Atty. Rondez' Notes On Insurance

NOTES ON INSURANCE
From the Lecture Notes of Atty. R. Rondez,

Bar Qs & As, and Other Review Materials on Insurance
NOTES ON INSURANCE between persons guilty of adultery or concubinage at the time
of the donation.”
WHAT LAWS GOVERN INSURANCE
3. Asia Life Insurance Co., an American corporation insured the life of
1. The laws governing insurance in the order of priority are: Constantino. The first premium covered the period up to September 26,
1942, after which no premium payments were made. By reason of the
(1) The Insurance Code, as amended by Batas Pambansa Blg. 872 Japanese occupation, the insurer had to close its offices until 1945.
(approved: June 12, 1985); Upon a subsequent claim, the insurer refused to pay due to non-
(2) In the absence of applicable provisions, the Civil Code; payment of the premium. The beneficiary maintains that the non-
(3) In the absence of applicable provisions of the Insurance Code and payment should be excused by reason of war. HELD: Since the law is
the Civil Code, the general principles on the subject in the United did not provide for the situation and the fact that the law on insurance
States (Constantino v Asia Life Insurance, 87 Phil. 248). and the Civil Code was largely copied from the Civil Code of California,
the court applied the United States Rule that declares that the contract
NOTE: On August 15, 2013, RA 10607 was signed into law. It is a
is not merely suspended as held by New York Rule, but instead is
restatement of the Insurance Code [PD 612], with amendments. While
abrogated (revoked) by reason of non-payment of the premium, since
RA 10607 restated the whole law, most of the amendments touch only
payment of the same is peculiarly of the essence of the contract.
the administrative portion of the Code, and very little on the substantive
portion. WHAT IS A CONTRACT OF INSURANCE?
2. H applied for insurance with S Company with offices in Montreal, 1. A contract of insurance is an agreement whereby one undertakes for a
Canada. The application was mailed to S and on November 26, the consideration to indemnify another against loss, damage or liability
insurer gave notice of acceptance by cable. H never received the cable arising from an unknown or contingent event [Sec. 2(a), Insurance
and he died on December 20. The Insurance Code is silent as to Code].
acceptance by cable. HELD: The Civil Code shall apply and under Art.
1319, an acceptance made by letter shall not bind the person making Bar Question (2011)
the offer except from the time it came to his knowledge. There was no Q: In return for the 20 years of faithful service of X as a house helper to
valid contract as H died without knowing the acceptance of his Y, the latter promised to pay P100,000 to X’s heirs if he (X) dies in an
application (Enriquez v Sun Life Assurance of Canada, 41 Phil. 269). accident by fire. X agreed. Is this an insurance contract?
2.1. B, a married man obtained a life insurance policy designating A: No, since Y actually made a conditional donation in X’s favour.
his common law wife, C as beneficiary. Upon B’s death, his
widow contested the right of C to receive the proceeds. HELD: 2. A contract of suretyship shall also be deemed an insurance contract if
Since the Insurance Code did not contain a specific provision made by a surety who or which is doing an insurance business [Sec. 2
applicable to the case, the provisions of Art. 2012 of the Civil (a)].
Code provides, “any person forbidden from receiving any
donation under Art. 739 cannot be named as a beneficiary of a 3. Doing an insurance business or transacting an insurance business is:
life insurance policy by a person who cannot make a donation
to him.” Art. 739 declares as void those donations “made
1
NOTES ON INSURANCE
(a) Making or proposing to make as insurer, any insurance contract;  The concept is that the premiums that are paid are accumulated in a
pool from which payment of claims are to be obtained. As a basis, it is
(b) Making or proposing to make, as surety, any contract of suretyship assumed that the people contributing premiums are in excess of those
as a vocation and not as merely incidental to any other legitimate making claims resulting in a larger pool of money than the amounts
business or activity of the surety; being claimed.
WHAT ARE PURE AND SPECULATIVE RISKS?

(c) Doing any business including a reinsurance business, specifically
recognized as doing an insurance business within the meaning of  The risks that may be insured against are what are known as pure risks,
the Code; as opposed to speculative risks.
(d) Doing or proposing to do any business in substance equivalent to  A pure risk is whether a person will suffer or will not suffer a loss from
any of the foregoing in a manner designed to evade the provisions the occurrence of an event.
of this Code.
 A speculative risk is whether a person will profit or suffer a loss from the
3.1. The fact that no profit is derived from making of insurance occurrence of an event.
contracts, agreements, or transactions or that no separate or
direct consideration is received shall not be deemed conclusive INSURANCE IS RISK- DISTRIBUTING
to show that the making thereof does not constitute the doing
 Insurance is a risk-distributing device because when the insurer
or transacting of an insurance business.
assumes the risk, it is distributing potential liability in part, among others.
3.2. Philippine Health Care Providers v CIR (2009) has stated that:
 It is not risk shifting because the entirety of the risk of loss is not shifted
(1) Contracts of law firm with clients whereby in consideration to another.
of periodical payments, the law firm promises to present
NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE
such clients in all suits for or against them are not
insurance contracts;
What is the nature of a healthcare agreement?
(2) A contract by which a corporation, in consideration of a
In the case of Fortune Medicare, Inc. v Amorin (GR No.
stipulated amount, agrees at its own expense to defend a 195872; March 12, 2014), it was held to be in the nature
physician against all suits for damages for malpractice is of non-life insurance, which is primarily a contract of
one of insurance, and the corporation will be deemed as indemnity. Once the member incurs hospital, medical, or
engaged in the business of insurance. any other expense arising from sickness, injury or other
stipulated contingency, the health care provided must pay
WHAT IS THE CONCEPT OF INSURANCE? for the same to the extent provided under the contract.
 Insurance is a means by which one seeks to be covered against the The Court also interpreted an ambiguity in favour of the
insured allowing him to recover for his medical expenses
consequences of an event that may cause loss or damage.
incurred while abroad.
2
NOTES ON INSURANCE
1. It is an aleatory contract as the liability of the insured depends upon the
happening of a contingent event. It is not a wagering contract (Bar 2012 6. It is a contract of adhesion as insurance companies manage to impose
MCQ). upon the insured prepared contracts which the insured cannot change.
2. It is a contract of indemnity if it is a non-life insurance contract as

recovery must be commensurate to the loss. It is an investment or a 6.1. The first rule of construction is: In case there is no doubt as to
contract to pay a sum certain in money upon death if it is a life insurance the terms of the insurance contract, it is to be construed in its
contract as it is secured by the insured as a measure of economic plain, ordinary and popular sense.
security for him during his lifetime and for his beneficiary upon his death,
life not being subject to a valuation nor the loss being adjustable on any Illustration:
principle of indemnity, except when it is secured by the creditor on the P Bank obtained insurance against robbery which excluded
life of the debtor. loss by any criminal act of the insured or any authorized
representative. While transferring funds from one branch to
another, the insured’s armored truck was robbed. The driver
2.1. An employee earns P20,000 a month. Over a 10-year period, was assigned by a labor contractor with the insured, while the
he will receive P2,400,000. He obtains a 10-year life insurance security guard was assigned by an agency contracted by the
policy for P5,000,000. When the employee dies, his beneficiary insured. Both driver and guard were found to be involved. Can
makes a claim on the policy but the insurer refused to pay the the loss be excluded? HELD: the loss is excluded as while the
full amount, instead it offers to pay the amount that the driver and guard are assigned by labor contractors, they are
employee would have earned had he not died. The refusal of still within the term “authorized representative (Fortune
the insurer to pay is not valid because life insurance is a not Insurance v CA, 244 SCRA 308).
contract of indemnity.
Illustration 2:
3. It is a personal contract as an insurer contracts with reference to the
character of the insured and vice versa. It might be willing to make good Personal Accident policies providing payment for “loss of
the loss of a person by the destruction of his property, while it would hand.” The insurance policy defines it as amputation. Insured
altogether be unwilling to insure the same property if owned by another. has an accident resulting in a temporary total disability but hand
On the other hand, the insurance taken by one person will not apply to is not amputated. HELD: Insurer is not liable (Ty v First National
the interest of another person in the same property. Surety and Assurance Co., 17 SCRA 364). Note though in a
case where the policy provided for loss of both legs by
4. It is an executor and conditional contract on the part of the insurer amputation, a claim against the policy was allowed for a total
because upon happening of the event or peril insured against, the paralysis to be excluded is contrary to public policy, public good
conditions having been met, it has the obligation to execute the contract and sound morality, as it would force the insured to have his
by paying the insured. On the other hand, it is an executed contract on legs amputated to be able to claim on the policy (Panaton v
the part of the insured after payment of the premium. Malayan, 2 Court of Appeals, 783).
5. It is a contract of perfect good faith for both insurer and insured, but more
so for the insurer, since its dominant bargaining position imposes a 6.2. The second rule of construction is: If the policy or its terms are
stricter liability/ responsibility. doubtful, ambiguous, or uncertain, it is to be construed strictly
3
NOTES ON INSURANCE
against the insurer and in favour of the insured because the Insurance Policy which covers a public vehicle for hire. HELD:
latter has no voice in the selection of the words used, and the Insurer is liable as it was aware all along that the vehicle of the
language used is selected by the lawyers of the insurer. insured was a private vehicle (Fieldmans Insurance v De
Songco, 25 SCRA 70).
Bar 2012
Illustration 4:
An insurance contract is a contract of adhesion, which means
that in resolving ambiguities in the province of the insurance Denial of claim for benefit due to the death of Flaviano Landicho
contract, they are to be construed liberally in favour of the in a plane crash under GSIS Policy on the ground of non-
insured and strictly against the insurer who drafted the payment of the premium. HELD: The policy contained a
insurance policy. provision that the application for insurance is authority for GSIS
to cause the deduction of premium from the insured’s salary
Illustration: (Landicho v GSIS, 44 SCRA 7).
Warranty in a fire insurance policy prohibited storage of oils 6.3. The third rule of construction is: Provisions in the insurance
having a flash point of below 300 Fahrenheit. Gasoline is contract must be read in its entirety and the stipulation therein
stored. Is there a policy violation? HELD: The clause is cannot be segregated in determining the intention of the
ambiguous. In ordinary parlance, oil means lubricants – not parties. The provisions must be construed together to arrive at
gasoline. There is no reason why gasoline could not be their true meaning.
expressed clearly in the language the public can readily
understand (Que Chee Gan v Law Union Rock Ins. Co. Ltd., 98 Illustration:
Phils. 85).
An insurance policy covers loss due earthquake shock to two
Illustration 2: swimming pools and for which a premium was paid. In a rider
entitled Earthquake Endorsement, it stated that in
An action to recover the amount of P2,000 due to death by consideration of a premium, but without any amount filled in,
drowning where the policy provided for indemnity in the amount the company agrees to be liable for earthquake shock damage
of P1,000 to P3,000. HELD: The interpretation of the obscure for other properties, the policy provisions notwithstanding. They
stipulation in contract must not favour the one who caused the insured claims that the conflict between the policy and the rider
obscurity. Hence, judgment for an additional P2,000 was should be resolved in its favour. HELD: Only the pools are
affirmed (Del Rosario v Equitable Insurance and Casualty Co., insured against earthquake shock. The rider cannot be
8 SCRA 343). construed to prevail over the policy (Guld Resorts, Inc. v Phil.
Charter Insurance Corp., 458 SCRA 550).
Illustration 3:
7. It is consensual because it is perfected by the meeting of the minds of
Denial of a claim on the ground that the insured vehicle was a the parties. There must be concurrence of offer and acceptance. Unless
private “owner” type vehicle on the ground that the policy otherwise stipulated, the policy is not essential to the existence of the
issued to the insured was a Common Carrier’s Liability
4
NOTES ON INSURANCE
contract. It merely evidences the terms and conditions thereof [Campos, Q: The Civil Code adopts the Theory of Cognition, while the Code of
Insurance (1983)]. Commerce generally recognizes the Theory of Manifestation, in the
perfection of contracts. How do these two theories differ?
NOTE: UST Golden Notes
Consensual – acceptance of the offer perfects the contract of insurance. A: under the Theory of Cognition, the acceptance is considered to
effectively bind the offeror only from the time it came to his knowledge.
Insurance contracts through correspondence follow the “cognition Under the Theory of Manifestation, the contract is perfected at the
theory” wherein an acceptance made by letter shall not bind the person moment when the acceptance is declared or made by the offeree.
making the offer except from the time it came to his knowledge (Enriquez
v Sun Life Assurance Co. of Canada, GR No L-15774; November 29, WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT?
1920).
1. Existence of Insurable Interest – the insured should possess an interest
of some kind, susceptible of pecuniary estimation – known as “insurable
8. It is voluntary. As a general rule, it is voluntary in the sense that it is not interest.”
compulsory and the parties are free to incorporate such terms and
conditions they may deem convenient provided they are not contrary to 1.1. Generally, a person has insurable interest in the subject matter
law, morals, good customs, public order or public policy. when: He has such a relation or connection with, or concern in,
such subject matter that he will derive pecuniary benefit or
8.1. Exceptions: Insurance contracts particularly liability insurance, advantage from its preservation or will suffer pecuniary loss or
may be required by law in certain instances: damage from its destruction, termination, or injury by the
happening of the event insured against (Lalican v Insular Life
a. For motor vehicles [Secs. 386 – 402]; Ins. Co., 2009).
b. For employees [Arts. 168 – 184, Labor Code].
Bar 2000
As a condition to granting a license to conduct business or Q: BD has a bank deposit of half a million pesos. Since the limit
calling affecting the public safety or welfare [De Leon (2010)]. of the insurance coverage of the PDIC is only 1/1o of BD’s
deposit, he would like some protection for the excess by taking
Also, there are insurance which may arise by operation of law. out an insurance against all risk or contingencies of loss arising
Social insurance for members of the GSIS and for the from any unsound or unsafe banking practices including
employees in the private sector covered by the SSS is unforeseen adverse effects of the continuing crisis involving the
established by law. banking and financial sector in the Asian region. Does BD have
an insurable interest within the meaning of the Insurance Code
9. It is unilateral because it imposes legal duties only on insurer who of the Philippines?
promises to indemnify in case of loss.
A: Yes, BD has insurable interest in his bank deposit. In case
10. It is onerous there is a valuable consideration called the “premium.” of loss of said deposit, more particularly to the extent of the
 Theory of Cognition vs Theory of Manifestation (Bar 1997) amount in excess of the limit covered by the PDIC Act, BD will
be damnified. He will suffer pecuniary loss of P400,000, that is,
5
NOTES ON INSURANCE
his bank deposit of half a million pesos minus P100,000 which consideration. Specifically, it is perfected the minute the offeror learns of the
is the maximum amount recoverable from the PDIC. acceptance of his offer by the offeree. It must be assented to by both parties,
either in person or through their agents, and sol long as an application for
1.2. Exception: the expectation of benefit from the continued life of insurance has not been either accepted or rejected, it is merely a proposal or an
the person insured need not be of a pecuniary nature. offer to make a contract.
1.3. A person has insurable interest in life, health and property.
1.4. It is necessary because its absence renders th contract of Mere submission of the application without the corresponding approval of the
insurance void. This is based on the principle that insurance is policy does not result in the perfection of the contract of insurance (Bar 2011).
a contract of indemnity. If the insured has no interest, he will
not stand to suffer loss or injury by the happening of the event Q: On June 1, 2011, X mailed to Y Insurance, Co., his application for life
insured against. insurance, with payment for 5 years of premium enclosed in it. On July 21, 2011,
the insurance company accepted the application and mailed on the same day its
2. Risk of loss – the insured is subject to risk of loss through the destruction acceptance plus the cover note. It reached X’s residence on August 11, 2011.
or impairment of that interest by the happening of the designated risks. But, as it happened, on August 4, 2011, X figured in a car accident. He died a day
3. Assumption of Risk – the insurer assumes the risk of loss later. May X’s heir recover on the insurance policy?
A: No, since X had no knowledge of the insurer’s acceptance of his application

4. Scheme to Distribute Losses – such assumption is part of a general
before he died.
scheme to distribute actual loss among a large group of persons bearing
somewhat similar risks. Note: What is being followed in insurance contracts is what is known as the
“cognition theory.”
5. Payment of Premium – as a consideration for the insurer’s promise, the
insured makes a ratable contribution called a “premium” to the general Bar 2012
insurance fund.
For both the life insurance and property insurance, the insurable interest is
NOTE: Requisites for a Valid Insurance Contract (UST Golden Notes) required to be existing at the time of perfection and at the time of loss for property.
In life insurance, however, it need not be present at the time of loss occurs.
(1) Subject Matter in which the insured has an insurable interest;
(2) Consideration which refers to the premium payments based on CONSENT REQUIREMENTS WHEN INSURANCE IS TAKEN
probability of loss and extent of liability;
(3) Object and purpose which is the transfer and distribution of risk of 1. Generally, the law does not require the consent of the person insured
loss, damage or liability; and such has been considered as not essential to the validity of the
(4) Cause which refers to an event or peril insured against; and contract as long as there is insurable interest at the beginning.
(5) A meeting of minds of the parties upon all the foregoing essentials. 2. The consent of the husband is not necessary for the validity of an
insurance policy taken out by a married woman on her life or that of her
PERFECTION OF AN INSURANCE CONTRACT children. She may exercise all rights and privileges of an owner under a
policy.
An insurance contract is a consensual contract. Therefore, it is perfected the
moment there is meeting of minds with respect to the object and the cause of
6
NOTES ON INSURANCE
2.1. She may also insure her separate property without the consent 2.2. A pecuniary interest exists as between partners or between the
of her husband as she has the right to administer her own employer and employee.
property (Art. 145, Family Code). 3. Any person under a legal obligation to him for the payment of money,
3. The provision of the law regarding a minor 18 years of age or more has respecting property or services, which death or illness might delay or
been rendered moot and academic by RA 6809 which reduced the age prevent performance.
of majority to 18 years. 3.1. A creditor has insurable interest in the life and health of his
3.1. Regarding an unemancipated minor, he cannot enter into a debtor.
contract of insurance without the consent of his parents or 4. Any person upon whose life, any estate or interest vested in him
guardian and when he does, the contract is voidable (Art. 1327 depends
and 1390, Civil Code). 4.1. When usufructuary X allows Y to receive fruits of the land of the
3.2. If the original owner of a policy covering the life of a minor will former as long as he is alive, Y has insurable interest in the life
die ahead of the minor, all rights, title and interest in the policy of X, because the death of X will terminate his right and cause
shall automatically vest in the minor unless otherwise provided him damage.
in the policy.
WHEN MUST INSURABLE INTEREST IN LIFE EXIST?
HOW IS AN OFFER AND ACCEPTANCE MADE IN PROPERTY AND
LIABILITY INSURANCE Insurable interest in life must exist at the time of the effectivity of the policy and
need not exist at the time of the death of the insured as life insurance is not a
When the insured applies for the insurance, he is already making an offer to the contract of indemnity.
insurer, who may now accept, reject or make a counter-offer.
However, insurable interest of a creditor on the life of a debtor exists not only at
Acceptance occurs in the same manner as in life and health insurance. the time of effectivity but also at the time of the death of the debtor because in
this instance, it is a contract of indemnity. The interest of the creditor is capable
INSURABLE INTEREST of pecuniary estimation.
Insurable interest will exist when the insured has such a relation or connection WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE?
with, or concern in, such subject matter that he will derive pecuniary benefit or
advantage from its preservation or will suffer pecuniary loss or damage from its 1. A person has unlimited interest in his own life or that of another person
destruction, termination, or injury by the happening of the event insured against. regardless of whether or not the latter has insurable interest. Provided,
that if the beneficiary has no insurable interest, there is no force or bad
IN WHOSE LIFE AND HEALTH DOES A PERSON HAVE INSURABLE faith.
INTEREST IN 2. However, if a person takes out a policy on the life of another and names
himself as the beneficiary, he must have an insurable interest in the life
1. Himself, his spouse and of his children; of the insured.
2. Any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest. Bar 1984
2.1. Art. 195 of the Family Code specifies the persons obligated to Q: On January 4, 1983, Mr. P joined Alpha Corp. (Alpha) as President
support each other. of the company. Alpha took out a life insurance policy on the life of Mr.
7
NOTES ON INSURANCE
P with Mutual Insurance Co., designating Alpha as the beneficiary. Q: On July 14, 1985, X, a homosexual, took an insurance policy on the
Alpha also carried fire insurance with Beta Insurance Co. on a house life of his boyfriend, Y. in the insurance application, X misrepresented
owned by it, but temporary occupied by Mr. P again with Alpha as that Y was in perfect health although he knew all the time that Y was
beneficiary. afflicted with AIDS. On October 18, 1987, Y died in a motor accident.
On September 1, 1983, Mr. P resigned from Alpha and purchased the Shortly thereafter, X filed his insurance claim. Should the insurer pay?
company house he had been occupying. A few days later, a fire occurred
resulting in the death of Mr. P and the destruction of the house. A: the insurer is not obliged to pay. Friendship alone is not the insurable
What are the rights of Alpha against Mutual Life Insurance on the life interest contemplated in life insurance. Insurable interest in the life of
insurance policy? others (other than one’s own life, spouse or child) is merely to the extent
of the pecuniary interest in that life.
A: Alpha can recover against Mutual Life in the life insurance policy as Assuming that such pecuniary interest exists, an insurer would be liable
its insurable interest in the life of the person insured, Mr. P, existed when despite concealment or misrepresentation if the insurance had been in
the insurance took effect. In life insurance, insurable interest need not effect for more than 2 years (Incontestability Clause).
exist thereafter or when the loss occurred.
Bar 1997
Bar 1987 Q: A obtains insurance over his life and names his neighbour B the
Q: Blanco took out a P1,000,000 life insurance policy naming his beneficiary because of A’s secret love for B. If A dies, can B successfully
girlfriend and creditor, Montenegro, as his beneficiary. When Blanco claim against the policy?
died, his outstanding loan obligation to Montenegro was only P50,000.
Blanco’s executor contended that only P50,000 out of the insurance A: Yes. In life insurance, it is required that the beneficiary must have
proceeds should be paid to Montenegro and the balance of P950,000 insurable interest in the life of the insured. It was the insured himself
should be paid to Blanco’s estate. who took the policy on his own life.
Is the executor correct?
Bar 2000
A: the contention of the executor is incorrect. The beneficiary of a life Q: IS is an elderly bachelor with no known relatives. He obtained life
insurance need not have any insurable interest in the life of the insured. insurance coverage for P250,000 from Starbite Insurance Corp., an
entity licensed to engage in the insurable business under the Insurance
Alternative Answer: Code of the Philippines. He also insured his residential house for twice
The contention of the executor is incorrect because it was Blanco himself that amount with the same corporation. He immediately assigned all his
who took out the life insurance policy on his own life, naming rights to the insurance proceeds to BX, a friend-companion living with
Montenegro as the beneficiary. It would have been different if it was him. 3 years later, IS died in a fire that gutted his insured house 2 days
Montenegro, as creditor, who took out a life insurance policy on the life after he had sold it. There is no evidence of suicide or arson or
of Blanco, as a debtor. In that case, Montenegro’s insurable interest in involvement of BX in these events. BX demanded payment of the
the life of Blanco would be only to the extent of P50,000, which is the insurance proceeds from the 2 policies, the premiums for which IS had
amount of his credit. been faithfully paying during all the time he was alive. Starbite refused
payment, contending that BX had no insurable interest and therefore
Bar 1987 was not entitled to receive the proceeds from IS’ insurance coverage on
his life and also on his property. Is Starbite’s contention valid?
8
NOTES ON INSURANCE
Bar 2011
A: Starbite is correct with respect to the insurance coverage on the Q: X has been a long-time household helper of Z. X’s husband, Y,
property of IS. The beneficiary in the property insurance policy or the has also been Z’s long-time driver. May Z insure the loves of both
assignee thereof must have insurable interest in the property insured. X and Y as beneficiary?
BX, a mere friend-companion of IS, has no insurable interest in the
residential house of IS. BS is not entitled to receive the proceeds from A: No, since Z has no pecuniary interest in the lives of X and Y
IS’ insurance on his property. arising from their employment with him.
As to the insurance coverage on the life of IS, BX is entitled to receive
the proceeds. There is no requirement that he should have insurable Bar 2012
interest in the life of IS. It was IS himself who took the insurance on his Q: X, a minor, contracted an insurance on his own life. What is the
own life. status of the policy?
Bar 2002 A: the life insurance policy is valid, provided the beneficiary is his
Q: Distinguish insurable interest in property from insurable interest in life estate or his parents, spouse or child.
insurance.
Bar 2013
A: Q: In 2010, the PNP declared Kadafi “Public Enemy No. 1” because
1) In property insurance, the expectation of benefit must have a legal of his terrorist activities in the country that have resulted in the death
basis. In life insurance, the expectation of benefit to be derived from of thousands of Filipinos. A ransom of P15, 000, 000 was place on
the continued existence of a life need not have any legal basis. his head.
2) In property insurance, the actual value of the interest therein is the Worried about the future or their family, Kadafi’s wife, Aurelia,
limit of the insurance that can validly be placed thereon. In life secured in December 2010 a life insurance policy on his life and
insurance, there is no limit to the amount of insurance that may be designated herself as beneficiary. Is the policy binding?
taken upon life.
3) In property insurance, an interest insured must exist when the A: Yes. The policy is valid and binding because Aurelia has an
insurance takes effect and when the loss occurs but need not exist insurable interest on the life of Kadafi.
in the meantime. In life insurance, it is enough that insurable interest
exists at the time when the contract is made but need not exist at Bar 2014
the time of loss. Q: Carlo and Bianca met in the La Boracay festivities. They fell in
love with each other and got married soon after. They have been
Bar 2011 cohabiting blissfully as husband and wife, but they did not have any
Q: X Co., a partnership, is composed of A (capitalist), B (capitalist) offspring. As the years passed by , Carlo decided to take out an
and C (industrial). If you were partner A, who between B and C insurance on Blanca’s life for P1,000,000 with him (Carlo) as sole
would have an insurable interest on your life, such that you my then beneficiary, given that the did not have a steady source of income
insure him? and he always depended on Blanca both emotionally and
financially. During the term of the insurance, Blanca died of what
A: Both B and C, as they are your partners. appeared to be a mysterious cause so that Carlo immediately
requested for an autopsy to be conducted. It was established that
9
NOTES ON INSURANCE
Blanca died of a natural cause. More than that, it was also on the policy. May Sotero validly designate her niece as
established that Blanca was a transgender all along – a fact beneficiary?
unknown to Carlo. Can Carlo claim the insurance benefit?
A: Yes, Sotero may validly designate her niece, Aban, as
A: Yes, Carlo can claim the insurance benefit. If a person insures beneficiary. Sotero had insurable interest in her own life, and
the life or health of another person with himself as beneficiary, all could validly designate anyone as her beneficiary.
his rights, title, and interests in the policy shall automatically vest in
the person insured. Carlo, as husband of Blanca, has insurable WHEN DOES A PERSON HAVE INSURABLE INTEREST IN PROPERTY?
interest in the life of the latter. Also, every person has an insurable
interest in the life and health of any person on whom he depends 1. A person has insurable interest in property, as every interest in property,
wholly or in part for support. The insurable interest in the life of the whether real or personal, or any relation thereto, or liability in respect
person insured must exist when the insurance takes effect but need thereof, of such nature that a contemplated peril might directly damnify
not exist when the loss occurs. Thus, the subsequent knowledge of the insured is an insurable interest.
Carlo, upon the death of Blanca, that the latter is a transgender does
WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN
not destroy his insurable interest on the life of the insured.
PROPERTY
Bar 2014 1. Whether one will derive pecuniary benefit or advantage from its
Q: On July 3, 1993, Delia Sotero took out a life insurance policy preservation or will suffer pecuniary loss or damage from its destruction.
from Ilocos Bankers Life Insurance Corp., designating Cresencia
Aban, her niece, as her beneficiary. Ilocos Life issued Policy No. WHAT DOES INSURABLE INTEREST IN PROPERTY CONSIST OF
747 with a face valie of P100,000 in Sotero’s favour on August 30,
1993, after the requisite medical examination and payment of the 1. An existing interest
premium. 1.1. By means of a conditional deed of sale, A sold his house to B
On April 10, 1996, Sotero died. Aban filed a claim for the insurance for P2,000,000. B pays a down payment of P500,000. Prior to
proceeds on July 9, 1996. Ilocos Life conducted an investigation full payment and execution of an absolute sale, A has insurable
into the claim and came out with the following findings: interest in the house equivalent to the balance due him, while
1. Sotero did not personally apply for insurance coverage, as she B has insurable interest to the extent of the down payment
was illiterate; because loss of the house will mean that he will suffer a loss of
2. Sotero was sickly since 1990; P500,000.
3. Sotero did not have financial capability to pay the premium on 2. An inchoate interest founded on an existing interest
the policy; 2.1. An inchoate interest has been defined as: Interest in real estate
4. Sotero did not sign the application for insurance; which is not a present but which may ripen into a vested interest
5. Aban was the one who filed the insurance application and if not barred, extinguished, or divested.
designed herself as beneficiary. 2.2. Interest in corporate property arising from stockholdings but
limited to its value is an inchoate interest founded on an existing
For the above reasons and claiming fraud, Ilocos Life denied interest.
Aban’s claim on April 16, 1997, but refunded the premium paid 3. An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
10
NOTES ON INSURANCE
3.1. The expectancy must be founded on an actual right to the thing As to C, he has no insurable interest on A’s house, being mere
or a valid contract for it. contingent or expectant interest not founded on an actual right or valid
3.2. A farmer has insurable interest on an anticipated harvest of the contract to A’s house; besides, the assignment to him of A’s insurance
crops that he will grow on land belonging to him at the time of policy was not approved by the insurer. Hence, C cannot recover.
the issuance of the policy.
4. A carrier depositary of any kind has insurable interest in the thing held MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE
by him as such to the extent of his liability but not to exceed the value INTEREST ON THE PROPERTY INSURED?
thereof.
5. But a mere contingent or expectant interest in anything, not founded on 1. Yes, as no contract or policy of insurance on property shall be
contract or actual right to the thing is not insurable as there is no enforceable except for the benefit of some person having insurable
insurable interest. interest in the property insured.
5.1. A son has no insurable interest on a building owned by father 1.1. The owner insures his building against fire, naming his nephew
despite being designated as an heir in the will as the will does as beneficiary. In case of loss, only the owner can recover.
not produce any effect before the testator’s death. What is not enforceable is the designation of beneficiary, not
the entire policy itself.
Bar 1982
Q: A owns a house valued at P50,000 which he had insured against fire Bar 2009
for P100,000. He obtained a loan from B in the amount of P100,000, and Q: Ciriaco leased a commercial apartment from Supreme
to secure payment thereof, he executed a deed of mortgage on the Building Corp. One of the provisions of the provisions of the
house, but without assigning the insurance policy to the latter. For A’s one-year lease contract states:
failure to pay the loan upon maturity, B initiated foreclosure proceedings “ –18. Xxx The LESSEE shall not insure against fire the
and in the ensuing public sale, the house was sold by the sheriff to B as chattels, merchandise, textiles, goods and effects placed at any
highest bidder. Immediately upon issuance of the sheriff’s certificate of stall or store or space in the leased premises without first
sale in his favour, B insured the house against fire for P120,000 with obtaining the written consent of the LESSOR. If the lessee
another insurance company. In order to redeem the house, A borrowed obtains fire insurance coverage without the consent of the
P100,000 from C and, as security device, he assigned the insured policy lessor, the insurance policy is deemed assigned and
of P100,000 to C. However, before A could pay B his obligation of transferred to the lessor for the latter’s benefit.”
P100,000, the house was accidentally and totally burned. Notwithstanding the stipulation in the contract, without the
Does A, B, or C have any insurable interest in the house? May A, B, and consent of SBC, Ciriaco insured the merchandise inside the
C recover under the policies? If so, how much? leased premises against loss by fire in the amount of P500,000
with First United Insurance Corp. A day before the lease
A: As to A, he has insurable interest in his house, an existing interest, contract expired, fire broke out inside the leased premises,
but only for P50,000, the value of said house. But, when he assigned it damaging Ciriaco’s merchandise. Having learned of the
to C, said A had no more interest in his insurance policy, and A cannot insurance earlier procured by Ciriaco, SBC demanded from
anymore recover on said insurance policy. FUIC that the proceeds of the insurance policy be paid directly
As to B, he has insurable interest on A’s house, having an interest to it, as provided in the lease contract. Who is legally entitled to
founded upon an existing interest, but only for P50,000, the value of A’s receive the insurance proceeds? Explain.
house, and therefore, he can recover only the amount of P50,000.
11
NOTES ON INSURANCE
A: Ciriaco is entitled to receive the proceeds of the insurance 2. A change in interest after occurrence of an injury that results in loss does
policy. not affect the right of the insured to indemnify as the occurrence of the
No contact or policy of insurance on property shall be loss will fix the liability of the insurer.
enforceable except for the benefit of some person having 3. A change of interest in one or more several distinct things, separately
insurable interest in the property insured. The stipulation that insured by one policy, does not avoid the insurance as to the others.
the policy is deemed assigned and transferred to SBC is void, 4. A change in interest by will or succession on the death of the insured
because SBC has no insurable interst in the merchandise of does not avoid the insurance and his interest passes in the thing insured
Ciriaco (Cha v CA, 277 SCRA 690; 1997). to the person taking his interest in the thing insured.
5. A transfer of interest by one or several partners, joint owners, or owners
WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST? in common, who are jointly insured to the others, does not avoid
insurance even though it has been agreed that insurance shall cease
1. Must exist at the time the insurance takes effect and when the loss upon an alienation of the thing insured.
occurs but need not exceed in the meantime. 5.1. The transfer contemplated is that to a stranger and if so, the
policy is only suspended to such equivalent extent as that
Change of Interest
transferred.
2. A change of interest in any part of a thing insured unaccompanied by a 6. When notwithstanding a prohibition, the consent of the insurer is
corresponding change of interest in the insurance suspends the obtained.
insurance to an equivalent extent until interest in the thing and interest 7. When the policy is so framed that it will inure to the benefit of
in the insurance is vested in the same person. whomsoever may become the owner during the continuance of the risk.
2.1. The contemplated change is an absolute transfer of the
DISTINGUISHING INSURABLE INTEREST IN LIFE FROM INSURABLE
insured’s entire interest in the property insured to one not
INTEREST IN PROPERTY
previously interested or insured.
2.2. The reason for the rule is that insurance is a personal contract. 1. Insurable interest in life can be based on consanguinity, affinity, contract
The insurer may not be willing to insure the same property if or a pecuniary interest, while insurable interest in property is based on
owned by another person. pecuniary interest;
2.3. The policy is revived by the assignment of the policy to the 2. Insurable interest in life must exist only at the effectivity of the contract
transferee with the consent of the insurer or the reacquisition except that taken by a creditor in the life of the debtor while insurable
by the insured of his interest in the property. interest in property must exist at the time of effectivity of the contract and
2.4. If there is a prohibition against alienation or change of interest when loss occurs, although it may not exist in the meantime.
without the consent of the insurer, the policy is not suspended 3. The value of insurable interest in life is not limited unless taken by a
but rather it is avoided. Hence, the subsequent reacquisition of creditor on the life of the debtor while insurable interest in property is
the interest will not revive the policy. limited to the actual value of the interest in the property.
WHEN IS INSURANCE CONTRACT NOT SUSPENDED?
Bar 2002
1. Life, health or accident insurances because they are not contracts of Q: Distinguish insurable interest in property insurance from insurable
indemnity and insurable interest is not required at the time of loss. interest in life insurance.
12
NOTES ON INSURANCE
A: Q: N owns a condominium unit presently insured with the Holy Insurance
1) In property insurance, the expectation of benefit must have a legal Co. for P1,000,000. N later sells the condominium unit to O. Somehow,
basis. In life insurance, the expectation of benefit to be derived from O fails to obtain the transfer of the insurance policy to his name from N.
the continued existence of a life need not have any legal basis; subsequently, fire of unknown origin destroys completely the
2) In property insurance, the actual value of the interest therein is the condominium unit. Who may collect the insurance proceeds?
limit of the insurance that can validly be placed thereon. In life
insurance, there is no limit to the amount of insurance that may be A: Neither N nor O may collect the insurance proceeds. As to N: An
taken upon life. interest in property insured must exist when the insurance takes effect
3) In property insurance, an interest insured must exist when the and when the loss occurs. Although N had insurable interest when the
insurance takes effect and when the loss occurs, but need not exist insurance took effect, he had no more interest when the loss happened.
in the meantime. In life insurance, it is enough that insurable interest Further, a change of interest in any part of a thing insured
exists at the time when the contract is made but it need not exist at unaccompanied by a corresponding change of interest in the insurance
the time of the loss. suspends the insurance to an equivalent extent, until the interest in the
thing insured and the interest in the insurance are vested in the same
Bar 1977 person.
Q: A owns a house worth P500,000. He insured it against fire for As to O: He cannot recover because he had no insurance contract on
P250,000 for the period from January 1, 1977 to January 1, 1978. At the the said condominium unit which he bought from N.
instance of B, who is a judgment creditor of A, the said house was levied
upon by the Sheriff and sold at a public auction on March 15, 1977. It Bar 1979
was adjudicated to B for P150,000 at the auction sale. B insured the
house against fire for P150,000 for the period from March 16, 1977 to Q: The agent of the insured A was employed to ship A’s copra to Manila
March 16, 1978. The house was accidentally burned on April 1, 1977. and to communicate the shipment to the buyer A in Manila. The said
May A recover under his policy? How about B? agent wrote the owner of the copra announcing the sailing of the ship,
but failed to state that the ship had run aground, which fact he already
A: A can recover under his policy. A judgment debtor whose property knew before announcing the sailing. A, the buyer of the copra, in all good
has been seized on execution has an insurable interest therein until the faith, took out a marine insurance on the copra. The copra was badly
right to redeem or have the same set aside has been lost. Inasmuch as damaged and was a total loss. Can the insured recover on the policy?
the right of A to redeem has not expired, the 12 months’ time after the
sale having not elapsed before the loss occurred. A has an insurable A: The insured may not recover on the policy, since the subject matter
interest in the house at the time of the loss. of the marine insurance at the time of contracting the insurance was
already lost. An interest in property insured must exist when the
As regards B, he can recover upon his policy because as purchaser at insurance takes effect and when the loss occurs.
a judicial sale, he has an insurable interest in the property to the extent
of the amount for which he insured it not exceeding his interest in the Bar 1984
property.
Q: On January 4, 1983, P joined Alpha Corp. as president of the
Bar 1980 company. Alpha took out a life insurance policy on the life of P with
Mutual Insurance, designating Alpha as beneficiary. Alpha also carried
13
NOTES ON INSURANCE
fire insurance with Beta Insurance on a house owned by it, but Q: A piece of machinery was shipped to Pablo on the basis of C&F,
temporarily occupied by P again with Alpha as beneficiary. Manila. Pablo insured said machinery with the Talaga Merchants
Insurance for loss or damage during the voyage. The vessel sank en
On September 1, 1983, P resigned from Alpha and purchased the route to Manila. Pablo then filed a claim with Talaga Merchants which
company house he had been occupying. A few days later, a fire occurred was denied for the reason that prior to delivery, Pablo had no insurable
resulting in the death of P and the destruction of the house. interest. Decide.
What are the rights of Alpha against Beta Insurance on the fire A: Pablo had an existing insurable interest on the piece of machinery he
insurance? bought. The purchase of goods under a perfected contract of sale
already vested equitable interest on the property in favour of the buyer
A: Alpha cannot recover from Beta Insurance since an interest in the while it is pending delivery.
property insured must exist not only when the insurance took effect but
also when the loss occurs. Since the fire that destroyed the insured’s Bar 1994
house took effect after Alpha had sold the house of P, the insurable
interest of Alpha in the property insured no longer exists when the loss Q: In a civil suit, the Court ordered Benjie to pay Nat P500,000. To
occurred. execute the judgment, the sheriff levied upon Benjie’s registered
property (a parcel of land and the building thereon), and sold the same
Bar 1987 at public auction to Nat, the highest bidder. The latter, on March 18,
1992, registered with the Register of Deeds the certificate of sale issued
Q: On February 3, 1987, while Jose Palacio was in the hospital to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured
preparatory to a heart surgery, he called his only son, Boy Palacio, and with Garapal Insurance for P1,000,000 the same building that was sold
showed the latter a will naming the son as sole heir to all the father’s at public auction to Nat. Benjie failed to redeem the property by March
estate including the family mansion in Forbes Park. The following day, 18, 1993.
Boy took out a fire insurance policy on the mansion. One week later, the
father died. After his father’s death, Boy moved his wife and children to On March 19, 1993, a fire razed the building to the ground. Garapal
the family mansion which he inherited. On March 30, 1987, a fire Insurance refused to make good its obligation to Benjie under the
occurred razing the mansion to the ground. Boy then proceeded to insurance contract.
collect on the fire insurance he took earlier on the house.
1. Is Garapal Insurance legally justified in refusing payment to Benjie?
Should the insurance company pay? 2. Is Nat entitled to collect on the insurance policy?
A: In property insurance, insurable interest must exist both at the time of A:

the taking of the insurance and at the time the risk insured against
occurs. The insurable interest must be an existing interest. The fact 1. Yes. At the time of the loss, Benjie was no longer the owner of the
alone that Boy was the expected sole heir of his father’s estate does not property insured as eh failed to redeem the property. The law
give the prospective heir any existing interest prior to the death of the requires in property insurance that a person can recover the
decedent. proceeds of the policy if he has insurable interest at the time of the
issuance of the policy and also at the time when the loss occurs. At
Bar 1991
14
NOTES ON INSURANCE
the time of fire, Benjie no longer had insurable interest in the a) Yes. The businessman, as owner, and the creditor, as mortgagee,
property insured. have separate insurable interests in the same stocks-in-trade. Each
2. No. While at the time of the loss he has insurable interest in the may insure such interest to protect his own separate interest.
building, as he was the owner thereof, Nat did not have any interest b) As judge, I would allow the businessman to recover his total loss of
in the policy. There was no automatic transfer clause in the policy P5,000,000 representing the full value of his goods which were lost
that would give him such interest in the policy. through fire. As to the creditor, I would allow him to recover the
amount to the extent of or equivalent to the value of the credit he
Bar 1997 extended to the businessman for the stocks-in-trade which were
mortgaged by the businessman.
Q: A obtains a fire insurance on his house and as a generous gesture
names his neighbour as beneficiary. If A’s house is destroyed by fire, Bar 2000
can B successfully claim against the policy?
Q: IS, an elderly bachelor with no known relatives, obtained life
A: No. In property insurance, the beneficiary must have insurable insurance coverage for P250,000 from Starbite Insurance, an entity
interest in the property insured. B does not have insurable interest in the licensed to engage in the insurable interest business under the
house insured. Insurance Code of the Philippines. He also insured his residential house
for twice that amount with the same corporation. He immediately
Bar 1999 assigned all his rights to the insurance proceeds to BX, a friend-
companion living with him. Three years later, IS died in a fire that gutted
Q: A businessman in the grocery business obtained from First Insurance
his insured house 2 days after he had sold it. There is no evidence of
an insurance policy of P5,000,000 to fully cover his stocks-in-trade from
suicide or arson or involvement of BX in these events. BX demanded
the risk of fire. Three months later, a fire of accidental origin broke out
payment of the insurance proceeds from the 2 policies, the premiums
and completely destroyed the grocery including his stocks-in-trade. This
for which IS had been faithfully paying during all the time he was alive.
prompted the businessman to file with the First Insurance a claim for
Starbite refused to pay, contending that BX had no insurable interest
P5,000,000 representing the full value of his goods.
and therefore not entitled to receive the proceeds from IS’ insurance
First Insurance denied the claim because it was discovered that at the coverage on his life and also on his property.
time of the loss, the stocks-in-trade were mortgaged to a creditor who
Is Starbite’s contention valid?
likewise obtained from Second Insurance for insurance coverage for the
stocks at their full value of P5,000,000. A: Starbite is correct with respect to the insurance coverage on the
property of IS. The beneficiary in the property insurance policy or the
a) May the businessman and the creditor obtain separate insurance
assignee thereof must have insurable interest in the property insured.
coverage over the same strocks-in-trade?
BX, a mere friend-companion of IS, has no insurable interest in the
b) Suppose you are the judge, how much would you allow a
residential house of IS. BX is not entitled to receive the proceeds from
businessman and the creditor to recover from their respective
IS’ insurance on his property.
insurers?
As to the insurance coverage on the life of IS, BX is entitled to receive
A:
the proceeds. There is no requirement that BX should have insurable
15
NOTES ON INSURANCE
interest in the life of IS. It was IS himself who took the insurance on his insurance over the vessel against perils of the sea will be paid lost or not
own life. lost;
3. Insurance risks are:
Bar 2001 a. One that may cause damage to the insured; or
b. One that may create liability against him.
Q: JQ, owner of a condominium unit, insured the same against fire with
XYZ Insurance Co., and made the loss payable to his brother, MLQ. In WHAT CANNOT BE INSURED?
case of loss by fire of the said condominium unit, who may recover on
the fire insurance policy? 1. Insurance for or against the drawing of any lottery or for or against any
chance or ticket in a lottery drawing a prize cannot be acquired;
A: JQ can recover on the fire insurance policy for the loss of said 2. It cannot be insured because gambling results in profit, while the object
condominium unit. He has the insurable interest as owner-insured. As of insurance is to indemnify the insured against loss;
beneficiary in the fire insurance policy, MLQ cannot recover on the fire
insurance policy. For the beneficiary to recover on the fire or property WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE?
insurance policy, it is required that he must have insurable interest in the
property insured. In this case, MLQ does not have insurable interest in 1. The Insurer – every person, partnership, association or corporation duly
the condominium unit. authorized to transact insurance business as provided in the Code may
be an insurer.
WHAT ARE THE VOID STIPULATIONS IN A CONTRACT OF INSURANCE?
Bar 2000
1. A stipulation for the payment of the loss whether the person insured
has or has no interest in the property insured because it is a contract Q: X Co. procured a group accident insurance policy for its construction
of indemnity. employees variously assigned to its provincial infrastructure projects. Y
2. A stipulation that the policy shall be received as proof of such Insurance Co. underwrote the coverage, the premiums of which were paid
interest because the existence of insurable interest does not for entirely X Co. without any employee contributions.
depend on the policy.
3. Every policy issued by way of gaming or wagering shall be void While the policy was in effect, five of the covered employees perished at sea
because those insured without insurable interest do not suffer a on their way to their provincial assignments. Their wives sued Y Insurance
damage from the occurrence of the event insured against. Instead, for payment of death benefits under the policy. While the suit was pending,
they will profit. Further, it brings a strong temptation to bring about the wives signed a power of attorney designating an X Co. executive, PJ, as
the occurrence of the event insured against. their authorized representative to enter into a settlement with the insurance
company. When a settlement was reached, PJ instructed the insurance
WHAT MAY BE INSURED AGAINST? company to issue a settlement check to the order of the X Co., which will
undertake the payment to the individual claimants of their respective shares.
1. Any unknown or contingent event, whether past or future, which may PJ misappropriated the settlement amount and the wives pursued their case
damnify a person having insurable interest or create a liability against against Y Insurance.
him;
2. Insurance against damage or liability arising from and unknown past Will the suit prosper?
event must ne expressly stipulated as in marine insurance where the
16
NOTES ON INSURANCE
A: Yes. Y Insurance is liable. X Co., through its executive PJ, acted as agent (a) The insurance is still deemed to be upon the interest of the
of Y Insurance. The latter is thus bound by the misconduct of its agent. It is mortgagor who does not cease to be a party to the original
the usual practice in the group insurance business that the employer-policy contract. Hence, if the policy is cancelled, notice must be given
holder is the agent of the issuer. to the mortgagor.
(b) Any act of the mortgagor, prior to loss, which would otherwise
1.1. It is the party who agrees to indemnify another upon the happening avoid the policy of insurance, will have the same effect,
of a specified contingency. although the property is in the hands of the mortgagee. Hence,
if there is a violation of the policy by the mortgagor, the
2. The Insured – who is the party to be indemnified in case of a loss mortgagee cannot recover.
2.1. Anyone, except a public enemy or a nation at war with the (c) Any act required to be done by the mortgagor may be
Philippines and every citizen or subject of such nation, may be performed by the mortgagee with the same effect as if it has
insured. The reason is that the purpose of war is to cripple the power been performed by the mortgagor as when if notice of loss is
and exhaust the resources of the enemy, and it is inconsistent to required, the mortgagee may give it.
destroy its resources then pay it the value of what has been (d) Upon the occurrence of the loss, the mortgagee is entitled to
destroyed. recover to the extent of his credit, and the balance, if any, is to
be paid to the mortgagor, since such is for both their benefits.
Bar 2000 (e) Upon recovery by the mortgagee, his credit is extinguished.
However, if the insurer assents to the transfer of the insurance
Q: May a member of the MILF or its breakaway group, the Abu from the mortgagor to the mortgagee, and at the time of his
Sayyaf, be insured with a company licensed to do business under assent, imposes further qualifications on the assignee, making
the Insurance Code of the Philippines? a new contract under him, the acts of the mortgagor cannot
affect the rights of the assignee. This is known as the Union
A: A member of the MILF or the Abu Sayyaf may be insured with a Mortgage Clause, which creates the relation of the insured and
company licensed to do business under the Insurance Code of the insurer between the mortgagee and the insurer independent of
Philippines. What is prohibited to be insured is a public enemy. A the contract of the mortgagor. In such case, any act of the
public enemy is a citizen or national of a country with which the mortgagor can no longer affect the rights of the mortgagee. The
Philippines is at war. Such member of the MILF or the Abu Sayyaf insurance contract is now independent of that with the
is not a citizen or national of another country, but of the Philippines. mortgagor. On the other hand, of the mortgagor still remains as
a party, the policy is said to contain an Open Mortgage Clause.
2.2. Both the mortgagor and the mortgagee may take out separate
policies with the same or different companies. The mortgagor, up to 2.4. When the mortgagee procures the insurance without reference to
the extent if the value of his property; the mortgagee, up to the the right of the mortgagor, the consequences are:
extent of his credit. (a) The mortgagee may collect from the insurer upon occurrence
of the loss to the extent of his credit.
2.3. When the mortgagor insures the property in his own name but (b) Unless otherwise stated, the mortgagor cannot collect the
assigns the policy to or makes loss payable to the mortgagee and balance of the proceeds after the mortgagee is paid.
unless the policy provides otherwise, the consequences are: (c) The insurer, after payment to the mortgagee, becomes
subrogated to the rights of the mortgagee against the
17
NOTES ON INSURANCE
mortgagor and may collect the debt to the extent paid to the Insurance from liability to Armando as mortgagee even though
mortgagee. it was Mario who committed them (Sec. 8, IC).
(d) The mortgagee after payment cannot collect anymore from the b) Since Armando would have collected P5,000,000 from Second
mortgagor but if he is unable to collect in full from the insurer, Insurance, this amount shold be considered as partial payment
he can recover from the mortgagor. of the loan. Atmando can still collect the balance of P5,000,000
(e) The mortgagor is not released from the debt because the from Mario, the mortgagor.
insurer is subrogated in place of the mortgagee It is a well-settled rule that the mortgagee after
payment cannot collect anymore from the mortgagor but if he
Bar 1984, 2010 is unable to collect in full from the insurer, he can recover from
the mortgagor. Also, under the Code, the insurer, after payment
Q: To secure a loan of P10,000,000, Mario mortgaged his building to the mortgagee, becomes subrogated to the rights against the
to Armando. In accordance with the loan arrangements, Mario had mortgagor and may collect the debt to the extent paid to the
the building insured with First Insurance for P10,000,000, mortgagee. Thus, Mario, mortgagor, is not released from the
designating Armando as the beneficiary. Armando also took an debt because Second Insurance is subrogated in place of
insurance of the building upon his own interest with Second Armando, the mortgagee. Hence, Second Insurance can
Insurance for P5,000,000. recover from Mario the amount of P5,000,000 it paid, because
it became subrogated to the rights of Armando.
The building was totally destroyed by fire, a peril insured against
under both insurance policies.it was subsequently determined that
2.5. When a person has dual citizenship, what will be material is his
the fire had been intentionally started by Mario and that in violation
choice of allegiance. Dual citizenship arises as a result of the
of the loan agreement, he had been storing flammable materials in
concurrent application of different laws, a person is simultaneously
the building.
considered a national of the said states. Dual allegiance, which is
a) How much, if any, can Armando recover from either or both declared inimical to national interest (Art. IV, Sec. 5, Constitution)
insurance companies? arises when a person simultaneously owes, by some positive act,
b) What happens to the P10,000,000 debt of Mario to Armando? loyalty to two or more states. In this sense, dual citizenship can be
said to be involuntary, while dual allegiance is a result of the
A: exercise of volition. Hence, if he opts for allegiance to the country
which the Philippines is at war with, he is not insurable.
a) Armando can receive P5,000,000 from Second Insurance. As
mortgagee, he had an insurable interest in the building. 3. The Beneficiary is the person who receives the benefits of an insurance
Armando cannot collect anything from First Insurance. policy upon its maturity.
First Insurance is not liable for the loss of the building. First, it
was due to a wilful act of Mario, who committed arson. Second, 3.1. In life insurance, anyone, except those who are prohibited by law to
fire insurance policies contain a warranty that the insured will receive donations from the insured. Under Art. 739 of the Civil Code,
not store hazardous materials within the insured premises. the following cannot be designated as beneficiaries:
Mario breached this warranty when he stored inflammable (a) Those made between persons guilty of adultery or
materials in the building. These two factors exonerate First concubinage at the time of the designation;
18
NOTES ON INSURANCE
(b) Those found guilty of the same criminal offense by reason designated his second wife as beneficiary, the same was upheld as
thereof; the later was not aware of the first marriage (SSS v Davac, 17
(c) Those made to a public officer, or his wife, descendants/ SCRA 863).
ascendants, by reason of his office.
3.3. The disqualification does not extend to the children of the adultery
Bar 1981, 1985, 1998 or concubinage in view of the express recognition of the
successional rights of illegitimate children.
Q: On July 1, 1979, Crispulo, married to Laura with whom he has
two legitimate children, was issued Policy No. 8008 of the Midland
Life Insurance, on a whole-life plan for P10,000. He designated 3.4. Generally, there is no requirement that the beneficiary shall have
Angie, his common-law wife as the revocable beneficiary. He insurable interest in the life of the insured as it is recognized that the
referred to her, in his application and policy, as his wife. insured may name anyone he chooses, except those disqualified to
receive donations, as beneficiary, in his life insurance, even if he is
Two years later, Crispulo died. Angie filed her claim for the proceeds
a stranger and has no insurable interest in the life of the insured.
of the policy as the designated beneficiary therein. The widow,
The designation, however, must be in good faith and without fraud
Laura, also filed her claim as legal wife.
or intent to enter into a wagering contract, as when: Jose obtains
If you were the legal counsel for the insurance company, to whom several life insurance policies that he cannot afford; named as
would you adjudicate the proceeds of the insurance policy? beneficiary is Juan, the spouse or children are not named as
beneficiaries.; the premiums paid by Juan, who did not have
A: I would adjudicate the proceeds of the policy to Laura, the legal insurable interest in the life of Jose; in this case, the policies are
wife. void because they were entered into as wagering contracts.
3.5. The designated beneficiary can be changed as the insured shall
Under Art. 739 of the Civil Code, one cannot be designated as have the right to change the beneficiary he designated – unless he
beneficiary if made between persons guilty of adultery or was expressly waived the right in the policy. If he has waived the
concubinage at the time of the designation. right, the effect is to make the designation as irrevocable.
Since Crispulo was married to Laura at the time when he designated Bar 1978
his beneficiary, his concubine, Angie, with whom he was guilty of
concubinage at the time of designation, Laura may have said Q: On December 20, 1974, A took out a life insurance policy and
designation of Angie nullified by mere preponderance of evidence named his wife B, as beneficiary. The policy was silent with regard
in the same action for nullification. There is even no need of the to any change of beneficiary. Suspecting that B was committing
criminal conviction for concubinage. adultery, A immediately notified the insurance company in writing
that he is substituting his brother C as beneficiary in place of B. A
3.2. A prior conviction for adultery or concubinage is not required as it died later on June 30, 1975. B claims the proceeds of the insurance
can be proven by a prepondenrance of evidence in the same action policy, contending that as designated beneficiary, she cannot be
nullifying the designation. The common law wife of the insured who changed without her consent, she having acquired a vested right to
is married could not be named as a beneficiary (Insular Life the proceeds of the policy.
Assurance v Ebrado, 80 SCRA 181). Note where the insured
19
NOTES ON INSURANCE
A: B cannot claim the proceeds to A’s life insurance policy. A’s discontinue payment of the premium, the beneficiary may continue
action in substituting his brother C as his beneficiary in place of B, paying. Neither can the insured get a loan or obtain the cash
his wife, in his insurance policy, is valid. The insured, A, can change surrender value of the policy without his consent (Nario v Philamlife,
the beneficiary in a policy of life insurance, without consent of the 20 SCRA 434). Where the wife and minor children were named
beneficiary. irrevocable beneficiaries and the wife dies, the husband’s change
of the beneficiaries with the consent of the children is not valid die
Bar 1998 to the minority of the children (Philamlife v Pineda, 170 SCRA 416).
Q: On October 18, 1988, P took out a life insurance policy and Bar 2005
named his only son Q as beneficiary. The policy was silent with Q: Jacob obtained a life insurance policy for P1,000,000
regard to any change of beneficiary. P later learned that Q was designating irrevocably Diwata, a friend, as his beneficiary. Jacob,
hooked on drugs and immediately notified the insurance company however, changed his mind and wants Yob and Jojo, his other
in writing that he is substituting his sister, R, as his beneficiary in friends, to be included as beneficiaries considering that the
place of Q. P later died of advanced tuberculosis. In the application proceeds of the policy are sufficient for the three friends. Can Jacob
form filled up by the agent of insurance company prior to the still add Yob and Jojo as his beneficiaries?
issuance of the life insurance policy by the insurance company, the
agent, without the knowledge of P, filled in a false answer and made A: The insured cannot add other beneficiaries as this would diminish
it appear that P was in good health. Upon P’s death, Q claimed the the interest of Diwata who is the irrevocably designated beneficiary.
proceeds of the insurance policy contending that as designated The insured can only do so with the consent of Diwata.
beneficiary, he cannot be changed without his consent, he having
acquired a vested right to the proceeds of the policy. Is Q’s 3.8. The interest of an irrevocable beneficiary in an endowment policy is
contention correct? contingent as benefits are to be paid to him only if the assured dies
before the specified period. If the insured outlives the period, the
A: No. The designation of the beneficiary is revocable unless the benefits are to be paid.
right to revoke is expressly waived.
3.9. The effect of the failure to designate a beneficiary or when the
beneficiary is disqualified is that the benefits of the policy shall
3.6. Note thought that the designation of the guilty spouse as irrevocable accrue to the estate of the insured.
beneficiary is revocable at the instance of the innocent spouse in
cases of: 3.10. When the beneficiary will predecease the insured, the effects are:
a) termination of a subsequent marriage;
b) nullification of marriage; (a) If the designation is irrevocable, the legal representatives of the
c) annulment of marriage; beneficiary may recover unless it was stipulated that the
d) legal separation (Art. 43, Family Code). benefits are payable only “if living”;
(b) If the designation is revocable, and no change is made, the
3.7. When an irrevocable beneficiary is designated in a life insurance benefits pass to the estate of the insured. The rule holds also if
contract, the beneficiary has a vested right that cannot be taken benefits were payable “only if living” or “if surviving” and the
away without his consent (Bar 2005). In fact, should the insured beneficiary dies before the insured.
20
NOTES ON INSURANCE
CONCEALMENT
3.11. If the beneficiary is the principal, an accomplice or an accessory in
the wilful killing of the insured, his interest is forfeited. The nearest Concealment is a neglect to communicate that which a party knows and ought to
relative of the insured will be entitled to the proceeds if not otherwise communicate.
disqualified. If not wilful or felonious, the provision does not apply.
 Requisites:
(1) A party knows a fact which he neglects to communicate or disclose
Bar 2008 to the other;
(2) Such party concealing is duty bound to disclose such fact to the
Q: On January 1, 2000, Antonio Rivera secured a life insurance other;
from SOS Insurance Corp. for P1,000,000 with Gemma Rivera, his (3) Such party concealing makes no warranty of the fact concealed;
adopted daughter, as the beneficiary. Antonio Rivera dies on March (4) The other party has not the means of ascertaining the fact
4, 2005 and in the police investigation, it was ascertained that concealed;
Gemma Rivera participated as an accessory in the killing of Antonio (5) The fact concealed is material.
Rivera. Can SOS Insurance avoid liability by setting up as a defense
Concealment may be committed by either the insured or the insured [Qua Chee
the participation of Gemma Rivera in the killing of Antonio Rivera ?
Gan v Law Union & Rock Insurance (1955); Fieldmen’s Insurance v Vda. de
Songco (1968)].
A: No, SOS Insurance cannot avoid liability.
Under Sec. 12 of the Insurance Code, the interest of a beneficiary
Generally, a party must have knowledge of the fact concealed at the time of the
shall be forfeited when the beneficiary is the principal, accomplice,
effectivity of the policy.
or accessory in wilfully bringing about the death of the insured. In
which event, the nearest relative of the insured shall receive the 1. Note that even if a party did not know of the existence at the time of
proceeds of said insurance, if not otherwise disqualified. application, but before its effectivity, there is still concealment.
Here, even if Gemma Rivera wilfully participated in the killing of
Antonio Rivera, the law provides that the nearest relative of the 2. Information acquired after effectivity is not concealment and does not
insured shall be the one entitled to receive the proceeds of the constitute ground to rescing the policy, as after the policy is issued,
policy. Thus, the insurance company must still pay out the proceeds information subsequently acquired is no longer material as it will not
of the life insurance policy to the nearest qualified relative of the affect or influence the party to enter into contract. However, in case of
insured. reinstatement of a lapsed policy, facts known after effectivity but before
reinstatement must be disclosed.
RESCISION OF INSURANCE CONTRACT

 Reinstatement of Lapsed Life Policy
Instances wherein a contract of insurance may be rescinded: Reinstatement of a lapsed life policy is not a non-default option. It does
not create a new contract, but merely revives the original policy so
1. Concealment insurer cannot require a higher premium than the amount stipulated in
2. Misrepresentation/ Omission the contract. It does not apply to group/ industrial life insurance.
3. Breach of Warranties
21
NOTES ON INSURANCE
Requisites: The waiver of medical examination in a non-medical insurance contract
(1) It must be exercised within three years from date of default; renders even more material the information required of the applicant
(2) The insured must present evidence of insurability satisfactory to the concerning the previous conditions of health and diseases suffered. The
insurer; fact that the matter concealed had no bearing on the cause of death is
(3) He must pay all back premiums and all indebtedness to the insurer; not important because it is well settled that the insured need not die of
(4) The CSV must not have been duly paid to the insured nor the the disease he had failed to disclose to the insurer. It is sufficient that his
extension period expired; nondisclosure misled the insurer in forming his estimates of the risks of
(5) The application must be filed during the lifetime of the insured the proposed policy or in making inquiries [Sunlife v Sps. Bacani (1995)].
[Andres v Crown Life Insurance (1958)]. Where matters of opinion or judgment are called for, answers made in
good faith and without intent to deceive will not avoid the policy even
3. The party claiming the existence of concealment must prove that there though they are untrue. Reason: The insurer cannot simply rely on those
was knowledge on the part of the party charged with concealment. If the statements. He must make further inquiry [Philamcare Health Systems
insured stated that there was no hereditary taint or illness that has v CA (2002)].
affected members of the family to my knowledge, in order to show or
prove concealment, the insurer must prove that the hereditary taint Bar 2001
alleged to exist was known to the insured.
Q: A applied for a non-medical life insurance. The insured did not inform the
4. The materiality of the fact concealed or misrepresented is determined insurer that one week prior to his application for insurance; he was examined and
not by the event, but solely by the probable and reasonable influence of confined at St. Luke’s Hospital where he was diagnosed for lung cancer. The
the facts upon the party to whom the communication is due, in forming insured soon thereafter died in a plane crash. is the insurer liable considering that
his estimate of the disadvantages of the proposed contract or in making the fact concealed had no bearing with the cause of death of the insured?
his inquiries.
A: No. The concealed fact is material to the approval and issuance of the
insurance policy. It is well-settled that the insured need not die of the disease he
4.1. The test of materiality is whether knowledge of the true facts
failed to disclose to the insurer. It is sufficient that his non-disclosure misled the
could have influenced a prudent insurer in determining whether
insurer in forming his estimate of the risks of the proposed insurance policy or in
to accept the risk or in fixing the premiums.
making inquiries.
5. Concealment need not, in order to be material, be of facts which bring Bar 1975
about or contribute to, or are connected of the insured’s loss. It is
immaterial that there is no causal relationship between the fact Q: In a non-medical insurance contract (one where the company waives medical
concealed and the loss sustained. It is sufficient that the non-revelation examination) the insured failed to disclose that she had once been operated on,
has misled the insurer in forming its estimate of disadvantage or in fixing although the information on this matter was supposed to have been supplied the
the premium as when the insured had concealed that he had kidney company. Within the proper period, may the insurance company have the contract
disease. He later dies in a plane crash. The insurer would not be liable rescinded?
due to concealment [Sunlife v CA, 245 SCRA 269].
A: Yes, the insurance company can rescind the contract on the ground of
 Concealment in Non-Medical Insurance misrepresentation or concealment of material fact. The fact of the insured’s
operation is material to the insurer, who may have refused to issue the life policy
22
NOTES ON INSURANCE
had it known of such fact. This is even more true in a non-medical insurance The policy is silent as to the effect of the insured’s negligence on the right to
where no medical examination is made and the information given by the insured recover thereunder. Juan’s wife insists that she has a right to recover because
concerning his past health and diseases is a very important factor which the Juan’s death was caused by an accident which had nothing to do whatsoever with
insurer takes into consideration in deciding to issue the policy. his liver ailment. She therefore insists on double indemnity.
Bar 1979 a) Is she entitled to any indemnity?

b) If Juan’s accident occurred in July 1983, would your answer be the
Q: A fire insurance policy in favour of the insured contained a stipulation that the same?
insured shall give notice to the company of any insurances already effected or
which may subsequently be effected, covering the property insured and that A:
unless such notice be given before the occurrence of any loss, all benefits shall
be forfeited. The face of the policy bore the annotation “Co-Insurance Declared.” a) No, she is not entitled to any indemnity. Although Juan did not die of a
The things insured were burned. It turned out that several insurances were liver ailment, the fact of his concealment vitiated the insured’s consent
obtained on the same goods for the same term. The insurer refused to pay on the to the contract of insurance. Under the Insurance Code, concealment of
ground of concealment. May the insured recover? a material fact is a ground for rescission. And materiality is determined
not by the event which caused the death but by the probable and
A: Yes, the insured may recover since there is no concealment. The face of the reasonable influence of the fact concealed upon the other party in
policy already bore the annotation “Co-Insurance Declared” which is a notice to forming his estimate of the disadvantages of the proposed contract, or
the insurer as to the existence of other insurance contracts on the property in making inquiries. If the insurer had known of Juan’s previous ailment,
insured [Gen. Insurance v Ng Hua; January 30, 1960]. it would in all probabilities have at least made more detailed inquiries
about it or make a special examination of his liver function, or perhaps
Bar 1983 even charge a higher premium because of the greater risk involved. The
concealment was therefore of a material fact, relieving the insurer from
Q: In June 1981, Juan applied for a life insurance policy with a double indemnity any liability on the policy, regardless of the cause of death. Since the
provision in case of death by accident. Despite an express inquiry in the insurer is relieved from liability, the question as to whether the event was
application form for insurance, he did not mention the fact that he had suffered an accident or not becomes moot. In any case, under the Insurance
from viral hepatitis the previous year. As Juan had fully recovered from the Code, negligence of the insured or of others does not exonerate the
disease, the medical examination performed by the insurance company’s insurer.
physician did not reveal such previous illness, and showed that Juan was healthy b) My conclusion would be different. The insurer would be liable despite
and was an insurable risk. The policy was issued forthwith. the fraudulent concealment because the policy has become
incontestable since more than two years had elapsed from the date
In March 1983, Juan died in an automobile accident. Subsequent investigation
thereof.
revealed that Juan was negligent in not having his brakes checked.
The insurance company refused to pay Juan’s wife, the designated beneficiary,
PROOF OF FRAUD IN CONCEALMENT
on two grounds: that Juan was guilty of fraudulent concealment of his liver
ailment, and that Juan’s death was caused by his own negligence. General Rule: Fraud need not be proven in order to prove concealment. Good
faith is not a defense.
23
NOTES ON INSURANCE
Exception: When the concealment is made by the insured in relation to the falsity
of a warranty, the non-disclosure must be intentional and fraudulent in order that A: The insured may not recover from the insurer. The information that
the contract may be rescinded. the ship in question was seen at sea, deep in water and leaky, although
erroneous, was material, and its concealment entitled the insurer to
WHAT IS THE EFFECT OF CONCELAMENT? rescind the contract of insurance.
Bar 2014
1. Whether intentional or not, it entitles the injured party to rescind the
contract of insurance. Q: On May 13, 1996, PAM, Inc. obtained a P15,000,000 fire insurance
policy from Ilocano Insurance covering its machineries and equipment
Bar 1989 effective for one year or until May 14, 1997. The policy expressly stated
that the insured properties located at “Sanyo Precision Phils. Building,
Q: X applied for life insurance with Metropolitan Life. The application Phase III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite.” Before its
contained this question: “Have you ever had any ailment or disease of expiration, the policy was renewed on “as is” basis for another year until
xxx (b) the stomach or intestines, liver, kidney or genitourinary organ?” May 14, 1998. The subject properties were later transferred to Pace
X, a laundrywoman who has no medical knowledge answered “No.” The Factory also in PEZA. On October 12, 1997, during the effectivity of the
application was approved, premium was paid and six months later, X renewed policy, a fire broke out at the Pace Factory which totally burned
died from cancer of the stomach. The post medical examination of X the insured properties.
shows that she had the cancer at the time she applied for a policy. Can The policy forbade the removal of the insured properties unless
the beneficiary of X collect on the policy? sanctioned by Ilocano Insurance. Condition 9 (c) of the policy provides
that “the insurance ceases to attach as regards the property affected
A: No. Concealment, as a defense against liability by the insurer, may unless the insured, before the occurrence of any loss or damage, obtains
either be intentional or unintentional. Lack of knowledge on the part of the sanction of the company signified by endorsement upon the policy
the insured about her ailment will not preclude the insurer from raising xxx (c) if the property insured is removed to any building or place other
the defense. The insurer my be held in estoppel only if, having known of than in that which is herein stated to be insured.” PAM claims that it has
the concealed or misrepresented fact, still accepts the payment of substantially complied with notifying Ilocano for the insurance coverage.
premium which is not the situation in this case. Is Ilocano liable under the policy?
Bar 1979 A: Ilocano is not liable under the policy. With the transfer of the location
Q: Marine insurance was secured upon goods on board a ship which of the subject properties, without notice and without the insured’s
departed from Madagascar to Manila, without any disclosure to the consent, after the renewal of the policy, the insured clearly committed
insurer of the fact that the ship had been reported at Lloyd of London as concealment, misrepresentation and a breach of material warranty. The
seen at sea, deep in water and leaky. This report turned out to be wrong Insurance Code provides that a neglect to communicate that which a
because the ship was at no time during the voyage leaky or in trouble, party knows and ought to communicate, is called concealment. It entitles
but was lost through another insured risk. The insurer refuses to pay the the injured party to rescind a contract of insurance in case of an
insured, claiming concealment. The insured counters that the fact not alteration in the use or condition of the thing insured. An alteration in the
disclosed was erroneous and did not increase the risk and therefore use or condition of a thing insured from that to which it is limited b the
immaterial. Decide on the dispute. policy made without the consent of the insurer, by means within the
24
NOTES ON INSURANCE
control of the insured, and increasing the risks, entitles the insurer to General Rule: Concealment vitiates the contract and entitles the insurer
rescind the contract of fire insurance. to rescind, even if the death or loss is due to a cause not related to the
concealed matter.
Bar 2013
Exceptions:
Q: Benny applied for life insurance for P1,500,000. The insurance 1) Incontestability Clause, which stipulates that the policy shall be
company approved his application and issued an insurance policy incontestable after a stated period. The incontestability clause is a
effective November 6, 2008. Benny named his children as his mandatory provision in life policies. The policy must be payable on
beneficiaries. On April 6, 2010, Benny died of hepatoma, a liver ailment. the death of the insured and has been in force during the lifetime of
The insurance company denied the children’s claim for the proceeds of the insured for at least 2 years from its date of issue or of its last
the insurance policy on the ground that Benny failed to disclose in his reinstatement;
application two previous consultations with his doctors for diabetes and
hypertension, and that he had been diagnosed to be suffering from 2) Concealment after the contract has become effective, because
hepatoma. The insurance company also rescinded the policy and concealment must take place at the time of the contract is entered
refunded the premiums paid. Was the insurance company correct? into in order that the policy may be avoided. Information obtained
after the perfection of the contract is no longer necessary to be
A: Under Sec. 27 of the Insurance Code, whether intentional or not, disclosed by the insured, even if the policy has not been issued
concealment entitles the injured party to rescind the contract of (except in reinstatement);
insurance.
Here, Benny did not disclose that he was suffering from diabetes, 3) Waiver or Estoppel;
hypertension, and hepatoma. The concealment is material, because
these are serious ailments (Florendo v Philam Plans, 666 SCRA 618; 4) Marine insurance, where concealment of the following matters does
2012). Thus, the insurance company has the right to rescind the life not vitiate the entire contract:
policy within two years from the date of issue or its reinstatement (Sec.
48, Insurance Code). (a) The national character of the insured;
(b) The liability of the thing insured to capture and detention;
1.1. Note though that the right to rescind is optional on the part of (c) The liability to seizure from breach of foreign laws of trade;
the injured party. Rescission is an option because it misleads (d) The want of necessary documents; and
or deceives the insurer into accepting the risk of accepting it at (e) The use of false and simulated papers [Sec. 112 (e)].
the rate of premium agreed upon.
WHAT FACTS THEN MUST BE COMMUNICATED?
2. The provisions on concealment and representation finds basis in the fact
that it is a fundamental characteristic of a contract of insurance that it is 1. Each party to an insurance contract is bound to communicate to the
one of perfect/ utmost good faith. other all facts that meet the following requisites:
 Notes on Effects of Concealment (a) Such facts that must be within his knowledge as concealment
requires knowledge of the fact concealed by the party charged with
concealment;
25
NOTES ON INSURANCE
(b) Fact/s must be material to the contract as it must be of such nature Those which the other knows as the insurer cannot say that it
that had the insurer known of it, it would not have accepted the risk has been deceived or misled as when the insured discloses
or demanded a higher premium’ that he has tuberculosis to the agent of the insurer, who in turn
(c) That the other party had no means of ascertaining such fact/s omits to state the same in the application of the insured was
(d) That the party with a duty to communicate makes no warranty. deemed knowledge of the insurer (Insular Life Assurance v
Feliciano, 74 SCRA 468), or when the insurer had surveyed the
1.1. The existence of a warranty makes the requirement to disclose location and surrounding area of a building that is to be insured
superfluous but an intentional and fraudulent omission on the against fire, an omission to state that there are neighboring
part of the one insured to communicate information on a matter building will not avoid the policy.
proving or tending to prove the falsity of the warranty entitles
the insurer to rescind, as when there is a warranty that the ship 1.2. Matters which each party is bound to know [Sec. 30 (b) and
is seaworthy, the intentional and fraudulent omission of the Sec. 32]
insured to state that the ship’s communications equipment is
out of order will entitle the insurer to rescind. Those which, in the exercise of ordinary care, the
other ought to know, and of which, the former has no reason to
 If the applicant is aware of the existence of some circumstance which he suppose him to be ignorant.
knows would influence the insurer in acting upon his application, food The facts that the other ought to know are:
faith requires him to disclose that circumstance, though unasked [Vance (a) All general causes which are open to his inquiry, equally
(1951)]. with that of the other, and which may affect the political or
material perils contemplated such as public events like the
(a) The mere fact of being a “mongoloid” is a material fact that needs fact that a nation is at war, or laws or political conditions in
to be disclosed {Great Pacific Life v CA (1979)]. other countries. Here, the source of information is equally
(b) Mere possibility of previous hypertension is not enough to establish open to the insurer, who is therefore presumed to know
concealment. them; and
(b) All the general uses of trade such as the rules of
WHEN IS THERE A WAIVER OF INFORMATION? navigation, kinds of seasons, all the risks of navigation.
A waiver takes place either, by the terms of the insurance or by the neglect to 1.3. Matters of which the insurer waives communication [Sec. 30 (c)
make inquiries as to such facts where they are distinctly implied in other facts of and Sec. 33]
which information is communicated.
A waiver takes place either, by the terms of the insurance or by
WHAT MATTERS NEED NOT BE COMMUNICATED?
the neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is
1. Except in answer to the inquiries of the other, the following facts needs
communicated.
not be communicated.
As when, an application for insurance is made in writing and

1.1. Matters already known to the insurer [Sec. 30 (a)]
the questions therein are unanswered or incompletely
answered, and the insurer without further inquiries, issues the
26
NOTES ON INSURANCE
policy. It thereby waives all right to a disclosure or to a more the same. Moreover, a disclosure may have warranted a
complete answer. If question asks whether the insured has medical examination of Juan by Good Life in order for it to
submitted himself to any infirmary, sanitarium or hospital for reasonably assess the risk involved in accepting the
consultation or treatment. Insured replies that he was confined application. In any case, good faith is no defense in
at the Quezon Memorial Hospital for 5 days due to influenza. concealment. The waiver of a medical examination in the “non-
There is no waiver and shall constitute concealment as the medical” life insurance from Good Life makes it even more
answer was complete and could be relied upon by the insurer. necessary that Juan supply complete information about his
If the insured answered “Yes”, the answer would have been previous hospitalization for such information constitutes an
incomplete and ambiguous. This would constitute a waiver as important factor which Good Life takes into consideration in
the insured did not make any further inquiry (Ng Gan Zee v deciding whether to issue the policy or not.
Asian Crusader, 112 SCRA 461). Note that the waiver of a If the policy of life insurance has been in force for a
medical examination is not tantamount to a waiver of material period of 2 years or more from the date of its issue (on which
information because waiver of medical examination is made point the given facts are vague), then Good Life can no longer
when the insured represents himself to be in good health. It is prove that the policy is void ab initio or is rescindable by reason
reasonable to assume that had the insured revealed material of fraudulent concealment or misrepresentation of Juan.
information, the insurer would not have waived the examination
(Saturnino v Philamlife, 7 SCRA 316). Bar 1997
Bar 1996 Q: The assured answers “No” to the question in the application
for a life policy, “Are you suffering from any form of heart
Q: Juan procured a “non-medical” life insurance from Good Life illness?” In fact, the assured has been a heart patient for many
Insurance. He designated his wife, Petra, as the beneficiary. years. On September 2, 1991, the assured is killed in a plane
Earlier, in his application response to the question as to crash. The insurance company denies the claim for insurance
whether or not he had ever been hospitalized, he answered in proceeds and returns the premium paid. Is the decision of the
the negative. He forgot to mention his confinement at the insurance company justified?
Kidney Hospital. After Juan died in a plane crash, Petra filed a
claim with Good Life. Discovering Juan’s previous A: assuming that the incontestability clause does not apply
hospitalization, Good Life rejected Petra’s claim on the ground because the policy has not been in force for 2 years from date
of concealment and misrepresentation. Petra sued Good Life, of issue, during the lifetime of the insured, the decision of the
invoking good faith on the part of Juan. Will her suit prosper? insurance company not to pay is justified. There was fraudulent
concealment. It is not material that the insured died of a
A: No. Petra’s suit will not prosper (assuming that the policy of different cause than the fact concealed. The fact concealed,
life insurance has been in force for a period of less than 2 years that is the heart ailment, is material to the determination by the
from the date of its issue). The matter which Juan failed to insurance company whether or not to accept the application for
disclose was material and relevant to the approval and insurance and to require the medical examination of the
issuance of the insurance policy. They would have affected insured.
Good Life’s action on his application, either by approving it with However, if the incontestability clause applies to the
the corresponding adjustment for a higher premium or rejecting insurance policy covering the life of the insured had been in
27
NOTES ON INSURANCE
force for 2 years from date of issuance thereof, the insurance OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED
company would not be justified in denying the claim for the
proceeds of the insurance and in returning the premium paid. 1. Information of the nature or amount of the interest of one insured unless
In that case, the insurer cannot prove the policy void ab initio if inquired upon by the insurer, except if required by Sec. 51 [Sec. 34].
or rescindable by reason of fraudulent concealment or Such information need not be communicated unless in answer to inquiry,
misrepresentation of the insured. except as prescribed by Sec. 51 as the extent of the interest of the
insured in property insured must be specified if he is not the absolute
Bar 1998 owner. Also, a trustee, mortgagee or building contractor must
communicate his particular insurable interest in the property even if no
Q: Renato was issued a life insurance policy on January 2, inquiry is made.
1990. He concealed the fact that 3 years prior to the issuance
of his life insurance policy, he had been seeing a doctor about 2. Matter of opinion [Sec. 35]
his heart ailment, and on March 1, 1992, he died of heart
failure. May the heirs file a claim on the proceeds of the life Neither a party to a contract is bound to communicate even upon inquiry
insurance policy of Renato? any information of his own opinion or judgment upon the matters in
question as only material facts are required – not opinions, speculations
A: Yes. The life insurance policy in question was issued on or expectations, except in marine insurance – where the belief or the
January 2, 1990. More than 2 years had elapsed when Renato, expectation of a 3rd person in reference to a material fact is material and
the insured, died on March 1, 1992. The incontestability clause must be communicated.
applies.
As when, the insured is required to disclose an opinion of marine experts
1.4. Matters which prove or tend to prove the existence of a risk as to seaworthiness of a vessel.
excluded by a warranty and which are not otherwise material
[Sec. 30 (d)]
REPRESENTATIONS
As when, the insured makes a warranty that when the covered
1. A representation is an oral or written statement of a fact or a condition
vessel sails to the Middle East, loss occasioned thereby shall
affecting the risk made by the insured to the insurance company tending
not be covered. There is thus no need to disclose the
to induce the insurer to take the risk.
anticipated dangers in the area.
2. It is made at the same time as or before the issuance of a policy since it
is an inducement to entering into a contract.
1.5. Matters which relate to a risk excepted in the policy, and which
are not otherwise material [Sec. 30 (e)]
2.1. It can also be made after the issuance of the policy when the
purpose thereof is to induce the insurer to modify an existing
As when, the policy covers against loss by theft. There is no
insurance contract, as the provisions likewise apply to a
need to disclose that the area where the object is located in
modification. Note that the rule is the same when it comes to
earthquake-prone area if loss due to earthquake is not covered
concealment.
by the policy.
28
NOTES ON INSURANCE
3. The language of representation is to be interpreted by the same rules as
the language of contracts in general. 2.1. While it does not form part of the contract, it may
qualify an implied warranty.
3.1. Consequently, it need not be literally true and correct/ accurate
in every respect. Rather it is sufficient that it is substantially or As when, under Sec. 115, it is implied that a ship
materially true. In the case of a promissory representation, it is is seaworthy. A representation. A representation
sufficient if it is substantially complied with. by the insured that its communication system is
defective will qualify the warranty. Hence, insured
As when, H bought a car for P2,800 and spent P900 for repairs. can still recover in case of loss.
H then gave it to W as a gift. W secures insurance and says the
price is around P4,000, though the present actual value is IS A REPRESENTATION PART OF THE INSURANCE CONTRACT?
about P3,000. Is W guilty if misrepresentation because she did
not pay for the car? No, because the literal truth is not a representation does not form part of the contract as an express provision thereof
necessary. The insurer can value the car independently. as it is a collateral inducement to the same.
While it does not form part of the contract, it may qualify an implied warranty.
WHAT ARE THE FORMS AND KINDS OF
REPRESENTATION? CAN A REPRESENTATION BE WITHDRAWN OR ALTERED?
1. Representations may be oral or written. A representation can be withdrawn as long as the insurance has not yet been
effected and the insured has not yet been induced to issue the policy. If withdrawn
1.1. They can be affirmative, when it is an affirmation or altered afterwards, the contract can be rescinded as the insurer has already
of a fact existing when the contract begins. been led to issue the policy.
As when, the insured states that he is of good TO WHAT DATE DOES A REPRESENTATION REFER?
health at the time of the contract.
1.2. They can be promissory, when it is a statement 1. It must be presumed to refer to the date on which the contract goes into
by the insured concerning what is to happen effect.
during the term of the insurance.
2. There is no false representation of it is true at the time the contract takes
As when, the insured will install additional fire effect although false at the time it is made.
extinguishers at a stipulated future date. A
representation as to the future is to be deemed a As when, the insured states at application that vessel in satisfactory
promise, unless it was merely a statement of operating condition but is really undergoing maintenance, there is no
belief or expectation. false representation if at issuance the vessel has completed
maintenance.
2. A representation does not form part of the contract as an
express provision thereof as it is a collateral inducement 2.1. Conversely, there is a false representation if it true at the time
to the same. it was made but false at the time the contract takes effect.
29
NOTES ON INSURANCE
(3) Waiver, made by acceptance of insurer of premium payments
As when, insured states that he has never been affected with despite knowledge of the ground for rescission;
pneumonia at the application, but if in the meantime, he is (4) A representation of the expectation, belief, opinion, or judgment of
afflicted with pneumonia before the policy takes effect, and he the insured, although false, and even if material to the risk
does not disclose, there is a false representation. [Philamcare Health Systems v CA (2002)]; and
(5) Representation by insured based on information obtained from 3 rd
WHEN IS A REPRESENTATION SAID TO BE FALSE? persons (not his agent), provided the insured:
(a) Has no personal knowledge of the facts;
A representation is said to be false when the facts fail to correspond with its (b) Believes them to be true; and
assertions or stipulations. (c) Explains to the insurer that he does so on the information of
others.
MUST THE INSURED COMMUNICATE INFORMATION OF WHICH AS NO
2. However, the right to rescind is considered waived by the acceptance of
PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM
premium payments despite knowledge of the ground to rescind.
OTHERS?
1. When a person has no personal knowledge of a fact, he may or may not As when: insurer was aware of the lack of extinguishers required by the
communicate such information to the insurer. If he does communicate, policy.
he is not responsible for its truth. Hence, there can be no
misrepresentation. 2.1. There is no waiver, if the insurer had no knowledge of the
ground at the time of the acceptance of the premium [Stokes v
2. However, when the information material to the transaction was acquired Malayan, 127 SCRA 766].
by an agent of the insured, the same must be communicated, as  A representation cannot qualify an express provision or an express
knowledge of the agent is also knowledge of the principal. warranty of insurance [Sec. 40] because a representation is not party of
the contract but only a collateral inducement to it. However, it may qualify
As when: a ship captain is aware of a defect that affects the as an implied warranty.
seaworthiness, that defect must be communicated as the ship captain is
under obligation to disclose it to the owner. There is fraud and misrepresentation when another person takes the
place of the insured in the medical examination [Eguaras v Great
WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT? Eastern (1916)].
1. If it false in a material point, whether affirmative or promissory, the The insurer is not entitled to rescission for misrepresentation of age if
injured party is entitled to rescind the contract from the time the the birth date on the policy leads to the conclusion that the insured is
representation becomes false. beyond the age covered and yet insurer continued to accept payment
and had issued the policy. Insurer is deemed estopped [Edillon v Manila
 Exceptions: Bankers Life (1982)].
(1) Incontestability Clause;
(2) Misrepresentation after contract takes effect; HOW IS MATERIALITY DETERMINED?
30
NOTES ON INSURANCE
The materiality of a representation is determined like in a concealment, that is the (c) It has been in force during the lifetime of the insured for at least 2
probable and reasonable influence of the facts upon the party to whom the years from date of issue or last reinstatement.
representation is made in forming his estimate of the advantages/ disadvantages
of the contract or in making inquiries. 3.1. The two-year period within which to contest the policy is regardless
of whether or not the insured is still living within the period [Tan v
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED? CA, 174 SCRA 403].
1. The right to rescind must be exercised prior to the commencement of an 3.2. The defenses that are not barred by the incontestability clause are:
action on the contract.
2. The right to rescind is also qualified by the 2 nd paragraph of Sec. 48 (a) Non-payment of premiums;
which provided: that after a policy of life insurance payable on the death (b) Lack of insurable interest;
of the insured shall have been in force during the lifetime of the insured (c) That the cause of death was expected or not covered by the
for a period of 2 years from the date of issue or its last reinstatement, terms of the policy;
the insurer cannot prove that the policy is void ab initio or is subject to (d) That the fraud was of a particular vicious type such as:
rescission by reason of a fraudulent concealment or misrepresentation (1) Policy was taken in furtherance of a scheme to murder the
of the insured or his agent. This is known as the Incontestability Clause. insured;
(2) Where the insured substituted another for the medical
 INCONTESTABILITY CLAUSE – a clause in a policy of a life insurance examination;
that is payable on the death of the insured which will prevent the insurer (3) Where the beneficiary feloniously killed the insured.
from claiming if the policy is void ab initio or is subject to rescission by (e) Violation of a condition in the policy relating to military or naval
reason of a fraudulent concealment or misrepresentation of the insured service in time of war;
or his agent if it shall have been in force during the lifetime of the insured (f) The necessary notice or proof of death was not given;
for a period of 2 years from the date of issue or its last reinstatement. (g) Action is not brought within the time specified in the policy,
which in no case should be less than 1 year.
2.1. The theory and object of the clause on the part of the insurer is that 3.3. If the incontestability clause applies, the insurer can no longer
an insurer has/ should have a reasonable opportunity to investigate escape liability under the policy or be allowed to prove that the
the statements which are made by the applicant and that after a policy is void ab initio or may be rescinded by reason of
definite period, it should no longer be permitted to question its concealment or misrepresentation by the insured or his agent.
validity.
Bar 1984
On the part of the insured, its object is to give the greatest possible Q: On May 5, 1982, Juan applied for a life insurance policy with
assurance that the beneficiaries would receive payment of the Acme Life. The policy was issued to Juan on June 30, 1982, but the
proceeds without question as to validity of the policy. date of issue, as appearing on the policy was May 15, 1982, the
date of his application. Juan subsequently realized that some of his
3. The requisites of its application are: answers in the insurance application were erroneous. Accordingly,
(a) It is a life insurance policy; he supplied the insurance company with the correct replies.
(b) It is payable on the death of the insured; However, his letter to the insurance company was lost in the mails.
He died on June 1, 1984.
31
NOTES ON INSURANCE
such application where the insured had not been guilty thereof.
The insurance company now refuses to pay Juan’s beneficiary When X filled out the card, it behoved the insurer to look into the
contending that Juan misrepresented the state of his health at the qualification of X whether he can thus be covered or not by the
time of his application. Is the insurance company liable? group life insurance policy. In issuing the certificate of coverage to
X, Phoenix may, in fact, be said to have waived the 30-hour per
A: Yes. The incontestability clause that must be contained in every week requirement.
individual life insurance policy refers to the date of its issue as
shown in the policy. Since the policy of life insurance had been in Bar 1991
force during the lifetime of the insured, Juan, for a period of 2 years
from May 15, 1982, the date of issue as shown in the policy, the Q: Atty. Roberto took out a life insurance policy from Dana
policy has become incontestable. The insurance company can no Insurance on September 1, 1989. On August 31, 1990, Roberto
longer prove that the policy is void ab initio or rescindable by reason died. Dana Insurance refused to pay his beneficiaries because it
of fraudulent concealment or misrepresentation of the insured. discovered that Roberto had misrepresented certain material facts
in his application. The beneficiaries sued on the basis that Dana
Bar 1989 Insurance can contest the validity of the insurance policy only within
2 years from the date of issue and during the lifetime of the insured.
Q: Manpower Co. obtained a group life insurance for its employees Decide.
from Phoenix Insurance. The master policy issued by Phoenix on
June 1, 1986 contained a provision that eligible employees form A: I would rule in favour of the insurance company. The
insurance coverage were all full time employees of Manpower incontestability clause applies only of the policy had been in effect
regularly working at least 30 hours per week. The policy also had for at least 2 years. The two-year period is counted from the time
an incontestable clause. Beforehand, Phoenix sent enrolment cards the insurance becomes effective until the death of the insured and
to Manpower for distribution to its eligible employees. X filled out the not thereafter.
card which contained a printed clause: “I request the insurance for
which I may become eligible under said Group Policy.” The cards Bar 1994
were then sent to Phoenix and X was among the employees of
Manpower who was issued a certificate of coverage by Phoenix. Q: On Septemeber 23, 1990, Tan took a life insurance policy from
Philam. The policy was issued on November 6, 1990. He died on
On July 3, 1988, X was killed on the occasion of a robbery in their April 26, 1992 of hepatoma. The insurance company denied the
house. While processing the claim of X’s beneficiary, Phoenix found beneficiaries’ claim and rescinded the policy by reason of alleged
out that X was not an eligible employee as defined in the group misrepresentation and concealment of material facts made by Tan
policy since he has not been employed 30 hours a week by in his application. It returned the premiums paid.
Manpower. Phoenix refused to pay. May X’s beneficiary invoke the The beneficiaries contend that the company had no right to rescind
incontestability clause against Phoenix? the contract as rescission must be done “during the lifetime” of the
insured within 2 years and prior to the commencement of the action.
A: The beneficiary of X may validly invoke the incontestability clause Is the contention of the beneficiaries tenable?
can apply even to cases of intentional concealment and
misrepresentation; there would be no cogent reason for denying
32
NOTES ON INSURANCE
A: No. The incontestability clause does not apply. The insured died 3. Sotero did not have financial capability to pay the premium on
within less than 2 years from the issuance of the policy on the policy;
September 23, 1990. The insurance died on April 26, 1992, or less 4. Sotero did not sign the application for the insurance;
than 2 years from September 23, 1990. 5. Aban was the one who filed the insurance application and
designated herself as beneficiary.
The right of the insurer to rescind is only lost if the beneficiary has
commenced an action on the policy. There is no such action in this For the above reasons and claiming fraud, Ilocos Life denied Aban’s
case. claim on April 6, 1997, but refunded the premium paid on the policy.
Bar 1998 a. May the incontestability period set in even in cases of

fraud as alleged in this case?
Q: Renato was issued a life insurance policy on January 2, 1990. b. Is Aban entitled to claim the proceeds under the
He concealed the fact that 3 years prior to the issuance of his life policy?
insurance policy, he had been seeing a doctor about his heart
A:
ailment. On March 1, 1992, Renato died of heart failure. May the
heirs file a claim on the proceeds of the life insurance policy of a. Yes. The incontestability clause is a provision in law that after a
Renato? policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period
A: Yes. The life insurance policy in question was issued on January of 2 years from date of its issue or of its last reinstatement, the
2, 1990. More than 2 years had elapsed when Renato, the insured, insurer cannot prove that the policy is void ab initio or is rescindable
died on March 1, 1992. The incontestability clause applies. by reason of fraudulent concealment or misrepresentation of the
insured or his agent.
Bar 2014
In this case, the policy was issued on August 30, 1993, and the
Q: On July 3, 1993, Delia Sotero took out a life insurance policy insured died on April 10, 1996. The insurance policy was thus in
from Ilocos Bankers Life Insurance Corp. designating her niece force for a period of 3 years, 7 months and 24 days. considering
Cresencia Aban as her beneficiary. Ilocos Life issued Policy No. that the insured died after the 2-year period, Ilocos Life is, therefore,
747, with a face value of P100,000, in Sotero’s favour on August 20, barred from proving that the policy is vod ab initio by reason of the
1998, after the requisite medical examination and payment of the insured’s fraudulent concealment or misrepresentation or want of
premium. insurable interest on the part of the beneficiary.
On April 10, 1996, Sotero died. Aban filed a claim for the insurance b. Yes. After the 2-year period lapse, or when the insured dies within
proceeds on July 6, 1996. Ilocos Life conducted an investigation the period, the insurer must make good on the policy, even though
into the claim and came out with the following findings: the policy was obtained by fraud, concealment, or
1. Sotero did not personally apply for insurance coverage, as she misrepresentation, as in this case, when the insured did not
was illiterate; personally apply for the policy as she was illiterate and that it was
2. Sotero was sickly since 1990;
33
NOTES ON INSURANCE
the beneficiary who filled up the insurance application designating A: No, the insurer cannot escape liability. The insurance agent is an agent not of
herself as beneficiary. the insured but of the insurer and the latter must thus suffer for the misconduct of
the agent. The result would have been different had the false answer been made
Bar 1976 by the agent in connivance with the insured.
Q: A, an agent of life insurance company X, induced B who has been suffering DISTINGUISH CONCEALMENT FROM REPRESENTATION
from advance tuberculosis to apply for P10,000 life insurance which B did and
requested A to fill the application form. Thru the connivance of the physician, it 1. Concealment is the neglect of one party to communicate to the other
was made to appear in the application that B is in good health and the P10,000 material facts. The information he gives in compliance with his duty
life insurance policy was issued by X to B. If B dies of tuberculosis, may his to reveal information is representation. Representation therefore, is
beneficiaries recover? the communication required to comply with the prohibition against
concealment.
A: It depends. The insurer is bound when its agent writes a false answer into the
application without the knowledge of the insured, in which case, the insured’s 2. Concealment is the passive and misrepresentation is the active
beneficiaries may recover but a collusion between the agent and the insured in form of the same bad faith.
misrepresenting the facts will vitiate the policy. Thus, in the instant case, if A
obtained from B a correct and truthful answer to interrogatories contained in the
application but without the knowledge of B filed in a false answer and thru the CONCEALMENT AND REPRESENTATION COMPARED
connivance with the company physician, it was made to appear that B was in
good health, the insurer cannot assert the falsity of such answers as a defense to 1. In concealment, the insured withholds information of material facts; in
liability on the policy. representation, the insured makes erroneous statements.
Bar 1988 2. In concealment and misrepresentation, both give the insurer the right to
rescind the contract of insurance.
On October 18, 1980, P took out a life insurance policy and named his only son
Q as beneficiary. The policy was silent with regard to any change of beneficiary.
P later learned that Q was hooked on drugs and immediately notified the 3. The materiality of concealment and representation are determined by
insurance company in writing that he is substituting his sister, R, as his beneficiary the same rules.
in place of Q. P later died of advanced tuberculosis. In the application form filled
up by the agent of the insurance company prior to the issuance of the life 4. Whether the concealment and representation is intentional or not, the
insurance policy by the insurance company, the agent, without the knowledge of injured party can rescind.
P, filled in a false answer and made it appear that P was in good health. Upon P’s
death, Q claimed the proceeds of the insurance policy contending that as
designated beneficiary, he cannot be changed without his consent, he having 5. Since insurance contracts are of utmost good faith, the insurer is also
acquired a vested right to the proceeds of the policy. covered by the rules.
Can the insurance company refuse liability on the policy? Bar 2009
34
NOTES ON INSURANCE
Q: Antarctica Life Assurance publicly offered a specially designed insurance Bar 1986
policy covering persons between ages of 5- to 75 who may be afflicted with
serious and debilitating illnesses. Quirico applied for insurance coverage, stating Q: Pabaya paid for a fire insurance policy on his multi-storey building. At the time
that he was already 80 years old. he applied for the insurance, he told the representative of the insurance company
that he planned to assign a security guard on every floor of the building right away.
Nonetheless, Antarctica Life approved his application. Quirico then requested Except for the ground floor, no security guards were assigned. Eleven months
Antarctica Life for the issuance of a cover note while he was trying to raise funds after the policy was issued, the building was gutted by fire which started on the
to pay the insurance premium. Antarctica Life granted the request. Ten days after third floor. Unknown to Pabaya, the insurance company had incorporated his
he received the cover note, Quirico had a heart seizure and had to be planned undertaking in the policy. Can Pabaya recover on the fire insurance
hospitalized. He then filed a claim on the policy. policy?
Can Antarctica Life validly deny the claim on the ground that the insurance A: Pabaya can recover under the insurance policy. The statement of Pabaya that
coverage, as publicly offered, was available only to persons 50 to 75 years of the planned to assign a security guard on every floor of the building, whether
age? incorporated in the policy or not, did not amount to firm commitment so as to
constitute an express warranty or representation. The facts indicate that it was
A: No. There is no misrepresentation or concealment in this case which would simply planned, not obligatory or promissory, undertaking.
result to the denial of Quirico’s claim because by approving the application of
Quirico who disclosed that he was already 80 years old. Antarctica Life waived FORM
the age requirement. The insurance company is now estopped from raising such
defense of age of the insured. 1. No particular form of words is necessary to create a warranty.
2. What is essential is what the parties intend a statement to be, and if so

intended as a warranty, it must be included as part of the contract.
WARRANTIES
2.1. Whether a warranty is constituted or not depends upon:
DEFINED (a) the intention of the parties,
(b) the nature of the contract, or
1. It is a statement or promise stated in the policy or incorporated therein
(c) the words used thereto.
by reference, whereby the insured, expressly or impliedly contracts as
to the past, present and future existence of certain facts, conditions, or
2.2. In case of doubt, the statement is presumed to be a
circumstances, the literal truth of which is essential to the validity of the
representation, not a warranty.
contract.
WHAT ARE THE KINDS OF WARRANTIES?
 Warranty is a statement or promise by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or 1. Affirmative warranties – refer to those that relate to matters that exist at
nonfulfillment of which in any aspect and without reference to whether or before the issuance of the policy.
the insurer was in fact prejudiced by such untruth or nonfulfillment,
renders the policy voidable by the insurer (Vance, 1951).
35
NOTES ON INSURANCE
2. Promissory warranties – refer to those where the insured promises or from the very nature of the insurance contract, a warranty is necessarily
undertakes that certain matters shall exist or will be done or will be inferred or understood.
omitted after the policy takes effect.
4.1. The law only provides for implied warranties only in contracts
2.1. It is a statement in the policy, which imports that it is intended of marine insurance.
to do or not to do a thing which materially affects the risk, is a
warranty that such act or omission shall take place.
As when: That a house shall not be leased our or that the EFFECT OF VIOLATION OR BREACH OF A MATERIAL WARRANTY
insured premises will be fenced.
1. The violation of a material warranty, or other material provision of the
policy, on the part of either party thereto, entitles the other to rescind.
2.2. Unless the contrary intention appears, the courts will presume
that the warranty is merely an affirmative warranty.
1.1. Note that the insured can exercise the right also when the
insurer violates a warranty, like when it refuses to grant a loan
As when: A description of the property as being a two-storey
on the policy.
residence, there is no promissory warranty that it will be
maintained as a residence or there is a statement that “there is
NOTE: Breach of a material warranty may either be:
a security guard on duty at night” is not a promissory warranty
that a security guard will be maintained.
(a) Without fraud, in which case, the insurer will be exonerated
from the time it occurs. If made during the inception, it will
3. Express warranty is a statement in a policy of a matter relating to the
prevent the policy from taking effect (Sec. 76).
person or the thing insured, or to the risk as a fact and where the
assertion or promise is clearly set forth in the policy or incorporated
(b) With fraud, in which case, the policy is avoided ab initio.
therein by reference.
2. The policy may declare that a violation of specified provisions thereof

3.1. They can be affirmative or promissory warranties.
shall avoid it, otherwise the breach of an immaterial provision does not
avoid the policy.
3.2. An express warranty made at or before the execution of the
policy should be contained:
2.1. This means that while ordinarily the breach of an immaterial
provision does not avoid the policy, a stipulation that any
(a) In the policy itself;
breach avoids the policy will cause it to be avoided.
(b) In another instrument signed by the insured and referred
to in the policy as making a part of it. This also includes a
3. A breach of warranty without fraud, merely exonerates an insurer from
rider. It is a part of the policy; it need not be signed unless
the time it occurs, or where it is broken at its inception, prevents the
the rider was issued after the original policy took effect.
policy from attaching to the risk.
4. Implied warranties are assertions or promises not expressly set forth in
the policy, but because of the general tenor of the terms of the policy, or
36
NOTES ON INSURANCE
3.1. This means that if the breach is without fraud, the policy is As when: A severe lack of materials to construct.
avoided only from the time of the breach, but prior to the
breach, it is still effective. Consequently, the insured is entitled (d) Waiver or Estoppel.
to:
Bar 1993
(a) a pro-rata return of the premium paid under Sec. 80; or
(b) all premiums, if the breach occurs at the inception of the Q: Julie and Alma formed a business partnership. Under the business name Pino
contract, as such is void ab initio and had never become Shop, the partnership engaged in a sale of construction materials. Julie insured
binding. the stocks in trade of Pino Shop with WGC Insurance for P350, 000.
Subsequently, she again got an insurance contract with RSI for P1,000,000 and
4. Note that a causal connection between a violation of the warranty and then from EIC for P200,000. A fire of unknown origin gutted the store of the
cause of the loss is not necessary. Hence, even if the violation did not partnership. Julie filed her claims with the 3 insurance companies. However, her
contribute to the loss, the other party may still rescind. claims were denied separately for breach of policy. Julie went to court and
contended that she could not be blamed for the omission, alleging that the
As when: A insured his building against fire. A warranty stated that no insurance agents for WGC, RSI and EIC knew of the existence of the additional
hazardous goods would be stored. A stored fireworks. The building was insurance coverage and that she was not informed about the requirement that
burned and the fireworks were discovered stored in the area not affected such other or additional insurance should be stated in the policy.
by fire. The insurer was not held liable as the storage had increased the
May she recover on her fire insurance policies?
risk [Young v Midland Textiles, 30 Phil. 617].
A: No, because she is guilty of violation of a warranty/ condition.
5. Exceptions:
BREACH OF IMMATERIAL WARRANTY
The non-performance of a promissory warranty does not avoid the policy
before the arrival of the time for performance when: 1. General Rule: Breach of an immaterial provision does not avoid the
policy (Sec. 75).
(a) The loss insured against happens or loss occurs before thej time of
performance of the warranty. 2. Exception: Breach of an immaterial provision avoids the policy when the
parties stipulate that violation of a particular provision, though
As when: There is a warranty that a firewall will be constructed, but immaterial, shall avoid the policy, in effect, the parties converted the
fire occurs before the period for compliance. immaterial provision into a material one (Sundiang and Aquino, 2013).
(b) The performance becomes unlawful at the place of the contract. 2.1. A condition in the policy which requires insured to disclose to
the insurer of any insurance that, if violated by the insured,
As when: A law or ordinance prohibits the construction of the would ipso facto avoid the contract (Pioneer v Yap, 1974).
specified firewall.
2.2. Insurer is barred by waiver (or estoppel) to claim violation of the
(c) The performance becomes impossible; so-called hydrants warranty when, despite knowing fully that
only 2 fire hydrants existed (out of the 11 hydrants required), it
37
NOTES ON INSURANCE
still issued the insurance policies and received the premiums As when: The claim of the beneficiary that since the insured was illiterate
(Qua Chee Gan v Law Union, 1955) and spoke Chinese only, she could not be held guilty of concealment
because the application and policy was in English when upheld (Tang v
CA, 90 SCRA 236).
DISTINGUISHING IT FROM REPRESENTATIONS
FORM OF THE POLICY
1. As to Nature: A warranty is a part of the contract; a representation is
merely a collateral inducement thereto; 1. It shall be printed and may contain blank spaces and any word, phrase,
clause or mark, sign, symbol, signature, or number necessary to
2. As to Form: A warranty is expressly set forth in the policy or incorporated complete it shall be written in the blank spaces.
therein by reference, while a representation may be oral or written in
another statement. 2. If there are riders, clauses, warranties or endorsements purporting to be
part of the contract of insurance and which are pasted or attached to the
3. As to Compliance: A warranty must be strictly and literally performed, policy is not binding on the insured unless the descriptive title of the
while a representation must be substantially true. same is also mentioned and written on the blank spaces provided in the
policy.
4. As to Materiality: A warranty is presumed material, while a
representation must be shown to be so. 2.1. If pasted or attached after the original policy at the time it was
issued, the signature of the insured is not necessary to make it
5. As to Applicability of Incontestability Clause: Incontestability clause does binding.
not apply to breach of warranty, while it applies in misrepresentation.
2.2. If pasted or attached after the original policy is issued, it must
6. A breach of warranty is a breach of the contract itself while a be counter-signed by the insured unless it was applied for by
misrepresentation is ground to rescind the contract. the insured.
2.3. No rider, clauses, or warranties, or endorsements shall be

attached, printed or stamped on the policy unless the form of
POLICY such application has been approved by the Insurance
Commissioner.
It is the written instrument in which a contract of insurance is set forth.
2.4. Riders are forms attached to the policy when the policy finds it
HOW TO CONSTRUE THE POLICY
necessary to alter or amend the applicant’s answer to any
1. Generally, policy is construed in favour of the insured and against the question in the application.
insurer.
2.5. Clauses are forms containing additional stipulations.
2. The burden of proving that the terms of the policy have been explained
is upon the party seeking to enforce it. 2.6. Warranties are written statements/ stipulations inserted on the
face of the contract or incorporated by proper words of
38
NOTES ON INSURANCE
reference where the insured contracts as to the existence of Commissioner if he determines that it does not violate the Insurance
facts, circumstances or conditions, the truth of which are Code.
essential to the validity of the contract.
3.1. The following rules have been promulgated by the Insurance
2.7. Endorsements are agreements not contained but may be Commissioner to govern cover notes:
written or attached to policy, to change or modify a part thereof.
(a) A cover note is valid for 60 days whether or not a premium
is paid but it may be cancelled by either party upon at least
WHAT MUST A POLICY SPECIFY? a 7-day notice to the other party;
1. A policy must specify (b) If the cover note is cancelled, a regular policy must be
issued within 60 days from the date of issue of the cover
(a) The parties between whom the contract is made; note, including within its terms the identical insurance;
(b) The amount to be insured except in open or running policies;
(c) The premium, or if the premium is to be determined at the (c) It may be extended with the written approval of the
termination of the contract, a statement of the basis and rates upon Commissioner but may be dispensed with by a certification
which the final premium is to be determined; of the President, Vice-President, or General Management
(d) The property or life insured; of the insurer that the risks involved and the extension do
(e) The interest of the insured in the property insured, if not the absolute not violate the Code.
owner;
(f) The risks insured against; and (d) Insurance companies may impose a deposit premium
(g) The period during which the insurance is to continue. equivalent to at least 25% of the estimated premium but in
no case less than P500.
WHAT ARE COVER NOTES? 4. A cover note will give adequate insurance protection when: it is
considered as a preliminary contract of present insurance and not a
1. It is a written memorandum of the most important terms of a preliminary mere agreement to insure at a future time, as on acceptance of the
contract of insurance intended to give protection pending investigation application or issuance/ delivery of the policy (44 CJS 958).
by the insurer of the risk or until the issuance of the formal policy.
4.1. As when: An agent issued a provisional policy acknowledging
2. It is also known as a “binding slip” or “binder.” receipt of premiums and stating that the insurance shall be
effective upon approval and issuance of the policy by the head
3. The effectivity of a cover note is 60 days, as within such period, a policy office. There is no protection as it is a mere acknowledgment
shall be issued including in its terms the identical assurance found under of the payment of premiums as the effectivity of the insurance
the cover rate and the premium therefore. It may however, be extended is expressly provided (Lim v Sunlife,, 41 Phil. 265), or a binding
beyond 60 days and with the written approval of the Insurance slip stated that it was subject to the approval of the insurer and
the same was subsequently disapproved (Grepalife v CA, 89
SCRA 543).
39
NOTES ON INSURANCE
concealment of a material fact in the insurance application form and that it had
5. Rules of Joyce (Joseph Joyce, Author of five volumes of Commentaries rejected the application. P contended, on the other hand, that the binding deposit
on Insurance) receipt constituted a temporary contract of life insurance.
(a) If the act of the acceptance of the risk by the agent and the giving How would you resolve this?
by him of a receipt are within the scope of his authority, and nothing
remains but to issue the policy, then the receipt will bind the A: The insurance company is not liable. The binding deposit receipt is merely
company. conditional and does not insure outright. Where an agreement is made between
(b) Where an agreement is made between the applicant and the agent, the applicant and the agent, no liability shall attach until the principal (insurance
whether by signing an application containing such condition, or company) approves the risk. The binding deposit receipt is subordinated to the
otherwise, that no liability shall attach until the principal approves act of the insurance company in approving or rejecting the application. Thus, in
the risk and a receipt is given by the agent, such acceptance is life insurance, a “binding slip” or “binding receipt” does not insure by itself. And,
merely conditional and subordinated to the act of the company in when as in this case, the application was disapproved, before the death of the
approving or rejecting. insured, there was no perfected contract of insurance in order to make the
company liable [Great Pacific Life v CA; April 30, 1979 (89 SCRA 549)].
(c) Where the acceptance of the agent is within the scope of his
6. A cover note has been held to be binding despite the absence of a
authority, a receipt containing a contract of insurance for a specified
premium payment for its issuance as no separate premiums are
time which is not absolute but conditional, upon acceptance or
intended or required to be paid on a cover note because they do not
rejection by the principal, covers the specified period unless the risk
contain the particulars of the property insured that would serve as the
is declined within the same period.
basis for the computation of the premiums. The cover note should not
be treated as a separate policy but should be integrated in the regular
Bar 1980 policy subsequently issued so that premiums on the regular policy
should include that for the cover note (Pacific Timber Export v CA, 112
Q: P filed an application with an insurance company for a 20-year endowment SCRA 199).
policy in the amount of P50,000 on the life of his one-year old daughter, supplying
all the essential data in the application form, but without disclosing that his Bar 2009
daughter was a mongoloid child. Upon P’s payment of the annual premium, a
Q: Antarctica Life publicly offered a specially designed insurance policy covering
binding deposit receipt was issued to him by the insurance agent, subject to
persons between the ages 50 to 75 who may be afflicted with serious and
processing by the company. The insurance company disapproved the insurance
debilitating illnesses. Quirico applied for insurance coverage, stating that he was
application stating that the plan applied for was not available for minors below 7
already 80 years old.
years old, and offered another plan. The insurance agent did not inform P of the
disapproval nor of the alternative plan offered, and instead, strongly Nonetheless, Antarctica Life approved his application. Quirico then requested
recommended that the company reconsider and approve the insurance Antarctica Life for the issuance of a cover note while he was trying to raise funds
application. to pay the insurance premium. Antarctica Life granted the request. Ten days after
he received the cover note, Quirico had a heart seizure and had to be
As fate would have it, P’s daughter died. P sought payment of the proceeds of
hospitalized. He then filed a claim on the policy.
the insurance but the company refused on the grounds that there was
40
NOTES ON INSURANCE
Did Antarctica Life’s issuance of a cover note result in the perfection of an law, not by the law covering donations or succession (Del
insurance contract between Quirico and Antarctica Life? Val v Del Val, 29 SCRA 534);
A: Yes. A cover note has been held to be binding despite the absence of a (b) In an action to recover cost of repairs and labor to a motor
premium payment for its issuance as no separate premiums are intended or vehicle where they policy states loss is payable to HS
required to be paid on a cover note. The cover note should not be treated as a Reyes, the mortgagee of the vehicle who had no
separate policy but should be integrated in the regular policy subsequently issued knowledge of the fact that Mara had it repaired with
so that premiums on the regular policy should include that for the cover note. The Bonifacio Bros., the Court ruled that HS Reyes is the one
issuance of the cover note is because there is a delay on the issuance of the entitled to the proceeds because a policy of insurance is a
policy. The rule on cover note is that it shall be valid for 60 days whether or not a separate and independent contract between the insured
premium is paid, but it may be cancelled by either party upon at least a 7-day and the insurer, and that third persons have no right to the
notice to the other party and if not cancelled, the policy shall be issued. proceeds of the insurance (Bonifacio Bros. v Mora; GR No.
L-20853; May 29, 1967).
7. As application for insurance is nothing more than an offer to enter into a
contract of insurance. Such application, therefore, shall not become a 1.2. Unless otherwise specified in the policy, a 3rd person may sue
contract until accepted by the insurer. Such acceptance cannot be the insurer if:
presumed from a delay on the part of the insurer in passing upon the (a) The insurance contract contains a stipulation in favor of a
application. On the contrary, such delay for an unreasonable period of 3rd person, the said 3rd though not a party may sue to
time may be construed as a rejection of the application. enforce before the contract is revoked by the parties.
7.1. Acceptance is presumed when the insurer accepts and retains As when: The insurance company undertook to indemnify
for an unreasonable period of time (30 days) the first premium any authorized driver who was driving the motor vehicle
covered by a cashier’s receipt stating that the policy is effective insured. Coquia, while driving the insured motor vehicle,
on the date it is issued, without the policy being issued. If loss met an accident and died. His heirs were allowed to sue
occurs before the rejection of the policy, the insurer is liable the insurer, the policy being considered in the nature of a
[Gloria, et. al. v Philamlife, (CA ) 73 OG 8660]. contract pour autrui, and therefore the enforcement thereof
may be demanded by a 3rd party for whose benefit it was
WHOSE INTEREST IS INSURED?
made (Coquia v Fieldmen’s Insurance, 26 SCRA 179);
1. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit is made. (b) The insurance contract provides for indemnity against
Unless otherwise specified in the policy liability to 3rd persons.
1.1. As when: As when: The insured procured insurance that would

(a) The designation of sister as sole beneficiary in a life indemnify him against any and all sums which he may be
insurance cannot be defeated by the contention of the legally liable to pay in respect to the death or bodily injury
plaintiff that proceeds belong to the estate of the insured to any person. A jeepney covered by the insurance had
was disregarded as insurance is to be governed by special bumped Guingon and had caused his death. The
insurance was held to be one for indemnity against liability
41
NOTES ON INSURANCE
to 3rd persons, and therefore, such 3rd person is entitled to 5. When a policy is so framed that it will inure to the benefit of whomsoever,
sue the insurer (Guingon v del Monte, 20 SCRA 1043). during the continuance of the risk, may become the owner of the interest
insured (Sec. 57).
1.3. The test to determine whether a 3rd person may directly sue the
insurer of the wrongdoer is: If the contract provides for 5.1. The proceeds become payable to who may be the owner at the
indemnity against 3rd persons, then the latter to whom the time the loss or injury occurs. This is an exception to Sec. 20.
insured is liable may directly sue the insurer. On the other hand,
if the insurance is for indemnity against actual loss or payment, 6. The mere transfer of a thing insured does not transfer the policy but it
then the 3rd person cannot sue the insurer, recourse is against suspends it until the same person becomes the owner of both the policy
the insured alone. and the thing insured.
2. If the contract is executed with an agent or trustee as the insured, the 6.1. Note the exception to this rule as found in Secs. 20-24 and 57.
fact that his principal or beneficiary is the real party in interest may be
indicated by describing the insured as the agent/ trustee or by general WHAT ARE THE KINDS OF INSURANCE POLICIES?
words in the policy.
1. The kinds of policies are:
2.1. If not indicated, it is as if the insurance is taken out by the agent/ (a) Open;
trustee alone, consequently the principal has no right against (b) Valued;
the insurer. (c) Running or Floating.
3. If a partner or part owner effects insurance, it is necessary that the terms 2. An open policy is one in which the value of the thing insured is not agreed
of the policy should be such as are applicable to the joint and common upon, but is left to be ascertained in case of loss.
interest so that it may be applicable to the interest of his co-partners/
owners. 2.1. What is mentioned as the amount is not the value of the
. property but merely the maximum limit of the insurer’s liability.
3.1. Consequently, the policy must state that the interest of all is In case of loss, the insurer only pays the actual cash value at
insured. If not, it is only the interest of the one getting the policy the time of loss.
that is insured.
3. A valued policy is one which expresses on its face that the thing insured
4. When the description of the insured in the policy is so general that it may shall be valued at a specified sum.
comprehend any person or any class of persons, only he who can show
that it was intended to include him can claim the benefit of the policy. 3.1. The valuation of the property insured is conclusive between the
parties. In the absence of fraud or mistake, such value will be
As when: In a fire insurance policy where the insured is Dela Cruz & paid in case of a total loss.
Associates, X to be able to recover his share, must prove that he is a
partner. 3.2. A valued policy distinguished from an open policy:
42
NOTES ON INSURANCE
(a) In a valued policy, proof of value of the thing after the loss If the policy is an open policy then under the law, appraisal of loss is made after
is necessary. In an open policy, the insured must prove the the fire. Since the house was worth P100,000 at such time, then the loss of Jose
value of the thing insured; is P20,000 and he can recover this amount under such an open policy.
(b) In a valued policy, the parties have conclusively stipulated
that the property insured is valued at a specified sum. In CANCELLATION OF POLICY
an open policy, the value is not agreed but left to be
ascertained upon loss. This does not violate the principle 1. No policy other than life shall be cancelled by the insurer, except upon
that a contact of insurance is a contract of indemnity as prior notice thereof to the insured.
long as the valuation is reasonable and is bona fide.
2. No notice of cancellation shall be effective if not based on the
4. A running policy is one which contemplates successive insurances and occurrence, after effective date of one or more of the following grounds:
which provides that the object of the policy may be from time to time
defined especially as to the subjects of insurance, by additional (a) Non-payment of premium;
statements or indorsements. (b) Conviction of a crime arising out of acts increasing the hazard
insured against
4.1. This is also known as “floating policy” which is usually issued
to provide indemnity for property which cannot be recovered by As when: Insured has been convicted of arson or car theft;
specific insurance because of a frequent change in location (c) Discovery of fraud or material misrepresentation
and quantity.
As when: Insured represents himself as the owner but is not actually
As when: Insurance procured by a retail establishment to cover the owner;
its inventory that fluctuates in quantity, or is located in several (d) Discovery of willfull or reckless acts or omissions increasing the
areas. hazard insured against
Bar 1975 As when: There is storage of hazardous materials in the premises;

(e) Physical changes in the property insured which result in the property
Q: In 1964, Jose constructed a house worth P50,000 which he insured against being uninsurable
fire for the same amount. The insurance for the same amount was renewed every
year. In 1974, when the house was already worth P100,000 on account of As when: A private vehicle is converted into a racing vehicle.
inflationary prices (in case of rebuilding), 1/5 of the house was destroyed by fire.
As nothing illegal about the contract, how much, if any, can Jose successfully (f) Determination by the Insurance Commissioner that a continuation
recover from the insurance company? of the policy would place the insurer in violation of the Code
A: If the insurance policy is a valued one, then Jose can recover 1/5 of P50,000, As when: Policy was issued absent insurable interest.
i.e. P10,000. Under the Insurance Code, the valuation in a valued policy is
conclusive between the parties in the absence of fraud. So Jose cannot claim that 3. As to form, the notice must be in writing, mailed or delivered to the
since his house was worth P100,000 at the time of the loss, he should be able to named insured at the address shown in the policy which shall state:
recover P20,000 (actual value of loss – 1/5 of P100,000).
43
NOTES ON INSURANCE
(a) The grounds relied upon as per Section 64, and
(b) That upon written request of the named insured, the insurer will 2. This is not an absolute right as it is conditioned on the insurability of the
furnish the facts on which cancellation is based. insured or evidence of good health and the payment of all overdue
premiums and indebtedness, if any.
3.1. A fire insurance policy is cancelled on October 15, 1981. The
insurer’s clerk allegedly sent notice sent notice of cancellation by
mail but there was no proof that it was actually mailed and received.
Insurer relies on the presumption of regularity. It was held that PREMIUM
considering the strict language of the law that no policy can be
DEFINED
cancelled without prior notice, it behoved on the insurer to make
sure that cancellation was actually sent and received by the insured 1. The agreed price for assuming and carrying the risk which the insurer is
(Malayan Insurance v Cruz Arnaldo, 154 SCRA 672). entitled to the payment of a premium as soon as the thing insured is
3.2. A insured his building against fire and made the loss payable to the exposed to the peril insured against.
mortgagee. Upon cancellation, notice was sent to the mortgagee. It
was held that there was no valid notice of cancellation. The notice 2. The payment of a premium is essential to the validity of an insurance
is personal to the insured and not to any unauthorized person policy, known as the “cash and carry basis” or “no premium payment, no
(Saura Import v Phil. International, 8 SCRA 143). policy” rule.
DOES THE INSURED HAVE THE RIGHT TO RENEW HIS POLICY?
1. In insurance other than life, the named insured, may renew the policy 3. As a rule, the obligation to pay the premium when due is considered an
upon payment of the premium due on the effective date of the renewal, indivisible obligation. Consequently, forfeiture is not prevented by a part
if, he has not been given notice by the insurer of the intention not to payment unless payment by instalment has been agreed upon or is the
renew or to condition renewal upon reduction of limits or elimination of established practice.
coverages by mail or delivery at least 45 days in advance of the end of
WHEN IS THE INSURER ENTITLED TO A PREMIUM?
the policy.
1. The insurer is entitled to the payment of a premium as soon as the thing
2. For reckoning the end date of a policy: any policy written for a term of insured is exposed to the peril insured against.
less than one year shall be considered as if written for a term of one
year. If written for a term of more than one year or any policy with no 2. Notwithstanding any agreement to the contrary, no policy or contract of
fixed expiration date, it shall be considered as if written for successive insurance issued by an insurance company is valid and binding unless
periods or terms of one year. and until the premium is paid, except in:
HOW IS REINSTATEMENT OF THE POLICY EFFECTED?

(a) In case of life or industrial life where the premium is payable monthly
1. Reinstatement can be permitted within 3 years, or a stipulated longer or oftener, whenever the grace period applies;
period, from the date of default. (b) When the insurer makes a written acknowledgment of the receipt of
a premium, such is conclusive evidence of the payment of the
44
NOTES ON INSURANCE
premium to make it binding notwithstanding any stipulation therein Non-payment of premiums occasioned by war causes an
that it shall not be binding until the premium is paid. Hence, the insurance to be not merely suspended, but is completely abrogated. It
effect of an acknowledgment in a policy or contract of insurance of would be unjust to allow the insurer to retain the reserve value of the
the receipt of the premium, is that it is conclusive evidence of its policy, which is the excess of the premium paid over the actual risk
payment so far as to make the policy binding, however it is not carried during the years when the policy had been in force in time of war
conclusive for the purpose of avoiding collection of the premium; [Constantino v Asia Life (1950)].
and
WHAT IS THE EFFECT OF PARTIAL PAYMENT?
(c) Where the oblige has accepted the bond or suretyship contract in
which case such bond or suretyship contract becomes valid and 1. As a rule, the obligation to pay the premium when due is considered
enforceable irrespective of whether or not the premium has been an indivisible obligation. Consequently, forfeiture is not prevented
paid by the obligor to the surety. by a part payment unless payment by instalment has been agreed
upon or is the established practice (Gulf Resorts v Philippine
3. There is no excuse for non-payment of the premium since payment on Charter Insurance, 458 SCRA 550).
time is of the essence. The only recognized exception is when failure is
due to the wrongful conduct of the insurer. 1.1. Payment made to an insurance agent or broker is payment
to the insurance company.
As when: There is a baseless refusal to accept a validly tendered
payment of the premium (Gonzales v Asia Life, 92 Phil 197).
NOTE: Non-payment of premiums 1.2. A payment by check or a promissory note will be sufficient
Non-payment of first premium, unless waived, prevents the to make the policy binding when it is encashed (Art. 1249,
contract from becoming binding notwithstanding the acceptance of the Civil Code).
application nor the issuance of the policy.
Non-payment of subsequent premiums does not affect the NOTE: The payment of premium by a postdated check at
validity of the contracts, unless by express stipulation, it is provided that a stated maturity subsequent to the loss is insufficient to
the policy shall in that event be suspended or shall lapse. In case of put the insurance into effect. But payment by a check
individual life insurance, the policy holder is entitled a grace period of bearing a date prior to the loss, assuming availability of
either 30 days or one month within which payment of any premium after funds, would be sufficient, even if it remains unencashed
the first may be made. In cases of industrial life insurance, the grace at the time of the loss. The subsequent effects of
period is 4 weeks, and where premiums are paid monthly, either 30 days encashment would retroact to the date of the instrument
or one month. and its acceptance by the creditor [Vitug, Commercial Law
and Jurisprudence (2006)].
NO EXCUSES
Bar 1976
Fortuitous events which render payment by the insured wholly Q: A insured his house against loss by fire for P100,000. The policy provides that
impossible will not prevent forfeiture of the policy when the premium the insurer shall be liable “if the property insured shall be damaged or destroyed
remains unpaid.
45
NOTES ON INSURANCE
by fire after payment of premium, at any time from June 15, 1976 to June 15, Bar 1978
1977.” The policy was delivered to A on June 15, 1976. Instead of paying the
premium in cash, A issued a promissory note dated June 15, 1976, for the amount Q: On December 17, 1975, a fire policy, insuring a building and its contents, was
of premium, payable within 30 days. The note was accepted. On June 29, 1976, delivered to the insured company. By agreement, it was allowed to pay the
the property insured was burned. The insurer refused to pay on the ground that premium within 30 days. On January 8, 1976, it paid the premium by means of a
the premium had not been paid, and the note did not have the effect of payment check postdated January 16, 1976. The check was deposited by the insurance
as its valued had not been realized at the time the house was burned. Decide. company only on February 20, but the check bounced, although on January 19,
the insured had sufficient bank balance. On January 18, two days after the
A: Since the case given took place after the effectivity of the Insurance Code, it premium became due, the insured property was burned and became a total loss.
must be governed by its provisions. Section 77 thereof provides: “Notwithstanding
any agreement to the contrary, no policy or contract of insurance issued by an Can the insurance company cancel the policy for non-payment of premium?
insurance company is valid and binding unless and until the premium thereof has
been paid…” Considering that this cited provision replaced Sec. 72 of the old A: Yes, the insurance company can cancel the policy for non-payment of the
Insurance Act expressly by permitting the granting of credit extension, the only premium. The new Insurance Code provides that notwithstanding any agreement
conclusion is that the law-making power intended by the amendment to disallow to contrary, no policy or contract of insurance is valid and binding unless and until
any agreement postponing payment of premium, including a grant of credit the premium thereof has been paid.
extension. The issuance of a promissory note postpones payment by granting
Bar 2006
credit extension. Therefore, the insurer is not liable under this express provision
of the new Insurance Code. The case of Capital Insurance v Plastic Era which Q: The Peninsula Insurance Co. offered to insure Francis’ brand new car against
held that acceptance of a promissory note constitutes waiver of the stipulation as all risks in the sum of P1,000,000 per year. The policy was issued with the
to mode of payment, a promissory note constitutes payment, took place before premium fixed at P60,000 in 6 months. Francis only paid the first two months
the Insurance Code came into effect and was based on Sec. 72 of the old instalments. Despite demands, he failed to pay the subsequent instalments, five
Insurance Act. It can therefore not be made applicable to the given case. months after the issuance of the policy, the vehicle was carnapped. Francis filed
with the insurance company a claim for its value. However, the company denied
Answer from UST Golden Notes:
his claim on the ground that he failed to pay the premium resulting in the
Yes, the insurer is liable because there has been a perfected insurance contract. cancellation of the policy.
The insurer accepted the promise of the applicant to pay the insurance premium
Can Francis recover from Peninsula Insurance?
within 30 days from the effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy and in effect, waived any A: Yes, considering that his car was carnapped before the 6-month period to pay
provision therein that it would only pay for the loss or damage in case the same the premium installments expired. An insurance premium can be paid in
occurs after the payment of the premium. instalments, and the insurance contract became valid and binding upon payment
of the first premium. When the insurer granted a credit term for the payment of
Considering that the insurance policy is silent as to the mode of payment, insurer
the premium, it is liable when the loss occurred before the expiration of such term.
is deemed to have accepted the promissory note in payment of the premium. This
It could not deny liability on the ground that payment was not made in full, for the
rendered the policy immediately operative on the date it was delivered [Capital
reason that it agreed to accept instalment payments. For the same reason, it
Insurance v Plastic Era; GR No. L-22375; July 18, 1975].
could not validly cancel the policy, more so, without giving notice to the insured
for its cancellation.
46
NOTES ON INSURANCE
Bar 2010 Q: Stable Insurance and St. Peter Manufacturing have had a long-standing
insurance relationship with each other: St. Peter secures the comprehensive fire
Q: Enrique obtained from Seguro Insurance a comprehensive motor vehicle insurance on its plant and facilities from Stable Insurance. The standing business
insurance to cover his top of the line Aston Martin. The policy was issued on practice between them has been to allow St. Peter a credit period of 90 days from
March 31, 2010 and, on even date, Enrique paid the premium with a personal the renewal of the policy with which to pay the premium. Soon after the new policy
check postdated April 6, 2010. was issued and before premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day after the fire, St. Peter issued
On April 5, 2010, the car was involved in an accident that resulted in its total loss. a manager’s check to Stable Insurance for the fire insurance premium, for which
On April 10, 2010, the drawee bank returned Enriques’s check with the notation it was issued a receipt. A week later, St. Peter issued its notice of loss. Stable
“insufficient funds.” Upon notification, Enrique immediately deposited additional Insurance responded by issuing its own manager’s check for the amount of the
funds with the bank and asked the insurer to redeposit the check. Enrique premiums St. Peter has paid, and denied St. Peter’s claim on the ground that
thereupon claimed indemnity from the insurer. under the cash and carry principle governing fire insurance, no coverage existed
at the time the fire occurred because the insurance premium had not been paid.
Is the insurer liable under the insurance coverage?
Is St. Peter entitled to recover from the loss from Stable Insurance?
A: No. Under Art. 1249 of the Civil Code, the delivery of a check produces the
A: St. Peter is entitled to recover for the loss from Stable Insurance. Stable
effect of payment only when it is encashed. The loss occurred on April 5, 2010.
Insurance granted a credit term to pay the premiums. This is not against the law,
When the check was deposited, it was returned on April 10, 2010, for insufficiency
because the standing business practice of allowing St. Peter to pay the premiums
of funds. The check was honoured only after Enrique deposited additional funds
after 60 days or 90 days, was relied upon in good faith by St. Peter. Stable
with the bank. Hence, it did not produce the effect of payment.
Insurance is in estoppel.
Bar 2007
Bar 2014
Q: Alfredo took out a policy to insure his commercial building against fire. The
Q: On September 25, 2013, Danny procured a n insurance on his life with a face
broker for the insurance company agreed to give a 15-day credit within which to
value of P5,000,000 from RN Insurance, with his wife Tina as sole beneficiary.
pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo
On the same day, Danny issued an undated check to RN Insurance for the full
issued a postdated check payable on May 30, 2006. On May 28, 2006, a fire
amount of the premium. On October 1, 2013, RN Insurance issued the policy
broke out and destroyed the building owned by Alfredo.
covering Danny’s life insurance. On October 5, 2013, Danny met a tragic accident
May Alfredo recover on the insurance policy? and died. Tina claimed the insurance benefit, but RN Insurance was quick to deny
the claim because at the time of Danny’s death, the check was not yet encashed
A: Yes. It is valid to stipulate that the insured will be granted credit term for and therefore, the premium remained unpaid.
payment of premium. Payment by means of a check which was accepted by the
insurer, bearing a date prior to the loss, would be sufficient. The subsequent Is RN Insurance correct? Will your answer be the same if the check is dated
effects of encashment retroact to the date of the check [UCPB General v October 15, 2013?
Masagana Telamart, 356 SCRA 307 (2001)].
A: No, RN Insurance is not correct. After the issuance of the check by Danny for
Bar 2013 the full amount of the premium, the unconditional delivery of an insurance policy
of RN Insurance to Danny corresponding to the terms of the application ordinarily
47
NOTES ON INSURANCE
consummates the contract, and the policy as delivered becomes the final contract (a) A short period rate has been agreed upon. What will be
between the parties. Where the parties, so intend, the insurance becomes recoverable is the agreed percentage of premiums as
effective at the time of the delivery of the policy notwithstanding the fact that the stated in the policy.
check was not yet encashed.
As when: The policy is returned after a month, the insurer
My answer will still be the same even if the check is dated October 15, 2013 since retains 20% of the premium because it has been agreed
an acknowledgment in a policy of the receipt of premium is conclusive evidence upon, the insured then receives 80%, not the premiums
of its payment for the purpose of making the policy binding. equivalent to the 11 months remaining on the term; or
2. Basic principles of equity and fairness would not allow the insurer (b) The policy is a life insurance policy as the same is
to collect and accept instalments and later deny liability as indivisible but the insured is entitled to a cash surrender
premiums were not paid in full (Philippine Phoenix Surety v value.
Woodworks, 20 SCRA 1272).
NOTE: Cash Surrender Value
2.1. Should any partial payment be made when there is an It is the amount that the insured is entitled to receive if he
agreement that the policy shall not be effective pending surrenders the policy and releases his claims upon it. The
payment of full premium was in the concept of a deposit right to CSV accrues only after three full annual premium
(Tibay v CA, 257 SCRA 126). payments. The insured is given the right to claim the
amount less than the reserve, reduced by surrender
REFUND OF PREMIUM
surcharge.
WHEN IS THE INSURED ENTITLED TO A RETURN (REFUND) OF THE
PREMIUMS PAID? The CSV is an amount which the insurance company hold
in trust for the insured to be delivered to him upon demand.
1. The insured will be entitled to a return of the premiums paid when: When the company’s credit for advances is paid out of the
cash value or CSV, that value and the company’s liability
1.1. To the whole premium, when no part of the interest in the thing is diminished [Manufacturer’s Life v Meer (1951)].
insured is exposed to any of the perils insured against. 1.3. When the contact is voidable on account of fraud or
misrepresentation of the insurer or the agent.
As when: Insurance is taken on a vessel for a voyage that did
not take place. As when: The insurer makes a representation regarding a loan
provision which is not contained in the policy that is issued.
1.2. Where the insurance is made for a definite period of time and
the insured surrenders his policy before the expiration of the 1.4. Where the contract is voidable on account of facts, the
period. Here the insured only recovers a portion of the policy existence of which the insured was ignorant without his fault.
premiums corresponding to the unexpired time, but it does not
apply if: As when: The insurance is taken by the insured, who is ignorant
of the fact that he did not have insurable interest or a person,
48
NOTES ON INSURANCE
not knowing that his car has been totally damaged, procured
insurance over it. (3) When the insured is guilty of fraud or misrepresentation.
1.5. When by default of the insured other than actual fraud, the
insurer never incurred any liability under the policy.
CLAIMS SETTLEMENT AND SUBROGATION
As when: A person insured his vessel for a trip, but the vessel
is destroyed before the trip. CONCEPT OF LOSS
Loss in insurance law embraces injury or damage [Bonifacio Bros. v Mora (1967)].
1.6. In case of over-insurance. Here, the insurance is in excess of
the amount of the insurable interest of the insured and it is
insured by several insurers, the insured is entitled to a ratable
return of premium, proportional to the amount by which the Requisites for Recovery upon Loss:
aggregate sum insured in all the policies, exceeds the insurable
value. (1) The insured must have insurable interest in the subject matter;
(2) The interest is covered by policy;
As when: The insured’s property is valued at P1,500,000. He (3) There be a loss;
obtains a policy from 1st Co. for P1,000,000, paying P10,000 (4) The loss must be one for which the insurer is liable;
and a policy from the 2nd Co. for P2,000,000, paying P20,000. (5) Notice and proof of loss must be given if policy is fire insurance or when
Since the value of the property is ½ the value of the insurance, the same is stipulated in the policy.
the insured is entitled to recover ½ of the premiums paid from
each of the insurers. Causes of Loss:
2. Unless otherwise stated, the premiums shall be returned to the insured (1) Remote causes is an event preceding another in a causal chain, but
that paid them. separated from it by other events;
(2) Proximate cause is “that cause, which, in natural and continuous
WHEN ARE THEY NOT RECOVERABLE? sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred [Vda. de
Premiums cannot be recovered: Bataclan v Medina (1975)]”
(3) Immediate cause is the cause, not the proximate cause which
(1) If the peril insured against has existed, and the insurer has been liable immediately precedes the loss.
for any period, the period being entire and indivisible
LOSS AND NOTICE OF LOSS
As when: The vessel is insured for a voyage that will take 5 days; 2 days
into the voyage, the policy is surrendered. WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS
LIABLE FOR THE LOSS OF THE THING INSURED
(2) In life insurance because it is considered as an entire contract of
assurance for life; and
49
NOTES ON INSURANCE
1. Loss of which a peril insured against is the proximate cause, although a injuries, which coupled with his weak heart causes his death.
peril not contemplated by the contract may have been a remote cause The proximate cause is the accident. The insurer is liable.
but the insurer is not liable for a loss of which the peril insured against
was only a remote cause. (c) If there are concurrent causes with an excepted peril or when
the insured peril and excepted peril operate together to
1.1. The proximate cause is that which, in a natural and continuous produce the loss, the claim will be outside the scope of the
sequence, unbroken by any efficient intervening cause, produces policy.
an injury and without which an injury and without which the injury
would not have occurred. As when: No liability in a claim for property stole by rioters
under a burglary policy, if the policy excludes riot risks.
1.2. As when: In life insurance that covers death by accident, if the
insured sustains an accident that renders him weak, while in said (d) But, if the results of the operation of the insured peril can be
state, he contracts a cold that develops into pneumonia, the clearly separated from the effects of the excepted peril, the
proximate cause is the accident, while the remote cause is the insurer is liable.
pneumonia. The insurer is liable.
As when: A personal accident policy will cover death by
1.3. As when: Firemen train their hoses at the house of the insured, accident although the insured was suffering from a disease
damaging windows and furniture, though not necessary to put out excluded by the policy.
the fire as the same was affecting the house of the neighbour. The
insured cannot claim loss due to fire as it is only a remote cause. (e) Where a number of causes operate one after the other, and the
original cause happens to be a peril insured against, there is
1.4. Recognizing that there are problems in determining probable cause, liability.
note the following principles:
As when: The insured is injured in an accident, he scratches an
(a) If there is a single cause which is an insured peril, clearly it is open wound, which gets infected, which ultimately results in
the proximate cause and there is liability. death, there is liability on the accident insurance policy,
As when: Insurance is against fire and the property insured is  but if the direct chain of events can be traced to an excepted peril, there
burned or insurance covers accidental death and the insured is no liability
dies in an accident. As when: An earthquake, if excepted, causes a fire that spreads, all
resulting fire damage is deemed caused by an excepted peril,
(b) If there are concurrent causes or those happening together,  but again, if the chain of events is broken by the intervention of a new
with no excluded perils, there is liability if one of the causes is and independent cause, the liability will depend upon whether the new
an insured peril, the others may be ignored. cause is an insured or excepted peril.
As when: In an accident insurance where the insured has a As when: The insured is treated in the hospital for an accident but while
heart disease. He is involved in an accident that causes there he contracts a disease, the disease is the proximate cause, there
50
NOTES ON INSURANCE
will be no liability under the accident policy. However, if death by disease
is covered, the insurer is liable. Q: Alfredo took out a policy to insure his commercial building against
fire. The broker for the insurance company agreed to give a 15-day
2. Loss cause by efforts to rescue the thing insured from a peril insured credit within which to pay the insurance premium. Upon delivery of
against that would otherwise have caused a loss, if in the course of such the policy on May 15, 2006, Alfredo issued a postdated check
rescue, the thing is exposed to peril not insured against, which payable on May 30, 2006. On May 28, 2006, a fire broke out and
permanently deprives the insured of its possession, in whole or in part, destroyed the building owned by Alfredo.
or where a loss is caused by efforts to rescue the thing insured from a
peril insured against. Suppose it was found that the proximate cause of the fire was an
explosion and that fire was but the immediate cause of loss and
2.1. As when: The thing insured is water damaged due to efforts to put there is no excepted peril under the policy, may Alfredo recover on
out a fire, the fire being a peril insured against, or theft by 3 rd the insurance policy?
persons while the goods are brought out in the course of rescuing A: Yes, recovery under the insurance contract is allowed if the
them from a fire, which is the peril insured against, but there is no cause of the loss was either the proximate cause or the immediate
liability for loss if the goods are left out and are lost as the same is cause as long as an excepted peril, if any, was not the proximate
now due to lack of reasonable care and vigilance, or while removing cause of the loss (Sec. 86, Insurance Code of the Philippines).
the contents of a burning house, they were stolen or they were
broken or damaged, theft or breakage not ordinarily being perils 4. An insurer is not liable for a loss caused by the wilful act or through the
insured against. connivance of the insured; but he is not exonerated by the negligence of
the insured, or of the insured’s agent or others.
3. Where a peril is especially excepted in a contract of insurance, a loss,
which would not have occurred but for such peril, is thereby excepted 4.1. Consequently, if the insured was merely negligent, the insurer is still
although the immediate cause of the loss was a peril which was not liable as one of the principal reasons for procuring insurance is to
excepted. protect himself against the consequences of his own negligence or
that of his agents.
3.1. The immediate cause is the cause or condition nearest the time and
place of injury. Bar 2007
Q: If the fire was found to have been caused by Alfredo’s
3.2. The insurer will be liable if both the immediate cause and the negligence, can he still recover?
proximate cause are not excepted. If the proximate cause is
excepted and the immediate cause is not, the insurer is not liable. A: Yes. Mere negligence on the part of the insured will not prevent
recovery under the insurance policy. The law merely prevents when
3.3. As when: A factory is insured against fire, but it excepts loss through the cause of the loss is the wilful act of the insured, alone or in
explosion. If an explosion occurs and results into a fire that creates connivance with others (Sec. 89, Insurance Code of the
a loss, the insurer is not liable. If a fire occurs first, then an explosion Philippines).
is caused, the insurer is liable.
Bar 1993
Bar 2007
51
NOTES ON INSURANCE
Q: S Insurance issued a Personal Accident Policy to Bob Tan with or wilfully exposing himself to needless peril except in an attempt to
a face value of P500,000. save human life.” Six months later, Henry died of a bullet wound in
his head. Investigation showed that one evening, Henry was in a
In the evening of September 5, 1992, after his birthday party, Tan happy mood although he was not drunk. He was playing with his
was in a happy mood but not drunk. He was playing with his handgun from which he had previously removed its magazine. He
handgun, from which he previously removed the magazine. As his pointed the gun at his sister who got scared. He assured her it was
secretary was watching television, he stood in front of her and not loaded. He then pointed the handgun at his temple and pulled
pointed the gun at her. She pushed it aside and said that it may be the trigger. The gun fired and Henry slumped dead on the floor.
loaded. He assured her that it was not and then pointed the gun at
his temple. The next moment, there was an explosion and Tan Henry’s wife Beverly, as designated beneficiary, sought to collect
slumped on the floor lifeless. under the policy. Sun-Moon rejected her claim on the ground that
the death of Henry was not accidental. Beverly sued the insurer.
The wife of the deceased sought payment on the policy but her Decide.
claim was rejected. The insurance company agreed that there was
no suicide. However, it was the submission of the insurance A: Beverly can recover the proceeds of the policy from the insurer.
company that there was no accident. In support thereof, it The death of the insured was not due to suicide or wilful exposure
contended that: to needless peril which are the excepted risks. The insured’s act
(a) There was no accident when a deliberated act was performed was purely an act of negligence which is covered by the policy and
unless some additional, unexpected, independent and for which the insured got the insurance for his protection. In fact, he
unforeseen happening occur which produces or bring about the removed the magazine from the gun and when he pointed it to his
injury or death; and temple, he did so because he thought it was safe for him to do so.
(b) The insured wilfully exposed himself to needless peril and this He did so to assure his sister that the gun was harmless. There is
removed himself from the coverage of the insurance policy. none in the policy that would relieve the insurer of liability for the
death of the insured since the death was an accident.
Are the two contentions of the insurance company tenable?
4.2. As when: The insured carelessly used kerosene in lighting a stove,
A: No. The insurer is liable for injury or death even due to the causing his house to catch fire, the insurer is liable for loss but if the
insured’s gross negligence. The fact that the insured removed the negligence is so gross so as to be sufficient basis for fraudulent
magazine from the handgun means that the insured did not wilfully intent, it can amount to a wilful act.
expose himself to needless peril. At most, the insured is only guilty
of negligence. TRANSFER OF CLAIMS
Bar 1995 1. An agreement not to transfer the claim of the insured after the loss
happens is void if made before the loss, except as otherwise provided in
Q: Sun-Moon Insurance issued a Personal Accident Policy to Henry case of life insurance.
Dy with a face value of P500,000. A provision in the policy states
that “the company shall not be liable in respect of bodily injury 2. This means that the insured has an absolute right to transfer his claim
consequent upon the insured person attempting to commit suicide against the insurer after the loss occurs, what is prohibited is a transfer
52
NOTES ON INSURANCE
prior to the loss. This is so because such a stipulation after the loss amounts claimed, and supporting evidence, together with a demand or
occurs shall hinder the transmission of property. Neither does it affect request for payment.
the insurer as its liability is already fixed and what is actually assigned is
the money claim or chose of action, not the contract itself. PROOF OF LOSS
3. The exception is Sec. 175 that provides that the transfer of a fire 1. If the policy requires Preliminary Proof of Loss or evidence given the
insurance policy to any person or company who acts as an agent for or insurer of the occurrence of the loss, its particulars, and data necessary
otherwise represents the issuing company is prohibited and is void to enable it to determine the liability and the amount thereof, it is not
insofar as it affects other creditors of the insured. necessary that the insured give such proof as may or would be sufficient
in a court of justice. What is sufficient is the best evidence that he has in
his power at that time.
NOTICE AND PROOF OF LOSS
NOTE: Like a notice of loss, in the absence of any stipulation in the
WHEN MUST NOTICE OF LOSS BE GIVEN AND BY WHOM policy, proof may be given orally or in writing (UP 2014).
1. Notice of loss must be given without unnecessary delay by the insurer 2. If in the giving of preliminary proof of loss, a certification or testimony of
or some person entitled to the benefit of the insurance. If not so given, a 3rd person other than the insured is required, it is sufficient for the
insurer is exonerated. insured to use reasonable diligence to procure it. In case of refusal to
give it, the insured can furnish reasonable evidence to the insurer that
2. Unnecessary delay is within a reasonable time, depending on such refusal was not induced by any just grounds of disbelief in the facts
circumstances of a peculiar case, although courts have construed the necessary to be certified or testified. Once shown or given, the
requirement liberally in favour of the insured. requirement may be dispensed with.
2.1. Note the specific application to fire insurance due to the nature RULES FOR RECOVERY
of the loss and urgent need to determine the cause thereof. The
longer the period that lapses from the time of the loss, the General Rule:
greater is the opportunity of the insured to tamper with the
evidence in preparation for a fraudulent claim. Timely compliance with the notice and proof of loss is a condition precedent to
the right to recover if the policy is fire insurance, or when the same is stipulated
FORM OF NOTICE OF LOSS in the policy.
1. In the absence of any stipulation in the policy, notice may be given orally Exceptions:
or in writing.
(1) For both notice and proof of loss, waiver:
2. The notice of loss may be in the form of an informal or provisional claim (a) Defects in a notice or proof of loss may be waived when such
containing a minimum of information as distinguished from a formal defects, which the insured might remedy, are not specified, without
claim which contains the full details of the loss, computation of the unnecessary delay, to him as ground of objection by the insurer
(Sec. 92);
53
NOTES ON INSURANCE
(b) Delay in presentation to an insurer of notice or proof of loss is
waived if caused by any act of his, or if he omits to take objection 2. Where a policy gives the insurer the control of the decision to settle claim
promptly and specifically upon that ground. or litigate it, the insurer nevertheless is required to observe a certain
measure of consideration for the interest of the insured.
(2) For notice of loss, a formal notice of loss is not necessary if insurer has
actual notice of loss. 3. In case of litigation, it is the duty of the Commissioner or the Court to
determine whether the claim has been unreasonably denied or withheld.
WHEN ARE DEFECTS IN THE NOTICE OR PROOF OF LOSS DEEMED
WAIVED BY THE INSURER? 4. Failure to pay any such claim within the time prescribed shall be
considered prima facie evidence of unreasonable delay in payment.
1. When the insurer fails to specify to the insured any defect which the
insured can remedy without unnecessary delay. CLAIMS LIFE INSURANCE NON-LIFE INSURANCE
Either:
As when: It is required to be sworn to but is accepted by the insurer. (1)Upon death of
the person insured;
(1)Upon happening of
2. When the insurer denies liability on a ground other than the defect in the event insured against;
(2)Upon his
notice or proof of loss. and
surviving a specific
period; or
As when: Denial of claim is based on nullity of the contract. MATURITY (2)Event must occur
within the period specified
(3)Otherwise
WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED? in the policy, otherwise,
contingently on the
insurer has no liability.
continuance or
1. If it is caused by any act of the insurer. cessation of life
(Sec. 180)
As when: The insurer accepts payment of the premium with full
knowledge that the premises have been lost or damaged will be
GR: The proceeds (1) Within 30 days after:
estopped from claiming delay in the giving of notice of loss.
should be delivered
immediately upon (a) Proof of loss is
2. If the insurer omits to make an objection promptly and specifically on maturity of policy. received by
that ground. insurer; and
DELIVERY OF EXCs: (b) Ascertainment of
As when: Despite a delay, the insurer does not object. PROCEEDS (1)If payable in loss or damage
instalments or as an is made either by
GUIDELINES ON CLAIMS SETTLEMENT annuity, when such agreement
instalments or between the
annuities become insured and
1. Claims settlement is the indemnification of the loss suffered by the
due; insurer or by
insured. The claimant may be the insured or reinsured, the insurer who arbitration;
is entitled to subrogation, or a 3rd party who has a claim against the
insured.
54
NOTES ON INSURANCE
(2)If maturity is (2)If ascertainment is not (4) Not attempting in good faith to effectuate prompt, fair and equitable
upon death, within made within 60 days after settlement of claims submitted in which liability has become reasonably
60 days after such receipt by insurer of clear; or
presentation of proof of loss, then loss or
claim and filing of damage shall be paid
proof of death of within 90 days after such
insured. receipt. (5) Compelling policyholders to institute suits to recover amounts due under
its policies by offering without justifiable reason substantially less than
(1) This entitles the beneficiary to collect the amounts ultimately recovered in suits brought by them.
interest on the proceeds of policy for the
duration of the delay at rate of twice the Evidence as to numbers and types of valid and justifiable complaints the
ceiling prescribed by the monetary Commissioner against an insurance company, and the Commissioner’s
Effect of refusal or
board (unless refusal to pay is based on complaint experience with other insurance companies writing similar lines of
failure to pay
ground that claim is fraudulent);
claim within time insurance shall be admissible in evidence in an administrative or judicial
prescribed proceeding for the purpose of determining whether unfair claims settlement
(2) In case damages are awarded, this
includes attorney’s fees and other practices have been committed.
expenses incurred due to delay (pus the
interest) It is found, after notice and an opportunity to be heard, that an insurance
UNFAIR CLAIMS SETTLEMENT: SANCTIONS company has violated this section, each instance of noncompliance may be
treated as a separate violation and shall be considered sufficient cause for
No insurance company doing business in the Philippines shall refuse, without just the suspension or revocation of the company’s certificate of authority (Sec.
cause, to pay or settle claims arising under coverages provided by its policies. 247).
Nor shall any such company engage in unfair claim settlement practices.
WHAT IS THE EFFECT OF A FRAUDULENT CLAIM?
WHAT CONSTITUTES UNFAIR CLAIM SETTLEMENT?
In United Merchants v Country Bankers [GR No. 198588 (July 11, 2012)], it was
Any of the following acts by an insurance company, if committed without just held that: Where a fire insurance policy provides that “if the claim be in any respect
cause and performed with such frequency as to indicate a general business fraudulent, or if any false declaration be made or used in support thereof, or if any
practice, shall constitute unfair claim settlement practices: fraudulent means or devices are used by the insured or anyone acting in his
behalf to obtain any benefit under the policy” and the evidence is conclusive that
(1) Knowingly misrepresenting to claimants pertinent facts or policy the proof of the claim which the insured submitted was false and fraudulent as
provisions relating to coverage at issue; both as to kind, quality and amount of the goods and their value destroyed by fire,
such proof of claim is a bar against the insured from recovering on the policy even
(2) Failing to acknowledge with reasonable promptness pertinent to for the amount of his actual loss. It has long been settled that a false and material
communications with respect to claims arising under its policies; statement made with intent to deceive or defraud voids on insurance policy. In Yu
Cua v South British Insurance, the claim was fourteen times bigger than the real
loss; in Go Lu v Yorkshire Insurance, eight times; in Tuason v North China
(3) Failing to adopt and implement reasonable standards for the prompt Insurance, six times. In the present case, the claim is twenty-five times the actual
investigation of claims arising under its policies; claim proved.
55
NOTES ON INSURANCE
SUBROGATION 1. In property insurance, after the insured has received payment from the
insurer of the loss covered by the policy, the insurance company is
Subrogation is a process of legal substitution. The insurer, after paying the subrogated to the rights of the insured against the wrongdoer or the
amount covered by the insurance policy, steps into the shoes of the insured and person who has violated the contract. The insurer becomes entitled to
avails himself of the latter’s rights that exist against the wrongdoer at the time of recover from the wrongdoer the amount of the loss it may have paid to
loss. the insured.
WHEN DOES SUBROGATION TAKE PLACE? 1.1. The right of subrogation accrues upon payment of the insurance
claim.
Subrogation inures to the insurer without need of assignment or express
stipulation upon payment made to the insured. The act of payment makes the
1.2. The rights to which the subrogee succeeds are the same as, but not
insurer a subrogee in equity.
greater than, those of the person for whom he is substituted.
NOTE: Subrogation applies only to property insurance and non-life
insurance. 1.3. The subrogee-insurer cannot acquire any claim, security, or remedy
the subrogor did not have. In other words, a subrogee cannot
WHAT IS THE CONCEPT BEHIND SUBROGATION? succeed to a right not possessed by the subrogor. A subrogee can
recover only if the insured likewise could have recovered [Sulpicio
1. Subrogation is the substitution of one person by another with reference Lines v First Lepanto (2005); Lorenzo Shipping v Chubb and Sons
to a lawful claim or right, so that he who is substituted succeeds to the (2004)].
rights of the other in relation to a debt or claim, including its remedies or
securities. The payment by the insurer to the insured operates as an 1.4. Subrogation takes effect by operation of law and does not require
equitable assignment to the insurer of all the remedies that the insured the consent of the wrongdoer (Fireman’s Insurance v Jamilla & Co.,
may have against the 3rd party whose negligence or wrongful act caused 70 SCRA 328).
the loss [Malayan Insurance v Alberto; GR No. 194320 (February 1,
2012)]. 2. There is no subrogation in
(a) Life insurance as it is not a contract of indemnity;
2. The right of subrogation is not dependent upon, nor does it grow out of, (b) When the proximate cause of the loss is the insured himself;
any privity of contract. It accrues simply upon payment by the insurance (c) When the insurer pays to be insured a loss not covered by the
company of the insurance claim (Keppel Cebu Shipyard v Pioneer policy.
Insurance, 601 SCRA 96).
2.1. The insured is no longer entitled to collect from the wrongdoer if the
3. It is intended to make the person who caused the loss legally responsible amount that he received from the insurer has fully compensated for
for it, prevents the insured from recovering twice, and upholds public the loss.
policy by preventing tortfeasors from being absolved from liability.
UP 2014: The insured can no longer recover from the offended party
WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO what was paid to him by the insurer but he can recover any
GIVING OF NOTICE OF LOSS? deficiency if the damages suffered are more than what was paid.
The deficiency is not covered by the right of subrogation. The
56
NOTES ON INSURANCE
insurer must present the policy as evidence to determine the extent Q: A helicopter of ABC Co. collided with XYZ’s tramway steel cables in its
of its coverage [Wallen Phil. Shipping v Prudential Guarantee logging area in Surigao resulting in the destruction of the helicopter and death
(2003)]. of two pilots. ABC insured at its expense the helicopter and death of two
pilots. ABC insured at its expense the helicopter for P80,000 and the two
3. No right of Subrogation: pilots (life insurance) for P50,000 each, and as a result of the crash, the
(a) If the insured releases the wrongdoer from liability before payment insurer paid ABC a total indemnity of P180,000. Nevertheless, ABC
by the insurer, the insured destroys his right to collect from the sustained additional damages of about P100,000 which were not covered by
insurer (Sy Keng v Queensland Insurance, 45 OG 351). If the insurance.
insured releases the wrongdoer after receiving payment from the
insurer, the insurer can recover from the insured the proceeds paid (1) ABC sued XYZ to recover not only the additional damages, but also the
(Manila Mahogany v CA, 154 SCRA 651); P180,000 which was already compensated by the insurer. Decide.
(2) What right/ recourse, if any, has the insurer in order to be reimbursed for
(b) Where the insurer pays the insured the value of the loss without the amount it paid to ABC?
notifying the carrier who has in good faith settled the insured’s claim
for loss; A:
(1) ABC ay bring the action against XYZ for its claim for the additional
(c) Where the insurer pays the insured for a loss or risk not covered by
damages not covered by the insurance, but not for the P180,000
the policy [Pan Malayan v CA, (1997)].
covered by the insurance. If a property is insured and the owner received
indemnity from the insurer, the latter is deemed subrogated to the rights
(d) In life insurance;
of the insured against the wrongdoer, and if the amount paid by the
insurer does not fully cover the loss, then the aggrieved party is the one
(e) For recovery of loss in excess of insurance coverage [de Leon
entitled to recover the deficiency.
(2010)]
(2) The insurer is deemed subrogated to the rights of ABC against XYZ to
the extent of P80,000 insurance paid for the helicopter only, but not for
NOTE: Since the insurer can be subrogated to only such rights as
the life insurance of the two dead pilots, since subrogation in the New
the insured may have, should the insured, after receiving payment
Civil Code refers only to property, and not to the life insurance [Philippine
from the insurer, release the wrongdoer who caused the loss, the
Airlines v Herald Lumber; GR No. L-11497 (August 16, 1957)].
insurer loses his rights against the later, but in such case, the
insurer will be entitled to recover from the insured whatever it has Bar 1980
paid to the latter, unless the release was made with the consent of
the insurer [Manila Mahogany v CA (1987)]. Q: L borrows P50,000 from M payable 360 days after date, at 12% interest per
annum. To secure the loan, L mortgages his house and lot in favour of M. To
4. Subrogation is discretionary on the part of the insurer. It may or may not protect himself from certain contingencies, M insures the house for the full amount
exercise the right (FF Cruz v CA, 164 SCRA 731). Hence, no one can of the loan with Rock Insurance. A fire breaks out and burns the house and M
force it to exercise the right even if it has paid the insured. collects from the insurance company the full value of the insurance.
Bar 1978 Upon maturity of the loan, the insurance company demands payment from L. the
latter refuses to pay on the ground that the loan had been extinguished by the
57
NOTES ON INSURANCE
insurance payment which M received from the insurance company. He argued (1)Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?
that he has not entered into any loan or contract of whatever nature with the
insurance company. He further contends that it is bad enough to lose a house but (2)May Cala recover what it has paid to Luz?
it is worse if one has to pay off a paid obligation to somebody who has not
extended any loan to him. Besides, he states that the insurance payment should A:
inure to his benefit because he owns the house.
(1) No. Luz executed a release in favour of Raul.
Pass upon the merits of L’s contentions. (2) Yes. Cala lost its right against Raul because of the release executed by
Luz. Since the release was made without the consent of Cala, Cala may
A: Neither the loan of L was extinguished by the insurance payment which M recover the amount of P5,000.
received from the insurance company, nor the insurance payment inures to L’s
benefit. What was then insured was the interest of M, the secured creditor, and PRESCRIPTION OF AN ACTION
not the interest of L, so the proceeds shall be applied exclusively to the proper
CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR
interest of M.
LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION?
L’s argument that he has not entered into any loan or contract of whatever nature
1. In the absence of an express stipulation in the policy, it being based on
with the insurance company is also untenable. When the secured creditor’s
a written contract, the action prescribes in 10 years (Art. 1144, Civil
interest in the mortgaged property of the mortgagor, L, was insured and said
Code). However, there can be an agreement provided the period agreed
property would be burned, the insurance company had to pay the insured, M, and
upon should not be less than 1 year. If period agreed upon is less than
payment by the insurer to the insured creates legal subrogation and makes the
1 year, the agreement is void.
insurer an assignee on equity to run after the mortgagor, L. said right of the insurer
is not dependent upon or does it grow out of, any privity of contract, or upon
1.1. Prescription is essential for the prompt settlement of claims as
written assignment of claim, and payment to insured makes the insurer an
it demands for suits to be brought while the evidence as to the
assignee in equity. Thus, L’s consent to said subrogation is not necessary [Art.
origin and cause of the loss or destruction has not yet
2207, New Civil Code; Fireman’s Fund Insurance v Jamila and Co., 70 SCRA 323
disappeared.
(April 7, 1976)].
Bar 1994 1.2. In a comprehensive motor liability insurance claim, a written

notice of claim must be filed within 6 months from the date of
Q: Raul’s car bumped the car owned by Luz. The car was insured by Cala accident. Otherwise, the claim is waived, even if an action is
Insurance. For the damage caused, Cala paid Luz P5,000 in amicable settlement. subsequently brought within 1 year from rejection of the claim.
Luz executed a release claim, subrogating Cala to all her rights against Raul.
When Cala demanded reimbursement from Raul, the latter refused saying that 2. The period so agreed shall be considered as having commenced from
he had already paid Luz P4,500 for the damage to the car as evidence by a the time the cause of action accrues.
release claim executed by Luz discharging Raul.
2.1. Usually, the cause of action accrues from the date of the
So, Cala demanded reimbursement from Luz, who refused to pay, saying that the insurer’s rejection of the claim of the beneficiary or of the
total damage to the car was P9,500. Since Cala paid P5,000 only, Luz contends insured, since prior to the same, there is no necessity to bring
that she was entitled to go after Raul to claim the additional P4,500. suit.
58
NOTES ON INSURANCE
(c) POEA or DOLE have the power to compel a surety to make good
2.2. If the insured will ask for reconsideration of the denial, the on a solidary undertaking in the same proceeding where the liability
period is still counted from the time the claim is denied at the of the principal obligor is determined.
first instance as to hold otherwise gives the insured a scheme
or devise to waste time until evidence that may be considered Bar 1996
against him can be destroyed (Sun Insurance v CA, 196 SCRA
193). Q: Robin insured his building against fire with EFG Assurance. The insurance
policy contained the usual stipulation as to the origin and cause of the destruction
2.3. In motor vehicle insurance, the period is also 1 year from denial has not yet disappeared; that any action or suit must be filed within 1 year after
of the claim, not the date of the accident (Summit Guaranty v rejection of the claim.
Cruz Arnaldo, 158 SCRA 332)
After his building burned down, Robin filed his claim for the fire loss with EFG. On
February 28, 1994, EFG denied Robin’s claim. On April 3, 1994, Robin sought
3. Note Sec. 3 (6) of the provisions of Carriage of Goods by Sea Act, stating
reconsideration of the denial, but EFG reiterated its position. On March 20, 1995,
that the carrier and the ship shall be discharged from all liability for loss
Robin commenced judicial action against EFG.
or damage to the goods if no suit is brought within 1 year from delivery
of the goods or date when they should have been delivered. Should Robin’s action be given due course?
3.1. If the insurer of the goods brings an action against the carrier, A: No. His filing of the request for reconsideration did not suspend the running of
it must do so within 1 year as reckoned above (Filipino the prescriptive period of 1 year stipulated in the insurance policy. Thus, when
Merchants v CA, 179 SCRA 638). However, while the action of Robin commenced judicial action against EFG on March 20, 1995, his ability to
the insurer is barred, it does not mean that the shipper cannot do so had already prescribed. The 1 year period is counted from February 28,
maintain an action against the insurer as its liability is 1994 when EFG denied Robin’s claim, not from the date (presumably after April
determined by the insurance contract and not by the contract 3, 1994) when EFG reiterated its position denying Robin’s claim. The reason for
of carriage (Mayer Steel Pipe v CA, 274 SCRA 432). this rule is to insure that claims against insurance companies are promptly settled
and that insurance suits are brought by the insured while the evidence as to the
3.2. When no period is stipulated as in the case of Mayer Steel Pipe, origin or cause of the loss or destruction has not yet disappeared.
or the stipulation is void, the period is within 10 years, under
Art. 1144 of the Civil code, as the policy is a written contract
(Eagle Star v Chia Yu, 96 Phil 696; ACCFA v Alpha Insurance,
24 SCRA 151). DOUBLE INSURANCE
4. An action may filed in the following: 1. Double insurance exists when the same person is insured by several
insurers separately in respect to the same subject or interest.
(a) Courts;
(b) Insurance Commissioner, who has concurrent jurisdiction with 2. The requisites are:
courts for claims not exceeding P100,000;
(a) Same person is insured;
(b) There are several insurers;
59
NOTES ON INSURANCE
(c) Subject insured is the same; (c) In case of damage, can X and CCC Bank separately claim for the
(d) Interest insured is the same; and insurance proceeds?
(e) Risk or peril insured against is the same.
A:
2.1. There is a provision as to double insurance to prevent over-
insurance, thereby preventing fraud. (a) No. Double insurance exists where the same person is insured by
several insurers separately with respect to the same subject and
Bar 1999 interest.
Q: A businessman in the grocery business obtained from First Insurance an (b) Yes, X and CCC Bank can both insure the house as they have different
insurance policy for P5,000,000 to fully cover his stocks-in-trade from the risk of insurable interest therein.
fire.
X, the borrower-mortgagor, has an insurable interest in the house being
Three months later, a fire of accidental origin broke out and completely destroyed the owner thereof, while CCC Bank, the lender, also has an insurable
the grocery including his stocks-in-trade. This prompted the businessman to file interest I the house as mortgagee thereof.
with First Insurance a claim for P5,000,000 representing the full value of his
goods. Thus, the insurance contract entered into by both is legally binding.
First Insurance denied the claim because it discovered that at the time of the loss, (c) Yes.
the stocks-in-trade were mortgaged to a creditor who likewise obtained from If X obtained an open policy then she should claim an amount
Second Insurance for insurance coverage for the stocks at their full value of corresponding to the extent of the damaged based on the value of the
P5,000,000. house determined as of the date when the damage occurred, but not to
exceed the face value of the insurance policy. However, if she obtained
First Insurance refused to pay claiming that double insurance is contrary to law.
a valued policy then she could claim an amount corresponding to the
Is this contention tenable?
extent of the damage based on the agreed upon valuation of the house.
A: No. There is no law providing that double insurance is illegal per se. Moreover, As for CCC Bank, it could claim an amount corresponding to the extent
in the problem at hand, there is no double insurance because the insured with the of the damage but not to exceeds the amount of the loan it extended to
First Insurance is different from the insured with the Second Insurance. The same X or so much thereof as may remain unpaid.
is true with respect to the interests insured in the two policies.
Bar 2008
Bar 2012
Q: Terrazas de Pation Verde, a condominium building, has a value of
Q: X borrowed from CCC Bank. She mortgaged her house and lot in favour of the P50,000,000. The owner insured he building against fire with 3
bank. X insured her house. The bank also got the house insured. insurance companies for the following amounts:
(a) Is this double insurance? Northern Insurance – P20,000,000;

(b) Is this legally valid? Southern Insurance – P30,000,000;
Eastern Insurance – P50,000,000.
60
NOTES ON INSURANCE
one-half of the total indemnity from the co-insurers in the proportion
(a) Is the owner’s taking of insurance for the building with 3 insurers of 60% for Southern Insurance to 40% for Northern Insurance.
valid?
(b) The building was totally razed by fire. If the owner decides to claim EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE
from Eastern Insurance only P50,000,000, will the claim prosper?
1. Insured, unless the policy otherwise provides, may claim payment from
A: 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) The taking of insurance from the 3 insurers is valid. It is a cause of
double insurance. The Insurance Code provides that double As when: A house is insured with X Insurance for P10,000, with Y
insurance exists where the same person is insured by several Insurance for P20,000, and with Z Insurance for P20,000. It is valued for
insurers separately in respect to the same subject and interest. P20,000. In case of loss, the insured can recover from any of the
insurers, but is limited to what is stipulated in their policy and in no case
Double insurance is valid. What is prohibited is for the insured to to exceed the value of the property or P10,000 from X Insurance and
recover more than his interest or value of the property pursuant to another P10,000 from either Y Insurance or Z Insurance.
the principle of indemnity.
2. Where the policy under which the insured claims is a valued policy, the
(b) Yes. The Insurance Code provides that where the insured is over insured must give credit as against the valuation for any sum received
insured by double insurance, the insured, unless the policy by him under any policy without regard to the actual value of the subject
otherwise provides, may claim payment from the insurers in such matter insured.
order as he may select, up to the amount for which the insurers are
severally liable under their respective contracts. As when: A owns a house valued at P40,000. He insured it with X
Each insurer is bound, as between himself and the other insurers, Insurance for P35,000, and with Y Insurance for P5,000. The value of
to contribute ratably to the loss in proportion to the amount for which the house with both companies is P20,000. If it is lost, A can collect
he is liable under his contract. P5,000 from Y Insurance. He cannot collect P35,000 from Y Insurance
but only the difference between the value of the house, P20,000, and
Other Answer: the value of the policy with Y Insurance, P5,000.
Insured can recover from Eastern Insurance up to the extent of his
loss. However, Eastern may refuse to pay if the policy contains an 3. Where the policy under which the insured claims is an unvalued policy,
“other insurance clause” stipulating that non-disclosure of double he must give credit, as against the full insurable value, for any sum
insurance will avoid the policy. As there is no indication of a received by him under any policy.
contractual prohibition on double or other insurance, all insurance
contracts over the building are deemed valid and enforceable. As when: A insured his house with X Insurance for P40,000, and with Y
Insurance for P30,000, and with Z Insurance for P20,000. The policies
The law prohibits double or over-recovery, not double insurance. are open. The loss is P70,000. If Y Insurance and Z Insurance have
Since Eastern Insurance insured the property up to 50% of the total already paid P50,000, X Insurance will only have to pay A, the difference
coverage, it is liable for only 50% of the total actual loss. Eastern between what he received from Y and Z Insurance, P50,000, and the
Insurance is liable to the extent of its coverage, but may recover amount of loss P70,000, or P20,000.
61
NOTES ON INSURANCE
Q: A businessman in the grocery business obtained from First Insurance an
4. Where the insured receives any sum in excess of the valuation in case insurance policy for P5,000,000 to fully cover his stocks-in-trade from the risk of
of a valued policy or the insurable value in case of an unvalued policy, fire.
he must hold such sum in trust for the insurers, according to their right
of contribution among them. Three months later, a fire of accidental origin broke out and completely destroyed
the grocery including his stocks-in-trade. This prompted the business to file with
As when: If A collects P35,000 from X Insurance, and P5,000 from Y First Insurance a claim for P5,000,000 representing the full value of his goods.
Insurance when the value of the house is only P20,000, he must hold
the P20,000 excess in trust. If the policies are open, if A can collect First Insurance denied the claim because it discovered that at the time of the loss,
P40,000 from X Insurance, P30,000 from Y Insurance and P20,000 from the stock-in-trade was mortgaged to a creditor who likewise obtained from
Z Insurance, when the actual loss is only P70,000, he must hold the Second Insurance for insurance coverage for the stocks-in-trade at their full value
excess recovery in trust for the insurers subject to the application of the of P5,000,000.
contribution clause.
(a) May the businessman and the creditor obtain separate insurance
coverage over the same stocks-in-trade?
5. Each insurer is bound, as between himself and the other insurers, to
(b) Suppose you are the Judge, how much would you allow the
contribute ratably to the loss in proportion to the amount for which it is
businessman and the creditor to recover from their respective insurers?
liable under his contract. This is referred to as the Principle of
Contribution, which has been incorporated in almost all policies, that A:
should there be other insurances covering the same property, the liability
of the company would be limited to its ratable proportion of the loss or (a) Yes. The businessman, as owner, and the creditor, as mortgagee, have
damage. separate insurable interests in the same stocks-in-trade. Each may
insure such interest to protects his own separate interest.
5.1. This is also known as the contribution clause.
(b) As Judge, I would allow the businessman to recover his total loss of
5.2. The formula is: Insurer’s Policy/ Total Amount of Policies, P5,000,000 representing the full value of his goods which were lost
multiplied by the amount of loss, equals the share of the through fire. As to the creditor, I would allow him to recover the amount
insurer. to the extent of or equivalent to the value of the credit he extended to
the businessman for the stocks-in-trade which were mortgaged by the
businessman.
Bar 2005
Q: What is the nature of the liability of the several insurers in double insurance? TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE
A: In double insurance, the insurers are considered as co-insurers. Each one is 1. The test is : Whether the insured, in case of happening of the risk, can
bound to contribute ratably to the loss in proportion to the amount for which he is be directly benefited by recovering on both policies? If so, there is double
liable under his contract. insurance.
Bar 1999 VALIDITY OF DOUBLE INSURANCE
62
NOTES ON INSURANCE
1. If there is an “other insurance” clause or one that prevents other 2. In double insurance, the total amount of the policies need not exceed
insurance on the property except with the consent of the company, then the value of insurable interest. In over-insurance, the value must always
it will prevent the enforcement of the policy, the policy then will be null be in excess of the insurance interest.
and void.
2. If there is no “other insurance” clause, then double insurance is allowed Other Answers from Bar 1994
but the provisions of Section 96 must be followed because property
insurance is a contract of indemnity. 1. Co-insurance is the percentage in the value of the insured property
which the insured himself assumes or undertakes to act as insurer to the
extent of the deficiency in the insurance of the insurance of the insured
Bar 1993 property. In case of loss or damage, the insurer will be liable only for
such proportion of the loss or damage as the amount of insurance bears
Q: Julie and Alma formed a business partnership. Under the business name Pino to the designated percentage of the full value of the property insured.
Shop, the partnership engaged in a sale of construction materials. Julie insured
the stocks in trade of Pino Shop with the WGC Insurance Company for 2. Reinsurance is where the insurer procures a 3rd party, called the
P350,000.00. Subsequently, she again got an insurance contract with RSI for reinsurer, to insure him against liability by reason of such original
P1,000,000.00 and then from EIC for P200,000.00. A fire of unknown origin gutted insurance. Basically, reinsurance is an insurance against liability which
the store of the partnership. Julie filed her claims with the 3 insurance companies. the original insurer may incur in favour of the original insured.
However, her claims were denied separately for breach of policy condition which
required the insured to give notice of any insurance effected covering the stocks
in trade. Julie went to court and contended that she should not be blamed for the
omission, alleging that the insurance agents for WGC, RSI and EIC knew of the REINSURANCE
existence of the additional insurance coverage and that she was not informed
Reinsurance occurs when an insurer procures a 3rd person to insure him against
about the requirement that such other or additional insurance should be stated in
loss or liability by reason of such original insurance.
the policy.
WHEN COMPULSARY
Is the contention of Julie tenable?
1. When a non-life insurer insures in any one risk or hazard an amount
A:
exceeding 20% of its net worth, the insurer needs reinsurance of the
No. An insured is required to disclose the other insurances covering the subject excess over such limit.
matter of the insurance being applied for.
2. When a foreign insurance company withdraws from the Philippines, it
DISTINGUISHING OVER-INSURANCE FROM DOUBLE INSURANCE should cause its primary liabilities under policies insuring residents of
the Philippines to be reinsured by another company authorized to
1. In double insurance, there must be 2 or more insurers. In over- transact an insurance business in the Philippines.
insurance, 1 insurer is sufficient.
DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE
63
NOTES ON INSURANCE
1. In double insurance, the insurer remains an insurer. In reinsurance, the 1. It is presumed to be a contract of indemnity against liability, and not
insurer becomes the insured. merely against damage.
2. In double insurance, the subject matter is property. In reinsurance, the 1.1. As a rule, the reinsurer is not liable to the reinsured for a loss
subject matter is the insurer’s risk or liability. under an original policy if the reinsured is not liable to the
original policy holder.
3. In double insurance, the same interest and risk is insured with another.
In reinsurance, different risk and interest are insured. As when: A insured his car against vehicular accidents with B
Insurance. B Insurance reinsures the policy with C Insurance.
A violates the policy by allowing an unlicensed driver to use the
WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER vehicle. B Insurance cannot claim against C Insurance on the
OBTAINS REINSURANCE? reinsurance as it was never liable to A.
1. Except in automatic reinsurance treaties, it must communicate: 1.2. But, when the reinsured becomes liable under the original
policy, it may obtain payment from the reinsurer even before
(a) All representations of the original insured; paying the loss to the original insured.
(b) All information or knowledge he possesses, whether previously or
subsequently acquired, which are material to the risk. As when: A insured his house with X Insurance. X Insurance
reinsures with Z Insurance. The house is burned, but X
As when: After issuance of the policy, the original insured had a bad Insurance cannot pay because it is insolvent. X Insurance can
reputation and that he had burned a building, the reinsurance is still collect from Z Insurance because it is a contract of
rendered void if it is not disclosed. indemnity against liability and not merely against damage. The
subject of the reinsurance contract is the insurer’s risk, not the
Note though: The fact that the representations on the original property insured in the original policy. It is not necessary that
insured were untrue at the time of the execution of the reinsurance the insurer first pay a claim on the original policy before
will not affect liability of the insurer, provided they were true at the claiming from the reinsurer.
time of the original contract.
1.1. An automatic reinsurance treaty is one where two or more

insurance companies agree in advance that they will WHAT IS THE EXTENT OF THE LIABILITY OF THE REINSURER?
reinsure a part of any line of insurance, taken by the other.
Since such contracts are self-executing and the obligation 1. The liability of the reinsurer is measured by the liability of the reinsured to
attaches automatically, the information required to be the original policy holder; Provided, it does not exceed the amount of
communicated herein could not influence the reinsurer in reinsurance
deciding whether or not to accept the reinsurance because
it is automatic. As when: A insures his house valued at P1,000,000.00 with X Insurance for
P1,500,00.00. X Insurance then reinsured with Z Insurance for
WHAT KIND OF CONTRACT IS REINSURANCE?
64
NOTES ON INSURANCE
P1,200,000.00. The house burns. The liability of Z Insurance is only up to (b) Person or property in connection with or appertaining to marine,
P1,000,000.00, which is the liability of X Insurance. island marine, transit or transportation insurance, including liability
for loss or in connection with the construction, repair, operation,
2. If the original insured and the original insurer will settle for less, the liability maintenance, use of the subject matter of the insurance, BUT not
of Z Insurance is still only up to what is paid by X Insurance, otherwise, the including life insurance or surety bonds, nor insurance against loss
original insurer profits and this violates the principle that it is a contract of by reason of bodily injury to any person arising out of the ownership,
indemnity. maintenance and use of automobiles.
WHAT IS THE LIABILITY OF THE ORIGINAL INSURED IN THE CONTRACT (c) Precious stones, jewels, jewelry, precious metals whether in the
OF REINSURANCE? course of the transportation or otherwise.
The original insured has no interest in the contract of reinsurance. Hence, only (d) Bridges, tunnels or other instrumentalities of transportation and
the reinsured can claim against the reinsurer. communications (excluding buildings, their furniture and
furnishings, fixed contents, and supplies held in storage), piers,
wharves, docks, slips, and other aids to navigation and
CLASSES OF INSURANCE transportation, including dry docks, marine railways, dams and
appurtenant facilities for the control of waterways, and
(e) “Marine Protection and Indemnity Insurance,” meaning insurance

MARINE INSURANCE against, or against legal liability of the insured for loss damage or
expense incident to ownership, operation, operation, chartering,
WHAT IS MARINE INSURANCE? maintenance, use, repair or construction of any vessel, craft or
instrumentality in use in ocean or island waterways, including
1. Insurance against loss or damage to: liability of the insured for personal injury, illness or death or for loss
or damage to the property of another person.
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes,
merchandise, effects, disbursements, profits, money, securities, 2. Marine insurance is really transportation insurance which is a kind of
choses in action, evidences of debt, valuable papers, bottomry or insurance that is concerned with the perils of property in, or incidental
respondentia interest, and all kinds of property and interest therein, to, transit as opposed to property perils at a generally fixed location.
in respect to, appertaining to or in connection with any and all risks
or perils of navigation, transit or transportation, or while being 2.1. It does not include normal motor vehicle insurance which is
assembled, packed, crated, baled, compressed, or similarly treated separately by law.
prepared for shipment, while awaiting shipment or during delays,
storage, transhipment or reshipment incident thereto, including war WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE?
risks, marine builder’s risk and all personal property floater risks.
These types of insurance follow the property wherever it may be. 1. The divisions of transportation insurance are:
65
NOTES ON INSURANCE
(a) Ocean Marine Insurance pertaining primarily to sea perils of ships 1. The basic risk insured against is what is commonly known as perils of
and cargoes. the sea or all kinds of marine casualties and damages done to the ship
or goods at sea by the violent action of the winds or waves, one that
Scope: Goods or cargoes, Earnings such as freight, passage could not be foreseen and is not attributable to the fault of anybody. Such
money, Liability incurred by reason of maritime perils, Ships or as: shipwrecks, foundering, stranding, collision, including the jettisoning
hulls), and of cargo if made for the purpose of saving the vessel although it may
also include fire, enemies, pirates, thieves, surprisals, taking at sea,
(b) Inland Marine Insurance pertaining primarily to land or over land, arrests, restraints, detainments of kings, princes and people of what
but sometimes water transportation perils of property shipped by nation, condition or quality of barratry of the master and all other perils,
railroads, motor trucks, airplanes and other means of transportation. losses, misfortunes that shall have or shall come to hurt, detriment, or
damages of said goods, merchandise, ship or any part thereof.
1.1. This includes four basic policies: Note: Perils of the Sea
(a) Property in transit – providing protection for property frequently Ocean marine insurance protects ships at sea and the cargo or freight
exposed to loss while in transport from one place to another; on such ships from standard “perils of the sea” or “perils of navigation”
which includes casualties arising from the violent action of the elements
(b) Bailee liability – providing protection to persons who have and does not cover ordinary wear and tear, or other damage usually
temporary custody of goods or personal property of others; incident to the voyage. The mere fact that an injury is due to violence of
some marine force does not necessarily bring it within the protection of
(c) Fixed transportation property – providing protection to fixed the policy if such violence was not unusual or unexpected.
property considered aids to the movement of property, like
bridges and tunnels, and Perils of the sea or perils of navigation include only those casualties due
to the unusual violence or extraordinary causes connected with
(d) Floater – providing protection to personal property, such as navigation. It has been said to include only such losses as are of
precious stones, jewelry, works of art, wherever it may be extraordinary nature or arise from some overwhelming power which
located subject always to the territorial limits of the contract and cannot be guarded against by the ordinary exertion of human skill or
need not necessarily be in the course of transportation. prudence, as distinguished from the ordinary wear and tear of the
voyage and from injuries suffered by the vessel in consequence of her
2. Note: Marine insurance may be in the form of property insurance, not being unseaworthy.
indemnifying the insured for loss or damage to property or liability
insurance, protecting the insured against the consequences of legal 2. Generally, perils of the ship are not covered. There are losses or
liability for loss or damage to property or for personal injury, illness or damages that result from:
death of a person.
(a) Natural and inevitable action of the sea;
(b) Ordinary wear and tear of the ship;
(c) Negligent failure of the ship owner to provide the vessel with the
WHAT RISKS ARE INSURED AGAINST? proper equipment to convey the cargo under ordinary conditions.
66
NOTES ON INSURANCE
1. It is to be construed as creating a special insurance and extending to all
As when: risks than are usually contemplated and will cover all losses except such
that may arise from intentional fraud, intentional misconduct, or that
(a) Insurance upon a cargo of rice, when sea water entered the otherwise excluded. It may include all losses whether arising from a
compartment where the rice was found through a defective marine peril or not, to include pilferage during a war.
steel pipe;
2. This can also be contained in an All Risks Clause which is one that
(b) The insured loaded logs unto a barge. The logs are covered covers any loss other than a willfull and fraudulent act of the insured and
insurance. The barge sank due to improper loading and leaks avoid putting upon the insured the burden of establishing that the loss
because the barge was not provided with tarpaulins that could was due to a peril within the policy’s coverage, whether arising from a
have prevented the barge from retaining sea water splashing marine peril or not, provided the risk is not excluded.
into it during the voyage.
2.1. In the absence of stipulation, the risks insured against DEFINITION OF OTHER TERMS
are only perils of the sea.
1. Barratry – a willful act of the master and crew in pursuance of some
2.2. However, in an all risk policy, all risks are covered fraudulent or unlawful purpose without the consent of the owner and to
unless expressly excepted. The burden rests on the the prejudice of his interest, such as the burning of the ship or unlawfully
insurer to prove that the loss is caused by a risk that selling the cargo.
is excluded.
2. Inchmaree Clause – a provision in marine insurance that it shall cover
loss or damage to the hull or machinery through the negligence of the
Bar 1998 master, charterers, mariners, engineers or pilots through explosion,
bursting of boilers, breakage of shafts or through any latent defect in the
Q: A marine insurance policy on a cargo states that “the insurer shall be liable for hull or machinery. This is also known as the Negligence Clause.
losses incident to perils of the sea.” During the voyage, seawater entered the
compartment where the cargo was sored due to the defective drainpipe of the
ship. The insured filed an action on the policy for recovery of the damages cause WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE
to the cargo. May the insured recover damages? INSURANCE?
A: No. The proximate cause of the damage to the cargo insured was the defective 1. The owner of a vessel has insurable interest in the vessel, and such shall
drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect continue even if the vessel has been chartered by one who covenants
in the drainpipe was the result of the ordinary use of the ship. To recover under a to pay the owner the value of the vessel upon loss, but in case of loss,
marine insurance policy, the proximate cause of the loss or damage must be peril the insurer is liable only for the part of the loss which the insured cannot
of the sea. recover from the charterer.
WHAT RISKS ARE INSURED IN AN “ALL RISKS POLICY”? 2. The insurable interest of the owner of a ship hypothecated by bottomry
is only the excess of its value over the amount secured by bottomry.
67
NOTES ON INSURANCE
2.1. Bottomry and respondentia are loans payable only if the vessel
(bottomry) or the goods (respondentia) given as security for 3.2. It exists:
said loan arrives safely at port from contemplated voyage.
(a) In case of a charter party when the ship has broken on the
Note: Bottomry and Respondentia chartered voyage;
Bottomry Loan – a loan that is obtained for the value of the (b) If a price is to be paid for the carriage of goods, when they
vessel on a voyage and the lender is repaid only if the vessel are actually on board or there is contract to put them on
subject of the loan arrives safely at its destination. The board, and the vessel and goods are ready for the
insurable interest of a ship owner on its bottomed boat is the specified voyage.
difference between the amount of the loan and the value of the
boat. Thus, if the amount of the loan does not cover the total PERSONS/ PARTIES OTHER THAN THE OWNER WHO HAVE INSURABLE
value of the boat, the owner can still insure the boat. INTEREST
1. One who has an interest in the thing from which profits are expected to
Respondentia Loan - a loan that is obtained as security for the
proceed, has insurable interest on the profits.
value of the cargo to be transported and the lender is repaid
only if the cargo arrives safely at its destination.
As when: Owner of the cargo transported on a vessel not only has
insurable interest on the cargo but also on the expected profits from a
2.2. These contracts are in the nature of mortgages as the owner
future sale.
borrows money for the use, equipment or repair of the vessel
for a definite term with the ship as security with maritime or
2. The charterer of a ship has insurable interest to the extent that he is
extraordinary interest on account of the risks borne by the
liable to be damnified by its loss.
lender, it being stipulated that if the ship be lost during the
voyage or within a limited period, the lender also loses his
As when: A charters B’s vessel on condition that A would pay B in case
money.
of loss the amount of P300,000.00. A has insurable interest to the extent
of P300,000.00.
3. The owner of a vessel has insurable interest in expected freightage
which in the ordinary course of things he would have earned but for the CONCEALMENT IN MARINE INSURANCE
intervention of the peril insured against or other peril incident to the
voyage. 1. A party is bound to communicate, in addition to what is required by
Section 28 referring to facts within his knowledge, material to the
3.1. Freightage refers to the benefits derived by the owner from: contract, other party has not the means of ascertaining, as to which party
with duty to communicate makes no warranty, information that he
(a) Chartering of the ship possesses, that are material to the risk, and to state the exact and whole
(b) Its employment for the carriage of his own goods or those truth in relation to all matters that he represents, or upon inquiry
of others. discloses or assumes to disclose, except those that the insurer knows
68
NOTES ON INSURANCE
or those in the exercise of ordinary care, the other ought to know, and
which the former has no reason to suppose him to be ignorant under 2. In ordinary insurance, a causal connection between the fact concealed
Section 30. and cause of loss is not necessary for the insurer to rescind; in marine
insurance, the concealment of any of the matters stated in Section 112
1.1. Note: The rules on concealment in marine insurance are merely exonerates the insurer from loss, if the loss results from the fact
stricter as it is sufficient that the insured is in possession of a concealed.
material fact, although he is unaware of it.
PRESUMPTION OF A PRIOR LOSS
As when: If an agent fails to notify the principal of the loss of
the cargo and the latter, after the loss but ignorant thereof, The insured in marine insurance is presumed to have knowledge, at the time of
secured insurance lost or not lost, the insurance will be void insuring, of a prior loss, if information might possibly reach him in the usual mode
due to concealment. of transmission and at the usual rate of communication.
2. A party is also bound to communicate the information, belief or

expectation of a 3rd person, in reference to a material fact, is material. REPRESENTATION IN MARINE INSURANCE
3. While concealment as a rule entitles the injured party to rescind, the rule WHEN IS THE INSURER ENTITLED TO RESCIND?
must yield to Section 112 as it does not vitiate the contract but merely
exonerates the insurer from a loss resulting from the risk concealed 1. If the representation is intentionally false in any material respect, or, in
when they relate to: respect of any fact on which the character and nature of the risk
depends, the insurer may rescind.
(a) The national character of the insured;
(b) The liability of the thing insured to capture and detention; 2. However, the eventual falsity of a representation as to an expectation
(c) The liability to seizure from breach of foreign laws of trade; does not, in the absence of fraud, avoid the contract. Such as statement
(d) The want of the necessary documents; as to time of sailing, general nature of the cargo, or amount of profits.
(e) The use of false/ simulated documents.
As when: The vessel is seized due to lack of documents, the insurer IMPLIED WARRANTIES IN MARINE INSURANCE
is exonerated. If the vessel is lost due to a storm, the insurer is liable
despite concealment of the lack of documents. The following warranties are implied in marine insurance:
DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE a. That the ship is seaworthy to make the voyage and/or take in certain
INSURANCE cargoes;
b. That the ship shall not deviate from the voyage insured;
1. In ordinary insurance, opinion or belief of a 3rd person o own judgment c. That the ship shall carry the necessary documents to show nationality
of the insured is not material and need not be communicated. In marine or neutrality and that it will not carry documents which will cast
insurance, the belief or expectation of a 3rd person in reference to a reasonable suspicion thereon; and
material fact is material and has to be communicated.
69
NOTES ON INSURANCE
d. That the ship shall not carry contraband, especially if it is making voyage Q: On October 30, 2007, M/V Pacific, a Philippine-registered vessel
through belligerent waters. owned by Cebu Shipping Company (CSC), sank on her voyage from
Hong Kong to Manila. Empire Assurance Company (EAC) is the insurer
of the lost cargoes loaded on board the vessel which were consigned to
1. In every contract of marine insurance upon a ship or freight, freightage Debenhams Company. After it indemnified Debenhams, EAC as
or upon anything which is the subject of marine insurance, there is an subrogee filed an action for damages against CSC.
implied warranty that the ship is seaworthy.
a) Assume the vessel was not seaworthy as in fact its hull had leaked,
Bar 2010 causing flooding in the vessel. Is CSC liable?
Q: Paolo, the owner of an ocean-going vessel, offered to transport the b) Assume the facts in question (a). Can the heirs of the 3 crew
logs of Constantino from Manila to Nagoya. Constantino accepted the members who perished recover from CSC?
offer, not knowing that the vessel was manned by an irresponsible crew
with deep-seated resentments against Paolo, their employer. A:
Constantino insured the logs against both perils of the sea and barratry. a) Yes, CSC is liable for the lost cargoes. Allowing the vessel to depart
The logs were improperly loaded on one side, thereby causing the on a voyage when it is not seaworthy is a violation of the implied
vessel to tilt on one side. On the way to Nagoya, the crew unbolted the warranty of seaworthiness, and thus constitutes negligence on the
sea valve of the vessel causing water to flood the ship hold. The vessel part of the owner of the ship and the ship captain. The hypothecary
sank. principle in maritime commerce – limiting the ship owner’s liability
to the amount of insurance proceeds – it not applicable when the
Constantino tried to collect from the insurance company which denied unseaworthiness of the vessel is due to the owner’s fault or
liability, given the unworthiness of both the vessel and its crew. negligence.
Constantino countered that he was not the owner of the vessel and he b) Yes, the heirs of the 3 crew members who perished can recover
could therefore not be responsible for conditions about which he was from CSC for negligence which constitutes quasi-delict in this case.
innocent.
Is the insurance company liable? 1.1. A ship is seaworthy when it is reasonably fit to perform the service
and to encounter the ordinary perils of the voyage, contemplated by
A: No. There is an implied warranty in every marine insurance that the the parties to the policy.
ship is seaworthy whoever is insuring the cargo, whether it be the
shipowner or not. There was a breach of warranty, because the logs 1.2. Note: Seaworthiness is relative and is made to depend on
were improperly loaded and the crew was irresponsible. It is the circumstances.
obligation of the owner of the cargo to look for a reliable common carrier
which keeps its vessel in seaworthy condition. 1.3. The implied warranty of seaworthiness is complied with as a general
rule when it is seaworthy at the time of the commencement of the
Bar 2008 risk, except:
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NOTES ON INSURANCE
(a) When the insurance is made for a specified length of time, it 1.6. Since there is an implied warranty of seaworthiness, it becomes the
must be seaworthy at the commencement of every voyage it obligation of the cargo owner or the insured to look for a reliable
undertakes at that time; common carrier which keeps its vessels seaworthy. The insured
may have no control on the vessel but has full control in the choice
(b) When the insurance is upon cargo, which by the terms of the of common carrier.
policy, description of the voyage, or established custom of
trade, is required to be transhipped at an immediate port, in 1.7. When a ship becomes unseaworthy during the voyage, it will not
which case – each vessel upon which the cargo is shipped or avoid the policy, as long as there is no unreasonable delay in
transhipped must be seaworthy at the commencement of each repairing the defect. Otherwise, the insurer is exonerated on the
particular voyage; ship or the ship owner’s interest from any liability from any loss
arising therefrom. Hence, if loss is not one due to the defect or the
(c) Where different portions of the voyage contemplated in the peril was not increased by the defect, the insurer is still liable.
policy differ in respect to the things requisite to make the ship
seaworthy, in which case it must be seaworthy at the Bar 1983
commencement of each portion. Q: A shipped 100 pieces of plywood from Davao City to Manila. He
took a marine insurance policy to insure the shipment against loss
1.4. The warranty of seaworthiness extends not only to the condition of or damage due to perils of the sea, barratry, fire, jettison, pirates
the structure of the ship, but it requires that: and other such perils.
(a) It be properly laden or loaded with cargo; When the ship left the port of Davao, the shipman in charge forgot
(b) Is provided with a competent master, sufficient number of to secure one of the port holes, thru which sea water seeped during
officers and seamen; the voyage, damaging the plywood. A filed a claim against the
(c) It must have the requisite equipment and appurtenances like insurance company which refused to pay on the ground that the loss
ballasts, cables, anchors, cordage, sails, food, water, fuel, or damage was not due to a peril of the sea or any of the risks
lights, and other necessary and proper stores and implements covered by the policy. It was admitted that the sea was reasonably
for the voyage. calm during the voyage and that no strong winds or waves were
encountered by the vessel.
1.5. Note: While a ship may be seaworthy for purposes of insurance on
it, it may by reason of being unfit to receive cargo, be unseaworthy How would you decide the case?
for the purpose of insurance on the cargo.
A: I would decide in favour of the insured A because the insurer was
As when: A cargo of wheat was laden on a ship which had a port guilty of breach of implied warranty of seaworthiness.
hole not securely fastened at the time of lading. The port hole was
a foot above the water line, and in the course of the voyage, water The Insurance Code provides that in every contract of marine
entered the cargo area and damaged the wheat. The ship was insurance, there is a warranty that the ship is seaworthy at the
deemed unseaworthy with reference to the cargo, hence the insurer commencement of the risk. Seaworthiness refers not only to the
of the cargo was not liable. structure of the ship but also as to its being properly laden. In other
words, a ship which is seaworthy for the insurance on the ship, may,
71
NOTES ON INSURANCE
by reason of being unfit to receive the cargo, be unseaworthy for
the purpose of insurance upon the cargo. In this case, the fact that (b) When necessary to comply with a warranty, or to avoid a peril,
the port hole was not secured at the port of departure made the ship whether or not the peril is insured against.
unseaworthy as far as the cargo of plywood was concerned. Thus,
the insurer should be liable for the damage thereto although the loss As when: Repairs are necessary or to avoid getting caught in a
was not one due to perils insured against. conflict.
2. It shall carry the requisite documents to show its nationality or neutrality (c) When made in good faith, and upon reasonable grounds of
and that it shall not carry any document that will cast reasonable belief in its necessity to avoid a peril.
suspicion on the vessel.
As when: Undertaken to avoid the eye of a storm.
2.1. This warranty arises only when the nationality or neutrality of the
vessel or the cargo has expressly been warranted. (d) When made in good faith, for the purpose of saving human life
or relieving another vessel in distress.
3. That the vessel shall not make any improper deviation from the intended
voyage. As when: Assistance is given.
3.1. The intended voyage is determined as follows: Note: Any deviation that is not included is an improper deviation.
(a) When it is described by places of beginning and ending, the Bar 2008
voyage is the course of sailing fixed by mercantile usage
Q: On October 30, 2007, M/V Pacific, a Philippine-registered vessel owned by
between those places;
CSC, sank on her voyage from Hong Kong to Manila. EAC is the insurer of the
lost cargoes loaded on board the vessel which were consigned to Debenhams
(b) When it is not fixed by mercantile usage, the voyage is the way
Company. After it indemnified Debenhams, EAC as subrogee filed an action for
between the places specified which to a master of ordinary skill
damages against CSC.
and discretion would seem the most natural, direct and
advantageous. Assume that the vessel was seaworthy. Before departing, the vessel was advised
by the Japanese Meteorological Center that it was safe to travel to its destination.
3.2. A deviation is a departure from the course of the voyage as defined But while at sea, the vessel received a report of a typhoon moving within its
by law or an unreasonable delay in pursing the voyage, or the general path. To avoid the typhoon, the vessel changed its course. However, it
commencement of an entirely different voyage. was still at the fringe of the typhoon when it was repeatedly hit by huge waves,
foundered and eventually sank. The captain and the crew were saved except 3
3.3. A deviation is proper: who perished. Is CSC liable to EAC?
(a) When it is caused by circumstances over which neither the A: No. The doctrine of proper deviation is applicable in this case. The change of
master nor the owner of the ship has any control. course made by the vessel is proper as it was to avoid the typhoon and the huge
waves are considered perils of the sea.
As when: An ailment strikes the crew of the vessel.
72
NOTES ON INSURANCE
(c) Any damage to the thing which renders it valueless to the owner for
the purpose that he held it;
3.4. When there is an improper deviation, the insurer is not liable for any (d) Any other event which effectively deprives the owner of the
loss happening to the thing insured subsequent to an improper possession, at the port of destination, of the thing insured.
deviation. This is so whether risk has been increased or diminished.
1.1. As when: When palay was rendered valueless because they began
4. That the vessel does not or will not engage in any illegal venture. to germinate, thus it no longer remains as the same thing, it was
held to be an actual total loss.
LOSS AND ABANDONMENT
2. An actual total loss can be presumed from the continued absence of the
LOSSES IN MARINE INSURANCE
ship without being heard of.
1. Losses in marine insurance may be
2.1. The length of time which is sufficient to raise this presumption
(a) Partial, or depends on the circumstances of the case.
(b) Total
3. Upon an actual total loss, the insured is entitled to payment without
2. A loss that is not partial is total. notice of abandonment and if the insurance is confined to an actual loss,
it will not cover a constructive loss, but it will cover any loss, which
3. If the vessel be prevented, at an immediate port, from completing the necessarily results in depriving the insured of possession, at the port of
voyage, by the perils insured against, the liability of the marine insurer destination of the entire thing insured.
on the cargo continues after they are reshipped.
3.1. This means that the policy can limit a claim for payment to an actual
3.1. This liability extends to damages, expenses of discharging, loss only.
storage, reshipment, extra freightage and all other expenses
CONSTRUCTIVE TOTAL LOSSES
incurred in saving the cargo reshipped up to them amount
insured, nothing however shall render the insurer liable for an 1. It is a constructive total loss when the person insured is given the right
amount in excess of the insured value or if none, of the to abandon.
insurable value.
1.1. Abandonment is the act of the insured by which, after a
ACTUAL TOTAL LOSSES
constructive total loss, he declares to the insurer the
1. What constitutes actual total loss? relinquishment in its favour of his interest in the thing insured.
If it is an actual total loss, it may be caused by: 1.2. For a constructive total loss to exist in marine insurance, it is
required that the person insured relinquished his interest in the
(a) Total destruction of the thing insured; thing insured. This relinquishment must be actual.
(b) The irretrievable loss of the thing by sinking or by being broken up;
73
NOTES ON INSURANCE
2. A person insured by a contract of marine insurance may abandon the (b) Is the position of the insurance company as to the absence of
thing insured, or any particular portion thereof separately valued by the constructive total loss well-taken?
policy, or otherwise separately insured and recover a total loss, when (c) Assuming that the ship owner failed to give the proper notice of
the cause of the loss is a peril insured against if: abandonment, may he still recover from the insurer?
(a) More than ¾ thereof in value is actually lost or would have to be A:

expended to recover it from the peril;
(a) First suggested answer:
(b) If it is injured to such extent as to reduce its value by more than ¾
of the value; The notice of abandonment made in writing by the insured to the insurer
was sufficient, had the loss been a constructive total loss of the vessel,
(c) If the thing injured is a ship, and the contemplated voyage cannot meaning more than ¾ of the value of the vessel.
lawfully be performed without incurring either an expense to the
insured of more than ¾ the value of the thing abandoned or a risk Second suggested answer:
which a prudent man would not take under the circumstances;
The notice of abandonment made in writing was not proper, since the
(d) If the insured is freightage or cargo and the voyage cannot be existence of the constructive total loss of the vessel had not yet been
performed, nor another ship procured by the master, within a determined.
reasonable with reasonable diligence to forward the cargo without
incurring the like expense or risk mentioned in item (c) but (b) Yes. The sum total of the damage to the vessel was only P1,340,000.00
freightage cannot be abandoned unless the ship is also abandoned. (P40,000.00 for the salvors; P1,300,000.00 for the restoration of the
vessel to its original condition) which amount is not more than ¾ of the
value of the vessel which is P2,000,000.00.
Bar 1982
(c) Yes. The ship owner may still recover from the insurer, his actual loss,
Q: An inter-island vessel, insured for P2,000,000.00 against “total and the amount of P1,340,000.00 which is now only partial loss, being not
constructive loss” sank in 50 feet of water one mile off Paranaque during a total loss. But since the said amount was already spent by the insurer
typhoon. After the typhoon, the ship owner gave written notice of abandonment on the vessel, the insurer is no longer liable to the ship owner, except to
of his interest in the entire sunken ship to the insurance company. Refusing to deliver the vessel.
accept the offer of abandonment, the insurer hired salvors to refloat the vessel at
a total cost of P40,000.00. because the refloated vessel needed repairs, the
insurer issued invitations to bid for repairs. Several firms submitted separate Bar 1992
sealed bids ranging from P1,200,000.00 to P1,300,000.00 for the complete
refurbishing and/or restoration of the vessel to its original condition. On the basis Q: An insurance company issued a marine insurance policy covering a shipment
of the following facts, the insurance company rejected the claim of the ship owner by sea from Mindoro to Batangas 1,000 pieces of Mindoro garden stones against
for payment of total loss on the ground that there was no constructive total loss. “total loss only.” The stones were loaded in two lighters, the first with 600 pieces
and the second with 400 pieces. Because of rough seas, damage was caused
(a) Was the notice of abandonment given by the owner properly made? the second lighter resulting in the loss of 325 out of the 400 pieces. The owner of
74
NOTES ON INSURANCE
the shipment filed claims against the insurance company on the ground of
constructive total loss inasmuch as more than ¾ of the stones had been lost in (b) It was proper for the ship owner to send a notice of abandonment to the
one of the lighters. insurance company, because there was reliable information of the loss
of the vessel.
Is the insurance company liable under its policy?
4. Abandonment must be made within reasonable time after receipt of
reliable information of the loss, but, where the information is of doubtful
character, the insured is entitled to a reasonable time to make an inquiry.
A: The insurance company is not liable under its policy covering against “total loss
only” the shipment of 1,000 pieces of Mindoro garden stones. There is no
4.1. The requirement as to when notice must be made is to enable
constructive total loss that can be claimed since the ¾ rule is to be computed on
the insurer to take steps to preserve the property.
the total 1,000 pieces of Mindoro garden stones covered by the single policy
coverage.
4.2. If the information proves incorrect or thing insured is restored
when the abandonment was made that there was then in fact
no total loss, the abandonment becomes ineffectual.
3. Abandonment when made must neither be partial or conditional. Hence,
it must be total and absolute. 5. Notice of abandonment is made by giving notice oral or written notice to
the insurer but if orally given, a written notice of such must be submitted
Bar 2005 within 7 days from giving oral notice.
Q: M/V Pearly Shells, a passenger and cargo vessel, was insured for 5.1. The notice must be explicit ad specify the particular cause of
P40,000,000.00 against “constructive total loss.” Due to typhoon, it sank near the abandonment but need state only enough to show that
Palawan. Luckily, there were no casualties, only injured passengers. The ship there is probable cause therefore and need not be
owner sent a notice of abandonment of his interest over the vessel to the accompanied by proof of interest or loss.
insurance company which then hired professionals to afloat the vessel for
P900,000.00. when refloated, the vessel needed repairs estimated at 5.2. The requirement as to the explicitness of the notice is due to
P2,000,000.00, the insurance company refused to pay the claim of the ship the fact that abandonment can only be sustained upon the
owner, stating that there was “no constructive total loss.” cause specified in the notice.
(a) Was there “constructive total loss” to entitle the ship owner to recover 6. Abandonment becomes effective upon the acceptance of the insurer.
from the insurance company?
(b) Was it proper for the ship owner to send a notice of abandonment to the 6.1. The acceptance may either be express or implied from the
insurance company? conduct of the insurer.
A:
6.2. The mere silence of the insurer for an unreasonable length of
time after notice shall be construed as acceptance.
(a) There was constructive total loss. When the vessel sank, it was likely
that it would be totally lost because of the improbability of recovery.
75
NOTES ON INSURANCE
6.3. Once accepted, it is conclusive between the parties. The loss If the ship is subsequently repaired, and continues on to Point
is admitted together with the sufficiency of the abandonment. Y, the freightage due belongs to the insurer of the ship.
6.4. It is also irrevocable upon acceptance and upon its being made 8. If abandonment is not accepted despite its validity, the insurer is liable
unless the ground upon which it was made proves to be upon an actual total loss, deducting from the amount any proceeds of
unfounded. Thus, if the insurer accepts the abandonment, it the thing insured that may have come to the hands of the insured. This
cannot raise any question as to insufficiency of the form under is due to the fact that under Section 1451 which provides that if notice is
Section 145, time for giving notice under Section 143, or right properly given, it does not prejudice the insured, if the insurer refuses to
to abandon under Section 141. The exception is under Section accept the abandonment.
152 when the ground is unfounded which is defined in Section
154. 9. The fact that abandonment is not made or is omitted does not prejudice
the insured as he may nevertheless recover his actual loss.
7. The effects of abandonment are:
(a) It is equivalent to a transfer by the insured of his interest to the AVERAGES

insurer, with all the chances of recovery and indemnity.
LIABILITY FOR AVERAGES
Note: if the insurer pays for the loss as if it were an actual total loss,
1. An average is an extraordinary or accidental expense incurred during
he is entitled to whatever may remain of the thing insured, or its
the voyage for the preservation of the vessel, cargo, or both and all
proceeds or salvage as if there has been a formal abandonment. In
damages to the vessel or cargo from the time it is loaded and the voyage
this case, the insurer has opted to pay for an actual total loss
commenced until it ends and the cargo is unloaded.
notwithstanding the absence of actual abandonment.
2. The kinds of averages are:

(b) Acts done in good faith by those who were agents of the insured in
respect to the thing insured subsequent to the loss, are at the risk
(a) Particular or Simple – a damage or expense caused to the vessel
of the insurer and for his benefit. In effect, the agents of the agents
or cargo which has not inured to the common benefit and profit of
of the insured become agents of the insurer. This retroacts to the
all persons interested in the cargo or vessel. This damage or
date of the loss when abandonment is effectively made.
expense is borne ordinarily by the owner of the vessel or cargo that
gives rise to the expenses or suffered the damage.
7.1. On an accepted abandonment involving a ship, freightage
earned previous to the loss belongs to the insurer of the
As when: Damage sustained by a cargo from the time it is loaded
freightage, that subsequently earned belongs to the insurer of
to the time it is unloaded or additional expenses that are incurred
the ship.
by the vessel from the time it is loaded to the time it is unloaded or
additional expenses that are incurred by the vessel from the time it
As when: The contemplated voyage for the transport of cargo
puts out to sea until it reaches its destination.
is from Point X to Point Y. in between, a loss occurs and the
ship is abandoned. The freightage already earned from Point X
until the point of loss, belongs to the insurer of the freightage.
76
NOTES ON INSURANCE
(b) General or Gross – an expense or damage suffered deliberately in As when: The cargo liable for contribution has been removed from
order to save the vessel or its cargo or both from a real or known the vessel.
risk. Thus, all persons having an interest in the vessel and cargo or
both at the occurrence of the average shall contribute to the loss. (b) When the insured having the right and opportunity to enforce
contribution from others, has neglected or waived the exercise of
As when: The ship is jettisoned. the right.
RULE ON LIABILITY FOR AVERAGES

2. This means that the insured has a choice of recovery on the happening
When it has been agreed that an insurance upon a particular thing or class of of a general average loss. They are:
things shall be free from a particular average, a marine insurer is not liable for a
particular average loss not depriving the insured at the port of destination, of the (a) Enforcing the contribution against interested parties; or
whole such thing, or class of things, even though it becomes entirely worthless,
but such insurer is liable for his proportion of all general average loss assessed (b) Claiming from the insurer.
upon the thing insured.
Note: If it be the latter, subrogation takes place.
IN CASE OF A GENERAL AVERAGE LOSS
MEASURE OF INDEMNITY IN MARINE INSURANCE
1. The insurer is liable for the loss falling upon the insured through a
contribution in respect to the thing insured when required to be made by 1. If the policy is valued: A valuation in the policy of marine insurance is
him towards a general average loss called for a peril insured against but conclusive between the parties thereto in the adjustment of either a
liability is limited to the proportion of the contribution attaching to his partial or total loss, if the insured has some interest at risk, and there is
policy value where this is less than the contributing value of the thing no fraud on his part.
insured.
1.1. If there is fraud in valuation, it would entitle the insurer to
1.1. This means that the insured can hold his insurer liable for his rescind by way an exception to conclusiveness.
contribution up to the value of the policy.
1.2. If however, the subject of insurance is hypothecated by
RIGHT OF SUBROGATION bottomry or respondentia before insurance and without
knowledge of the person securing it, he may show the real
1. When a person insured in a contract of marine insurance has demand value.
against the others for contribution, he may claim the whole loss from his
insurer subrogating the insurer to his own right to contribution, but no As when: A person purchases a vessel subject to bottomry but
such claim can be made upon the insurer if: he is unaware of it, he may upon a loss show the real value of
the vessel. The insurer cannot rescind.
(a) There is separation of the interest liable to contribution, nor
77
NOTES ON INSURANCE
1.3. An insurer is liable upon a partial loss only for such proportion expressly stipulated. In life insurance, there is none as value is
of the amount insured by him, as the loss bears to the whole fixed in the policy.
interest of the insured. The effect is that the insured is deemed
a co-insurer if the value of the insurance is less than the value 1.6. Section 159 is further qualified as in case of a partial loss of the
of the property. This applies even in the absence of a stipulation ship or its equipment, the old materials are t be applied towards
in the contract as is also known as the Average Clause. the payment of the new and unless stipulated in the policy, the
insurer is liable only for 2/3 of the remaining cost or repairs after
the deduction except that anchors are paid in full. This is the
1/3 old for new rule as it is contended that the repairs once
As when: A vessel valued at P500,000.00 is insured for completed will enhance the value of the thing insured.
P400,000.00. The vessel is damaged to the extent of
P200,000.00. The insurer is liable not for the P200,000.00, but 1.7. In case profits are separately insured in a contract of marine
for only P160,000.00. insurance, the insured can recover in case of a loss, a
proportion of such profits equivalent to proportion of the value
The formula is: of the property lost bears to the value of the whole.
(Insurance / Value) X Loss = Liability As when: Goods are valued at P500,000.00, expected profits
are P50,000.00. Goods suffer a partial loss of P100,000.00.
1.4. The requisites for the application of the Average Clause are: The insured can recover P10,000.00 ion the insurance over
profits.
(a) Insurance is for less than actual value;
(b) The loss is partial. Formula:
Amount Recoverable = (Insurance of Profits/ Value of Goods)

When does co-insurance exist? X Loss
Co-insurance exists when the subject matter is insured for Note: There is a conclusive presumption of a loss from the loss
an amount less than its value. In this case, the insured is of the property out of which they were expected to arise, and
considered as a co-insurer for the portion not covered by the valuation fixes their amount.
insurance. 1.8. In case of a valued policy on freightage or cargo, if only a part
of the subject is exposed to the risk, the valuation applies only
This will apply only if the loss is partial. in proportion to such part.
This is also known as the “Average Clause.” As when: Goods are valued at P500,000.00, if only
P250,000.00 are shipped and exposed to the risk, the valuation
1.5. Note: Co-insurance only exists in marine insurance, as a is reduced by ½ . In case of a total loss, the insured can only
general rule. In fire insurance, there is no co-insurance, unless demand ½ of valuation, or P250,000.00.
78
NOTES ON INSURANCE
2. If the policy is Open: The value of the ship is its value at the beginning (a) Market Price in sound state – Market Price in damaged
of the risk, including all articles or charges which add to its permanent state = Reduction in Value
value or which are necessary to prepare it for the voyage insured. The
value at the time it was built or acquired is not the value that is material. (b) (Reduction in Value / Market Price in sound state) X
Amount of Insurance = Amount of Recovery
2.1. The value of the cargo is its actual cost to the insured, when
laden on board or where that cost cannot be ascertained, its
market value at the time and place of lading, adding the 3. Regardless of whether the policy is Valued or Open: An insurer is liable:
charges incurred in purchasing and placing it on board, but
without reference to any loss incurred in raising money for its (a) Port of Refuge Expenses - all the expenses attendant upon a loss
purchase or any drawback on its exportation or fluctuation of that forces the ship into port to be repaired. These refer to expenses
the market at the port of destination or expenses incurred on for repairing the ship due to damages attributable to perils insured
the way or on arrival. against, as well as other expenses such as launching, towing,
raising and navigating the vessel.
A drawback is government allowance upon duties on imported
merchandise when the importer re-exports instead of selling it. (b) Sue and Labor Clause – if so stipulated, that the insured shall labor
for recovery of the property insured, the insurer is liable for
2.2. The value of freightage is the gross freightage, exclusive of expenses incurred thereby.
primage, without reference to the cost of earning it.
As when: The vessel is unlawfully detained.
Primage is the compensation paid by the shipper to the master
of the vessel for his care and trouble bestowed on the goods of 3.1. In either case, said expenses are to be added to a total loss, if
the shipper, which he retains in the absence of a contrary that afterwards occurs.
stipulation with the owner of the vessel.
2.3. The cost of insurance is in each case to be added to the value

thus estimated. FIRE INSURANCE
WHAT IS INCLUDED IN FIRE INSURANCE?

2.4. If the cargo is insured against a partial loss and it arrives at the
port of destination in a damaged condition, the loss of the 1. Insurance against fire may include loss or damage due to lightning,
insured is deemed to be the same proportion of the value which windstorm, tornado, earthquake or other allied risks when such risks are
the market price at that port of the thing so damaged bears to covered by extensions to the fire insurance policy or under separate
the market price it would brought if sound. Meaning, if reduction policies.
in value is 1/5, then the amount of recovery in the insurance is
also 1/5. 1.1. Hence, while it is not limited to loss or damage due to fire,
coverage as to other risks is not automatic.
The formula is:
79
NOTES ON INSURANCE
2.2. Note: The policy itself may limit or restrict coverage to losses
under ordinary conditions but not those due to extraordinary
FIRE, DEFINED circumstances or abnormal conditions like war, invasion,
rebellion, civil war, or similar causes. In these cases, recovery
1. In insurance, fire is “the active principle of burning, characterized by heat is still possible.
and light combustion.”
ALTERATION, DEFINED
Combustion without visible light or glow is not fire.
1. An alteration is a change in the use or condition of a thing insured from
As when: Damage caused by smoke from a lamp when no ignition that to which it is limited by the policy made without the consent of the
occurred outside the lamp. insurer by means within the control of the insured and increasing the
risk, which entitles the insurer to rescind the contract of insurance.
1.1. Fire cannot be considered a natural disaster or calamity since
it almost always arises from some acts of man or by human 2. From the foregoing definition, the following requisites must be present
means. It cannot be an act of God unless caused by lightning to constitute an alteration so as to allow the rescission of the contract:
or a natural disaster or casualty not attributable to human
agency. 2.1. The use or condition of the thing insured is specifically limited
or stipulated in the policy. Note that the contract of insurance is
2. To allow recovery, it must be the proximate cause of the damage or loss not affected by an act of the insured subsequent to the
and the fire must be hostile. execution of the policy, which does not violate its provisions,
even though it increases the risk and is the cause of the loss.
2.1. The fire is hostile if:
As when: If the insured stored thinner, paints and varnish; a fire
(a) Burns at a place where it is not intended to burn; subsequently occurs and there is no express prohibition as to
storage of such items, even if the risk is increased, the insurer
(b) Starts as a friendly fire but becomes hostile if it should is still liable or the policy states that the 1st floor is unoccupied,
escape from the place where it is intended to burn and it is later occupied. There is no alteration that entitles the
becomes uncontrollable; insurer to rescind, the description of the house cannot be said
to be a limitation as to use.
(c) Is a friendly fire which becomes hostile by not escaping
from its proper place but because of the unsuitable 2.2. There is an alteration in the said use or condition;
material used to light it, and it becomes inherently
dangerous and uncontrollable as opposed to a friendly fire 2.3. The alteration is without the consent of the insurer;
that burns in a place where it is intended to burn and
employed for the ordinary purpose of lighting heating or 2.4. The alteration is made by means within the insured’s control. If
manufacturing. the alteration be by accident or means beyond the control of
the insured, this requisite is not met.
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NOTES ON INSURANCE
As when: The alteration is made by a tenant with the consent 3. In case of loss, provided there is no change increasing the risk without
or knowledge of the insured, the insurer can rescind. If the the consent of the insurer, or fraud on the part of the insured, the insurer
alteration was undertaken by the tenant without the consent or will pay the whole amount so insured and stated in the policy is paid.
knowledge of the insured, the insurer cannot rescind.
3.1. If it is a partial loss, the whole amount of the partial loss is paid.
2.5. The alteration increases the risk of loss. Note that any alteration
in the use or condition of the thing insured from that which is 3.2. In case there are 2 or more policies, each shall contribute pro-
limited by the policy, which does not increase the risk does not rata to the total or partial loss but the liability of the insurers
affect the contract. cannot be more than the amount stated in the policy.
3. Rescission is due to the fact that payment of the premium is based on 4. Or the parties may stipulate that instead of payment, the option to repair,
the risk as assessed at the time of the issuance of the policy when the rebuild, or replace the property wholly or partially damaged or destroyed
risk is increased without a corresponding increase in premium, it is as if shall be exercised.
no premium is paid.
5. No policy of fire insurance shall be pledged, hypothecated or transferred
MEASURE OF INDEMNITY IN FIRE INSURANCE to any person, firm or company that acts as agent for or otherwise
represents the issuing company, such shall be void and of no effect
1. In an Open policy, it is the expense it would be to the insured at the time insofar as it may affect other creditors of the insured.
of the commencement of the fire to replace the thing lost or injured in
the condition in which it was at the time of the injury.
2. In a Valued Policy, it is the same as in marine insurance, the valuation CASUALTY INSURANCE
as agreed upon by the parties is conclusive in the adjustment of either a
partial or total loss in the absence of fraud. CASUALTY INSURANCE, DEFINED
1. Generally, it is one that covers loss or liability arising from an accident

HOW VALUATION IS MADE or mishap, excluding those that fall exclusively within other types of
insurance like fire or marine.
1. Whenever the insured would like to have a valuation stated in a policy
insuring a building or structure against fire, it may be made by an Bar 1975
independent appraiser, who is paid by the insured and the value may
then be fixed between the insurer and the insured. Q: In a course of a voluntary boxing contest, B who had an accident
insurance policy, slid and slipped, enabling his opponent boxer to hit him
2. Subsequently, the clause is then inserted in the policy that said valuation with a blow that threw him to the ropes, hitting his head against the
has thus been fixed. canvass, causing his eventual death. There is nothing in the insurance
contract appertaining to boxing. Is the insurance company liable?
81
NOTES ON INSURANCE
A: The insurer is liable because the death in this case was an accident connection with their employment. Note that most if not all types of this
within the meaning of the policy. It was an accident because the insured insurance is underwritten by the GSIS or the SSS.
did not expect to die by entering such contest. His slipping was
accidental and this caused him to hit his head against the canvass, 3. Public Liability – insurance against liability of the insured to pay damages
leading to his death. for accidental bodily injury or damage to property arising from an activity
of the insured defined in the policy.
Case: Finman General Assurance Corp. v. CA
4. Motor Vehicle Liability – insurance against loss or injury arising from the
There is no “accident” in the context of an accident policy, if it is the use of a motor vehicle by its owner as opposed loss or damage to the
natural result of the insured’s voluntary act, unaccompanied by anything vehicle itself. Coverage for both may however be contained in one
unforeseen except the injury. There is no accident when a deliberate act policy.
is performed, unless some additional and unforeseen happening occurs
that brings about the injury. 5. Plate Glass – insurance that indemnifies the insured against loss caused
by the accidental breaking of plate glass, windows, doors, or show
2. It includes: cases.
(a) Employer’s liability; 6. Burglary and Theft – insurance against loss of property through burglary
(b) Workmen’s compensation and theft.
(c) Public liability;
(d) Motor vehicle liability; 7. Personal Accident – insurance against expense, loss of time and
(e) Plate glass liability; suffering from accidents that cause a physical injury.
(f) Burglary and theft;
(g) Personal accident and health insurance as written by non-life 8. Health – insurance for indemnity for expenses or loss occasioned by
companies; and sickness or disease.
(h) Other substantially similar insurance.
SURETYSHIP
DEFINITIONS 1. An agreement whereby a party called the surety guarantees the

performance by another party called the principal or obligor of an
1. Employer’s Liability – insurance obtained by the employer against obligation or undertaking in favour of a 3rd party called the obligee.
liability to an employee for damages caused or arising from injuries by
reason of his employment. 2. This includes official recognizances, bonds, or undertakings issued by
any company under Act No. 536, as amended by Act No. 2206 in relation
2. Workmen’s Compensation – insurance secured by an employer for the to government transactions by authorized companies.
benefit of his employees and laborer for loss resulting from injuries,
disablement, or death through industrial accident, casualty or disease in
LIABILITY OF THE SURETY
82
NOTES ON INSURANCE
It is joint and several or solidary with the obligor but limited to the amount of the (a) Death of the person; or
bond and determined strictly by the terms of the contract in relation to the principal (b) His surviving a specified period; or
contract between obligor and obligee. (c) Or otherwise, contingently on the continuance or cessation of life.
IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM COMMON KINDS OF LIFE INSURANCE
HAS NOT YET BEEN PAID?
1. Whole Life/ Ordinary Life/ Straight Life – premiums are payable for life
Generally, payment of the premium is a condition precedent. Hence, the bond is and the insurer agrees to pay the face value upon the death of the
not valid. An exception is when it is issued and accepted by the obligee, it is valud insured.
despite the non-payment of the premium.
2. Limited Payment Life – insured pays premiums for a limited period after
WHAT OTHER LAWS GOVERN A SURETYSHIP CONTRACT? which he stops with a guarantee by the insurer that upon death, the face
amount is to be paid – if death occurs while payment is not complete –
In the absence of specific provisions, the Civil Code will apply in a suppletory beneficiary receives face amount.
character if necessary to interpret contract provisions.
3. Term Policy – insurer is liable only upon death of the insured within the
DISTINGUISHED FROM GUARANTY
agreed term or period. If insured survives, the insurer is not liable.
(a) A surety assumes liability as a regular party to the agreement; a
guarantor’s liability depends on an independent agreement to pay if 4. Endowment – protection is for a limited period, if the insured is still alive
primary debtor fails to pay. at the end of the period, the value of the policy is paid to him. If he dies
before the end of the period, it is paid to the beneficiaries.
(b) A surety is primarily liable; a guarantor is secondarily liable.
5. Annuity – where the insured or a named person is paid a sum or sums
(c) A surety is not entitled to exhaustion; a guarantor is entitled to periodically during life or a certain period. Note that contracts for the
exhaustion. payment of endowment or annuities are considered as life insurance
contracts.
LIFE INSURANCE DISTINGUISHING LIFE INSURANCE FROM PAYMENT OF ANNUITY
LIFE INSURANCE PAYMENT OF ANNUITY

Payable upon the death of the Payable during the lifetime of the
It is insurance on human lives and insurance appertaining thereto or connected insured annuitant
therewith. Premium is paid in instalments Annuitant pays a single premium
There is lump sum payment upon Annuities are paid until death
WHEN PAYABLE death
An insurance upon life may be made payable on:

EXERCISE BY THE MINOR OF HIS RIGHTS AS INSURED OR BENEFICIARY
83
NOTES ON INSURANCE
As far as a minor, who is the insured or a beneficiary in an insurance contract, in
the absence or capacity of a judicial guardian, the father, in default, the mother, 2. The effect is that the person to whom it is transferred may recover upon
may act in behalf of the minor without need of bond or court authority when it it whatever the insured might have recovered.
involves the exercise of any right under the policy, to include but not limited to
obtaining a policy loan, surrendering the policy, receiving the proceeds of the 2.1. Note: While there is no need for the assignee/ transferee to
policy and giving the minor’s consent to any transaction on the policy provided have insurable interest, it should not be used to circumvent the
the interest of the minor does not exceed P20,000.00. law prohibiting insurance without insurable interest. Thus, an
assignment contemporaneous with issuance may invalidate
WHAT RISKS ARE COVERED? the policy unless made in good faith.
1. Generally, all causes of death are covered unless excluded by law, by 3. Notice to the insurer is not necessary to preserve the validity of the policy
the policy or public policy. unless thereby expressly reserved.
2. A cause is excluded by law, as when the beneficiary is the principal, 4. The consent of the irrevocable beneficiary would be required as he has
accomplice or accessory in bringing the death of the insured. acquired a vested right.
2.1. It is excluded by the policy, as when it is stipulated that it does

not cover assault, murder or injuries inflicted intentionally by a Bar 1991
3rd person.
Q: The policy of insurance upon his life, with a face value of P100,000.00, was
Note: Where the insured is not the intended victim, the insurer assigned by Jose, a married man with 2 legitimate children, to his nephew, Y, as
is liable. What must be considered is that death or injury is not security for a loan of P50,000.00. He did not give the insurer any written notice of
the natural or probable result of the insured’s voluntary act as such assignment despite the explicit provision to that effect in the policy. Jose
opposed to an act of the insured to confront burglars. died. Upon the claim on the policy by the assignee, the insurer refused to pay on
the ground that it was not notified of the assignment. Upon the other hand, the
2.2. It is excluded by public policy, as when the insured is executed heirs of Jose contended that Y is not entitled to any amount under the policy
for a crime that he committed. because the assignment without due notice to the insurer was void.
3. Suicide is not generally compensable unless committed after the policy Resolve the issues.
has been in force for a period of 2 years from date of issue or last
reinstatement, or a shorter period if provided, or if committed in a state A: A life insurance is assignable. A provision, however, in the policy stating that
of insanity. written notice of such an assignment should be given to the insurer is valid. The
failure of the notice of assignment would thus preclude the assignee from claiming
rights under the policy. The failure of the notice did not, however, avoid the policy;
IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE? hence, upon the death of Jose, the proceeds would, in the absence of a
designated beneficiary, go to the estate of the insured. The estate, in turn, would
1. Life insurance may pass by transfer, will or succession to any person, be liable for the loan of P50,000.00 owing in favour of Y.
whether he has insurable interest or not.
84
NOTES ON INSURANCE
WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE but the CSV is always a lesser sum than the total amount of premiums
paid.
1. Unless the interest of a person insured is susceptible of pecuniary
estimation, the amount stated or specified in the policy is the measure (e) Reinstatement
of indemnity.
Every life insurance policy must contain a provision that the holder of the
2. Hence, a life insurance policy has been held to be a Valued policy. policy shall be entitled to reinstatement of the contract at any time within
3 years from the date of default in the payment of the premium, unless
the cash value has been duly paid or the extension period expired upon
WHAT ARE THE NON-DEFAULT OPTIONS IN LIFE INSURANCE? production of evidence of insurability satisfactory to the company and
payment of all overdue premiums and any indebtedness to the company
To prevent a life insurance policy from lapsing, the following devices are used:
upon such policy.
(a) Grace Period
COMPULSARY MOTOR VEHICLE LIABILITY INSURANCE
In life insurance, after the payment of the 1st premium, the insured is CONCEPT OF MVLI
entitled to a grace period of 30 days or one month within which to pay
the succeeding premiums. 1. It is to provide protection or coverage to answer for bodily injury or
property damage that may be sustained by another arising from the use
(b) Automatic Loan Clause of a motor vehicle.
It is the stipulation in the policy providing that upon default on the 2. Note: What is now compulsory is death or bodily injury arising from MV
payment of premium, the same shall be paid from the loan value of the accidents as per amendment of the Insurance Code, brought about by
policy until the value is consumed. insurance losses due to padded claims form property damage. Hence,
property damage is now optional.
(c) Paid-Up Insurance
No more payments are required and consists of insurance for life in such HOW IS THE COMPULSARY NATURE ENFORCED?
amount as the sum available therefore, considered as single and final
premium will purchase. It results in the reduction of the original amount 1. The compulsory nature of the insurance is enforced by prescribing that
of insurance but for the same period originally stipulated. any land transportation operator/ owner or MVs for transportation of
passengers for compensation, including school buses or owner of a
(d) Cash Surrender Value motor vehicle, referring to the actual legal owner of a MV in whose name
the vehicle is registered with LTO, would be considered as unlawfully
As applied to life insurance, it is the sum of money the company agrees operating a MV, unless, there is a:
to pay to the holder of the policy if he surrenders it and releases his claim
upon it. The greater the sum of CSV will be if more premiums are paid; (a) Policy of insurance or contract of insurance against passenger or
3rd party liability for death or bodily injury arising from MV accidents;
85
NOTES ON INSURANCE
1.1. Own damage insurance answers for reimbursement of the cost
(b) Guaranty in cash; of repairing the damage to vehicle of the insured.
(c) Surety bond, to indemnify the death or injury to a 3rd party other than 1.2. Comprehensive insurance answers for all liabilities/ damages
a passenger, excluding a member of the household, or a member arising from the use/ operation of a MV; it includes Third Party,
of the family of a MV owner or land transportation operator or his Own Damage, Theft, and Property Damage.
employee in respect to death, bodily injury or damage to property
arising out of and in the course of employment, or passenger How can the theft clause be interpreted?
referring to any fare paying person being transported or conveyed
in and by MV for transportation of passengers for compensation, In Paramount Insurance v. Spouses Remondeulaz, the respondents entrusted
including persons expressly authorized by law or by the vehicle’s possession of their vehicle only to the extent that Sales will introduce repairs and
operator or his agents to ride without fare arising from the use improvements thereon and not to permanently deprive them of possession
thereof. thereof. Since theft can also be committed by misappropriation, the fact that Sales
failed to return the subject vehicle to the respondents constitutes Qualified Theft.
2. Compliance by the MV owner or the land transportation operator is Hence, since the respondents’ car is undeniably covered by a Comprehensive
monitored as the LTO shall not allow registration or renewal of MV Insurance Policy that allows for recovery in cases of theft, petitioner is liable
registration without compliance with Section 390. under the policy for the loss of respondents’ vehicle under the “theft clause.”
Case: Villacorta v. Insurance Commissioner

3. A violation of the provision is punishable by a fine not less than
P500,000.00, but not less than P1,000.00 and/ or imprisonment of not The taking of a car even though temporary ad only for a joy ride, without the
more than 6 months. consent of the car owner, is theft; and therefore, insurer is liable for total loss due
to car accident of insured’s car wrongfully taken, without the insured’s consent,
3.1. If a land transportation operator violated the prescribed from repair shops entrusted for repairs.
minimum limits of coverage, it is sufficient cause for revocation
of a certificate of public convenience. WHEN DOES THE LIABILITY OF THE INSURER ACCRUE?
3.2. If the violation is committed by a corporation/ association or 1. In an insurance policy that directly insures against liability, the insurer’s
government office/ entity, the executive officer/s who shall have liability accrues immediately upon the occurrence of the injury upon
knowingly permitted or failed to prevent the violation shall be which liability depends, and does not depend on the recovery of
held liable as principals. judgment by the injured party against the insured. Hence, there is no
need for the insured to wait for a decision of the court finding him guilty
DISTINGUISHED FROM OWN DAMAGE COVERAGE AND of reckless imprudence.
COMPREHENSIVE MV INSURANCE
2. The occurrence of an injury for which the insured may be liable
1. Third party liability answers for liabilities arising from death or bodily immediately gives rise to insurer liability. In fact, since third party liability
injury to 3rd persons or passengers. insurance insures against 3rd persons, the injured party for whom the
contract is intended can directly sue the insurer. The purpose is to
enable the injured person to proceed directly against the insurer so as
86
NOTES ON INSURANCE
to avoid the probable insolvency of the insured who had directly caused Q: While driving his car along EDSA. Cesar sideswiped Roberto, causing injuries
the damage. to the latter. Roberto sued Cesar and the third party liability insurer for damages
and/ or insurance proceeds. The insurance company moved to dismiss the
2.1. The provision creates a contractual relation, which inures to the complaint, contending that the liability of Cesar has not yet been determined with
benefit of any person who may be negligently injured by the finality.
insured, as if such person was specifically named in the policy.
(1) Is the contention of the insurer correct?
2.2. The insurer is not solidarily liable with the insured as its liability (2) May the insurer be held liable with Cesar?
is based on contract, while that of the insured is based on tort.
A:
Bar 2000 (a) No. There is no need to wait for the decision of the court determining
Cesar’s liability with finality before the third party liability insurer could be
Q: X was riding a suburban utility vehicle covered by a comprehensive motor sued. The occurrence of the injury to Roberto immediately gave rise to
vehicle liability insurance underwritten by FastPay Insurance when it collided with the liability of the insurer under its policy. In other words, where an
a speeding bus insurance policy insures direct liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or event upon which the
owned by RM Travel. The collision resulted in serious types of injuries to X; Y, a liability depends.
passenger of the bus; and Z, a pedestrian waiting for a ride at the scene of the
collision. The police report established that the bus was the offending vehicle. The (b) The insurer cannot be held solidarily liable with Cesar. The liability of the
bus had a CMVLI policy issued by Dragon Insurance. X, Y and Z jointly sued RM insurer is based on contract while that of Cesar is based on tort. If the
Travel and Dragon Insurance for indemnity. The lower court applied the “no-fault” insurer were solidarily liable with Cesar, it could be made to pay more
indemnity policy of the statute, dismissed the suit against RM Travel, and ordered than the amount stated in the policy. This would, however, be contrary
Dragon Insurance to pay indemnity to all three plaintiffs. to the principles underlying insurance contracts. On the other hand, if
the insurer were solidarily liable with Cesar and it is made to pay only up
Do you agree with the court’s judgment? to the amount stated in the insurance policy, the principles underlying
solidary obligations would be violated.
A: No. The cause of action of Y is based on the contract of carriage, while that of
X and Z is based on torts. The court should not have dismissed the suit against
RM Travel. The court should have ordered Dragon Insurance to pay each of X, Y EFFECT OF CHANGE IN OWNERHIP OR CHANGE IN ENGINE
and Z to the extent of the insurance coverage, but whatever amount is agreed
upon in the policy should be answered first by RM Travel and the succeeding There is no need to issue a new policy until the next date of registration; provided,
amount should be paid by Dragon Insurance up to the amount of the insurance the insurer shall agree to continue the policy and such change shall be indicated
coverage. The excess of the claims of X, Y and Z, over and above such insurance in a second duplicate which is filed with the LTO.
coverage, if any, should be answered or paid by RM Travel.
PAYMENT OF CLAIMS
Bar 1996
1. A claim for payment shall be filed without unnecessary delay, within 6
months from the date of accident by giving notice setting forth the nature,
87
NOTES ON INSURANCE
extent, and duration of the injuries as certified by a duly licensed b. Either death certificate and sufficient evidence to establish the
physician. payee; or
c. The medical report and evidence of medical or hospital
1.1. The failure to file a claim will be deemed as a waiver. disbursement in respect of which refund is made.
1.2. If a claim is filed but denied, an action must be brought within 3. A claim under the No Fault Indemnity Clause may be made against one
1 year from date of denial with the Insurance Commissioner or motor vehicle insurer only as follows:
the Court, otherwise the right of action will be deemed as
having prescribed. (a) In case of an occupant of a vehicle – against the insurer of the
vehicle in which the occupant is riding, mounting or dismounting
WHAT SHALL THE INSURANCE COMPANY DO UPON FILING OF THE from;
CLAIM? (b) In any other case – from the insurer of the directly offending vehicle;
(c) In all cases – the right of the party paying the claim to recover
1. It shall forthwith ascertain the truth and extent of the claim and make against the owner of the vehicle responsible for the accident shall
payment within 5 working days after reaching an agreement. If no be maintained.
agreement is reached, it must nevertheless pay the No Fault Indemnity
without prejudice to a further pursuit of claim, in which case he shall not
be required or compelled to execute a quit-claim or release from liability. 3.1. The term “occupant” must be distinguished from a
“passenger” who is “any fare-paying person being
1.1. In case of dispute as to enforcement of policy provisions, the transported and conveyed in and by a motor vehicle for
adjudication shall be within the original and exclusive transportation of passengers for compensation including
jurisdiction of the Commissioner subject to Section 439, which persons expressly authorized by law or by the vehicle’s
provides for concurrent jurisdiction but the filing with the operator or his agents to ride without fare.” Any person
Insurance Commissioner shall preclude filing with the Court. other than a passenger is a “third-party” so long as they
are riding in, or mounting, or dismounting from a motor
NO FAULT INDEMNITY
vehicle.
1. It is a claim for payment for death or injury to a passenger or 3 rd party
INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE
without necessity of proving fault or negligence.
1. Purpose: To assure that the persons other than the insured owner, who
2. This is payable by the insurer, provided: drives the car on the insured’s order, such as his regular driver, or with
his permission, such as friends or family members or employees of a car
(a) Indemnity in respect of one person shall not exceed P15,000.00; service or repair shop, are duly licensed drivers and have no
(b) The necessary proof of loss under oath to substantiate the claim is disqualification to drive a motor vehicle.
submitted.
2. Thus, the authorized driver clause is interpreted to refer to the insured
These are: or any person driving on the order of the insured or with his permission,
a. Police report of accident provided, such person is permitted to operate a motor vehicle in
88
NOTES ON INSURANCE
accordance with our licensing laws or regulations and who is not
otherwise disqualified. 3.7. The unauthorized use of a motor vehicle for a joy-ride
constitutes theft and a prior criminal conviction is not necessary
2.1. When the insured is the one driving the vehicle, a license is not to enable the insured to recover under a comprehensive
necessary. He has a right to recover the damage even if he has insurance policy.
no driver’s license or that the same had expired at the time of
the accident. 4. The standard Authorized Driver clause requires that the driver at the time
of the accident must be duly authorized and licensed to drive. An
3. Jurisprudence on the interpretation and application of the authorized irregular license is not a license at all.
driver clause:
BUSINESS OF INSURANCE
3.1. If the license of the driver other than the insured has expired,
such person is not authorized to operate a motor vehicle. The
renewal of the license a week after the accident shall not cure
ORGANIZATION
the defect.
1. The term insurer or insurance company shall include all individuals,
3.2. When a driver is issued a Temporary Operator’s Permit or a partnerships, associations or corporations, including GOCCs or entities
Temporary Vehicle Receipt, such person is authorized to engaged as principals in the insurance business.
operate a motor vehicle, but if it has expired, it is as if he had
no license. 2. Expressly excluded is Mutual Benefit Association which is based on
reciprocal contracts and requires that the members receive benefits as
3.3. A tourist with a license issued in his home country but in the a matter of right. Commonly, a fraternal or social organization that
Philippines for more than 90 days, is not authorized to operate provides insurance for members on an assessment basis. However,
a motor vehicle because it is as if he had no license. before it is allowed to transact, the law requires it to secure a license
from the Insurance Commissioner.
3.4. A driver’s license that bears all the earmarks of a duly issued
license is a public document that is presumed genuine. 2.1. It is formed without capital stock and not organized for profit. Its
main purpose is paying sick benefits to members, or furnishing
3.5. When the driver is authorized to drive, the fact that the purpose financial support to its members while out of employment or of
of the trip was not authorized will not affect the right of the paying to relatives of deceased members a fixed or any sum of
insured to recover from the insurer should the vehicle be money, irrespective of whether such aim or purpose is carried
damaged. out by means of fixed dues, assessments, or voluntary
contributions, or of providing by the issuance of certificates
3.6. When a motor vehicle is covered by a policy that includes theft, insurance benefits, out of dues, assessments, collected from
the insurer is liable for the damage sustained by the insured members.
vehicle on occasion of or while the theft is being committed by
a thief without a license to drive. The same is true if the thief
had an expired license.
89
NOTES ON INSURANCE
2.2. The insurance aspect of their operations, being an incident and REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE
not the main purpose of the organization, and the insurance INSURANCE COMMISSION
feature is adopted, not for purpose of gain, but with the object
of benevolence. 1. The requirements are:
2.3. Do not confuse with Mutual Insurance Company, which is a (a) Qualified by Philippine laws to transact insurance business;
cooperative or enterprise where the members are both insurer (b) Has a name that is not in any way similar to another company;
and insured. In it, the members all contribute, by a system of (c) If organized as a stock corporation, it should have a paid-up capital
premiums or assessments, to the creation of a fund from which of no less than P5,000,000.00;
all losses and liabilities are paid, and where the profits are (d) If organized as a mutual company or one whose capital funds are
divided among themselves, in proportion to their interest. not contributed by stockholders but by policy holders, it must have
available cash assets of at least P5,000,000.00 above all liabilities
2.4. An example is a “Protection and Indemnity Club,” which is an for losses reported, expenses, taxes, legal reserves and
association composed of ship owners in general who band reinsurance of all outstanding risks, and the contributed surplus
together for the specific purpose of providing insurance cover fund equal the amounts required of stock corporations,
on a mutual basis against liabilities incidental to ship owning P1,000,000.00 if life insurance company, P500,000.00 if non-life.
that the members incur in favour of 3rd parties. It is a form of
insurance against 3rd party liability, where the 3rd party is MARGIN OF SOLVENCY
anyone other than the P&I and its members. It is therefore, a
1. The margin of solvency is the excess of the value of insurance
mutual insurance association engaged in the marine insurance
company’s admitted assets, exclusive of its paid up, in case of a
business and must be duly licensed by the Insurance
domestic insurance company or an excess of the value of its admitted
Commission.
assets in the Philippines exclusive of security deposits, in case of a
foreign company, over the amount of its liabilities, unearned premiums,
2.5. If a Labor Union shall provide its members with a mutual benefit
and reinsurance reserves in the Philippines.
feature, it shall be governed by the provisions of the Labor
Code.
2. The required margin in case of life insurance companies is 2% of the
total amount of its insurance in force as of the preceding calendar year
on all policies except term insurance.
3. Insurance Corporation – one that is formed or organized to have any
2.1. In case of non-life insurance companies, at least 10% of the
person or persons or other corporations harmless from loss, damage or
total amount of its net premium during the preceding calendar
liability arising from any unknown or future or contingent event, or to
year.
indemnify or to compensate any person or persons or other corporations
for any such loss, damage or liability, or to guarantee the performance
3. In no case shall the margin of solvency be less than P500,000.00.
of or compliance with contractual obligations or the payment of debts of
others.
90
NOTES ON INSURANCE
3.1. If the requirement is not met, the insurance company is not receipts and disbursements, as well as the basis therefor, for the next succeeding
permitted to take on any new risk and no dividends can be 3 years.
declared by the deficient company.
OTHER PROVISIONS
LIQUIDATION OF INSURANCE COMPANY
BANCASSURANCE
If the company is determined by the Commissioner to be insolvent, or cannot
resume business, he shall, if public interest so requires, order its liquidation RA 10607 introduced provisions governing bancassurance.
(Section 256).
Such term shall mean the presentation and sale to bank customers by an
This should be distinguished from a situation where a conservator is appointed insurance company of its insurance products within the premises of the head
when the Commissioner finds that a company is in a state of continuing inability office of such bank duly licensed by the BSP, or any of its branches under rules
or unwillingness to maintain a condition of solvency or liquidity adequate to protect and regulations which the Commissioner and the BSP may promulgate.
the policy holders and creditors. The conservator will take charge of the
management of the insurance company (Section 255). To engage in a bancassurance arrangement, a bank is not required to have equity
ownership of the insurance company. No insurance company shall enter into a
REVOCATION OF CERTIFICATE OF AUTHORITY bancassurance arrangement unless it possesses all the requirements as may be
prescribed by the Commissioner and the BSP.
Grounds:
No insurance product, whether life or non-life, shall be issued or delivered
(a) The company is in an unsound condition; pursuant to a bancassurance arrangement, unless in the form previously
(b) That it has failed to comply with the provisions of law or regulations approved by the Commissioner (Section 375).
obligatory upon it
(c) That its condition or method of business is such as to render its Personnel tasked to present and sell insurance products within the bank premises
proceedings hazardous to the public or its policy holders; shall be duly licensed by the Commissioner and shall be subject to the rules and
(d) That its paid-up capital stock, in the case of a domestic stock regulations of this Act (Section 376).
corporation, or its available cash assets, in the case of a domestic
mutual company, or its security deposits, in the case of a foreign
company, is impaired or deficient;
INSURANCE COMMISSIONER
(e) That the margin of solvency required of such company is deficient.
JURISDICTION AND ADJUDICATORY POWERS
The Commissioner is authorized to suspend or revoke all certificates of authority
granted to such insurance company, its officers and agents, and no new business 1. The Insurance Commissioner has, among other functions, concurrent
shall thereafter be done by such company or for such company by its agents in jurisdiction with the courts for claims under any kind of policy or contract
the Philippines, while such suspension, revocation or disability continues or until of insurance where the amount of the loss, damage or liability, excluding
its authority to do business is restored by the Commissioner. interest, costs, attorney’s fees does not exceed P100,000.00.
Before restoring such authority, the Commissioner shall require the company
concerned to submit to him a business plan showing the company’s estimated
91
NOTES ON INSURANCE
1.1. With the increase in the jurisdictional amounts for the courts, Note: However, the Commission has no jurisdiction to decide the legality of a
that of the Insurance Commissioner was not increased. Hence, contract of agency entered into between an insurance company and its agent.
the court with which he as concurrent jurisdiction refers to the The same is not covered by the term “doing or transacting insurance business”
MTC. under Section 2, neither is it covered by Section 439, which grants the
Commissioner adjudicatory powers.
2. The filing with the Commissioner shall preclude civil courts from taking
cognizance of a suit over the same subject matter. However, this does
not preclude a claimant who has filed an action with the courts from
pursuing an administrative action against the insurer simultaneously.
3. Decisions are appealable to the CA within 30 days by notice of appeal.

This matter is now open to question.
The Commissioner has the power to adjudicate disputes relating to an insurance

company’s liability to an insured under a policy. A complaint or claim filed with
such official is considered an “action” or “suit” the filing of which would have the
effect of tolling the suspending the running of the prescriptive period.
Concurrent jurisdiction (with regular civil courts) over cases where any single
claim does not exceed P5,000.00 involving liability arising from:
(a) Insurance contract;

(b) Contract of suretyship;
(c) Reinsurance contact;
(d) Membership certificate issued by members of mutual benefit association
(Section 439).
Primary and exclusive jurisdiction over claims for benefits involving pre-need
plans where the amount of benefits does not exceed P100,000.00 (Section 55,
Pre-Need Code).
For the purpose of proceeding under its adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof designated by him, is empowered
to administer oaths and affirmation, subpoena witnesses, and compel their
attendance, take evidence and require the production of any books, papers,
documents or contracts or other records which are relevant or material to the
inquiry (Section 439).
92

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NOTES ON INSURANCE

From the Lecture Notes of Atty. R. Rondez,

WHAT ARE PURE AND SPECULATIVE RISKS?

2. It is a contract of indemnity if it is a non-life insurance contract as

A: No, since X had no knowledge of the insurer’s acceptance of his application

A: In property insurance, insurable interest must exist both at the time of A:

RESCISION OF INSURANCE CONTRACT

Bar 1979 a) Is she entitled to any indemnity?

As when, an application for insurance is made in writing and

Bar 1998 a. May the incontestability period set in even in cases of

2. What is essential is what the parties intend a statement to be, and if so

2. The policy may declare that a violation of specified provisions thereof

2.3. No rider, clauses, or warranties, or endorsements shall be

1.1. As when: As when: The insured procured insurance that would

Bar 1975 As when: There is storage of hazardous materials in the premises;

HOW IS REINSTATEMENT OF THE POLICY EFFECTED?

Bar 1994 1.2. In a comprehensive motor liability insurance claim, a written

(a) Is this double insurance? Northern Insurance – P20,000,000;

DISTINGUISH REINSURANCE FROM DOUBLE INSURANCE

1.1. An automatic reinsurance treaty is one where two or more

(e) “Marine Protection and Indemnity Insurance,” meaning insurance

2. A party is also bound to communicate the information, belief or

(a) More than ¾ thereof in value is actually lost or would have to be A:

(a) It is equivalent to a transfer by the insured of his interest to the AVERAGES

2. The kinds of averages are:

RULE ON LIABILITY FOR AVERAGES

Amount Recoverable = (Insurance of Profits/ Value of Goods)

2.3. The cost of insurance is in each case to be added to the value

WHAT IS INCLUDED IN FIRE INSURANCE?

1. Generally, it is one that covers loss or liability arising from an accident

DEFINITIONS 1. An agreement whereby a party called the surety guarantees the

LIFE INSURANCE DISTINGUISHING LIFE INSURANCE FROM PAYMENT OF ANNUITY

LIFE INSURANCE PAYMENT OF ANNUITY

An insurance upon life may be made payable on:

2.1. It is excluded by the policy, as when it is stipulated that it does

Case: Villacorta v. Insurance Commissioner

3. Decisions are appealable to the CA within 30 days by notice of appeal.

The Commissioner has the power to adjudicate disputes relating to an insurance

(a) Insurance contract;

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