Oligarchial System in Philippines

THE FUNDAMENTAL PRINCIPLES OF INSURANCE

I. RISK AND INSURANCE

a. Meaning of risk
Exposure to the chance of injury or loss; a hazard or dangerous chance.
The potential of loss (an undesirable outcome, however not necessarily so) resulting from a given action, activity and/or inaction, foreseen or unforeseen.

b. Types of Risk (Chances of Loss)

As to what causes the risk:

1. Pure Risk - a risk in which there is only a possibility of loss or no loss—there is no possibility of gain. Also, related to events that are beyond the risk-takers’ control and, therefore, a person cannot consciously take on pure risk.

a. Personal Risk - are risks that affect someone directly, such as illness, disability, or death.
b. Property Risk - affects either personal or real property.
c. Legal Risk (Liability Risk) - is a particular type of personal risk that you will be sued because of neglect, malpractice, or causing willful injury either to another person or to someone else's property. Legal risk is the possibility of financial loss if you are found liable, or the financial loss incurred just defending yourself, even if you are not found liable.

2. Speculative Risk - a category of risk that, when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances.

As to whom it affects:

1. Fundamental Risk - affect the entire economy or large numbers of people or groups within the economy. Examples of fundamental risks are high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods.

2. Particular Risk - are risks that affect only individuals and not the entire community. Examples of particular risks are burglary, theft, auto accident, dwelling fires. With particular risks, only individuals experience losses, and the rest of the community are left unaffected.

c. Perils – is the cause of a risk. It is the immediate specific event causing loss and giving rise to risk.

d. Hazards – is the source of danger. The hazard is the underlying factor behind the peril that leads to the probability of a particular loss to the insurer. It is the active ingredient that could create a peril, which could then lead to a particular loss event.

Types of Hazards
1. Physical Hazard - a physical condition that increases the possibility of a loss.
2. Moral Hazard - a condition of morals or habits that increase the probability of a loss from a peril.
3. Morale Hazard - an attitude that increases the probability of loss from a peril.

e. Losses

According to Webster Dictionary: failure to keep or to continue to have something the experience of having something taken from you or destroyed money that is spent and that is more than the amount earned or received

Definition of Loss in Insurance

The primary purpose of an auto or home insurance policy is to protect the insured’s against a loss. In insurance terms, a loss is any injury or damage that the insured suffers because of a covered accident or misfortune. It generally refers to a reduction in a property's value or to harm affecting a person, such as an injury after a car accident.

Types of Loss
Property losses are partial or total. A partial loss is one that does not completely destroy the property and the property can be repaired without exceeding the policy limits or the property value. A total loss occurs when the cost of repairing the property is more than the property's value. Partial losses are more common than total losses.

Covered Losses
Your insurance policy defines what losses the policy covers. If your property is damaged by a loss that is not covered, you receive no compensation. For example, if your car is damaged in a hail storm and you do not have comprehensive coverage as part of your auto insurance policy, the insurance company will not pay for your car repairs.

Tax Deductions
If you have a substantial unreimbursed insurance loss, you may be able to deduct that loss from your income tax. You can generally deduct the loss if it exceeds 10 percent of your adjusted gross income, minus $100. You should be sure you can document the deduction with receipts, insurance statements and a copy of the police report if one was filed.

Deductibles
When you file an insurance claim after a loss, your insurance company pays the amount of the loss up to the policy limit minus your deductible. The deductible is the amount you agree to pay toward any claim. The higher you set your deductible, the lower your premium will be.

Loss Prevention
Preventing losses helps to keep your insurance costs down because the fewer claims you file, the lower your premiums will be. Installing anti-theft and safety devices in your home and auto are one way to prevent losses. You can also prevent losses by regularly completing routine maintenance tasks.

Type of Losses for Insurance Claims
A loss is the basis of a claim for damages under the terms of an insurance policy. Types of covered losses can be broken down by commercial versus personal insurance, then by line of business (LOB), then further by type of loss (TOL). Some terms used in the insurance industry for types of loss do not necessarily correspond to the descriptions used by laymen. Therefore, standard insurance policies with few exceptions have a definitions page in the front.

Liability
Liability coverage applies to situations in which someone other than the insured is injured. Property damage covers injury to the injured party's own property. "Bodily injury" refers to damage to the injured party's person. "Personal injury" refers to damage to a person's character or reputation. "Medical payments" refers to payment for minor medical expenses of the injured party. Part of the aim of this part of coverage is to generate goodwill in the injured party, reducing the chance of an expensive liability loss. "Medical malpractice," or "medmal," is loss coverage offered to medical professionals. Other examples of professional liability types are Errors & Omissions (E&O), Directors & Officers (D&O), and Employment-Related Practices Liability (ERPL). Examples of ERPL losses are employment discrimination and wrongful termination. E&O covers liability for financial losses, such as those due to employee embezzlement.

Auto
Auto insurance losses can include liability (both bodily injury and property damage), collision, theft, fire, vandalism and glass breakage. No-fault insurance will cover medical, funeral and property expenses for pedestrians and drivers you hit, instead of providing liability coverage.

Property
Property insurance can cover homes, apartments, apartment contents, vehicles, art, and so on. Homeowners insurance can be broken down further by flood, hurricane, vandalism, theft, fire and lightning, water damage, and wind and hail.

Health
Health insurance TOLs include pharmaceuticals, dental, vision, disability, income loss, and mental health, among others. "Catastrophic losses" refer to large medical bills, for example for multiple operations. "Long-term care" refers to hospice care or at-home nursing. Worker's compensation losses are health-related but are incurred on the job site.

Life
Life insurance policies pay out in the event of the named insured's death. The insured names the beneficiary in the policy. Payments tend to be in a lump sum.

Marine
Marine insurance covers commercial losses during transport. Inland marine insurance refers to transport over land.

II. REQUIREMENTS FOR INSURANCE

Elements of an Insurance Contract
The insured possesses an insurable interest susceptible of pecuniary estimation;
The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils;
The insurer assumes that risk of loss;

III. LEGAL CONCEPTS OF INSURANCE

INSURANCE CONTRACTS

1. CHARACTERISTICS OF AN INSURANCE CONTRACT
(The Insurance Code of the Philippines Annotated,Hector de Leon, 2002 ed.)

1. Consensual – it is perfected by the meeting of the minds of the parties.
2. Voluntary – the parties may incorporate such terms and conditions as they may deem convenient.
3. Aleatory – it depends upon some contingent event.
4. Unilateral – imposes legal duties only on the insurer who promises to indemnify in case of loss.
5. Conditional – It is subject to conditions the principal one of which is the happening of the event insured against.
6. Contract of indemnity – Except life and accident insurance, a contract of insurance is a contract of indemnity whereby the insurer promises to make good only the loss of the insured.
7. Personal – each party having in view the character, credit and conduct of the other.

2. REQUISITES OF A CONTRACT OF INSURANCE
(The Insurance Code of the Philippines Annotated, Hector deLeon, 2002 ed.)

1. A subject matter which the insured has an insurable interest.
2. Event or peril insured against which may be any future contingent or unknown event, past or future and a duration for the risk thereof.
3. A promise to pay or indemnify in a fixed or ascertainable amount.
4. A consideration known as “premium”.
5. Meeting of the minds of the parties.

3. CONSTRUCTION OF INSURANCE CONTRACT

The ambiguous terms are to be construed strictly against the insurer, and liberally in favor of the insured. However, if the terms are clear, there is no room for interpretation. (Calanoc vs. Court of Appeals, 98 Phil. 79)

III. DISTINGUISHING ELEMENTS OF AN INSURANCE CONTRACT
1. The insured possesses an insurable interest susceptible of pecuniary estimation;
2. The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks; and
5. The insured makes a ratable contribution (premium) to a general insurance fund.

4. PERFECTION OF AN INSURANCE CONTRACT

An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. What is being followed in insurance contracts is what is known as the “cognition theory”. Thus, “an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge”. (Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269)

Binding Receipt A mere acknowledgment on behalf of the company that its branch office had received from the applicant the insurance premium and had accepted the application subject to processing by the head office.

Cover Note (Ad Interim) A concise and temporary written contract issued to the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance.

Purpose:

It is intended to give temporary insurance protection coverage to the applicant pending the acceptance or rejection of his application.

Duration:

Not exceeding 60 days unless a longer period is approved by Insurance Commissioner (Sec. 52).

Riders

Printed stipulations usually attached to the policy because they constitute additional stipulations between the parties. (Ang Giok Chip vs. Springfield, 56 Phil. 275)

In case of conflict between a rider and the printed stipulations in the policy, the rider prevails, as being a more deliberate expression of the agreement of the contracting parties.

Clauses

An agreement between the insurer and the insured on certain matter relating to the liability of the insurer incase of loss.
(Prof. De Leon, p.188)

Endorsements

Any provision added to the contract altering its scope or application.
(Prof. De Leon, p.188)

POLICY OF INSURANCE The written instrument in which a contract of insurance is set forth. (Sec. 49)

Contents: (Sec. 51)
1. Parties
2. Amount of insurance, except in open or running policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property if he is not the absolute owner;
6. Risk insured against; and
7. Duration of the insurance.
Persons entitled to recover on the policy (sec. 53):

The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or to whose benefit it is made, unless otherwise specified in the policy. Kinds:
1. OPEN POLICY – value of thing insured is not agreed upon, but left to be ascertained in case of loss. (Sec.60) The actual loss, as determined, will represent the total indemnity due the insured from the insurer except only that the total indemnity shall not exceed the face value of the policy. (Development Insurance Corp. vs. IAC, 143 SCRA 62)
2. VALUED POLICY – definite valuation of the property insured is agreed by both parties, and written on the face of policy. (Sec. 61) In the absence of fraud or mistake, the agreed valuation will be paid in case of total loss of the property, unless the insurance is for a lower amount.
3. RUNNING POLICY – contemplates successive insurances and which provides that the object of the policy may from time to time be defined (Sec. 62)

IV. TYPES OF INSURANCE CONTRACTS
1. Life insurance a. Individual Life (Secs. 179–183, 227) b.Group life (Secs. 50, last par., 228) c.Industrial life (Secs. 229–231)
2. Non-life insurance a.Marine (Secs. 99–166) b.Fire (Secs. 167–173) c.Casualty (Sec. 174)
3. Contracts of bonding or suretyship (Secs. 175–178)

Note:
1. Health and accident insurance are either covered under life (Sec. 180) or casualty insurance. (Sec. 174).
2. Marine, fire, and the property aspect of casualty insurance are also referred to as property insurance.

V. THE PRINCIPLES OF INSURANCE
The main objective of every insurance contract is to give financial security and protection to the insured from any future uncertainties. Insured must never ever try to misuse this safe financial cover.
Seeking profit opportunities by reporting false occurrences violates the terms and conditions of an insurance contract. This breaks trust, results in breaching of a contract and invites legal penalties.
An insurer must always investigate any doubtable insurance claims. It is also a duty of the insurer to accept and approve all genuine insurance claims made, as early as possible without any further delays and annoying hindrances.

Principles of Outmost Good Faith
Both the parties, the insured and the insurer should have a good faith towards each other.
The insurer must provide the insured complete, correct and clear information of subject matter.
The insurer must provide complete, correct and clear information regarding terms and condition of the contract.
This principle is applicable to all contracts. i.e. life, fire and marine insurance.

Principle of Uberrimae fidei (a Latin phrase), or in simple english words, the Principle of Utmost Good Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer his complete true information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured.

Principles of Indemnity
Indemnity means a guarantee or assurance to put the insured in the same position in which he was immediately prior to the happening of the uncertain event. The insurer undertakes to make good the loss.
It is applicable to fire, marine and other general insurance.
Under this the insurer agrees to compensate the insured for the actual loss suffered.
Indemnity means security, protection and compensation given against damage, loss or injury.
According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit else its sole purpose is to give compensation in case of any damage or loss.
In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage. Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for giving protection against losses and not for making profit.
However, in case of life insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money.

Principles of Subrogation
As per this principle after the insured is compensated for the loss due to damage to property insured, then the right of ownership of such property passes on to the insurer.
This principle is corollary of the principle of indemnity and is applicable to all contracts of indemnity.
Subrogation means substituting one creditor for another.
Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to all contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.
This principle is applicable only when the damaged property has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the insured as compensation.

For example :- Mr. John insures his house for $ 1 million. The house is totally destroyed by the negligence of his neighbour Mr.Tom. The insurance company shall settle the claim of Mr. John for $ 1 million. At the same time, it can file a law suit against Mr.Tom for $ 1.2 million, the market value of the house. If insurance company wins the case and collects $ 1.2 million from Mr. Tom, then the insurance company will retain $ 1 million (which it has already paid to Mr. John) plus other expenses such as court fees. The balance amount, if any will be given to Mr. John, the insured.

VI. REINSURANCE
Reinsurance is the practice of insurers transferring portions of risk portfolios to other parties by reinsurance agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions.
Example:
For example, assume an insurer sells 1000 policies, each with a P1 million policy limit. Theoretically, the insurer could lose P1 million on each policy – totaling up to P1 billion. It may be better to pass some risk to a reinsurer as this will reduce the ceding company's exposure to risk.
There are two basic methods of reinsurance:
1. In Facultative Reinsurance, the terms of the contract are negotiated for a specific policy. The reinsurer has the right to evaluate the risks involved, unlike in treaty reinsurance, when it cannot evaluate individual risks. The company proposes a price that it believes to be reasonable, and if the insurance company agrees, then the policy is written. Periodically, the terms are reviewed, giving both parties a chance to walk away from the contract if they feel that it is no longer necessary, that the policy is too risky for the reinsurer, or that the terms need to be renegotiated.
2. Treaty reinsurance can take different forms. In some instances, a company will contract to take over the risk of any insurance policy that exceeds the limit which would have been set for the original insurer. For example, a particular company may only be allowed to underwrite a maximum business insurance policy of P1 million, yet their customer requires a P3 million policy. The policy can be written in the reinsurance company underwrites the additional P2 million.

VII. RETROCESSION
Retrocession is used in two very different ways. In the financial world, it refers to a situation in which one firm which specializes in reinsurance agrees to take on some of the risk for another reinsurance company. This is designed to reduce risk by spreading it out, reducing the liability burden for insurance companies. Retrocession is especially common in areas prone to natural disasters like hurricanes and earthquakes, as it may not be able to provide insurance without reinsurance and retrocession to spread the risk.