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Section 1. This decree shall be known as the Insurance Code of 1978

A. Origin of Insurance
What is the principle behind insurance? Insurance is based upon the principle of aiding another from a loss caused by an unfortunate event. How old is the concept of insurance? Very old. Benevolent societies organized for the purpose of extending aid to their unfortunate members from a fund contributed by all, have been in existence from the earliest times. They existed among the Egyptians, the Chinese, the Hindus, the Romans, and are known to have been established among the Greeks as early as, believe it or not, 3 B.C. How did insurance develop in the Philippines? Pre-Spanish Era - there was no insurance; every loss was borne by the person or the family who suffered the misfortune. Spanish era Insurance, in its present concept, was introduced in the Philippines when Lloyds of London appointed Strachman, Murray & Co., Inc. as its representative here. 1898 Life insurance was introduced in this country with the entry of Sun Life Assurance of Canada in the local insurance market. 1906 First domestic non-life insurance company, the Yek Tong Lin Insurance Company, was organized 1910 First domestic life insurance company, the Insular Life Assurance Co., Ltd., was organized 1939 Union Insurance Society of Canton appointed Russel & Surgis as its agent in Manila. The business transacted the Philippines was then limited to non-life insurance. 1936 Social insurance was established with the enactment of Commonwealth Act no. 186 which created the Government Service Insurance System (GSIS) which started operations in 1937. The Act covers govt employees. 1949 Government agency was formed to handle insurance affairs, where the Insular Treasurer was appointed commissioner ex-officio. 1950 Reinsurance was introduced by the Reinsurance Company of the Orient when it wrote treaties for both life and non life. 1951 First workmens compensation pool was organized as the Royal Group Incorporated. 1954 RA 1161 was enacted which provided for the organization of the Social Security System (SSS) covering employees of the private sector. How did insurance laws develop in the Philippines? During the Spanish Period, the laws on insurance were found in Title VII of Book II and Section III of Title III of Book III of the Spanish Code of Commerce; and in Chapters II and IV of Tile XII of Book IV of the Spanish Civil Code of 1889 (whew!) During the American Regime, on Dec. 11, 1914, the Phil Legislature enacted the Insurance Act (Act 2427). This Act which took effect on July 1, 1915 repealed the provisions of the Spanish Code of Commerce on Insurance. When the Civil Code of the Philippines (RA 386) took effect on August 30, 1950, the provisions of the Spanish Civil Code of 1889 were likewise repealed. For quite a long time, the Insurance Act was the governing law on insurance in the Philippines. On Dec. 18, 1974, PD 612 was promulgated, ordaining and instituting the Insurance Code of the Philippines, thereby repealing Act 2427. PDs 63, 123 and 317 were issued, amending PD 612. Finally PD 1460 which took effect on June 11, 1976 consolidated all insurance laws into a single code and this is what we know now as the Insurance Code of 1978.

B. Laws Governing Insurance in the Philippines

PD 1460, and Articles 2011-2012, 2021-2027 and 2166 of the New Civil Code. What do these Civil Code Provisions say? 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. Art. 2012. Any person who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by a person who cannot make any donation to him, according to said article. Art. 2021. The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of income. Art. 2022. The annuity may be constituted upon the life of the person who gives the capital, upon that of a third person, or upon the lives of various persons, all of whom must be living at the time the annuity is established.

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It may also be constituted in favor of the person or persons upon whose life or lives the contract is entered into, or in favor of another or other persons. Art. 2023. Life annuity shall be void if constituted upon the life of a person who was already dead at the time the contract was entered into, or who was at the that time suffering from an illness which caused his death within twenty days following said date. Art. 2024. The lack of payment of the income due does not authorize the recipient of the life annuity to demand the reimbursement of the capital or to retake possession of the property alienated, unless there is a stipulation to the contrary; he shall have only a right judicially to claim the payment of the income in arrears and to require a security for the future income, unless there is a stipulation to the contrary. Art. 2025. The income corresponding to the year in which the person enjoying it dies shall be pain in proportion to the days during which he lived; if the income should be paid by installments in advance, the whole amount of the installment which began to run during his life shall be paid. Art. 2026. He who constitutes an annuity by gratuitous title upon his property, may provide at the time the annuity is established that the same shall not be subject to execution or attachment on account of the obligations of the recipient of the annuity. If the annuity was constituted in fraud of creditors, the latter may ask for execution or attachment of the property. Art. 2027. No annuity shall be claimed without first proving the existence of the person upon whose life the annuity is constituted. Are there 1. 2. 3. 4. 5. 6. special laws that govern insurance? Revised GSIS Act of 1977 (PD 1146, as amended) Social Security Act of 1954 ( RA 1161, (as amended) The Property Insurance Law ( RA 656, as amended by PD 245) Republic Act No. 4898 EO 250; and RA 3591

How do we construe the provisions of the Insurance Code (IC)? Since our present IC is based mainly on the Insurance Act, which in turn was taken verbatim from the law of California (except for Chap V, which was taken from the law of NY), the courts should follow in fundamental points, at least, the construction placed by California Courts on California law (and the construction placed by the NY Courts on NY law). This is in accordance with the well settled rule in statutory construction that when a statute has been adopted from some other state or country, and said statute has previously been construed by the courts of such state or country, the statute is usually deemed to have been adopted with the construction so given.

C. Insurance Contract
Section 2. Whenever used in this Code, the following terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: (1) 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. (2) The term doing an insurance business or transacting an insurance business withing the meaning of this Code, shall include: (a) Making or proposing to make, as insurer, any insurance contract; (b) 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; (c) Doing any kind of business including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to 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 distinct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

i. Definition (3) As used in this Code, the term Commissioner means the Insurance Commissioner.

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De Leon believes that it is not. He opines that the definition does Not include Life insurance which is a contract upon a condition rather than a contract to indemnify for nor recovery can fully repay a beneficiary for the loss of life which is beyond pecuniary value. A better definition he thinks, is that of Vance who said that a contract of insurance is an agreement by which one party, for a consideration, promises to pay money or its equivalent, or to do some act valuable to the insured or his nominee, upon the happening of a loss, damage, liability or disability arising from an unknown or contingent event.

ii.

Elements

Like any other contract, an insurance contract must have consent of the parties, object and cause or consideration. The parties who give their consent in this contract are the insurer and insured. The object of the contract is the transferring or distributing of the risk of loss, damage, liability or disability from the insured to the insurer. The cause or consideration of the contract is the premium which the insured pays the insurer. What is an additional element of an insurance contract? Insurable Interest. This means that the insured possesses an interest of some kind susceptible of pecuniary estimation.

iii. 1. 2. 3. 4. 5. 6. 7.

Characteristics
Consensual perfected by the meeting of the minds of the parties 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 are not against the law or public policy Aleatory depends upon some contingent event Executed as to the insured after the payment of the premium Executory as to the insurer as it is not executed until payment for a loss Conditional subject to conditions the principal one of which is the happening of the event insured against Personal each party in the contract have in view the character, credit and conduct of the other.

What does the term doing insurance business include? The term doing an insurance business or transacting an insurance business includes: a) Making or proposing to make, as insurer, any insurance contract; b) 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; c) Doing any kind of business including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; d) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this code. Does the fact that no profit was derived from the transaction nor a separate consideration received therefore mean that no insurance business was transacted? No. Fact that no profit is derived from the contract or transaction or that no separate or direct consideration is received for such contract or transaction is NOT deemed conclusive to show that no insurance business was transacted. Will any suretyship agreement amount to an insurance contract? No. In order for a suretyship agreement to come under the purview of the Insurance Code, the Surety undertaking to ensure the performance of the obligations must be registered with the Insurance Commissioner and must have been issued by the latter with a certificate of authority. Furthermore, the person acting as a surety is habitually engaged as such for a livelihood.

iv.

Interpretation of Insurance Contracts

Ambiguities or obscurities must be strictly interpreted against the party that caused them. As the insurance policy is prepared solely by the insurer, the ambiguities shall be construed against it and in favor of the insured. (Qua Chee Gan)

CASES: 1. Del Rosario vs. Equitable Insurance and Casualty (1963)

FACTS: Francisco del Rosario availed of a personal accident policy from Equitable Insurance and Casualty binding. The latter binding itself to pay the sum of P1,000.00 to P3,000.00 as indemnity for the death of the insured.

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On February 24, 1957, the insured Francisco del Rosario alias Paquito Bolero, while on board the motor launch "ISLAMA" together with 33 others, including his beneficiary in the Policy, Remedios Jayme, were forced to jump off said launch on account of fire which broke out on said vessel, resulting to the death by drowning, of the insured and beneficiary in the waters of Jolo. Simeon Del Rosario, father of the insured and the sole heir of the deceased filed a claim for the insurance benefit. He received P1K. However, Atty. Francisco wrote to the insurance company disputing the amount received. He claimed that the del Rosario is entitled to a higher amount because death by drowning is not one of those causes enumerated in the Policy wherein a fixed amount of P1K shall be the indemnity. The crux of the controversy is the proper amount that should be claimed. ISSUE: WON del Rosario is entitled to an amount higher that P1K. RULING: Yes. 'Part I of the policy fixes specific amounts as indemnities in case of deaths resulting from bodily injury which is effected solely thru violence, external, visible and accidental means' but, Part I of the Policy is not applicable in case of death by drowning because death by drowning is not one resulting from 'bodily injury which is affected solely thru violent, external, visible and accidental means' as 'Bodily Injury means a cut, a bruise, or a wound and drowning is death due to suffocation and not any cut, bruise or wound.' xxx xxx xxx Besides, on the face of the policy Exhibit 'A' itself, death by drowning is a ground for recovery a part from the bodily injury because death by bodily injury is covered by Part I of the policy while death by drowning is covered by Part VI thereof. But while the policy mentions specific amounts that may be recovered for death for bodily injury, yet, there is no specific amount mentioned in the policy for death thru drowning although the latter is, under Part VI of the policy, a ground for recovery thereunder. Since the defendant has bound itself to pay P1,000.00 to P3,000.00 as indemnity for the death of the insured but the policy does not positively state any definite amount that may be recovered in case of death by drowning, there is an ambiguity in this respect in the policy, which ambiguity must be interpreted in favor of the insured and strictly against the insurer so as to a low a greater indemnity. xxx xxx xxx . . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the amount of P1.000.00 to the plaintiff so that there still remains a balance of P2,000.00 of the amount to which plaintiff is entitled to recover under the policy exhibit 'A'. /adsum

2. Fieldmens insurance vs. vda de songco (1968)

FACTS: Federico Songco is a man of scant education. He owns a private owner type jeep. Benjamin Sambat, Fieldmens Insurances agent induced him to avail of their companys Common Carrier's Liability Insurance Policy covering his motor vehicle. According to the latter, even if their owner type jeep is not a common carrier, it can well be covered by the insurance policy because their company is not the government, so they have the discretion on what to insure. A few months after, the insured vehicle collided with another vehicle which caused the death of Federico and his other son and injuries to the other passengers. RTC decision: in favor of the Songcos. CA decision: affirmed the RTC. ISSUE: WON the Insurance company can deny liability. RULING: This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the weaker party may not change one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles 'contracts by adherence' (contracts d' adhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime example) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary./adsum

3. Landicho vs. GSIS (1972)

FACTS: Flaviano Landicho, a civil engineer of the Bureau of Public Works was issued by GSIS with an optional additional life insurance policy. While still under the employment of the Bureau of Public Works, Mr. Landicho met his death, on June 29, 1966, in an airplane crash in Mindoro. His widow and their children filed with the GSIS a claim for P15,800, as the double indemnity due under policy No. OG-136107, because of the untimely death of the insured owing to said accident. The GSIS denied the claim, upon the ground that the policy had never been in force. Thus, an action was filed before the CFI. AFFIRMATIVE: xxx plaintiffs invoke the stipulation in the policy to the effect that the information contained in the application filed by the insured shall form part of the contract between him and the GSIS, and, especially, subdivisions (c) and (d) of paragraph 7 of said application stating that the same shall serve "as a letter of authority to the Collecting Officer of our Office" the Bureau of Public Works "thru the GSIS to deduct from my salary the monthly premium in the amount of P33.36 beginning the month of May, 1964, and every month thereafter," and that "failure to deduct from my salary the monthly premiums shall not make the policy lapse, however, the premium account shall be considered as indebtedness which, I" the insured "bind myself to pay the System."

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DEFENSE: xxx relying upon subdivision (e) of the same paragraph No 7, which provides that the "policy shall be made effective on the first day of the month next following the month the first premium is paid." Under this theory, subdivisions (c) and (d) of said paragraph 7 would not apply unless and until the first premium shall have been actually paid, pursuant to subdivision (e) of the same paragraph. CFI/RTC decision: in favor of the Landichos. ISSUE: WON the insurance policy in question has ever been in force, not a single premium having been paid thereon. RULING: Yes. In other words, the language of subdivisions (c), (d) and (e) is such as to create an ambiguity that should be resolved against the party responsible therefor defendant GSIS, as the party who prepared and furnished the application form and in favor of the party misled thereby, the insured employee. Indeed, our Civil Code provides: "The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity." This is particularly true as regards insurance policies in respect of which it is settled that the "'terms in an insurance policy, which are ambiguous, equivocal, or uncertain . . . are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved' (29 Am. Jur., 181), and the reason for this rule is that the 'insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance company.' (44 C.J.S., p. 1174.)" 3 The equitable and ethical considerations justifying the foregoing view are bolstered up by two (2) factors, namely: (a) The aforementioned subdivision (c) states "that this application serves as a letter of authority to the Collecting Officer of our Office" the Bureau of Public Works "thru the GSIS to deduct from my salary the monthly premium in the amount of P33.36." No such deduction was made and, consequently, not even the first premium was "paid" because the collecting officer of the Bureau of Public Works was not advised by the GSIS to make it (the deduction) pursuant to said authority. Surely, this omission of the GSIS should not inure to its benefit. (b) The GSIS had impliedly induced the insured to believe that Policy No. OG-136107 was in force, he having been paid by the GSIS the dividends corresponding to said policy. Had the insured had the slightest inkling that the latter was not, as yet, effective for non-payment of the first premium, he would have, in all probability, caused the same to be forthwith satisfied./adsum

4. Dela Cruz vs. Capitol Insurance (1966)

FACTS: Eduardo de la Cruz, a mucker at Itogon-Suyoc Mines, Inc. in Baguio City was covered by an accident insurance policy underwritten by Capitol Insurance for a period of 1 year (November 13, 1956-November 12, 1957). On January 1, 1957, in connection with the New Year celebration, the company sponsored a boxing match for entertainment, to which dela Cruz was a participant. In the course of the bout, dela Cruz slipped and and was hit by his opponent on the left part of the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring. He was brought to the hospital and died the next day. Simon dela Cruz, the insureds father, the named beneficiary claimed the insurance benefits but the same was denied. Thus, an action for specific performance was brought before the court. The insurer set up the defense that the death of the insured, caused by his participation in a boxing contest, was not accidental and, therefore, not covered by insurance. RTC decision: in favor of dela cruz. ISSUE: WON Eduardo dela Cruz died due to an accident. RULING: Yes. The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes place without one's foresight or expectation an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected. xxx The generally accepted rule is that, death or injury does not result from accident or accidental means within the terms of an accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything unforeseen except the death or injury. There is no accident when a deliberate act is performed unless some additional, unexpected, independent, and unforeseen happening occurs which produces or brings about the result of injury or death. 4 In other words, where the death or injury is not the natural or probable result of the insured's voluntary act which produces the injury, the resulting death is within the protection of policies insuring against the death or injury from accident. In the present case, while the participation of the insured in the boxing contest is voluntary, the injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he could not have received that blow in the head and would not have died. The fact that boxing is attended with some risks of external injuries does not make any injuries received in the course of the game not accidental. In boxing, as in other equally physically rigorous sports, such as basketball or baseball, death is not

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ordinarily anticipated to result. If, therefore, it ever does, the injury or death can only be accidental or produced by some unforeseen happening or event as what occurred in this case. Furthermore, the policy involved herein specifically excluded from its coverage "(e) Death or disablement consequent upon the Insured engaging in football, hunting, pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling." Death or disablement resulting from engagement in boxing contests was not declared outside of the protection of the insurance contract. Failure of the defendant insurance company to include death resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death./adsum

5. Ty vs. Capitol Surety (1961)

FACTS: Diosadado Ty was employed as an operator mechanic foreman in the Broadway Cotton Factory. He insured himself in 18 local insurance companies (8 of which are the present defendants). The premiums for which were paid by his employer. He was issued with personal accident policies naming his employer as beneficiary. A fire broke which totally destroyed Broadway Cotton factory. While fighting his way out he was injured on the left hand by a heavy object. He thereafter received medical attendance. The accident caused temporary total disability of his left hand. Consequently, he filed notices of disability and claims against the insurance companies. The insurance companies rejected his claim for indemnity for the reason that there was no severance or amputation of the left hand. Thus, the disability suffered by him was not covered by his policy. MTC decision: dismissed the complaint and absolved the insurance companies from liability. CA decision: ISSUE: WON Ty has sustained partial disability as to warrant him to claim from the insurance. RULING: No. While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued, we can not go beyond the clear and express conditions of the insurance policies, all of which define partial disability as loss of either hand by a amputation through the bones of the wrist." There was no such amputation in the case at bar. All that was found by the trial court, which is not disputed on appeal, was that the physical injuries "caused temporary total disability of plaintiff's left hand." Note that the disability of plaintiff's hand was merely temporary, having been caused by fractures of the index, the middle and the fourth fingers of the left hand. We might add that the agreement contained in the insurance policies is the law between the parties. As the terms of the policies are clear, express and specific that only amputation of the left hand should be considered as a loss thereof, an interpretation that would include the mere fracture or other temporary disability not covered by the policies would certainly be unwarranted./adsum

6. New Life Enterprises vs. CA (1992)

FACTS: Julian Sy and Jose Sy Bang formed a partnership known as New Life Enterprises, engaged in the sale of construction materials. Julian insured its the stocks in trade with Western Guaranty Corporation, Reliance Surety and Insurance Co. Inc., and Equitable Insurance Corporation. The 3 insurance companies issued their respective Fire insurance policies. The building occupied by New Life Enterprises was gutted by fire. Accordingly, the cause of fire was electrical in nature. His claim for indemnity was denied by the 3 insurance companies. The reason for denial are of the same tenor, i.e. breach of policy conditions, specifically Policy Condition No. '3' which requires the insured to give notice of any insurance or insurances already effected covering the stocks in trade." RTC decision: in favor of Sy. CA decision: reversed the RTC. ISSUE: WON plaintiffs violated the conditions of the insurance policy. RULING: Yes. The terms of the contract are clear and unambiguous. The insured is specifically required to disclose to the insurer any other insurance and its particulars which he may have effected on the same subject matter. The knowledge of such insurance by the insurer's agents, even assuming the acquisition thereof by the former, is not the "notice" that would stop the insurers from denying the claim. Xxx Furthermore, when the words and language of documents are clear and plain or readily understandable by an ordinary reader thereof, there is absolutely no room for interpretation or construction anymore. Courts are not allowed to make contracts for the parties; rather, they will intervene only when the terms of the policy are ambiguous, equivocal, or uncertain. The parties must abide by the terms of the contract because such terms constitute the measure of the insurer's liability and compliance therewith is a condition precedent to the insured's right of recovery from the insurer. 11 While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company, yet contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. Moreover, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Xxx

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"The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a fire would be profitable to the insured./adsum