Published — February 6, 2019
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
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.
Related article: What you should know about the State Insurance Fund
There are two (2) kinds of events in our lives, those that are planned and unplanned. In planned, situations we schedule our actions and predict what may happen during the period in a way to avoid and lessen the impact of an unfortunate event. In unplanned situations, on the other hand, when the unforeseen meets the unprepared, most of the time, drastic or stressful results follow. Because of this, we tend to search for contingency plans which may prepare our lives and to be better at coping up with unlikely situations. One of the modernized ways in flowing with the rhythm of events is the utilization of and investment on Insurance Policies.
Insurance Policies are progressively becoming essential tools for living a peaceful and manageable life. It helps us prepare for the upcoming risks that we may face in our everyday lives. It grants us peace of mind, by managing the uncertainties and it distributes the risks in order to easily deal with the results of a peril. Because of this, it was recently reported that the insurance industries are continuing in growth despite financial interventions which might affect their business[1].
Insurance Contract
Before we discuss matters on the enforceability of Insurance Policy, it is important to know what is an insurance contract. The Insurance Code of the Philippines, or Republic Act. No. 10607, provides for the general definition of an Insurance Contract. A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damages or liability from an unknown or contingent event (Sec. 2, Republic Act No. 10607 or the Insurance Code of the Philippines).
Contract of Insurance may also be defined as a contract whereby one party, called an insurer undertakes for a consideration to pay another, called the insured, or his beneficiary, upon the happening of the peril insured against, whereby the party insured or his beneficiary suffer loss or damage or is exposed to liability.
One of the principal characteristics of an insurance contract is that it is a consensual contract[2]. Being a consensual contract, it is perfected by mere consent of the parties, as such, no formality is required for its perfection. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer (Art. 1319 of the New Civil Code of the Philippines).
As held by the Supreme Court in the case of Perez vs. Court of Appeals, G.R. No. 112329, 323 SCRA 613, January 28, 2000, it is of course a primary rule that a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement. Hence, as a rule the absence of a written contract of insurance does not bar the contract from coming into existence.
Nevertheless, a written insurance contract is called a Policy.
Formal Requirements of an Insurance Policy
Although there is no required format in the perfection of the Insurance Contract, it is still required under the law that written policies of Insurance should be issued by the insurer. A policy of insurance is defined under Section 49 of the Insurance Code as the written instrument in which a contract of insurance is set forth.
Section 50 of the same basis requires that the policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary, to complete the contract of insurance shall be written on the blank spaces provided therein. The policy may also be in electronic form subject to the provisions of Republic Act No. 8792, otherwise known as the ‘Electronic Commerce Act’ and to such rules and regulations as may be prescribed by the Insurance Commissioner.
As a matter of general public safety, it is required that the insurance policy is readable and understandable. It is an added protection for the general public that, all policies issued by the insurance companies are approved by the Commission in accordance with Section 232 of the Insurance Code, which states that no policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner, and no application form shall be used with, and no rider, clause, warranty or endorsement shall be attached to, printed or stamped upon such policy, certificate or contract unless the form of such application, rider, clause, warranty or endorsement has been approved by the Commissioner.
Insurance Policy as a Contract of Adhesion
Insurance Policies are contracts of adhesion because only one party (insurer) prepares the written contract while the other party (insured) merely adheres to the contact. Usually, the insured cannot change the written policy imposed by the insurer. Despite being a contract of adhesion, it does not follow that the insured has not given his consent to the terms and conditions of insurance. A contract of adhesion is as equally binding as any other contract. Every insured should be aware of the fact that a party is not relieved of the duty to exercise the ordinary care and prudence that would be exacted just because what is involved is a contract of adherence (adhesion). The conformity of the insured to the terms of the policy is implied from his failure to express any disagreement with what is provided for therein. (Aquino, Timoteo, Essentials on Insurance Law, Page 110, Second Edition, 2014)
In the case of Rizal Surety & Insurance Company vs. Court of Appeals 336 SCRA 12, July 18, 2000, 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 forfeiture is involved’, and the reason for this 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.
Enforcement of Insurance Policy
Taking the principle that the insurance contract is a consensual contract, the same, including the terms and conditions of the Insurance Policy is perfected upon the meeting of the mind of the parties. However, the insurance contract becomes enforceable as against the insurer only after payment of the premium.
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril (Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation 458 SCRA 550, May 16, 2005).
The insurer, to be able to become a risk-spreading device, requires its clients to pay premium. The premiums paid will be pooled on a common fund and will answer for the losses of each insured. As such, the premiums paid by the insured is taken as the elixir vitae of the insurance business (Gaisano vs Development Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017). The premiums are needed in order for the insurer to maintain a legal reserve fund to meet its contingent obligations to the public, hence, the imperative need for its prompt payment and full satisfaction (Tibay vs. Court of Appeals 257 SCRA 126, May 24, 1996).
As a matter of enforcement, it is only upon payment of the premium due will the insurer be bound by an enforceable obligation under the Insurance Policy. Usually, the insured cannot be sued for non-payment of the premium, the only effect of non-payment being that the policy will not go into force.
There are five (5) exceptions to the rule that the policy is not valid and binding unless the premiums have been paid. These exceptions are as follows:
- When the grace period applies in the case of life and industrial life policy;
- When there is acknowledgement in the policy or receipt that the premium has been paid;
- When there is an agreement that the premium shall be payable on installment;
- When there is a credit extension;
- When the equitable doctrine of estoppel applies;
(Aquino, Timoteo, Essentials on Insurance Law, Page 84, Second Edition, 2014)
It must also be noted that payment of premium by installment will have no effect. Payment of premium must be for the full amount and is considered as an indivisible obligation. However, if payment of premium is an established practice, acceptance of the payment by installment would suffice to make the policy binding because it reveals an intention on the part of the insurer to honor the policy. This was discussed in the case of Makati Tuscany Condominuim Corp. vs. Court of Appeals 215 SCRA 462, November 06, 1992, where the Supreme Court held that the subject policies are valid even if the premiums were paid on installments. The records of the case clearly show that insurer and insured intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in the first year was renewed on succeeding years. In those years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer’s intention to honor the policies it issued to the insured. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepared in full.
Payment by means of a
check or note accepted by the insurer is sufficient to put the insurance into
effect, so long as the check or note bears a date prior to the loss and the
funds are sufficiently available. It would be sufficient even if it remains
unencashed at the time of the loss. The subsequent effects of encashment would
retroact to the date of the instrument and its acceptance by the creditor. (Aquino,
Timoteo, Bar Reviewer on Commercial Law, 2017 Edition, Pages 104- 105)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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