IN 1906 Act 1459 was passed to introduce a way to organize collective efforts of individuals desiring to enter in business endeavors. Thus was born a person called corporation.
According to the said law, a corporation is “an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.” Effectively, a group of persons becomes one distinct person once registered with the Securities and Exchange Commission (SEC) as a corporation.
Being a juridical entity, a corporation has a personality separate and distinct from its stockholders. As each human being has a personality different from other human beings, so has a corporation. Our corporation law has created this corporate being to shield human beings’ business affairs from their personal affairs. Hence, the stockholders of an insurance company may not mix their personal interests with the company’s business transactions.
Because of its impact on the overall economy, an insurance business can be operated only by corporations and similar organizations such as partnerships, associations, cooperatives and government-owned or -controlled corporations. Since the passage of Republic Act (RA) 10607, an individual acting alone has been disallowed to act as an insurer. Thus, only duly registered insurance corporations can be granted a license to engage in insurance activities.
Registration is different though from licensing. Registration with the SEC does not mean the company is already authorized to conduct insurance business. It merely attains corporate personality. In a manner of speaking, the certificate of registration is merely the birth certificate of the company.
While a birth certificate gives a person his identity, it does not guarantee his exercise of certain privileges, like driving a car. A birth certificate will not automatically allow a person to drive in public places. That person must first apply for a driver’s license and prove his qualifications before he can exercise the privilege to drive a vehicle. The same is true for an insurance company. Aside from its corporate registration, it must also obtain a license from the Insurance Commission (IC) by complying with certain financial and legal requirements in accordance with the Insurance Code.
As licensed insurance corporations proliferated, so are the relationships among them just like relationships among human beings. A corporation once born (incorporated) can conceive corporate children called subsidiaries who may call themselves sister companies.
As subsidiaries grow, a corporate family is formed called group of companies with the parent or holding company as the head of the family. Corporate marriages (mergers and consolidations) are also becoming a trend. The analogy can be found anywhere from corporate birth (incorporation) to corporate hospitalization (rehabilitation) and corporate death (liquidation, dissolution and winding up). Some liquidated companies even attempt to undergo corporate resurrection or reincarnation.
Once a person parts with his money to form or invest in an insurance corporation, his control with his money diminishes. His money is now subject to the collective decision of all stockholders and more frequently to the actions of their agent, the board of directors. His money is now also subject to the regulation of the government through the IC since an insurance business is imbued with public interest.
For instance, when a holding company’s insurance company subsidiary continuously fails to maintain the financial requirements under the Insurance Code, the insurance commissioner may declare the said subsidiary under conservatorship, receivership, or liquidation.
Under the corporate family, the parent company can sell its interest (shares) in the subsidiary but the former cannot sell for its own account or appropriate the latter’s own separate assets. The parent company can get assets from the subsidiary only by way of dividends declared by the latter whenever it has retained earnings available or by way of liquidating dividends in case of liquidation. A parent company has to respect the separate personality of the subsidiary.
Therefore, in case the subsidiary is declared under conservatorship, the parent company has to give way to the decision of the subsidiary’s conservator and the insurance commissioner. This possibility must be accepted by the investor the moment he parts with his money.
Even so, there are certain instances where this separate personality need not be respected, and in fact, may be disregarded. Because of the complex relationships that could arise among corporations and their stockholders, our judiciary adopted the doctrine of piercing the veil of corporate fiction.
While it is true that the corporation is separate and distinct from its stockholders, this corporate fiction can be pierced and the courts can treat them as one. This is usually done to avoid fraud, irregularities, violations of tax laws, or in cases where the corporate fiction is being utilized to cause injustice and prejudice to the public.
Also, under Section 296 of RA 10607, “every holding company and every controlled person within a holding company system shall be subject to examination by order of the commissioner if he or she has cause to believe that the operations of such persons may materially affect the operations, management or financial condition of any controlled insurer with the system and that he is unable to obtain relevant information from such controlled insurer.” This gives the insurance commissioner the authority to look into the whole corporate family for the purpose of examining its insurance operations.
Together with the profit motive, these factors must be considered by a responsible investor contemplating to enter the insurance business. Insurance continues to be a very profitable business if capitalized and managed well. Hence, the people composing it must match this profit opportunity with good corporate governance.
Good governance is the mark of a truly successful insurance company. To meet the public’s high expectations, insurance companies must infuse not only adequate capital but more so with sufficient human talent and integrity.
Whatever the legal connotation of insurance corporations, they are still governed by human beings. After all, insurance is a business by human beings for human beings.
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Atty. John A. Apatan is presently the chief of the Conservatorship, Receivership and Liquidation Division of the Insurance Commission.