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, 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

1
http://en.wikipedia.org/wiki/insurance
2
Encyclopedia Britannica, 15th Ed., Vol. 6, page 336
3
Ibid page 337.
 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 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

4
Encyclopedia Britannica, 15th Ed., Vol. 7, page 426
5
Ibid. page 427
6
http://www.batasnatin.com/law-library/mercantile-law/insurance/1573-history-of-insurance-in-the-
philippines.html
7
Ibid.
 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 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.
8
http://en.wikipedia.org/wiki/Insurance
C. Characteristics and Elements of Insurance Contract

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 the
creditor. He does not however, have any more extensive rights than the creditor 10.
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

9
Adjusting Today The Extended Period of Indemnity Endorsement, William G. Rake SPPA Adjusters International
10
West's Encyclopedia of American Law, edition 2. 2008 The Gale Group, Inc
11
Copyright 1981-2005 by Gerald N. Hill and Kathleen T. Hill (http://legal- dictionary.thefreedictionary.com)
 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 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:

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

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.

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

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

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

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

15
44 AM Jur. 2nd. 639
 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.

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. 300
 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 policy 17. 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.

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

17
Ibid. page 21
 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

18
Ang Giok Chip vs. Springfield Fire and Marine Insurance co., 56 Phil. 375
 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.

“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

19
Pacific Banking Corporation vs. Court of Appeals, 168 SCRA 1988
 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 Santos 21 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

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

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

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

23
SSS vs. Davac Et Al, G.R. No. L-21642 July 30, 1966
24
http:www.gsis.gov.ph
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 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.

25
http://noynoyaquino.org.ph
 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 35 26

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.

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

26
Ibid.
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

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,

27
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 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

28
Ibid.
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;
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
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 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 and safeguarding the
interest of the depositing public by way of providing permanent and continuing

30
http://www.pdic.gov.ph
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

31
Manila Bulletin, May 05, 2009
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 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