Sundiang Insurance Law Reviewer - baixardoc

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REVI EW ER IN INSURANCE LAW

As lectured by Dean Jose R. Sundiang

MATTERS TO STUDY:

For purposes of the bar, study very well the following:

1. Insurable interest (most important)

2. The principle of indemnity, specially in property insurance

3. The principle of subrogation (Art. 2207, NCC)

4. The principle of utmost good faith

5. The principle of insurance as a contract of adhesion

CASE: ENRIQUEZ VS. SUN LIFE ASSURANCE CO.

FACTS: An application for life insurance was mailed. An acceptance was also mailed by

the insurer. Before the receipt of the acceptance letter, the insured died.

HELD: Follow the Theory of Cognition. A contract is perfected upon knowledge

of the acceptance. There was no perfected contract since it was not shown that the

acceptance of the application ever came to the knowledge of the applicant.

HISTORY:

1. Insurance Act (2427)

2. PD 612

3. PD 1460 - merely codified all the insurance laws of the Philippines; date ofeffectivity - 11 June 1978

4. PD 1814 - amending certain provisions of the Insurance Code

5. BP 874

CONTRACT OF INSURANCE

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.

It is an agreement, a contract. Hence, it must have all the essential elements of a contract: consent, object, and cause or consideration.

What are the essential elements of a contract of insurance? There must be

a subject matter in which case there must be an insurable interest,

especially in property insurance. There must be the risk or the peril insured

against. Under the Code, the risk is any contingent and unknown event, whether

past or future, which may damnify a person having an insurable interest can be

insured against.

Insurable interest is a very important concept in insurance. There must be

a risk or peril insured against. There must also be the consent of the contracting

parties. As a rule, it is a voluntary contract. The only exception is found in

Chapter VI, the Compulsory Motor Vehicle Liability Insurance. Those who have cars

know this. You cannot register your vehicle unless it is covered by this type of

insurance.

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But as a rule, insurance is a voluntary contract. So the parties must give

their consent freely; no vice of consent, like force, intimidation, undue

influence, mistake, violence, etc. Then, like any other contract, there must

be a meeting of the minds. It is a consensual contract; it is perfected by mere consent.

There is also an offer and an acceptance between the insurer and the insured. These

elements must concur before you have a contract of insurance.

Who are the parties? The insured and the insurer. Who is the insurer? He is

the party who undertakes to indemnify the insured against loss, damage or

liability arising from an unknown or contingent event. The insured on the other hand,

is the party to be indemnified upon the occurrence of the loss. Aside from being

capacitated to enter into a contract, what other qualifications must the insured

posses? The law says under Sec. 7, he must not be a public enemy. The law says anyone

except a public enemy can be insured against.

What does public enemy mean? To what does it refer? It refers to a country

with which the Philippines is at war and the citizens thereof. What is the reason why,

under the law, a public enemy cannot be insured against? The reason is obvious. The

purpose of war is to cripple the power & exhaust the

resources of the enemy. If the Code did not contain the aforementioned prohibition,

it could be insured to compensate by way of insurance after having destroyed or

crippled the resources of the enemy.

May a minor validly enter into a contract of insurance? Under the present

Code, the law by way of exception provides that a minor may enter into a contract of life, health and accident insurance, provided the beneficiary is

among those mentioned under the law: the minor's estate, the parents,

spouse, children, siblings (Sec. 3[3]).

Consider, however, RA 6809, which reduced the minority age to eighteen. So

when the law speaks of a minor at least eighteen years of age, considering RA

6809, I believe that said provision of the Insurance Code has been correspondingly modified by said piece of legislation.

In other words, one who is eighteen (18) years of age is no longer a minor

under RA 6809. Therefore, a person who is eighteen years of age may enter not

only into a contract of life and accident insurance, but even property

insurance.

Suppose the insured is minor, below eighteen years of age, say seventeen

and he enters into a contract of property insurance. The insurance company issues a policy. There is a loss by fire. Can the insurance deny the claim on

the ground that the insured is a minor? May the insurer raise as a defense the minority

of the insured, and therefore consider the contract void? NO. Recall the law on

contracts under the Civil Code. Under the law, a contract

entered into by a minor is not void, it is only voidable, therefore valid until

annulled (Art. 1390 [1], NCC)

Furthermore, we have that law on contracts, that when one of the parties

is incapacitated, the capacitated party cannot invoke as a defense the incapacity of

the other party. In other words, in the absence of misrepresentation on the part of

the minor, the insurer will be liable despite the fact that the insured is a minor.

We can even apply the principle

of estoppel. The insurer is estopped from denying the claim.

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How about a married woman? Can she enter into a contract of insurance

without the consent of her husband? YES provided that the insurance is on herlife or that of her children (Sec. 3, par. 2, ICP)

The law does not mention property insurance. Under the Civil Code and under thepresent Family Code, with respect to the question of whether a wife

may engage in any trade, occupation or profession without the consent of the

husband, the rule is YES, the wife can do so. All that the wife can do is to

object on serious moral grounds and provided that his income is sufficient

to support the family in accordance with its social standing.

There are many important concepts referring to a contract of insurance. The most

important ones are:

1. it is a personal contract

2. it is a contract of adhesion

CHARACTERISTICS OF A CONTRACT OF INSURANCE

1. It is an aleatory contract

Art. 2010, NCC - by an aleatory contract, one of the parties or both reciprocallybind 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.

Event which may or may not happen - fire

Even that will happen although we do not know when - death (in so far

as the insurer is concerned, the even is conditional, it may or may nothappen)

2. It is a personal contract

See Sec. 20

The law presumes that the insurer considered the personal qualifications of

the insured.

3. It is a contract of indemnity (except life & accident insurance where the resultis death)

In so far as property insurance is concerned. The purpose of the insurance

contract is to indemnify. Therefore, the amount to be recovered should never

be more than the loss. Otherwise, the contract becomes an instrument for

unjust enrichment (solutio indebiti).

4. It is a contract of adhesion

A contract which does not result from the negotiation of the parties.

In insurance, there is a policy, normally in printed form. Normally, the applicant of the insured has no participation in the preparation of

the contract. He may either accept or reject the contract.

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In transportation law, there is a case involving a plane ticket which the

Supreme Court held as a contract of adhesion. Will it bind the passenger

although he has not read it? Yes, because while it is a contract of adhesion, it

is not a void contract. It follows that he is

bound by the provisions thereof. That is also the case of a contract ofinsurance.

The situation is different in a contract of sale where the parties normally would have a say on the terms thereof, the manner of payment,

the manner of delivery, who should shoulder the expenses, etc. This does not

apply in a contract of insurance.

In a contract of insurance, the policy is in written form presented to the

applicant. He either adheres (that is why it is called a contract

of adhesion) or rejects the contract. Therefore, as a result, being a contract

of adhesion, the rule is: should there be any doubt, ambiguity

or obscurity, in any of the terms and stipulations of the contract, the

same shall be interpreted strictly against the insurer and liberally in

favor of the insured.

There is a similar provision of the Civil Code, under Art. 1377.

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

Applying the aforesaid provision to a contract of insurance, who is that party? The insurer. The party who prepared the contract. Therefore,

should there be any doubt, any ambiguity or obscurity, in any of the

terms and conditions of the contract, therule shall be interpreted strictly againstthe favor of the insured.

to follow is: the same insurer and liberally in

To illustrate: regarding the so-called authorized driver clause of the policy, who is deemed to be an authorized driver under the policy? In a

contract of insurance, should there be an accident, and the driver at the time

of the accident is not an authorized driver within the meaning

of the policy, there can e no recovery.

Under the policy, who is an authorized driver?

1. the insured

2. any person driving upon the insured's order with his permission

provided the person driving is authorized to drive the motor vehicle

in accordance with the licensing laws, rules, or regulations and is

not disqualified from driving the same by order of a court law, or

any rule or regulation on that behalf.

Simply that means: if the one driving is other than the insured:

1. he must be authorized or permitted by the insured.

2. he must be qualified to drive in accordance with, say, the Land

Transportation Code, and other rules and regulations, must not have

been disqualified by any court of law, rule or regulation in that behalf.

According to the Code, however, the requirement that the person driving,must be duly authorized to drive in accordance with the licensing law,

rules and regulations, and is not disqualified from driving the said

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motor vehicles by any order of a court of law, etc., applies only if the person driving is other than the insured.

So, in the case of Palermo, and some other cases, at the time of the accident, the

one driving his car was the insured himself. He had an expired driver's license.

The insurance company denied the claim

involving the authorized driver clause. According to the insurance

company, the under the policy, the insured as driver was not authorized,

hence, the insurer was not liable.

The Supreme Court said NO. Because at the time of the accident, the one

driving the car was the insured himself. The foregoing requirement does

not apply.

In the case of Perla Compania de Segurus vs. CA, 208 scra 478, the insured car was parked somewhere in Makati. It was car napped. It was

being driven by someone who had an expired license before it was stolen.

The insurance company denied the claim invoking the authorized driver clause.

The Supreme Court disagreed. In the first place, what should apply is the theft

clause, not the authorized driver clause. The fact that the person driving the

car before it was stolen did not have a license or

had an expired driver's license is of no moment. The clause that should

apply is the theft clause.

In the case of Villacorta vs. Insurance Commission, 100 SCRA 467, the insured

car was involved in an accident and was brought to the repair

shop. Necessarily the owner would have to entrust the keys of the car

to the owner of the shop or the authorized representative, so the car

after the repair had been completed could be road-tested. But some of the employees of the motor shop used the car in a joy-ride around

Manila. Unfortunately, it was involved in an accident, again the

insurance company denied the claim invoking the authorized driver clause.

The Supreme Court disagreed. When the insured entrusted the keys to theowner of the repair shop, there was an implied authority given by the

insured either to the owner of the shop or the latter's employees to drive the

car. Secondly, in that case, what should apply is not the authorized driver

clause but the theft clause of the policy.

EXCEPTION TO THE RULE: tourists, however, who have an expired xxx of 90

days is not under the law, an authorized driver unless he secures a Philippine

Driver's License.

REMEMBER -

You apply the rule that should there be any doubt, ambiguity or obscurity, in

any of the terms and stipulations of the contract, the same shall be

interpreted strictly against the insurer and liberally in

favor of the insured, only when there is doubt, ambiguity or obscurity,in any of the terms and stipulations of the contract.

But if the terms, conditions, and stipulations are clear, there is no room for interpretation.

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When the law or contract is clear, no matter how harsh it may be, then

the courts will have to enforce the law or contract. Courts are not supposed

to make contracts for the parties. That is also true with the

contract of insurance.

Why don't we refer or apply to the provisions of the Civil Code when we

talk about the contract of insurance? What laws govern the contract of

insurance?

Art. 2011, CC: The contract of insurance is governed by special laws.

Matters not expressly provided for in such special laws shall

be regulated by this Code.

Primarily, a contract of insurance is governed by special laws (PD 1460,

as amended). In the absence of any applicable provision of the special

law, the provisions of the Civil Code, particularly the provisions on

Obligations and Contracts shall be applied.

In the absence of any applicable provisions in both, then decisions and

doctrines prevailing in the United States may be applied. Why? Because

primarily, our law on insurance is of American origin, patterned from the

insurance laws of California and New York.

REMEMBER, in resolving insurance problems, apply the following in the order

they are mentioned:

1. Special Laws

2. Civil Code (Art. 2011)

3. American decisions and doctrines

5. It is based on the principle of subrogation (applicable only to property

insurance)

Art. 2027, CC: 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.

Subrogation is essentially a process of substitution, where the subrogee,

in this case, the insurer, steps into the shoes of the insured. Actions or

rights pertaining to the insured will be transferred to the insurer.

For example, you have a car insured under a comprehensive policy. It was

involved in an accident. It was the fault of the other party. Damage:

P30,000.00. What are your remedies? Either you recover from the insurer or

from the party at fault. You cannot recover from both. Why

not? Because a contract of insurance is a contract of indemnity. It isnot to be used as an instrument for profit or gain.

Suppose you decide to recover from the insurer, but the insurer pays you only

P25,000.00. With respect to that amount, there will be subrogation. It is now

the insurer who can recover this amount from the

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party at fault. In the case of Malayan Insurance Company, the court held that

subrogation is a normal incident of indemnity insurance. It inures to the

insurer without the need of formal assignment or an express stipulation in the

policy to that effect. The moment the insurer pays the insured, the insurer

becomes a subrogee in equity.

May the insured recover from the party at fault? Art. 2207 of the Civil

Code says YES, because the law says, "if the amount paid by the insurance

company does not fully recover the injury or loss, the

aggrieved party shall be entitled to recover the deficiency from the person

causing the loss or injury."

Can the insurer's right of subrogation be destroyed? Yes. The insurer's right

of subrogation can be destroyed when the insured releases the other party at

fault from liability. Why? Because by releasing the other party, the insured

destroys or defeats the insurer's right of subrogation. Hence, the insurer

will deny the claim of the insured.

In other words, it is the obligation of the insured to preserve at all

times that right of recovery which belongs to him, but which will eventually

be transferred to the insurer by way of subrogation. That is

a condition in the insurance policy.

How else can the right of subrogation be destroyed or defeated? When the

insurer pays the insured even if the cause of the loss was not the

risk or peril insured against.

What factors must concur before there can be recover in property insurance?

1. the insured must have an insurable interest in the subject matter;

2. that the interest must be properly covered by the policy;

3. there must be a loss; and

4. as a rule, the loss must be proximately caused by the peril insuredagainst.

ILLUSTRATIONS:

1. A owns a house worth P1M. He has an insurable interest in the house.

But B insured the house in his name. Should there be a loss, can B recover? No. Because he has no insurable interest in the house. Can

A recover? No. Because while A has an insurable interest in that house,

such interest was not covered by the policy, as it was B who

insured the house.

2. In the same example, A insured the house against fire for one year.During the year, there was no fire, there was no loss. Can there be

a refund of the premiums paid? No. there can be no recovery. What does the

insured get? What is the consideration?

The consideration on the part of the insurer is the premium paid by

the insured. How about the insured, what is its consideration? The

protection, the promise, the undertaking on the part of the insurer

to indemnify the insured in case of loss. That is the consideration

on the part of the insured.

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So it is not correct to say that should there be no loss within theterm of the policy, there is no cause or consideration. There was a

consideration. If there is no cause or consideration, even under

the law on contracts, the contract is void. Or where the cause or

consideration is illicit or unlawful, the contract is also void.

Art. 1411, CC: When the nullity proceeds from the illegality of the

cause or object of the contract, and the act constitutes a criminal

offense, both parties being in pari delicto, they shall have no action

against each other, and both shall be prosecuted. xxx

INSURABLE INTEREST

When is a person said to have an insurable interest in a subject

matter? Why does the law require the insured to have an insurable interest?

If the insured has no insurable interest in the subject matter, the contract

becomes a wagering contract, on the theory that he has nothing to lose and everything

to gain.

While it is true that the insurance is a conditional contract based on chance, it

is not the same as a wagering contract. The law does not authorize

it under Sec. 4, 16 and 25.

When is the insured deemed to have an insurable interest? A person has an

insurable interest in the subject matter if he is so connected, so situated,

so circumstanced, so related, that by the preservation of the property he shall

suffer pecuniary loss, damage or prejudice.

How do we determine whether a person has an insurable interest in the life

of another person, without considering the enumeration under Sec. 10? There is insurable interest when that person has an interest in the preservation of

life of another despite the insurance, rather than in its destruction

because of the insurance.

In other words, could the

that life so that he could

interested in preserving that

insurable interest in that life.

beneficiary be more interested in terminating

recover from the insurer, or could he be more life,

despite the insurance, then he has

In whose life or health does a person has an insurable interest?

Sec. 10. Every person has an insurable interest in the life and health:

a) of himself, of his spouse and of his children;

b) of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

c) of any person under a legal obligation to him for the payment of money, or

respecting property or services, of which death or illness might delay or

prevent the performance; and

d) of any person upon whose life any estate or interest vested in

him depends.

The explanations for (a) and (b) above are self-explanatory.

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For (c) above, this refers to a case where the person in question is under

obligation either for payment of money or to render services. The movie companies

for instance, have insurable interest in the life/lives and health

of the actors and actresses who are under contract with them. Why? Because these

actors and actresses are under obligation to render services to said movie companies.

Without these actors and actresses, these movie companies are liable to close down.

With respect to the obligation for the payment of money, there is the creditor-

debtor relationship. A creditor has insurable interest in the life of the debtor, but

only to the event of the obligation. For instance, the debtor owes the creditor of

P1M in the form of a loan. Can the creditor insure the life of the debtor? Yes.

Because the debtor is under obligation to

pay money to the creditor. The death of the debtor will either delay or prevent the

payment of the loan. But although the creditor can insure the life of the debtor,

the insurance is limited to the amount of the loan which

is P1M.

QUERY:

In the example above, suppose C (creditor) insures the life of D (debtor)

for P1M. Before the death of D, the loan had been fully paid by him. Can D recover? No, because he was not a party to the contract (Art. 1311, CC). An

insurance procured by the creditor over the life of the debtor for the benefit of the

creditor will not inure to the benefit of the debtors. The creditor is not acting as

an agent. Can C recover? No, because he no longer

had insurable interest on the life of D at the time of D's death. Who can recover?

Nobody.

Suppose it was D who insured his own life and made C as the beneficiary,

but before D's death, the loan had been paid in full, this time who can recover? Theheirs or legal representative of D.

Try to consider the difference between those two different situations. An

insurance procured by the creditor on the life of the debtor in the name or for

the benefit of the creditor will not inure to the benefit of the debtor.

The nature of the life insurance partakes of the nature of a contract of indemnity

because, unlike in property insurance, in life insurance, as a rule,

there is no limit. That is one of the distinctions between life insurance and

property insurance. You can insure your own life for as much as you wish, with as

many insurance companies as you like, provided you pay the premiums.

In property insurance, on the other hand, there is a limit. And that is the

extent of the insurable interest. Under Sec. 14, for a person to have insurable

interest in property, he need not be the owner thereof.

Sec. 14. An insurable interest in property may consist in:

(a) An existing interest;

(b) An inchoate interest founded on an existing interest; or

(c) An expectancy, coupled with an existing interest in that out of

which the expectancy arises.

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Aside from an owner of a property, who else can have an insurable interest

in such property? A lessee, among others. In order to ascertain whether or not a

person has an insurable interest in property subject matter, the test to be applied is

Sec. 17.

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.

In the event of loss or injury to the property, will he be damnified? Will

he suffer any loss, damage or prejudice? If the answer is YES, then he has insurable

interest.

In the sale of property, the vendor, prior to actual delivery, has an insurable

interest in the property. In sale with a right to repurchase (pacto

de retro), within the period of redemption, the vendor a retro has an insurable

interest in the property because he still has the right of redemption.

Although you should recall how is ownership of the thing sold transfers to

the vendee or buyer. That is important for determining for instance, the issue of who

should bear the loss, because of the principle or res perit domino.

In transfer by delivery, tradition, actually or constructively, it is not

the perfection of the contract, nor the payment of the price, but the delivery, which

will transfer ownership to the buyer. So pending delivery, despite perfection or even

payment of the price, as a rule, then vendor is still the owner. The vendee, of

course, under Arts. 1163 -1165, CC, can demand

delivery. He has a right. So in effect, both the vendor and the vendee have insurable interest in property subject matter.

With respect to a stockholder of a corporation, does he have insurable interest

in the corporate assets and property? The rule in corporation law is

that a corporation has a personality distinct and separate from those of its

stockholders. Hence, any property of the corporation is not property of its

stockholders. Such property belongs to the corporation as a distinct and separate

entity. But a stockholder has an inchoate interest to the extent of

his shares or subscription in corporate assets. To that extent, a

stockholder has insurable interest in the property of a corporation.

Going back to life insurance, do you have an insurable interest in the life of

your girlfriend? No. Mere relationship is not enough to grant insurable interest in a

person party to such relationship. Unless she depends

on you for support.

What about a corporation, does it have an insurable interest in the life

of its janitor? No. Even if the janitor is under obligation to render services

to the corporation, death of the janitor cannot bring loss or prejudice to the

corporation. But does a corporation have an insurable interest in the life of

its president? Yes. Death of the president will mean

loss or prejudice to the corporation itself.

Do you have an insurable interest in the life of your lecturer? Is he not

under obligation to render service to you (deliver lectures)? Or is it the school which has an insurable interest in the life of the lecturer? No.

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