THE INSURANCE CODE OF THE PHILIPPINES (PD 612, AS AMENDED BY RA 10607)Pauline Mariz V. GarciaBook of De Leon + San Beda Reviewer 2013

GENERAL PROVISIONS

SEC. 1 This Decree shall be known as The Insurance Code

1. The Insurance Code of 1978, in PD 1460Historical origin of insurance:

1. Mutual insurance as old as society itself they have existed among the Egyptians, Chinese, Hindus and Romans1. Origin of present day insurance attributed to merchants of Italian cities 1. Development of insurance in England lombards Italian merchants coming from the flourishing commercial centers in Northern Italy1. Development of insurance in the US exception of ocean marine insurance1. Development of insurance in the Philippines 4. Pre-spanish political unit was then the family, if a member of the family died or suffered other misfortune, it was borne by the family; baranganys, societies & fraternal associations4. Present concept introduced sometime in 1829, limited to non-life insurance 1939; in 1898, life insurance was introduced in the country Sun Life Assurance of Canada4. Social Insurance established in 1936 with the enactment of C.A. No. 186 which created the GSIS which started operations in 1937; In 1954 by RA no. 1161 SSS

Sources of insurance law in the Philippines1. Spanish period, 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 18891. Act No. 2427 (enacted on Dec. 11, 1914) = Insurance Act, took effect on July 1, 1915 during the American Regime, the provisions of the Code of Commerce on insurance were expressly repealed1. RA No. 386 = CCP took effect on August 30, 1950, those provisions of the old CC on insurance were also expressly repealed1. PD No. 612, as amended, which ordained and instituted The Insurance Code, was promulgated and became effective on Dec. 18, 1974 during the period of martial law. It repealed Act No. 2427, as amended1. PD 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, the date of its promulgation 1. RA No. 10607 An Act Strengthening the Insurance Industry, Further Amending PD No. 612, otherwise known as the Insurance Code, as amended xxx ( From 424 sections, the Code now contains 448 sections )

Laws governing insurance1. Insurance Code of 1978 1. Civil Code1. Special laws SSA, GSIS1. Others Code of Commerce

Applicability of the Civil Code1. Article 2011 of the CC if the Insurance Code does not specifically provide for a particular matter in question, the provisions of the CC regarding the contracts shall govern1. Insurance contracts are governed primarily by the Insurance Code and subsidiarily, by the CC1. Accordingly, our SC held that:1. Where the insurance companys consent to the policy was vitiated by error, such fact may give rise to the nullity of the contract1. The contract for a life annuity was not perfected where the acceptance of the application by the home office of the insurer never came to the knowledge of the applicant who died1. An insurance contract is null and void where the consideration is false or fraudulent1. Since the insurance code has no provisions regarding the amount of recovery in case of rescission, the rule found in the CC which imposes the obligation of mutual restitution should apply1. A common-law wife is disqualified from becoming the beneficiary of the insured in view of the prohibition in Art. 2012 in relation to Art. 739 of the CC and the absence of any specific provision in the IC on the matter1. The award of moral and exemplary damages in case of unreasonable delay in the payment of insurance claims, shall be governed by the rules under the CC

Construction of the Insurance Code

1. Taken verbatim verbatim from the law of California ( Act No. 2727 )

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 the Code, shall include:(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 doingof an insurance business within the meaning of this Code;(4)doing or proposing to doany business in substance equivalentto any of the foregoingin a manner designedto evade the provisions of this Code.

In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct considerationis received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or threatening of an insurance business.

(c) As used in this Code, the term Commissioner means the Insurance Commissioner.

Elements of the contract:1. Subject matter thing insured1. Consideration premium paid by the insured 1. Object and purpose transfer and distribution of risk of loss, damage or liability arising from an unknown or contingent event through the payment of a consideration by the insured to the insurer under a legally binding contract to reimburse the insured for losses suffered on the happening of the stipulated event*As in other contracts, there must be an offer and acceptance, and the parties must have the LEGAL CAPACITY to enter into such contract* To be enforceable, all the requisites of a binding contract must be present

Nature and characteristics of an insurance contract1. Consensual perfected by the meeting of the minds of the parties; not accepted or rejected, there is no contract as yet1. Voluntary it is not compulsory and the parties may incorporate such terms and conditions as they may deem convenient which will be binding provided they do not contravene any provision of law and are not opposed to public policy (Art 1306)1. Aleatory in the sense that it depends upon some contingent event; not a contract of chance1. Executory on the part of the insurer in the sense that it is not executed until payment for a lossExecuted as to the insured after the payment of the premiumUnilateral imposes legal duties only on the insurer who promises to indemnify in case of loss1. Conditional subject to conditions1. Contract of indemnity (except life and accident insurance death) because the promise of the insurer is to make good only the loss of the insured (sec. 18)1. Personal contract contract cannot be assigned to others without the consent of the insurer (Secs. 20, 57, 58); personal in category, liability and interest*life insurance policies generally assignable or transferable1. Property in legal contemplation 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: 1. Insured possesses an interest of some kind susceptible of pecuniary estimation, known as insurable interest1. Insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils1. The insurer assumes that risk of loss1. 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; and1. As consideration for the insurers promise, the insured makes a ratable contribution called premium, to a general insurance fund*It is not a contract of insurance 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

CONTRACT OF INSURANCEWHAT MAY BE INSURED

SEC. 3 Any contingent or unknown event,whether past or future,which may damnify a personhaving an insurable interest, or create a liability against him,may be insured against,subject to the provisions of this chapter.

The consent of the spouseis not necessary for the validityof an insurance policy taken outby a married personon his/her life or that of his/her children.

All rights, title and interestin the policy of insurance taken outby an original owner on the life or healthof the person insuredshall automatically vest in the latterupon the death of the original owner,unless otherwise provided for in the policy.

Requisites of a contract of insurance1. A subject matter in which the insured has an insurable interest (Secs. 12-14)1. Event or peril insured against which may be any contingent or unknown event, past or future (Sec. 3), and a duration for the risk thereof (sec. 51[g])1. A promise to pay or indemnify in a fixed or ascertainable amount (Sec. 2)1. A consideration for the promise, known as the premium (Sec. 77)1. A meeting of minds of the parties upon all the foregoing essentials (Arts. 1318, 1319, CC)*The parties must be competent to enter into the contract*The contract must not be for a purpose contrary to law or public policy

Event or peril insured against1. Under sec. 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 or1. Create a liability against him*Unknown event may be past or future (Sec. 51[f])1. The insurer is liable for a fortuitous event if it is the event or peril insured against and is the proximate cause of the lossAn 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*A person who caused injury may insure himself against liability to third persons reinsurance

Insurance by a married woman1. May take out an insurance against her life or that of her children without the consent of her husband (sec 3, par2), or that of her husband, she having an insurable interest in the latter (Sec. 10)1. She may also take out an insurance on her paraphernal or separate property, or on property given to her by her husband

Insurance by a minor (below 18)1. Not entirely void 1. Merely voidable; valid until annulled 1. 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 contracted1. 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 received1. An insurance company contracting with a minor is bound by the contract; the minor ordinarily is not1. Judicial or natural guardian, as the case may be, may exercise in behalf of the minor any right under the policy

SEC. 4 the preceding section does not authorize an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a price.

1. Three essential elements of lottery:1. Consideration1. Prizes1. Chance*failure to win a prize would not damnify or create a liability against him

Contract of insurance not a wagering contractWagering ContractContract of insurance

-parties contemplate gain through mere chance-parties seek to distribute possible loss by reason of mischance

-courts fortune-tends to equalize fortune

-essence: whatever one person wins from a wager is lost by the other wagering party-what one insured gains is not at the expense of another insured

-he creates a risk of loss to himself where no such risk existed previously-the purchase of insurance does not create a new and, therefore, non-existing risk of loss to the purchaser

*BINGO per se is invalid, unless authorized by law PCSO

SEC. 5 - All kinds of insurance are subject to the provisions of this chapter so far as the provisions can apply.

PARTIES TO THE CONTRACT

SEC. 6 Every corporation, partnership, or association duly authorized to transact insurance business as elsewhere provided in this Code, may be an insurer.

Parties to a contract of insurance1. Insurer party who assumes or accepts the risk or 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 event1. Insured 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*possible that the insured may assign the proceeds to someone else

Who may be an insurer

1. Foreign or domestic insurance company or corporation must first obtain a certificate for that purpose from the insurance commissioner 1. Individual, partnership, or association holds certificate of authority from the insurance commissioner; must possessed of the capital assets required of an insurance corporation*Under the General Banking Law of 2000 a bank shall not directly engage in insurance business as the insurer (Sec. 54)*corporations includes GOCCs]

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

Capacity of party insured (essential requisites)1. He must be competent to make a contract1. He must possess an insurable interest in the subject of the insurance1. Must not be a public enemy

Public Enemy a nation with whom the Philippines is at war and it includes every citizen or subject of such nation

1. With respect to property insurance an insurance policy ceases to be valid and enforceable as soon as an insured becomes a public enemy1. With respect to life insurance 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 contract1. Where loss occurs after end of war the termination of the war does not revive the contract

SEC 8. Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor.Insurable interest of mortgage and mortgagor1. Separate insurable interest 1. Extent of insurable interest of mortgagor to the extent of its value, even though mortgage debt equals such value1. Extent of insurable interest of mortgagee to the extent of the debt secured; his insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property1. 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 mortgaged1. San Miguel Brewery vs. Law Union, Inc.Owner has no interest in the insurance taken out by the mortgagee on his own interest.

Insurance by mortgagee of his own interest1. Right of mortgagee in case of loss proceeds of the policy in case of loss before payment of the mortgage1. Subrogation of insurer to right of mortgagee to the extent of money paid1. Change of creditor the insurer can collect from the mortgagor, to the extent of the amount paid to the former. The insurer cannot collect both the insurance and the mortgage debt

Insurance by mortgagor for the benefit of mortgagee, or policy assigned to mortgagee

1. The contract is deemed to be upon the interest of the mortgagor; hence, he does not cease to be party to the contract;1. Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee1. Any act which under the contract of insurance is to be performed by the mortgagor may be performed by the mortgagee with the same effect1. In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit; and1. Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished1. The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case

Right of mortgagee under mortgagors policy1. Before loss the mortgagee is a conditional 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 mortgagee1. 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; if the loss happens after the credit has matured, the mortgagee may apply the proceeds to the extent of his credit

Effect of insurance by mortgagee on behalf of mortgagor1. Discharge of debt 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; 1. Right to subrogation if there is stipulation, payment of the policy will not discharge the debt even though the mortgagee may have procured the policy by arrangement with the mortgagor;if there is no such stipulation, the rule on subrogation does not apply except where the mortgagee insures only his interest

SEC. 9 If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligations on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of said assignee.

EFFECT: 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 policy1. Fire policy not subject to assignment w/o consent of the insurer1. Marine insurance is assignable, consent of the insurer is also needed1. Casualty policy consent is also required1. Life policy may freely be assigned before or after the loss occurs

INSURABLE INTEREST

SEC. 10 Every person has an insurable interest in the life and health:1. Of himself, of his spouse and of his children;1. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;1. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and1. Of any person upon whose life any estate or interest vested in him depends

Insurable interest that interest which the law requires the owner of an insurance policy to have in the person or thing insured

Two general classes of life policies1. Insurance upon ones life1. Insurance upon life of another

SEC. 11 The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.

Beneficiary refers to the person who is named or designated in a contract of life, health, or accident insurance1. Intended recipient of the proceeds or benefits of the insurance if the insured risk occurs

Kinds of beneficiary1. Insured himself1. Third person who paid a consideration1. Third person through mere bounty of insured

Limitations in the appointment of beneficiary1. Article 2012 of the CC any person who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him (adultery/concubinage, criminal, public officer..)

SEC. 12 The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured

SEC. 13 Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest

*SEC. 14 An insurable interest in property may consist in:1. An existing interest1. An inchoate interest founded on an existing interest1. An expectancy, coupled with an existing interest in that out of which the expectancy arises

SEC. 15 A carrier or depositary of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof.

SEC. 16 A mere contingent or expectant interest in any thing, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.

SEC. 17 The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof.

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.

1. Doctrine of waiver or estoppel not applicable

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.

THE POLICY

SEC. 49 The written instrument in which a contract of insurance is set forth,is called a policy of insurance.

Policy of Insurance written document embodying the terms and stipulations of the contract of insurance between the insured and the insurer1. policy insurance policy1. Signed only by the insurer or his duly authorized agent1. 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)

SEC. 50 The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein.

Any rider, clause, warranty, or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned & written on the blank spaces provided in the policy.

Unless applied for by the insured or owner, any rider, clause, warranty, or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty, or endorsement.

Notwithstanding the foregoing, the policy may be in electronic form subject to the pertinent provisions of Republic Act No. 8792, otherwise known as the Electronic Commerce Act and to such rules and regulations as may be prescribed by the Commissioner.

Policy controls terms of insurance contract1. Measure of insurers liability 1. Presence of requisites for validity

SEC. 66 In case of insurance other than life, unless the insurer at least 45 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 1 year shall be considered as if written for a term of 1 year. Any policy written for a term longer than 1 year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of 1 year.

WARRANTIES

SEC. 67 A warranty is either express or implied.

Warranty a statement or promise by the insured contained in the policy itself or incorporated in or attached to it by proper reference, the falsity or nonfulfillment of which and regardless of whether or not the insurerhas suffered loss or prejudice as a result of the falsity or nonfulfillment, renders the policy voidable at the election of the insurer.

1. A warranty may also be made by the insurer (Art. 74)

Kinds of warranties:1. Express warranty1. Implied warranty marine insurance1. Affirmative warranty asserts a fact 1. Promissory warranty nature of a condition subsequent 1. Shall be done or omitted; executory

SEC. 68 A warranty may relate to the past, present, the future, or to any or all of these.

Promissory warranty only to future events

SEC. 69 No particular form of words is necessary to create a warranty

1. Warranty not necessary to constitute a warranty1. Depends upon the intention of the parties in regard thereto1. In case of doubt, a statement will be construed as a representation rather than a warranty

As toWARRANTYREPRESENTATION

NaturePart of the contractMere collateral inducement

FormWritten on the policy, actually/ by referenceMay be written in the policy/oral

MaterialityPresumed materialMust be proved to be material

ComplianceMust be strictly complied withRequires only substantial truth and compliance

Effect of falsity/ non-fulfillmentFalsity/non-fulfillment operates as a breach of contractFalsity renders the policy void on the ground of fraud

SEC. 70 without prejudice to sec 51, 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.

1. Sec. 51 enumerates what the policy of insurance must contain ( parties, amount, premium, property/life insured, interest, risks & period)

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.

1. Statement must refer to a fact1. Where statement in the nature of an opinion

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.

1. Promissory warranty1. Breach of promises/agreements as to future acts will not avoid a policy unless the promises are material to the risk

SEC. 73 When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy.

GENERAL RULE: a violation of a warranty avoids a contract of insuranceEXCEPTION: 1. When the loss occurs before time for performance1. When performance becomes unlawful1. When performance becomes impossible

SEC. 74 The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind.

RIGHT TO RESCIND FOR VIOLATION OF A MATERIAL WARRANTY:1. Rescission by the insured1. Rescission by the insurer

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

GENERAL RULE:It will avoid the policy (Immaterial)EXCEPTION: When the policy expressly provides that a violation thereof will avoid it-every warranty is conclusively presumed material

SEC. 76 A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.