Insurance Law by Hector S. De Leon, Hector M. De Leon PDF

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THE INSURANCE CODE OF THE PHILIPPINESP. 612, AS AMENDED BY R. 10607GENERAL PROVISIONSSEC. 1 Decree shall be known as “The Insurance Code.”MUTUAL INSURANCE AS OLD AS SOCIETY ITSELF - Based upon the principle of aiding another from a loss caused by an unfortunate event. Existed among the Egyptians, Ch...

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INSURANCE (BASED ON 2014 DE LEON BOOK)

THE INSURANCE CODE OF THE PHILIPPINES P.D. 612, AS AMENDED BY R.A. 10607 GENERAL PROVISIONS SEC. 1.This Decree shall be known as “The Insurance Code.” MUTUAL INSURANCE AS OLD AS SOCIETY ITSELF 1. 2.

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Based upon the principle of aiding another from a loss caused by an unfortunate event. Existed among the Egyptians, Chines, Hindus, Romans and are known to have been established among the Greeks as early as the third century before Christ. Origin of present day insurance attributed to merchants of Italian cities who sought to distribute the loss falling upon any one by reason of the perils of navigation. From Italy the practice of insuring commercial ventures against disaster spread to other maritime States of Europe such as England. Lombards founded trading houses in London in the 12th Century. All questions of insurance were decided based on the customs of merchants and merchant courts Middle 18th Century – Common law courts of England began to take adequate cognizance of insurance cases Lord Mansfield was the “Father of English Commerical Law” and the same law was used to determine questions in insurance.

DEVELOPMENT IN THE UNITED STATES 1. With the exception of maritime insurance, English practices and English decisions have little influence in the United States. DEVELOPMENT IN THE PHILIPPINES 1. Insurance in the Philippines is rather a nascent institution. It did not exist prior to the 19th Century. 2. It started with the practice of giving abuloy to the relatives of the dead. And rendering financial aid when family members suffered any sort of misfortune 3. Eventually mutual benefit societies and fraternal organizations were organized for the purpose of rendering assistance.

4. What worked against the early development of insurance in the Philippines was the fatalistic attitude exemplified by the phrase “bahala na.” BIRTH IN THE PHILIPPINES

1. 1829 Lloyd’s of London appointed Stracham, Murray & Co., Inc. as its representative here. 2. 1939 The Union Insurance Society of Canton appointed Russel & Sturgis as its agent in Manila -Both were limited to non-life insurance 3. 1898 Life insurance was introduced by Sun Life Assurance of Canada 4. First domestic non-life insurance company was Yek Tong Lin Fire and Marine Insurance Co. in June 8, 1906 5. First domestic life insurance company, the Insular Life Assurance Co., Ltd., in 1910. 6. In 1950 reinsurance was introduced with Reinsurance Company of The Orient for both life and non-life. 7. First Workmen’s Compensation Pool was organized in 1951 as the Royal Group Inc. 8. 1949, a government agency was formed to handle insurance affairs, The Insular Treasurer was appointed Commissioner ex-officio. 9. Social insurance was established in 1936 through the GSIS. 10. SSS followed suit in 1954. SOURCES OF INSURANCE LAW IN THE PHILIPPINES 1. Spanish Period – Old Civil Code of 1889 and the Code of Commerce 2. Insurance Code expressly repealed the provisions on insurance in the Code of Commerce 3. Civil Code of The Philippines 4. P.D. 612 instituted “The Insurance Code” in 1974 5. P.D. 1460 consolidated all insurance laws into a single code known as “The Insurance Code of 1978” 6. R.A. 10607 mad many substantial amendments to the Insurance Code LAWS GOVERNING INSURANCE 1. Insurance Code of 1978 -Governs the different types of insurance contracts and those engaged in insurance business in the Philippines. 2. Civil Code

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a. Void Donations – Arts. 739 and 2012 b. Applicability of the Civil Code –Art. 2011 c. Life Annuity Contracts – Arts. 2021-2027 d. Compulsory M.V. Liability Insurance – Art. 2186 e. Insurer’s right of subrogation – Art. 2207 Note: Insurance contracts are governed primarily by the Insurance Code but if it doesn’t specifically provide for a particular matter in question, the provisions of the Civil Code on contract and other special laws shall govern. 3.

Special Laws a. The Insurance Code

b. The Revised Government Insurance Act of 1977 c. The Social Security act of 1954 4. Others – Insofar as the Civil Code is concerned, the Code of Commerce is a special law a. R.A. 656 known as the “Property Insurance Law” dealing with government property b. R.A. 4898 providing life, disability and accident insurance coverage to barangay officials c. E.O. 250 increases, integrates and rationalizes the insurance benefits of barangay officials and members of the Sanggunians. d. R.A. 3591 established the Philippine Deposit Insruance Corporation INSURER’S RIGHT OF SUBROGATION

1. Basis – Substitution of one person in place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies and securities. -Basically a process of legal substitution. The insurer, after paying the amount covered by the policy, steps into the shoes of the insured, availing of himself the latter’s rights that exist against the wrongdoer at the time of the loss. 2. Purposes of subrogation condition in policy 1. To make the person who caused the loss legally responsible 2. Prevent the insured from having double recovery from the wrongdoer and the insurer.

-The insurer has the right to recover 1. Directly in a suit against the wrongdoer or 2. As the real party in interest in a suit brought by the insured Case Doctrine: Whenever the wrongdoer settles with the insured without the consent of the insurer and with the knowledge of the insurer’s payment and right of subrogation, such right is not defeated by settlement. 3. Right of subrogation applicable only to property insurance -Value of human life is unlimited thus no recovery from a third party can be deemed adequate to compensate the insured’s beneficiary. Life insurance contracts are not ordinarily contracts of indemnity. 4. Privity of contract or assignment by insured of claim not essential. a. Payment by the insurer to the insured serves as an equitable assignment to the former of all the remedies which the latter may have against the third party. b. Right of subrogation does not come from privity of contract but it accrues upon payment of the claim by the insurer c. The subrogation receipt is sufficient to establish not only the relationship of the insurer and the insured, but also the amount paid to settle the insurance. 5. Loss or injury for risk must be covered by the policy otherwise there could be no subrogation. 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 (Remember that it is a contract of indemnity hence the insured cannot profit). -If the amount paid bu the insurance company does not fully cover the injury or loss, the aggrieved party viz. the insured is entitled to recover the deficiency NOT the insurer. 7. Right of insured to recover from insurer instead of the third party – The insurer cannot defeat the claim on the ground that the insured has the right to be indemnified by the third person who caused the loss. 8. The right of the insurer against the third party who caused the loss is limited to the amount recoverable from the latter by the insured. 9. The exercise of the right of subrogation by the insurer is purely discretionary 10. The right of subrogation has its limitations a. Both the insurer and the consignee are bound by the contractual

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stipulations under the bill of lading b. The insurer can be subrogated only to the rights as the insured may have against the wrongdoer

the insured 6. The award of moral and exemplary damages in case of unreasonable delay in the payment of insurance claims shall be governed by the Civil Code

Note: If the insured, after receiving payment from the insurer, by his own act, releases the wrongdoer from liability then the insurer loses his rights to the wrongdoer. Consequently, the insured will be bound to return to the insurer, the amount it paid as indemnity. Under Art. 2207, the insurer is the REAL PARTY IN INTEREST as re: the portion of the indemnity paid. Case: 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 can’t bring an action against the carrier on his right of subrogation

CONSTRUCTION OF THE INSURANCE CODE

11. Effect of assignment by insured of its rights against third party to insurer -Where the insured (shipper) has assigned its rights against defendant (carrier of goods) for damages caused to the cargo shipped, to the insurer which paid the indemnity, the case isn’t between the insured and 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 vs. the carrier on account of the damage to cargo such action can be asserted or availed of by the insurer as a subrogee of the insured and the carrier cannot set up as a defense any defect in the insurance policy because it is not privy to it.

1. The interpretation of the judicial authorities of the State from where the Insurance Code was taken shall be instructive, at the very least, in terms of the fundamental points. 2. The rules enunciated by the best considered American authroties involving similar provisions of the Philippine law on insurance should be adopted for the purpose of having our law on insurance conform as nearly as possible to the modern law of insurance as found in the United States. SEC. 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: (a) A “contract of insurance” is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter provided. (b) The term “doing an insurance business” or “transacting an insurance business,” within the meaning of this code shall include:

APPLICABILITY OF THE CIVIL CODE Doctrines: 1. If the insurer’s company is vitiated by error then such fact may be used to give rise to the nullity of the contract 2. Contract for a life annuity was not perfected where the acceptance of the home office of the insurer never came to the knowledge of the applicant who perished 3. An insurance contract is null and void where the consideration is false or fraudulent 4. When an insurance contract is rescinded then the obligation of mutual restitution under the Civil Code shall apply 5. A common-law wife is disqualified from becoming the beneficiary of

(1) Making or proposing to make, as insurer, any insurance contract; (2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (3) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transactions of that no

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separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the ding or transacting of an insurance business (c) as used in this Code, the term “Commissioner” means the “Insurance Commissioner. LEGAL CONCEPT OF INSURANCE

1. “Assurance” is also used instead of “insurance.” But strictly, Assurance – refers to an event like death, which is certain to happen Insurance – refers to a contingent event which may or may not happen -Under the Code, however, the term “insurance” covers “assurance” 2. Better definition – a contract of insurance is an agreement by which one party for a consideration paid by the other party, promises to pay money or its equivalent or to do some act valuable to the latter, upon the happening of a loss, damage, liability, or disability arising from an unknown or contingent event. 3. In general, an insurance contract is a promise by one person to pay another upon the happening of a fortuitous event beyond the effective control of either party in which the promise has an interest apart from the contract. -A written insurance contract is called a policy DEFINITION OF INSURANCE FROM OTHER VIEWPOINTS

1. Economic – reduces risk by a transfer and combination of uncertainty in regard to financial loss 2. Business – serves as basis for credit and a mechanism for savings and investments 3. Mathematical – application of actuarial principles to calculate risk 4. Social – social device whereby uncertain risks of individuals may be combined in a group and this made more certain, with small periodic contributions by the individuals providing a fund out of which those who suffer losses may be reimbursed DETERMINATION OF THE EXISTENCE OF THE CONTRACT

1. Nature – to be determined by the exact nature of the contract actually entered into whatever form it takes or whatever name it may be called. Note- 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.” But strictly, a contract of suretyship is different from an insurance contract. 2. Elements of the contract 1. Subject matter – thing insured 2.Consideration – premium paid by insured 3. Object and purpose – risk-bearing contract; transfer and distribution of risk of loss, damage, or liability arising from an unknown or contingent event Note – to be binding there must be an acceptance of the offer and legal capacity. To be enforceable, all the requisites of a binding contract must be present NATURE AND CHARACTERISTICS OF AN INSURANCE CONTRACT

1. Consensual – perfected by a meeting of the minds of the parties 2. Voluntary – parties may incorporate such terms and conditions as they please. EXCEPTIONS: 1. May be required by law such as in motor vehicles or as a condition to granting a license to conduct a business affecting public safety or welfare 2. May arise by operation of law e.g. War Damage Corporation Act 3. Social insurance for members of the government service or for employees of the private sector 3. Aleatory – it depends on some contingent event thus it is not a contract of chance and in an insurance contract each party must take a risk. Insurer: Risk of having to pay the indemnity if the contingent event happens Insured: Risk of paying the premium without receiving anything therefor if the contingent event does not happen except protection, which in itself is a valuable consideration 4. Unilateral – imposing legal duties only on the insurer who promises to indemnify in case of loss -It is executed as to the insured after 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. -Insured usually assumes no duty to pay subsequent premiums unless the insurer has continued the insurance after maturity of the premium, in consideration of the insured’s express or implied promise to pay. BUT he has the right to pay the stipulated premium and the insurer has

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the duty to accept the payment when tendered. 5. Conditional – Subject to conditions the principal one of which is the happening of the contingent event insured against 6. A contract of INDEMNITY – except for life and accident insurance where the result is death because the promise of the insurer is only to make good the loss of the insured. 1. If you have no insurable interest then you cannot be insured and the contract will be void and unenforceable 7. Personal – between insurer and insured 1. Insured generally cannot assign before the happening of the loss, his rights under a property policy without the consent of the insurer. The obligation to pay does not attach to the object insured. If a transfer is allowed in the policy then such contracts by which insurance is made to pass from one owner to another are in the nature of successive novations. 2. Life insurance policies, however, are generally assignable or transferable as they are in the nature of property. 8. Since insurance is a contract then such is considered property in legal contemplation. But unlike property policies, life insurance policies are generally assignable like any chose in action

3. Assumption of risk by insurer is only a risk-shifting device not a contract of insurance e.g. contract of guaranty 1. Equitably distributes losses out of a general fund contributed by all 2. Provides protection against absorbing one’s losses alone COPING WITH RISK

Different ways of coping with risk 1. Limiting probability of loss – e.g. use of safety measures and devices 2. Limiting effects of loss – e.g. sprinkler systems, fire extinguishers 3. Diversification in investment – basically this is the opposite of putting all your eggs in one basket. You manage your portfolio so you could gain on your investments in terms of a net profit while incurring some losses in some areas. 4. Self-insurance or self-financing – e.g. rainy day money 5. Ignoring risk – bahala na si batman 6. Transferring risk to another - by contractual arrangement such as a seller’s warranty. If your T.V. breaks within a couple of years, the manufacturer’s warranty handles the repairs and defrays the costs. VALUE OF TRANSFERRING RISK

DISTINGUISHING ELEMENTS OF THE CONTRACT OF INSURANCE

Note- ALL the elements must be present, otherwise it is not an insurance contract. And even if all the elements are present, it is not an insurance contract if the same is entered into for the purpose of rendering service and not indemnification for a loss.

1. Risk preferring – those who choose to forego the certain loss in the hope of incurring no loss, despite the equal probability of suffering a large loss 2. Risk neutral – indifferent to the alternatives 3. Risk averse – people who do not want to play ball. They’d rather choose to lose P500 with certainty than confront the 50% chance of losing twice as much Notes – As the potential magnitude of loss increases, most people become more risk averse. This is true even though the probability of loss declines. -The more wealth a person has the less likely it is that the person will be risk averse -When people are averse to the risk of a loss, they are usually willing to pay someone else to assume the risk.

INSURANCE AS RISK -DISTRIBUTING DEVICE

ECONOMIC EFFECTS OF THE TRANSFER & DISTRIBUTION OF RISK

A contract which only possesses the following elements: 1. Insurable interest 2. Risk of loss

1. Benefit to society as a whole – society as a whole would be better off if a large number of similar, mutually beneficial transactions would occur 2. Undesirable side effects – If X’s risk is complet...