4B Merc 2 Insurance Credit Trans PPSA

4B 2020-2021
Notes for Merc Rev 2
the principal debtor. However, the answer

APRIL 22, 2021
depends on whether or not the surety like a
FREEZER BUNNY
bonding company is engaged in the insurance
business.
CONCEPT OF INSURANCE
So if the person secures the obligation of the
other as a business like a bonding company,
What is an insurance contract?
then even the contract of suretyship is
considered an insurance contract.
A contract of insurance is an agreement
whereby one undertakes, for a
In return for the 20 years of faithful
consideration, to indemnify another
service of X as a househelper to Y, the
against loss, damage, or liability arising
latter promised to pay Php100,000.00 to
from an unknown or contingent event.
X’s heirs if he (X) dies in an accident by
Section 2, Insurance Code.
fire. X agreed. Is this an insurance
contract?
Is a surety agreement signed by a person
undertaking to guarantee the No, all the elements of insurance contract
performance of an obligation an are not present. It is a conditional donation
insurance contract? of Y in X’s favor.
A contract of suretyship shall be deemed

Philippine Health Care Providers, Inc. is
an insurance contract only if made by a
a domestic corporation whose primary
surety who or which, as such is doing an
purpose is "to establish, maintain,
insurance business as defined by the
conduct and operate a prepaid group
Insurance Code.
practice health care delivery system or a
health maintenance organization to take
A guaranty agreement signed by a person
care of the sick and disabled persons
not engaged in the business of insurance is,
enrolled in the health care plan and to
therefore, not an insurance contract. There
provide for the administrative, legal,
is no premium required for such
and financial responsibilities of the
undertaking. The assumption of risk made
organization." Individuals enrolled in
by the surety in case the principal debtor
its health care programs pay an annual
does not perform his obligation is not part
membership fee and are entitled to
of a general scheme to distribute actual
various preventive, diagnostic, and
losses among a large group or substantial
curative medical services provided by its
number of persons bearing a similar risk.
duly licensed physicians, specialists, and
other professional technical staff
Because it is similar in concept. The surety
participating in the group practice
secures the performance of the obligation of
health delivery system at a hospital or
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clinic owned, operated, or accredited by members and the HMO an insurance policy
it. in the context of the Tax Code.
The Commissioner of Internal Revenue So the issue in the case is actually taxation.
ordered Philippine Health Care The argument of the BIR is that the health
Providers to pay documentary stamp maintenance agreement is a non-life
tax (DST) on its health care agreements. insurance policy because HMO is engaged in
It moved for reconsideration arguing insurance business.
that DST is imposed only on a company
engaged in the business of fidelity bonds (context: kinuha raw silang legal counsel ng
and insurance policies. Philippine Maxicare) My argument was that the
Health Care Providers, Inc., as a health dominant phase of the service of Maxicare is
maintenance organization (HMO), is a rendition of health service, preventive in
service provider and not an insurance nature. True, some members receive
company. indemnity when they get sick but that is only
a minor feature of the services rendered by
Is Philippine Health Care Providers, Maxicare. The dominant feature is
Inc. (now Maxicare) engaged in the preventive, diagnostic of rendition of dental
business of insurance? or medical health service. Because, the
primary principal purpose is rendition of
This case refers to the liability of HMOs or service and not indemnity, our basic
Health Maintenance Organizations. argument is that it is not an insurance
company and not engaged in insurance
The members of the HMOs pay for premium business.
in advance. In consideration of the payment
of the premium by the members, they are No, Maxicare, as an HMO, is not engaged
entitled to avail themselves of the various in insurance business. The basic distinction
medical, dental services of the HMOs. between medical service corporations and
ordinary health and accident insurers is
You don’t have to get sick to be able to avail that the former undertake to provide
yourself of the services of HMOs. You can prepaid medical and health services
have executive check-up even though you are through participating physicians and
not feeling anything. accredited establishments, thus relieving
subscribers of any further financial burden,
Given that the character or the business of the while the latter only undertake to
HMO is to render service and indemnity is indemnify an insured for medical expenses
only a minor feature of its service. Is it an up to, but not beyond, the schedule of rates
insurance company? Is the health contained in the policy. The mere presence
maintenance agreement signed by the of risk would be insufficient to override the
primary purpose of the business to provide
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medical services as needed, with payment v. Commissioner of Internal Revenue,

made directly to the provider of these G.R. No. 167330, September 18, 2009.
services. Even if Maxicare assumes the
risk of paying the cost of these services, it We handled another case. This time, with
nevertheless cannot be considered as being Medicard which is the competitor of
engaged in the insurance business. Maxicare. So Medicard was slapped with
Assumption of the expense by Maxicare is VAT. The issue was do you pay VAT on the
not confined to the happening of a entire premium payments or do you pay VAT
contingency but includes incidents even in only on that portion that will be booked by
the absence of illness or injury. the HMO as its admin expense or income.
BIR lost all the way. We capitalized on the
Since indemnity of the insured was not the word “deemed” received. The entire amount
focal point of the agreement but the is deemed to be the gross receipts of the
extension of medical services to the HMO. We said it is only deemed and not
members at an affordable cost, it did not conclusive. So, therefore, if there is evidence
partake of the nature of a contract of to the contrary, so it is not correct to impose
insurance. VAT on the entire amount of premium.
Even if a contract contains all the elements Is the health care agreement an
of an insurance contract, if its primary insurance contract for the purpose of
purpose is the rendering of service, it is not assessing DST?
a contract of insurance. Under the
principal purpose test, the test applied is No, it will not qualify as in insurance
whether the assumption of risk and contract as discussed above. Also, there is
indemnification of loss (which are no loss, damage or liability on the part of
elements of an insurance business) are the member that should be indemnified by
the principal object and purpose of the Maxicare as an HMO. Under the
organization or whether they are merely agreement, the member pays Maxicare a
incidental to its business. If these are the predetermined consideration in exchange
principal objectives, the business is that for the hospital, medical, and professional
of insurance. But if they are merely services rendered by affiliated physicians.
incidental, and service is the principal In case of availment by a member of the
purpose, then the business is not benefits under the agreement, Maxicare
insurance. does not reimburse or indemnify the
member as the latter does not pay any third
Therefore, since Maxicare substantially party. Instead, it is Maxicare who pays the
provides health care services rather than participating physicians and other health
insurance services, it cannot be considered care providers for the services rendered at
as being in the insurance business. pre-agreed rates. Philippine Health Care
Philippine Health Care Providers, Inc.
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Providers, Inc. v. Commissioner of interpretation also holds true for HMO, right?
Internal Revenue, G.R. No. 167330, ibid. Because the liability is similar to a non-life
insurance policy?
It should be noted, however, that in another
case, it was held that for purposes of Q: What was the context?
determining the liability of a health care A: A member of Fortune Medicare went to
provider to its members, a health care Honolulu, Hawaii for an appendectomy
agreement is in the nature of non-life operation. He spent something like $10,000.
insurance, which is primarily a contract of Under the terms and conditions of the health
indemnity. Once the member incurs maintenance agreement, the member entitled
hospital, medical, or any other expense to reimbursement up to 80% of standard
arising from sickness, injury, or other operating charge.
stipulated contingent. the health care
provider must pay for the same to the Q: What standard operating charge will
extent agreed upon under the contract. be the basis? The standard operating
Limitations as to liability must be charge in Honolulu, Hawaii or the
distinctly specified and clearly reflected in standard operating charge in the
the extent of coverage which the company Philippines?
voluntarily assume, otherwise, any A: So, given that there is ambiguity, that
ambiguity arising therein shall be ambiguity was resolved in favor of the
construed in favor of the member. Fortune insured or the member. 80% of the standard
Medicare, Inc. v. David Robert Amorin, operating charges in Honolulu, Hawaii.
G.R. No. 195872, March 12, 2014 Why? For the purposes of determining
liability of the healthcare provider to the
In Fortune v. Amorin, it is liability to its members, healthcare agreement is in the
members and not to the government. nature of non-life insurance contract.
Q: What is the reason for this decision in Summary:

Fortune v. Amorin? 1. For DST purposes, tax purposes,
A: Because of the construction or governmental purposes, HMOs are
interpretation of insurance contract. not engaged in business of insurance.
They are not insurance companies.
Q: How do you interpret an insurance 2. To determine liability of the HMO to
contract? its members, it is similar to a non-life
A: Any doubt or ambiguity in the terms and insurance contract.
conditions of the contract is resolved in favor
of the insured and strictly against the insurer. Q: Potential question. Now, all HMOs are
supervised by the Insurance Commission.
But that interpretation only applies to So when this case was decided, they were
insurance. So, they have to say then, that not under the supervision of the Insurance
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Commission. So, given that the a citizen of a country with whom the
jurisdiction and supervision of HMOs are Philippines is at war.
now with the Insurance Commission, are
HMOs engaged in insurance business? May a member of the MILF or its
A: Still NO because the Insurance breakaway group, the Abu Sayyaf, be
Commission may have supervision but it insured with a company licensed to do
does not change the nature of its business. Its business under the Insurance Code of
primary purpose is service and not the Philippines? Explain.
indemnity; therefore, not an insurance
company. A member of the MILF or the Abu Sayyaf
may be insured with a company licensed to
Who are the parties to a contract of do business under the Insurance Code of
insurance? the Philippines, what is prohibited to be
insured is a public enemy. A public enemy
1. Insurer - It assumes the risk of loss and is a citizen or national of a country with
undertakes for a consideration to which the Philippines is at war. Such
indemnify the insured upon the member of the MILF or the Abu Sayyaf is
happening of the designated peril. not a citizen or national of another country,
but of the Philippines. BAR 2000.
Every corporation, partnership, or
association, duly authorized to transact [continuation of who are the parties to a
insurance business by the Insurance contract of insurance]
Commission may be an insurer. A
natural person is not allowed to be an 3. Assured - The insured is also the
insurer. assured when the proceeds are payable
to him. In property insurance, the
2. Insured - is the person whose loss is assured must have insurable interest
the occasion for the payment of the over the property and such insurable
insurance proceeds by the insurer. interest is covered by the insurance
Anyone except a public enemy maybe policy. In life insurance, the insured
insured. A public enemy is a nation, may insure someone else’s life and
including its citizens or subjects, with designate himself as the beneficiary
whom the Philippines is at war. provided that he has insurable interest
over the life of the person whom he
Under RA 10607, only a juridical person insures.
can be an insurer.
4. Beneficiary - He is the third person
There’s something wrong with the slide. It designated by the insured to receive the
should be: a public enemy is a national or proceeds. In case of failure to designate
a beneficiary in a life insurance or the
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beneficiary designated is disqualified, Insurable interest is that interest which a

the proceeds should accrue to the estate person is deemed to have in the subject
of the insured. matter of the insurance where he has a
relation or connection to it such that the
If the insured is also the beneficiary to the person will derive pecuniary benefit or
proceeds, then he can also be called the advantage from the preservation of the
assured. subject matter or will suffer pecuniary loss
or damage from its destruction,
termination, or injury by the happening of
ELEMENTS OF AN INSURANCE
CONTRACT the event insured against it.
If person procuring interest has no

What are the elements of an insurance insurable interest in the subject matter of
contract? the insurance, the insurance is void. He
will not stand to suffer any loss or damage
a. The insured has an insurable interest by the happening of the event insured
capable of pecuniary estimation; against.
b. The insured is subject to a risk of loss
by the happening of the designated
This element [insurable interest] of an
peril;
insurance contract cannot be waived.
c. The insurer assumes the risk of loss;
d. Such assumption of risk is part of a
If the person procuring insurance has no
general scheme to distribute actual
insurable interest over the subject matter of
losses among a large group of persons
the insurance, the insurance is void.
bearing a similar risk; and
e. In consideration of the insurer's
What may be insured against?
promise, the insured pays a premium.
Philippine Health Care Providers vs.
Any contingent or unknown event,
Commissioner of Internal Revenue,
whether past or future, which may damnify
G.R. No. 167330, September 18, 2009.
a person having an insurable interest, or
create a liability against him, may be
CODE: I-R-A-S-P
insured against, subject to the relevant
I – Insurable interest
provisions of the Insurance Code.
R – risk of loss by the happening of the
designated peril
Cite examples of perils which may result
A – assumption or risk of loss
in risk of loss.
S – general scheme to distribute actual losses
P – premium
a. Fire, including the risks allied to it, like
lightning, windstorm, tornado,
What is insurable interest?
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earthquake and other similar risks The insurer incurs losses when the cost of
(Section 169, Insurance Code); insurance claims is more than the
b. Loss or damage in marine insurance premiums paid. The amount of premium is
(Section 101, Insurance Code); calculated on the basis of the assumptions
c. Death or injury; made relative to the insured.
d. Casualty or liability in case of accident
or mishap (Section 176, Insurance This is the risk that is an element of the
Code); and, insurance contract as opposed to investment
e. Non-performance by the principal risk.
debtor of his obligation to the creditor.
(Section 177, Insurance Code) Is actuarial risk the same an investment
risk?
Q: When you obtain a fire insurance policy
over a property, does it cover loss It is not the same. As held in the previously
earthquake? cited Philippine Health Care Provider case,
A: Only if earthquake is included as a risk investment risk is a risk that the company
insured against in the fire insurance policy. might fail to earn a reasonable return on its
So the generic term for this type of risk is investment but it is not the kind of risk
called fire. So, you don’t get earthquake associated with insurance called actuarial
policy. But, for you to include earthquake risk. For instance, HMO, undertakes a
though, it has specified in the policy and you business risk when it offers to provide
have to pay corresponding increase of health services. But it is not the risk of the
premium. type peculiar only to insurance companies.
Insurance risk, also known as actuarial
What is an actuarial risk? risk, is the risk that the cost of insurance
claims might be higher than the premiums
It refers to the possibility that the paid.
assumptions made by the actuaries, in
pricing specific insurance policies, may So meaning, in investment risk, eto yun pera
prove to be inaccurate or wrong. Possible mo pero di ka kumita.
assumptions include frequency of losses,
severity of losses and the correlation of What is an insurance premium?
losses between contracts. For example, if
an actuary is using a statistical model and It is the amount of money a person pays for
determines that a policy holder is likely to an insurance policy, in consideration for
live for 35 more years, there is an actuarial the assumption by the insurance of the risk
risk that the policyholder will die of loss as a result of the happening of the
tomorrow. This will then result in large designated peril.
losses for the insurer.
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What are the characteristics of an with respect to a life insurance

insurance contract? policy?
A: It is the face value of the property.
a. It is a risk-distributing device in the As an exception, however, is a creditor
sense that the risk of economic loss is may insure the life of the debtor but
distributed among a large group or only to the extent of the amount of the
substantial number of persons bearing debt.)
the same or similar risk;
d. It is a contract of adhesion, considering
b. It is Uberrimae Fides Contract, or one that it is a ready-made contract, the
of perfect good faith; other party generally adheres to the
(Dean: this is more pronounced terms and conditions thereof;
relating to the obligation to disclose to (Dean:
each other material facts known to the Q: What do you mean by a contract
parties before the inception of the of adhesion?
effectivity of the policy.) A: It means that it is a ready-made
contract and the participation of the
c. It is a contract of indemnity in the sense insured is just to adhere to the terms
that the insured is entitled to recover and conditions proposed by the insurer.
only the amount of total loss actually
sustained. This rule applies only to A contract of adhesion is not void.
property insurance. In life insurance,
one cannot assign a price tag on the Q: What is the consequence of this
value of human life. The measure of characteristic of an insurance
liability of the insurer is the face value contract? What is the significance?
of the insurance policy. By way of A: Because of this characteristic of an
exception, a creditor may insure the life insurance contract, there arises the rule
of a debtor but only up to the amount that in case of doubt or ambiguity, that
of the debt — which is the extent of the doubt or ambiguity should be resolved
creditor's insurable interest; against the insurer in favor of the
(Dean: You should not make money insured.)
from an insurance contract. It is an
indemnity to make up for your loss. e. It is a voluntary contract, as the parties
This rule only applies to property may incorporate such terms and
insurance. In life insurance, you conditions which they may deem
cannot put a price tag on the value of convenient.
human life. (Dean:
Q: Is it not incompatible with the
Q: What then is the limit of liability contract of adhesion?
or the measure of liability of insurer
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A: It is not inconsistent because even Who is entitled to receive the proceeds

though it is a contract of adhesion, it of the insurance policy?
does not negate the participation of the
insured in proposing the revisions or This is to illustrate the characteristic of an
the changes to those proposed by the insurance of contract of being a personal one.
insurer.)
Spouses Cha, not CKS, are entitled to
f. It is personal in the sense that in receive the proceeds of the insurance
agreeing to be bound by the contract of policy. A contract of insurance is personal
insurance, each party has in mind the in nature. In agreeing to be bound by the
character, qualifications, and conduct insurance contract, each party has in mind
of the other. Thus, the insurer is only the character, credit, and conduct of the
liable to pay the person for whose other. CKS is not privy to the contract
benefit the insurance policy was signed by Spouses Cha and United. United
obtained. Fieldman's Insurance Co., approved the insurance contract bearing in
Inc. v. Vda. de Songco, G.R. No. L- mind the personal qualifications of
24833 Spouses Cha. The stipulation that the
policy is deemed assigned and transferred
Spouses Cha and CKS Development to CKS does not bind United.
Corporation entered into a one (1) year
lease contract with a stipulation not to Moreover, Section 18 of Insurance Code
insure against fire the chattels, provides that no contract or policy of
merchandise, textiles, goods, and effects insurance on property shall be enforceable
placed at any stall or store or space in except for the benefit of some person
the leased premises without first having an insurable interest in the property
obtaining the written consent and insured. A non-life insurance policy such
approval of the lessor. However, as the fire insurance policy taken by
Spouses Cha insured against loss by fire Spouses Cha over their merchandise is
their merchandise inside the leased primarily a contract of indemnity.
premises with the United Insurance Co., Insurable interest in the property must exist
Inc. without the written consent of CKS. at the time the insurance takes effect and at
the time the loss occurs. CKS has no
On the day the lease contract was to insurable interest on the property owned by
expire, fire broke out inside the leased Spouses Cha.
premises and CKS, learning that the
spouses procured an insurance wrote to The automatic assignment of the policy to
United Insurance to have the proceeds CKS under the provision of the lease
be paid directly to it. contract previously quoted is void for
being contrary to law and/or public policy.
The liability to CKS for violating their
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lease contract in obtaining the policy was held that loss of the insured's car is
without the consent of CKS, is a separate not excluded under the insurance
and distinct issue. Spouses Nilo Cha and policy. The words "loss" and "damage"
Stella Uy Cha, et al. v. Court of Appeals mean different things in common
and CKS Development Corporation, ordinary usage. The word "loss" refers
G.R. No. 124520, August 18, 1997; 2009 to the act or fact of losing, or failure to
BAR. keep possession, while the word
"damage" means deterioration or
State the rules on interpretation of injury to property. By reason of the
insurance contract. exclusive control of the insurance
company over the terms and
a. An insurance contract is a contract of phraseology of the insurance contract,
adhesion, which means that in ambiguity must be strictly interpreted
resolving ambiguities in the provision against the insurer and liberally in
of the insurance contract, the same are favor of the insured, especially to avoid
to be construed liberally in favor of the forfeiture. Alpha Insurance and
insured and strictly against the insurer Surety co. v. Arsenia Sonia Castor,
who drafted the insurance policy. The G.R. No. 198174, September 2, 2013.
ambiguity does not, however,
invalidate the contract. BAR 2012 (Dean: In this case, there are two
clauses. The damage clause and the
In one case, the insured entered into a loss or theft clause. So which should
comprehensive motor vehicle you apply?
insurance contract. Thereafter, the car A: The SC said loss and damage are
was stolen and was reported lost by the two different things. What is applicable
police report. Allegedly, it was the to this case is the theft clause.)
driver of the insured who took the said
car, thus prompting the latter to file a In another case, when a Health Care
claim with the insurer. The claim was Contract stipulates that the provider
denied on the ground that pursuant to shall reimburse the total hospitalization
the insurance contract, an excluding cost including the professional fee
circumstance which would excuse the (based on the total approved charges)
insurer from paying proceeds would to a member who receives emergency
be, "Any malicious damage caused by care in a non-accredited hospital, The
the Insured, any member of his family above coverage applies only to
or by “A PERSON IN THE Emergency confinement within
INSURED'S SERVICE.” In other Philippine Territory. However, if the
words, the insurer argued that the term emergency confinement occurs in a
"damage" would also be applicable to foreign territory, Fortune Care will be
the stolen and lost car of the insured. It obligated to reimburse or pay 80% of
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the approved standard charges which the applicant's "lifetime and good
shall cover the hospitalization costs health" and the insured died before the
and professional fees. insurer could process the application.
The amount the applicant paid in
The member underwent surgery in the connection thereto was only to be
Hawaii, USA while on vacation, The considered as a deposit. Violeta R.
American standard charge, not the Lalican v. The Insular Life
Philippine standard charge, should be Assurance Company Limited, as
applied considering that the operation represented by the President Vicente
took place in the USA. R. Avilon, G.R. No. 183526, August
25, 2009.
Being a contract of adhesion, the terms
of an insurance contract are to be (Dean: In this case, it was provided
construed strictly against the party that for the application of
which prepared the contract — the reinstatement, it is subject to
insurer. Fortune Medicare, Inc. v. approval of the head office during
David Robert U. Amorin, G.R. No. the applicant’s lifetime and good
195872, March 12, 2014. health. Then, the insured died before
the insurance company could
b. While it is a cardinal principle of process the application. Was there
insurance law that a policy or contract reinstatement?
of insurance is to be construed liberally A: The terms are clear and
in favor of the insured and strictly as unambiguous. It is only reinstated upon
against the insurer company, yet, approval by the head office and during
contracts of insurance, like other the lifetime of the insured. He died
contracts, are to be construed before it could be approved. Therefore,
according to the sense and meaning of there is no reinstatement.)
the terms, which the parties themselves
have used. If such terms are clear and Similarly, if loss of hand is defined in
unambiguous, they must be taken and the policy as amputation of the hand,
understood in their plain, ordinary, and the insurer is not liable if the insured
popular sense. Thus, it was held that had an accident which only resulted in
the life insurance policy was not temporary disability of his left hand but
considered reinstated despite issuance the hand was not amputated. Ty v.
of the receipt for payment by the First National Surety, No. L-16138,
spouse of the insurance agent if the April 29, 1961
application for reinstatement provided
that the policy would only be
considered reinstated upon approval of
the application by the insurer during
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If one insures his own life, he can designate

INSURABLE INTEREST
anyone as his beneficiary. It can be a friend,
a distant relative. It can be anyone as long as
In life/ health not disqualified to receive donation.
This is one lawful way of impairing the

Upon whose life or health does a person
legitime of the lawful heir.
have insurable interest in?
Who are the persons specified in Article

Every person has an insurable interest in
739 and as such, cannot be designated
the life and health:
beneficiary of the insured?
a. Of himself, of his spouse and of his
children;
The persons specified in Article 739 of the
b. Of any person on whom he depends
Civil Code are:
wholly or in part for education or
a. persons in illicit relations — adultery
support, or in whom he has a pecuniary
or concubinage (no need for
interest;
conviction);
c. Of any person under a legal obligation
to him for the payment of money, or b. persons found guilty of adultery or
concubinage;
respecting property or services, of
c. public officer or his wife, descendants,
which death or illness might delay or
or ascendants.
prevent the performance; and
Insular Life Assn. Co., Ltd. v. Ebrado,
d. Of any person upon whose life any
G.R. No. L-44059, October 28, 1977;
estate or interest vested in him
BAR 1981.
depends.
If any person, other than those

Insurable interest on his own life, his disqualified to receive donation under
spouse or children Article 739 of the Civil Code, is
designated beneficiary, can the lawful
If a person procures insurance on his spouse and legitimate children of the
own life, who may be his beneficiary? insured complain of denial of their
legitime?
A person can take insurance on his own life
and designate anyone as beneficiary except The lawful spouse and legitimate children
those disqualified to receive donation cannot complain of denial of their legitime
under Article 739 of the Civil Code. The because the proceeds of the life insurance
beneficiary in this case can be anyone, such policy do not form part of the estate of the
as a distant relative or a friend, who need insured. Neither can they claim the
not have any insurable interest in the life of insurance proceeds because they are not
the insured. privy to the contract.
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The legitimate heirs of Loreto who were

Moreover, under Section 53 of the not designated as beneficiaries in the life
Insurance Code, the insurance proceeds insurance policy are considered third
shall be applied exclusively to the proper parties to the insurance contract, and thus
interest of the person in whose name or for not entitled to the proceeds thereof. The
whose benefit it is made unless otherwise insurers have no legal obligation to turn
specified in the policy. over the proceeds to them. The revocation
of the common law spouse of Loreto as
Heirs of Loreto Maramag, his legal wife beneficiary is of no moment considering
and his legitimate children filed a case that the designation of the illegitimate
for revocation and/or reduction of children as beneficiaries remains valid.
insurance proceeds alleging that Eva de Because no legal proscription exists in
Guzman Maramag (Eva) was a naming as beneficiaries the children of
concubine of Loreto and a suspect in the illicit relationships by the insured, the
killing of the latter, thus, she is shares of Eva in the insurance proceeds,
disqualified to receive any proceeds whether forfeited by the court in view of
from his insurance policies and that the prohibition on donations under Article
illegitimate children of Loreto were 739 of the Civil Code or by the insurers
entitled only to one-half of the legitime themselves for reasons based on the
of the legitimate children. insurance contracts, must be awarded to
the said illegitimate children. Heirs of
Who are entitled to the proceeds of the Loreto Maramag v. Eva Verna De
insurance policy? Guzman Maramag, et al., G.R. No.
181132, June 5, 2009; 1998 and 2019 Bar
The illegitimate children, designated as exams.
beneficiaries, are entitled to the insurance
proceeds, to the exclusion of the legitimate The ruling in Insular Life Assn. Co., Ltd.
children. Section 53 of the Insurance Code v. Ebrado that the proceeds should be paid
states that the insurance proceeds shall be to the legal spouse in case of a common
applied exclusively to the proper interest of law spouse is designated beneficiary is not
the person in whose name or for whose entirely correct. The proceeds should be
benefit it is made unless otherwise payable to the estate which includes not
specified in the policy. Pursuant thereto, it only the spouse but the children as well.
is obvious that the only persons entitled to
claim the insurance proceeds are either the Here, there is no proscription in naming your
insured, if still alive; or the beneficiary, if illegitimate children. The proscription is
the insured is already deceased, upon the naming your common law spouse as the
maturation of the policy. beneficiary.
The forfeited share of the common law
spouse should not be given to the estate of the
Page 13 of 203
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insured. The share of the unlawful Yes, as such, they can take insurance on the
beneficiary shall form part of the share of the life of their children, whether legitimate or
lawfully named beneficiary. So, everything illegitimate, because the law makes no
goes to the illegitimate children. distinction as to the kind of children and
there being no statutory prohibition against
What is the rationale for the rule it.
prohibiting the donees specified in
Article 739 of the Civil Code from being Can a person take insurance on the life
designated as beneficiaries in life of another person and designate himself
insurance policy? as the beneficiary?
Life insurance policy is no different from A person can take an insurance on the life
donation insofar as the beneficiary is of another person and designate himself as
concerned. Both are founded on liberality. the beneficiary provided that he has
A beneficiary is like a donee because from pecuniary interest in the person he is
the premiums of the policy which the insuring. In other words, the insured must
insured pays out of liberality, the be any of the persons under Section 10 (b
beneficiary will receive the proceeds of the to d).
insurance. As a consequence, the
proscription in Article 739 of the Civil Blanco took out a P1M life insurance
Code should equally operate in life policy naming his friend and creditor,
insurance contracts. The Insular Life Montenegro, as his beneficiary. When
Assurance co. v. Ebrado, 80 SCRA 181, Blanco died, his outstanding loan
October 28, 1977. obligation to Montenegro was only
P50,000.00. Blanco’s executor
Does a person have insurable interest on contended that only P50,000.00 out of
the life of his parents? the insurance proceeds should be paid to
Montenegro and the balance of
By express exclusion under par. (a), a P950,000.00 should be paid to Blanco’s
person has no insurable interest on the life estate.
of his parents and other ascendants unless
he depends upon them for education and/or Is the executor’s contention correct?
support. (Par. b.) The rationale for their Reason out your answer.
exclusion in par. (a) is that the parents are
logically expected to predecease their The contention of the executor is incorrect.
children. The beneficiary of a life insurance need not
have any insurable interest in the life of the
Do the parents have insurable interest insured. Any person can take insurance on
on the life and health of their illegitimate his own life like what Blanco did and
children? designate anyone as his beneficiary except
Page 14 of 203
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those disqualified to be donees under Carlo and Bianca met in the La Boracay
Article 739 of the Civil Code. Blanco's festivities. Immediately, they fell in love
friend and creditor does not fall within the with each other and got married soon
disqualification. after. They have been cohabiting
blissfully as husband and wife, but they
It would have been different if it was did not have any offspring. As the years
Montenegro, as creditor, who took out an passed by, Carlo decided to take out an
insurance policy on the life of Blanco, as a insurance on Bianca's life for P
debtor. In that case, Montenegro's 1,000,000.00 with him (Carlo) as sole
insurable interest in the life of Blanco beneficiary, given that he did not have a
would be only to the extent of P50,000.00, steady source of income and he always
which is the amount of his credit. BAR depended on Bianca both emotionally
1987. and financially. During the term of the
insurance, Bianca died of what
On July 14, 1985, X, a homosexual, took appeared to be a mysterious cause so
an insurance policy on the life of his that Carlo immediately requested for an
boyfriend, Y. In the insurance autopsy to be conducted. It was
application, X misrepresented that Y established that Bianca died of a natural
was in perfect health although he knew cause. More than that, it was also
all the time that Y was afflicted with established that Bianca was a
AIDS. On October 18, 1987, Y died in a transgender all along —a fact unknown
motor accident. Shortly thereafter, X to Carlo.
filed his insurance claim.
Can Carlo claim the insurance benefit?
Should the insurer pay? Reasons.
Yes. Carlo can claim the insurance benefit.
The insurer is not obliged to pay. X has no If a person insures the life or health of
insurable interest on the life of his another person with himself as beneficiary,
boyfriend, Y. Friendship alone is not the all his rights, title, and interests in the
insurable interest contemplated in life policy shall automatically vest in the
insurance. Insurable interest in the life of person insured. Carlo, as the husband of
others (other than one's own life, spouses, Bianca, has an insurable interest in the life
or children) is merely to the extent of the of the latter because he depended upon
pecuniary interest in that life. Bianca wholly or in part for support. The
fact that Bianca is a transgender is
irrelevant. It is Carlo's reliance on Bianca
Of any person on whom he depends
wholly or in part for education or for support which establishes Carlo's
support, or in whom he has a pecuniary insurable interest in the life of Bianca.
interest BAR 2014.
Page 15 of 203
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to the usufruct will be extinguished upon

Of any person under a legal obligation
to him for the payment of money, or death of the latter.
respecting property or services, of
which death or illness might delay or There is no such thing as naked owner. It is
prevent the performance. naked title.
Give examples. Can the insured change his beneficiary?
a. A mortgagee may insure the life of the The insured shall have the right to change
mortgagor up to the extent of the the beneficiary he designated in the policy,
mortgage debt to the mortgagee. unless he has expressly waived this right in
said policy. Notwithstanding the
b. A seller may insure the life of the buyer foregoing, in the event the insured does not
if the latter has the obligation to deliver change the beneficiary during his lifetime,
a specified property under a contract to the designation shall be deemed
sell. The seller's insurable interest is the irrevocable.
contracted value of the property for
delivery. What are the effects of the irrevocable
designation of the beneficiary in a life
c. A law firm may procure a keyman insurance policy?
insurance policy on its Managing
Partner. In case of irrevocable designation, the
(Dean: It is called keyman because he beneficiary has acquired a vested right on
is the most important person in the the life insurance policy including its
organization.) incident such as the policy loan and cash
surrender value. As such, any act on the
d. An employer corporation has an part of the insured which may impair the
insurable interest on its manager where interest of the irrevocably designated
the death of the manager will be beneficiary is null and void. Thus, the
detrimental to the corporation's beneficiary cannot be changed, no
operations. El Oriente Fabrica de additional beneficiary can be designated
Tabacos, Inc. Juan Posadas, G.R. and the insured cannot take a cash
No. 34774, September 21, 1931. surrender value on the policy unless the
beneficiary consents to any of the
foregoing acts. 2005 Bar.
Of any person upon whose life any
estate or interest vested in him depends.
Bottomline:
If it is irrevocable designation, any act on the
Thus, the usufructuary may insure the life part of the insured that may impair the
of the owner of the naked title if his right interest of the beneficiary is null and void.
Page 16 of 203
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For example, the insured cannot add another named Yinsel. Without the knowledge of
beneficiary or the insured cannot take a cash Yang, Yin changed the designation of
surrender value in the policy unless the the beneficiary to an "irrevocable
beneficiary consents. designation" of Yinsel and Yessel
jointly. When Yang learned of the affair,
Q: So who alone can take the cash she was so despondent that, having
surrender value of the insurance policy if chanced upon Yin and Yessel on a date,
it is one of irrevocable designation? she rammed them down with the car she
A: No more than the beneficiary unless the was driving, resulting in Yin's death and
beneficiary consents. Yessel's complete loss of mobilization.
Yang was sued for parricide, and while
What are the effects of the revocable the case was pending, she filed a claim
designation of the beneficiary? on the proceeds of the life insurance of
Yin as irrevocable beneficiary, or at
The insured may change the beneficiary least his legal heir, and opposed the
during his lifetime, add a beneficiary or claims on behalf of Yessel and her
exclude a beneficiary in case of joint daughter Yinsel. Yang claimed that her
designation of beneficiaries. 1978 and designation as beneficiary in Yin's life
1988 Bar. insurance policy was irrevocable, in the
nature of one "coupled with interest,"
The same rule applies in case the policy is since it was made in accordance with
silent on the nature of the designation, for their mutual agreement to designate one
in such case, the designation is deemed to another as sole beneficiary in their
be revocable. respective life policies. She also claimed
that the beneficiary designation Of
Shortly after Yin and Yang were wed, Yessel and the illegitimate minor child
they each took out separate life Yinsel was void being the product of an
insurance policies on their lives, and illicit relationship, and therefore
mutually designated one another as sole without insurable interest."
beneficiary. Both life insurance policies
provided for a double indemnity clause, a. Is Yang correct in saying that her
the cost for which was added to the designation as beneficiary was
premium rate. During the last 10 years irrevocable?
of their marriage, the spouses had
faithfully paid for the annual premiums b. Do Yessel and Yinsel have insurable
over the life policies from both their interest on the life of Yin?
salaries. Unfortunately, Yin fell in love
with his officemate, Yessel, and they a. Yang is not correct. The insured shall
carried on an affair. After two years, have the right to change the beneficiary
their relationship bore them a daughter he designated in the policy unless he
Page 17 of 203
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has expressly waived this right in the

policy. There is nothing in the life c. In case of joint designation of lawfully
insurance policy taken by Yang which designated beneficiaries, proceeds
indicated that the designation of Ying shall be divided based on terms of
is irrevocable. As such, it is deemed to policy. If the policy is silent, the
be revocable. proceeds shall be divided equally
b. Yessel has no insurable interest on the between or among the beneficiaries.
life of Yin because she cannot be
lawfully designated as beneficiary, d. In case a beneficiary is lawfully
Yinsel, however, has insurable interest designated and the insured dies ahead
on the life of Yin. There is no of the beneficiary, the proceeds are
proscription in naming an illegitimate payable to the beneficiary unless he is
child as a beneficiary. Heirs of Loreta the principal, accessory or accomplice
Maramag vs Maramag, GR No. in willfully bringing about the death of
181132, June 5, 2009; BAR 2018. the insured. (Dean: Key emphasis on
the word willfully. If it is due to
To whom will the proceeds of the life accident or imprudence, then the
insurance policy be payable? beneficiary may still get the insurance
proceeds.)
The proceeds of the life insurance policy
are payable as follows:
e. In such a case, interest of the
beneficiary shall be forfeited and the
a. In case a beneficiary is unlawfully
share forfeited shall pass on to the other
designated, the proceeds shall payable
beneficiaries, unless otherwise
to the estate of the insured (not only to
disqualified. In the absence of other
the lawful spouse of the insured
beneficiaries, the proceeds shall be
although she has a share in the estate of
paid in accordance with the policy
the insured). It is because the policy
contract. If the policy contract is silent,
remains valid. Only the designation is
the proceeds shall be paid to the estate
void. 2012 Bar.
of the insured. Note that the insurer is
still liable. 2008 Bar.
b. In case of joint designation of
(Dean: Take note that even if the
beneficiaries, the share of the
beneficiary is the principal,
unlawfully designated beneficiary shall
accomplice, or accessory, it does not
form additional part of the share of the
mean that the insurer is not liable. The
lawfully designated beneficiary. Thus,
insurer is still liable except that the
the share of the common law spouse
beneficiary’s share is forfeited.
shall be forfeited in favor of the
designated illegitimate children.
Q: To whom will it go?
Maramag v. Maramag, ibid.
Page 18 of 203
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A: It may pass on the other irrevocable or revocable, the proceeds

beneficiaries if they are named shall inure to the estate of the insured
accordingly. If they are not named, on because the designation is revocable
the absence of other beneficiaries, the unless otherwise specified in the
proceeds shall be paid in accordance to policy.
the policy contract. If it is silent, the
proceeds shall be paid to the estate.) g. The beneficiary's interest in a life
insurance endowment policy will only
f. In case the beneficiary predeceases the accrue if the insured dies before the end
insured, make a distinction between of the endowment period. If the insured
irrevocable and revocable beneficiary. survives, the proceeds are payable to
If irrevocable, the proceeds shall inure him.
to the benefit of the legal (Dean: This is the most popular
representatives of the beneficiary. If insurance, the endowment policy.)
revocable, the proceeds shall inure to
the estate of the insured. If the policy is
silent as to whether designation is
Page 19 of 203
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a) A carrier or depository of any kind has

an insurable interest in a thing held but
APRIL 29, 2021
not to exceed the value thereof.
LUCKY CHARM
In here, the law talks about the
insurable interest of the carrier, in our
PROPERTY INSURANCE discussion on common carrier we know that
insurable interest of the carrier is not
limited to the thing or goods that it holds
What does insurable in property consist or it owns. It includes likewise the goods that
of? have been loaded on board the vessel, since
in case of loss or damage to those goods, it
shall be liable to the shipper or owner.
Every interest in property, whether real or
local, or any relation thereto, or liability in b) Both the mortgagor and mortgagee may
respect thereof, of such nature that a insure the mortgaged property against
contemplated peril might directly damnify fire.
the insured, is an insurable interest. Multiple interest over the same
An insurable interest in property may property. The mortgagor based on the
consist in: ownership over the property, while the
a) An existing interest; mortgagee is based on the mortgage debt.
b) an inchoate interest founded on an
existing interest; or c) A depositor may insure his deposits in
c) an expectancy, coupled with an excess of the PDIC insurance coverage.
existing interest in that out of Under the PDIC insurance coverage,
which the expectancy arises. P500,000.00 for individual accounts and
additional P500,000.00 for various accounts.
Give examples of existing interest:
a) A carrier or depository of any kind has

an insurable interest in a thing held by
him as such, to the extent of his liability
but not to exceed the value thereof.
b) Both the mortgagor and mortgagee

may insure the mortgaged property against
fire. The mortgagor may insure it up to the
extent of the value while the mortgagee up
to the extent of the mortgage debt.
c) A depositor may insure his deposits in

excess of the PDIC insurance coverage.
Dean’s discussion:
Page 20 of 203
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on his brand-new yacht because of his

JQ, owner of a condominium unit, passion for sailing. Hearing about his
insured the same against fire with XYZ coming voyage, Sean (bossom friend),
Insurance Co., and made the loss asked Seth if he could borrow the car for
payable to his brother, MLQ. In case of his next roadshow. Sean, who had been
loss by fire of the said condominium in the business of holding motor shows
unit, who may recover on the fire and promotions, proposed to display the
insurance policy? State the reason/s for restored car of Seth in major cities of the
your answer. country. Seth agreed and lent the Ford
Answer: JQ can recover on the fire Mustang to Sean. Seth and Sean then
insurance policy for the loss of the said went together to Bayad Agad Insurance
condominium unit. He has the insurance Co. (BAIC) to get separate policies for
interest as owner-insured. His act of the car in their respective names.
designating his brother as beneficiary is
not similar to assignment of right to the Do Seth and Sean have separate
policy which result in loss of insurable insurable interests?
interest.
Answer: Yes, Seth and Sean have separate
With respect to MLQ, he cannot recover insurable interests. Seth’s insurable
on the fire insurance policy despite his interests is his legal and/or equitable
designation as beneficiary, for lack of interest over the vehicle as an owner. On
insurable interest on the condominium the other hand, Sean’s insurable interest is
unit. In property or fire insurance, for the preservation of the vehicle which may
beneficiary to recover, he must have become the basis of liability in case of loss
insurable interest in the property or damage thereto. Malayan Insurance
insured. vs. Philippine First Insurance
(BAR2017)
Q: What are the two (2) things needed in Dean’s discussion:
able to recover on property or fire As discussed in the case of “Malayan
insurance policy? Insurance vs Philippine First Insurance”,
A: Two things: (a) you must have insurable both of them have insurable interest over the
interest over the property and (b) that interest property. Owner has insurable interest based
must be covered, protected or specified in the on his ownership over the car up to the
insurance policy. extent of the value of the car.
INSURABLE INTEREST IN How about the borrower (Sean)? Yes, he has

PROPERTY INSURANCE insurable interest in the sense that if it gets
lost. He will be liable to the owner. Under the
insurance code, the when the loss or damage
The newly restored Ford Mustang might directly damnify the insured, he has
muscle car was just released from the insurable interest.
car restoration shop to its owner, Seth
(an avid sportsman). He needed to go to
a round-the-world voyage with his crew
Page 21 of 203
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Examples of inchoate interest founded d) A general creditor, however, has no

on existing interest: insurable interest on the debtor’s property.
This is because prior to the levy, the
a) A stockholder may insure corporate general creditor’s interest on the debtor’s
property to the extent of and in proportion property is a mere contingent or expectant
to the value of his shares in the corporation. interest not founded on an actual right to
A stockholder has inchoate right to the the thing, nor upon any valid contract for
corporate assets which will ripen into it.
full ownership upon dissolution and
liquidation of the corporation.
b) A property under contract to sell. The

buyer may insure the property to the
extent of the amount of payment he has
made or the entire value of the property
depending on how the stipulation in the
agreement will damnify him in case of loss Give examples of expectancy coupled
of such property. The seller may also with existing interest out of which the
expectancy arises.
insure the property to the extent of the
a) Growing crops;
unpaid purchase price or even the full
b) Expected freightage of the
value if there is a stipulation that he is
common carrier;
liable to return the payment in case of non-
c) Profits of a partnership for a
delivery. (1991, 2015 BAR)
partner.
c) The judgment creditor, after levy of the
judgment debtor’s property, may insure it Q: Does a son have insurable interest on
because the debtor may not exercise his the property of his father?
right of redemption. He has inchoate
interest because he may acquire A: No, as his interest in such property is a
ownership of the levied property in case mere expectancy not founded on actual right.
of failure to redeem by the debtor.
Q: When should insurable interest exist in
The judgment creditor and the property and in life and health?
judgment debtor both have insurable
interest over the property which can be A: An interest in property insurance must
separately covered by fire insurance. exist both when the insurance takes effect and
when the loss occurs, but need not to exist in
In case of loss before the expiration of the meantime. In life or health insurance,
the redemption period, the owner and the insurable interest must exist at the time the
judgment creditor may recover on their insurance police take effect, but need not to
separate insurance. exist thereafter or when the loss occurs.
If the loss occurs after the expiration of

the redemption period, only the judgment
creditor may claim on the insurance.
Page 22 of 203
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On February 3, 1987, while Jose Palacio b) In property insurance, an interest must

was in the hospital preparatory to a exist when the insurance takes effect and
heart surgery, he called his son, Boy when the loss occurs, but need not to exist
Palacio, and showed the latter a will in the meantime. In life insurance, it is
naming the son as sole heir to all the enough that insurable interest exists at the
father’s estate including the family time when the insurance takes effect but it
mansion in Forbes Park. The following need not exist at the time of loss or
day, Boy Palacio took out a fire thereafter.
insurance policy on the Forbes Park
mansion. One week later, the father c) The beneficiary in property insurance
died. After his father’s death, Boy must have insurable interest over the
inherited. On March 30, 1987, a fired property insured and such insurable
occurred razing the mansion to the interest must be covered by the insurance
ground. Boy then proceeded to collect on policy contract. In life insurance, if the
the fire insurance he took earlier on the procured insurance on his own life, he can
house. Should the insurance company designate anyone as beneficiary, even
pay? though the latter has no insurable interest
Answer: in the life of the insured except those
disqualified to receive donation under the
No, as rule in property insurance, New Civil Code.
insurable interest must exist both at the
time of the taking of the insurance and
at the time of the loss. The insurable
interest must be an existing interest. The IS, is an elderly bachelor with no known
fact alone that Boy Palacio was the relatives, obtained life insurance
potential sole heir of his father’s estate coverage for P250,000 from Starbrite
does not give him any existing interest Insurance Corporation, an entity
prior to the death of the decedent. (Sec. 18 licensed to engage in the insurable
of the Insurance Code) business under the Insurance Code of
the Philippines. He also insured his
residential house for twice that amount
with the same corporation. He
Distinguish insurable interest in immediately assigned all his rights to the
property insurance from insurable insurance proceeds to BX, a friend,
interest in life insurance companion living with him. Three (3)
years later, IS died in a fire that gutted
a) In property insurance, the actual value of his insured house two (2) days after he
the interest therein is the limit of the had sold it. There is no evidence of
insurance that can validly be placed suicide or arson or involvement of BX in
thereon. In life insurance, there is no limit these events. BX demanded payment of
to the amount of insurance that may be the insurance proceeds from the two (2)
taken upon life EXCEPT in case if a policies, the premiums for which IS had
creditor securing the life of the debtor in been faithfully paying during his life.
which the insurance should be limited to Starbrite refused payment on the
the amount of the debt. ground that BX had no insurable
Page 23 of 203
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interest and hence, not entitled to On march 2, 2020, a fired razed the
receive the proceeds from IS insurance building to the ground. Garapal
coverage on his life and also on his Insurance refused to make good its
property. Is starbrite’s contention obligation to Benjie under the insurance
valid? contract.
Answer: a. Is Garapal Insurance legally justified

With respect to the insurance coverage on in refusing payment to Benjie
the property of IS. BX has no insurable
interest in the property covered by the fire b. Is Nat entitled to collect on the
insurance. The policy was assigned to him insurance policy?
prior to the loss. Insurable interest on the
property must exist both at the time of the Answer:
issuance of the policy and at the time of the a. Yes. At the time of the loss, Benjie was
loss. BX had no insurable interest in both no longer the owner of the property insured
cases. as he failed to redeem the property. The
law requires in property insurance that a
With respect to the insurance coverage on person can recover the proceeds of the
the life of IS, BX is entitled to receive the policy if he has insurable interest at the
proceeds assuming that he was designated time of the issuance of the policy and also
as beneficiary in the policy. There is no at the time when the loss occurs. When the
requirement that BX should have insurable fire occurred, Benjie was no longer had
interest in the life of IS. It was IS himself insurable interest in the property insured.
who took the insurance on his own life and
BX is not disqualified to his beneficiary. b. No. While at the time of the loss he has
(BAR 2000) insurable interest in the building, as he was
the owner thereof, Nat did not have any
interest in the policy. There was no
In a civil suit, the Court ordered Benjie automatic transfer clause in the policy that
to pay Nat P5million. To execute the would give him such interest in the policy.
judgment, the sheriff levied upon (Sec. 19, Insurance Code; Bar 1994)
Benjie’s registered property (a parcel of
land and the building thereon), and sold
the same at public auction to Nat, the
highest bidder. The latter, on April 18,
2019 registered with the Register of
Deeds the certificate of sale issued to him
by the sheriff. Meanwhile, on January
27, 2020, Benjie insured with Garapal
Insurance for P5 million the same
building that was sold at public auction
to Nat. Benjie failed to redeem the
property by April 19, 2020.
Page 24 of 203
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a) The mortgagor has insurable interest on the

On January 4, 2019, Mr. P joined Alpha property up to the extent of the value of the
Corporation (ALPHA) as President of the mortgaged property while the mortgagee has
company. Alpha took out a life insurance insurable interest on the same property but
policy on the life of Mr. P with Mutual only up to the extent of the amount of the debt
Insurance Company, designating secured by the mortgage.
ALPHA as the beneficiary. ALPHA also b) Consequently, they can separately procure
carried fire insurance with Beta fire insurance policy on the same property to
Insurance (BETA) on a house owned by the extent of their respective insurable
it, but temporarily occupied by Mr. P interest. This will not result in double
again with ALPHA as beneficiary. insurance or over-insurance in the context of
the insurance code. Geagonia vs CA (1995)
On September 1, 2019, Mr. P resigned
from ALPHA and purchased the
company house he had been occupying. A If the mortgagor obtained an open
few days later, a fire occurred resulting in policy, then he could claim an amount
the death of Mr. P and the destruction of corresponding to the extent of the
the house. What are the rights of ALPHA damage, but not to exceed the face value
against Mutual Life Insurance on the life of the insurance policy, however, if he
insurance policy? obtained a valued policy then he could
claim an amount based on the agreed
Answer: upon valuation of the property.
a. ALPHA can recover against Mutual Life a. Unless the policy otherwise provides,
Insurance Co, in the life insurance policy as where a mortgagor of property effects
its insurable interest in the life of the person insurance in his own name providing that
insured, Mr. P, existed when the insurance the loss shall be payable to the mortgagee,
took effect. In life insurance, insurable or assigns a policy of insurance to a
interest need not exist at the time of loss. mortgagee, the insurance is deemed to be
upon the interest of the mortgagor, who
b. ALPHA, however, cannot recover on the does not cease to be a party to the original
fire insurance because at the time of loss, it contract, and any act of his, prior to the
had no more insurable interest having sold loss, which would otherwise avoid the
the property to Mr. P. In property insurance, insurance, will have the same effect,
it is not enough that the insured must have although the property is in the hands of the
insurable interest at the time of the issuance mortgagee, but any act which, under the
of the policy but also at the time of loss. contract of insurance, is to be performed by
(BAR 1984) the mortgagor, may be performed by the
mortgagee therein named, with the same
effect as if it had been performed by the
Q: Discuss the insurable interest of the mortgagor.
mortgagor and mortgagee on the
mortgaged property and right to recover b. If an insurer assents to the transfer of an
under the polices. insurance from a mortgagor to a
Answer: mortgagee, and, at the time of his assent,
imposes further obligations on the
Page 25 of 203
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assignee, making a new contract with him, period, the mortgagor can no longer
the acts of the mortgagor cannot affect the recover on the insurance because he has no
rights of said assignee. more insurable interest at the time of loss.
c. If the mortgagor procures fire insurance h. Assume that the mortgagor procured fire
policy without designating the mortgagee insurance after his default and the
as beneficiary, the mortgagor shall obtain mortgagee thereafter obtained his own fire
the proceeds of insurance in case of loss. insurance. If the mortgagor obtained a loan
The mortgagee is not entitled to the from a general creditor to pay the
insurance proceeds because he is not the redemption price, then assigned the policy
beneficiary and/or the insurance policy to the general creditor and the loss occurs,
was not assigned to him. But, as a the mortgagor cannot recover on his fire
mortgagee, he has a lien on the insurance insurance because he has no more
proceeds. insurable interest on the property at the
time of loss, having assigned his policy to
d. If the mortgagor procures fire insurance the creditor. The general creditor cannot
policy and designated the mortgagee as the recover on the fire insurance policy
beneficiary, in case of loss, the mortgagee assigned to him because he has no
shall be entitled to the proceeds of the insurable interest at the time of the
insurance. The loan shall be extinguished issuance of the policy. The mortgagee can
to the extent of the amount of the obtain the proceeds of the fire insurance he
insurance. The insurer shall be subrogated obtained separately.
to the rights of the mortgagor and may
proceed against the one who caused the
loss, if any.
To secure a loan of P10 Million, O
e. If the mortgagor procures fire insurance mortgaged his building to C. In
and designated the mortgagee as accordance with the loan arrangements,
beneficiary up to the extent of the O had the property insurance with Acme
mortgage debt, the insurer is not liable if Insurance Company for P10 Million with
the mortgagor deliberately set the insured C as the beneficiary. C also took an
property on fire. The mortgagee is bound insurance on the building upon his own
by the acts of the mortgagor and cannot interest with Beta Insurance Co, for P5
recover. Million.
f. If the mortgagor and the mortgagee The building was totally destroyed by fire,
separately obtained fire insurance and the a peril insured against in both insurance
mortgagor designated the mortgagee as the policies. It was subsequently determined
beneficiary in the fire insurance, any act that the fire had been intentionally
done by the mortgagor that will avoid the started by O and that, in violation of the
insurance is binding on the mortgagee but loan agreement, O had been storing
he can still recover on the fire insurance he inflammable materials in the building.
separately procured.
How much can C recover from either or
g. If the mortgagor obtained fire insurance both insurance companies?
but the loss occurs after the redemption
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What happens to the P10M debt of O to MULTIPLE INSURABLE INTEREST

C? ANSWER: OVER THE SAME PROPERTY
C cannot recover from Acme Insurance Co. Dean’s discussion:

unless the policy otherwise provides, where Q: What are the effects if the mortgagee
a mortgagor of property effects insurance in procures separate insurance coverage
his own name providing that the loss shall be without reference to the right of the
payable to the mortgagee, the insurance is mortgagor?
deemed to be upon the interest of the A: The effects are as follows:
mortgagor. Any act of the mortgagor prior to
the loss which would otherwise avoid the a. The mortgagee may collect from the
insurance will have the same effect. Apart insurer to the extent of his credit.
from the storing of the inflammable b. The insurer, after payment to the
materials, the act of the owner-mortgagor, mortgagee, is subrogated to the rights
O, caused the peril insured against. of the latter against the mortgagor and
may collect the debt of the latter to the
With respect to the Beta Insurance Co., C extent of the amount paid to the
can recover the full amount of P5M since the mortgagee. This principle applies
act of O in intentionally starting the fire that only where the policy obtained by the
caused the loss cannot be attributable to the mortgagee covers his interest alone.
mortgagee, C. The act of O in storing c. The mortgagee-insured can no
inflammable in the building contrary to the longer collect the mortgagor’s
loan agreement does not affect the insurance indebtedness after receiving full
policy, unless the insurance policy itself payment of the credit from the
prohibited any storing of inflammable insurer since the latter acquires the
materials. right to collect from the mortgagor by
virtue of the subrogation. However, if
The P10M debt of O to C will be affected by the mortgagee is not able to collect
the amount which is able to collect from the the whole amount of the credit, he
insurance companies. If C is unable to may still collect the deficiency from
recover any amount, the full amount of the the mortgagor.
debt remains.
If Cis able to recover P5M from Beta “A” owns a house valued at P5,000,000.00
insurance Co., C, the mortgagee is not which he had insured against fire for
allowed to retain his claim against O, the P7,500,000.00. He obtained a loan from
mortgagor, but it passes by subrogation to “B” in the amount of P3,500,000.00, and
the insurer to the extent of the money paid. to secure payment thereof, he executed a
In this case, Beta Ins. Co. will become deed of mortgage on the house, but
entitled to collect PSM from O, and O will without assigning the insurance policy to
continue to remain liable to C for the balance the latter. For “A’s” failure to pay the
of P5M. Palileo v. Cosio, G.R. No. L-7667, loan upon maturity, “B” initiated
November28, 1955; 1984, 2010 BAR foreclosure proceedings and in the
ensuing public sale, the house was sold by
the sheriff to “B” as highest bidder.
Immediately upon issuance of the
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sheriff’s certificate of sale in his favor, This prompted the business man to file
“B” insured the house against fire for with First Insurance a claim for PSM
P3,500,000.00 with another insurance representing the full value of his goods.
company. In order to redeem the house,
“A” borrowed P3,500,000.00 from “C” First Insurance denied the claim
and, as security device, he assigned the because it discovered that at the time of
insurance policy of P7,500,000.00 to “C”. the loss, the stock-in-trade were
However, before “A” could pay “B” his mortgaged to a creditor who likewise
obligation, the house was accidentally and obtained from Second Insurance
totally burned. Company for insurance coverage for he
stocks at their full value of P5M.
Do “A”, “B”, and “C” have any insurance a. May the businessman and the creditor
interest in the house? May “A”, “B’, and obtain separate insurance coverage over
“C” recover under the policies? If so, how the same stocks-in- trade? Explain.
much?
b. Suppose you are the Judge, how much
As to A: He has insurable interest in his would you allow the businessman and
house, an existing interest, but only for the creditor to recover from their
P5,000,000.00, the value of the said house. respective insurers. Explain.
But, when he assigned it to C, said A had no
more interest in his insurance policy, and A a. Yes. The businessman, as owner, and the
cannot anymore recover on said insurance creditor, as mortgagee, have separate
policy. insurable interests in the same stocks-in-
trade. Each may insure such interest to
As to B: He has insurable interest on A’s protect his own separate interest.
house, having an interest founded upon an b. As judge, I would allow the
existing interest, for P3,500,000.00, the businessman to recover his total loss of
amount of mortgage debt. P5M pesos representing the full value of
his goods which were lost through fire. As
As to C: He has no insurable interest on A’s to the creditor, I would allow him to
house when the insurance took effect and his recover the amount to the extent of or
interest is a mere contingent or expectant equivalent to the value of the credit he
interest not founded on an actual right or extended to the businessman for the
valid contract to A’s house. Hence, C cannot stocks-in-trade which were mortgaged by
recover. the businessman.
Section 18, Insurance Code; BAR 1999.
A businessman in the grocery business Dean’s discussion:

obtained from First Insurance an This is a case of multiple insurable interest
insurance policy for P5M to fully cover over the same property.
his stocks-in-trade from the risk of fire.
In mortgage, the mortgagor having the legal
3 months later, a fire of accidental origin title and the mortgagee having equitable title.
broke out and completely destroyed the Both of them can procure an insurance over
grocery including his stocks-in-trade. the same property involved without resulting
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in double insurance. This is because there is Who may collect the insurance
a separate or non-identical insurable interest. proceeds?
Hence, there is no double insurance. There Neither N nor O may collect. As to N, an

is double insurance when the insured interest in property insured must exist
procures two or more insurance policies when the insurance takes effect and when
involving the same risk and the same interest the loss occurs. Although N had insurable
interest when the insurance takes effect,
Q: What is the extent of insurable interest? yet he had no more interest when the loss
A: As to the owner of the mortgaged happened.
property, the extent of his insurable interest
would be up to the value of the property itself. Also, a change of interest in any part of a
As to the mortgagee, it would only be up to thing insured unaccompanied by a
the extent of the amount of the loan or credit corresponding change of interest in the
subject of the mortgage. The mortgagee can insurance, suspends the insurance to an
only claim the remaining balance of the loan equivalent extent, until the interest in
obligation at the time of the loss or the thing insured and the interest in the
destruction. insurance are vested in the same person.
CHANGE OF INTEREST IN THE As to O: He cannot recover, because he had

THING INSURED no insurance contract on the said
condominium unit which he bought from
Q: What is the effect of a change of interest N. Section 19, Insurance Code; BAR 1980.
in any part of a thing insured
unaccompanied by a corresponding
change of interest in the insurance? DEAN’S DISCUSSION:
A: A change of interest in any part of a thing Note that the change of interest
insured unaccompanied by a corresponding contemplated is absolute transfer of the
change of interest in the insurance suspends insured’s entire interest in the property
the insured to one not previously interested or
insurance to an equivalent extent, until the insured.
interest in the thing and the interest in the
insurance are vested in the same person. Hence, the insured retains insurable
interest in the property insured in the
following cases:
“N” owns a condominium unit presently
insured with Holy Insurance Co. for P10 a. Execution of mortgage by the insured since
Million. N later sells the condominium interest in the property did not pass to the
unit to “O”. Somehow “O” fails to mortgagee by the mere execution of the
obtain the transfer of the insurance mortgage;
policy to his name from “N”. b. Lease of the insured property;
Subsequently, fire of unknown origin c. If the insured is a judgment debtor whose
destroys property was sold on execution, until the
completely the condominium unit. right to redeem has expired;
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d. If the insured is the mortgagor whose This is because this situation allows
property has been foreclosed until expiration for change of interest in the property but
of the redemption period. without corresponding loss of insurance
coverage.
What are the exceptions to the rule?
a. In life, health, and accident insurance (Sec Thus, if a fire insurance policy provides that
20) the loss was payable to the mortgagee, as its
Because for these types of insurance, interest may appear, the remainder to
it is enough that insurable whomsoever during the continuance of the
interest exists at the time of the issuanceof the risk may become owner of the interest
policy. insured, the buyer may recover because it was
so framed for the benefit of whomsoever
b. A change of interest in the thing insured during the continuance of the risk may
after the occurrence of an injury which results become the owner of the interest insured.
in a loss (Sec 21)
This is because the right is already NOTE: A mere transfer of thing insured
vested and the benefit has accrued. before the loss, unaccompanied by a
corresponding change of interest in the
c. A change of interest in one or more of insurance does not transfer the policy but
several things, separately insured by one suspends it to an equivalent extent.
policy (Sec 22)
This is because there is no change of DOUBLE INSURANCE
interest and in insurance with respect to the
remaining properties. Thus, if the insured A double insurance exists where the same
obtains insurance for two separate houses person is insured by several insurers
but covered by one policy and then sold one separately in respect to the same subject and
but both were destroyed by fire. The insured interest. Section 95; 2008 Bar.
can claim on the insurance with respect to the (ST-SIR Same person, Two or more insurers,
unsold property. Subject matter, Interest and Risk)
d. A change of interest by will or succession NOTE: Double insurance only applies to

on the death of the insured (Sec 23) property insurance. There is no law
This is because the ownership is prohibiting double insurance.
effectively transferred to the heirs.
e. A transfer of interest by one of several Reputable is the forwarder of Wyeth’s

partners, joint owners, or owners in common goods. Pursuant to their contract of
who are jointly insured, to the others. (Sec carriage, Reputable insured Wyeth’s
24) goods with Malayan. Wyeth also has its
This is because the transfer is not own insurance policy from the
made in favor of any third party. Philippines First Insurance Co., Inc.
(Phil First). During the life of these
f. When a policy is so framed that it will inure insurance policies, the truck carrying
to the benefit of whomsoever, during the Wyeth’s goods were hijacked. Thus, Phil
continuance of the risk, may become the First paid Wyeth on its policy and sued
owner of the interest insured (Sec 57) Reputable and Malayan for
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reimbursement. Seeking to avoid safety of the goods, which may become the
liability, Malayan invoked Section 5 of basis of the latter’s liability in case of loss
the SR Policy and argued that in as or damage to the property.
much as there was already a marine Malayan Insurance v. Philippine First
policy issued by Phil First securing the Insurance Co., G.R. No. 184300, July 11,
same subject matter against loss and 2012.
that since the monetary coverage/value
of the marine policy is more than enough
to indemnify the hijacked cargo, Phil Armando Geagonia, as the owner of
First alone must bear the loss. Norman’s Mart, obtained insurance
from Country Bankers Insurance
Is there double insurance? Corporation. The insurance policy
contained the condition that the insured
None. Double insurance exists where the shall give notice to Country Bankers of
same person is insured by several insurers any insurance or insurances already
separately in respect to the same subject effected, or which may subsequently be
and interest. The requisites in order for effected, covering any of the property or
double insurance to arise are as follows: properties insured, and unless such
1) The person insured is the same; notice be given and the particulars of
2) Two or more insurers insuring such insurance or insurances be stated
separately; therein or endorsed in this policy before
3) There is identity of subject matter; the occurrence of any loss or damage, all
4) There is identity of interest insured and; benefits under this policy shall be
5) There is identity of the risk or peril deemed forfeited.
insured against.
The building subject of fire insurance
In the present case, while it is true that the was razed by fire. Country Bankers
Marine Policy and the SR Policy were both refused to pay alleging that Geagonia
issued over the same subject matter, i.e. did not inform it of a previous insurance
goods belonging to Wyeth, and both obtained by its creditor Cebu Tesing
covered the same peril insured against, it Textiles over the same property and in
is, however, beyond cavil that the said violation of Condition 3.
policies were issued to two different
persons or entities. Wyeth is the Is the policy avoided by the failure of
recognized insured of Phil First under its Geagonia to inform Country Bankers of
Marine Policy, while Reputable is the other insurance policies over the
recognized insured of Malayan under the property?
SR Policy. The interest of Wyeth over the
property subject matter of both insurance No. Condition 3 or the Other Insurance
contracts is also different and distinct from Clause of the policy is a condition which is
that of Reputable. The policy issued by not proscribed by law. Such a condition is
Phil First was in consideration of the legal a provision which invariably appears in
and/or equitable interest of Wyeth over its fire insurance policies and is intended to
own goods. On the other hand, what was prevent an increase in the moral hazard.
issued by Malayan to Reputable was over However, in order to constitute a violation,
the latter’s insurable interest over the the other insurance must be upon the same
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subject matter, the same interest therein, exceed the face value of the insurance policy
and the same risk. contract.
A double insurance exists where the same (b) Where the policy under which the insured
person is insured by several insurers claims is a valued policy, any sum received
separately in respect of the same subject by him under any other policy shall be
and interest. The insurable interest on the deducted from the value of the policy without
mortgaged property of a mortgagor which regard to the actual value of the subject
covers the full value of the property and the matter insured;
interests of a mortgagee which extends
only to value of debt are distinct and (c) Where the policy under which the insured
separate. Since the two policies of the claims is an unvalued policy, any sum
PFIC do not cover the same interest as that received by him under any policy shall be
covered by the policy of the private deducted against the full insurable value, for
respondent, no double insurance exists. any sum received by him under any policy;
The non-disclosure then of the former
policies was not fatal to the Geagonia’s (d) Where the insured receives any sum in
right to recover on the Country Banker’s excess of the valuation in the case of Valued
policy. Armando Geagoniav. Court of policies, or of the insurable value in the case
Appeals and Country Bankers of unvalued policies, he must hold such sum
Insurance Corporation, G.R. No. in trust for the insurers, according to their
114437, February 6, 1995. right of contribution among themselves;
(e) Each insurer is bound, as between himself

NOTE: If an insurance policy prohibits and the other insurers, to contribute ratably to
additional insurance on the property insured the loss in proportion to the amount for which
without the insurer’s consent, a violation by he is liable under his contract.
the insured shall avoids the policy.
Dean’s discussion: MULTIPLE OR SEVERAL
INTERESTS ON SAME PROPERTY
Q: To what extent may the insured recover
in a policy, other than life, if the insured is
over insured by double insurance? Terrazas de Pation Verde, a
A: The insured shall be governed by the condominium building, has a value of
following rules if he is over insured by double P5OM. The owner insured the building
insurance. against fire with three (3) insurance
companies for the following amounts:
(a) The insured, unless the policy otherwise
provides, may claim payment from the 1. Northern Insurance Corp.—P20M
insurers in such order as he may select, up to 2. Southern Insurance Corp.—P30M
the amount for which the insurers are 3. Eastern Insurance Corp.—P50M
severally liable under their respective
contracts; a) Is the owner’s taking of insurance for
So, meaning it can elect to chose or to the building with three (3) insurers
recover to any of the insurers but not to valid?
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Yes, the taking of insurance from the three The owner can choose who he wants to
(3) insurers is valid, there being no claim against to recover the full indemnity
stipulation against obtaining additional provided that the claim will not exceed the
insurance. It is a case of “double face value of the insurer’s respective
insurance”. insurance policies. BAR 2012.
Double insurance is valid. What is Dean’s discussion:

prohibited is for the insured to recover With respect to question (a):
more than his interest or value of the This is a case of double insurance, you can
property as this will violate the indemnity take as many fire insurances as you want, if
principle of an insurance contract. there is no prohibition as to additional or co-
insurance. What is not allowed by law is to
b) The building was totally razed by fire. recover more than the loss sustained or
If the owner decides to claim from suffered by the insured.
Eastern Insurance Corp. only P50M,
will the claim prosper? Explain. CONCEPT OF MORTGAGE
REDEMPTION INSURANCE
Yes, the owner may legally claim the
entire P50M from Eastern Insurance
Corp. The Insurance Code provides that A contract of group life insurance was
where the insured is over-insured by executed between Great Pacific Lie
double insurance, the insured, unless the (Grepalife) and Development Bank
policy otherwise provides, may claim (DBP). Great Pacific agreed to insure
payment from the insurers in such order the lives of eligible housing loan
as he may select, up to the amount for mortgagors of DBP. Wilfredo Leuterio,
which the insurers are severally liable a physician and a housing debtor of
under their respective contracts. Each DBP, applied for membership in the
insurer is bound, as between himself and group life insurance plan.
the other insurers, to contribute ratably to
the loss in proportion to the amount for Grepalife issued a coverage to the value
which he is liable under his contract. BAR of P86,200. Dr. Leuterio died due to
2008. massive cerebral hemorrhage. The
widow of the late Dr. Leuterio filed a
c) Can the owner claim from Northern complaint against Grepalife. Grepalife
Insurance and Southern Insurance alleged that the complaint was instituted
Corporation? by the widow who is not the real party in
interest.
If the owner has been paid in full by
Eastern Insurance, he can no longer ls Grepalife liable? What is the concept
recover from any of Northern and Southern of mortgage redemption insurance?
Insurance Corporations. Otherwise, the
owner can recover P20M and P30M, Yes. The rationale of a group insurance
respectively. policy of mortgagors, otherwise known as
the "mortgage redemption insurance," is a
device for the protection of both the
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mortgagee and the mortgagor. On the part Q: HOW DO THESE TWO (2)
of the mortgagee, it has to enter into such THEORIES DIFFER?
form of contract so that in the event of the A: Under the theory of cognition, the
unexpected demise of the mortgagor acceptance is considered to effectively bind
during the subsistence of the mortgage the offeror only from the time it came to his
contract, the proceeds from such insurance knowledge. Under the theory of
will be applied to the payment of the manifestation, the contract is perfected at the
mortgage debt, thereby relieving the heirs moment when the acceptance is declared or
of the mortgagor from paying the made by the offeree. BAR 1997.
obligation. In a similar vein, ample
protection is given to the mortgagor under Q: WHEN IS A CONTRACT OF
such a concept so that in the event of death; INSURANCE PERFECTED?
the mortgage obligation will be A: Pursuant to the cognition theory, an
extinguished by the application of the insurance contract is perfected when the
insurance proceeds to the mortgage applicant-insured has knowledge of the
indebtedness. acceptance and approval by the insurer of his
application.
Consequently, where the mortgagor pays
the insurance premium under the group The cognition theory should be construed in
insurance policy, making the loss payable relation to the provisions of the Insurance
to the mortgagee, the insurance is on the Code on premium payment. Save for the
mortgagor's interest, and the mortgagor exceptions, there is no valid and perfected
continues to be a party to the contract. In insurance contract without payment of
this type of policy insurance, the premium.
mortgagee is simply an appointee of the
insurance fund, such loss-payable clause
does not make the mortgagee a party to the Jason is the proud owner of a newly-
contract. Thus, Grepalife is liable to pay built house worth P5 million. As a
the widow of Dr. Leuterio upon protection against any possible loss or
presentation of proof of prior settlement of damage to his house, Jason applied for a
mortgagor's indebtedness to DBP. Great fire insurance policy thereon with Shure
Pacific Life Assurance Corporation v. Insurance Corporation (Shure) on
Court of Appeals and Medarda October 11, 2016 and paid the premium
Leuterio, G.R. No. 113899, October 13, in cash. It took the company a week to
1999. approve Jason's application. On
October 18, 2016, Shure mailed the
approved policy to Jason which the
PERFECTION OF THE CONTRACT latter received five (5) days later.
OF INSURANCE However, Jason's house had been razed
by fire which transpired a day before his
The Civil Code adopts the “theory of receipt of the approved policy. Jason
cognition”, while the Code of Commerce filed a written claim with Shure under
generally recognizes the “theory of the insurance policy. Shure prays for the
manifestation”, in the perfection of denial of the claim on the ground that
contracts. the theory of cognition applies to
contracts of insurance.
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Decide Jason's claim with reasons. None, an application form does not prove
that insurance was secured. Anybody can
No. What governs insurance contract is the get an application form for insurance, fill it
cognition theory whereby the insurance up at home before filing it with the
contract is perfected only from the time the insurance company. There was no contract
applicant came to know of the acceptance yet. Furthermore, there is no proof that the
of the offer by the insurer. In this case, the insurance company approved the proposal,
loss occurred a day prior to Jason’s no proof that any premium payments were
knowledge of the acceptance by Shure of made, and no proof from the record of
Jason’s application. There being not exhibits as to the date it was accomplished.
perfected insurance contract, Jason is not People of the Philippines v. Yip Wai
entitled to recover from Shure. BAR 2016, Ming, G.R. No. 120959, November14,
2011. 1996.
Ming and Lam Po Chun came to Manila This summary of this case, is that the
on vacation. Hardly a day passed when prosecution tries to question the motive of the
Chun was brutally beaten up and accused in murdering his girlfriend, the
strangled to death in their hotel room. prosecution would like to establish the theory
On the day of the killing, Ming was that the accused murdered his girlfriend in
touring Manila with Filipino welcomers order to collect life insurance, they presented
while Chun was left in the hotel room a “proposal to life insurance”. Is there a valid
allegedly because she had a headache insurance contract in this case? The Supreme
and was not feeling well enough to do the Court said none, a proposal to life insurance
sights. A witness and evidence were or an application form does not prove a
presented which pointed out to Ming as perfected insurance policy contract. Anybody
the guilty party, sentencing him to can get an application form for insurance.
imprisonment by the RTC. Prosecution
also alleged that there was a motive to Valenzuela Hardwood and Industrial
kill the victim as she was insured and the Supply, Inc. insured with South Sea
accused was the beneficiary. The Surety and Insurance Company, Inc. the
Prosecution presented the “Proposal for logs to be shipped to Manila on board
Life Insurance” as proof, but the same the vessel owned by Seven Brothers.
was a mere photocopy and does not bear Marine Cargo Insurance Policy No.
the victim’s signature which would 84/24229 was issued by South Sea.
indicate that the victim herself applied Hardwood gave the check in
for the insurance. Although there payment of the premium on the
appears a signature of “Apple Lam”, the insurance policy to Mr. Victorio Chua,
same is not the name of the victim and an agent of Columbia Insurance
nobody insures himself under a Brokers, Ltd. The said vessel sank
nickname. resulting in the loss of the insured logs.
Payment of the proceeds of the policy
Is there a valid and perfected insurance was demanded from South Sea but the
contract? latter denied liability under the policy.
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insurance agent shall be deemed to have

Does Mr. Chua in receiving the check authorized such agent to receive on its behalf
for the South Sea Surety acted as its payment of any premium.
agent?
PREMIUM PAYMENT
Yes. Section 306 of the Insurance Code
(now Section 315) provides that any Q: What is the cash and carry rule under
insurance company which delivers to an the Insurance Code?
insurance agent or insurance broker a A: Under the cash and carry rule, an
policy or contract of insurance shall be insurance policy is generally not binding
deemed to have authorized such agent or unless the premium thereof has not been paid.
broker to receive on its behalf payment of This is based on Section 77 of the Insurance
any premium which is due on such policy Code which provides that an insurer is
of contract of insurance at the time of its entitled to payment of the premium as soon
issuance or delivery or which becomes due as the thing insured is exposed to the peril
thereon. insured against. Notwithstanding any
agreement to the contrary, no policy or
When the South Sea Surety and Insurance contract of insurance issued by an insurance
Co., Inc. delivered to Mr. Chua the marine company is valid and binding unless and until
cargo insurance policy for the logs of the premium thereof has been paid.
Hardwood, he is deemed to have been
authorized by the South Sea Surety and
Insurance Co., Inc. to receive the premium Upon Woodwork’s application, Phil.
which is due on its behalf. When therefore Phoenix issued in its favor a fire
the insured logs were lost, the insured had insurance policy where by it insured
already paid the premium to an agent of the Woodwork’s building, machinery and
South Sea Surety and Insurance Co., Inc., equipment for a term of one year from
which is consequently liable to pay the against loss by fire. Woodwork did not
insurance proceeds under the policy it pay the premium stipulated in the Policy
issued to the insured. South Sea Surety when it was issued nor at any time
and Insurance Co., Inc. v. Court of thereafter. Before the expiration of the
Appeals, G.R. No. 102253, June 2,1995. one-year term, Phil Phoenix notified
Woodwork of the cancellation of the
Policy allegedly upon request of
DEAN’S DISCUSSION: Woodwork. Phil Phoenix Woodworks
Q: This case is about the effect of the with the amount of P3,110.25 for the
delivery of the insurance policy contract unexpired period of 94 days, and
by the insurer to the agent, the said agent claimed the balance of P7,483.11
who also accepted the premium and representing, earned premium. Wood
likewise delivering the policy to the work disclaimed any liability
insured. Let’s assumed that the agent did contending, in essence, that it need not
not remit the premium payment. Can the pay premium because Phil Phoenix did
insured recover? not stand liable for any indemnity
A: The Supreme Court applied the Sec. 306 during the period the premiums were
(now section 315) of the insurance code, any not paid.
insurance company which delivers to an
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Can Phil Phoenix collect the earned Finding that Maxilite failed to pay the
premiums? insurance premium, FEBIBI sent
written reminders to FEBTC to debit
No, since the premium had not been paid, Maxilite’s account. On 24 and 26
the policy must be deemed to have lapsed. October 1994, Maxilite fully settled its
It is explicit in the policy the Phil. Phoenix trust receipt account. On 9 March 1995,
agreement to indemnify Woodwork for a fire gutted the Aboitiz Sea Transport
loss by fire only arises after payment of Building, where Maxilite’s office and
premium. The non-payment of premiums warehouse were located. As a result,
does not merely suspend but put an end to Maxilite claimed against the fire
an insurance contract since the time of the insurance policy with Makati Insurance
payment is peculiarly of the essence of the Company. Makati Insurance Company
contract. Philippine Phoenix Surety & denied the fire loss claim on the ground
Insurance Company v. Woodwork,Inc., of non-payment of premium. FEBTC
G.R. No. L-25317, August6, 1979. and FEBIBI disclaimed any
responsibility for the denial of the claim.
Is there payment of premium?

Maxilite Technologies, Inc. is a domestic
corporation engaged in the importation There is none insofar as Makati Insurance
and trading of equipment for energy- Company is concerned because it did not
efficiency systems. Jose N. Marquesis receive any premium payment. However,
the President and controlling FEBTC is estopped from claiming that the
stockholder of Maxilite. Far East Bank insurance premium was not paid. FEBTC
and Trust Co. (FEBTC) handled the induced Maxilite and Marques to believe
financing and related requirements of that the insurance premium has in fact been
Marques and Maxilite. Marques and debited from Maxilite’s account. However,
Maxilite maintained accounts with FEBTC failed to debit and instead
FEBTC. Far East Bank Insurance disregarded the written reminder from
Brokers, Inc. (FEBIBI) is a local FEBIBI to debit Maxilite’s account.
insurance brokerage corporation while FEBTC’s conduct clearly constitutes
Makati Insurance Company is a local negligence in handling Maxilite’s and
insurance company. Both companies Marques’ accounts and must be held liable
were subsidiaries of FEBTC. for damages pursuant to Article 2176 of the
Civil Code.
FEBIBI, upon the advice of FEBTC,
facilitated the procurement and
processing from Makati Insurance DEAN’S DISCUSSION:
Company of four separate and The summary of this case is that basically Far
independent fire insurance policies over East Bank has two insurance company
the trust receipted merchandise of subsidiaries, and these subsidiaries issued
Maxilite. Maxilite paid the premiums fire insurance on goods subject to a trust
for these policies through debit receipt, the understanding is that the
arrangement. entrustees account with Far East Bank will be
debited for the payment of premium. So, the
Far East Bank assured that the account of
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entrustees have been debited and premium the loss of the vehicle on September 27,
remitted in favor of the insurer. The goods 1996. While Jaime Gaisano claims that
have been destroyed by fire. Is the insurer is Trans-Pacific was informed that the check
liable? was ready for pick-up on September 27,
1996, the notice of the availability of the
No, since there no premium received by the check, by itself, does not produce the effect
insurer, the insurer is not liable under the cash of payment of the premium. At the time of
and carry rule. The one liable in this case Far loss, there was no payment of premium yet
East Bank for the value of the goods because to make the insurance policy effective.
of its negligence and estoppel in making the Jaime Gaisano also failed to establish the
insured believe that the account have been fact of a grant by respondent of a credit
debited in favor of the insurer. term in his favor, or that the grant has been
consistent.
On September 27, 1996, Development

Insurance and Surety Corporation Q: CAN AN INSURANCE POLICY BE
(insurance company) issued a BINDING EVEN IF THE PREMIUM IS
comprehensive commercial vehicle UNPAID?
policy to Jaime Gaisano. His company, A: The answer is the exceptions of the “cash
Noah’s Ark, immediately processed the and carry rule”:
payments and issued a check, a. Whenever the grace period applies in the
representing the payment of premium case of a life or an industrial life policy.
and other charges, dated September 27,
1996 payable to the insurance b. Whenever under the broker and agency
company’s agent, Trans-Pacific, on the agreements with duly licensed
same day. However, nobody from intermediaries, a 90-day credit extension is
Trans-Pacific picked up the check that given. No credit extension to a duly licensed
day. Trans-Pacific informed Noah's Ark intermediary should exceed 90 days from
that its messenger would get the check date of issuance of the policy.
the next day, September 28.
c. An acknowledgment in a policy or contract
In the evening of September 27, 1996, of insurance or the receipt of premium is
while under the official custody of conclusive evidence of its payment, so far as
Noah's Ark, the vehicle was stolen. to make the policy binding, notwithstanding
Oblivious of the incident, Trans-Pacific any stipulation therein that it shall not be
picked up the check on September 28 binding until the premium is actually paid.
and issued an official receipt dated
September 28, 1996. d. In a contract of suretyship, the suretyship
or bond shall not be valid and binding unless
Is there a binding insurance contract? and until the premium therefor has been paid,
except where the oblige has accepted the
No, there is no dispute that the check was bond, in which case the bond becomes valid
delivered to and was accepted by insurance and enforceable irrespective of whether or
company's agent, Trans-Pacific, only on not the premium has been paid by the obligor
September 28, 1996. No payment of to the surety.
premium had thus been made at the time of
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e. When there is an agreement allowing the Is there a contract of insurance between

insured to pay the premium in installments Capital Insurance and Plastic Era?
and partial payment has been made at the
time of the loss. Yes, by accepting the promise of Plastic
Era to pay the insurance premium within
f. In case of estoppel as when there is a long- 30 days from the effective date of policy,
standing business practice of allowing the Capital Insurance has implicitly agreed to
insured to pay the premiums after issuance of modify the tenor of the insurance policy
the policy and was relied upon and in effect, waived the provision therein
in good faith by the insured. that it would only
pay for the loss or damage in case the same
g. If a cover note is issued to temporarily bind occurs after the payment of premium.
the insurance pending Considering that the insurance policy is
issuance of the policy. silent as to the mode of payment, Capital
Insurance is deemed to have accepted the
promissory note in payment of the
Capital Insurance & Surety Co., Inc. premium. This rendered the policy
(Capital Insurance) delivered to Plastic immediately operative on the day it was
Era Manufacturing Co., Inc., (Plastic delivered. In effect, Capital Insurance
Era) its open Fire Policy No. 22760 extended credit to Plastic Era.
wherein the former undertook to insure
the latter's building, equipment, raw It should be noted that in the Capital
materials, products and accessories. The Insurance case, the check which was issued
policy expressly provides that if the in payment of the premium was dishonored
property insured would be destroyed or due to insufficiency of funds and yet
damaged by fire after the payment of the insurer was made liable because it clearly
premiums, at anytime between the 15th granted a credit extension to the insured
day of December 1960 and one o'clock in and the loss occurred during the extension
the afternoon of the 15th day of period.
December 1961, the insurance company
shall make goodall such loss or damage
in an amount not exceeding P100,000.00.
When the policy was delivered, Plastic Antonio Chua obtained from American
Era failed to pay the corresponding Home fire insurance covering the stock-
insurance premium. However, through in-trade of his business. The insurance
its duly authorized representative, it was due to expire on March 25, 1990. On
executed acknowledgment receipt of April 5, 1990, Chua issued a check for
Plastic Era’s promissory note. P2,983.50 to American Home’s agent,
James Uy, as payment for the renewal of
The property insured by Plastic Era was the policy. The official receipt was issued
destroyed by fire. In due time, the latter on April 10. In turn, the latter a renewal
notified Capital Insurance of the loss of certificate. A new insurance policy was
the insured property by fire and issued where petitioner undertook to
accordingly filed its claim for indemnity, indemnify respondent for any damage
but was denied, or loss arising from fire up to
P200,000.00 March 20, 1990 to March
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25, 1991. The business was completely transaction is exempted from the cash and
razed by fire. Antonio Chua filed an carry rule. In that case, the insurer accepted
insurance claim with American Home all installment payments for three years. Such
and four other co-insurers. American acceptance of payments speaks loudly of the
Home refused to honor the claim insurer’s intention to honor the policies it
alleging that there was no existing issued to the insured. Certainly, basic
contract because Antonio Chua did not principles of equity and fairness would not
pay the premium. allow the insurer to continue collecting and
accepting the premiums, although paid on
Is American Home liable to Antonio installments, and later deny liability on the
Chua? lame excuse that the premiums were not
prepaid in full.
Yes, Section 78 of the Insurance Code
explicitly provides that an Thus, if the premium is payable on
acknowledgment in a policy or contract of four installments, the insured may recover the
insurance of the receipt of premium is full amount if the loss occurred after the first
conclusive evidence of its payment, so far installment payment even pending full
as to make the policy binding, payment of the balance without prejudice to
notwithstanding any stipulation therein the insured’s obligation to pay the remaining
that it shall not be binding until the amount of the premium.
premium is actually paid. This section
establishes a legal fiction of payment and However, if the policy indicates that
should be interpreted as an exception to failure to pay in full any of the scheduled
Section 77. installments on or before the due date shall
render the insurance policy void and
Acknowledgement of premium payment ineffective as of such date, then the failure
when none was received is also a form of to make premium payment on the first due
estoppel. date resulted in a void and ineffective
policy. Hence, there is no credit extension to
consider as the provision itself expressly cuts
off the inception of the insurance policy in
AGREEMENT FOR PARTIAL case of default. Philam Insurance vs. Parc
PREMIUM PAYMENT Chateu Condominium Unit (March 4,
2019)
Q: DOES PAYMENT BY
INSTALLMENT OF PREMIUMS It was also held that the insurer is not
INVALIDATE THE INSURANCE liable for the payment of the insurance
CONTRACT? proceeds if the policy provides for payment
A: As discussed in the case of “Makati of premium in full. Accordingly, where the
Tuscany vs. CA”, Premium may be paid on premium has only been partially paid and the
installments, if allowed by the insurance balance paid only after the peril insured
policy. against has occurred, the insurance contract
It was ruled that where there is an did not take effect and the insured cannot
agreement allowing the insured to pay the collect at all on the policy. Sps. Antonio and
premium in installments and partial payment Violeta Tibay, et al. v. Court of Appeals
has been made at the time of the loss, the
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and Fortune Life and General Insurance policy of the receipt of premium is
Inc., conclusive evidence of its payment so far
as to make the policy binding,
ESTOPPEL notwithstanding any stipulation therein
that it shall not be binding until premium is
actually paid. Third exception was laid in
Masagana Telemart obtained from Makati Tuscany Condominium
UCPB five (5) insurance policies on its Corporation v. Court of Appeals, wherein
Manila properties. The policies were the Court ruled that Section 77 may not
effective from May 22, 1991 to May 22, apply if parties have agreed to the payment
1992. On June 13, 1992, Masagana’s in installments and partial payment has
properties were razed by fire. On July been made at the time of loss. The said case
13, 1992, Masagana Telemart tendered also provided the fourth exception, that is
five checks as renewal premium the insurer may grant credit extension for
payments. A receipt was issued. On July payment of premium. This means that if
14, 1992, Masagana Telemart made its the insurer has granted the insured a credit
formal demand for indemnification for term for the payment of the premium and
the burned insured properties. UCPB loss occurs before the expiration of the
then rejected Masagana’s claims under term, recovery on the policy should be
the argument that the fire took place allowed even the premium is paid after the
before the tender of payment and that it loss but within the credit term. As fifth
did not result in renewal of the policies. exception, estoppelb ars it from taking
Thus, Masagana Telemart filed a refuge under Section 77 since Masagana
complaint against UCPB. On trial, it Telemart relied in good faith on such
was found that Masagana Telemart, practice. UCPB General Insurance Co.,
which had procured insurance coverage Inc. v. Masagana Telemart, Inc., G.R.
from UCPB for a number of years, had No. 137172, April 4, 2001; BAR 2013
been granted a 60 to 90-daycredit term
for the renewal of the policies. Such a
practice had existed up to the time the NOTE: Facts similar to the Masagana ruling
claims were filed. Most of the premium should be decided on a case-by- case basis. It
shave been paid for more than 60 days is submitted that just because the insurer, in
after the issuance. certain cases, accommodated late payments
from the insured does not conclusively bind
Must Section 77 of the Insurance Code the insurer to the same kind of arrangement
be strictly applied despite practice of all through out, particularly, if there is a clear
granting 60-to-90-day credit for and categorical rejection of the application
payment of premium? for renewal because there was no
corresponding timely premium payment.
Yes, Section 77 of the Insurance Code
admits of exception and the first is It would have been different if the insured
provided in the section itself that is in case issued a check or a promissory note, duly
of life or industrial life policy whenever the accepted by the insurer to indicate its
grace period provision applies. The second conformity to the credit extension. The
is that covered by Section 78 which validity, if not fairness, of a credit extension
provides that any acknowledgment in a
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based on supposed previous Arrangements is

debatable, to say the least.
ISSUANCE OF COVER NOTES
Cover notes are issued to bind

insurance temporarily pending the issuance
of the policy. Within 60 days after issue of a
cover note, a policy shall be issued in lieu
thereof, including within its terms the
identical insurance bound under the cover
note and the premium therefor. “P” filed an application with an
insurance company for a 20-year
Cover notes may be extended or endowment policy on the life of his one-
renewed beyond such 60 days with the year-old daughter, supplying all the
written approval of the Commissioner if he essential data in the application form,
determines that such extension is not contrary but without disclosing that his daughter
to and is not for the purpose of violating any was a mongoloid child. Upon “P’s”
provisions of the Insurance Code. payment of the annual premium, a
binding deposit receipt was issued to
Let’s see this bar exam question: (Previous “P” by the insurance agent, subject to
slide was lost) According to dean: the processing by the company. The
concept here is that the goods were lost insurance company disapproved the
during the cover note period and no premium insurance application stating that the
has been paid to the cover note. Is the insurer plan applied for was not available for
liable? The answer obviously is yes, since minors below seven years old, and
cover note presupposes no premium offered another plan. The insurance
payments. It is a temporary insurance agent did not inform “P” of the
coverage pending issuance of the policy. The disapproval nor of the alternative plan
policy will contain the same terms and offered, and instead, strongly
conditions as the cover note. Pacific Timber recommended that the company
Export Corporation v. Court of Appeals, reconsider and approve the insurance
et al., G.R. No. L-38613, February 25, 1982 application.
As fate would have it, “P’s” daughter

COVER NOTE BINDING
died. “P” sought payment of the
RECEIPT
proceeds of the insurance but the
Temporary A conditional company refused on the grounds that
insurance coverage insurance coverage there was concealment of a material fact
pending issuance of but does not in the insurance application form and
the policy and the become effective that it had rejected the application. “P”
insurer is liable if unless eventually contended, on the other hand, that the
the loss occurred approved by the binding deposit receipt constituted a
during such insurer. temporary contract of life insurance.
provisional period.
How would you resolve the issue?
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of one or more of the following, after the

The insurance company is not liable. The effective date of the policy:
binding deposit receipt is merely
conditional and does not insure outright. (a) Non-payment of premium;
Where an agreement is made between the
applicant and the agent, no liability shall (b) Conviction of a crime arising out of acts
attach until the principal (insurance increasing the hazard insured against;
company) approves the risk. Unlike a
cover note, the binding deposit receipt is (c) Discovery of fraud or material
subordinated to the act of the insurance misrepresentation;
company in approving or rejecting the
application; thus, in life insurance, a (d) Discovery of willful or reckless acts or
“binding slip” or “binding receipt” does omissions increasing the hazard insured
not insure by itself; and, when as in this against;
case the application was disapproved,
before the death of the insured, there was (e) Physical changes in the property insured
no perfected contract of insurance in order which result in the property becoming
to make the company liable. Great Pacific uninsurable;
Life Ass. Co. v. C.A., G.R. No. L-31845,
April 30, 1979; BAR 1980. (f) Discovery of other insurance coverage
that makes the total insurance in excess of the
value of the property insured; or
DEAN’S DISCUSSION:
This is a case decided by the Supreme Court, (g) A determination by the Commissioner
in here what was issued to the insured was not that the continuation of the policy would
a cover note but a binding receipt. violate or would place the insurer in violation
of the Insurance Code.
Basically, it says “subject to the approval and
process of head office. Theoretically, even if NOTE: All notices of cancellation
the premium was received by the agent, mentioned in the preceding section shall be in
insure is not liable because was issued was a writing, mailed or delivered to the named
binding receipt and not a binding insurance insured at the address shown in the policy, or
policy contract. But if it issued a cover note, to his broker provided the broker is
regardless non-payment of premium. Then, authorized in writing by the policy owner to
receive the notice of cancellation on his
the insurer is liable. behalf.
Q: May an insurance policy be cancelled? REINSTATEMENT OF A LAPSED
If yes, under what grounds and POLICY OF LIFE INSURANCE
conditions?
A: As a general rule, no policy of insurance Q: Does a stipulation in a life insurance
other than life shall be cancelled by the policy giving the insured the privilege to
insurer except upon prior notice thereof to the reinstate it upon written application
insured, and no notice of cancellation shall be within three years from the date it give
effective unless it is based on the occurrence lapses give the insured absolute right to
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such reinstatement by the mere filing of an Q: Name at least 3 instances when an

application therefor? insured is entitled to a return of the
A: No. The stipulation in a life insurance premium paid?
policy giving the insured the privilege to A: Three instances when an insured is
reinstate it upon written application within entitled to a return of premium paid are:
three years from the date it lapses and upon
of evidence of insurability satisfactory to the a. To the whole premium, if no part of his
insurance company and the payment of all interest in the thing insured be exposed to any
overdue premiums and any other of the perils insured against.
indebtedness to the company, does not give
the insured absolute right to such b. Where the insurance is made for a definite
reinstatement by the mere filing of an period of time and the insured surrenders his
application n therefor. policy, to such portion of the premium as
corresponds with the unexpired time at a pro
The insurer has the right to deny the rata rate, unless a short period rate has been
reinstatement if it is not satisfied as to the agreed upon and appears on the face of the
insurability of the insured and of the latter policy, after deducting from the whole
does not pay all overdue premiums and all premium any claim for loss or damage under
other indebtedness to the company. It was the policy which has previously accrued.
held that after the death of the insured, the
insurer cannot be compelled to entertain an c. When the contract is voidable on account
application for reinstatement of the policy of the fraud or misrepresentation of the
because the conditions precedent to insurer or of his agent or on account of facts
reinstatement can no longer be determined the existence of which the insured was
and satisfied. James McGuire v. ignorant without his fault; or when, by any
Manufacturers Life Insurance Co., G.R. default of the insured other than actual fraud,
No. L-3581, September21, 1950. the insurer never incurred any liability under
the policy. BAR 2000.
Also, the payment of premiums on a
life insurance policy is not suspended by war.
TC, upon the solicitation of MS, an
It was also held that where a life underwriter for an insurance company,
insurance policy lapsed, and as compliance applied for a 20-year endowment policy.
with the conditions for reinstatement of the His application, with the requisite
policy, the insured paid only part of the medical examination, was accepted and
overdue premium, the failure to pay the approved by the company and in due
balance of the overdue premium prevented course, Endowment Policy No.
the reinstatement of said policy as well 221944wasissued in his name. It was
recovery therefrom. Rufino Andres v. released for delivery on January 24,
Crown Insurance Life, Co., G.R. No. L- 2020 and was actually delivered to him
10875, January 28, 1958. by the underwriter, on January 25,
2020. The effective date indicated on the
REFUND OF PREMIUM face of the policy in question was
December 25, 2019. MS assured him
that the first premium may be paid
within the grace period of 30 days from
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date of delivery of the policy. The first

premium was paid by him in three (3) Q: What is CONCEALMENT?
installments. A: The neglect to communicate that which a
party knows and ought to communicate is
In a letter dated June 1, 2020, the called a concealment.
insurer advised TC that Policy No.
221944 was not in force. To make it Q: What is the effect of
enforceable and operative, TC was CONCEALMENT?
asked to remit the balance to complete A: A concealment, whether intentional or
his initial annual premium due unintentional, entitles the injured party to
December 15, 2019, and to see a rescind a contract of insurance.
physician for another full medical Moreover, based on the wordings of
examination at his own expense. The Justice Leonen, the basis of the rule vitiating
insured immediately informed the the contract in cases of concealment is that it
insurer that he was cancelling the policy misleads or deceives the insurer into
and he demanded the return of his accepting the risk, or accepting it at the rate
premium plus damages. of premium agreed upon; The insurer, relying
upon the belief that the assured will disclose
Is TC entitled to refund of his premium? every material fact within his actual or
presumed knowledge, is misled into a belief
Yes, the insurance company should have that the circumstance withheld does not exist,
informed TC of the deadline for paying the and he is thereby induced to estimate the risk
first premium before or at least upon upon false basis that it does not exist. The
delivery of the policy to him, so he could principal question, therefore, must be, Was
have complied with what was needful and the assurer misled or deceived into entering a
would not have been misled into believing contract obligation or in fixing the premium
that his life and his family were protected of insurance by a withholding of material
by the policy, when actually they were not. information or facts within the assured's
And, if the premium paid by TC was knowledge or presumed knowledge. Insular
unacceptable for being late, it was the Life Assurance Co., Ltd. v. Heirs of
company’s duty to return it. Alvarez, G.R. Nos. 207526 and 210156
By accepting his premiums without giving

him the corresponding protection, the Ignacio Saturnino and his children filed
company acted in bad faith. Since the an action to recover the face value of an
policy of TC was inoperative from the insurance policy issued by Phil-Am Life
beginning, the insurance company was on the life of Estefania A. Saturnino. The
never at risk, thus, it is not entitled to keep policy sued upon is one for 20-year
the premium. Great Pacific Life endowment non-medical insurance.
Insurance Corporation v. Court of This kind of policy dispenses with the
Appeals, et al., G.R. No. L-57308, April medical examination of the applicant
23, 1990. usually required in ordinary life
policies. However, detailed information
is called for in the application
RESCISSION OF INSURANCE concerning the applicant's health and
CONTRACTS medical history. Saturnino died of
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pneumonia, secondary to Influenza.

Ignacio demanded payment of the face
value of the policy, but was rejected. It DEAN’S DISCUSSION:
appears that two months prior to the We need to appreciate the facts of this
issuance of the policy, Saturnino was given case, in here hindi niya sinabi na meron
operated on for cancer, involving siyang cancer and he did not disclose also that
complete removal of the right breast. he was operated on. So, the fact the he was
Notwithstanding the fact of her operated on, he should have disclosed it.
operation, Estefania A. Saturnino did
not make a disclosure thereof in her So, is there a need for fraud, should
application for insurance. Ignacio concealment have attended by fraud? In this
contends that there was no fraudulent case, Supreme Court stated that there need
concealment of the truth inasmuch as not to be fraud. Concealment is the neglect to
the insured herself did not know, since communicate that which a party knows and
her doctor never told her, that the ought to communicate. In the case of “Insular
disease for which she had been operated Life vs. Alvarez”, Justice Leonen said it is
on was cancer. Is there concealment? because fraud is presumed, when you conceal
a material fact there is basically a fraud.
Yes, in the first place, concealment of the
fact of the operation itself was fraudulent, So now, where is fraud needed? It is
as there could not have been any mistake needed in case of misrepresentation.
about it, no matter what the ailment.
Secondly, in order to avoid a policy, it is RECITATION ROUND 1:
not necessary to show actual fraud on the
part of the insured. In this jurisdiction, Q: mortgagor procured a fire insurance
concealment, whether intentional or over his mortgaged property. After non-
unintentional entitled the insurer to rescind payment of the loan, the mortgagee
the contract of insurance, concealment procured a separate fire insurance over
being defined as “negligence to the same property. The mortgagor
communicate that which a party knows and obtained a loan from C to pay off the
ought to communicate.” The basis of the mortgagee. The mortgagor assigned the
rule vitiating the contract in cases of policy in favor of the creditor. The
concealment is that it misleads or deceives property thereafter caught fire. Does the
the insurer into accepting the risk, or mortgagee or mortgagor or creditor have
accepting it at a rate of premium agreed insurable interest over the property? Who
upon. The insurer, relying upon the belief can recover on the fire insurance policy?
that the insured will disclose every A: Only the mortgagee can recover. As a rule,
material fact within his actual or presumed insurable interest in property insurance must
knowledge, is misled into a belief that the exist two times: a) at the time the insurance
circumstances withheld does not exist, and took effect and; b) at the time of the lost but
he is thereby induced to estimate the risk need not exist for the mean time. In the given
upon a false basis that it does not exist. case, the mortgagor has no insurable interest
Ignacio Saturnino v. Philippine at the time of loss since assignment was done
American Life Insurance prior to the occurrence of the loss. At the time
Company,G.R. No. L-16163, February the property caught fire, the policy was
28, 1963. already assigned to the creditor. With respect
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to the mortgagee, the policy was assigned to debtor recover from the fire insurance
him as given in the facts. policy?
A: Yes, since the debtor has still insurable
Q: Mortgagor obtained a loan from a interest over the property after the auction
bank. The mortgagor is a juridical person. sale and before the expiration of the
It likewise obtained fire insurance over the redemption period.
mortgaged property. The mortgagee-bank
assigned its right over the mortgage in Q: Can the judgment creditor/ winning
favor of a non-bank entity. The loan was bidder recover from the fire insurance
not paid, and the mortgage was foreclosed policy over said property?
extrajudicially under Act 3135. After the A: No, since the creditor has no insurable
sale, the non-bank registered the sale. The interest when the fire insurance took effect.
day after the registration of the sale, the In property insurance, insurable must exist
property was destroyed by fire. Can the two times: a) at the time the insurance took
mortgagor recover on the fire insurance effect and; b) at the time of the lost but need
policy? not exist for the mean time.
A: No. Upon the expiration of the redemption
period, the judgment debtor has no more Q: Can the judgment creditor procure a
insurable interest over the property since it separate insurance policy after the auction
failed to redeem the property. In the case, sale?
upon registration of the sale the redemption A: Yes, being a judgment creditor, it has
period is already terminated. insurable interest over the property since it
will gain pecuniary benefit from its
Q: What if the mortgagor assigned the preservation and suffer pecuniary damage by
policy in favor of the mortgagee? its destruction.
A: Yes. Hence, if the mortgagee bank
assigned this right to the mortgagor, then the Q: The property was destroyed by fire
non-bank entity can likewise recover from after the one-year period of registration of
the insurance policy. the sale. Who between the creditor or
debtor can recover from the fire insurance
Q: Debtor is indebted to a creditor. He policy?
procured fire insurance over his property. A: The creditor can recover if he procured a
Can the creditor apply for an insurance separate insurance but he cannot recover if it
policy over the property of the debtor? is from the policy procured by the debtor.
A: NO. The creditor has no insurable interest With respect to the debtor, after the one-year
over the property of the debtor. Creditor period, his right to redeem the property was
cannot obtain pecuniary benefit from its already expired, hence, no more insurable
preservation or suffer pecuniary damage by interest.
its destruction.
RECITATION ROUND 2:
Q: Let’s say the debtor procured a fire
insurance policy. He was unable to pay so Q: The insurance policy provides that the
there was a collection suit and the property premium must be fully paid, the insured
was auctioned. After the auction sale, the made a partial payment of the premium.
property was destroyed by fire. Can the Thereafter, let’s say the property was
destroyed by fire, (fire is the risk insured
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against) may the insured recover on the paid. As discuss in the case of “Makati
fire insurance policy? Tuscany vs. CA”
A: The insured cannot recover, since the
insurance policy provides that the premium NOTE: Installment payment is allowed only
must be fully paid before the insured can if it is stated on the policy.
recover, hence there is no perfected insurance
policy contract yet. Q: Let’s say the insured is allowed to pay
premium on credit, he issued a promissory
Q: The policy allows for a payment of note payable to the order of the insurer, at
premium on installments, it further the same time he issued a check, the check
provides that if the first installment was was however dishonored, for being drawn
not made, then the policy is avoided, against insufficient funds. May the insured
before the premium could be paid, the recover on the fire insurance policy?
property is destroyed by fire. Can the A: In the case of “capital insurance
insured recover. corporation” asked twice in the bar, yes it can
A: No, the insured cannot recover since the recover as long as the loss occurred during
property was destroyed before the payment the credit extension period. The dishonor of
of premium, hence there is no perfected the check is immaterial.
insurance policy contract yet.
Q: What if there is no promissory note, the
Q: Same facts. The policy allows for the check issued and dishonored for
payment of premium on installment basis, insufficiency of funds. Can the insured
there is also a stipulation that, in any of the recover?
installments is not made the policy is A: No, the dishonor of the check is
avoided. The insured was able to make the tantamount to a non-payment of the
first installment payment, before he could premium.
make the second installment, the property
was destroyed by fire. May the insured Q: What if the dishonor happened after
recover? the loss occurred?
A: In this case, the insured can recover since, A: Still no, since under the cash and carry
as an exception of the “cash and carry rule, as a general rule, no policy or contract
rule”, payment of premium by of insurance issued by an insurance company
installments shall amount to a perfected is valid and binding unless and until the
insurance policy contract and the insurer premium thereof has been paid. Any
shall be liable for the face value of the policy agreement to the contrary is void. Unless
provided that there is no delay on the part of there is credit term extension granted to
the insured in paying the installment. Without the insured.
prejudice to recover the balance premiums
Page 48 of 203
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6 months after the death of the president,

then the insurance company will have 3
MARCH 6, 2021
years and 6 months only.
JOHN GALT
Q: Is this doctrine retroactive or
RECIT prospective in application?
A: It is prospective as held in Henson.
Q: ABC hired Juan Dela Crus as its DISCUSSION:

President and as part of his compensation
package, ABC Corporation obtained a Saturnino v. Philam
house for Juan Dela Cruz and ABC had to
purchase, for its purpose, a property at - we discussed this case in reference to
Forbes Park. ABC obtained Fire the statement of Leonen regarding the
Insurance on the residential property for difference between concealment and
the President as well as life insurance misrepresentation. This case tells us
policy. While the President was sleeping, that the concealment need not be
somebody killed him by setting his house fraudulent. Concealment is the
on fire. Right away, the insurance neglect to communicate a fact known
company paid off ABC Corporation. So to the insured before the effectivity of
after payment, what right does the the policy. Leonen clarified that there
insurance company have, if any, against is no need to show fraudulent intent
the one that caused the death and the for concealment because concealment
destruction of the property? assumes the existence of fraud.
However, in misrepresentation, there
A: The insurance company only has a right as has to be a fraudulent intent.
to the property insurance policy. The right of
subrogation is expressly provided under SLIDE
Article 2207 of the Civil Code wherein it is
stated that it is only applicable to property X applied for life insurance with
insurance and not life insurance. Metropolitan Life Insurance Company.
The application contained this question:
Q: Within what period may the insurance "Have you ever had any ailment or disease
company enforce the subrogation? of x x x (b) the stomach or intestines, liver,
kidney, or genitourinary organ?" X, a
A: The insurance company has, by virtue laundrywoman who has no medical
of the Henson ruling, 4 years from the time knowledge answered 'fiNo". the
the tortious act was committed. application was approved, premium was
paid and six (6) months later, X died from
DEAN: The SC said the insurance cancer of the stomach. The post medical
company inherits the remaining period as examination of X shows that she had the
far as the right of the insured is concerned. cancer at the time she applied for a policy.
So it means, 4 years not from the time of Can the beneficiary of X collect on the
payment but 4 years from the time the act policy? Reasons.
was committed. So if the beneficiary filed
a claim and the claim was processed after SLIDE
Page 49 of 203
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The beneficiary of X cannot collect on the matter, the knowledge of such insurance
policy. Concealment, as a defense against by the insurers' agents, even assuming the
liability by the insurer, may either be acquisition thereof by the insurers, is not
intentional or unintentional. Lack of the notice that would estop the insurers
knowledge on the part of the insured about from denying the claim. New Life
her ailment will not preclude the insurer Enterprises and Julian Sy v. Court of
from raising the defense. The insurer may Appeals, et al., G.R. No. 94071, March 31,
be held in estoppel only if, having known 1992.
of the concealed or misrepresented fact,
still accepts the payment of premium In this case, the argument of the insured is
which is not the situation in this case. BAR that he disclosed the existence of other
1989. insurance in favor of the agent. Is that
disclosure to the agent likewise disclosure to
So she withheld a material fact that she was the insurer? What if the agent did not disclose
operated on. She did not disclose to the to the insurer? Is there concealment? YES.
insurer, this amounted to concealment. The theory of imputed knowledge does not
apply to property insurance. Disclosure to the
agent is not disclosure to the insurer.
SLIDE
Julian Sy, one of the partners, insured the
SLIDE
stocks in trade of New Life Enterprises
with Western Guaranty Corporation, What facts should be disclosed to each
Reliance Surety and Insurance. Co., Inc., party in a contract of insurance?
and Equitable Insurance Corporation.
When the building occupied by the New SLIDE

Life Enterprises was gutted by fire, the • Each party to a contract of insurance
stocks in the trade inside said building must communicate to the other, in
were insured against fire in the total good faith, all facts within his
amount of P1,550,000.00. After the fire, knowledge which are material to the
Julian Sy went to the three insurance contract and as to which he makes no
companies. Ultimately, the three insurance warranty, and which the other has not
companies denied plaintiffs' claim for the means of ascertaining.
payment for not giving notice of any
insurances already effected covering the
stocks in trade. Is there concealment?
• An insured, who gains knowledge of a
Concealment is not limited to life insurance, material fact already after the
it also applies to property insurance. effectivity of the insurance policy, is
not obliged to divulge it. The reason for
this is that the test of concealment of
SLIDE material fact is determined at any time
Yes, where Julian Sy is specifically
required to disclose to the insurers any
other insurance and its particulars which he
may have effected on the same subject
Page 50 of 203
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before the policy becomes effective. the insurer's action on the application of
BAR 2011. the insured, either by approving it with the
corresponding adjustment for a higher
premium or rejecting the same. Sunlife
Assurance Company of Canada v. Court of
Appeals, G.R. No. 105135, June 22, 1995.
TEST OF MATERIALITY
SLIDE
SLIDE
Cite cases/instances constituting
What is the test of materiality? concealment even though the facts
concealed were not the proximate cause of
Materiality is to be determined not by the the loss.
event, but solely by the probable and
reasonable influence of the facts upon the
party to whom the communication is due,
in forming his estimate of the SLIDE
disadvantages of the proposed contract, or a. "A" applied for a non-medical life
in making his inquiries. insurance. The insured did not inform the
insurer that one week prior to his
Very clearly, based on the test of materiality, application for insurance, he was examined
the facts concealed need not be the cause of and confined at St. Luke's Hospital where
the loss. By materiality, what is meant is, will he was diagnosed for lung cancer. The
the insurer accept the proposal to extend the insured soon thereafter died in a plane
insurance coverage and for what amount of crash. BAR 2001.
premium, if that information was made b. The insured did not disclose that
known to him. his daughter was a mongoloid child even
though the cause of her death was
SLIDE influenza. Great Pacific Life Assurance
Should the fact/s concealed be the Company v. Court of Appeals, G.R. No. L-
proximate cause of the loss in order to 31845, April 30, 1979.
constitute concealment? c. When the insured answered that he
consulted a doctor for cough and flu
SLIDE complications but the insurer discovered
that two weeks prior to his application for
No, the facts concealed need not be the
insurance, he was examined and confined
proximate cause of the loss in order to
at the Lung Center of the Philippines,
constitute concealment. Materiality is to be
where he was diagnosed for renal failure,
determined not by the event, but solely by
even though the insured died in a plane
the probable and reasonable influence of
crash. Sunlife Assurance Company of
the facts upon the party to whom the
Canada v. Court of Appeals, GR. No.
communication is due, in forming his
105135, June 22, 1995.
estimate of the disadvantages of the
proposed contract, or in making his
inquiries. The test is whether the matters d. When the insured consulted a
concealed would have definitely affected doctor and was diagnosed as suffering
Page 51 of 203
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from "sinus tachycardia"; then consulted Hospital even though he died in a plane
the same doctor again and this time was crash. BAR 1996
found to have "acute bronchitis", even
though the cause of the death was
"congestive heart failure," "anemia," and
"chronic anemia." Thelma Vda. de
Canilang v. Court of Appeals and Great
Pacific Life Assurance Corporation, G.R.
No. 92492, June 17, 1993.
e. When the insured did not disclose SLIDE
in this fire insurance application that his What facts need not be communicated to
house had been insured with another each other in a contract of insurance?
insurance company. The fact of the
existence of the other insurance is material
because had he answered truthfully, the SLIDE
insurer would probably have charged him Neither party to a contract of insurance is
higher premium, or would have made bound to communicate information of the
further inquiries, or would have imposed matters following, except in answer to the
some other conditions in the policy to inquiries of the other:
protect its interest. The existence of a large
amount of insurance increases the moral (a) Those which the other knows;
hazard or the temptation to commit arson.
BAR 1997 "(b) Those which, in the exercise of
ordinary care, the other ought to know,
f. When the insured did not mention in his and of which the former has no reason to
application for life insurance that he had suppose him ignorant; "
suffered from viral hepatitis the previous
year even though he had fully recovered (c) Those of which the other waives
from the disease, the medical examination communication;
performed by the insurance company's
physician did not reveal such previous "(d) Those which prove or tend to prove
illness, and showed that he was healthy and the existence of a risk excluded by a
was an insurable risk, even though he died warranty, and which are not otherwise
of an automobile accident. material; and
g. When in his application, in response to "(e) Those which relate to a risk excepted
the question as to whether or not he had from the policy and which are not
ever been hospitalized, he answered in the otherwise material.
negative and forgot in good faith to
mention his confinement at the Kidney
Regarding waiver of communication, what if

the insurer waives medical examination?
Does that also amount to waiver of the right
to material information?
Page 52 of 203
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Yes, the insured may recover since there is

NO. In fact with more reason that if the no concealment. The face of the policy
insurer waives medical examination, there bore already the annotation, "Co-insurance
has to be more obligation on the part of the declared" which is a notice to the insurer as
insured to disclose material information to the existence of other insurance
known to him. Waiver of medical contracts on the property insured. Gen.
examination is not waiver of right to Insurance & Surety Corporation v. Ng
material information. Hua, G.R. No. L-14373, January 30, 1960;
BAR 1979.
SLIDE SLIDE
- Information of the nature or Kwong Nam applied for a 20-year
amount of the interest of one endowment insurance on his life with his
insured need not be communicated wife, Ng Gan Zee as beneficiary. On the
unless in answer to an inquiry, same date, Asian Crusader, upon receipt of
except as prescribed by Section 51. the required premium from the insured,
- Neither party to a contract of approved the application and issued the
insurance is bound to corresponding policy. Kwong Nam died of
communicate, even upon inquiry, cancer of the liver with metastasis. All
information of his own judgment premiums had been paid at the time of his
upon the matters in question. death.
It has to be material facts, not opinions. Ng Gan Zee presented a claim for payment
of the face value of the policy. Asian
SLIDE Crusader Life Assurance denied the claim
A fire insurance policy in favor of the on the ground that the answers given by the
insured contained a stipulation that the insured to the questions in his application
insured shall give notice to the company of for life insurance were untrue, claiming
any insurances already effected or which that Kwong Nam misrepresentation when
may subsequently be effected, covering the he answered "No" to the question
property insured and that unless such appearing in the application for life
notice be given before the occurrence of insurance. Also, it was alleged that Kwong
any loss, all benefits shall be forfeited. The Nam was examined in connection with his
face of the policy bore the annotation application for life insurance, but he gave
"Coinsurance declared." The things the medical examiner false and misleading
insured were burned. It turned out that information as to his ailment and previous
several insurances were obtained on the operation by saying that it was associated
same goods for the same term. The insurer with ulcer of the stomach. Asian Crusader
refused to pay on the ground of contended that he was operated on for
concealment. May the insured recover? peptic ulcer 2 years before the policy was
Reason. applied for and that he never disclosed
such an operation. Is there concealment?
SLIDE
Page 53 of 203
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SLIDE other insurers is tantamount to waiver on the

part of the insurer.
No, concealment exists where the assured
has knowledge of fact material to the risk,
and honesty, good faith, and fair dealing MISREPRESENTATIONS/
requires that he should communicate it to OMISSIONS
the assurer, but he designedly and
intentionally withholds the same. In the
absence of evidence that the insured had SLIDE
sufficient medical knowledge as to enable What is representation in the context of
him to distinguish peptic ulcer and a tumor, insurance laws?
his statement that said tumor was
associated with ulcer of the stomach, Representation is a statement of fact or
should be construed as an expression made condition relating to the risk which
in good faith of his belief as to the nature induced the insurer to enter into a contract.
of his ailment and operation. Ng Gan Zee Representation is the statement made in
v. Asian Crusader Life Assurance compliance with the duty to disclose.
Corporation, G.R. No. L30685, May 30,
1983.
SLIDE
In this case, there was disclosure of a material When is a representation deemed false?
fact and it was made in good faith. He is not
a doctor to known the distinction between
these illnesses. A representation is to be deemed false
when the facts fail to correspond with its
assertions or stipulations.
SLIDE
When is the right to material facts waived?
SLIDE
The right to information of material facts When is the effect of a false
may be waived, either by the terms of representation?
insurance or by neglect to make inquiry as - If a representation is false in a
to such facts, where they are distinctly material point, whether affirmative
implied in other facts of which information or promissory, the injured party is
is communicated. entitled to rescind the contract from
the time when the representation
So let’s say there was a question on the becomes false
application of a fire insurance, whether or not - A representation as to the future is
the insured has obtained an initial insurance. to be deemed a promise, unless it
The insured answered yes. The second appears that it was merely a
question says “if yes, cite the names of those statement of belief or expectation
insurers.” If the insured left those items
blank, in that case, if there’s no inquiry on the
part of the insurer, it it tantamount to waiver Misrepresentation, just like concealment,
of the right to that information. There was entitled the insurer to rescind the contract.
disclosure of other insurance. The neglect to
follow through with respect to the names of
Page 54 of 203
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SLIDE concealment or misrepresentation on the part

of the agent would amount to concealment or
Manuel Florendo filed an application for
comprehensive pension plan with Philam misrepresentation on the part of the insured.
Plans, Inc. Ma. Lourdes S. Florendo, his
wife, was stated as beneficiary. Philam THEORY OF IMPUTED
Plans issued Pension Plan Agreement. KNOWLEDGE
Eleven months later, Manuel died of blood
poisoning.
SLIDE
Subsequently, Lourdes filed a claim with What is the theory of imputed knowledge?
Philam Plans but it declined the claim and
found that Manuel was on maintenance
medicine for his heart and had an This means that if the insured furnished the
implanted pacemaker. Further, he suffered agent the needed information and
from diabetes mellitus and was taking delegated to him/her the filling up of the
insulin. Lourdes contends that Manuel had insurance application, then, he/she acted
concealed nothing since Perla, the on the insured's, instruction, not that of the
soliciting agent, knew that Manuel had a insurer. If the agent answered the
pacemaker implanted on his chest in the application differently, the insured is
70s or about 20 years before he signed up bound by the statements and information
for the pension plan and that it is the
contained in the application, unless there is
soliciting agent who filled up the form. Is
connivance between the insurer and the
there misrepresentation?
agent. Florendo v. Philam, ibid.
This theory, however, was not applied in

property insurance. In one case, it was held
SLIDE that the insurer is not liable despite the
Yes, when the insured sign the pension claim of the insured that the insurance
plan application, he adopted as his own the agent knew about other insurance covering
written representations and declarations the same property against fire and
embodied in it. It is clear from these knowledge of the agent is not tantamount
representations that he concealed his to knowledge of the insurer. New Life
chronic heart ailment and diabetes. Philam Enterprises v. Court of Appeals, G.R. No.
plans has every right to act on the faith of 94071, March 31, 1992.
that certification. Assuming that it was the
insurance agent Perla who filled up the NOTE: The theory of imputed knowledge
application form, Manuel is still bound by does not apply to property insurance. So in
what it contains since he certified that he the bar exam, be fact-specific. If it is life
authorized her action. Ma. Lourdes insurance, apply Florendo v. Philam. If
Florendo v. Philam Plans, Inc., et al., G.R. property insurance, apply New Life
No. 186983, February 22, 2012 Enterprise v CA.
Basically, if the insured delegated to the
insurance agent the matter of filling out the
form, he is no longer the agent of the insurer SLIDE
but the agent of the insured. So the
Page 55 of 203
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What is the test to determine the intentional concealment can be

materiality of the representation? avoided. Thus, a concealment,
- The materiality of representation is regardless of actual intent to
determined by the same rules as the defraud, "is equivalent to a false
materiality of the concealment. representation.
SLIDE
It means that which would have prompted the On the basis of the entries in the death
insurer to inquire and ask questions and certificate of the insured, Manulife
would have meant the approval or rejection conducted an investigation into the
of the application for insurance or charging a circumstances leading to the insured's
higher amount of premium. death. It relied on the medical records of
the hospital where the insured was
SLIDE confined, and that Manulife thereafter
concluded that the insured misrepresented
Is proof of fraudulent intent on the part of
or concealed material facts at the time the
the insured necessary in order to entitle the
insurance policies were applied for; and
insurer to rescind the policy?
accordingly, Manulife denied the death
claims. Should the policy be rescinded?
SLIDE
• The Insurance Code dispensed SLIDE
with proof of fraudulent intent in
- No, in order for the insurer to
case of rescission due to
rescind the policy, there should be
concealment but not so in case of
intent to defraud on the part of the
rescission due to false
insured to rescind the policy. The
representation. Insular Life
medical records that might have
Assurance Co., Ltd. v. Heirs of
established the insured's purported
Alvarez, C.R. Nos. 207526 and
misrepresentation/s or
210156, October 3, 2018; Manulife
concealment/s is inadmissible for
v. Ibanez, November 28, 2016.
being hearsay, given the fact that
Manulife failed to present the
• This is neither because intent to
physician or any responsible
defraud is intrinsically irrelevant in
official of the hospital who could
concealment, nor because
confirm or attest to the due
concealment has nothing to do with
execution and authenticity of the
fraud. To the contrary, it is because
alleged medical records. Manulife
in insurance contracts, concealing
had utterly failed to prove by
material facts is inherently
convincing evidence that it had
fraudulent: "if a material fact is
been beguiled, inveigled, or
actually known to the [insured], its
cajoled into selling the insurance to
concealment must of itself
the insured who purportedly with
necessarily be a fraud. When one
malice and deceit passed himself
knows a material fact and conceals
it, "it is difficult to see how the off as thoroughly sound and
healthy, and thus a fit and proper
inference of a fraudulent intent or
Page 56 of 203
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applicant for life insurance. The Heirs Of Alvarez filed a complaint for
Manulife's sole witness gave no specific performance to demand against
evidence at all relative to the Insular Life to fulfill its obligation as an
particulars of the purported insurer under the Group Mortgage
concealment or misrepresentation Redemption Insurance, and for
nullification of foreclosure against Union
allegedly perpetrated by the
Bank. Was there concealment?
insured, Manulife v, Ibanez,
November 28, 2016.
- It should be noted that when the
Supreme Court ruled that there SLIDE
should be proof of fraudulent
intent to defraud, it should be • None. Section 26 defines concealment
construed to refer to as a neglect to communicate that which
misrepresentation and not a party knows and ought to
concealment. That such proof is communicate. However, Alvarez did
required in misrepresentation is not withhold information on or neglect
to state his age. He made an actual
made clear in Insular Life v.
declaration and assertion about it. What
Alvarez.
this case involves, instead, is an
allegedly false representation. If indeed
SLIDE Alvarez misdeclared his age such that
his assertion fails to correspond with his
factual age, he made a false
Jose Alvarez applied for and was granted a representation, not a concealment. As
housing loan by Union Bank. This loan such, fraudulent intent on the part of the
was secured by a promissory note, a real insured must be established to entitle
estate mortgage over the property of the insurer to rescind the contract. The
Alvarez and a mortgage redemption Insurance Code dispenses with proof of
insurance taken on the life of Alvarez with fraudulent intent in cases of rescission
Union Bank as beneficiary. Alvarez was due to concealment, but not in cases of
among the mortgagors included in the list rescission due to false representation,
of qualified debtors covered by the Group When abundance of documentary
Mortgage Redemption Insurance that
evidence can be referenced to
Union Bank had with Insular Life. Alvarez
demonstrate a design to defraud,
died and subsequently, Union Bank filed
with Insular Life a death claim under presenting singular document with
Alvarez's name pursuant to the Group erroneous entry does not qualify as
Mortgage Redemption Insurance. Insular clear and convincing proof of
Life denied the claim after determining fraudulent intent. Insular Life basically
that Alvarez was not eligible for coverage relied on the Health Statement form
of Group Mortgage Redemption Insurance personally accomplished by Alvarez
as he was supposedly more than 60 years wherein he wrote that his birth year was
old at the time of his loan's approval. With 1942.
the claim's denial, the monthly
amortizations of the loan stood unpaid.
Subsequently, the lot was foreclosed and
sold at a public auction with Union Bank
as the highest bidder.
If the question is, was there concealment?
The answer should none. But if the question
Page 57 of 203
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is, was there misrepresentation? Answer capitulated to Insular Life’s assertion of

should also be none. fraud.
Basically, there was no misrepresentation.

SLIDE The proceeds of the policy should have been
The Court, however, posited that Alvarez remitted in favor of Union Bank.
must have accomplished and submitted
many other documents when he applied for SLIDE
the housing loan and executed supporting When should the insurer rescind the policy
instruments like the promissory note, real account of concealment or
estate mortgage, and Group Mortgage misrepresentation?
Redemption Insurance. A design to
defraud would have demanded his - Whenever a right to rescind a
consistency. He needed to maintain contract of insurance is given to the
appearances across all documents. insurer on account of concealment
However, the best that Insular Life could or misrepresentation, such right
come up with before the Regional Trial must be exercised previous to the
Court and the Court of Appeals was a commencement of an action on the
single document. The Court of Appeals contract.
was straightforward, i.e., the most basic
document that Alvarez accomplished in If an action has been filed already by the
relation to Insular Life must have been an insured against the insurer, then concealment
insurance application form. Strangely, and misrepresentation can no longer be
Insular Life failed to adduce even this invoked as a defense. It has to be invoked
document — a piece of evidence that was before the filing of the action.
not only commonsensical, but also one
which has always been in its possession SLIDE
and disposal. Insular Life Assurance Co., Distinguish misrepresentation from
Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 concealment.
and 210156, October 3, 2018
a. a. There is concealment with the
insured withholds information of
SLIDE material fact from the insurer, while
there is misrepresentation when the
Incidentally, the Supreme Court also ruled insured makes erroneous statements
that the foreclosure of the mortgage was with the intent of inducing the insurer
void. Union Bank approved Alvarez's loan to enter into the insurance contract;
and real estate mortgage, and endorsed the
mortgage redemption insurance to Insular b. A concealment is a negative act,
Life. Fully aware of considerations that meaning, the neglect to communicate
could have disqualified Alvarez, it information as to material facts
nevertheless acted as though nothing was known to the insured, while
irregular, It itself acted as if, and therefore misrepresentation is a positive act as
represented that, Alvarez was qualified, the insured volunteers such fact;
Yet, when confronted with Insular Life's c. Concealment usually occurs prior to
challenge, it readily abandoned the stance the making of the insurance contract,
that it had earlier maintained and while misrepresentation may be made
Page 58 of 203
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at the time of, or prior, to the issuance It means that after two years from date of
of the insurance policy; and issuance of the policy or its last
d. Proof of fraudulent intent is not reinstatement, the insurer must make good
necessary in case rescission due to on the policy, even though the policy was
concealment but not so in case of obtained by fraud, concealment, or
rescission due to misrepresentation. misrepresentation. It basically precludes
the insurer from rescinding the policy on
While there are distinctions between the
two, concealment has the same effect as account of concealment or
misrepresentation in terms of entitling the misrepresentation. Sunlife of Canada
insurer to rescind the insurance policy. (Philippines), Inc. v. Sibya, et al., G.R. No.
211212, June 8, 2016; BAR 2012.
THEORY OF IMPUTED
KNOWLEDGE SLIDE
What are the requisites of the
SLIDE incontestability clause?
Explain the incontestability clause.
The requisites are:
The incontestability clause in life a. The insurance is life insurance payable
insurance policy is based on Section 48 of on the death of the insured.
the Insurance Code; The clause is therefore not applicable to
"Whenever a right to rescind a annuity because the annuitant pays lump
contract of insurance is given to the sum to the insurer and gets a certain
insurer by any provision of this amount from the insurer every year until
chapter, such right must be the annuitant/insured dies.
exercised previous to the
commencement of an action on the
contract.
After a policy of life insurance SLIDE

made payable on the death of the The requisites are:
insured shall have been in force
during the lifetime of the insured a. The insurance is a life insurance
for a period of two years from the payable on the death of the insured.
date of its issue or of its last
reinstatement, the insurer cannot ➢ The clause is therefore not
prove that the policy is void ab applicable to annuity because the
initio or is rescindable by reason of annuitant pays lump sum to the
the fraudulent concealment or insurer and gets a certain amount
misrepresentation of the insured or from the insurer every year until
his agent." the annuitant/insured dies.
b. The clause is therefore not applicable

to annuity because the annuitant pays
Page 59 of 203
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lump sum to the insurer and gets a grounds of concealment and

certain amount from the insurer every misrepresentation.
year until the annuitant/insured dies.
➢ The two-year period is not
reckoned from date of receipt
but from issuance of the policy
or last reinstatement.
In annuity (kind of life insurance), the

insured pays a lump sum and the insurer pays
every year. The annuitant, the obligation to
pay ends upon the death of the insured.
SLIDE
On March 6, 1997, Felipe N. Khu, Sr. This is a case where the SC applied the rule
(Felipe) applied for a life insurance policy on the petition of insurance policy- always
with Insular Life. This took effect on June resolve in favor of the insured as against the
22, 1997. On June 23, 1999, Felipe's policy insurer, in relation to incontestability clause.
lapsed due to non-payment of the premium
covering the period from June 22, 1999 to
June 23, 2000. On September 7, 1999, SLIDE
Felipe applied for the reinstatement of his Hence, the beneficiaries instituted a
policy and paid the premium. complaint for specific performance with
damages and prayed that the reinstated life
On October 12, 1999, Insular Life advised insurance policy be declared valid,
Felipe that his application for enforceable and binding on Insular Life;
reinstatement may only be considered if he and that the latter be ordered to pay unto
agreed to certain conditions such as Felipe's beneficiaries the proceeds of the
payment of additional premium and the policy.
cancellation of the riders pertaining to
premium waiver and accidental death
benefits, Felipe agreed to these conditions In its Answer, Insular Life countered that
and on December 27, 1999 paid the agreed Felipe did not disclose certain ailments that
additional premium. he already had prior to his application for
reinstatement of his insurance policy; and
that it would not have reinstated the
On January 7, 2000, Insular Life issued the insurance policy had Felipe disclosed the
Endorsement corresponding to the policy. material information on his adverse health
On September 22, 2001, Felipe died. On condition. It further contended that when
October 5, 2001, Felipe's beneficiaries
Felipe died, the policy was still
filed With Insular Life a claim for benefit
under the reinstated policy. This claim was contestable. Was the insurance policy still
denied. Instead, Insular Life advised contestable?
Felipe's beneficiaries that it had decided to
rescind the reinstated policy on the
SLIDE
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• No, The Letter of Acceptance of Insular attempts at insurance fraud would be

Life indicates that it accepts the timely uncovered - thus deterring them
imposition of extra/additional premium from venturing into such nefarious
of Php 5.00 a year per thousand of enterprise. At the same time, legitimate
insurance; effective June 22, 1999 " policy holders are absolutely protected
• The Endorsement, in turn, "certifies from unwarranted denial of their claims or
that as agreed to by the Insured, the delay in the collection of insurance
reinstatement of this policy has been
proceeds occasioned by allegations of
approved by the Company on the
understanding that the following fraud, concealment, or misrepresentation
changes are made on the policy by insurers, claims which may no longer be
effective June 22, 1999:" set up after the two-year period expires as
• It is not entirely clear whether the ordained under the law. Insular Life v.
phrase "effective June 22, 1999" refers Felipe Khu, ibid, citing Manila Bankers v.
to the subject of the sentencer namely Aban, supra
"the reinstatement of this policy," or to
the subsequent phrase "changes are
made on the policy." SLIDE
Renato was issued a life insurance policy
• The date of last reinstatement on January 2, 1990. He concealed the fact
mentioned in Section 48 of the that 3 years prior to the issuance of his life
Insurance Code pertains to the date that insurance policy, he had been seeing a
the insurer approved' the application for
reinstatement. However, in light of the doctor about his heart ailment.
ambiguity in the insurance documents
in this case, the Court adopted the On March 1, 1992, Renato died of heart
interpretation favorable to the insured failure. May the heirs file a claim on the
in determining the date when the proceeds of the life insurance policy of
reinstatement was approved. The Renato?
subject policy was deemed reinstated as
of June 22, 1999 and thus, the period of
contestability had lapsed. Insular v. SLIDE
Felipe Khu, G.R. No 195176 April 18,
2016 Yes. The life insurance policy in question
was issued on January 2, 1990. More than
two (2) years had elapsed when Renato, the
insured, died on March 1, 1992. The
incontestability clause applies. Bar 1998
SLIDE
What is the rationale of the incontestability
clause? SLIDE
In January 2016, Mr. H was issued a life
insurance policy by XYZ Insurance Co.,
The incontestability clause regulates both wherein his wife, Mrs. W, was designated
the actions of the insurers and prospective as the sole beneficiary. Unbeknownst to
takers of life insurance. It gives insurers XYZ Insurance Co., however, Mr. H had
enough time to inquire whether the policy been previously diagnosed with colon
was obtained by fraud, concealment, or cancer, the fact of which Mr. H had
misrepresentation; on the other hand, it
forewarns scheming individuals that their
Page 61 of 203
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concealed during the entire time his Mr. H. Under the Insurance Code, the
insurance policy was being processed. insurer is liable when suicide is
committed after the policy has been in
force for a period of two (2) years from
In January 2019, Mr. H unfortunately the date of issue or its last
committed suicide. Due to her husband's reinstatement. In this case, Mr. H
death, Mrs. W, as beneficiary, filed a claim committed suicide three (3) years after
with XYZ Insurance Co. to recover the issuance of the policy. Thus, XYZ
proceeds of the late Mr. H's life insurance should be liable to the beneficiary of
policy. However; XYZ Insurance Co. Mr. H. BAR 2019; 2013.
resisted the claim, contending that: (I) The
policy is void ab initio because Mr. H
fraudulently concealed or misrepresented SLIDE
his medical condition, i.e., his colon
cancer; and (2) As an insurer in a life Can the incontestability clause be invoked
insurance policy, it cannot be held liable in after the death of the insured if the death
case of suicide. occurred before two (2) years from
issuance of the policy?
Rule each of XYZ Insurance Co.'s

contentions. SLIDE
• In Tan v. Court of Appeals, the
Supreme Court ruled that the so-called
"incontestability clause" precludes the
insurer from raising the defenses of
SLIDE false representations or concealment of
• The first contention is not tenable. material facts insofar as health and
Under the incontestability clause, after previous diseases are concerned if the
a policy of life insurance made payable insurance has been in force for at least
upon the death of the insured shall have two (2) years during the insured's
been in force during the lifetime of the lifetime. The phrase "during the
insured for a period of two (2) years lifetime" found in Section 48 of the
from the issuance of the policy or last Insurance Law simply means that the
reinstatement, the insurer must make policy is no longer considered in force
good on the policy even though the after the insured has died. The key
policy was obtained through fraud, phrase in the second paragraph of
concealment, or misrepresentation. Section 48 is "for a period of two
Even if Mr. H had concealed or years". The policy was issued on
misrepresented that he was previously November 6, 1973 and the insured died
diagnosed with colon cancer, XYZ can on April 26, 1975, The policy was thus
no longer rescind the policy since it had in force for a period of only one year
been in force already for three (3) years. and five months. Considering that the
Section 48 Insurance Code; Manila insured died before the two-year period
Bankers v. Aban, G.R. No. 175666, has lapsed, Philippine American Life
July 29, 2013; Sun Life of Canada v. Insurance Company is not, therefore,
Sibya, G.R. No. 211212, June 8, 2016. barred from proving that the policy is
void ab initio by reason of the insured's
• On the second contention, XYZ fraudulent concealment or
Insurance is liable despite the suicide of misrepresentation. Emilio Tan, Juanito
Page 62 of 203
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Tan, Alberto Tan, and Arturo Tan v. disclose that he was confined for renal
Court of Appeals and Philippine failure. Three months from issuance of the
American Life Insurance Company, policy, he died of gunshot wounds. The
G.R. No. 48049, June 29, 1989. Supreme Court held that there was no
concealment given the information that he
disclosed and that he further authorized the
insurer to conduct investigation on his
SLIDE medical background. And even assuming
• In other words, the clause can be that there was concealment, the insurer
invoked even after the death of the must make good on the policy because the
insured and not just during his lifetime. insured died within the two-year period,
The rescission need not be always done citing Manila Bankers v. Aban. G.R. NO.
during the lifetime of the insured. The 211212, June 8, 2016.
incontestability clause will only set in
after two (2) years from issuance of the
policy or last reinstatement. Side comment: This case was very
controversial. I wrote an article regarding
• However, in the case of Manila Bankers this in Tribune and when Sun Life read it,
Life Insurance Corporation v. Aban, it they hired me. I did not criticize the Supreme
was held that after the two-year period Court but I urged them to reassess its ruling.
lapsed, or when the insured dies within So Sun Life is now our client and we filed our
the period, the insurer must make good second MR to be referred to the SC en banc.
on the policy, even though the policy So to me, Sun Life v. Sibya is still an obiter
was obtained by fraud, concealment, or dictum.
misrepresentation.
• In Aban, more than two years had SLIDE
lapsed from the issuance of the policy, Based on Aban and Sibya cases, there are
thus, the incontestability clause had now two incontestability clauses:
lapsed. However, the Supreme Court
1. Two years had lapsed from
also said that if the insured died within
the two year period from the issuance of issuance of the policy or last
the policy (not after two [21 years), the reistatement
insurer can no longer rescind the policy 2. The insured died within 2 years
on account of misrepresentation and/or from the issuance of the policy.
concealment, It may be said that this
part of the decision is only an obiter The second application, however, goes
dictum because two (2) years had against the rationale of the incontestability
lapsed anyway, and the incontestability clause. It precludes the insurer from
clause already applied. conducting investigation if the insured
committed concealment and/or
misrepresentation, particularly if the
SLIDE insured died shortly after the issuance of
However, that principle was reiterated in the policy. It is submitted that this ruling
Sun Life of Canada v. Sibya. In this case, should be reassessed.
the insured applied for life insurance. He
disclosed in his application that he sought
Side comment: Even the Insurance
advice for kidney problem but failed to
Commission intervened with this case and
Page 63 of 203
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urged the SC to reconsider their decision 4. Sotero did not sign the application
because of the impact on the insurance for insurance.
industry. Anong impact? Eh what if 5. Aban was the one who filed the
maraming insured mamatay one day after insurance application and
issuance or before 2 years, maraming designated herself as the
magsasara na insurance company. beneficiary.
For bar exam purposes, the better ruling is

still Tan v. CA because it is consistent with
the rationale of the incontestability clause. SLIDE
For the above reasons and claiming fraud,
Clearly, in Aban, the statement is to the effect Ilocos Life denied Aban's claim on April
that if the insured dies within 2 years, the 16, 1997, but refunded the premium paid
clause will set in, is an obiter dictum. In on the policy.
Sunlife, you can also take the position that
it’s an obiter dictum because the SC said
there was no concealment. If there was no a. May Sotero validly designate her niece
concealment, then there’s no reason to apply as beneficiary?
even the incontestability clause. Why was b. May the incontestability period set
there no concealment? Two reasons (1) the even in cases of fraud as alleged in this
case?
insured disclosed that he sought advice for
c. Is Aban entitled to claim the proceeds
his kidney problem and (2) accordingly, he
under the policy?
authorized the insurer to conduct an intensive
medical background on the insured.
SLIDE
SLIDE
On July 3, 1993, Delia Sotero (Sotero)
took out a life insurance policy from Ilocos a. Yes. Sotero may validly designate
Bankers Life Insurance Corporation her niece, Aban, as beneficiary.
(Ilocos Life) designating Cresencia Aban When the insured takes insurance
(Aban), her niece, as her beneficiary. on his own life, he can designate
anyone as beneficiary except those
On April 10, 1996, Sotero died. Aban filed disqualified to receive donation
a claim for the insurance proceeds on July under Article 739 of the Civil
9, 1996. Ilocos Life conducted an Code. Aban does not fall within the
investigation into the claim and came out disqualification.
with the following findings: b. Yes. The "incontestability clause"
is a provision in Insurance Code
which provides that after a policy
1. Sotero did not personally apply for
of life insurance made payable on
insurance coverage, as she was
illiterate, the death of the insured shall have
2. Sotero was sickly since 1990. been in force during the lifetime of
3. Sotero did not have the financial the insured for a period of two (2)
capability to pay the premium on years from the date of its issue or of
the policy. its last reinstatement, the insurer
cannot prove that the policy is void
Page 64 of 203
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ab initio or is rescindable by reason b. Premium was not paid

of fraudulent concealment or c. The death was due to excepted risk,
misrepresentation of the insured or (like suicide);
his agent. d. The insured employed vicious
fraud (as in another person took the
In this case, the policy was issued physical exams for the insured);
on August 30, 1993, and the e. Failure to comply with conditions
insured died on April 10, 1996, The imposed by the insurer; and
insurance policy was thus in force f. Time specified in the contract to
for a period of three (3) years, make claims is not complied with.
seven (7) months and 24 days.
Considering that the insured died
after the two-year period, Ilocos is, WARRANTIES
therefore, barred from proving that
the policy is void ab initio by
SLIDE
reason of the insured's fraudulent
concealment or misrepresentation What is a warranty in the context of
or want of insurable interest on the insurance laws?
part of the beneficiary.
Warranty is a statement or promise made
SLIDE by the insured set forth in the policy itself
or incorporated in it by proper reference,
c. Yes, Aban is entitled to claim the the untruth or non-fulfillment of which in
proceeds. After the two-year period lapsed, any respect, and without reference to
or when the insured dies within the period, whether the insurer was in fact prejudiced
the insurer must make good on the policy, by such untruth or nonfulfillment renders
even though the policy was obtained by the policy voidable by the insurer.
fraud, concealment, or misrepresentation,
as in this case, when the insured did not
personally apply for the policy as she was
illiterate and that it was the beneficiary SLIDE
who filled up the insurance application Pabaya paid for a fire insurance policy on
designating herself as beneficiary. Manila his multi-storey building. At the time he
Bankers Life Insurance Corporation v. applied for the insurance, he told the
Aban, G.R. No. 175666; BAR 2014. representative of the insurance company
that he planned to assign a security guard
SLIDE on every floor of the building right away.
Except for the ground floor, no security
What are the defenses not barred by the guards were assigned. Eleven months after
incontestability clause? the policy was issued, the building was
gutted by fire which started on the third
SLIDE floor. Unknown to Pabaya, the insurance
These defenses are not barred by the company had incorporated his planned
incontestability clause: undertaking in the policy. Can Pabaya
recover on the fire insurance policy?
a. Lack of insurable interest
Page 65 of 203
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Pabaya can recover under the insurance A statement in a policy, which imparts that
policy. The statement of Pabaya that he it is intended to do or not to do a thing
planned to assign a security guard on every which materially affects the risk, is a
floor of the insured building, whether warranty that such act or omission shall
incorporated in the policy or not, did not take place.
amount to firm commitment so as to
constitute an express warranty or
representation. The facts indicate that it
was simply planned, not obligatory, or SLIDE
promissory, undertaking. BAR 1986 What is the legal effect when before the
time arrives for the performance of a
warranty, the loss insured against happens?
SLIDE
What are the kinds of warranty? SLIDE
a. A warranty may be expressed or When, before the time arrives for the
implied. performance of a warranty relating to the
➢ A statement in a policy, of a future, a loss insured against happens, or
matter relating to the person or performance becomes unlawful at the
thing insured, or to the risk, as place of the contract, or impossible, the
fact, is an express warranty omission to fulfill the warranty does not
thereof. avoid the policy.
➢ Every express warranty, made at
or before the execution of a
policy, must be contained in the SLIDE
policy itself, or in another When may the insurer rescind for violation
instrument signed by the insured of warranty?
and referred to in the policy as
making a part of it,
➢ Implied warranty is one that is SLIDE
deemed incorporated in the
contract although not expressly • The insurer may rescind the policy in
mentioned therein. An example of case of violation of a material warranty,
implied warranty is the warranty or other material provision of a policy,
of seaworthiness in marine on the part of either party thereto,
insurance policy entitles the other to rescind.
b. Affirmative- it affirms the • A policy may declare that a violation of

existence of a fact or condition at specified provisions thereof shall avoid
the time it is made. it, otherwise the breach of an
c. Promissory the insured warrants immaterial provision does not avoid the
that certain facts or conditions policy.
exist.
• A breach of warranty without fraud
merely exonerates an insurer from the
SLIDE time that it occurs, or where it is broken
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in its inception, prevents the policy mortgagee even though it was Mario
from attaching to the risk, who committed them. BAR 2010.
SLIDE
To secure a loan of P 10M, Mario SLIDE
mortgaged his building to Armando. In On May 13, 1996, PAM, Inc. obtained a
accordance with the loan arrangements, P15,000,000.00 fire insurance policy from
Mario had the building insured with First Ilocano Insurance covering its machineries
Insurance Company for PIOM,
and equipment effective for one (I) year or
designating Armando as the beneficiary.
until May 14, 1997. The policy expressly
stated that the insured properties were
Armando also took an insurance on the located at "Sanyo Precision Phils.
building upon his own interest with Second Building, Phase Ill, Lots 4 and 6, Block 15,
Insurance Company for P5M. PEZA, Rosario, Cavite." Before its
expiration, the policy was renewed on "as
is" basis for another year or until May 13,
The building was totally destroyed by fire, 1998. The subject properties were later
a peril insured against under both transferred to Pace Factory also in PEZA.
insurance policies. It was subsequently On October 12, 1997, during the effectivity
determined that the fire had been of the renewed policy, a fire broke out at
intentionally started by Mario and that in the Pace Factory which totally burned the
violation of the loan agreement, he had insured properties. The policy forbade the
been storing inflammable materials in the removal of the insured properties unless
building. sanctioned by Ilocano. Condition 9 (c) of
the policy provides that "the insurance
ceases to attach as regards the property
SLIDE
affected unless the insured, before the
How much, if any, can Armando recover occurrence of any loss or damage, obtains
from either or both insurance companies? the sanction of the company signified by
• Armando can receive P5M from Second endorsement upon the policy x x x (c) if the
Insurance Company. As mortgagee, he property insured is removed to any
had an insurable interest in the building. building or place other than in that which
Armando cannot collect anything from is herein stated to be insured." PAM claims
First Insurance Company. First that it has substantially complied With
Insurance Company is not liable for the
notifying Ilocano through its sister
loss of the building. First, it was due to
a willful act of Mario, who committed company, the RBC, Which, in fact,
arson. Second, fire insurance policies referred PAM to Ilocano for the insurance
contain a warranty that the insured will coverage, Is Ilocano liable under the
not store hazardous materials within the policy?
insured's premises. Mario breached this
warranty when he stored inflammable
materials in the building. These two SLIDE
factors exonerate First Insurance Ilocano is not liable under the policy.
Company from liability to Armando as With the transfer of the location of the
subject properties, without notice and
Page 67 of 203
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without insurer's consent, after the SLIDE

renewal of the policy, the insured
clearly committed concealment, No, it is barred by waiver (or rather
misrepresentation, and a breach of estoppel) to claim violation of warranties
material warranty. Moreover, under for the reason that knowing fully all that
Section 168 of the Insurance Code, the the number of hydrants demanded therein
insurer is entitled to rescind the never existed from the very beginning,
insurance contract in case of an respondent nevertheless issued the policies
alteration in the use or condition of the in question subject to such warranty, and
thing insured. An alteration in the use or received the corresponding premiums. It is
condition of a thing insured from that to a well-settled rule of law that an insurer
which it is limited by the policy made which with knowledge of facts entitling it
without the consent of the insurer, by to treat a policy as no longer in force,
means within the control of the insured, receives, and accepts a premium on the
and increasing the risks, entitles the policy, estopped to take advantage of the
insurer to rescind the contract of fire forfeiture. Qua Chee Gan v. Law Union
insurance. Malayan Insurance and Rock Insurance co., Ltd., G.R. No. L-
Company v. PAP Co, G.R. No. 200784, 4611, December 17, 1955
August 7, 2013; BAR 2014.
SLIDE
SLIDE K.S, Young has a business of a candy and
Qua Chee Gan obtained fire insurance fruit store in Escolta and occupied a
policies from Law Union and Rock building as a residence and bodega. Young
Insurance for his four warehouses used for entered into a contract of insurance with
storing copra and hemp. Under the Midland Textile Insurance in case said
policies, Qua Chee Gan should install fire residence and bodega and its contents
hydrants every 150 feet or 11 hydrants in should be destroyed by fire. One of the
the warehouse premises, however, he conditions of said contract of insurance is
installed only two (2) hydrants. found in "warranty B" which provides that
no hazardous goods should be stored or
kept for sale, and no hazardous trade or
Nevertheless, Law Union proceeded with process be carried on, in the building to
the insurance and collected premiums from which this insurance applies, or in any
Qua Chee Gan. In the 1940s, three (3) of building connected therewith. However,
the warehouses were razed by fire Young placed in said residence and bodega
prompting Qua Chee Gan to demand three (3) boxes filled with fireworks
insurance payment from Law Union. The intended to be used in the celebration of
insurance company refused, alleging that Chinese New Year. A few days after, the
the policies should have been avoided for insured building got partially destroyed by
breach of warranties. fire. The said fireworks, however, were
found in the part of the building not
destroyed by the fire and that they in no
May Law Union and Rock Insurance avoid
the policy? way contributed to the fire or to the loss
occasioned thereby.
Page 68 of 203
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and varnishes upon the premises

SLIDE where the insured property was
Is placing of fireworks a violation of the stored. If British American
terms of the policy? Assurance Company intended to
rely upon a condition of that
• Yes, it is a breach of warranty. character, it ought to have been
Contracts of insurance are plainly expressed in the policy.
contracts of indemnity upon the E.M. Bachrach v. British American
terms and conditions specified in Assurance Company
the policy. The parties have a right
to impose such reasonable
SUMMARY OF PRINCIPLES:
conditions at the time of the
making of the contract as they may
deem wise and necessary. If the SLIDE
insured cannot bring himself The principles enunciated in the foregoing
within the conditions of the policy, cases may be summarized as follows:
he is not entitled to recover for the The insurer may rescind the policy in case
loss. The terms of the policy of:
constitute the measure of the a. Breach of warranty whether or not
insurer's liability, and in order to it is the cause of the loss
recover the insured must show b. Violation of a material provision of
himself within those terms; and if it the policy
appears that the contract has been c. Violation of a non-material
terminated by a violation, on the provision of the policy, if so
part of the insured, of its stipulated.
conditions, then there can be no
Breach of warranty, however, may be
right of recovery. waived expressly, or impliedly,
• The argument that the storing of the
fireworks on the premises did not
contribute in any way to the (The powerpoint does not include the
damage occasioned by the fire is question)
untenable. The violation of the
terms of the contract, by virtue of SLIDE
the provisions of the policy itself, No. The keeping of inflammable oils in the
terminated, at the election of either
insured premises, though prohibited by the
party, the contractual relations.
policy, does not void it if such keeping is
K.S. Young v. Midland Textile
Insurance Company, G.R. No. incidental to the business. Moreover, there
9370, March 31, 1915. was no provision in the policy prohibiting
the keeping of paints and varnishes upon
• No. The keeping of inflammable
the premises where the insured property
oils in the insured premises, though
was stored. If British American Assurance
prohibited by the policy, does not
Company intended to rely upon a condition
void it if such keeping is incidental
of that character, it ought to have been
to the business. Moreover, there
plainly expressed in the policy. E.M.
was no provision in the policy
Bachrach v. British American Assurance
prohibiting the keeping of paints
Page 69 of 203
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Company, G.R. No. L-5715, December 20, insurance claim, in which case, the insured
1910. should take legal action, or the insurance
claim will be processed and paid, in which
case, the next phase is subrogation.
CLAIMS SETTLEMENT AND
SUBROGATION
NOTICE AND PROOF OF LOSS
SLIDE SLIDE
What does loss in insurance mean?
A loss is the injury or damage sustained by

the insured as a consequence of the
happening of the risk/s insured against
which the insurer, in consideration of the
premium, has undertaken to indemnify or
pay the insured.
First, application, whether a proposal on the
part of the insured or an offer on the part of
the insurer. SLIDE
Perfection- once acceptance is manifested to When is an insurer liable for loss?
the other party.
If there is a loss, there must be a notice of loss
first and then the insurer submits a proof of An insurer is liable for a loss in the
loss. Upon submission, 2 things may happen- following cases:
payment of the claim or rejection of the
claim. Once claim is rejected, a suit takes a. If the proximate cause of the loss
place which has to be filed within 10years is the risk or peril insured against
from accrual of cause of action. We also b. If the immediate cause of the loss
know that the payment to file a claim may be is the risk or peril insured against
reduced by stipulation. When does a cause of unless the proximate cause is an
action accrue? Upon rejection of the insurer. excepted peril.
If there’s no rejection, then there is no basis
to file a suit. If there is payment, the insurer Thus, if an explosion occurs in
becomes subrogated to the rights of the Building A and as a result, fire
insured. coming therefrom spreads to
Building B where the property
SLIDE insured against fire is located, the
Above is the diagram illustrating the insured may recover unless
transaction flow of an insurance contract. explosion is an excepted peril.
c. Where the thing insured is rescued
from a peril insured against that
In case of loss, the insured must submit the would otherwise have caused a
notice and proof of loss, Any of two things loss, if, in the course of such
may happen, the insurer may reject the
Page 70 of 203
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rescue, the thing is exposed to a SLIDE

peril not insured against, which
Alfredo took out a policy to insure his
permanently deprives the insured
commercial building against fire. The
of its possession, in whole or in
broker for the insurance company agreed
part; or where a loss is caused by
to give a 15-day credit to pay the insurance
efforts to rescue the thing insured
premium. Upon delivery of the policy on
from a peril insured against.
May 15, 2020, Alfredo issued a postdated
Thus, if in the course of the efforts check payable on May 30, 2006, On May
to save personal effects from fire, 28, 2020, a fire broke out and destroyed the
the risk insured against, the insured building owned by Alfredo,
temporarily stored the property in a
secluded area, but stolen by looters,
as the insured returns to the fire a. May Alfredo recover on the insurance
scene to try to save more policy?
properties, the insured may recover
for the loss of the stolen property, b. Would your answer in a) be the same if
even though robbery is not a peril it as found that the proximate cause of the
insured against. fire was an explosion and that fire was but
d. Loss caused by the negligence of the immediate cause of the loss and there
is no excepted peril under the policy?
the insured, or of the insurance
agents or others
c. If the fire was found to have been caused
by Alfredo's own negligence, can he still
recover on the policy?
Q: Why is it that negligence of the insured
still entitles the insured to recover from the
insurer? Reason briefly in a, b, and c.
A: Because that’s why you get insurance,
right? To make up for lapses in negligence as
long as it does not amount to gross SLIDE
negligence. a. Yes, Alfredo may recover on the policy.
It is valid to stipulate that the insured will
SLIDE be granted credit term for the payment of
premium and the risk insured against
When is an insurer not liable despite the occurred during the credit extension
occurrence of a loss? period.
SLIDE
b. Yes, recovery under the insurance
SLIDE
contract is allowed if the proximate or
An insurer is not liable for a loss caused by immediate cause of the loss is the risk
the willful act or through the connivance of insured against except where the
the insured; for a loss of which the peril proximate cause was an excepted peril.
insured against was only a remote cause, or
c. Yes, mere negligence on the Bart of the
if the loss is caused by an excepted risk.
insured will not prevent recovery under the
insurance policy. The law merely prevents
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recovery when the cause of loss is the insurer omits to specify to him, without
willful act of the insured, alone, or in unnecessary delay, as grounds of
connivance with others objection, are waived.
SLIDE SLIDE
What should the insured to after the loss in Anco Enterprises Company owned the
order to recover from the insurer? M/T ANCO tugboat and the D/B Lucio
barge which were operated as common
• After the loss, the insured must submit carriers. San Miguel Corporation (SMC)
the notice and proof of loss within the entered into agreement with ANCO
period stipulated in the policy. wherein the latter will ship its cargoes on
• When a preliminary proof of loss is
board the DIB Lucio, for towage by M/T
ANCO. They further agreed that SMC will
required by a policy, the insured is not insure the cargoes in order to recover
bound to give such proof as would be
indemnity in case of loss, hence the
necessary in a court of justice; but it is
cargoes were insured with FGU Insurance
sufficient for him to give the best
evidence which he has in his power at Corporation. ANCO failed to deliver to
the time. SMC's consignee the cargoes. As a
consequence of the incident, SMC filed a
• If the policy requires, by way of complaint for Breach Of Contract of
Carriage and Damages against ANCO.
preliminary proof of loss, the certificate
or testimony Of a person other than the
insured, it is sufficient for the insured to Subsequently, ANCO filed a Third-Party
use reasonable evidence to the insurer Complaint against FGU on the ground that
that such refusal was not induced by the loss of said cargoes occurred as a result
any just grounds of disbelief in the facts of risks insured against in the insurance
necessary to be certified or testified. policy and during the existence and
lifetime of said insurance policy.
SLIDE
What happens in case of non-submission
or delay in the submission of the notice SLIDE
and/or proof of loss? Is FGU liable under the insurance policy?
The insurer shall be relieved of liability in No. It is a basic rule in insurance that the
case of non-submission or delay in the carelessness and negligence of the insured
submission of the notice and/or proof of or his agents constitute no defense on the
loss, unless the delay in the presentation to part of the insurer. This rule, however,
an insurer of notice or proof of loss is presupposes that the loss has occurred due
waived by the insurer or it omits to take to causes which could not have been
objection promptly and specifically upon prevented by the insured, despite the
that ground. exercise of due diligence. However, when
evidence show that the insured's
negligence or recklessness is so gross as to
All defects in a notice of loss, or in be sufficient to constitute a willful act, the
preliminary proof thereof, which the insurer must be exonerated. In the case at
insured might remedy, and which the
Page 72 of 203
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bar, ANCO's representatives had failed to existing at the time of the fire. United
exercise extraordinary diligence required Merchants Corporation v. Country
of common carriers in the shipment of Bankers Insurance Corporation, G.R. No.
SMC's cargoes. Such blatant negligence 198588, July 11, 2012.
being the proximate cause of the loss of the
cargoes and is of such gross character that
it amounts to a wrongful act which must What if there is no stipulation as regards
exonerate FGU from liability under the discrepancy? There has to be a fraudulent
insurance contract. discrepancy between the amount claimed and
the actual loss suffered by the insured to
negate the liability of the insurer to the
DEAN: Why did I cite this case? In all the
insured.
cases in transpo, the common carrier is
always entitled to recover from the insurer in
case of loss or damage to goods. This is one SLIDE
case where the SC said there was gross It was also ruled that a false and material
negligence on the part of the common carrier statement made with an intent to decide or
that’s why it’s not entitled to recover from the defraud avoids an insurance policy. In this
insurer. I included this to support our case, the insured's verified claim totaled
discussion that when it comes to gross P31,860.85, of which, in accordance with
negligence, the insurer is not liable. the terms of the policy, three-fourths was
asked, or P 23,895.64 but the insurer's
SLIDE inventory of the goods found after the fire
came to P 13,113. The difference between
Does discrepancy between the actual loss
the two claim's estimate of the loss, which
and that claimed in the proof of loss void
was confirmed in the trial court, was P
the policy and adversely affect the right of
18,747.85. In connection with these
the insured to recover?
figures, the insured suggested too low a
valuation by the representatives of the
SLIDE insurer but even when computed at the
The Insurance Code provides that a policy insured's valuation, the goods inventoried
may declare that a violation of specified by the insurer's committee would amount
provisions thereof shall avoid it. Thus, in to P 19,346.30. There would, however, still
fire insurance policies, if so stipulated, a remain a considerable void between the
fraudulent discrepancy between the actual two (2) amounts, of P12.514.55. Tan It v.
loss and that claimed in the proof of loss Sun Insurance, G.R. No. L-27847,
voids the insurance policy. Mere filing of December 12, 1927
such a claim will exonerate the insurer. In
one case, the claim is twenty-five times the SLIDE
actual claim proved. As a consequence, the Pursuant to the fire insurance policy,
policy was voided. The Supreme Court Usiphil Incorporated filed with Finman
stated that the most liberal human General Assurance an insurance claim for
judgment cannot attribute such difference the loss of the insured properties due to
to mere innocent error in estimating or fire. Usiphil also submitted its Sworn
counting but to a deliberate intent to Statement of Loss and Formal Claim
demand from insurance companies together with Proof of Loss as compliance
payment for indemnity of goods not with the requirements of H.H. Bayned, the
Page 73 of 203
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adjuster appointed by Finman General. SLIDE

However, Finman General refused to pay
the insurance claim on the ground that The facts are as follows:
Usiphil Incorporated failed to comply with Industrial Personnel and Management
Policy Condition No. 13 which provides Services. Inc. (IPAMS) began recruiting
that within 60 days after the loss, unless registered nurses for work deployment in
time is extended, the insured shall render a the United States of America (U.S.). By
signed and sworn statement of proof of reason of the advances made to the nurse
loss. Does Usiphil comply with the applicants, the latter were required to post
condition as regards submission of surety bond. The purpose of the bond is to
documents to prove loss? guarantee the following during its validity
period: (a) that they will comply with the
entire immigration process, (b) that they
will complete the documents required, and
(c) that they will pass all the qualifying
examinations for the issuance of
SLIDE
immigration visa, The Country Bankers
• Yes. A perusal of the records shows that Insurance Corporation (Country Bankers)
Usiphil, after the occurrence of the fire, and IPAMS agreed to provide bonds for
immediately notified Finman General the said nurses. The surety bonds issued
Assurance thereof. Thereafter, Usiphil specifically state that the liability of the
submitted the following documents: (1) Country Bankers, shall be limited only to
actual damages arising from Breach of
Sworn Statement of Loss and Formal Contract by the applicant. A Memorandum
Claim; and (2) Proof of Loss. The of Agreement (MOA) was executed by the
submission of these documents said parties which stipulated the various
constitutes substantial compliance with requirements for collecting claims from
the above provision. Indeed, as regards Country Bankers. On the basis of the
the submission of documents to prove MOA, IPAMS submitted its claims under
loss, substantial compliance with the the surety bonds issued by Country
requirements Will always be deemed Bankers. For its part, Country Bankers,
sufficient. upon receipt of the documents enumerated
under the MOA, paid the claims to
• In Industrial Personnel and IPAMS. According to IPAMS, starting
Management Services, Inc. v. Country 2004, some of its claims were not anymore
Bankers Insurance Corporation, the settled by Country Bankers as it insisted on
Supreme Court reiterated the rule that the production of official receipts of
substantial compliance with the IPAMS on the expenses it incurred for the
requirements under the policy suffices. application of nurses.
It was held that the statement of accounts,

There was notice given to the insurer. And in lieu of official receipts, sufficed to allow
thereafter, the document that fully complied the insured to recover. Industrial Personnel
with the requirements of the insurer were and Management Services, Inc. v. Country
submitted. In this case, because there was Bankers Insurance Corporation, G.R. No.
immediate notice to the insurer, there was 194126, October 17, 2018
substantial compliance with the terms of the
policy on the period to submit the proof of
loss.
SLIDE
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Is the submission of the notice of loss to presentation of the claim and filing of
the agent deemed as notice to the insurer? the proof of death of the insured.
SLIDE • PROPERTY— The amount of any loss

Yes. In Bank of the Philippine Island v. or damage for which an insurer may be
Laingo, BPI offered a bank product where liable, under any policy other than life
a depositor is automatically covered by an insurance policy, shall be paid within
insurance policy against death and 30 days after proof of loss is received
disability. The policy was issued by its by the insurer and ascertainment of the
affiliate company, FGU Insurance, now loss or damage is made either by
known as BPI/MS Insurance Corporation. agreement between the insured and the
When the depositor died, the beneficiary of insurer or by arbitration; but if such
the life insurance policy notified BPI. ascertainment is not had or made within
60 days after such receipt by the insurer
However, the insurer denied the insurance
of the proof of loss, then the loss or
claim because the notice was given to it damage shall be paid within 90 days
beyond the period required by the policy. after such receipt.
It was held that under the doctrine of
representation, BPI is deemed to be the
agent of FGU. The timely notice to BPI of SLIDE
the death of the depositor-insured was What happens in case of delay in the
considered notice to FGU. G.R. No. payment of insurance claim?
205206, March 2016
SLIDE
SLIDE
When should the insurer make insurance
• Refusal or failure to pay the claim
within the time prescribed will entitle
payment to the insured? the beneficiary to collect interest on the
proceeds of the policy for the duration
SLIDE of the delay at the rate of twice the
ceiling prescribed by the Monetary
Insurance payment should be made within Board, unless such failure or refusal to
the following periods: pay is based on the ground that the
claim is fraudulent.
• LIFE insurance — The proceeds of a • In case of any litigation for the
life insurance policy shall be paid enforcement of any policy or contract of
immediately upon maturity of the insurance, it shall be the duty of the
policy, unless such proceeds are made Commissioner or the Court, as the case
payable in installments or as an annuity, may be, to make a finding as to whether
in which case the installments, or the payment of the claim of the insured
annuities shall be paid as they become has been unreasonably denied or
due: Provided, however, That in the withheld; and in the affirmative case,
case of a policy maturing by the death the insurance company shall be
of the insured, the proceeds thereof adjudged to pay damages which shall
shall be paid within 60 days after consist of attorney's fees and other
expenses incurred by the insured person
Page 75 of 203
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by reason of such unreasonable denial is not made after the 90th day after the proof
or withholding of payment plus interest of loss.
of twice the ceiling prescribed by the
Monetary Board of the amount of the GUIDELINES ON CLAIMS
claim due the insured, from the date
following the time prescribed in Section
248 or in Section 249, as the case may SLIDE
be, until the claim is fully satisfied. SETTLEMENT
Provided, That failure to pay any such
claim within the time prescribed in said
a. Unfair Claims Settlement, Sanctions
sections shall be considered prima facie
evidence of unreasonable delay in
payment.
SLIDE
SLIDE What constitute unfair claim settlement?
In Stronghold Insurance v. Pamana Island a. Knowingly misrepresenting to claimants

Resort, it was held that given the pertinent facts or policy provisions relating
provisions of the Insurance Code, which is to coverage at issue;
a special law, the applicable rate of interest b. Failing to acknowledge with reasonable
shall be that imposed in a loan or promptness pertinent communications
forbearance of money as imposed by BSP with respect to claims arising under its
even irrespective of the nature of the policies;
insurer's liability. In the past years, the rate c. Failing to adopt and implement
was at 12%. However, in light of Circular reasonable standards for the prompt
799 issued by the BSP on June 21, 2013 investigation of claims arising under its
decreasing interest on loans or forbearance policies;
of money, the declared rate of 12% per
d. Not attempting in good faith to
annum shall be reduced to 6% per annum
effectuate prompt, fair and equitable
starting July 1, 2013, the effectivity of the settlement of claims submitted in
circular. which liability has become
reasonably clear; or
SLIDE e. Compelling policyholders to institute
The insurer then is liable to pay 12% per suits to recover amounts due under its
annum on the insurance proceeds for the policies by offering without justifiable
duration of the delay. Delay should be reason substantially less than the amounts
construed after the lapse of the period to ultimately
pay as set forth by law.
PRESCRIPTION OF ACTION
Q: What do you mean by delay? When is
there delay?
A: The insurance law is not very clear but if
the insurer has 90 days in property to pay, it
means that he is not in default within that
period. So there is only delay if the payment
Page 76 of 203
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SLIDE period, but in no case, shorter than one

(I) year from accrual of cause of action.
What is the remedy available to the
insured in case his insurance claim is • A condition, stipulation, or agreement
rejected by the insurer? in any policy of insurance, limiting the
• In case of denial of the insurance time for commencing an action
thereunder to a period of less than one
claim, the insured may file an action
(I) year from the time when the cause
for specific performance against the
of action accrues, is void.
insurer within the prescriptive period
allowed by law.
• The prescriptive period to file a legal

SLIDE
action against the insurer, for an
action based on breach of an When does the cause of action of the
insurance policy, is ten years from insured accrue?
accrual of cause of action, unless the
policy reduced such period, but in no
case, shorter than one (I) year from The cause of action accrues from the
accrual of cause of action. rejection of the insurance claim.
• A condition, stipulation, or agreement

in any policy of insurance, limiting
the time for commencing an action
thereunder to a period of less than one SLIDE
(I) year from the time when the cause Jose Ledesma, Geronima Pulmano, and
of action accrues, is void. Amelia Generao were insured with
Summit Guaranty and Insurance Company
for purposes of Third Party Liability. They
all filed, in separate cases, notice of claim
with Summit Guaranty. However, the
petitioner failed to act on their claim.
Consequently, Ledesma and Pulmano filed
a complaint before the Insurance
Commission. Summit Guaranty contends
SLIDE that the two (2) periods prescribed in the
• In case of denial of the insurance claim,
Section 384 of the Insurance Code, that is,
the six-month period for filing the notice of
the insured may file an action for
specific performance against the claim and the one-year period for bringing
insurer within the prescriptive period an action or suit — are mandatory and
allowed by law. must always concur. Petitioner company
argues that under this law, even if the
• The prescriptive period to file a legal notice of claim was timely filed with the
action against the insurer, for an action insurance company within the six-month
based on breach of an insurance policy, period, the action or suit that follows, if
is ten years from accrual of cause of filed beyond the one-year period should
action, unless the policy reduced such necessarily be dismissed on the ground of
prescription.
Page 77 of 203
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Has the cause of action already prescribed? date of rejection by the insurer as
this is the time when the cause of
action accrues. In the cases at bar,
no denial of the claims was ever
SLIDE made and hence there has yet been
no accrual of cause of action.
• No, there is absolutely nothing in Therefore, the prescription has not
the law which mandates that the yet set in. Summit Guaranty and
two (2) periods must always Insurance Company Inc. v. Hon.
concur. On the contrary, it is very Jose de Guzman, et al.,
clear that the one-year period is
only required "in proper cases." It
appears that the insurer Q: What happens when the insurer delays the
disregarded this very significant processing of the claim?
phrase when it made its own A: Based on this doctrine, you cannot file a
interpretation of the law, Had the case against the insurance company because
lawmakers intended it to be the the cause of action has not accrued yet.
way petitioner company assumes it
to be, then the phrase "in proper We are currently handling a case, our client
cases" would not have been is the insured, we’re going against a
inserted. multinational insurance company. That’s
what the insurance company has been doing-
• Also, the cause of action did not not rejecting the claim. But because there is
accrue until claim was finally no rejection, based on this case, we cannot
rejected by the insurance company. sue the insurer. Our argument is inaction is
This is because before such final tantamount to denial. There has to be some
rejection there is no real necessity kind of remedy available to the insured.
for bringing suit. The one-year
period should be counted from the
Page 78 of 203
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remaining period insofar as the right of the

MAY 6, 2021
insured is concerned.
MOIRA ROSE
PEPPER STARK
Q: Is the Henson doctrine retroactive or
prospective?
RECITATION A: This doctrine is prospective in application.
Q: ABC hired Juan Dela Cruz as its PRESCRIPTION OF ACTION

president. As part of its package, ABC
Corporation provided housing
accommodation for Juan Dela Cruz. They When does the prescriptive period for
obtained a house and lot in Forbes Park the insured’s action for indemnity be
for this purpose. It obtained a fire reckoned from?
insurance on the residential prop for the
president as well as a life insurance policy. The prescriptive period for the insured’s
action for indemnity should be reckoned
While the president was sleeping in the from the "final rejection" of the claim.
mansion, somebody killed him by setting "Final rejection" simply means denial by
the property on fire. the insurer of the claims of the insured and
not the rejection or denial by the insurer of
Right away the insurance company paid the insured’s motion or request for
ABC Corporation. After payment, what reconsideration. H.H. Hollero
right does it have, if any, against the one Construction, Inc. v. Government Service
who caused the death of the president, and Insurance System and Pool of Machinery
the destruction of property of ABC Insurers, G.R. No. 152334, September 24,
Corporation? 2014. Sun Life Office, Ltd. v. Court of
Appeals, G.R. No. 89741, March 13, 1991.
A: The insurance company may only have the
right of subrogation with respect to the fire
The request for reconsideration does not
insurance policy because Art. 2207 of the
suspend the running of the prescriptive
New Civil Code expressly provides that said
period stipulated in the insurance policy.
right applies only to property insurance and
The reason for this rule is to insure that
not life insurance.
claims against insurance companies are
promptly settled and that insurance suits
Q: Within what period may the insurance
are brought by the insured while the
company enforce the right of subrogation?
evidence as to the origin and cause of the
A: The insurance company, by virtue of the
destruction has not yet disappeared. BAR
Henson ruling case, has 4 years from the time
1996
the time the tortious act was committed. This
is so because the insurer inherits the
Page 79 of 203
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However, where the delay in bringing the SUBGROGATION

suit against the insurance company was not
caused by the insured or its subrogee but
by the insurance company itself, it is unfair What is subrogation? What is the
to penalize the insured or its subrogee by statutory basis of the right of the insurer
dismissing its action against the insurance to subrogation?
company on the ground of prescription. In
one case, the insured sent a notice of claim The basis of subrogation is Article 2207 of
to the insurance company two months after the Civil Code of the Philippines which
the accident. However, it was only a year provides that “if the plaintiff’s property has
later that the insurer replied to the been insured and he has received
insured’s letter informing it that they could indemnity from the insurance company for
not take appropriate action on the insured’s the injury or loss arising out of the wrong
claim because the attending adjuster was or breach of contract complained of, the
still negotiating the case. It was held that insurance company shall be subrogated to
prescription has not set in. Country the rights of the insured against the
Bankers Insurance Corporation v. wrongdoer or the person who has violated
Travellers Insurance and Surety the contract. If the amount paid by the
Corporation, G.R. No. 82509, August 16, insurance company does not fully cover
1989. the injury or loss, the aggrieved party shall
be entitled to recover the deficiency from
“Final Rejection” the person causing the loss of injury.”
Final rejection does not mean the denial of
the request for reconsideration, but the denial Applicability of Art. 2207
of the insurer at the first instance. Art. 2207 of the NCC applies on to property
insurance, not to life insurance. This is
Prescription evidenced by the phrase “plaintiff’s property
In the case of Country Bankers vs. Travellers has been insured and he has received
Insurance, prescription has not set in because indemnity from the insurance company”.
there was no denial in yet by the insurer that
will give rise for a cause of action to file a
Is the consent of the wrongdoer
suit.
necessary to enable the insurer to
acquire the right of subrogation?
Q: What happens if there is consistent
delay?
A: The insurer is liable for interest, but no suit Subrogation does not require the consent
can be filed because there was no rejection of of the wrongdoer. It is an equitable
the claim. assignment of right that accrues to the
insurer after valid payment is made to the
insured as a result f the happening of the
Page 80 of 203
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risks insured against. Payment by the

insurer to the assured operates as an In other words, where the insurer was made
equitable assignment to the former of all to pay the insured for a loss covered by the
remedies which the latter may have against insurance contract, such insurer can run
the third party whose negligence or after the third person who caused the loss
wrongful act caused the loss. The right of through subrogation. The basis for
subrogation is not dependent upon, nor conferring the right of subrogation to the
does it grow out of, any privity of contract insurer is the equitable assignment that
or upon written assignment of claim. It results from the insurer’s payment of the
accrues simply upon payment of the insured. BAR 2011.
insurance claim by the insurer. BAR 2014;
Pan Malayan Insurance Corporation v. Is the consent of the insured necessary
Court of Appeals, et al., G.R. No. 81026, for the right of subrogation to exist?
April 3, 1990. Aboitiz Shipping
Corporation v. Insurance Company of
North America, G.R. No. 168402, August No, after payment to the insured, the
6, 2008. Philippine American General insurer is entitled to go after the person that
Insurance Company, Inc. v. Court of violated its contractual commitment to
Appeals, et al., G.R. No. 116940, June 11, answer for the loss insured against. When
1997; Equitable Insurance Corporation v. the insurance company pays for the loss,
Transmodal International, Inc., G.R. No. such payment operates as an equitable
223592, August 7, 2017 assignment to the insurer of the property
and all remedies which the insured may
have for the recovery thereof. That right is
Discussion: not dependent upon, nor does it grow out
It is the mere payment which transfers the of, any privity of contract, or upon written
right and remedies of the insured in favor of assignment of claim, and payment to the
the insurer. It takes effect by equitable insured makes the insurer an assignee in
assignment, not by any consent or equity. Fireman’s Fund Insurance
acquiessence. Company v. Jamila & Company, Inc., G.R.
No. L-27427, April 7, 1976.
The doctrine of subrogation has its roots in
equity. It is designed to promote and to
Q: The mortgagee procured a fire
accomplish justice; and is the mode that
insurance on his property and the
equity adopts to compel the ultimate
property was destroyed by fire. The fire
payment of a debt by one who, in justice,
was not started by a third person, hence no
equity, and good conscience, ought to pay.
wrong-doer.
Malayan Insurance Co., Inc. v. Rodelio
Alberto, et al., G.R. No. 194320, February
1, 2012.
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Accordingly, the mortgagee filed a claim he states, the insurance payment should
with the insurer, and the latter paid the inure to his benefit because he owns the
mortgagee-insured. house.
Can the insurer run after or enforce

Pass upon the merits of “L’s”
payment by the mortgagor?
contentions.
A: Yes because the insurer stepped into the
shoes of the mortgagee and acquired the
rights and remedies of the mortgagee against Neither the loan of L was extinguished by
the mortgagor. the insurance payment which M received
from the insurance company; nor the
There need not be a third party wrong-doer. insurance payment inures to L’s benefit;
The rights and obligations can be enforced what was then insured was the interest of
against the mortgagor for the non-payment of M, the secured creditor, and not the interest
the mortgage debt. of L, so the proceeds shall be applied
exclusively to the proper interest of M.
“L” borrows P50,000.00 from “M”
payable 360 days after date, at 12% L’s argument that he has not entered into
interest per annum. To secure the loan, any loan or contract of whatever nature
“L” mortgaged his house and lot in with the insurance company is also
favor of “M”. To protect himself from untenable. When the secured creditor’s
certain contingencies, “M” insures the interest in the mortgaged property of the
house for the full amount of the loan mortgagor, L, was insured and said
with Rock Insurance Company. A fire property would be burned, the insurance
breaks out and burns the house and company had to pay the insured, M, and
“M” collects from the insurance payment by the insurer to the insured
company the full value of the insurance. creates legal subrogation and makes the
Upon maturity of the loan, the insurance insurer an assignee on equity to run after
company demands payment from “L.” the mortgagor, L, Said right of the insurer
The latter refuses to pay on the ground is not dependent upon nor does it grow out
that the loan had been extinguished by of, any privity of contract, or upon written
the insurance payment which “M” assignment of claim, and payment to
received from the insurance company. insured makes the insurer an assignee in
He argues that he has not entered into equity; thus, L’s consent to said
any loan or contract of whatever nature subrogation is not necessary. Article 2207,
with the insurance company. He further N.CC.; Fireman’s Fund Insurance Co. v.
contends that it is bad enough to lose a Jamila & Co., GER. No. L-1976,
house but it is worse if one has to pay off April 7, 1976; BAR 1980.
a paid obligation to somebody who has
not extended any loan to him. Besides,
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Discussion: Claiming to have paid Honda Trading’s

insurance claim for the loss it suffered,
As discussed earlier, there need not be a Tokio Marine filed a complaint for
wrong-doer. The one who caused the damages against Keihin-Everett. Tokio
violation of the contract will be liable to the Marine maintained that it had been
insurer because the latter steps into the shoes subrogated to all the rights and causes
of the mortgagee and acquired the rights and of action pertaining to Honda Trading.
remedies. Keihin-Everett denied liability for the
lost shipment on the ground that the loss
Honda Trading Phils. Ecozone thereof occurred while the same was in
Corporation (Honda Trading) ordered the possession of Sunfreight
80 bundles of Aluminum Alloy Ingots. Forwarders.
The goods were loaded in two container
vans which were, in turn, received in Is subrogation proper?
Jakarta, Indonesia by Nippon Express
Co., Ltd. for shipment to Manila. Aside
Yes, the Insurance Policy itself expressly
from insuring the entire shipment with
made Tokio Marine as the party liable to
Tokio Marine & Nichido Fire Insurance
pay the insurance claim of Honda Trading
Co., Inc. (TMNFIC), Honda Trading
pursuant to the Agency Agreement entered
also engaged the services of Keihin-
into by and between Tokio Marine and
Everett to clear and withdraw the cargo
TMNFIC. The Agency Agreement shows
from the pier and to transport and
that TMNFIC had subsequently changed
deliver the same to its warehouse at
its name to that of Tokio Marine.
Laguna. Meanwhile, Keihin-Everett
had an Accreditation Agreement with
Sunfreight Forwarders whereby the By agreeing to this stipulation in the
latter undertook to render common Insurance Policy, Honda Trading binds
carrier services for the former and to itself to file its claim with Tokio Marine
transport inland goods within the and thereafter to accept payment from it.
Philippines. The shipment arrived in Since the insurance claim for the loss
Manila and was caused to be released sustained by the insured shipment was paid
from the pier by Keihin-Everett and by Tokio Marine as proven by the
turned over to Sunfreight Forwarders Subrogation Receipt — showing the
for delivery to Honda Trading. En route amount paid and the acceptance made by
to the latter's warehouse, the truck Honda Trading, it is inevitable that it is
carrying the containers was hijacked entitled, as a matter of course, to exercise
and the container van was reportedly its legal right to subrogation as provided
taken away under Article 2207 of the Civil Code.
Keihin-Everett Forwarding v. Tokio
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Marine Malayan Insurance, et al., G.R. the insured for damages under the
No. 212107, October 28, 2019. insurance, the insurer is subrogated merely
to the rights of the insured. As subrogee, it
Discussion: can recover only the amount that is
recoverable by the latter. Since the right of
This means that the insurer has the right to go the assured is limited by the provisions in
after Keihin-Everett and/or to run after said the bill of lading, a suit by the insurer as a
freight forwarder. subrogee is necessarily subject to like
limitations. St. Paul Fire & Marine
Thus, whatever right or remedy available to Insurance Co. v. Macondray & Co., Inc.,
the insured, the breach of contract of carriage et al., G.R. No. L-27796, March 25, 1976.
against the custom broker, or tort against the
said freight forwarder may be enforced Discussion:
against by the insurer. The limit of liability of 500USD per package
can be enforced by the common carrier,
How much may the insurer recover responsible for the loss or damage, against
from the wrongdoer as a result of the insurance company.
subrogation?
The insurance company only acquires the
rights and remedies of the insured. Whatever
The insurer, after paying the claim of the defenses which may be raised by the insured
insured under the insurance policy, is can also be raised by the insurance company.
subrogated merely to the rights of the
assured. As subrogee, it can recover only Therefore, the limitation of liability, as set
the amount that is recoverable by the latter. forth in the bill of lading, may be enforced by
In one case, a shipment was covered by a the common carrier against the insurance
bill of lading which stipulated, among company.
others, that the carrier’s liability with
respect to lost or damaged shipments is
In another case, it was held that the failure
expressly limited to the C.I.F. value of the
of the insurer to present sufficient proof
goods, upon arrival at the Port of Manila,
that the subrogor sustained damages,
several cartons were received in bad order
which would have entitled it to indemnity,
condition, hence the consignee filed a
precludes recovery on the part of the
claim with the carrier as well as the insurer
insurer. The rights of a subrogee cannot be
but the carrier refused, so it was the insurer
superior to the rights possessed by a
that paid the value of the insured goods,
subrogor. Consequently, an insurer
including other expenses in connection
indemnifies the insured based on the loss
therewith. Thereafter, the insurer sued the
or injury the latter actually suffered from.
carrier, to collect what it paid the insured.
If there is no loss or injury, then there is no
It was held that after paying the claim of
obligation on the part of the insurer to
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indemnify the insured. Should the insurer A helicopter of ABC Co. collided with
pay the insured and it turns out that XYZ’s tramway steel cables in its
indemnification is not due, or if due, the logging area in Surigao resulting in the
amount paid is excessive, the insurer takes destruction of the helicopter and death
the risk of not being able to seek of two pilots. ABC Co. insured at its
recompense from the alleged wrongdoer. expense the helicopter and death of two
Loadstar Shipping Company v. Malayan pilots. ABC Co. insured at its expense
Insurance, G.R. No. 185565, November 26, the helicopter for P8,000,000.00 and the
2014. two pilots for P5,00,000.00 each, and as
a result of the crash, the insurer paid
In this particular case, the Philippine ABC Co. a total indemnity of
Associated Smelting and Refining P13,000,000.00. Nevertheless, ABC Co
Corporation (PASAR) had not established sustained additional damages of about
by an iota of evidence the amount of loss P1,000,000.00 which were not covered
or actual damage it suffered by reason of by insurance.
seawater wettage of the 777.29 metric tons
of copper concentrates. In spite of no proof a. ABC Co. sued XYZ to recover not
of loss, Malayan paid the claim of PASAR only the additional damages, but also
in the amount of P33,934,948.75. The the amount which was already
Supreme Court ruled that Malayan cannot compensated by the insurer. Decide.
make the common carrier answerable for Give reasons.
its mistake in indemnifying PASAR. This
is in line with the principle that a subrogee
steps into the shoes of the insured and can b. What right/recourse, if any, has the
recover only if the insured likewise could insurer in order to be reimbursed for
have recovered. Loadstar Shipping the amount it paid to ABC Co? Give
Company and Loadstar International reasons.
Company v. Malayan Insurace, ibid.
a. ABC Co may bring the action against
In what instances is the insurer not XYZ for its claim for the additional
entitled to the right of subrogation? damages not covered by insurance, but not
for the amount already paid by the insurer.
If a property is insured and the owner
The insurer is not entitled to the right of
received indemnity from the insurer, the
subrogation in the following cases:
latter is deemed subrogated to the rights of
the insured against the wrongdoer, and if
i. In life insurance, because subrogation the amount paid by the insurer does not
exists only when insurance is a contract of fully cover the loss, then the aggrieved
indemnity.
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party is the one entitled to recover the all because there is no loss, thereby
deficiency. effecting voluntary payment.
To allow ABC Co. to bring an action iv. Where the insurer pays the assured the
against XYZ for the amount already paid value of the lost goods without notifying
by the insurer will result in unjust the carrier who has in good faith settled the
enrichment and violate the indemnity assured’s claim for loss, the settlement is
principle of an insurance contract. binding on both the assured and the
insurer, and the latter cannot bring an
action against the carrier on his supposed
b. The insurer is deemed subrogated to the
right of subrogation.
rights of ABC Co against XYZ to the
extent of P8,000.000 insurance paid for the
helicopter only, but not for the life v. When the insured releases the
insurance of the two dead pilots, since wrongdoer, the insurer is released from
subrogation in the New Civil Code refers liability. If the release was done after the
only to property, and not to the life insured has received the payment from the
insurance. insurer, insurer can recover from insured.
Pan Malayan Insurance Corporation v.
Discussion: Court of Appeals, et al., G.R. No. 81026,
April 3, 1990.
It’s not the insured that will bring an action
against XYZ, but the insurer by virtue of the If the insured received partial indemnity
right of subrogation. amount from the wrongdoer but the latter
was completely released by the insured, the
*Continuation of Instances when latter cannot recover the deficiency from
Insurer not entitled to Right of the insurer.
Subrogation*
Manila Mahogany Manufacturing
ii. When the proximate cause of the loss Corporation insured its Mercedes Benz
was the negligence of the insured himself. car with Zenith Insurance Corporation.
The insured can recover because only The car was bumped and damaged by a
gross negligence bars recovery but there is truck owned by San Miguel
no subrogation if there is no wrongdoer or Corporation (SMC). For the damage
violator of the contract. caused, Zenith Insurance paid Manila
Mahogany. However, Zenith Insurance
was not able to collect from SMC,
iii. When the insurer pays the insured for a
because it so happened that SMC
loss due to a risk not covered by the policy
already paid Manila Mahogany for
or payment should not have been made at
which it executed a release claim
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discharging SMC from all actions or In marine insurance, is presentation of

claims. Hence, Zenith Insurance the insurance policy necessary for
demanded for the return of the money it subrogation?
paid Manila Mahogany, but the latter
refused prompting Zenith Insurance to
No, in one case, it was held that
file a complaint against Manila
presentation of the marine insurance policy
Mahogany.
is not indispensable before the insurer may
recover from the common carrier the
Is Zenith entitled to the return of the insured value of the lost cargo in the
money? exercise of its subrogatory rights. The
subrogation receipt is sufficient to
Yes. The right of subrogation can only establish not only the relationship of the
exist after the insurer has paid the insured. insurer and the assured, but also the
If the insurance proceeds are not sufficient amount paid to settle the insurance claim.
to cover the damages suffered by the Delsan Transport Lines v. Court of
insured, then he may sue the party Appeals, G.R. No. 127897, November 15,
responsible for the damage for the 2001.
remainder. Since the insurer can be
subrogated to only such rights as the But the Supreme Court ruled differently in
insured may have, should the insured, after a subsequent case.
receiving payment from the insurer,
release the wrongdoer who caused the loss,
the insurer loses his rights against the Eastern Shipping Lines is being sued by
latter. But in such a case, the insurer will Prudential Guarantee and Assurance
be entitled to recover from the insured Inc. through its right of subrogation.
whatever it has paid to the latter, unless the This is on account of the damage
release was made with the consent of the sustained by the policy holder, Nissan
insurer. Manila Mahogany Manufacturing Corp. It is the contention of Eastern
Corporation v. Court of Appeals, G.R. No. Shipping that the Prudential cannot sue
L-52756, October 12, 1987; BAR 1994. based on its right of subrogation
because the insurance policy was never
presented by the respondent.
*Naka-strikethrough yung first sentence
because dean asked Ms. Sarah to remove it
from the slide.* Is there subrogation?
No. Marine insurance policy needs to be

presented in evidence before the trial court
or even belatedly before the appellate
court. The presentation of the marine
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insurance policy was necessary, as the

issues raised therein arose from the very
existence of an insurance contract between Within what period should the right of
the insurer and the insured. Presentation or subrogation be exercised?
attaching the insurance policy in a
complaint filed by the insurance company
In Vector Shipping Corporation v.
against another on account of its right of
American Home Assurance Company, the
subrogation is an indispensable
Supreme Court ruled that after payment by
requirement. Failure to present the policy
the insurer to the insured, it is subrogated
would warrant the dismissal of the
to the rights of the latter. Its right of
complaint. Eastern Shipping Lines, Inc. v.
subrogation under Article 2207 of the Civil
Prudential Guarantee and Assurance,
Code in relation to Article 1144 gives rise
Inc., G.R. No. 174116, September 11,
to a cause of action created by law. The
2009.
prescriptive period for cause of action
based on law (such as subrogation) is 10
Nevertheless, the rule is not inflexible. By years. Thus, the insurer has 10 years from
way of exception, when the defendant fails the date it indemnified the insured to file
to timely put in issue the need for the the action against the wrongdoer.
presentation of the insurance policy to
prove one’s right to subrogation, it is
However, the Supreme Court abandoned
deemed barred from pleading the absence
the Vector ruling in Vicente Henson, Jr. v.
of the insurance policy on appeal. Asian
UCPB General Insurance, an en banc
Terminals, Inc. v. First Lepanto Taisho
decision, where it was held the insurer only
Insurance, G.R. No. 185964, June 16,
steps into the shoes of the insured. No new
2014.
obligation was created between the insurer
and the wrongdoer. The rights of a
It is submitted that in marine insurance, subrogee cannot be superior to the rights
while subrogation takes effect by possessed by a subrogor. Therefore, for
operation of law the moment the insurer purposes of prescription, the insurer
validly pays the insured, the document inherits only the remaining period within
evidencing the right of subrogation which the insured may file an action
should, nevertheless, be presented to against the wrongdoer. The Supreme Court
prove the right of subrogation, unless the said, however, that the Henson doctrine is
defendant fails to timely put it in issue. prospective in application.
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The facts of this case are as follows: ruled that the claim has not yet prescribed
following the Vector ruling. Although in
this case, the Court deemed it necessary to
From 1989 to 1999, National Arts Studio
abandon the ruling in Vector that an
and Color Lab (NASCL) leased the front
insurer may file an action against the
portion of a two-storey building owned by
tortfeasor within 10 years from the time the
Vicente Henson Jr. (Henson). In 1999,
insurer indemnifies the insured, the
NASCL gave up its lease and instead
abandonment of the Vector doctrine
leased the right front portion and the entire
should be prospective in application for the
second-floor of the building. Meanwhile,
reason that judicial decisions applying or
Copylandia Office Systems Corp.
interpreting the laws or the Constitution,
(Copylandia) moved in to the ground floor.
until reversed, shall form part of the legal
system of the Philippines.
A water leak occurred in the building
causing injury to the various equipment of
The rule now is, following the principles of
Copylandia. As the said equipment were
subrogation, the insurer only steps into the
insured, Copylandia filed a claim with its
shoes of the insured. No new obligation
insurer, UCPB General Insurance Co., Inc.
was created between the insurer and the
(UCPB). UCPB paid the claim and, as
wrongdoer. The rights of a subrogee
subrogee, demanded from NASCL for the
cannot be superior to the rights possessed
amount of the payment it made. Since the
by a subrogor. Therefore, for purposes of
demand proved to be futile, UCPB filed a
prescription, the insurer inherits only the
complaint for damages against NASCL.
remaining period within which the insured
may file an action against the wrongdoer.
Meanwhile, Henson transferred ownership The indemnification of the insured by the
of the building to Citrinne Holdings, Inc. insurer only allows it to be subrogated to
(CHI), where he was a stockholder and the former's rights, and does not create a
President. UCPB amended its complaint new reckoning point for the cause of action
impleading CHI as a defendant. that the insured originally has against the
Thereafter, UCPB filed a motion praying wrongdoer. Thus, applying prospectively,
Henson, instead of CHI, be impleaded as a the prescription period to claim
defendant. CHI opposed the complaint on indemnification from a tortfeasor is only
the ground of prescription, arguing that four (4) years. Vicente Henson, Jr. v.
since UCPB’s cause of action is based on UCPB General Insurance Co., G.R. No.
quasi-delict, it must be brought within four 223134, August 14, 2019.
(4) years from its accrual on May 9, 2006.
This should mean that if tortious act was
On the issue of whether the claim of UPCB committed on January 8, 2020, the insured
already prescribed, the Supreme Court party has up to January 8, 2024 to file the
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complaint against the tortfeasor. If the transit or transportation insurance,

insurer pays the insured on June 8, 2020, including liability for loss of or damage
the insurer does not have a fresh period of arising out of or in connection with the
four years from June 8, 2020 to enforce its construction, repair, operation,
right of subrogation but only the remaining maintenance or use of the subject matter of
period from June 8, 2020 to January 8, such insurance (but not including life
2024. insurance or surety bonds nor insurance
against loss by reason of bodily injury to
any person arising out of ownership,
CLASSES OF INSURANCE maintenance, or use of automobiles);
1. MARINE INSURANCE
"(3) Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise; and
What is marine insurance?
Bridges, tunnels and other
Marine insurance is a type of insurance instrumentalities of transportation and
against loss or damage to: communication (excluding buildings, their
furniture and furnishings, fixed contents
"(1) Vessels, craft, aircraft, vehicles, and supplies held in storage); piers,
goods, freights, cargoes, merchandise, wharves, docks and slips, and other aids to
effects, disbursements, profits, moneys, navigation and transportation, including
securities, choses in action, instruments of dry docks and marine railways, dams and
debts, valuable papers, bottomry, and appurtenant facilities for the control of
respondentia interests and all other kinds waterways.
of property and interests therein, in respect
to, appertaining to or in connection with It also covers marine protection and
any and all risks or perils of navigation, indemnity insurance, meaning insurance
transit or transportation, or while being against, or against legal liability of the
assembled, packed, crated, baled, insured for loss, damage, or expense
compressed or similarly prepared for incident to ownership, operation,
shipment or while awaiting shipment, or chartering, maintenance, use, repair, or
during any delays, storage, transshipment, construction of any vessel, craft or
or reshipment incident thereto, including instrumentality in use of ocean or inland
war risks, marine builder's risks, and all waterways, including liability of the
personal property floater risks; insured for personal injury, illness or death
or for loss of or damage to the property of
"(2) Person or property in connection with another person.
or appertaining to a marine, inland marine.
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its value over the amount secured

Tersely put, a marine insurance is an by bottomry.
insurance against loss or damage to any
kind of property or loss of life or injury to The shipowner has insurable
person in connection with any and all risks interest likewise in freightage.
or peril of navigation, transit or Freightage, in the sense of a policy
transportation. of marine insurance, signifies all
the benefits derived by the owner,
Discussion: either from the chartering of the
ship or its employment for the
It does not include loss caused by fire even carriage of his own goods or those
though it states “all risk”. of others.
The provisions of the Insurance Code on The owner of a ship has an

Marine Insurance would seem to limit the insurable interest in expected
application to maritime commerce. It makes freightage which according to the
reference to the insurable interest of the ordinary and probable course of
charterer, ship owner, and the like. things he would have earned but for
the intervention of a peril insured
However, in reality it covers risk of all related against or other peril incident to the
to navigation, transit, or transportation. voyage.
Who has insurable interest in marine The shipowner also has insurable
insurance? interest on the cargo or goods
loaded into the ship and subject by
a contract of carriage. His insurable
a. The shipowner has in all cases an interest is the extent he will be
insurable interest in the ship, even damnified if the goods are
when it has been chartered by one damaged or lost.
who covenants to pay him its value
in case of loss: Provided, That in If the ship is hypothecated by
this case the insurer shall be liable bottomry, the insurable interest of
for only that part of the loss which the shipowner is only the excess of
the insured cannot recover from the its value over the amount secured
charterer. by bottomry.
If the ship is hypothecated by The shipowner has insurable

bottomry, the insurable interest of interest likewise in freightage.
the shipowner is only the excess of Freightage, in the sense of a policy
of marine insurance, signifies all
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the benefits derived by the owner, a contract of carriage between the

either from the chartering of the charterer and the cargo owner.
ship or its employment for the
carriage of his own goods or those
of others. Insurable Interest of the Ship Owner
The owner of a ship has an It terms of insurable interest, it is based on the

insurable interest in expected value of the vessel, but in terms of liability,
freightage which according to the the insurer is liable only on the part of the
ordinary and probable course of insured which cannot be recovered from the
things he would have earned but for charterer.
the intervention of a peril insured
against or other peril incident to the Insurable Interest of a Charterer
voyage.
A charterer may enter into a contract of
The shipowner also has insurable carriage with cargo owners. For this reason,
interest on the cargo or goods he has an insurable interest not only on the
loaded into the ship and subject by ship that he chartered, but also on the goods
a contract of carriage. His insurable loaded therein.
interest is the extent he will be
damnified if the goods are
In marine insurance, what peril may be
damaged or lost.
insured against?
b. The cargo owner has insurable

As a rule, only perils of the sea may be
interest over the cargo subject of a
insured against. To recover under a marine
contract of transportation.
insurance policy, the proximate cause of
the loss must be perils of the sea. The
c. The charterer of the ship has an
insurer is not liable if the loss is due to
insurable interest in it, to the extent
ordinary, natural and inevitable action of
that he is liable to be damnified by
the sea, ordinary wear and tear and
its loss.
unseaworthiness. Loss due to
unseaworthiness is tantamount to perils of
Thus, he has insurable interest on
the ship. 2011 Bar
the ship to the extent that he will be
damnified in case of loss or
destruction thereof . However, if the parties agreed on an all
risk policy, all losses connected with the
He likewise has insurable interest voyage or transportation may be covered
on the cargo loaded on the unless expressly excepted.
chartered vessel if it is covered by
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Define perils of the sea. Define perils of the ship
Perils of the sea or perils of navigation Perils of the ship refer to losses which in
pertain to casualties arising from the the ordinary course of events result from
unusual violence or extraordinary causes the ordinary, natural and inevitable action
connected with navigation. It includes such of the sea, or from ordinary wear and tear
losses as are of extraordinary nature which of the ship, or from the negligent failure of
cannot be guarded against by the ordinary the ship’s owner to provide the vessel with
exertion of human skill or prudence, as the adequate crew complement and proper
distinguished from the ordinary wear and equipment to convey the cargo under
tear of the voyage and from injuries ordinary conditions.
suffered by the vessel in consequence of
her not being unseaworthy. La Razon v.
Union Insurance, G.R. No. 139983,
Cite examples of Perils of the Ship
September 1, 1919.
Discussion: a. Sinking of the vessel due to

improper loading of the logs on one
For purposes of the bar exam, if it is related side so that the barge was tilting on
to unseaworthiness, or only ordinary and one side and for that it did not
evitable action of the sea, it is peril of the navigate on even keel and
ship. developed a leak. Roque v. IAC.
Anything outside of these two is peril of the b. The captain was inexperienced or
sea, which makes the insurer liable. with expired license or in case of
deep seated anger by the crew
against the ship captain, or when
Is the rusting of steel pipes in the course the crew unbolted the sea valve of
of voyage a “peril of the sea”? the vessel causing water to flood
the ship hold. 2010 Bar
Yes, rusting of steel pipes in the course of
voyage a “peril of the sea” in view of the c. Roof deck cargo, reconfiguration
toll on the cargo of wind, water, and salt of the cargo to accommodate more
conditions. Cathay Insurance Co. v. Hon. passengers, lack of weather
Court of Appeals and Remington monitoring equipment, and not
Industrial Sales Corporation, G.R. No. enough life jackets.
76145, June 30, 1987.
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d. Seawater entered the compartment What is an “all risks” policy?

where the cargo was stored because
of defective drainpipe of the ship.
An “all risks policy" should be read
literally as meaning all risks whatsoever
e. Engine pipes leaked and the oil
and covering all losses by an accidental
seeped into the cargo compartment
cause of any kind. The terms have been
and the leakage was caused by the
taken to mean that which happens by
extensive mileage that the ship had
chance or fortuitously, without intention
accumulated. 2011 Bar.
and design, and which is unexpected,
unusual and unforeseen. A marine
f. The porthole was not secured at the
insurance policy providing that the
port of departure. 1983 Bar.
insurance was to be "against all risks" must
be construed as creating a special
g. Strong winds and waves are not
insurance and extending to other risks than
automatically considered perils of
are usually contemplated. The very nature
the sea if these conditions are not
of the term "all risks" must be given a
unusual for that particular area at
broad and comprehensive meaning as
that specific time or if they could
covering any loss other than a willful and
have reasonably been anticipated.
fraudulent act of the insured.
Under these conditions, strong
winds and waves are perils of the
ship. Transimex v. Mafre Generally, the burden of proof is upon the
Insurance Corporation, September insured to show that a loss arose from a
14, 2016. covered peril, but under an "all risks"
policy the burden is not on the insured to
Inexperience of the Crew and/or Conflict prove the precise cause of loss or damage
between them for which it seeks compensation. The
insured under an "all risks insurance
This makes the vessel unseaworthy.
policy" has the initial burden of proving
Unseaworthiness pertains to adequacy of
that the cargo was in good condition when
manpower, likewise inadequacy of
the policy attached and that the cargo was
equipment to carry the voyage.
damaged when unloaded from the vessel;
thereafter, the burden then shifts to the
Roof deck cargo, and Reconfiguration of insurer to show the exception to the
the Roof deck coverage. In the present case, there being
This makes the vessel unseaworthy, hence no showing that the loss was caused by any
peril of the ship. of the excepted perils, the insurer is liable
under the policy. Filipino Merchants
Monsoon Rains Insurance Co., Inc. v. Court of Appeals, et
Considered as perils of the ship al., G.R. No. 85141, November 28, 1989;
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Choa Tiek Seng, doing business under the South Sea and Charter refused to pay
name and style of Seng’s Commercial because the insurance surveyor's report
Enterprises v. Court of Appeals, et al., allegedly showed that the damage is a
G.R. No. 84507, March 15, 1990. factory defect. RTC noted that the
insurance contracts executed by Mayer,
“All Risk” South Sea and Charter are "all risks"
It must be read and applied in relation to policies which insure against all causes
transit and navigation. of conceivable loss or damage. The only
exceptions are those excluded in the
Q: What may be excluded from an “all policy, or those sustained due to fraud or
risk” insurance policy? intentional misconduct on the part of the
A: insured. CA set aside the complaint on
1. Those that are excluded in the policy; the ground of prescription. It held that
and the action is barred under Section 3(6)
2. Those caused by the willful acts of the of the Carriage of Goods by Sea Act
insured since it was filed more than two years
from the time the goods were unloaded
Other than these two, an “all risk” insurance from the vessel. It ruled that this
policy covers both perils of the sea and perils provision applies not only to the carrier
of the ship. but also to the insurer.
Hongkong Government Supplies Are South Sea and Charter liable?

Department (Hongkong) contracted
with Mayer Steel Pipe Corporation Yes, South Sea and Charter are liable
(Mayer) to manufacture and supply under the all-risk marine insurance policy
various steel pipes and fittings. Mayer which covers all kinds of loss other than
shipped the pipes and fittings to those due to willful and fraudulent act of
Hongkong. Prior to the shipping, Mayer the insured. Under the Carriage of Goods
insured the pipes and fittings against all by Sea Act, only the carrier's liability is
risks with South Sea Surety and extinguished if no suit is brought within
Insurance Co, Inc. (South Sea) and one year. But the liability of the insurer is
Charter Insurance Corp. (Charter). It not extinguished because the insurer's
was certified that the pipes and fittings liability is based not on the contract of
were in good condition before they were carriage but on the contract of insurance. A
loaded in the vessel. When the goods close reading of the law reveals that the
reached Hongkong, it was discovered Carriage of Goods by Sea Act governs the
that a substantial portion thereof was relationship between the carrier on the one
damaged. Mayer filed a claim for hand and the shipper, the consignee and/or
indemnity under the insurance contract. the insurer on the other hand. It defines the
Page 95 of 203
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obligations of the carrier under the contract the vessel's crew had lacked sufficient
of carriage. It does not, however, affect the training; (3) the improper loading of the
relationship between the shipper and the logs on only one side of the vessel had led
insurer. The latter case is governed by the to the tilting of the ship to the other side
Insurance Code. In the case at bar, it was during the stormy voyage; and (4) the
the shipper which filed a claim against the extremely bad weather had been a
insurer. The basis of the shipper's claim is fortuitous event.
the "all risks" insurance policies issued by
South Sea and Charter to Mayer. Mayer ATC now seeks your legal advice to
Steel Pipe Corp. v. Court of Appeals and know if its claim was sustainable. What
South Sea Surety, G.R. No. 124050, June
is your advice? Explain your answer.
19, 1997.
ATC’s claim is sustainable. The all-risk

As previously noted, the prescriptive policy that ATC procured from the insurer
period to file a suit against the insurer is ten insures against all causes of conceivable
years from accrual of the insured's cause of loss or damage except when the loss or
action, unless the policy reduces the period damage was due to fraud or intentional
to not less than one year from accrual of misconduct committed by ATC. The
cause of action. grounds of denial that the insurer invoked
are not due to the fraud or intentional
Discussion: misconduct of the insurer. New World
International Development v. NYK
The 1 year period applies only on the ship FilJapan Shipping Corporation, 656
owner and the ship agent, not against SCRA 129; BAR 2017.
insurance company because it is based on a
different cause of action.
What is “barratry” in marine
Absolute Timber Co. (ATC) has been insurance?
engaged in the logging business in
Isabela. To secure one of its shipments Barratry is any willful misconduct on the
of logs to be transported by Andok part of the master or the crew in pursuance
Shipping Co., ATC purchased a marine of some unlawful or fraudulent purpose
policy with an "all risks" provision. without the consent of the owner and to the
Because of a strong typhoon then hitting prejudice of the interest of the owner. BAR
Northern Luzon, the vessel sank and the 2010
shipment of logs was totally lost. ATC
filed its claim, but the insurer denied the What are the implied warranties in
claim on several grounds, namely: (1) marine insurance?
the vessel had not been seaworthy; (2)
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The following warranties are implied ballasts, cables and anchors, cordage and
marine insurance; sails, food, water, fuel and lights, and other
necessary or proper stores and implements
a That the ship is seaworthy to make the for the voyage.
voyage and/or to take in certain
cargoes; Manila Bay, a common carrier, entered
b That the ship shall not deviate from the into a contract with Isabel Roque, doing
voyage insured; business under the name and style of
c That the ship shall carry the necessary Isabela Roque Timber (Isabel) whereby
documents to show nationality or Manila Bay will load and carry on board
neutrality and that it will not carry its barge wooden logs from Palawan to
document which will cast reasonable Manila. Thereafter, Isabel insured the
suspicion thereon; logs against loss with Pioneer.
d That the ship shall not carry Thereafter, during the voyage for the
contraband, especially if it is making delivery of the aforementioned logs, the
voyage through belligerent waters. ship of Manila Bay sank, rendering the
BAR 2000. delivery of the wooden logs to Manila
impossible. This prompted Isabel to
So, demand from Manila Bay payment for
a. Seaworthiness the loss of the shipment plus costs for
b. Deviation unrealized profits. However, Manila
c. Against illegality Bay ignored Isabel's demand.
d. Documents
Thereafter, Isabel demanded from
It goes without saying, there is also warranty Pioneer payment for the lost logs
of insurable interest. pursuant to the insurance policy but
Pioneer refused on the ground that there
When is ship seaworthy? was a breach of implied warranty of
seaworthiness on the part of Isabel,
A ship is seaworthy when it is reasonably hence not covered by the marine
fit to perform the service and to encounter insurance policy. Is Pioneer liable for
the ordinary perils of the voyage payment under the marine insurance
contemplated by the parties to the policy. policy?
A warranty of seaworthiness extends not
only to the condition of the structure of the No, Pioneer is not liable for payment under
ship itself, but requires that it be properly the marine insurance policy. Section 113 of
laden, and provided with a competent the Insurance Code provides: In every
master, a sufficient number of competent marine insurance upon a ship or freight, or
officers and seamen, and the requisite freightage, or upon anything which is the
appurtenances and equipment, such as
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subject of marine insurance, a warranty is to flood the ship hold. The vessel sank.
implied that the ship is seaworthy. Constantino tried to collect from the
insurance company which denied
Since the law provides for an implied liability, given the unworthiness of both
warranty of seaworthiness in every the vessel and its crew.
contract of ordinary marine insurance, it
becomes the obligation of a cargo owner to Constantino countered that he was not
look for a reliable common carrier which owner of the vessel and he could
keeps its vessels in seaworthy condition. therefore not be responsible for
The shipper of cargo may have no control conditions about which he was innocent.
over the vessel but he has full control in the Is the insurance company liable?
choice of the common carrier that will
transport his goods. Or the cargo owner No, the insurance company is not liable
may enter into a contract of insurance because there is an implied warranty in
which specifically provides that the insurer every marine insurance that the ship is
answers not only for the perils of the sea seaworthy whoever is insuring the cargo,
but also provides for coverage of perils of whether it be the shipowner or not. There
the ship, was a breach of warranty, because the logs
were improperly loaded and the crew was
Moreover, the fact that the irresponsible, It is the obligation of the
unseaworthiness of the ship was unknown owner of the cargo to look for a reliable
to the insured is immaterial in ordinary common carrier which keeps its vessel in
marine insurance and may not be used by seaworthy condition. Bar 1986; 2010.
him as a defense in order to recover on the
marine insurance policy. On October 30, 2007, M/V Pacific, a
Philippine registered vessel owned by
Paolo, the owner of an ocean-going Cebu Shipping Company (CSC), sank
vessel, offered to transport the logs of on her voyage from Hong Kong to
Constantino from Manila to Nagoya. Manila. Empire Assurance Company
Constantino accepted the offer, not (Empire) is the insurer of the lost
knowing that the vessel was manned by cargoes loaded on board the vessel
an irresponsible crew with deep-seated which were consigned to Debenhams
resentments against Paolo, their Company. After it indemnified
employer. Constantino insured the Debenhams, Empire as subrogee filed
cargo of logs against both perils of the an action for damages against CSC.
sea and barratry. The logs were
improperly loaded on one side, thereby a. Assume the vessel was not
causing the vessel to tilt on one side. On seaworthy as in fact its hull had
the way to Nagoya, the crew unbolted leaked, causing flooding in the
the sea valve of the vessel causing water
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vessel. Will your answer be the When the voyage contemplated by a

same? Explain. marine insurance policy is described by the
b. Assume the facts in question b), places of beginning and ending, the voyage
Can the heirs of the three (3) insured is one which conforms to the
crew members who perished course of sailing fixed by mercantile usage
recover from CSC? Explain between those places.
fully.
If the course of sailing is not fixed by
a. No, my answer will be different. mercantile usage, the voyage insured by a
Allowing the vessel to depart on a marine insurance policy is that way
voyage when it is not seaworthy is between the places specified, which to a
a violation of the implied warranty master of ordinary skill and discretion,
of seaworthiness, and thus would mean the most natural, direct, and
constitutes negligence on the part advantageous.
of owner of the ship and the ship
captain. What is the legal effect of an improper
b. Yes, the heirs of the three (3) crew deviation?
members who perished can recover
from CSC. The hypothecary An insurer is not liable for any loss
principle in maritime commerce happening to the thing insured subsequent
limiting the liability of the to an improper deviation. Stated
shipowner to his interest in the differently, the insurer is liable for any loss
vessel does not apply if the to the thing insured if the deviation is
shipowner is at fault for not making proper.
the vessel seaworthy and/or for
claims of crewmembers. Bar 2008. Under what circumstances can a vessel
properly proceed to a port other than its
port of destination? Explain.
What is deviation in the context of
marine insurance? A vessel can properly proceed to a port
other than its port of destination in the
Deviation is a departure from the course of following cases:
the voyage insured or an unreasonable a. When caused by circumstances
delay in pursuing the voyage or the over which neither the master or
commencement of an entirely different the owner of the ship has any
voyage. control;
b. When necessary to comply with a
What is the voyage insured? warranty, or to avoid a peril,
whether or not the peril is insured
against;
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c. When made in good faith, and upon the earthquake and tsunami struck
reasonable grounds of belief in the three (3) days later and the ship was
necessity to avoid peril; saved. Was the deviation proper?
d. When made in good faith for the
purpose of saving human life or No, because no reasonable ground for
relieving another vessel in distress. avoiding a peril existed at the time of the
deviation.
In the foregoing cases, the deviation is
proper,
What are the kinds of loss in marine
On a clear weather, MV Sundo, insurance?
carrying insured cargo, left the port of
Manila bound for Cebu. While at sea, A loss may be either total or partial. Every
the vessel encountered a strong typhoon loss which is not total is partial. A total loss
forcing the captain to steer the vessel to may be either actual or constructive.
the nearest island where it stayed for
seven (7) days. The vessel ran out of Constructive total loss results when there is
provisions for its passengers. abandonment.
Consequently, the vessel proceeded to
Leyte to replenish its supplies. If there is no constructive loss because the
damage is not commensurate to the threshold
Assuming that the cargo was damaged amounts indicated by law, the insured may
because of such deviation, who between still recover, not based on the total loss, but
the insurance company and the owner of based on actual loss sustained.
the cargo bears the loss? Explain.
Just because there is no total loss doesn’t
The insurance company should bear the mean that the insurer is not liable. The insurer
loss. The deviation was due to a strong is liable but only up to the loss sustained or
typhoon and therefore caused by suffered by the insured.
circumstances beyond the control of the
captain. The deviation was also needed to When may the insured recover an actual
avoid a peril whether or not insured total loss under a marine insurance?
against. The deviation was therefore
proper. Bar 2005 & 2008. The insured may recover for an actual total
loss under a marine insurance in the
T, captain of MV Don Alan, while asleep following cases:
in his cabin, dreamt of an Intensity 8
earthquake along the path of his ship. If the actual total loss is caused by:
On waking up, he immediately ordered
the ship to return to port. True enough,
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a. Total destruction of the thing An actual loss may be presumed from the
insured; continued absence of a ship without being
b. The irretrievable loss of the thing heard of. The length of time which is
by sinking, or by being broken up; sufficient to raise this presumption
c. Any damage to the thing which depends on the circumstances of the case.
renders it valueless to the owner for
the purpose for which he held it; or Upon an actual total loss, a person Insured
is entitled to payment without notice of
RC Corporation purchased from abandonment.
Thailand, which it intended to sell
locally. Due to stormy weather, the ship There is also total loss in case of
carrying the rice became submerged in constructive total loss coupled with
sea water and with it the rice cargo. abandonment on the part of the insured.
When the cargo arrived in Manila, RC
filed a claim for total loss with the
insurer, because the rice was no longer What is abandonment?
fit for human consumption. Admittedly,
the rice could still be used as animal Abandonment, in marine insurance, is the
feed. act of the insured by which, after a
constructive total loss, he declares the
Is RC's claim for total loss justified? relinquishment to the insurer of his interest
Explain. in the thing insured.
Yes, RC's claim for total loss is justified. There are two things to warrant total loss
The rice, which was imported from recovery:
Thailand for sale locally, is obviously 1. Constructive Loss
intended for consumption by the public. 2. Abandonment
The complete physical destruction of the
rice is not essential to constitute an actual On the account of travel interest, obviously
loss. Such a loss exists in this case since the there is no abandonment in the context of a
rice, having been soaked in sea water and marine insurance.
thereby rendered unfit for human
consumption, has become totally useless When may a person insured by a
for the purpose for which it was imported. contract of marine insurance abandon te
Bar 1996 thing insured?
"(d) Any other event which effectively A person insured by a contract of marine
deprives the owher of the possession, at the insurance may abandon the thing insured,
port of destination, of the thing insured. or any particular portion thereof separately
valued by the policy, or otherwise
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separately insured, and recover for a total fire, a covered peril under the marine
loss thereof, when the cause of the loss is a insurance policies obtained by WG&A
peril insured against: from Pioneer. The estimates given by the
three disinterested and qualified
"(a) If more than three-fourths (3/4) thereof shipyards show that the damage to the
in value is actually lost, or would have to ship would exceed or % of the total
be expended to recover it from the peril; value of the policies — Considering the
extent of the damage, WG&A opted to
"(b) If it is injured to such an extent as to abandon the ship and claimed the value
reduce its value more than three-fourths of its policies.
(3/4);
Is there a constructive total loss?
"(c) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully Yes, in marine insurance, a constructive
performed without incurring either an total loss occurs under any of the
expense to the insured of more than three- conditions: a) If more than three-fourths
fourths (3/4) the value of the thing thereof in value is actually lost or would
abandoned or a risk which a prudent man have to be expended to recover it from the
would not take under the circumstances; or peril; or b) If it is injured to such an extent
as to reduce its value more than three-
"(d) If the thing insured, being cargo or fourths.
freightage, and the voyage cannot be
performed, nor another ship procured by An insurance company issued a marine
the master, within a reasonable time and insurance policy covering a shipment by
with reasonable diligence, to forward the sea from Mindoro to Batangas of 1,000
cargo, without incurring the like expense pieces of Mindoro garden stones against
or risk mentioned in the preceding "total loss only". The stones were loaded
subparagraph, But freightage cannot in any in two lighters, the first with 600 pieces
case be abandoned unless the ship is also and the second with 400 pieces. Because
abandoned. of rough seas, damage was caused the
second lighter resulting in the loss of 325
WG & A Jebsens Shipmgmt, out of the 400 pieces. The owner of the
owner/operator of M/V shipment filed claims against the
"SUPERFERRY 3" and Keppel Cebu insurance company on the ground of
Shipyard, Inc. (KCSI) entered into an constructive total loss inasmuch as more
agreement for the Drydocking and than 3/4 of the value of the stones had
Repair of the above-named vessel. In the been lost in one of the lighter.
course of its repair, M/V "Superferry 3"
was gutted by fire. M/V "Superferry 3" Is the insurance company liable under
suffered widespread damage from the its policy? Why?
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The insurance company is not liable under probable cause therefor, and need
its policy covering against "total loss only" not be accompanied with proof of
the shipment of 1,000 pieces of Mindoro interest or of loss.
garden stones. There is no constructive 5. It can be sustained only upon the
total loss that can be claimed since the 3/4 cause specified in the notice
rule is to be computed on the total 1,000 thereof.
pieces of Mindoro garden stones covered 6. It must be accepted by the insurer.
by the single policy coverage.
The acceptance of an abandonment
What are the requisites of a valid may be either express or implied
abandonment? from the conduct of the insurer,
The mere silence of the insurer for
The requisites of a valid abandonment are an unreasonable length of time
as follows: after notice shall be construed as an
1. It must be neither partial nor acceptance.
conditional,
2. It must be made within a 7. An abandonment once made and
reasonable time after receipt of accepted is irrevocable, unless the
reliable information of the loss, but ground upon which it was made
where the information is of a proves to be unfounded.
doubtful character, the insured is
entitled to a reasonable time to If an insurer refuses to accept a valid
make inquiry. abandonment, he is liable as upon an actual
3. It is made by giving notice thereof total loss, deducting from the amount any
to the insurer, which may be done proceeds of the thing insured which may
orally, or in writing: Provided, that have come to the hands of the insured.
if the notice be done orally, a
written notice of such If an insurer refuses to accept a valid
abandonment shall be submitted abandonment, he is liable as upon an actual
within seven (7) days from such total loss, deducting from the amount any
oral notice. proceeds of the thing insured which may
An agent who procured the insurance have come to the hands of the insured.
can also give notice of abandonment
for his principal. What is the effect of abandonment?
4. A notice of abandonment must be An abandonment which is made after a

explicit, and must specify the constructive total loss entitles the insured
particular cause of the to recover for a total loss.
abandonment, but need state only
enough to show that there is
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On the part of the insurer, an abandonment a. Was the notice of abandonment

is equivalent to a transfer by the insured of given by the owner properly
his interest to the insurer, with all the made? Reason.
chances of recovery and indemnity.278 If
a marine insurer pays for a loss as if it were The notice of abandonment made
an actual total loss, he is entitled to in writing by the insured to the
whatever may remain of the thing insured, insurer was sufficient, had the loss
or its proceeds or salvage, as if there had been a constructive total loss,
been a formal abandonment. meaning more than % of the value
of the vessel.
What is the effect of the omission of the
insured to abandon? b. Is the position of the insurance
company as to the absence of
He cannot recover for a total loss but he constructive total loss well
may nevertheless recover his actual loss. taken? Reason.
An inter-island vessel, insured for P2M Yes, the position of the insurance
against "total and constructive total company as to the absence of
loss," sank in 150 ft of water 1 mile off constructive total loss is well taken.
Parafiaque during a typhoon. After the The sum total of the damage to the
typhoon, the ship owner gave written vessel was only (P40,000.00 for
notice of abandonment of his interest in the salvors, and PI,300.00 for the
the entire sunken ship to the insurance restoration of the vessel to its
company. Refusing to accept the offer of original condition) which amount
abandonment, the insurer hired salvors is not more than 3/4 of the value of
to refloat the vessel at a total cost of the vessel (P2M).
P40,000.00. Because the refloated vessel
needed repairs, the insurer Issued c. Assuming that the ship owner
invitations to bid for repairs, Several failed to give the proper notice of
firms submitted separate sealed bids abandonment, may he still
ranging from PI. 2M to P 1.3M for the recover from the insurer? Why?
complete refurbishing and/or
restoration of the vessel to its original Yes, the shipowner may still
condition. On the basis of the following recover from the insurer, his actual
facts, the insurance company rejected loss, the amount of which is now
the claim of the ship owner for payment only partial loss, being not total
of total loss on the ground that there was loss. But since the said amount was
no constructive total loss. already spent by the insurer on the
vessel, the insurer is no longer
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liable to the shipowner, except to extension to fire insurance policies or

deliver the vessel. Bar 1982 under separate policies.
A cargo ship of X Shipping Co. ran While conceptually fire insurance includes
aground off the coast of Cebu during a allied risks as enumerated above, the
storm and lost all its cargo amounting to insured may recover only for the risk/s
P50M. the ship itself suffered damages insured against, as specified in the policy.
estimated at P80M, The cargo owners
filed a suit against X Shipping but it If the fire insurance policy limits the risk to
invoked the doctrine of limited liability fire, can the insured recover if the property is
since it vessel suffered an P80M damage, destroyed by earthquake? It cannot, unless
more than the collective value of all lost earthquake is included as the risk insured
cargo. against, which will, of course, mean higher
amount of premium.
Is X Shipping correct?
EXTENT OF LIABILITY
a. Yes, since under the doctrine, the
value of the lost cargo and the What are the different kinds of insurance
damage to the ship can be set-off. policy? (*In relation to fire insurance)
b. No, since each cargo owner has a
separate and individual claim for ● A policy is either open, valued or
damages. running.
c. Yes, since the extent of the ship's ● An open policy is one in which the
damage was greater than that of the value of the thing insured is not
value of the lost cargo. agreed upon, and the amount of the
d. No, since X Shipping neither insurance merely represents the
incurred a total loss nor abandoned insurer’s maximum liability. The
its ship. value of such thing insured shall be
ascertained at the time of the loss.
● A valued policy is one which
2. FIRE expresses on its face an agreement
that the thing insured shall be
Enumerate the perils covered under a valued at a specific sum
fire insurance. ● A running policy is one which
contemplates successive
Fire insurance is insurance against loss insurances, and which provides that
arising from fire, lightning, windstorm, the object of the policy may be
tornados, earthquakes and other allied from time to time defined,
risks, when such risks are covered by especially as to the subjects of
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insurance, by additional statements payment on the insurance policies

or indorsements. issued by Y and Z, Fortune may no
longer recover from X Insurance
a. Suppose that Fortune owns a house Company.
valued P600,000 and insured the same
against fire with three (3) insurance c. If each of the policies obtained by
companies as follows: Fortune in problem (a) above is an
open policy and it was immediately
X P400,000 determined after the fire that the
Y P200,000 value of Fortune’s house was P2.4M,
Z P600,000 how much may he collect from X, Y,
and Z?
In the absence of any stipulation in the
policies, which insurance company or In an open policy, the insured may
companies may Fortune recover in case recover his total loss up to the amount of
fire should destroy his house the insurance coverage. Thus, the extent
completely? of recovery would be P400,000.00 from
X; P200,000.00 from Y; and
Fortune may recover from the insurers P600,000.00 from Z.
in such order as he may select up to their
concurrent liability. d. In the problem (a), what is the extent
of the liability of the insurance
b. If each of the fire insurance policies companies among themselves?
obtained by Fortune in problem (a) is
a valued policy and the value of his In the problem (a), the insurance
house was fixed in each of the policies companies among themselves would be
at PIM, how much would Fortune liable, viz:
recover from X if he has already
obtained full payment on the X – 4/12 of P600,000 = 200,000
insurance policies issued by Y and Z? Y – 2/12 of P600,000 = P100,000
Z – 6/12 of P600,000 = P300,000
Assuming that the real value of the
property is PIM, Fortune may recover e. Supposing in the problem (a) above,
only the balance of P200,000.00 from X Fortune was able to collect from both
Insurance Company since the insured Y and Z, may he keep the entire
may only recover up to the extent of his amount he was able to collect from
loss. said two insurance companies?
Explain your answer.
Assuming that the real value is
P600,000.00, having obtained full
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No, he can only be indemnified for his Jose is P3M and he can recover this amount
loss, not profit thereby; hence, he must under such an open policy.
return P200,000 of the P800,000 he was
able to collect. Bar 1990 Here, a distinction has to be made.
He can recover from any one of them until A fire occurred in the building of the
has recovered his loss. He has the option to Philippine Union Realty Development
proceed against any one of the insurance, but Corporation. It sued for recovery of
the limited liability of the insurers is the damages from Development Insurance
principal value. Corporation on the basis of an insurance
contract between them. Development
Jose constructed a house worth Insurance Corporation argues that the
P5,000,000 which he insured against fire insurance covers only the building and
for the same amount. The insurance for not the elevators, and that the elevators
the same amount was renewed every were insured only after the fire.
year. After a few years, when the house
was already worth P15,000,000 on Is the Development Insurance
account of inflationary prices (in case of Corporation liable for the amount of the
a rebuilding), one-fifth (1/5) of the house building?
was destroyed by fire. As there is
nothing illegal about the contract, how Yes, the Development Insurance
much, if any, can Jose successfully Corporation's claim that the insurance
recover from the Insurance Company? covered only the building and not the
Reason. elevators is absurd, to say the least, The
only remaining question to be settled is the
If the fire policy is a valued one, then Jose amount of the indemnity due under the
can recover 1/5 of P5,000,000, i.e., insurance contract, The policy is an open
P1,000,000. Under the Insurance code, the policy — one which the value of the thing
valuation in a valued policy is conclusive insured is not agreed upon but is left to be
between the parties in the absence of fraud. ascertained in case of loss.292 This means
So Jose cannot claim that since his house that the actual loss, as determined, will
was worth P15,000,000 at the time of the represent the total indemnity due the
loss, he should be able to recover insured from the insurer except only that
P3,000,000 (actual value of 105—1/5 of the total indemnity shall not exceed the
P15,000,000) face value of the policy. The actual loss has
been ascertained in this case and the Court
If the policy is an open policy then under will respect such factual determination in
the law, appraisal of loss is made after the the absence of proof that it was arrived at
fire. Since the house was worth arbitrarily. Development Insurance
P15,000,000 at such time, then the loss of Corporation v. Intermediate Appellate
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Court, et al., G.R. No. L-71360, July 16, An alteration in the use or condition of a
1986. thing insured from that to which it is
limited by the policy made without the
Paramount Shirt Manufacturing Co. consent of the insurer, by means within the
(insured) was issued a Fire Policy by control of the insured, and increasing the
which Oriental Assurance Corporation risks, entitles an insurer to rescind a
bound itself to indemnify the former for contract of fire insurance.
any loss or damage caused by fire to its
property. While the aforesaid policy was An alteration in the use or condition of a
in full force and effect, a fire broke out thing insured from that to which it is
on the subject premises destroying the limited by the policy, which does not
goods contained in its ground and increase the risk, does not affect a contract
second floors. It was thereafter learned of fire insurance.
that the insured did not reveal
undeclared co-insurances and that the The following are the requisites of the
insured failed to file the required proof alteration in the use or condition of the
of loss prior to the court action as thing insured in order to entitle the
required under the policy. insurer to rescind.
Is Oriental Assurance Corporation 1. The use or condition of the thing

liable? insured must be stated in the policy
2. The use or condition of the thing
No, the insurance policy against fire insured was altered.
expressly required that notice should be 3. The alteration was made without
given by the insured of other insurance the consent of the insurance.
upon the same property, the total absence 4. The aleration in the use or
of such notice nullifies the policy. By condition of the thing insured
reason of said unrevealed insurances, the increased the risk insured against.
insured had been guilty of false
declaration; a clear misrepresentation and In other words, increase in risk alone will
a vital one because where the insured had not entitle the insured to rescind a contract
been asked to reveal but did not, that was of insurance. There must be a
deception. Pacific Banking Corporation corresponding violation of the provision of
v. Court of Appeals and Oriental the policy otherwise there is no right to
Assurance Corporation, G.R. No. L- rescind the policy. Thus, a contract of fire
41014, November 28, 1988. insurance is not affected by any act of the
insured subsequent to the execution of the
What is the effect of alteration in the use policy which does not violate its
or condition of the thing insured? provisions, even though it increases the
risk and is the cause of loss.
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renewed policy, a fire broke out at the

Example: After effectivity of the policy, Pace Factory which totally burned the
the insured stored gasoline, paints and insured properties. The policy forbade
varnishes within the premises insured. The the removal of the insured properties
insurer is liable if there is no provision in unless sanctioned by Ilocano, Condition
the policy prohibiting the keeping of 9(c) of the policy provides that "the
gasoline, paints and varnishes upon the insurance ceases to attach as regards the
premises of the insured. property affected unless the insured,
before the occurrence of any loss or
Another, a fire insurance policy was issued damage, obtains the sanction of the
describing the building insured as company signified by endorsement upon
unoccupied at the first floor. The said floor the policy x x x (c) if the property
was later on occupied. There is no insured is removed to any building or
alteration if the policy did not clearly place other than in that which is herein
require that the first floor of the house stated to be insured." PAM claims that
should remain unoccupied for the duration it has substantially complied with
of the policy, notifying Ilocano for the insurance
coverage.
To summarize, Increase in the risk of loss
as a rule is necessary for alteration of the Is Ilocano liable under the policy?
use or condition of thing insured as a
ground to rescind the policy, However, Ilocano is not liable under the policy, With
when the policy provides that a violation of the transfer of the location of the subject
the policy shall avoid it, increase in the risk properties, without notice and without
of loss is not necessary to enable the insurer's consent, after the renewal of the
insurer to escape liability. policy, the insured clearly committed
concealment, misrepresentation, and a
PAM, Inc. obtained a P15M fire breach of material warranty. A
insurance policy from Ilocano Insurance concealment entitles the injured party to
covering its machineries and equipment rescind a contract of insurance in case of an
effective for I year. The policy expressly alteration in the use or condition of the
stated that the insured properties were thing insured. An alteration in the use or
located at "Sanyo Precision Phils. condition of a thing insured from that to
Building, Phase Ill, Lots 4 and 6, Block which it is limited by the policy made
15, PEZA, Rosario Cavite." Before its without the consent of the insurer, by
expiration, the policy was renewed on means within the control of the insured,
"as is" basis for another year. The and increasing the risks, entitles the insurer
subject properties were later to rescind the contract of fire insurance.
transferred to Pace Factory also in Bar 2014
PEZA. During the effectivity of the
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Distinguish friendly fire from hostile material that was highly flammable. The
fire. furnace fire caused intense heat and
great volumes of smoke and soot that
FRIENDLY FIRE HOSTILE FIRE damaged the furnishings in the rooms of
Is one which is Is a fire that goes X. When X tried to collect on the policy,
deliberate and out of control and Queens Insurance refused to pay
remains within the beyond the limits contending that the damage is not
limits for it. intended for it. To covered by the policy, where the fire is
be covered by fire confined within the furnace. Decide.
insurance, the fire
must be hostile. The refusal of Queens to pay is justified.
The damage is not covered by the policy
Cite examples of damage caused by which only insures "against all direct loss
friendly fire for which the insurer is not and damage by fire." The damage being
liable. claimed by X was caused by intense heat
and great volumes of smoke and soot and
a. Damage caused on the insured curtains not directly by fire. The stipulation in the
in a condominium unit by smoke from policy is paramount, not being contrary to
a lamp when no ignition occurred law. Bar 1989
outside of the lamp.
b. Damage done to sugar by the heat of What is the measure of indemnity in fire
the usual fires employed for refining, insurance policy?
being accumulated by the
mismanagement of the insured, who If there is no valuation in the policy, the
inadvertently kept the top of their measure of indemnity in an insurance
chimney closed. against fire is the expense it would be to the
c. Smoke emitted by cooking stove. insured at the time of the commencement
of the fire to replace the thing lost or
Cite examples of damage caused by injured in the condition in which it was at
hostile fire. the time of the injury; but if there is a
valuation in a policy of fire insurance, the
a. Faulty wiring that caused fired. effect shall be the same as in a policy of
b. Christmas lights that caught fire and marine insurance. This means that the
exploded. measure of indemnity is the value of the
property indicated in the policy.
Queens Insurance Company insured X,
a resident of Baguio City, “against all Whenever the insured desires to have a
direct loss and damage by fire.” X lived valuation named in his policy, insuring
in a house heated by a furnace. His any building or structure against fire, he
servant built a fire in the furnace using may require such building or structure to
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be examined by an independent Casualty insurance is insurance covering

appraiser and the value of the insured's loss or liability arising from accident or
interest therein may then be fixed as mishap, excluding certain types of loss
between the insurer and the insured. The which by law or custom are considered as
cost of such examination shall be paid falling exclusively within the scope of
for by the insured. A clause shall be other types of insurance such as fire or
inserted in such policy stating marine. It includes, but is not limited to,
substantially that the value of the employer's liability insurance, motor
insured's interest in such building or vehicle liability insurance, plate glass
structure has been thus fixed. In the insurance, burglary and theft insurance,
absence of any change increasing the personal accident and health insurance as
risk without the consent of the insurer or written by non-life insurance companies,
of fraud on the part of the insured, then and other substantially similar kinds of
in case of a total loss under such policy, insurance.
the whole amount so insured upon the
insured's interest in such building or Luis was the holder of an accident
structure, as stated in the policy upon insurance policy effective November 1,
which the insurers have received a 1988 to October 31, 1989. At a boxing
premium, shall be paid, and in case of a contest held on January 1, 1989 and
partial loss the full amount of the partial sponsored by his employer, he slipped
loss shall be so paid, and in case there and was hit on the face by his opponent
are two or more policies covering the so he fell and his head hit one of the
insured's interest therein, each policy poses of the boxing ring. He was
shall contribute pro rata to the payment rendered unconscious and was dead on
of such whole or partial loss. But in no arrival at the hospital due to
case shall the insurer be required to pay intracranial hemorrhage.
more than the amount thus stated in such
policy. This section shall not prevent the Can his father who is a beneficiary
parties from stipulating in such policies under said insurance policy successfully
concerning the repairing, rebuilding, or claim indemnity from the insurance
replacing of buildings or structures company? Explain your answer.
wholly or partially damaged or
destroyed. (Skipped: we have seen that) Yes, the father who is a beneficiary under
the accident insurance can successfully
claim indemnity for the death of the
3. CASUALTY INSURANCE insured. Clearly, the proximate cause of
the death was the boxing contest. Death is
What is casualty insurance? sustained in a boxing contest is an accident,
The insurer is liable because the death in
this case was an accident within the
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meaning of the policy. It was an accident insured got the insurance for his protection.
because the insured did not expect to die by In fact, he removed the magazine from the
entering such contest. Bar 1990 gun and when he pointed the gun to his
temple he did so because he thought that it
Sun-Moon Insurance issued a Personal was safe for him to do so. He did so to
Accident Policy to Henry Dy with a face assure his sister that the gun was harmless.
value of P500,000.00. A provision in the There is none in the policy that would
policy states that “the company shall not relieve the insurer of liability for the death
be liable in respect of bodily injury of the insured since the death was an
consequent upon the insured person accident. BAR 1995, 1993.
attempting to commit suicide or willfully
exposing himself to needless peril except Fortune Insurance and Surety Co., Inc.
in an attempt to save human life”. Six (6) (Fortune) issued a policy to Producers
months later, Henry died of a bullet Bank wherein it stipulated under the
wound in his head. Investigation showed General Exceptions Clause that “the
that one evening Henry was in a happy company shall not be liable under this
mood although he was not drunk. He policy in respect of x x x (b) any loss
was playing with his handgun from caused by any dishonest, fraudulent or
which he had previously removed its criminal act of the insured or any
magazine. He pointed the gun at his officer, employee, partner, director,
sister who got scared. He assured her it trustee or authorized representative of
was not loaded. He then pointed the gun the Insured whether acting alone or in
at his temple and pulled the trigger. The conjunction with others. x x x”
gun fires and Henry slumped dead on
the floor. Henry’s wife, Beverly, as the An armored car of the bank driven by
designated beneficiary, sought to collect Magalong was robbed while
under the policy. Sun-Moon rejected her transferring it to another branch.
claim on the ground that the death of Producers Bank demanded payment
Henry was not accidental. Beverly sued from Fortune but the latter refused to
the insurer. pay as the loss is excluded from the
coverage of insurance policy under the
Decide. Discuss fully. General Exception Clause.
Beverly can recover the proceeds of the Is the Fortune liable under the theft or
policy from the insurer. The death of the robbery insurance policy?
insured was not due to suicide or willful
exposure to needless peril which are the
excepted risks. The insured’s act was No, Fortune is exempt from liability. It
purely on act of negligence which is should be noted that theft or robbery
covered by the policy and for which the insurance policy is a form of casualty
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insurance. It has been aptly observed that driver and conductor”. The policy also
in burglary, robbery, and theft insurance, stated that in “the event of the death of
the opportunity to defraud the insurer is so the driver, the Company shall indemnify
great that insurers have found it necessary his personal representatives and at the
to fill up their policies with countless Company’s option may make indemnity
restrictions, many designed to reduce this payable directly to the claimants or
hazard. The purpose of the exception is to heirs of the claimants.” During the
guard against liability should the theft be policy’s lifetime, a taxicab of the insured
committed by one having unrestricted driven by Coquia met an accident and
access to the property. Coquia died. When Fieldmen’s
Insurance Co. refused to pay the parents
It is clear that insofar as Fortune is of Coquia, they instituted a complaint.
concerned, it was its intention to exclude Fieldmen’s Insurance Co. argued that
and exempt from protection and coverage Coquia’s parents have no cause of action
losses arising from dishonest, fraudulent, since the Coquias have no contractual
or criminal acts of persons granted or relationship with it.
having unrestricted access to Producers’
money or payroll. When it used then the Can the parents of Coquia collect on the
term “employee,” it must have had in mind policy?
any person who qualifies as such as
generally and universally understood, or as Yes, pursuant to the stipulations in the
statutorily declared even in a limited sense policy, Fieldmen’s Insurance Co. will
as in the case of Article 106 of the Labor indemnify any authorized Driver who is
Code. Even granting that the contracts with driving the Motor Vehicle of the Manila
Magalong’s employers was labor-only Yellow Taxicab and, in the event of death
contracts, it may fall under the definition of said driver, the Fieldmen’s Insurance
“representative”. Fortune Insurance and Co. shall, likewise, indemnify his personal
Surety Co., Inc. v. Court of Appeals and representatives. In fact, Fieldmen’s
Producers Bank of the Philippines, G.R. Insurance Co. may, at its option, make
No. 115278, May 23, 1995. (might be indemnity payable directly to the claimants
included in the exam) or heirs of claimants. Thus, the policy
under consideration is typical of contracts
Fieldmen’s Insurance Co. issued in pour autrui. It is clear that the Coquias,
favor of the Manila Yellow Taxicab a who are the sole heirs of the deceased are,
common carrier insurance policy with a have a direct cause of action against the
stipulation that the company shall Fieldmen’s Insurance Co. and may collect
indemnify the insured of the sums which on the policy. Melecio Coquia, et al. v.
the latter may be held liable for with Fieldmen’s Insurance Co., Inc., G.R. No.
respect to “death or bodily injury to any L-23276, November 29, 1968.
fare-paying passenger including the
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Carlie Surposa was insured with having been expressly included in the
Finman General Assurance enumeration of the circumstances that
Corporation (Finman). While said would negate liability in said insurance
policy was in full force and effect, the policy, it cannot be considered by
insured died as a result of a stab wound implication to discharge the Finman from
without provocation and warning on the liability for, any injury, disability or loss
part of the insured as he and his cousin suffered by Carlie. Thus, the failure of the
were waiting for a ride on their way petitioner insurance company to include
home. Thereafter, Julia Surposa and the death resulting from murder or assault
other beneficiaries of said personal among the prohibited risks leads inevitably
accident insurance policy filed a written to the conclusion that it did not intend to
notice of claim with the Finman which limit or exempt itself from liability for such
denied said claim contending that death.
murder and assault are not within the
scope of the coverage of the insurance Also, where the death or injury is not the
policy as the cause of death wasnot natural or probable result of the insured’s
accidental but a deliberate act of the voluntary act, or if something unforeseen
assailant in killing Carlie. occurs in the doing of the act which
produces the injury, the resulting death is
Is Finman liable under the insurance within the protection of the policies
policy? insuring against death or injury from
accident. In the case at bar, it cannot be
Yes, the personal accident insurance policy pretended that Carlie died in the course of
involved herein specifically enumerated an assault or murder as a result of his
only 10 circumstances wherein no liability voluntary act considering the very nature
attaches to Finman for any injury, of these crimes. Finman General
disability or loss suffered by the insured as Assurance Corporation v. Honorable
a result of any of the stimulated causes. Court of Appeals and Julia Surposa,
The principle of “expresso unius exclusio G.R. No. 100970, September 2, 1992.
alterius” is therefore applicable in the
instant case. Since murder and assault, not
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A: Also for tort, Dean.

MAY 9, 2021
MORTICIA ADDAMS AND FREEZER BUNNY
Q: Can the insurer be ordered to pay
X,Y,Z under the no fault indemnity clause
RECITATION of the Comprehensive Motor Vehicle
Insurance Policy?
A: Yes but it is not limited to that No Fault
Situation:
Indemnity Clause.
Lets assume that A is the owner of a public
transportation company, particularly a
Q: Who is liable in case there is
passenger bus that collided with another bus
enforcement of the no fault indemnity
owned by C. As a result of the collision, X, a
clause of the Comprehensive Motor
passenger of A was injured and so with a
Vehicle Insurance Policy?
pedestrian (Y) and a passenger of C (Z). X, Y
A: The insurer of the vehicle where the
and Z filed action against A, as operator of
injured passenger was disembarking or on
the bus that collided with another bus. The
board. (This is for X, as passenger of A)
judge ordered the insurer of A to pay each of
X,Y and Z 15,000 pesos and dismissed all
Q: What about Y and Z? Is it correct
other complaints/cases. (Note: both A and C
likewise to enforce likewise the no fault
are at fault)
indemnity clause of the Comprehensive
Motor Vehicle Insurance Policy against
Q: Did the judge commit a mistake or
A’s insurer for the claim of Y and Z?
rendered a valid and correct decision in
A: No Dean because it should be claimed as
ordering the dismissal of the cases against
against the vehicle they were on board.
A but ordered the insurer of A to pay
X,Y,Z 15,000 each?
Q: What about the pedestrian? It is not an
A: Yes, the judge made a mistake in limiting
occupant of A and C’s buses right. So
the liability to the insurer of the operator of
against whom can he file a claim based on
the bus because the insurer has different
the no fault indemnity clause of the
cause of action.
Comprehensive Motor Vehicle Insurance
Policy?
X, the passenger of the bus was injured, its
A: Since the no fault indemnity clause
cause of action is based on the contract of
provides that it could be liable for third
carriage that it has against the bus company.
persons even if it not on board a particular
On the other hand, the other passenger in the
vehicle, the insurer of A is automatically
other vehicle (Z) and the pedestrian (Y)
liable.
would have cause of action for tort naman as
against that bus operator.
Dean: The insurer of the offending party is
liable but in this case there are two so any one
Q: What about Z (the passenger of C that
of them or both of them may be held liable
decided to sue A instead of C)
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under the no fault indemnity clause but it A: Yes, they can run after the deficiency from
cannot exceed 15,000. It cannot be 15,000 the wrongdoer. They cannot restrict their
per insurer, it could only be 15,000 for the claims from the insurer.
claim or victim.
Dean: So the judgment against A, as
Q: In case they don’t want to enforce the operator, is breach of contract of carriage (for
no fault indemnity clause of the X). The judgment for X (Y ata to dapat) and
Comprehensive Motor Vehicle Insurance Z for tort less any amount that the insurer was
Policy, can they claim more than 15,000 made to pay in favor X, Y and Z.
against insurer?
A: Yes, Dean if the insurance policy would
SURETYSHIP
amount to a different amount or liability
Q: Lets say for example A’s insurer is What is a contract of suretyship?

made a defendant with A, as operator of
the bus. So the plaintiffs are X,Y and Z. "SECTION 177. A contract of suretyship
Can the insurer be made liable for the is an agreement whereby a party called the
claims of X, Y and Z not for the no fault surety guarantees the performance by
indemnity clause but for the insurance another party called the principal or
policy issued by the insurer of A? obligor of an obligation or undertaking in
A: They can all claim against the insurer of favor of a third party called the obligee. It
the offending vehicle includes official recognizances,
stipulations, bonds or undertakings issued
Q: Would it be limited to the P15,000? by any company by virtue of and under the
A: No, they can claim for a different liability provisions of Act No. 536, as amended by
if the insurance would actually cover that Act No. 2206.”
liability.
Q: So what would be the measure of ● Examples: Contractor bond,

liability of the insurance company in this attachment bond, injunction bond
case?
A: It depends on what is indicated on that We discussed for the first time contract of
policy. suretyship in relation to what is insurance
business and as well as the exceptions to the
Dean: The measure of the indemnity is the rule of non-payment of premium – despite the
terms and amount indicated in the policy. non-payment of premium, the surety is still
liable.
Q: Suppose it is not enough to cover the
judgment in favor of X, Y and Z. Do they It is the same concept as the contract of surety
still have cause of action against A? under the Civil Code, in that the surety is
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liable solidarily with the principal debtor. What is the liability of a surety
The distinction being that if it is a suretyship company?
issued by a bonding company or insurance
company as accredited by the Insurance "Section 178. The liability of the surety
Commissioner, then the liability is only up to or sureties shall be joint and several with
the obligor and shall be limited to the
the extent of the amount indicated in the
amount of the bond. It is determined
policy. If it is to the extent of the amount strictly by the terms of the contract of
insurance policy or bond is equivalent to the suretyship in relation to the principal
amount of the claim against the principal contract between the obligor and the
debtor, then both of them are liable solidarily. obligee."
But in excess of the amount as set forth in the
bond issued by the surety, the excess cannot The concept is same as surety under the Civil
be said to be an obligation joint and several Code, then the principal obligation is void
with the principal debtor. and obviously the surety likewise has no
obligation under the bond. If the principal
So while it is solidary, it is still dependent on obligation is unenforceable, then the
the face value or the maximum amount obligation of surety is also unenforceable, it
indicated in the policy or the bond issued by being mere accessory obligation.
the surety.
William B. Murphy filed a case for
The other instance we encountered the collection of a sum of money, accounting
concept of suretyship: Remember our and damages against Pedro Mejorada.
discussion regarding bond Murphy likewise prayed for a Writ of
Preliminary Attachment, which the Trial
Q: What will make a bond binding on the Court granted upon a bond of P250,000.00
obligee? issued by Zenith Insurance Corporation in
A: Premium is paid to the surety company or favor of Murphy. A judgment was
even though no premium was paid, if the rendered against Murphy. Thereafter,
bond is delivered to and accepted by the Mejorada proceeded against the balance of
obligee Zenith's attachment bond coverage. An
Alias Writ was issued on the basis of
In the case of Philippines Pryce Corporation Mejorado's contention that Zenith's
vs CA, the check issued in favour of the surety liability not being limited to the amount of
bounced but because the bond was being the bond it has put up but includes all the
delivered to and accepted by the oblige, then actual and consequential damages suffered
the surety is liable for that particular bond by private respondent, there having
despite non-payment of premium intervened malice and bad faith on Zenith's
part. Is Zenith liable for more than the
amount of bond?
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"Section 178. The liability of the surety saying that no such agreement was
or sureties shall be joint and several with executed with Chevron. First Lepanto then
the obligor and shall be limited to the advised Chevron the nonexistence of the
amount of the bond. It is determined
strictly by the terms of the contract of principal agreement as confirmed by
suretyship in relation to the principal Fumitechniks. Chevron formally
contract between the obligor and the demanded from First Lepanto the payment
obligee." of its claim under the surety bond. First
(yes po yan talaga ulit ung slide) Lepanto reiterated its position that without
the basic contract subject of the bond, it
Based on what we quoted a while ago under cannot act on Chevron's claim.
Section178 - while the surety is liable
solidarily with the principal debtor, it is only Is First Lepanto liable to Chevron, the
up to the amount indicated in the bond. creditor, in the absence of the principal
contract?
Chevron Philippines sued First Lepanto-

Taisho Insurance Corp. for payment of No, Section 175 of the Insurance Code
defines suretyship as a contract or
unpaid oil and petroleum purchases made
agreement whereby a party, called the
by its distributor, Fumitechniks Corp. surety, guarantees the performance by
Fumitechniks applied for and was issued a another party, called the principal or
Surety Bond by First Lepanto. As stated in obligor, of an obligation or undertaking
the attached rider, the bond was in in favor of a third party, called the
compliance with the requirement for the obligee. Such undertaking makes a
grant of a credit line with Chevron to surety agreement an ancillary contract
as it presupposes the existence of a
guarantee payment/ remittance of the cost
principal contract. Although the
of fuel products withdrawn within the contract of a surety is in essence
stipulated time in accordance with the secondary only to a valid principal
terms and conditions of the agreement. obligation, the surety becomes liable for
Fumitechniks defaulted on its obligation to the debt or duty of another although it
Chevron. As such, Chevron notified First possesses no direct or personal interest
over the obligations nor does it receive
Lepanto of Fumitechniks' unpaid
any benefit therefrom. And
purchases. First Lepanto then demanded notwithstanding the fact that the surety
from Fumitechniks the delivery of contract is secondary to the principal
documents including, among others, a obligation, the surety assumes liability
copy of the agreement secured by the as a regular party to the undertaking. A
Surety Bond and information such as surety contract should be read and
ternns and conditions of any arrangement interpreted together with the contract
entered into between the creditor and
that Fumitechniks might have made or
the principal.
ongoing negotiations with Chevron in
connection with the settlement of its
obligations. Fumitechniks responded by
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A reading of the bond shows that it Is Finman General liable to Inocencio and
secures the payment of purchases on others so as to implead it in the complaint?
credit by Fumitechniks in accordance
with the terms and conditions of the
"agreement" it entered into with
Chevron. The word "agreement" has Yes, Finman General is solidarily liable.
reference to the distributorship
Under Section 176 of the Insurance Code,
agreement, the principal contract and
by implication included the credit as amended, the liability of a surety in a
agreement in the rider. In this case, surety bond is joint and several with the
Chevron has executed written principal obligor. Finman's bond was
agreements only with its direct posted by Pan Pacific in compliance with
customers but not to distributors like the requirements of Article 31, Labor Code
Fumitechniks and it also never relayed in order to guarantee recruitment
the terms and conditions of its
distributorship agreement to First procedures. Thus, Finman General is
Lepanto after the delivery of the bond. solidarily liable with Pan Pacific.
(First Lepanto-Taisho Insurrance
Corporation v. Chevron Philippines, Inc., The answer obviously is yes because that is
G.R. No. 177839, January 18, 2012.)
the concept of a bond. The bonding company,
as a surety, is liable solidarily with the
This case is a long one but this reiterates that principal obligor or debtor.
if the principal debtor is not liable then the
surety likewise is not liable, it being mere When is a surety entitled to premium
accessory obligation. payment?
Pan Pacific Overseas is a recruitment

agency which offers jobs abroad duly The surety is entitled to payment of the
registered with the POEA. Finman General premium as soon as the contract of
is acting as Pan Pacific's surety. Pan suretyship or bond is perfected and
Pacific was sued by William Inocencio and delivered to the obligor.
three (3) others for alleged violation of
Articles 32 and 34 of the Labor Code.
Inocencio alleged that Pan Pacific charged Regarding payment of premium, is it on a
and collected fees but failed to provide yearly on annual basis?
employment abroad. POEA ruled in favor
of Inocencio et al and had impleaded Lets say you were granted attachment or
Finman in the complaint. The Labor injunction but you were required to put up a
Secretary affirmed POEA's ruling. Finman bond and the bonding company posted a bond
General asserts that it should not be
to indemnify for any damage/liability that the
impleaded in the case because it is not a
party to the contract between Pan Pacific obligee may suffer as a result of the issuance
and Inocencio et al. of the bond if it turns out that the petitioner is
not entitled thereto.
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to the surety: Provided, That if the contract

Q: Is the premium paid every year or is it of suretyship or bond is not accepted by, or
a one time payment that makes the bond filed with the obligee, the surety shall
valid all throughout the case? collect only a reasonable amount, not
A: Although it is not in the insurance code, exceeding fifty percent (50%) of the
the bond payment or premium payment is on premium due thereon as service fee plus
annual basis. That’s why it is very expensive the cost of stamps or other taxes imposed
to maintain a bond because you have to pay for the issuance of the contract or bond:
the premium every year and there are Provided, however, That if the non-
bonding companies that require collateral. acceptance of the bond be due to the fault
or negligence of the surety, no such service
Lets say you were able to get an attachment fee, stamps or taxes shall be collected.
for P300M, as you know the Court will
require an attachment bond. If it turns out that
In the case of a continuing bond, the
the plaintiff is not entitled to the bond, then obligor shall pay the subsequent annual
the Court will render judgment against both premium as it falls due until the contract
the plaintiff and the bonding company. The of suretyship is cancelled by the obligee
bonding company will be liable solidarily or by the Commissioner or by a court of
competent jurisdiction, as the case may
with the plaintiff but only up to the extent of be.
the amount of the bond as provided for on the
face of the bond itself.
This is the case we mentioned – Philippine
So it can be expensive if you pay premium Pryce vs CA. There are two ways to make a
every year, especially if the bonding company bond effective: 1. Premium payment; and
requires collateral. I know bonding 2. Delivery of the bond in favour of the
companies that offer only 1-3% without obligee. Notwithstanding the non-payment
collateral but only if the principal debtor has of the premium, if the bond is delivered to
excellent credit reputation. and accepted by the obligee then the surety is
liable on the bond.
When does the bond issued by the surety
That is why the practice is not to deliver
company become valid and binding?
the bond unless and until the premium
payment has been made.
No contract of suretyship or bonding shall
be valid and binding unless and until the
Are the provisions of the Civil Code on
premium therefor has been paid, except
guaranty applicable to a contract of
where the obligee has accepted the bond,
suretyship?
in which case the bond becomes valid and
enforceable irrespective of whether or not
the premium has been paid by the obligor Pertinent provisions of the Civil Code of
the Philippines shall be applied in a
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suppletory character whenever necessary years, the insurer is precluded from

in interpreting the provisions of a contract rescinding the policy on account of
of suretyship. concealment or misrepresentation)?
A: It will not apply because the first element
of incontestability clause provides that it is a
life insurance payable upon the death of the
LIFE INSURANCE insured. In this kind of insurance (annuity)
the obligation to pay ends when the insured
What is Life Insurance? dies.
Life insurance is insurance on human
lives and insurance appertaining thereto To whom will the proceeds of the life
or connected therewith. insurance policy be payable?
Every contract or undertaking for the As previously discussed, the proceeds of

payment of annuities including contracts the life insurance policy are payable as
for the payment of lump sums under a follows:
retirement program where a life
insurance company manages or acts as a a. In case a beneficiary is unlawfully
trustee for such retirement program shall designated, the proceeds shall payable to
be considered a life insurance contract the estate of the insured (not only to the
for purposes of the Insurance Code
lawful spouse of the insured although she
has a share in the estate of the insured). It
It has to be said that annuity is a life insurance is because the policy remains valid. Only
policy because this is not the essence of a life the designation is void.
insurance policy. In a life insurance, the
insurer pays upon death of the insured. But in Remember the ruling in Insular Life vs
a contract of annuity, the annuitant pays a Ebrado, it was said that it was not payable to
lump sum to the insurance company and the lawful spouse but payable to the estate.
every year the insurer pays the annuitant (x) The surviving spouse of course has a share in
amount and the obligation to pay upon death the estate but is so with the other heirs. It is
of the insured. because the policy remains valid even if the
designation is void.
That is not the concept of life insurance that
we know but the Insurance Code says that a b. In case of joint designation of
contract of annuity is considered a life beneficiaries, the share of the unlawfully
insurance contract. designated beneficiary shall form
additional part of the share of the lawfully
designated beneficiary. Thus, the share of
Q: If it is a life insurance contract as the common law spouse shall be forfeited
annuity contract, would that be covered by in favor of the designated illegitimate
the incontestability clause under Section children.
48 of the Insurance Code (after lapse of 2
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This is the case of Maramag vs Maramag. forfeited. Not forfeited as in it will not be
given to anyone but the share forfeited shall
c. In case of joint designation of lawfully pass on to other beneficiaries unless
designated beneficiaries, proceeds shall be otherwise disqualified. In the absence of
divided based on terms of policy. If the other beneficiaries, the proceeds shall be paid
policy is silent, the proceeds shall be in accordance with the policy contract. In
divided equally between or among the case the policy contract is silent then that is
beneficiaries. the only time that the proceeds are payable to
the estate of the insured.
d. In case a beneficiary is lawfully

designated and the insured dies ahead of
e. In case the beneficiary predeceases the
the beneficiary, the proceeds are payable to
insured, make a distinction between
the beneficiary unless he is the principal,
irrevocable and revocable beneficiary. If
accessory or accomplice in willfully
irrevocable, the proceeds shall inure to the
bringing about the death of the insured.
benefit of the legal representatives of the
In such a case, interest of the beneficiary
beneficiary. If revocable, the proceeds
shall be forfeited and the share forfeited
shall pass on to the other beneficiaries, shall inure to the estate of the insured. If
unless otherwise disqualified. In the the policy is silent as to whether
absence of other beneficiaries, the designation is irrevocable or revocable, the
proceeds shall be paid in accordance with proceeds shall inure to the estate of the
the policy contract. If the policy contract is insured because the designation is
silent, the proceeds shall be paid to the revocable unless otherwise specified in the
estate of the insured.
policy.
Note that the insurer is still liable. 2008 Bar

f. The beneficiary "s interest in a life
insurance endowment policy will only
Q: Does it mean that if the beneficiary is accrue if the insured dies before the end of
the principal/accomplice/accessory in the endowment period. If the insured
wilfully bringing about death upon the survives, the proceeds are payable to him.
insured, the insurer is relieved from
liability under the policy?
A: No. The insurer is still liable but the
liability is based on the provisions of the Who will get proceeds of life insurance
Insurance Code and the terms of the policy. policy in case insured failed to
designate beneficiaries?
The law says that if the beneficiary is the
principal/accomplice/accessory in wilfully Where a GSIS member failed to state his
bringing about death upon the insured, the beneficiary in his application for
interest of that beneficiary shall be membership, the proceeds of the
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retirement benefits shall accrue to his statutory daily wage in manila and if the
estate and will be distributed among his words "industrial policy are printed on the
legal heirs in accordance with the law on policy."
intestate succession. Re: Claims for
Benefits of the Heirs of the Late Mario V.
Chanliongco, Adm. Matter No. 190-RET,
What are the non-default or forfeiture
October 18, 1977.
options in whole life insurance?
We know that the insured pays premium

What are the principal types of
Insurance? depending on the frequency stipulated in the
policy. Because he pays premium, that life
a. Term Insurance — this is the simplest insurance policy would have a cash value.
form of life insurance. It pays only if the The greater the amount depends on the
death occurs during the term of the policy. number of premiums made by the insured.
(also the cheapest according to Dean)
b. Whole life or permanent insurance — Q: What if in a certain point the insured

it pays a death benefit whenever the stops paying or cannot afford to pay? Can
insured dies. (more expensive because its he get a refund of the premium he paid?
coverage is all throughout the life of the
A: There is no refund in life insurance. There
insured)
is refund in property insurance but not in life
c. Annuity— a contract with the insurer insurance.
where individuals agree to pay the
company a certain amount of money, But we have non-default options for the
either in a lump sum or through insured.
installments, which entitles them to receive
payment annually from the insurer, but The non-default options in whole life
which obligation ends upon death of the insurance are restated as follows:
annuitant
a. Extended term insurance the policy's
d. Endowment is a life insurance that available cash value will be used as single
doubles as an investment or a savings premium to purchase a term insurance.
account. It pays a lump sum to the insured
after a specified number of years but if he
dies before the agreed period, the b. Reduced paid up cash value will be used
beneficiary gets the proceeds of the policy. to purchase a paid-up insurance providing
a coverage with a term equivalent to the
e. Industrial life — The form of life
original policy but lower amount.
insurance under which premiums are
payable weekly or monthly or oftener, if
the face amount of the insurance is not c. Cash surrender once policy is
more than 500 times that of the current surrendered it cannot be reinstated.
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beneficiary to collect interest on the

The insured cannot get a refund of proceeds of the policy for the duration of
premium in life insurance, but he has the delay at the rate of twice the ceiling
non- default options. prescribed by the Monetary Board, unless
such failure or refusal to pay is based on
the ground that the claim is fraudulent.
When is Life Insurance payable?
An insurance upon life may be made For letter (b):

payable on the death of the person, or on
his surviving a specified period, or This is the typical life insurance policy.
otherwise contingently on the continuance
or cessation of life. In the case of Stronghold vs Pamana, the
Supreme Court held that it would mean that
6% x 2 (or 12%) interest for the duration of
Every contract or pledge for the payment
delay until it is actually paid.
of endowments or annuities shall be
considered a life insurance contract for
We all know that the legal rate has been made
purposes of the Insurance Code
uniform at 6% regardless of whether loan or
non-loan forebearance of money, goods or
We covered this already. credit and the law says twice the rate of the
ceiling prescribed by the MB. It should mean
Within what period should the claim be 12% per annum for the duration of the delay
paid? until full payment.
a. The proceeds of a life insurance policy Q: When is a person or insurer considered

shall be paid immediately upon maturity of in delay? Is it non-payment upon death of
the policy, unless such proceeds are made the insured?
payable in installments or as an annuity, in A: It is not non-payment upon death of the
which case the installments, or annuities insured but the expiration of the 60-day
shall be paid as they become due period from the filing of the claim and
presentation of the proof of death. That is the
only time the insurer is in default.
b. In the case of a policy maturing by the
death of the insured, the proceeds thereof
Is the insurer in a life insurance liable in
shall be paid within 60 days after
case of suicide by the insured?
presentation of the claim and filing of the
proof of death of the insured. Refusal or
failure to pay the claim within the time The insurer in a life insurance contract
prescribed herein will entitle the shall be liable in case of suicide only when
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it is committed after the policy has been in joke and assured her that it was not loaded,
force for a period of two (2) years from the then he put the gun to his temple and fired
date of its issue or of its last reinstatement, it.
unless the policy provides a shorter period:
Provided, however, that suicide committed Sun Insurance agreed that it was not
in the state of insanity shall be suicide, but argued that it was not an
compensable regardless of the date of accident and is therefore not covered by
commission. the insurance. Sun Insurance argued that
one of the four exceptions in the said
The insurer, however, is not liable if insurance contract includes bodily injury
suicide in an excepted risk. consequent upon the insured person
attempting to commit suicide or "willfully
exposing himself to needless peril" except
X, in January 30, 2009, or two (2) years in an attempt to save a human life, and that
before reaching the age of 65, insured his the mere act of pointing the gun to his
life for P20M. For reason unknown to his temple showed that Felix willfully exposed
family, he took his own life two (2) days himself to danger.
after his 65th birthday. The policy contains
no excepted risk. Which statement is most
Is Lim's death covered by the insurance
accurate?
policy?
a. the insurer will be liable Yes, "Accident/AccidentaI" in insurance

b. the insurer will not be liable. contracts are construed and considered
according to the ordinary understanding
c. the state of sanity of the insured is and common usage and speech: That
relevant in cases of suicide in order to hold which happens by chance or fortuitously,
the insurer liable. without intention or design, and which is
d. the state of sanity of the insured is unexpected, unusual, and unforeseen.
irrelevant in cases of suicide in order to There is nothing in the policy that
hold the insurer liable. Bar 2012 relieves the insurer of the responsibility
to pay the indemnity agreed upon if the
insured is shown to have contributed to
SLIDE his own accident. Indeed, most accidents
are caused by negligence. Lim was
unquestionably negligent and that
Sun Insurance issued a Personal Accident negligence cost him his own life. But it
Policy to Felix Lim, Jr. with a face value should not prevent his wife from
of P 200,000.00 with his wife, Nerissa, as recovering from the insurance policy he
obtained precisely against accident. Sun
beneficiary. On October 6, 1982, Lim Insurance Office, Ltd. v. Court of
"accidentally" shot himself in the head and Appeals and Nerissa Lim, G.R. No.
was killed on the spot. According to his 92383, July 17, 1992
secretary, Lim pointed the gun at her as a
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May a Life Insurance be assigned? that Y is not entitled to any amount under
the policy because the assignment without
due notice to the insurer was void. Resolve
A policy of insurance upon life or health
the issues.
may pass by transfer, will or succession
to any person, whether he has an insurable
interest or not, and such person may A life insurance is assignable. A provision,
recover upon it whatever the insured might however, in the policy stating that written
have recovered. The assignee need not notice of such an assignment should be
have insurable interest in the life of the given to the insurer is valid. The failure of
insured. This is because in life insurance, the notice of assignment would thus
insurable interest must exist only at the preclude the assignee from claiming rights
time of the issuance of the policy. The only under the policy. The failure of notice did
exception is to circumvent the rule on not, however, avoid the policy; hence,
insurable interest as when assignment is upon the death of Jose, the proceeds
made in favor of a person who cannot be would, in the absence of a designated
designated beneficiary of the insured. beneficiary, go to the estate of the insured.
The estate, in turn, would be liable for the
loan of P50,000.00 owing in favor of Y.
Is notice to the insurer of the assignment
Bar 1991
necessary for its validity?
Notice to an insurer of a transfer or bequest

This is a bar exam question. If notice is
thereof is not necessary to preserve the
required to be given to the insurer and the
validity of a policy of insurance upon life
notice was not given, then the assignment is
or health, unless thereby expressly
not valid.
required.
Is consent of the beneficiary required

The policy of insurance upon his life, with for the validity of the assignment?
a face value of P 100,000.00, was assigned
by Jose, a married man with 2 legitimate
Consent of the beneficiary is not
children, to his nephew, Y as security for a
necessary unless the designation is
loan of P50,000.00. He did not give the irrevocable.
insurer any written notice of such
assignment despite the explicit provision
to that effect in the policy. Jose died. Upon
So we said that if the beneficiary is
the claim on the policy by the assignee, the
designated irrevocably, then any act of the
insurer refused to pay on the ground that it
insured that may impair the interest of the
was not notified of the assignment. Upon
beneficiary is not allowed.
the other hand, the heirs of Jose contended
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What is the measure of indemnity The basis of compulsory motor vehicle

under a life insurance policy? liability insurance is Article 387 of the
Insurance Code which provides that it shall
be unlawful for any land transportation
Unless the interest of a person insured is
operator or owner of a motor vehicle to
susceptible of exact pecuniary
operate the same in the public highways
measurement, the measure of indemnity
unless there is in force in relation thereto a
under a policy of insurance upon life or
policy of insurance or guaranty in cash or
health is the sum fixed in the policy.
surety bond issued to indemnify the death,
bodily injury, and/or damage to property of
a third-party or passenger, as the case may
MICROINSURANCE be, arising from the use thereof.
The more recent issuance of the Insurance

What is microinsurance?
Commission is that it is limited only to death
or bodily injury - compulsory liability to
Microinsurance is a financial product or death or injury of third person. So damage to
service that meets the risk protection needs property is not compulsory.
of the poor where:
What is the extent of liability of the
insurer under a motor vehicle insurance
a. The amount of contributions, premiums,
fees or charges, computed on a daily basis, policy?
does not exceed seven and a half percent
(7.5%) of the current daily minimum wage
The insurer's liability is measured by the
rate for nonagricultural workers in Metro
Manila; and terms of the policy. It is not solidarily
liable with the tortfeasor.
b. The maximum sum of guaranteed
benefits is not more than 1,000 times of the It is not solidarily liable with the tortfeasor
current daily minimum. only because there is a limit of the liability of
the insurer. The liability is only up to what is
provided for in the policy. But if the claim
COMPULSORY MOTOR VEHICLE against the tortfeasor is just similar or the
LIABILITY INSURANCE same as the amount of the policy, in that case
we can say that they should be practically
made solidarily liable - that is if the amount
What is the basis for compulsory motor is the same. If the amount is not the same,
vehicle liability insurance? that’s the context by which we said the
insurer is not liable solidarily because the
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liability is based on the amount set forth in be held solidarily liable with the insured
the policy itself. and/or the other parties found at fault. The
liability of the insurer is based on contract;
Lope Maglana met an accident that that of the insured is based on tort.
resulted in his death while driving his
motorcycle on his way to workstation. He But we have seen cases where the tortfeasor
was bumped by a PUJ jeep which was and the operator of the common carrier, as in
driven by Pepito Into and was operated and the case of Tiu vs Arriesgado, that you can
owned by defendant Destrajo, when he make the tortfeasor and the common carrier
overtook another passenger jeep that was joint and severally liable even if they have
going towards the city. Thereafter, the different causes of action insofar as the
heirs of the deceased filed an action against aggrieved party is concerned; and different
Destrajo and the Afisco Insurance source liability.
Corporation (AFISCO) for damages and
attorney's fees. So although the Supreme Court says that only
tortfeasors can be made joint and severally
AFISCO was ordered to reimburse liable, we have cases seen in Transpo and
Destrajo whatever amounts the latter shall portion of insurance that a tortfeasor can be
have paid only up to the extent of its jointly and severally liable with a carrier,
insurance coverage, signifying only eventhough the latter’s liability is based on
secondary liability. The heirs, however, contract.
claimed that AFISCO should not merely be
held secondarily liable because the What we’re saying is that when the SC says
Insurance Code provides that the insurer's the surety or insurance company is not
liability is "direct and primary and/or liable soliadrily with the tortfeasor or
jointly and severally with the operator of third party insured, it is because there is a
the vehicle", although only up to the extent limit to the liability of the insurer – not the
of the insurance coverage. entire amount or claim or judgment
against tortfeasor but only up to extent of
liability as set forth in the policy itself.
Is AFISCO solidarily liable with Destrajo?
When does the right of the insured to

No, while it is true that where the insurance recover under the policy accrue?
contract provides for indemnity against
liability to third persons, such third persons AFISCO's liability under Third Party
can directly sue the insurer, however, the Liability coverage accrues immediately
direct liability of the insurer under upon occurrence of injury or event upon
indemnity contracts against third party which the liability depends and does not
liability does not mean that the insurer can depend on the recovery of judgment by the
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injured party against the insured.

Therefore, the AFISCO can be sued and That is in theory as I said –for bar exam
held directly liable by the injured party to purposes. In practice, you realize it does not
the extent of coverage but not solidary with work that way.
that of Destrajo. As such, the heirs have the
option either to claim from AFISCO and National Food Authority (NFA) was the
the balance from Destrajo or enforce the owner of a Chevrolet truck which was
entire judgment from Destrajo subject to insured against liabilities for death of and
reimbursement from AFISCO to the extent injuries to third persons with the GSIS.
of the insurance coverage. Figuracion Thereafter, it collided with a public utility
Vda. de Maglana, et al. v. Hon. Francisco vehicle, a Toyota Tamaraw. Civil case for
Consolacion and Afisco Insurance damages, was filed by an injured
Corporation, G.R. No. 60506, August 6, passenger, Librado Taer, against Uy, the
1992 operator of the public utility vehicle, and
insurer, Mabuhay Insurance and Guaranty
This is for bar exam. This is in theory. But in Co. (MIGC). Trial court rendered its
practice or in reality, the insurer will not pay decision holding that Corbeta's negligence
until and unless it established that the insured was the proximate cause, awarded Uy the
is at fault. In fact, we will see in a couple of total amount of for damages and ordered
cases where the insurer refused to pay, MIGC, Corbeta and NFA to pay plaintiff
eventhough liable under the policy or Taer, jointly and severally. GSIS denies
eventhough supposed to be third party solidary liability with the NFA or the
liability insurance coverage. negligent operator of the cargo truck
because it claims that they are liable under
The reality is the insurer does wait for the different obligations and since neither the
judgment finding the injured at fault. If it provision of the contract nor the insurance
turns out that it is the fault of the claimant or law provides for solidary liability.
the plaintiff and the insured is not liable, why
should a surety or insurer pay. That is why Is GSIS solidarily liable?
there is the concept of no fault indemnity
clause. Without having to prove the fault of
No. The insured or the heirs of a deaceased
any of the parties, the insurer must be made
victim of a vehicular accident may sue
liable but only up to P15,000.
directly the insurer of vehicle for
But for bar exam purposes this is your
indemnity, but the insurer’s liability is only
answer: it accrues right away upon the
up to the extent of the insurance policy.
occurrence of the injury or the event upon
GSIS’ liability based on the insurance
which the liability depends. So you don’t
contract is direct, but not solidary with that
have to exhaust the judgment or litigation
of NFA. Government Service Insurance
process against the insured, you can file a
claim with the insurance company.
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System. V. Court of Appeals et.al., G.R. solidarily liable with Cesar, it could be
No. 101439, June 21, 1999 made to pay more than the amount stated
in the policy. This would, however, be
This is just the reiteration of Consolacion vs contrary to the principles underlying
Maglana. insurance contracts. On the other hand, if
the insurer were solidarily liable with
Cesar and it is made to pay only up to the
While driving his car along EDSA, Cesar
amount stated in the insurance policy, the
sideswiped Roberto, causing injuries to the
principles underlying solidary obligations
latter. Roberto sued Cesar and the third-
would be violated. Bar 1996
party liability insurer for damages and/ or
insurance proceeds. The insurance
company moved to dismiss the complaint, This is the same as the first case.
contending that the liability of Cesar has
not yet been determined with finality. The next case is similar to the first 2 cases
that we saw but with a difference as we’ll see
when we discuss the answer.
a. Is the contention of the insurer correct?
Explain.
Poe was run over by a truck which was
b. May the insurer be held liable with insured with Malayan Insurance. Heirs of
Cesar? Poe then filed a complaint against the
owner of the truck and Malayan Insurance.
Malayan Insurance while admitting that it
a. No, the contention of the insurer is not is the insurer of the truck, it asserts that its
correct. There is no need to wait for the liability is limited, and it should not be held
decision of the court determining Cesar's solidarily liable with the owner for all the
liability with finality before the third-party damages awarded to the aggrieved parties.
liability insurer could be sued. The
occurrence of the injury to Roberto Is Malayan Insurance solidarily liable
immediately gave rise to the liability of the with the truck owner?
insurer under its policy. In other words,
where an insurance policy insures directly No, where the insurance contract provides
against liability, the insurer's liability for indemnity against liability to third
accrues immediately upon the occurrence persons, the liability of the insurer is direct
of the injury or event upon which the and third persons can directly sue the
liability depends. insurer. The direct liability of the insurer
under indemnity contracts against third
b. The insurer cannot be held solidarily party liability does not mean, however, that
liable with Cesar. The liability of the the insurer can be held solidarily liable
insurer is based on contract while that of with the insured and/or the other parties
Cesar is based on tort. If the insurer were found at fault, since they are being held
liable under different obligations. The
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liability of the insured carrier or vehicle a. The total indemnity in respect of any
owner is based on tort, in accordance with person shall not be less than P 15,000
the provisions of the Civil Code; while that b. The following proofs of loss, when
of the insurer arises from contract, submitted under oath, shall be sufficient
particularly, the insurance policy. The evidence to substantiate the claim:
third-party liability of the insurer is only up
● Police report of accident; and
to the extent of the insurance policy and
● Death certificate and evidence
that required by law; and it cannot be held
sufficient
solidarily liable for anything beyond that
● Medical report and evidence of
amount. Any award beyond the insurance
medical or hospital disbursement
coverage would already be the sole
in respect of which refund is
liability of the insured and/or the other
claimed.
parties at fault. However, Malayan did
not produce evidence to prove its limited
c. Claim may be made against one motor
liability so the Court concluded that it
vehicle only. In the case of an occupant of
had agreed to fully indemnify third-
a vehicle, claim, shall lie against the
party liabilities. Heirs of George Poe v.
insurer of the vehicle in which the
Malayan Insurance Company, G.R. No.
occupant is riding, mounting or
156302, April 7, 2009.
dismounting from. In any other case, claim
shall lie against the insurer of the directly
The insured in this case was made liable offending vehicle. In all cases, the right of
equivalent to the amount of judgment against the party paying the claim to recover
the operator and tortfeasor because it did not against the owner of the vehicle
produce evidence of its limited liability. responsible for the accident shall be
maintained.
Q: What evidence should have been
presented to prove the limit of liability of
You know the P20,000 by way of an
the insurer?
amendment to the Insurance Code.
A: Of course, the policy itself.
X is a passenger of a jeepney for hire being

driven by Y. The jeepney collided with
NO FAULT INDEMNITY CLAUSE
another passenger jeepney being driven by
Z who was driving recklessly. As a result
What do you understand by the "no fault of the collision, X suffered injuries. Both
indemnity" provision in the Insurance passenger jeepneys are covered by
Code? What are the rules on claims under Comprehensive Motor Vehicular
said provision? Insurance Coverage. If X wants to claim
under the "no fault indemnity clause",
against whom will his claim lie?
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claim against the vehicle in

The claim shall lie against the insurer of which the deceased was riding is
the passenger jeepney driven by Y because the one authorized, but the claim
X was his passenger. Bar 2012 against the other vehicle will not
prosper.
Jose, driving his own car together with his

wife Maria, were on their way home from Jose may claim only up to an amount not
less than P15,000 pursuant to Section 391
their respective offices when a car driven
of R.A. No. 10607.
by Pedro hit them from behind which was
in turn hit by a gasoline tanker driven by
Mario, causing the car of Jose to turn- If Jose includes in the claim damage for his
turtle, thus, resulting in the death of Maria. car, will the claim prosper?
All motor vehicles being insured, Jose
filed his claim for the death of Maria
Jose's claim for damages for his car will
against the "NO FAULT" Insurance,
not prosper. As may be clearly gleaned
Section 378 of the Insurance Code.
from Section 378 of the Insurance Code on
NO- FAULT Insurance applies only to
Will Jose's claim for the death of Maria "any claim for death or injury to any
against insurers of said three motor passenger or third party". Bar 1997
vehicles prosper and up to what amount?
Reasons.
Remember: damages to property is not
Jose's claim for the death of Maria against included
the insurer of said three (3) motor vehicles
will not prosper. According to Section 378 The next slide is an example of the injured
of the Insurance Code: party is not an occupant of vehicle – not
"Any claim for death or injury riding, not alighting or dismounting from the
to any passenger or third-party vehicle.
pursuant to the provisions of
this chapter shall be paid X owns and operates several passenger
without necessity of proving jeepneys in Metro Manila. He entered into
fault or negligence of any kind; a contract with Gold Mine Insurance &
Provided, that for purposes of Surety Co., insuring the operation of his
this section. x x x jeepneys against accidents with third
(iii) Claim may be made against party-liability. During the effectivity of the
one motor vehicle only. In the insurance, one of his jeepneys bumped
case of an occupant of a vehicle,
"B", who had just alighted from another
claim shall lie against the insurer
of the vehicle in which the passenger jeepney whose driver unloaded
occupant is riding, mounting or passengers in the middle of the street. "B"
dismounting from. Clearly, in suffered bodily injury as a consequence
the instant case, the NO-FAULT and filed a claim against the insurance
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company. The latter refused to pay on the

ground that the driver of the jeepney from Being covered by the compulsory liability
which passenger "B" alighted was guilty of policy required of all vehicle owners under
negligence in unloading in the middle of the Insurance Code, A referred the matter
the street, and that the driver of the insured to his insurance company, which refused to
operator was not at fault. reimburse him, claiming that since A was
not at fault (it was admitted that he was not
speeding or in any way negligent), there
Can passenger "B" recover from the was no third-party liability for
insurance company? Explain. which the insurance company could be
liable under A's policy. Is the insurance
company liable to reimburse A for the
Yes, passenger "B" may recover from the
hospital expenses? Explain.
insurance company. The insurance covers
the operation of "X's" jeepneys against
Yes, the insurance company is liable
accidents with third parties; therefore, the
provided A can present the police report of
insurance covers the liability for death or
the accident and the medical report as well
body injuries of third persons, like what
as the hospital receipts. The Insurance
happened to "B", and the claim shall be
Code has the "no-fault" provision
against the insurer of the directly offending
imposing liability for any claim for death
vehicle (X's vehicle). Furthermore, any
or injury to any third party under the
claim of this nature shall be paid without
compulsory motor vehicle liability
necessity of proving fault or negligence of
insurance. Under the provision, the
any kind, provided that the total indemnity
insurance company may be held liable for
in respect of any person shall be in
the maximum amount of P15,000.00
accordance as provided under the law. Bar
without necessity of proving fault or
1981
negligence of any kind, provided the
aforementioned proofs are submitted
Driving his car one night, A crossed an under oath.
intersection as the signal light turned
green. Suddenly he saw an old woman
X was riding a suburban utility vehicle
crossing the street just a few feet from his
(SUV) covered by a comprehensive motor
car. He applied his brakes immediately, but
vehicle liability insurance (CMVLI)
just the same, he hit the woman who turned
underwritten by FastPay Insurance
out to be senile already. He brought her to
Company when it collided with a speeding
the nearest hospital where she was
bus owned by RM Travel, Inc. the collision
confined for three (3) days due to her
resulted in serious injuries to X; Y, a
injuries. Upon her discharge, A had to pay
passenger of the bus; and Z, a pedestrian
the hospital bill which amounted to
waiting for a ride at the scene of the
P2,000.00 including X-rays, doctor's fees
collision. The police report established that
and medicines.
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the bus was the offending vehicle. The bus Seguros, Inc., to pay immediately within
had a CMVLI policy issued by Dragon five (5) days the required amount under the
Insurance Corporation, X, Y and Z jointly "no-fault clause" as provided for in Section
sued RM Travel and Dragon Insurance for 378 of the Insurance Code. Perla
indemnity under the Insurance Code of the Compania de Seguros, Inc., contends that
Philippines. The lower court applied the under Section 378 of the Insurance Code,
"no-fault" indemnity policy of the statute, the insurer liable to pay the P5,000 is the
dismissed the suit against RM Travel, and insurer of the vehicle in which private
ordered Dragon insurance to pay respondents were riding, not petitioner.
indemnity to all three plaintiffs.
Is Perla Compania de Seguros, Inc., liable?
Do you agree with the court's judgment?
Explain. No, the essence of "no fault indemnity"
clause is to provide victims of vehicular
accidents or their heir's immediate
No. The cause of action of Y is based on
compensation pending final determination
the contract of carriage, while that of X
of who is responsible for the accident.
and Z is based on torts. The court should
From a reading of Section 378, the
not have dismissed the suit against RM
following rules on claims under the no
Travel. The court should have ordered
fault indemnity provision, where the proof
Dragon Insurance to pay each of X, Y,
of fault or negligence is not necessary for
and Z to the extent of the insurance
payment of any claim for death or injury to
coverage. The excess of the claims of X,
passenger or third party, are: 1) claim may
Y, and Z, over and above such insurance
be made against one motor vehicle only; 2)
coverage, if any, should be answered or
if the victim is occupant of a vehicle, the
paid by RM Travel. Bar 2000
claim shall be against the insurer of vehicle
in which he is riding, mounting, or
There was a collision between the IH dismounting from; 3) in any other case, the
Scout, where private respondents were claim shall lie against the insurer of
riding, and a Superlines bus. Private directly offending vehicle; 4) in all cases,
respondents sustained injuries. A the right of other party paying the claim to
complaint for damages was filed against recover against the owner of the vehicle
Superlines, the bus driver and Perla responsible for the accident shall be
Compania de Seguros, Inc., the insurer of maintained. Perla Compania de Seguros
the bus. The vehicle in which the private Inc. v. Hon. Constante Ancheta, et al., G.R.
respondents were riding was insured with No. L-49699, August 8, 1988.
Malayan Insurance Co. Even before
summons could be served, the judge issued
an order for the Perla Compania de
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Not liable because it is not insurer of the vehicle and is not disqualified from doing
vehicle where the claimant was an so under any enactment or regulation. At
occupant. the time of the accident, Stokes had been
in the Philippines for more than 90 days.
AUTHORIZED DRIVER CLAUSE Hence, under the law, he could not drive a
motor vehicle without a Philippine driver's
license. He was therefore not an
You will see various clauses in the "authorized driver" under the terms of the
comprehensive motor vehicle insurance insurance policy in question, and Malayan
policy. We now take a look at authorized was right in denying the claim of the
driver clause. insured. James Stokes, as Attorney-in-Fact
of Daniel Stephen Adolfson v. Malayan
Daniel Adolfson had a subsisting Malayan Insurance Co, Inc., G.R. No. L-34768,
car insurance policy with coverage against February 24, 1984.
own damage as well as third party liability
when his car figured in a vehicular You can drive but not more than 30 days. For
accident with another car, resulting to laws of other countries, you’re allowed to
damage in both vehicles. At the time of the drive for (inaudible), but beyond that
accident, Adolfson's car was being driven whatever foreign license that you have will
by James Stokes, who was authorized to do no longer be valid.
so by Adolfson. Stokes, an Irish tourist
who had been in the Philippines for only
Andrew Palermo, filed a complaint against
90 days, had a valid and subsisting Irish Pyramid Insurance Co., Inc., for payment
driver's license but without a Philippine of his claim under a Private Car
driver's license. Comprehensive Policy MV 1251.
Adolfson filed a claim with Malayan but In its answer, Pyramid Insurance Co., Inc.,
the latter refused to pay contending that alleged that it disallowed the claim
Stokes was not an authorized driver under because at the time of the accident, the
the "Authorized Driver" clause of the insured was driving his car with an expired
insurance policy in relation to Section 21 driver's license
of the Land Transportation Code. Is
Malayan Insurance liable to pay
Adolfson? Does the authorized driver clause apply to
the insured himself so as to excuse
Pyramid Insurance from liability?
No. Under the authorized driver clause, an
authorized driver must not only be
permitted to drive by the insured but it is
also essential that he is permitted under No, the requirement that the driver be
the law and regulations to drive the motor permitted in accordance with the licensing
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or other laws or regulations to drive the proper driver's license at the time of the
Motor Vehicle and is not disqualified from accident. The Restriction 4 in Leonardo
driving such motor vehicle by order of a Anit's driver's license provided that he can
Court of Law or by reason of any only drive four-wheeled vehicles weighing
enactment or regulation in that behalf, not more than 4,500 kgs. Since the insured
applies only when the driver is driving on truck he was driving weighed more than
the insured's order or with his permission. 4,500 kgs, he therefore violated the
It does not apply when the person driving "authorized driver" clause 5 of the
is the insured himself. Andrew Palermo v. insurance policy. Is Standard Insurance
Pyramid Insurance Co., Inc., G.R. No. L- liable to pay Lao?
36480, May 31, 1988; 1991 Bar
SLIDE
We have to add: without prejudice to his
liability under the Land Transportation
Code. For insofar as the liability of the No, if the license of the third party driving
insurer is concerned, it does not matter that the private motor vehicle prohibits him
the driver/operator/owner of the vehicle, if from driving a vehicle exceeding the
he’s the one driving, does not have a valid weight of 4,500 kgs, the Standard
license. Insurance is not liable if the weight
exceeds 4,500 kgs. The license provides
The next slide is variation in the sense that to for the extent of authority. Rudy Lao v.
be an authorized driver, you should be the Standard Insurance co., Inc., G.R. No.
owner itself or person authorized by the 140023, August 14, 2003
owner but without valid license
corresponding to the type of vehicle that the
driver is operating. Lets take a look at this So the license provides for the extent of
case. authority so while you may have a license,
SLIDE that license must correspond to the type of
vehicle that you are driving. Otherwise,
unless you are the owner yourself, the
Rudy Lao is the owner of a Fuso truck
insurer is not liable.
insured with Standard Insurance Co., Inc.
While the policy was in effect, the insured
truck bumped another truck, also owned by Capital Insurance & Surety Co., Inc.
Lao. Lao filed a claim with the insurance insured for one (I) year the jeepney of
company for the proceeds from his policy. Agapito Gutierrez against passenger and
However, the claim was denied by the third-party liability. The policy provides in
insurance company on the ground that it Item 13 that the authorized driver must be
was found that the driver of the insured the holder of a valid and subsisting
truck, Leonardo Anit, did not possess a professional driver's license. A driver with
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an expired Traffic Violation Receipt or own damage, theft and third-party liability.
expired Temporary Operator's Permit is While the car was in the repair shop, one
not considered an authorized driver. The of the employees of the said repair shop
insured jeepney figured in an accident. As took it out for a joyride after which it
a result, a passenger fell off the vehicle and figured in a vehicular accident. This
died. At the time of the accident, Teofilo resulted to the death of the driver and some
Ventura, the jeepney driver, did not have of the passengers as well as to extensive
his license but he had with him instead a damage to the car.
carbon copy of a traffic violation report Villacorta filed a claim for total loss with
(TVR) issued by a policeman. However, the said insurance company. However, it
the said TVR was already expired because denied the claim on the ground that the
it only served as a temporary operator's accident did not fall within the provisions
permit for 15 days from receipt. of the policy either for the Own Damage or
Theft coverage, invoking the policy
provision on "Authorized Driver Clause".
Does the insurance cover a jeepney whose
driver's TVR or temporary operator's
permit had already expired? Is Empire Insurance liable under the
Authorized Driver Clause?
No, where the driver's temporary
operator's permit had expired, and the No, Empire Insurance is not liable
insurance policy states that a driver with an under the Authorized Driver Clause,
expired TVR or expired temporary
but under the Theft Clause. The main
operator's permit is not considered an
authorized driver within the meaning of the purpose of the authorized driver clause is
policy, the expiration of the same bars that a person other than the insured owner,
recovery under the policy. In liability who drives the car on the insured's order,
insurance, the parties are bound by the such as his driver, or with his permission,
terms of the policy and the right of the such as friend or member of the family or
insured to recover is governed thereby. employees of a car service shop must be
Agapito Gutierrez v. Capital Insurance &
Surety co., Inc., G.R. No. L-26827, June duly licensed drivers and have no
29, 1984 disqualification to drive a motor vehicle.
The mere happenstance that the employee
of the shop owner diverts the use of his car
to unauthorized purpose does not mean
THEFT CLAUSE
that the authorized driver clause has been
violated such as to bar recovery, provided
This is a case is in relation to theft and that the employee is qualified to drive
authorized driver clauses. under a valid license. Jewel Villacorta v.
Insurance Commissioner, et al., G.R. No.
Villacorta had her Colt Lancer car insured 54171, October 28, 1980; 1981 Bar.
with Empire Insurance Company against
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complaint sheet as part of its procedure.

HL insured his brand-new car with P In the complaint sheet, Jess alleged that
Insurance Company for comprehensive a certain Ric Silat (Silat) took possession
coverage wherein the insurance of the subject vehicle to add accessories
company undertook to indemnify him and improvements thereon. However,
against loss or damage to the car (a) by Silat failed to return the subject vehicle
accidental collision xxx (b) by fire, within the agreed three-day period. As a
external explosion, burglary, or theft, result, Jess notified Jack of his claim for
and (c) malicious act. reimbursement of the value of the lost
vehicle under the insurance policy. Jack
After a month, the car was carnapped refused to pay claiming that there is no
while parked in the parking space in theft as Jess gave Silat lawful possession
front of the Intercontinental Hotel in of the car.
Makati. HL's wife who was driving the
said car when it was carnapped was in Is Jack correct?
possession of an expired driver's license,
a violation of the "authorized driver" No. Jack is not correct. The "theft clause"
clause of the insurance company. of a comprehensive motor vehicle
insurance policy has been interpreted by
May the insurance company be held the Court in several cases to cover
liable to indemnify HL for the loss of the situations like (1) when one takes the
insured vehicle? Explain. motor vehicle of another without the
latter's consent even if the motor vehicle is
Yes. The car was lost due to theft. What later returned, there is theft—there being
applies in this case is the "theft" clause, and intent to gain as the use of the thing
not the "authorized driver" clause. It is unlawfully taken constitutes gain, or (2)
immaterial that HL's wife was driving the when there is taking of a vehicle by another
car with an expired driver's license at the person without the permission or authority
time it was carnapped. from the owner thereof. Paramount
Insurance v. Spouses Remondeulaz,
On May 26, 2014, Jess insured with Jack G.R. No. 173773, November 28, 2012;
Insurance (Jack) his 2014 Toyota BAR 2014.
Corolla sedan under a comprehensive
motor vehicle insurance policy for one On February 21, 2013, Barrack entered
(1) year. On July 1, 2014, Jess' car was into a contract of insurance with Matino
unlawfully taken. Hence, he Insurance Company (Matino) involving
immediately reported the theft to the a motor vehicle. The policy obligates
Traffic Management Command (T MC) Matino to pay Barrack the amount of
of the Philippine National Police (PNP), Six Hundred Thousand Pesos
which made Jess accomplish a (P600,000.00) in case of loss or damage
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to said vehicle during the period means deterioration or injury to property.

covered, which is from February 26, Also, a contract of insurance is a contract
2013 to February 26, 2014. of adhesion. So, when the terms of the
insurance contain limitations on liability,
On April 16, 2013, at about 9:00 a.m., courts should construe them in such a way
Barrack instructed his driver, J], to as to preclude the insurer from non-
bring the motor vehicle to a nearby auto compliance with his obligation. Alpha
shop for tune-up. However, JJ no longer Insurance and Surety Co. v. Castor,
returned and despite diligent efforts to G.R. No. 198174, September 2, 2013;
locate the said vehicle, the efforts proved BAR 2014.
futile. Resultantly, Barrack promptly
notified Matino of the said loss and It is not the damage clause that will apply. In
demanded payment of the insurance case of the damage clause, the insurer will not
proceeds of P600,000.00. In a letter be liable because the one liable is the driver
dated July 5, 2013. Matino denied the himself. However, it is not damage clause
claim, reasoning as stated in the contract that will apply because loss is different from
that "the company shall not be liable for damage as explained in this case.
any malicious damage caused by the
insured, any member of his family or by
COMPULSORY INSURANCE
a person in the insured's service. COVERAGE FOR AGENCY-HIRED
WORKERS
Is Matino correct in denying the claim?
The agency hired OFW compulsory
No. Matino is not correct in denying the
insurance or the compulsory coverage for
claim. An insurance company cannot deny
agency-hired migrant workers is an
a claim by the owner of a motor vehicle
insurance mechanism made available by
who insured it against loss or damage
law to provide insurance coverage for the
because the driver he employed stole it.
OFWs. It covers accidental death benefit,
Matino cannot invoke the provision
natural death benefit, permanent total
excluding malicious damages caused by a
disablement benefit, repatriation cost
person in the service of the insured.
benefit, subsistence allowance, money
Contracts of insurance are to be construed
claim benefit, compassionate visit benefit,
according to the sense and meaning of the
medical evacuation, and medical
terms which the parties themselves have
repatriation benefits.
used. If such terms are clear and
unambiguous, they must be taken and
OFW and migrant workers mean the same
understood in their plain, ordinary and
thing.
popular sense. The word "loss" refers to the
act or fact of losing or failure to keep
possession, while the word "damage"
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Kung merong compulsory motor vehicle The higher the premium, the higher the
insurance, meron din compulsory insurance amount of recovery. You will not get back
for agency hired workers. what you paid but you will get a certain
amount of income on your premium.
VARIABLE CONTRACTS
It is basically a combination of insurance and
banking.
What is a variable contract?
Note: An insurance company cannot issue a
The term variable contract shall mean any variable contract without the permission of
policy or contract on either a group or on the Insurance Commission.
an individual basis issued by an insurance
company providing for benefits or other
contractual payments or values thereunder BUSINESS OF INSURANCE
to vary so as to reflect investment results of
any segregated portfolio of investments or Requirements Important Rules:
of a designated separate account in which
amounts received in connection with such a. Contract of insurance involves public
contracts shall have been placed and interest, regulation by the State is
accounted for separately and apart from necessary. No insurer or insurance
other investments and accounts. This company is allowed to engage in the
contract may also provide benefits or insurance business without a license or
values incidental thereto payable in fixed a certificate of authority from the
or variable amounts, or both. It shall not be Insurance Commission.
deemed to be a security or securities. b. Before a foreign corporation can
transact business it must first obtain a
Q: Why is it variable contract? license to transact business and secure
A: Under a variable contract, your premium the proper authorizations under
will also be used as an investment. It is existing law.
possible for you to get a certain amount even c. The law makes no distinction whether
though the insured will not die. So let’s say the transaction is one that is isolated or
after 5 years of premium payment, you get in the regular course of business, for an
this kind of benefit. insurance company to secure a license
from the Insurance Commission.
The most common example of a variable d. Engaging in insurance without license
contract is when you surrender the policy and from the Insurance Commission is a
get the surrender value. Under this variable criminal offense without prejudice to
contract, the insurance company will invest the imposition of administrative
your premium in certain products. sanctions under 438 of the IC.
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e. No person shall act an insurance agent regulate the issuance and sale of
without first procuring license from the variable contracts as defined in
Insurance Commission. Section 232 and to provide for the
f. Capital requirement (P900 million by licensing of persons selling such
end 2019 and 1.3 billion by 2022). contracts, and to issue such
reasonable rules and regulations
Q: Is an insurance company a wholly governing the same;
nationalized activity?
A: It is not. In fact, there are foreign b. The Commissioner may issue such
insurance companies in the Philippines. ruling, instructions, circulars,
Those foreign corporations, of course, cannot orders and decision as he may
be allowed to engage in insurance business in deem necessary to secure the
the Philippines without authorization from enforcement of the provisions of
the Insurance Commission. this Code, subject to the approval
of the Secretary of Finance.
Q: How much is the extent of foreign
ownership in an insurance company? Except as otherwise specified,
A: It depends on the capital of the insurance decisions made by the
company but one thing is certain, it is not a Commissioner shall be appealable
wholly nationalized activity. to the Secretary of Finance;
(Dean: The rulings issued by the

INSURANCE COMMISSIONER AND
ITS POWER commissioner be all related to
insurance. Any matter relating to
the corporation must be decided by
Q: What are the powers of Insurance the SEC because as you all know
Commissioner? insurance companies must be
juridical persons.)
a. The Insurance Commissioner shall
have the duty to see that all laws c. In addition to the foregoing, the
relating to insurance, insurance Commissioner shall have the
companies and other insurance following powers and functions:
matters, mutual benefit
i. Formulate policies and
associations, and trusts for recommendations on issues
charitable uses are faithfully concerning the insurance
executed and to perform the duties industry, advise Congress
imposed upon him by this Code, and other government
and shall, notwithstanding any agencies on all aspects of
existing laws to the contrary, have
the insurance industry and
sole and exclusive authority to
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propose legislation and stockholders or members

amendments thereto; thereof under its
ii. Approve, reject, suspend or supervision;
revoke licenses or ix. Issue subpoena duces
certificates of registration tecum and summon
provided for by the Code; witnesses to appear in any
iii. Impose sanctions for the proceeding of the
violation of laws and the Commission and, in
rules, regulations and appropriate cases, order the
orders issued pursuant examination, search and
thereto; seizure of all documents,
iv. Prepare, approve, amend or papers, files and records,
repeal rules, regulations tax returns, and books of
and orders, and issue accounts of any entity or
opinions and provide person under investigation
guidance on and supervise as may be necessary for the
compliance with such rules, proper disposition of the
regulations and orders; cases before it, subject to
v. Enlist the aid and support the provisions of existing
of, and/or deputize any and laws;
all enforcement agencies of x. Suspend or revoke, after
the government in the proper notice and hearing,
implementation of its the license or certificate of
powers and functions under authority of any entity or
the Code; person under its regulation,
vi. Issue cease and desist upon any of the grounds
orders to prevent fraud or provided by law;
injury to the insuring xi. Conduct an examination to
public; determine compliance with
vii. Punish for contempt of the laws and regulations if the
Commissioner, both direct circumstances so warrant as
and indirect, in accordance determined by appropriate
with the pertinent rules and regulations.
provisions of and penalties xii. Investigate not oftener than
prescribed by the Rules of once a year from the last
Court; date of examination to
viii. Compel the officers of any determine whether an
registered insurance institution is conducting its
corporation or association business or a safe and sound
to call meetings of basis: Provided, That, the
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deficiencies/irregularities of any provision of the Code, or

found by or discovered by any order, instruction, regulation,
an audit shall be or ruling of the Commissioner, or
immediately addressed; any commission or irregularities,
xiii. “Inquire into the solvency and/or conducting business in an
and liquidity of the unsafe or unsound manner as may
institutions under its be determined by the
supervision and enforce Commissioner, the following:
prompt corrective action; a. Fines not less than Five
xiv. “(n) To retain and utilize, in thousand pesos (P5,000.00)
addition to its annual and not more than Two
budget, all fees, charges hundred thousand pesos
and other income derived (P200,000.00); and
from the regulation of b. Suspension, or after due
insurance companies and hearing, removal of
other supervised persons or directors and/or officers
entities; and/or agents.
xv. To fix and assess fees,
charges and penalties as the Does the Commissioner have the power
Commissioner may find to adjudicate claims and complaints
reasonable in the exercise involving any loss, damage or liability
of regulation; and for which the insurer may be
xvi. Exercise such other powers answerable under any insurance policy?
as may be provided by law
as well as those which may Yes, the Commissioner shall have the
be implied from, or which power to adjudicate claims and complaints
are necessary or incidental involving any loss, damage or liability for
to the express powers which an insurer may be answerable under
granted the Commission to any kind of policy or contract of insurance,
achieve the objectives and or for which such insurer may be liable
purposes of the Code. under a contract of suretyship, or for which
a reinsurer may be sued under any contract
d. In addition to the administrative of reinsurance it may have entered into; or
sanctions provided in the Code, the for which a mutual benefit association may
Commissioner is also authorized, at be held liable under the membership
his discretion, to impose upon certificates it has issued to its members,
insurance companies, their where the amount of any such loss, damage
directors and/or officers and/or or liability, excluding interest, cost and
agents, for any willful failure or attorney's fees, being claimed or sued upon
refusal to comply with, or violation any kind of insurance, bond, reinsurance
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contract, or membership certificate does This is the difference between the ruling of
not exceed in any single claim Five million the SEC and the ruling of the insurance
pesos. commissioner.
The power of the Commissioner does not SEC IC

cover the relationship between the Mode of Petition for Notice of
insurance company and its agents/brokers appeal review Appeal
but is limited to adjudicating claims and under Rule
complaints filed by the insured against the 43
insurance company.
Ramon Paterno filed a letter-complaint
This just basically says that the commissioner against Philippine American Life
has concurrent jurisdiction with the courts on Insurance Company (Philamlife) to the
claims not exceeding five million pesos. Insurance Commissioner alleging
certain problems encountered by agents,
Is the authority of the Commissioner to supervisors, managers and public
adjudicate concurrent with the courts? consumers as a result of certain
practices by said company. Manuel
Yes, the authority to adjudicate granted to Ortega, Philamlife's Senior Assistant
the Commissioner shall be concurrent Vice-President and Executive Assistant
with that of the civil courts, but the filing to the President filed a motion to quash
of a complaint with the Commissioner raising as one of the grounds that the
shall preclude the civil courts from taking Insurance Commission has no
cognizance of a suit involving the same jurisdiction over the subject or nature of
subject matter. the action and over the parties involved.
The Insurance Commissioner denied the
Any decision, order or ruling rendered by motion to quash. Is the resolution of the
the Commissioner after a hearing shall legality of the contract of agency falls
have the force and effect of a judgment. within the jurisdiction of Insurance
Any party may appeal from a final order, Commissioner?
ruling or decision of the Commissioner by
filing with the Commissioner within thirty No. The general regulatory authority of the
(30) days from receipt of copy of such Insurance Commissioner is described in
order, ruling or decision a notice of appeal Section 414 of the Insurance Code which
to the Court of Appeals in the manner shows that the Insurance Commissioner
provided for in the Rules of Court for has the authority to regulate the business of
appeals from the Regional Trial Court to insurance. Section 2 of the said law defines
the Court of Appeals. the term "doing an insurance business" or
"transacting an insurance business." Since
the contract of agency entered into
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between Philamlife and its agents is not Capt. Nuval to receive the insurance
included within the meaning of an pertaining to the beneficiaries.
insurance business, Section 2 of the
Insurance Code cannot be invoked to give Is Capt. Nuval authorized to receive the
jurisdiction over the same to the Insurance proceeds?
Commissioner. Philippine American Life
Insurance Company, et al. v. Hon. Yes, in group insurance policies, the
Armando Ansaldo, G.R. No. 76542, July employer is the agent of the insurer. Group
26, 1994. insurance is essentially a single insurance
contract that provides coverage for many
It is the claim of the insured against the individuals. In its original and most
insurance company that is within the common form, group insurance provides
jurisdiction of the Insurance Commissioner life or health insurance coverage for the
and not the claim of an insurance agent employees of one employer. The coverage
against the insurance company. terms for group insurance are usually
stated in a master agreement or policy that
is issued by the insurer to a representative
INSURANCE AGENT
of the group or to an administrator of the
--excluded since not part of the BAR insurance program, such as an employer.
The employer acts as a functionary in the
But I maintained this part which is the collection and payment of premiums and in
concept of group policy insurance: performing related duties.
Petitioners, beneficiaries in the life Payment of the employer is payment to the

insurance benefits under a group policy, insured.
sought to recover these benefits from
Insular Life but the latter denied their
claim on the ground that its liability was REINSURANCE
already extinguished upon delivery to
and receipt by Prime Marine Services, CISC and SAPL entered into a
Inc. of the checks issued in their names. Memorandum of Agreement (MOA)
Capt. Roberto Nuval, President and whereby MSAPL appointed CISC as the
General Manager of PMSI, the exclusive agent of MSAPL to PCSO
employer of seamen who died, allegedly during the lifetime of the recently
received the checks through the special concluded MOA entered into between
power of attorney issued by petitioners MSAPL, PCSO and other parties. After
and these checks were deposited in his initially complying with its obligation
account. On trial, CA ruled that the under the MOA, MSAPL stopped
powers of attorney relied upon by remitting commissions to CISC. As a
Insular Life were sufficient to authorize result of MSAPL's refusal to pay, CISC
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filed a complaint for specific risk is insured in the reinsurance

performance against MSAPL, MSPI, agreement. The reinsurer's contractual
Atty. Ofelia Cajigal, and PCSO. CISC relationship is with the direct insurer, not
prayed that private respondents be the original insured, and the latter has no
ordered to comply with its obligations interest in and is generally not privy to the
under the MOA. CISC posted a bond contract of reinsurance. Put simply,
through Plaridel Surety and Insurance reinsurance is the "insurance of an
Company (Plaridel) in favor of MSAPL. insurance." Communication and
Two days later, MSAPL filed a motion Information Systems Corporation v.
to determine the sufficiency of the bond Mark Sensing Australia Pty. Ltd., G.R.
because of questions regarding the No. 192159, January 25, 2017.
financial capacity of Plaridel. But before
the RTC could act on this motion, Q: GSIS, for example. It insures all
MSAPL, apparently getting hold of government properties but it has a limited
Plaridel's latest financial statements, capital. How can it underwrite bonds given
moved to recall and set aside the its limited capital?
approval of the attachment bond on the A: Because it reinsures its obligation under
ground that Plaridel had no capacity to its insurance contract with reputable
underwrite the bond pursuant to Section reinsurers all over the world.
215 of the old Insurance Code because
its net worth was only P214,820,566.00 Lepanto Consolidated Mining Company
and could therefore only underwrite up filed a complaint with a plea for
to P42,964,113.20. RTC denied preliminary mandatory injunction
MSAPL's motion, finding that although against Malayan Insurance Company,
Plaridel cannot underwrite the bond by Inc. founded on the Marine Open Policy
itself, the amount covered by the issued by the latter in favor of Lepanto.
attachment bond was likewise reinsured Ivor Robert Dayton Gibson, one of re-
to sixteen other insurance companies. insurers in the reinsurance contract
Plaridel submitted proof of reinsurance. obtained abroad by Malayan through
Is Plaridel's bond correctly approved? Sedgwick, Collins & Co., Limited, filed
a motion to intervene. He claimed that
Yes, reinsurance contracts were correctly he has a legal interest in the subject
issued in favor of Plaridel. A contract of matter of litigation in that he stands to
reinsurance is one by which an insurer (the be held liable to pay on its reinsurance
"direct insurer" or "cedant") procures a contract should judgment be rendered
third person (the "reinsurer") to insure him requiring the Malayan to pay the claim
against loss or liability by reason of such of the Lepanto. Is reinsurer's
original insurance. It is a separate and intervention proper?
distinct arrangement from the original
contract of insurance, whose contracted
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No. The rights, if any, of Ivor Robert reinsurance companies. Worldwide

Gibson are not prejudiced by the present Surety and Insurance, in a Deed of
suit and will be fully protected in a separate Assignment, acknowledged a remaining
action against him and his co-insurers by balance of P 19,444,447.75 still due
Malayan. The general rule in the law of Yupangco Cotton Mills, and assigned to
reinsurance is that the re-insurer is entitled the latter all reinsurance proceeds still
to avail itself of every defense which the collectible from all the foreign
re-insured, Malayan, might urge in an reinsurance companies. Avon Insurance
action by the person originally insured, submitted that the Court has no
Lepanto. The clause "to pay as may be paid jurisdiction over them, being all foreign
thereon" contained in Ivor Robert Gibson's corporations not doing business in the
reinsurance contract does not preclude Philippines with no office, place of
the reinsurer from insisting upon proper business or agents in the Philippines. Is
proof that a loss strictly within the terms of Avon Insurance subject to the Court's
the original policy has taken place. Ivor jurisdiction?
Robert Dayton Gibson v. Hon. Pedro
Revilia, et al., G.R. No. L-41432, July 30, No. A corporation to qualify as duly
1979. engaged in reinsurance business, it must
comply with the requirements provided by
So, the reinsurer cannot intervene in a suit Philippine law. If a foreign corporation
between the original insured and the insurer. does not do business here, there would be
no reason for it to be subject to the State's
Yupangco Cotton Mills engaged to regulation. A reinsurance company is not
secure with Worldwide Security and doing business in a certain state merely
Insurance Co., Inc., several of its because the property or lives which are
properties under Policy No. 20719 and insured by the original insurer are located
Policy No. 25896. Both contracts were in such State. In so far as the State is
covered by reinsurance treaties between concerned, such foreign corporation has no
Worldwide Surety and Insurance and legal existence. Therefore, to subject such
several foreign reinsurance companies, corporation to the courts' jurisdiction
including Avon Insurance. The would violate the essence of sovereignty.
reinsurance arrangements had been Avon Insurance PLC, et al. v. Court of
made through international broker C.J. Appeals, G.R. No. 97642, August 29,
Boatwright and Co. Ltd., acting as agent 1997.
of Worldwide Surety and Insurance.
Within the respective effectivity periods PRE-NEED CODE OF THE
of the 2 policies, the properties therein PHILIPPINES
insured were razed by fire. Partial
payments were made by Worldwide
Surety and Insurance and some of the
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What law governs the establishment,

operation, and regulation of pre-need Define pre-need company.
companies in the Philippines? Which
regulatory body oversees the pre-need "Pre-need company" refers to any
companies in the Philippines? corporation registered with the Insurance
Commission and authorized/licensed to
The establishment, operation and sell or offer to sell pre-need plans. The
regulation of pre-need companies are term "pre-need company" also refers to
governed by Republic Act ("R.A.") No. schools, memorial chapels, banks,
9829, otherwise known as Pre-Need Code nonbank financial institutions, and other
of the Philippines, which took effect on entities which have also been
December 3, 2009. authorized/licensed to sell or offer to sell
pre-need plans insofar as their pre-need
All pre-need companies shall be under the activities or business are concerned.
primary and exclusive supervision and
regulation of the Insurance Commission. Q: Why are banks considered as pre-
need?
Define pre-need plans. A: Because banks can sell products of a pre-
need company. It can also sell insurance
"Pre-need plans" are contracts, products. That is why it is included in the
agreements, deeds, or plans for the benefit definition of a pre-need company.
of the planholders which provide for the
performance of future service/s, payment Is a pre-need plan considered a security
of monetary considerations, or delivery of under the Securities and Regulation
other benefits at the time of actual need or (“SRC”)?
agreed maturity date, as specified therein,
in exchange for cash or installment Section 3.9 of the SRC specifically defines
amounts with or without interest or pre-need plans as: "SECTION 3.
insurance coverage and includes life, Definition of Terms• — xxx xxx xxx
pension, education, interment, and other
plans, instruments, contracts, or deeds as 3.9. 'Pre-Need Plans" are contracts
may in the future be determined by the which provide for the performance
Insurance Commission. of future services or the payment of
future monetary considerations at
The most popular pre-need plans are the time of actual need, for which
educational plans, pension plans and planholders pay in cash or
memorial plans. installment at stated prices, with or
You pay now for services to be rendered in without interest or insurance
the future or amount to be paid in the future coverage and includes life,
at the time of actual need. pension, education, interments and
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other plans which the Commission Commission. Pre-need companies are under
may from time to time approve." the supervision of the Insurance
Commission. Therefore, theoretically, it
The fact that pre-need plans are defined in should be an exempt security but not so held
Section 3.9 of the SRC could only mean by the SC. So, preneed plans are securities
that it is treated as one of the securities and they are not exempt securities. They are
being regulated by the SRC. Otherwise, securities that have to be registered before it
there is no reason for its inclusion in the can be sold within the Philippines to the
said law, which was primarily enacted for general public.
the purpose of regulating a socially
conscious free market that ensures full and
B. REGISTRATION OF PRE-NEED
fair disclosure of securities. PLANS
However, even if there is no Section 3.9 of

Are pre-need plans required to be
the SRC, a pre- need plan still satisfies all
registered before they can be offered to
the elements of an investment contract
the public?
under the Howey Test and is, therefore, a
security. In a pre-need plan or contract, the
Before offering them for sale to the public,
planholder pays a pre-need company a
pre-need plans must be registered with the
certain amount to answer for a determined
Insurance Commission.
future need (education, pension, memorial,
etc.), which is essentially a return or
Within a period of 45 days after the grant
benefit, primarily from the efforts of
of a license to do business as a pre-need
others, the amount of which is higher than
company, and for every pre-need plan
the amount earlier paid. Re: Pre-Need
which the preneed company intends to
Products as Securities, SEC-OGC
offer for sale to the public, the pre- need
Opinion No. 54-19, November 25, 2019.
company shall, among other things, file
with the Insurance Commission the
Of course, the answer is YES.
following:
a. Duly accomplished Registration
In a case decided by the SC, it held that
Statements;
preneed plans like educational plans are
b. Board resolution authorizing the
securities and therefore, they cannot be
registration of applicant's pre-need
issued, offered to be sold, distributed to the
plans;
public in the Philippines, unless registered
c. Opinion of independent counsel on
with the SEC.
the legality of the issue;
d. Audited financial statements;
One of the exempt securities however is the
securities or derivative of which that are
under the supervision of the Insurance
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e. Viability study with certification, corporate secretary. However, in the

under oath, of pre-need actuary registration of a pre-need plan, you just
accredited by the Commission; need a board resolution to authorize the
f. Copy of the proposed pre-need registration of the applicant’s pre-need
plan; and plans.
g. Sample of sales materials.
When can the Insurance Commission
Such registration statements and sales deny the registration of pre-need plans?
materials required under this section shall
contain the appropriate risk factors as may The Insurance Commission shall deny the
be determined by the Insurance registration of a pre- need plan/s of a pre-
Commission. need company if on the basis of its latest
audited financial statements, trust fund
The procedure mirrors the registration of annual statements, and reserves valuation
securities under the SRC. report, it has solvency or trust fund
deficiencies, or paidup capital impairment.
Q: You will notice that it is registered with
the Insurance Commission but can the "Trust fund" refers to a fund set up from
SEC issue a CDO to stop the registration the planholders' payments to pay for the
or sale of unregistered securities? cost of benefits and services, termination
A: Yes. SEC acted correctly in issuing a CDO values payable to planholders and other
for the sale of preneed plans because they are costs necessary to ensure the delivery of
not registered with the SEC. benefits or services to planholders as
provided for in the contracts.
Q: But in this provision of the code that we
are seeing, they have to be registered with Aside from the registration of preneed
the Insurance Commission. So what do plans, what are the other requirements
you do now? Should you register it with that must be satisfied before the pre-
the SEC or the Insurance Commission? need plans can be sold to the public?
A: One thing is for sure. You have to register
it with the appropriate government agency. If All forms, including amendments thereto,
they are not registered, then the SEC has the relating to the pre- need plans shall be
power to issue a CDO to enjoin the sale even approved by the Insurance Commission.
though there is no complainant. The SEC can No pre- need contracts or certificates shall
motu proprio issue a CDO to stop the sale of be issued or delivered within the
unregistered securities. Philippines unless in the form previously
approved by the Insurance Commission.
You remember, there are specific persons
who should sign the RS. The CEO, the No registered pre-need plan shall be sold to
COO, the CFO, the chief accountant, the prospective planholders unless an
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information brochure, which has been filed advertising material to be deemed

with the Insurance Commission, has been approved. For purposes hereof, the
provided to the purchaser. The information Insurance Commission shall have the
brochure shall contain an explanation of power to define the scope of its
the principal features of the pre-need plan, advertising rules to appropriately cover
a statement that the planholder may avail advertising or other communications to
of a default or reinstatement period within the public.
which to reinstate his lapsed plan, and the c. Any person who sells or offers to sell
conditions of the same and the rates of any pre-need plan or contract by any
return for scheduled benefit plans and means or instruments of
illustrative yields for contingent benefit communication in violation of the
plans, and such other information that the foregoing rules on pre-need advertising
Insurance Commission shall require by shall be liable to the person purchasing
rule. such pre-need contract who may sue to
recover the consideration paid for such
Q: What is the document counterpart that pre-need contract with interest thereon.
you file with the SEC regarding of In addition hereto, the Insurance
securities? Commission shall have the power to
A: It is a prospectus. Prospectus is the same pursue the erring pre-need company in
as a brochure but under the Pre-need Code, it an administrative or criminal
is not a prospectus but an information proceeding.
brochure. It contains all the relevant d. A fine of P 100,000.00 shall be
information about the pre-need company and imposed on any pre-need company
the pre-need plan it will issue. found to have violated the foregoing
rules: Pro- vided, That a second
What are the rules on pre-need violation shall, in addition to the fine
advertising? imposed, result in the suspension of the
license of the pre-need company.
a. Pre-need plans shall be advertised and
sold in an appropriate non-misleading What are the grounds for mandatory
manner. cancellation of registration and permit
b. It shall be unlawful for any pre-need to sell of pre-need plans?
company to advertise itself or its
preneed plans unless the Insurance The Insurance Commission shall cancel
Commission has approved such the registration of any pre-need plan and
advertising material. The Insurance the permit to sell such pre-need plan by
Commission shall have a period of 10 issuing an order to this effect, setting forth
working days to approve or deny the its findings in respect thereto, if, after due
advertising material and failure to act notice and hearing, it shall appear that the
within the said period shall cause the Issuer:
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i. Is insolvent; notified the Commission of an intention to

ii. Has violated any of the provisions sell such pre-need plan.
of the Pre-Need Code, or the rules
promulgated pursuant thereto, or The power of the Insurance Commission to
any order of the Commission of cancel the registration and/or the permit to
which the issuer has notice; sell is without prejudice to its power under
iii. Has been or is engaged or is about the Pre-Need Code to enforce compliance
to engage in fraudulent therewith.
transactions;
iv. Is in any other way dishonest or has How can the issuer voluntarily cancel
made any fraudulent the registration and permit to sell of its
representation in any circular or pre-need plans?
other literature that has been
distributed concerning the issuer or A registration of a pre-need plan may be
its pre-need plans; and cancelled or a permit to sell may be
v. Does not conduct its business in suspended or cancelled by the Commission
accordance with law. upon petition for its suspension and/or
cancellation, as the case may be, by the
The Insurance Commission shall compel issuer.
the production of all the books and records
of the issuer, administer oaths to, and A petition for the cancellation of
examine the officers of such issuer or any registration of a pre-need plan or a petition
other person connected therewith as to its for suspension and/or cancellation of a
business or affairs, and may require a permit to sell shall be accompanied by the
balance sheet exhibiting the assets and following:
liabilities of such issuer and/or its income a. Petition for the cancellation of the
or profit statement, certified to by an registration or petition for
independent certified public accountant. suspension and/or cancellation for
the permit to sell stating the reasons
If the issuer shall refuse to permit an therefor;
examination to be made by the b. Proof of the reasons for
Commission, its refusal shall give ground cancellation of registration or sus-
for the cancellation of registration. pension and/or cancellation of the
permit to sell;
Notice of issuance of an order of c. Proof of publication of a notice to
cancellation shall be given by mail, stockholders/investors/
personally, by telephone confirmed in planholders of said petition for
writing, or by telegraph, to the issuer and cancellation of registration and/or
every dealer and broker who shall have petition for suspension and/or
cancellation of a permit to sell;
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d. Board resolution certified under If after the completion of the aforesaid

oath by the corporate secretary of publication, the Commission finds that the
the issuer and attested to by the petition together with all the other papers
president or one performing similar and documents attached thereto is on its
functions approving such petition face complete and that no party stands to
for cancellation and/or suspension suffer damage thereby, it shall issue an
as the case may be; order cancelling said registration or
e. List of all planholders; cancelling and/or suspending the permit to
f. A certification under oath by the sell. However, such order shall not
treasurer of the issuer attested to by preclude any planholder from his available
the President that the planholders' remedies under the law should the
claims have been settled in cancellation and/or suspension cause him
accordance with the pre-need plan damage.
contract;
(Dean: This is very important. It is not a question of “I don’t have the money
They have to say that the claims of anymore so I have to stop selling” because
the planholders have been settled in one of the requirements is the evidence of
accordance with the pre-need plan sufficiency of the trust fund to cover payment
contract.) of outstanding liabilities to planholders.
g. A joint and several assumption of
liability executed by the treasurer
C. LICENSING OF SALES
and the president of the issuer for COUNSELORS AND GENERAL
claims that may arise as a result of AGENTS
said cancellation/suspension; and
h. Evidence of sufficiency of the trust
Who is a sales counselor, and what are
fund to cover payment of
the requirements before a sales
outstanding liabilities to
counselor can sell pre-need plans?
planholders.
"Sales counselors" refers to natural
After the filing of the petition and
persons who are engaged in the sale of, or
supporting documents and the payment of
offer to sell, or counsel of prospective
the filing fee, the petition shall be
planholders for the purpose of selling,
immediately published by the issuer in two
whether or not on commission basis, pre-
(2) newspapers of general circulation, once
need plans upon the authority of the pre-
a week for two (2) consecutive weeks
need company.
reciting the contents of the petition and
notifying planholders to file their claims
No sales counselor shall be allowed to
with the issuer.
solicit, sell, or offer to sell pre-need plans
without being licensed as such by the
Insurance Commission. No license shall be
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issued unless the following qualifications issued, shall be suspended or revoked

have been complied with: based on the following grounds:
a. The applicant must be of good a. Materially misrepresented
moral character and must not have statements in the application
been convicted of any crime requirements;
involving moral turpitude; b. Obtained or attempted to obtain a
b. The applicant has undergone a license by fraud or mis-
training program approved by the representation;
Insurance Commission and such c. Materially misrepresented the
fact has been certified under oath terms and conditions of pre-need
by a duly authorized representative plan which he sold or offered to
of a pre-need company; and sell;
c. The applicant has passed a written d. Solicited, sold, or attempted to
examination administered by the solicit or sell a pre-need plan by
Insurance Commission: Provided, means of false or misleading
that the administration of the representation and other fraudulent
examination may be delegated to means;
an independent organization under e. Terminated for cause from another
the supervision of the Insurance pre-need company;
Commission. f. Similar grounds found in Section
11 of this Pre-Need Code, to wit:
Such license shall automatically expire a. Any person convicted of
every thirtieth day of June or such date of any crime involving any
every year as may be fixed by the pre-need plan, security, or
Insurance Commission and may be financial product;
accordingly renewed. b. Any person convicted of an
offense involving moral
That is why it is tougher to become a sales turpitude or involving fraud
counselor than an insurance agent because or embezzlement, theft,
you have to be renewed every year by the estafa, or other fraudulent
commission. acts or transactions;
c. Any person who, by reason
What are the grounds for denial, of any misconduct, is
suspension, and revocation of a license enjoined by order,
to act as a sales counselor? judgment, or decree by any
court, quasi-judicial body,
An application for the issuance or renewal or administrative agency of
of a license to act as sales counselor may competent jurisdiction from
be denied, or such license, if already acting as a director, officer,
employee, consultant,
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4B 2020-2021
agent, or occupying any If the issuer should contract the services of

fiduciary position; a general agent to undertake the sales of its
d. Any person found by the plans, such general agent shall be required
Insurance Commission to to be licensed as such with the Insurance
have willfully violated or Commission, in accordance with the
willfully aided, abetted, requirements imposed by the Insurance
counseled, commanded, Commission.
induced, or procured the
violation of the Pre-Need The following are the minimum
Code, the Insurance Code, requirements for the licensing of general
the Securities Regulation agents:
Code or any related laws i. Copy of certificate of registration;
and any rules or orders ii. Copy of articles of
thereunder; incorporation/partnership/cooperat
e. Any person judicially ion and by-laws;
declared to be insolvent or iii. Minimum paid-up capital of P
incapacitated to contract; 1,000,000.00;
and iv. Application form;
f. Any person found guilty by v. Endorsement of the applicant by
a foreign court, regulatory the principal pre-need company;
authority, or government and
agency of the acts or vi. Copy of the general agency
violations similar to any of agreement.
the acts or misconduct
enumerated in the The general agent must be a registered
foregoing paragraphs: corporation or partnership in the
Provided, That conviction Philippines. Agents soliciting or selling
in the first instance shall be pre-need plans in behalf of the general
considered as sufficient agent must possess the same qualifications
ground for disqualification; as the sales counselors.
g. Willfully allowing the use of one's
license by a non-licensed or barred (Dean: In other words, sales counselors are
individual; and natural persons while general agents must
h. Analogous circumstances. be juridical persons.)
Can the issuer contract the services of The application of a general agent shall not
the general agent for the sale of the pre- be approved unless a salesman is qualified
need plans? What are the requirements? and licensed by the Insurance
Commission. The general agent shall cease
solicitation and selling of pre-need plans
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when no natural person holds a valid period of at least 60 days within which to
license representing the general agent. pay accrued installments, counted from the
due date of the first unpaid installment.
The general agent must be authorized in
the general agency agreement or by a Nonpayment of a plan within the grace
written power of attorney to receive period shall render the plan a lapsed plan.
notices, summons, and legal processes for Any payment by the planholder after the
and in behalf of the pre-need company grace period shall be reimbursed forthwith,
concerned in connection with actions or unless the planholder duly reinstates the
legal proceedings against said pre-need plan. The planholder shall be allowed a
company. period of not less than two (2) years from
the lapse of the grace period or a longer
A license issued to a general agent shall period as provided in the contract within
authorize only the individual or individuals which to reinstate his plan. No cancellation
named in the license. Exercise or attempted of plans shall be made by the issuer during
exercise of such authority by an individual such period when reinstatement may be
not so named in the license, with the effected.
knowledge or consent of the licensee shall
constitute cause for the revocation, Within 30 days from the expiration of the
suspension, or non-renewal of the license. grace period and 30 days prior to the
expiration of the reinstatement period,
which is two (2) years from the lapse of the
D. DEFAULT AND TERMINATION
grace period, the pre-need company shall
give written notice to the planholder that
What is a lapsed plan? Can a lapsed his plan will be cancelled if not reinstated
plan be reinstated? within two (2) years from the lapse of the
grace period or a longer period as provided
"Lapsed plan" refers to a plan that is in the contract. Failure to give either of the
delinquent in payment of installments required notices shall preclude the pre-
provided for in the contract, the need company from treating the plans as
delinquency of which extends beyond the cancelled.
grace period provided for in the plan or
contract. How can a planholder terminate his pre-
need plan?
The pre-need company must provide in all
contracts issued to planholders a grace
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is no wrong doer against whom the insurer

may run after. Obviously, the insurer cannot
MAY 16, 2021
run after the mortgagor, otherwise the
BRODY mortgagor will be paying twice.
Some clarification under the topic of
Insurance Q: What if the mortgagee obtains fire
insurance policy over the same property
UCPB v Henson: The insurer after payment and the property is destroyed by fire?
is made to the insured inherits the cause of
action of the insured by virtue of subrogation. A: The insurer pays the mortgagee. The
insurer has the right of subrogation, it can
Q: When may the insurer run after the proceed against the mortgagor for the
wrong doer? payment of the mortgaged debt. The basis
that subrogation is not only based on wrong
A: Only the balance of the remaining period doing but also violations of contract. The
available to the insured because the insurer mortgagor by not paying the debt, violated
by virtue of subrogation only steps into the the contract so the insurer steps into the shoes
shoes of the insured. of the mortgagee can enforce the cause of
action available to the mortgagee against the
Comment of NTD: Something that the mortgagor to collect payment.
Supreme Court did not say, because in (Comment NTD: This scenario is unresolved
Henson case the underlying action is based by the Supreme Court.)
on tort. The insurer has 4 yrs likewise to
enforce its right of subrogation but only the Q: What is the remaining period for which
balance of the remaining period. Example, the insurer may proceed against the
tortious act was committed Jan. 1, 2020 and mortgagor?
the insurer paid the insured June 8, 2020 then
the 4 yr period is reckoned from the dated the A: The underlying cause of action is not
act was committed. based on tort, but it is based on contract. The
correct interpretation should be “what is the
Q: What if the subrogation is by reason of cause of action available the insured is
the insurer paying the mortgagee as a inherited by the insurer”. If it is tort 4 yrs to
result of the destruction of the mortgaged enforce. If it is based on written contract (ex.
property? Remember that the mortgagee has loan agreement) then the period prescribed
a separate insurable interest of the mortgaged by law.
property. If the mortgagor obtains fire
insurance policy over the property and then Topic: Alteration
the property is destroyed by fire so the insurer
pays the mortgagor and the proceeds will be Alteration, use or condition of the thing
applied to the obligation of the mortgagor to insured entitles the insurer to rescind if the
the mortgagee, if there is assignment of the
following elements are present:
proceeds or the main beneficiary is the policy
is the mortgagee. 1. The use of the thing insured is
Is there subrogation in this case? specified in the policy
A: Only if there is a wrong doer. If there is no 2. There is alteration
one that caused the property on fire then there 3. Without consent of the insurer
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4. It increased the risk shall be fair, equitable, and in compliance

with the Insurance Commission issuances.
If alteration is the reason for the rescission of The termination value of the pre-need plan
the policy there must be increase in the risk shall be pre-determined by the actuary of
of loss. Alteration per se does not entitle the the pre-need company upon application for
insurer to rescind exception if the policy itself registration of the pre-need plans with the
provides that any violation of the policy the Insurance Commission and shall be
policy will be avoided. Ex. If there is a disclosed in the contract.
discrepancy between the claim and the actual
loss incurred, so if discrepancy entitles the
insurer to rescind it does not matter whether NTD: Counterpart of cash surrender value
there is an increase in the risk of loss. for life insurance policy.
Topic: Pre-need Slide: Any offer by the pre-need company

to terminate the pre-need plan for
A pre-need plan (ex. Educational plan or
consideration exceeding the termination
pension plan) are securities, therefore they
value provided in the plan contract shall
have to be registered.
not require the prior approval of the
Insurance Commission, provided that:
Q: Where should they be registered?
(i) the consideration shall be below the
A: Premanila plan v CA. Supreme Court
pre-need reserves for the specific plan, (ii)
affirmed the authority of the SEC to issue
the offer is accepted by the pre-need
cease and desist order to stop the sale of
planholders, and
unregistered pre-need plan. The case was
(iii) the offer shall not prejudice the claim
decided before the effectivity of the pre-need
of planholders who do not avail of such
code therefore the securities must be
offer.
registered with the insurance commission if
pre-need plans are not registered with the
insurance commission, then the SEC has to
power to issue CDO based on 2019 SEC E. CLAIMS SETTLEMENT
opinion.
Slide: What can be considered as unfair
claims settlement practices of the issuer?
Cont. Pre-Need
(NTD: similar to insurance unfair claim
settlement practice)
SLIDE: How can a planholder terminate a. No pre-need company shall refuse,
his pre-need plan? without just cause, to pay or settle
claims arising under coverages
A planholder may terminate his pre-need provided by its plans nor shall any such
plan at any time by giving written notice to company engage in unfair claim
the issuer. settlement practices. Any of the
following acts by a pre-need company,
A pre-need plan shall contain a schedule of if committed with just cause, shall
termination values to which the planholder constitute unfair claims settlement
is entitled to upon termination. Such
practices:
schedule of termination value shall be
required for all in-force pre-need plans and
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i. Knowingly misrepresenting to In the case of scheduled benefit plans, the

claimants pertinent facts or plan proceeds of the plan shall be paid
provisions relating to coverages immediately upon maturity of the contract,
at issue; unless such proceeds are made payable in
ii. Failing to acknowledge with installments or as an annuity, in which case
reasonable promptness pertinent the installments or annuities shall be paid
as they become due. Refusal or failure to
communications with respect to
pay the claim within 15 days from maturity
claims arising under its plan;
or due date will entitle the beneficiary to
iii. Failing to adopt and implement collect interest on the proceeds of the plan
reasonable standards for the for the duration of the delay at the rate
prompt investigation of claims twice the legal interest unless such failure
arising under its plan; or refusal to pay is based on the ground that
iv. Failing to provide prompt, fair, the claim is fraudulent: Provided, That the
and equitable settlement of planholder has duly complied with the
claims submitted in which documentary requirements of the pre- need
liability has become reasonably company.
clear; or
v. Compelling planholders to In the case of contingent benefit plans, the
institute suits or recover benefits shall be paid by the preneed
company 30 days upon submission of all
amounts due under its plan by
necessary documents.
offering, without justifiable
reason, substantially less than
the amounts ultimately
Slide: How can a planholder recover
recovered in suits brought by
his/her investment in the event of
them.
insolvency or bankruptcy of the pre-
b. Evidence as to the number and need company?
types of valid and justifiable
complaints to the Insurance The planholder may institute the necessary
Commission against a pre-need legal action in court to recover his/her
company shall be deemed investment in the pre-need company, in
admissible in an administrative or case of insolvency or bankruptcy of the
judicial proceeding for unfair pre-need company.
claims settlement practices.
c. Any violation of the foregoing shall However, in case the insolvency or
be considered sufficient cause for bankruptcy is a mere cover- up for fraud or
the suspension or revocation of the illegality, the planholder may institute the
legal action directly against the officers
company’s certificate of authority.
and/or controlling owners of the said pre-
need company.
Slide: When should the plan proceeds be
paid to the planholders?
Slide: When can a pre-need company
declare dividend?
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A pre-need company may declare A: If the obligation of the obligor/debtor is

dividends: Provided, that the following yet to be determined in an arbitration
shall remain unimpaired, as certified under proceeding then the obligee cannot run after
oath by the president and the treasurer with the surety yet. There ought to be a principal
respect to items (a) and (b); and in the case obligation before you can make the accessory
of item (c), by the trust officer: obligation liable. The principal obligation
a. One hundred percent (100%) of the should be valid and collectible before you can
capital stock; run after the surety.
b. An amount sufficient to pay all net
losses reported, or in the course of Note: REM or Security Interest over personal
settlement, and all liabilities for property is not a mode of payment. The
mortgagee or grantee can run after the
expenses and taxes; and
deficiency after applying the proceeds of the
c. Trust fund.
property sold.
Any dividend declared under the preceding
paragraph shall be reported to the The principal obligation is secured by a
Insurance Commission within 30 days surety or guaranty or REM is not always a
after such declaration. loan obligation. There can be other principal
obligations (ex. Payment of concession fees
NTD: Counterpart of trust fund doctrine for or construction projects). In one case, the SC
pre-need company said that a performance bond is akin to a
surety agreement.
CREDIT TRANSACTION
Slide: What is a contract of guaranty?
It is a contract whereby a person, called the

GUARANTY guarantor, binds himself to the creditor to
Preliminary discussion: fulfill the obligation of the principal debtor
4 Security agreements covered in the in case the latter should fail to do so. A
syllabus: Guaranty, Surety, REM, Security guaranty may be conventional, legal or
Interest (PPSA) judicial, gratuitous, or by onerous title. It
may also be constituted, not only in favor
They are all accessory obligations. They need of the principal debtor, but also in favor of
a principal obligation in order to exist. the other guarantor, with the latter’s
consent, or without his knowledge, or even
Arbitration topic: Q: Whether or not a bond over his objection.
issued by a surety be called on by the
obligee if the legality or enforceability of NTD: Gratuitous means that there is no
the obligation is the subject of the separate consideration for the guaranty in
proceeding. Should arbitration be agreeing to secure the obligation of the
exhausted first before the oblige can run principal debtor.
after the surety? So, can the surety be held
liable even though the liability of the Slide: What are the characteristics of a
principal debtor is still being litigated? contract of guaranty?
a. Nominate
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b. Consensual – the contract is accessories, including the judicial costs,

between the creditor and the provided with respect to the latter, that the
guarantor guarantor shall only be liable for those
c. Generally, it is gratuitous. costs incurred after he has been judicially
Exception: when there is a required to pay.
stipulation to the contrary
d. Accessory – it cannot exist without NTD: In one case, in the contract the word
a valid principal obligation “guaranty” or “guaranty the obligation” is
present it does not automatically mean it is a
e. Can be given as security for future
guaranty agreement. It must be a categorical
debts
assumption of the obligation.
f. Governed by the Statute of Frauds Q: Is it allowed that the guarantor
– it must be in writing to be stipulate that he will be liable only for the
enforceable. principal amount for 500k? What if it is
silent as to interest?
Slide: Can a married woman guarantee A: Yes. As to interest there should be a
an obligation? distinction. Even though he may exclude
Yes. A married woman may guarantee an interest, interest imposed by reason of default
obligation without the husband’s consent, may be collected against the guarantor even
but shall not thereby bind the conjugal though it may be in excess of the amount of
partnership, except in cases provided by liability he indicated in the guaranty
law. agreement.
Slide: Who may act as a guarantor?

Slide: What is the scope of the obligation
of a guarantor? A person who possesses integrity, capacity
to bind himself, and sufficient property to
A guarantor may bind himself for less, but answer for the obligation which he
not for more than the principal debtor, both guarantees.
as regards the amount and the onerous
nature of the conditions. Should he have Slide: What is the benefit of excussion?
bound himself for more, his obligations
shall be reduced to the limits of that of the The guarantor cannot be compelled to pay
debtor. the creditor unless the latter has exhausted
all the property of the debtor, and has
NTD: Accessory obligation cannot be more resorted to all the legal remedies against
than the principal obligation. the debtor.
Slide: What are the conditions for the
Slide: What is the extent of a contract of exercise of the benefit of excussion?
guaranty? The conditions for the exercise of the
A guaranty is not presumed; it must be benefit of excussion are as follows:
express and cannot extend to more than 1. The case does not fall under any of
what is stipulated therein. If it be simple or the instances enumerated in Article
indefinite, it shall comprise not only the 2059
principal obligation, but also all its
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Excussion shall not take place:

• If the guarantor has NTD: Q: What is the best proof that the
expressly renounced it; creditor has exhausted all the assets of the
• If he has bound himself debtor and resorted to all legal remedies
solidarily with the debtor; against the debtor?
• In case of insolvency of the A: If a writ of execution is returned
debtor; unsatisfied.
Comment: When filing a case against the
• When he has absconded, or
debtor it is not wrong to implead both the
cannot be sued within the debtor and the guarantor in the same case. To
Philippines unless he has enforce the claim against the guarantor it
left a manager or must be proven that the assets of the debtor
representative; has been exhausted.
• If it may be presumed that
an execution on the Slide: What is the effect, if any, of a
property of the principal compromise between the creditor and
debtor would not result in principal debtor? What about a
the satisfaction of the compromise between the guarantor and
obligation. creditor?
2. The guarantor complies with
Article 2060 A compromise between the creditor and
the principal debtor benefits the guarantor
• He must set it up against the
but does not prejudice him. That which is
creditor upon the latter’s entered into between the guarantor and the
demand for payment from creditor benefits but does not prejudice the
him, and point out to the principal debtor.
creditor available property
of the debtor within the Comment: if principal obligation is partially
Philippine territory, extinguished, it should benefit the guarantor.
sufficient to cover the
amount of the debt. Slide: Is there a sub-guarantor’s right to
excussion?
Yes. The guarantor of a guarantor shall
NTD: Under item 1, when does waiver come enjoy the benefit of excussion, both with
in? Waiver is tantamount to renunciation. respect to the guarantor and to the principal
debtor.
Slide: What happens if the creditor is Slide: What is the benefit of division?
negligent in exhausting the property
pointed out by the guarantor? Should there be several guarantors of only
one debtor and for the same debt, the
The creditor who is negligent in exhausting obligation to answer for the same is
the property pointed out shall suffer the divided among all. The creditor cannot
loss, to the extent of said property, for the claim from the guarantors except the
insolvency of the debtor resulting from shares which they are respectively bound
such negligence. to pay, unless solidarity has been expressly
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stipulated. The benefit of division against guarantor has compromised with the
the coguarantors ceases in the same cases creditor, he cannot demand of the debtor
and for the same reasons as the benefit of more than what he has really paid.
excussion against the principal debtor.
Slide: What happens if the guarantor
NTD: there is a benefit of division among the pays without notifying the debtor?
guarantors so if there are four (4) guarantors
securing a 10mil obligation so each of them If the guarantor should pay without
2.5mil each (joint obligation) unless there is notifying the debtor, the latter may enforce
solidarity stipulated. Unlike in surety the against him all the defenses which he could
entire 10mil obligation can be enforced have set up against the creditor at the time
against any. the payment was made. Also, if the
guarantor has paid without notifying the
Slide: What right does a guarantor who debtor, and the latter not being aware of the
pays for a debtor acquire against the payment, repeats the payment, the former
latter? has no remedy whatever against the debtor,
but only against the creditor. Nevertheless,
The guarantor who pays for a debtor must in case of a gratuitous guaranty, if the
be indemnified by the latter. The indemnity guarantor was prevented by a fortuitous
comprises: event from advising the debtor of the
(i) the total amount of the debt; payment, and the creditor becomes
insolvent, the debtor shall reimburse the
(ii) the legal interests thereon from
guarantor for the amount paid.
the time the payment was made
known to the debtor, even
Slide: What are the instances when the
though it did not earn interest
guarantor, even before having paid may
for the creditor; proceed against the principal debtor?
(iii) the expenses incurred by the
guarantor after having notified The guarantor, even before having paid,
the debtor that payment had may proceed against the principal debtor:
been demanded of him; a. when he is sued for the payment;
(iv) damages, if they are due. b. in case of insolvency of the
principal debtor;
Note, however, that if the debt was for a
c. when the debtor has bound himself
period and the guarantor paid it before it
became due, he cannot demand to relieve him from the guaranty
reimbursement of the debtor until the within a specified period, and this
expiration of the period unless the payment period has expired;
has been ratified by the debtor. d. when the debt has become
demandable, by reason of the
Slide: Does the guarantor who pays for a expiration of the period for
debtor acquire a right to subrogation? payment;
e. after the lapse of 10 years, when the
Yes. The guarantor who pays is subrogated principal obligation has no fixed
by virtue thereof to all the rights which the period for its maturity, unless it be
creditor had against the debtor. If the of such nature that it cannot be
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extinguished except within a period P30 Million from any of the

longer than 10 years; guarantors. [Arts. 2065, par.2,
f. if there are reasonable grounds to 2059(3), Civil Code]
fear that the principal debtor
intends to abscond; If GI pays the entire loan of P30
g. if the principal debtor is in Million, she can later demand from
G2 and G3 PIO Million each.
imminent danger of becoming
insolvent.
b. If any of the guarantors should be
• In all these cases, the action of the insolvent, his share shall be borne by
guarantor is to obtain release from the the others, including the payer, in the
Guaranty, or to demand a security that shall same proportion.
protect him from any proceedings by the
creditor and from the danger of insolvency To illustrate:
of the debtor. Using our previous example, if G2 is
insolvent, her share shall be borne by
NTD: Q: Can this be done without the GI and G3 proportionately. Thus, Gl
consent of the creditor? It requires the can demand P 15 Million from G3.
consent of the creditor
c. A sub-guarantor, in case of the
Slide: In case the payment has been
insolvency of the guarantor for
made in virtue of a judicial demand, or
when the principal debtor or one of the whom he bound himself, is
guarantors is insolvent, what are the responsible to the coguarantors in
effects of guaranty as between co- the same terms as the guarantor.
guarantors?
To illustrate:
In case the payment has been made in Using our previous example, if SG is
virtue of a judicial demand, or when the the guarantor of G3, and G3
principal debtor or one of the guarantors is becomes insolvent, SG is liable to Gl
insolvent, the effects of Guaranty as for PIO Million, or P15 Million if G2
between co-guarantors are as follows: is also insolvent.
a. When there are two (2) or more
guarantors of the same debtor and d. The co-guarantors may set up
for the same debt, the one who has against the one who paid, the same
paid may demand of each of the defenses which would have
others the share which is pertained to the principal debtor
proportionally owing from him. against the creditor, and which are
not purely personal to the debtor.
To illustrate:
GI, G2, and G3 are D’s guarantors of
Slide: What are the causes for
a P30 Million loan obtained from C.
extinguishment of Guaranty?
If D becomes insolvent, guarantors
Gl, G2, and G3 lose the benefit of
Causes for extinguishment of guaranty:
division as far as C is concerned. C
may demand payment of the entire
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a. Principal obligation is Code and special laws (like the Rules of

extinguished; Court).
b. Same causes as all other NTD: Example, the bonding company
obligations; undertakes to produce the body of the
c. If creditor voluntarily accepts accused in case there is a hearing
immovable or other properties in
payment of the debt (even if he Slide: Is a judicial bondsman and sub-
should afterwards lose the same surety entitled to excussion?
through eviction or conveyance of
No. A judicial bondsman cannot demand
property);
the exhaustion of the property of the
d. Release in favor of one of the principal debtor. Likewise, a sub-surety in
guarantors, without consent of the the same case, cannot demand the
others, benefits all to the extent of exhaustion of the property of the debtor or
the share of the guarantor to whom of the surety.
it has been granted;
e. Extension granted to the debtor by Slide: Chabs Inc. issued a guaranty in favor
the creditor without the consent of of DSD, which among others, provides that
guarantor; or should DSD default on its obligations to X
f. When by some act of the creditor, Co., Chabs Inc. shall be liable to pay
the guarantors even though they are 5,000,000.
solidarily liable cannot be
During the term of the contract, DSD
subrogated to the rights,
defaulted and X Co. came after Chabs Inc.
mortgages, and preferences of the
as the guarantor to collect the damages
former. totaling to P 7,000,000.00 pesos including
all the interests and expenses.
NTD: Modes of extinguishing an obligation Chabs, Inc. responded that they should not
in oblicon. NoCoMeRe PaLo – be made to pay more than the fixed amount
Novation, Compensation, Merger, written in their guaranty agreement. X Co.
Remission, Payment, Loss countered that the guaranty agreement
provided for liability for interest and
Under item (d). Example, four (4) guarantors expenses. Who is correct? Decide.
for 40mil obligation. If one guarantor is
released the 10mil share will benefit the other Ans. X Co. is correct. It can collect from
3. The obligation will be reduced Chabs Inc. the entire amount
proportionately. notwithstanding the fixed amount written
on the guaranty agreement. The limit of
Chabs Inc’s liabilities must be determined
Slide: What is a bondsman?
from the suretyship agreement it had
signed. It is undoubtedly true that the law
A bondsman is a surety offered in virtue of
looks upon the contract of suretyship with
a provision of law or a judicial order. He
a jealous eye, and the rule is settled that the
must have the qualifications required of a
obligation of the surety cannot be extended
guarantor under Article 2056 of the Civil
by implication beyond its specified limits.
To the extent, and in the manner, and under
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the circumstances pointed out in his is no theoretical or doctrinal difficulty

obligation, he is bound, and no farther. The inherent in saying that the suretyship
law is clear that a guarantor may bond agreement itself is valid and binding even
himself for less, but not for more than the
before the principal obligation intended to
principal debtor, both as regards the
amount and the onerous nature of the be secured thereby is born, any more that
conditions. However, in this case, the there would be in
agreement provides for liability for interest
and expenses, then Chabs Inc. is bound by NTD: A guaranty or surety may secure
this agreement and should be liable for the future debts as long as the subsequent debts
entire P 7,000,000.00. (Dino & Uy v. Court are incurred by the principal debtor. As long
of Appeals & Metropolitan Bank as it is stipulated a guaranty or surety may
& Trust Company) secure future debts.
Slide: What is the extent of the “right to

Slide: BSC obtained a 10-year credit indemnification” of the guarantor
facility from xyz Bank in the amount of against the principal debtor?
P1 Billion. ABC Guaranty Inc. issued a
guaranty to secure the obligations of As a rule, a guarantor who pays for a debtor
BSB. In year 5, the loan released to BSB should be indemnified by the latter and
increased to P1.5 Billion. Can the would be legally subrogated to the rights
guaranty issued by ABC Guaranty Inc. which the creditor has against the debtor.
sufficiently secure the obligations of However, a person who makes payment
BSB currently amounting to 1.5 Billion without the knowledge or against the will
already? of the debtor has the right to recover only
insofar as the payment has been beneficial
Ans. Yes. A guaranty may be given to to the debtor. If the obligation was subject
secure future debts. The Supreme Court in to defenses on the part of the debtor, the
same defenses which could have been set
the case Atok Finance Corp. v. Court of
up against the creditor can be set up against
Appeals, et al., stated, “It is clear to us that the paying guarantor. Philippine Export
the Rizal Commercial Banking and Foreign Loan Guarantee Corporation
Corporation and the NARIC cases rejected v. V.P. Eusebio Construction, Inc., et al.,
the distinction which the Court of Appeals G.R. No. 140047, July 13, 2004.
in the case at bar sought to make with
respect to Article 2053, that is, that the
Slide: In 2011, Veterans Bank granted a
‘future debts’ referred to in that Article five (5)-year 10 million-peso loan with
relate to ‘debts already existing at the time XYZ, Inc. To secure payment, ABC Corp.
of the constitution of the agreement but the executed a Guarantee Agreement agreeing
amount [of which] is unknown,’ and not to to guarantee payment of XYZ Inc.’s entire
debts not yet incurred and existing at that loan obligation. The Guarantee
time. Of course, a surety is not bound under Agreement, however, states that ABC
Corp. waives its right of excussion under
any particular principal obligation until
Article 2058 of the Civil Code and that,
that principal obligation is born. But there consequently, Veterans Bank can claim
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under the Guarantee Agreement directly stay order has the effect of staying
against ABC Corp. without having to enforcement only with respect to claims
exhaust all the properties of XYZ, Inc. and made against the debtor, its guarantors and
without need of any prior recourse against persons not solidarity liable with the
XYZ, Inc. In 2013, a huge storm destroyed debtor:
XYZ, Inc.’s facilities indefinitely halting
its business operations. In 2014, XYZ Inc. Section 6. Stay Order. - If the court finds
filed a Petition for Voluntary the petition to be sufficient in form and
Rehabilitation under the Financial substance, it shall, not later than five (5)
Rehabilitation and Insolvency Act of 2010 working days from the filing of the
(FRIA) before the RTC which, acting as a petition, issue an order: (a) appointing a
Rehabilitation Court, issued a Stay Order rehabilitation receiver and fixing his bond;
in favor of XYZ Inc. In 2015, Veterans (b) staying enforcement of all claims,
Bank demanded payment of the entire loan whether for money or otherwise and
from ABC Corp. Invoking the RTC’s Stay whether such enforcement is by court
Order, ABC Corp. denied Veterans Bank’s action or otherwise, against the debtor, its
claim. Veterans Bank filed a collection suit guarantors and persons not solidarily liable
against ABC Corp. before the RTC. with the debtor x x x.
Decide.
The Guarantee Agreement, however,
NTD: Taken up in FRIA the stay order shows that ABC, Corp. waived its right of
does not benefit the surety, it benefits the excussion under Article 2058 of the Civil
guaranty, it does not benefit a person who Code. In effect, the nature of the guarantee
binds himself solidarily with the principal obligation assumed by ABC, Corp. under
debtor the Guarantee Agreement was transformed
into a suretyship thus solidarily binding
ANS. The Stay Order issued by the itself with XYZ, Inc.
Rehabilitation Court does not preclude the
RTC from hearing and deciding Veterans • Under a normal contract of
Bank’s complaint. guarantee, the guarantor binds himself to
the creditor to fulfill the obligation of the
The Stay Order relied upon by ABC Corp. principal debtor in case the latter should
merely ordered the staying and suspension fail to do so. The guarantor who pays for a
of enforcement of all claims and debtor, in turn, must be indemnified by the
proceedings against XYZ, Inc. and not latter. However, the guarantor cannot be
against other persons or entities solidarily
compelled to pay the creditor unless the
liable with the debtor. Section 18(c) of the
latter has exhausted all the property of the
FRIA explicitly states that a stay order
shall not apply “to the enforcement of debtor and resorted to all the legal
claims against sureties and other persons remedies against the debtor. This is what is
solidarily liable with the debtor, and third otherwise known as the benefit of
party or accommodation mortgagors as excussion. Conversely, if this benefit of
well as issuers of letters of credit, x x x”. In excussion is waived, the guarantor can be
addition, under Rule 4, Section 6 of A.M. directly compelled by the creditor to pay
No. 00-8-10SC or the Interim Rules of the entire debt even without the exhaustion
Procedure on Corporate Rehabilitation, a of the debtor’s properties.
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surety’s obligation is not an original and

• In other words, a guarantor who direct one for the performance of his own
engages to directly shoulder the debt of the act, but merely accessory or collateral to
debtor, waiving the benefit of excussion the obligation contracted by the principal.
and the requirement of prior presentment, Nevertheless, although the contract of a
surety is in essence secondary only to a
demand, protest, or notice of any kind,
valid principal obligation, his liability to
undoubtedly makes himself/herself
the creditor or promisee of the principal is
solidarily liable to the creditor. said to be direct, primary, and absolute; in
other words, he is directly and equally
• Veterans Bank can thus claim bound with the principal. Lim v. Security
under the Guarantee Agreement Bank Corporation, G.R. No. 188539
DIRECTLY against ABC, Corp. without
having to exhaust all the properties of
XYZ, Inc. and without need of any prior Slide: Is there a required form for a
recourse against XYZ, Inc. Trade and contract of suretyship?
Investrnent Development Corporation of
the Philippines also known as Philippine Yes. A contract of suretyship is a special
Export-Import Credit Agency v. Philippine promise to answer for the debt, default, or
Veterans Bank, G.R. No. 233850, July 1, miscarriage of another; hence, pursuant to
2019. the Statute of Frauds, it must in writing and
subscribed by the party charged or by the
latter’s duly authorized agent. Otherwise, it
would be unenforceable.
SURETY
Slide: What is the concept and nature of Slide: Distinguish surety from
suretyship? guaranty.
If a person binds himself solidarily with the By a guaranty a person, called the
principal debtor, the contract is called a guarantor, binds himself to the creditor to
Suretyship. fulfill the obligation of the principal debtor
in case the latter fails to do so. On the other
A Contract of Suretyship is an agreement hand, if a person himself is solidarily liable
whereby a party, called the surety,
with the principal debtor, the contract is
guarantees the performance by another
party, called the principal or obligor, of an called a suretyship
obligation or undertaking in favor of
another party, called the obligee. Although Guaranty Surety
the Contract of a Surety is secondary only Guarantor is Surety is
to a valid principal obligation, the surety secondarily liable. primarily liable.
becomes liable for the debt or duty of Insurer of solvency of Insurer of the
another although it possesses no direct or debtor (a guarantor debt (a surety
personal interest over the obligations nor agrees that the promises to pay
does it receive any benefit therefrom. The creditor, after the principal’s
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proceeding against the debt if the insolvent solidary

principal, may proceed principal will not debtor.
against the guarantor if pay)
the principal is unable
to pay) Slide: Distinguish an “accommodation
surety” from a “compensated surety”
Slide: Distinguish surety from solidary
co-debtor. The Supreme Court has clarified on the
distinction between an accommodation
A suretyship requires a principal debtor to surety and a compensated surety and the
whom the surety is solidarily bound by reasons for treating them differently:
way of an ancillary obligation of segregate
identity from the obligation between the The law has authorized the formation of
principal debtor and the creditor. Further, corporations for the purpose of conducting
solidarity signifies that the creditor can surety business, and the corporate surety
compel any one of the joint and several differs significantly from the individual
debtors or the surety alone to answer for private surety. First, unlike the private
the entirety of the principal debt. The surety, the corporate surety signs for cash
difference lies with regard the right to seek and not for friendship. The private surety is
reimbursement for the sums paid out to the regarded as someone doing a rather foolish
creditor. Articles 2047, 1217, Civil code; act for praiseworthy motives; the corporate
Escano, et al., v. Ortigas, Jr., G.R. No. Surety, to the contrary, is in business to
151953, June 29, 2007. make a profit and charges a premium
depending upon the amount of guaranty
and the risk involved. Second, the
corporate surety, like an insurance
Surety Solidary co-debtor company, prepares the instrument, which
Not a party to the A party to the is a type of contract of adhesion whereas
obligation; and does obligation the private surety usually does not prepare
the note or bond which he signs. Third, the
not benefit from the
obligation of the private surety often is
transaction between assumed simply on the basis of the debtor’s
the creditor and the representations and without legal advice,
solidary debtors while the corporate surety does not bind
Entitled to obtain Right for itself until a full investigation has been
made. For these reasons, the courts
indemnification for reimbursement is
distinguish between the individual
the entire amount subject to gratuitous surety and the vocational
deductions corporate surety. In the case of the
pertaining to his corporate surety, the rule of strictissimi
share or at times juris is not applicable, and courts apply the
even pertaining to rules of interpretation of appertaining to
his proportionate contracts of insurance.
share in the portion
that should have Consequently, the rule of strict
been paid by an construction of the surety contract is
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commonly applied to an accommodation effect, constitute an implied novation

surety but is not extended to favor a of the surety contract.
compensated corporate surety. • A surety is released from its obligation
when there is a material alteration of
The rationale of this doctrine is reasonable; the contract in connection with which
an accommodation surety acts without
the bond is given, such as a change
motive of pecuniary gain and, hence,
which imposes a new obligation on the
should be protected against unjust
pecuniary impoverishment by imposing on promising party, or which takes away
the principal duties akin to those of a some obligation already imposed, or
fiduciary. This cannot be said of a one which changes the legal effect of
compensated corporate surety which is a the original contract and not merely its
business association organized for the form. A surety, however, is not
purpose of assuming classified risks in released by a change in the contract
large numbers, for profit and on an which does not have the effect of
impersonal basis, through the medium of making its obligation more onerous.
standardized written contractual forms People’s Trans-East Asia Insurance
drawn by its own representatives with the Corporation, a.k.a. People’s General
primary aim of protecting its own interests. lnsurance Corporation v. Doctors of
New Millennium Holdings, Inc.
NTD: In case of doubt, the doubt is resolved
in favor of the insured. NTD: Example of material alteration of the
contract, change in the term of payment or
Slide: Does a change in the terms of the change in the amount.
principal contract automatically cancel
the surety contract? Slide: Can a Surety Agreement secure
an obligation in the absence of a written
• The liabilities of an insurer under the contact?
surety bond are not extinguished when
the modifications in the principal Yes. Section 175 of RD. No. 612
contract do not substantially or (Insurance Code, as amended) defined
materially alter the principal’s suretyship as an agreement where a party
obligations. called the surety guarantees the
performance by another party called the
• A suretyship consists of two (2)
principal or obligor of an obligation or
different contracts: (1) the surety
undertaking in favor of a third person
contract and (2) the principal contract called the obligee.
which it guarantees. Since the
insurer’s liability is strictly based only Under Section 176 of the Insurance Code,
on the terms stated in the surety the nature and extent of a surety’s liability
contract in relation to the principal are as follows:
contract, any change in the principal
contract, which materially alters the SEC. 176. The liability of the surety or
principal’s obligations would, in sureties shall be joint and several with the
obligor and shall be limited to the amount
of the bond. It is determined strictly by the
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terms of the contract of suretyship in the law. There is no question that a surety
relation to the principal contract between should not be made to pay more than its
the obligor and the obligee. assumed obligation under the surety bonds.
However, a surety’s liability for the
Thus, the surety’s liability is joint and payment of interest is not by reason of the
several with the obligor, limited to the suretyship agreement itself but because of
amount of the bond, and determined the delay in the payment of its obligation
strictly by the terms of the contract of under the said agreement. Commonwealth
suretyship in relation to the principal Insurance v. Court of Appeals, G.R. No.
contract between the obligor and the 130886, January 29, 2004.
obligee.
NTD: Example, the contract says 500k plus
Article 1356 of the Civil Code provides interest. The surety or guaranty can be held
that contracts shall be obligatory in liable for more than 500k. The interest is not
whatever form they may have been entered included in the 500k limit set in the contract.
into, provided all the essential requisites It is different if it says 500k inclusive of
for their validity are present. Thus, an oral interest and other cost then the limit is only
agreement which has all the essential 500k.
requisites for validity may be guaranteed
by a surety contract. To rule otherwise What if the contract says 500k inclusive of
contravenes the clear import of Article interest and other cost. Does this include
1356 of the Civil Code. compensator interest? Supreme Court said
no. The amount can exceed 500k when
Slide: Can a surety become liable to pay compensatory interest is imposed by reason
the legal interest thereby making its of delay.
liability more than the amount of its
issued bonds? REAL ESTATE MORTGAGE
Yes. As early as Tagawa vs. Aldanese and

Slide: What is a Real Estate Mortgage?
Union Gurantee Co. and reiterated in
Plaridel Surety & Insurance Co., Inc.
A REM is a contract whereby the debtor
v. P.L. Galang Machinery Co., Inc., and
secures to the creditor the fulfillment of the
more recently, in Republic v. Court of
principal obligation, specially subjecting to
Appeals and R & B Surety and
such security immovable property or real
Insurance Company, Inc., the Supreme
rights over immovable property, in case the
Court has sustained the principle that if a
principal obligation is not fulfilled at the
surety upon demand fails to pay, he can be
time stipulated.
held liable for interest, even if in thus
paying, its liability becomes more than the
Slide: What are the characteristics of a
principal obligation. The increased liability
REM?
is not because of the contract but because
a. It is a real right;
of the default and the necessity of judicial
b. it is an accessory contract;
collection.
c. it is indivisible [each and every
A surety’s liability under the suretyship parcel under mortgage answers for
contract is different from its liability under the totality of the debt];
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d. it is inseparable [a mortgage Slide: Can a valid REM be constituted

directly and immediately subjects on the building erected on the land
the property upon which it is belonging to another?
imposed, whoever the possessor
may be, to the fulfillment of the Yes. The Supreme Court has ruled that the
obligation for whose security it was inclusion of “building” as separate and
distinct from the land in the enumeration in
constituted; the mortgage adheres
Article 415 of the Civil Code can only
to the property, regardless of who
mean that a building is by itself an
its owner may subsequently be]; immovable property. Thus, while it is true
and that a mortgage of land necessarily
e. the object of the contract is includes, in the absence of stipulation of
immovable property or alienable the improvements thereon, buildings, still
real rights over immovable a building by itself may be mortgaged apart
property. from the land on which it has been built.
Such a mortgage would still be a real estate
NTD: indivisible, it means that if a loan is mortgage for the building would still be
secured by four mortgaged properties partial considered immovable property even if
payment would not result in the proportionate dealt with separately and apart from the
release of the mortgaged properties. land. In the same manner, possessory
rights over said properties before title is
Inseparable means that the lien attaches to the vested on the grantee, may be validly
property. There are cases that the Supreme transferred or conveyed as in a deed of
Court affirmed the power of the mortgagor to mortgage.
constitute a second mortgage on the
mortgaged property. The mortgagor may sell, Slide: Explain the “inseparable”
but it is always subject to the rights of the characteristic of a real estate mortgage.
mortgagee.
It is a real right following the property,
Q: What will entitle the mortgagee to such that in subsequent transfers by the
enforce his interest? mortgagor, the transferee must respect the
mortgage. A registered mortgage lien is
A: it does not only cover non-payment of the considered inseparable from the property
loan. It may include violation of the contract inasmuch as it is a right in rem. The
which would justify foreclosure of mortgage. mortgage creates a real right or a lien
If the mortgage agreement prohibits the sale which, after being recorded, follows the
of the mortgaged property without the chattel wherever it goes. The mortgage on
consent of the mortgagee but the mortgagor the property may still be foreclosed despite
sells the property without consent of the the transfer. Article 2126, Civil Code;
mortgagee. The sale is valid but mortgagee
treat it as a violation of the agreement.
Therefore, the mortgagee may foreclose the Slide: Is a stipulation forbidding the
mortgage because the lien attaches to the owner from alienating the mortgaged
property. immovable valid?
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No. A stipulation forbidding the owner c. The mortgagor has the free disposal
from alienating the mortgaged immovable of the property, and in the absence
is void. thereof, that he is legally
authorized for the purpose.
Slide: Can mortgage credit be alienated
or assigned? Third persons who are not parties to the
principal obligation may secure the latter
Yes. The mortgage credit may be alienated mortgaging their own property.
or assigned to a third person, in whole or in
part, with the formalities required by law. In relation thereto, Article 2125 of the Civil
Code further provides:
In addition to the requisites stated in
Article 2085, it is indispensable, in
order that a mortgage may be validly
constituted, that the document in which
it appears be recorded in the Registry of
NTD: Can the mortgaged credit be Property. If the instrument is not
assigned even though the loan is not yet recorded, the mortgage is nevertheless
been paid? binding between the parties.
The mortgaged credit may be assigned Thus, as between the parties to a mortgage,
whether the loan was paid or not yet been the non-registration of a REM deed is
paid. immaterial to its validity. Recording in the
Registry of Property is only necessary in
Bank assigned a mortgage agreement in favor order to bind third persons.
of a non-bank. In the hands of the non-bank
(mortgagee) it foreclosed extra-judicially. NTD: Is an accommodation mortgagor liable
The SC said, although the assignee is a non- to pay deficiency?
bank it only acquires the reduced period of
redemption under the General Banking Law Only to the extent of the value of the
not the rule on foreclosure of mortgage under mortgaged property. Exceptions, if he
Act 3135. expressly assumes the liability or if the
accommodation mortgagor acts as a surety.
Slide: What are the requisites for a valid
constitution of a REM? NTD: You cannot register a REM if it is not
notarized the RD will not accept it. If the
The following requisites are essential for mortgage is not notarized, is it valid? Yes, but
the constitution of a REM: it will not bind third persons.
a. It is constituted to secure the
fulfillment of a principal What if there is a defect in the notarization, is
the mortgage valid? Yes, but it will not bind
obligation;
third persons.
b. The mortgagor must be the
absolute owner of the real estate
Slide: Is a REM valid if the deed
mortgaged;
evidencing the same was notarized
without authority and compliance with
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the prescribed form under Sec.112 of PD tantamount to a waiver or abandonment of

1529 (Property Registration Decree)? the mortgage lien. Thus, should the
mortgagee obtain adverse judgment in the
The defective notarization of a REM collection case, he can no longer foreclose
agreement merely strips it of its public the real estate mortgage.
character and reduces it to a private
document. Although Article 1358 of the Should the mortgagee opt to foreclose the
New Civil Code requires that the form of a mortgage, he may still file an action for
contract transmitting or extinguishing real collection to enforce payment of the
rights over immovable property should be deficiency if the sale proceeds realized
in a public document, the failure to observe during the foreclosure are not sufficient to
such required form does not render the satisfy the loan secured by the real estate
transaction invalid. The necessity of a mortgage.
public document for the said contracts is
only for convenience; it is not essential for NTD: if the mortgagee files a criminal action
its validity or enforceability. When there is for BP22 against the mortgagor it is
a defect in the notarization of a document, tantamount to a collection suit.
the clear and convincing evidentiary
standard originally attached to a duly- NTD: A loan is secured by a REM and
notarized document is dispensed with, and security interest on personal property. The
the measure to test the validity of such loan was not paid. The creditor foreclosed the
document is preponderance of evidence. mortgage and sues for deficiency. If he sues
for deficiency what happens now to the
Slide: What are the remedies available security interest on personal property?
to the mortgagee in case of non-payment
of the loan secured by the REM or It is tantamount to a waiver of the second
violation of the terms and conditions of collateral. If you foreclose the mortgage, you
the loan agreement? must exhaust all the collaterals both the REM
and the security interest.
The mortgagee may either file an action for
specific performance to compel payment Slide: To secure a loan, the Sps. Santos
of the loan or he may foreclose the mortgaged their property covered by TCT
mortgagee, extra-judicially, in accordance No. 1234 to Standard Bank. The Sps.
with Act No. 3135, as amended, (An Act to Santos defaulted in their loan payments
Regulate the Sale of Property under causing Standard Bank to extrajudicially
Special Powers Inserted in or Annexed to foreclose on the mortgage with ABC Corp.
Real Estate Mortgages) or judicially, either getting the highest bid. For failure to
Rule 68 of the Rules of Court. redeem the property during the redemption
period, TCT No. 1234 was cancelled and a
Slide: What is the effect of the filling of new title was issued in favor of ABC Corp.
an action for specific performance on The Sps. Santos leased the subject property
the right of the mortgagee to foreclose to others and collected rentals thereon.
the REM? ABC Corp. filed before the RTC a petition
for the issuance of a writ of possession.
The mere filing of action for specific The RTC issued two (2) Orders: the first,
performance to collect the loan is issued the writ of possession; the second,
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ordered the Sps. Santos to deliver to ABC different under the PPSA). Redemption for
Corp. and/or deposit with the Court the REM purposes is the buying back of the
monthly rentals of the subject property property.
covering the period after expiration of the
redemption up to the time they surrender GR: 1yr period to redeem the property
the possession thereof to ABC Corp.
XPN: Under the General Banking Law,
Can back rentals be awarded in an ex parte mortgagor is a juridical person and
application for writ of possession under mortgagee is a bank and the mode of
Act No. 3135, as amended? foreclosure is extra-judicial. The period is 3
months
ANS: Yes. When the redemption period
expired, ABC Corp. became the owner of During the redemption period the owner of
the subject property and was, from then on, the property is still the mortgagor. He loses
entitled to the fruits thereof. The Sps. ownership when he fails to redeem during the
Santos ceased to be the owners of the period for redemption. So rent accruing
subject property, and had no right to the during the redemption period belongs to the
same as well as to its fruits. Under Section mortgagor.
32, Rule 39 of the Rules of Court, on
Execution, Satisfaction, and Effect of Slide: Does the mortgagor lose
Judgments, all rents, earnings, and income ownership of the mortgaged property
derived from the property pending after extra-judicial foreclosure of the
redemption shall belong to the judgment REM under Act. 3135, as amended?
obligor, but only until the expiration of his
period of redemption. The mortgagor does not lose ownership of
the mortgaged property after foreclosure
After the redemption period expired because he has redemption right under the
without the Sps. Santos redeeming the law. It is only when he fails to redeem the
subject property, ABC Corp. became the real estate mortgage within the period
absolute owner thereof, and the Sps. prescribed by law that the mortgagee may
Santos lost all their rights thereto, consolidate title to the property, resulting
including the right to lease out the same in the mortgagor’s loss of ownership
and collect rentals on said lease. The Sps. thereof.
Santos simply hold the amounts collected
in trust — with the obligation to return the As a consequence, the mortgagor may sell
same to their rightful owners. Sps. Teves v. the property or constitute a second
Integrated Credit and Corporate Services, mortgage thereon, but subject to the
Inc. preferred rights and lien of the mortgagee.
NTD: There is a redemption period for the NTD: the mortgagee need not file a petition
mortgagor or the judgment debtor to redeem for issuance of new title over the mortgaged
the property. For foreclosure, the redemption property after the expiration of the
period is one year from registration of sale. redemption period. The mortgagee may
For execution sale, one year from registration acquire full ownership by filing an affidavit
of sale. No redemption for personal property. of consolidation of title to the property. The
(Note: concept of redemption for REM is affidavit must indicate all relevant dates to
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establish that the mortgagor lost his right to Court said that it does not mean future
redeem. So the RD will issue a new title to obligations are embraced by the same chattel
the judgment creditor. mortgage agreement. It will only be
embraced if there will be a fresh chattel
Slide: Is the validity of a mortgage mortgage agreement or an amendment to the
contract that was constituted to secure a existing chattel mortgage agreement.
loan obligation affected by the validity
of the loan contract? For REM, no need to amend the agreement if
a dragnet clause is present. All subsequent
Yes. The validity of accessory contracts loans will be covered by the REM.
mainly flows from the validity of the
principal contracts. A real estate mortgage It is not clear if the same principle that applies
is in the nature of an accessory contract; to chattel mortgage applies to PPSA.
thus, its validity depends on the validity of
the loan contract. Slide: A REM agreement provides:
Slide: What is a blanket mortgage or “That, for and in consideration of certain

dragnet clause in a REM contract? loans, and other credit accommodations
obtained from the Mortgagee, and to
It is the stipulation extending the coverage secure the payment of the same and those
of a mortgage to advances or loans other that may hereafter be obtained, a real estate
than those already obtained or specified in mortgage is hereby constituted on the real
the contract. Panacan Lumber Co. v. property, more particularly described
Solidbank Corporation, G.R. No. 226272, under TCT No. 123456, registered in the
September 16, 2020. name of Juan dela Cruz”. Does the REM
agreement secure past obligations?
Thus, if a mortgagor obtains a loan for Php
1 million secured by a real estate mortgage ANS: Although a blanket mortgage or a
which contains a dragnet clause, loans dragnet clause is generally recognized as
incurred subsequent to the execution of the valid, these other obligations, past or
mortgage agreement are covered by the future, secured by the real estate contract
mortgage even though no amendment to must be specifically described within the
the existing mortgage contract or a fresh terms of the mortgage contract. It is clear
mortgage agreement is signed by the that the agreement does not cover
parties when the future loans are actually obligations incurred prior to the execution
obtained. of the mortgage instrument.
NTD: What about for security interest

over personal property, can it secure NTD: A dragnet clause may cover past,
future debts? present and future obligation if so stipulated
but under the problem the terms provided that
Under chattel mortgage, it cannot secure it does not include past obligations.
future obligations. Even if a chattel mortgage
agreement contain a dragnet clause, Supreme
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This is very important because as you will see

MAY 20, 2021
later, on the priority of payments or
FREEZER BUNNY
obligations of sale proceeds or in terms of
equity of redemption. Although the law says
PERSONAL PROPERTY SECURITY redemption, it is not redemption like real
ACT (R.A. NO. 11057) estate mortgage (REM) or sale of real
property under Rule 39 where the judgment
debtor or redemptioner can buy back after the
Let us first define the terms.
sale. The concept of redemption under the
PPSA is similar to equity of redemption
Commodity contract — refers to a
under Rule 68 on judicial foreclosure. It
commodity futures contract, an option on a
means the right of the grantor or the right
commodity futures contract, a commodity
of a lien holder, meaning competing with
option, or another contract if the contract
the secured creditor, the right to pay the
or option is: (i) traded on or subject to the
obligation of the grantor to be able to
rules of a board of trade that has been
acquire the property.
designated as a contract market for such a
contract; or (ii) traded on a foreign
Consumer goods — refer to goods that are
commodity board of trade, exchange, or
used or acquired for use primarily for
market, and is carried on the books of a
personal, family, or household purposes.
commodity intermediary for a commodity
customer.
Control agreement — an agreement in
writing between the grantor and the
Let’s say you would like to purchase a fuel
secured creditor which perfects the
five years from now to make up for you fuel
security interests over an intangible asset.
inventory at the price determined today and
i. With respect to intermediated
delivery after 5 years. That’s an option. If that
securities, the control agreement is
contract can be exchanged or subject of
among the issuer or the
trading in a future’s board.
intermediary, the grantor and the
secured creditor, according to
Competing claimant — refers to a
which the issuer or the
creditor of a grantor or other person with
intermediary agrees to follow
rights in an encumbered asset that may be
instructions from the secured
in competition with the rights of a secured
creditor with respect to the
creditor in the same encumbered asset.
security, without further consent
from the grantor.
Here, we talk about a lien for a judgment
creditor or another grantor which may be in
(Dean: Intermediated because it is
competition with the claim of the secured
under the custody of a third party
creditor.
like a broker, a depositary.
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The issuer is the one who issued ii. With respect to rights to a
the shares or the securities. deposit account, the control
agreement is among the deposit-
The grantor is the debtor or the taking institution, the grantor, and
obligor. the secured creditor, according to
which the deposit-taking institution
Secured creditor encompasses the agrees to follow instructions from
term “mortgagee” under the old the secured creditor with respect to
chattel mortgage law and the payment of funds credited to
“pledgee”. the deposit account without further
consent from the grantor.
For REM, you can sill call the
creditor as a mortgagee. For (Dean: An example would be a
personal property, it is now loan by the grantor secured by
generically called as a secured deposit with the bank.
creditor.
Q: What if it stipulates that upon
Q: Will this violate the rule on default of the grantor, the bank
pactum commissorium? Let’s shall release the deposit in favor
say the control agreement says of the secured creditor based on
the in case the loan is not paid, the control agreement? Will this
then the shares shall be conveyed violate the rule on pactum
in favor of the secured creditor in commissorium?
payment of the debt. A: In a previous case, Integrated
A: You know that as a rule on Realty Corporation v. CA, where
pactum commissorium, there must the assignment of deposits is
be a mortgage (whether REM or considered as a pledge. If it
chattel) or a pledge and then amounts to a pledge, there is no
second, a provision that says that in right to recover deficiency. But
case of default automatic now, under this law, it is clear that
ownership shall be transferred in the bank can, from the instruction
favor of the pledgee or the of the secured creditor, release the
mortgagee. It seems that given this deposits in favor of the secured
provision on control agreement, the creditor upon default of the grantor.
intermediary remits or delivers the Given that it is now allowed by
securities to the secured creditor. It law, it will not amount to pactum
will not amount to pactum commissorium.
commissorium.)
Q: In case there is a conflict
between the rights of the deposit
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institution and the rights of the product. So either the difference in

creditor, who will prevail if the money or the commodity will be
grantor also owes money from delivered to the secured creditor
the deposit institution? depending on the provision on the
A: The law says that the bank has control agreement.
the better right to apply the deposit
against the loan. This is similar to There are three ways to perfect security
the case of Caltex v. CA. In that interests over intangible assets or other
case, the certificate of deposit has properties. These are:
been lost and the Security Bank 1. Control Agreement
issued a replacement certificate of 2. Possession
deposit. It turns out that the original 3. Notice – similar to the registration of
certificates of deposits were not a chattel mortgage under the old
lost but in fact delivered to Caltex chattel mortgage law.
to guarantee the payment of
obligation of Angel dela Cruz. The Default — the failure of a debtor to pay or
SC said that the right of the bank to otherwise perform a secured obligation,
apply the deposit shall prevail over and any other event that constitutes default
that of the Caltex. That case mirrors under the terms of an agreement between
this provision of the law. The the grantor and the secured creditor.
bank’s right over the deposit is
superior over the right of the Although the most common event of default
creditor.) for a loan obligation is non-payment, there
can be other events that will constitute as
iii. With respect to commodity default. That will then justify enforcement of
contracts, the control agreement is security interests or rights of the creditor over
among the grantor, secured the grantor including the control agreement.
creditor, and intermediary,
according to which the commodity Other forms of default:
intermediary will apply any value 1. Non-payment of the loan
distributed on account of the 2. Failure to insure the property
commodity contract as directed by 3. Failure to renew premium for the
the secured creditor without further insurance of the property
consent by the commodity 4. Transfer of collaterals from one place
customer or grantor. or another
5. The value of the collateral depreciates
Dean: In our example a while ago, and the grantor did not make a
purchase of fuel. Purchase today replacement to make up the
but delivery is in 5 years to hedge depreciated value
against inflation in the price of fuel
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Deposit-taking institution — refers to a corresponding amendments to describe those

bank under R.A. No. 8791 or the General properties.
Banking Law, a nonstock savings and loan
association as defined under R.A. No. 8367 Grantor — refers to (i) the person who
or the Revised Nonstock Savings and Loan grants a security interest in collateral to
Association Act of 1997, or a cooperative secure its own obligation or that of another
as defined under R.A. No. 9520 or the person; (ii) a buyer or other transferee of a
Philippine Cooperative Code. collateral that acquires its right subject to a
security interest; (iii) a transferor in an
Equipment — means a tangible asset outright transfer of an accounts receivable;
other than inventory or consumer goods, or or (iv) a lessee of goods
livestock, that is primarily used or intended
to be used by the grantor in the operation Used to be the mortgagor or the pledgor.
of its business.
So he can also secure the obligation of
As opposed to intangible assets like another person. You see the concept of an
securities, deposits. accommodation mortgagor that we talked
about in REM was retained under this law. A
Removal of the equipment is one of the third party may subject his own property to
remedies allowed to a secured creditor. security interest to secure the obligation of
another.
Future property — refers to any movable
property which does not exist or which the In a recent case, the Supreme Court affirmed
grantor does not have rights in or the power the validity of an accommodation mortgage.
to encumber at the time the security So it applies to both REM and personal
agreement is concluded. property.
Q: May after acquired properties be Grantor is also a buyer or other transferee of

subject of security interest? a collateral that acquires its right subject to a
A: Yes but subject to the execution of an security interest. Meaning, he is the one that
appropriate amendment or refreshed buys property from the grantor. Again, the
agreement to cover future properties. lien follows the properties especially for in
tangible asset.
Q: Why is that so?
A: Because except for all of my stocks within Intangible asset — means any movable
this period or within this day, you don’t have property other than a tangible asset
to identify them. But what about equipment including, but not limited to, investment
and machineries? You have to identify them. property, deposit accounts, commodity
So while a future property may be included contracts and receivables.
in a security agreement, there has to be
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Other than shares of stock or deposit, a good lien. This includes initial notice,
example would be a developer, selling amendment notice, and termination notice.
subdivision lots, or a car companies selling
cars on installment basis. These are This used to be registration.
receivables. They can be subject of security
interest. They can be assigned by the grantor Q: Why does it include amendment
or the payee. The payee or grantor can assign notice?
the receivables in favor of a secured creditor. A: Because you may include other properties,
you may include additional grantor. The
Intermediary — refers to a person, amount of the obligation may be increased.
including but not limited to, a bank, trust
entity, depositary, broker, or central Q: What is termination notice?
securities depositary, that in the ordinary A: It is similar to the concept of discharge of
course of business or regular activity obligation under the old law. You want to
maintains an account for such securities or have proof, for example, or you want to show
assets, for another person, and is acting in to the whole world that your personal
that capacity. property is not subject to lien anymore. Then,
you can file a termination notice or
Intermediated securities — means essentially the same as a discharge of an
securities credited to a securities account obligation.
and rights in securities resulting from the
credit of securities to a securities account Proceeds — any property received upon
sale, lease or other disposition of collateral,
For example, the shares lodged with the or whatever is collected on or distributed
Philippine Deposit System. with respect to collateral, claims arising
out of the loss or damage to the collateral,
Lien — refers to a qualified right or a as well as a right to insurance payment or
proprietary interest, which may be other compensation for loss or damage of
exercised over the property of another. the collateral.
Non-intermediated securities — means One of the extrajudicial modes allowed by

securities other than intermediated the law to the creditor is that the creditor may
securities apply the proceeds of the property subject of
a security interest.
Meaning, it not in possession of a third party.
Here, it is interesting to point out that it
Notice — refers to a statement of includes insurance payment. So if the
information that is registered in the collateral is lost, the insurance proceeds take
Registry relating to a security interest or the place of the property that will answer the
obligation of the grantor.
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Purchase money security interest — Security interest — refers to a property

refers to a security interest in goods taken right in collateral that secures payment or
by the seller to secure the price or by a other performance of an obligation,
person who gives value to enable the regardless of whether the parties have
grantor to acquire the goods to the extent denominated it as a security interest, and
that the credit is used for that purpose. regardless of the type of asset, the status of
the grantor or secured creditor, or the
An example would be a trust receipt or the nature of the secured obligation; including
unpaid vendor’s lien. the right of a buyer of accounts receivable
and a lessor under an operating lease for
Registry — refers to the centralized and not less than one (1) year.
nationwide electronic registry established
in the Land Registration Authority Q: Now, many lawyers do not know that
("LRA") where notice of a security interest there is a new law, the PPSA. What if that
and a lien in personal property may be lawyer denominates the security
registered. agreement as one of pledge or chattel
mortgage? Would it be invalid?
Secured creditor — refers to a person that A: No, because of this provision of the law on
has a security interest. For purposes of security interest. It provides that regardless of
registration and priority, it includes a buyer whether the parties have denominated it as
of an account receivable and a lessor of security interest. So a pledge or chattel
goods under an operating lease for not less mortgage, adopted by lawyers not familiar
than one (1) year with this law, will fall under this concept of
security interest. So, the rights will be
The case of *inaudible*. If the lease is for enforced under this law provided that the
more than 1 year and registered with the RD, contract was executed during the effectivity
the lessor has a right against the whole world of the PPSA and not during the transition
including the right of a secured creditor. period.
Meaning, they must respect the lease.
What is the scope of application of
Q: Let’s say under the old law, you have a Personal Property Security Act
chattel mortgage subject of a lease. Should (“PPSA”)?
the mortgagee honor the lease?
A: if it is for more than 1 year and registered, The PPSA applies to all transactions of any
then the creditor must respect the lease over form that secure an obligation with
the property. personal property, whether it is a tangible
or an intangible asset, except interests in
So, now, the law includes the lessor of goods aircraft subject to R.A. No. 9497 or the
under a lease for more than 1 year. Civil Aviation Authority Act of 2008, and
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interests in ships subject to P.D. No. 1521 Yes. A security agreement may provide for
or the Ship Mortgage Decree of 1978. the creation of a security interest in future
property or after-acquired assets, but the
Only aircraft and vessels under these two security interest in that property is created
laws are not included in the coverage of the only when the grantor acquires rights in it
PPSA. or the power to encumber it. It may provide
that a security interest in a tangible asset
Is there a prescribed form of security that is transformed into a product extends
agreement? to the product, but such interest shall be
limited to the value of the encumbered
Yes. A security agreement must be asset immediately before it became part of
contained in a written (including the product. A security agreement may also
electronic) contract signed by the parties. It provide that a security interest in a tangible
must identify the collateral and the secured asset extends to its replacement, but such
obligation. It may consist of one (1) or interest shall be limited to the value of the
more writings that, taken together, encumbered asset immediately before it
establish the intent of the parties to create was replaced.
a security interest.
What is the extent of security interests
What constitutes a sufficient description over right to proceeds and commingled
of collateral? funds?
A description of collateral shall be A security interest in personal property

considered sufficient, whether it is specific shall extend to its identifiable or traceable
or general, if it reasonably identifies the proceeds. Where proceeds in the form of
collateral. A description such as "all funds credited to a deposit account or
personal property," "all equipment, all money are commingled with other funds or
inventory," or "all personal property within money:
a generic category" of the grantor shall be
sufficient. (i) the security interest shall extend to
the commingled money or funds,
Our example a while ago: all of my stocks in notwithstanding that the proceeds
my department store from this period to this have ceased to be identifiable to the
period or the replacement thereof. extent they remain traceable;
Can a security agreement provide for (ii) the security interest in the
the creation of a security interest in commingled funds or money shall
future property? be limited to the amount of the
proceeds immediately before they
were commingled; and
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(Dean: So it does not include all So if you have 10 sacks commingled with 100
the funds commingled but only the sacks, the right only corresponds to the 10
proceeds immediately before they sacks.
were commingled.)
Can a security agreement provide for
(iii) if at any time after the security interest in accounts
commingling, the balance credited receivables?
to the deposit account or the
amount of the commingled money Yes. A security agreement may provide for
is less than the amount of the security interest in accounts receivable
proceeds immediately before they arising from: (i) a contract for the supply or
were commingled, the security lease of goods or services other than
interest against the commingled financial services; (ii) a construction
funds or money shall be limited to contract or contract for the sale or lease of
the lowest amount of the real property; and (iii) a contract for the
commingled funds or money sale, lease, or license of intellectual
between the time when the property.
proceeds were commingled and the
time the security interest in the Collectibles arising from IP like royalties can
proceeds is claimed. be the subject of security agreements.
Q: First question is can money or funds be Also includes the promissory notes between
commingled? the developer, the realty, the car company
A: Yes. and the buyer.
What is the extent of security interest Can there be a stipulation limiting the
over tangible assets commingled in a grantor’s right to create a security
mass? interest in accounts receivables?
A security interest in a tangible asset that is No. Any stipulation limiting the grantor's
commingled in a mass extends to the mass, right to create a security interest shall be
but such interest shall be limited to the void. A security interest in an account
same proportion of the mass as the quantity receivable shall be effective
of the encumbered asset bore to the notwithstanding any agreement between
quantity of the entire mass immediately the grantor and the account debtor or any
after the commingling. secured creditor limiting in any way the
grantor's right to create a security interest.
Like a warehouseman for example,
commingling those sacks of rice, sacks of Will the creation of a security interest in
sugar, palay. a receivable affect the rights and
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obligations of the debtor of the Who are the parties to, and what are the
receivable? form and contents of a Control
Agreement?
No. The creation of a security interest in a
receivable does not, without the consent of Parties Forms/Contents
the debtor of the receivable, affect its rights Securities Executed in Stipulate that the
writing by the issuer or the
and obligations, including the payment
issuer or the intermediary
terms contained in the contract giving rise intermediary, agrees to follow
to the receivable. However, a payment the grantor instructions from
instruction may change the person, and the the secured
address, or account to which the debtor of secured creditor with
creditor respect to the
the receivable is required to make
security, without
payment. further consent
from the grantor
When and how can a security interest be Deposit Executed in Stipulate that the
perfected? Account writing among deposit-taking
the deposit- institution agrees
taking to follow
A security interest shall be perfected when institution, the instructions from
it has been created and the secured creditor grantor and the secured
has taken one of the following actions: the secured creditor with
(i) registration of a notice with the creditor respect to the
payment of funds
Registry;
credited to the
(ii) possession, whether actual or deposit account
constructive, of the collateral either without further
by the secured creditor or a consent from the
depositary acting for the secured grantor
Commodity Executed in Stipulate that the
creditor; or
Contracts writing among commodity
(iii) control [conclusion of a control the grantor, intermediary will
agreement] of investment property secured apply any value
and deposit account. creditor and distributed on
intermediary account of the
commodity
A security interest in any tangible asset
contract as
may be perfected by registration or directed by the
possession, while a security interest in secured creditor
investment property and deposit account without further
may be perfected by registration or consent by the
commodity
conclusion of a control agreement.
customer or
grantor
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For purposes of registration of security notice with the Registry. That notice will
interest, what constitutes as a sufficient bind third persons.
notice?
Q: What happens, for example, pending
An initial notice of security interest is release of the loan, the notice has been
deemed sufficient if: (i) it identifies the registered with the registry and a
grantor by an identification number; (ii) it judgment creditor comes in?
identifies the secured creditor or an agent A: Because a notice has been filed before the
of the secured creditor by name; (iii) it release of the loan, the secured creditor has a
provides an address for the grantor and better right over the attaching or judgment
secured creditor or its agent; (iv) it creditor as long as the loan is actually
describes the collateral; and (v) the released.
prescribed fee has been tendered, or an
arrangement has been made for payment of When does the notice take effect?
fees by other means.
A notice shall be effective at the time it is
If the grantor is a natural person, that discoverable on the records of the Registry,
grantor shall be identified through the and shall remain effective for the duration
name appearing in any of the grantor's of the term indicated in the notice unless a
government-issued identification, If the continuation notice is registered before the
grantor is a juridical person, that grantor term lapses. The period of effectiveness of
shall be identified through its name in the a notice may be continued by registering an
most recently registered articles of amendment notice that identifies the initial
incorporation, or in an agreement notice by its registration number.
constituting the legal person. Continuation of notice may be registered
only within six (6) months before the
Can the notice be registered even before expiration of the effective period of the
a security agreement is concluded? notice.
Yes. A notice may be registered before a Can a registered notice be amended?

security agreement is concluded. Once a
security agreement is concluded, the date Yes. A notice may be amended by the
of registration of the notice shall be registration of an amendment notice that
reckoned from the date the notice was identifies the initial notice by its
registered registration number and provides new
information. The amendment notice may
It may happen that the loan is being processed be filed: (i) by the secured creditor alone,
and the secured creditor would like to have a if the changes to the security interest can
better right over the property against be effected with the sole consent of the
competing claimant so it may decide to file a secured creditor; or (ii) by the grantor, if
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the changes to the security interest requires amendment notice likewise should be
the grantor's consent. If the amendment registered.
notice adds collateral that is not proceeds,
it must be authorized by the grantor in Just to compare our discussion with future
writing. If the amendment notice adds a debts.
grantor, it must be authorized by the added
grantor in writing. Such amendment Q: Can a surety agreement or guarantor
notices shall be effective as to the added agreement cover future debts?
collateral or grantor from the date of its A: Yes, as long as those future debts are
registration and shall be effective only as actually incurred by the debtor.
to each secured creditor who authorizes it.
If a secured creditor assigns a perfected Q: How about in REM? Are future debts
security interest, an amendment notice included?
may be registered to reflect the assignment. A: Yes, if the agreement has a dragnet clause.
If none, only existing obligations.
As we said, if you acquire other property, you
have to amend the notice. Q: What about security interest over
personal property?
Q: What if there is a new or future A: There must be a corresponding
obligation? Should the future obligation be amendment to the agreement to embrace
subject of an amendment notice? those future debts.
A: A chattel mortgage cannot secure future
obligations unlike REM. It cannot apply to Q: What if the security agreement says it
after-acquired obligations. The concept of covers present and future obligations? Is it
dragnet clause does not apply to chattel void?
mortgage. In a REM, if there is a dragnet A: It is not void but it amounts to a promise
clause, there no need to amend or execute a on the part of the grantor that when the loans
refreshed agreement to embrace the second are actually incurred, there will be an
or future loan. In a chattel mortgage, there is amendment or a refreshed agreement. The
a need to have an amendment or a fresh amendment notice should be filed of course
agreement because under the old law, there is with the registry to bind third persons.
an affidavit of good faith that the chattel
mortgage shall only secure a valid and When can the grantor demand
existing obligation. Now, that provision is amendment or termination of notice?
gone. However, an amendment is required
if there be additional obligations. In other A grantor may give a written demand to the
words, future obligations may be included secured creditor to amend or terminate the
but subject to the amendment to the effectiveness of the notice if: (i) all the
existing mortgage agreement. An obligations under the security agreement to
which the registration relates have been
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performed and there is no commitment to mode of perfection, except as provided

make future advances; (ii) the secured below:
creditor has agreed to release part of the
collateral described in the notice; (iii) the In other words, first in time, first in right. Any
collateral described in the notice includes creditor is second to the one who filed the
an item or kind of property that is not a notice or perfected. The agreement is called
collateral under a security agreement the subordinate lien holder.
between the secured creditor and the
grantor; (iv) no security agreement exists Priority Rules for Intangible Assets
between the parties; or (v) the security (Investment property and deposit
interest is extinguished in accordance with accounts)
law.
a) A security interest in a deposit account
Can the effectiveness of a notice be with respect to which the secured
terminated? creditor is the deposit-taking institution
or the intermediary shall have priority
Yes. The effectiveness of a notice may be over a competing security interest
terminated by registering a termination perfected by any method.
notice that identifies the initial notice by its (Dean: The right of the bank is
registration number and each secured superior over the secured creditor.)
creditor who authorizes the registration of
the termination notice. The notice is b) A security interest in a deposit account
terminated from the date and time when the or investment property that is perfected
information in the notice is no longer by a control agreement shall have
accessible to searchers of the public priority over a competing security
registry record. interest except a security interest of the
deposit-taking institution or the
When there is a termination of notice, the intermediary.
records of the registry should no longer bear (Dean: Let’s say the broker has unpaid
any interest over the personal property. fees. Then, the broker has the right over
the securities against the secured
What are the rules with respect to creditor.
priority of security interest?
Q: What if the corporation has a lien
The priority of security interests and liens on the shares for non-payment of
in the same collateral shall be determined dues and assessments?
according to the time of registration of a A: In the RCC, if you have provision in
notice or perfection by other means, the bylaws that the corporation has a
without regard to the order of creation of lien over those shares, that provision of
the security interests and liens or to the the bylaws is not self-executory. It
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should be coupled with a f) A security interest in electronic

corresponding chattel mortgage or a securities not held with an intermediary
pledge. perfected by the conclusion of a control
agreement shall have priority over a
Q: Does this authorize the security interest in the same securities
corporation to sell the shares and perfected by registration of a notice in
apply the proceeds for the payment the Registry.
of dues and assessments? Will the (Dean: For those securities not in the
interest be subordinated to the rights possession of a third party as against
of a secured creditor? security interest subject of registration
A: To be consistent with the RCC and with the registry, the law says the latter
the PPSA, it should only correspond to would have a better right. Registration
unpaid subscription that the interest of prevails of the right of the non-
the corporation prevails over the intermediated securities.
secured creditor.)
Intermediated are those in the
c) The order of priority among competing possession of the bank, the broker, etc.)
security interests in a deposit account
or investment property that were g) A security interest in electronic
perfected by the conclusion of control securities held with an intermediary
agreements shall be determined on the and perfected by the conclusion of a
basis of the time of conclusion of the control agreement shall have priority
control agreements. over a security interest in the same
securities perfected by any other
d) Any rights to set-off that the deposit- method.
taking institution may have against a
grantor's right to payment of funds h) The order of priority among competing
credited to a deposit account shall have security interests in electronic
priority over a security interest in the securities not held with an intermediary
deposit account. perfected by the conclusion of control
agreements is determined on the basis
e) A security interest in electronic non- of the time of conclusion of the control
intermediated securities perfected by a agreements
notation of the security interests in the
books maintained for that purpose by Priority Rules for Tangible Assets
or on behalf of the issuer shall have embodied in Instruments
priority over a security interest in the
same securities perfected by any other a) A security interest in a deposit account
method. with respect to which the secured
creditor is the deposit-taking institution
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or the intermediary shall have priority A: This provision retains the power of the
over a competing security interest warehouseman with respect to payment of his
perfected by any method. fees.
b) A security interest in a deposit account Priority Rules on Purchase Money

or investment property that is perfected Security Interest
by a control agreement shall have
priority over a competing security a) A purchase money security interest in
interest except a security interest of the equipment and its proceeds shall have
deposit-taking institution or the priority over a conflicting security
intermediary. interest, if a notice relating to the
purchase money security interest is
c) A perfected security interest in registered within three (3) business
livestock securing an obligation days after the grantor receives
incurred to enable the grantor to obtain possession of the equipment.
food or medicine for the livestock shall (Dean: The vendor’s lien has priority
have priority over any other security interest over other interest.)
interest in the livestock, except for a
perfected purchase money security b) A purchase money security interest in
interest in the livestock, if the secured consumer goods that is perfected by
creditor providing credit for food or registration of notice not later than
medicine gives written notification to three (3) business days after the grantor
the holder of the conflicting perfected obtains possession of the consumer
security interest in the same livestock goods shall have priority over a
before the grantor receives possession conflicting security interest.
of the food or medicine.
c) A purchase money security interest in
Priority and Right of Retention inventory, intellectual property, or
A person who provides services or livestock shall have priority over a
materials with respect to the goods, in the conflicting perfected security interest
ordinary course of business, and retains in the same inventory, intellectual
possession of the goods shall have priority property, or livestock if:
over a perfected security interest in the (i) The purchase money
goods until payment thereof. security interest is perfected
when the grantor receives
Q: So who has a better right, the possession of the inventory
warehouseman over his fees or a secured or livestock, or acquires
creditor over a perfected security interest? rights to intellectual
property; and
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(ii) Before the grantor receives assets through either a public or private
possession of the inventory disposition.
or livestock, or acquires
rights in intellectual Just like the old law, there are two ways to
property, the purchase enforce:
money secured creditor 1. Judicial process
gives written notification to It means it is an action for specific
the holder of the conflicting performance to compel payment of
perfected security interest obligation. Just like in REM, the
in the same types of filing of action for collection shall
inventory, livestock, or preclude the remedy of enforcement
intellectual property, The of security interest on a personal
notification sent to the property.
holder of the conflicting
security interest may cover In Caltex v. CA under the old law
multiple transactions [let’s contextualize it under the new
between the purchase law], if you have a loan secured by a
money secured creditor and REM and a security interest over a
the grantor without the need personal property, we know that if the
to identify each transaction. secured creditor files an action for
(Dean: Again, priority in time, collection, it is tantamount to waiver
priority in right.) of the lien over the real estate and
likewise of the personal property.
d) The purchase money security interest
in equipment or consumer goods In REM, if there is foreclosure of
perfected timely in accordance with mortgage and an action to collect
subsections (a) and (b), shall have deficiency, the action to collect
priority over the rights of a buyer, deficiency is tantamount to waiver of
lessee, or lien holder which arise the foreclosure of the chattel
between delivery of the equipment or mortgage.
consumer goods to the grantor and the
time the notice is registered. So the remedy if you have various
collaterals is to exhaust the
How can the secured creditor enforce its foreclosure procedure. Only after that
security interest? you have exhausted the same, you can
sue for the deficiency if any.
The secured creditor may enforce its
security interest whether through a judicial Q: What about this law (PPSA)?
process or through an extrajudicial A: We should apply the same. There
process, including the sale of the secured is no case in the contrary anyway. The
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principle is anyway the same. So if So there are 2 conditions:

you have a loan secured by a REM 1. It must be stipulated; and
and a security interest over a personal 2. There must be no breach of the peace.
property, the filing of the action for
collection is tantamount to waiver of If there is opposition or resistance from the
the right to enforce those lien. grantor, it has to be done through court
Similarly, of you foreclose a REM, process.
you cannot sue for deficiency yet
unless you have enforced your Q: In an old case, can a chattel mortgagee
security interest over the personal file an action for a writ of replevin to
property. obtain possession of a fixture and remove
it from the property?
2. Extrajudicial process A: Yes. Now, it is mirrored in this provision
of the law. The secured creditor may remove
the same provided that there is no breach of
EXPEDITED REPOSSESSION OF
COLLATERAL the peace.
With Judicial Process

Without Judicial Process
If, upon default, the secured creditor
The secured creditor may take possession
cannot take possession of collateral
of the collateral without judicial process if
without breach of the peace, the secured
the security agreement so stipulates,
creditor may proceed as follows:
provided, that possession can be taken
without a breach of the peace.
• The secured creditor shall be entitled to
an expedited hearing upon application
[Breach of the peace shall include: entering
for an order granting the secured
the private residence of the grantor without
creditor possession of the collateral.
permission, resorting to physical violence
Such application shall include a
or intimidation, or being accompanied by a
statement by the secured creditor,
law enforcement officer when taking
under oath, verifying the existence of
possession or confronting the grantor]
the security agreement attached to the
application and identifying at least one
If the collateral is a fixture, the secured
(1) event of default by the debtor under
creditor, if it has priority over all owners
the security agreement;
and mortgagees, may remove the fixture
(Dean: Under oath so the motion must
from the real property to which it is affixed
be verified.
without judicial process. The secured
creditor shall exercise due care in
Q: How do you do it?
removing the fixture.
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A: Similar to a possession of real default has occurred under the security

property, you do it via petition for the agreement and that the secured creditor
issuance of a writ of possession. You has a right to take possession of the
all know that for real property, petition collateral. The court may direct the
for writ of possession may be issued grantor to take such action as the court
once the period to redeem has expired deems necessary and appropriate so
and the mortgagee has a consolidated that the secured creditor may take
title over the property. possession of the collateral.
Now, for personal property, here, the This is how it goes when there is an
law allows the secured creditor to take opposition or resistance from a grantor →
possession of the property through Judicial Process.
expedited means via application with
the court for the issuance of an order From these provisions, it seems that there is
to take possession of a collateral. If no notice requirement to the grantor. So once
there is opposition or objection from there is default, the secured creditor may file
the grantor, you cannot take the law in the application or petition to get possession
your own hands. You have to go the of the collateral but the court may direct the
court and secure an order to take grantor (meaning, the court may notify the
possession of the collateral. grantor) to take appropriate action to protect
his interest.
You all know that there is no pleading
called application. You either do it via Can a higher-ranking secured creditor
a petition or motion. So how do you do take over enforcement?
it? What will be the caption of your
pleading? You have to file it via a Yes. Even if another secured creditor or a
petition for the issuance of a writ of lien holder has commenced enforcement, a
possession.) secured creditor whose security interest
has priority over that of the enforcing
• The secured creditor shall provide the secured creditor or lien holder shall be
debtor, grantor, and, if the collateral is entitled to take over the enforcement
a fixture, any real estate mortgagee, a process. This right may be invoked at any
copy of the application, including all time before the collateral is sold or
supporting documents and evidence for otherwise disposed of, or retained by the
the order granting the secured creditor secured creditor or until the conclusion of
possession of the collateral; and an agreement by the secured creditor for
that purpose.
• The secured creditor is entitled to an
order granting possession of the Q: A second creditor, subordinate to the
collateral upon the court finding that a first, was able to enforce it, to take the
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enforcement process ahead of everybody. apply the balance of the deposit

What may be now the right of the first account to the obligation secured by
secured creditor? the deposit account; and
A: The law says he has the right to take over
the enforcement. In other cases of a security interest in a
deposit account perfected by a control
Q: How do you concretize it? How do you agreement, instruct the deposit-taking
take over the enforcement? institution to pay the balance of the deposit
A: Basically, you file an action with prayer account to the secured creditor's account
for injunction to stop the other creditor from by providing: (i) a copy of the security
enforcing his interest and selling the agreement that creates or provides for a
property. security interest; and (ii) the secured
party's affidavit stating that a default has
What are the rules on recovery in special occurred, and that the secured party is
cases (such as security interest in entitled to enforce the security interest
Accounts Receivable, Negotiable non-judicially.
document, Deposit Account)?
Does the secured creditor have a right to
a) Accounts Receivable. Instruct the sell or dispose of the collateral?
account debtor of an accounts
receivable to make payment to the Yes. After default, a secured creditor may
secured creditor, and apply such sell or otherwise dispose of the collateral,
payment to the satisfaction of the publicly or privately, in its present
obligation secured by the security condition or following any commercially
interest after deducting the secured reasonable preparation or processing. A
creditor's reasonable collection disposition is commercially reasonable if
expenses. On request of the account the secured creditor disposes of the
debtor, the secured creditor shall collateral in conformity with commercial
provide evidence of its security interest practices among dealers in that type of
to the account debtor when it delivers property.
the instruction to the account debtor;
So your extrajudicial process includes public
b) Negotiable document. In a negotiable and private sale.
document where the security interest is
perfected by possession, proceed as to What are the notification requirements
the negotiable document or goods prior to disposition of the collateral?
covered by the negotiable document;
Not later than ten(10) days before
c) Deposit account. In a deposit account disposition of the collateral, the secured
maintained by the secured creditor, creditor shall notify:
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(i) the grantor; established by a disinterested third

(ii) any other secured creditor or lien party.
holder who, five (5) days before the (Dean: meaning, email is allowed)
date notification is sent to the d. The requirement to send a notification
grantor, held a security interest or shall not apply if the collateral is
lien in the collateral that was perishable or threatens to decline
perfected by registration; and speedily in value or is of a type
(iii) any other person from whom the customarily sold on a recognized
secured creditor received market.
notification of a claim of an interest
in the collateral if the notification Under the old chattel mortgage law, you are
was received before the secured allowed to sell perishable goods without
creditor gave notification of the notice to the chattel mortgagor.
proposed disposition to the grantor.
What are the guidelines on private or
Dean on (ii): includes attaching creditor, public disposition?
second secured creditor or any creditor
subordinate to the interest of the secured The secured creditor may dispose of the
creditor collateral through sale open to
participation by the general public,
Q: What is the purpose of the notification? Moreover, the secured creditor may buy
A: For them to exercise the so called right of the collateral at any public disposition, or
redemption. Pay the obligation of the grantor at a private disposition but only if the
to stop the sale of the collateral. collateral is of a kind that is customarily
sold on a recognized market or the subject
a. The grantor may, after default, waive of widely distributed standard price
the right to be notified. quotations.
b. A notification of disposition is
sufficient if it identifies the grantor and Q: May a secured creditor appropriate the
the secured creditor; describes the property?
collateral; states the method of A: In your law on pledge, there has to be 2
intended disposition; and states the sales. First sale if there is no bidder then the
time and place of a public disposition pledgee may appropriate the thing pledged
or the time after which other and the property appropriated answers the
disposition is to be made. obligation of the pledgor to the pledgee.
c. The secured creditor shall notify the
persons entitled to notification via In your old chattel mortgage law, your chattel
registered mail, private courier, mortgagee shall also participate in the sale of
electronically, or through any means the property and he can be the winning
where receipt of the notice can be bidder.
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So in the law on mortgage and pledge whether the sale satisfies the good faith and
combined, the creditor may participate in a commercial reasonableness requirement:
sale of the collateral as long as it is a public i. that the person or entity who
sale. presides over the auction is an
experienced dealer in the type of
Extra-judicial disposition property sold;
The secured creditor may, subject to the ii. that the participating bidders do not
guidelines below, select the method, engage in collusive practices that
manner, time, place, and other aspects of prevent free and open competition;
the sale or other disposition, lease or iii. that the records of the proceedings,
license, including whether to sell or including the identities and
otherwise dispose of, lease or license respective submissions of the
encumbered assets individually, in groups bidders, are documented in writing
or altogether, provided, that the disposition and subsequently maintained; and
is undertaken in good faith and satisfies the iv. that the highest bidder is duly
commercial reasonableness requirement. awarded the collateral.
The secured creditor shall, no later than ten The winning bidder must fully pay the bid
(10) days before the extra-judicial price at the conclusion of the auction.
disposition of the collateral, cause the Otherwise, the collateral may be awarded
posting With the Registry Of a notice that to the next highest bidder. (Dean: The
sufficiently describes the collateral to be winning bidder must pay in cash at the
sold and specifies the method, manner, conclusion of the auction.)
time, place, and other details of the sale,
The Registry shall ensure that all such Any government agency that regularly
notices posted are publicly accessible and undertakes public auctions in the course of
searchable. its regular activities may be engaged by
any secured creditor to preside over public
[In adherence with the commercial auctions over securitized movable
reasonableness requirement, the secured collateral, through rules and regulations
creditor may also cause the advertisement that must be submitted to the Department
of the disposition through any other means of Finance for prior approval. Private
or medium as the secured creditor may entities such as auction houses, industry
deem as suitable, to maximize awareness groups of secured creditors, or
of the sale among dealers in the type of organizations of recognized dealers of
property to which the collateral belongs.] specific movables may likewise adopt
rules and regulations for the conduct of
All collateral shall be disposed through public auctions, subject to the approval of
auction. Below are the indicators that must the Department of Finance. Any public
be taken into account in determining auction of movable collateral conducted by
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any government agency or private entity security interest or lien in the

under rules duly approved by the collateral if a written demand and
Department of Finance shall be proof of the interest are received
conclusively presumed to be commercially before distribution of the proceeds
reasonable. is completed
(Dean: There are no rules yet implemented
by the Department of Finance.) This almost mirrored the provisions in the old
chattel mortgage law.
Judicial disposition
If there is any excess after you apply the
Judicial dispositions shall be governed by proceeds against the expenses and obligation,
rules promulgated by the Supreme Court. the surplus if any shall apply to subordinate
(Dean: So far, none yet.) or junior creditors or lien holders.
If a method of disposition of collateral has a. The secured creditor shall account to

been approved in any legal proceeding, the grantor for any surplus, and, unless
whether judicial or administrative, it is otherwise agreed, the debtor is liable
conclusively commercially reasonable. for any deficiency.
(Dean: This is the question which I
This is different from an action for collection. think would be most likely asked in the
That is judicial process. This one is judicial bar. There is no more difference
disposition of the goods. No rules yet adopted between a pledgee and chattel
by the Supreme Court. mortgagee.
How will the proceeds from the sale be Q: So what if the document is
applied? documented as a pledge but effective
during this law? Does that mean that
The proceeds of disposition shall be the pledgor or pledgee once it caused
applied in the following order: the sale of the thing pledged and the
i. the reasonable expenses of taking, proceeds are not enough to pay for
holding, preparing for disposition, the obligation, can he still run after
and disposing of the collateral, the pledgor?
including reasonable attorney's A: Yes, under this new law. No matter
fees and legal expenses incurred by how you call it. A security interest over
the secured creditor; a personal property that is perfected
ii. the satisfaction of the obligation during the PPSA is governed by the
secured by the security interest of PPSA. Therefore, the right to recover
the enforcing secured creditor; and deficiencies applies.)
iii. the satisfaction of obligations
secured by any subordinate
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4B 2020-2021
b. The reasonable expenses of holding the notice before the sale and 30-day (time for the
collateral shall include all expenses mortgagor to pay for the obligation) before
incurred by the secured creditor in the you can sell the property.
preservation and care of the collateral
in his possession with the diligence of Same concept for PPSA. There is redemption
a good father of a family. but it is not in the concept that we know
generally. It is not the right to buy back after
c. The secured creditor shall be liable to the sale. Once it is sold, there is no right to
the grantor for the value of the loss and buy it back.
deterioration that may be suffered due
to his failure to preserve and care for Can the secured creditor retain the
the collateral. collateral?
Is there a right of redemption? Yes. After default, the secured creditor

may propose to the debtor and grantor to
Yes. Any person who is entitled to receive take all or part of the collateral in total or
a notification of disposition is entitled to partial satisfaction of the secured
redeem the collateral by paying or obligation, and shall send a proposal to:
otherwise performing the secured a. the debtor and the grantor;
obligation in full, including the reasonable b. any other secured creditor or lien
cost of enforcement. holder who, five (5) days before the
proposal is sent to the debtor and the
The right of redemption may be exercised, grantor, perfected its security interest
unless: (i) the person entitled to redeem or lien by registration; and
has, after the default, waived in writing the c. any other person with an interest in the
right to redeem; (ii) the collateral is sold or collateral who has given a written
otherwise disposed of, acquired, or notification to the secured creditor
collected by the secured creditor, or when before the proposal is sent to the debtor
an agreement with those effects on the and the grantor.
collateral is concluded by the secured
creditor; or (iii) the secured creditor has The secured creditor may retain the
retained the collateral. collateral in the case of:
a. A proposal for the acquisition of the
They took the concept under the old chattel collateral in full satisfaction of the
mortgage law. Remember, under the old law, secured obligation, unless the secured
there is still right of redemption but more in creditor receives an objection in
the context of equity of redemption. writing from any person entitled to
receive such a proposal within 20 days
Remember the twin periods in the foreclosure after the proposal is sent to that person;
of chattel mortgage. You have a 10-day or
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4B 2020-2021
b. A proposal for the acquisition of the a. A prior interest that was perfected
collateral in partial satisfaction of the under any law that existed or in force
secured obligation, only if the secured before the effectivity of the PPSA
creditor receives the affirmative ("Prior Law") continues to be deemed
consent of each addressee of the perfected under the PPSA until the
proposal in writing within 20 days after earlier of: (i) the time the prior interest
the proposal is sent to that person. would cease to be perfected under prior
law; and (ii) the beginning of full
In other words, the retention of the collateral implementation of the PPSA.
need not be in the full payment of the b. The priority of a prior interest as
obligation. The secured creditor may against the rights of a competing
quantify the amount that these properties are claimant is determined by the prior law
only so much that I will retain the collaterals if: (i) the security interest and the rights
and the X amount will apply to the obligation, of all competing claimant arose before
either full obligation or partial obligation the effectivity of the PPSA; and (ii) the
only. In either case, if there is no objection priority status of these rights has not
from other parties involved, the secured changed since the effectivity of the
creditor may retain the collateral and acquire PPSA. For this purpose, the priority
ownership of the same. status of a prior interest has changed
only if:
Q: Is this similar to pactum a. It was perfected when the
commissorium? PPSA took effect, but ceased to
A: It is not because there is still notice be perfected; or
consent required on the part of the grantor b. It was not perfected under prior
and other affected parties. law when the PPSA took effect,
and was only perfected under
Q: What will make it pactum the PPSA.
commissorium? c. The enforcement of all existing
A: If it is automatic transfer of ownership in security interests during the
favor of the creditor upon default. transitional period shall be governed by
the PPSA.
What are the rules on security interest
created or provided for by an agreement Q: What happens to the chattel mortgage
or other transaction that was made or then that was registered with the RD or a
entered into before the effectivity of the pledge over a personal property embodied
PPSA and that had not been terminated in an instrument?
before the effectivity of the PPSA (Prior A: They bind the whole world as long as
Interest)? those procedures are complied with.
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4B 2020-2021
concurrence and preference of credit will

CONCURRENCE AND
PREFERENCE OF CREDIT apply.
Q: What are those proceedings?

How are credits classified in the context
A: Either liquidation or settlement of estate
of the laws on concurrence and
preference of credit?
"Credits which are specially preferred
because they constitute liens (tax or
The credits are classified into three (3)
nontax) in turn, take precedence over
general categories, namely, "(a) special
ordinary preferred credits so far as
preferred credits listed in Articles 2241 and
concerns the property to which the liens
2242, (b) ordinary preferred credits listed
have attached. The specially preferred
in Article 2244[,] and (c) common credits
credits must be discharged first out of the
under Article 2245."'
proceeds of the property to which they
relate, before ordinary preferred creditors
The special preferred credits enumerated in
may lay claim to any part of such
Articles 2241 (with respect to movable
proceeds."
property) and 2242 (with respect to
immovable property) are considered as
"In contrast with Articles 2241 and 2242,
mortgages or pledges of real or personal
Article 2244 creates no liens on
property, or liens within the purview of Act
determinate property which follow such
No. 1956. These credits, which enjoy
property. What Article 2244 creates are
preference with respect to a specific
simply rights in favor of certain creditors
movable or immovable property, exclude
to have the cash and other assets of the
all others to the extent of the value of the
insolvent applied in a certain sequence or
property. If there are two (2) or more liens
order of priority."
on the same specific property, the
lienholders divide the value of the property
It was held that concurrence and
involved pro rata, after the taxes on the
preference of credits can only be
same property are fully paid.
ascertained in the context of a general
liquidation proceeding that is in rem, such
The rule on concurrence and preference of
as an insolvency proceeding, where
credit will only apply if there is a proceeding
properties of the debtor are inventoried and
in rem that will bindingly adjudicate all the
liquidated and the claims of all the
claims against the insolvent debtor.
creditors may be bindingly adjudicated.
The application of this order of priorities
You can’t apply these rules on concurrence
established under the Civil Code in
and preference of credit if there is no such
insolvency proceedings assures that
proceeding. Just because the debtor is in
priority of claims are respected and credits
default, it does not mean that the rules on
belonging to the same class are equitably
Page 200 of 203

4B 2020-2021
treated. Metrobank v. Naguiat G.R. No. insolvent bank, for specific performance,
178407 March 18, 2015. breach of contract, damages, or whatever.
The term is defined in an all-encompassing
Q: During the pendency of the civil case and broad manner so as to include any
with the RTC of Pasig City, Fil-Agro cause of action against the insolvent bank,
was placed under the receivership of the regardless of its nature or character,
PDIC pursuant to Resolution No. 1486 irrespective of whether the relief sought
of the Monetary Board of the BSP. would directly affect the property of the
Thereafter, the RTC of Malolos City bank under liquidation. In fact, Section
was constituted as the liquidation court 30(2) of R.A. No. 7653 authorizes the
tasked to adjudicate disputed claims receiver to defend any action against the
against Fil-Agro and assist the PDIC in insolvent bank.
undertaking its liquidation. Antonio,
however, insists that his claim against Section 30 of R.A. No. 7653 reads:
Fil-Agro is not a disputed claim within SEC. 30. Proceedings in Receivership and
the purview of Section 30 of R.A. No. Liquidation. - Whenever, upon report of
7653 because ownership of the the head of the supervising or examining
mortgaged property has not yet vested department, the Monetary Board finds that
on Fil-Agro. He maintains that the a bank or quasi-bank:
Court's ruling in Vda. de Ballesteros a. is unable to pay its liabilities as they
cannot be applied here where become due in the ordinary course of
foreclosure of the subject properties was business: Provided, that this shall not
not made by the insolvent bank. Decide. include inability to pay caused by
extraordinary demands induced by
We took it up in SPCL. When a bank is financial panic in the banking
placed under liquidation, all the claims must community;
be filed in the liquidation proceeding. So b. has insufficient realizable assets, as
when you have a claim, there’s an action for determined by the Bangko Sentral, to
collection, there’s a judgment for the meet its liabilities; or
liquidation of the bank, that judgment should c. cannot continue in business without
be treated as a claim to the liquidation involving probable losses to its
proceeding. All claims basically shall be depositors or creditors; or
made in the liquidation proceeding. Just to d. has willfully violated a cease and desist
clarify, all claims against the bank under order under Section 37 that has become
liquidation. Claims of the bank shall be final, involving acts or transactions
filed separately in the appropriate courts. which amount to fraud or a dissipation
of the assets of the institution, in which
Jurisprudentially, it has long been resolved cases, the Monetary Board may
that "disputed claims" covers all claims summarily and without need for prior
whether they be against the assets of the hearing forbid the institution from
Page 201 of 203

4B 2020-2021
doing business in the Philippines and implement the distribution plan adopted by
designate the Philippine Deposit the PDIC for general application to all
Insurance Corporation as receiver of closed banks. Simply put, if there is a
the banking institution. judicial liquidation of an insolvent bank,
all claims against the bank should be filed
For a quasi-bank, any person of recognized in the liquidation proceeding. This holds
competence in banking or finance may be true regardless of whether or not the claim
designated as receiver. is initially disputed in a court or agency
before it is filed with the liquidation court.
The receiver shall immediately gather and Fil-Agro Rural Bank, Inc. v. Villaseöor,
take charge of all the assets and liabilities Jr., G.R. Nos. 226761 & 226889, July 28,
of the institution, administer the same for 2020
the benefit of its creditors, and exercise the
general powers of a receiver under the This pertains to the power of a receiver of a
Revised Rules of Court but shall not, with bank placed under receivership.
the exception of administrative
expenditures, pay or commit any act that This is a new case. Even though it involves a
will involve the transfer or disposition of bank, the claims should be filed against the
any asset of the institution: Provided, That closed bank in the liquidation proceeding and
the receiver may deposit or place the funds PDIC will be the one to carry out the
of the institution in non-speculative liquidation of the bank. PDIC must do so with
investments, The receiver shall determine a petition for the assistance of the court.
as soon as possible, but not later than
ninety (90) days from take-over, whether What is important to point out is that
the institution may be rehabilitated or while this case is decided in 2020, it was
otherwise placed in such a condition that it decided under the old law before RA 11211
may be permitted to resume business with [NCBA]. Under RA 11211, there is no
safety to its depositors and creditors and more power on the part of the receiver to
the general public: Provided, That any rehabilitate the bank. Once the bank is
determination for the resumption of placed under receivership, it must proceed
business of the institution shall be subject with liquidation right away.
to prior approval of the Monetary Board.
If a bank which has been ordered closed
The above legal provision recognizes the by the Bangko Sentral ng Pilipinas
exclusive jurisdiction of the liquidation (Bangko Sentral) and is placed under
court to adjudicate disputed claims against the receivership of the Philippine
the closed bank, assist in the enforcement Deposit Insurance Corporation, how
of individual liabilities of the stockholders, can a secured creditor enforce its claim
directors, and officers, and decide on all on the basis of the preference and
other issues as may be material to concurrence of credit under the law?
Page 202 of 203

4B 2020-2021
As a consequence of the receivership, the

closed bank may sue and be sued only
through its receiver, the Philippine Deposit
Insurance Corporation. Any action filed by
the closed bank without its receiver may be
dismissed. Banco Filipino Savings and
Mortgage Bank v. Bangko Sentral ng
Pilipinas, G.R. No. 200678, June 4, 2018.
Page 203 of 203

4B Merc 2 Insurance Credit Trans PPSA

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4B 2020-2021

Notes for Merc Rev 2

the principal debtor. However, the answer

A contract of suretyship shall be deemed

medical services as needed, with payment v. Commissioner of Internal Revenue,

Q: What is the reason for this decision in Summary:

beneficiary designated is disqualified, Insurable interest is that interest which a

If person procuring interest has no

What are the characteristics of an with respect to a life insurance

A: It is not inconsistent because even Who is entitled to receive the proceeds

If one insures his own life, he can designate

This is one lawful way of impairing the

Who are the persons specified in Article

If any person, other than those

The legitimate heirs of Loreto who were

to the usufruct will be extinguished upon

Give examples. Can the insured change his beneficiary?

has expressly waived this right in the

A: It may pass on the other irrevocable or revocable, the proceeds

a) A carrier or depository of any kind has

a) A carrier or depository of any kind has

b) Both the mortgagor and mortgagee

c) A depositor may insure his deposits in

on his brand-new yacht because of his

INSURABLE INTEREST IN How about the borrower (Sean)? Yes, he has

Examples of inchoate interest founded d) A general creditor, however, has no

b) A property under contract to sell. The

If the loss occurs after the expiration of

On February 3, 1987, while Jose Palacio b) In property insurance, an interest must

Answer: a. Is Garapal Insurance legally justified

a) The mortgagor has insurable interest on the

What happens to the P10M debt of O to MULTIPLE INSURABLE INTEREST

C cannot recover from Acme Insurance Co. Dean’s discussion:

A businessman in the grocery business Dean’s discussion:

Hence, there is no double insurance. There Neither N nor O may collect. As to N, an

CHANGE OF INTEREST IN THE As to O: He cannot recover, because he had

d. A change of interest by will or succession NOTE: Double insurance only applies to

e. A transfer of interest by one of several Reputable is the forwarder of Wyeth’s

(e) Each insurer is bound, as between himself

Double insurance is valid. What is Dean’s discussion:

insurance agent shall be deemed to have

Is there payment of premium?

On September 27, 1996, Development

e. When there is an agreement allowing the Is there a contract of insurance between

based on supposed previous Arrangements is

ISSUANCE OF COVER NOTES

Cover notes are issued to bind

As fate would have it, “P’s” daughter

of one or more of the following, after the

such reinstatement by the mere filing of an Q: Name at least 3 instances when an

date of delivery of the policy. The first

By accepting his premiums without giving

pneumonia, secondary to Influenza.

6 months after the death of the president,

Q: ABC hired Juan Dela Crus as its DISCUSSION:

When the building occupied by the New SLIDE

Regarding waiver of communication, what if

Yes, the insured may recover since there is

SLIDE other insurers is tantamount to waiver on the