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When insurance fails to deliver
(Article published in the June 25, 2001 issue of TODAY, Business Section)

That almost everyone with some money to spare has at one time or another bought life insurance is both a tribute to the vim, vigor and vitality with which the industry has been putting its product in the market, as well as a testimony to the fundamental utility of life insurance for everybody. Without any exaggeration, life insurance is, or ought to be, a part of nearly every well-thought out estate plan.

The core promise of life insurance is protection. Protection against what? Certainly not against death (otherwise, the product should be called "death insurance") but against the unwanted financial consequences of death on the living, such as, the disruption of revenue flows into the insured’s family, the claims of creditors who had extended loans based on the insured’s earning capacity, the demands of the tax collector who must be paid the estate tax ordinarily within six months from the insured’s death as well as the urgent living expenses, education needs, support and maintenance requirements of those left behind.

Surely, these financial requirements can be met by other financial products and services. But the unique feature of life insurance setting it apart from all the rest in the estate planner’s tool box is its ability to deliver on its promise from the very first instant it comes into effect. Savings plans, accumulation trusts, money market investments, mutual fund shares, and all other financial products need the lapse of reasonable time to bring forth, if at all, their promised fruits. Life insurance, alone, acts like an umbrella and protects the insured as soon as it is opened. The minute an insurance policy takes effect, it is capable of providing the contracted proceeds.

The crucial question, therefore, is when an insurance policy takes effect. Unfortunately, this is not a detail that is sufficiently stressed by the insurance advisor and, consequently, not paid attention to by the insured. The case of Perez v. Court of Appeals, G.R. No. 112329, promulgated on 28 January 2000 shows the importance of the exact date when a life insurance policy takes effect.

Perez, although already insured for Php 20,000 with an insurance company since 1980, applied for additional coverage of Php 50,000 on October 20, 1987 after having been convinced to do so by the insurance company’s agent. He accomplished the application form, paid the incremental premium, underwent the required medical examination and adequately passed it. In accordance with procedures of the insurance company, his application and supporting documents were forwarded to the company’s office in the province where he lived and the office was supposed to forward the papers forthwith to the head office in Manila.

On November 25, 1987, nearly one month after completing all that was required of him by the insurance company for the issuance of his policy, Perez died. He was riding in a banca which capsized during a storm. It turned out that at the time of his death, Perez’s application and other papers were still in the company’s office at the province and so the agent took it upon himself to bring them to Manila where they were received by the head office on November 27, 1987. Unaware that Perez had already died, the head office issued the corresponding life insurance policy five days later.

When the widow claimed the proceeds from the insurance company, the latter paid the proceeds only of the original policy of Php 20,000 and refunded the premiums paid on the additional coverage. The question before the courts was whether a contract of life insurance, to the extent of the additional coverage applied for, existed between Perez and the insurance company before his death.

The Supreme Court decided the issue on the basis of a provision in the application form signed by Perez which said that "there shall be no contract of insurance unless and until a policy issued on this application and that the policy shall not take effect until the first premium has been paid and the policy has been delivered and accepted by me/us in person while I/we are/am in good health". Taking the application as the offer and the issuance of the policy as the acceptance required to constitute a meeting of the minds between the insurance company and the insured, the Court, very logically, ruled "no contract" since Perez died two days before the time the insurance company, at its head office, could have accepted and communicated its acceptance to Perez. In fact, when the policy was issued on December 2, 1987, it was beyond doubt that Perez may no longer be said to be in good health, much less able to accept delivery of the policy.

Decisions like Perez alienate my human heart from my legal mind. Although impeccably correct according to the law, Perez grates against the grain of real life. In the first place, it is unreal (although the insurance industry has been able to convince lawyers to so believe) to consider that the application for additional insurance is an offer from Perez. Life insurance is sold, not bought. In the natural order of things, it was the insurance company that offered additional insurance to Perez and it was Perez who, by signing the application, paying his premiums, undergoing and passing medical examination, in fact doing everything required of him by the insurance company for the issuance of the necessary policy, accepted the offer and made known his acceptance to the company at its provincial office.

Secondly, only lawyers, mad cows and demented women senators really bother to read the fine print of an application for life insurance. Crafted by insurance lawyers cramming every legal protection in each paragraph, an application for insurance is neither legible nor lucid. Ordinary people who have not set foot in Harvard and even those who passed the Upcat do not usually examine the application with a fine-toothed comb.

Finally, in this day and age of wireless communication, and even those in the early days of Perez in 1987 when DOS ruled the desktop, why should the transportation of paper, which serves no purpose than act as a medium for the storage of though and consent, be more important than the fact of mutual agreement, or what lawyers love to say "meeting of minds"?

Law cannot be (although it has always been) lagging too far behind life. Our new legislature must buckle down to work as soon as it convenes in July. Either that, or our elected lawmakers should ride a banca during a storm.