I. INTRODUCTION

A. OVERVIEW

In a contemporary age where people travel through air and water,

use electronic machines, build high structures, cook with gas stove, and

work in a heavy equipment factory – exposure to loss of something as

valuable as life is inevitable. In one way or another, Insurance has been

part of an average modern day individual. With the increase of hazard in

almost every aspect of one’s life, may it be in business, property rights

and interest, health, etc., a person finds it necessary to ensure the return

of something that may have been lost due to some unforeseeable or

certain events. It has been a common practice of an individual to

safeguard his interests even if it means paying for such protection. While

most people own at least one insurance policy, a great number of

individuals do not know or understand what it truly means or how it

operates.

Where does the concept of insurance begin?

In an uncertain world, death is one of the few things that life

considers certain. Risk of dying depends on the lifestyle of an individual.

The wife of a pilot concerns herself and prays hard for a safe journey of

her husband during flight. The mother of a soldier could not sleep

because of the peril that his son might come home injured if he did not

arrive dead from a battle. The son of a construction worker longs for a

harmless day’s work of his father. These people may be challenged with

greater danger than a regular student who comes to and from school

everyday. However, what are the chances that this student would get hit

by a car while crossing the street? Or even be struck by a lightning in the

comforts of his home? One could not be more optimistic than truthful.

Risk is everywhere – that is certain. With the ever increasing probability

of hazard in a modern society, people tend to cope up with these threats

by making sure that they are protected from great loss when these

tragedies happen.

How does one become protected when the life of a loved one has

been taken?

Protection with respect to the concept of insurance neither denotes

physical security nor shelter from harm. It simply means that while risk

is certain, the monetary damage of the loss could be covered up by way

of replacement. This replacement or otherwise called “insurance benefit”

works as the inducing factor why people get Insurance policy. Simply

put, in the contract of insurance, the insured pay premium and the

insurer promises to indemnify the former in case the thing insured is

lost. As a result of the need to manage risk, Insurance became a popular

tool since time immemorial to help individual cope up with misfortunes in

life.

As the population grows, more individuals are bound to grasp the

importance of insurance being a predestined fraction of a progressive

society. Thus, the state necessitates itself to promulgate laws in order to

regulate the affairs of Insurance companies and to make sure that the

public is not only protected from risks but also from fraudulent

machinations that puts up a facade of a legitimate insurer.

This paper will extensively discuss the concept of Insurance and

the laws that the legislatures enacted in order to better understand the

rights and obligations of the parties in an insurance contract.

B. SCOPE AND LIMITATIONS

The study has three main parts, to wit: principles of insurance;

special laws governing insurance with the corresponding Supreme Court

decisions relating to such laws; and the summary of the paper. The paper

shall also discuss pertinent information on what the readers should know

regarding the topic including its history and how it developed throughout

the years emphasizing on its evolution in the domestic territory.

The researchers will limit its discussion on Philippine legislations and

decisions only. Due to the number of legislations relating to insurance,

the authors picked, among others, those which are more basic and

general for academic purposes, to wit:

1. Insurance Code of 1978

2. Revised Government Security Insurance System Act of 1977

3. Social Security Act of 1954

4. Pre-need Code of 2009

5. The Home Guaranty Act of 2000

6. Philippine Deposit Bank Corporation

The provisions of the New Civil and other laws insofar as it may be

applied in the contract of insurance shall likewise be discussed in this

paper.

C. OBJECTIVES

The main objective of the paper is to discuss the concept of insurance

and its governing laws giving emphasis on its salient features and

characteristics. The importation of the Supreme Court decisions is

basically to enable the readers to fully understand insurance laws and to

facilitate in their minds a working idea on what insurance is all about.

At the end of the study, the authors shall give a summary or insight of

what has been discussed hoping to impart upon the readers a better

understanding on Philippine Insurance Laws and jurisprudence and its

importance to the society.

II. FUNDAMENTALS AND PRINCIPLES OF INSURANCE

A. HISTORY

Many insurance book authors suggest that the birth of insurance

dates back as early as time. During primitive economies where people

engage in barter or trade and the use of a financial instrument was still

inexistent, insurance is in a form of agreements of mutual aid. If one

family's house is destroyed the neighbours are committed to help

rebuild. Granaries housed another primitive form of insurance to

indemnify against famines. Often informal or formally intrinsic to local

religious customs, this type of insurance has survived to the present day

in some countries where modern money economy with its financial

instruments is not widespread. 1

Developing in the modern sense, the earliest persisting historical

forms of insurance were the so-called bottomry contracts on shipping,

1 http://en.wikipedia.org/wiki/insurance

which have been discovered in Babylonian records as early as the fourth

millennium BC. This type of insurance normally took the form of a loan to

a shipowner, the repayment of which was made contingent on the safe

completion of the voyage. The development of the bottomry contract into

full-fledged marine insurance and likewise its extension to land journeys

began in the late Middle Ages as a consequence of and spur to the

expansion of long distance trading. In this, it paralleled the spread of

other commercial innovations such as bills of exchange and other credit

mechanisms. 2

The evolution of insurance throughout the ages matured and

sprung in different dimensions. The Great Fire of 1666 opened the eyes

of many seeing insurance as a necessity rather than convenience. It was

not long enough when commercialists saw the potential of insurance as a

tool to invest and earn income.3 The Lloyd’s of London is one of the

prominent international insurance marketing associations in the world. It

started in the late 1680’s when Edward Lloyd kept a coffeehouse in

Tower Street, London, England. Merchants assembled there to transact

business informally. It became a popular meeting place for underwriters

– those who would accept insurance on ships for the payment of

premium. Since then, Edward Lloyd turned his humble shop into an

enormous marketplace for underwriters and insurers.4 At present,

Lloyd’s of London is the most distinguished insurance establishment in

the world.5

In the Philippines, insurance was inexistent during the Pre-Spanish

Era, every loss was borne by the person or family who suffered the

misfortune. When the Spaniards came, insurance was first introduced in

2 Encyclopedia Britannica, 15th Ed., Vol. 6, page 3363 Ibid page 337.4 Encyclopedia Britannica, 15th Ed., Vol. 7, page 4265 Ibid. page 427

the country. Lloyd’s of London appointed a company named Strachman,

Murray & Co., Inc as its representative in the Philippines. From then on,

life and non-life insurance were introduced in the Philippines with the

entry of Sun Life Assurance of Canada and Yek Tong Lin Insurance Co in

the early 1900’s. Throughout this period, insurance was governed by the

Spanish Code of Commerce. However, the latter was repealed by the

Insurance Act (Act 2427) which took effect on July 1, 1915 during the

American Regime.6

In 1936, Social insurance was established with the enactment of

Commonwealth Act No. 186 which created the Government Service

Insurance System (GSIS) and started its operations in 1937. In 1949, a

government agency was formed to handle insurance affairs in the

country. In 1954, RA 1161 was enacted which provided for the

organization of the Social Security System (SSS) covering employees of

the private sector. It was only in 1974 when PD 612 was promulgated

ordaining and instituting the Insurance Code of the Philippines, thereby

repealing Act 2427. During the Marcos administration, PD 1460 which

took effect on June 11, 1976 consolidated all insurance laws into a single

code and this is what we know now as the Insurance Code of 1978.7

B. Concept

Insurance is based upon the principle of transferring or

distributing risk by aiding another from a loss caused by an untoward

event. It includes the collection of funds whereby the a party known

as the insurer obligates himself to indemnify the another called the

insured or the beneficiary upon the happening of an event insured

against. Therefore people or group of people agrees to pay on a

condition that in case the risk insured against occurs, the insurer shall

6 http://www.batasnatin.com/law-library/mercantile-law/insurance/1573-history-of-insurance-in-the- philippines.html7 Ibid.

pay the amount. Simply stated, in a contract of insurance, one

undertakes for a consideration to indemnify another against loss,

damages or liability arising from an unknown or contingent event.

The insured entities are therefore protected from risk for a fee,

with the fee being dependent upon the frequency and severity of the

event occurring. In order to be insurable, the risk insured against

must meet certain characteristics in order to be an insurable risk.

Insurance is a commercial enterprise and a major part of the financial

services industry, but individual entities can also self-insure through

saving money for possible future losses.8

Since the Insurance Code is adopted from the Insurace Act,

which was generally taken to the letter of the California Law on

Insurance, the local courts therefore apply the fundamental

construction laid down by the California Courts insofar as it may be

applied in the local setting. Such principle is in accordance with the

well-entrenched rule in statutory construction that when a statute has

been adopted from some other state, and said statute has previously

been construed by the courts of such state or country. The statute is

usually deemed to have been adopted with the construction so given.

In case of doubt or ambiguities in the interpretation of contracts, the

construction shall always be in strictly against the party that caused

them. More often than not, the insurance policy is prepared by the

insurer. Thus, the ambiguities shall be construed against it and in

favour of the insured.

C. Characteristics and Elements of Insurance Contract

8 http://en.wikipedia.org/wiki/Insurance

An insurance contract admits of several characteristics, among

others are the following:

1. Consensual Contract – it is perfected by the meeting of the

minds of parties;

2. Voluntary – It is a personal act. It is not compulsory and the

parties may incorporate such terms and conditions as they

deem convenient which will be binding so long as such

incorporation is not contrary to law or public policy;

3. Aleatory – An insurance contract is aleatory because it is

being dependent upon some unknown or contingent event.

4. Conditional – The conditions that the happening of the

unknown or contingent event, whether in the past or future,

and the payment of the premium had already been fully

satisfied should have first be met before the contract may be

enforced; and

5. Personal – each party in the contract have in view the

character, credit and conduct of each other.

Since insurance is a contract, it must also have all the three

basic elements of a contract – consent, object and consideration. The

parties who give their consent are the insured and the insurer. The

object of the contract pertains to the transfer or distribution of the

risk of loss, damage, liability or disability from the insured to the

insurer. The element of risk insured against must be present and shall

be explicitly stated in the policy. The Insurance Code provides that a

risk is any contingent or unknown event, whether past or future which

may indemnify a person. The consideration of an insurance contract is

the payment of premium which the insured gives the insurer. In

addition thereto, insurable interest is also a key element that is

worthy to note and understand in studying the law on insurance. It

means that the insured possesses an interest of some kind susceptible

of pecuniary estimation. It will be further discussed in Chapter III.

D. Parties

In a contract of insurance, there are two parties involved. These

are the following:

1. Insurer – the one who undertakes to indemnify the insured

against loss, damage or liability arising from any unknown or

contingent event.

2. Insured – is the party to be indemnifies upon the occurrence

of the loss. Sec. 7 of the Insurance Code states that anyone,

except a public enemy can be insured against

However, there may exist a third person who may not be a party

to the contract but is nevertheless mentioned and included in the

insurance policy. The beneficiary is the one who is called to receive

the insurance benefit. More often than not, the insured or the owner

of the policy and the beneficiary are one and the same. While, most of

the insured name themselves as the beneficiary, that is not always the

case as when the policy holders may institute any person to benefit

from the insurance proceeds so long as the requirement provided for

in the Code have been met.

Indemnification is an important concept in insurance. It must be

noted that in the contract of insurance, the insurer promises to

indemnify the insured in case of the latter’s loss, damage or liability.

What does indemnity mean in relation to the contract of insurance? –

Indemnity insurance compensates the beneficiaries of the policies for

their actual economic losses, up to the limiting amount of the

insurance policy. It generally requires the insured to prove the

amount of its loss before it can recover. Recovery is limited to the

amount of the provable loss even if the face amount of the policy is

higher. This is in contrast to, for example, life insurance, where the

amount of the beneficiary's economic loss is irrelevant. The death of

the person whose life is insured for reasons not excluded from the

policy obligate the insurer to pay the entire policy amount to the

beneficiary.9

While indemnification may be an obligation created by law

specially in cases of Delict or Quasi-delict whereby the offender has

the legal obligation to remunerate or compensate another for the

damage that the latter has caused, indemnity insurance differ in that,

the obligation does not arise from torts or criminal acts but rather

from contract. Thus, the insured is subrogated to the extent of the

amount paid by the insurer so that the latter may go after the culprit

or the person responsible to pay the indemnity, liability or damage.

Subrogation is the substitution of one person in the place of

another with reference to a lawful claim, demand, or right, so that he

or she who is substituted succeeds to the rights of the other in

relation to the debt or claim, and its rights, remedies, or Securities.

There are two types of subrogation: legal and conventional. Legal

subrogation arises by operation of law, whereas conventional

subrogation is a result of a contract. The purpose of subrogation is to

compel the ultimate payment of a debt by the party who, in Equity and

good conscience, should pay it. This subrogation is an equitable

device used to avoid injustice. The right to subrogation accrues upon

payment of the debt. The subrogee is generally entitled to all the

creditor's rights, privileges, priorities, remedies, and judgments and is

subject only to whatever limitations and conditions were binding on

9 Adjusting Today The Extended Period of Indemnity Endorsement, William G. Rake SPPA Adjusters International

the creditor. He does not however, have any more extensive rights

than the creditor10. Typically an insurance company which pays its

insured client for injuries and losses then sues the party which the

injured person contends caused the damages to him/her.11

E. Classification of Insurance

Insurance contracts are classified in the Insurance Code as

follows:

1. Life Insurance

a. Individual (Section 179 – 183, 227)

b. Group Life (Section 50 - 228)

c. Industrial Life (Sec 229 - 231)

2. Non Life Insurance

a. Marina (Section 99 - 166)

b. Fire (Section 167 - 173)

c. Casualty (Section 174)

3. Contracts of Suretyship and Bonding

F. The Insurance Commission

The Insurance Act of July 1 1915 created the Office of the

Insurance Commissioner and made the Insular Treasurer as Insurance

Commissioner ex-officio. It was only in 1949 through RA 275 that the

Office of the Insurance Commissioner became an independent office

10 West's Encyclopedia of American Law, edition 2. 2008 The Gale Group, Inc11 Copyright 1981-2005 by Gerald N. Hill and Kathleen T. Hill (http://legal- dictionary.thefreedictionary.com)

and on Nov 20 1972, PD63 was promulgated amending certain

sections of the Insurance Act.12

The Commission is a government agency under the Department

of Finance. It supervises and regulated the operations of life and non-

life companies, mutual benefit associations and trusts for charitable

uses. It issues licenses to insurance agents, general agents, resident

agents, under writers, brokers, adjusters and actuaries. It has also the

authority to suspend or revoke such licenses.

More specifically, PD 63 provides:

1) It shall be the duty of the Insurance Commission to see that

all laws relating to insurance and insurance companies are

faithfully executed and to perform the duties imposed upon it

by this Act.

2) Power to adjudicate claims and complaints involving any loss,

damage or liability for which an insurer may be answerable

under any kind of policy or contract of insurance or for which

each insurer may be liable under any contract of guaranty or

suretyship.

3) Issue certificate of authority to any foreign or domestic

insurance company to transact business in the Philippines

upon satisfactory compliance and examination by the

Commission.

4) Revoke certificate of authority if it is the opinion of the

insurance Commission that its condition or method of

business is hazardous to the public.

12 http://www. insurance.gov.ph

5) Apply for an order of liquidation any domestic insurance

company or a Philippine branch of a foreign insurance

company whenever it finds that the company cannot be

permitted to resume business with safety to its policy holder

or to its creditors.

6) An order to liquidate the business of an insurance company

shall direct the Insurance Commission to be vested by

operation of law with the title to all of the property,

contracts, rights of action and all of the books and records of

the insurance company.

PD 1460 or the Insurance Code of 1978 further empowers the

Insurance Commission to adjudicate insurance claims and complaints

involving any loss, damage or liability where the amount involved

does not exceed P100,000 for any single claim. Informal and

administrative complaints against malpractices of insurance

companies or agents may also be filed with the Commission. Decisions

or orders of the Commission may be appealed to the Appellate Courts.

Insurance regulation is affected with widespread public interest

as almost every individual, employees both in government and in the

civilian sector, business and industries essentially depend on

insurance as a protection to maintain the stability of our living

standards, our property rights and family relationships. It is for this

end that the Government views the regulation of the insurance

industry of paramount importance.

This regulatory function13 is available to the government

through legislative enactment, administrative action through the

Insurance Commissioner and through Court Action.

13 Insurance Code of the Philippines, Annotated 2006 Edition, De Leon, pp. 710-711

Administrative Action is exercised through the Insurance

Commissioner by his power of licensing, examination and

investigation.

Licensing is a check in the insurer’s financial condition to

ascertain that it has the required capital and surplus for the kind of

insurance permitted in the license. The Commissioner, upon his

determination can refuse to issue a license, suspend or revoke an

existing license or refuse issuance of a renewal license.

Examination of insurance companies once they have been

licensed includes checking of assets, liabilities, and reserves as well

as review of almost all underwriting, investment and claim practices

of the insurers. It must ne emphasized that most obligations of

insurers extend years into the future and the state should provide

supervision to see that the premises in the contract are fulfilled.

Investigation powers of the Commissioner extend to a wide

variety of powers to determine whether or not answers are complying

with the requirements of the law. PD 63 grants the Commissioner the

power either by itself or by its duly authorized representatives to

subpoena witnesses and to require the production of any books,

papers relevant to the inquiry. From there, he may issue such rulings,

instructions, circulars, orders and decisions as he may deem

necessary to secure the enforcement of the provisions of the Code.

Court action may most often be used in private action against

the Commissioner’s ruling through mandamus or injunction may be

petitioned to enforce the rulings or orders by the Commission.

In 1966, the High Court ruled in Lopez vs Filipinas Compania de

Seguros, “That there is nothing in the Insurance Law Act No 2427, as

amended nor in any of its allied legislations which empowers the

Insurance Commissioner to adjudicate or disputes relating to an

insurance company’s liability to an insured under a policy issued by

the former to the latter.”

The validity of an insured’s claim under a specific policy, its

amount and all such other matters as might involve the interpretation

and instruction of the insurance policy, are issues which only a

regular court of justice may resolve and settle.

Similarly in the High Court’s decision of July 26 1994 in

PHILAM LIFE vs Hon. Armando Ansaldo involving the issue whether

or not the resolution of the legality of the Contract of Agency falls

within the jurisdiction of the Insurance Commission, it held:

A plain reading of the above-quoted provisions show that the

Insurance Commissioner has the authority to regulate the business of

insurance, which is defined as follows:

The term “doing an insurance business” or “transacting an

insurance business,” within the meaning of this Code, shall include (a)

making or proposing to make, as insurer, any insurance contract; (b)

making, or proposing to make, as surety, any contract or suretyship as

a vocation and not as merely incidental to any other legitimate

business or activity of the surety; (c) doing any kind of business,

including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of

this Code; (d) doing or proposing to do any business in substance

equivalent to any of the foregoing in a manner designed to evade the

provisions of the Code.

Since the contract of agency entered into between Philamlife

and its agents is not included within the meaning of an insurance

business, Section 2 of the Insurance Code cannot be invoked to give

jurisdiction over the same to the Insurance Commissioner, Expression

unius est exclusion alterius.

With regard to private respondent’s contention that the quasi-

judicial power of the Insurance Commissioner under Section 416 of

the Insurance Code applies in his case, we likewise rule in the

negative. A reading of the Section 416 shows that the quasi-judicial

power of the Insurance Commissioner is limited by law “to claims and

complaints involving any loss, damage or liability for which an insurer

may be answerable under any kind of policy or contract of insurance, .

. . “Hence, this power does not cover the relationship affecting the

insurance company and its agents but is limited to adjudicating claims

and complaints filed by the insured against the insurance company.

In an earlier case brought by Almendras Mining Corporation

against Country Bankers Insurance Corporation wherein the

petitioner sought revocation of the respondent’s Bankers Certificate

of Authority to engage in the insurance business. The petition was

dismissed due to absence in the record to show there was any unfair

claim settlement practice as would warrant revocation. Clearly,

therefore the Insurance Commissioner’s disputed Resolution and

Order was issued in the performance of administrative and regulatory

duties and function and should have been appealed by petitioner to

the Office of the Secretary of Finance.

Petitioner Almendras in effect invoked only the Commissioner’s

regulatory authority to determine whether or not private respondent

Bankers had violated provisions of the Insurance Code, as amended.

Petitioner had chosen to litigate the substantive aspects of its

insurance claim against Bankers in a different forum – a judicial one –

for it instituted a separate civil action for damages before the

Regional Trial Court of Pasay City, on 13 August 1985, that is, after

efforts at amicable settlement of Administrative Case No. 006 had

failed. Petitioner Almendras had in fact to go before a judicial forum

and to limit the proceedings before the Insurance Commissioner to

regulatory, non-judicial matters; the claim of petitioner Almendras

was in excess of P100,000.00 and, therefore, fen outside the quasi-

judicial jurisdiction of the Insurance Commissioner under Section 416

of the Insurance Code, as amended.

We conclude that petitioner Almendras remedy after its Motion

for reconsideration in Administrative Case NO. 006 had been denied

by public respondent Commission was to interpose an appeal to the

Secretary of Finance. The present Petition for certiorari is neither

proper nor an appropriate substitute for such an appeal.

The three cited cases exemplifies the extent of the powers of the

Insurance Commissioner, the adjudication of claims and complaints

against insurance companies. That it is an administrative agency of

government which is regulatory and quasi judicial in its functions.

III. INSURANCE LAWS AND JURISPRUDENCE

A. INSURANCE CODE OF 1978 (Presidential Decree No. 1460)

Contract of Insurance

Under Sec. 2 of the Insurance Code, 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. Insurance is entered into by the parties

to secure protection against financial losses due to fortuitous events

or otherwise known as “risks”. A “risk” may be defined as “an

uncertainty regarding a loss. Risk must be distinguished from chance.

While risk entails a loss which may or may not happen, chance is

predicated upon the probability or desirability of profit or gain. While

a risk may be insured, Sec. 4 of the Insurance Code states that

insurance against the drawing of any lottery or for or against any

chance or ticket in a lottery drawing prize cannot be insured against.

Thus, contract of insurance is a contract of indemnity. Indemnity is

the reimbursement for a certain loss or damage. The claimable

amount of insurance proceeds cannot exceed the value of the thing

lost because the essence of insurance is only to indemnify a person

insured. It therefore follows that the insured cannot receive more

than the cost of damage.

“Risk” may likewise be referred to as any contingent or

unknown event, whether past or future, which may damnify a person

having insurable interest, or create a liability against the person

seeking for protection. This kind of risk as provided by law in Sec. 3 of

the Insurance Code is exclusive as to what may be insured. It can be

inferred from the given provision that this contingent or unknown

event is the subject of an insurance contract, without which the

agreement is void. It must also be noted that even a past event can be

insured against so long as the happening of such condition is yet to be

known. Unlike most of the contracts entered into by spouses, a

married woman need not get the consent of her husband when the

former insures her life or the life of her children.

As mentioned earlier, there are only two parties in the insurance

contract – the insurer and the insured. An insurer may be natural or

juridical person (i.e. partnership, association, corporation, etc.). The

law however provides that before a person transact or engage in

insurance business, the approval of the Insurance Commissioner must

first be solicited. An application for the issuance of Certificate of

Authority must be filed before the Commission. The latter may grant

the application if it sees that all the requirements have been met or

otherwise deny the same.

Under Sec. 8 of the Insurance Code, anyone except a public

enemy may be insured. The word “enemy” denotes a nation to which

the Philippines is currently at war with. The reason for the

importation of such exception is the fact that the purpose of war is to

cripple the power and exhaust the resources of the enemy, and it is

inconsistent that one country should destroy its enemy, and repay in

insurance the value of what has been destroyed.14

According to Sec. 10 of the Insurance Code, “Every person has

an insurable interest in the life and health:

1) Of himself, of his spouse and of his children;

2) Of any person on whom he depends wholly or in part for

education or support, or in whom he has a pecuniary interest;

14 6 Couch, Cyc. of Ins. Law, pp. 5352-5353, G.R. No. L-2294

3) Of any person under a legal obligation to him for the payment of

money, or respecting property or services, of which death or

illness might delay or prevent the performance; and

4) Of any person upon whose life any estate or interest vested in

him depends.”

Sec. 10 speaks only of insurable interest in life insurance. The

persons who intend to take hold of an insurance policy must have an

insurable interest in the subject matter of the contract. In general, 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 from its destruction,

termination or, injury by the happening of the event insured against.

It therefore follows that when a policy is issued to a person without

interest, the contract becomes a wagering policy and is void being

against public policy. In designating a beneficiary, it is not necessary

that the beneficiary has an insurable interest.

While there are only two parties in the contract of insurance,

there are instances when the insured designates a beneficiary other

than himself. “Beneficiary is the term ordinarily used in referring to

the person who is designated in a contract of life, death or accidental

insurance as the one who is entitled to receive the insurance

proceeds.15 Any person may be called to receive the life insurance

proceed as a beneficiary even though the latter has no insurable

interest in the life insured except those who are forbidden by law to

receive donations from the insured, such as:

15 44 AM Jur. 2nd. 639

1) Those made between persons who are guilty of adultery or

concubinage at the time of the donation;

2) Those made between persons found guilty of the same criminal

offense, in consideration thereof; and

3) Those made to a public officer or his wife, descendants,

ascendants, by reason of his office.

The law provides that the insured may change the designation

of the beneficiary unless the former expressly waives such right, in

which case the designation shall be irrevocable and can only be

modified upon the consent of the latter. Should the insured

discontinued paying premiums, the beneficiary may continue paying it

and is entitled to automatic extended term or paid up insurance

options. However, Sec. 12 provides that the interest of a beneficiary is

the principal accomplice, or accessory in wilfully bringing about the

death of the insured in which event, the nearest relative of the insured

shall receive the proceeds in the latter is not otherwise disqualified.

This rule shall discourage any attempt by the beneficiary on the life of

the insured.

Sec. 14 provides for the insurable interest in property. To wit:

1) An existing interest;

2) An inchoate interest founded on an existing interest; or

3) An expectancy, coupled with an existing interest in that

out of which the expectancy arises.

In property insurance, the person who sought protection from

the insured must positively ascertain the former’s interest in the

subject matter of the contract, otherwise, the contract shall be void. A

mere contingent or expected benefit, uncoupled with actual or legal

right will not support a contract of insurance. Thus, an expectant heir

cannot insure nor can a general creditor insure the property of his

debtor, even though destruction of said property is worthless any

judgment he might obtain.16

In property insurance, the measure of an insurable interest is

the extent to which the insured might be damnified by loss or injury

thereof. Sec. 17 reiterates the principle that Insurance is a contract of

indemnity. The insurance proceeds cannot exceed the value of the

thing lost, otherwise, the contract is not one of insurance but a

wagering contract.

The principle of indemnity is the basis of all contracts of

property insurance. Accordingly, an insurance taken out by a person

on property in which he has no insurable interest is not valid. The

existence of the insurable interest in life or health insurance must be

present when the insurance take effect, and when the loss occurs, but

need not exist in the meantime. On the other hand, the interest in life

and health insurance must exist when the insurance take effect, but

need not exist thereafter or when the loss occurs.

In property insurance, insurable interest should exist not only

on the date of the execution of the contract of insurance but on the

date of the occurrence of the risk or loss insured against. If a fire

occurs after the sale or alienation of the property insured, the former

owner cannot collect on the policy17. In property insurance, if the

person insured did not have any interest at the time of the loss, it

follows that it did not sustain any damage that may be indemnified by

the insurer, hence, the payment of insurance proceed would defeat

the very essence of insurance.

16 Martin’s Philippine Commercial Law, Vol. II p. 20, citing Vancouver Nat. Bank v. Law Union and Crowns Insurance Co., 153 F. 440; Baldwin Insurance, Co. 60 Iowa 497, 15 N.W. 30017 Ibid. page 21

Concealment

A neglect to communicate that which a party knows and ought

to communicate is called concealment. Whether concealment is

intentional or unintentional, the party injured is entitled to the

rescission of insurance contract. The parties to a contract is entitled

to communicate to the other in good faith, all the facts within its

knowledge which are material to the contract, to which he has no

warranty and the other has no means of ascertaining. Materiality is to

be determined by the probable and reasonable influence of the facts

upon the party to whom the communication is due in forming the his

estimate of disadvantages of the proposed contract or in making his

inquiries.

Reperesentation

Representation is defined as the statements given to the insurer

to induce the latter to enter in the contract of insurance. A

representation may be oral or written and may be made at the time or

before the issuance of the policy. Any alteration or withdrawal of the

representation after the insurance has been effected cannot be made.

On the other hand, misrepresentation is a statement which the

insured has knowledge of its untruthfulness or which the latter

positively states as true without knowing it to be true or which has the

tendency to mislead where such fact is material to the risk.

Representation cannot qualify as the exact provision of in a

contract but may be considered an implied warranty. If the

representation fails to correspond with its assertions or stipulations,

such representation is deemed to be false. The materiality of

representation is the same as the materiality in concealment.

Whenever a right to rescind a contract of insurance is given to the

insurer by any provision of this chapter, such right must be exercised

previous to the commencement of an action on the contract.

Policy

The written instrument in which a contract of insurance is set

forth is called the policy of insurance. It is a formal document which

provides an evidence of such contract. The policy must contain

statements of offer, acceptance and consideration.

The receipt of a policy by the insured without objection binds

the acceptor or insured to the terms thereof. It is his duty to read the

policy and it will be assumed that he did so. Where the holder,

discovering a mistake, the agent attaching a wrong rider to his

application elects to retain the policy as issued, he thereby accepts

the terms.18

While it is a cardinal principle of insurance law that a policy or

contract of insurance is to be construed liberally in favour of the

insured and strictly against the insurer company, yet, contracts of

insurance, like other contracts are to be construed according to the

sense and meaning of the terms which the parties themselves have

used. If such terms are clear and unambiguous, they must be taken

and understood in their plain ordinary and popular sense19.

“Rider” and “endorsement” are used interchangeably. They are

agreements not contained in the policy, but written on or attached to

it. A rider is a printed typed stipulation contained on a slip of paper

attached to the policy because they constitute additional stipulation

between the parties.

18 Ang Giok Chip vs. Springfield Fire and Marine Insurance co., 56 Phil. 37519 Pacific Banking Corporation vs. Court of Appeals, 168 SCRA 1988

“Warranties are inserted or attached to a policy to eliminate

specific potential increases of hazard during the policy term owing to

actions of the insured, or conditions property.

“Clauses” are agreements between the parties on certain

matters relating to the liability of the insurer in case of loss.

Incontestability clauses in life insurance policies stipulating that the

policy shall be incontestable after a stated period. Sec. 48 par. 2

requires that the incontestability of a life insurance policy starts after

the lapse of two years that the insurance was in force during the

lifetime of the insured. This is to dive the insurer a reasonable

opportunity to investigate the statements which the applicant makes

in procuring his policy and that the definite period, the insurer should

not be permitted to question the validity of the policy either by

affirmative action or by defense to a suit brought on the life policy by

the beneficiary. As to the insured, such clauses give assurance to the

policy holder that his beneficiaries would receive payment without

question as to the validity of the policy or the existence of the

coverage once the period of contestability passes. These are the

requisites of incontestability:

1) The policy is a life insurance policy

2) It is payable on the death of the insured;

3) It has been in force during the lifetime of the insured for at

least two years from its date of issue or of its last

reinstatement.

Whereas the Code specifically provided for the information

required to be stated in the policy insurance. It includes the following:

1) The parties between whom the contract is made;

2) The amount to be insured;

3) 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 rated upon which

the final premium is to be determined;

4) The property or life insured;

5) The interest of the insured in property insured, if he is not

the absolute owner thereof;

6) The risks insured against; and

7) The period during which the insurance is to continue.

Under Sec. 52. Cover notes may be issued to bind insurance

temporarily pending the issuance of the policy. Within sixty days after

the issue of the 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

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.

The cover note is merely a written memorandum of the most

important terms of the preliminary contract of insurance, intended to

give temporary protection pending the investigation of the risk by the

insurer, or until the issuance of a formal policy, provided that it is

later determined that the applicant was insurable at the time it was

given.

Sec. 53 stated that the insurance proceeds shall be applied

exclusively to the proper interest of the person in whose name or for

whose benefit it is made unless otherwise specified in the policy. A

policy may be framed that it may inure to the benefit of whomsoever,

during the continuance of the risk, may become the owner of the

interested insured. The mere transfer of a thing insured does not

transfer the policy, but suspends it until the same person becomes the

owner of both the policy and the thing insured. The importation of

such provision that a policy is a personal contract with the insured

and does not run with the insured property unless so expressly

stipulated, and in the absence of an assignment of the policy with the

insurer’s consent, the purchaser of the interest of the property

requires no privity with the insurer.

Classes of Insurance

Marine Insurance

Marine Insurance cover the loss or damage of vessels at sea or on

inland waterways, and of cargo in transit, regardless of the method of

transit. When the owner of the cargo and the carrier are separate

corporations, marine cargo insurance typically compensates the

owner of cargo for losses sustained from fire, shipwreck, etc., but

excludes losses that can be recovered from the carrier or the carrier's

insurance. Many marine insurance underwriters will include "time

element" coverage in such policies, which extends the indemnity to

cover loss of profit and other business expenses attributable to the

delay caused by a covered loss.20

20 www.wikipedia.com

Fire Insurance

It is a type of property insurance and as provided for in Sec. 167 of

the Insurance Code includes insurance against loss by fire, lightning,

windstorm, tornado and earthquakes and all allied risk, when such

risks are covered by extension to fire insurance policies or under

separate policies. The loss or damage must be caused directly by fire.

The loss may not be due to fire but the proximate cause thereof must

be by reason of fire.

Casualty Insurance

Sec. 174 of the Insurance Code provides for the coverage of

casualty insurance. It covers the loss or liability arising from accident

or mishap, excluding certain types of loss which by law or custom are

considered as falling exclusively within the scope of other types of

insurance such as fire or marine. It includes but not limited to,

employer’s liability insurance, workman’s compensation insurance,

public liability insurance, motor vehicle liability insurance, personal

accident and health insurance as written by non-life insurance

companies, and other substantially similar kinds of insurance. The law

covers all kinds of risks not falling under fire and marine insurance.

The legislation of Government Service Insurance Act and Social

Security Act in effect covers risks involving workmen’s compensation

insurance insofar as governmental and private employees are

concerned.

Suretyship

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.

Life Insurance

Sec. 179 defines life insurance as an insurance on human lives

and appertaining thereto or connected therewith. Generally, a life

insurance is distinct and different from an accident insurance because

the latter is written by non life insurance companies. However, when

one of the risk insured is death of the insured by accident, then such

accident insurance may be regarded as a life insurance.

B. SOCIAL SECURITY ACT OF 1954

Sec. 2 of Republic Act No. 8282, otherwise known as the Social

Security Act of 1997 provides for the policy of the state. To wit, “It is the

policy of the State to establish, develop, promote and perfect a sound

and viable tax-exempt social security system suitable to the needs of the

people throughout the Philippines which shall promote social justice and

provide meaningful protection to members and their families against the

hazards of disability, sickness, maternity, old age, death and other

contingencies resulting in loss of income or financial burden. Toward this

end, the State shall endeavor to extend social security protection to

workers and their beneficiaries.” The law is passed to provide protection

to the Filipino labourers in case of damage, loss or liability and

workmen’s compensation due to work related hazards concerning private

employees.

The Social Security System is created which is initiated, promoted

and developed by the Government of the Philippines. This system is built

mainly for the benefit of the SSS members such as to provide protection

against socially hazardous conditions, such as but not limited to sickness,

disability, maternity, death, or other such contingencies resulting in loss

of income or results to a financial instability. The Social Service shall not

only benefit the workers but also extend its assistance to the latter’s

beneficiaries. However, as ruled in the case of SSS vs. De Los Santos21

the Supreme Court held that, “AN ESTRANGED wife who was not

dependent upon her deceased husband for support is not qualified to be

his beneficiary. Respondent herself admits that she left the conjugal

abode on two (2) separate occasions, to live with two different men. The

first was in 1965, less than one year after their marriage, when she

contracted a second marriage to Domingo Talens. The second time she

left Antonio was in 1983 when she went to the US, obtained a divorce,

and later married an American citizen. In fine, these uncontroverted

facts remove her from qualifying as a primary beneficiary of her

deceased husband”.

A Social Security Commission was also created to make sure that

the goals of the Act are met and to provide a quality service to the

Filipino workers. The law gave the Commission ample powers and

functions to meet the needs of the workers and to provide nationwide

service on the laborers. These powers among others include the:

1) Adoption, amendment and rescission, subject to the approval of the

President of the Philippines, such rules and regulations as may be

necessary to carry out the provisions and purposes of this Act;

2) Establishment of fund for the members consisting of voluntary

contributions and the maintenance of such fund;

3) Approval of proposals for the payment of due but unremitted

contributions and unpaid loan amortizations under such terms and

conditions as it may prescribe;

21 G.R. No. 164790, August 29, 2008

4) Authorization of cooperatives registered with the cooperative

development authority or associations registered with the appropriate

government agency to act as collecting agents of the SSS with respect

to their members: Provided, That the SSS shall accredit the

cooperative or association: Provided, further, That the persons

authorized to collect are bonded;

5) Compromise or release, in whole or in part, any interest, penalty or

any civil liability to SSS in connection with the investments authorized

under Section 26 hereof, under such terms and conditions as it may

prescribe and approved by the President of the Philippines.

6) Entering into agreements as may be necessary for the proper,

efficient and stable administration of the SSS.

7) Settlement of dispute arising within its jurisdiction.

The law also provides for a list of individuals who are compulsory

covered by the SSS. The coverage of the following shall be compulsory:

1) All employees who are not over sixty (60) years of age and their

employers: Provided, That in the case of domestic helpers, their

monthly income shall not be less than One thousand pesos (P1,000.00)

a month:

2) Spouses who devote full time to managing the household and family

affairs, unless they are also engaged in other vocation

3) Self-employed persons as may be determined by the Commission

under such rules and regulations as it may prescribe.

4) The coverage in the SSS shall be voluntary upon:

5) Spouses notwithstanding devotion to managing the household is also

engaged in other employment which is subject to mandatory

coverage;

6) Filipinos recruited by foreign-based employers for employment abroad

may be covered by the SSS on a voluntary basis.

The effectivity of the coverage shall be on the first day of his operation

and that of the employee on the day of his employment: Provided, That the

compulsory coverage of the self-employed person shall take effect upon his

registration with the SSS.

The separation from employment of employees under compulsory

coverage has the effect of ceasing the latter’s obligation to pay

contributions on his account starting at the end of the month of such

separation. However, said employees shall be credited with all contributions

paid on his behalf and entitled to benefits according to the provisions of this

Act. The concerned employer is given the right to continue to pay the total

contributions to maintain his right to full benefit. The SSS members are

entitled to several kinds of benefit.

Retirement Benefit

The Retirement Benefit is granted when an employee retires from

work upon reaching the retirement age established in the collective

bargaining agreement or other applicable employment contract.

Death Benefit

The Death Benefit is granted in event of the deceased SSS

member's beneficiaries, receiving from the System an amount equivalent

to the deceased member's monthly income benefit, plus a ten percent

(10%) fraction of the death benefit thereof for every listed dependent

child, with the list not exceeding five, beginning with the youngest to the

oldest. The list may not be substituted nor appended.

Disability Benefit

The Disability Benefit is granted depending on the severity of the

disability claim which is to be determined by the Medical Director of the

System and approved by the Employees' Compensation Commission.

Articles 191, 192 and 193 of the Philippine Labor Code cover the

different degrees of the disability and the benefits accompanying them.22

Funeral Benefit

A funeral grant equivalent to Twelve thousand pesos (P12,000.00)

shall be paid, in cash or in kind, to help defray the cost of funeral

expenses upon the death of a member, including permanently totally

disabled member or retiree.

Sickness Benefit

A member who has already paid contributions for a period of three

months prior to the confine shall be entitled to the sickness benefit if

confined for more than three (3) days in a hospital or elsewhere with the

approval of the SSS. A daily sickness benefit equivalent to ninety percent

(90%) of the average daily salary credit shall be paid to the member for

each day of compensable confinement or a fraction thereof by his

employer if employed , or the SSS if such person is unemployed or self-

employed.

Maternity Leave Benefit

Maternity leave benefit is given to a female member who has paid at

least three (3) monthly contributions in the twelve-month period

immediately preceding the semester of her childbirth or miscarriage. He

22 http://www.gopinoy.com/advice/employee-benefits/social-security-system-in-the-philippines.html

member shall be paid a daily maternity benefit equivalent to one hundred

percent (100%) of her average daily salary credit for sixty (60) days or

seventy-eight (78) days in case of caesarian delivery.

The Act also provides for the non-transferability of benefit. Thus, Sec.

15 of the Social Security Code states that:

SEC. 15. Non-transferability of benefit. - The system shall pay the benefits provided for in this Act to such persons as may be entitled thereto in accordance with the provisions of this Act. Such benefits are not transferable, and no power of attorney or other document executed by those entitled thereto in favor of any agent, attorney, or any other individual for the collection thereof in their behalf shall be recognized except when they are physically and legally unable to collect personally such benefits: Provided, however, That in the case of death benefits, if no beneficiary has been designated or the designation there of is void, said benefits shall be paid to the legal heirs in accordance with the laws of succession. (Rep. Act 2658, amending Rep. Act 1161.)

In short, if there is a named beneficiary and the designation is not

invalid (as it is not so in this case), it is not the heirs of the employee who

are entitled to receive the benefits (unless they are the designated

beneficiaries themselves). It is only when there is no designated

beneficiaries or when the designation is void, that the laws of succession

are applicable. And we have already held that the Social Security Act is

not a law of succession.23

C. REVISED GOVERNMENT SERVICE INSURANCE ACT OF 1977

History and Related Laws of GSIS Act of 197724

23 SSS vs. Davac Et Al, G.R. No. L-21642 July 30, 196624 http:www.gsis.gov.ph

Commonwealth Act 186 of November 14, 1936 created the GSIS as

a social insurance fund for all employees of the Philippine Government

providing life insurance; retirement insurance giving entitlement to a life

annuity of five (5) years and thereafter as long as the employee lives;

disability benefit and survivors benefit.

Republic Act No. 660 of June 16 1951, an amendment of CA 186

provides retirement option also known as “magic 87” which provides that

after 30 years of service and attainment of the age of 57 years old, an

employee is given the option to retire.

Republic Act No.1616 a retirement option of GSIS popularly known

as “The Take All Option” provides for a gratuity benefit for retiring

members who will qualify under this retirement mode giving them

entitlement to a refund of premiums paid, personal share with interest

and government shares without interest.

Republic Act 3593 of June 22 1963 – amended CA 186 to provide

immediate life insurance coverage and compulsory membership as well

as increase additional life insurance coverage to all government

employees.

Republic Act 4968 of June 17 1967 amended again CA 186 to

further define life insurance, retirement insurance, compulsory

membership and rates of premium contributions.

Republic Act 611 of Aug 4 1969 established the Philippine Medical

Care Plan and created the Philippine Medical Care Commission. The Plan

consists of Program I for the members of SSS and GSIS and Program II

for those not covered in Program I. Those beneficiaries under Program I

are entitled to medical care benefits.

Presidential Decree 626 of January 1 1975 amended PD 492 or the

Labor Code of the Philippines to effect adjustments needed to coordinate

grant of social security benefits.

Presidential Decree 1368 of May 1 1978 amended Book IV of the

Labor Code of the Philippines and defined the coverage of the

Employee’s Compensation program. Presidential Decree 1519 of 11 June

1978 revised the Philippine Medical Care Act to provide total medical

services to the people of the Philippines through a comprehensive and

coordinated care plan. The plan covers legal dependents of SSS and

GSIS members.

Presidential Decree 1641 of 1 January 1980 further amended the

Employee’s Compensation Program and State Insurance Fund of the

Labor Code of the Philippines and upgraded the benefits structure for all

covered employees.

Republic Act 7699 of May 1 1994 also known as Portability Law

which allows the addition of all creditable services or periods of

contributions made continuously or in the aggregate of a worker under

either the GSIS or SSS for eligibility and computation of benefits.

Republic Act 8291 of May 30 1997 otherwise known as the

Government Insurance Act of 1997 which amended the 26 year old

revised charter of the GSIS known as Presidential Decree 1146, to

expand and increase the coverage and benefits of the GSIS and introduce

institutional reforms to have more flexibility and thus perform its mission

and providing security protection more effectively.

The Implementing Rules and Regulations of GSIS Act 8291

The creation of the Government Service Insurance System is part

of the States’ social legislation to provide meaningful protection to

workers in government against the perils of disability, hazards of work

related illness through compulsory and optional life insurance,

retirement separation and employees compensation.

Membership in the GSIS is compulsory for all employees receiving

compensation who have not reached the compulsory retirement age

irrespective of employment status except members of the AFP and the

PNP.

Contributions to the System shall be mandatory from both the

employee and the Agency-employer in equal amounts ranging from 9-

12% of the average monthly compensation of the employee. The Agency

contribution is part of their annual appropriations which is to be remitted

to GSIS together with the salary deducted from the employee.

The GSIS provides the following benefits:

1) Monthly pension equivalent to 37.5% of monthly compensation after 15 years of service and

adjusted 2.5% for every year if service in excess of 15 years payable for life after 60 years of age.

2) Separation benefits – cash payment equivalent to average monthly compensation for each year

of service when employee resigns after less than 15 years of service.

3) Permanent Disability Benefits – a member who suffers permanent disability for reasons not due

to his grave misconduct, notorious negligence, habitual intoxication or willful intention to kill

himself or another, shall receive a monthly income benefit for life equal to the basic monthly

pension.

4) Permanent Partial Disability Benefit – if the disability is partial he shall receive a cash payment in

accordance with a schedule of disabilities prescribed by GSIS e.g. loss of any finger, toe, arm, leg,

ears, etc.

5) Temporary Partial Disability Benefit – An employee is entitled to 75% of his current daily

compensation for each day of temporary disability but not exceeding 120 days in one calendar

year.

6) Survivorship Benefits – when a member or pensioner dies, the beneficiaries shall be entitled to

receive 50% of the basic monthly pension.

7) Funeral Benefits – equivalent to P12,000 for an active member, a pensioner or a retiree.

8) Life Insurance Benefits

Funds of the GSIS

All contributions payable to the System together with the earnings

and accruals thereon shall constitute the GSIS Social Insurance Fund. It

shall be used to finance the benefits administered by the GSIS under this

Act. The funds shall not be used for purposes other than what are

provided for under this Act. No portion of the General Fund of the

national government and its political subdivisions, instrumentalities and

other agencies including government owned and controlled corporations

except as maybe allowed by this Act. A maximum expense loading of 12%

of the yearly revenues from all sources may be disbursed for

administrative and operational expenses except as maybe otherwise

approved by the President of the Philippines.

The funds which are not needed to meet the current obligations

maybe invested under such terms and conditions and rules and

regulations as maybe prescribed by the Board. Provided, that

investments shall satisfy the requirements of liquidity, safety and

security in order to ensure the actuarial solvency of the funds of the

GSIS.

Powers and Functions of the GSIS

The GSIS shall exercise the following powers and functions:

1) To formulate, adopt, amend and rescind such rules and regulations as maybe necessary to carry

out the provisions and purposes of this Act as well as the effective exercise of the powers and

functions and the discharge of the duties and responsibilities of the GSIS, its officers and

employees.

2) To invest the funds of the GSIS, directly or indirectly.

3) To acquire, utilize or dispose of in any manner recognized by law, real or personal property in

the Philippines or elsewhere necessary to carry out the purposes of this Act.

4) To invest, own or otherwise participate in equity in any establishment, firm or entity.

5) To be able to float proper instrument to liquefy long term maturity by pooling funds for short

term secondary market.

Social Security Guaranteed by GSIS

On January 25, 2008, GSIS President and General Manager

Winston Garcia announced the availability of $5 Billion for investment in

fixed income, equities and properties here and abroad apparently to

prove to its members the liquidity of the system and its capability to

meet its obligations. Two years later, members to the System, public

school teacher, retirees and pensioners were up in arms against policies

implemented by the Board of Trustees which they branded as anti-

member.

GSIS Policy and Procedural Guidelines No. 171-0325 amended the

definition of Creditable Service under RA 8291 which provides :the

computation of service for determining the amount of benefits payable

shall be from the date of original appointment/election. In its guidelines

GSIS defined Creditable Service as the computed period of service of a

regular member while in government service where the corresponding

25 http://noynoyaquino.org.ph

compulsory premium contributions were actually paid and remitted to

the GSIS for such period. The situation gives rise to the non inclusion of

the years of service when an employee was still contractual with unpaid

premium.

A second modification of the law by GSIS is the restructuring of the

survivorship pension policy by terminating the granting of survivorship

pension to the primary beneficiary after having benefited the same for 5

years, and /or if the beneficiary is not totally dependent for support on

the pensioner, or has a source of income other than the income of the

pensioner, is currently employed, and a pensioner of GSIS or other

institutions.

The Court of Appeals had upheld the constitutionality of the

premium-based policy but the Supreme Court still has to rule on the

annulment of the policies and a writ of prohibition on the enforcement of

these unjust rules prejudicial to the interest of GSIS members is to be

pleaded.

Another provision of the GSIS Act that is sought to be amended is

Section 3526 which provides for a twelve percent (12%) maximum

expense loading of the yearly revenues for administrative and

operational expenses. The amendment is reduction to eight (8%) in order

to safeguard the mandated contribution of government employer to the

system.

The reduction of the operational expenses for the system would

release more of the Depositors Insurance Funds for investments that can

generate more benefits for its depositors and government employee-

members.

26 Ibid.

The GSIS Act empowers the Board of Trustee to decide on how the

funds of the GSIS shall be invested provided that it shall satisfy the

requirements of liquidity safety/security and yield in order to ensure

actuarial solvency of the funds of the GSIS. Yet, in the case GSIS vs

Court of Appeals and Jose Salonga, the GSIS was rebuked by the High

Court for its failure to exercise due diligence in ascertaining the real

owners of the mortgaged properties in consideration of P14.360 M loan

granted. The Court emphasized that the funds of the GSIS come from the

monthly contributions of its members, Thus, its business is to keep in

trust money belonging to its members being allowed to engage in

financing, the GSIS should therefore exercise care and prudence in

investing its funds such as in granting loans.

The System is also empowered to collect monthly contributions

from the members and their employer and that all its assets, revenues,

including accruals there-to and benefits paid shall be exempt from all

taxes, assessments, fees, charges and duties of all kinds. This exemption

is highlighted in the Supreme Court’s decision in GSIS vs COA dtd Nov

10 2004, when GSIS collected COA disallowances against the retirement

benefits of its employees, It repeated earlier decision in Cruz vs.

Tantuico “ that the exemption should be liberally construed in favor of

the pensioner. Pension in this case is a bounty flowing from the

graciousness of the Government intended to reward past services and, at

the same time, to provide the pensioner with the means with which to

support himself and his family. Unless otherwise clearly provided, the

pension should inure wholly to the benefit of the pensioner.

The latest GSIS enactment, RA 8291, 29 provides for a more

detailed and wider range of exemptions under Section 39, Aside from

exempting benefits from judicial processes, it likewise unconditionally

exempts benefits from quasi-judicial and administrative processes,

including COA disallowances, as well as all financial obligations of the

member, the latter includes any pecuniary accountability of the member

which arose out of the exercise or performance of his official functions or

duties or incurred relative to his position or work, The only exception to

such pecuniary accountability is when the same is in favor of the GSIS.

Thus, monetary liability in favor of GSIS refers to indebtedness

of the member to the System other than those which fall under the

categories of pecuniary accountabilities exempted under the law. Such

liability may include unpaid social insurance premiums and balances on

loans obtained by the retiree from the System, which do not arise in the

performance of his duties and are not incurred relative to his work. The

general policy, as reflected in our retirement laws and from outstanding

obligations of the member to the system, This is to ensure maintenance

of the GSIS fund reserves in order to guarantee fulfillment of all its

obligations under RA 8291.

Several other cases involving benefit claims against the System

has also arisen wherein the Supreme Court had repeatedly invoked the

nature of its function in relation to the salutary intentions of the law in

favor of the worker.

In GSIS vs CA and Rosa Balais the private respondent was

granted permanent partial disability after she underwent craniotomy.

Since she could not perform her job as she usually did, she retired and

requested for her classification as permanent total disability. It was

denied by ECC and GSIS.

The High Court rules that “disability should not be understood

more on its medical significance but on the loss of earning capacity.”

Judicial precedents likewise show that disability is intimately

related to one’s earning capacity. It has been a consistent

pronouncement of this Court that “permanent total disability means

disablement of an employee to earn wages in the same kind of work, or

work of a similar nature that she was trained for or accustomed to

perform, or any kind of work which a person of her mentality attainment

could do.” “It does not mean state of absolute helplessness, but inability

to do substantially all material acts necessary to prosecution of an

occupation for remuneration or profit in substantially customary and

usual manner.”

The Court has construed permanent total disability as the “lack

of ability to follow continuously some substantially gainful occupation

without serious discomfort or pain and without material injury or danger

to life.” It is, therefore, clear from established jurisprudence that the loss

of one’s earning capacity determines the disability compensation one is

entitled to.

One final note, the GSIS and ECC should be commended for

their vigilance against unjustified claims that will deplete the funds

intended to be disbursed for the benefit only of deserving disabled

employees. Nevertheless, we should caution them against a too strict

interpretation of the rules lest it result in the withholding of full

assistance from those whose capabilities have been diminished, if not

completely impaired, as a consequence of their dedicated service in the

government. A humanitarian impulse, dictated by no less than the

Constitution itself under the social justice policy, calls for a liberal and

sympathetic approach to the legitimate appeals of disables public

servants like the herein private respondent. Compassion for them is not a

doleout but a right.

In the case GSIS vs CA and Romeo Bella, the High Court

clarified that if the sickness of the employee made him unable to perform

any gainful occupation for a continuous period exceeding 120 days, thus

entitles him to permanent total disability benefits.

Clearly, the position taken by the GSIS and the ECC runs

counter to the avowed policy of the State to construe social legislations

liberally in favor of the beneficiaries. The Court takes this occasion to

stress once more its abiding concern for the welfare of the government

workers, especially the humble rank and file, whose patience, industry

and dedication to duty have often gone unheralded, but who, in spite of

every little recognition, plod on dutifully to perform their appointed

tasks. It is for this reason that the sympathy of the law on social security

is toward its beneficiaries, and the law, by its own terms, requires a

construction of utmost liberality in their favor.

The main issue in other benefit claims is whether ailments suffered

by employees or members which are not listed under present laws are

compensable. In a September 1987 decision by the Supreme Court

(Tanedors vs ECC and GSIS) it reiterated that a compensable sickness is

any illness definitely accepted as an occupational disease listed by the

Commission or any illness caused by employment subject to proof by the

employee that the risk of contracting the same is increased by working

conditions. For this the ECC has determined the approved occupational

diseases and work-related illnesses that maybe considered compensable

based on the peculiar hazards of employment. It is clear that in order

that sickness and the resulting disability or death be compensable, the

claimant must show either:

1) That it is the result of an occupational disease listed by ECC

rules with the conditions therein satisfied

2) If not so listed, that the risk of contracting the disease is

increased by the working conditions.

GSIS denied a claim for income benefits on the ground that end

state renal disease and diabetic nephropathy are not among the

compensable occupational diseases listed by ECC or PD 626. The

claimant was a driver-mechanic and would not be under tremendous

tension and pressure in his work conditions. The Court in this case

(Barrios vs ECC and GSIS) stated “the law does not require that the

connection be established with absolute certainty or that a direct causal

relation be shown. It is enough that the theory upon which the claim is

based is probable. Probability, not certainty is the touchstone”. Under

these circumstances, we must apply the avowed policy of the State to

construe social legislation liberally in favor of the beneficiaries, in line

with Art.166 of PD 626 which reads “The State shall promote and

develop a tax-exempt employee’s compensation program whereby

employees and their dependents, in the event of work connected

disability or death may promptly secure adequate income benefit and

medical or related benefits”.

Chronic Glomerulo Nephritis is not an occupational disease, GSIS

contends in the case of GSIS vs Maria Teresa Cordero but the Supreme

Court once more reversed the GSIS decision as it stated that what the

laws requires is a reasonable work-connection and not a direct causal

relation. It is sufficient that the hypothesis on which the workmen’s claim

is based is probable since probability, not certainty is the touchstone.

Osteosarcoma is not listed as an occupational disease in the

amended rules on Employees Compensation and the claimant failed to

present evidence to establish that the development of his ailment was

traceable to his working condition in the Philippine Navy and the PNP.

Nonetheless, the Supreme Court agreed with the Appellate Court’s

ruling that petitioners failure to present positive evidence of a causal

relation of the illness and his working conditions is due to the pure and

simple lack of available proof to be offered in evidence. Verily, to deny

compensation to osteosarcoma victims who will definitely be unable to

produce a single piece of proof to that effect, is unrealistic, illogical and

unfair. At the very least, on a very exceptional circumstance, the rule on

compensability should be relaxed and be allowed to apply to such

situations. To disallow the benefit will even more add up to the suffering,

this time, for the ignorance of the inability of mankind to discover the

real truth about cancer. Respondent is entitled to compensation

consistent with the social legislations intended beneficial purpose.

The GSIS must not therefore loss sight of its primary purpose to

give full force and effect to the policy of the State of giving maximum aid

and protection to workers in government.

D. PRE-NEED ACT (Republic Act No. 9829)

The Legislatures passed into law the Republic Act No. 9829

otherwise known as the Pre-Need Code of the Philippines. It took effect

last December 3, 2009, and issued its Implementing Rules and

Regulations 8 March 8, 2010.

The legislatures laid down the policies of the state in enacting the

Pre-Need Code. Thus, as provided for in Sec. 2 of the Code, the

government seeks to (1) standardize the institution of pre-need

companies and secure their operations on sound and stable basis for

optimum advantage, and to (2) prevent such practices as are prejudicial

to plan holders and public interest.

To attain such policies, the law transferred the regulation and

supervision of all pre-need companies to the Insurance Commission (IC)

from the Philippine Securities and Exchange Commission (SEC). Such

transfer is due to the recognition of the pre-need contracts as an

insurance product rather than securities. The IC is given the authority to

prescribe, pass upon and review the qualifications and disqualifications

of directors and officers of pre-need companies.

The law vested the Insurance Commission, among others, the

following powers and functions:

1) Approve, amend, renew or deny any license, registration or

certificate issued under this Code;

2) Fix and assess fees and/or charges as it may find reasonable in

the exercise of regulation;

3) Regulate, supervise and monitor the operations and

management of pre-need companies

4) Issue cease and desist orders, subpoena duces tecum and ad

testificandum, order the examination, search and seizure of

documents, papers, files, tax returns, books of accounts and

other records, in whatever form, of any entity or person under

investigation;

5) Take over pre-need companies which fail to comply with this

Code, related laws, rules, regulations and orders issued

pursuant thereto, either through the appointment of a

conservator, receiver or liquidator;

6) Formulate policies and recommendations on issues concerning

the pre-need industry, including proposed legislations;

Under the Pre-Need Code, a pre-need plan refers to any contract,

agreement, deed or plan for the benefit of a planholder, which provides

for the performance of future services payment of monetary

considerations, or delivery of other benefits at the time of actual need or

agreed maturity date, in exchange for cash or installment amounts. It

includes life, pension, education, interment and any other plan,

instrument, contract or deed, as determined by the IC. A pre-need

company is any corporation registered with the SEC and licensed by the

IC to sell or offer to sell pre-need plans. It also covers schools, memorial

chapels, banks, non-bank financial institutions and other entities licensed

by the IC to sell or offer to sell pre-need plans.

Licensing and Incorporation of Pre-need Companies

The Securities and Exchange Commission shall not approve any

pre-need company for the application of its incorporation unless a

favourable recommendation was given by the Insurance Commission.

The law sets forth the requisites for the incorporation of pre-need

companies. Such regulations are imported to provide better security to

the plan holders and standardize the growth of pre-need companies.

The minimum paid-up capital of P100 million Pesos is required of

any pre-need company wishing to incorporate. The existing pre-need

companies should comply with the following minimum unimpaired paid-

up capital: (a) 100 Million Pesos for companies selling at least three

types of plan; (b) 75 Million Pesos for companies selling two types of

plan; and (c) 50 Million Pesos for companies selling a single type of plan.

A plan may be educational, pension, life or memorial. Mindful of their

key role in the pre-need industry, the law requires existing pre-need

companies with traditional education plans to have a minimum

unimpaired paid-up capital of P100 million.27

Directors

27 www.bakermckenzie.com/RRManilaRegulationPreNeedCompaniesNov10

Similar to the “fit and proper” rule that the Bangko Sentral applies

to bank directors and officers, this power will enable the IC to “maintain

the quality of management of pre-need companies and afford better

protection to plan holders and beneficiaries.” In addition, the law

requires pre-need companies to elect into their board of directors at least

two independent directors or 20 percent of the members of the board,

whichever is higher. To avoid conflicts of interest, the law prohibits

directors and officers, in their personal capacity or acting as agents, to

have direct or indirect investments in excess of P5 million in any

corporation or undertaking in which the pre-need company’s trust fund

has an investment or financial interest. The prohibition also applies to

their relatives within the fourth degree of consanguinity or affinity while

the director or officer concerned holds that position in the company. It is

in the establishment and handling of the trust fund that the Pre-need

Code takes to heart the protection of the interests of planholders. A trust

fund is a fund created from the planholders’ payments to pay for the cost

of benefits and services, termination values payable to planholders, and

other costs necessary to ensure the delivery of benefits or services as

provided for in the contracts.

Registration

Within a period of forty-five (45) days after the grant of a license to

do business as a pre-need company, and for every pre-need plan which

the pre-need company intends to offer for sale to the public, the pre-need

company shall file with the Commission a registration statement for the

sale of pre-need plans pursuant to this Code. The Commission shall

promulgate rules governing the registration of pre-need plans and the

required documents which include, among others, the viability study

with certification, under oath, of a pre-need actuary accredited by the

Commission. Said rules shall further set forth the conditions under which

such registration may be denied, revoked, suspended or withdrawn, and

the remedies of pre-need companies in such instances.

Investment

The Pre-Need Code imposes very stringent controls, particularly on

how funds are invested by pre-need companies. To ensure the delivery of

guaranteed benefits and services provided under a plan, a trust fund per

pre-need plan category is required to be established. Pre-need

companies should make monthly deposits into the trust fund in an

amount sufficient to pay the benefits promised under the plans. For plans

paid in full, the minimum deposit is 45% of the amount collected for life

plans, and 51% for education, pension and all other plans. The trust fund

may be invested in (1) fixed income instruments (such as government

securities, savings/time deposits, commercial papers and direct loans),

(2) equities, and (3) real estate.28

Claims Settlement

The Pre-Need Code protect plan holders against Unfair Claims

Settlement Practices. The law prohibits the pre-need companies from

refusing without just cause to pay or settle any claims arising under

coverages provided by its plans nor shall any such. Any of the following

acts by a pre-need company, if committed without just cause, shall

constitute unfair claims settlement practices:

1) Knowingly misrepresenting to claimants pertinent facts or plan

provisions relating to coverages at issue;

28 Ibid.

2) Failing to acknowledge with reasonable promptness pertinent

communications with respect to claims arising under its plan;

3) Failing to adopt and implement reasonable standards for the

prompt investigation of claims arising under its plan;

4) Failing to provide prompt, fair and equitable settlement of claims

submitted in which liability has become reasonably clear; or

5) Compelling planholders to institute suits or recover amounts due

under its plan by offering, without justifiable reason, substantially

less than the amounts ultimately recovered in suits brought by

them.

The payment of proceeds shall be made immediately upon

maturity of the contract the in case of scheduled benefit plans, unless

such proceeds are made payable in installments or as an annuity, in

which case the installments or annuities shall be paid as they become

due. Refusal or failure to pay the claim within fifteen (15) days from

maturity or due date will entitle the beneficiary to collect interest on

the proceeds of the plan for the duration of the delay at the rate twice

the legal interest unless such failure or refusal to pay is based on the

ground that the claim is fraudulent. In the of contingent benefit plans,

the benefits shall be paid by the pre-need company thirty (30) days

upon submission of all necessary documents.

Trust funds

A pre-need company is required to create a trust fund for each type

of pre-need plan that the company is authorized to sell. The Insurance

Commission may approve the request of the company to entrust the

management of the trust fund to reputable bank’s trust department or

other entities authorized by the government.

To ensure the accomplishment of the objective of the trust fund,

the law provides that its assets shall “at all times remain for the sole

benefit of the planholders.” No part of the assets can be used for or

diverted to any purpose other than for the exclusive benefit of the

stockholder. Neither can the assets be touched to satisfy the claims of

the company’s creditors, nor can they be considered part of the assets of

the company that is subject to distribution in case the company files for

insolvency.29

Violations of the Pre-Need Code

Any person, after notice and hearing who is found guilty of any

unlawful practices or committed any violations of the Pre-Need Code

may be Administratively, Civilly or Criminally charged as the case may

be. The Commission may impose any or all of the sanctions for the

following offenses:

1) The making of any untrue statement of a material fact in a

registration statement, information brochure and its supporting

papers and other reports required to be filed with the

Commission;

2) The failure to disclose any material fact required to be stated

therein;

3) The refusal to permit any lawful examination into its affairs; and

29 http://business.inquirer.net/money/columns/view/20091217-242576/New-law-for-pre-need-plans

4) Any violation of this Code or its implementing rules and

regulations.

The unauthorized sale of pre-need plans shall subject the issuer to

a fine as follows:

1) First violation – thirty percent (30%) of the aggregate gross pre-

need price of the plans sold;

2) Second violation – forty percent (40%) of the aggregate gross pre-

need price of the plans sold; and

3) Third violation – suspension or revocation of license

The following acts are considered criminal acts and are penalized

by the Code depending on the gravity of the offense:

1) Selling or offering to sell a pre-need plan by unregistered

persons;

2) Selling or offering to sell an unregistered pre-need plan or any

product that has pre-need plan features;

3) Soliciting, selling or offering to sell a pre-need plan by means

of false or misleading representation and other fraudulent

means;

4) Any negligent act or omission that is prejudicial or injurious to

the planholder;

5) Any fraudulent act or omission that is prejudicial or injurious

to the planholder;

6) Willful violation of the provisions of the Code or orders of the

Commission: Provided, That repeated violations shall

constitute prima facie evidence against the offender.

Other sanctions include, suspension or revocation of licence,

payment of fine ranging from P10,000 to P5,000,000 and imprisonment

ranging from one year to 14 years based on the culpability of the

violation.

E. HOME INSURANCE GUARANTY ACT OF 2000

It is the declared policy of the State to undertake in cooperation

with the private sector a continuing nationwide housing program

which will make available at affordable cost decent housing. Towards

this end, the Home Guaranty Corporation1 shall:

1) Ensure continuous funding support to implement the

governments programs for urban and rural housing.

2) Provide for a strong and sustainable finance program with

complimentary program which will pump-prime, buildup and

strengthen available sources of cheap and long term capital.

3) Increase private sector’s participation in the investment of their

funds into housing finance for developmental and end-user

financing requirements.

4) Encourage the flow of private funds for mass housing

development and home buyers financing through a viable

system of mortgage and credit guaranty.

Corporate Powers and Functions

To promote homebuilding and land ownership the Corporation

encourages banks and financial institutions to lend to home and

housing develops. In turn it assures these lenders and investors in

housing by issuing loan and securitization guarantees. It guarantees

the payment of the guaranteed loan or investment balance

outstanding and due on the principal obligation, plus interest yields

up to 11%. It exempts the interests derived and other yields from the

loan from all forms of taxes. The Government of the Republic of the

Philippines guarantees the payment of HBC’s obligations.

The guaranty programs of the Corporation which are available

to banks, government and financial institutions, housing developers,

and building and loan associations are:

1) Developmental Loan Guaranty – covers loans extended to

developers for the development of subdivisions, townhouses,

dormitories, apartments and other residential dwellings.

2) Retail Loan Guaranty – covers loans and credit facilities

extended for the purchase/acquisition of a single family

residence.

3) Guaranty for Securitization Schemes which provides guaranty

cover on securities and/or financial instruments or on the

receivables backing up the securities.

To be eligible for credit guaranty the account for developmental

loans (Sec.13), involve a principal obligation not to exceed 70% of the

prudent production cost of the project for bond guaranty coverage or

60% of the prudent production cost of the project for cash guaranty

coverage. For single family residence, involve a principal obligation

not to exceed 100% of the appraised value of the property value of the

property for low cost housing packages; 80% of the appraised value

for medium cost housing packages and 70% of the appraised value for

open housing packages.

Guaranty Premiums, Appraisal Fees (Sec.14)

In accordance with sound actuarial practice and the risk

characteristics involved the rates of guaranty premium to be imposed

shall be fixed by the Corporation. Provided, that no guaranty premium

shall be fixed at less than one-half of one percent of the amount of the

outstanding principal obligation for socialized housing, three fourths

of one percent for low cost housing; one percent for medium cost

housing, and one and one half percent for open housing. In addition,

the Corporation may charge and collect such fees and amounts as may

be reasonable for appraisal of a project offered for guaranty.

The Corporation shall guaranty payment of the balance

outstanding and due on the guaranteed principal obligation plus

interests and yields thereon up to eleven percent per annum for

socialized housing; ten percent per annum for low cost housing; nine

and one half percent per annum for medium cost housing and eight

and one half percent per annum for open housing packages.

In the event of default on the guaranteed obligation, the

guaranteed entity shall be entitled to receive the benefit of the

guaranty upon:

1) The prompt conveyance to the Corporation of the right to the

property securing the guaranteed obligation.

2) The assignment to the Corporation of all claims of the

mortgages against the mortgager under the guaranteed

obligation.

Participation of Financing Institutions

All banking institutions, trust companies, personal finance

companies, mortgage companies, building and loan associations,

savings and loan associations, installment lending companies,

insurance companies, GSIS, SSS, DBP and other government owned

and controlled corporations are authorized to invest part of their

funds for the purpose of giving loans and advanced of credits as

contemplated by this Act and shall be guaranteed by the Corporation

under the provisions of this Act.

Subject to the approval of the Monetary Board of the BSP the

aforementioned government financing institutions are authorized to

constitute the secondary market for guaranteed mortgages and issue

bonds, debentures, securities, collaterals and other obligations

against the security of mortgages guaranteed under this Act.

Under Section 26, the powers, authorities and responsibilities

vested in the Corporation with respect to homeowners associations

under RA 580 as amended under EO 535 is now transferred to the

Housing and Land Use Regulatory Board.

The Home Insurance Guaranty Corporation is assailed in court

in the case of United BF Homeowners Association and HIGC vs. USBF

Homes Inc. for its rules of procedure in the hearing of homeowner’s

disputes.

PD 902-A, under Section 5(b) the HIGC’s jurisdiction over

homeowner’s disputed is limited to controversies that arise out of the

following intra corporate relations:

1) Between and among members of the association.

2) Between any or all of them and the association of which

they are members or associates.

3) Between such association and the state insofar as it

concerns their individual franchise or right to exist as

such entity.

Under HIGC rules Section 1(b), Rule II the type of dispute over

which the HGIC has jurisdiction include:

(b) Controversies arising out of intra corporate

relations between and among members of the

association between any and/or all of them and the

association of which they are members and insofar as

it concerns its right to exist as a corporate entity,

between the association and the state/general public

or other entity.

The Supreme Court ruled, the HIGC went beyond the authority

by the law when it promulgated the revised rules of procedure. There

was a clear attempt to unduly expand the provisions of Presidential

Decree 902-A. As provided in the law, insofar as the association’s

franchise or corporate existence is involved, it is only the State, not

the “general public or other entity” that could question this. The

appellate court correctly held that: “The inclusion of the phrase

GENERAL PUBLIC OR OTHER ENTITY is a matter which HIGC

cannot legally do…” The rule-making power of a public administrative

body is a delegated legislative power, which it may not use either to

abridge the authority given it by Congress or the Constitution or to

enlarge its power beyond the scope intended. Constitutional and

statutory provisions control what rules and regulations may be

promulgated by such a body, as well as with respect to what fields are

subject to regulation by it. It may not make rules and regulations

which are inconsistent with the provisions of the Constitution or a

statute, particularly the statute it is administering or which created it,

or which are in derogation of, or defeat, the purpose of a statute.

F. PHILIPPINE DEPOSIT INSURANCE CORPORATION

History

The Philippine Deposit Insurance Corporation¹ is a government

corporation established under Republic Act 3591. This legislation was

meant to build up confidence in the stability of banks and encourage idle

funds to be put into savings with the banking system, through the

protection of insured deposits in the event of bank closures and bank

runs.

In 1992 Republic Act 7100 amended RA 3591 and expanded

PDIC’s authority and regulatory powers to include examination of banks.

It also made PDIC the mandatory receiver/liquidator of banks ordered

closed by the Monetary Board; its powers to grant financial assistance in

banks in danger of closing was expanded to include assumption of

liabilities in addition to making deposits, purchasing of assets or the

making of a direct loan; increased the deposit insurance coverage from

P40,000 to P 100,000 per depositor.

On August 12, 2004 Republic Act 9302 took effect and amended

the PDIC charter increased the maximum deposit insurance coverage

from P100,000 to P250,000. The increase in coverage at the time it came

into effect provided full protection to 96% of all deposit accounts, almost

all or 99% of deposit accounts in rural banks were backed by full

insurance coverage and some 95% of deposit accounts in commercial

banks were fully insured. In addition, the amendment provided for other

penalties for unsafe and unsound practices among bank owners and

officials. The new law also commits to every depositor continued

protection guaranteed by deposit insurance s PDIC’s authority to

terminate the insurance status of banks has been revoked. This provision

imposes much greater risk on the deposit insurance fund.

Republic Act 9576 came into effect after its approval on April 29,

2008. This amendment to the PDIC charter doubled the maximum

deposit coverage from P250,000 to P500,000 for each depositor, it

likewise granted PDIC institutional and financial strengthening increases

to support the increase of deposit insurance.

Amongst the institutional strengthening measures granted to PDIC

are the authority to determine insured deposits, conduct special bank

examination nd examine deposit accounts of ailing banks; and immunity

from suits.

These authorities were complemented by financial

strengthening measures to preserve and protect the Deposit Insurance

Fund such as the grant of tax exempt status to PDIC and sovereign

guarantee on PDIC’s borrowings not to exceed twice the amount of the

DIF as of date of debt insurance. For the first five years, PDIC’s tax

obligations will be charged against the Tax Expenditure Fund. Starting

on the sixth year, PDIC will be exempt from income tax, withholding tax,

VAT on assessment collections as well as local taxes. The new law

insures that PDIC will have the financial capacity to cover the risks posed

by threats of insurance calls. As Congress echoed this amendment

“signifies the government’s commitment to enhance the stability of the

banking and financial system amidst an unprecedented global financial

crisis as it reinforces PDIC’s role as a vital part of the financial safety

net”.30

PDIC Charter

The creation of the Philippine Deposit Insurance Corporation is to

insure the deposit of all banks which are entitled to the benefits of

insurance is enumerated in Section 1 of RA3591 but this is better

explained in Section 1 of RA9576, the latest amendment of the Charter

as it declares: “to be the policy of the State to strengthen the mandatory

deposit insurance coverage system to generate preserve, maintain faith

and confidence in the country’s banking system and protect it from

illegal schemes and machinations”.

Towards this end, the government must extend all means and

mechanisms necessary for the PDIC to fulfill its vital task of promoting

30 http://www.pdic.gov.ph

and safeguarding the interest of the depositing public by way of

providing permanent and continuing insurance coverage or all insured

deposits and in helping develop a sound and stable banking system at all

times.

Clearly, PDIC is mandated to insure the interests of the depositing

public and ensure the institutional and financial stability of our banking

system.

The Charter thus provides:

1) Deposit Insurance Coverage – the deposit liabilities of any bank

or banking institution which is engaged in the business of

receiving deposits as defined in the law or which thereafter may

engage in the business of receiving deposits shall be insured

with the Corporation. The assessment rate shall not exceed one

fifth of one percent per annum. Assessment is on a semi-annual

basis.

2) Sanctions against unsafe and unsound banking practices –

Whenever upon examination by the Corporation into the

condition of any insured bank, it shall be disclosed that an

insured bank or its directors or agents have committed are

committing or about to commit unsafe or unsound practices in

conducting the business of the bank, or have violated, are

violating or about to violate any provisions of any law or

regulation to which the insured bank is subject, the Board of

Directors shall submit the report of the examination to the

Monetary Board to secure corrective action thereon. If no such

corrective action is taken by the Monetary Board within forty-

five (45) days from the submission of the report, the Board of

Directors shall, motu proprio, institute corrective action which it

deems necessary. The Board of Directors may thereafter issue a

cease and desist order and require the bank or its directors or

agents concerned to correct the practices or violations within

forty-five (45) days. However, if the practice or violation is likely

to cause insolvency or substantial dissipation of assets or

earnings of the bank, or is likely to seriously weaken the

condition of the bank or otherwise seriously prejudice the

interests of its depositors and the Corporation, the period to

take corrective action shall not be more than fifteen (15) days.

The order may also include the imposition of fines provided in

Section 21 of the Charter.

3) Conduct examination of banks with prior approval of the

Monetary Board or conduct a special examinations as concurred

by a majority of the Board of Directors in coordination with the

Bangko Sentral if there is a threatened or impending closure of

a bank or may inquire into or examine deposit accounts and all

information related thereto in case there is a funding of unsafe

or unsound banking practice.

4) To act as receiver and shall control, manage and administer the

affairs of the closed bank.

5) Financial assistance – When the Corporation has determined

that an insured bank is in danger of closing and in order to

prevent such closing the Corporation, in the discretion of its

Board of Directors, is authorized to make loans to, or purchase

the assets of, or assume liabilities of, or make deposits in such

insured bank, upon such terms and condition as the Board of

Directors may prescribe, when in the opinion of the Board of

Directors, the continued operation of such bank is essential to

provide adequate banking service in the community or maintain

financial stability in the economy.

To carry out the purpose of this Act, the permanent insurance fund

shall be Three Billion Pesos (P 3,000,000,000.00). The Deposit Insurance

Fund shall be the capital account of the Corporation and shall consist of

the following:

1) The Permanent Insurance Fund

2) Assessment Collections

3) Reserves for insurance and financial assistance losses

4) Retained earnings

Whenever an insured bank shall have been closed by the Monetary

Board pursuant to Section 30 of R.A. 7633, payment of the insured

deposits on such closed bank shall be made by the Corporation as soon

as possible either by (1)by cash or (2)by making available to each

depositor a transferred deposit in another insured bank in an amount

equal to insured deposit of such depositor. Provided however, That the

Corporation, in its discretion, may require proof of claims to be filed

before paying the insured deposits, and that in any case where the

Corporation is not satisfied as to the viability of a claim for an insured

deposit, it may require final determination of a court of competent

jurisdiction before paying such claim: Provided, further, That failure to

settle the claim, within six(6) months from the date of filing of claim for

insured deposit where such failure was due to grave abuse of discretion,

gross negligence, bad faith, or malice, shall, upon conviction, subject the

directors, officers or employees of the Corporation responsible for the

delay, to imprisonment from six (6) months to one (1) year.

PDIC vs Legacy Banks

PDIC as receiver of Philippine Countryside Rural Bank (PCRBI)31

was able to prove allegations in support for the prayer of writ of

attachment on assets of Celso de los Angeles and three (3) Legacy

affiliated Companies. The case is among those filed by PDIC to recover

the assets of the closed Legacy banks to protect the interest of creditors

and depositors. It is for the recovery of cash advances granted by PCRBI

to Shining Armour Property Inc., Galaxy Realty and Holdings Inc. and

Legacy Card Inc., all believed to be owned by de los Angeles.

The complaint by PDIC alleges that the P10M cash advances given

to the three corporations were in violation of existing banking

regulations and with preconceived plans defraud PCRBI. It also asserted

that de los Angeles should be made personally liable for the cash

advances extended by PCRBI to defendant Corporations under the

doctrine of piercing the veil of corporate function. De los Angeles

controlled all three corporations and used such control to siphon off

funds of PCRBI to the prejudice of its creditors and depositors.

The cash advances were highly irregular, improper and fraudulent

in violation of PCRBI’s Manual of Operation which provides that only

officers and employees of PCRBI are entitled to cash advances subject to

30 day liquidation. Such cash advances are in reality loans granted to

directors, officers, stockholders and related interests. The grant of such

is restricted under Section 36 of the General Banking Law which

provides that no bank director or officer shall directly or indirectly

borrow from the bank except with the written approval of the majority of

all the directors of the bank, excluding the director concerned. There is

31 Manila Bulletin, May 05, 2009

however nothing in the records of PCRBI that would show that the said

requirement was complied with.

The Legacy Group controversy involves 12 Legacy banks, several

corporations and an estimated P14 Billion in 135,000 accounts.

Following this controversy, and with the amendment introduced by

RA 9576 PDIC in its Regulatory Issuance No. 2011-01 on Unsafe and/or

Unsound Banking Practices has excluded certain products from the

benefits of deposit insurance. Deposits derived from unsafe and unsound

banking practices which include excessive reliance on large, high cost,

or volatile deposits or borrowings, engaging in speculative and

hazardous investment policies, paying excessive cash dividends in

relation to the capital position, earnings capacity and asset quality of the

bank are not covered by deposit insurance. Also not covered are

unfunded, fictitious or fraudulent as well as these determined to be the

proceeds of an unlawful activity as defined by the Anti-Money

Laundering Act. PDIC is now authorized to issue a cease and desist order

against such deposit account or transactions and shall not be paid after

due notice and hearing and publication of a directive to cease and desist

from engaging in the cited unsound/unsafe practices.

The payout from PDIC will easily inundate its Deposit Insurance

Fund with no recoveries as it discovered overstatements in the Legacy

bank books, and because it has been hit hard, it is also now going to go

after the more gullible investors who are induced to part with their

saving by the big schemers and racketeers. The PDIC will now refuse to

provide insurance to bank accounts that are opened up in banks that

initially had been granted authority by the Bangko Sentral to offer their

products and services. If the intent of the law is to protect the public and

maintain the stability of the banking and financial institutions, the

regulatory and supervisory function of PDIC should instead be

strengthened and directed against the likes of de Los Angeles to be able

to preempt fraud against the small depositors.

III. SUMMARY