Part 1

The cooperative is amended at R.A. 9520

As per definition, cooperative is an autonomous and duly registered association of persons, with a
common bond of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required, patronizing their
products and services and accepting a fair share of risks and benefits of the undertaking in accordance
with the universally accepted cooperative principles.

Just like partnership, cooperative consist of persons which are the natural or artificial persons with a
common bond of interest and requires equitable contributions to the capital to have or gain profits.

The government agency that is in charge of the registration and regulation of cooperatives is called
Cooperative Development Authority (CDA) under the office of the President.

The objectives and goals of cooperative:

- The primary objective of every cooperative is to help improve the quality of life of its members.

To attain the primary objective, the cooperative shall aim to:

1. Provide goods and services to its members, to increase income, savings, investments,
productivity, and purchasing power
2. Provide optimum social and economic benefits
3. To teach efficient ways of doing things in a cooperative manner (providing seminars and trainings)
4. Propagate cooperative practices and new ideas in business
5. Allow the less privileged groups to increase their ownership
6. Cooperate with government, other cooperatives, and people-oriented organizations

Cooperative Principles (MADE VCC)

1. Member economic participation – Members are required to contribute funds to cooperative

2. Autonomy and independence – Cooperative is considered as self-help organization and can stand
on its own.
3. Democrative member control – Controlled by their members who actively participate in
management. (Members are the highest policy making body of a cooperative)
4. Education, training, and information – Cooperative gives training, education, or seminars to its
members including directors.
5. Voluntary and open membership – Persons who have the same principles can be a member of a
cooperative and is open to all.
6. Cooperation among cooperatives – Different groups consist of federation and union.
7. Concern for community – As to primary objective of the cooperative, it is to uplift the quality of
life or improve the quality of life of the members.
Part 2

Types of cooperatives

1. Credit Cooperative – Is one that promotes and undertakes savings and lending services. (Credit
cooperative profits from the interest that it collects from the members.)
2. Consumer Cooperative – Is one the primary purpose of which is to produce and distribute
commodities to members and non-members just like merchandising. (For members, it has a
discount and regular price for non-members.)
3. Producers Cooperative – Is one that undertakes production whether agricultural or industrial. It
is formed and operated by its members to undertake the production and processing of raw
materials or goods produced by its members into finished or processed products. (It involves
production of goods and are held for sale.)
4. Marketing Cooperative – Is one which engages in the supply of production inputs to members and
market their products. (Marketing cooperative gives inputs to the members process it into
finished product and the finished product will be bought by cooperative and will be sell in outside
customers.)
5. Service Cooperative – Involves rendering services and is one which engages in medical and dental
care, hospitalization, transportation, insurance, housing, labor.
6. Multi-purpose Cooperative – Combines two or more of the business activities of these different
types of cooperatives. (A cooperative can have two or more business activities that’s why it’s
called multi-purpose. But a single purpose cooperative can be converted into multi-purpose after
2 years of operation.)
7. Advocacy Cooperative – Is a primary cooperative which promotes and advocates cooperativism
among its members and the public through socially-oriented projects, education and training,
research and communication. (Promotes activities to reach out to its intended beneficiaries.)
8. Agrarian Reform Cooperative – Is one organized by marginal farmers majority of which are
agrarian reform beneficiaries for the purpose of developing an appropriate system of land tenure,
land development, land consolidation, or land management in areas covered by agrarian reform.
(The members in this cooperative are the beneficiaries of agrarian reform program of the
government.)
9. Cooperative Bank – Is one organized for the primary purpose of providing a wide range of financial
services to cooperatives and their members. (It exercises those functions of the bank by providing
wide range financial services.)
10. Dairy Cooperative – Is one whose members are engaged in the production of fresh milk which
may be processed and marketed as dairy products. (Involves the production of dairy products just
like fresh milk, cheese, and other processed dairy products.)
11. Education Cooperative – Is one organized for the primary purpose of owning and operating
licensed educational institutions.
12. Electric Cooperative – Is one organized for the primary purpose of undertaking power generation,
utilizing renewable sources, including hybrid systems, acquisition and operation of sub
transmission or distribution to its household members. (the purpose is to provide electricity to its
members.)
 13. Financial Service Cooperative – Is one organized for the primary purpose of engaging in savings
and credit services and other financial services. (it’s like cooperative bank.)
14. Fishermen Cooperative – Is one organized by marginalized fishermen in localities whose products
are marketed either as fresh or processed products.
15. Health Services Cooperative – Is one organized for the primary purpose of providing medical,
dental, and other health services.
16. Housing Cooperative – Is one organized to assist or provide access to housing for the benefit of
its regular members who actively participate in the savings program for housing. It is co-owned
and controlled by its members. (Building houses to its beneficiaries or having housing project
intended for the members who actively participate in the savings program for housing.)
17. Insurance Cooperative – Is one engaged in the business of insuring life and property of
cooperatives and their members. (Providing insurance to members and non-members.)
18. Transport Cooperative – Is one which includes land and sea transportation, limited to small
vessels, as defined or classified under the Philippine maritime laws. (Association of drivers may it
be tricycle operators, jeepney drivers, and bus drivers. In this cooperative, there is contribution
and the fund can be used for drivers to have loans for their vehicle and equipment.)
19. Water Service Cooperative – Is one organized to own, operate and manage waters systems for
the provision and distribution of potable water for its members and their households. (Providing
water systems to the members.)
20. Workers Cooperative – Is one organized by workers, including the self-employed, who are at the
same time the members and owners of the enterprise. Its principal purpose is to provide
employment and business opportunities to its members and manage it in accordance with
cooperative principles. (The principal purpose is to provide employment and business
opportunities to its members.)

A cooperative organized by minors shall be considered a laboratory cooperative and must be affiliated
with a registered cooperative. (Provided that the laboratory cooperative is affiliated with registered
cooperative. A cooperative organized by minors.)
Part 3

Categories of Cooperatives includes:

1. In terms of membership, cooperative shall be categorized into:

a. Primary – The members of which are natural persons. (Usually, some existing cooperatives
are primary cooperatives.)
b. Secondary – The members of which are primaries. (Secondary cooperatives are primary
members, and at least 10 primary cooperatives.)
c. Tertiary – The members of which are secondary cooperatives. (Tertiary cooperatives have
secondary members, and at least 10 secondary cooperatives.)

Secondary and Tertiary is called Federation.

2. In terms of territory, cooperative shall be categorized according to areas of operations which may
or may not coincide with the political subdivisions of the country. You can say that it is operated
in the municipality. You can categorize that cooperative is operating within a certain city or
province.

Organization and Registration of Cooperatives

A cooperative may be organized and registered for any or all of the following purposes: (These purposes
are discussed in the part of types of cooperatives.)

1. To encourage thrift and savings mobilization among the members. (It can be credit cooperative
or financial cooperative.)
2. To generate funds and extend credit to the members for productive and provident purposes. (It
can be credit cooperative, financial, or cooperative bank.)
3. To encourage among members systematic production and marketing. (In this part, marketing
cooperative is included or producers cooperative.)
4. To provide goods and services and other requirements to the members. (Can be consumer
cooperative.)
5. To develop expertise and skills among its members. (It can be advocacy, workers, and educational
cooperatives.)
6. To acquire lands and provide housing benefits for the members. (It can be agrarian or housing
cooperatives.)
7. To insure against losses of the members. (It can be insurance cooperative.)
8. To promote and advance the economic, social, and educational status of the members. (This is
the primary purpose of the cooperative.)
9. To establish, own, lease or operate cooperative banks, cooperative wholesale and retail
complexes, insurance and agricultural/industrial processing enterprises, and public markets. (It’s
the cooperative bank.)
10. To coordinate and facilitate the activities of cooperatives.
 11. To advocate for the cause of the cooperative movements. (It is the advocacy cooperative.)
12. To ensure the viability of cooperatives through the utilization of new technologies.
13. To encourage and promote self-help or self-employment as an engine for economic growth and
poverty alleviation. (It’s the workers cooperative.)
14. To undertake any and all other activities for the effective and efficient implementation of the
provisions of the Cooperative Code. (Included here are all of the categorized cooperatives.)

Organizing a Primary Cooperative

- Fifteen or more natural persons who are Filipino citizens, of legal age, having common bond of
interest and are actually residing or working in the intended area of operation, may organize a
primary cooperative. (In organizing a primary cooperative, the requirements are fifteen or more
and natural persons. Being a Filipino citizen, legal age, and working in the intended area of
operation is also required and must have a common bond of interest.)
• A single purpose cooperative may transform into a multipurpose or may create subsidiaries only
after two years of operations.
- All cooperatives applying for registration shall file with the CDA the Articles of Cooperation which
shall be signed by each of the organizers and acknowledged by them if natural persons (primary
cooperatives), and by the chairpersons or secretaries, if juridical persons (secondary or tertiary
cooperatives), before a notary public. (In organizing a primary cooperative, what needs to submit
to CDA is articles of cooperation, which shall be signed by each of the organizers and shall be
approved by all of the organizers. It also should be acknowledged by them if natural persons. In
secondary or tertiary, it can be acknowledged by chairperson or secretary.)
The articles of cooperation shall set forth:
1. The name of the cooperative which shall include the word cooperative.
2. The purposes or purposes and scope of business for which the cooperative is to be registered.
3. The term of existence of the cooperative. (Existence of cooperative can last for 50 years and
can be renewed for another 50 years.)
4. The area of operation and the postal addresses of its principal office.
5. The names, nationality, and the postal addresses of the registrants.
6. The common bond of membership. (It should be stated for example that it’s for the drivers,
farmers, fishermen, or residence of a specific municipality.)
7. The list of names of the directors who shall manage the cooperative.
8. The amount of its share capital, the names and residence of its contributors and a statement
of whether the cooperative is primary, secondary, or tertiary.

Economic Survey

- Every group of individuals or cooperatives intending to form a cooperative shall submit to the CDA
a general statement describing, among others the structure and purposes of the proposed
cooperative. Four copies each of the proposed articles of cooperation, bylaws, and the general
statement required under Article 11 of the Cooperative Code shall be submitted to the CDA. (The
documents that are required to submit is called Economic Survey.)
Minimum Subscribed and Paid-up Shares

- No cooperative, other than a cooperative union, shall be registered unless the articles of
cooperation is accompanied with the bonds of the accountable officers and a sworn statements
of the treasurer elected by the subscribers showing that at least twenty-five per centum of the
authorized share capital has been subscribed and at least twenty-five per centum of the total
subscription has been paid. In no case shall the paid-up share capital be less than fifteen thousand
pesos, except for multipurpose cooperative which should not be less than one hundred thousand
pesos. (In corporation, there is no minimum subscribed and paid-up. While in cooperative, at least
25% of the authorized share must be subscribed and 25% must have been paid.)
• The CDA shall periodically assess the required paid-up share capital and may increase it every five
years when necessary upon consultation with the cooperative sector and the National Economic
and Development Authority (NEDA).
Part 4

Minimum Paid-up Capital of Federation and Union

- The minimum paid-up share capital for any proposed federation or union shall be:
a. Secondary, for Federation is 500,000 pesos, for Union is not applicable. (Members are
Primary)
b. Tertiary, for Federation is 5,000,000 or feasibility study requirement (whichever is higher), for
Union is not applicable. (Members are Secondary)

• Federation means a cooperative of the members of which are primary cooperatives doing the
same line of business.
• Union refers to a cooperative that the members of which are registered cooperatives and
federations organized purposely to represent the interest and welfare of all types of cooperatives
at the provincial, city, regional, and national levels. (Can be a group of Secondary or Tertiary
Cooperative. Also, in Union it can be any line of business so that’s why there is no required
minimum paid-up.)

Common and Preferred Shares (A cooperative can classify its shares, which are common or preferred. In
preferred, it should not be more than 25%)

- The share capital of cooperative may consist of common share capital and preferred share capital
if the latter is provided for under the cooperatives’ Articles of Cooperation and by-laws. Should
the cooperative with to have common and preferred shares, statement to that effect should
appear in the Articles of Cooperation specifying the amount of shares to be offered for common
shares and for preferred share. However, it is recommended that only the common share be
offered. (Preferred share have rights and privileges. If the cooperative would like to issue a
preferred share, it must be expressly stated in the Articles of Cooperation and By-laws.)
- Should preferred share capital be offered, the rights and privileges of holders of preferred shares
shall be provided for in the by-laws of the cooperative.
- The preferred share capital shall not exceed 25% or ¼ of the total authorized share capital of the
cooperative.
- Share refers to a unit of capital in a primary cooperative, the par value of which may be fixed to
any figure not more than 1,000 pesos and a minimum of 100 pesos. The share of capital of a
cooperative is the money paid or required to be paid for the operations of the cooperative. The
method for the issuance of share certificates shall prescribed in its by-laws. (If you invest or if you
would like to be a member in a cooperative, what you buy or acquire is share.)

Certificate of Registration

- A cooperative formed and organized under this Code acquires juridical personality from the date
the CDA issues a certificate of registration under its official seal. (After complying with all the
 requirements of the law including the requirements of the Cooperative Development Authority,
what will be issued to you is not certificate of cooperation. Instead, what will be issued is
certificate of registration.)

- All applications for registration shall be finally disposed of by the CDA within a period of 60 days
from the filing thereof, otherwise the application is deemed approved, unless the cause of the
delay is attributable to the applicant (Approval by Inaction)

- In case of a denial of the application for registration, an appeal shall lie with the Office of the
President within 90 days from receipt of notice of such denial. The failure of the Office of the
President to act on the appeal within 90 days from the filing thereof shall mean approval of said
application (Approval by Inaction)

- A certificate of Registration issued by the CDA under its official seal shall be conclusive evidence
that the cooperative therein mentioned is duly registered unless it is proved that the registration
thereof has been cancelled.

By-laws

- Each cooperative to be registered under this Code shall adopt by-laws not inconsistent with the
provisions of the Cooperative Code. The by-laws shall be filed at the same time as the articles of
cooperation. The by-laws of each cooperative shall provide: (If you file your application for
registration, in the Articles of Cooperation, the By-laws must be included. The By-laws can not be
file after the issuance of your certificate of registration by the CDA, it should be at the same time.)
1. The qualifications for admission to membership and the payment to be made or interest to
be acquired as a condition for the exercise of the right of membership
2. The rights and liabilities of membership. (The members have limited liabilities. Their liabilities
are up to extent of their contributions.)
3. The circumstances under which membership is acquired, maintained and lost
4. The procedure to be followed in cases of termination of membership
Part 5

By-laws

5. The conditions under which the transfer of a share or interest of the members shall be
permitted. (The members can transfer their interests from one member to the other or from
member to non-member.)
6. The rules and procedures on the agenda, time, place and manner of calling, convening,
conducting meetings, quorum requirements, voting systems, and other matters relative to
the business affairs of the general assembly, board of directors, and committees
7. The general conduct of the affairs of the cooperative, including the powers and duties of the
general assembly, the board of directors, committees and the officers, and their qualifications
and disqualifications. (By-laws are internal rules and procedures of a cooperative.)
8. The manner in which the capital, may be raised and the purposes for which it can be utilized.
9. The mode of custody and of investment of net surplus
10. The accounting and auditing systems
11. The manner of loaning and borrowing including the limitations thereof
12. The method of distribution of net surplus in the form of dividends
13. The manner of adopting, amending, repealing, and abrogating by-laws
14. A conciliation of mediation mechanism for the amicable settlement of disputes among
members, directors, officers, and other committee members of the cooperative
15. Other matters incident to the purposes and activities of the cooperative

Amendment of Articles of Cooperation and By-laws

- Any provision or matter stated in the articles of cooperation and by-laws may be amended by 2/3
vote of all the members with voting rights, without prejudice to the right of the dissenting
members to exercise their right to withdraw their membership. (In the amendments of Articles of
Cooperation and By-laws, there is called withdrawal which is the right of the dissenting members
to withdraw their membership.)
- Amendments shall be indicated by the underscoring or otherwise appropriately indicating the
charge or charges made and a copy of the amended articles or amended by-laws duly certified
under oath by the cooperative secretary and a majority of the directors stating the fact that said
amendment or amendments to the articles of cooperation and by-laws have been duly approved
by the required vote of the members.
- The amendments shall take effect upon its approval by the CDA or within 30 days from the date
of filing thereof if not affected upon by the DA for a cause not attributable to the cooperative.

Division of Cooperative

- Any registered cooperative may, by a resolution approved by a vote of ¾ of all the members with
voting rights, present and constituting a quorum, resolve to divide itself into the two or more
 cooperatives. (If the members would like to divide a cooperative, the voting requirement is the
majority vote of the directors plus ¾ vote of the members.)

Merger and Consolidation of Cooperatives

- Two or more cooperatives may merge into a single cooperative which shall either be one of the
constituent cooperatives or the consolidated cooperative. No merger or consolidation shall be
valid unless approved by the ¾ vote of all the members with voting rights, present and
constituting a quorum of each of the constituent cooperatives at separate general assembly
meetings. The dissenting members shall have the right to exercise their right to withdraw their
membership. In any case, the merger or consolidation shall be effective upon the issuance of the
certificate of merger or consolidation by the CDA.

Cooperative Name

- The word “Cooperative” or “Kooperatiba”, shall be included in the name of the cooperative.

Limited Liability of Cooperatives

- A cooperative duly registered under the Code shall have limited liability. The members are liable
only to the extent of their contributions.

Cooperative Term

- A cooperative shall exist for a period not exceeding 50 years from the date of registration unless
sooner dissolve or unless said period is extended. The cooperative term, as originally stated in the
Articles of Cooperation, may be extended for periods not exceeding 50 years in any single instance
by an amendment of the articles of cooperation. No extension can be made earlier than 5 years
prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier
extension.

Powers of Cooperatives (After the registration of the cooperative, having the By-laws, name, and terms,
next is the powers of cooperatives. These powers include the express, implied, and incidental.)

- A cooperative registered under this Code shall have the following powers, rights, and capacities:
1. To the exclusive use of its registered name, to sue and be sued. (If there is a member who
resigned, withdraw, died, or transferred his share to another member, the cooperative will
not dissolve.)
2. Of succession. (Because it has a right of succession.)
3. To amend its Articles of Cooperation.
4. To adopt By-laws not contrary to law, morals or public policy, and to amend and repeal the
same.
5. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise
deal with such real and personal property as the transaction of the lawful affairs of the
cooperative may reasonably and necessarily require, subject to limitations prescribed by law
and the Constitution.
6. To enter into division, merger or consolidation. (The voting system for division and merger is
majority votes of the directors plus the ¾ votes of the members. In merger and consolidation,
there is right of withdrawal.)
Part 6

Powers of Cooperatives

7. To form subsidiary cooperatives and join federations or unions.

8. To avail of loans, be entitled to credit and to accept and receive grants, donations and
assistance from foreign and domestic sources, subject to the conditions of said loans, credits,
grants, donations or assistance that will not undermine the autonomy of the cooperative.
9. To avail of preferential rights granted to cooperatives under Republic Act. 7160, otherwise
known as the Local Government Code, and other laws, particularly those in the grant of
franchises to establish, construct, operate and maintain ferries, wharves, markets or
slaughterhouses and to lease public utilities, including access to extension and on-site
research services and facilities related to agriculture and fishery activities.
10. To organize and operate schools in accordance with Republic Act. 9155, Governance of Basic
Education Act of 2001 and other pertinent laws.
11. To exercise such other powers granted by the Cooperative Code or necessary to carry out its
purpose or purposes as stated in its Articles of Cooperation.

Membership

- Member includes a person either natural or juridical, who adhering to the principles set forth in
the Corporative Code and in the Articles of Cooperative, has been admitted by the cooperative as
member. (In primary cooperative, the members are only natural persons. In secondary and
tertiary cooperative, the members are juridical.)

Dual Membership

- A prospective cooperative may include in its By-laws as provision not allowing members of
existing cooperatives of the same type within the same area of operation to be a member of
proposed cooperative unless they resign from the former. (The dual membership can be
forbidden)

General Assembly

- Shall mean the full membership of the cooperative duly assembled for the purpose of exercising
all the rights and performing all the obligations pertaining to cooperatives, as provided by the
Cooperative Code, its Articles of Cooperation, and By-laws. (Group of members is called General
Assembly. It is the highest policy making body of a cooperative.)

Kinds of Member
 1. Regular members – Member is one who has complied with all the membership requirements and
entitled to all the rights and privileges of membership.
2. Associate members – Is one who has no right to vote nor be voted upon and shall be entitled only
to such rights and privileges as the By-laws may provide.

- An associate who meets the minimum requirements of regular membership, continues to

patronize the cooperative for 2 years, and signifies his/her intention to remain a member shall be
considered a regular member.
- A prospective member of a primary cooperative must have completed a Pre-Membership
Education Seminar (PMES). (Before someone can be a member, they should first have a seminar
before they become a member.)
- An applicant for membership shall be deemed a member after approval of his membership by the
board of directors and shall exercise the rights of member after having made such payments to
the cooperative in respect to membership or acquired interest in the cooperative as may be
prescribed in the By-laws.
- In case membership is refused or denied by the board of directors, an appeal may be made to the
general assembly and the latter’s decision shall be final. For this purpose, the general assembly
may opt to create an appeal and grievance committee, the members of which shall serve for a
period of 1 year and shall decide appeals on membership application within 30 days upon receipt
thereof. If the committee fails to decide within the prescribed period, the appeal is deemed
approved in favor of the applicant. (The General Assembly is the one who will appoint the
Electoral and Audit Committee and other committee can be appoint by the board of directors.)
- A member shall be liable for the debts of the cooperative to the extent of his contribution to the
share capital of the cooperative.

Membership in Federation and Union

- The minimum members in Secondary Cooperative under Federation are 10 primary coops and
under the Union is 15 primary coops. In Tertiary Cooperative, the minimum members under the
Federation are 10 secondary coops and under Union is 15 secondary coops.

Termination of Membership

1. A member of a cooperative may, for any valid reason, withdraw his membership from the
cooperative by giving a 60-day notice to the board of directors. Subject to the By-laws of the
cooperative, the withdrawing member shall be entitled to a refund of his share capital
contribution and all other interests in the cooperative. However, such fund shall not be made if
upon such payment the value of the assets of the cooperative would be less than the aggregate
amount of its debts and liabilities exclusive of his share capital contribution. (There is limitation
on buying the share of one member, it is up to 10% of capital share. This is voluntary termination
by the General Assembly)
 2. The death or insanity of a member in a primary cooperative, and the insolvency or dissolution of
a member in a secondary or tertiary cooperative may be considered valid grounds for termination
of membership. In case of death or insanity of an agrarian reform beneficiary-member of a
cooperative, the next-of-kin may assume the duties and responsibilities of the original member.
(Termination by the death or insanity of a member.)
3. Membership in the cooperative may be terminated by a vote of the majority of all the members
of the board of directors for any of the following causes: (A member can be terminated by the
board of directors by the vote of the majority.)
a. When a member has not patronized any of the services of the cooperative for an
unreasonable period of time as may be previously determined by the board of directors.
b. When a member has continuously failed to comply with his obligations.
c. When a member has acted in violation of the By-laws and the rules of the cooperative
d. For any act or omission injurious or prejudicial to the interest or the welfare of the
cooperative.

- A member whose membership the board of directors may wish to terminate shall be informed of
such intended action in writing and shall be given an opportunity to be heard the said board makes
its decision. The decision of the board shall be in writing and shall be communicated in person or
by registered mail to said member and shall be appealable within 30 days from receipt thereof to
the general assembly whose decision shall be final. The general assembly may create an appeal
and grievance committee whose members shall serve for a period of 1 year and shall decide
appeals on membership termination. The committee is given 30 days from receipt thereof to
decide on the appeal. Failure to decide within the prescribed period, the appeal is deemed
approved in favor of the member. Pending a decision by the general assembly, the membership
remains in force. (A termination required hearing and notice and the member who will be
terminated must be informed.)

Effect of Death of a Member

- Where a member of cooperative dies, his heir shall be entitled to the shares of the decedent
provided that the total shareholding of the heir does not exceed 10% of the share capital of the
cooperative and that the heir is qualified and is admitted as members of the cooperative. If the
heir fails to qualify as a member or where his total shareholding exceeds 10% of the share capital,
the share or shares excess will revert to the cooperative upon payment to the heir of the value of
such shares.
Insurance

- Agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. (Normally, if there is contract,
there is always consent object and consideration. The object of insurance is the indemnity against
loss, damage or liability arising from contingent event. The consideration are the premiums, it is
the monthly payment in insurance.)
- A contract of suretyship shall be deemed to be an insurance contract, within the meaning of this
Code, only if made by a surety who or which, as such, is doing an insurance business as hereinafter
provided. (Contract of suretyship is to answer for liability of another. It is different from
guarantee, guarantee is there is only payment if the principal failed to pay. Also, the suretyship is
joint and solidary liable to the obligation.

Doing an Insurance Business or Transacting an Insurance Business

1. Making or proposing to make, as insurer, any insurance contract. (If you are proposing or making
insurance contract as an insurer, you are doing an insurance business.)
2. Making or proposing to make, as insurer, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety. (If you usually do
insurance contract as a surety, you are engaged doing insurance business.)
3. 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. (Doing any kind
of business including reinsurance. Reinsurance happens when insurer is the one who insure to the
person insuring, the insurer can make his own insurer in case of loss.)
4. Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.

Parties

1. Insured (The one who pays the premium to insurer, so that, in case of loss, insurer will be the one
to carry the loss and not the insured.)
2. Insurer (Is the one who handles the payment of insured and the one who will carry the loss in case
there is any.)
3. Beneficiary

- Anyone except a public enemy may be insured. (Public enemy is a citizen of a country in which
the Philippines is at war.)

Characteristic of Insurance Contract

1. Risk Distributing Device

 • Not risk-shifting. (The risk cannot be shift to insurer, he distributes potential liability among group
of persons bearing the same risk. Insurer is not totally the one who carry the risks, instead, he
distributes it in insured.)

2. Contract of Adhesion
• Drafted only by one party in a take it or leave it basis where the other party has a little opportunity
to bargain or alter the contact. (In contract of insurance, there is a form wherein it consists of the
terms and conditions, the specific amount, the amount of premiums, and is ready to be signed by
the one who is insuring. The contract of adhesion is interpreted in favor of the insured.)

3. Aleatory Contract
• Aleatory contract value to either or both parties depend on chance or future events (Insurer will
only pay if the contingent event will happen.). The monetary values of the parties’ performance
are unequal (Because the premium is small but indemnity is huge. Premium is distributed among
group of persons bearing the same risk.)

4. Contract of Indemnity
• Insurers pay no more than the actual loss suffered (you will only be paid based on how much loss
you suffered. Insured cannot profit in contract of insurance.). Purpose is to maintain status quo
because you can’t profit in contract of insurance except life insurance and personal accident
insurance because the value of life is immeasurable.

5. Uberrima Fides Contract

• It is a contract of utmost good faith wherein It is necessary to have a full disclosure. The insured
must disclose all material facts relative to the risk.

6. Personal Contract
• A contract of insurance is a personal contract. Personal contract only binds the parties and will
not attach to the property.

7. Executory and Conditional

• Executory because insured have partial performance because he pays premium. Conditional
because insurer will perform only if the condition will happen.

Elements

1. The insured has an insurable interest.

2. The insured is subject to a risk of loss by the happening of a designated peril.
3. The insurer assumes the risk.
4. Such assumption of risk is part of a general scheme to distribute the actual losses among a large
group of persons bearing similar risk.
5. In consideration of the insurer’s promise, the insured pays a premium.
Insurable interest

- Legal right to insure any type of property or any event that may cause a financial loss or create a
legal liability. (You should have value to that object or in someone’s life before you can insure it.
It’s either financial loss if the person died or the property got lost.)

Every Person has an Insurable Interest in the Life and Health (Insurable Interest can directly go to Love
and Affection, Blood and Marriage Relationship, and Financial Interest or Legal Liability.)

a. Of himself, of his spouse and of his children.

b. Of any person on whom he depends wholly or in part of education or support, or in whom he has
a pecuniary interest.
c. 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.
d. Of any person upon whose life any estate or interest vested in him depends.

Insurance Interest in the Life and Health

- Beneficiary in a life insurance is revocable unless waived. Beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing
about the death of the insured. (Life insurance should be intentional action. If your wife is your
beneficiary and she killed you, the life insurance will not be given to her.)

Insurable Interest in Property

- Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify or directly injured the
insured, is an insurable interest.
- It may consist of:
a. An existing interest (For example is you have a car and you use it for business. If the car got
lost, you will have a business loss.)
b. An inchoate interest founded on an existing interest (The asset is not directly yours but you
have an inchoate interest.)
c. An expectancy, coupled with an existing interest in that out of which the expectancy arises
(For example is you are a stockholder in a corporation, if the corporation got dissolved, you
will have an asset after the distribution and you can insure it.)
- Carrier or depository of any kind has an insurable interest in a thing held by him. (Any other
company engaged in delivery services, they can insure the object that they carry so if happen that
it got lost, the loss will be bear by the insurance company.)
- Measure of an insurable interest in property is the extent to which the insured might be damnified
by loss or injury thereof. (You cannot profit in insurance contract. The amount of what you
suffered is the amount that will give back to you.)
 - No contract or policy of insurance on property shall be enforceable except for the benefit of some
person having an insurable interest in the property insured. (You can’t insure a property without
having insurable interest because that will be form of gambling.)

Existence of Insurable Interest

Life or Health Insurance – Must exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs.

Property Insurance – Must exist when the insurance takes effect, and when the loss occurs, but need not
exist in the meantime.

General Rule: A change of interest in any part of a thing insured unaccompanied by a corresponding
change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in
the thing and the interest in the insurance are vested in the same person.

Exception:

1. Life, accident, and health insurance.

2. Change of interest in a thing insured, after the occurrence of an injury which results in a loss.
3. Change of interest in one or more of several distinct things, separately insured by one policy.
4. Change of interest, by will or succession, on the death of the insured.
5. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly
insured to the others.

Types

1. Health – Pays for medical expenses. (If the insured got health problem, the insurance company
will be the one to pay the medical expenses.)
2. Disability – Insures earned income against risk of disability making working impossible. (If you got
in to accident, and making working impossible, the insurance company will pay your income.)
3. Casualty – Written to cover the loss that is a direct result of an accident.
4. Life – Insurer agrees to pay money upon the insured’s death in exchange for payment of
premiums.
5. Property – Provides protection against most risk to property, open or named. (All of the risk that
can happen to the property can be insured. Open property insurance refers peril like fire, flood,
lightning, or storm. While in named, it refers to the insurance company will be only liable if what
is included in insurance contract happens.)
6. Liability – Very broad superset that covers legal claims against the insured. (You can insure in any
liabilities that can happen.)
7. Credit – Repays some or all of a loan back when certain things happen to the borrower.

Classes under Insurance Code

Life Insurance is insurance on human lives and insurance appertaining thereto or connected therewith.
(Life insurance is connected to life. You can insure your own life or the life of other people as long as you
have insurable interest in others life.)

• Suicide – Will relieve the insurer from liability unless:

a. It occurs after 2 years from the date of issue or last reinstatement.
b. Insured is insane.

Group Life Insurance

- Life insurance for a group of people like employees and officers. (It’s usually done by some
companies because they will have a business loss or their operation will stop if there is a
widespread peril. It is normally offered as flexible product wherein it consists of a lot of inclusions
like life, health, accident, or casualty.

Industrial Life Insurance

- Industrial life insurance as used in this Code shall mean that form of life insurance under which
the premiums are payable either monthly or oftener, if the face amount of insurance provided in
any policy is not more than five hundred times that of the current statutory minimum daily wage
in the City of Manila. Normally, this usually done in minimum wage employees that doesn’t have
the capability to buy an insurance. The amount of payment in industrial life insurance is low and
it can be done daily but their insurance is very limited.

Marine Insurance

- An insurance against loss of or damage to anything related to bridges, tunnels, and other
instrumentalities of transportation. Vessels, crafts, aircraft, vehicles, goods, freights, and
merchandise, disbursements, profits, and moneys are also included in marine insurance. Under
this insurance are also the jewelries that will travel through seas.

Fire Insurance

- Insurance against loss by fire, lightning, windstorm, tornado, or earthquake and other allied risks,
when such risks are covered by extension to fire insurance policies or under separate policies.
- Alteration in the use or condition of a thing insured limited by the policy without the consent of
the insurer and increasing the risks, entitle an insurer to rescind a contract of fire insurance.

Casualty Insurance
 - Insurance covering 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 is not limited to, employer’s liability insurance,
motor vehicle liability insurance, plate glass insurance, burglary and theft insurance.

Compulsory Motor Vehicle Liability Insurance

- Two main components – The liability of public utility vehicle and owners of motor vehicles in case
of liability for death or injury to third parties. If you got someone in to accident using your vehicle,
you should have compulsory motor vehicle liability insurance because all of the public utility
vehicle owners and motor vehicles owners are required to have this insurance. No fault
indemnity, if you got someone in to accident, the victim will claim 15,000 pesos without the needs
to prove fault on the part of the vehicle owner.

Suretyship

- An agreement whereby a party called 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 oblige.
It includes official recognizances, stipulations, bonds, or undertaking issued by any company. It is
joint and several with the obligor.

Variable Contracts

- Any policy or contract on either a group or on an individual basis issued by an insurance company
providing for benefits or other contractual payments or values thereunder to vary so as to reflect
investment results of any segregated portfolio of investments or of a designated separate account
in which amounts received in connection with such contracts shall have been placed and
accounted for separately and apart from other investments and accounts. No foreign insurance
company shall be authorized to issue, deliver, or sell any variable contract in the Philippines,
unless it is likewise authorized to do so by the laws of its domicile. Variable universal life (VUL) is
a type of permanent life insurance policy with a built-in savings component that allows for the
investment of the cash value.

Perfection of the Contract of Insurance

- Signed insurance application is merely an offer to enter into a contract. (After you signed, there
is no automatically contract of insurance. Your signing of contract of insurance is merely an offer
to enter into a contract. The perfection of insurance follows the Cognition Theory wherein when
the insurer will communicate to you the acceptance through the issuance of policy.). It is generally
consensual unless otherwise stipulated.

Cover Notes
 - Cover notes may be issued to bind insurance temporarily pending the issuance of the policy.
Within 60 days after issue of a 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.

Rescission of Insurance Contracts

- Rescission is cancellation of insurance contracts and with that, insurer will not be liable. The
common grounds are concealment and misrepresentation, and the effects is that the insurer will
not be liable and the return of the premiums paid. This made by judicial or extra-judicial.

Concealment

- Neglect to communicate that which a party knows and ought to communicate. It is intentional or
unintentional. All facts within his knowledge which are material to the contract and as to which
he makes no warranty, and which the other has not the means of ascertaining. Materiality refers
to probable and reasonable influence of the facts upon the party to whom the communication is
due.

Misrepresentation

- Misrepresentation refers to the facts that fails to correspond with its assertions or stipulations.
Misrepresentation can be done before or at and not after because it will not be effective to the
decision of the insurer.

Claims Settlement and Subrogation

- Payment upon occurrence of the risk or peril insured against. If the event happened, the insurance
company must pay you. Subrogation is a legal technique by which one party steps into the shoes
of another so as to have the benefit of the latter’s rights and remedies against a third party. It’s
like assignment except that it can occur without agreement of the parties.