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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Characteristics of Insurance Contracts:
- Consensual;
- Personal;
- Voluntary;
- Aleatory;
- Contract of Indemnity;
- Risk Distributing;
- Uberrimae Fidei; and,
- Partly executed and partly executory.
As defined under Section 2, Republic Act No. 10607, 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.
Understanding the characteristics of insurance contract is important for both policyholders and insurers. Adherence to these principles ensures that the contract is legally binding and provides the intended protection.
Consensual
An insurance contract is formed through mutual consent between the insurer and the insured. This means that both parties must willingly agree to the terms and conditions of the contract. Once the offer is made and accepted, a binding agreement is established, and both parties are obligated to fulfill their respective roles.
Preliminarily, it bears emphasis that a contract of sale is a consensual contract. No particular form is required for its validity. Upon perfection thereof, the parties may reciprocally demand performance, i.e., the vendee may compel the transfer of ownership over the object of the sale, and the vendor may require the vendee to pay for the thing sold. (Felipa Binasoy Tamayao and the Heirs of Rogelio Tamayao vs. Felipa Lacambra, G.R. No. 244232, November 03, 2020)
Being a consensual contract, sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. A perfected contract of sale imposes reciprocal obligations on the parties whereby the vendor obligates himself to transfer the ownership of and to deliver a determinate thing to the buyer who, in turn, is obligated to pay a price certain in money or its equivalent Failure of either party to comply with his obligation entitles the other to rescission as the power to rescind is implied in reciprocal obligations. (Spouses Antonio Beltran and Felisa Beltran vs. Spouses Apolonio Cangayada, Jr., G.R. No. 225033, August 15, 2018)
Personal
An insurance contract is inherently personal, implying that only the involved parties in the insurance contract are obligated to adhere to its stipulations. Due to its personal nature, an insurance contract can exclusively hold accountable those individuals who have directly entered into the contractual arrangement.
Further, insurance contracts are designed to provide protection for specific individuals or entities against specific risks. This means that the terms and conditions of an insurance policy are tailored to the unique circumstances and needs of the insured party. As a result, insurance policies are not transferable without the consent of the insurer.
The standard principle dictates that only the parties involved in the insurance contract are obligated to uphold its terms. However, there are exceptions where a person who is not a direct party to the contract can still assert rights under it in specific circumstances in cases of stipulation pour autrui or stipulation in favor of a third person.
Simply put, the requisites of a stipulation pour autrui or a stipulation in favor of a third person are the following: (1) there must be a stipulation in favor of a third person, (2) the stipulation must be a part, not the whole, of the contract, (3) the contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest, (4) the third person must have communicated his acceptance to the obligor before its revocation, and (5) neither of the contracting parties bears the legal representation or authorization of the third party. (South Pachem Development, Inc. vs. Honorable Court of Appeals and Makati Commercial Estate Association, Inc., G.R. No. 126260, December 16, 2004)
Voluntary
Participation in an insurance contract is entirely voluntary. Individuals or entities have the freedom to decide whether or not to purchase insurance coverage. This characteristic is significant because it underscores the principle of free will and allows individuals to assess their own risk tolerance and financial capacity before entering into an insurance agreement.
An insurance contract is typically a matter of personal choice and this implies that the decision to obtain insurance is entirely up to the individual. It rests upon their discretion whether they opt for coverage or not, including their choice of insurer. This voluntariness extends to the insurer’s side as well. They have the discretion to accept or decline the associated risk. While a person may meet the criteria for insurability, it ultimately falls to the insurer to determine whether or not to provide coverage.
Aleatory
One of the unique features of insurance contracts is their aleatory nature. This means that the benefits received by the insured and the premiums paid to the insurer are not equal. The outcome of the contract is contingent on the occurrence of a specific event, such as an accident, illness, or other covered risks. The amount paid in premiums may far exceed the benefits received, or vice versa.
Further, jurisprudence states, “insurance is an aleatory contract which, unlike a conditional agreement whose efficacy is dependent on stated condition, is at once effective upon its perfection although the occurrence of a condition or event may later dictate the demandability of certain obligations thereunder”. (Spouses Antonio Tibay and Violeta Tibay vs. Court of Appeals and Fortune Life and General Insurance Co., G.R. No. 119655, May 24, 1996)
Contract of Indemnity
Most insurance contracts operate on the principle of indemnity. This means that the purpose of insurance is to restore the insured to the financial position they were in before the loss or damage occurred.
Contracts of insurance are contracts of indemnity, upon the terms and conditions specified therein. Parties have a right to impose such reasonable conditions at the time of the making of the contract as they deem wise and necessary. The rate of premium is measured by the character of the risk assumed. The insurer, for a comparatively small consideration, undertakes to guarantee the insured against loss or damage, upon the terms and conditions agreed upon, and upon no other. When the insurer is called upon to pay, in case of loss, he may justly insist upon fulfillment of the terms of the contract. If the insured cannot bring himself within the terms and conditions of the contract, he is not entitled to recover for any loss suffered. The terms of the contract constitute the measure of the insurer’s liability. If the contract has been terminated, by a violation of its terms on the part of the insured, there can be no recovery. Compliance with the terms of the contract is a condition precedent to the right of recovery. (Charles Abolafia vs. Liverpool and London and Globe Insurance Company, G.R. No. L-21991, October 31, 1924)
Risk Distributing Device
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is primarily a risk-distributing device, a mechanism by which all members of a group exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting with the amount required as premium without receiving anything therefore in case the contingency does not happen. (Jaime Gaisano vs. Development Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017)
In other words, insurance contracts are a means of distributing risk among a large pool of policyholders. By pooling together premiums from many individuals or entities, insurers can effectively spread the financial burden of claims. This helps to stabilize the impact of unexpected events and ensures that no single policyholder bears the full weight of a loss.
Uberrimae Fidei
The contract of insurance is one of perfect good faith (uberrimae fidei) not for the insured alone, but equally so for the insurer; in fact, it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, the ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, specially to avoid a forfeiture. (Qua Chee Gan vs. Law Union and Rock Insurance Co., G.R. No. L-4611, December 17, 1955)
The principle of uberrimae fidei, or utmost good faith, is a cornerstone of insurance contracts. Both parties are bound by a duty of honesty and full disclosure. The insured is obligated to provide all relevant information truthfully, and the insurer must be transparent about the terms and conditions of the policy. Failure to uphold this principle can lead to the nullification of the contract.
Partly executed and partly executory
Insurance contracts are considered partly executed and partly executory. This means that while certain aspects of the contract are already in effect (such as the payment of premiums), other elements are contingent on future events (such as the occurrence of a covered risk). As such, insurance contracts are dynamic and can evolve over time.
There is, consequently, no doubt at all that, as between the insurer and the insured, there was not only a perfected contract of insurance but a partially performed one as far as the payment of the agreed premium was concerned. Thereafter the obligation of the insurer to pay the insured the amount, for which the policy was issued in case the conditions therefore had been complied with, arose and became binding upon it, while the obligation of the insured to pay the remainder of the total amount of the premium due became demandable. (Spouses Antonio Tibay and Violeta Tibay vs. Court of Appeals and Fortune Life and General Insurance Co., G.R. No. 119655, May 24, 1996)
Read also: Basics of an Insurance Contract
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