NW 868.) The policyholder is not a partner
of the company, but his relation with the company is one of
contract and is measured by the terms thereof. (Brown vs. Stoerkel, 41
NW 921.)

Secs. 262-272

THE BUSINESS OF INSURANCE
Title 17. — Mutualization of Stock Life Insurance Companies

617

A mutual life insurance company is conducted for the
benefit of its member-policyholders, who pay into its capital by
way of premiums. To that extent, they are responsible for the
payment of all its losses. "The 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
member-policyholders do not acquire the status of creditors.
Rather, they simply become debtors for whatever premiums
that they have originally agreed to pay the company, if they
have not yet paid those
amounts
in full, for "[m]utual
companies xxx depend solely upon xxx premiums." Only
when the
premiums will have accumulated to a sum
larger than that required to pay for company losses will the
member-policyholders be entitled to a "pro rata division thereof
as profits." (Republic vs. Sunlife Assur. Co.
of Canada, 473 SCRA 129 [2005].)
(4) Right to share in the common fund. — Sharing in the
com-mon
fund,
any
member-policyholder
may
choose
to
withdraw dividends in cash or to apply them in order to
reduce a subse-quent premium, purchase additional insurance,
or accelerate the payment period. Although the premium made
at the beginning of a year is more than necessary to provide
for the cost of car-rying
the
insurance,
the member-policyholder
will
nevertheless receive the benefit of the overcharge by way
of dividends, at the end of the year when the cost is actually
ascertained. The decla-ration of a dividend upon a policy
reduces pro tanto the cost of insurance to the holder of the
policy. That is its purpose and ef-fect.
The 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.
The quasi-appearance of profit
will
not
change its
character. It remains an overpayment, a benefit to which the
member-policyholder is equitably entitled. (Ibid.)

618

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 owns the property,
the
members own the corporation. (Huber vs. Martin, 105 NW
1135.) Upon the dissolution of
the
company, its
general
creditors are entitled to priority over the claims of the
members for the reason that the
members
are,
generally
speaking, the debtors. (Moyer vs. Atty. Gen., 32 NJ Eq. 815.)
After the payment of debts, it would appear to be that the assets
belong only to members at the time of dissolution,
which
includes
only
present
policyholders.
(Powers vs.
Gaty, 105 NW 1013,1135; 3 Am. Jur. 2d 167-169,193.)

— 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

620

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 273-2

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
insur-ance 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
insur-ance company until after it shall have obtained a
special certificate of authority to act as such from the
Commis-sioner upon application therefor and payment
by the com-pany 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 ser-vice its policyholders, and to
comply with all the applica-ble provisions of law and
regulations.

Regulation of foreign insurance companies.
A state, in the exerdse of its police powers, has very
broad powers to
establish
conditions for
the
admission
of
foreign insurance companies to
do business within the state. (Employer's Liability Assur. Corp.
vs. Frost, 107 ALR 1413.) After admission, they become subject to
its laws.
The power of local control over foreign companies has
been held to extend even to preventing them from concerted
action in withdrawing from the state and cancelling the policies
in force, because of changes made in the laws under which they
are doing business. (State ex rel. Broker vs. Assur. Co. of
America, 158 SW 640; see 43 Am. Jur. 2d 142-145.)

. 273-279

THE BUSINESS OF INSURANCE
Title 18. — Withdrawal of Foreign
Insurance Companies

621

ithdrawal of foreign insurance companies.
(1) Procedure.

Sections 273 to
277
prescribe
the
procedure be followed upon cessation of business of a foreign
insurance mpany. The foreign insurer must apply. Its application must
be
ublished in two newspapers. It must discharge its liabilities to
olicy holders and creditors in this country, and cause
its policies suring Philippine residents to be taken up by
other qualified nsurers. Then the
"Insurance Commissioner shall make an
xamination of the books and records of the withdrawing
company and if upon such examination he finds the
insurer has no
outstanding liabilities to residents of the Philippines, he shall x
x x permit the insurer to withdraw."
The procedure outlined is intended to govern the conduct
of the Insurance Commissioner where petitions are made for
return of the deposit upon 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 him or such portion
thereof as may be necessary to satisfy the local claimants. Yet it
would be incorrect to assert that whenever 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 may permit
the foreign insurer to withdraw (and get back 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
may 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

622

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 273-

may review the discretion exercised by him and substitute
the own judgment therefor, where the insurer has accrued
"liabilitie which the law requires it to discharge before
withdrawal. The la should not be interpreted as to permit
foreign insurers to escap the
results
of pending actions
against them
by withdrawin from the Philippines
with all the securities they have deposited provided they get
the sanction of the Commissioner. That woul be
giving
the
Commissioner discretion to frustrate orders o courts in litigations
against foreign insurers and to liberate the latter from claims
of local policyholders, whose interest it is his principal duty to
protect, and for whose benefit he is given broad powers of
supervision
over
insurance
companies
as
are
seldom
conferred upon parallel agencies. (Ibid.)
Section 278 states when a foreign life insurance company
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. — The whole idea of the law is to require the
foreign insurance company to show that it has no more
responsibilities to any resident here, and may, therefore, go
home with its securities. It is not correct to construe the second
part of Section 276 as permitting the withdrawing foreign
reinsurer, without the consent of the insured, to transfer to
another insurer his accrued liabilities under a policy, thus,
foisting a new debtor upon the insured. It is fundamental in
our civil laws (see Arts. 1205,1293, Civil Code.) that the
debtor (insurer) may not have 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. The
first speaks of liabilities of the foreign insurer to policyholders
and creditors. The 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,

. 273-279

THE BUSINESS OF INSURANCE
Title 18. — Withdrawal of Foreign
Insurance Companies

623

e first refers to accrued liabilities (outstanding claims) to
discharged, the second and third, to contingent
liabilities utstanding
risks)
to
be
reinsured.
The
third
permitting can-llation
obviously
contemplates
outstanding
policies on which e risk has not yet happened, because
evidently, the insurer may ot cancel a policy on which a claim
has already accrued by the ccurrence of the risk. Now the
second part requires the foreign surer to "reinsure."
(3) Reinsurance
contemplated.

Reinsurance
as
defined
in Section 95 is not obviously what Section 275
contemplates because the foreign reinsurer is not thereby
relieved of local responsibility.
Yet the
term "reinsurance"
is
also sometimes "applied to a contract between
two insurers by which the one assumes the risk of the other
and becomes substituted to its contracts, so that on the
consent of the original policyholders, the liability of the first
insurer ceases, and 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 275, i.e.,
reinsurance that frees the original insurer from liability. (Scottish
Union & Nat. Ins. Co. 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, asso-ciation 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. Nosuch
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
Com-missioner must be satisfied that the name of the
applicant is not that of any other known company
transacting insur-ance 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

. 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
cor-poration 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 Com-missioner.
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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 280-2

(2) Special type. —A special type of reinsurer is the
reinsuran pool, which is an association for the exchange of
reinsuranc among two or more insurers according to an automatic
agreement (Many
of
these pools
are
technically
associations of
insurer rather
than
reinsurers;
thus,
they are insurance pools instead o 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 company group or fleet. (D.L. Bickelhaupt, op. cit.,
p. 162.)
(a) Much greater capacity is obtained by companies
joining in pools wherein six or seven companies agree
to accept a share and the pool itself reinsures the writings of
the individual members 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
company is made smaller.
(c) It may also serve as a means of stabilizing
premium rates because the business must be transferred to
the pool on a uniform basis.
Of course, a reinsurance company may be a member 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,”
“con -trolled 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 nonmanagement 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 con-trolled persons.
627

628

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 283-2

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
subsi-diaries;
(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
uncon-ditionally 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.

. 286-289

THE BUSINESS OF
INSURANCE Title ?.0. —
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 incor-poration 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-

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 290-2

mation obtained by him in connection therewith
confi-dential 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 op-portunity 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 priorwritten 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
con-trolled 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

. 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 non-controlled 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:

632

THE INSURANCE CODE OF THE PHILIPPINES

Sec. 2

(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

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
autho-rized 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

Secs. 282-

(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" means any person who directly or
indi-rectly controls any authorized insurer; while "control"
means the possession directly or indirectly of the power to
direct or cause the direction of the management and policies
of an authorized insurer or other person or corporation within
the holding com-pany system, (see Sec. 282.)
Under the Insurance Code, no insurance company may
be acquired by a holding company without prior review by
the Insurance
Commissioner
(see
Sec.
294.);
all
insurance
companies controlled by a holding company are required to
register with the Commissioner, furnish the Commissioner with
the required information concerning the holding company (see
Sec. 286.), and file such
reports
concerning
operations
which
may
materially affect
the
operations, management or financial condition of the controlled
insurer (see Sec. 287.); and all holding companies are subject to
examination on matters affecting an insurance company which is
held or on such insurance company's treatment of its
policyholders, (see Sec. 288.)
Conflicts of interest in transactions between an insurance
company and its parent holding company or its affiliates
are prohibited, (see Secs. 290-293.)

Need for regulation.
(1) "While holding companies are not themselves new,
the dominant motive for their formation might change from desire to

s. 282-298

THE BUSINESS OF INSURANCE
Title 20. — Holding Companies

635

cilitate the conduct of the insurance business to a desire to
shift way from the insurance business and to subordinate
insurance : other
business
objectives.
This
change
would increase the train on the established regulatory system.
(2) Moreover,
the
opportunities
for
pyramiding
and
xcessive accumulation of economic power through the use
of olding companies are real and potentially contrary to the public
interest.
(3) When a non-insurance holding company system
includes an insurance company within it, its potential for
specific harm becomes 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 become vulnerable.
(4) Furthermore, the interests of the controlling persons
are potentially in conflict not only with those of the
policyholders and the public but with those of the other
shareholders of the insurance company.
(5) Ideally,
an
insurance business,
which
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 Commissioner G. CruzAmaldo.)

—0O0 —

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
in-surance broker in the solicitation or procurement of
appli-cations 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 annu-ally on the
first day of January, or within six months there-after.
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 pre-scribed by the Commissioner giving
such information as he may require, and upon
payment
of
the
corresponding fee
hereinafter
prescribed. The Commissioner shall sat-isfy himself
as to the competence and trustwprthiness 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

.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. — The business of buying and selling
insurance is almost
entirely carried
on
by
insurance
agents, brokers, solicitors, and other persons
who act as representatives of sellers or of buyers. The principles
of the general law on agency apply to the relationship of
insurers and insurance companies on the one
hand and their agents on the other. (43 Am. Jur. 2d 198.)
The Insurance Code does not have any provisions
governing the relations between 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 SCRA 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

Secs. 299-3

insurance. (Washington Nat. Co. vs. Employment Secur. Com
61 Ariz. 112.)
(a) These agents are of various kinds and classes, su
as
general,
special,
local,
resident,
soliciting, collectin
and adjusting. The definition of an insurance agent
unde 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
must state that it was 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 Aispoma vs. Court of Appeals, 113 SCRA 459
[1982].)
(b) An insurance company may have two classes of
agents who sell its insurance policies: salaried employees
who keep definite hours and work under the control and
supervision of the company, and registered representatives
who work on
commission
basis.
(GreatPacific
Life
Assurance
Corp. vs. Judico, 180 SCRA 445 [1989].) The
first is not required to secure a license if they are not given
additional compensation for acting as such agents.
Under the first category, the relationship between
the insurance company and its agents is governed by
the contract of employment and the provisions of the
Labor Code, while under the second category, the same is
governed by the contract of agency and the pertinent
provisions of the Civil Code. Disputes involving the latter
are cognizable by the regular courts.1 (Phil. American Life
Ins. Co. vs. Ansaldo, supra.)
(c) Payment of claims arising from the peril insured
against, to which the insurer is liable, is definitely not one of

Uf 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 com-pany, they are its employees. (Tongko vs. Manufacturers Life
Insurance Co., Inc., 570 SCRA 503 [2008].)

. 299-301

SALES AGENCIES AND SERVICES
Title 1. — Insurance Agents and Brokers

639

the
liabilities
of
an
insurance
agent.
(Pandimin
Philippines, Inc. vs. Marine Manning Management Corp., 460
SCRA 418 [2005].)
(3) Insurance broker. — The term refers to one who acts as
a middleman between the insured and the insurer, and
who solicits insurance from the public and either places the
insurance with a company selected by the insured, or in the
absence of any selection by him, then with the company selected
by such broker. (43 Am. Jur. 2d 199.)
(a) An insurance broker, by definition under Section
301, cannot issue policies nor can it involve itself in the
process of its issuance. Only insurance companies and their
general agents, in some cases, are allowed to issue insurance
policies. An insurance company cannot allow an insurance
broker to issue policies in its behalf either tacitly or by a
special power of attorney or by any other instruments. (Ins.
Cir. Letter No. 11-94, April 25,1994.)
(b) The insurance broker in theory represents the
insured (see Sec. 301.) and not the insurance company.
So, where a renewal notice was 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 make the
company 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. The practice in
the insurance industry, however, is for
tiie
insurance
company to pay the commission of both agents and brokers.
(c) The broker, when 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

THE INSURANCE CODE OF THE PHILIPPINES Secs. 299-3

(d) As explicitly prescribed by Sections 300 and 30
the role for which an insurance agent may be licensed
a such by the Insurance Commission is just to solicit,
obtain or negotiate insurance in behalf of an insurance
compan and performs acts necessary or incidental thereto,
such a 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 unknown or
contigent event.
In view thereof,
enjoined from —
1) requiring
liability under, or

all
their

insurance

companies

insurance

agents

are
to

assume

2)
demanding from their insurance agents the
reim-bursement of the amounts paid on claims arising
from such policies or bonds issued. (Cir. Letter No. 12/
88, Dec. 19,1988.)
(4) Distinctions. — A broker sustains no fixed and
permanent employment by, or relation to, any principal, but
holds himself out for employment by the public generally,
his employment in each instance being that of a special agent
for a single object, whereas an agent sustains a fixed and
permanent relation to the principal whom he represents and to
whom he owes a permanent 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 more generic, and every insurance agent is not a broker. (43
Am. Jur. 2d 199.)

Regulation of insuranc
e agents
and brokers.
(1) Licensing. — The right of a state to regulate and control
the insurance business includes the right to regulate and control the

. 299-301

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Title 1. — Insurance Agents and Brokers

641

gents and brokers through which such business is carried on.
O'Gormon & Young vs. Hartford F. Ins. Co., 282 US 251.)
Thus, e State has the right to require that all persons who
engage in
e insurance business within its borders first secure a license
from a designated authority authorizing the engaging in such
business. (Robertson vs. California, 528 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 among their
primary purposes the purpose to act as insurance or
reinsurance broker and to include in the business, corporate
name the descriptive words "insurance
brokers" or
"reinsurance broker" to properly represent the company's
operation, in order to avoid confusion among the insuring public.
(2) Revocation or suspension of license2 — The power to
enact
laws
prescribing
and
fixing
the
qualifications
of
agents and
requiring them 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 Secs. 305, 312, 317, 321, 322, 330.) The order or
decision of the Insurance Commissioner must specifically find
and state the act or acts of which the licensee whose license is
revoked is found guilty, and it is insufficient that the
revocation
is
made
merely
because
the licensee
is
not
"trustworthy." Findings must be made as to the specific act or
acts which constitute the violation. (Goldman vs. Pink, NYS 2d
562; see 43 Am. Jur. 2d 125-129.)

Licensing requirements and limitations.
(1) No insurance company 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 have
first procured from the Insurance Commissioner a license to act as an
insurance agent (Secs. 299,

2General 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. 1906, May 19,2006.)

642

THE INSURANCE CODE OF THE PHILIPPINES Secs. 299-

301.), variable contract agent, general agent, insurance brok
(Sec. 301.), or reinsurance broker (Sec. 310, par. 2.), as the
ca may be.3
(a) A "variable contract agent" is any person who
sells o offers for sale variable contracts, as defined
in Section 232(2 of the Insurance Code, or does or
performs any act or thing' the sale, negotiation, making or
consummating of any su contract other than for himself.
(b) A "general agen t" is any person who, for
compensation, solicits or
obtains
insurance on
behalf
of
any insurance company
or
transmits for a person other than himself an application
for a policy or contract of insurance to or from such
company or offers or assumes to act in the negotiation of
such insurance and empowered by such company to do
such other acts and things for and on its behalf in the
conduct of its business as specified in the general agency
agreement executed by and between 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) Such
license shall be issued only if, upon
written application of the person desiring it and payment
of the corresponding fee therefor, such person is found
qualified and not otherwise disqualified for such license.
Such license shall be valid until midnight of 30th day of
June of the year following its issuance unless sooner
revoked or suspended for cause, and may be renewed
annually on the 1st day of January, or within six (6)
m©*rths thereafter, (see Sec. 299, par. 2.)
(b) A license issued to a partnership, association or
corporation to act as an insurance agent, etc. shall
authorize only the individual named in the license, (see
Sec. 364.) Exercise or attempted exercise of such
authority
by
an individual not so named in the
license with the knowledge

3Ins.

Cir. Letter No. 3-2009 (Jan. 22,2069) grants provisional authority to sell or solicit
Insurance business pending issuance of regular
license subject to prescribed guidelines.

.299-301

SALES AGENCIES AND SERVICES
Title 1. — Insurance Agents and Brokers

643

or consent of the licensee shall constitute cause for the
revocation or suspension of the license.
(c) An insurance company already licensed as such
needs a separate license to act insurance agent. (White Gold
Marine Services, Inc. vs. Pioneer Insurance and Surety
Corporation, 464 SCRA 498 [2005].)
(4) No insurance company doing business in the
Philippines, or any agent thereof, shall pay to any person
licensed to act as insuranceagent,
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
same company 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 which 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, members or stockholders.
(5) No person shall be licensed to act as an insurance
agent or general agent of more than one 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 named 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^n 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 299-

(7) No application for license of an employee with the
r of manager and above, of an insurance company to act as
it insurance agent or general agent shall be entertained unless it
i accompanied by a board resolution authorizing said employee
t act as such. (Ins. Memo. Cir. No. 3-93, June 28,1993, as
amende Ins. Memo Cir. No. 2-94, July 15,1994.)
The Insurance Code governs the licensing requirements
and other particular duties of insurance agents but it does not
for the application of the Labor Code with regard to labor
standards and labor relations. (Great Pacific Life Assur. Corp.
vs. National Labor Relations Commission, 187 SCRA 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 upon
forms prescribed by the
Insurance
Commissioner. For
a
partnership, association
or
corporation, the
application
shall
designate the individual
who is to exercise the power granted by the license. Such
application shall be accompanied by a copy of the applicant's
income tax return for the preceding year and privilege
tax receipts for the current year if applying for renewal of license.
(2) The
application
for
the
issuance
of
a
general
agent's license shall, in addition, be accompanied by a copy
of the general
agency
agreement
entered
into by
andbetween the applicant and the insurance company
concerned, limiting the power of the agent to solicitation of
insurance business only, together with a copy of the power of
attorney duly executed by the insurance
company
empowering
the applicant to receive notices,
summonses,
and
legal
processes for and in behalf 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 licenses,4
particularly with
respect to the income earned by the applicant concerned, it
shall be considered sufficient compliance with the "actively engaged"

‘Effective February 15,2006, the Commission started an electronic way of
processing new and renewal of life insurance agents application for license.

.299-301

SALES AGENCIES AND SERVICES
Title 1. — Insurance Agents and Brokers

645

quirement (infra.), if it is certified under oath by the
president the executive/senior
vice-president
(if there be
more
than ne vice-president) or the vice-president (if
there be only one 'ce-president) of the insurance
company
which such applicant presents that he has examined the income
tax return of the said pplicant for the preceding year and
found that the amount of ommission or other compensation
which the latter has received or 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
state-ment 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 who has
been licensed as such
by
the
Insurance Commission before September 30, 1968, and
has
continually been so licensed, shall submit proof that he
has submitted the report prescribed in Section 2, Rule IV of the
Implementing
Rules
of
Republic Act No. 5455, to the
Board
of Investments.
(6) In case an insurance agent's or general agent's license
for life business is denied renewal on the ground that he has
not been 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 him and receive renewal
commissions therefor. But in no case shall he solicit new
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.

issuance of a new license upon showing that such applicant
h undergone training in the kind or kinds of business
contemplat in the license applied for in the company he desires
to represe for at least forty (40) hours during the last six (6)
months prior his application. (Ins. Memo. Cir. No. 3-93, supra.)
An
insurance
or
reinsurance
broker,
whether
single
propr' etorship, partnership or corporation is considered in a
service oriented business subject to value-added tax (VAT)
pursuant t Section 102(a) of the National Internal Revenue
Code. Both bro kers are required by the Insurance Commission
to pay the VAr before their licenses as such may be renewed
by the Commis sion. (Ins. Cir. Letter No. 3-90 CL, Feb. 19,1990.)

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,

c. 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.
The applicant for an insurance broker's license must file
with the application a bond in the amount of P500,000.00
in favor of the people of the Republic of the Philippines
executed by a company authorized to become surety upon
official recog-nizances, stipulations, bonds or undertakings under
Act No. 536, as amended by Act No. 2206, which bond shall be
maintained in force while so licensed.
The bond 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. (Ins. Memo Cir. No. 2-85,
Aug. 7,1985.)
The bond is intended primarily for the protection of
the insured against non-delivery to the insurance company of
the premiums paid. Such bond is not necessary in the use of
an insurance agent, for payment to him is payment to his principal
— the insurance company.5

Errors and omissions insurance polic
y required of insurance brokers.
Upon approval of the application, but before the issuance
or renewal of an insurance broker's or reinsurance broker's license,

®Ins. Memo. Cir. No. 1-06, April 24, 2006, prescribes the capitalization
requirements for existing insurance and reinsurance brokers and new entrants
effective July I, 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.

the applicant must also file two (2) errors and omissions
insu ance
policies
(professional liability
or
professional
indemni policy) issued separately
by two (2) insurance companies autho rized to do business in
the Philippines, satisfactory to the Insur ance Commissioner.
(1) Purpose. — The policies shall indemnify the applican
against
any
claim
or
claims
for
breach
of
duty
as
insurance broker or reinsurance broker, as the case may be,
which may 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 may
thereafter during the subsistence of the policies, be employed by
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. — The total limit of liability of
the said two policies shall be equivalent to 100% of the
broker's insurance-related
income
(commissions
and/or
fees)
for
the
preceding
fiscal
year, but not exceeding a maximum of P10 million (subject
to periodic review should there be changes in the market
conditions), or in the event that no insurance company 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
203 of the Insurance Code with, and satisfactory to, the
Insurance Commissioner, free from any lien or encumbrance,
equivalent to said deficiency, likewise to answer 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. Memo. Cir. No. 2-85, supra.)

Sec. 303. The Commissioner shall, in order to
deter-mine 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
satisfac-tion of the
Commissioner.
Such examination shall be held

.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 insur-ance.

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, if
not otherwise exempt from taking the same.
(2) In case the applicant is a partnership, association or
corporation,
such
applicant
must
be
domiciled
in
the
Philippines and empowered under its articles of incorporation to
transact the kind of business applied for. The individual to be
named in the license applied for must possess the above
qualifications. (Ins. Memo. Cir. No. 3-93, supra.)

Qualifications for insurance
or reinsurance
broker’s license.
An applicant for a broker'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. Memo. Cir. No. 2-85,
supra.) may be allowed to continue as such broker, provided
that he has a permanent resident status;

650

THE INSURANCE CODE OF THE PHILIPPINES Secs. 303-

(2) He must have at least ten (10) years experience as:
(a) a sales and/or underwriting executive (at lea
department manager level) in an insurance brokerage
fir or insurance company, or
(b) a general agent.
The above requirement may be reduced to five (5) years
i the applicant holds at least an assodateship from the
Insurance Institute of Asia and the Pacific (IIAP), 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. Memo. Cir. No. 2-85, supra.)
The chief operating officer of a broker must be a
Filipino citizen and
must
possess
the
above
qualifications. However, an alien who has been appointed
to and was occupying such position at the time of the
effectivity of the circular may be allowed to continue holding
such position, provided that he has a permanent resident status.
A broker which is a stock corporation may be issued
separate licenses as an insurance and reinsurance broker,
provided that the corporation shall have separate soliciting
officials, separate errors and omissions policies (infra.) and
separate books 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 named in the license. Exercise
or attempted exercise of such authority by an individual
not so named in the license, with the knowledge 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

cs. 303-304

SALES AGENCIES AND SERVICES
Title 1. —Insurance Agents and Brokers

651

r consummating of any variable contract unless such person
hall have a valid and current license from the
Commission uthorizing such person to act as a variable
contract agent. No icense shall be issued unless and until
such person shall show to the satisfaction of the Commission
that he has satisfied the following qualifications:
(1) He has been 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 Commission for such purpose, unless exempted from taking
the same (under Item 4.7 of Ins. Memo. Cir. No. 2-81, Dec.
17,1981). (Ins. Memo. Cir., May 21,1985.)

Qualifications for authorization of
life insurance
companies to issue, deliver,
sell or use variable
contracts.
Any life insurance company authorized to transact
business in the Philippines requesting authority to issue, deliver,
sell or use variable contracts must show 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) The 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) The 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 PI,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
PI,000,000.00
from
the
unassigned
surplus
of
the
company; and

652

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 303-

(4) The company shall at all times maintain in the
designate 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.
The
surplus
shall
in
no event
be
less
than
PI,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 Code shall be deemed to exclude the
insurance in force on the variable contracts. (Ins. Memo. Cir. No.
185, July 18,1985.)

Examination required of applicant.
(1) The applicant for license shall qualify himself in a
written examination for the kind of license applied for, if
not otherwise exempt from taking the same. The applicant for
such examination must be of good moral character and must not
have been convicted of any crime involving moral turpitude. He
must satisfactorily show that he has been trained in the kind or
kinds of insurance contemplated in the license applied for. A
grade of 70% shall be necessary to pass the examination.
(2) No such examination shall be required of the following:
(a) One who presently holds, or previously held at
anytime during the last ten (10) years, a license (excluding
a temporary certificate of authority) of the kind applied for;
(b) One who has successfully completed the
Insurance Agents'
Course conducted by the
Insurance Institute for Asia and the Pacific or an academic
course and/or training program, satisfactory — to the
Insurance Commissioner, in the kind or kinds of insurance
contemplated in the license applied for; and
(c) One who, because of his previous connections
with any insurance company, or with any office or firm
handling insurance matters, is found by the Insurance Commissioner

.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. Memo. Cir. No.
393, supra.)

Issuance of limited license.
(1) In order to increase the number of Filipinos with
life insurance protection, new insurance agents were issued
certificate of authority to act as such even without passing
the required insurance
agent's
examination,provided
that
said
agents
shall
sell personal accident insurance policies only. (Ins. Cir. Letter No.
1197, Oct. 13,1997.) The Insurance Commission no longer
issues limited license for agents of personal accident policies.
Those who intend to sell or solicit such policies shall
have to apply for license to sell them. However, agents who
were already issued license for personal accident may continue
to possess the license and are allowed to renew their licenses.
(2) Existing limited licenses to solicit fire and motor car
insurance (under CL No. 12-99) shall continue to be effective
until the date of their expiry. Those intending to sell or solicit
fire and motor insurance shall have 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 re-newed, shall be suspended or revoked if
the Commission-er 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
(Ij

(d) has been guilty of fraudulent or dishonest
prac-tices; or
(e) has misappropriated or converted to his
own use or illegally withheld moneys required to be
held in a fiduciary capacity; or

654

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 306-3

(f) has not demonstrated trustworthiness and
com-petence 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
pre-scribed, 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 con-summating 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

6In 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 Assur-ance Company vs. Chua, 309 SCRA 250 [1999].)

cs. 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 exam-ination 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 af-ter notice and
hearing, if he shall find that the holder there-of 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
trea-ty, it shall be unlawful for any person, partnership,
associ-ation or corporation in the Philippines, for himself
or itself, or for some other person, partnership,
association or cor-poration, 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,
associa-tion or corporation violating the provisions of
this section shall be deemed guilty of a penal offense,
and upon con-viction 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 rein-surance.

7As to foreign insurance company, see Section 190.

656

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 305-

Denial, suspension, or revocation of license.
The grounds are enumerated in Section 305. An
applicatio for the issuance or renewal of a license8 to act as
an insuranc 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.
A license to act as insurance agent or general agent
may likewise be revoked upon the termination of the agency
contract, in which eventthe
insurance company concerned
shall
give immediate notice in writing to the Insurance
Commissioner. (Ins. Memo. Cir. No. 3-93, supra.)

“Actively engaged” requirement.
(1) The term "actively engaged" means that the license
holder shall have earned, during the year following the issuance
of the license, commission or other compensation for services
rendered as such insurance agent, variable contract agent,
general
agent, insurance
broker
or
reinsurance
broker
amounting to at least P3,600.00.
(2) In case
association or
engaged"
the license.

the license holder
corporation, the
applies
to

is a partnership,
term
"actively
the individual named in

(3) Except
where
the
applicant
has
undergone
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
having been renewed during the current year, has not been
actively
engaged
as
such
agent or broker during the
effectivity of his last license, (ibid.)
— oOo —

8The 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 Phil-ippines unless he is authorized as
such by the Commis-sioner.
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

Secs. 310-31

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.
A reinsurance broker1 is an intermediary between a
company that desires reinsurance and a receptive reinsurer. For
this service, the broker receives a commission from the
reinsurer recouped from the rate charged to the primary writer (insurer).
Such brokers are useful because:
(1) They are able to suggest favorable facilities to
primary writers;
(2) They can furnish information on the policies, capacity,
and financial condition of reinsurers, especially foreign companies;
(3) They prevent embarrassment to the ceding
if the proposition proves unacceptable to the reinsurer;

company

(4) They secure reciprocators for reciprocal agreements; and
(5) They secure uniformity
partici-pating companies.

where

there

are

several

Such

services are particularly useful to small
companies needing reinsurance and may reduce the
expense of the primary writer by eliminating the need for
reinsurance personnel. Brokers first arose when reinsurance was
sought in foreign countries, and their work increased
when
treaties increased. Some
companies
do not solicit brokerage business and deal directly only with

'For qualifications of applicant for a reinsurance broker's license, see Insura
nce Memorandum Circular No. 2-85. (Title 1, supra.)

. 310-312

rimary writers.
rimarily
a
compensation m
represents
the
p. 127.)

SALES AGENCIES AND SERVICES
Title 2. —Reinsurance Brokers

659

For the reinsurance company, the broker is
"producer"
of
business,
receiving
his
the reinsurer, although in other respects, he
rimary writer. (Riegel, Miller & Wiliams, Jr., op. cit.,

— 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. 5455,1 if
such foreign insurer or broker is not otherwise
exempt from such requirement.
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

.313-317

SALES AGENCIES AND SERVICES
Title 3. —Resident Agents

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 behalf of a foreign insurer or broker not
authorized to do business in the Philippines, notices, summonses
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 Code of the Philippines
(Batas Pambansa Big. 36.) provides the rules regarding the
service of summons, processes and all legal notices on a foreign
corporation when 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 Revised 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].)
Under said section of the Rules of Court, service may be made
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, evalu-ate and accept risks for, and to
determine the terms and conditions, including those
pertaining to amounts of re-tentions, 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 shail 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

cs. 318-322

SALES AGENCIES AND SERVICES
Title 4. — NonLife 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 b y 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
non-life 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, fas amended by Pres. Decree
No. 1455.)

Employment of non-life company
underwriters. (1) Every nonlife insurance company is required to employ
at least one non-life company underwriter, duly registered with

663

664

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 318-322

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,
and/or 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 Commission for
each line of risks such branch, etc. is authorized to write and
issue. (Ins. Cir. Letter, April 15, 1977; see Ins. Cir. No. 68, Nov.
2, 1966; Ins. Memo. Cir. No. 1-90, March 2,1990; see Secs. 318-319.)
(3) No person registered with the Insurance Commission
as non-life company underwriter shall be licensed as nonlife insurance agent in view of the conflict of interest that will
arise from the nature of the work of an underwriter and
agent. The Certificate of Registration of
a
non-life
company 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.
Memo. Cir. No. 3-91, Sept. 19,1991.)

Insurance underwriting.
The underwriters' of a company are those who have 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
some
acceptances and some rejections or that not all risks will be
accepted for insurance. Obviously, it would not be a sound
business practice for an insurer to write an insurance contract
for
every
individual
who 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.)

.318-322

SALES AGENCIES AND SERVICES
Title 4. — NonLife Company Underwriter

665

not want bad risks, or those which seem to offer a high
probability of loss. On the other hand, even bad 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. The purpose of underwriting is thus
found to be the acquisition by the insurer of selected insureds
who at least in the long run will return a profit to
stockholders (or policyholders of a mutual type insurer.)
(2) Rating or pricing. — The pricing of insurance contracts
is a specialized part of underwriting which requires the
services of experts. Basically, insurance rates are calculated by
actuaries (infra.) who
apply sound
principles
of
mathematics to
the particular pricing problems of
insurance. The fundamental part of most insurance rates is the
estimate of future losses, (see D.L. Bickelhaupt, op. cit., pp. 140147; 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,
partner -ship, association or corporation which, for
money, com-mission 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

Secs. 326-330

SALES AGENCIES AND SERVICES
667 Title 5. — Adjusters

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

668

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 323-

allow an examination into his affairs or method of
doing business as hereinafter provided.
Sec. 331. Every adjuster shall submit to the
Commis-sioner 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 representa-tives may readily verify the
quarterly reports of the said adjuster and ascertain
whether the said adjuster has com-plied 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 more than one) arising under an
insurance contract
or
policy
and
theamount
or indemnity
which the
insured is entitled to receive under said contract or policy.

Kinds of adjusters.
Adjusters fall into five (5) categories
:
(1) Agents as adjusters. — Agency involves a principal who
authorizes a second party, an agent, to create, modify, or terminate

Secs. 323-334

SALES AGENCIES AND SERVICES
Title 5. — Adjusters

669

contractual relations between 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. — Many agents have the
author-ity of their companies to settle a claim immediately
with the policyholder.
For smaller
and
uncomplicated losses,
this is the most expedient and
efficient way to pay claims.
(b) In life insurance. — The agent is often involved
directly in the loss payment. The life agent usually
forwards the death notice and certificates to the insurer and
the check is issued by the company 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 common
in
property
insurance
losses.
An
exception
would be
the
extra
payments
for
accidental
death,
which
requires legal
investigation and definition in some cases (ibid., pp. 178179.);
(2) Staff or company adjusters.' — They are salaried
employees of an insurance company for the adjustment of
claims filed under policies issued by such insurance company.
No license is required of them by law. (Sec. 325, par. 2.) Some
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. — The term is defined by law.
(see Sec. 324.) Independent adjusters are experts who have made
loss-adjusting a business. Some have specialized in particular
fields. They work for the insurers who request their services (ibid.);
(4) Adjustment

bureaus. — These are separate
corporations supported
by
many
insurers
that
regularly
use
their
services.
Their sole business is claim adjustment, (ibid., p. 181.) In the United

'Also called "in-house" adjusters.

670

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 323-334

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
Departmentof
Justice, insurers divested
themselves
of
ownership
in
these
bureaus
(Riegel, Miller
and Williams, Jr., op. cit., p. 113.); and
(5) Public adjusters. — The term is defined by law. (see
Sec. 324.) As the name implies, public adjusters represent the
public in contrast to the adjusters who represent insurers.2
They 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. 181-182.)
The provisions of Title 5 do not apply to any duly
licensed attomey-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. 329.)

Liability of a settling
or claim agent under an
insurance policy.
In one case, the main issue is whether 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) The scope and extent of the functions of an
adjustment and settlement agent do not include personal liability. His func-

2No
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 informa-tion 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 clear-ances from the NICA, Bureau of
Internal Reyenue (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.)

Secs. 323-334

SALES AGENCIES AND SERVICES
Title 5. — Adjusters

671

tions are merely to settle and adjust claims in behalf of his
prin-cipal 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. The 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. The agent cannot be sued nor held
liable whether singly or soli-darity with the principal. (Smith Bell
& Co., Inc. vs. Court of Ap-peals, 267 SCRA 530 [1997], citing
Salonga vs. Warner, Barnes & Co., Ltd., 88 Phil. 125 [1951].)
Under Article
binding only upon
who execute them.

1311 of the Civil Code, contracts are
the parties (and their assigns and heirs)

(2) Article 1207 of the Civil Code clearly provides that
"there is solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation
requires solidarity.”
The
well-entrenched
rule
is
that
solidary obligation cannot
lightly
be
inferred.
It
must be positively and clearly expressed.
Section 190 of the Insurance Code is quite clear as to the
pur-pose 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 mere 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 may 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;

672

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 323-334

(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,
nions, and preparing necessary documents.

securing

expert

opi-

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 adjustme
nt to insurance company.
The following are the regulations of the Insurance
Commission on this matter:
(1) No report of adjustment on any insurance loss
claim shall be submitted by an independent adjuster or a
"company" or
"in-house" adjuster, and
no
insurance
company
concerned shall
receive,
acknowledge,
and/or
accept such
report,
unless the same is under oath, duly
subscribed and sworn to before a notary public or any
public
officer
authorized
to
administer
oaths by the adjuster rendering the same.
Such adjustment report, however, may be qualified in
such manner as may be necessary and insofar as to matters
about which the adjuster rendering or submitting the same has
no first hand knowledge or information.
(2) No fee or salary, as the case may 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 been duly submitted
within 60 days from date of filing of claim by the insured
with the insurance company concerned, except when prevented
so to do for reasons beyond the adjuster's control.
(3) Failure of the company concerned to receive such
adjust-ment report within 60 days as specified above from the
adjuster assigned cannot be a valid reason for it to withhold
payment or settlement of the loss or claim. (Ins. Memo. Cir. No.
4-93, Dec. 24, 1993.)

.323-334

SALES AGENCIES AND SERVICES
Title 5. —Adjusters

673

Report of claim/loss adjustme
nt to Insurance Commission.
(1) Every adjuster, independent and/or company (inhouse) must
submit
to
the
Insurance
Commissioner
quarterly report within the period as required under Section 331.

the

(2) To facilitate the implementation of the provisions of
Paragraph (b), No. 6, Section 13 of Presidential Decree No.
1185, otherwise known as the "Fire Code 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 xxx fees which shall accrue to the
general fund of the National Government are hereby imposed: xxx
"(6) Two per centum (2%) of the service fees received
from fire,
earthquake, and
explosion
hazard
preinsurance
survey and post loss service of
insurance
adjustment companies
doing business in the Philippines directly through agents,"

xxx

every
independent
adjuster
must
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
company
concerned
for
the
adjustment services of claims and/or 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
Code
shall
be
computed
and collected. (Ibid.;
Ins. Memo. 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 60% of its
capital must be owned by citizens of the Philippines. (Sec. 323.)
(a) Natural person. — In addition:

674

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 323-3

1)
The
applicant
must
be
of
good
moral
characte 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 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
and/or 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) The
President,
General
Manager
or
Chief
Operating Officer of the applicant shall 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; and
2)
The
President,
General
Manager,
or
Chief
Oper-ating Officer of the applicant shall have at least
ten (10) 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 and/or program satisfactory to the
Insur-ance Comixiission in the line of business being
applied for or passed the adjuster's examination .given
by the Insur-ance Commission.
3) Applicant must have at least a paid-up capital of
P500,000.00.
(c) Common requirements. — They are as follows:
1)

Submission of a 3-year business plan;

2) That the application of an adjuster may be
referred to the Association of Philippine Adjustment Companies

.323-334

SALES AGENCIES AND SERVICES
Title 5. —Adjusters

and
Insurance
and
Surety
Philippines for comment
applicant's moral integrity,
and trustworthiness; and

675

Association

of
the
as
to
honesty

3) A pre-licensing examination of applicant's office
premises and books of accounts and bank deposit/s
shall be conducted by the Insurance Commission to
determine if applicant is ready to do business as an adjuster.
(2) Renewal of adjuster's license.
as follows:

— The

requirements are

(a) Information sheet shall be submitted yearly with
re-newal application for license showing the updated lists
of owners,
partners and/or
stockholders and
their
correspond-ing 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 been actively engaged as such
in accordance with such rules as the Commissioner may
pres-cribe.
The term "actively engaged" should
be
taken
to
mean that the license holder shall have 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 have the following qualifications:
(a) 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.
(b) Applicant shall have at least five (5) years
experience in the line of adjustment being applied for with
any adjust-ment firm or insurance company or must have
successfully completed the insurance adjuster's course
conducted by the
Insurance Institute for Asia and the Pacific and/or program

676

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 323-334

satisfactory to the Insurance Commission in the line of
busi-ness being applied for or passed the adjuster's examination
given by the Insurance Commission.
(Ins. Memo. 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 Home Office, such branch or regional office must
have a qualified
adjuster
duly licensed
by
and
registered with this Commission on each of the fire,
marine, casualty, and/or surety line of insurance loss
adjustment which the branch or regional office intends to
engage in. (Ibid.)

Prohibited acts.
(1) The cause or causes by which an adjuster's license
may be suspended or revoked are specified under Section 330
of the Code.
(2) Any
adjuster,
independent
and/or
company
(inhouse), found by the Insurance Commissioner
to
have
either received, exacted, and/or demanded money or other
form of consideration directly or indirectly from an
insurance
claimant for an
expeditious
and favorable
recommendation of
the settlement of the claim, and / or
recommending payment of claim in an amount which is either
excessive or unreasonably meager as a result of the failure of
claimant to satisfy such consideration so demanded or being
exacted by the adjuster shall be deemed 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 have 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 company (in-house) adjuster found likewise

Secs. 323-334

SALES AGENCIES AND SERVICES

677 Title5. —Adjusters

to have committed similar acts shall be separated
immediately from the employ of the insurance company.
(3) No adjuster, independent and/or company (inhouse) 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 company shall have any equity in
an insurance company 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

cs. 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
Law Dictionary [3rd ed.], 130.)

680

THE INSURANCE CODE OF THE PHILIPPINES

He is one whose business
insurance risks and premiums.

or

profession is

Secs. 335-338

to

calculate

Actuarial work in insurance.
(1) In life insurance. — The rates of premium are fixed
by a separate actuarial staff. With the aid of mortality tables
and the accumulated experience of his own 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. — The 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.
The basic obligation of life insurers is to pay death
benefits, so they must know the expected life span of an
insured group. The mortality table is the instrument by which
the probability of living or dying is measured. This is a table
showing the probable death rate at each age, and by starting
with a given number at a given age, it shows how many
persons will probably die during each succeeding year.
Life insurance actuaries construct tables showing the mortality experience of large groups of people. Applying the
prin-ciples of probability and large numbers, they can predict
closely the number of deaths and the time of their occurrence
in any large group. The greater the accuracy of predictions,
the greater the number of cases under observation. Large
numbers permit variations from the average to cancel each
other. The 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 rate-making 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

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 ratemaking 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-iaws, rules and regulations governing the conduct of
its business, and (2) its list of members and subscribers.
A “member” means an i nsurer 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 ail 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 Cbmmissioner 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

Secs. 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 coop-eration are subject to all provisions of this
title which are applicable to filings generally. The
Commissioner may re-view such cooperative activities
and
practices
and
if
he
finds that any such activity or practice is unfair or unrea-

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
unreason-able, 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 ail 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
pros-pective
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.

Secs. 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

686

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
organi-zation, 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
is-sue 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
deter-mine, after notice and a hearing, that the rates
charged
or
filed on
any class of
risks are excessive, discriminatory,

Secs. 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

688

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 an
d rating
bureaus.
Prior
to
any
legislation
on
the
subject,
voluntary
associations variously
called "board
of underwriters,"
"rating bureaus,"
or "insurance exchanges" 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. Such combinations were generally

Secs. 339-363

SALES AGENCIES AND SERVICES Title 7.
— Rate Organization and Rate Making

689

held not to violate any public policy, even though one of
the purposes
was
to
secure
uniformity
in
rates
and
premiums to be charged for insurance upon the different
classes of property.1 (Aetna Ins. Co. vs. Commonwealth, 51 SW 624.)
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 would be invalid as a
restraint of trade. (National Union Ins. Co. vs. Dickinson, 194 SW
254; United States vs. South Eastern Underwriters Assn., 323 US 811.)

Regulation of rates.
(1) Necessity of regulation. — The validity of
legislation conferring upon the state the power to regulate
the rates charged by insurers is upheld on the ground that
the insured has no bargaining power to protect himself against
excessive rates. "The price of insurance is not fixed over the
counters of the companies by what Adam Smith 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. 39,
citing German 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 govern-ment 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 Com-mission. It is managed by a governing committee composed
of seven members and pre-sided 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.

690

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
Com-missioner has no power not conferred upon him
by the express letter or reasonable construction of the
statute. The right given the Commissioner to approve or
disapprove rate schedules
filed
by
insurance
companies does
not
include the
right
to
regulate
die
declaration
of
dividends,
out
of
distributable earnings, to the policyholders. (43 Am. Jur.
2d, 123-124.)
(b) The 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
Secs.
351353.), and to empower the Insurance Commissioner to
order a correction or adjustment of the rates charged (see
Secs. 354-358.), either on
his
own
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 and health insurance rates to much
less restrictive regulation. Two major reasons for this
difference in treatment are that property and liability
insurance
rates
(a)
are often made 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
same
hazards and expense elements, (see Secs. 349[b, c], 355,358.)
(a) Rates
are
considered
reasonable
and
adequate
when 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. 210;
Riegel, Miller & Williams, Jr., op. cit., p. 62.)

Secs. 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. They 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 engage in such business, (see 43
Am. Jur. 2d 125; Aetna Ins. Co. vs. Hyde, 275 U.S. 440.)
In a case, the petitioner, a life insurance underwriter or
agent was found to have induced private respondent to take
a life insurance policy by promising him a rebate equivalent
to 50% of the just annual premium payment, which would be
taken out of her commission on the policy. This promise was
held covered equally
by
Sections
361
and 363.
(Lumibao
vs. Intermediate
Appellate Court, 189
SCRA 469 [1990].)

Combinations among insurance companies.
The test as to whether 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 upon trade may be upheld when not
contrary to the public welfare and not greater than is
necessary to afford a fair and reasonable protection to the
party in whose favor it is imposed. (Ollendorf vs. Abrahamson,
38 Phil. 585 [1918].) The 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
may suppress or even destroy competition. (Board of Trade of
Chicago vs. U.S., 246 US 231, 62 L. ed. 683 [1918], cited in
Filipinas Cia de Seguros vs. Mandanas, 17 SCRA 391 [1966].)
Applying this test, the Supreme Court held that Article
22 of the constitution of the Philippine Rating Bureau
(now, Philippine
Insurance Rating Association) which
provides that members 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 member 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

Secs. 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. What is more, whatever the Bureau may do in the matter
of rate fixing is not decisive insofar as the public is concerned,
for no insurance company in the Philippines may charge a rate
of premium that has not been approved by the Insurance
Commissioner. It does not, therefore, constitute an illegal or
undue restraint of trade. (Ibid.)

— 0O0 —

Title 8
PROVISION COMMON 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.
The applicant for insurance makes contact with the insure
r
through one or more of the following:
(1) Agent. —
The 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
withinthe scope of the authority
delegated to him. Incidentally, secret
limitations do not bind a third party and the agent may bind

693

694

THE INSURANCE CODE OF THE PHILIPPINES

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. — The agent is merely a
solicitor, with
no power to
bind
the company.
The company
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 company still retains the right
to accept or reject the risk he secures. (Riegel, Miller &
Williams, Jr., op. cit., p. 97.) The life insurance agent is
authorized to receive the first premium due on the
application
obtained
by
him,
but
not
subsequent
premiums. An exception is the "industrial" life insurance
agent who does collect renewal premiums regularly at the
home 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 who legally represents
the insurer, the broker acts on behalf 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. The broker has been
termed an anomaly in that he serves the insured, yet is paid by
the insurer; and
(4) Service representative. — He is a specialist employed
by the insurer on a salary basis to work with and assist
agents in writing specialized lines. Company officers, managers,
or general agents of insurance companies employed 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 non-life
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
seventy-five 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 non-life 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

Secs. 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

Secs. 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 Commis-sioner 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
admi-nistration
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 Fund.
The
Security
Fund
created
assures
the
payment
of
allowed claims against an insurance company which remains
unpaid by reason of insolvency of such company. It will not
only provide assistance
to
companies
on
the
brink
of
bankruptcy but also assure continued trust and confidence in
the industry from the public.
The Fund has also a secondary purpose. In the event of
na-tional emergency or calamity (e.g., war, riots, rebellion,
earth-quake, or flood), the Fund may likewise be used to pay
insured claims which otherwise would not be compensable
under the provisions of the policy. (Sec. 365.)

— 0O0 —

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, (as 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 o wner
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 quasijudicial fran-chising and regulatory body.
699

700

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 374-377

(f) “Insurance policy” or “Policy” refers to a
contract of insurance against passenger and thirdparty 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 third-party 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 trans-portation 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-

Secs. 374-377 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

ger or third party and an amount for each of such
catego-ries, 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 twentyfive 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;

701

702

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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

Secs. 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
transpor-tation 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

704

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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. 2
(As amended

2If the written notice of claim is filed beyond six (6) months from the date of the
ac-cident, 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 ac-tion 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

Secs. 385-387 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

705

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
pro-visions 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.3 (As amended by Pres.
Decree No. 1455.)

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. Amaldo, 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 set-tled in order that the latter will not find it necessary to immediately
bring suit, the one-year 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].)
’The 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 Secs. 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 Transportation4
covering the vehicle concerned.
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 Act No. 4136, a motor
vehicle shall mean any
vehicle
propelled by
any
power other than muscular power using the public
highways,5 but excepting road rollers,
trolley
cars, street
sweepers, sprinklers, lawn
mowers,
bulldozers,
graders, forklifts, amphibian trucks, and cranes
if
not used in public highways, vehicles which run only on rails
or tracks, and tractors, trailers and traction engines of all kinds
used exclusively for agricultural purposes.
Trailers having any number of wheels, when propelled
or intended to be propelled by attachment to a motor vehicle
shall be classified as separate motor vehicle with no power rating.
For meaning of other terms, see Section 373.

4Now, Land Transportation Franchising and Regulatory Board (LTFRB).
5Public
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.)

Secs. 373-389 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE 707

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 damage that may be sustained by
another arising from the use and operation of a motor
vehicle by its owner, (see Compulsory Motor 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 owner to meet his needs in connection with
whatever liability may be incurred in operating the vehicle.
At present, however,
motor
vehicle
liability insurance
must, to
a
certain extent, be taken on
compulsory basis by a motor vehicle owner.6 (ibid.)

Prerequisite regarding the operati
on and
registration of motor vehicles.
Section374
of
the
Insurance
Code
enjoins
a
land
transportation operator (LTO) or a motor vehicle owner (MVO)
not to operate his vehicle in public highways 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,7 as the case may be, arising
from the use thereof what the law mandates is third party8
liability coverage for such death or bodily injury.
6A 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. 906, 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. 1005A, April 25, 2005.
7Passenger is any fare-paying person being transported and conveyed in and by
a motor vehicle for transportation of passengers for compensation, including
persons, ex-pressly authorized by law or by the vehicle's operator or his agents to
ride without fare. (Ins. Cir. Letter No. 3-81, supra.)
8Third 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.)

708

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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 thi
rd party liability insurance.
The overriding consideration in compelling motor vehicle
owners or operators to have third party liability insurance
or surety bonds9 is to assure victims of motor vehicle accidents
and / or their dependents, especially when they are poor,
immediate financial assistance or indemnity regardless
of
the
financial capability of motor vehicle owners or operators
responsible for the
accident sustained. The insurer's
liability
is primary and accrues immediately upon the occurrence of
the injury or event upon which the liability depends, and
does not depend on the recovery of judgment by the injured
party against the insured. (Schafer vs. Judge, RTC, 167 SCRA
386 [1986]; First Integrated Bonding & Insurance Co., Inc. vs.
Hernando, 199 SCRA 796 [1991].) The injured or the heirs of a
deceased victim of a vehicular accident may sue directly the
insurer
of
the
vehicle.10
(GSIS
vs.
Court of Appeals, 308 SCRA 559 [1997].)
The toll of traffic losses in the form of either death or
bodily injuries (and
damage
to
property) has reached
an alarming proportion with the ever increasing use of
motor vehicles. It is of the essence, therefore, that MVOs
inflicting such losses must be capable of answering for
damages caused and duly compensate the victims.
Compulsory
motor
vehicleliability
insurance
(CMVLI)
is the answer to the existing need to assure financial

‘’Surety bond or bond insofar as the subject matter herein is concerned, means an
un-dertaking 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].)

Secs. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

709

assistance and relief to victims regardless of the financial
capability
of
MVOs
responsible
for
such
traffic
losses.
(CMVLI, supra, p. 4.)
Note: Presidential Decree No. 1814 which amended
Chapter VI deleted property damage from compulsory
coverage under the CMVLI. Thus, the compulsory insurance
only covers death of or bodily injuries to persons involved in
vehicular accidents.11 The amendment was effected because of
alleged tremendous losses encountered by the insurance
industry under the scheme arising from padded and
sometimes non-existent third party property damage
claims even involving personnel of insurance companies, and
the premiums generated by the unified pooling system
under
the
Philippine
Motor Vehicle Liability
Pool (PMVLP)
composed
of non-life insurance
companies,
which has been
abolished, could not adequately meet such losses.
"Own damage" coverage to the insured motor vehicle is
not also required by law. The parties, however, may agree
upon a separate insurance to cover damage to property.
The
deletion
of
property
damage
makes
possible
substantial increase of
the amounts in the
schedule of
indemnities
for professional fees
and hospital charges to approximate the present rates of medical
costs which has been felt to be inadequate with a concomitant
decrease in premium rates.

Effect of insured’s violation
of policy condition on insurer’s liability to
third -party claimant.
The insurer's liability to any party attaches during the
effec-tivity 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 who might suffer 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

Secs. 373-389

very purpose of the law. (Bonifacio Bus vs. Towers
Assurance Corp., I.C. Case No. 451, Dec. 9,1977.)

Persons subject to the CMVLI requirement.
Owners of motor vehicles subject are those who are
generally classified either as a:
(1) Motor Vehicle Owner (MVO) or one who is the
actual legal owner of a motor vehicle in whose name such
vehicle is registered with the Land Transportation Office; or
(2) Land Transportation Operator (LTO) or one who 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.
MVOs or LTOs, instead of a CMVLI policy, may either:
(1) Post a surety bond with the Insurance Commissioner
who shall be made the obligee or creditor in the bond in
such amount or amounts required as limits of indemnity to
answer for the same losses sought to be covered by a CMVLI policy; or
(2) Make a cash deposit with the Insurance Commission
in such amount or amounts required as limits of indemnity also
for the same purpose.
After the cash deposit has been proceeded against by
the Insurance Commissioner, such cash deposit should be
replenished or such surety bond should be restored by the MVO
or LTO in the right amount or amounts required as limit of
liability within sixty (60) days after impairment or expiry, as
the
case
may
be,
otherwise he shall
secure the insurance
policy required. (Ibid.)

Scope of coverage required.
(.1) For owners of private motor vehicles, the coverage
must 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
must also be comprehensive against both passenger and third-party

Secs. 373-389 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE 711

liabilities for death or bodily injuries. The insurer may
extend additional other risks at its option, (ibid.; see Ins. Memo.
Cir. No. 3-81.)
Section 377 prescribes the minimum limits of indemnity
of the comprehensive coverage for different kinds of private
motor and public utility vehicles. An insurance policy which
places the insurer's liability for all damages arising out of death
or bodily injury sustained by one person as a result of any
one accident at P12,000 is valid as the amount complies with
the minimum fixed by the law. (Perla Compania de Seguros,
Inc. vs. Court of Appeals, 185 SCRA 741 [1990].)
In case of excess over the minimum limit of coverage,
such excess should be deemed as to have been 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
a written notice of his intention to cancel;

company

concerned

(2) Secure, before the insurance policy or surety bond
ceases to be effective, another similar policy or bond to replace
that one cancelled; or
(3) Without making any such replacement, make a cash
deposit
in
sufficient
amount
with
the
Insurance
Commissioner and secure a certification from the Insurance
Commissioner re-garding the deposit made for presentation to
and filing with the Land Transportation Office. (CMVLI, supra, p. 12;
Secs. 380-381.)

Effect of cancellation of cover.
Upon
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 CMVLI
cover which may be either an insurance policy or guaranty in
cash or surety bond;

712

THE INSURANCE CODE OF THE PHILIPPINES

(2) a signed duplicate of an
issued by the insurance company
or continuance of the CMVLI cover; or

Secs. 373-389

endorsement or addendum
concerned showing revival

(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 him by the MVO 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
own contributory fault or the fault of the tortfeasor. The
fundamental purpose of the "no-fault" provision is to guarantee
compensation
or
indemnity to persons suffering
loss in motor vehicle accidents.
(1) Claim subject to certain conditions. — Under Section
378, the insurance company 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 may 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. (CMVLI, supra, p. 13;
see Secs. 243,378, 384, 385.)
(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. The claimant is not free to
choose
from which insurer
he will
claim the
"no-fault
indemnity" as the law, by using the word "shall," makes it
mandatory 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 moment since the law itself provides that the
party paying the claim may 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 who is

Secs. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

713

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 373 (par. iii.) uses the
general term "occupant" to distinguish it from a "passenger"
and a "third party." (Sec. 373[b and c].) Thus, as used,
"occupant" includes both a "passenger" and a "third party" so
long as they are riding in or mounting or dismounting from
a motor vehicle. (Perla Compania de Seguros, Inc. vs. Ancheta, 164
SCRA 144 [1988].)

Certificate of cover.
The MVO or LTO procuring a CMVLI cover, aside from
the corresponding insurance policy or guaranty in cash or
surety bond, shall also be issued by the insurance company
concerned a Certificate of Cover in the form approved by the
Insurance Commissioner.
The Certificate of Cover will serve as the substantiating
docu-mentation that will be accepted by and filed with the LTC
during registration of motor vehicles as proof of insurance
upon such motor vehicle. It is also a secondary proof of such
coverage and may be presented in the investigation of traffic
accident by the MVO or in the investigation of traffic accident
by the MVO or LTO, or his representative, to Government
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

714

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 373-389

(3)
The
commission
of
an
agent
procuring
the
corresponding insurance policy or surety bond shall in no case
exceed 10% 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 motor vehicle policy, it is
provided that the policy does not cover:
(1) Use
for
the
hauling
and/or
lumber, sand,
gravel,
bottled
beverages,
and/or other inflammable articles or materials;
(2) Use for racing, pacemaking,
testing, or use for any purpose
motor trade; or

carrying
gasoline

of
logs,
products,

reliability trial
in connection

or speed
with the

(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/or
carrying
of
logs,
lumber, sand,
gravel,
bottled
beverages,
gasoline
products,
and/or 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
testing;

for

racing,

pacemaking,

reliability

trial,

or

speed

(3) Use for the carriage of passengers or for hire or
reward; or
(4) Use for any purposes in connection with the motor trade.
Limitations (1) and (2) may be deleted
named therein covered by the policy upon
payment of 205 additional premium to the company.

and the risks
agreement and

Limitations as to use of insured
vehicle under the master
land transportation operators policy.
The
cover:

master

land

transportation operators

policy

does

not

Secs. 373-389 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE 715

(1) Use for hauling and/or carrying of logs, lumber,
sand, gravel,
bottled
beverages, gasoline
products,
and/or 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
and/or
carrying
of
logs,
lumber, sand,
gravel,
bottled
beverages,
gasoline
products,
and/or other inflammable articles or materials;
(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 purpose in connection with the motor trade.

The malus system under CMVLI.
Under the "malus system," a vehicle owner who 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. The 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:

716

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 373-389

AUTHORIZED DRIVER.
Any of the following:
(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. — The 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.
Under 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 must have been duly authorized by the insured to drive the
vehicle, to make the insurance company liable for the driver's
negligence. The main purpose of the "authorized driver clause"
is that a person other than the insured owner, who drives the
vehicle on the insured's order or with his permission, must be a
duly licensed driver and has no disqualification to drive as
motor vehicle. (Villacorta vs. Insurance Commission, 100 SCRA 467
[1980].)
The requirement of a license does not apply where
the person driving is the insured himself. While the motor
vehicle law prohibits a person from operating a motor vehicle
on the highway without a license or with an expired license, an
infraction of the law on the part of the insured is a bar to
recovery under the insurance contract. It, however, renders him
subject to the penal provisions of the motor vehicle law.
(Palermo vs. Pyramid Insurance Co., Inc., 161 SCRA 677 [1988].)
(3) When theft clause applicable. — Where a car is
unlawfully and wrongfully taken without the owner's consent or
knowledge, such taking constitutes, theft, and, therefore, it is the
"theft clause" and not the "authorized driver clause" that should
apply. Theft is an entirely different legal concept from that of
accident, and clearly, the risk against accident is distinct from
the
risk
against
theft.
The "authorized
driver
clause" in a typical insurance policy

Secs. 373-389

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

is in contemplation or anticipation of accident
sense in which it should be understood, and not
such as theft. There is no causal connection
possession of a valid driver's license and the loss
(Perla Compania de Seguros, Inc. vs. Court of Appeals,
[1992].)

717

in the legal
of an event
between the
of a vehicle.
208 SCRA 487

Pertinent provisions of the Civil Code.
The following provisions should be noted:
"Art. 2176. Whoever by act or omission causes
damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if
there is no
pre-existing contractual
relation
between
the
parties, is called quasi-delict and
is governed by the provisions of this Chapter. (1902a)
Art. 2177. 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 damages twice for the same
act or omission of the defendant.

xxx

Art.

2180.

imposed

The

by

Article

2176

is

obligation
demandable not only for one's own acts or omissions,
but also for those of person for whom one is responsible.
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 anybusinessor industry. x

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.

x

xx

2184.

In

motor

xxx

vehicle
the

mishaps,
owner

is

solidarity liable with his driver, if the former, who was in the

718

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 373-389

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. 2185. Unless there is proof to the contrary, it
is presumed that a person driving a motor vehicle has
been negligent if at the time of the mishap, he was
violating any traffic regulation.
Art. 2186. Every owner of a motor vehicle shall
file with the proper government office a bond executed
by a government-controlled
corporation or office,
to
answer
for
damages
to
third
persons. The amount of the bond and other terms shall be fixed
by the competent 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
orga-nized and authorized to transact business as a
charitable or benevolent organization, and whenever it
has
this
fea-ture
as incident to
its existence, the corresponding charter
719

720

THE INSURANCE CODE OF THE PHILIPPINES

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 be-comes 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
Forty-One of the Revised
Administrative
Code,1
as
amended by

’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 promul-gates the Administrative Code of 1987.

Sec. 392
MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS
721 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 Fund2 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.
All moneys received by the Commissioner for
this purpose must be deposited by him in interestbearing 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.)

The 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.)

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
incorpo* ration 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 Commis-sioner.
Sec. 394. A mutual benefit association may, by
reinsur-ance 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 col-lected from its members, sufficient reserves
for the pay-ment 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

Secs. 398-399 MUTUAL BENEFIT
ASSOCIATIONS AND TRUSTS
FOR CHARITABLE USES
Title 1. — Mutual Benefit Associations

other good securities as may be approved by the
Commis-sioner.
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 repre-sentatives, 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

724

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 400-402

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.

Secs. 403-406 MUTUAL BENEFIT
ASSOCIATIONS AND TRUSTS
FOR CHARITABLE USES
Title 1. — 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
con-verted into and licensed as a mutual life
insurance
com-pany
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 meet-ing
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
dec-lared 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;

726

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 391-409

(d) exceeded its power to the prejudice of
its members; (e)
conducteditsbusinessfraudulentlyorhazardously;
(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 from mutu
al insurance
companies.
While it has been said that there is no distinction
between mutual
insurance
companies
and
mutual
benefit
societies,
except
where
a statute has created a difference, and
while insurance

Secs. 391-109
MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS
727 FOR CHARITABLE USES
Title 1. —
Mutual Benefit Associations

principles are applicable in the case of mutual benefit
certificates, benefit societies
as
usually
constituted
are
materially different
from
mutual insurance companies. They differ chiefly in that:
(1) They partake of many of the characteristics and
incidents of fraternal societies;
(2) The membership is generally limited to those
belonging to a particular organization or order; and
(3) The real purpose of the societies or certificates issued
by them is not that of indemnification or security against loss,
but of contribution and relief against distress or misfortune. (43
Am. Jur. 2d. 162.)

— oOo —

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 inc lude 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

Secs. 410-413

MUTUAL BENEFIT ASSOCIATIONS AND TRUSTS
729 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. — The one who causes the trust to come
into existence is called the settlor, the grantor, the trustor, the
creator, or, if the trust is created in a will, the testator. The
trustee is the one who holds the property for the benefit of
another called the beneficiary or the cestui que trust. The trustee
may 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 may also be a trustee; a beneficiary may be
one of the trustees; or the grantor may also be a beneficiary.
At least two different legal entities are usually necessary for a valid trust.
(3) Trust property. — The property to which the trustee
has legal title may 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. — The trustee must deal with the
trust property
honestly, putting
the
beneficiary's
interest
above his own.
The grantor of the trust, therefore, must use care in selecting
a responsible trustee — one in whom he has the utmost
confidence.
The
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. — The trustee must follow
the guiding instrument in administering the trust. If the trust

closely

730

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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.
Modem 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 may 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. They may be
testamentary trusts — those created in a will; or living or inter vivos trusts
— those
that
come
in
operation
during
the
grantee's
lifetime. Among living trusts, those
revocable
and
amendable
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,
instruc-tions, 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 Fi-nance. 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 Commis-sioner 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
733 Title 1. — Administrative and Adjudicatory Powers

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
Com-missioner 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.1 (As amended by B.P. Big.
874.)

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 evi-dence, and require the production
of any books, papers, documents, or contracts, or
other records which are rel-evant 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 Instance2 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 testi-mony
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 Commis-sioner, there to produce records, if so
ordered or to give
testimony touching the matter in question. Any failure to

1The amendment by Batas Pambansa Big. 874 transfers the matter of appeal of the
de-cision, order or ruling of the Commissioner from the Supreme Court to the
Intermediate Appellate Court, now Court of Appeals.
2Now, Regional Trial Court.

734

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
proceed-ings 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 Com-missioner.
A transcribed copy of the evidence and proceeding,
or any specific part thereof, of any hearing taken by a
stenog-rapher 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.
The Insurance Commissioner is given wide latitude of
discretion, to regulate the insurance industry so as to
protect the insuring
public. The
general regulatory authority
of the Insurance Commissioner
is described in Section
414.
Included in his regulatory responsibilities is the duty to
hold the security deponents under Sections 191 and 203 for the
benefit and security of all policyholders. (Republic vs. Del
Monte Motors, Inc., 504 SCRA 53 [2006].) The general purpose
of insurance regulation is to
protect
the
public
against
insolvency
or
unfair
treatment
by insurers.
Insurance
is
generally classed as a business which is "affected with public
interest." This characteristic is the reason why
many
forms
of
government
regulation
of insurance
are deemed necessary.
(D.L. Bickelhaupt, op. cit., p. 197.)
Three basic methods of
are available to the government:
(1) Legislation.

providing

insurance

regulation

— This is the foundation of
insurance regulation. The insurance law is
now embodied in the Insurance Code of 1978. (Pres. Decree No. 1460.)

Secs. 414-416
THE INSURANCE COMMISSIONER
735 Title 1. — Administrative and Adjudicatory Powers

(2) Administrative action. — This is also very important,
as many 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 Secs. 186-191.) The Commissioner has considerable
power to refuse to issue a renewal license as well as the
power of suspension or
revocation.
He
also conducts
examinations through
his
Office which determine the issuance of agent's or
broker's licenses, (see Secs. 247-299.)
(b) The examination of insurance companies once they
have been licensed is also an important task of the
Commissioner. The 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.3 (see Secs. 245246.)
(c) The investigation powers of the Commissioner
extend to a wide variety of powers to determine whether or
not in-surers or their representatives are meeting the
requirements of the law. Free access to records and books 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, whichare often
informal,
the
Commis-sioner may issue
administrative rulings
or advisory
opin-ions with
regard to the business conduct of insurers or their
agents. In extreme cases, he may declare the insolvency of an

3A11
insurance companies, insurance brokers, reinsurance brokers, mutual
benefit associations, and trusts for charitable uses authorized to transact business in
the Philip-pines 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. Letter No. 31-05, Sept. 26,2005, as amended
by Ins. Cir. Letter No. 3-08, Jan. 17,2008.)

736

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 414-416

insurer in liquidation or rehabilitation proceedings. All
such powers have as their major goal the protection of
insurance policyholders and claimants, (see Secs. 414-416, 245-247.)
(3) Court action. — The
the Commissioner is subject to
inter-pretation by the courts.

extremely broad authority of
some measure of review and

(a) The notice and hearing procedures which are
con-ducted by the Commissioner in order to arrive at
official rulings may be reviewed by the courts to determine if
he has carried out his duties in conformity with law.
(b) His
discretionary
power
is
also
subject
to
mandamus (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
ac-tions against the Commissioner, the reverse may be true.
The Commissioner may, for example, petition the courts to
en-force 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 because of its
ever-present
potential
effect
in
providing
detailed
interpretations
of troublesome
parts
of
the
law.
(D.L.
Bickelhaupt, op. cit., 200-206.) When courts decide a case, they
apply rules to a particular fact situation and announce a
decision that operates retroactively on the parties. When they
intepret language or decide cases through application of the
doctrines
of
waiver
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. Jerry,
II, op. cit., p. 91.)

Powers and duties, generally, of an
Insurance Commissioner.
The general duty and function of the Insurance
Commissioner is to regulate and supervise the transaction of
insurance business so as to protect the interest of the
public, to execute the insurance

Secs. 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 have 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 examine them with
reference to their assets, financial
condition, and methods of
doing business and to take corrective action, to require that
the salaries of officers of mutual
insurance
companies
be
reasonable and based
upon sound business practice, and
to require restitution of excessive and exhorbitant amounts so
paid, and to approve or disapprove the purchase
of
property
by
an
insurance
company,
have generally been upheld or
recognized as a proper delegation of administrative or
ministerial
duties,
rather
than
of
legislative powers. (43 Am.
Jur. 2d 114.)
(2) Exercise generally not subject to judicial review. —
Where provision has been made 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 may 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 company 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.
The Insurance
Commission is an administrative agency vest-ed 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

Secs. 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 upon a finding of
the existence of
statutory
grounds
for such
revocation or
suspension. The 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
Commis-sioner is described in Section 414 which also specifies
the
author-ity
to
which
a
decision
of
the
Insurance
Commissioner rendered in the exercise of his regulatory function
may be appealed. Such authority is limited to the business of
insurance as defined in Section 2(2).
(2) Adjudicatory or quasi-judicial. — The adjudicatory
authority of the Insurance Commissioner is generally described
in Section 416 (infra.) which also specifies the authority to
which appeal may be taken from a final order or decision of the
Commissioner given in the exercise of his adjudicatory or quasijudicial power.
In a case, the insured originally sought remedies which
would have
required the
Insurance
Commissioner 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 Commissioner to submit the case for resolution
on the sole issue of whether or not revocation or suspension
of insurer's certificate to engage in insurance was justified. The
scope of the issues involved having been so limited, the
Insurance
Commissioner
was left
with
the task
of
administratively
determining
Whether
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 Commissioner's resolution
dismissing
the
insured's
complaint
andorder denying its
motion fo‘f reconsideration was issued in tjie 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. The petition for certiorari filed with the
Supreme Court was neither proper nor appropriate substitute
for
such
appeal.
The
insured, in effect, violated
provisions of the Insurance Code.

Secs. 414-416
THE INSURANCE COMMISSIONER
739 Title 1. — Administrative and Adjudicatory Powers

In
this
case,
the
insured
had
chosen
to
litigate
the
substantive aspects of its insurance claim against the insurer in
a different forum—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 had
failed. The claim was in excess of P100,000 and, therefore, falls
outside the quasi-judicial jurisdiction
of
the
Insurance Commissioner under
Section 416.
(Almendres
Mining
Corp.
vs.
Insurance
Commission,
160
SCRA 656 [1988]; Go vs. Office of the Ombudsman, 413
SCRA 608 [2003].)

Commissioner’s decision
s, regulations,
and rulings.
The Insurance Commissioner's official acts are of two
general types:
(1) Adjudications or decisions in individual cases. — In
these cases, he acts like a judge and is required, in some
instances to give interested parties a formal hearing. (E.W.
Patterson, op. cit., pp. 12-13.)
Section
416
empowers
the
Commission
to
adjudicate
claims and complaints involving any loss, damage or liability
being claimed or sued upon any kind of insurance, bond,
reinsurance contract, or
membership
certificate
where the
amount
thereof, excluding interests, cost
and
attorney's fees, does not exceed in any single claim P100,000.00.
Any decision, order, or ruling rendered by the Commissioner
after a hearing has the force and effect of a judgment
appealable to the Court of Appeals, (see Summit Guaranty &
Insurance Co., Inc. vs. Court of Appeals, 110 SCRA 241 [1981].)
Under Section 416, the power 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

Secs. 414-416

give
jurisdiction
over
the
same
to
the
Insurance
Commissioner. Expressio unius est exclusio alterius. (Phil. American
Life Ins. Co. vs. Ansaldo, 234 SCRA 509 [1994].)
(2) Issuance in the form of regulations, rulings, etc. — The
power of the Insurance Commissioner to issue "reasonable
rules and regulations," "rulings,
instructions,
and
circulars, orders
or decisions" as he may
deem necessary to secure the enforcement of the Insurance Code
is conferred by Section 414.
(a) Formal promulgation of official regulations. — The
Insurance Commissioner is authorized by law
to
make 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 beyond the scope of the Commissioner's
powers are invalid. (E.W. Patterson, op. cit., p. 13.)
(b) Making of rulings. — Because of the informality of
his procedure,
the Commissioner
often
makes
"rulings"
that express his views as to the meaning
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 more scrupulously than
he
does
the
rulings of his predecessors
in
Office. The
Commissioner, unlike a court of law, is not bound by
precedents. He is free to disregard rulings previously
made 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 histor
y of the Insurance Commission.
The Insurance Commission was formerly referred to as
the Office of the Insurance Commissioner. The law that created the

Secs. 414-116
THE INSURANCE COMMISSIONER
741 Title 1. — Administrative and Adjudicatory Powers

Office of the Insurance Commissioner as an independent office
is Republic Act No. 275/ which took effect upon the formal
opening of the Central Bank of the Philippines on January 3,
1949 and which, in effect, superseded the provisions of
Executive Order No. 54, dated April 21, 1947, and Section 169
of Act No. 2427, otherwise known as the Insurance Act.
(1) Under Act No.
the Insular Treasurer,
designated Insurance
government agency
business in this
1941, or for a period
the Insurance Division,

2427, which took effect on July 1, 1915,
in addition to his official title, was
Commissioner
ex-officio.
The
which
supervised insurance
country was therefore, until December 31,
of over 26 years, only a division, called
of the Bureau of the Treasury.

(2) During the Japanese occupation of the Philippines,
the Insurance Division was separated from the Bureau of
Treasury and became a part of the pre-war Bureau of Banking,
then called the Bureau of Financing. The latter name was
changed to Bureau of Credits and Investments near the end of the
enemy occupation.
(3) Soon after the liberation of Manila and the
establishment of the government of the Commonwealth of the
Philippines on February 27,1945, the Insurance Division again
became a part of the Bureau of Treasury. However, under
Executive Order No. 54, which became effective on April
21,1947, the Insurance Division was separated once more from
the Bureau of Treasury, and again merged with the Bureau of
Banking. And then, under Republic Act No. 275 which took
effect upon the formal opening of the Central Bank of the
Philippines on January 3,1949, the Office of the Insurance
Commissioner came into being, with the Insurance
Division as its nucleus.
(4) On November 29, 1972, Pres. Decree No. 63 was
pro-mulgated, amending certain sections of Act No. 2427,
otherwise known as the Insurance Act, as amended. The amendments

4An Act changing the name of the Bureau of Banking to that of "Office of the
Insur-ance Commissioner," providing for the assessment upon insurance companies
to cover the excess of the expenses of the Office of the Insurance Commissioner
relating to insur-ance companies, agents and insurance matters over its income from
certain sources, and for other purposes.

742

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 414-416

increased, among others, the minimum capital required of
domestic
companies
and
gave
the Insurance
Commissioner certain adjudicatory powers.
(5) On
December
18,1974,
the
insurance
laws
were
codified with the promulgation of Pres. Decree No. 612,
otherwise known as the
Insurance Code, (see
pp.
1-2,
Information
Data
and Statistics,
published
by
the
Insurance Commission.) The present Insurance Code of 1978 was
promulgated by the President of the Philippines under his
martial law powers on June 11,1978.
(6) The Insurance Commission is presently attached to
the Department of Finance. (Sec. 57[c], Exec. Order No. 127, Jan.
29, 1987.)

Objectives of insurance regulation.
The objectives of insurance regulation which the Insurance
Code seeks to attain have been stated as follows:
(1) To make insurance available to all who want and need 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 has been to preserve
the solvency
of
insurance
companies.
Other
objectives
have
been
fair
treatment
of
insureds
and
fair
competition
among
insurance companies
(Riegel, Miller and Williams, Jr., op. cit., p. 61.), i.e., to
provide through the exercise of administrative powers more
speedy and effective protection of the insuring public and to
set a higher standard of fair competition than that which
prevails in many 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,
Insurance Commission exercises under the Insurance Code
following specific duties and functions:

the
the

Secs. 414-416
THE INSURANCE COMMISSIONER
743 Title 1. — Administrative and Adjudicatory Powers

(1) To insure the solvency of insurance companies. —
(a) To issue certificates of authority to insurance
compa-nies that meet the minimum legal requirements (Sec. 187.);
(b) To suspend or revoke the certificates of authority
of companies that are in unsound condition or that have
failed to comply with the provisions of law or regulations
obligatory upon them, or whose condition or method of
business is such as to render their proceedings hazardous
to the public or their policyholders (Sec. 247.);
(c) To require insurance companies
records, accounts and vouchers (Sec. 245.);

to

keep

books,

(d) To require the setting up of reserves (Secs. 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 (Secs. 349, 354, 358.);
(g) To pass upon and approve
investments (Secs. 191,193,198, 200, 201, 202.);

certain

classes

of

(h) To cause an examination, at least once a year and
as often as the public interest so demands, to be made 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 (Secs. 191,192, 203.);
(j) To see that no non-life insurance company shall
retain any risk on any one subject of insurance in an
amount exceeding 20% of its net worth (Sec. 215.);
(k) To rehabilitate or
companies (Secs. 248 to 251.); and

liquidate

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. (Secs. 365-372.)

744

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 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
(Secs. 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, summons
or other legal process for foreign insurance companies
without an agent on whom such notice of loss, proof of loss,
summons
or other legal process may be served.
(Sec. 190.) (3) To assure reasonable insurance
service. —
(a) To license agents, brokers, adjusters,
non-life
company
underwriters,

resident agents,
actuaries
and
rating

organizations. (Secs. 229341, 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
(Secs. 191,193,198, 200-208.);
(b) To require insurance companies to increase their
retention of local risks and/or reinsure locally before
ceding to
unauthorized
foreign
companies whenever
technically
feasible (Secs. 216-223.);
(c) To pass upon and approve reinsurance
treaties (ibid.)-, and
(d) To pass upon remittances of reinsurance premium
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, pur-suant to pertinent provisions of this
Code, the Commis-sioner 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,
twenty-five 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 nonlife 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
747 Title 2. — Fees and Other Sources of Funds

(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.)
Sec. 418. If the total expenses of the Insurance
Com-mission 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. 12000) prescribes the increased fees and charges.

748

THE INSURANCE CODE OF THE PHILIPPINES

Secs. 417-418

hundred fifty-five2 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 seventy-five, shall continue to remain in
force and effect.

Insurance Fund.
Section 418 of the Insurance Code created the Insurance
Fund out of the proceeds of taxes on insurance premiums
imposed by Section 255 of the former National Internal
Revenue Code (NIRC), and from which fund the Insurance
Commission will derive its operating expenses in lieu of the
special assessments being made by the Office of the Insurance
Commissioner from insurance
companies in
accordance with the
provisions of Sections
2, 3, and 4 of Republic Act No. 275. (supra.)
To harmonize the provisions of Section 255 of the
National Internal Revenue Code with the provisions of Section
418 of the Insurance Code so as not to disturb the collection of
the premium tax which accrues to the general fund, Section 255
was amended by Presidential Decree No. 739. Section 255 is now
Section 123 of the National Internal Revenue Code of 1997.
Section 123 reads as follows:
"Sec. 123. Taxes on life insurance premiums. — There
shall be collected from every person, company, or
corporation (ex-cept purely cooperative companies or
associations) doing in-surance business of any sort in the
Philippines a tax of five (5) per cent of the total premiums
collected, whether such pre-miums are paid in money, notes,
credits, or any substitute for money; but premiums refunded
within six (6) months after payment on account of rejection
of risk or returned for other reason to a person insured
shall not be included in the tax-able receipts; nor shall any
tax be paid upon reinsurance by a company that has already
paid the tax; nor upon premiums collected or received by
any branch of a domestic corpora-tion, firm or association
doing business outside the Philip-

2Now, Section 123, as amended by Presidential Decree No. 1994 and R.A. No. 842
4, limiting its application to life insurance premiums.

THE INSURANCE COMMISSIONER
Secs. 417-418
749 Title 2. — Fees and Other Sources of Funds

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 branch is established nor
upon premiums collected or received on account of any
reinsur-ance, if the insured, in case of personal insurance,
resides outside the Philippines, if any tax on such premiums
is im-posed by the foreign country where the original
insurance has been issued or perfected; nor upon that
portion of the premiums collected or received by insurance
companies on variable contracts (as defined in Section 232[2]
of the Insur-ance Code) in excess of the amounts necessary
to insure the lives of variable contract owners.
Cooperative companies or associations are such as
are conducted by the members thereof with the money
collected from among themselves and solely for their own
protection and not for profit."
The Insurance Commission has been designated by the
Bureau of Internal Revenue as the latter's deputy collector
for the collection of the premium tax due from insurance
companies subject to the audit of the Commission on Audit or by
the internal auditors of the BIR. A Premium Tax Return (BIR
Form No. 2001.) is required to be filed with the Insurance
Commission. (Ins. Cir. Letter No. 1-86.)
Pursuant to Section 123, the 5% premium tax is based on
the total premiums collected. As there is no law which
prohibits insurance companies to bill the 5% premium 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

Secs. 419-424

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 Code 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 amended the provisions of the Insurance Code
of the Philippines on June 11,1978. (Presidential Decree No. 612.)"
The new Code was promulgated on June 11, 1978 by
the President under the 1973 Constitution and in the exercise of
his martial law powers.
— oOo —

Appendix "A"
INSURANCE COMMISSION
I. ORGANIZATIONAL CHART

1985

Appendix A
INSURANCE COMMISSION

753

II. FUNCTIONS

1. Insurance Commissioner
(1) Establishes general policies, directs and coordinates
Commission activities;
(2) Sees to it that all laws relating to insurance,
insurance companies, insuranceadjusters 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 imposed upon him by the
Insurance Code.

2. Assistant Insurance Commissioner

(1) Directs, supervises, coordinates and / or
synchronizes the work of the division chiefs;
(2) Assists the Insurance Commissioner in the
mance of his duties; and
(3) Acts as Insurance Commissioner in his absence.

perfor-

3. Technical Staff
(1) Provides the necessary assistance to
the
Insurance Commissioner
in
the formulation
of economic
policies, guidelines and
standards of investments, credit and lending operations of
insurance companies;
(2) Conducts
technical
studies
and
researches
in
insurance, reinsurance and investment fields; and
(3) Gives assistance to the Insurance Commissioner
in the proper action on some papers referred to them
for
further study.

4. Actuarial Division

(1) Checks the computation of and analyzes the
actua-rial valuations and
formulations
on premium
rates,
non-forfeiture 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
mutual benefit associations applying for license;
(5) Reviews and passes upon the
association's
membership
certificate
consistency with the actuarial formulations; and

projections

of

mutual benefit
verifying
its

(6) Monitors and analyzes the developments in the
ac-tuarial field, here and abroad, and studies their
implications on both practices of local insurance industry
and the poli-cies of the Insurance Commission.

Regulation Division
(1)
Supervises
the
conduct
of
hearings
of
administrative complaints
brought
against
Insurance
Commission
person-nel 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 nonlife policy forms, riders, clauses, warranties, endorsements
and bond 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;

755

Appendix A
INSURANCE COMMISSION

(4) Prepares drafts
memorandum circulars,
regulations; and

of circulars,
relating to

circular

letters and
insurance

(5) Gives advice to the Insurance Commissioner on
the legal problems of the Commission.

6. Statistics and Research Division
(1)
Prepares
annual
reports
of
the
Insurance
Commission which
includes
among
others,
compilations
and tabulations of financial status of life and non-life
insurance companies, volume of business transacted by
them,
technical
results
of operations,
amount
of
investments, and securities deposited by
insurance
companies, mutual
benefit associations
and
other regulated companies;
(2) Prepares other technical
Commission
to
the
Ministry
agencies, including the UNDP;

reports of the Insurance
of
Finance
and
other

(3) Conducts studies and researches on various
aspects of insurance business including its role in the
development of our national economy; and
(4) Conducts researches on a continuing basis on
various
projects
in
cooperation
with
the
UNCTAD/UNDP especially on insurance education in Asia
for the staff of insurance supervisory authorities.

7. Licensing Division
(1) Processes applications for and issues licenses to
insurance
companiies,
general
agents,
ordinary agents,
brokers, adjusters, rating organizations,
non-life
company underwriters,
actuaries,
mutual
benefit
associations
and trusts for charitable uses;
(2)
Renews
insurance agents',
and

such
licenses;
conducts
qualifying
non-life
company
underwriters'
adjusters' examinations; and

(3) Issues suspension orders
and associations under its supervision.

to

unscrupulous

entities

756

THE INSURANCE CODE OF THE PHILIPPINES

8. 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
manage-ment and administration of
the P10M
Security
Fund contributed
/depositedby
life
and
non-life
insurance companies,
domestic
and
foreign,
Guaranty
Fund
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
rations and related topics;

on

investments,

credit

ope-

(5) Verifies the monthly report of investments
insurance companies and mutual benefit associations; and
(6) Coordinates with other agencies of the
government on matters affecting investments and
operations of insurance companies.

of

credit

9. Reinsurance Division
(1) Processes applications of insurance and reinsurance
companies
to
purchase
foreign
exchange
remittance
abroad and the
issuance of
corresponding
certifications used by the Central Bank as its basis
in the approval of dollar remittances
to its
foreign
counterparts/affiliates
and
reinsurance companies/brokers;
(2) Analyzes particulars of reinsurance treaties/cover
notes, etc., submitted by insurance companies for approval;
(3) Analyzes
requests
of
insurance
companies
to
reinsure, facultatively with foreign reinsurers/brokers
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

(5) Coordinates with the Central
government
agencies
on
matters
exchange remittances of insurance companies.

757

Bank and other
affecting
foreign

10. Liquidation and Conservation Division
(1) Supervises the work 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 cases / incidents brought to Court
for assistance in the Liquidation Proceedings;
(3) Supervises the work relating to companies under
conservatorship and/or rehabilitation in close coordination
with the appointed
conservator/receiver
on
aspects of
rehabilitation and restoration of the companies' liabilities,
and undertakes an analytical studies on actions taken by
the receivers/conservators; and
(4) Reviews
rehabilitation plans
submitted
by
management of suspended companies and monitors
actual rehabilitation being undertaken thereon.

the
the

11. Field Examination Division I
(1) Supervises
the
examination
of
the
affairs,
financial condition and methods of doing
business of
non-life insurance/reinsurance 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
person within a holding company system.

every

controlled

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
engaged in life insurance business;

and

(2) Examines holding companies and
person within a holding company system; and

other

every

entities

controlled

(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
withthe
requirements of
law and that their operations
redound to the benefit of their members and beneficiaries
and to protect its member from fraudulent transactions of
the officers.

13. Rating Division
(1) Supervises the examination of non-life insurance
companies, its branches, regional and district offices,
general agents and insurance brokers to
determine
compliance with/or 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)
Recommends changes in rate structures; and
(5) Checks and analyzes statistical reports of
adjusters on claims of insurance companies offered for
adjustment to determine compliance with established standards.

14. Financial Analysis Division
(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 members from fraudulent transactions of
the officers; and
(3) Issues certifications pertaining to the financial
con-dition, results of operation and methods 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 Commission
against
insurance/reinsurance companies, mutual
benefit
associations and
other
entities engaged
in
insurance
operationsinvolving
loss,
damage or
liability which does not exceed 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 judgment which is appealable
only to the appellate court.

16. Public Assistance and Information Division
(1) Assists the insuring and the general public in
all matters
brought to
this Commission against
entities
or individuals
engaged
in
insurance
activities and associations with benevolent and charitable
features arising from various offenses,
malpractices,
and
the
like,
including
informal
cases filed
with the Commission;
(2) Gives free legal and technical advice to the
general public who
come
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 and
/ or defend them against malpractices/abuses 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
Commis-sion; and performs other related activities.

the

THE INSURANCE CODE OF THE PHILIPPINES

760

17. District Offices (Dagupan, Cebu and Davao)
(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,
gen-eral
agents,
brokers,
adjusters,mutual benefit
associations and charitable trusts;
(3) Supervise and conduct insurance agent's,
writer's and adjuster's examination within the region;

under-

(4) Examine the financial condition, affairs and
methods of
doing
business
of insurance
companies' branches, regional
and
district
offices,
insurance intermediaries, mutual benefit
associations and trusts for charitable uses operating within
the region;
(5) Conduct
the region; and

insurance

information

dissemination

(6) Perform such other duties which
Commissioner may delegate from time to time.

the

in

Insurance

18. Budget Division
(1)
Provides
the
necessary
assistance
to
Insurance Commissioner on
planning, control,
budgetary
and related matters
recommends remedial measures when necessary;

the
and

(2) Provides

the
management with
both
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
most profitable
and economical
channels by means of a balanced and unified program;
(4) Plans and prepares the Commission's annual,
sup-plemental and special budget estimates and other
budget-ary requirements as well as the corresponding justifications;
the

(5) Prepares the necessary work and financial plans,
realignment of expenditures in accordance
with
the General Appropriations Act, Appropriation Reserves, and

761

Appendix A
INSURANCE COMMISSION

the quarterly allotments by program, project
activity; controls allotment of appropriations;

and

(6) Acts as fiscal adviser of the Commission;
(7) Reviews fiscal documents and accounts relating
to disbursementof funds; including the expense vouchers
covering payment against authorized allotments;
(8) Conducts
fringe benefits;

study

on

salaries

and

other

employees'

(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 Department of Budget
and Management on the establishment of the Insurance
Commission funds pursuant to the provisions of Section
418
of
the
Insurance
Code,
as
amended, and P.D. No. 739, as amended; and
(10)
Performs other duties assigned from time to time
by superiors.

Planning and Management Division
(1) Provides management 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 means
for preparing and presenting information in a uniform manner;
(2) Assists the management in reducing the time
and volume of information required to make decision
by reporting to each level of management 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
minimum
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
efficiency in the agency operations.

to determine

20. Accounting Division
(1) Takes charge of the accounting and bookkeeping
of the Insurance Commission funds;
(2) Prepares
financial
statements
and
reports
the Commission to the Department of Finance, and
the Commission on Audit; processes all disbursements
charged against the special and/or regular funds; and

of

(3) Certifies to the availability of
funds. 21.

Administrative Division

(1) Supervises and
functions
such
as
training, performance
retirement and
maintenance

coordinates personnel administration
employee
recruitment,
selection,
evaluation,
promotions, transfers,
the
improvement
and
of
employee relations;

(2)
Supervises
and
coordinates
general
service
functions such
as
records,
mail
management,
library,
general clerical, janitorial,
security, transportation,
property utilization,
and
building maintenance and repair;
(3) Implements administrative policies and
routine employee relations, problems and conflicts;
(4) Supervises cash
proper cash custody;

collection,

decides

on

disbursement and

(5) Passes upon vouchers, payrolls, requisitions and
other
reports;
supervises
supply
procurement
and
distribu-tion;
prepares
Office
Orders,
Circulars
and Memorandum for the proper guidance of the employees;
(6) Passes upon appointments and correspondence
the signature of the Insurance Commissioner; and
(7) Reviews, checks, and certifies communications,
and signs communications and other papers as delegated.

— oOo —

for

Appendix “B”
RULES OF PROCEDURE
GOVERNING
ADMINISTRATIVE
CASES BEFORE THE INSURANCE
COMMISSION
Insurance Memorandum
Circular No. 1-93, Dec. 3,1992
Pursuant to Executive Order No. 26 dated October 7,
1992, and in conjunction with Book VII of the Administrative
Code 1987
(Executive
Order No. 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.

RULE 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 whom action is made shall be called the Respondent.

RULE III
COMMENCEMENT OF ACTIO
N
Section 1. Caption and Title. — In all complaints and
pleadings filed with the Insurance Commission, the full name 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
numbers and/ or abbreviation may be used for reference.
Section 3. Summons. — Upon docketing of the
complaint, the
Insurance
Commission
shall
issue
summons requiring respondent/s to file its
Answer/Counter-Affidavit within fifteen (15) days from receipt
thereof. Copy of the complaint shall be sent to the
respondent together with the summons.
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
respondent/s and any interested party prior to the proceedings.
Section 5. Default. — Should the respondent fail to
answer the complaint within the reglementary period as provided
for in the summons, he shall be declared in default and 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 may be considered as in
default and proceedings shall proceed ex-parte.

Appendix B
RULES OF PROCEDURE GOVERNING ADMINISTRATIVE CASES
BEFORE THE INSURANCE COMMISSION

765

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 him for a pretrial conference to consider: (a) the
possibility of an amicable settlement;
(b) the simplification of the issues;
(c) the necessity or desirability of amendment to the
pleadings;
(d) the possibility of obtaining admission or stipulation of
facts;
(e) the exchange and acceptance of service of exhibits to be
offered in evidence;
(f) the limitation of the number of witnesses;
(g) the admissibility and relevance of evidence proposed
to be submitted by the parties;
(h) such other matters as may aid in the just speedy
and inexpensive disposition of the case.
All the parties and their attorneys shall attend the pretrial conference. The presence of a party is indispensable
unless his counsel is authorized to enter into agreement on any
or all the above matters. The 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
pre-trial
conference,the Commission
shall issuean
order
which recites the
action
taken thereat, the
amendments allowed on the pleadings, and/or 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. The
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. — The Hearing Officer shall
conduct hearings and
shall be
empowered
to administer
oaths and affirmations,
to
issue
subpoenas,
take
evidence and to compel attendance of parties and witnesses
and the production of any books,
papers,
correspondence,
memoranda, 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, Book VII of the Administrative Code of 1987,
the mandatory use of affidavits in lieu of direct testimonies
shall be required.
In any hearing, the hearing officer, upon appropriate
order, may cause the deposition of witnesses residing within or
without the
Philippines
to
be
taken
in
the
manner
prescribed under Rule 24 of the Rules of Court. Where witnesses
reside in a place distant from Manila and it would be
inconvenient and expensive for
them to
appear
personally
before the Hearing Officer, a Municipal/Regional Trial Court
Judge or any Clerk 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, and on said date to proceed to
take the depositions, reducing them in writing. After the
depositions have been 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

767

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 Municipal/Regional Trial Court
Judge or any Clerk of Court may designate. The Hearing
Officer
may
also request a
notary
public to take the
deposition in the manner herein provided.
Section 3. Postponement. — Any motion for postponement
or continuance of hearing may be granted or denied by the
Hearing Officer. Such motion, upon meritorious reason must be
filed with the Commission 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 deemed submitted for resolution
upon expiration of the period for filing memorandum, position
paper or last pleading required of the parties.
The 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. The Insurance
Commis-sioner shall have 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. The motion for reconsideration may be based on any
of the following specific grounds:
(a) Newly discovered evidence which could not have
been discovered and produced at the trial and which 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 have been committed
prejudicial to the interest of the respondent. (Sec. 39[b], P.D.
No. 807.)
(d) Fraud, accident, mistake or excusable negligence which
ordinary prudence could have guarded against and by reason
of which such aggrieved party has probably been impaired of
his rights. (Sec. l[a], Rule 37, Rev. Rules of Court.)
If the motion is denied, the movant may 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
Motion for Reconsideration,
the
adverse
party may
file his
opposition
thereto and
serve a copy thereof upon 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

the Hearing Officer shall consider it necessary to
parties, in which case the
Commission shall
the
corresponding order or notice to that effect.

769

hear

the
issue

RULE 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 become
final
and
executory after
fifteen (15)
days from the
date of
receipt thereof.

RULE IX
APPEAL FROM ORDER OR RESOLUTIO
N
Section 1. How Appeal Taken. — Any party to the
contested case affected by
a
final
order,
ruling
or
resolution
of
the Insurance
Commission
may, within fifteen (15) days from receipt of such order, ruling
or resolution, file a notice of appeal and memorandum 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, December
3,1992.

— oOo —

Appendix “C”
SYNOPSIS OF ANNUAL
STATEMENTS (CIR. LETTER NO. 8-89*
APRIL 11,1997.)

SUBJECT : Synopsis of Annual Statement in PILIPINO
TO
: All Insurance Companies Doing Business in
the Philippines
1

Under the provisions of Section 225 of the Insurance
Code, 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
another in PILIPINO, a full synopsis of its financial statement
showing 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.
2

For the purpose of having uniform synopsis, attached is
a listing of commonly used terms and accounts with official
translation in PILIPINO for guidance and immediate reference.
3

ENGLISH
I.

DESCRIPTION
1. Synopsis of Annual
Statement

PILIPINO
Buod ng Tauitang Ulat

*The listing attached to Circular Letter dated March 15,1973
is superseded.
' Now, Section 225 of the Insurance Code.
3New Accounts to be reported, see Note,

a.
770

infr

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

5.

Margin of Solvency

Kakulangang Halaga sa

Deficiency

Pagiging Matatag

Capital Impairment

Kabawasang Halagang

2

771

Buong Daigdig

6

.

Buong Napagtakpan

7.
Subsequently covered

Ang Buod na ito na hinango

up in full
8

.

sa

This Synopsis,
prepared from the

by the Insurance
Commissioner is
published pursuan
t
to
Section 225 of the
Insurance Code
9.

Annual
Taunang Ulat pinagtibay ng
Statement, approved
Komisyo-nado ng Seguro
ay inilathala alinsunod sa
Seksiyon 225 ng Sinusugang
Batas sa Seguro

Napag-iiba-ibang Kasunduan

Variable Contract
Accounts

ACCOUNTS COMMON TO BOTH LIFE AND NON-LIFE,
DOMESTIC AND FOREIGN
ASSETS

MG A ARI-ARIAN

1

.

Bonds

Mga Bono

2

.

Stocks

Mga Sapi

3.

Real Estate

Mga Ari-ariang di Natitinag

4.

Purchase Money

Mga Pautang na may

Mortgages

Sanglang Ari-ariang Nailit

5.

Mortgage Loans

Pautang sa mga

.

Collateral Loans

Maysangla

(Lupa at Gusali)

6

Mga Pautang na may Panagot

THE INSURANCE CODE OF THE PHILIPPINES

772

7.
Guaranteed
Loans 8 . Other Loans
9.

Short-term
Investments

10

.

Security Fund

11

.

Other Investments

12

.

Cash on Hand and
in Banks
Commissions
Receivables

13.
14.

Accrued
Investment Incom
e

15.

Accounts/Notes
Receivables

16.

EDP Machine

17.

Other
Admitted
Assets

18.

Iba pang mga Pamumuhunan
Salapi sa Tanggapan at mga
Bangko
Mga
Singiling
Komisyong
Reaseguro
Mga
Natipong
Tubo
at
Iba
pang
Kita
sa
Pamumuhunan na Singilin
Mga
Singiling Pautang/Mga
Singiling Pautang na may
Kasulatan
Mga Makina ng EDP
Mga Iba pang Kinikilalang
mga Ari-arian
Kabuuang Kinikilalang mga
Ari-arian
MGA PANANAGUTAN
Mga Bayaring Komisyon

Total Admitted
Assets

LIABILITIES
Gugulin 19. Commissions
Payable
20

.

Accrued Expenses

21

.

Taxes Payable

22

.

Accounts/Notes
Payable

23.

Dividends Payable

24.

Unearned
Investment Incom
e
Other Liabilities

25.

Mga Garantisadong Pautang
Iba pang mga Pautang
Mga Maigsing Kasunduan sa
Pamumuhunan
Panagot na Pondo

Mga Natipong
Mga Bayaring Buwis
Mga
Bayaring
Utang/Mga
Bayaring Utang na may Kasulatan
Mga Bayaring Pakinabang
Tubong di pa Kinita sa Pamumuhunan
Iba pang mga Pananagutan

773

Appendix C
SYNOPSIS OF ANNUAL STATEMENTS

26.

Total Liabilities

NET WORTH/TRUST-

Kabuuang mga Pananagutan
NETONG HALAGA/IPINAG-

EED SURPLUS
PANAGOT NA

KATIWALANG
LAGAK
AT
KALABISANG

27.

Capital Stock

Saping Puhunan

28.

Capital Paid in

Bayad na Puhunan sa Labis na

Excess of

Halagang Nimel

Par Value

Ambag ng mga Aksiyonista

Contributed
Surplus

Kalabisang Pondong Espesyal

29.
30.

Reserba sa Pagbabago-bago

31.

Special Surplus
Funds
Fluctuation

Reserba sa Pagbabago-

32.

Reserve Stock/
Bond Investment
Fluctuation

ng Saping Puhunan

bago ng Halaga ng Palitan

Reserve Foreign
Exchange
33.

Revaluation
Reserve

34.

Retained
Earnings / Earned
Surplus

, TOTAL LIABILITIES
AND NET WORTH/
TRUSTEED SURPLU
S

Reserba sa Pagbabago ng
Ha-laga ng Ari-ariang di
Natitinag (lupa at gusali)
Kalabisang Kinita na
Walang
Kinauukulan
KABUUANG MGA PANANAGUTAN AT NETONG HALAGA/IPINAGKATIWALANG
PANAGOT NA LAGAK AT
KALABISANG KITA

II. ACCOUNTS OF LIFE COMPANIES
1.
2.

Policy Loans
Net Life Insurance
Premium &
Annuity

M ga

Pautang sa Polisa

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
Kalu-Premiums Due and
Uncollected

Mga Prima ng Sakuna at
sugan na Ipinagpaliban at
di
Nasisingil

4.

Aggregate Reserve
for Accident Policies
& Contract

Mga Natipong Reserba sa mga
Polisa at Kasunduan

5.

Aggregate Reserve
for
Accident and Health
Policies

Mga Natipong Reserba sa mga
Polisa ng Sakuna at Kalusugan

6.

Supplementary
Contracts without
Life
Contingencies

7.

Policy and
Claims

Contract

8. Policyholders'
Ibabalik Dividends Experience
Refunds Due and
Unpaid
9.

Karagdagang Kasunduan
sa walang Naganap na
Pangyayari

Paghahabol sa Polisa at
Kasunduan
Mga Bayarin at
na Pakinabang ng
mga
nakaseguro
na
Ipinagpaliban

Policyholders'
Dividend
Accumulatio
n

10. Policyholders'
Dividends &
na Experience Refunds
Payable in the
following year
11. Amount Provisionally
Held for Deferred
Dividend Policie
12. Premiums and
Annuity Consideratio
n
Received in Advance

Natipong Pakinabang ng mga
Nakaseguro

Mga Babayaran at Ibabalik
Pakinabang ng mga
Nakaseguro sa Susunod na Taon

Halagang Pansamantalang
Pinigil sa mga Polisang
Ipinagpaliban
na Pakinabang
Prima at Taunang Bayad na
Paunang Tinanggap

Appendix C
SYNOPSIS OF ANNUAL STATEMENTS

13.

775

Pananagutang Pondo sa
Primang Nakalagak

Liability for Premium
Deposit Funds

IV. ACCOUNTS OF VARIABLE CONTRACTS

1.

2

Mapag-iiba-ibang
Kasunduan
Account —
Kalabisang
Pondong
Espesya
Fund
l
Variable C
Variable C

.

Mapag-iiba-ibang Kasunduan
Natirang kinita
Account Retained
Earnings
ACCOUNTS OF NON-LIFE COMPANIES

1.

Premium
Receivable

Mga Primang Singilin

.

Premium Due From

mga Nagbigay ng Reaseguro

Ceding Companies

Primang Inilaan ng mga Nag-

2

3.

4.

Premium Reserve
Withheld By Ceding
Companies

bigay ng Reaseguro

Loss Reserve Withheld

Primang Inilaan para sa

By
Ceding Companies
5.

Reinsurance
Recoverable on
Losses

6

.

Other Reinsurance
Accounts Receivable

7.

Salvage Recoverable

.

Losses and Claims

8

Payable
9.

10

.

Loss Adjustment

.

Reinsurers
Kapin-salaan ng mga
Nagbigay ng Reaseguro
Reasegurong Masisingil sa
Kapinsalaan
Mga Iba pang
Reasegurong Masisingil
Mga Labing Masisingil
Mga Bayaring
Kapinsalaan at Paghahabol
Mga Bayaring Gastos

Expenses Payable

Kaugnay ng Kapinsalaan at
Paghahabol

Reserve for Unearned

Reserba sa Primang di pa
Kinita

Premium
11

Tatanggapin sa

Premium Due to

Takdang Bayarin sa mga

Tumanggap ng Reaseguro

776

THE INSURANCE CODE OF THE PHILIPPINES

12.
Premium
Pondong Inilaan para sa mga
Reserve
Tumanggap ng Reaseguro
Withheld for RI
13.
Loss Reserve Withheld Primang Inilaan para
for RI
sa Kapinsalaan ng mga
Tumanggap ng Reaseguro
14.
Other RI Accounts
Payable
15.
Return Premiums
Payable

Mga Iba pang
Reasegurong Bayarin
Mga Bayaring Primang
Isasauli

VI. ACCOUNTS OF FOREIGN INSURANCE COMPANIES

. Due from
Home Office
1

Mga Tatanggapin sa
Punong Tanggapan
Mga Bayarin sa Punong

2

.

Due to Home Office

Tang-gapan
Mga Bayarin sa

3.

Due to Other Foreign

mga Banyagang

Branches

Sangay

4.

Statutory Deposit

Laang Panagot sa Lagak Ayon

5.

Home Office Account

sa Batas
Pananagutan ng Punong

.

Home Office Inward

Padalang Halagang Tulong

Remittances

ng

Tanggapan
6

Punong Tanggapan

Note: As a supplementary to Circular Letter No. 8
/ 89,
Circular Letter No. 14-97 (Dec. 2, 1997) was issued to add the
following accounts with the corresponding translation in Pilipino.

Life
Receivable from life
Insurance Pools

Non-Life

Catastrophe Loss Reserve

Mga Singilin sa Samahan
Ng Seguro sa Buhay
Reserba sa Pinsala
sa Kalamidad

Appendix C
SYNOPSIS OF ANNUAL STATEMENTS

777

Life and Non-Life
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 ACCOUNT
S (NOV. 27,1991.)

SUBJECT
:
TO

Uniform Chart of Accounts
: All Non-Life Insurance Companies Authorized to
Transact Business in the Philippines

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 Commission.
To minimize difficulties, the attached chart of accounts
enumerating the minimum accounts and
subsidiary
ledgers/ sub-accounts/schedules that should be maintained by
a non-life insurance company 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 company
may
maintain more
accounts
depending
on
the needs of management.

Chart of Accounts for Non-life Insurance Companies
ASSETS
1.

Bonds

2.

Stocks

3.

Real Estate

3a.

Accumulated Depreciation — Building

778

Appendix D
UNIFORM CHART OF ACCOUNTS

4.

Purchase Money Mortgages

5.

Mortgage Loans

6.

Collateral Loans

7.

Guaranteed Loans

8.

Other Loans

9.

Short-Term Investments

10.

Security Fund

11.

Other Investments

12.

Cash on Hand

13.

Cash in Banks

14.

Premiums Receivable

15. Premiums Due from Ceding Companies —
Treaty 16. Premiums Due from Ceding Companies

Facultative
17. Premium Reserve Withheld by Ceding Companies
— Treaty
18.

Premium Reserve Withheld by Ceding

Companies — Facultative
19. Loss Reserve Withheld by Ceding Companies
— Treaty
20. Loss Reserve Withheld by Ceding Companies —
Facultative
21. Reinsurance Recoverable on Paid Losses — Treaty
22. Reinsurance Recoverable on Paid Losses
— Facultative
23. Reinsurance Recoverable on Unpaid Losses
— Treaty
24. Reinsurance Recoverable on Unpaid Losses
— Facultative
25.

Commissions Receivable — Treaty Reinsurers

26.

Commissions Receivable — Facultative Reinsurers

27.

Other Reinsurance Accounts Receivable

779

THE INSURANCE CODE OF THE PHILIPPINES

28.

Salvage Recoverable

29.

Accounts Receivables

30.

Notes Receivables

31.

Accrued Investment Income

32.

Other Receivables

32a.

Allowance for Doubtful Accounts

33.

Electronic Data Processing Machine

33a. Accumulated Depreciation — Electronic
Data Processing Machine
34. Furniture, Fixtures, and Office Equipment
34a. Accumulated Depreciation —
Furniture, Fixtures
and Office Equipment
35. Transportation Equipment
35a. Accumulated Depreciation —
Transportation
Equipment
36.

Deposits

37.

Prepayments

38.

Leasehold and Leasehold Improvements

39.

Other Assets
LIABILITIES
Losses and Claims Payable — Direct Business

1.
2.

Loss Adjustment Expense Payable—Direct Business

3.

Reserve for Unearned Premiums

4.

Commissions Payable — Direct Business

5.

Premiums Due to Reinsurers — Treaty

6.

Premiums Due to Reinsurers — Facultative

7.

Losses and Claims Payable to Ceding Companies

— Treaty
8.
Loss Adjustment Expenses Payable to
Ceding Com-panies — Treaty

Appendix D
UNIFORM CHART OF ACCOUNTS

781

9.
Losses and Claims Payable to Ceding Companies
— Facultative
10 .
Loss Adjustment Expenses Payable to Ceding
Companies — Facultative
11

.

Commissions Payable to Ceding Companies

— Treaty
12

.

Commissions Payable to Ceding Companies

— Facultative
13.

Premium Reserve Withheld for Reinsurers — Treaty

14.

Premium Reserve Withheld for Reinsurers —

Facul-tative
15.

Loss Reserve Withheld for Reinsurers — Treaty

16.

Loss Reserve Withheld for Reinsurers — Facultative

17.

Other Reinsurance Accounts Payable

18.

Return Premiums Payable

19.

Income Tax Payable

20

.

Premium Tax Payable

21

.

Other Taxes and Licenses Payable

22

.

Deposit for Real Estate

Under Contract to Sell 23.

Accrued Expenses

24.

Accounts Payable

25.

Notes Payable

26.

Dividends Payable

27.

Due to Home Office"

28.

Due to Other Foreign Branches**

29.

Other Liabilities

1.

NET WORTH*/TRUSTEED SURPLUS**
Subscribed Capital Stock*

Note:
* — applicable to domestic companies
** — applicable to branches of foreign companies
without *
— applicable to domestic companies and branches of foreign companies

782

THE INSURANCE CODE OF THE PHILIPPINES

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.
Fluctuation Reserve — Stock and
Bond Invest-ments
B. Revaluation Reserve — Real Estate
8.

Retained Earnings*/Earned Surplus*
A.

Appropriated/Assigned

B.

Unappropriated /Unassigned*

9.

Statutory Deposits**

10.

Home Office Account**

11.

Home Office Inward Remittances**
INCOME AND EXPENSES ACCOUNTS

1.

Gross Premiums — Direct Business

2.

Reinsurance Premiums Assumed — Treaty

3.

Reinsurance Premiums Assumed — Facultative

4.

Returns and Cancellations

5.

Reinsurance Premiums Ceded — Treaty

6.

Reinsurance Premiums Ceded — Facultative

7.

Interest Income

8.

Dividend Income

9.

Rent Income

10.

Gain (Loss) on Sale of Investments

11.

Other Investment Income

12.

Commission Income — Treaty

13.
14.

Commission Income — Facultative
Other Underwriting Income

Appendix D
UNIFORM CHART OF ACCOUNTS

15.
16.

Losses — Direct Business
Losses on Reinsurance Assumed — Treaty

17.

Losses on Reinsurance Assumed — Facultative

18.

Salvage Recoveries or Loss Recoveries on Direct

Business
19.

Loss Recoveries on Reinsurance Ceded — Treaty

20

.

Loss Recoveries on Reinsurance Ceded—Facultative

21

.

Loss Adjustment Expenses — Direct

22

.

Loss Adjustment Expenses on Reinsurance Assumed

— Treaty
23.

Loss Adjustment Expenses on Reinsurance

Assumed — Facultative
24.

Commission Expenses — Direct Business

25.

Commission Expenses on Reinsurance Assumed

— Treaty
26.

Commission Expenses on Reinsurance Assumed

— Facultative
27.

Other Underwriting Expenses

28.

Provision for Income Tax

29.

Premium Tax

30.

Other Taxes and Licenses

31.

Interest Expenses

32.

Salaries and Wages

33.

Allowances and

Bonuses 34. SSS
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

783

784

THE INSURANCE CODE OF THE PHILIPPINES

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 Dues

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 discount/premium when applicable) of
investments in bonds registered in the name of the company,
issued by government or private corporations, whether domestic or
foreign.
2. Stocks. — This represents the cost of investments in
preferred and common stocks of financial and nonfinancial 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
Com-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
company on its buildings.
4. Purchase
Money
Mortgages.

This
represents the
uncollected portion of the consideration on the sale of real
estate owned by the company, whereby 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. Unpaid 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. Unpaid interest on
these loans should not form part of this account but 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 company to the Security Fund, Non-Life Account.
11. Other
Investments.

This
represents
all
other
investments which the company may 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 and / or 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
taxes
receivable
may
be
included
provided
they
properly segregated and corresponding liabilities are set up.

fire
are

15. Premiums Due from Ceding Companies — Treaty. —
This represents all reinsurance premiums due to the company
as a result of treaty acceptances from ceding companies.
16. Premiums Due from Ceding Companies — Facultative.
— This represents all reinsurance premiums due to the company
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 premium
withheld by ceding companies in accordance with treaty agreements.
18. Premium Reserve Withheld by Ceding Companies —
Faculta-tive. — This pertains to a portion of the reinsurance
premium 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 premium
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 premiums
withheld by
the
ceding companies under
facultative
reinsurances as reserve for losses.
21. Reinsurance Recoverable on Paid Losses — Treaty. —
This represents the amount recoverable from reinsurers under
treaty agreements as their share in paid losses and loss
adjustment expenses. The 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. The share of the reinsurers on
whatever salvage
recoveries
fromlosses or
claims
sustained shall be deducted from this account.

787

Appendix D
UNIFORM CHART OF ACCOUNTS

23. Reinsurance Recoverable on Unpaid Losses — Treaty. —
This represents the amount recoverable from reinsurers under
treaty agreements as their share on unpaid losses and loss
adjustment expenses.
The 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 amount recoverable from
reinsurers under facultative reinsurances as their share on
unpaid losses and loss adjustment expenses. The share of the
reinsurers on whatever salvage recoveries from losses or
claims
sustained shallbe deducted from this account.
25. Commissions Receivable — Treaty Reinsurers. — This
repre-sents all kinds of commissions due but not yet collected
on rein-surance business under treaty agreements.
26. Commissions Receivable — Facultative Reinsurers. — This
represents all kinds of commissions 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
recoveries the
policies issued.

Recoverable. —
company may

This represents the estimated
have from losses on surety

29. Accounts Receivable. — This represents receivables
non-insurance and non-reinsurance transactions of the company.
30. Notes Receivable. — This represents
company evidenced by promissory notes.

receivables by

from
the

31. 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
whichhas been charged against operations.
35. Transportation Equipment.
of motor
vehicles
and
transportation equipment
company and used in the business.



This

represents the
other
owned
by

cost
the

35a.

Accumulated Depreciation — Transportation
Equipment.
—This
represents
the
accumulated
depreciation
on
transportation
equipment which has been
charged against operations.
36. Deposits. — This represents refundable deposits made
for use of public utilities, compliance with requirements of
insurance and reinsurance pools, and other specific purposes.
37. Prepayments. — This represents all payments for
expenses not yet incurred at the time of payment which will be
amortized over a period usually not exceeding one year.
38. Leasehold and
the cost of building
leased properties,
rights
and
properties ready for

Leasehold Improvements. — This represents
and/or improvements introduced on
including the cost
of
leasehold
other expenses incurred in making the
use and occupancy.

The 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 amount 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 premium income recognized from policies
in force as at report date. Setting up reserves shall be in
accordance with the provisions of the Insurance Code and related
rulings of the Insurance Commission.
4. Commissions
Payable

Direct
Business.

This
represents unpaid
commissions
on
the
company's
direct
business,
payable
to
ordinary agents, general agents and
insurance brokers.
5. Premiums
Due
to
Reinsurers

Treaty.

This
represents reinsurance premiums payable by the company to all
its faculta-tive reinsurers.
6. Premiums Due to Reinsurers —
repre-sents reinsurance premiums payable
all its facultative reinsurers.

Facultative. — This
by the company to

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 —
This
represents
unpaid
commissions
on
the
assumed business under treaty agreements.

Treaty. —
company's

12. Commissions Payable to Ceding Companies —
— This represents unpaid commissions on the
assumed business under facultative agreements.

Facultative.
company's

13. Premium Reserve Withheld for Reinsurers — Treaty. —
This represents a portion of the reinsurance premium ceded
to reinsurers
which
was
withheld
by
the
company
in
accordance with treaty agreements and/or laws, rules, and regulations.
14. Premium Reserve Withheld for Reinsurers — Facultative.
— This represents a portion of the reinsurance premium ceded
to reinsurers
which
was
withheld
by
the
company
in
accordance
with
facultative agreements and/or
laws,
rules and regulations.
15. Loss Reserve Withheld for Reinsurers — Treaty. —
This represents a
portion of
the
reinsurance premium ceded
to reinsurers which
was withheld by the company as reserve for losses in
accordance with treaty agreements and/or laws, rules and
regulations.
16. Loss Reserve Withheld for Reinsurers — Facultative. —
This represents a portion of the reinsurance premium ceded
to reinsurers which was withheld by the company as reserve
for losses
in accordance with facultative
agreements
and/or 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.

aggregate premiums to be refunded to
endorsement or cancellation of the policies.

This
represents
the
the insureds due to

19. Income Tax Payable. — This represents the unpaid
balance of the income tax liability of the company.
20. Premium Tax Payable. —
balance of the premiums tax liability.

This

represents

the

unpaid

21. Other Taxes and Licenses Payable. — This represents
all unpaid taxes other than income and premium taxes due
the government.

791

Appendix D
UNIFORM CHART OF ACCOUNTS

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 name of the company.
23. Accrued Expenses.
incurred but not yet paid.



This

represents

24. Accounts Payable. — This represents
the company arising from non-insurance
reinsurance transactions.
25. Notes
indebtedness
company.

expenses

already

the obligations of
and non-

Payable. — This represents obligations
evidenced by promissory notes executed

and/or
by the

26. 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 advanced by the Home Office for the account of
the Philippine branch or amount remitted by the Home Office
for losses and expenses of the branch.
28. Due to Other Foreign Branches.** — This represents
the liability for the amount 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*/TRUSTEED SURPLUS**
1. Subscribed Capital Stock*
stock subscribed as at report date.



This

represents

2. Subscription Receivable* — This represents
portion of the subscribed capital stock of the company.
3. Capital Stock Paid-Up*
par value of fully paid shares.



This

represents

Note:
*— applicable to domestic companies
**

applicable to branches of foreign companies

the
the

the

capital
unpaid

total

792

THE INSURANCE CODE OF THE PHILIPPINES

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 may include the following:
A. Fluctuation Reserve — Stock and Bond Investments.
— This represents the unrealized appreciation in market
value of stock and bond investments, as at a given report date.
B.
Revaluation
Reserve

Real
Estate.

This
represents appreciation or increase in book 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
company's operations.
The company's Board of Directors may appropriate a
portion of this account for specific purpose/s.
9. Statutory Deposits.** — This represents the market
value of the securities deposited with the Insurance
Commission 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 head office to the Philippine
branches of
authorized
foreign
companies,
in
compliance
with the requirements of the Insurance Code.
INCOME AND EXPENSES ACCOUNTS
1. Gross Premiums — Direct Business. — This represents the
aggregate premiums arising from direct business of the
company for the period being reported.

793

Appendix D
UNIFORM CHART OF ACCOUNTS

2. Reinsurance Premiums Assumed — Treaty.—This
represents the aggregate premiums assumed from ceding
companies under treaty agreements.
3. Reinsurance Premiums Assumed — Facultative. — This
rep-resents the aggregate premiums assumed from ceding
compa-nies under facultative agreements.
4. Returns and Cancellations. — This represents premiums
on policies cancelled or partially modified.
5. Reinsurance Premiums Ceded — Treaty. — This
represents premium on outward cessions under treaty agreements.
6. Reinsurance
Premiums
repre-sents premiums on
facultative agree-ments.

Ceded
— Facultative.
outward cessions under



This

7. Interest Income. — This represents income from
interest-bearing investments and bank 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. —
from investments which cannot be
the foregoing investment income accounts

This represents income
classified under any of

1

12. Commission
Income

Treaty.
commis-sions due to the company for
under treaty agreements.


its

This
represents
outward cessions

13. Commission Income — Facultative. — This represents
com-missions due the company for its outward cessions under
facul-tative agreements.
14. Other Underwriting Income. — This represents
underwrit-ing income not classifiable under any of the
foregoing under-writing income accounts.

'Account Nos. 7 to 11 may be recorded net of any final taxes paid..

794

THE INSURANCE CODE OF THE PHILIPPINES

15. tosses 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 company 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 company on
business ceded under facultative reinsurances.
21. 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 company'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
company's
share
on
reinsurance acceptances under
facultative
reinsurances.
24. Commission Expenses — Direct Business. — This
represents the
commissionsgiven
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

26.

795

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.
28. Provision for Income Tax. — This represents the amount
set up for the estimated income 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 income and premium taxes.
31. Interest Expenses. — This represents the interest
expense on all borrowings of the company.
32. Salaries and Wages. — This represents the regular
compensation of officers and employees.
33. 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 System 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
bene-fits given by the company 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 repairs and maintenance of company's properties.

796

THE INSURANCE CODE OF THE PHILIPPINES

41. Light and Water.
expenses of the company.



This

represents

light

and

water

42. Advertising and Promotions. — This represents expenses
for advertising and publicity to promote the business of
the company.
43. Representation and Entertainment.
the representation
and
entertainment
promotion of the business of the company.

— This pertains to
expenses
for
the

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 company by other entities
/ persons.
46. Management Fees. — This represents fees arising from
a management contract.
47. Printing,
Stationery
represents expenses
for
stationery
and
in business.

and

Office
printed
various

Supplies.

This
materials,
office supplies used

48. Communication and Postage. — This
represents
expenses incurred for postage stamps used, telephone services,
cables and telegrams and other means of communication.
49. Donations and Contributions. — This represents
donations and contributions made by the company.
50. Association and Pool Dues. — This represents expenses
in connection with membership in associations and pools.
51. Depreciation and Amortization. — This
depreciation and amortization of company's assets.

represents

52. Transportation and Travel Expenses. — This
expenses for the travel of directors, officers and
in connection with business operations.

the

represents
employees

53. Other Operating Expenses. — This represents all other
expenses which cannot be classified under any of the
foregoing operating expenses accounts.

797

Appendix D
UNIFORM CHART OF ACCOUNTS

Subsidiary Ledgers or Records
In general, subsidiary ledgers or records should be maintained
owing accounts:
for the fol
Bonds
A1
A2

Stocks

A3

Real State — a. Land
b. Building

A4

Purchase Money Mortgages

A5

Mortgage Loans

A6

Collateral Loans

A 7 Guaranteed Loans
A8

Other Loans

A9

Short-Term Investments

All

Other Investments

A12

Cash on Hand

A13

Cash in Bank

A14

Premiums Receivables

A28

Salvage Recoverable

A29

Accounts Receivable

A30

Notes Receivable

A31

Accrued Investment Income

A32

Other Receivables
A32 Allowance for Doubtful Accounts
receivable.
a

- - for each type of

A34) Furniture, Fixtures and Office Equipment
A34a) Accumulated Depreciation — Furniture, Fixtures
and Office Equipment
A35)
Transportation Equipment

Note:

A

Assets
L
Liabilities N
Network

798

THE INSURANCE CODE OF THE PHILIPPINES

A35a) Accumulated Depreciation — Transportation
Equip-ment
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 Premiums
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 Ceding Company:
A15) Premiums Due from Ceding Companies — Treaty
A16) Premiums Due from Ceding Companies —
Facultative
A17) Premium Reserve Withheld by Ceding
Companies — Treaty
A18) Premium Reserve Withheld by Ceding
Companies — Facultative
A19) Loss Reserve Withheld by Ceding Companies —
Treaty
A20) Loss Reserve Withheld by Ceding Companies
— Facultative
L7) Losses and Claims Payable to Ceding Companies
— Treaty

Appendix D
UNIFORM CHART OF ACCOUNTS

799

L8 ) Loss Adjustment
Expenses Payable to Ceding Companies
— Treaty
L9) Losses and Claims Payable to Ceding Companies
— Facultative
L10) Loss Adjustment Expenses Payable to Cedin
g Companies — Facultative
Lll) Commissions Payable to Ceding Companies
— Treaty
L12) Commissions Payable to Ceding Companies —
Facultative
LI 7) Other Reinsurance Accounts Payable
For Each Reinsurer:
A21) Reinsurance Recoverable on Paid Losses —
Treaty A22) Reinsurance Recoverable on Paid Losses

Facultative
A23) Reinsurance Recoverable on Unpaid Losses
— Treaty
A24) Reinsurance Recoverable on Unpaid Losses
— Facultative
A25) Commissions Receivable — Treaty Reinsurers
A26) Commissions Receivable — Facultative Reinsurers
A27) Other Reinsurance Accounts Receivable
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.

800

THE INSURANCE CODE OF THE PHILIPPINES

Accounts that Should be Grouped to Facilitat
e Preparation of Statements or Reports to be
Submitted to the Insurance Commission
Al) Bonds
l.
A Deposited with the Insurance Commission. —
This comprises investment mostly in government bonds
deposited with the Insurance Commission 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
bills/notes and certificates of indebtedness issued and
guaranteed by the Philippine government, its
political
subdivisions
and
instrumen-talities
and/or
corporations-owned and/or
-controlled
by the government;
2. Domestic Private Issues. —
per-tains to investments in bonds
instruments issued by private entities.

This
and

classification
other debt

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 government bonds
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.
These investments should be recorded at their
respective foreign currency values at their
corresponding local currency equivalent on the dates of
transactions.

801

Appendix D
UNIFORM CHART OF ACCOUNTS

A2) Stocks
2.
A Domestic
by companies
in the

Issues. — These are stocks issued
organized
and incorporated
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
in-vestments
in
stocks of establishments engaged in passenger
and
freight
transportation
by
railways,
highways, water or air warehousing, telephone and
telegraph
com-munication,
and
the
supplying
of
electricity, gas, water and other sanitary services.
b) Industrial. — This classification pertains
cost of investments in stocks of domestic
industrial companies. This is further sub-classified into:

to

the

b.l)
Board
of
Investments
(BOI)-Registered.

These are investments in stocks of BOIRegistered industrial companies. (R.A. No. 5186, as amended.)
b.
2) Non-BOIRegistered.—These 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
invest-ments in stocks of foreign companies organized or
incorpo-rated outside the Philippines and may further be
classified into financial and non-financial institutions.

THE INSURANCE CODE OF THE PHILIPPINES

802

A3) Real Estate
3A 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 company premises
acquired by the company judicially or extrajudicially in
settlement of loans and/or 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 which 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 company premises, such as petty cash
fund, commission fund, documentary stamp fund, etc.
12.
B
Deposit in Transit. — These are the cash and
checks
already deposited per company records but not yet taken
up per bank statement.
A13) Cash in Banks
13.
A
Cash in Banks — Domestic. — This includes
the company's total deposit account balances with any
autho-rized bank within the Philippines.
13.
B Cash in Banks — Foreign. — This includes the
com-pany's total deposit account balances with any bank
outside the Philippines.
13.
C Suspended Banks. — This includes the company's
total deposit account balances with any unauthorized bank.
A29) Accounts Receivable
29.

A Affiliates

29.

B Others

L23) Notes Payable
23.

A Affiliates

23.

B Others

803

Appendix D
UNIFORM CHART OF ACCOUNTS

The following Accounts:
A
L




4

L



18 Return Premiums Payable

L



3

Reserve for Unearned Premiums

IE



1

Gross Premiums — Direct Business

IE



2

Reinsurance Premiums Assumed — Treaty

IE



3

Reinsurance Premiums Assumed — Facultative

IE



4

Returns and Cancellation

IE



5

Reinsurance Premiums Ceded — Treaty

IE



6

Reinsurance Premiums Ceded — Facultative

IE



12

Commission Income — Treaty

IE



13 Commission Income — Facultative

IE



15 Losses — Direct Business

IE



16 Losses on Reinsurance Assumed — Treaty

IE



17 Losses on Reinsurance Assumed — Facultative

IE

'—

18 Salvage

1

Premiums Receivable
Losses and Claims Payable — Direct Business

Recoveries

or

Loss

Recoveries

on

Direct Business
IE



19 Loss Recoveries on Reinsurance Ceded — Treaty

IE



20

IE



21

IE



22

on

Reinsurance

IE



Reinsurance

IE



23 Loss
Adjustment
Expenses
on
Assumed — Facultative
24 Commission Expenses — Direct Business

IE



IE



Loss
Recoveries
on
Reinsurance
Ceded
Facultative
Loss Adjustment Expenses — Direct Business
LossAdjustment
Assumed — Treaty

25 Commission
— Treaty
26 Commission

Facultative

Expenses

Expenses

on

Expenses

on

Reinsuranc
e



Assumed
Assumed

Reinsuranc
e

THE INSURANCE CODE OF THE PHILIPPINES

15
16
17
18
19
20
21
22
23
24
25
26

Premiums Due from Ceding Companies
— Treaty
Premiums Due from Ceding Companies
— Facultative
Premiums Reserve Withheld by
Ceding Com-panies — Treaty
Premiums Reserve Withheld by Ceding
Com-panies — Facultative
Loss Reserve Withheld by Ceding Companies
— Treaty
Loss Reserve Withheld by Ceding Companies
— Facultative
Reinsurance Recoverable on Paid Losses
— Treaty
Reinsurance Recoverable on Paid Losses
— Facultative
Reinsurance Recoverable on Unpaid Losses
— Treaty
Reinsurance Recoverable on Unpaid Losses —
Facultative
Commissions Receivable — Treaty Reinsurers
Commissions Receivable —
Facultative Reinsu-rers

27

Other Reinsurance Accounts Receivable

5

Premiums Due to Reinsurers — Treaty

6

Premiums Due to Reinsurers — Facultative

7

Losses and Claims Payable to Ceding
Companies — Treaty
8
Loss Adjustment Expenses Payable to Ceding
Companies — Treaty
9
Losses and Claims Payable to Ceding
Companies Facultative
10 Loss Adjustment Expenses Payable to
Ceding Companies — Facultative

Appendix D
UNIFORM CHART OF ACCOUNTS

L

— 11

L

— 12

L

— 13

805

Commissions
Treaty

Payable

to

Ceding

Companies



Commissions Payable to Ceding Companies
Facultative
Premium Reserve Held for Reinsurers — Treaty



L

— 14

L

— 15

Premium
Reserve
Held
for
Reinsurers
Facultative
Loss Reserve Held for Reinsurers — Treaty

L

— 16

Loss Reserve Held for Reinsurers — Facultative

L

— 17

Other Reinsurance Accounts Payable

L

— 20

Premium Tax Payable

Should be classified as follows:
1.

Fire

2.

Earthquake/Fire/Shock

3.

Typhoon / Flood / Tidal Wave

4.

Ocean Marine

5.

Inland Marine

6.

Marine Hull

7.

Aviation

8.

Judicial Bonds

9.

Judicial Criminal Bonds

10. Customs Bonds
11. Other Bonds
12. Compulsory Motor Vehicle Liability (CMVL) —
Land Transportation Operators
13. Compulsory Motor Vehicle Liability (CMVL) — NonLand Transportation Operators
14. Other than CMVL — Land Transportation Operators
15. Other than CMVL — Non-Land
Transportation Operators



806

THE INSURANCE CODE OF THE PHILIPPINES

16.

Health and Accident

17.

Burglary/Theft/Larceny

18.

Other Casualties

All reinsurance accounts should further be grouped as follows:
1.

Authorized — Domestic Companies

2.

Authorized — Foreign Companies

3.

Unauthorized — ASEAN countries

4.

Unauthorized — other than ASEAN countries

— oOo —

Appendix “E”
STANDARD LIFE INSURANCE
POLICY PROVISIONS
(CIR. LETTER NO. 1493 CL, JUNE 25,1993.)

SUBJECT : Standard Life Insurance Policy Provisions
TO

: 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. Any 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.
The Policy Data page must include the following:
A. Basic Information
1.

Policy Number

2.

Policy Date

3.

Owner

4.

Insured

5.

Age of Insured As of Policy Date

6.

Policy Amount

7.

Life Insurance Plan

8.

Maturity / Expiry / Termination Date

807

808

THE INSURANCE CODE OF THE PHILIPPINES

B.

Schedule of Benefits and Premiums
1.

Form No.

2.

Benefit Description

3.

Benefit Amount

4.

Premiums
a.

Premiums (annual and selected modes)

b.

Due dates of the selected modes

c.

Maximum Years Payable

C. Others
1.

Form 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 Company will pay at its Head
Office the Amount of Insurance to the designated Beneficiaries
upon the death of the insured, or the Pure Endowment Amount
to the Owner upon the survival of the insured at maturity
date. Any indebtedness or lien under this Policy will be
deducted from such payable amount.
The Amount of Insurance and the Pure Endowment
Amount are each equal to the Policy Amount (for level benefit
contracts). In addition, any then paid-up additional life
insurance amount and any then remaining dividend
accumulation are payable.
The Amounts of Insurance and the Pure Endowment
Amounts are defined as follows (for varying benefit amounts):

GENERAL PROVISION
S 1. Grace Period
After the payment of the initial premium, any premium
due must be paid not later than 31 days after its due date. Any
unpaid premium is deductible from the benefits that may arise
during the 31-day grace period.

Appendix E
STANDARD LIFE INSURANCE POLICY PROVISIONS

2.

809

Incontestability

Except
for
non-payment
of
premiums
or
any
other
grounds recognized
by
law
and jurisprudence, the
Company cannot contest this Policy after it has been
in force during the lifetime of the Insured for two (2) years from
date of issue of this Policy or of its last reinstatement.

3.

Entire Contract

The Company issues this Policy in consideration of its
application and the receipt of its initial premium. This Policy,
its application, a copy of which is attached, and all attached
riders and endorsements constitute the entire Contract.
Only the Chairman of the Board of Directors, the
President, or officers duly authorized in writing by the Board of
Directors have the authority to modify this contract. Any such
modification must be in writing and duly signed by the authorized officer.

4.

Effectivity of Policy and Policy Date

This policy becomes effective only upon the payment of its
initial premium and its delivery to the Owner while the
Insured is alive and in good health. The Policy Date, shown in
the policy data page will be used to determine premium due
dates, policy years and policy anniversaries.

5.

Misstatement of Age

The age at issue of the insured is
[last/nearest] birthday as of the Policy Date.

his

age

If the age of the Insured has been misstated, the amount
of insurance will be adjusted to the amount which the
premium would have purchased at the correct age, applicable
risk class and applicable premium rates as of the policy date.
If at the correct age, the Insured is not eligible for any
cover-age under this Policy or its riders, the Company 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 Owner of the
premiums actually received by the Company 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
Company will determine yearly as a
dividend that part, if any, of the divisible surplus of the
Company as may be distributed to this Policy.

8.

Dividends (for participating contracts)

Dividends may be payable on this Policy as of each
policy anniversary date. Upon written request, such dividends may be:
(1) paid in cash to the Owner; or (2) applied to any
premium due; or (3) left to accumulate with interest at a rate
set by the Company; or
(4) applied as
paid-up
additionalparticipating [non-participating] life insurance.
If
no
option
is
elected,
Option
[Company's
choice]
automati-cally applies. Any option elected applies only to
subsequent div-idends.

9.

Non-forfeiture

If this Policy has an available Cash Value as set forth in
the Table of
Non-Forfeiture Values, the
Owner
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)
The Owner may
surrender this Policy for its Net
Surrender Value which is the Cash Value derived from the
Table of Non-Forfeiture Values, less any indebtedness under this Policy.
Option 1. Net Surrender Value (for participating contract)
The Owner may
surrender this Policy
for its Net
Surrender Value, which is the Cash Value derived from the
Table of Non-Forfeiture
Values,
together
withany
cash
value
of
paid-up
insurance
from
dividends
and
remaining
dividend
accumulation,
less any indebtedness under this policy.
Option 2. Paid-Up Insurance
This Policy may be continued without further premiums
as
participating
[non-participating]
Paid-Up
Insurance with
a reduced amount 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 3. Extended Term Insurance (for nonparticipating contract)
This Policy may be continued without further premiums as
a 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
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 Paid-Up Pure
Endowment
payable
to
the
Owners
at maturity date
if the Insured is then alive.
Option 3. Extended Term Insurance (for participating contract)
This Policy may 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

812

THE INSURANCE CODE OF THE PHILIPPINES

of the life insurance plan for the then policy year together
with any
then
paid-up
insurance amount
and
remainingdividend 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 Paid-Up Pure Endowment payable
to the Owner at maturity date if the Insured is then alive.

10. Policy Loan
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 Owner may obtain a loan for
an amount not exceeding the Cash Value on the sole security
of this Policy and its proper assignment.
The loan will be charged interest at a rate approved by
the Insurance
Commission
as communicated to
the
borrower
on the date the loan
is effected. The loan together with interest is payable on or
before the next policy anniversary, but, if it is not paid, both
loan and interest automatically becomes a new loan on the
policy anniversary, on which 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 Company under this Policy.
This Policy automatically terminates if the total debt under this
Policy exceeds the Cash Value.
The Company may postpone the granting of a loan,
other than to pay a premium due, for not more than six (6 )
months after receiving the written application for the loan.

11. Premium Loan Option
a.

For Non-Participating Contract

If the Premium Loan Option is elected, any premium due
remaining unpaid at the end of its Grace Period is
automati-cally paid as a Policy Loan. However, if the Net Surrender
Value is not enough, the next smaller mode premium is paid

Appendix E
STANDARD LIFE INSURANCE POLICY PROVISIONS

813

instead, provided this is not less than a quarterly
premium. If the Net Surrender Value is still less than a
quarterly pre-mium, 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.
When the Net Surrender Value becomes less than
the quarterly mode premium due, the Owner will be
informed in writing of the remaining term of coverage.
b.

For Participating Contract

If
the
Premium
Loan
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 mode
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 Net Surrender Value bears to the
quarterly premium.
When the Net Surrender Value becomes less than
the quarterly mode premium due, the Owner will be
informed in writing of the remaining term of coverage.

12. Table of Non-Forfeiture Values
The 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 Option
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.

814

THE INSURANCE CODE OF THE PHILIPPINES

14. Settlement Option
Settlement options other than lump sum are available
upon written application to the Company.

15. Reinstatement
Subject to the approval of the Company, this Policy may
be reinstated at any time within three (3) years from the due
date of the premium in default provided:
a. the policy has not been surrendered for
converted to Extended Term Insurance which has expired;

cash

or

b. a written application for reinstatement is
submitted to the Company together with evidence of
insurability of the Insured satisfactory to the Company; 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 Company and a
policyholder relating to insurance matters.

OPTIONAL PROVISION
S 1. Assignment
The Company is not bound by any assignment of this
Policy unless duly
endorsed on this Policy. The
Company assumes no responsibility for the effect,
sufficiency or validity of any assignment. The Company 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 Company 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

The Beneficiaries are the persons designated to receive
the proceeds of this Policy upon 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
Owner may
delete
any
Beneficiary
or
designate
new
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 Owner 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
Bene-ficiaries in the same beneficiary classification share equally
in the death benefit proceeds for that Beneficiary classification,
unless otherwise specified. The death benefit proceeds are
payable to primary Beneficiaries surviving at the death of the
Insured; if no primary Beneficiary survives the
insured,
to secondary
Benefi-ciaries surviving at the death of the
insured; or if no Beneficiary survives the insured, to the owner
if alive, otherwise, to the es-tate of the Insured.
The

Owner 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 mode 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.

816

THE INSURANCE CODE OF THE PHILIPPINES

5. Limitation of Action
No legal action on this Policy may be filed after five (5)
years from the time the cause of action accrues.
6. Currency
All amounts of money in this Policy are in the legal
currency of the Philippines.
The provision of Article 1250 of the Civil Code
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 payment x x x."
is understood and agreed not to apply in determining the
extent of any liability of the Company 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 Premium Loan is available
in this Policy.
2. Term
Plans with cash values (a)
Policy loan
No loan including Premium Loan is available
in this Policy.
(b) Non-Forfeiture Provisions — same as
for perma-nent plans.
OPTIONAL PROVISIONS FOR TERM PLANS

1. Optional Conversion
Number of years such conversion is allowed and manner of
computation for back premiums are left to
Company's discretion.

Appendix E
STANDARD LIFE INSURANCE POLICY PROVISIONS

817

Following is a sample:
This Policy, if in force, may be converted without evidence of
insurability to a new policy on the Insured at any time ([a] or
[b]) (a)
before the Policy Anniversary.
(b)

prior to age of the Insured.

The new Policy may be on any whole life insurance
or endowment
plan with level
amount
of
insurance
then being issued by the Company.
The amount of insurance of the new policy may not be more
than the then amount of insurance of this Policy. The new
premiums will be based on rates then in use for the then
attained
age
of
the
Insured,
and
the
applicable
risk
class under this Policy.
The conversion becomes effective only upon approval by
the Company
of
the
proper written application
for the
conversion duly signed by the Owner, all assignees, and all
irrevocable Beneficiaries; and upon receipt of the full initial
premium for the new policy.
2.

Renewal

Left to the Company'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 may be renewed for the
period
shown in the schedule of Benefits and Premiums. Renewal
will be effective upon payment of the premium 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, JULY26,2006.)

SUBJECT : Compulsory Motor Vehicle Liability
Insurance (CMVLI) Coverage
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 414 in
relation to Chapter VI of the Insurance Code of 1978, the Limits
of Liability, Schedule of Indemnities for Bodily Injury and/or
Death, and Premium
Rates
prescribed under
Insurance
Memorandum Circular No. 1-96
dated November 4,1996 are hereby revised as follows:

I.

LIMITS OF LIABILITY

The limits for
third party
liability for all
CMVLI
coverage shall be One Hundred Thousand Pesos (P100,000.00)
each for all types of motor vehicles with an additional One
Hundred Thousand Pesos (P100,000.00) for passenger liability if
the motor vehicles is used as a public utility vehicle.

II. SCHEDULE OF INDEMNITIES
FOR BODILY INJURY AND/OR DEATH
The 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 CMVLI policy.

818

Appendix F
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE COVERAGE

A.

)

INDEMNITY
B.

819

DEATH

P70,000.00

Burial and Funeral Expenses
30,000.00
)
BODILY INJURIES AND FRACTURES

Types of Accommodation Or
Professional Attendance
Extended

1. Hospital Rooms

Services Rendered

Maximum of 45 days per
accident
Laboratory Examination,
fees, x-rays

Maximum
Reimbursable Fees
and/or
Charges

P500.00/day
2,000.00

2. Surgical Expenses

Major Operation
Medium Operation
Minor Operation

7.500.0
5,000.00
1.500.00

3. Anaesthesio-logist's Fees

Major Operation
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
medi-cal expenses must
not ex-ceed
(For single period of
con-finement)

6. Drugs and Medicines

7. Ambulance

P400.00/day

5,000.00

Actual value of drugs and
medicines used but not to
exceed

20,000.00

Actual
amount
charged
for
ambulance
transport but not to exceed

1,500.00

820

THE INSURANCE CODE OF THE PHILIPPINES

PERMANENT DISABLEMENT

AMOUNT

Loss of or Loss of Use of:
Two limbs

50.0.

00

Both hands, or All fingers or Both

50.0.

00

thumbs Both feet

50.0.

00

One hand and one foot

50.0.

00

Sight of both eyes

50.0.

00

50.0.

00

50.0.

00

Injuries resulting in being
permanently bedridden
Any other injury causing
permanent total disablement
Arm at or above elbow
Arm between elbow and wrist
Hand 15,000.000

20.0. 00
15.0.

00

Four fingers and thumb of one

15.0.

00

hand Four fingers

One foot

12.0. 0
0
20,000.0
0

All toes of one foot

15.0.

00

Thumb

15.0.

00

Index finger

10.0. 0
0

Let at or above knee
Leg below knee

Sight of one eye
Hearing — both ears
Hearing — one ear

III. NO
FAULT INDEMNITY

8,000.0
0
6,000.0

Any claim for death or bodily injuries sustained by a
passenger or third party shall be paid without the necessity of
proving fault or negligence of any kind provided the total
indemnity in respect of any person shall be P15,000.00 for all
motor vehicles.

IV. Set forth hereunder are the respective rates of premium
for one-year and three-year CMVLI coverage.

Appendix F
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE COVERAGE
VEHICLE CLASSIFICATIO
N

BASIC
PREMIUM

821

DST
12.50%

EVAT
12.00%

LGT
TOTAL 0.75%
PREMIUM

55.89

53.65

3.35

560.00

For OneYear CMVLI Coverage
1.

Private Cars (including jeeps & 447.11
Utility Vehicles)

2. Light/Medium Trucks
(Own
Goods) Not Over 3,930 kgs.
3. Heavy Trucks (Own Goods)
and Private Buses over 3,930 kgs.

487.03

60.88

58.44

3.65

610.00

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.

878.24

109.78

105.39

6.59

Taxi, PUJ and Mini Bus 6.

1,157.6

144.71

138.92

1,100.00

24.95

23.95

1,450.00

PUB and Tourists Bus

9

7. Motorcycles / Tricycles / Trailers

199.60

8.68

1.50

250.00

154.25

9.64

1,610.00

For Three-Year CMVLI Coverage
1.

Private Cars (including
& Utility Vehicles)

jeeps

2. Light/Medium Trucks
(Own
Goods) Not Over 3,930 kgs.
3. Heavy Trucks (Own Goods)
and Private Buses over 3,930 kgs.

1,285.43162.67

1,397.21

162.67

167.67

10.48

1,750.00

2,746.5
1

162.67

329.58

20.60

3,440.00

162.67

203.11

12.69

2,120.00

162.67

301.80

18.86

3,150.00

162.67

397.60

24.85

4,150.00

162.67

68.98

4.31

4. AC and Tourists Cars
5. Taxi, PUJ and Mini Bus
6. PUB and Tourists Bus
7. Motorcycles / Tricycles / Trailers

1,692.6
1
2,514.9
7
3,313.3
7
574.85

This Circular shall apply to all CMVLI policies that
shall be issued on or after January 1, 2007.

— 0O0 —

720.00

Appendix “G”
ISSUANCE OF BONDS
(INS. MEMO. CIR. NO. 17, MARCH 1,1977.)

SUBJECT

:

Rules and regulations governing the issuance of
bonds in the Philippines in favor of the government
and other persons

TO: All Non-Life Insurance Companies Doing Business
in the Philippines:
Pursuant to the authority granted to the undersigned
by Section 414 of Presidential Decree No. 612, otherwise
known as the Insurance Code, the following rules and
regulations are hereby promulgated:
(1) All bond forms which are to be used in the
Philippines by an insurance company must at least be in
duplicate and must be
consecutively
and serially prenumbered,
in
the
manner indicated in the
attached Schedule A, such consecutive serial number to be
printed in bold color on the original and copies of such bond
forms.
(2)
Any
bond
form
destroyed
in
the
course
of
preparation shall be plainly marked with the word "destroyed"
and shall be preserved and placed in a separate file by
the insurance company concerned. In the event any bond
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
bond form was never issued in favor of anyone.
(3) Every insurance company authorized to issue bonds
in the Philippines shall maintain a bond registry book which shall

822

Appendix G
ISSUANCE OF BONDS

823

be open to the public and to duly authorized representatives
of the Insurance Commission during all reasonable business
hours. Every bond issued by an insurance company shall be
entered and recorded in numerical and chronological order in
the bond registry book, such entry and record to indicate the
consecutive serial number of the bond issued, the date and place
where it had been issued, the face amount 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 whose favor the bond had been issued, as well
as an indication that the bond is outstanding or had been cancelled.
Should such bond registry book be lost or destroyed
or should any page or pages thereof be removed therefrom,
the insurance company to which such bond registry book
belongs shall
submit
withoutdelay
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. And
an insurance company which bond registry book had been
lost or totally destroyed shall immediately desist from issuing
new bonds until such lost or totally destroyed bond registry
book shall have been reconstituted. In case any page or pages
of a bond registry book had been removed therefrom, a
reconstitution of such page or pages should be made
without delay by the insurance company concerned.
(4) Should the certificate of authority granted to an
insurance company be suspended or revoked by the Insurance
Commis-sioner,
the
insurance
company
concerned shall, without
delay,
surrender its bond registry book 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
the Philippines are hereby prohibited from issuing signed
blank bond forms to their agents.

in

(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 company concerned as well as the certificate of its
officers, general agents, and agents under Section 247 of the
Insurance Code and for the imposition of such other sanctions
as those mentioned in Section 415 of the same Code.
This Insurance Memorandum Circular supersedes Circular
No. 66 dated September 19, 1966 of the Office of the
Insurance Commissioner
and
shall
take
effect
immediately
upon
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
Memorandum Circular, bond forms commonly issued by an
insurance company shall be classified and shall bear the
abbreviated symbols or codes and shall be pre-numbered by
prefixing the abbreviated symbols or codes to the proposed serial
number as indicated hereunder:

Class of Bond
JUDICIAL CIVIL
Administrator Bond
Appeal Bond
Attachment, Bond to Lift
Attachment Bond
Guardian's Bond
Heirs Bond
Heirs Bond (Two
Years) Injunction Bond
Injunction Bond To Lift
Receiver's Bond
Receiver, Bond
To Appoint Receiver,
Bond To Lift
Replevin Bond

Symbol

Number

JCL
JCL(l)
JCL(2)
JCL(3)
JCL(4)
JCL(5)
JCL(6)
JCL(7)
JCL(8)
JCL(9)

00001
00001
00001
00001
00001
00001
00001
00001
00001
JCL(IO)
00001 JCL(ll)
00001 JCL(12)
00001
JCL(13)
00001

Appendix G
ISSUANCE OF BONDS

Replevin Bond, Counter
Supersedeas
Etc.
JUDICIAL CRIMINAL

825

JCL(14)
JCL(15)
JCL(-)
JCR

JCR(l)
00001 JCR(2)
00001

Appeal Bond
Bail Bond
FIREARMS
Firearm Bond P6.00 — P10.00

F

Firearm Bond, ROTC Armory
Firearm Dealer's Bond

F(l)

Internal Revenue Bond
(Payment of Deficiency
Taxes)
Internal Revenue Bond
(Payment of
Taxes Under Protest)
CUSTOMS

00001
F(2)
00001 F(3)
00001

INTERNAL REVENUE
Cigarette Stamp Bond

00001
00001
00001

IR
IR(1)

00001

IR(2)

00001

IR(3)

00001

c

Advance Baggage Bond
Anti-Dumping Bond
Arrastre Bond
Berthing Bond

C(1)
C(2)
C(3)
C(4)

00001
00001
00001
00001

Common Carrier Bond
Compensating Tax Bond
Broker's Bond, Customs
Export Bond
Export Bond, ReGeneral Importers Bond
General Bonded Warehouse
Surety Bond
Wharfage Bond
Etc.

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

GUARANTY

G

Bid Bond, Standing
Bid Bond, One Bid Only
Broker's Bond, Merchandise
G(3)

G(l)
00001 G(2)
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 Bond —
Stock Fishpond Bond
Forestry Bond
Guaranty Payment
Manufacturer's Official
Bond Payment Bond
Performance Bond
Reconstituted Title Bond
Reconstituted Title Bond (2
yrs.) Surety Bond
Sweepstake Bond (One
Draw) Sweepstake Bond
(One Year) Warehouse, Rice
Bonded
Etc.
FIDELITY
Fidelity Bond (Blanket)
Fidelity
Bond (Individual)
PROMISSORY NOTE
Promissory Note
IMMIGRATION

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

FID
FID(l)

00001
FID(2)
00001

PN
PN

00001

IM
IM

00001

Immigration Bond
(2) All bond forms issued by the regional or branch
offices of an
insurance company
must follow the
same
pattern
of numbering as prescribed in the
preceding paragraph and further prefixing thereto the complete or
abbreviated name of the official station of the regional or
branch offices. For instance, the Cebu branch office of an
insurance company which issues a Bail Bond must
indicate this number on the bond:
CEBU/JCR(2) — 00001 or CEB/JCR(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 own terms and conditions on the
bonds must
likewise
be
numbered
in
accordance
with
paragraph 1 of this Schedule.
1

— 0O0 —

'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)

(2)

(3)

Judicial bonds can only be issued by the head office or branches and district
of-fices of insurance companies, duly registered with the Insurance
Commission to the exclusion of others;
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 par-ticular 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;
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/FORM
S (CIR. LETTER NO. 11/90 CL, JULY 10,1990.)

SUBJECT

TO

:

Minimum requirements for the approval of insurance
plans/forms for policy, certificate or contract of insurance, application, rider, clause, warranty or endorsement
: All life insurance companies doing business in
the Philippines

Pursuant to Section 225 of the Insurance Code, which
provides that, "No policy, certificate or contract of insurance
shall be issued or delivered within the Philippines unless in the
form previously approved by
the Commissioner, and no
application form shall be used with, and no rider, clause,
warranty
or endorsement shall be attached to, printed or
stamped upon such policy, certificate or contract unless the
forms
of
such
application, rider,
clause,
warranty
or
endorsement has been approved by the Commissioner,"
the
following minimum 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

829

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 con-tract of insurance, including any
special reserves
as may be required by the Insurance Code;
3. bases used in the computations of
non-forfeiture 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,
among others, the following
: 1.
gross premium

2.

direct expenses such as commissions,
documentary stamp tax, premium tax, etc.
3.

mortality rates

4.

withdrawal rates
5.
death benefit cost

.

surrender cost

7.

increase in reserves

.

contribution to general expenses (optional)

6

8

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
(letterform) 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 usedin
the
premium
rates and valuation bases used in the
calculation of legal policy reserves, and other
reserves on contract of insurance including any
special reserves as may be required by the
Insurance
Code
are
adequate and
bear
reasonable
and
appropriate
relationship to the
company's experience;
*3. a statement certifying that the cash
sur-render values and one or more paid-up
benefits available under the policy are computed
in accor-dance with the pertinent provisions of
the Insurance Code.
The abovestated report shall
:

a.

mention the name of plan(s);

b. be addressed to the Insurance Commissioner in a letterhead stationery, either of the
Company or that of the Actuary; and
c. indicate the position/title of the
Actuary in
the company
and his
privilege
tax
receipt number.
Enclosed is a sample of short-form
actuarial report. (Annex "A.")

'Whenever applicable.

831

Appendix H
MINIMUM REQUIREMENTS FOR APPROVAL
OF INSURANCE PLANS/FORMS

i. Illustrative
policies.

dividends

for

participating

2. The 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
number(s) tax account number of the company;
b. a statement that documentary stamps
affixed and properly cancelled with respectto
policy;
c. the applicable
PARTICIPATING or
in bold
on the face of the policy;

are
the

term, whether
NON-PARTICIPATING,
letters,
preferably

d. provision for necessary blank spaces, with
the corresponding
headings for
the
descriptive title or name of any rider,
clause,
warranty
or
endorsement
as may be attached to the policy; and
e. in substance, the applicable provisions as
specified under Chapter III, Title 9. Policy Forms
or Title 10. Variable Contracts, and
other
provisions which the
company
may
deem
necessary for the insurance plan;
f.

the provision:

"The
Insurance
Commission,
with
head
office at United Nations Avenue, 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
company
and
a
policyholder relating to insurance matters."
B.

For application(s) and related form(s)
1. The documents to be
consist of the following:

submitted shall

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
which the form(s) is/are to be used.
2.

plans/policies for

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
designation.

applicant's

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: two (2) copies of the final draft of the form(s);
1. brief and concise description of the feature/
2.
mechanics of the attachment(s);
3. types of all insurance plans /
policies to which the form(s) is /are to be attached; and
4.
all applicable items under A above. II. Revised
Plans/Forms
For revision/modification of existing plan(s) and/or
form(s), the documents to be submitted shall consist of the following:
A. all applicable items under I. A, B, C, as the case may be;
B. specimen copy of the form(s) being revised
clearly indicating
which particular provisions are
revised/modified, as the case may 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

833

Annex "A"
Sample of Short Form
Actuarial Report
Date _______________

The

Insurance
Comissioner
United
Nations
Ermita, Manila

1071
Avenue

Madam:
I hereby certify that the actuarial formulations
_____________________ are accurate and in accordance with

used

for

generally accepted actuarial principles, and, in my opinion,
the actuarial assumptions therefor,
such as the mortality,
withdrawal, interest, and expenses, are adequate and bear a
reasonable and appropriate relationship to the company's experience.
‘Further,
paid-up
with

I hereby certify that the cash values and
benefits
are computed
in
accordance
the pertinent provisions of the Insurance Code.

Very truly yours,

Name of Accredited Actuar
y Position/Title
PTR No. ______________

0O0 —
’Whenever applicable.

Appendix “I”
PRESIDENTIAL DECREE NO. 530
GRANTING
CHARTER
TO
THE
"ASIAN
INSTITUTE
OF INSURANCE, INC." TO ORGANIZE AS A NONSTOCK, NON-PROFIT CORPORATION.
WHEREAS, insurance is vital to the socio-economic life of
a country;
WHEREAS,
in
many
countries
of
Asia,
domestic
insurance companies do
not
find facilities to
educate
and train their
personnel in insurance and in insurance management;
WHEREAS, the Philippines has earned in East Asia a
reputation for leadership in various fields, among which
are insurance, insurance education and management;
WHEREAS, consonant with this leadership in
insurance, insurance education and management,
it behooves the Philippines to set up to offer to its Asian
neighbors
the
facilities
they
need
and lack for insurance education training and management;
WHEREAS, such facilities as would enable the
Philippines to discharge this assumed responsibility with
effectiveness and prestige would require both capable people
and financing in a significant amount;
WHEREAS, there are capable individuals and entities in
the Philippine Insurance Industry interested to set up a nonstock, non-profit institution that would carry out the purposes
and aims as hereinabove stated, with the end in view of
establishing in this country a center of learning fo^nsurance in
Asia particularly Far East Asia;
WHEREAS, if given proper incentives the financing
needed might be raised from persons and entities, both within and

834

Appendix I
PRESIDENTIAL DECREE NO. 530

outside

835

the Philippine Insurance Industry, who will
contribute to the Institution by way of donation,
bequest, endowment, or other forms;
NOW, THEREFORE, I, FERDINAND E. MARCOS,
President of the Philippines, by virtue of the powers vested in
me by the Constitution, do hereby order and decree:
SECTION 1. Any provisions of law, decree, executive
order, administrative order, letter of instruction, or rules and
regulations to the contrary notwithstanding, there shall be
created a non-stock and non-profit corporation to be called
and named the "ASIAN INSTITUTE OF INSURANCE, INC."'
to 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.
The Insurance Commissioner shall approve, the Articles
of Incorporation and By-Laws of the "Asian Institute of
Insurance, Inc." to ascertain in the carrying out of the
purposes herein enunciated and upon approval of the said
Articles and By-Laws, the same shall be forwarded to and
recorded in the office of the Securities and Exchange Commission.
SEC. 2. This Decree shall take effect and shall be
implemented immediately.
DONE in the City of Manila, this 7th day of August, in
the year of Our Lord, nineteen hundred and seventy-four.
— oOo —

'In 1975, it became the Insurance Institute for Asia and the Pacific (DAP). Its
board of trustees is composed of 15 members, among the foreign members are
insurance com-panies from all the ASEAN nations as well as those from China.

Appendix “J”
PRESIDENTIAL DECREE NO. 1270
AUTHORIZINGTHE
ORGANIZATION
AND
LICENSING
OF A PROFESSIONAL
REINSURER TO
BE
KNOWN AS
THE
NATIONAL REINSURANCE CORPORATION
OF
THE PHILIPPINES
AND
DESIGNATING
SAID
CORPORATION AS THE NATIONAL INSTITUTION THAT
WILL SUBSCRIBE TO THE CAPITAL STOCK
OF THE
ASIAN REINSURANCE CORPORATION.
WHEREAS, it is the policy of the state to promote
and develop a strong national insurance industry and to
provide
for its integration in the country's economic and social
development;
WHEREAS, in line with this policy, there is a
pressing need to
provide
a well-coordinated and
efficient
machinery in reinsurance for the purpose of
achieving a higher national retention indispensable to the
growth of healthy insurance and reinsurance markets;
WHEREAS, in line also with this policy, it is desirable to
utilize the regional retention capacity to the maximum by
participating in regional
or
international
cooperation
or
arrangement in
insurance and reinsurance;
WHEREAS, the Republic of the Philippines on September
30, 1977
signed the Agreement establishing
the
Asian Reinsurance Corporation;
WHEREAS, there is a need to have an organization
through which the Philippine
insurance
and reinsurance
markets may participate in the Asian Reinsurance
Corporation or in
any other
regional
or
international
cooperation or arrangement in insurance and reinsurance;

836

837

Appendix J
PRESIDENTIAL DECREE NO. 1270

WHEREAS, 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 MemberState;
NOW, THEREFORE, I, FERDINAND E. MARCOS,
President of the Republic of the Philippines, by virtue of the
powers vested in me by the Constitution do hereby decree,
order and make as part of the law of the land the following:
SECTION
1.
National
Reinsurance
Corporation
of
the
Philippines: Authority to license. — Any 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
Commissioner
to
license
a
corporation to
be
organized under the provisions of Act No. 1459, otherwise
known as the Corporation Law,
as a professional reinsurer
under Presidential Decree No. 612,3
otherwise known as the
Insurance Code, which
corporation shall be known as
the "National Reinsurance Corporation of the Philippines."
2

SEC. 2. The Insurance Commissioner shall approve the
Articles of Incorporation and By-Laws of the said corporation to
ascertain the carrying out of the purposes herein aboveenumerated and, upon approval of the said Articles of
Incorporation and By-Laws, shall forward the same to the
Securities and Exchange Commission for registration.
SEC. 3. The National Reinsurance Corporation of the
Philip-pines is hereby designated as the national institution
authorized to subscribe to the portion of the capital stock of the
Asian Rein-surance Corporation allotted to the Republic of
the Philippines in the amount of US$500,000. The Insurance
Commissioner
is hereby designated as the Philippine representative to the
Coun-cil of Members of the Asian Reinsurance Corporation.
SEC. 4. Upon the commencement of operations
National Reinsurance Corporation of the Philippines, all non-

of

2Now,
Batas Pambansa Big. 68, otherwise known as the Corporation Code of the Phil-ippines.
3Now,

Presidential Decree No. 1460.

the

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
new reinsurance placed which would otherwise be outward
foreign
reinsurance
as
well
as
of
the renewals
of such new reinsurance placements.
The
aforesaid
compulsory
companies shall be accorded the
afforded by the existing treaties.

cessions
from
best terms and

insurance
conditions

SEC. 5. Effectivity.—This Decree shall take effect immediately.
DONE in the City of Manila, this 22nd day of December
in the year of Our Lord, nineteen hundred and seventy-seven.

— oOo —

THE
INSURANCE CODE
OF
THE PHILIPPINES
ANNOTATED
By
HECTOR S. DE LEON

LL.B., University of the Philippines
Author: Philippine Constitutional Law: Principles and Cas
es
(2 vols.); Comments and Cases on Succession; Comments
and Cases on Sales and Lease; etc.
Co-author: Comments and Cases on Property; Comments and Cases
on Obligations and Contracts; Comments and Cases on Partnership,
Agency, and Trusts; Comments and Cases on Torts and Damages; Administrative Law: T
ext and Cases; The Law on Public Officers and Election Law;
The Corporation Code of the Philippines Annotated;
The Philippine Negotiable Instrument Law (and Allied Laws) Annotated;
The Fundamentals of Taxation; The Law on Income Taxation;
The Law on Transfer and Business Taxation;
The National Internal Revenue Code Annotated (2 vols.); etc.

and
HECTOR M. DE LEON, JR.
A.B., LL.B., University of the Philippines
LL.M., University of Michigan
Partner, SyCip Salazar Hernandez & Gatmaita
n
Co-author: Comments and Cases on Property; Comments and Cases on
Obligations and Contracts; Comments and Cases on Partnership,
Agency, and Trusts; Comments and Torts and Damages;
Administrative Law: Text and Cases;
The Law on Public Officers and Election Law;
The Corporation Code of the Philippines Annotated;
The Philippine Negotiable Instrument Law (and Allied Laws) Annotated;
The Fundamentals of Taxation;
The Law on Income Taxation; The Law on Transfer and Business
Taxation; and The National Internal Revenue Code Annotated (2 vols.).

2010 Edition

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AND
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ISBN 978-971-23-5669-8
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ISBN 978-971-23-56698 HI

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PREFACE
This work which is now on its tenth edition, is
primarily intended to provide a basic text for the law course in
INSURANCE. To those connected with the industry, it may
serve as a ready reference on questions pertinent to the subject.
Briefly,
the
book
aims
to
present
a
simplified,
correlated treatment of our law of insurance, now embodied in
Presidential Decree No. 1460 (as amended), otherwise known as
"The Insur-ance Code of 1978," in a way which is at the same
time authorita-tive and exhaustive.
Opinions of
recognized
writers
and
Philip-pine
and
American
judicial
decisions
including the latest rulings of our Supreme Court are cited or
quoted in the proper places by way of explanation of the law.
Numerous illustrations are also given to further help the reader
understand the matter being ex-plained.
The author is gratified to note that the previous
editions have been used not only by law students but also to a
consider-able extent by lawyers and judges and those interested
to acquire an adequate grasp of important doctrines of
insurance law as they relate to the principles and practices of
the insurance busi-ness, thus fulfilling the aim behind this work
as a source material and reference in the study of insurance.
The author would like to say a word of thanks to
former Dean Jose R. Sundiang (San Beda College) and Atty.
Norberto F. Castro,
former
Chief,
Regulation Division,
Insurance
Com-mis-sion,
for
making
comments
and
suggestions.
Of
course,
for
all
shortcomings
and mistakes, he is solely responsible.

HECTOR S. DE LEON
HECTOR M. DE LEON, JR
.
June 2010

iii

CONTENTS
GENERAL PROVISIONS
Section
1.
2.
3.
4.

5.
6.

1 .......................................................................................................

1

Historical origin of insurance ....................................................
1
Sources of insurance law in the Philippines...........................
5
Laws governing insurance .........................................................
5
Right of subrogation of insurer to rights
of insured against wrongdoer...........................................
7
Applicability of the Civil Code..................................................
12 Construction of the Insurance Code ........................................
13

Section
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

2 .......................................................................................................

13

Legal concept of insurance .........................................................
14
Definition of insurance from
other viewpoints...................................................................
15
Determination of the existence
of the contract........................................................................
16
Nature and characteristics of an
insurance contract ................................................................
17
Distinguishing elements of the contract
of insurance ...........................................................................
21
Insurance, a risk-distributing device........................................
22 Coping with risk ...........................................................................
24
The value of transferring risk ....................................................
26 Economic effects of the transfer
and distribution of risk .......................................................
29
The fields of insurance.................................................................
32
Classifications of contracts of insurance..................................
34
Classification by interests protected.........................................
35
Classifications under the Code..................................................
40
Contracts written by guaranty or surety
companies ..............................................................................
41

V

15.

Construction of insurance contracts

42

ILLUSTRATIVE CASES:
1.
2.

3.
4.

5.

6.

Del Rosario vs. Equitable Insurance &
Casualty Co., 8 SCRA 343 (1963).............................
Taurus Taxi Co., Inc. vs. The Capital
Insurance & Surety Co., Inc.,
24 SCRA 454 (1968) ...................................................
CCC Insurance Corp. vs. Court
of Appeals, 31 SCRA 264 (1970) .............................
Association of Baptists for World
Evangelism, Inc. vs. Fieldmen'
s Insurance Co., Inc.,
124 SCRA 618 (1983) .................................................
Landicho vs. Government Service
Insurance System,
46 SCRA 7 (1972)........................................................
Gonzales vs. The Phil. American Life
Insurance Co., I.C. Case No. 56,
June 21, 1976) ..............................................................

44

45
46

47

48

49

7.
American Home Assurance Compa
ny vs. Tantuco Enterprise, Inc.,
366 SCRA 740 (2001) .................................................

Misamis Lumber Corporation vs.
Capital
Dev. & Surety Co., 17 SCRA
228 (1966) .....................................................................
2.
Union Manufacturing Co., Inc. vs. Phil.
Guaranty Co., 47 SCRA 271 (1972) ........................
3.
Ty vs. First National Surety & Assurance Co.,
Inc., 1 SCRA 1324 (1961)...........................................
4.
Ang vs. Fulton, 2 SCRA 945 (1961) ..................................
5.
Dumoy Sawmill, Inc. vs. Times Surety
and Insurance Co., Inc., I.C. Case
No. 132 (1976) .............................................................
6.
Perla Compania de Seguros, Inc. vs. CA,
185 SCRA 741 (1990) .................................................
What constitutes doing or transacting
an insurance business..........................................................

52

1.

16.

vi

53
53
54
54

55
55
55

17. Functions of insurance.....................................................................

58

Chapter I. — CONTRACT OF INSURANCE
Title 1
What May Be Insured
Section 3 .............................................................................................................
1.
2.

62 3.
63 4.
64 5.
64 6.
65

Requisites of a contract of insurance.........................................
Subject matter of contract of insurance ....................................
Event or peril insured against ....................................................
Insurance by a married woman.................................................
Insurance by a minor....................................................................
Ownership of life insurance policy ...........................................

Section 4 .............................................................................................................
1.
2.

Concept of lottery..........................................................................
Contract of insurance not a wagering
contract....................................................................................
Similarity between insurance
and gambling.........................................................................

3.

61
61

66
66

67
68

Section 5 .............................................................................................................
68

1.

Applicability of provisions of Chapter 1............................

68

Title 2
Parties to
the Contract
Section 6
1.
2.
3.
4.
Section 7
1.
2.
3.

..............................................................................................................
Parties to a contract of insurance ...............................................
Terms used .....................................................................................
Who may be an insurer................................................................
Business of insurance affected with
public interest ........................................................................

70
70
71
71

.............................................................................................................
Capacity of party insured............................................................
Meaning of public enemy............................................................
Effect of war on existing insurance
contracts ..................................................................................

73
74
74

vii

73

74

Section
1.
2.
3.
4.

5.
6.
7.
Sectio
n
1.
2.
3.

.........................................................................................................
Insurable interest of mortgagee
and mortgagor...: ..................................................................
Insurance by mortgagee of his own interest...........................
Insurance by mortgagor of his own interest ...........................
Insurance by mortgagor for benefit of
mortgagee, or policy assigned
to mortgagee..........................................................................
Effect of standard and open clauses in fire
insurance policy....................................................................
Right of mortgagee under mortgagor's
policy.......................................................................................
Effect of insurance by mortgagee on behalf
of mortgagor..........................................................................

76

9 ........................................................................................................
Assignment or transfer of insurance policy ............................
Right of mortgagor to assign insurance
policy to mortgagee .............................................................
Effect of new contract between insurer
and mortgagee-assignee.....................................................

82
82

8

76
77
78

79
80
80
81

83
84

Title 3
Insurable Interest
Sectio
n
1.
2.
3.
4.
5.
6.
7.
8.

10 ......................................................................................................
Insurable interest in general .......................................................
Necessity of insurable interest to validity
of contract...............................................................................
Requirement, a matter of public policy....................................
Two general classes of life policies............................................
87 Insurable interest in one's own life............................................
Similarity between a life insurance policy
and a civil donation .............................................................
Insurable interest in life of another ...........................................
Insurable interest in life of person upon
whom one depends for education o
r support or in whom he has a
pecuniary interest.................................................................

viii

85
85
86
86

88

89
90

91

9.
10.
11.
12.

Insurable interest of a person in life of another
under a legal obligation to former....................................
Insurable interest of creditor in life
of his debtor ...........................................................................
Insurable interest in life of person upon
which an estate or interest depends.................................
Consent of person whose life is insured.................................

Section
1.
2.
3.

11
..............................................................................................
Beneficiary defined......................................................................
Kinds of beneficiary ....................................................................
Limitations in the appointment
of beneficiary .........................................................................
4.
Right of insured to change beneficiary
in life insurance.....................................................................
5.
Measurement of vested interest
of beneficiary in policy ........................................................
6.
Where beneficiary dies before insured ...................................
102 7.
Designation of beneficiary .........................................................
103

Section
1.
2.

Sectio
n
1.
Sectio
n
1.
Sectio
n
1.

12

..............................................................................................

93
94
95
95
96
96
97
98
99
100

105

Forfeiture of the interest of the beneficiary
in a life insurance policy .....................................................
105
Liability of insurer on death of insured ..................................
106
ILLUSTRATIVE CASES:
A. Tolentino vs. Filipinas Life Assuranc
e
Co., Inc., I.C. Case No. 162,
July 19, 1976 ................................................................
13 .....................................................................................................

108
109

Insurable interest in property in general................................

109

14 ..................................................................................................... Ill
Insurable interest in property
in particular cases................................................................. Ill
15 .....................................................................................................

113

Insurable interest of carrier or depository..............................

113

ix

Section 16 ..........................................................................................................
1. Mere contingent or expectant interest
not insurable .........................................................................

114
114

Section 17 ..........................................................................................................
115 1. Measure of insurable interest in property....................................
115
Section 18 ..........................................................................................................
1. Effect of absence of insurable interest
in property insured .............................................................
2. Measure of indemnity in insurance
contracts.................................................................................

117

Section 19 ..........................................................................................................
1. Time when insurable interest must exist ................................
2. Existence of insurable interest when
risk attaches...........................................................................
3. Insurable interest in life and property
distinguished ........................................................................

120
120

Section 20 ..........................................................................................................
1. Effect, in general, of change of interest....................................
2. Object of rule against alienation................................................
3. Change of interest covered by law ...........................................
4. Exceptions to general rule ..........................................................

124
124
124
124
125

Section 21 ..........................................................................................................

125

1.

117
118

122

123

Change of interest in a thing insured
after loss .................................................................................

126

Section 22 ..........................................................................................................

126

1.

Change of interest where several things
separately insured by one policy......................................

126

Section 23 ..........................................................................................................
127 1.

Change of interest by death of insured ...................................
127

Section 24 ..........................................................................................................
1.

128

Transfer of interest by one of the several
partners, etc. jointly insured..............................................

X

128

Section 25 ..............................................................................................
1.
2.

Stipulations prohibited in an insurance
policy.......................................................................................
Wagering or gaming policies void............................................

129
129
130

Title 4
Concealment
Section 26 ..............................................................................................
1.
2.
3.
4.

Four primary concerns of the parties
to an insurance contract......................................................
Devices for ascertaining and controlling
risk and loss...........................................................................
Concealment defined...................................................................
Requisites of concealment...........................................................

Section 27 ..............................................................................................

131
131
131
133
134

134

1. Effect of concealment ..............................................................
134 2.
Proof of fraud in concealment ..............................................
135 3.
Rules as to marine insurance.................................................
137

Section 28 ..............................................................................................
1.
2.

Matters that must be communicated
even in the absence of inquiry...........................................
Effect of failure of insurer to verify...........................................

138
138
139

Section 29 ..............................................................................................
139 1.

When fraudulent intent necessary............................................
139

Section 30 ..............................................................................................
1.
2.

Matters made the subject of special
inquiries material .................................................................
When there is no duty to make
disclosure ...............................................................................

Section 31 ..............................................................................................
1. Determination of materiality......................................................
142
Time when information acquired.............................................
145

140
140
140

142
2.

xi

Section 32 ..........................................................................................................
145 1. Matters each party bound to know ...............................................
145
Section 33 ..........................................................................................................
146 1. Right to information may be waived............................................
146
ILLUSTRATIVE CASES:
1.

A.G. Factor vs. The Phil. American Life
Insurance Co., I.C. Case No. 310,
Aug. 29, 1997..............................................................
Ng Zee vs. Asian Crusader Life Assurance Corp., 122 SCRA 461 (1983) ..........................

147

Section 34 ..........................................................................................................

148

2.

148

1. Disclosure of nature and extent of interest
of insured ...............................................................................

148

Section 35 ..........................................................................................................
1. Disclosure of judgment upon the matters
in question .............................................................................

149
149

Title 5
Representatio
n
Section 36 ..........................................................................................................
1. Representation defined...............................................................
2. Misrepresentation defined .........................................................
3. Form and nature of representation ..........................................
Section 37
152 1.

150
150
150
151

.................................................................................................
Time when representation may be made ...............................
152

Section 38 ..........................................................................................................
152 1.

Construction of representations................................................
152

ILLUSTRATIVE CASES:
1.

Penn. Mutual Life Ins. Co. vs. Nunnery,
176 Miss. 197..............................................................

153

xii

2.
3.

Fitch vs. Am. Popular Life Ins. Co.,
59 N.Y. 557, 17 Am. Rep. 372...................................
E. Agos vs. The Phil. American Life
Ins., Co., I.C. Case No. 10,
March 11, 1976 ............................................................

Section 39 ..........................................................................................................
1.
2.
3.
4.
Section 40

153

153
153

Kinds of representation...............................................................
Nature of promissory representations ....................................
Effect on policy of expressions of opinion
or expectation........................................................................
When representation deemed a mere
expression of opinion ..........................................................

153
154

............................................................................................

156

155
156

1. Effect of representation on express
provisions of policy ........................................................
Section 41 ..........................................................................................................

156
157

1. When representation may be altered
or withdrawn ........................................................................

157

Section 42 ...... ...................................................................................................
157 1. Time to which representation refers .............................................
157
Section 43 ..........................................................................................................
1. Effect where information obtained from
third persons .........................................................................
2. Effect where information obtained from
agent of insured/insurer ....................................................

158

Section 44 ..........................................................................................................

160

158
159

1.

When representation deemed false..........................................

160

2.

Construction of representation as affirmative .......................

161

Section 45 ..........................................................................................................
1. Effect of falsity of representation ..............................................
2. Effect of collusion or fraud of agent
of insurer ................................................................................

161
161
162

Section46 ................................................................................................................
.
163
xiii

1.
2.

Materiality of representation ......................................................
Concealment and misrepresentation
compared ...............................................................................

163

Section

47 ......................................................................................................

164

1.

Applicability of Sections 26 to 48 ...............................................

164

Section

48 .......................... ...........................................................................

164

1.

2.
3.

4.
5.

163

When an an insurer must exercise his right
to rescind................................................................................
164
Incontestability of life policies ....................................................
165
Theory and object of the incontestable
clause.......................................................................................
166
Requisites for incontestability.....................................................
166
Effect when policy becomes incontestable ..............................
167
ILLUSTRATIVE CASE:

6.

Enriquez vs. The Phil. American Life Insurance
Co., I.C. Case No. 13, July 21, 1976 ...................................

169

Defenses not barred by incontestable
clause.......................................................................................

169

Title 6
The Policy
Sections 49-50 ...................................................................................................
1. Policy of insurance defined.........................................................
2. Signature of the parties ................................................................
3. Policy controls terms of insurance
contract..................
4. Policy, a contract of "adhesion" ..................................................
5. Policy different from contract itself ...........................................
6. Form of contract of insurance.....................................................
7. Perfection of insurance contract.................................................
8. Offer and acceptance in insurance contract.............................
9. Importance of delivery of policy................................................
10. Modes of delivery of policy ........................................................
11. Delivery to insurer's agent as delivery
to insured ...............................................................................

xiv

171
171
171
172
172
175
175
176
178
179
180
181

12. Effect of delivery of policy ..........................................................
181
13.
Rider in a contract of insurance .................................................
182 14.
Attached papers on insurance policy.......................................
183 15. Effect of failure of insured to read policy ................................
185 16.
Insurer's duty to explain the policy ..........................................
187 17.
Group insurance............................................................................
189
Section 51
.............................................................................................
1.
Contents of the policy ..................................................................
2.
Kinds of insurable risks ...............................................................
3.
Risk, peril, and hazards distinguished.....................................
4.
Requirements for risks to be insurable.....................................
5.
Requirements not absolute .........................................................

192
192
195
196
198
199

Section 52
.............................................................................................
1.
Preliminary contracts of insurance ...........................................
2.
Issuance and renewal of cover notes........................................
3.
Rules on cover notes.....................................................................

199
199
201
202

Section 53 ..........................................................................................................
203 1.

Persons entitled to recover on policy .......................................
203

ILLUSTRATIVE CASES:
1.
2.
3.

Rizal Commercial Banking Corp. vs. CA,
289 SCRA 292 (1998).................................................
Coquia vs. Fieldmen's Insurance Co.,
Inc., 26 SCRA 178 (1968)..........................................
A. Carlos vs. Summit Guaranty and
Insurance Co., Inc., I.C. Case
No. 181, Jan. 23, 1976 ...............................................

Section 54 ..........................................................................................................
1.

204
205

206
206

Where insurance made by an agent
or trustee ................................................................................

206

Section 55 ..........................................................................................................

206

1.

Where insurance effected by partner
or part owner ........................................................................

XV

207

Sections 56-57 ...................................................................................................
207 1. Where description of insured general ..........................................
207
Section 58 ..........................................................................................................
208 1. Effect of transfer of thing insured ..................................................
208
Sections 59-62 ...................................................................................................

208

1.

Kinds of policies ...........................................................................

209

2.

Advantages of a running policy ...............................................

212

Section 63 ..........................................................................................................
1. Validity of agreement limiting time
for commencing action .......................................................
2. Nature of condition limiting period
for filing claim.......................................................................
3. Where action brought against
insurer's agent.......................................................................
4. When cause of action accrues....................................................

212

Sections 64-65 ...................................................................................................
1. Cancellation of non-life insurance policy ...............................
2. Form and sufficiency of notice
of cancellation .......................................................................
3. Prior notice of cancellation to insured .....................................

216
217

212

213
213
214

217
218

Section 66 ............................................................................................................
219 1.

Renewal of non-life insurance policy ......................................
219
Title 7
Warranties

Section 67 ..........................................................................................................
1. Warranty defined .........................................................................
2. Kinds of warranties......................................................................
3. Warranty presumed affirmative...............................................

221
221
221
222

Section 68 ............................................................................................................
223 1.

Time to which warranty refers..................................................
223

Section69 ...............................................................................................................
..
223

xvi

1.
2.

Intention of parties governs ........................................................
Warranties distinguished from
representations.......................................................................

223
224

Section 70 ...........................................................................................................
226 1. Express warranty, where contained...............................................
226
Section 71 ...........................................................................................................

227

1. Express warranty regarding person,
thing, or risk ...........................................................................

227

Section 72 ...........................................................................................................

228

1. Warranty of facts or omissions which
materially affect the risk ......................................................

228

Section 73 ...........................................................................................................
1. When breach of warranty does not
avoid policy ............................................................................
2. Where insurer barred by waiver
or estoppel ..............................................................................

229
229
230

ILLUSTRATIVE CASE:
Far Eastern Surety & Insurance Co. vs. Vda.
de Misa, 25 SCRA 662 (1968) ..............................................
Section 74 ...........................................................................................................
1.

232
232

Right to rescind for violation of a material
warranty..................................................................................

232

Section 75 ...........................................................................................................

233

1.

When violation of immaterial provisions
shall avoid policy ..................................................................

233

Section 76 ..................................................... ..................................................
... ......................................................................... 234
1.
2.
3.
4.
5.

Effect of breach of warranty by insured...................................
Conditions in insurance policy...................................................
Warranties and conditions distinguished................................
Exceptions in insurance policy ...................................................
Exceptions distinguished from warranties
and conditions........................................................................

xvii

234
235
235
236
236

6.

Effects of breach on legal relations of parties... 237

Title 8
Premiu
m
Section 77 ..........................................................................................................
1.
2.
3.
4.

Premium defined .........................................................................
Assessment defined.....................................................................
Premium distinguished from assessment..............................
Payment of premium ordinarily not
a debt or obligation..............................................................

238
238
238
239
239

ILLUSTRATIVE CASES:
1.

2.

3.

4.

5.
6.
7.

8.

Phil. Phoenix Surety & Insurance Co.,
Inc. vs. Woodworks, Inc., 20 SCRA
1270 (1967) ..................................................................
Phil. Phoenix Surety & Ins., Co. vs.
Woodworks, Inc., 92 SCRA 419
(1979)............. ............................................................
.. ........................241
Tibay vs. CA, 70 SCAD 744, 257 SCRA
126 (1996).....................................................................
American Home Assurance Company, Inc.
vs. Tantoco Enterprises, Inc.,
366 SCRA 740 (2001).................................................

Effect of nonpayment of premium ..........................................
Excuses for nonpayment of premiums...................................
Validity of policy where credit extension
granted to insured................................................................
When policy valid and binding notwithstanding
non-payment of premium..................................................

240

243

246
247
248
249
251

ILLUSTRATIVE CASE:
1.

Makati Tuscany Condominium Corp. vs.
CA, 215 SCRA 462 (1992) ........................................

256

2.
UCPB General Insurance Co., I
nc. vs. Masagana Teliemart,
Inc.,
356 SCRA 307 (2001) ................................................
259
Section78 ............................................................................................................
265
xviii

1.

Effect of acknowledgment of receipt
of premium in policy....................................

266

ILLUSTRATIVE CASE:
Capital Insurance & Surety Co., Inc. vs. Plastic
Era Co., Inc., 65 SCRA 134 (1975) ........................................

Effect of acceptance of

2.

premium.....................................

267
267

Sections 79-82 .................................................................................................
268
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

When insured entitled
to recover premiums....
Where risk has never attached..................................................
Where insured surrenders policy before
termination .............................................................................
Where short period rate has been
stipulated.................................................................................
Right to recover premiums as to life
insurance .................................................................................
Where risk has attached .............................................................
Where the contract is voidable .................................................
Where there is over-insurance ..................................................
Where insurance is illegal ..........................................................
Basis of right to recover premiums..........................................

268
269
270
271
272
272
273
274
275
276

Title
9
Loss
Sectio
n
1.
2.

Sectio
n
1.
2.
3.
4.
5.

Sectio
n

83 .....................................................................................................

277

Claim insurance defined ................................... .......................

277

Effect of agreement not to transfer
claim
of insured after a loss............................................................

277

84 .....................................................................................................

278

Loss in insurance defined...........................................................
Scope of loss ..................................................................................
Liability of insurer for loss .........................................................
Meaning of proximate cause .....................................................
Hostile and friendly fires explained ........................................

278
278
279
280
281

85 .....................................................................................................

283

Extension of principle of proximate cause .............................

283

1.

xix

Section 86 ............................................................................................................
1.
Where proximate cause is an
excepted peril ........................................................................

284

Section 87 ...........................................................................................................
1.
Loss by willful act or through connivance
of insured................................................................................
2.
Loss caused by negligence of insured.....................................

285

284

285
286

Title 10
Notice and Proof of Los
s
Sections 88-89 ...................................................................................................
1.
Conditions before loss ................................................................
2.
Conditions after loss....................................................................
3.
Meaning and purpose of notice of loss...................................
4.
Necessity of notice of loss ..........................................................
5.
lime for giving notice of loss .....................................................
6.
Meaning and nature of proof of loss .......................................
7.
Form of notice or proof of loss..................................................
8.
Purpose of proof of loss..............................................................
9.
Burden of proof of loss in court action....................................
10. Excuses for non-compliance with conditions.... 294

289
289
290
291
291
291
292
292
293
293

Section 90 ...........................................................................................................
1.
When defects in notice or proof
deemed waived.....................................................................

294

Section 91 ...........................................................................................................
1.
When delay in presentation of notice
or proof deemed waived ....................................................

295

294

295

ILLUSTRATIVE CASE:
Pacific Timber Export Corp. vs. Court of
Appeals, 112 SCRA 199 (1982)...........................................

297

Section92..................................................................................................................
297
XX

1.

Effect of failure to secure certificate
or testimony of third person ....................

297
Title 11
Double Insuranc
e
Sectio
n
1.
2.
3.
4.
5.

93 .....................................................................................................

298

Double insurance defined...........................................................
Requisites of double insurance..................................................
Double insurance distinguished from
over-insurance.......................................................................
Binding effect of stipulation against double
insurance ..................................... .........................................
Purpose of prohibition against double
insurance ................................................................................

298
298

Section 94 .......................................................................................................
1.

299
300
300
301

Rules for payment of claims where there is
over-insurance by double insurance................................

301

Title 12
Reinsurance
Section 95 .............................................................................................
1. Reinsurance defined ....................................................................
306
Reinsurance distinguished from double
insurance ................................................................................
3. Value of reinsurance ....................................................................

Section 96 .......................................................................................................
1.
2.
3.

Duty of reinsured to disclose facts............................................
Automatic and facultative methods
of ceding reinsurance...........................................................
Reinsurance treaty distinguished
from reinsurance policy ......................................................

306
2.
307
307
309
309
310
312

Section 97 .......................................................................................................
312 1.

Nature of contract of reinsurance .............................................
312

xxi

Section 98 .............................................................................................
1.
2.
3.

Rights of original insured in contract
of reinsurance........................................................................
Liability of reinsurer to reinsured ............................................
Liability of reinsurer to original insured ................................

313
314
314
314

Chapter II. — CLASSES OF INSURANCE
Title 1
Marine
Insurance
Sub-Title 1-A
Definition
Section 99 .............................................................................................
1.
Transportation insurance defined............... ............................
318
Major divisions of transportation
insurance ................................................................................
3.
Scope of ocean marine insurance .............................................
4.
Risks or losses covered in ocean marine
insurance ................................................................................
5.
"Perils of the sea," as used in ocean marine
insurance, explained............................................................
6.
Perils of the sea distinguished from perils
of the ship...............................................................................
7.
Perils of the sea must be the proximate
cause of loss...........................................................................
8.
"All risks" marine insurance policy..........................................
9.
Development of inland marine insurance
in the United States..............................................................
10. Classes (scope) of inland marine
insurance ................................................................................

317
2.
318
319
320
322
323
324
325
326
329

Sub-Title 1-B
Insurable Interes
t
Section 100 ............................................ .........................................................
1.

Insurable interest of insured in marine
insurance ................................................................................

330
330

2.

Insurable interest of owner of a ship ........................................

331

3.
Insurable interest and sale contracts............................ .........
... 332
Section 101 ........................................................................................................
1. Shipowner's and lender's insurable interest
where vessel hypothecated
by bottomry ...........................................................................

333

Section 102 ........................................................................................................

333

333

1.

Meaning of freightage..................................................................

334

2.

Sources of freightage....................................................................

334

Section 103 ........................................................................................................
1. Insurable interest in expected or anticipated
freightage................................................................................
2. Insurable interest in passage money ........................................

334

Section 104 ........................................................................................................

335

334
335

1. Insurable interest in expected
freightage in a charter party ..............................................

335

Section 105 ........................................................................................................
336 1.

Insurable interest in expected profits .......................................
336

Section 106 ........................................................................................................

337

1.

Insurable interest of the charterer .............................................

337

2.

Types of charter parties ...............................................................

337

Sub-Title 1-C
Concealment
Section 107 ........................................................................................................
1.
2.

Meaning of concealment in marine
insurance......................... .......................................................
Rules as to misrepresentations
and
concealments stricter in marin
e
insurance.................................................................................

340
340

340

Section 108 ........................................................................................................
341 1.

Opinions or expectations of third persons ..............................
341

xxiii

Section 109 ........................................................................................................

342

1. Presumptive knowledge by insured
of prior loss ............................................................................

342

Section 110 ........................................................................................................

342

1. When concealment does not vitiate
entire contract........................................................................

343

Sub-Title 1-D
Representations
Section 111 ........................................................................................................
1.

343

Applicability of rules on representation
to marine insurance .............................................................
Effect of false representation by insured.................................

343
344

Section 112 ........................................................................................................

344

2.

1. Effect of falsity of representation
as to expectation ...................................................................

344

Sub-Title 1-E
Implied Warranties
Section 113 ........................................................................................................
1. Warranty in marine insurance defined ...................................
2. Implied warranties in marine insurance.................................
3. Implied warranty of seaworthiness .........................................

345
345
345
346

Section 114 ........................................................... ............................................
347 1.

What constitutes seaworthiness................................................
347

ILLUSTRATIVE CASE:
Madrigal, Tiangco & Co. vs. Hanson, Orth &
Stevenson, Inc., 103 Phil. 345 (1958) .................................
2.

349

Criterion of seaworthiness .........................................................

349

Section 115 ...............................................; .......................................................

349

1.

When seaworthiness is complied with....................................

350

2.

Time and voyage policies...........................................................

351

xxiv

Section 116 ........................................................................................................
352 1. Scope of seaworthiness of vessel....................................................
352
Section 117 ........................................................................................................
353 1. Seaworthiness during voyage in stages .......................................
353
Section 118 ........................................................................................................

354

1. Where ship becomes unsea worthy
during voyage .......................................................................

354

Section 119 ........................................................................................................
354 1. Seaworthiness as to cargo................................................................
354
Section 120 ........................................................................................................
1.
2.

Express warranty as to nationality
or neutrality............................................................................
Implied warranty to carry requisite
documents..............................................................................

355
355
355

Sub-Title 1-F
Voyage and Deviation
Sections 121-123
......................................... ..................................................... ..........................
..............................................356
1.

Meaning of deviation...................................................................

356 2.

Cases of deviation in marine insurance...................................
356

Sections 124-125 ...............................................................................................

357

1.

Kinds of deviation ........................................................................

357

2.

When deviation is proper ...........................................................

357

Section 126 ........................................................................................................
358 1.

Effect of improper deviation ......................................................
358
Sub-Title 1-G
Loss

Sections 127-129 ...............................................................................................
359 1.

Kinds of losses...............................................................................
359

Section130...............................................................................................................
.
359
XXV

1.
2.

Meaning of actual total loss........................................................
Complete physical destruction not essential
to constitute actual total loss .............................................
Limited Liability rule...................................................................

359

Section 131 ........................................................................................................

362

3.
1.
2.

Meaning of constructive total loss ............................................
Importance of distinction between actual
and constructive total loss..................................................

360
361
362
362

Section 132 ........................................................................................................
362 1. Presumption of actual total loss .....................................................
362
Section 133 ........................................................................................................
363 1. Liability of insurer in case of reshipment.....................................
363
Section 134 ........................................................................................................

364

1.
Additional liability of insurer of goods ............................
.. 364
Section 135 ........................................................................................................
1.

364

Right of insured to payment upon an actual
total loss .................................................................................

364

Section 136 ..................................................................... ..................................

364

Meaning of average......................................................................
Kinds of average ...........................................................................
Principle of general average contribution....,..........................
Right of a party to claim general average
contribution...........................................................................
Liability of insurer for general average ...................................
Liability of insurer for particular average...............................

365
365
366

Section 137 ..................................................................... ..................................

369

1.
2.
3.
4.

5.
6.

1.

Scope of insurance against actual
total loss .................................................................................

366
367
368

369

Sub-Title 1-H
Abandonment
Section 138 ........................................................................................................
369 1.

Meaning of abandonment ..........................................................
369

xxvi

2.

Requisites for valid abandonment ............................................

370 3.

Necessity for abandonment........................................................
370

Section 139 ........................................................................................................
1. When constructive total loss exists ...........................................
2. Abandonment where insurance divisible
and where indivisible ..........................................................
3. Criterion as to extent of loss........................................................

371
371
372
372

Section 140 ........................................................................................................
373 1. Abandonment must be absolute ....................................................
373
Section 141 ........................................................................................................

373

1. Abandonment must be made within
a reasonable time ..................................................................

373

Section 142 ........................................................................................................

374

1.

Abandonment must be factual ..................................................

374

2.

Information need not be direct or positive..............................

375

Section 143 ........................................................................................................

375

1.

Form of notice of abandonment ................................................

375

2.

By whom and to whom notice made .......................................

375

Section 144 ........................................................................................................
1. Notice of abandonment must be explicit.................................
2. Notice of abandonment must specify
particular cause thereof.......................................................

376
376
376

Section 145 ........................................................................................................
376 1. Proof of other cause not admissible...............................................
376
Section 146 ........................................................................................................
377 1. Effect of valid abandonment ...........................................................
377
Section 147 ........................................................................................................
1.

377

Rights of insurer who pays partial loss
as actual total loss .................................................................

377

Section 148 ........................................................................................................

378

1.

Transfer of agency to insurer..................................................

378

2.

Liability of insurer for expenses

378

and wages ................

Section 149 ........................................................................................................

378

1. Effect on insurer's refusal to accept
abandonment on insured's rights ....................................

378

Section 150 ........................................................................................................
379 1. Form of acceptance of abandonment............................................
379
Sections 151-152 ...............................................................................................
379 1.

Effect of acceptance of abandonment ..................................
379

Section 153 ........................................................................................................
380 1.

Right of

insurer to freightage.................................................
380

Section 154 ........................................................................................................

381

1. Effect of refusal to accept a valid
abandonment on insurer's liability..................................
Section 155 ........................................................................................................

381
381

1. Effect of insured's failure to make
abandonment........................................................................

381

Sub-Title 1-1
Measure of
Indemnity
Section 156 ........................................................................................................
381 1. Valuation in a marine policy...........................................................
382
Section 157 ........................................................................................................
1.

382

When insured a co-insurer in marine
insurance................................................................................

382

Section 158 ........................................................................................................
383 1.

Loss of profits separately insured ............................................
383

Section159...............................................................................................................
.
384
xxviii

1. Where only part of a cargo or freightage
insured exposed
to risk .............................................

384

Section 160 .........................................................................................................
385 1. Presumption
of loss of profits........................................
385
Section 161 .........................................................................................................
1.
Rules for estimating loss under an
open
policy of marine insurance.................................................

385

Section
1.

162 ...................................................................................................
Where cargo insured against partial
loss
is damaged.............................................................................

387

163 ...................................................................................................
Liability of insurer for expenses
incurred
for repair and recovery........................................................

388

Sections 164-165 ...............................................................................................
1.
Rights of insured in case of general
average.... 389
2.
Limit as to liability of insurer ....................................................

389

Section
1.

Section
1.

166 ...................................................................................................
Liability of insurer in case of partial loss
of ship or its equipment ......................................................

386

387

388

390
390
390

Title 2
Fire Insurance
Sectio
n
1.
2.
3.
4.
5.
6.
7.
8.

167 ...................................................................................................
Fire insurance defined ................................................................
Fire-and-extended coverage......................................................
Nature of fire insurance..............................................................
Concept of fire ..............................................................................
Risks or losses covered ...............................................................
Indirect loss coverage..................................................................
Kinds of indirect losses...............................................................
Ocean marine and fire policies
distinguished.........................................................................

AAIX

392
392
392
392
393
393
394
394
395

9.

Importance of the distinction .....................................................

395

Sections 168-169 ...............................................................................................

396

1.

2.
3.
4.
5.

6.

Section
1.

When alteration in thing insured entitles
insurer to rescind..................................................................
396
Increase of risk or hazard in general.........................................
396
Alterations avoiding policy ........................................................
397
Alterations not avoiding policy .................................................
397
Where insured has no control
or knowledge of alteration.................................................
398
Application of Sections 75 and 169 ...........................................
399
170 ....................................................................................................

399

Where act of insured not in violation
of policy ..................................................................................

399

Sections 171-172 ...............................................................................................

400

1.
2.
3.
4.
5.
Section
1.

Measure of indemnity under an
open policy ............................................................................
401
Measure of indemnity under a valued
policy.......................................................................................
402
Insured not a co-insurer under fire
policies in the absence of stipulation ...............................
403
Reason for co-insurance clause
in fire policies ........................................................................
403
Option to rebuild clause ..............................................................
404
173 ....................................................................................................

405

Pledge, etc. of fire insurance
policy after a loss..................................................................

Section
1.
2.
3.
4.

405

Title 3
Casualty Insurance
174 ....................................................................................................
Casualty insurance defined .............................. .........................
Risks or losses covered.................................................................
Two general divisions of casualty
insurance ................................................................................
Liability insurance defined .........................................................
rant

406
406
406
407
407

5.
6.
7.
8.
9.

Liability insurable...........................................................................
Insurable interest in liability insurance .....................................
When liability insurance in policy payable ..............................
Right of injured person to sue insurer
of party at fault......................................................................
Basis and extent of insurer's liability..........................................

408
409
409
410
410

ILLUSTRATIVE CASE:
Malayan Insurance Co. vs. CA,
165 SCRA 136 (1988) ............................................................
10. Accident and health insurance....................................................
11. Meaning of "accident" and "accidental"
as used in accident policy ...................................................
12. Rule as to death or injury resulting from
"accidental" or accidental means.......................................
13. Suicide and willful exposure to needless
peril..........................................................................................
14. Meaning of "intentional" as used in
accident policy.......................................................................

412
413
414
415
416
417

ILLUSTRATIVE CASES:
1.
2.
3.
4.

Biagtan vs. The Insular Life Assur. Co.,
Ltd., 44 SCRA 58 (1972)............................................
Hutchcrafts's Ex'r. vs. Travelers Ins.,
Co., 87 Ky. 300, 8 S.W. 570 ........................................
Calanoc vs. CA, 98 Phil. 79 (1955).....................................
Finman Gen. Assur. Corp. vs. CA,
213 SCRA 493 (1992) .................................................

15. Effect of "no action" clause in policy
of liability insurance.............................................................

417
418
418
419
419

Title 4
Suretyship
Section 175 ...............................................: .......................................................
1. Suretyship defined .........................................................................
2. Undertakings within the scope
of suretyship ..........................................................................

xxxi

421
421
421

3.

Corporate suretyship ..................................................................

Section 176 ............................................................................................
1.

Nature of liability of surety ..................................... .................

423

423
423

ILLUSTRATIVE CASE:
Edward Keller, Ltd. vs. Workmen's Insurance
Co., Inc., I.C. Case No. 378, Aug. 8, 1977....
2.
3.

Sectio
n

Distinctions between suretyship and
property insurance...............................................................
Distinctions between suretyship and
guaranty .................................................................................

425
425
426

177 ........................................................................................

426

Payment of premiums ................................................................

427

1.
ILLUSTRATIVE CASES:
1.
2.

Arranz vs. Manila Fidelity and Surety Co.,
101 Phil. 272 (1957)....................................................
Capital Ins. & Surety Co., Inc. vs. Ronquillo
Trading, 123 SCRA 526 (1983)................................

428
429

2.

Types of surety bonds.................................................................

429

Sectio
n

178 ........................................................................................

431

1.

in a suppletory character....................................................

Pertinent Civil Code provisions applicable
431

Title 5
Life Insurance
Sections 179-180 ...............................................................................................
1.
Life insurance defined ................................................................
2.
Parties involved in a policy of life
insurance ................................................................................
3.
Nature of life insurance..............................................................
4.
Life insurance distinguished from fire
and marine insurance..........................................................

xxxii

432
432
433
434
436

5.
6.
7.
8.
9.
10.
11.

Exemption of life insurance policies
from execution......................................................................
Application of exemption to accident
insurance................................................................................
Kinds of life insurance policies .................................................
Scope of life insurance ................................................................
Contract of life annuity defined................................................
The annuity concept....................................................................
Annuity contracts distinguished
from ordinarylife policies ..................................................

438
438
439
442
443
444
444

Section 180-A ...................................................................................................
445 1.

Liability of insurer in case of suicide .......................................
445

Section 181 ........................................................................................................
1.
2.

Right of insured to assign life insurance
policy.......................................................................................
Necessity of consent of beneficiary
to assignment ........................................................................

446
446
447

Sectio

182 ...................................................................................................

n

448 Notice to insurer of transfer ......................................................

1.

448

Section
1.

183 ...................................................................................................

449

Measure of indemnity under life

449

policy ...................

Chapter III. — THE BUSINESS OF INSURANCE
Title 1
Insurance Companies: Organization
, Capitalization, and Authorization
Sections 184-193 .........................................................................................................
450 1. Power of state to regulate insurance
business ..................................................................................
458
2.
Business of insurance conducted
almost
exclusively by corporations ...............................................
461
3.
General requirements before an insurance
company may transact insurance
business ..................................................................................
462

xxxiii

4.

5.

6.

Minimum paid-up capital for new joint
ventures, insurance, and reinsurance
companies..............................................................................
Deposits and withdrawal of securities
by foreigninsurance companies........................................
Entry of foreign insurance or reinsurance
companies
or intermediaries...................................

463
464
465

Title 2
Margin of
Insolvency
Section 194 ...........................................................................................
1.

Section 195 ...........................................................................................
1.

469

Maintenance of margin of solvency
at all times..................... .....................................................
... .........................................470

472

Distribution of dividends to stockholders
of domestic corporations....................................................

472

Title 3
Assets
Sections 196-197 ..................................................................................
1.
2.

Classification of assets of an insurance
company ................................................................................
Treatment of premium as assets ..............................................

474
476
477

Title 4
Investments
Sections 198-209 ..........................................................................................
1.
2.

3.
4.

5.

6.

Investments by insurance companies .....................................
Investment of the amount of increase
of paid-up capital or assets................................................
Investment of legal reserve........................................................
Foreign curreny denominated investments
and insurance policy ...........................................................
Necessity of approval of investments
by the Insurance Commission ..........................................
Dual nature of the business of insurance ...............................

xxxiv

480
490
491
492
493
496
498

X

Title 5
Reserves

Sections 210-214 .................................................................................
Reserves in general.......................................................................
502 2. Reserves in life insurance............................................................
503 3. Reserves in property insurance ................................................
504 4. Valuation of reserves and cash surrender
values in life policies ............................................................
5.
Cash surrender value, an asset
of policyowner.......................................................................
6.
Nonforfeiture values on termination
of life policies............................................................... .......
... ........................................................................................50
6

500

1.

505
506

Title 6
Limit of Single Risk
Section 215 ...........................................................................................
508 1.
Retention limit...............................................................................
508

Title 7
Reinsurance Transaction
s
Sections 216-222 ...........................................................................................
1.
2.
3.
4.

Power to engage in reinsurance business ...............................
Ceding of excess risks..................................................................
Rules and regulations on reinsurance .....................................
Glossary of important reinsurance terms ...............................

512
512
512
513
514

Title 8
Annual Statement
s
Sections 223-225 .................................................................................
519 1.
Reports and statements...............................................................
519

Title 9
Policy Forms
Section 226 ...........................................................................................
520 1.
Standardization of insurance contracts ...................................
520

XXXV

2.
3.

Power to prescribe insurance contracts
and standard policies..........................................................
Submission of policies for approval..........................................

521
522

Section 227 ........................................................................................................
1. General form of a life insurance policy ....................................
2. Major classes of life insurance ....................................................
3. Special characteristics of life insurance
contract...................................................................................
4. Life insurance as property...........................................................
5. Protection function of life insurance .........................................
6. Sayings function of life insurance..............................................
7. Apportionment and distribution of policyowner dividends..................................................................
8. Misstatement of age......................................................................
9. Rights of insured under a lapsed
life policy................................................................................
10. Options available to insured in life
insurance................................................................................
11. Cash surrender value defined....................................................
12. Nature of cash surrender value..................................................
13. Other required policy provisions ..............................................
14. Optional policy provisions..........................................................

523
526
527

Section 228 ........................................................................................................
1. Growth of group insurance business................................:......
2. Social insurance and private insurance
distinguished ........................................................................
3. Group insurance and individual
insurance contrasted ...........................................................
4. Types of group insurance............................................................

542
545

Sections 229-231 ...............................................................................................
1. Industrial life insurance ...............................................................
2. Non-payment of premiums by buyers
of industrial life policies .....................................................
3. Existence of insurable interest....................................................

549
554

528
530
531
532
533
534
534
536
536
537
537
539

546
547
548

556
556

Title10
Variable
Contracts
Sections 232-240 ...............................................................................................
1.
2.
3.

Variable life insurance defined.....................................
Fundamental idea behind variable life
contracts..................................................................................
Underwriting and administrative
aspects.....................................................................................

558
562
562
563

Title 11
Claims Settlement
Section 241 ........................................................................................................
564 1.

Unfair claims settlement practices ............................................
565

ILLUSTRATIVE CASES:
1.

Phil. Episcopal Church vs. The New
Zealand
Ins. Co., Ltd., I.C. Case No. 40,
March 24, 1977............................................................
J. Guanco vs. Summit Guaranty & Insurance
Co., Inc., I.C. Case No. 115,
May 31, 1977 ..............................................................

2.

2.

Insurer's obligation to respect
insured's decision to compromise
third party claim ...................................................................

565

566

566

ILLUSTRATIVE CASE:
Yap vs. Perla Compana de Seguros, Inc., I.C.
Case No. 103, Nov. 26, 1976 ..............................................
Section 242 ........................................................................................................
1.
2.
3.

567
568

Life insurance losses.....................................................................
Time for payment of claims in life
policies............
Sixty-day period procedural in nature.....................................

568
569
569

Section 243 ................................................ .......................................................

570

1.

570 2.

Fire insurance losses.....................................................................
Liability insurance losses ............................................................
571

xxxvii

3.

4.
5.
6.
7.

Time for payment of claims in non-life
policies............ ........................................................................
Effect where claim is fraudulent ..............................................
Effect of false statements innocently
made ...............
Reference to arbitration..............................................................
Right of insurer to subrogation ................................................

572
573
573
574
576

ILLUSTRATIVE CASE:

8.

Sectio
n
1.

Cebu Shipyard and Engineering Works, Inc
. vs. William Lines, Inc., 106 SCAD 382,
306 SCRA 762
(1999) ...................................................

578

Loan repayable from collection not deemed
payment of insurance ..........................................................

578

244 .......................................................................................

579

Liability of insurer to pay damages
and interests...........................................................................

579

Title 12
Examination of Companie
s
Sections 245-246 .................................................................................
1.
2.

Examination of insurers .............................................................
Examination of insurance and reinsurance
brokers.....................................................................................

585
586
586

Title 13
Suspension and Revocation
of Authority
Sectio
n

247 .......................................................................................

589

Suspension and revocation of license .....................................

589

1.

Title 14
Appointment of Conservato
r
Sectio
n
1.
2.

248 .......................................................................................

591

Appointment of conservator.....................................................
592 Nature of conservation proceedings.......................................
592

xxxviii

3.

Action against conservator ........................................................

593

Title 15
Proceedings Upon
Insolvency
Sections 249-251 ...........................................................................................
1.
2.

Power to dissolve and liquidate insurance
companies ..............................................................................
Action against receiver or liquidator.......................................

594
596
599

Title 16
Consolidation and Merger of Insurance Compani
es
Sections 252-261 ..................................................................................
600 1.
Definition of terms.......................................................................
603

Title 17
Mutualization of Stock Life Insurance Companies
Sections 262-272 ..................................................................................
1. Types of insurance organization ..............................................
615
Status of members of mutual insurance
companies ..............................................................................

604
2.
616

Title 18
Withdrawal of Foreign Insurance Companies
Sections 273-279 ..................................................................................

619

1. Regulation of foreign insurance companies...........................
620
2.
Withdrawal of foreign insurance
companies ..............................................................................
621
3. Reinsurance by withdrawing
foreign insurer.......................................................................
622

Title 19
Professional Reinsurer
s
Sections 280-281 ..................................................................................
624 1.
Types of reinsurers ......................................................................
625

xxxix

Title20
Holding
Companies
Sections 282-298 ...............................................................................................
627 1.

Regulationof holding companies .............................................
634

2.

Need for regulation .....................................................................

634

Chapter IV. — SALES AGENCIES AND SERVICES
Title 1
Insurance Agents and Broker
s
Section 299-301 .................................................................................................
1.
2.

636

Insurance agents and brokers ...................................................
Regulation of insurance agents
and brokers............................................................................
Licensing requirements and limitations .................................
Application for license ................................................................

637

Section 302 ........................................................................................................

646

3.
4.

1.
2.

640
641
644

Surety bond required of insurance brokers ...........................
Errors and omissions insurance policy
required of insurance brokers ...........................................

647

Sections 303-304 ...............................................................................................

648

Qualifications for insurance agent's license ...........................
Qualifications for insurance or reinsurance
broker's license......................................................................
Qualifications for authorization of life
insurance agents to sell or offer
for sale variable contracts ...................................................
Qualifications for authorization of life
insurance companies to issue, deliver
,
sell or use variable contracts..............................................
Examination required of applicant ..........................................
Issuance of limited license..........................................................

649

1.
2.

3.

4.

5.
6.

647

649

650

650
652
653

Sections 305-309 ...............................................................................................
653 1.

Denial, suspension, or revocation of license..........................
656

xl

2. "Actively engaged" requirement.

656

Title 2
Reinsurance Broker
s
Sections 310-312 ...........................................................................................
657 1. Reinsurance brokers..........................................................................
658

Title 3
Resident Agents
Sections 313-317 ...........................................................................................
660 1.

Principal duty of resident agent ................................................
661

Title 4
Non-Life Company Underwriter
Sections 318-322 ...........................................................................................
1.
2.

Employment of non-life company
underwriters..........................................................................
Insurance underwriting...............................................................

662
663
664

Title 5
Adjusters
Sections 323-334 ..................................................................................
Adjustment of claims defined ....................................................
668 2. Kinds of adjusters..........................................................................
668 3. Liability of a settling or claim agent undeer
an insurance policy ..............................................................
4. Services of Adjusters ....................................................................
5. Report of claim/loss adjustment
to insurance company .........................................................
6. Report of claim/loss adjustment
to Insurance Commission...................................................
7. Licensing of adjusters...................................................................
8. Establishment of branch or regional
offices ............................................................................... ...
... ...........................................................................................
676
9. Prohibited acts ...............................................................................

666

1.

xli

670
671
672
673
673

678

Title 6
Actuaries
Sections 335-338 .................................................................................
1.
2.
3.

Actuary defined.............................................................................
Actuarial work in insurance........................................................
The mortality table ........................................................................

678
679
680
680

Title 7
Rate Organization and Rate Makin
g
Sections 339-363 ...............................................................................................
1.

681

Underwriters' associations and rating
bureaus....................................................................................
688
2. Regulation of rates.........................................................................
689 3. Combinations among insurance companies...........................
691

Title 8
Provision Common
to Agents, Brokers, and Adjusters
Section 364 ...................................................................................................
1.

Types of insurer representatives................................................

693
693

Chapter V. — SECURITY FUND
Sections 365-372 ...........................................................................................
695 1.

Security Fund .................................................................................
398

Chapter VI. —
COMPULSORY MOTOR
VEHICLE LIABILITY INSURANCE
Sections 373-389 ............................................................................. ..............
1.
2.
3.
4.

Meaning of motor vehicle............................................................
Meaning of motor vehicle liability
insurance.................................................................................
How protection is obtained.........................................................
Prerequisite regarding the operation and
registration of motor vehicles ............................................

699
706
707
707
707

xlii

5.
6.

7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

18.
19.
20.
21.

Spirit behind or need for compulsory third
party liability insurance.......................................................
Effect of insured's violation of policy
condition on insurer's liability to thirdparty claimant........................................................................
Persons subject to the CMVLI requirement............................
Substitutes for a CMVLI policy .................................................
Scope of coverage required ........................................................
Duty of MVO or LTO contemplating
cancellation of his cover ......................................................
Effect of cancellation of cover.....................................................
No-fault indemnity claim ...........................................................
Certificate of cover........................................................................
Limitations with respect to CMVLI cover
solicitation ..............................................................................
Limitations as to use of insured vehicle under
the master private vehicle policy ......................................
Limitations as to use of insured vehicle under
the master commercial vehicle policy..............................
Limitations as to use of insured vehicle
under the master land transportation
operators policy.....................................................................
Limitations as to use of the insured vehicle
under the master motorcycle policy.................................
The malus system under CMVLI................................................
Where insured himself or his driver
without license or with expired license ..........................
Pertinent provisions of the Civil Code.....................................

708

709
710
710
710
711
711
712
713
713
714
714

714
715
715
715
717

Chapter VII. —
MUTUAL BENEFIT
ASSOCIATIONS AND TRUSTS
FOR CHARITABLE USES
Title 1
Mutual Benefit
Associations
Sections 390-409 ............................................................................................
1.

Distinguished from mutual insurance
companies...............................................................................

xliii

719
726

Title 2
Trusts for Charitable Uses

Sections 410-413 ..................................................................................
1. The trust relationship ...................................................................
729
Types of trust..................................................................................
730

728
2.

Chapter VIII. —
THE INSURANCE
COMMISSIONER

Title1

Administrative and Adjudicatory Power
s
Sections 414-416 ............ ............................ ........................................
1.
2.
3.
4.
5.
6.
7.

Government regulation of insurance........................................
Powers and duties, generally, of an
Insurance Commissioner ...................................................
Nature of powers of the Insurance
Commission ..........................................................................
Comissioner's decisions, regulations,
and rulings ............................................................................
Creation and organizational history
of the Insurance Commission ...........................................
Objectives of insurance regulation ............................................
Duties and functions of the Insurance
Commission ..........................................................................

731
734
736
737
739
740
742
742

Title 2
Fees and Other Sources of Fund
s
Sections 417-418 ..................................................................................
1.

Insurance Fund ..............................................................................

745
748

MISCELLANEOUS PROVISIONS
Sections 419-424 ..................................................................................
750 1. Effectivity ........................................................................................
751

xliv

APPENDICES
"A"

"C" —
"D" —
"E" —
"P" ___
"G" —
"H" —
//j/f
rf/j//

Insurance Commission........................................
752 "B"
Rules of Procedure Governing
Administrative Cases Before the
Insurance Commission..........................................
763
Synopsis of Annual Statements....................................
Uniform Chart of Accounts...........................................
Standard Life Insurance Policy
Provisions ..................................................................
807
Compulsory Motor Vehicle Liability
Insurance Coverage.................................................
818
Issuance of Bonds ............................................................
Minimum Requirements for the Approval
of Insurance Plans/Forms .....................................
828
Presidential Decree No. 530...........................................
Presidential Decree No. 1270 ........................................

—0O0

xlv

770
778

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836

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