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POLICY OF INSURANCE

Definition
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the written instrument in which a contract of insurance is set forth.


(Art. 49)
It is the written document embodying the terms and stipulations of the
contact of insurance between the insured and the insurer.

Form
The contract may be informal, e.g. as a binding slip, or a written
application informally accepted.
The contract may be formal, being the carefully drawn written policy in
customary use.
The policy must be in written form. Any word, sign, symbol, etc.
necessary to complete the contract of insurance shall be written on the
blank spaces provided in the policy.
In case of conflict between the written and printed portions of a policy,
the written portion prevails.

Fine print rule


The terms are drafted and imposed by the insurer. Ordinarily, contracts
are freely negotiated by parties with roughly equivalent bargaining
power. However, this classical model is far removed from the reality of
the insurance business.
Insurance contracts are drafted with the aid of skillful and highly
paid legal talent, from which no deviation desired by an applicant
will be permitted.
Except for riders which may later be inserted, the insured sees the
contract in its final form and has had no voice in the selection or
arrangement of the words employed therein.
The insured cannot negotiate the substance of the contract with
the insurer. The provisions are normally drafted by industry experts.
Since the parties do not bargain on equal footing, the weaker partys
participation is reduced to the alternative to take it or leave it.
Consequently, where the language use in an insurance contract or
application is such as to create ambiguity, the same should be resolved
liberally in favor of the insured and strictly against the party responsible
therefor. The reason being, to afford the greatest protection to the
insured.
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Construe contracts as to preclude the insurer from evading


compliance with its just obligations.
Forfeitures are not favored and that any construction which
would result in the forfeiture of the policy benefits for the person
claiming thereunder will be avoided if it is possible to construe
the policy in a manner which would permit recovery.
This rule that insurance contracts are to be construed liberally in
favor of the insured and strictly against the insurer applies to
suretyship agreements.
If the terms of the contract are clear and unambiguous, there is no
room for construction and such terms cannot be enlarged or
diminished by judicial construction.
The courts will only rule out blind adherence to terms where facts
and circumstances will show that they are basically one-sided.
Contents of the policy
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; and
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
Names of the parties are essential.
But the mere fact that the name of the insured was incorrectly
spelled is of no importance whatever, provided that the identity of
the party can be sufficiently established.
Amount of insurance is necessary in order to easily and exactly determine
the amount of indemnity to be paid the insured in case of loss or damage
especially if it is only partial and not total.
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The sum insured is the basis for calculating the premium.


It need not be stated in the case of pen or running policies.
The amount of insurance is the maximum limit on the insurers
liability for loss or damage.
Such amount is not necessarily the value of the property insured
nor the extent of liability of the insurer in the event of loss unless
it is otherwise stipulated.
In life, health, accidental, and injury insurance, a fixed sum is
payable.
In workmens compensation insurance, the amount is not
specified in the policy but by the law imposing liability upon the
employer, which is, by reference, made part of the contract.
The amount insured is the amount fixed in the policy
The deductible is the stated amount to be deducted from any
loss, which is shouldered by the insured making the insurer liable
only for the excess of said amount.
The premium is also essential because it represents the consideration of
the contract.
This is what the insured pays the insurer to assume the risk of or the
value of the loss.
The rates of premium are developed on the basis of the nature
and character of the risk assumed and also on the value of the
property or other interest insured.
The property or life insured constitutes the subject matter of the contract.
It has been suggested that the proper phrase to use is thing
insured because insurable interest may be in liability and not in life
or property.
The requirement of interest insured in property is especially important in
fire insurance policies to determine the actual damage suffered by the
insured in case of loss of the property covered by the policy if he is not
the absolute owner thereof.
The risks insured against must be stated because the insurers
undertaking is to indemnify the insured for loss, damage or liability
caused or created only by the risks insured against.
Almost any contingent or unknown event, whether past or future,
may be insured against except those repugnant to public policy,
positively prohibited, or those occasioned by the insureds own fraud
or misconduct.
The period during which the insurance is to continue must also be stated
because although the loss suffered by the insured was caused by the risk
insured against, the insurer would not be liable unless it occurred during
such duration of the insurance.
It may be expressed in terms of time, distance or voyage.

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The period of time during which the insurer assumes the risk of loss is
known as the life of the policy. (12 mos. annual policy; <12 mos.
short period policies)
Papers attached to the policy and their binding effects (rider,
warranties, clause, and endorsement)
Generally, the rider, slip or other paper becomes a part of a contract or
policy of insurance if properly and sufficiently attached or referred to
therein in a manner as to leave no doubt as to the intention of the parties
in such respect.
Section 226: no rider shall be attached to, printed, or stamped upon a
policy of insurance unless the form of such rider has been approved by
the Insurance Commissioner.
A rider, clause, warranty or endorsement is not binding on the insured
unless the descriptive title or name of the rider, etc. is also mentioned
and written on the blank spaces provided in the policy.
Warranties are inserted or attached to a policy to eliminate specific
potential increases of hazard owing to (1) actions of the insured or (2)
condition of the property.
A clause is an agreement between the insurer and the insured on
certain matter relating to the liability of the insurer in case of loss.
An endorsement is any provision added to an insurance contract
altering its scope or application. (Like extending the perils covered)
An endorsement may be in the nature of a permit such as one
authorizing the removal of the insured property and providing
for coverage in another location.
As to the lack of signature:
General Rule: If the rider is physically attached to a policy of
insurance contemporaneously with its execution and delivered to the
insured so attached, and sufficient reference is made in the policy,
the fact that it is without the signature of the insurer or of the insured
will not prevent its inclusion and construction as a part of the
insurance contract.
Same rule as above if the rider, although issued after the
original policy, was applied for by the insured or owner.
Exception: The countersignature of the insured or owner is required
to any rider, etc. not applied for by him if issued after the delivery of
the policy. The countersignature shall be taken as his agreement to
the contents of the matter so attached.

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Kinds of policy
1. Open (Sec. 60)
An open policy is one in which the value of the thing insured is not
agreed upon, and the amount of the insurance merely represents the
insurers maximum liability.
The value of such thing insured shall be ascertained at the time
of the loss.
It is one in which a certain agreed sum is written on the face of
the policy NOT as the value of the property insured, but as the
maximum limit of the insurers liability.
The insured must establish the FMV of the property at the time of
the loss.
If the FMV exceeds the maximum, the insurer will pay the
maximum.
If the FMV is less than the maximum, the insurer will pay
the FMV.
2. Valued (Sec. 61)
A valued policy is one which expresses on its face an agreement that
the thing insured shall be valued at a specific time.
There are 2 values, the face value and the value of the thing
insured. In the absence of fraud or mistake, the agreed value of
the thing insured will be paid in case of total loss of the property.
In life insurance, the liability of the insurer is measured by the
face value of the policy.
Example: A policy insuring a ship valued at P50 million is a
valued policy.
3. Running (Sec. 62)
A running policy is one which contemplates successive insurances,
and which provides that the object of the policy may be from time to
time defined, especially as to the subjects of insurance, by additional
statements or indorsements.
Here the risk is shifting, fluctuating, or varying, and which covers
a class of property rather than any particular thing.
In some cases, the nature of the property insured or the
circumstances are such as to make it impossible to designate the
subject matter of insurance with certainty or particularity. These
policies are usually known as floating, running, or blanket.
A blanket policy (in the US) is one covering by a single amount of
insurance the same kind of property at different locations or
different kinds of property at a single location.

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Running policies are in reality open policies. When the goods


change location frequently so as to make it difficult to insure its
whole value, the remedy is a contract that has no fixed face
value, the face value adjusting itself to the changing value at one
specified location or at each of several locations.
Advantages of a running policy
Neither underinsured or overinsured at any time, the premium being
based on the monthly values reported
He avoids cancellations that would otherwise be necessary to keep
insurance adjusted to the value at each locations. (These cancellations
would also be charged an expensive short rate)
To save the trouble of watching his insurance and the danger of being
underinsured in spite of his care.
The rate is adjusted to 100% insurance, whereas valued policies
Cover notes
SEC. 52. Cover notes may be issued to bind insurance temporarily pending
the issuance of the policy. Within sixty (60) days after issue of a cover note, a
policy shall be issued in lieu thereof, including within its terms the identical
insurance bound under the cover note and the premium therefor.
Cover notes may be extended or renewed beyond such sixty (60) days
with the written approval of the Commissioner if he determines that such
extension is not contrary to and is not for the purpose of violating any
provisions of this Code. The Commissioner may promulgate rules and
regulations governing such extensions for the purpose of preventing such
violations and may by such rules and regulations dispense with the
requirement of written approval by him in the case of extension in
compliance with such rules and regulations.
Preliminary contracts of insurance (2 kinds)
Preliminary contract of present insurance. The insurer insures
the subject matter through a binding slip or cover note which is to
be effective until the formal policy is issued or the risk rejected.
The binder is a temporary contract of insurance and is usually
issued after the applicant pays the first premium.
The cover note contains the most important terms of a
preliminary contract of insurance and is intended to give
temporary protection pending investigation or issue of the formal
policy. By its nature, it is subject to all the conditions in the policy
expected even though that policy may never issue.

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In life insurance no liability shall attach until the insurer approves


the risk. Thus a binding slip or binding receipt does not insure by
itself.
Binders or cover notes serve the needs of commercial
convenience and yet are more definite and reliable than oral
agreement.
Preliminary executory contract of insurance. Here, the insurer
makes a contract to insure the subject matter at some subsequent
time which may be definite or indefinite. In this contract, the right
acquired by the insured is merely to demand the delivery of a policy in
accordance with the terms agreed upon and the obligation assumed by
the insurer is to deliver such policy.
Issuance and renewal of cover notes
Cover notes are short-term insurance policies that may be issued to
afford immediate provisional protection to the insured until the insurer
can inspect or evaluate the risk in question and issue the proper policy
or until the risk is declined and notice thereof given.
It is sufficient that the cover note shows, by necessary
implication, an agreement to pay whatever rate may be fixed.
Cover notes do not contain particulars that would serve as basis
for the computation of the premiums and consequently, no
separate premiums are intended or required to be paid therefor.
A cover note is integrated with the regular policy to be
subsequently issue
Rules on cover notes
Insurance companies doing business in the Philippines may issue cover
notes to bind insurance temporarily, pending the issuance of the policy.
A cover note shall be deemed to be a contract of insurance within the
meaning of Section 1(1) of the Code.
No cover note shall be issued or renewed unless in the form previously
approved by the Insurance Commission.
A cover note shall be valid and binding for a period not exceeding 60
days from the date of its issuance, whether or not the premium
therefor has been paid. The cover not may be cancelled by either party
upon at least 7 days notice to the other party.
If the cover note is NOT cancelled, within 60 days after its issuance, a
policy of insurance shall be issued in lieu thereof.
This policy will include an identical insurance bond and premium
provided under the cover note.
A cover note may be extended or renewed beyond the period of 60
days with the written approval of the Insurance Commission. The
written approval may be dispensed with upon the certification of the
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president, vice-president, or general manager of the insurance


company concerned that the risks involved, the values of such risks,
and the premiums therefor have not as yet been determined or
established and that such extension is not for the purpose of violating
any provisions of the Insurance Code or any rulings, instructions,
circulars, orders or decisions of the Insurance Commissioner.
Insurance companies may impose on cover notes a deposit
premium equivalent to at least 25% of the estimated premium
coverage but in no case less than P500.
Cancellation of policy
SEC. 64. No policy of insurance other than life shall be cancelled by the
insurer except upon prior notice thereof to the insured, and no notice of
cancellation shall be effective unless it is based on the occurrence, after the
effective date of the policy, of one or more of the following:
(a) Non-payment of premium;
(b) Conviction of a crime arising out of acts increasing the hazard
insured against;
(c) Discovery of fraud or material misrepresentation;
(d)Discovery of willful or reckless acts or omissions increasing the
hazard insured against;
(e) Physical changes in the property insured which result in the property
becoming uninsurable; or
(f) Discovery of other insurance coverage that makes the total insurance
in excess of the value of the property insured; or
(g) A determination by the Commissioner that the continuation of the
policy would violate or would place the insurer in violation of this
Code.
SEC. 65. All notice of cancellation mentioned in the preceding section shall
be in writing, mailed or delivered to the named insured at the address shown
in the policy or to his broker provided the broker is authorized in writing by
the policy owner to receive the notice of cancellation on his behalf, and shall
state (a) Which of the grounds set forth in Section 64 is relied upon and (b)
That, upon written request of the named insured, the insurer will furnish the
facts on which the cancellation is based.
Cancellation of non-life insurance policy
Cancellation is broadly regarded as the right to rescind, abandon or
cancel a contract of insurance.

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It is the termination by either the insurer or the insured of a policy of


insurance before its expiration.
The insured can cancel an insurance contract at his election by
surrendering the policy. Such surrender, however, entitles him to the
return of the premiums on the customary short-rate basis.
Form and sufficiency of notice of cancellation by the Insurer
There must be prior notice of cancellation to the insured;
The notice must be based on the occurrence, after the effective date
of the policy, of one or more of the grounds mentioned (Sec 64);
The premium referred to in Sec 64(a) must be a premium
subsequent to the first, because it speaks of non-payment after
the effective date of the policy.
It must be in writing, mailed or delivered to the named insured at the
address shown in the policy, or to his authorized broker; and
It must state which of the grounds set forth is relied upon.
It is the duty of the insurer upon written request of the named
insured to furnish the facts on which the cancellation is based.
Prior notice of cancellation to insured
The purpose for notice to the insured is to prevent the cancellation of
the policy without allowing the insured ample opportunity to negotiate
for other insurance in its stead for his own protection.
Notice given to insured himself. The notice should be personal to the
insured and not to and/or through any unauthorized person by the
policy.
Notice delivered personally or sent by mail. There must be proof that
it was actually sent by mail.
SEC. 66. In case of insurance other than life, unless the insurer at least
forty-five (45) days in advance of the end of the policy period mails or
delivers to the named insured at the address shown in the policy notice of its
intention not to renew the policy or to condition its renewal upon reduction of
limits or elimination of coverages, the named insured shall be entitled to
renew the policy upon payment of the premium due on the effective date of
the renewal. Any policy written for a term of less than one (1) year shall be
considered as if written for a term of one year. Any policy written for a term
longer than one (1) year or any policy with no fixed expiration date shall be
considered as if written for successive policy period or terms of one (1) year.
Renewal of non-life insurance policy

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As a new contract or extension of old one. As a general rule, a


renewal of insurance by the payment of a new premium and the
issuance of a receipt therefor where there is no provision in the policy
for its renewal, is a new contract on the same terms as the old one.
But where the renewal is in pursuance of a provision to that
effect, it is not a new contract but an extension of the old one.
In the last analysis, the resolution of the question depends
primarily on the intention of the parties as ascertained from the
instrument itself.
Rights of parties. In the case of insurance other than life, the name
insured is given the right to renew upon the same terms and conditions
the original policy upon payment of the premium due on the effective
date of the renewal.
Unless the insurer, at least 45 days in advance of the end of the
period, mails or delivers to the insured notice of its intention not
to renew the policy or to condition its renewal upon reduction of
its amount or elimination of some coverages.
If the insureds attention was not called as regards a reduction in
the policy coverage, the insurance company is bound by the
greater coverage in an earlier policy.
Period for giving notice of non-renewal by insurer. For the purpose of
determining whether or not the insurer has given such notice, a policy
written for a term of less than one (1) year is considered as if written
for a term of one (1) year while a policy written for a longer term or
with no fixed expiration date is considered as if written for successive
policy period terms of one (1) year.
Thus, where the term of the policy is 5 years. Notice must be given at
least 45 days before the anniversary date of any given policy year. If
the 45-day rule is not complied with, the insurer may not refuse to
renew a policy upon payment of the premium due.
Time to commence action on the policy; effect of stipulation (Sec.
63)
SEC. 63. A condition, stipulation, or agreement, in any policy of insurance,
limiting the time for commencing an action thereunder to a period of less
than one (1) year from the time when the cause of action accrues, is void.
Validity of agreement limiting time for commencing action
General rule. A clause in the policy providing that an action must be
brought within a certain period is valid if not contrary to Section 63.
Period limitation. If the period fixed is less than 1 year, it is void.
EXCEPT: In a policy of industrial life insurance, the period cannot
be less than six (6) years after the cause of action accrues.
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Nature of condition limiting period for filing claim

The condition is an important matter, not merely a procedural


requirement, essential to prompt settlement of claims against
insurance companies.
It demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of the loss or destruction has not
yet disappeared.
It is a Resolutory cause, the purpose of which is to terminate all
liabilities in case the action is not filed by the insured within the period
stipulated.
Where action brought against insurers agent
The bringing of such action against the agent cannot have any legal
effect except that of notifying the agent of the claim.
When cause of action accrues
The right of the insured to the payment of his loss accrues from the
happening of the loss.
However, the cause of action in an insurance contract does not accrue
until the insureds claim is finally rejected by the insurer.
Before such final rejection, there is no real necessity for bringing
suit.
The period for commencing an action under a policy of insurance under
Section 63 is to be computed not from the time when the loss actually
occurs but from the time when the insured has a right to bring an
action against the insurer.
Examples:
Where the policy provided that no such suit or action thereon
for the recovery of any claim shall be sustainable in any court of
law or equity unless the insured shall have fully complied with all
the terms and conditions of the policy nor unless commenced
within 12 months next after the happening of the loss, it has
been held that such stipulation is repugnant to Section 63.
In effect, it reduces the period allowed the insured for
bringing his action to less than 1 year.
Obviously, compliance with the terms and conditions
would require some time and that will shorten the period
for bringing the suit.
As the stipulation is upon a written contract, the time limit
is 10 years from the time the cause of action accrues.
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Where the policy provided that if a claim be made and rejected,


an action or suit should be commenced within 12 months after
such rejection otherwise the claim would prescribe, it has been
held that such a stipulation is valid.
Where a fidelity bond requires action to be filed within 1 year
from the filing of the claim of loss, such condition contradicts
Section 63.
A fidelity bond is in the nature of a contract of insurance
against loss from misconduct.
Contractual limitations contained in insurance policies are regarded
with extreme jealousy by courts and will be strictly construed against
the insurer.
The new Insurance Code empowers the Insurance Commissioner to
adjudicate disputes relating to an insurance companys liability to an
insured. Hence, a complaint or claim filed by the insured with the
Office of the Insurance Commissioner would now be considered an
action or suit the filing of which would have the effect of tolling or
suspending the running of the prescriptive period.

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