The Insurance Contract

An insurance contract is an agreement where one person, for consideration, agrees to indemnify another against loss, damage or liability due to an unknown or contingent event. A contract of suretyship becomes an insurance contract if the surety is engaged in the insurance business.

It is a "risk-distributing device" because the insurer distributes the risk to a large number of insured who will all pay their contributions/premiums. The premiums will be used to pay for the losses.

It becomes a "risk-shifting device" if the insurer obliges himself to assume the risk of loss which the insured, who has an insurable interest, is subject to. The insurer, therefore, agrees to bear the burden of having to suffer the loss.

The Insurance Code classifies insurance contracts as either life, non-life or surety. 

Life Insurance Policy

Insurance upon life is made payable on the death of the person, his surviving a specified period or otherwise contingently on the continuance or end of life.

1.) Ordinary

Premiums are regularly paid, usually on a yearly basis, throughout the insured's life. The beneficiary will be paid only when the insured dies. The policy may provide for a "cash surrender value," which is paid if the policy is cancelled, or a "loan value" that the insured can borrow.

2.) Limited

Premiums are paid only for an agreed period (ex. 5 years, etc.) The beneficiary is paid only when the insured dies. The premium payment is relatively higher than in an ordinary life policy.

3.) Term Insurance

Covers only an agreed limited term (ex. 20 years, etc.) The beneficiary will be paid only if the insured dies within the covered term; if he survives beyond the covered term, the contract is terminated. The premium is relatively higher than in 1 and 2.

4.) Endowment

Insurer will pay the insured if he survives an agreed period. If the insured dies within the period, the insurer will pay the beneficiary. This is usually availed of for retirement purposes. The premium payment is also relatively higher.

Non-life Insurance Policy

Also termed "property insurance." The insured is indemnified for loss due to damage to/destruction of his property or for damages he may be held legally liable as a result of injuries to other persons or damage to their property.

1.) Marine/transportation

Covers perils that may be encountered while the property is in transit and may include ocean marine insurance involving sea perils and inland marine insurance involving land transportation perils.

2.) Fire

The owner is indemnified for loss or damage to his property due to fire, earthquake, lightning windstorm and other allied risks.

3.) Casualty

Covers loss or liability due to accident or mishap but excludes those that fall under the other types of insurance contracts.

Surety

The surety guarantees the obligee the performance of the obligation/undertaking of the principal/obligor; this is because it's a collateral contract in relation to the principal one between the obligor and obligee. It includes official recognizances, bonds, undertakings or stipulations issued by any company.

The surety bond is the evidence of a contract of surety and the surety's liability is in solidum. The obligor is to execute an indemnity agreement to indemnify the surety against loss.

If an insurance company isn't authorized to issue surety bonds but it does so, it is estopped from claiming its lack of authority (Pryce vs. CA, 230 SCRA 164.)