Understanding the Compulsory Third-Party Liability insurance

Chapter 6 of the Amended Insurance Code (AIC) provides for the law on Compulsory Motor Vehicle
Liability Insurance (CMVLI). The CMVLI has two main components. The first pertains to public-utility
vehicles (PUVs); and the second pertains to owners of motor vehicles in case of liability for death or
injury to third parties (Section 387). With respect to PUVs, Section 387 requires any land-
transportation operator to acquire an insurance policy to indemnify any passenger for death or bodily
injury. This law, together with Executive Order 202, laid the legal basis for the Passenger Personal
Accident Insurance Program (PPAIP) of the Land Transportation Franchising and Regulatory Board
(LTFRB).

On the other hand, Section 387 to 390 of the AIC established the basis for the Compulsory Third-
Party Liability (CTPL) insurance. Under Section 389, no motor vehicle may be registered or renewed
for registration without proving that it has acquired an insurance coverage. Section 390 affords the
motor-vehicle owner the option to choose between securing an insurance policy, securing a surety
bond or making a cash deposit. In actual practice, however, securing an insurance policy is the only
option being implemented. Section 390 also allows the Insurance Commission (IC) to fix the amount
of indemnities in case of death or bodily injuries.

Rebating and inducement under the Insurance Code

WHILE rebating is seemingly proconsumer, the main reasons for the prohibition are actually
grounded on consumer protection, to wit: one, is that rebating encourages price discrimination,
since policy-holders, in the same actuarial pool, may not receive the same rebates; two, is that the
practice will lead to the insurers insolvency, because the premium received will be less than that
approved; and, third, rebating undermines agent professionalism.

The first would apply where rebates are given only to a select group; the second would appear valid
only in cases of excessive rebates. The third argument is that agents should focus more on the
quality of service, rather than on the price and commissions. Various court decisions have dealt with
the antirebating law. The Pennsylvania Supreme Court stated: The thrust of the antirebate provisions
of the statute is against the placement of insurance, whereby the insured secures the insurance at a
favored rate, regardless of the mode of the manner in which such favored rate is obtained. The court
below well stated that, as is universally stated and recognized, a reduction of cost is the test of
whether or not the statute is being violated.

SECTION 370 of the Amended Insurance Code prohibits rebating and inducement by insurers or
agents. Some writers, though, would classify inducement as a topic already covered by rebating.
Rebating includes the sharing of agents commissions to the insured. While rebating is accepted and
welcome in most industries, in insurance it is not. Insurance companies should, therefore, keep their
marketing activities in line with the antirebating law.

Rebating is a practice whereby something of value is given to sell the policy that is not provided form
in the policy itself. It is returning a portion of the premium or the agents / brokers commission on
the premium to the insured or other inducements to place business with a specific insurer. Rebates
are incentives, in the form of gifts or other consideration, given to induce customers to purchase
insurance coverage from a particular insurer. They have been described as side deals that are not
included in the insurance policy. They have also been described as extra-contractual benefits.

Rebates can be in the form of cash, gifts, services, payment of premiums, employment, or almost
any other thing of value. Rebating is prohibited and is considered an unfair practice in the insurance
industry. It is, moreover, an ethical issue. According to Richard M. Weber, president of Ethical Edge
Inc., When you complicate the solicitation and underwriting process with what appears to be a
meaningful incentive, you alter normal conditions, causing the actuarial science to be thrown off
kilter. In other words, it undermines the entire actuarial and underwriting practice. He adds, The fear
is if you introduce a financial incentive to buy insurance, you introduce a different sort of population
into the mixone that is buying insurance for the wrong reasons. The most common form of
rebating is a cash return of part of the premium or the acceptance of an amount less than the full
premium payable. There are other forms of rebating, such as giving goods or services at no cost or at
a discount. In one case, it was ruled that rebating is committed by giving the insured a favorable
interest rate on a loan used to pay the premium. Several state regulators in the US have issued
advisory bulletins that insurers are prohibited from providing free or discounted value-added services
unrelated to the sale of the insurance, unless it is set forth in the insurance policy.
The full and prompt payment of premiums

Today, Section 77 of the Amended Insurance Code provides that no contract of insurance is valid and
binding unless the premium has been paid. After all, premium has been described as the elixir vitae
or the elixir of life of the insurance business.

The payment contemplated means full and prompt payment. Hence, the nonpayment of premiums
would result to the lapse and forfeiture of the policies (Valenzuela v. Court of Appeals). Nonpayment
of the premiums does not merely suspend but puts an end to an insurance contract.
In Constantino v. Asia Life Insurance Company, it was ruled that even if the nonpayment of premiums
was due to the second world war, specifically by reason of the closure of the insurers Manila branch
office because of the Japanese occupation, the insurance contract should be deemed abrogated by
reason of nonpayments, as argued by the so-called United States Rule. In other words, war was no
excuse for the nonpayment of premiums. This general rule in Section 77 is what is known as the
Cash and Carry rule.

The payment may be made to the insurer or to its agent pursuant to Section 315 (paragraph 2) of the
Insurance Code.

The Insurance Code and jurisprudence have, however, stated five exceptions to this general rule: a)
in case of a life and or an industrial life policy whenever the grace period applies (Section 77); b)
when a 90-day credit extension is given (Section 77); c) acknowledgement of payment in the policy
even if no actual payment has been received (Section 79); d) if the parties have agreed to the
payment in installments of the premium and partial payment has been made at the time of loss
(Makati Tuscany Condominium v. CA); and e) when estoppel applies (UCPB General Insurance
Co. v. Masagana Telamart Inc. 2001).

Section 77 provides: An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid, except in the case of a life or an industrial life policy whenever the
grace period provision applies, or whenever under the broker and agency agreements with duly
licensed intermediaries, a 90-day credit extension is given. No credit extension to a duly licensed
intermediary should exceed 90 days from date of issuance of the policy.

What is unfair claims settlement?

Unfair claims-settlement practices is defined through an enumeration of five acts committed by the
insurer in Section 247 of the Amended Insurance Code. These five acts are: 1) knowingly
misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; 2)
failing to acknowledge with reasonable promptness pertinent communications with respect to claims
arising under its policies; 3) failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies; 4) not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted in which liability has become reasonably clear
(although the first sentence of Section 247 already states refusal, without just cause, to pay or settle
claims); or 5) compelling policyholders to institute suits to recover amount due under its policies by
offering without justifiable reason substantially less than the amounts ultimately recovered in suits
brought by them.

Note that the commission of these acts is qualified by the phrase without just cause and performed
with such frequency as to indicate a general business practice. Thus, failing to make prompt
payment of claims may be excused for just reasons.

A finding of unfair claims settlement is sanctionable with the suspension or revocation of the
companys certificate of authority (Secretary 247 [c]). Note that, in addition to the revocation or
suspension of license (although not expressly stated in Section 247), the insurance commissioner
also has the discretion to impose upon the erring insurance companies and its directors, officers and
agents, fines and penalties, as set out under Section 438.

Incontestability clause
Under the new Civil Code, a contract is voidable if the consent by one party is vitiated by mistake or
fraud. The incontestability clause in the Insurance Code is an exception to this Civil Code provision.
The incontestability clause provides that a life-insurance policy shall be incontestable after two years
from the date of issuance, regardless of any mistake, fraud, concealment or misrepresentation. Under
Philippine laws, it may only be contested on the ground of nonpayment of premiums.
The ultimate aim of the incontestability clause is to compel insurers to solicit business from or
provide insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly
investigate those they insure within two years from effectivity of the policy and while the insured is still
alive. If they do not, they will be obligated to honor claims on the policies they issue, regardless of
fraud, concealment or misrepresentation. (Manila Bankers Life Insurance Corp. v. Aban, GR 175666,
July 29, 2013).

The object of an incontestability clause is to restrict the insurer to a definite time within which to
discover any fraud or misrepresentation made by the insured in the application for insurance and to
take appropriate action to cancel the policy.

The ultimate aim of the incontestability clause is to compel insurers to solicit business from or
provide insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly
investigate those they insure within two years from effectivity of the policy and while the insured is still
alive. If they do not, they will be obligated to honor claims on the policies they issue, regardless of
fraud, concealment or misrepresentation. (Manila Bankers Life Insurance Corp. v. Aban, GR 175666,
July 29, 2013).

The object of an incontestability clause is to restrict the insurer to a definite time within which to
discover any fraud or misrepresentation made by the insured in the application for insurance and to
take appropriate action to cancel the policy.

The insurer has two years from the date of issuance of the insurance contract or of its last
reinstatement within which to contest the policy, whether, the insured still lives within such period.
After two years, the defenses of concealment or misrepresentation, no matter how patent or well
founded, no longer lie. Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability. The petitioners interpretation would give rise to the
incongruous situation where the beneficiaries of an insured who dies right after taking out and paying
for a life-insurance policy, would be allowed to collect on the policy even of the insured fraudulently
concealed material facts.
Direct action against reinsurers

Section 100 of the Amended Insurance Code provides: The original insured has no interest in a
contract of reinsurance. There is no privity of contract between the original insured and the reinsurer.
Thus, the original insured would have no cause of action to recover insurance proceeds from the
reinsurer. Conversely, the reinsurer, as a general rule, is not liable to the original insured of the
ceding insurer. The reinsurer is not a cosigner of the policy issued. It is also not jointly and severally
(solidarily) obligated to the policyholder. The reinsurer is only in contractual privity with the ceding
insurer.

Likewise, the insurer (or ceding insurer) may not raise the defense to an insurance claim that the
insurer had obtained reinsurance from other companies to cover its liability. The insured can only
move for enforcement of its insurance contract with its insurer. A reinsurance contract is generally a
separate and distinct arrangement from the original contract of insurance, whose contracted risk is
insured in the reinsurance agreement.

In Guingon v Del Monte et al., a jeepney operator entered into a contract with Capital Insurance &
Surety Co. Inc. to insure his jeepney against accidents with third-party liability. The court ruled that
the right of the person injured to sue the insurer of the party at fault [insured], depends on whether
the contract of insurance is intended to benefit third persons also or only the insured. And the test
applied has been this: Where the contract provides for indemnity against liability to third persons, then
third persons to whom the insured is liable, can sue the insurer. Where the contract is for indemnity
against actual loss or payment, then third persons cannot proceed against the insurer, the contract
being solely to reimburse the insured for liability actually discharged by him through payment to third
persons, said third persons recourse being, thus, limited to the insured alone. In this case, the policy
involved is one whereby the insurer agreed to indemnify the insured against all sumswhich the
insured shall become legally liable to pay in respect of: death of or bodily injury to any person
Clearly, therefore, it is one for indemnity against liability; from the fact then that the insured is liable to
the third person, such third person is entitled to sue the insurer.

A stipulation pour autrui that intends to benefit an insured should be provided in the reinsurance
contract or a specific agreement between the reinsurer and the original insured.
In addition to stipulations pour autrui, there are other exceptions to the general rule stated in Section
100. One is when an insurer, after acknowledging a claim payable, has assigned to the insured the
reinsurance proceeds collectible from the reinsurers. The insured, as assignee and original insured,
may institute a collection suit directly against the reinsurers (see Avon Insurance Plc. et al. v Court of
Appeals et al., GR 97642, August 29, 1997).

In the United States one exception to the rule on lack of privity is when an insured is considered as a
third-party beneficiary where the direct insurer is found to be insolvent or bankrupt and is considered
merely as a fronting company (see Koken v Legion Ins. Co., 831 A. 2d 1196).

Another exception is when there is a cut-through provision (or cut-through endorsement) in the
underlying policy, which gives the insured a contractual right to take direct action against the
reinsurer. The insured is then considered as a third-party beneficiary. Cut-through provisions are
usually provided for in case of insolvency of the direct insurer. In the US, many states allow cut-
through provisions, among them the California Insurance Code and the Texas Insurance Code.