37.2 Insurance Law
Key Takeaways
An insurance contract requires insurable interest, risk of loss, the insurer's assumption of risk, a general scheme to distribute losses, and a premium.
Insurance contracts are contracts of adhesion, so ambiguities are construed against the insurer, and they require the utmost good faith from both parties.
Insurable interest in property must exist both when the policy takes effect and at the time of loss; in life insurance, only when the policy takes effect.
No policy is binding until the premium is paid, except for life grace periods, acknowledged receipt, installment or credit arrangements, and suretyship.
After two years in force during the insured's lifetime, a life policy is incontestable for concealment or misrepresentation, and a paying insurer is subrogated to the insured's rights against wrongdoers.
Insurance Law
Insurance is a regulated business under the Insurance Code (PD 612, as amended by RA 10607), administered by the Insurance Commission. This section covers the concept, elements, and characteristics of insurance contracts, the classes of insurance and variable contracts, insurable interest, perfection of the contract and premium payment, rescission for concealment, misrepresentation, and breach of warranty, and claims settlement and subrogation.
1. Concept and Elements
A contract of insurance is an agreement by which one party, for a consideration, undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event (Section 2). An insurance contract has five elements:
- The insured has an insurable interest;
- The insured is subject to a risk of loss by the happening of the designated peril;
- The insurer assumes that risk;
- The assumption is part of a general scheme to distribute actual losses among a large group with similar risks; and
- The insured pays a premium as consideration.
2. Characteristics
| Characteristic | Meaning |
|---|---|
| Aleatory | Performance depends on an uncertain event |
| Contract of indemnity | Property insurance only reimburses actual loss; life insurance is not a contract of indemnity because a life has no fixed value |
| Personal | The insurer relies on the character of the insured, so property insurance generally cannot be assigned without the insurer's consent |
| Uberrimae fidei | Both parties must act with the utmost good faith, disclosing all material facts |
| Contract of adhesion | The insurer drafts the terms, so ambiguities are construed against the insurer and in favor of the insured |
| Executory and conditional | The insurer's obligation arises only when the loss occurs |
3. Classes of Insurance and Variable Contracts
The Code classifies insurance into marine, fire, casualty (including accident, health, and liability), suretyship, and life insurance (including health and accident coverage attached to life policies).
A variable contract is a policy or contract whose benefits vary with the investment experience of a separate account maintained by the insurer, such as a variable unit-linked (VUL) policy. Insurers must be authorized by the Insurance Commission to issue variable contracts, and their agents must hold a separate license for them.
4. Insurable Interest
| Point | Life insurance | Property insurance |
|---|---|---|
| Who has it | Every person in their own life (unlimited), and in the life of anyone on whom they depend for support or education, anyone under a legal obligation to them, or anyone in whom they have a pecuniary interest (such as a creditor in a debtor's life, up to the debt) | Anyone with an existing interest, an inchoate interest founded on an existing interest, or an expectancy coupled with an existing interest, such that the peril might directly damnify them |
| When it must exist | When the policy takes effect (not required at death) | Both when the policy takes effect and when the loss occurs |
| Amount | Own life: any amount; others: generally limited to the interest | Limited to the actual interest and loss (indemnity) |
A policy without insurable interest is a wagering contract and is void.
5. Perfection and Premium Payment
The contract is consensual, perfected when the insurer accepts the application. However, under Section 77, no policy is valid and binding unless and until the premium has been paid ("cash and carry" rule). Recognized exceptions include:
- Life and industrial life policies with a grace period for premium payment;
- An acknowledgment of premium receipt in the policy, which is conclusive evidence of payment for binding effect;
- An agreement allowing payment in installments, where partial payment was accepted;
- An agreement granting a credit extension for the premium; and
- Suretyship, where the bond is valid even if the premium is unpaid.
6. Rescission of Insurance Contracts
- Concealment (Sections 26 to 27): neglect to communicate what a party knows and ought to communicate entitles the injured party to rescind, whether intentional or not, if the fact is material.
- Misrepresentation (Sections 44 to 45): a false representation of a material fact, made at or before the issuance of the policy, entitles the insurer to rescind.
- Breach of warranty: a violation of a material warranty or condition entitles the other party to rescind.
- Incontestability (Section 48): after a life policy has been in force for two years during the insured's lifetime, the insurer can no longer prove that it is void or rescindible because of fraudulent concealment or misrepresentation.
7. Claims Settlement and Subrogation
| Policy | Payment deadline |
|---|---|
| Life | Upon maturity, or within 60 days after the insurer receives the claim and proof of death |
| Non-life | Within 30 days after proof of loss and ascertainment of the loss (by agreement or arbitration); if ascertainment is not made within 60 days, within 90 days after receipt of proof of loss |
Unreasonable delay or refusal to pay entitles the insured to interest at twice the ceiling set by the Monetary Board, plus attorney's fees.
Subrogation (Civil Code, Article 2207): when the insurer pays the insured for a loss caused by a third party, the insurer is subrogated to the insured's rights against the wrongdoer, up to the amount paid. Subrogation does not apply to life insurance. If the insured releases the wrongdoer before being paid, the insured loses the claim against the insurer to the extent the release prejudices the insurer's subrogation right.
A homeowner applies for fire insurance, the insurer approves the application and issues the policy, but no premium is paid and there is no credit extension or installment agreement. The house burns a week later. Is the insurer liable?
Yes, because the contract was perfected when the application was approved
No, because under Section 77 no policy is valid and binding until the premium is paid, and no exception applies
Yes, if the homeowner pays the premium after the fire
Yes, because insurance contracts are construed against the insurer
A buyer insured a warehouse under a policy taken out in January but sold the warehouse in June. The warehouse burned in August. May the former owner collect on the policy?
Yes, because insurable interest existed when the policy took effect
No, because in property insurance, insurable interest must exist both when the policy takes effect and when the loss occurs
Yes, as long as premiums were paid
No, because property insurance requires insurable interest only at the time of loss
A life insurance policy has been in force for three years during the insured's lifetime when the insured dies. The insurer discovers that the insured concealed a heart condition when applying. May the insurer rescind the policy?
Yes, because concealment always entitles the insurer to rescind
No, because under the incontestability clause the insurer can no longer contest the policy for concealment or misrepresentation after two years
Yes, if the concealment was intentional
No, because life insurance is never rescissible
Sections you finish are checked off in the contents.