Insurance Law

Contract of Insurance defined – an agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event.

Civil Code Provisions

Art. 2011. The contract of insurance is governed by special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code

 In determining the law applicable concerning insurance contracts, the Civil Code shall only be
applied suppletory.
 Insurance code or any special law > Civil Code

Art. 2012. 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.

 Beneficiary – a person to whom the proceeds of an insurance policy may be released upon the
happening of the loss contemplated in the policy.
 GR: The insured can designate ANYONE as their beneficiary subject to certain limitations.

o Those made between persons who were guilty of adultery or concubinage at the time of
the donation. (Designation to the child of the paramour is still valid)
o Those made between persons found guilty of the same criminal offense, in
consideration thereof
o Those made to a public officer or his wife, descendants, and ascendants, by reason of his
office (insured -> public official as beneficiary)

In the case referred to in No. 1, the action for declaration of nullity may be brought by
the spouse of the donor or the done; and the guilty of the donor and done may be
proved by preponderance of evidence in the same action.

Note: The designation to the beneficiary prohibited by law is only VOID not the
insurance contract itself.

Art. 2021 – 2027 – Life Annuities

Annuity, defined – Contract whereby a person pays premium, either through a series of payments or in
lump-sum, in exchange for retirement benefits in the future.

 Considered as an insurance contract by express provision of the Insurance code.

o Section 181. Life insurance is insurance on human lives and insurance appertaining
thereto or connected therewith.

Every contract or undertaking for the payment of annuities including contracts for the
payment of lump sums under a retirement program where a life insurance company
manages or acts as a trustee for such retirement program shall be considered a life
insurance contract for purposes of this code.
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.

Subrogation. – one which will involve the transfer of all the rights of the creditor to a third person to
substitute him in all his rights. (jurisprudence)

 In an insurance contract, subrogation involves the transfer of all the rights of the INSURED to an
INSURER who substitute him in all his rights.

Article 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.

 When will the right of the insurer to subrogation arise?

There must be payment first. Subrogation can only be exercised only if the insured has received
indemnity from the insurance company from the injury or loss arising out of the wrong or
breach of contract complained of.

Where is subrogation allowed?

 Only in cases involving property insurance. (Cannot be applied on life or accident insurance contracts.
The purpose of such contracts is not for indemnification as you cannot put value on human life)

When can the insurer be subrogated to the rights of the insured?

 From the moment of payment.

 The right of subrogation of the insured is conferred by law. It is a form of legal subrogation as
contrary distinguished from conventional subrogation.

o Legal vs. Conventional

 In a conventional subrogation, there needs to exist a contract first or some

document before a third person can be subrogated into the rights of the
creditor. For legal subrogation, there is NO CONTRACT OR DOCUMENT needed.

Extent of the Rights of the Subrogated Insurer

 It cannot go beyond the rights of the creditor.

 The insurer is also limited by matters such as the period to file a claim against the offender /
violator.
 SC: The exercise of the right of the subrogation is purely discretionary on the part of the insurer.
The insured / tortfeasor cannot compel the insurer to exercise their right of subrogation.

Instances when the right of subrogation is defeated.

 1. If the assured by his own act releases the wrongdoer or third party liable for the loss or damage,
from liability.

2. Similarly, where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on
both the assured and the insurer, and the latter cannot bring an action against the carrier on his
right of subrogation.

3. Where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby
effecting “voluntary payment”

What if the insured releases the negligent party after the insurer had paid the proceeds?

 The insurer cannot exercise his/her right of subrogation.

 Remedy of the insurer: Demand reimbursement from the insured because the right of
subrogation was defeated by the insured’s own act.

Article 2207, NCC. “…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.”

 Note: Insurer still has a cause of action against the offender / violator as it can still exercise its
right of subrogation for the amount it released to the insured.

Scenarios:

X is the owner of a motor vehicle. It is covered by a property insurance policy with insurer, Y. Z causes
damage to the motor vehicle of X. X filed a claim for insurance proceeds amounting to Php 100,000 from
Y which was paid accordingly by Y.

What is the remedy of Y?

 File an action against Z. From the moment it paid the amount to X, its right of subrogation is
already approved. Y can step in the shoes of X and may claim the amount of Php 100,00 from Z.

In the earlier example, X signed a quitclaim and released Z from any liability. X then claimed insurance
proceeds from Y amounting to Php 100,000

Can Y be subrogated to the rights of X? What is the remedy of Y?

 No. The right of subrogation on the part of insurer was already defeated due to the quitclaim
signed by X releasing Z from any liability. As remedy, Y can ask for reimbursement for the
amount it released to X.

A secured a life insurance policy from Insurer B. On the other hand, C secures a property insurance
policy over his car from Insurer, D. Unfortunately, A died in a car mishap on account of C’s negligence.
And so, the beneficiaries of A were given 1M by Insurer B as per the life insurance policy? Insurer B now
files an action for damages against C.

What will you do?

  Dismiss the case. The right of subrogation only applies in property insurance policies. The case at
bar, what is involved is a life insurance policy and, in such policy, there can be no subrogation
because its purpose is not indemnification given that you cannot put a value on human life.

What may be insured? (Sections 3 – 5, IC)

Insurable Risks

1. Personal – Life and allied insurance policies

2. Property
3. Liability

What may be insured? (Sec. 3 and 5, IC).

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.

1. Any contingent or unknown event

2. Past or future
3. Damnify of a person having an insurable interest
4. Creating a liability against the insured

Insurance by a married individual

- The consent of the spouse is not necessary for the validity of an insurance policy taken out by a
married person on his or her life or that of his or her children.

Can you insure gambling activities?

- NO.

Section 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 prize.

Parties to the Contract of Insurance

1. Insurer – the person who undertakes to pay proceeds upon the happening of the risk.
2. Insured – person who is covered by the insurance policy.
3. Beneficiary – the person who is entitled to receive the insurance proceeds.

NB: It is possible that the identity of the insured and beneficiary can be merged into one identity
only.
4. Assured / Owner – a person in life insurance contract policies who insures the life of another.

5. Agent of the insurer

Who can be an insurer? (Sec. 6, IC)

1. Corporation
2. Partnership
3. Association

Note: No natural person is allowed to be an insurer in view of the amendatory law.

Who can be an insured?

 General Rule: Anyone can be the insured

 Exception: Section 7, IC. Anyone except a public enemy may be insured.
o Public enemy – Citizens of a country which is at war with the Philippines. (There must be
proof that it is in the state of war in a particular country)

Who can be the beneficiary?

 Anyone except those listed under Article 2012 of the Civil Code.
o Guilty of adultery or concubinage
o Those who committed the same criminal offense
o Public officer including their spouse, ascendants, descendants by reason of his/her office

Designation of Beneficiary

General rule: Revocable

Exception:

1. Waived
2. Did not change in their lifetime.

Agent of the Insured –

 Only juridical persons can be the subject of an insurance contract. It needs natural persons to
act in its stead.
 Thus, the insurer will appoint agents that will act for and its behalf that will transact with
potential clients.

Theory on Cognition – The acceptance of the agent does not necessarily mean acceptance of the insurer.
Exceptions:

1. By express authority given by the authority to the agent.

2. Upon receipt of the contract of insurance, it is deemed accepted for a specific time unless it was
rejected by the insurer.
o During review of the application by the insurer, there exists a valid existing insurance
contract between the applicant and the agent of the insured. Once the insurer rejects
the application, the contract of insurance ceases to exist.

Insurance by Mortgagors and Mortgagees

Section 8, IC – Loss Payable Clause (NB: May also exist in life insurance contracts (mortgage redemption
insurance – a kind of life insurance which contains a loss payable clause as once the mortgagor dies, the
monetary obligations incurred by the same with another individual shall be satisfied by way of the
insurance contract))

Section 8. Unless the policy otherwise provides, where a mortgagor of property effects insurance in his
own name
 1. Providing that the loss shall be payable to the mortgagee,
2. 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…

 Mortgagor remains to be a party to the contract and for the interest of the same despite the
assignment.
 Insurer cannot raise the defense that the insured assigned his rights to the creditor-mortgagee.

Effect of payment:

- If loss takes place, and there was payment done, it will be considered as done for the interest of
the mortgagor. As such, the payment is deemed to inure to the benefit of the mortgagor.
Accordingly, the loan obligation subject of a mortgage security is deemed extinguished.

..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..

 The mortgagee is bound by the acts of the mortgagor-insured.

But any act which, under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee herein named, with the same effect as if it had been performed by the
mortgagor.

Section 9, IC – Union Mortgage Clause

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.

 Imposes further obligations to the assignee

 Acts of the mortgagor prior to the loss will no longer bind the mortgagee as compared to a loss
payable clause wherein any acts of the mortgagor prior to the loss even if it is on the hands of
the mortgagor will bind the mortgagee which may resort to the avoidance of the insurance
policy.

Loss Payable Clause Union mortgage Clause

Is there assignment of rights Yes Yes

involved?
Are there additional obligations None Yes
imposed
Will the acts of the mortgagor Yes No
bind the mortgagee

Insurable Interest
Insurable interest is one the most basic of all requirements in insurance.  In general, a person is deemed
to have insurable interest in the subject matter insured where he ha a relation or connection with or
concern in it that he will derive pecuniary 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.

Section 10, IC. Every person has an insurable interest in the life and health

a. Of himself, of his spouse and 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, or respecting property or
services of which death or illness might delay or prevent the performance
d. Of any person upon whose life any estate or interest vested in him depends.