II. THE CONTRACT OF INSURANCE

Question 1

What is a contract of insurance?

Answer 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. [RA 10607 Sec. 2(a)].

Question 2

When is a contract of suretyship deemed as a contract of insurance?

Answer 2

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. [RA 10607 Sec. 2a].

Question 3

What is a contract of suretyship?

Answer 3

A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of an under the provisions of Act No. 536, as amended by Act No. 2206.

Question 4

What does the term “doing an insurance business” or “transacting an insurance business” mean?

Answer 4

The term doing an insurance business or transacting an insurance business, within the meaning of this Code, shall include:

• Making or proposing to make as insurer any insurance contract;
• Making or proposing to make, as surety, any contract of suretyship as a vocation and not merely incidental to any legitimate business or activity of the surety;
• Doing any kind of business, including a reinsurance business, specifically recognized as the doing of an insurance business within the meaning of this Code;
• 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.

Question 5

What does the term “doing an insurance business” or “transacting an insurance business” mean within the meaning of the Insurance Code?

Answer 5

The term doing an insurance business or transacting an insurance business, within the meaning of this Code, shall include:

• Making or proposing to make, as insurer, any insurance contract;
• 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;
• Doing any kind of business, including a reinsurance business, speicifically recognized as constituting the doing of an insurance business within the meaning of this Code;
• 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.

Question 6

What are the elements of an insurance contract?

Answer 6

The elements of an insurance contract are:

1. Insurable interest;
2. Risk of loss or damage;
3. Designated peril as cause;
4. Consideration: premium;
5. Risk distributing scheme.

Question 7

What must a policy of insurance specify?

Answer 7

Sec. 51. A policy of insurance must specify:

(a) The parties between whom the contract is made;
(b) The amount to be insured except in the cases of open or running policies;
(c) The premium, or if the insurance is of a character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.

Question 8

What are the characteristics of an insurance contract?

Answer 8

The characteristics of an insurance contract are:

1. Aleatory;
2. Executory and conditional;
3. Synallagmatic;
4. Consensual and voluntary;
5. Contract of Adhesion;
6. Personal and of highest degree of good faith;
7. Indemnity (non-life or property)

Question 9

When will a warranty become an insurance contract?

Answer 9

When the warranty goes materially beyond the goods, or beyond defects in the goods to compensate for losses due to causes unrelated to the general merchantability of the goods.

“As a general statement, a warranty that covers extended service contracts within the scope of goods sold for defects that likely existed in the goods at the time of sale is not an insurance contract, while a warranty that goes materially beyond the goods, or beyond defects i n the goods to compensate for losses due to causes unrelated to the general merchantability of the goods is an insurance contract.” [Carale].

Question 10

What is the “principal object and purpose test?”

Answer 10

The “principal object and purpose test” determines whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business.

If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

[Phil. Health Care Providers vs. CIR];

Question 11

What is the definition of a “pre-need plan”?

Answer 11

According to the Pre-Need Code, pre-need plans are defines as “contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, education, interment and other plans, instruments, contracts or deeds as many in the future be determined by the Commission.”

Question 12

What are the general classifications of insurance under the Insurance Code?

Answer 12

The general classifications of insurance under the Insurance Code are:

1. Life;
2. Non-life;
3. Other classifications/variations.

Question 13

What are classified as life insurance?

Answer 13

Life insurance - defined as a mutual agreement by which a party agrees to pay a given sum on the happening of a particular event contingent on the duration of human life, in consideration of the payment of a smaller sum immediately, or in periodical payments by the other party.

Question 14

What are the kinds of life insurance?

Answer 14

The kinds of life insurance are:

1. Individual Life;
2. Group Life; and
3. Industrial Life.

Question 15

What are the kinds of non-life insurance?

Answer 15

The following are non-life insurance:

1. Marine Insurance;
2. Fire Insurance;
3. Casualty or Liability Insurance; and
4. Suretyship.

Question 16

When will strict interpretation of terms be applied? And when will liberal interpretation of terms be applied?

Answer 16

Strict interpretation of terms is applied when the terms of the contract are clear and present no ambiguities. On the other hand, liberal interpretation of terms is used when the terms and conditions are ambiguous and susceptible to various interpretations or construction, the issue to be resolved against the insurer, being the party which prepared the contract.