ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 44 October 2022 CPA Licensure Examination
RFBT-04
REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS J. DOMINGO N. SORIANO
LAW ON INSURANCE
❖ Concept of insurance
A contract of insurance is an agreement whereby one who undertakes, for a consideration, to indemnify
another against loss, damage, or liability arising from an unknown or contingent event. The risk insured against
may be any contingency or unknown event, the happening of which will damnify a person having an insurable
interest or will create liability against him. Even fortuitous events may be insured against.
As a rule, only future events may be covered by an insurance contract. An exception would be a marine
insurance where a past event may be insured if the loss of the vessel in the past could not have been known by
ordinary means of communication.
❖ Parties to a contract of Insurance
1. Insured - the person whose loss is the occasion for the payment of the insurance proceeds by the insurer.
He must have the capacity to enter into a contract and he must not be a public enemy.
2. Insurer – the person who assumes the risk of loss and undertakes for a consideration to indemnify the
insured upon the happening of the designated peril. Any person may be an insurer provided he obtains a
certificate of authority to transact insurance business from the Insurance Commission.
3. Assured – the insured is also the assured when the proceeds are payable to him.
4. Beneficiary – the third person designated by the insured to receive the proceeds
❖ Elements of an insurance contract
1. The insured possesses insurable interest capable of pecuniary estimation
2. The insurer assumes the risk of loss
3. The insured pays a premium which is his ratable contribution to the general insurance fund
4. The insured is subject to a risk of loss upon the happening of the designated peril.
5. The assumption of risk is part of a general scheme to distribute actual losses among a large group or
substantial number or persons bearing similar risks.
❖ Characteristics and nature of insurance contracts
1. Uberrimae Fides Contract
The contract of insurance is one of perfect good faith, not for the insured alone, but equally so for the
insurer. In fact, it is more so for the latter since the insurer’s dominant bargaining position carries
with it stricter responsibility.
2. Contract of Indemnity
The insured is entitled to recover only the amount of total loss sustained, and the burden is upon him
to prove the amount of such loss.
3. Risk Distributing Device
The risk of economic loss is distributed among a large group of people bearing the same risk.
4. Aleatory
The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of
an event which is uncertain. It does not depend upon some contingent event.
5. Contract of Adhesion
An insurance contract is a ready-made form of contract, which the other party may accept or reject,
but which the latter cannot modify.
6. Personal
The law presumes that the insurer considered the personal qualification of the insured in approving
the insurance application. The insured cannot assign, before the happening of the loss, his rights
under a property policy without the consent of the insurer.
7. Voluntary
A contract of insurance is not compulsory, and the parties may incorporate such terms and conditions
as they may deem convenient. This is allowed provided that they do not contravene any provision of
law and are not against public policy.
8. Synallagmatic
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Both the insured and insurer have reciprocal obligations of equal value to each other.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
LAW on INSURANCE RFBT-04
❖ Classes/Types of Insurance
1. Life insurance contracts
a. Individual life
b. Group life
c. Industrial life
2. Non-life insurance contracts
a. Marine
b. Fire
c. Casualty
3. Contracts of suretyship
❖ Variable contracts
The term variable contract shall mean any policy or contract on either a group or on an individual basis
issued by an insurance company providing for benefits or other contractual payments or values thereunder to
vary so as to reflect investment results of any segregated portfolio of investments or of a designated separate
account in which amounts received in connection with such contracts shall have been placed and accounted for
separately and apart from other investments and accounts. This contract may also provide benefits or values
incidental thereto payable in fixed or variable amounts, or both.
Variable contracts or investment-linked insurance products is regulated by Sections 238 to 246 of the
Amended Insurance Code. In the US, it is known as variable life or variable universal life. In the UK, it is known
as unit linked. In Asia, it is known as investment-linked, or insurance that is “linked” to investments. Others call
it equity-linked insurance.
❖ Insurable interest
It is that interest which the law requires the owner of an insurance policy to have in the person or thing
insured. A person is deemed to have an insurable interest in the subject matter insured where he has a relation
or connection with or concern in it that he will derive pecuniary benefit or advantage from its preservation and
will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event
insured against.
❖ Perfection of the contract of insurance
As a consensual contract, the contract of insurance is perfected from the moment there is a meeting of
the minds with respect to the object and the cause or consideration. Under the Cognition Theory, an insurance
contract is perfected only when the applicant-insured has knowledge of the acceptance and approval by the
insurer of his application.
❖ Premium
It is a consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.
As a rule, no policy or contract of insurance is valid and binding unless and until the premium thereof has been
paid. This is the “cash and carry rule” under the Insurance Code. The payment of the premium is imperative for
the validity of the policy.
❖ Rescission/Cancellation of insurance contracts
The following are grounds for the cancellation of a non-life policy insurance:
1. Non-payment of premium
2. Fraud or material misrepresentation
3. Physical changes in the property insured which result in the property becoming uninsurable
4. Conviction of a crime arising out of acts increasing the hazard insured against
5. Willful or reckless acts or omissions increasing the risk insured against.
6. Determination by the Insurance Commissioner that the policy would violate the Insurance Code.
The following are the requisites for a valid cancellation of an insurance policy:
1. Prior notice of cancellation, in writing, is given to the insured.
2. Notice must be based on any of the grounds mentioned in Sec. 64 of the Insurance Code
3. Upon request of the insured, the insurer must furnish facts on which cancellation is based.
❖ Claims settlement and subrogation
In life insurance, the proceeds shall be paid immediately upon the maturity of the policy if there is such
a maturity date. If the policy matures by the death of the insured, the proceeds shall be paid within 60 days from
filing of the claim and upon the proof of the death of the insured.
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In property insurance, the proceeds must be paid within 30 days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made. If no such ascertainment is made within 60 days after
receipt by the insurer of the proof of loss, the proceeds shall be paid within 90 days from such receipt.
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