DOUBLE INSURANCE

DEFINITION
SEC. 95 of the Insurance Code:
A double insurance exists where the same person is insured by several insurers separately in respect to
the same subject and interest.
(When two or more insurers issue separate insurance policies over the same subject)

REQUISITES. Based on Section 95, it is clear that double insurance is present if the following requisites
will concur:
(1) The same person is insured;
(2) There are two or more insurers that insured the person separately;
(3) The insurance is over the same subject;
(4) The same interest is involved; and
(5) The same peril is insured against.

 Thus, there is double insurance if the owner of a house will insure it with two insurers.
 There is NO double insurance if the owner and the lessee of the same house insures the same
with two insurers. (Two separate interests are insured by different persons)
 There is NO double insurance if the mortgagor and the mortgagee separately insure the
mortgaged property. The two insurance policies do not involve the same interest.
 There is No double insurance when the same person and subject are involved in both insurance
policies, the peril insured against are different.
 T h e r e is also No double insurance if the owner and the carrier separately insured the same
goods. The Carrier’s insurance interest is recognized under Section 15 of the Insurance Code

DOUBLE INSURANCE IN LIFE INSURANCE

There can be double insurance in life insurance but there can never be over-insurance.

The life of a person can be insured for any amount and it would still be inadequate because of the:
intrinsic value of life.

NO GENERAL PROHIBITION AGAINST DOUBLE INSURANCE

Under the Insurance Code, double-insurance is not prohibited.

By way of EXCEPTION, R.A. No. 10607 modified Section 64(f) of the Insurance Code by providing that the
insurance policy can be rescinded upon if two conditions are present:
(1) another insurance coverage is discovered; and
(2) the total insurance is in excess of the value of the property insured.

Strict interpretation of the provision indicates that the general rule is that taking other insurance
coverage is not prohibited provided that the total insurance is not in excess of the value of the
property insured.
Taking of another insurance policy over the same property may also be prohibited by stipulation in
what is known as the “Other Insurance Clause.”

The other insurance clause may appear in different forms. These include the following:
1. A condition that states that procurement of additional insurance without the consent of the
insurer renders void the policy ipso facto.
2. A provision that requires the insured to disclose the existence of any other insurance on the
property. Otherwise, the contract may be avoided for material concealment.
3. A warranty that there is no other existing insurance over the same property.

The standard fire policy used by insurance companies usually contains a condition that the insured shall
give notice to the insurer of any insurance or insurances already effected, or which may subsequently be
effected covering any property or properties and unless such notice is given and the particulars of such
insurance or insurances is stated, all benefits under the policy shall be forfeited.

RATIONALE.
The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance and thus
avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the
situation in which a peril like fire would be profitable to the insured.
The “Other Insurance Clause” prevents the increase of the moral hazard.

VALIDITY.
The validity of a clause in a fire insurance policy to the effect that the procurement of additional
insurance without the consent of the insurer renders i p s o f a c t o the policy void is well-settled.

The law also authorizes insurance companies to terminate the contract at any time, at its option, by
giving notice and refunding a ratable proportion of the premium.

It was held that an additional insurance, unless consented to, or unless a waiver was shown,
i p s o f a c t o avoided the contract, and the fact that the company had not, after notice of such
insurance, cancelled the policy, did not justify the legal conclusion that it had elected to allow it to
continue in force.

The terms of the policy which required the insured to declare other insurances, the statement in
question must be deemed to be a statement (warranty) binding on both insurer and insured, that
there was no other insurance on the property. The annotation must be deemed to be a warranty that
the property was not insured by any other policy.

Violation thereof entitled the insurer to rescind. Such misrepresentation is fatal. The materiality of
non-disclosure of other insurance policies is not open to doubt.

“Other Insurance Clause” cannot be invoked if the other insurance is only an additional insurance to
cover the remaining value of the goods.

The existence of another insurance is a material fact that should have been disclosed to the insurer.
Section 26 of the Insurance Code defines concealment as “a neglect to communicate that which a party
knows and ought to communicate.” Section 27 also of the Insurance Code, provides further that “a
concealment whether intentional or unintentional entitled an injured party to rescind a contract of
insurance.
The insured may recover from the insurer. The insurer cannot claim that there was material
concealment. The problem states that the face of the policy bore an annotation, “Co- insurance
declared.” This annotation is notice to the insurer as to the existence of other
insurance contracts on the property insured. The insurer should have inquired about the details of such
other insurance if it was really concern about them.

OVER-INSURANCE BY DOUBLE INSURANCE.

There is over-insurance if the insured takes out an insurance over the property insured in an amount
which is in excess of the value of his insurable interest.

Over-insurance may exist even if there is only one insurer and one policy
Over-insurance may likewise exist if there is double insurance.

It does not follow, however, that there will be over insurance if there is double insurance.
It does not follow, however, that there will be over insurance if there is double insurance.
In fact, there can be underinsurance even if there is double-insurance

The taking of another insurance without over-insurance is not a ground to rescind the policy under
Section 64.

RULES IN CASE OF OVER-INSURANCE BY DOUBLE INSURANCE

If there is over-insurance by double insurance, it is necessary to determine from whom and how much
can the insured recover. It is also necessary to determine the rights of the insurers.

In determining the rights of the insured, one indispensable consideration is that an insurance contract
is a contract of indemnity.

The insured cannot recover more than what he lost. The insured is not supposed to profit from his loss
even if he has two or more insurers.

This is true only with respect to property insurance because insurance over the life of a person is not a
contract of indemnity and there cannot be over insurance over the life of any person.

Section 96 of the Insurance Code provides the rules.

Where the insured in a policy other than life is over insured by double insurance:

Sec. 96 (a) The insured, unless the policy otherwise provides, may claim payment from the insurers in
such order as he may select, up to the amount for which the insurers are severally liable under their
respective contracts;

a.) Rules under above-quoted Section 96 will apply if there was prior consent of the insurers in
taking the insurance or double insurance is not prohibited in the policy even if the total
coverage is in excess of the value of the property.
Sec. 96 (b) Where the policy under which the insured claims is a valued policy, any sum received by him
under any other policy shall be deducted from the value of the policy without regard to the actual value
of the subject matter insured;

b.) The provision simply states that “where the policy under which the insured claims is an
unvalued policy, any sum received by him under any policy shall be deducted against the full
insurable value, for any sum received by him under any policy. Thus, the insurer will already
deduct the amount that was previously received by the insurer.

Sec. 96 (c) Where the policy under which the insured claims is an unvalued policy, any sum received by
him under any policy shall be deducted against the full insurable value, for any sum received by him
under any policy;

c.) Simply states that “in an unvalued policy, any sum received by the insurer under any policy shall
be deducted against the full insurable value, for any sum received by him under any policy.

COLLATERAL SOURCE RULE.

Under the collateral source mile, the defendant is prevented from benefiting from the plaintiff’s receipt
of money from other sources. Thus, the question is whether or not a person who recovered from an
insurer the proceeds of a life insurance policy, can still recover from other sources.

The collateral source rule is ‘predicated on the theory that a tortfeasor has no interest in, and therefore
no right to benefit from monies received by the injured person from sources unconnected with the
defendant’.

The collateral source rule is designed to strike a balance between two competing principles of tort law:
(1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and
2) a defendant is liable for all damages that proximately result from his wrong.

REINSURANCE

DEFINITION The Insurance Code defines reinsurance as follows:

A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or
liability by reason of such original insurance.

A reinsurance transaction is defined as “an agreement between two parties, called the
reinsured (ceding company, a term also often used — especially in relation to reinsurances on a
proportional basis) and reinsurer, respectively, whereby the reinsurer agrees to accept a certain fixed
share of the reinsured’s risk upon terms set out in the agreement.”

The original insurer, who, having issued a policy to an insured to cover a certain risk, desires to relieve
itself of part thereof. It cannot exist without an original insurance coverage.
NATURE.
Reinsurance is presumed to be a contract of indemnity against liability, and not merely against
damage. The peril insured against is the risk that the insurer will suffer a loss when it will be required to
pay the original insured. The risk of damage to the property insured by the insurer (reinsured) is not
assumed by the reinsurer although the same damage triggers the liability of the reinsurer.

DISTINCTIONS.
Reinsurance should be distinguished from double insurance which involves the same insured and the
same risk and subject matter. It should also be distinguished from the co-insurance clause under which
the risk of loss of a percentage in the value of the insured property is assumed by the insured himself.

The insured absorbs the loss to the extent of the deficiency in the insurance of the insured property .
The insurer will be liable only for such proportion of the loss or damage as the amount of the insurance
bears to the percentage of the full value of the property insured.

PARTIES. The parties to the contract are the original insurer (now called the reinsured) and the
reinsurer. The reinsured is also called the “ceding company” or the “direct-writing company.” A
reinsurer of the reinsurer is called “retrocessionaire”.

No privity between original insured and reinsurer. Section 100 of the Insurance Code makes it clear that
“the original insured has no interest in a contract of reinsurance.” Thus, the original insured cannot file
an action to recover from the reinsurer even if he has difficulty in recovering from the original insurer.

There is no privity between the original insured and the reinsurer. Reinsurance is therefore the
insurance of an insurance.

Direct recourse against reinsurer.

The original insured may be allowed to directly sue the reinsurer if the reinsurance policy contains a
stipulation p o u r a u t r u i in favor of the original insured which is allowed under the second paragraph
of Article 1311 of the New Civil Code.

The stipulation must be clear and unmistakable that such right is given to the original insured.
However, it is important to note that notwithstanding such provision allowing direct recourse by the
original insured against the reinsurer, the original insured’s right to sue the original insurer (re-insured)
directly and solely would not be affected or curtailed in any way. without prejudice to the insurer in turn
filing a third-party complaint against the reinsurer.

Reinsurer not a party in an action against the insurer. Since the reinsurer is not a party to the original
insurance contract, the reinsurer cannot intervene as matter of right in an action filed by the original
insured against the insurer.

Assignment.
The original insured may likewise directly sue the reinsurer if the insurer-reinsured assigns the proceeds
of the reinsurance policies to the original insured. This presupposes that the right to recover already
accrued and the original insured is the assignee of such right against the reinsurer.
FUNCTIONS. From the perspective of the original insurer (reinsured), the primary function of
reinsurance is to absorb those surplus amounts on each risk accepted by the reinsured which go
beyond what it can safely retain for its own account.

Reinsurance is a method whereby an original insurer distributes its risks by giving off the whole or some
portion thereof to another insurer, with the object of reducing the amount of its possible loss.

The significant functions include the following:

(1) It gives insurers the benefit of greater stability resulting from a widespread business. “By accepting
many risks and scaling down by reinsurance, all those that are larger than the normal carrying capacity
of the ceding company justifies, uncertainty is reduced through the application of the law of large
numbers.” In catastrophic losses, the reinsured is likewise protected.

(2) “Reinsurance enables insurers to have a single risk capacity to accommodate policies of large
amounts, with the knowledge that they can protect themselves against staggering losses by adjusting
risks in such a manner as to reduce the probability of serious inroad into their capital and surplus.”

KINDS
There are two basic types of reinsurance transactions, namely:
(1) Facultative Reinsurance; and (2) Automatic Treaty.

FACULTATIVE REINSURANCE.
Facultative reinsurance is an optional, case-by-case method used when the ceding company receives an
application for insurance. The reinsurer is under no obligation to accept the insurance. Its advantage is
flexibility since the reinsurance contract can be made to fit a particular case.

Each risk to be reinsured is individually offered to and accepted by or declined by the reinsurer.

The term “facultative” is used in insurance contracts merely to define the right of the reinsurer to
accept or not to accept participation in the risk insured. But once the share is accepted, the obligation is
absolute and the liability assumed thereunder can be discharged by one and only way — payment of the
share of the losses.

A facultative reinsurance contract is not the equivalent or a type of facultative obligation contemplated
under the New Civil Code. There is a facultative obligation under the New Civil Code when only one
prestation has been agreed upon but the obligor may render another in substitution.
There is no alternative nor substitute prestation in reinsurance.

TREATY.
Automatic treaty involves a prior agreement between the insurer and the reinsurer that the reinsurer is
compelled to accept what is being ceded by the insurer. It may also be provided that the insurer is
compelled to cede a particular type of insurance to the reinsurer.

Automatic treaty may be

1. “Quota-share Treaty,”
2. “Surplus-share Treaty,”
3. “Excess-of-loss Treaty,” and
4. “Reinsurance Pool”
Quota-shareTreaty—
The insurer and the reinsurer agree to share losses and premiums based on some proportion.

S u r p l u s - s h a r e T r e a t y — The reinsurer accepts in excess of the ceding company’s retention

limit up to a maximum amount.

E x c e s s - o f - L o s s T r e a t y — Losses in excess of the retention limit are paid by the reinsurer up

to some maximum limit. This is often used for catastrophic loss.

R e i n s u r a n c e P o o l — It is an organization of insurers that underwrites reinsurance on a joint

basis.

INSURABLE INTEREST.
Like all types of insurance contracts, the presence of insurable interest is indispensable in reinsurance.
In reinsurance, the reinsured has no interest in the property or life that is originally insured.

However, the requirement of insurable interest is complied with by the fact that the reinsured has
issued the original policy and accepted liability to its original insured.

PREMIUM.
The re-insured is required to pay the premium to the reinsurer. The same rules that apply ordinary
insurance policies apply to reinsurance contracts. Even with respect to reinsurance contracts, the re-
insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of reinsurance
issued by the re-insurance company is valid and binding unless and until the premium thereof has been
paid. However, the exceptions are applicable as well. Hence, the re-insured is also allowed to pay the
reinsurance premiums on installment basis.

OBLIGATION.
The reinsurer is obligated to pay the insurer or ceding company the moment the latter is exposed to
liability.
For example, if the building that was insured was destroyed and the original insured demanded payment
from the insurer, the insurer can in turn already demand payment from the reinsurer. At that time, the
reinsured is already exposed to the peril insured against in the reinsurance contract.

MEASURE OF LIABILITY.
Following the basic principle in insurance, a reinsurance contract is a contract of indemnity.
The extent of the liability of the reinsurer is measured by the extent of the liability of the reinsured
under the original policy and the amount of the reinsurance. The reinsurance cannot exceed the
amount of the liability of the insurer under the original policy. If the insurer entered into an amicable
settlement with the original insured with the latter accepting an amount lesser than the face value of
the original policy, the reinsurer should likewise be liable for such lesser amount even if the
reinsurance covers the entire face value of the policy. This is consistent with the characteristic of
reinsurance as an insurance against liability. The limit is the extent of the liability of the reinsured.
GOOD FAITH.
Reinsurance is also a contract u b e r r i m a e f i d a e . The doctrine of good faith that applies to direct
insurance is equally applicable to reinsurance.

It has been stated that the foundation of reinsurance are the following:

1. Full information, so far as possessed by the reinsured, as to the risk on which the reinsurance is
requested.
2. Full information as to the amount retained by the reinsured on the identical property which the
reinsurance is requested.

Duty to communicate.
Consistently, the reinsured has a specific obligation to disclose all representations and all the
knowledge and information he possesses under Section 98 which states:

SEC. 98. Where an insurer obtains reinsurance, except under automatic reinsurance treaties,
he must communicate all the representations of the original insured, and also all the knowledge and
information he possesses, whether previously or subsequently acquired, which are material to the risk.

Therefore, the insurer or ceding company in facultative reinsurance must communicate

(1) representations of the original insured, and
(2) knowledge and information he possesses whether previously or subsequently acquired. These facts
may affect the decision of the reinsurer to accept the ceded insurance.

“The duty of disclosure in reinsurance business is qualified by one important fact, that is, it is
transacted between parties who are equally experts in their business. This will sometimes relax to a
minor degree the duty imposed upon the reinsured.

Duty to communicate in a treaty.

In the case of an automatic treaty, the reinsurer will no longer decide whether or not to accept the
insurance.

Hence, representations or other information need not be disclosed by the insurer because the
reinsurer is compelled to accept what is being ceded. “Under this method, it may not be possible for
the reinsured to give full information as to the nature of the risk to be reinsured or its own retention, in
respect to every cession to be made under a treaty. To have to do this would go a long way to defeat the
objects for which this method of reinsurance was devised.

However, the duty of good faith remains in automatic treaty. “It is incumbent upon the reinsured to
make a full disclosure of all the material facts in the negotiations leading up to the completion of the
contract.”
In addition, in the general operation of the treaty, the reinsured is bound to exercise the utmost good
faith towards its reinsurer.

Thus, before entering into a treaty, the reinsurer is necessarily interested in acquiring general
knowledge of the reinsured and the latter must give information that relates to the following:
( i ) The standing and reputation of the reinsured;
( i i ) The experience and quality of its management;
The general underwriting policy of the reinsured;
( i v ) The company’s limit of retention and their relationship with the total premium income; and
( v ) The different areas from which the business is derived.

Bordereau.
In this connection, it is well to note that in a form called Bordereau, the policy form shows loss history
and premium history with respect to specific risks. The reinsurer uses this information to establish the
reinsurance premium.

CANCELLATION.
Reinsurance policies may be cancelled on the same grounds as ordinary insurance policies.
For example, there can be cancellation of policies on the ground of nonpayment of premium or material
misrepresentation or fraud.

Cancellation of the reinsurance treaty does not automatically result in the cancellation of the
reinsurance contracts entered into pursuant thereto. Reinsurance Contracts may continue despite the
cancellation of the treaty.